European stocks slump in wake of Tokyo plunge

European stock markets slumped Thursday, with most indices dropping more than 2.0 percent after Tokyo shares plunged owing to weak Chinese data and signs that the US Federal Reserve may soon taper massive stimulus measures, analysts said.

London's FTSE 100 index of leading shares fell 2.10 percent to 6,696.79 points, while in Frankfurt the DAX 30 index also dropped 2.10 percent to 8,351.98 points.

In Paris the CAC 40 shed 2.07 percent to 3,967.15 points, while Milan plunged 3.06 percent and Madrid slid 1.40 percent.

European equities pulled back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains.

Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Federal Reserve chief Ben Bernanke had told Congress on Wednesday that the US central bank could scale back stimulus measures soon if economic conditions improved.

While US stocks also opened sharply lower Thursday, they had recovered much of the ground by midday, with the Dow showing a loss of just 0.03 percent to 15,303.33.

The S&P 500 was off 0.34 percent to 1,649.75 points, while the Nasdaq slipped 0.19 percent to 3,456.62.

"Fed chairman Ben Bernanke's much anticipated testimony...certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen.

He added that while share prices initially rose after Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings.

"To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Cohen said.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

Meanwhile the slump in global share prices came also after HSBC bank said that manufacturing activity in China contracted in May for the first time for seven months in another sign of the weakness of the recovery.

-- Reaction to Bernanke's testimony --

In foreign exchange activity, the European single currency climbed to $1.2915 from $1.2855 on Wednesday. The dollar slid to 101.66 yen from 103.10 yen.

The euro was higher despite news of a downturn in eurozone private sector business activity.

The Markit Eurozone Composite Purchasing Managers Index registered 47.7 points in May, a three-month high and well up on April's 46.9 points albeit still below the threshold of 50 points indicating growth or recession.

On the London Bullion Market, the price of gold dropped to $1,380.50 an ounce from $1,408.50 late in New York on Wednesday.

"The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Neil MacKinnon at VTB Capital financial group.

"In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients.

"To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target?" MacKinnon added.

Julian Jessop at Capital Economics said the sell off "backs our view that the rally had become overly dependent on expectations of further support from monetary policy."

David White at Spreadex said "the heavy selling seen last night and this morning had participants running for the exits, banking solid returns from the past six months as they go."