Gloomy data makes investors more cautious on global economy

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Global stocks were mostly down and oil slipped on Tuesday as declining factory activity in the euro zone and China tempered investors’ optimism over U.S. economic prospects and a likely end to Fed rate hikes.

Markets also digested fresh U.S. manufacturing data, which appeared to stabilize at weaker levels in July amid a gradual improvement in new orders. Other data showed U.S. job openings fell to the lowest level in more than two years in June, but remained at levels consistent with tight labour market conditions.

On Wall Street, The Dow Jones Industrial Average was virtually flat at 35,566.76, the S&P 500 lost 0.42%, to 4,569.61 and the Nasdaq Composite dropped 0.78%, to 14,233.63.

Shares of Merck & Co dipped 0.1% even though it raised its full-year profit forecast. Pfizer  missed estimates for quarterly revenue but its shares gained 1% after the drugmaker said it would launch a program to cut costs if demand for its COVID-19 products remains muted this fall; and Caterpillar Inc rose 7% after reporting a better than expected rise in second-quarter profit, although it also warned on third-quarter sales and margins.

European stocks fell 0.6%, deepening losses through the morning and stepping back from a 2% increase in July, the index’s second month of gains.

UK stocks were little changed, though HSBC climbed as much as 3% after announcing a $2 billion share buyback and raising its key profitability target.

Losses accelerated across European markets after data showed manufacturing activity in the bloc contracted in July at the fastest pace since May 2020 amid slumping demand even as factories cut their prices sharply.

The data disappointed investors who are readying for an end to a series of U.S. Federal Reserve interest rate hikes, with an increase last week widely seen as one of the last in its current tightening cycle.

The yield on 10-year Treasury notes was up 8.4 basis points at 4.041%. The two-year yield, which typically moves in step with interest rate expectations, was up 2.8 basis points at 4.902%.

Market players put Tuesday’s losses down to a combination of profit taking at the start of the month, as well as nerves over the health of the global economy.

“The economy is a little bit weaker than perhaps people would like, and I think that’s a concern for earnings growth heading into the second half of the year,” said Michael Hewson, chief market analyst at CMC Markets.

The MSCI world equity index, which tracks shares in 47 countries, fell 0.6% after gaining 3.5% last month.

Oil prices traded near a three-month high hit on Monday amid signs of tightening global supply. Also underpinning prices were producers cutting output and demand in the United States, the world’s biggest fuel consumer, remaining resilient. U.S. crude fell 0.64% to $81.28 per barrel and Brent was at $84.95, down 0.56% on the day.

Energy giant BP gained 0.8% and boosted its dividend by 10% after reporting a second-quarter profit of $2.6 billion, down 70% from a year earlier.

The U.S. dollar index , which measures the currency against six major peers, rose 0.44% to as high as $102.35 for the first time since July 10.

The dollar also hit a three-week high against the yen as investors continued to seek clarity on the Bank of Japan’s recent adjustment to its yield curve control and what that might mean for monetary policy.

MSCI’s broadest index of Asia-Pacific shares traded down 0.4%, just below the high reached Monday, which was its strongest since April last year.

Still, many investors remain positive.

“Markets are fully focusing on the bright side of the puzzle,” said Sandrine Perret, portfolio manager at Unigestion. “The market reaction since last week, after the Fed rally, has been really strong and resilient.”

NARRATIVE TESTS

Signs of a peaking out in European inflation on Monday echoed the narrative in the United States, providing more evidence that the biggest central banks are nearing the end of their tightening cycles.

Yet other data gave cause for caution on prospects for the global economy.

China’s stumbling post-pandemic recovery remained in focus, for instance, after a surprise contraction in manufacturing in a private-sector survey released Tuesday.

The positive U.S. narrative also faces some crucial tests this week, with several closely watched jobs reports due, culminating with monthly payrolls on Friday.

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