Weak PMIs, Spain election uncertainty dent sentiment
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[July 24, 2023] By
Nell Mackenzie and Dhara Ranasinghe
London (Reuters) -World stocks slipped on Monday, with weak business
activity data and an inconclusive election result in Spain weighing on
sentiment in Europe ahead of a central bank-packed week for markets.
German business activity contracted in July, increasing the likelihood
of a recession in the second half of the year, the German Flash
Composite Purchasing Managers' Index (PMI) showed.
HCOB's flash Composite Purchasing Managers' Index (PMI) for the euro
zone, seen as a good gauge of overall economic health, dropped to an
eight-month low of 48.9 in July from June's 49.9.
This together with news that no clear winner had emerged from Spain's
snap election on Sunday added to a sombre mood as European markets
opened.
The euro slipped 0.4% against the dollar, government bond yields across
the bloc edged lower while European stock markets dipped, with Spain's
benchmark index down over 1% in a clear underpeformance.
With the Federal Reserve, European Central Bank and Bank of Japan
meeting this week, the overall mood across global markets was tempered
somewhat with caution setting in.
"The upcoming meetings of the FOMC (fed) and the ECB are anticipated to
result in a 25 basis points increase in rates from both institutions,
accompanied by hawkish forward guidance," said Bruno Schneller, a
managing director at INVICO Asset Management.
"The decision for subsequent hikes in September hinges on both the
direction of growth and forthcoming inflation data," said adding that a
significant deceleration in U.S. economic GDP growth was likely and
pointed to a pause in rate increases.
The odd person out will be the Bank of Japan which meets on Friday and
is thought likely to keep its super-loose policy intact, but some
Western banks are speculating on a tweak to its yield curve control
stance.
Reuters reported last week that BOJ policymakers prefer to scrutinise
more data to ensure wages and the inflation rate keep rising before
changing policy, though the decision could still be a close call.
Japan's Nikkei rose 1.2% gain, while MSCI's broadest index of
Asia-Pacific shares outside Japan eased 0.5%.
China's Politburo meeting this week could see more stimulus announced,
though investors have so far been underwhelmed by Beijing's actions to
shore up a sputtering post-pandemic recovery.
Chinese blue chips dipped 0.4%, while property developer Country Garden
slid on debt concerns.
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A woman walks past the skyline of the
financial district during sunset in Frankfurt, Germany, October 26,
2020, REUTERS/Kai Pfaffenbach/File Photo
SPAIN UNDERPERFORMS
Spain faced political gridlock on Monday after the right-wing
parties failed to clinch a decisive victory and no clear winner
emerged in Sunday's national election, leaving Basque and Catalan
small regional parties as potential kingmakers.
Investors reacted by pushing Spain's benchmark IBEX index down over
1%.
Shares in major lenders Santander, BBVA, Sabadell and Caixabank were
down between 1.5% and 3.3%, ranking them among the biggest decliners
across the European stock market.
"I don’t think it’s (the election) necessarily part of a darker
outlook for Spain in the longer term, but just think at the moment,
we're seeing that uncertainty and markets hate uncertainty," City
Index strategist Fiona Cincotta said.
HOST OF EARNINGS
On top of central bank meetings and economic data, investors also
braced for a slew of earnings from both sides of the Atlantic.
U.S. stock futures were up slightly, pointing to a positive open for
Wall Street.
A who's who of major companies are reporting this week including
Alphabet, Meta, Intel, Microsoft, GE, AT&T, Boeing, Exxon Mobil,
McDonald's, Coca Cola, Ford and GM.
The results will have to be good to justify the S&P 500's earnings
multiple of 20 and its gains of 19% year-to-date.
"The performance of the current market can be attributed to the
narrowest leadership seen in three decades," said INVICO Asset
Management's Schneller. "The entire S&P 500's year-to-date returns
of approximately 16.5% can be accounted for by merely 31 stocks."
Yields on 10-year Treasuries were steady at around 3.82%, still
below the recent spike high of 4.094%.
The U.S. dollar eased 0.25% to 141.48 yen, having jumped 1.3% on
Friday following the report on the BOJ.
The euro was lasy down around 0.4% to $1.1082 while government bond
yields across the euro area fell after the weak PMI data.
Oil prices trimmed earlier falls with Brent trading virtually flat
on the day at $81 and U.S. crude also little changed at around $77.
[O/R]
(Reporting by Nell Mackenzie and Dhara Ranasinghe in London;
Additional reporting by Wayne Cole in SYDNEY and Amanda Cooper in
London.)
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