U.S. Economic Worries Slam European Shares

German government bond yields hit their lowest level since September on Tuesday and European shares fell sharply as investors returning from a long weekend switched from riskier to safer assets after surprisingly weak U.S. jobs data.

The cost of insuring Italian and Spanish debt and their bond yields also climbed higher, in another sign of risk aversion.

The concerns about the world's largest economy overshadowed positive trade numbers from Germany and China, with both nations enjoying strong export growth, although weak Chinese import numbers took some of the gloss off the data.

"Our feeling is we are back to looking primarily at the shape of the U.S. economy in the second quarter," said Adam Cole, head of FX research at RBC Capital Markets.

"I think the risk is even a normal quarter will be seen as disappointing," he said.

Investor concerns about the global economic outlook, already tainted by the euro zone debt crisis, took a knock from the U.S. nonfarm payrolls report released on Friday when European markets were closed for the Easter break.

The report showed payrolls grew by just 120,000 in March, far below the expected increase of 203,000.

Ian Williams, an equity strategist at Peel Hunt, said the data confirmed that the Federal Reserve was right to be cautious about the U.S. recovery.

"Although that could be interpreted as increasing the likelihood of sustained Fed support, the "risk off" mood that prevailed in the early days of the second quarter seems likely to persist for now," he said.

The key FTSE Eurofirst index of top European shares was down one percent in early trade at 1041.55 with Germany's DAX index down 0.75 percent.

The Euro STOXX 50 volatility index, Europe's main barometer of investor appetite for risky assets such as stocks, also surged 12 percent to a five-week high.

Global stocks also eased as major Asian markets saw a second straight day of losses with higher-than-expected Chinese inflation data also weighing on sentiment as it reduced the hopes of further monetary policy easing.

The MSCI world equity index was down 0.2 percent to near one-month lows at 234.89.


The concerns about the weaker U.S. economic outlook and the damage it could do to indebted European economies pushed safe-haven German government bond yields lower, and sent yields on riskier Italian and Spanish debt higher.

The moves extended a trend begun last week in the wake of a disappointing Spanish bond auction and will likely influence demand at a German 10-year bond sale in the coming week and an Italian bond auction on Thursday.

Italian yields rose across the curve with 10-year bond yields up 12 basis points at 5.56 percent while the premium offered to investors to hold 10-year Spanish debt compared to German debt rose 15 basis points to 418, its widest since November 2011.

In the foreign exchange markets the euro was largely steady against the dollar, clinging to $1.3110 having bounced from a four-week low of $1.3033 hit on Monday.

The big mover was the Japanese yen which hit a one-month high against the dollar and the euro after the Bank of Japan refrained from more policy easing, maintaining its view that the economy is showing signs of picking up. 1/8ID:nL3E8F937P 3/8

In commodity markets investors were more worried about the soft Chinese import data which raised concerns about demand from the world's second biggest economy.

Front-month Brent crude futures were down 85 cents at $121.85 a barrel. The contract slipped as low as $121.02 on Monday, the lowest since March 15. U.S. oil was down 58 cents to $101.88.

Copper prices also fell due to the Chinese data. 1/8nL3E8FA1UQ 3/8

Investors are watching for signs that China can avoid a hard landing as it tweaks monetary and fiscal policies to cut rising costs and help small businesses hit by a global downturn.

(Additional reporting by David Brett; Editing by Anna Willard)