European stocks and US stock futures started the month on a dull note, as disappointing Chinese factory data muddled the economic outlook.
After tumbling global stocks rebounded in July, as markets responded to the economic slowdown by predicting a decline in high inflation, the Stoxx 600 regional index for Europe was flat in early trading on Monday.
Futures trading indicated that Wall Street’s S&P 500 blue chip index will fall 0.3 percent at the opening bell in New York.
Official data released over the weekend showed that Chinese factory activity unexpectedly contracted last month after the outbreak of the new Corona virus and tension in the country’s real estate market led to weak demand. The manufacturing PMI produced a reading of 49, down from 50.2 in June and below the 50 threshold that separates expansion from contraction.
“Domestic demand and external manufacturing demand have been weak,” ING Senior China Economist Iris Pang said in a note to clients.
“Unfinished real estate projects may be at least part of the reason,” Pang added, after debtor developers suspended construction of millions of apartments. Pang also noted “the risk of contagion from financially unhealthy real estate developers to their primary and primary industries.”
Later Monday, the closely watched ISM manufacturing PMI was expected to show a slowdown in growth in US activity, with economists polled by Reuters forecasting a reading of 52 in July from 53 the previous month.
However, investors remain unsure whether the heightened recession risks will affect stock prices by affecting corporate earnings or boost expectations that high global inflation will peak, prompting central banks to be cautious about future rate hikes.
Markets are “looking beyond the well-known issue of inflation and what they see as a slowdown that will force central banks back in again,” said Antonio Cavarero, head of investments at Generali Insurance Asset Management.
“However, some caution is needed, as next quarter earnings may not maintain the current market enthusiasm.”
In government debt markets, the yield on the benchmark 10-year Treasury bond added 0.03 percentage point to 2.67 percent as the instrument price fell. This came on the heels of a strong rise in government debt last week after data showed that the US economy contracted for the second consecutive quarter.
While the Federal Reserve raised its key interest rate by 0.75 percentage points to a range of 2.25 to 2.5 percent last week, futures markets are now pricing in a peak of the federal funds rate at around 3.3 percent in early 2023, with rate cuts thereafter.
The yield on Germany’s 10-year bond settled at 0.83 per cent, with a measure of eurozone debt costs falling sharply after exceeding 1.9 per cent in June.
Brent crude, the oil benchmark, fell 0.5 percent to $103.42 a barrel.