European Stocks Drop First Day in Five on ECB Policy Spat Woes

(Bloomberg) -- European equities fell for the first day in five amid concerns about the reported possibility of conflict among policy makers over a stimulus package for the single-currency region.

The Stoxx Europe 600 Index closed 0.8% lower in London, trimming the weekly gain to 2%. Cyclical, or more economically sensitive sectors led the declines, with banks, automakers and household goods falling more than 1%. The U.S. markets were closed for Independence Day, which usually means lower trading volumes in Europe.

Investors fled risk assets after Bloomberg News reported the European Central Bank is facing a potential rift over how much their emergency bond-purchase program should stay weighted toward weaker countries such as Italy. Market players are concerned about such friction possibly undermining a program unveiled at the height of the crisis that was meant to reassure investors of the ECB’s resolve in maintaining the unity of the euro alliance.

A potential spat would have significant negative implications for European equities, which have become global investors’ favorites over the past few weeks. The likes of BlackRock Inc. have recommended buying the previously unloved asset class because of the strength and decisiveness of the European fiscal and policy response.

Chancellor Angela Merkel said time is pressing for European Union member states to reach an agreement on an economic recovery plan. The bloc’s member states are negotiating a 750 billion-euro ($843 billion) fund, drawn partly from joint borrowing, to pull the 27-member bloc out of economic peril.

Earlier, data showed that Purchasing Manager Indexes from the euro area, Germany and the U.K. came in ahead of forecasts. Although the euro-area economy should grow again in the third quarter, weak demand and mounting job cuts will likely curtail the recovery. Separately, France was preparing for a government reshuffle after Jean Castex was named prime minister following Edouard Philippe’s resignation.

“The open question is, which path is embedded in the stock market,” Nordea Investment Funds macro strategist Sebastien Galy wrote in a note. “The Eurostoxx Cyclical index recovered half of its value since the Covid-19 crisis, having suffered a tiny fraction of the shock of the Great Financial Crisis that suggests a more rapid pace of recovery than is likely.”

Among notable movers, Delivery Hero SE climbed to a fresh record after order numbers in the second quarter rose 94% against the same period last year, while UBI Banca rose after reports suitor Intesa Sanpaolo SpA may be considering improving its takeover offer. Rolls-Royce Holdings Plc slumped 10% after Bloomberg News reported that the British jet-engine maker is exploring options to raise funds that would help fortify the company against a downturn in the aerospace industry.

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