Investors bolted from riskier assets in early European trading Tuesday, hitting stock prices, the euro and oil on continuing concerns about the health of Europe's banks.
The euro tumbled to a fresh four-year low against the dollar and an 18-month low against the pound. Oil prices fell around $2 a barrel and credit spreads widened. U.S. stock index futures were sharply lower.
By contrast, the June German bund future came close to last-week's all-time high for a front-month contract, while gold, another 'safe haven' for investors seeking less risky assets, gained more than $4 per troy ounce. The dollar and the Japanese yen benefited too.
"We have had a few particularly negative noises coming out of the European Central Bank and China, and these have heightened concerns that the economic recovery could be at a slower pace than first predicted," said Joshua Raymond at City Index.
The Stoxx Europe 600 index had fallen 1.8% to 240.56. London's FTSE 100 Index was down 2.2% at 5073.58, Frankfurt's DAX index was 1.8% lower at 5859.22, and Paris's CAC-40 index lost 2.5% to 3421.57.
At the same time, U.S. stock futures indicated a weaker open on Wall Street. The June Dow Jones Industrial Average futures contract was down 1.2% at 10008 and the June Standard & Poor's 500 futures contract was down 1.4% at 1073.2.
As U.S. markets return from a three-day weekend, European investors will be looking to see how far down Wall Street opens, particularly in light of Spain's downgrade at the end of last week. In economic news, the Institute for Supply Management manufacturing index and consumer spending data are due at 1400 GMT.
Earlier, downbeat euro-zone and Chinese manufacturing purchasing managers' indexes sparked renewed fears over the global economic recovery. In China, the manufacturing PMI fell by more than expected in May, suggesting a moderation in economic growth, while, in the euro zone, manufacturing PMI data also signaled that the recovery may be losing traction. The data showed manufacturing activity slowed considerably in May, with the index falling to 55.8 from 57.6 against expectations for a reading of 55.9.
Unemployment data for the region also knocked sentiment. The unemployment rate increased to 10.1% in April from 10.0% in March—its highest level for almost 12 years.
Meanwhile, investors were focused on the European bank sector after European Central Bank board member Christian Noyer, speaking in Seoul, said responses by central banks to recent financial crises have been broadly successful. However, he warned that "steering the economy may prove more challenging and new risks can weigh negatively on the recovery underway."
The ECB also said that euro-zone banks could face another €195 billion ($239.93 billion) of bad debt writedowns over the next 18 months. The pan-European Stoxx 600 banks index lost 3%.
Adding to the downbeat mood Monday, French budget minister Francois Baroin told French television that his country has to carry out its planned cuts in spending and reduce its deficit to keep its top triple-A credit rating.
Oil and gas stocks suffered the brunt of the selling, led lower by BP, which fell 15% amid ongoing concerns about the company's inability to plug the oil leak in the Gulf of Mexico, after it emerged over the weekend that its latest attempt has failed. The pan-European Stoxx 600 index for the sector dropped 4.3%.
Still, there were some bright spots on the corporate front, with Prudential up 3.9% after AIG rejected the insurance company's revised offer for its Asian life-insurance unit. The deal has largely been unpopular with Prudential's largest shareholders and so the likely collapse of the expensive acquisition deal is being viewed positively.
Asian markets ended lower Tuesday, with some investors selling shares on the hints of a slowdown in China's economy. Reports of a potential real-estate tax trial in China also worried the markets. However, some pared their early losses as the data were digested.
The Shanghai Composite index was volatile but came off its lows to end 0.9% lower. Hong Kong's Hang Seng Index declined 1.4%, Japan's Nikkei Stock Average fell 0.6%, Australia's S&P/ASX 200 was 0.4% lower and South Korea's Kospi Composite was off 0.7%.
In the European foreign exchanges, the euro was lower against the dollar and the yen in thin trading, partly weighed down by the comments from the ECB. Also, Fitch's downgrade of Spain on Friday continued to hit the currency.
The euro was recently trading at $1.2158, down from $1.2306 late in Toronto Monday, while the dollar was trading at ¥91.05, down from ¥91.27.
