European stock markets slide despite encouraging data

European equity markets retreated on Monday despite encouraging data coming out of China and Europe as attention shifted back to US monetary policy.

Earlier, the markets had welcomed Angela Merkel's third election victory in Germany, providing stability for Europe's biggest economy.

London's FTSE 100 index fell 0.47 percent to stand at 6,565.31 points in afternoon trading. Frankfurt's DAX 30 dropped 0.34 percent to 8,646.46 points, while the CAC 40 in Paris shed 0.55 percent to 4,180.75.

On the foreign exchange markets, the European single currency slipped to $1.3515 from $1.3524 late in New York on Friday. The dollar fell to 98.82 yen from 99.35.

Sterling rose to $1.6057 from $1.6010 late on Friday, and to 1.1887 euros from 1.1834.

Gold slid to $1,321.75 from $1,349.25 on Friday.

European shares initially held their own as traders welcomed news that eurozone business activity continued to pick up in September, hitting a 27-month high as the region climbed out of a record recession, according to a key survey.

The Composite Purchasing Managers' Index compiled by Markit Economics jumped to 52.1 points for September from 51.5 in August, pushing further beyond the 50-point boom-or-bust line.

Earlier, data from HSBC showed that China's manufacturing activity expanded in September to a six-month high in a further sign that a recovery is gaining steam on improving demand.

HSBC said its preliminary purchasing managers' index for the manufacturing sector in China hit 51.2 in September, the highest since March when the index stood at 51.6.

It was higher than last month's final reading of 50.1, which improved from an 11-month low of 47.7 in July and ended three months of contraction, according to the bank.

The data helped Shanghai jump 1.33 percent, but Hong Kong eased 0.56 percent in shortened trade due to Typhoon Usagi.

Seoul gained 0.19 percent, while Sydney was down 0.46 percent. Tokyo was shut for a public holiday.

But as the opening in Wall Street approached, European stocks turned down, as attention turned to US monetary policy.

Markets 'not willing to put their money where their mouth is'

For months, attention has been focused on when the US Federal Reserve will begin reducing its $85-billion-a-month bond-buying scheme -- known as quantitative easing (QE).

Global stock markets rallied last week when the Fed, in a surprise decision, kept its aggressive stimulus programme intact.

With a number of Federal Reserve officials due to speak on Monday, attention turned back to the United States, where tensions are also rising over a high-stakes political battle that could see the US government shut down.

"The stock market can handle good news and bad news, but it doesn't handle uncertainty very well," Gail Dudack, managing director of Dudack Research, a division of brokerage firm Wellington Shields, was quoted as saying by Dow Jones Newswires.

Greg Erlam at Alpari Research said "while most people in the markets would agree that the odds of a government shutdown are extremely slim, they are clearly not willing to put their money where their mouth is."

Earlier, markets had welcomed Merkel's victory.

"Risk tone improved Monday with investors responding well to news that Germany's Angela Merkel recorded the biggest victory in the country since 1990, winning her third term," said analyst Ishaq Siddiqi at traders ETX Capital.

The conservatives' best result since the country's joyous reunification in 1990 meant Merkel nearly became the only chancellor to win an absolute majority since Germany's first post-war leader, Konrad Adenauer, 56 years ago.

Merkel's CDU party is likely to team up with the centre-left SPD, but could also try to form a coalition with the Greens.

"Whatever the look of any government that is formed, and this might take several days, one of the key factors that did come out of the campaign was the increasing opposition of a rising number of German voters to further bailouts of what they perceive as fiscally irresponsible peripheral European economies," said analyst Michael Hewson at traders CMC Markets UK.