European Stocks Slump For Third Day After Weak German Data

European stock markets declined for a third straight day on Tuesday, after weak trade data from Germany added to evidence that economic activity in the country has slowed down.

The Stoxx Europe 600 index dropped 0.6% to 342.68, on track for the lowest closing level in July.

Germany's DAX 30 index gave up 0.5% to 9,852.59, after trade data showed both exports and imports fell in Germany in May, creating further fears that Europe's economic engine is cooling.

The data followed a meager industrial-production report for May on Monday, a disappointing reading on manufacturing orders released on Friday and softer-than-forecast unemployment data also out last week -- all raising red flags about Germany's growth potential.

Stephen Pope, managing partner at Spotlight Ideas, said in a note on Tuesday that a critical analysis of the German economy is necessary, as the overall GDP looks to the industrial sector for 28% of its value. With the recent weak data, the economy is on track to expand by only 0.1% quarter-on-quarter in the second quarter, indicating a 0.4% annualized rate. That would be a "tremendous decline" from first quarter's 3.3% annualized rate, Pope said.

"If the number one [European] economy is running at anything less than full tilt, then the overall region will struggle to expand, and the ECB will face an enduring headache of disinflation leading to deflation," he said. "Without a vibrant Germany, the 18-member euro zone will struggle to expand."

Elsewhere in Europe, France's CAC 40 index lost 0.5% to 4,382.80, while the U.K.'s FTSE 100 index fell 0.5% to 6,789.48.

Stocks in London were weighed by fresh data on U.K. factory output for May, which unexpectedly fell and showed a broad based decline. The news also hurt the pound (GBPUSD) that fell to $1.7109 from as high as $1.7149 ahead of the data.

Economists, however, didn't seem to worry too much about the weakness. Rob Wood, chief U.K. economist, at Berenberg said the data were "unlikely to be a true reflection of what is happening in the sector" and that a big bounce-back in output is possible next month.

Chris Williamson, chief economist at Markit, also cautioned not to read too much into one month's data and noted that the more stable three-month trend rate of growth in the official data remains historically strong at 1.1%, which is broadly in line with the PMI survey.

Stock movers

Among notable movers, shares of Air France-KLM slumped 4.6% after the airline company lowered its 2014 earnings guidance due to weak demand and difficulties in repatriating revenue from Venezuela.

Commerzbank AG gave up 3.7% after reports that the German lender has begun settlement talks with U.S. regulators over its payment activities with Iran and other countries blacklisted by the U.S. A representative from Commerzbank wasn't immediately available to comment.

Also in Frankfurt, shares of Volkswagen AG slipped 0.6% after the auto maker said sales of its namesake-branded cars in the first half of the year were weak in Europe and continued to slide in the U.S. and South America.

Sodexo SA gained 0.5% after Société Générale lifted the catering and facilities-management company to buy from hold.