Spain, Italy weigh on Europe stocks; banks drop

LONDON (MarketWatch)'European stock markets ended lower in a choppy session as losses for banks weighed on sentiment Tuesday and Spanish and Italian bond yields surged on debt concerns.

The Stoxx Europe 600 index XX:SXXP 'closed down 1.1% at 264.29, after trading as high as 267.62 earlier in the day.

In Spain, the IBEX 35 index XX:IBEX 'tumbled 2.7% to 7,824.50, while yields on 10-year Spanish government bonds ES:10YR_ESP 'rose 9 basis points to 5.41%.

'One cannot say with any conviction that the euro zone is robust or recovering,' said Stephen Pope, managing partner at Spotlight ideas. He further added that bad news from Spain 'traveled to the next in line which from the markets perspective is Italy.'

Unemployment in the Spain rose 0.8% in March to 4.75 million, government figures showed. Separately, Spanish Finance Minister Luis de Guindos told The Wall Street Journal in an interview that there was 'no margin for error' with the government's 2012 budget announced last week. He said Spain's debt-to-gross-domestic-product ratio will likely rise to just over 78% this year from 68.5% in 2011.

Shares of Bankinter SA ES:BKT 'fell 5.9%, Banco Santander SA ES:SAN 'gave up 4%, while BBVA SA ES:BBVA '< span class="quotePeekContainer">BBVA 'shed 4.5%.

Yields were also rising for Italy's 10-year government bonds IT:10YR_ITA ,'adding 10 basis points to 5.14%. Bond prices move inversely to their yields.

In Milan, the FTSE MIB index XX:FTSEMIB 'traded 2% lower at 15,624.23, weighed down by Banca Popolare di Milano SCARL IT:PMI ,'off 6.6%, and Banco Popolare SC IT:BP , down 6.8%.

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Gloomy data hit at austerity plans

Dire figures on unemployment and manufacturing activity in the euro-zone's weakest members on Monday highlighted the scale of the currency bloc's economic problems. (Photo: AFP/Getty.)

In the U.S., stocks were mostly lower on Wall Street, pivoting away from gains in the first session of the second quarter. Factory orders for the U.S. rose 1.3% in February, slightly below analysts' estimates, while orders for January were revised down to a 1.1% decline from a prior estimate of a 1.0% drop.

Banks were also lower in France. BNP Paribas SA FR:BNP 'gave up 2.8%, Soci't' G'n'rale SA FR:GLE 'lost 3.7%, while Credit Agricol! e SA FR:ACA 'fell 3.2%. The CAC 40 index FR:PX1 'closed 1.6% lower at 3,406.78.

And in the U.K., shares of Royal Bank of Scotland Group PLC UK:RBS 'RBS 'declined 3.1% and Barclays PLC UK:BARC 'BCS 'lost 2.6%.

The FTSE 100 index UK:UKX 'was 0.6% off at 5,838.34, further pressured by Compass Group PLC UK:CPG , off 1.8%, after Morgan Stanley downgraded the food-service firm to equalweight from overweight. FTSE 100 gives up gains

Bucking the trend, Cairn Energy PLC UK:CNE added 4% outside London's main index. The oil and gas producer bought Agora Oil & Gas, a private Norwegian company, for $450 million in shares and cash.

In Germany, the DAX 30 index DX:DAX gave up 1.1% to 6,982.28, as Commerzbank AG DE:CBK 'shed 3.4% and Deutsche Bank AG DE:DBK ! 'lost 3%.

K+S AG DE:SDF also'weighed on the index, down 1.4% after Nomura Securities downgraded the potash producer to reduce from neutral.

Nomura also downgraded Dutch specialty-chemicals firm Akzo Nobel NV NL:AKZA , down 2.7%, to neutral from buy.

Among notable gainers, Novo Nordisk AS DK:NOVOB , up 2.4%, provided the biggest support in Europe as Bank of America Merrill Lynch added the stock to its Europe 1 list. The Danish firm was also among the biggest gainers on Monday after saying it owns 4.71% of its total share capital, as part of a buyback plan. The Danish OMX Copenhagen 20 index rose 1.3% to 465.15.

Swiss biotech firm Lonza Group AG CH:LONN 'added 1.6%. The company said Richard Ridinger has been appointed as new chief executive effective May 1.

In Brussels, drug maker UCB SA BE:UCB 'added 1.5% after the U.S. Food and Drug Administration approved its Neupro drug for Parkinson's disease treatment.

Slow GDP Growth Sets Stage for Fed& Next Round of Quantitative Easing

The U.S. economy continued to struggle to grow in the third quarter, most likely giving government officials enough cover to pump more liquidity into the financial system to stimulate hiring.

Gross domestic product (GDP), the value of all goods and services produced, increased by 2% in the third quarter, the Commerce Department reported Friday. Economists polled by Dow Jones Newswires were expecting GDP to rise by 2.1% in the July to September period, The Wall Street Journal reported.

The gain was slightly more than the second quarter's 1.7% growth but not enough to revive a moribund job market, according to most economists.

The report was the final important economic indicator the government will release before midterm elections tomorrow and the next meeting of the Federal Reserve Board, which will conclude on Wednesday.

Even though the economists have said the recession ended more than a year ago, the unemployment rate remains stubbornly high at 9.6%. The sluggish economy could sweep Republicans into power in the Congressional elections and push the Fed to resume buying Treasury bonds in a renewed move towards quantitative easing.

The report also showed inflation cooled to 0.8%, well below the Federal Reserve's preferred threshold of 2%, giving policy makers room to pump more money into the world's largest economy.

The GDP report also showed that spending by Americans, accounting for about 70% of demand in the U.S. economy, rose at a 2.6% rate, the best quarter of the recovery that began in June 2009. That's up from a 2.2% increase in the April to June period and 1.9% in the first quarter

"Consumer spending is growing, business demand is still OK," Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (NYSE: JPM) in New York, told Bloomberg News.

"We need to do better than this to get a real recovery in the labor market. The report leaves everything in place for more asset purchases by the Fed next week." said Feroli, who accurately forecast the gain in household purchases.

Fed Chairman Ben S. Bernanke announced in August the central bank "will do all that it can" to keep the economy growing. Most analysts have said they are expecting policy makers to launch another round of Treasury purchases after the bank bought $1.7 trillion in debt from December 2008 through March.

The U.S. government needs to consider selling assets to boost the economy and reduce the deficit, Mexican billionaire Carlos Slim told Bloomberg Friday.

"Most aggressive monetary and fiscal policies are not enough," Slim said at the George Washington University Global Forum in New York City. "They are temporary measures."

The gain in consumer spending, the biggest since the end of 2006, compared with a 2.5% median forecast in the Bloomberg survey of economists. Spending added 1.8 percentage points to growth.

Even though they are improving, consumer purchases remain well below levels seen following previous U.S. recessions. In the four quarters after the last deep U.S. recession in 1982, consumer spending posted increases of between 4% and 8%.

Americans' wealth and incomes were badly hit by the collapse in home prices and the extremely weak jobs market that followed the financial crisis. GDP growth in the 2.5% percent to 2.8% range is needed to generate enough jobs to meet population growth and keep the jobless rate stable, according to policy makers' forecasts.

The latest report of tepid GDP growth is causing investors to exercise caution heading into next week's midterm elections and breeding uncertainty about the size of economic stimulus measures the Federal Reserve is expected to announce ne! xt week.

Most investors expect the Fed to announce plans to buy U.S. Treasury bonds worth a few hundred billion dollars over several months to keep interest rates low in an effort to spark growth.