European equities sold off for a fourth session on Thursday, heading for their longest down run in four months as gloomy news from manufacturers in key economic powerhouses, China and Germany, cast doubts over the strength of global demand.
China's manufacturing sector contracted for a fifth month in March, according to the HSBC flash purchasing managers index, while a key Chinese think-tank said the country should be ready to cope with extreme risks to the economy from a sharper global downturn.
Germany, seen as the star in the otherwise recession-mired euro zone, and France both reported an unexpected contraction in manufacturing activity. Britain added to the gloom with a steeper than forecast fall in retail sales.
The pan-European FTSE Eurofirst 300 was down 1.0 percent to 1,080.69 points by 1126 GMT, extending its losses since the start of the week to 2.4 percent. It is on track for its longest continuous sell-off since stock markets turned higher in November kick-starting what turned into a major rally.
The Euro STOXX 50 of euro zone blue chips fell 1.4 percent to 2,531.14 points, slipping through mild technical support of the 10-, 20- and 30-day moving averages but stopping short of the 40-day line which lay around 2,515.56 points.
Our index targets have been already reached, so we see a short-term correction on European equities and the figures on the PMI indexes could be a good trigger for the start of a correction, said Benoit Peloille, equity strategist at Natixis, who targets 2,300 on Euro STOXX 50 by the end of the year.
The weak data put the spotlight on the U.S. weekly jobs data due at 1230 GMT. Following recent signs of strength, any deterioration risks exacerbating the fall in equities.
The implied volatility on the Euro STOXX 50 - seen as a crude gauge of investors' risk aversion - jumped 11 percent to 22.18, on track for its biggest daily increase in two weeks.
The put/call ratio on the euro zone index, which charts demand for options that bet on a falling market versus those positioned for a rally, rose to 1.615, its highest level since March 9, according to Thomson Reuters Datastream.
Increased trade in put options signals that investors could be insuring their equity holdings against possible weakness by buying the right to sell out at a pre-determined price.
Both implied volatility and the put/call ratio, however, remained far from the extreme highs set last year when risk aversion ruled and investors were ditching equities in droves.
The gloomy news on the economy and accompanying market turnaround comes just as investors were starting to become less pessimistic, with the net percentage of asset allocators who are underweight falling to 14 from 20 this month, according to the Bank of America Merrill Lynch fund manager survey.
The French CAC 40 was down 1.6 percent, while the German DAX - which has been the outperformer in Europe so far this year with a rise of 18 percent - fell 1.3 percent.
I have downgraded Germany to a more neutral stance because Germany is in part dependent on global growth and this is under scrutiny, Gerhard Schwarz, head of equity strategy at Baader Bank, said. I am a little bit skeptical that the momentum of the outperformance of Germany can continue.
BNP Paribas suggested that one way to bet on the end of the DAX's outperformance would be through buying at-the-money September 2012 puts on the German index and selling puts on South Korea's Kospi 200 index which has risen by a more modest 13 percent since the start of this year.
Among the sectors, miners, for whom resource-hungry China is a key consumer, underperformed with the STOXX 600 basic resources index down 3.1 percent.
Banks fell 1.7 percent, their high-beta profile making them sensitive to the pick up in risk aversion and also weighed down by resurgent concerns about Spain's ability to deal with its debt pile which saw yields on its 10-year sovereign bonds rise to 2-1/2 month highs.
The biggest faller on the FTSE Eurofirst 300, though, was Rangold Resources, which lost 13 percent as mutinying soldiers said they have seized power in Mali, which accounts for roughly two-thirds of the miner's production. Rangold said its operations in Mali were running normally
Despite the pull-back, European equities are still on track for their strongest first quarter since 1998 and, according to Commerzbank analyst Petra Kerssenbrock, technical charts remain in a long-term bull trend.
We had quite a movement to the upside, so a longer consolidation period shouldn't come as a surprise. But it is a consolidation, not more than that, she said, adding that weakness on the Euro STOXX 50 could be limited by the 2,500 mark - just six percent below current levels.