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European Stocks Drop on Greek Deadlock, Merkel’s Setback

Source: Bloomberg

 

European stocks fell as Greece moved closer to a possible exit from the euro currency union and German Chancellor Angela Merkel’s party lost a state election. US index futures and Asian shares also declined.

Banks paced losses, with HSBC Holdings Plc dropping 1.6 per cent. Infineon Technologies AG, Europe’s second-largest semiconductor maker, retreated after Chief Executive Officer Peter Bauer decided to step down. ING Groep NV tumbled 5.4 per cent as European Union regulators will re-examine its rescue by the Dutch government.

The Stoxx Europe 600 Index lost 1.9 per cent to 247.31 at 11:06 am in London. The gauge reached within 1.1 per cent of erasing this year’s gains as an inconclusive election in Greece left political parties struggling to form a government, risking the collapse of proposed austerity measures. Standard & Poor’s 500 Index futures expiring in June slipped 0.8 per cent, while the MSCI Asia Pacific Index fell 0.7 per cent.

“With no new Greek government in sight, I think that we will see continued insecurity and volatility in financial markets this week,” said Alessandro Fezzi, senior market analyst at LGT Capital Management AG in Pfaeffikon, Switzerland. The impasse “will lead us to new elections in June, which will prolong investors’ insecurity as they worry about possible contagion risks, especially regarding Spain.”

A European measure of implied volatility increased the most in three weeks. The VStoxx Index, a measure of Euro Stoxx 50 Index options prices, rose 13 per cent, the biggest jump since April 23.

Greece’s political deadlock looked set to continue for a second week as President Karolos Papoulias failed to secure agreement on a unity government and avert new elections. Syriza, the left-wing group opposed to spending cuts, defied overtures to join the government on Sunday.

Meanwhile, the debate between growth and austerity will form the centrepiece of talks on Tuesday between the newly installed French President Francois Hollande and Merkel, who has championed an agenda of spending cuts.

Merkel’s party was defeated in Germany’s most populous state in an election that helped the Social Democrats tighten their grip on the country’s regional governments.

The SPD, the main opposition party nationally, increased its vote share in Sunday’s ballot in North Rhine-Westphalia. Merkel’s Christian Democratic Union fell to its worst score since World War Two.