By Sruthi Shankar and Shristi Achar A
(Reuters) -European shares tumbled to two-week lows on Wednesday, with broad-based losses as investors fled riskier assets after a surprise downgrade of the U.S. credit rating by Fitch.
The pan-European STOXX 600 index fell 1.4%, touching its lowest level since July 18 and extending declines to the second straight day.
Rating agency Fitch on Tuesday downgraded U.S. debt rating, saying expected fiscal deterioration over the next three years and repeated down-to-the-wire debt ceiling negotiations threaten the government's ability to pay its bills.
The downgrade roiled global stock markets and drove euro zone bond yields lower as investors sought the relatively safety of sovereign debt.
The EURO STOXX volatility index also hit a nine-week high, reflecting investor anxiety.
"The downgrade appears to have prompted further profit taking on the back of the weakness that started yesterday, due to concerns over weaker economic data, and the earnings outlook," said Michael Hewson, chief market analyst at CMC Markets.
Hopes of an end to the market-punishing interest rate hikes from major central banks had pushed European stock markets to multi-year highs earlier this week, though data highlighting faltering global growth pressured equities on Tuesday.
"Most people are saying earnings are doing well, markets are doing well but we do expect a slowdown to come at some point, particularly in the U.S. where valuations are quite expensive. So we will be sensitive to any potential negative newsflow," said Caroline Simmons, UK chief investment officer at UBS Global Wealth Management.
The German DAX, however, pulled back from record highs on Tuesday after weak factory activity data from across the globe raised concerns of an economic slowdown.
Among single stocks, Telefonica (BME:TEF) Deutschland tanked 17.9% to its lowest since March 2020 with traders linking the move to rival Vodafone (LON:VOD) announcing a roaming deal with 1&1 in Germany.
U.S.-German medical device maker Siemens Healthineers dropped 5.6% after posting an unexpected drop in quarterly operating profit.
JDE Peet's NV slid 1.9% as one of the world's largest coffee companies lowered its annual earnings target.
German fashion house Hugo Boss slipped 1.9% even as it raised its full-year outlook.
Nearly all major STOXX 600 sectors were lower, with retail stocks and miners down 2.6% and 2.7% respectively.
The aerospace and defence index was a bright spot, up 0.5%, boosted by a 6.4% rise in BAE Systems (LON:BAES) after the British defence firm upgraded its 2023 earnings forecast.