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European markets slump to 26-month closing low

European stocks plunged to a new low Thursday, with leading markets taking a hit of 4 to 5 percent as weak data from China and Europe worried investors. A new US stimulus plan unveiled by the Fed failed to stem the losses.


REUTERS - European shares slumped to a 26-month closing low on Thursday after a gloomy economic outlook from the U.S. Federal Reserve and weak data from China and Europe spooked investors.

The Fed said overnight, it now saw "significant" downside risks to the economy. Chinese manufacturing shrunk for the third straight month and the euro zone service sector posted a shock contraction.

While the sell off was widespread, with no gainers across the FTSEurofirst 300 , cyclical stocks seen most at risk in recession, were among the worst hit.

"Global growth worries today are even more prominent than the sovereign crisis; and that's not because sovereign crisis risk has diminished, it's because global growth worries have clearly increased," said Patrick Moonen, equity strategist at ING Investment Management.

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By the close, the FTSEurofirst 300 index of leading blue-chip shares was down 4.7 percent at 875.30 points, wiping $270 billion off its market capitalisation, nearly half the size of the euro zone sovereign rescue fund.

Volatility as measured by the Euro STOXX Volatility index , rose 8 percent but remains well off its September high.

The STOXX Europe 600 Basic Resources index , construction and materials and autos all fell between 5.4 percent and 8.9 percent, while a host of base metal mining stocks populated the leading fallers' list.

Copper-focused Antofagasta fell 12.7 percent in volume nearly three times its 90-day daily average after the industrial metal, used in wires and pipes, fell to a 1-year low .

Operation Twist

Overnight, the Fed announced plans to reshuffle its bond portfolio to suppress long-term interest rates, in a move known as "Operation Twist". The move, to try and stimulate growth, left markets largely unimpressed, however.

"Deep down there is a growing realisation that the Fed is running out of options and that the U.S. Government is unlikely to be able to offer any help until after the 2012 elections," said David Miller, partner at Cheviot Asset Management.

Data out Thursday showed a fall in jobless claims but the decline did little to calm fears the world's biggest economy could be facing a return to recession.

Fresh concerns over Europe's handling of its sovereign debt problems added to the weak sentiment, with more world leaders calling for firm action to end the crisis and a European Central Bank study warning on the future of the euro currency project.

Banks were hit again on concerns about their liquidity and how their reduced lending will impact the real economy.

Highlighting those fears, Airbus parent EADS fell 7.9 percent on worries clients may not be able to get the funding needed to buy its planes, after several French banks scaled back their involvement in the sector.
"It's the first big example of the renewed credit crunch spreading from the financial sphere to the real economy," David Thebault, head of quantitative sales trading, at Global Equities, said.

Investors fear French lenders would be particularly hard hit if Italy, which they have a large exposure to through both sovereign debt holdings and corporate relation, gets dragged further into the debt crisis.

BNP Paribas' chief executive on Thursday, however, said it had no need for fresh capital and denied talk it was in the process of tapping Qatar for investment.

French financials carry a forward five-year earnings per share compound annual growth rate of 9.3 percent, Thomson Reuters StarMine data showed, although the figure implied by the closing price on Wednesday is minus 15.3 percent.

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