GLOBAL MARKETS: European Stocks Decline Ahead Of US Payrolls

LONDON -- European stocks were lower Friday, with investors adopting a cautious stance and booking profits ahead of the pivotal U.S. employment report after disappointing economic data Thursday dented investors' appetite for risk.

"It appears that some investors are still nervous about the overall state of the world economy, deciding to play safe and take profits ahead of the U.S employment report," said analysts at ODL Securities.

Thursday's U.S. economic data did little to calm the jitters, said Ian Williams, strategist at Altium Securities. "The recovery is continuing, but the pace may just be moderating, which does present some short-term downside risk to share prices that may have run a little too far ahead of reality," he said.

At 0735 GMT, the Dow Jones Stoxx 600 index was down 1.3% at 235.49, London's FTSE 100 index was off 0.7% at 5008.32, Frankfurt's DAX index lost 0.9% at 5504.75, and the CAC-40 index in Paris was 1.3% lower at 3671.20.

Traders were waiting for the release of the U.S. nonfarm payrolls report for September at 1230 GMT, hoping for further clues to the state of the U.S. labor market following disappointing ISM manufacturing data Thursday. Economists surveyed on average expect the payrolls report to show 175,000 jobs shed in September, with the unemployment rate rising to 9.8%.

"It's unlikely we will be seeing investors buying into morning weakness as they hold off until this afternoon [for the payrolls report]. A weak figure could signal the end of the recent rally and offer hope to the bears that their correction isn't too far away," said traders at Spreadex.

Meanwhile, corporate activity was thin on the ground, with few earnings reports to offer stocks meaningful direction. But basic resource stocks declined as base metal prices fell. Also affecting the sector, the U.K. Takeover Panel ruled Friday that Anglo-Swiss mining company Xstrata (XTA.LN) must "put up or shut up", and formalize its offer for rival Anglo American (AAL.LN) by Oct. 20 or walk away from the deal.

Shares in Xstrata declined 2.4%, while shares in Anglo American fell 1.0%. The pan-European Dow Jones Stoxx 600 basic resource index lost 2.0% to 379.63.

On Wall Street Thursday, stocks suffered their worst decline in about three months as a disappointing report on manufacturing led to a broad selloff for many of the companies that led the third-quarter advance. Overall, the Dow Jones Industrial Average closed down 203 points, or 2.1%, to 9509.28, marking its biggest point and percentage drop since July 2. The Standard & Poor's 500 lost 27.23, or 2.6%, to 1029.85. The Nasdaq Composite fell 64.94, or 3.1%, to 2057.48.

Setting Thursday's tone, a report on manufacturing activity restoked fears that a rally of more than six months in the stock market may have left it overextended. Notably, some of the most economically sensitive sectors, those that had paced the market to its best quarterly performance since 1998 in the third quarter, were its weakest.

The negative tone on Wall Street put Asian stocks markets under pressure, with the region's bourses sharply lower Friday. Japanese automakers were hit by weak U.S. sales data and the strong yen. Japan's Nikkei 225 was down 2.5% and Hong Kong's Hang Seng index lost 2.8%. South Korean and Chinese markets were closed.

"We can't expect global stock markets to pick up again any time soon," said Tachibana Securities analyst Kenichi Hirano in Tokyo. "This correction may continue at least through the end of this month," with players paying close attention to U.S. corporate earnings, he added.

Japanese automakers were hit after data Thursday showed September U.S. auto sales returned to depressed levels, as the jolt from the government-run "Cash for Clunkers" subsidy program proved to be "just a flash in the pan," said Nikko Cordial senior strategist Tsuyoshi Kawata. "The market had been too optimistic about economic recovery prospects," he added. The yen's continued strength against the dollar also added pressure.

In the currency markets, the euro and sterling weakened in early European trade Friday, as traders waited for the U.S. employment report, the forthcoming G7 meeting and the Irish referendum result.

At 0805 GMT, the euro was trading at $1.4536, down from $1.4546 in late New York trade Thursday. The dollar was at Y89.42, down from Y89.61, while the pound was at $1.5882, down from $1.5949.

Elsewhere, spot gold was at $997.90 per troy ounce, down $1.10 from the New York close, while in the oil market November Nymex crude oil futures were down $1.02 at $69.80 per barrel after picking up 21 cents on Thursday.

Meanwhile, European government bonds were firmer. The December bund contract stood at 122.62, up 0.30.