European stocks retreat at close as weak US payrolls stoke slowdown fears

By Johann M Cherian

(Reuters) -European stocks surrendered early gains to finish lower on Friday, dragged by energy and financial shares, as investors turned cautious after softer‑than‑expected U.S. payrolls data heightened concerns about cracks in the world's largest economy.

The pan-European STOXX 600 ended 0.16% lower at 541.21, with the energy index weighing heavily with a 1.8% drop as it mirrored lower oil prices on growing expectations of higher supply.

U.S. job growth weakened sharply in August, confirming that labor market conditions were softening and sealing the case for an interest rate cut from the Federal Reserve this month.

"There are definitely signs of it cracking, and that's what's unnerving the market," Fiona Cincotta, senior market analyst at City Index, said.

"Initially, the focus was on the Federal Reserve rate cut expectations, and that seems to have turned away to worries about what this means for the U.S. economy, whether the Fed is actually now behind the curve."

According to the CME Group's FedWatch tool, traders are widely expecting at least three U.S. rate cuts by the end of this year.

Concerns about a slowing U.S. economy also weighed on Wall Street, with its main indexes trading lower.

Back in Europe, regional banks came under pressure, falling 1.3%. Bank shares often fall on rate-cut hopes as lower interest rates compress net interest margins, hitting their profits and squeezing loan demand.

Insurance fell 0.6%, while financial services lost 0.3%.

Euro zone government bond yields fell, with Germany's 10-year bond yield down 6.1 bps to 2.661%, a three-week low, lagging a bigger drop in its U.S. counterpart following the jobs data.

The real estate sector, sensitive to interest rates, jumped 1.6% to limit the overall decline in the STOXX 600 index, which, after Friday's moves, ended the week with marginal losses.

Energy was the biggest loser for the week, down 3.2%, while healthcare and media remained the biggest gainers, up 1.2% each this week.

On Friday, Hexagon jumped about 7.4% after the Swedish industrial technology group agreed to sell its design & engineering business to Cadence for 2.7 billion euros ($3.16 billion).

Temenos tanked 16% to the bottom of the benchmark index after the banking software group parted ways with its CEO, Jean-Pierre Brulard.

Moves in the bond market will be in focus next week after a selloff earlier on Tuesday, amid concerns over government fiscal stability across developed markets.

The next test will be a French confidence vote on Monday, where Prime Minister Francois Bayrou's minority coalition government appears at risk of collapsing - a scenario that could trigger a rating downgrade and raise the risk of forced selling of France's already pressured bonds.

French stocks have underperformed the benchmark index so far this year. The country's credit was downgraded by Moody's after its previous government collapsed last year. 

On the data front, German industrial orders unexpectedly fell in July due to a drop in large-scale orders.

Euro zone gross domestic product increased by 0.1% in the second quarter compared with the previous three months, while the bloc's employment rose by 0.1% quarter-on-quarter and by 0.6% year-on-year in the second quarter.

Orsted gained 2.7% after shareholders voted for a proposed $9.4 billion rights issue.

($1 = 0.8542 euros)

(Reporting by Tristan Veyet in Gdansk and Johann M Cherian in Bengaluru; Editing by Janane Venkatraman and Andrew Heavens)