European stocks closed lower in extremely thin trading on Monday after China's interest rate rise over the weekend fuelled concerns about the outlook for economic growth. The FTSEurofirst 300 ended down 0.9 percent at 1,137.49, with German carmakers Volkswagen and BMW the worst hit, both down more than 5.5 percent.
Volumes were thin, however, at just 29 percent of the index's 30-day average volume, with Britain on holiday until Wednesday and many institutional trading books closed ahead of year-end. The pan-European index has gained 6.6 percent in December and, in spite of the Monday's hefty fall, is still on track to record its biggest monthly gain since March.
The Christmas Day news that China would raise interest rates for the second time in just over two months in an attempt to cap surging inflation drove the market firmly lower at the open.
For more, see: However, "whatever view markets take in the short term, growth in China will still be well above the norm," said Howard Wheeldon, an equity strategist at BGC Capital Partners. "There's a slowing down, but China is not going into a reverse." The STOXX Europe 600 Automobiles & Parts index was the worst-hit sector, down 3.9 percent on concern the rate hike could hit demand for cars from consumers in China, a key export market for many automakers.
Adding to sector woes was last Friday's news Beijing aims to tackle congestion in China's capital by limiting new-car registrations. "They may do the same in other cities in China, and it will hurt the German makes like Daimler," said Heino Ruland, a strategist at Ruland Research, in Frankfurt. In addition to the falls for BMW and VW, shares in Daimler and parts maker Continental also ended sharply lower, down 4.6 percent and 4.3 percent, respectively.
Regional index losses could be extended in the coming days, said a trader at a leading US bank, as many firms in the STOXX Europe 600 Basic Resources index are listed in London and have yet to price in the China rate hike. "I still think the market may not have fully factored the rate rise in yet. Investors need to fully digest this, and there's not been enough commentary released yet," he added.
In the heavyweight banking sector, a combination of the China rate hike and ongoing sovereign debt woes pushed shares lower, said Ruland, with peripheral eurozone banks particularly weak. Spain's Banco Santander and BBVA closed down 2.9 percent and 2.3 percent, respectively, while Greek lenders Alpha Bank and National Bank of Greece were down more than 3.5 percent. Across Europe, Germany's DAX and France's CAC 40 ended down 1.2 and 1 percent, respectively, while Spain's IBEX 35 closed down 2.1 percent.
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