By Sruthi Shankar and Ankika Biswas
(Reuters) - European shares hit a two-month low on Wednesday as concerns about a global slowdown on China's weak economic data and uncertainty around the U.S. debt ceiling outpaced optimism from signs of easing inflation in some major euro zone economies.
The pan-European STOXX 600 index closed 1.1% lower, after hitting its lowest level since March 30.
China-linked luxury firms and automakers led sectoral losses in Europe after data showed factory activity in the Asian country shrank faster than expected in May on weakening demand. China is Germany's main trading partner.
"China's downturn is the real problem for the luxury sector" said Chris Beauchamp, chief market analyst at IG Group.
Luxury stocks came under strong profit booking earlier this month after a stellar run amid signs of weakening demand in United States, with Paris' CAC 40 losing 5.2% in May.
Other main regional stock markets also clocked monthly losses, with London's FTSE 100 losing 5.4%.
Meanwhile, investors keenly awaited a crucial vote by U.S. lawmakers on a deal to raise the world's largest economy's debt ceiling, a critical step to avoid an unprecedented default that could come early next week without congressional action.
The benchmark STOXX 600 logged its steepest monthly drop of 3.2% so far this year on concerns about debt ceiling standoff and signs of a global economic slowdown.
"Even when the deal is done (as looks likely), markets might keep falling. It seems too obvious to think a deal headline will prompt a rally. Instead, worries about the hit to confidence will linger," Beauchamp added.
Easing some concerns, however, data showed French inflation cooled more than expected in May, while German state North Rhine-Westphalia also saw easing price pressures this month.
Analysts noted that the evidences of cooling price pressures may likely induce some softening in monetary policy stance by the European Central Bank, that is set to meet next month.
On that note, ECB Vice President Luis de Guindos remarked that the drop in euro zone inflation seen in recent regional data has been bigger than forecast and indicate a continued slowdown in price growth.
Leading declines on the STOXX 600, troubled Swedish real estate firm SBB sank 27.7%, with local analysts pointing to a media report on the Swedish landlord potentially breaching its loan covenants.
Meanwhile, B&M jumped 8% to top the STOXX 600 after the British discount retailer forecast higher 2024 core earnings, as customers snap up budget food and goods amid a cost-of-living crunch.