European stocks dropped two per cent yesterday, ending at a seven-week closing low after data showed a jump in the US jobless rate that sent the dollar down and led to a surge in the oil price. Banks were among the biggest losers, with UBS down 6.4 per cent and Royal Bank of Scotland down 5.2 per cent. The FTSEurofirst 300 index of top European shares ended two per cent lower at 1,283.99 points, a closing level not seen since April 15.
The index, which lost 3.7 per cent on the week, is down 15 per cent on the year, hit by fears of a US recession as well as concerns over the impact of a credit crisis that has forced banks to unveil massive asset right-downs and emergency capital injections.
"The US is already in a recession in the construction, real estate and financial sectors. It has not spilled into other sectors so far because exports are strong and consumer spending shows some resilience," said Jean-François Virolle, chief strategist at Global Equities, in Paris.
"But between the bears and the bulls, a lot of people don't know where to go because there is a total lack of visibility."
Shares in airlines - sensitive to high oil prices - were among the worst hit, with Air France-KLM down six per cent, while exporters such as automakers got hammered as the euro rose against the greenback. BMW shed 4.4 per cent and Daimler fell 4.7 per cent.
"This confirms that oil prices are closely following the dollar, and stocks are suffering from the spike, particularly airlines. Just look at how their shares have been dumped," Mr Virolle said.
"Automakers are suffering too, hit from all sides: the rising euro, rising steel prices, rising oil prices... while the outlook for consumer spending is gloomy."
Data yesterday showed the US unemployment rate jumped to 5.5 per cent last month from five per cent, and US employers shed jobs for a fifth consecutive month in May, cutting some 49,000 jobs, up from a revised 28,000 that were lost in April.
"All in all, we usually look at the big non-farm payroll figure but this time it seems to be the actual unemployment rate which has risen quite dramatically," said Angus Campbell, head of sales at Capital Spreads.
"It's not looking great when the last few weeks we've had glimmers of hope for the market place."
Oil soared by more than $9 a barrel to over $137, bringing gains in the last two days to $15 as the dollar weakened further on the rise in the US jobless rate.
A Morgan Stanley report predicting oil could reach a record high of $150 by July 4, also sent crude prices roaring upwards.
But the fresh spike in oil failed to boost energy shares, which retreated along with the broad market. Total fell one per cent, BP shed 0.4 per cent and Repsol YPF dipped 0.1 per cent.
Among the few stocks on the upside, Xstrata gained 3.7 per cent, BHP Billiton rose 1.3 per cent and BG Group added 2.4 per cent.
Around Europe, Germany's DAX index lost two per cent, UK's FTSE 100 index dropped 1.5 per cent and France's CAC 40 fell 2.3 per cent.