Weak PMIs, Spain Election Uncertainty Dent Sentiment

Weak PMIs, Spain Election Uncertainty Dent Sentiment
A passerby walks past an electric monitor displaying various countries' stock price index outside a bank in Tokyo, Japan, on March 22, 2023. (Issei Kato/Reuters)

London—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 eurozone, 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 percent against the dollar, government bond yields across the bloc edged lower while European stock markets dipped, with Spain’s benchmark index down over 1 percent 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.

Japan’s Nikkei rose 1.2 percent gain, while MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.5 percent.

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 percent, while property developer Country Garden slid on debt concerns.

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 percent.

Shares in major lenders Santander, BBVA, Sabadell, and Caixabank were down between 1.5 percent and 3.3 percent, 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 percent 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 percent can be accounted for by merely 31 stocks.”

Yields on 10-year Treasuries were steady at around 3.82 percent, still below the recent spike high of 4.094 percent.

The U.S. dollar eased 0.25 percent to 141.48 yen.

The euro was lasy down around 0.4 percent 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.