European stocks sank to fresh eight-month lows yesterday after tumbling US retail sales pointed to cracks in the bedrock of the world's biggest economy, denting profit recovery prospects.
An early technology-led bounce melted away when US telecoms gear firm Lucent warned of a sharp fall in its third quarter revenues as customer demand failed to perk up.
Lucent's French peer Alcatel dropped 2.7 per cent and helped push Europe's tech sector to its weakest level since its multi-year lows of September 21.
Investors nibbled at some defensive stocks like tobacco, foods and personal care such as L'Oreal, but the US data sent most investors scrambling and put more downward pressure on the dollar.
"May retail sales are a big disappointment and reinforce recent worries about the pace of the US economic recovery," said Ken Wattret, chief Euroland economist at BNP Paribas.
However, an eight per cent year-on-year drop in May new car sales in Western Europe also highlighted the patchy economic performance in Europe and sent car stocks skidding. Sector leader DaimlerChrysler fell 3.3 per cent.
Fund managers said European shares have already dropped below fair value compared to bonds, but only a slight recovery was anticipated over coming months.
"On a 12-month view, we are looking for markets to be about 5 per cent higher," said Jamie Sandison, European portfolio manager at Edinburgh Fund Managers.
At 1532 GMT with only Frankfurt officially trading, the FTSE Eurotop 300 index was down 1.15 per cent at 1,092 points, with declining issues outpacing advancers by three-to-one.
The blue-chip index was headed for its weakest close since late September.
The Euro Stoxx 50 index shed one per cent. On Wall Street, the Dow Jones industrial average was down 0.5 per cent at 9,567 points. The tech-studded Nasdaq Composite also fell 0.5 per cent.
The day's turning point came when the US Commerce Department said retail sales last month fell by 0.9 per cent, the largest amount since November and by much more than the 0.3 per cent drop economists had forecast. The drop was largely blamed on weaker car and gasoline sales.
Consumer activity accounts for two-thirds of the US economy and investors are anxious that Americans continue to dig deep into their pockets to fuel recovery that companies need to revive profits.
"The strength of consumer spending staved off a recession in the United States so if this important part of the economy falters it does not auger well for the outlook," BNP Paribas' Wattret said.
On the positive side, the data reinforced the case for a delay in US interest rate rises, Wattret added.
Pricing power at the wholesale level remains weak as US May producer prices in May fell 0.4 per cent, the biggest drop since December 2001.
Attention now turns to today's US economic numbers, particularly the University of Michigan preliminary consumer sentiment index for June.
Corporate news was thin with soured sentiment largely responsible for pushing shares lower as an early bounce found little support in the face of renewed doubts over the pace of economic rebound.
A slew of European sectors hit new lows for the year, including technology, media, insurers, financials, consumer cyclicals, and industrials, while banking and telecoms were just a whisker away from their 2002 troughs.
The pullback in media was broad, with sector leader Vivendi Universal Europe's top blue chip decliner, the stock falling 3.3 per cent.
Insurers hit a new low for the year in spite of Europe's second largest insurer, Axa of France, gaining 0.9 per cent after saying the underlying value of its insurance business fell slightly last year but remained higher than expected.
In financials, Germany's MLP dropped 6.2 per cent, but was well off its lows after rejecting reports that cast doubt on its accounting practices.
Meanwhile shares in MobilCom jumped 18 per cent after board members told Reuters the supervisory board was set to sack the telecoms group's founder and boss Gerhard Schmid later this month in a bid to get support from the embattled firm's majority shareholder France Telecom.
Europe's biggest supermarkets group Carrefour rose 1.3 per cent after it confirmed its targets for a rise in sales and net profit this year.
Fund managers urged selectivity and value. "Our portfolio is overweight basic materials as they have relatively low valuations, and we also like utilities with a good dividend yield," Edinburgh Fund Mangers' Sandison said.
"Some of the banks look quite good with fairly low valuations but we still do not see much in the way of value in IT and telecoms, nor do we think the sell-side analysts have yet really woken up to reality on this," Sandison added.