European stock markets take a dive after Tokyo shares plunge

LONDON (AFP) - European stock markets slumped on Thursday, with most indices losing more than 2 per cent after Tokyo shares plunged owing to weak Chinese data and signs that the United States Federal Reserve may soon taper massive stimulus measures, analysts said.

London's benchmark FTSE 100 index sank 1.82 per cent to stand at 6,715.83 points in midday deals, Frankfurt's DAX 30 slumped 2.36 per cent to 8,329.66 points and in Paris, the CAC 40 shed 2.18 per cent to 3,962.61.

The Madrid market gave up 1.60 per cent, Milan slid 2.44 per cent and Stockholm dived 2.66 per cent.

European equities were pulling back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing euro zone strains and some still weak numbers out of the US and China.

Tokyo's main index ended down more than 7 per cent on Thursday as investors took profits also after strong recent gains.

Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Fed chief Ben Bernanke told Congress on Wednesday that the US central bank could scale back stimulus measures soon if economic conditions improved.

"Fed chairman Ben Bernanke's much anticipated testimony... certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen.

He added that while share prices initially rose after Mr Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings.

"To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Mr Cohen said.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

In foreign exchange activity, the European single currency climbed to US$1.2886 from US$1.2855 on Wednesday. The dollar slid to 101.60 yen from 103.10 yen.

The euro was higher despite news of a downturn in euro zone private sector business activity.

The Markit Eurozone Composite Purchasing Managers Index registered 47.7 points in May, a three-month high and well up on April's 46.9 points, albeit still below the threshold of 50 points indicating growth or recession.

On the London Bullion Market, the price of gold dropped to US$1,392.60 an ounce from US$1,408.50 late in New York on Wednesday.

Meanwhile, the slump in global share prices came also after HSBC Bank said that manufacturing activity in China contracted in May for the first time for seven months, in another sign of the weakness of the recovery.

Wall Street had ended lower on Wednesday following a choppy day of trading, as the market weighed exit signals on the Fed's exceptionally loose monetary policy.

The Dow Jones Industrial Average dropped 0.52 per cent, the broad-based Standard & Poor's 500 Index gave up 0.83 per cent and the tech-rich Nasdaq Composite Index sank 1.11 per cent.

"The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Mr Neil MacKinnon of VTB Capital financial group.

"In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients.

"To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target?" Mr MacKinnon added.