European stocks fell sharply on Friday, giving back much of their gains made the previous day as investors showed caution ahead of a jobs report that could be key in determining whether US interest rates rise later this month.
London's FTSE 100 index dropped 1.49 percent in morning trading to 6,101.58 points, the CAC 40 in Paris tumbled 1.92 percent to 4,564.51 and in Frankfurt the DAX 30 fell 1.84 percent to 10,127.89.
European markets had shot higher after the European Central Bank boosted market sentiment when president Mario Draghi said policy makers were ready to ramp up its contentious bond purchase programme -- known as quantitative easing -- if more stimulus is needed in the single currency area.
Also enjoying a respite from bad news from China, which had pummelled markets last week as trading there was closed for a long holiday weekend, the FTSE ended Thursday with a 1.82 percent gain, the CAC rose 2.17 percent and DAX 2.68 gained percent.
But market attention has now turned to the US non-farm payroll data to be released later Friday, with investors turning cautious as the information could be key in the decision later this month by the US Federal Reserve to begin raising interest rates.
"This cautious approach prior to such a key release is quite common in the markets, especially when this release could determine whether we see a change in monetary policy, on this occasion the first rate hike in almost a decade," said analyst Craig Erlam at currency trading platform OANDA.
Investors have been weighing the likelihood of a Fed increase in zero-level interest rates this month or whether recent market volatility and somewhat hesitant US recovery will convince policymakers to push it back several months.
"The fact is, rightly or wrongly, investors are going to look to today’s data and view it as either the final nail in the coffin for a September rate hike or the data that puts it back on the table," added Erlam.
"With that in mind, I would expect to see a lot of volatility around the release."
However dealer Jonathan Sudaria at London Capital Group believes that the non-farm payroll data will push down the market no matter what.
"If it beats expectation, we’re going to sell off on the fears of a rate hike, and if it’s weak, it’ll be put down to another indicator of a faltering global economy," he said.
- Tokyo touches seven-month low -
Japanese stocks led a broad Asian stock slide Friday on concerns of a US interest rate hike.
While that would normally push up the value of the dollar, a flight to safety by investors pushed up the yen, which caused Tokyo's Nikkei index to stumble 2.15 percent to a seven-month low.
The dollar bought 119.25 yen in Tokyo, compared with 120.01 yen in New York and much lower than the 120.40 yen earlier Thursday in Asia.
A stronger yen hurts Japanese exporters, whose repatriated profits are boosted by a weaker currency.
"There’s nervousness in the market about growth in Asia and the implications of the Fed changing policy should payrolls be seen as clearing the way for a hike," Sean Callow, a strategist at Westpac Banking Corp. in Sydney, told Bloomberg News.
Among other Asian markets, Hong Kong gave up early gains to close 0.45 percent lower in late trade -- after returning from a one-day holiday -- while there were also losses of more than one percent in Seoul and Singapore.
However, Sydney bounced back from early selling to end 0.25 percent higher.
The euro recovered slightly from its sharp drop on Thursday following the ECB's pledge to step up stimulus if necessary, rising to $1.1149 from $1.1127 late in New York.