European stocks touched their lowest level in nearly two years on Monday as rating agency Standard & Poor's move to downgrade US debt ignited concerns that the world's biggest economy could slip back into recession. Automobile and mining shares bore the brunt of the sell-off, down 8.1 percent and 6.3 percent, respectively, on escalating fears that slower global recovery would hit demand for vehicles and raw materials.
The market saw a bounce in early session on the European Central Bank's decision to buy Spanish and Italian bonds to halt contagion from the eurozone debt crisis, but nervousness soon crept in. The move failed to lift sentiment, battered in the past days on bleak economic numbers and debt fears in the United States and Europe. The FTSEurofirst 300 index of top European shares closed 4 percent lower at 936.29 points after hitting 935.83 - a two-year low. Volumes were 186 percent of its 90-day daily average. The index saw its biggest one-day percentage decline since March 2009.
Most indexes suffered heavily, with Germany's DAX down 5 percent - the biggest daily percentage drop since March 2009 - and Spain's IBEX down 2.4 percent. "Continued concerns over global growth were the cause of yet another mass sell-off, and it would seem that not even call after call from analysts saying valuations are now exceptionally cheap and attractive from a buying point of view, these aren't enough to tempt the bulls back in," said Angus Campbell, head of sales at Capital Spreads.
The recent sharp pullback on European stocks has dragged down European stock valuations. The average one-year forward price-to-earnings (P/E) ratio of stocks in the STOXX Europe 600 is now at 10.2, against its 10-year average of 13.3. Analysts said investors feared the market could fall further, and shares could become even cheaper, preventing investors jumping in to grab beaten-down stocks. They said S&P's move to cut the US long-term credit rating on Friday could eventually raise borrowing costs in the country and hurt fragile economic recovery.
"The sell-off is mainly due to the fear that we will relapse into recession. Many investors have finally realised that the US economy will not grow at 3 percent," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($468 billion). "I will attach a one-third probability to a renewed recession, not so much because it is fundamentally inherent in the system, but because the political risk has gone up."
Banks, which generally suffer in difficult economic conditions, also slipped. European banks fell 3.7 percent, while Commerzbank dropped 8.5 percent. The Thomson Reuters Peripheral Eurozone Banks index, which sank 14 percent last week, was down 1.6 percent, while the Thomson Reuters Peripheral Eurozone Countries Index fell 2.9 percent.
The eurozone's blue chip Euro STOXX 50 index was down 3.7 percent at 2,286.91 points, losing ground for the 11th session in a row and hitting a two-year low. Over the past six sessions, European shares measured by the MSCI Europe index have lost about $1 trillion in market capitalisation, more than the combined GDPs of Greece, Portugal and Ireland.
The FTSEurofirst 300 index has lost about 21 percent since a peak in mid-February to fall into bear market territory, characterised by a drop of more than 20 percent over a certain period of time. The Euro STOXX 50 has fallen about 26 percent since mid-February.
The Euro STOXX 50 volatility index, Europe's main fear gauge, known as the VSTOXX index, was up 15 percent at a 14-month high, highlighting the recent surge in investors' aversion to risky assets such as equities. Greece's stock market regulator said short-selling will be banned on the Athens bourse for two months from August 9. Analysts said the move could help reduce volatility in a market hit hard by the debt crisis. Greek shares fell 6 percent.
"I would sell equities with a large amount of exposure to the United States such as AstraZeneca , ARM Holdings and Wolseley ," said Manoj Ladwa, senior trader at ETX Capital. Rio Tinto fell 6.5 percent, Siemens dropped 4.7 percent, and Airbus parent EADS sank 8.6 percent. In a note to clients, UniCredit retained its defensive stance with an "underweight" recommendation on eurozone equities, and cut its year-end target for the Euro STOXX 50 index by 8.6 percent to 2,650 points with a negative revision risk.
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