European shares hit 6-week closing low on US data

By Atul Prakash

LONDON, June 2 (Reuters) – European shares fell sharply for a second straight session to a six-week closing low on Thursday as more U.S. data raised concerns about the pace of recovery in the world’s top economy.

A 9.2 percent surge in the Euro STOXX 50 volatility index, one of Europe’s main barometers of sentiment, suggested a fall in investors’ appetite for risk. Analysts said equities could drop further before bouncing back after the summer.

The uncertain outlook prompted traditional long-only funds to stay on the sidelines, analysts said, adding investors had been taking refuge in defensive sectors such as utilities and pharmaceuticals, at the cost sectors such as mining.

Miners topped the losers’ list, with the STOXX Europe 600 Basic Materials index falling 2.6 percent, tracking steep losses in metals that slipped on concerns about demand for raw materials. Rio Tinto fell 2.6 percent.

The FTSEurofirst 300 index of top European shares finished 1.3 percent lower at 1,115.92 points — the lowest close since mid-April. The index is down 0.5 percent this year.

“Given new fears emerging over the underlying health of the U.S. economy and just less than thirty days before the Fed finally turns the taps off from quantitative easing 2, worries over the U.S. outlook are certainly justified,” said Howard Wheeldon, senior strategist at BGC Partners.

“Now two years into its ‘recovery’ process, the U.S. has done well to reach the point that it supposedly has but those that have long felt some of this to be built on sand are yet to be proved fully wrong.”

Figures showed new orders received by U.S. factories declined in April and chain-store sales in May were lacklustre. Initial claims for U.S. state unemployment benefits slipped by 6,000 to a seasonally adjusted 422,000, less than economists’ expectations for a fall to 415,000.

Energy shares tracked weaker crude oil. The STOXX Europe 600 oil and gas index fell 2 percent in high volumes.

 

DISAPPOINTING DATA

The numbers followed Wednesday’s data, which showed the U.S. national factory activity index in May was lower than expected. Private-sector job growth fell to its lowest in eight months, prompting Goldman Sachs and other banks to cut their estimates for Friday’s widely watched nonfarm jobs data.

“It’s an incredibly difficult environment. We are seeing volatile economic numbers coming through and you really need to see the next set of figures to confirm if there is a trend,” said the head of investment dealing at a fund company that manages about $80 billion.

“We are going to go lower before moving higher. A lot of the markets are breaking support levels.”

The FTSEurofirst 300 index closed below its 50-day and 200-day moving averages. Technical analysts said there was a risk the market could fall about 5 percent, from where a sustainable rally could emerge.

Graham Bishop, equity strategist at RBS, said: “Our six-month view is still bullish on the basis that valuations are still ok and you have got earnings momentum.”

“You are slowly seeing a rotation into defensives. The one sector that has been winning so far is pharma. On the flip side, you have got the mining sector which is being sold off and that may start to spread to other cyclicals like industrials.”

Lingering concerns about euro zone debt also weighed on the market. Moody’s on Wednesday downgraded Greece by three notches deep into junk territory, citing a growing risk that Athens would have to restructure its debt.

“Whether or not a further restructuring plan is agreed, Greece will at some point have little option but to default. Of course it does matter, not least because it further destroys what little market confidence exists,” Wheeldon said.

The STOXX Europe 600 banking index fell 1.2 percent, while Greek banking shares dropped 0.3 percent.