Europe close: Stocks drop further amid heightened trade tensions

Stocks across the Continent slumped after China allowed its currency to fall sharply in value against the US dollar and euro with analysts divided on just how far stocks might drop on the back of the trade war between Washington and Beijing.

China also instructed state-owned companies to halt their purchases of US agricultural commodities.

Some analysts said that China was "weaponising" its currency, amid worries that such a move might foreshadow a further escalation in trade tensions and possible dislocations in financial markets, including in China.

Commenting on the outlook for equity markets, strategists at JP Morgan said that weak purchasing managers' indices, a stronger US dollar and the escalation in trade tensions, combined with poor seasonals may see "markets experience a few weeks' worth of pullback", but their core view remained that investors should use weakness as an oportunity to add.

Analysts at UBS were less positive, telling clients that a trade war scenario in which the US hiked its new 10% tariff to 25% would shave 75 basis points off the rate of growth in annual global gross domestic product over six quarters, "resembling a mild global recession, with equities potentially falling by 20%."

By the end of trading, the benchmark Stoxx 600 was trading lower by 2.31% to 369.43, alongside a fall of 1.80% to 11,658.51 for the German Dax, while the FTSE Mibtel was off by 1.30% at 20,773.30.

Safe havens on the other hand were finding a solid bid, with December gold futures on COMEX adding 1.28% to $1,476.20/oz. and the yield on 10-year bunds down by two basis points at -0.52%, while Bitcoin was 7.71% higher to $11,776.27.

Also in currency markets, the pound was lower by 0.88% versus the euro at 1.0854 amid speculation that the new government in Westminster might call a snap election.

Some economists' comments following the release of the final reading for IHS Markit's Eurozone composite output index for July echoed analysts' caution.

The output index printed at 51.5, coming in bang in line with forecasts.

Meanwhile, the same survey compiler's services sector PMI meanwhile printed at 53.2, which was down from 53.6 in the month before and only slightly below the consensus projection for a reading of 53.3.

Yet according to IHS Markit's Chris Williamson, "with the July survey indicating the weakest jobs gains in over three years, there are signs that this growth engine is also losing impetus, and adding another headwind to the economy for the coming months."