By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) -- European shares drifted lower, with
investors eyeing the debt-ceiling debate and mixed economic data in
the U.S., while an estimate of Germany's 2012 economic growth
reinforced widespread expectations that Europe's largest economy
contracted in the final quarter of last year.
The Stoxx 600 Europe index fell 0.4% to 284.89. The index also
lost 0.4% on Monday.
Bank shares came under pressure, with Banco Santander dropping
1.9% in Madrid, BNP Paribas losing 2.2% in Paris, and Barclays PLC
trading down 1.6% in London.
Capturing investors' attention, Treasury Secretary Timothy
Geithner warned late Monday that the U.S. government could run up
against the debt ceiling by mid-February or early March. The White
House and congressional Republicans continue to wrangle over the
debt-limit issue just weeks after taking steps to avert a
combination of tax hikes and spending cuts known as the fiscal
cliff.
"The looming threat of further political fallout in the U.S. is
the key threat over the coming weeks with both President Obama and
Fed Chairman [Ben] Bernanke warning of the dire repercussions if
Republicans carry out their threats to withhold an increase in the
U.S. debt ceiling beyond the end of February," said Rebecca
O'Keeffe, head of investment at Interactive Investor in London.
Failure to raise the debt limit could result in a default.
Fitch Ratings on Tuesday said it continued to view a default as
unlikely but warned that a delay in raising the debt ceiling would
prompt a formal review of its AAA sovereign rating on the U.S.
.
U.S. and German data in focus
Tuesday's trading in U.S. stocks began on a bearish note on Wall
Street, as investors digested a plate of economic data.
U.S. retail sales rose 0.5% in December, topping forecasts for a
0.2% rise, while wholesale-level inflation remained well contained.
The Empire State Index, however, showed manufacturing in the New
York region contracting for a sixth consecutive month.
Earlier, German data showed the country's economy grew by a
calendar-adjusted 0.9 % in 2012, downshifting from a 3.1% rate in
2011. Germany has yet to release its estimate of fourth-quarter
gross domestic product, but the head of the government's statistics
office said a quarterly contraction of 0.5% is currently being
penciled in.
While not a shock, the estimates show Europe's largest and most
resilient economy finally fell prey to the euro-zone crisis and
global worries in the final three months of 2012, underlining
expectations the euro-zone as a whole saw a deeper recession for
the fourth quarter.
Economists noted, however, that early indicators, including
purchasing-managers' indexes and the Ifo Institute's closely
watched gauge of German business sentiment, have shown improvement,
suggesting the downturn may have already bottomed.
"After growing relatively healthy at the start of 2012, the
economy has entered into a weak spot at the end of the year. We
expect the weakness to be relatively short lived with respect to
latest indications of a pickup of global economic activity," said
Rainer Sartoris, economist at HSBC.
Shares of Hochtief AG rose 5.6% in Frankfurt after Goldman Sachs
added the company to its "conviction buy" list, saying the
construction firm stands to continue to benefit from a sector
upturn.
"Hochtief has rallied since the new CEO was announced [in
November], but with the rest of the sector up, we believe Hochtief
can go further," the Goldman analysts wrote, upping their 12-month
price target to EUR61 from EUR46, implying 32% upside
potential.
Germany's DAX 30 stock index fell 1% to 7,652.99.
Retailers were in focus, with shares of Burberry Group PLC
rallying 3.8% in London. The luxury-goods firm delivered
stronger-than-expected third-quarter revenue growth on robust
own-store sales, despite lowering guidance for sales to department
stores. .
Shares of Swedish fashion retailer Hennes & Mauritz AB gave
up strong early gains to lose 1.2%. The company said same-store
sales saw a 2% year-on-year decline last month, but analysts had
forecast a 2.6% fall. Total sales rose 8% from December 2011,
topping expectations for a 5.9% increase.
ARM shares hit by downgrade
Meanwhile, Pearson PLC shares rose 2.8% to 1,215 pence, gaining
after analysts at UBS reiterated a buy rating on the media firm and
raised its price target to 1,500 pence from 1,450 pence.
The analysts said underperformance in the second half of 2012
came despite growing signs of value across the group.
They said cost savings from the merger of publishers Penguin and
Random House and accelerating momentum in its international
education business added 7% to their long-term earnings forecast
for the firm, while a sale of the FT Group, publisher of the
Financial Times newspaper, could add 5%.
Shares of ARM Holdings PLC (ARMHY) dropped 4.3%. Morgan Stanley
analysts downgraded the chip maker from overweight to equalweight
and removed it from the bank's "Best Ideas" list.
They said its current share price implies a "near-perfect
trajectory" in ARM's market share and royalty rate for the next two
years, adding that they would wait for "better entry point into
what remains a great story."
The FTSE 100 stock index in London fell 0.2% to 6,093.12, while
in Paris, the CAC-40 stock index fell 0.3% to 3,695.33.
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