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Europe: China and banks rattle European stocks

[LONDON] European stock markets slumped on Tuesday, dragged down by weak bank results and disappointing Chinese data as the EU cut its forecast for eurozone growth.

But the euro still managed to reach an eight-month high against the dollar, which tumbled also versus the yen on dwindling prospects of a further hike in US interest rates any time soon, according to analysts.

London's benchmark FTSE 100 index closed the day down 0.9 per cent, while in Paris the CAC 40 retreated 1.6 per cent and in Frankfurt the DAX 30 tumbled 1.9 per cent to fall below the 10,000 points level.

"European stock markets don't seem to have finished with risk aversion," said market analyst Yoav Nizard at FXCM online brokerage.

"The bad manufacturing and non-manufacturing PMI figures from China this week have resurrected fears that risk getting worse as the slowdown in China appears inevitable.

Chinese factory activity fell by 0.3 point to 49.4 in April, according to the private Caixin survey of purchasing managers, further below the 50 level that separates growth from contraction.

Meanwhile in Europe, weak earnings updates from German titan Commerzbank and Swiss lender UBS were only partly offset by better-received numbers out of HSBC and BNP Paribas, whose share prices rose.

Commerzbank's stock dove 9.6 per cent to 7.32 euros and UBS tumbled 7.5 per cent to 15.29 Swiss francs.

The European Union meanwhile on Tuesday cut its eurozone growth forecasts for this year, warning that global risks including the slowdown in China and the danger of Britain leaving the bloc were harming economic recovery.

Yet the euro hit an eight-month high at $1.1616, but that was more due to data released Monday that showed that growth in US factory activity slowed last month.

Following last week's soft consumer spending report and news that the world's top economy expanded less than expected in the first quarter, investors are seeing less likelihood of a hike in US interest rates in June, leading to a softer dollar.

"The weak US first quarter growth figures on top of a cautious statement from the Federal Reserve has seen market expectations for a June rate hike fall to 12 per cent," said analyst Jasper Lawler at CMC Markets.

Attention is already turning to the release of US jobs data on Friday. Many expect a slowdown in hiring, which would also push the Fed to further delay tightening monetary policy.

The US currency also fell to 105.55 yen, an 18-month low.

The yen has also rallied as the Bank of Japan shocked markets last week by not expanding its stimulus.

Wall Street stocks also fell on Tuesday, with the Dow dropping 1.1 per cent approaching midday, taking cues from poor European bank earnings and weak Chinese manufacturing data.

Nevertheless Shanghai stocks rallied, ending three days of losses, as speculation swirled the Chinese government would introduce new measures to support the market.

And Sydney soared more than two per cent after Australia's central bank slashed interest rates to a record low after inflation last week came in well below expectations.

REUTERS