European shares lurch lower on emerging market jitters

Mon Feb 3, 2014 10:46am EST

* Euro STOXX 50 Volatility Index up 8 pct

* FTSEurofirst 300 down 1 pct

* FTSEurofirst set for lowest close since mid-December

* Emerging markets worries continue to weigh

By Sudip Kar-Gupta

LONDON, Feb 3 (Reuters) - European shares fell to their lowest level in more than a month on Monday, knocked back by data showing China's economy losing momentum and by growing worries about the impact on companies from emerging market turmoil.

The pan-European FTSEurofirst 300 index, which in January had its first monthly loss since August, was down by 1 percent at 1,277.77 points in late session trading.

The euro zone's blue-chip Euro STOXX 50 index also declined by 1.4 percent to 2,972.64 points, while uncertainty over the near-term outlook drove up the Euro STOXX 50 Volatility Index by 8 percent to 23.56 points.

Fresh evidence of a slowdown in economic growth in China came after China's official Purchasing Managers' Index (PMI) dipped in January.

Emerging markets, which depend heavily on investment from the likes of China and the United States, have been hit by this uncertainty over the outlook for China and a scaling-back in U.S. economic stimulus measures.

The winding-down of the U.S. Federal Reserve's bond-buying programme has pushed up returns on U.S. Treasuries, causing investors to buy back into Treasures while selling out of emerging markets assets.

"What's been interesting has been the scale and the rapidity with which the emerging markets have unwound," said Christopher Mahon, director of asset allocation research at the Global Multi Asset Group at Barings.

"Although we don't think equities will do badly, and will end up higher than they were at the start of the year, we think it will come with more volatility than 2013 had," added Mahon.

TOO RISKY TO BUY ON THE DIP?

Shares in companies with a significant exposure to emerging markets fell sharply. Cement maker Lafarge fell 3.8 percent while Spanish bank Banco Santander - which is exposed to Latin America - also weakened 2.8 percent.

The STOXX Europe 600 Banking Index was also knocked by a 6.8 percent fall at Swiss bank Julius Baer after the company posted lower-than-expected earnings.

In spite of the current emerging market turmoil, many investors with a long-term view over the whole of 2014 remain optimistic for the prospects for European equities this year.

Such investors say European stocks should gradually move up over the course of the year as the region's economy slowly recovers.

However, those with a more short-term view said now was not the time to go back into the equity market.

Montaigne Capital fund manager Arnaud Scarpaci said the Euro STOXX 50 could soon fall back to the 2,700-2,730 point range while David Thebault, head of quantitative sales trading at Global Equities, also expected more near-term volatility.

"It's not yet time to buy this dip," said Thebault.