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EUROPE MARKETS: Strong Euro Drags European Stocks Lower On 2018's First Trading Day

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01/02/2018 | 06:02pm CET

By Sara Sjolin, MarketWatch

BMW shares fall after a broker downgrade

European stocks kicked off the new year on a downbeat note on Tuesday, with a rally by the euro and pound weighing on the region's big exporters.

What are markets doing: The Stoxx Europe 600 index lost 0.2% to close at 388.35, logging a third straight session of losses.

The pan-European benchmark slipped 0.1% in Friday's session , the last of 2017. It still, however, ended the year 7.7% higher, scoring its best annual return since 2013, when it rallied 15%.

Germany's DAX 30 index dropped 0.4% to 12,871.39 on Tuesday, while France's CAC 40 index fell 0.5% to 5,288.60.

The U.K.'s FTSE 100 index fell 0.5% to end at 7,648.10 .

The euro rose to $1.2050 from $1.2006 late Monday in New York, while the pound fetched $1.3581 compared with $1.3502 on Monday.

What's driving the markets: The euro strength was seen as a key reason European stocks dropped on Tuesday. The rally was partly due to a broad-based dollar selloff , and partly due to comments from European Central Bank policy maker Benoît Coeuré over the weekend. Coeure told Chinese financial magazine Caixin Global that given the improvement in the eurozone economy, "there is a reasonable chance that the extension of our asset purchase program decided in October can be the last."

The ECB in October decided to extend its quantitative easing to the end of September 2018, although at a slower pace of EUR30 billion a month. Until the end of 2017, the central bank purchased EUR60 billion of bonds monthly.

The comments were perceived as a hawkish signal, sending European yields higher as well. The interest rate on 10-year German government bonds rose 3 basis points to 0.461%, according to Tradeweb.

Stock movers: Shares of BMW AG fell 0.5% after Evercore downgraded the car maker (>> Bayerische Motoren Werke) to in-line from outperform, according to Dow Jones Newswires.

BP PLC (>> BP) shares lost 1%. Earlier Tuesday, the energy giant said it expects recent changes to U.S. corporate taxes to boost its future earnings , but added that it will take a one-off $1.50 billion noncash charge due to the revaluation of deferred tax assets and liabilities.

Steinhoff International Holdings NV jumped 9.8% even after the embattled retailer said its accounting problems may go further back than 2016. Steinhoff shares tumbled 91% in 2017 after an accounting scandal was disclosed in December and the company said it'll have to restate its financial statements for the recent years.

International Consolidated Airlines Group SA (>> International Consolidated Airlines Group) (>> International Consolidated Airlines Group) added 2.7%. The British Airways parent said late Friday it is buying the assets of Austrian carrier Niki, an arm of defunct Air Berlin.

Shares of Vestas Wind Systems AS (>> Vestas Wind Systems) rose 2.6% after Sydbank lifted its recommendation on the Danish wind turbine maker to buy from hold.

Economic news: The final eurozone manufacturing PMI for December was confirmed at 60.6 (https://www.markiteconomics.com/Survey/PressRelease.mvc/b0cb3d5a14ab402489ae2c34385ac69e), up from 60.1 in November. A reading above 50 signals expansion.

Meanwhile in the U.K., the December manufacturing PMI fell to 56.3 (https://www.markiteconomics.com/Survey/PressRelease.mvc/c6d5055ead4b4fd9a1e8f0a6dd95923f) from November's 51-month high at 58.2.

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