European shares fell on Monday, with investors' heightened fears pushing a volatility index to a new high, as worries over a possible Chinese credit crunch and a scaling back in US economic stimulus hit markets. Traders and investors said the rout was not over yet, with some taking out "put" options to bet on further falls on key indexes such as Germany's DAX over the next month. The pan-European FTSEurofirst 300 index closed down 1.6 percent at 1,114.19 points, its worst finish since ending at 1,108.59 points on November 29 last year.
The eurozone's blue-chip Euro STOXX 50 index also fell 1.5 percent to 2,511.83 points, while the Euro STOXX 50 Volatility Index - a measure of investors' fears - rose 5.2 percent to a 9-month high of 25.30 points. World stock markets hit record highs in late May but then fell back after US Federal Reserve head Ben Bernanke confirmed the Fed would soon scale back a stimulus programme known as "quantitative easing" that had driven the equity rally.
Signs of a cash crunch in China's banks over the last week have also added to the rout, with some 877 billion euros ($1.15 trillion) wiped off the pan-European STOXX Europe 600 index since markets hit their late May peak. The pullback has wiped out much of the gains on European markets. The FTSEurofirst 300 is down 1.7 percent since the start of 2013, the Euro STOXX 50 is down nearly 5 percent while Germany's DAX, which hit an all-time high in May, is now only up 1.1 percent this year.
"There are concerns about China and there's little for people to be positive about at the moment. Things have been dropping like a stone. It seems a little bit too brutal for it to be just a healthy pullback," said MB Capital trading director Marcus Bullus. The lingering worries over the banking system in China hit mining stocks hard, due to the sensitivity of that sector to the economy of China, which is the world's biggest metals consumer.
The STOXX Europe 600 Basic Resources Index, which comprises mining stocks, fell 3 percent to make it Europe's worst-performing equity sector. Central Markets Investment Management trading head Darren Courtney-Cook said he had bought "put" options to bet on further falls on the DAX, which fell 1.2 percent to 7,692.45 points. Rupert Baker, a European equity sales executive at Mirabaud Securities, also felt European shares had further to fall given the likely end to the Fed's stimulus measures. "Have we finished coming off? No, of course not. If you switch off the laughing gas, what do you expect?" he said.