European stocks fell sharply on Monday as weak US manufacturing data added to worries about a slow recovery for the world's biggest economy, more than offsetting optimism the United States would avert a disastrous debt default.
The FTSEurofirst 300 index of top European shares fell 1.3 percent to 1,067.97 points, the lowest close in two weeks, and only just above its low for 2011, 1,065.72. Volumes were high, at 125 percent of the 90-day average for the index.
"Growth looks as though it's waning in a lot of developed economies, and the (US and eurozone) debt situation can only be solved with growth," said Michael McNaught-Davis, head of international equities at Scottish Widows, which has 145 billion pounds under management. "I'm more concerned about the growth and earnings than what's been going on with US debt, which is semantics and accounting as much as anything."
Banking shares were a major drag on the index, with Italy's heavyweight Intesa SanPaolo among the worst off, down 7.9 percent. Citigroup cut its target price for all Italian banks, including Intesa, which it lowered to 1.9 euros, from 2.16. "The increase in the Italian sovereign debt yield has driven a strong increase in funding costs," Citi said.
The STOXX Europe 600 Banking Index fell 2 percent, and is down 13.6 percent in 2011, on worries about sovereign debt levels. The fall on Monday was despite Europe's biggest bank, HSBC, gaining 2.2 percent after its results beat forecast. The Thomson Reuters Peripheral Eurozone Banking Index fell 6.2 percent.
The US Institute for Supply Management manufacturing report, a gauge of factory activity, fell to 50.9 in July, its lowest since July 2009 and barely above the 50 mark dividing growth and contraction. The data followed Friday's below-forecast US GDP data. In Europe, the euro zone manufacturing PMI, which gauges thousands of businesses, fell to 50.4 in July from 52.0 in June - its worst showing since September 2009.
Across Europe, Britain's FTSE 100 fell 0.7 percent while Germany's DAX and France's CAC40 fell 2.9 and 2.3 percent respectively. The Thomson Reuters Peripheral Eurozone Countries Index was down 4.5 percent, with Italy's benchmark down 3.9 percent. "The earnings season in Europe has been pretty disappointing," McNaught-Davis said. "Analysts have clearly underestimated the impact of higher raw material prices, and how difficult it would be for companies to pass them on."
Air France-KLM, among those reporting last week, fell 4.5 percent to a new 12-month low. Investors are bracing for a flurry of European corporate earnings due this week from big names like Societe Generale and Deutsche Telekom, ahead of Friday's key US monthly non-farm payrolls.
Europe's second-quarter results season has so far revealed an equal split between earnings beats and misses, falling short of the near-80 percent earnings beats reported by US companies, data from Thomson Reuters StarMine shows. Of the 137 European companies that have reported second quarter earnings, 51 percent of them have come in above or in line with analysts' forecasts. The remaining 49 percent came in below.
US congressional leaders rushed to line up Republican and Democratic votes on Monday for a White House-backed deal to raise the US borrowing limit and avert an unprecedented debt default. The Euro STOXX 50 index of euro zone blue chips fell 2.9 percent, and its 14-day Relative Strength Index fell to 33.6, with 30 and below considered "oversold".
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