Europe close: Stocks drop sharply ahead of ECB after selling in Asia picks up

European stocks fell sharply on Wednesday, as selling carried over from the Asian session and oil futures slid lower yet again, sending the Footsie into so-called 'bear-market' territory.

The benchmark DJ Stoxx Europe 600 index was down 3.20%, the Footsie by 3.46%, France’s CAC 40 was off by another 3.45% and Germany’s DAX was 2.82% weaker.

Shares in Asia dropped. China’s Shanghai Composite fell 1%, Hong Kong’s Hang Seng lost 3.8% and Japan’s Nikkei 225 ended 3.7% lower, entering a bear-market too.

A report from the Institute for International Finance revealed net capital flows into emerging markets went into reverse in 2015, for the first time since 1988, almost entirely because of China.

That came alongside a sharp strenthening in the Japanese yen versus the US dollar, a clear sign of risk-aversion in most traders' book. Dollar/yen fell 1.03% to 116.36.

Meanwhile, Italy’s FTSE MIB slumped 4.83% as bank stocks tanked again. Banco Popolare, UniCredit and Intesa Sanpaolo were all firmly in the red after data from banking lobby ABI showed banks’ bad loans rose in November.

Market regular Consob extended a ban on short-selling of Monte dei Paschi di Siena until Thursday.

To take note of, recent market action had left Fed funds futures pricing in just one interest rate hike in 2016, according to CME data.

With similar implications, speaking on the sidelines of the World Economic Forum in Davos, ex-International Monetary Fund chief economist Kenneth Rogoff told Bloomberg he expected the European Central Bank to top up its quantitative easing programme, adding that the ECB needed to add "more radical" tools.

By the close of trading West Texas Intermediate crude futures were down 6.47% to $26.62 per barrel on the NYMEX.

On Wednesday, the International Energy Agency warned that oil markets could “down in oversupply”, adding that Iran’s return to the market was unlikely to be balanced out by production cuts from other countries.

The IAE reckons oil markets will still have a surplus of 1.5m barrels a day in the first half of this year.

“A return to the template of an overnight Chinese selloff has dented European optimism, causing markets to tumble.

The aggressive nature of this morning’s selloff highlights how fragile confidence in 2016 has been. Once again, the financial world’s focus will be on the Alps as Davos hosts its annual World Economic Forum,” said Alastair McCaig, market analyst at IG.

Resources and energy stocks suffered the brunt of the losses, with the Stoxx 600 index for basic resources down 5.44% and the sub-index for oil and gas 5.25% lower.

In corporate news, BHP Billiton was under the cosh after the miner cut its iron ore production guidance in the wake of the Samarco disaster.

Shell was also in the red after the oil major said its profit fell by up to 50% in the fourth quarter and announced plans to cut up to 10,000 jobs in a cost-cutting drive.

Shares in Zurich Insurance tumbled after it issued a profit warning on the back of the winter storms in the UK and Ireland.

On Thursday, traders would be looking out for the result of the European Central Bank's policy meeting and the follow-up press conference from its president, Mario Draghi.