European stocks dipped on Wednesday as mounting worries over global growth following a string of bleak macro data weighed on sentiment in the run-up to a European Central Bank meeting on Thursday.
Shares in BP sank 4.2 percent, the biggest loser among Europe's blue chips, after the U.S. Justice Department ramped up its rhetoric against the oil major for the massive 2010 oil spill in the Gulf of Mexico, describing in new court papers examples of what it called "gross negligence and wilful misconduct."
At 0840 GMT, the FTSEurofirst 300 index of top European shares was down 0.3 percent at 1,075.65, while the euro zone's blue chip Euro STOXX 50 index was down 0.4 percent at 2,425.18, reversing gains made in early trading.
"On one hand, credible solutions to the debt crisis in Europe are emerging, but on the other hand the macro newsflow in the United States is turning ugly," said David Thebault, head of quantitative sales trading at Global Equities.
Data showed on Tuesday that U.S. manufacturing contracted at its fastest rate in more than three years in August, while euro zone data showed on Wednesday that the contraction that began in smaller peripheral members of the 17-nation bloc is now taking hold even in Germany, the region's largest and strongest economy.
Wednesday's retreat in stocks was limited by expectations of bold measures by the European Central Bank, whose policy meeting takes place on Thursday, to fight the debt crisis.
The ECB is expected to unveil a plan to buy bonds from Spain and Italy to lower the two countries' borrowing costs and ease the debt crisis, though it may outline rather than detail its strategy, keeping the pressure on the two countries to bring their deficits and debts under control.
The Euro STOXX 50 surged as much as 16 percent and the zone's bank index soared 36 percent in the weeks after ECB head Mario Draghi said in late July that the central bank was ready to take all the necessary measures to save the euro, sparking hopes of a bond buying programme.
Over the past two weeks, however, worries about the ECB plan's potential hurdles have prompted investors to cash in some of the lofty gains, and the Euro STOXX 50 lost 3 percent.
"We might not get all the details of the ECB plan tomorrow, but we know it's coming, so it's priced in. There isn't much downside risk here," Thebault said.
"The downside risk is elsewhere, in Chinese and U.S. macro data. The question is: 'how bad is the situation in the U.S. economy?' We'll get a better idea on Friday with the payrolls."
Thebault recommends buying assets linked to volatility indexes as a hedge against expected swings in the coming months, and suggests setting up long-short pairs trade strategies by buying European stocks and short-selling U.S. shares.
Pairs trades, a market neutral strategy which matches a long position with a short position in two stocks of the same sector, creates a hedge against the overall market as the investor bets solely on the gap between the performance of the two stocks.
The Euro STOXX 50 volatility index, Europe's main gauge of equity market investor anxiety known as the VSTOXX, was up 2.7 percent at 28.52 on Wednesday, after hitting a six-week high of 28.68 earlier in the session.
The VSTOXX, which measures the cost of protecting against a decline in share prices on the Euro STOXX 50 index, has jumped 35 percent over the past two weeks, while stocks have been moving sideways.
"Selling pressures are suddenly back, although it's only when stock indexes break below their recent short-term sideway channel that a real correction will start, with potentially a 50 percent retracement of the July 25-August 21 rally," Aurel BGC chartist Gerard Sagnier said.
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