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Europe: Stocks fall on deflation fears

[LONDON] Europe's leading stock markets fell sharply on Wednesday as deflation fears swept across the region, while tumbling commodity prices sent mining and oil share prices crashing.

London's benchmark FTSE 100 index tumbled 2.35 per cent to 6.388.46 points, as shares in mining groups collapsed after copper prices slumped to near six-year low points.

Frankfurt's DAX 30 closed 1.25 per cent down at 9,817.08 points and the CAC 40 in Paris shed 1.56 per cent to 4,223.24 points.

Crude futures were stuck around the lowest levels since 2009.

"It was a sea of red for European equities on Wednesday even with a cautious green light for QE (quantitative easing) from the European Court of Justice after the World Bank slashed its world and European growth outlook despite the potential benefits from falling oil prices," said Jasper Lawler, analyst at CMC markets.

The rate of return on 10-year French government bonds fell to a record low level Wednesday in the wake of weak inflation data and as expectations mount that the European Central Bank will unveil more stimulus at its policy meeting next week.

The yield on German, Italian and Spanish bonds also fell.

ECB president Mario Draghi said the central bank does not have many options left apart from sovereign bond purchases to ward off deflation in the euro area.

One possible problem for an ECB stimulus programme of a large-scale buying of government bonds known as QE was removed on Wednesday.

A senior lawyer at the EU's top court found that a hugely controversial earlier bond-buying programme readied by the European Central Bank is legal.

Advocate General Cruz Villalon at the European Court of Justice said in an opinion that the programme was "in principle" in accordance with European treaties, after a legal challenge by German politicians and academics who charged the ECB was overstepping its powers.

"The reason why this ruling was so important was because of the implications it could have had for QE, which the ECB is expected to announce next week," said Craig Erlam, market analyst at Alpari trading group.

The euro firmed despite rising expectations that the ECB would pump more money into the economy, rising to US$1.1802 from US$1.177 late in New York on Tuesday, when the World Bank cut its global growth forecast for this year to 3.0 per cent from 3.4 per cent.

For developing countries which have been the biggest contributors to global growth in recent years, the World Bank cut its 2015 forecast by 0.6 percentage points to 4.8 per cent.

The price of copper tumbled Wednesday in reaction.

Copper for delivery in three months plunged in Asian trading hours to US$5,353.25 per tonne, a level last seen in July 2009. That marked an 8.0 per cent slide from Tuesday's close.

"With little respite for investors amid deflation concerns and the World Bank lowering its outlook for the growth prospects of the global economy, the volatility of late is set to continue," said Andy McLevey, head of dealing at stockbroker Interactive Investor.

Mining companies saw their share prices dive Wednesday, with Glencore plunging 9.28 per cent to 244 pence, Anglo American tumbling 8.99 per cent and BHP Billiton retreating 5.31 per cent.

World oil prices meanwhile remained close to six-year lows after major crude producers stressed they would maintain output levels despite global oversupply, while traders awaited the latest update on US crude inventories.

In late afternoon deals in London, Brent North Sea crude for February delivery lost 33 cents compared with Tuesday's close to stand at US$46.26 per barrel.

US benchmark West Texas Intermediate for delivery in February rose 8 cents to US$45.97 a barrel.

Energy company shares were down sharply, with BP shedding 3.57 per cent and Shell losing 3.32 per cent.

Wall Street opened down after data showed that US retail sales fell 0.9 percent from the previous month in December, the prime holiday shopping month of the year, although the data were influenced by the tumbling fuel prices.

The Dow Jones Industrial Average fell 1.39 per cent to 17,369.05 points in the first five minutes of trading.

The broad-based S&P 500 tumbled 0.91 per cent to 2,004.69, while the tech-rich Nasdaq Composite Index shed 0.61 per cent to 4,632.96.