European stocks dive on U.S. economy fears

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Stocks plunged in Europe on Monday, driving some markets to new lows for the year, as worries mounted about the U.S. economy and as Italy and Spain faced a fresh jump in bond yields.

European markets had been drifting modestly lower until the U.S. Institute for Supply Management reported its manufacturing-sector index for July. The index (charted below) came in at 50.9, far below analysts’ expectations of about 54.5.

A reading below 50 would indicate that manufacturing activity was contracting, which of course would stoke fears of recession.

With much of Europe’s economy already so battered by the continent’s debt crisis and by government austerity programs, a weaker U.S. economy is another blow to confidence across the pond.

The main Italian stock index plummeted 713 points, or 3.9%, to 17,720.44, its lowest since April 2009.

The Italian market has fallen 23.5% from its 2011 peak in February, meaning a new bear market is underway. The threshold for a bear market generally is a 20% drop in major indexes.

Spain’s main index fell 3.2% on Monday. It has fallen 16% from its February high. The French market lost 2.3% for the day and is down 13.7% from its February peak.

By contrast, stocks were broadly lower on Wall Street at midday, but the losses were moderate compared with Europe. The Dow Jones industrial average was off 103 points, or 0.8%, to 12,040 at about 11:15 a.m. PDT. The Dow is off 6% from its 2011 high reached April 29.

U.S. stocks had rallied in the opening minutes, reacting to the tentative debt-ceiling deal reached by leading Democrats and Republicans on Sunday. But the ISM index report quickly pulled the rug out from under the rally.

European equity markets also were under pressure as government bond yields continued to rise in Italy and Spain.

Less than two weeks ago the European Union agreed on a new Greek bailout and renewed financing support for Italy and Spain. One goal of the EU package was to boost confidence that debt-hobbled Italy and Spain wouldn’t follow Greece, Portugal and Ireland in needing full bailouts from the rest of the euro-zone.

But investors have continued to push up Italian and Spanish bond yields in recent days, raising the risk that those governments will at some point be unable to borrow in the private markets to roll over maturing debts.

The yield on 10-year Italian bonds jumped to 6% on Monday, up from 5.87% on Friday and a new high since the euro-zone debt crisis has worsened this year.

Spain’s 10-year bond yield rose to 6.20% from 6.08% on Friday, nearing the recent high of 6.32% on July 18.

The euro tumbled 1.1% to $1.424 from $1.439 on Friday.

-- Tom Petruno

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