Growth fears hit Europe stocks and oil, gold recovers

By Richard Hubbard

LONDON (Reuters) - European shares dropped sharply on Wednesday as investors switched to stronger markets in the United States and Asia, where economic growth prospects are brighter due to massive central bank stimulus.

Expectations of further support from the U.S. Federal Reserve and the Bank of Japan amid signs of weak inflation also helped gold to recover from its lowest level in over two years hit on Tuesday after three days of heavy selling.

"Fund managers in Europe are switching guns because they are seeing on the one side Japan with positive momentum and Europe just getting deeper and deeper into a recessionary environment," Didier Duret, chief investment officer at ABN Amro.

Concerns have risen since the International Monetary Fund trimmed its forecasts for the world economy for this year and next on Tuesday, showing modest growth in the United States, expansion in Japan and weakness in Europe.

The pan-European FTSEurofirst extended a three-day losing streak to fall 0.8 percent in morning trade while London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were as much as 1.2 percent lower.

Earlier MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.4 percent, rebounding from Tuesday's selloff when it fell as much as 1 percent and was close to its 2013 low.

U.S. stocks jumped more than 1 percent on Tuesday, although future point to a weak start when Wall Street reopens.

GOLD REBOUND

Gold, which has posted its biggest falls in over 30 years since last Friday, was last trading at $1,383.65, up around 0.8 percent.

"You'd expect to see a bounce after that kind of a move," said Citigroup metals strategist David Wilson. "The reason investors have been walking away from gold is that the fear of inflation driven by the expansion in central bank balance sheets is simply not there."

Other industrial commodities such as copper and oil, while supported by the easy Fed and BOJ monetary policies, were weighed down by worries about future demand levels as global growth is likely to remain sluggish.

Brent crude oil futures gave up their early gains to dip 0.8 percent to $99.11 a barrel, after breaching the $100 a barrel mark for the first time in nine months on Tuesday.

Three-month copper on the London Metal Exchange eased 1 percent to stand at $7,210 a tonne, and has now fallen more than 8 percent for this year.

YEN SLIDES

In the currency markets the Japanese yen resumed its fall against the euro and the dollar as traders anticipated flows out of Tokyo by investors looking for higher returns due to the central bank's aggressive policy easing plans.

The dollar gained 0.8 percent to 98.25 yen, although it was still down about 1.6 percent from a four-year high of 99.95 yen set last week. The euro rose 0.8 percent to 129.52 yen, but stayed below its three-year peak of 131.10 yen also hit last week.

"Over the next couple of days we might see some consolidation around current levels but with the easing from the BOJ we think the dollar will trade higher versus the yen," said Marcus Hettinger, global FX strategist at Credit Suisse.

Currency traders' attention was turning to a meeting of finance officials from the Group of 20 leading nations beginning in Washington on Thursday, for any signs of concerns about the yen's weakness.

In the debt market the focus was on a German auction of 3.35 billion euros of 10-year debt, which saw good demand, supported by investors' expectations that the European Central Bank will cut interest rates in the next few months.

Anticipation that Germany's safe-haven debt will also benefit from Japanese investors switching out of their ultra-low yielding domestic bonds added to its attraction. Yields at the auction were in line with a previous sale in March at around 1.36 percent.

(Additional reporting by Marc Jones and Anooja Debnath. Editing by Anna Willard/David Stamp)