Europe shares set to sink as Wall Street plunges

 

European stock index futures sank early on Friday following a plunge on Wall Street on mounting fears over the prospect of another recession and worries about Italy and Spain's debt troubles.

By 0635 GMT, futures for Euro STOXX 50, for Germany's DAX and for France's CAC were down 2.5-3.5%.

The Dow markets and the S&P 500 tumbled more than 4% on Thursday and the Nasdaq lost 5% on escalating worries that the world's biggest economy is staring at another economic downturn and that Spain and Italy could become the next dominos to fall in the euro zone debt crisis.

The euro zone's blue chip Euro STOXX 50 index plummeted to a 2-year low on Thursday in massive volumes, losing nearly 10% on the week. It has tumbled 22% since mid-February, slipping into bear market territory - characterized by a fall of more than 20% over a prolonged period.

Investors braced for the all-important U.S. monthly non-farm payrolls as well as the unemployment rate, due later on Friday, seeking more insight on the extent of the damage in the labor market following a string of bleak acroeconomic data.

Economists see payrolls up by 85,000, according to a Reuters survey, after a tepid 18,000 gain in June. The unemployment rate is expected to hold steady at 9.2%.

On the European front, French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday, Sarkozy's office said in a statement.

The sell-off in Spanish and Italian stocks accelerated in late trade on Thursday after the ECB failed to include the two battered countries in a fresh round of bond buying, even though yields on their debt shot above 6 percent, the highest level since the euro was launched over a decade ago.

ECB President Jean-Claude Trichet said there was not full support in the central bank for the action, underscoring deep divisions within Europe over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek financial rescues.

"Ambiguity about which bonds were being bought only served to highlight continued policy mistakes by EU leaders in the misreading of the debt problems facing Italy and Spain," CMC Markets analyst Michael Hewson wrote in a note.

"The ECB's fixation on inflation targeting has helped precipitate the very crisis they should be looking to avoid as investors see growth slowing and debt rising. With Europe's leaders on holiday and no chance of the EFSF getting the powers it needs in time to avert a meltdown, the ECB could well be forced into cutting rates and printing money to free up liquidity to prevent another freezing up in the credit markets."

The sell-off in European equities this week has wiped 400 billion euros off the market capitalization of German, British, French, Italian, Spanish and Dutch blue-chips indexes - bigger than Switzerland's GDP last year and almost the size of the 440 billion euro capacity of the rescue fund set up by the EU to tackle the debt crisis.

Despite the stock market plunge this week, price-to-earnings ratios on the broad STOXX Europe 600 .STOXX have remained stable, with the benchmark index trading at 10.2 times 12-month forward earnings, signaling that analysts have started to slash their profit forecasts for companies.