LONDON (Reuters) - European stocks touched their lowest level in nearly two years on Monday as rating agency Standard & Poor’s move to downgrade U.S. debt ignited concerns that the world’s biggest economy could slip back into recession.
Automobile .SXAP and mining .SXPP shares bore the brunt of the sell-off, down 8.1 percent and 6.3 percent, respectively, on escalating fears that slower global recovery would hit demand for vehicles and raw materials.
The market saw a bounce in early session on the European Central Bank’s decision to buy Spanish and Italian bonds to halt contagion from the euro zone debt crisis, but nervousness soon crept in. The move failed to lift sentiment, battered in the past days on bleak economic numbers and debt fears in the United States and Europe.
The FTSEurofirst 300 .FTEU3 index of top European shares closed 4 percent lower at 936.29 points after hitting 935.83 -- a two-year low. Volumes were 186 percent of its 90-day daily average. The index saw its biggest one-day percentage decline since March 2009.
“Continued concerns over global growth were the cause of yet another mass sell-off, and it would seem that not even call after call from analysts saying valuations are now exceptionally cheap and attractive from a buying point of view, these aren’t enough to tempt the bulls back in,” said Angus Campbell, head of sales at Capital Spreads.
The recent sharp pullback on European stocks has dragged down European stock valuations. The average one-year forward price-to-earnings (P/E) ratio of stocks in the STOXX Europe 600 is now at 10.2, against its 10-year average of 13.3.
Analysts said investors feared the market could fall further, and shares could become even cheaper, preventing investors jumping in to grab beaten-down stocks. They said S&P’s move to cut the U.S. long-term credit rating on Friday could eventually raise borrowing costs in the country and hurt fragile economic recovery.
“The sell-off is mainly due to the fear that we will relapse into recession. Many investors have finally realized that the U.S. economy will not grow at 3 percent,” said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($468 billion).
“I will attach a one-third probability to a renewed recession, not so much because it is fundamentally inherent in the system, but because the political risk has gone up.”
Banks, which generally suffer in difficult economic conditions, also slipped. European banks .SX7P fell 3.7 percent, while Commerzbank (CBKG.DE) dropped 8.5 percent. The Thomson Reuters Peripheral Eurozone Banks index .TRXFLDPIPUBANK, which sank 14 percent last week, was down 1.6 percent, while the Thomson Reuters Peripheral Eurozone Countries Index .TRXFLDPIPU fell 2.9 percent.
“We are staying with positions in Northern Europe; we do not think we have got sufficient certainty to buy back into Italian, Spanish and other peripheral markets,” said Bob Parker, senior adviser at Credit Suisse.
The euro zone's blue-chip Euro STOXX 50 .STOXX50E index was down 3.7 percent at 2,286.91 points, losing ground for the 11th session in a row and hitting a two-year low.
Over the past six sessions, European shares measured by the MSCI Europe index .MSCIEU have lost about $1 trillion in market capitalization, more than the combined GDPs of Greece, Portugal and Ireland.
The FTSEurofirst 300 index has lost about 21 percent since a peak in mid-February to fall into bear market territory, characterized by a drop of more than 20 percent over a certain period of time. The Euro STOXX 50 has fallen about 26 percent since mid-February.
The Euro STOXX 50 volatility index .V2TX, Europe’s main fear gauge, known as the VSTOXX index, was up 15 percent at a 14-month high, highlighting the recent surge in investors’ aversion to risky assets such as equities.
Greece's stock market regulator said short-selling will be banned on the Athens bourse .ATG for two months from August 9. Analysts said the move could help reduce volatility in a market hit hard by the debt crisis. Greek shares fell 6 percent.
“I would sell equities with a large amount of exposure to the United States such as AstraZeneca (AZN.L), ARM Holdings ARM.L and Wolseley WOS.L,” said Manoj Ladwa, senior trader at ETX Capital.
“And I would buy high-yielding insurance companies such as Aviva (AV.L), as they have been dragged down by the banking sector, but do not have the same sort of exposure to sovereign debt.”
Cyclical stocks such as miners and industrials were beaten down again as investors fretted about the impact of the U.S. credit downgrade on global growth.
In a note to clients, UniCredit retained its defensive stance with an "underweight" recommendation on euro zone equities, and cut its year-end target for the Euro STOXX 50 .STOXX50E index by 8.6 percent to 2,650 points with a negative revision risk.
“A rapid resolution of the deficit and competitiveness problems in EMU is not possible — and consequently nor is a rapid end to the crisis,” it said in the note.
(Graphics by Scott Barber; Editing by Will Waterman)
Additional reporting by Blaise Robinson in Paris and Joanne Frearson in London