By Jamie McGeever
LONDON (Reuters) - Global shares fell on Wednesday after figures showing the biggest contraction in China's manufacturing sector since the global financial crisis intensified fears that a slowdown in the world's second-largest economy will spread more widely.
A surprise bounce in French business activity boosted investor sentiment in Europe, however, where markets were in large part beholden to the sharp swings in shares of scandal-hit Volkswagen (XETRA:VOWG) and the broader auto sector.
In early trade the FTSEuroFirst index of leading 300 European shares, Germany's DAX and France's CAC 40 were all up a third of one percent, and Britain's FTSE 100 was up two thirds of one percent.
But Asian stocks posted their biggest single-day fall in a month, with MSCI's broadest index of Asia-Pacific shares outside Japan down 2.3 percent, its biggest daily loss since Aug. 24, according to Thomson Reuters data.
The MSCI world index was down 0.2 percent, marking the fourth consecutive daily loss. S&P mini futures pointed to a slightly lower open on Wall Street Wednesday, with concerns over China paramount.
The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) fell to 47.0 in September, the worst since March 2009, missing market expectations for 47.5 and slipping from August's final 47.3.
Levels below 50 signify a contraction.
"The decline was driven by a fall in new orders and new export orders. Falling demand both domestically and abroad is only going to make the task of achieving 7 percent growth that much harder," said Craig Erlam, senior market analyst at Oanda in London.
VW ROLLERCOASTER
The Chinese data came after the U.S. central bank refrained from lifting interest rates for the first time in nearly a decade last week, citing concerns that global problems, and China in particular, may hurt the U.S. recovery.
On Tuesday, the Asian Development Bank lowered its growth forecast for China to 6.8 percent for 2015.
European PMIs painted a more positive picture on Wednesday, consistent with economic expansion across the continent in September, albeit at a slightly slower pace than the previous month due to weaker demand from Asia.
Volkswagen AG (DE:VOWG_p) was in the spotlight again after the company said a scandal over falsified U.S. vehicle emission tests could affect 11 million of its cars around the globe as investigations of its diesel models multiplied, heaping fresh pressure on CEO Martin Winterkorn.
The share price fell as much as 8 percent in early trade on Wednesday before rebounding to trade up 2 percent. It plunged 19 percent on Monday and 20 percent on Tuesday.
"We are downgrading the sector to 'Neutral' and Volkswagen to 'Hold'. The company could face a fine of up to $18 billion," SocGen's equity strategy team wrote in a note on Wednesday.
The resilience of European stocks, however, cooled overnight demand for safe-haven fixed-income assets.
The benchmark two-year U.S. Treasury yield fell to 0.68 percent, nearing a two-week low, but the yield on the 10-year U.S. bond rose 2 basis points to 2.15 percent.
Yields on benchmark German bonds also rose as much as 2 basis points..
With little movement in relative U.S. and euro zone yields, the euro held steady at $1.1125. The dollar was also little changed against the yen at 120.20 yen.
In emerging markets, Brazil's real languished at a record low against the dollar, having fallen through the 4 per dollar level on Tuesday for the first time ever.. It has now lost around 35 percent this year.
In commodities U.S. crude futures rose 1 percent to $46.84 per barrel, while Brent futures also rose 1 percent firmer to $49.55.
Copper recovered in European trading from near four-week lows overnight in Asia. It was last up 0.5 percent having earlier posted its biggest one-day drop in more than two months as fund and speculative selling pushed prices down following the Chinese PMI report.
Demand for precious metals recovered in European trading, with spot gold last up 0.2 percent at $1,126 an ounce.