Autos skid as growth worries European shares

LONDON: European equities fell sharply on Thursday with deepening concern about the pace of global economic recovery hurting sentiment and dragging down the automobile and construction sectors, where prospects are tied to growth.

A Morgan Stanley note saying the global economy was dangerously close to recession added to the misery of investors.

The bank cut its growth forecast for 2011 and 2012, citing recent policy errors in the US and Europe and the prospect of more fiscal tightening in 2012.

Appetite for riskier assets, such as equities, waned, with the Euro STOXX 50 volatility index, one of Europe's main barometers of sentiment, surging 15 percent. Higher index the lower the desire to buy shares.

Auto shares, down 4.9 percent, featured among the worst performers on worries a slowdown in global economy would dent vehicle demand. Fiat fell 8.3 percent, following disappointing sales news from one of its key markets, Brazil.

At 1144 GMT, the FTSEurofirst 300 index of top European shares was down 2.8 percent at 944.93 points, after falling as low as 942.52.

The index, which hit a two-year low last week and has fallen in 13 of the past 19 sessions, is down 12 percent this month the biggest monthly drop since late 2008.

"There is an increasing danger of a double-dip scenario and, if that happens, we are in for even a steeper downturn in stocks. If we get a recession, then all this talk about cheap stocks will be off the table," said Koen De Leus, strategist at KBC Securities in Brussels.

Analysts and fund managers said equity valuations were more relevant in a relatively stable market and, in the current environment, there was a risk of a further sharp sell-off.

According to Thomson Reuters Datastream, the STOXX Europe 600 index carried a 12-month forward price-to-earnings ratio of 8.7, the lowest since early 2009 and against a 10-year average of 13.3.

Analysts said the US economy was passing through a rough phase following lower spending, as consumers' purchasing power had weakened and amid job insecurity. In Europe, austerity programmes in several countries had been hampering a recovery.

Macroeconomic data also painted a bleak picture. Figures showed British retail sales barely grew in July as cash-strapped consumers cut spending, underscoring risks threatening the UK's fragile economic recovery.

Across Europe, Germany's DAX underperformed the wider market and fell about 4 percent, with traders saying a drop in the index below one level had triggered "stop-loss" selling. The index was last down 3.5 percent.

Construction and materials shares were also hit, the sector index falling 4.3 percent on worries tough economic conditions will hit the companies.

Miners fell 3.8 percent, tracking a sharp fall in metals prices on demand concerns, while banks shed 4.4 percent.

Technical analysts said the July-August sell-off in the Euro STOXX 50 index has brought significant damage to the chart. The index was down 3 percent at 2,260.76 points.

"The recent price advance reached 2,352, which is the 38.2-percent Fibonacci retracement from the sell-off, denoting a textbook-perfect correction," said Dmytro Bondar, technical analyst at RBS.

"As the price didn't recover above 2,352, a continuation of the downtrend can be expected in the near term. Important support levels include 2,247 and the recent low at 2,077."

But some analysts said that chances of another recession were remote and equities could move higher from here.

Citigroup analysts said GDP forecasts were in the process of coming down to levels consistent with sluggish growth, but not a global recession.

"We believe global stock prices will continue to grind higher ... until there are clearer signs of a peak in the current global profits cycle. Our best guess is that this peak will be sometime in 2013."

Copyright Reuters, 2011