LONDON European shares tumbled to six-month lows on Friday and braced for further losses as weak economic data from the United States and Europe cast new shadows on global economic recovery prospects.
Markets extended losses in the afternoon, when data showed U.S. job growth braked sharply in May and the unemployment rate rose for the first time since June, coming on the back of a raft of soft national factory surveys in Europe published earlier on Friday.
"Today's non-farm payrolls data confirms the U.S. economy is not heading for a strong recovery this year," Michiel Van Cranenburgh, a director at Paris-based Neuflize Private Assets, which manages around 4 billion euros chiefly invested in European equities.
"We try to avoid stocks that are dependent on growth in the U.S. or Europe because we're clearly not optimistic for the next couple of years."
The euro zone's manufacturing sector shrank at its steepest pace in nearly three years in May, with the contraction also affecting Germany, in a sign Europe's largest and so far most resilient economy was also suffering from the repercussions of the euro zone crisis.
Frankfurt's Dax, which outpaced all other major European national benchmarks so far this year, was the worst performer on Friday as it fell 3.4 percent to a five-month low, while France's CAC-40 hit a six-month closing trough as it ended down 2.2 percent.
The pan-European FTSEurofirst 300 index closed 1.9 percent lower at 954.74 points, a closing level not seen since December, while the Euro STOXX 50 index of euro zone blue chips fell to a seven-month closing low of 2,068.66 points, down 2.4 percent.
Volumes on the indexes were above their anaemic 90-day average at 120 percent for the FTSEurofirst 300 and 133 percent for the Euro STOXX 50, suggesting a relatively high number of investors took part in the sell-off.
Charts on the Euro STOXX June futures pointed to further downside in the very short term after the contract broke below a technical support at 2,092 to settle at 2,068 points.
"The downside breakout of the support threshold has triggered a bearish acceleration," Nicolas Suiffet, an analyst at Trading Central said. "As long as 2,101 is resistance, look for further weakness towards 2,023 and 1,999."
Implied volatility on the Euro STOXX 50, a crude measure on investor risk aversion, rose 4.1 percent to 36.38 after hitting a six-month high of 37.44 in intra-day trade.
The poor economic data piled pressure on the Federal Reserve and the European Central Bank to use monetary tools to stimulate the economy, which was already strained by a sovereign debt crisis in the euro zone and deleveraging by banks.
Neuflize's Van Cranenburgh expected sovereign debt problems in Europe and the United States to result in further monetary policy easing in coming years, resulting in higher inflation.
For this reasons, the strategists favored miners that traded gold, which is regarded as an inflation hedge and rallied more than 2 percent after the U.S. data on Friday, amid expectations the U.S. authorities could unveil another round of monetary easing.
UK-listed gold miner Randgold was by far the best performer on the FTSEurofirst 300 as it rose 6.9 percent in volume nearly twice its 90-day average.
Neuflize was short both the Euro STOXX 50 and the U.S. Standard & Poor's 500 to reflect its bearishness on developed market equities and had taken the cash portion of its portfolio to around 30 percent.
This compared to a 12.5 cash holding for funds polled by Reuters in May, the highest monthly reading in nearly a decade as fund managers rushed to safety amid fears of a Greek exit from the euro and Spain's banking crunch.
An escalating euro zone crisis saw investors take out their money from European equity funds in the week to May 30, while U.S. bond funds took in over $1.5 billion for the 24th week in a row and gold funds recorded their biggest inflow since late January, according to data by EPFR Global.
(Additional reporting by Sudip Kar-Gupta; editing by Ron Askew)