European stocks fall as Chinese factory activity slows

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European stocks followed China lower on Tuesday after new data pointed to a slowdown in Chinese factory activity, raising investor concerns over a global slowdown in demand for goods.

The region-wide Stoxx Europe 600 index slipped 0.2 per cent at the opening bell, as did France’s Cac 40 and Germany’s Dax. Materials stocks led losses, as the Stoxx 600 Basic Resources index opened 1 per cent lower.

The declines echoed markets in China, where the CSI 300 index of Shanghai- and Shenzhen-listed stocks and Hong Kong’s Hang Seng index both gave up 0.4 per cent, with investors worried about the country’s stalled post-pandemic recovery.

The moves came after the Caixin manufacturing purchasing managers’ index, a private sector survey tracking monthly changes in factory activity, slipped to 49.2 in July from 50.5 in June, undershooting analysts’ forecasts of 50.3.

The reading fell below the neutral 50 mark, meaning the majority of respondents reported a contraction in activity, for the first time since April. 

The politburo, China’s top decision-making body, had earlier vowed to extend further support to prop up the world’s second-largest economy but offered few details, stretching investors’ nerves.

“This limited policy support means that China’s recovery probably will continue to be ‘tortuous’, uneven and drawn out,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

Elsewhere in Asia, Japan’s Topix index was up 0.6 per cent, and South Korea’s benchmark Kospi rose 1.3 per cent. 

Meanwhile, slowing inflation prompted Australia’s central bank to keep its key interest rate unchanged for the second consecutive meeting, at 4.1 per cent, defying market forecasts of a 0.25 percentage point increase. The S&P/ASX 200 gained 0.5 per cent.

The meeting came a week after central banks in the US and Europe raised rates but refrained from their usual hawkish guidance in a sign that the global tightening cycle could soon draw to a close.

In the US, contracts tracking Wall Street’s benchmark S&P 500 fell 0.1 per cent, while those tracking the tech-focused Nasdaq 100 slipped 0.2 per cent ahead of the New York open.

US stocks clocked their longest monthly winning streak in two years in July, as signs of falling inflation and resilient growth raised investors’ hopes that the US Federal Reserve could complete its monetary tightening cycle without causing a recession.

“The attitude of the market is assured and investors expect upside for the foreseeable future, and any downside along the way is being dismissed as trivial noise,” said Mike Zigmont, head of research and trading at Harvest Volatility.