Shock US jobs update hits shares as Europe sinks again

Poor figures hint at slowdown in America's recovery as elections loom in France and Greece

Stock markets on both sides of the Atlantic saw heavy sell-offs yesterday in the wake of new figures that pointed to a faltering US recovery and the eurozone sinking still deeper into recession.

The US Labor Department reported that 115,000 new non-farm jobs were created in April, well below the 170,000 that analysts had been expecting.

This came hours after a regular snapshot of the manufacturing and services sectors across the single currency area showed the fastest decline in activity since last October, with deep contractions in the two most vulnerable nations, Italy and Spain.

The FTSE 100 shed 1.9 per cent in response to the set of bad news, while equity indexes in France and Germany were down 1.9 per cent and 1.99 per cent respectively. Wall Street fell by 1.2 per cent in morning trading.

The weak American job creation figures marked the third month in a row that the hiring rate in the US economy has slowed. It raised expectations in some quarters that the Federal Reserve will reactivate its quantitative easing programme in order to stimulate demand in the world's largest economy.

"There is little you can say about that number that was good, except for the fact that it might bring in the cavalry," said Ron Florance, managing director of investment strategy for Wells Fargo Private Bank.

Markit's eurozone composite Purchasing Managers' Index (PMI) fell to 46.7 in April from March's 49.2, with any figure below 50 suggesting contraction. The Spanish services PMI reading plummeted from 46.3 in March to 42.1. Italy's contracted at the sharpest rate since June 2009, falling to 42.3. There was also a slowdown in France and Germany, where the index fell to 45.9 and 50.5 respectively.

The weak figures, coming two days ahead of crucial elections in France and Greece, also alarmed investors. "Things only seem to be going downhill," said Sakshi Gupta of HSBC. "The PMI surveys are in line with our forecast that the eurozone will register a third consecutive quarter of contracting GDP in Q2." Markit itself said the figures suggested that the eurozone economy as a whole contracted at a quarterly rate of 0.5 per cent in April.

Tomorrow the French will vote in the final run-off of the French presidential elections, with the Socialist challenger, Francois Hollande, expected to prevail over the incumbent, Nicolas Sarkozy. There will also be parliamentary elections in Greece, which is now in its fifth year of recession. There are concerns that the next government in Athens will lack the strength to deliver on the austerity measures demanded by the country's European partners, thus raising the prospect, once again, of a eurozone exit by Greece.

Despite the poor job creation figures, the overall US unemployment rate dropped slightly, from 8.2 per cent to 8.1 per cent over the month. However, this was primarily due to more people falling out of the job market. The total labour force fell by 342,000, and the participation rate slipped to a 30-year low of 63.6 per cent. Public sector employment fell 15,000, with most of the losses coming from layoffs by local governments.

Some US analysts suggested that the US job figures could be a blip. "The employment deceleration in part results from warm winter weather that pulled some hiring forward, producing a payback now," said Nigel Gault of IHS Global Insight. "For that reason we think that the March and April payroll figures understate the pace of recovery, and we look for a better but still subdued pace of job creation in the 150,000 to 200,000 region over the rest of the year."