GLOBAL MARKETS-Shares, euro knocked by fresh growth worries

Fri Mar 1, 2013 1:38pm GMT

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* Euro hovers near 2-month low vs dollar
    * Shares fall as euro zone data disappoints
    * Wall Street expected to fall as spending cuts loom
    * lacklustre China manufacturing data hits commodity markets

    By Marc Jones
    LONDON, March 1 (Reuters) - European shares fell sharply and
the euro hit a two-month low on Friday, as weak economic data
from Italy, France and Britain added to concerns about imminent
U.S. spending cuts and political stalemate in Rome.
    Wall Street was also expected to open lower as investors
waited for U.S. government budget cuts due to take effect at the
end of the day, and for a flurry of new data that will help
gauge the temperature of the world's biggest economy. 
    New surveys from Europe hit investor confidence. They showed
British manufacturing shrank unexpectedly in February, while
France's factories suffered their 20th consecutive monthly fall
in activity and industrial activity in Spain and Italy
deteriorated again. 
    It points to a largely poor start to the year for all the
region's big economies barring Germany, which continues to grind
out improvements. Its manufacturing sector grew for the first
time in a year as export orders hit a 21-month high. 
    Britain's Markit/CIPS Manufacturing PMI fell to 47.9 from a
downwardly revised 50.5 in January, confounding forecasts of a
rise to 51.0. It was the first reading below the 50 line that
separates growth from contraction since November.
    European shares and the euro had been in
positive territory ahead of the data but tumbled after the PMIs,
which further dented hopes of a quick rebound in the 17-nation
bloc's economy.
    "The concern is that manufacturing trends are diverging
strongly within the euro zone," said Chris Williamson, chief
economist at data collator Markit.
    "A revival in export orders and resilient domestic demand
has helped propel Germany's growth so far this year, while
deteriorating domestic demand is holding back the economies of
France, Italy and Spain."
    After a brief spell of resistance, the euro dropped to a
two-month low of $1.29855 versus the dollar just after midday.
Its weakness was compounded by a buoyant dollar, which hit a
six-month high versus a basket of major currencies.
    After a turbulent week, the pan-European FTSEurofirst also
reacted badly to the data as it fell to a session low to leave
it down 0.9 percent on the day despite a positive start.
    Italy's main FTSE MIB was leading the slide, down
over 2 percent and 4 percent lower on the week, as figures
showing the unemployment rate at a 21-year high added to
concerns about the country's post-election political stalemate.
 
        
    ITALY CONCERN
    Investors are worried that political problems in Italy, the
euro zone's third-largest economy, could reignite the bloc's
crisis, now in its fourth year. 
    Some economists have even questioned whether the European
Central Bank's pledge to help struggling member states which ask
for aid can be utilised if there is no workable government.
 
    Italian bonds came under more pressure after their worst
week in six months. Yields - which rise as prices fall - rose
again, to 4.8 percent on 10-year paper from 4.45
percent at the start of the week.
    "I'm not convinced there's going to be any huge turnaround
in Italian politics so we'll continue to play negative outlook
on risk," said one bond market trader who requested anonymity.
 
    
    U.S. SPENDING CUTS
    Also weighing on financial markets was the prospect of the
gradual introduction of automatic U.S. spending cuts worth $85
billion after U.S. lawmakers failed to reach a compromise deal.
    President Barack Obama meets top leaders of Congress at the
White House at 10 a.m. EST (1500 GMT) to explore ways to avoid
the unprecedented cuts. With stock futures pointing to
opening losses of around 0.6 percent, Wall Street didn't appear
overly optimistic.
    The International Monetary Fund said on Thursday it would
probably slice 0.5 percentage points off its 2 percent 2013
growth forecast for the world's biggest economy if the cuts are
fully implemented. 
    Known as "sequester", the cuts are originally part of a
package of measures agreed by politicians to try and force an
agreement to cut the budget deficit and will affect everything
from air traffic control to defence spending.
    They should start to bite in the coming weeks and could
potentially cause hundreds of thousands of workers to be laid
off. On the flip side for investors, any weakness stemming from
the cuts is likely to mean central bank stimulus remains firmly
in place.
    "The market is of the view that if there's a fiscal
tightening, which causes a significant negative impact on
economic prospects and the labour market, then the Fed will have
to respond," Morgan Stanley executive director Ian Stannard
said. 
    Chinese data showing factory growth cooled in February also
dampened the mood on commodity markets..
    The potential impact on demand for crude dragged oil prices 
down almost $1 to a six-week low of $110.3 a barrel.    
    Growth-attuned copper fell to its lowest in more
than two months, after a drop of more than 4 percent in
February. Platinum, another key metal used heavily in
cars and gadgets, hit a seven-week low.
    "The PMIs were pretty nasty. We got the poor flash HSBC PMI
earlier in the week and the real ones are no better. Clearly the
situation in China is not as good as people had hoped," said
analyst Nic Brown at Natixis in London.