Europe close: Stocks begin month on back foot

European stocks finished lower on the first session the month, with traders trying and digest the potential implication for equities of a modestly more hawkish policy bias from rate-setters in the US and ahead of two key votes at the weekend in Italy and Germany.

As of 1700 GMT, the benchmark Stoxx 600 was down by 1.26% to 374.86, alongside a fall of 1.97% or 244.91 points to 12,190.94 on the German Dax, while the FTSE Mibtel was under by 0.70% and trading at 22,448.38.

Meanwhile, the yield on the benchmark 10-year German bund was three basis points lower to 0.63%, with the yield gap to the US the widest in over 20 years.

The euro was hit bit by the upward move in the US dollar and the cooling of eurozone manufacturing sector.

"The momentum in the market recovery has run out of steam, and now traders are undecided whether the market will turnover on itself again, or if this is a breather before another leg higher," said analyst David Madden at CMC Markets. "The economic outlook hasn’t changed, but with the Italian election over the weekend we could see traders adopt a risk-off strategy."

On 4 March, Italian voters will be called on to vote in parliamentary elections, amid concerns that political gridlock in the Eurozone's third largest economy would stymie efforts aimed at economic reforms.

That same day, the results would be revealed of a ballot among members of Germany's SPD on whether to form a grand coalition with the CDU/CSU.

Eurozone manufacturers reported a slight easing in growth, IHS Markit's PMI survey revealed, slipped from a reading of 59.6 for January to a reading of 58.6 in February, which was nevertheless a tad ahead of the consensus forecast of 58.5.

Italian, French and German manufacturing all grew at a slower pace in February, and all the reports missed economists’ expectations.

Commenting on the data, Claus Vistesen, chief euro area economist at Pantheon Macroeconomics said: "Overall, these data signal solid momentum in Eurozone manufacturing albeit at a slightly slower pace in February compared to the breakneck pace at the start of the year. Growth is strongest in the investment good sector, but all industries are enjoying solid demand conditions.

"The expansion continues to push firms closer to their capacity limits; work backlogs are rising and companies are scrambling to find workers to meet increasing demand. Finally, both input and output price gauges point to much higher inflation pressures in coming months, although we haven’t seen much of this in the CPI data yet."

In parallel, Eurostat reported that the Eurozone's rate of unemployment dipped by a tenth of a percentage point last month to 8.6%, as expected by economists.

Investors sifted through a barrage of US economic data, including the latest reading on the 'core' personal consumption expenditures prices - the US central bank's preferred inflation gauge, which said personal income and spending sprinted ahead of forecasts at the start of the year, alongside a hefty 0.9% jump in disposable incomes as recently approved tax cuts kicked-in, according to figures from the Department of Commerce.

Despite that, key inflation gauges contained within the same report - including the Federal Reserve's preferred inflation index - came in just as expected, rising at the same clip as in December.

At the headline level, the year-on-year rate of gain on the price deflator for personal consumption expenditures held at 1.7%, while at the 'core' level, excluding food and energy, the PCE price index came in at 1.5%.

Investors were also expected to keep a close eye on recently-appointed Fed chair Jerome Powell's second day of testimony, this time before the US Senate's banking committee.

On the corporate front, investors were keeping an eye on Deutsche Post which fell 2.90% to €36.50 per share after negotiations with its main union Verdi where its latest offer for higher wages was said to be below expectations.

Also in Germany, and of potential interest for investors in Airbus - down 1.32% to €97.03, the country's defence ministry said it would give European jets preference over US made rivals in an upcoming tender to replace its veteran fleet of Tornado jets.