Shares of BAE Systems and EADS decline after merger talks
By Sara Sjolin, MarketWatch
LONDON (MarketWatch) — European stock markets dropped on Thursday, as investors remained in a cautious mood ahead of the conclusion of a two-day U.S. Federal Reserve policy meeting.
The Stoxx Europe 600 index XX:SXXP -0.47% fell 0.3% to 271.97. On Wednesday, the index closed at its highest level since July, 2011, after the German constitutional court ruled in favor of the euro zone’s permanent rescue fund, the European Stability Mechanism.
“The decision from the high court in Germany was positive for the markets yesterday and today markets are cautious ahead of the [U.S. Federal Reserve] decision. If [Fed Chairman Ben] Bernanke doesn’t deliver we could have a correction tomorrow with markets coming off 2.5%,” said Koen de Leus, senior economist at KBC Group.
“We expect Bernanke to announce QE3, which adds liquidity and is good for markets in the short term,” he said, using market lingo for a third round of quantitative easing. “But looking at it from the other side, he doesn’t do it without a reason. The jobs he wants aren’t being created and the economy is not as strong as he wants it to be.”
Wall Street shares opened mostly steady on Thursday.
EADS NV FR:EAD -8.88% sank 8.9%, a day after the company and peer BAE Systems PLC UK:BA -7.59% confirmed they were in talks about a potential merger. Shares of BAE rallied 11% on the news in late trade on Wednesday, but dropped 7.7% on Thursday. See: BAE Systems and EADS confirm talks on combination
French defense and media conglomerate Lagardère SCA FR:MMB +0.90% , which owns 7.5% of EADS’s equity capital, said it would look into “all the consequences” of a potential merger deal before consenting. Lagardère shares rose 1%. See: Lagardère: Will mull BAE/EADS deal before consent
Fed in focus
Elsewhere, investors remained in a wait-and-see mode ahead of the U.S. Federal Reserve announcement on its latest policy stance due after Europe’s close. Expectations of another round of quantitative easing are high, as weak nonfarm payrolls data from last week added to concerns about slow growth in the labor market.
On Thursday, data showed weekly jobless claims jumped by 15,000 to 382,000 last week, exceeding analysts’ estimates of a rise to 370,000. See: U.S. jobless claims jump 15,000 to 382,000
But even if Fed Chairman Ben Bernanke pushes the QE button it may be hard for stock markets to push much higher in coming months, de Leus from KBC said.
“We already had a big rally this year and I don’t think markets can go up much further without an economy that picks up again. And there are nothing in the cards that indicates that. We have uncertainty about the election coming up in the U.S. and worries about the fiscal cliff, so companies are not going to invest more and hire more people,” he said.
“Quantitative easing is not a long-term solution and markets should get out of this liquidity addiction. The Fed keeps injecting money into the economy and we only feel a little better, but in five to 10 years it could end up creating bigger problems,” de Leus added.
U.S. stock futures pointed to a lower open on Wall Street.
In Italy, the government succeeded in selling 6.5 billion euros ($8.4 billion) at a debt sale, with solid demand and lower borrowing costs compared with a previous sale. See: ECB-fueled optimism aids Italian bond auction
The FTSE MIB index XX:FTSEMIB -1.31% , however, fell 1% to 16,254.56. Shares of UniCredit SpA IT:UCG -4.56% fell 2.6%.
Major movers
Risk-sensitive sectors such as banks and miners weighed the most on European bourses.
Spain’s Banco Santander SA ES:SAN -3.02% SAN -2.63% gave up 2.4% and BBVA SA ES:BBVA -2.64% BBVA -2.59% lost 2.1%. The IBEX 35 index XX:IBEX -1.36% dropped 1.1% to 7,907.10.
In Germany, Commerzbank AG DE:CBK -2.87% fell 2.7% and Deutsche Bank AG DE:DBK -2.00% DB -2.07% slipped 2%, weighing on the DAX 30 index DX:DAX -0.65% , which traded 0.3% lower at 7,320.42.
Among mining firms, Rio Tinto PLC UK:RIO -1.32% RIO -0.67% AU:RIO -0.07% gave up 1.4% and Vedanta Resources PLC UK:VED -3.04% tripped 2.9%. Metals prices were mixed.
High street fashion chain Next PLC UK:NXT -6.79% tanked 6% after it said recent sales have been disappointing and that consumer confidence remains cautious. See: Next remains cautious as profit rises
The FTSE 100 index UK:UKX +0.20% was, however, 0.2% higher at 5,793.32, as Vodafone Group PLC UK:VOD +2.01% VOD +1.58% climbed 1.8%. The wireless telecom firm’s joint venture in the U.S., Verizon Wireless, said after the launch of Apple Inc.’s AAPL +1.31% iPhone 5, that, it would offer the phone on its 4G LTE network from Sept. 21.
Sara Sjolin is a MarketWatch reporter, based in London.
