By Sara Sjolin, MarketWatch
LONDON (MarketWatch) — European stock markets dropped on Tuesday after Moody’s Investors Service warned that the European Union could lose its Aaa debt rating, increasing pressure on the European Central Bank to activate stimulus measures.
The Stoxx Europe 600 index XX:SXXP -0.74% fell 0.6% to 266.87, pulling back after the index on Monday posted its best performance in a month.
Investors remained cautious ahead of the ECB’s policy meeting on Thursday, as they worried that ECB President Mario Draghi would fail to outline details of the bank’s proposed bund-buying program.
“I believe he will say nothing Thursday and wait until the verdict from the German Constitutional Court” on Sept. 12, said Christian Tegllund Blaabjerg, chief economist at FIH Erhvervsbank in Copenhagen. “`Never provoke a sleeping giant’ seems to be his way of thinking, and I agree.”
Blaabjerg does expect, however, the ECB to cut interest rates by one-quarter percentage point to 0.5%.
Among notable movers on Tuesday, shares in Dutch supermarket company Royal Ahold NV NL:AH +4.49% rose 4.1% after the firm said it’s exploring strategic options for its 60% stake in ICA AB. See: Ahold explores alternatives for ICA venture
Drug makers added the most pressure on the pan-European index.
Roche Holding AG CH:ROG -1.26% RHHBY -0.73% gave up 1.2%, Novo Nordisk AS DK:NOVOB -1.07% lost 1.3% and GlaxoSmithKline PLC UK:GSK -1.39% GSK -0.71% fell 1.5%.
All eyes on the ECB
The European Union’s credit rating got attention after Moody’s overnight cut the outlook on the region to negative.
The credit-rating firm said it needed to adjust its outlook on the EU due to “the likelihood that the large Aaa-rated member states would likely not prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.” See: Moody's warns on European Union debt rating
“Moody’s timing of the warning two days ahead of the ECB’s interest-rate decision is by no means coincidental,” said Blaabjerg from FIH Erhvervsbank.
“There are increased expectations that the ECB will save the euro zone with measures to ensure permanent, low yields in Italy and Spain, in a way to allow them economic space to reconstruct their economies.
“And Moody’s wants to maintain that pressure because confidence that European policy makers will come up with the right solutions in time is limited,” he added.
Draghi and bond buying
Late Monday, ECB boss Draghi indicated a new bond-buying program could include bonds with maturities as long as three years without violating the prohibition on central-bank financing of government borrowing, according to media reports. See: Draghi fuels short-end Spain, Italy debt rally
The reports spurred a rally in Spanish and Italian bonds. The yield, which moves inversely to prices, on 10-year Italian government bonds IT:10YR_ITA -1.77% fell 11 basis points to 5.66%, according to electronic trading platform Tradeweb.
The IBEX 35 stock index XX:IBEX +1.06% gained 1.4% to 7,534.20.
Banco Popular Español SA ES:POP +4.37% gained 4.3% as it said it is considering taking over smaller peer Banco Mare Nostrum. See: Banco Popular mulls takeover of Banco Mare Nostrum
More movers
Shares in wireless-telecom firm Vodafone Group PLC UK:VOD -2.21% VOD -1.66% fell 1.3%.
Bernstein Research cut the stock to market perform from outperform, citing “an increasing number of negative operational risks.”
The U.K.’s FTSE 100 index UK:UKX -1.11% lost 0.9% to 5,706.06.
Royal Bank of Scotland Group PLC UK:RBS -1.94% RBS -1.53% gave up 1.6% after Investec Securities cut the stock to hold from buy.
In Germany, Volkswagen AG DE:VOW -2.33% DE:VOW3 -3.05% lost 2.9%, weighing on the DAX 30 index DX:DAX -0.72% , which slipped 0.4% to 6,987.94.
Deutsche Lufthansa AG DE:LHA -1.15% fell 1.4% after a strike called by the German labor union UFO caused the airline to cancel more than half its short- and medium-haul flights, and some long-haul flights, at Frankfurt Airport. See: Lufthansa halts some Frankfurt long-haul flights
France’s CAC 40 index FR:PX1 -0.92% shed 0.6% to 3,431.75, with Sanofi SA FR:SAN -2.00% off 2%.
Sara Sjolin is a MarketWatch reporter, based in London.
