European stocks drop on German data

Londond - Europe's main stock markets fell sharply on Monday as negative German business data overpowered broad relief after the European Central Bank gave passing grades to a comfortable majority of eurozone banks subjected to stress tests.

The German data, along with the re-election of Brazilian President Dilma Rousseff - viewed as unfavourable to business - also weighed down Wall Street, with the Dow trading down more than a third of a percent.

London's benchmark FTSE 100 index slipped 0.40%t to 6 363.46 while Frankfurt's DAX 30 dropped 0.95% to 8 902.61.

In Paris the CAC 40 lost 0.78% to 4 096.74 compared with Friday's closing value, while Madrid gave up 1.39%, with the Ibex 35 finishing at 10 195.20 points.

Milan shed 2.40%, with banking shares hit hard.

Nine of the 25 banks that failed the ECB test were Italian, including Banca Monte dei Paschi di Siena (BMPS), the third-biggest Italian bank, whose shares plunged 21.5% to €0.785. Banca Carige lost 17.19% to €0.0771.

Even Italian giants UniCredit and Intesa Sanpaolo, which passed the stress tests conducted on a total of 130 eurozone banks, saw their shares shed 2.55% and 3.14%, respectively.

Greek banks suffered too, after strong initial gains, with the index of banking shares dropping 3.77% and the general equity market Athex losing 3.29%t at the close.

In Germany, where one bank failed the test, bank shares were firm, while stock in leading French banks, which passed the tests, fell on profit-taking, dealers said.

British banks, despite passing their tests as part of a wider EU assessment, were also trading lower.

Shares of state-rescued lenders Lloyds Banking Group and Royal Bank of Scotland dropped 1.37% and 1.43% to 74.97 pence and 359.2p, respectively.

Barclays lost 1.99% to 221.85p.

But analysts said that overall there were few surprises, and there was some profit taking.

'Tightrope walk'

"It was always going to be a tightrope walk for the ECB; if too many banks failed there'd be panic in the markets, but if not enough fail then the results are not deemed credible," said Jasper Lawler of CMC Markets UK.

The German data reminded investors that the stress tests "were never going to be any kind of silver bullet to heal the European economy," he added.

Germany's business confidence fell to the lowest level for nearly two years in October, as the outlook for Europe's biggest economy continues to cloud over.

The Ifo economic institute's closely watched business climate index fell to 103.2 points in October from 104.7 points in September, the think-tank said in a statement.

That is the lowest level since December 2012.

The euro firmed against other major currencies after the ECB results Sunday fuelled hopes that a major cause of economic uncertainty could soon be eliminated.

The ECB audit - aimed at preventing a repetition of the crisis that nearly led to the euro's collapse - found that 25 banks were short of financial resources by a combined €25bn at the end of 2013.

READ: ECB fails 25 banks in stress test

Loans to the private sector in the euro area, a gauge of economic health, fell year-on-year in September, but by slightly less than in August, the ECB said on Monday.

Wall Street stocks fell in early trade following the disappointing German economic data as the market looked ahead to a two-day Federal Reserve monetary policy meeting that opens Tuesday.

About half an hour into trading, the Dow Jones Industrial Average stood at 16,740.13, down 65.28 points (0.39%).

The broad-based S&P 500 dropped 11.32 (0.58%) to 1 953.26, while the tech-rich Nasdaq Composite Index declined 29.62 (0.66%) to 4 454.10.

In foreign exchange deals, the euro climbed to $1.2715 at around 17:00 GMT from $1.2666 late in New York on Friday.

The European single currency edged up to 78.82 British pence from 78.73p.

"The euro wasn't stressed by the stress test," said analyst David Madden of IG. "Traders shrugged off the large number of banks that failed the test, as the core eurozone banks received a clean bill of health."

The British pound advanced to $1.6132 from $1.6086 on Friday. It slipped slightly against the yen, to ¥136.84 against ¥136.97 on Friday, as did the greenback, to 107.62 from 108.14.

The rouble fell to record levels against the dollar and the euro.