Europe close: China stimulus, German political uncertainty drag stocks lower

European stocks fell on Friday, with markets in the UK, Germany and France registering heavy losses by the close, as a wave of poorly received corporate earnings and underwhelming stimulus measures in China weighed on sentiment.

The Stoxx 600 declined 0.7% to 506.63, with small losses in Milan (-0.5%) and Madrid (-0.2%) met with more significant drops in London (-0.8%), Frankfurt (-0.8%) and Paris (-1.2%).

In Germany in particular, ongoing political uncertainty in Berlin was keeping investors on their toes following this week's collapse of the coalition government after Chancellor Olaf Scholz's decision to dismiss his finance minister, paving the way for a confidence vote and potentially a snap election.

"Political instability in Germany comes at particularly tricky time for Europe. In the short term, the downside risks to growth are probably a little higher now because Germany might be without a budget for part of next year, unless the ruling SPD and Scholz's remaining coalition partner, the Green party, manage to get support from elsewhere," said Angel Talavera, head of European economics at Oxford Economics.

Meanwhile, China unveiled its latest stimulus package on Friday, as it looked to tackle surging levels of local government debt and revive the country's flagging economy. Beijing approved a Rm10trn (£1.1bn) plan to help heavily-indebted local governments refinance. The funds will go towards reducing off-balance, or hidden, debts. However, many say the measures don't get far enough.

"The problem with China’s stimulus measures is that they are not stimulus. They are essentially a debt swap to shore up local government’s finances. The market reaction shows that traders do not see these measures as boosting consumption, and instead they are designed to stop a financial crisis domestically in China," said Kathleen Brooks, research director at XTB.

Investors were also still digested interest-rate cuts in Sweden, the UK and US on Thursday, along with uncertainty surrounding the potential ramifications of newly elected US president Donald Trump's proposed import tariffs on international trade.

Market movers

London's heavyweight mining sector was providing a drag as Chinese stimulus measures disappointed, with Anglo American, Antofagasta, Glencore and Rio Tinto all out of favour.

Richemont shares were down 7% after the Swiss luxury accessories group said weak consumer spending in China led to a 1% fall in second-quarter sales, missing analysts' estimates. Others in the sector such as Burberry, Swatch Group and Kering also fell.

Vistry dropped nearly 26% after the UK housebuilder warned on full-year profits again, cutting its forecast for completions and highlighting issues at its South Division.

Also in London, Serco fell 9% after revealing it had lost a £165m-a-year long-running Australian immigration detention centres contract, and estimating that labour costs would rise by £20m a year due to tax changes announced in last week's autumn budget.

Polish retailer Dino Polska was the standout performer on the Stoxx 600, rising 14% after beating forecasts with its third-quarter results, which saw double-digit growth in both sales and gross profits.

Spanish and London-listed airline IAG also jumped 6% after beating analysts' forecasts for top-line growth in the third quarter and delivering strong guidance, as it unveiled a €350m share buyback plan.