EUROPE MARKETS: Europe Under Pressure After German ZEW Data

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets dropped on Tuesday after German investor confidence data posted an unexpected drop, while mining firms showed positive moves after an upbeat production update from Rio Tinto PLC.

The Stoxx Europe 600 index fell 0.7% to close at 295.31 after settling at the highest level since early June on Monday.

Shares of Telecom Italia SpA lost 3.4% after the firm said late the prior day it has put plans to spin off its fixed-line copper network on hold.

Shares of Rio Tinto PLC (RIO) gained 2.7% after the heavyweight miner posted record output of iron ore in the second quarter. Additionally, the company said its recovery from a landslide at a major copper mine in the U.S. is faster than expected.

For the broader European markets, investors digested the latest take on German investor confidence, with the ZEW economic sentiment indicator dropping to 36.3 points in July from 38.5 in June. The index, which measures investors' expectations for the coming six months, was forecast to rise to 39.4, according to FactSet.

"Yet the new communication policy of the ECB (forward guidance) which was introduced at the July policy meeting has not boosted investors' expectations. Indeed, the German economy is resilient, but remains clearly dependent from activity in peripheral countries," analysts at Société Générale said in a note.

Guy Foster, head of portfolio strategy at Brewin Dolphin, said that slower growth in the euro zone's powerhouse could actually turn out to be an advantage for the broader region.

"We believe the monetary policy has been appropriate for Germany, but too tight for the rest of the euro zone. The other members with the weaker financial position ought to achieve priority in monetary policy, but that hasn't been the case. It would be a positive if German growth would slow to meet growth from other European countries as they emerge from recession," he said.

Germany's DAX 30 index closed 0.4% lower at 8,201.05.

Shares of Deutsche Lufthansa AG climbed 0.8% after Goldman Sachs lifted the airline to neutral from sell and removed it from the pan-Europe sell list.

On the data front in the euro zone, inflation edged up to 1.6% in June, up from 1.4% in May and in line with expectations.

U.S. data in focus

Investors were also keeping an eye on the U.S., with the consumer price index rising 0.5% in June, in line with market expectations and marking the biggest increase since February.

Meanwhile, a gauge of home-builder confidence in July hit the highest level in more than seven years.

The data come ahead of Federal Reserve Chairman Ben Bernanke's semiannual testimony to Congress on Wednesday, with market participants closely looking for hints of a timetable for tapering the central bank's $85-billion-a-month asset purchases.

"It's been notably difficult to call Bernanke lately. He would always tend to be quite dovish, but since the end of May he has been a bit more difficult to read. Investors think he's back on the hawkish side as the data have improved, but consumer confidence and retail sales have [not been as strong]," Foster from Brewin Dolphin said.

"We think the Fed will struggle with keeping its credibility if it doesn't taper to some extent in September, although only modestly. I think markets will be pleased with [tapering of] less than $15 billion. The concern is that it's going to be say $20 or $25 billion, followed by another $20 billion and so on," he added.

U.S. stocks traded lower on Wall Street.

Europe movers

Among country-specific indexes in Europe, France's CAC 40 index lost 0.7% to 3,851.03.

In the U.K., the FTSE 100 index shaved off 0.5% to 6,556.35, although miners were on the rise. Shares of BHP Billiton PLC (BHP) climbed 1.4% and Anglo American PLC picked up 1.8%. Metals prices were also higher.

Spain's IBEX 35 index gave up 0.7% to 7,798.20 as Prime Minister Mariano Rajoy rejected calls for his resignation amid a growing corruption scandal.

Outside the major indexes, shares of Swedbank AB dropped 3.9% after the Swedish bank reported earnings that fell short of analysts' expectations.

Also in Sweden, shares of SKF AB added 3.1% after the world's biggest ball-bearing maker posted better-than-expected second-quarter earnings.

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