Shares limp toward biggest monthly drop since February

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World shares limped towards their worst month since February, with sentiment hurt by still-gloomy China factory readings on Thursday, as traders awaited European and U.S. data that could add to bets that interest rates have peaked.

Europe’s main bourses started fractionally higher as UBS’s results and cost-cutting plans for its Credit Suisse takeover sent its shares 5% higher, and travel and leisure stocks gained 0.7% after their worst month of 2023.

Both S&P 500 futures and Nasdaq futures were little changed ahead of U.S. trading later, while Asian shares saw a low-key finish to a difficult August, especially in China’s property market which has slumped again.

European bond yields and the euro both dipped ahead of euro zone inflation data as investors pondered if early readings, showing prices remained stubbornly high in both Germany and France in August, could mean the European Central Bank delivers another rate hike next month.

One of the ECB’s top policymakers, Isabel Schnabel, also cautioned in a speech that recent falls in “risk-free rates” in Europe meant markets may have undone some of the ECB’s work.

Those rates are now back to February levels, Schnabel explained. “This decline could counteract our efforts to bring inflation back to target in a timely manner.”

Data overnight had showed China’s manufacturing activity contracted for a fifth straight month in August, and while the pace of declines moderated, the services sector lost a little momentum.

“The latest official PMI data were not uniformly bad,” said Robert Carnell, head of research, Asia-Pacific, at ING.

“Both series (manufacturing and services) seem to be converging on a point close to 50 consistent with an economy that is neither expanding nor contracting. Things could be worse. But markets are not likely to take too much comfort from this set of data.”

Chinese blue-chips ended down 0.6%, while Hong Kong’s Hang Seng Index gave up earlier gains to finish 0.5% lower, weighed by another 1.9% drop in property developers that have lost more than 13% this month.

China’s largest private property developer, Country Garden, warned of default risks if its financial performance continued to deteriorate, fuelling concerns that piecemeal support measures from Chinese authorities are not enough to engineer a turnaround in a critical sector.

The country’s tech sector was brighter though. Shares in Baidu and SenseTime gained 3.1% and 2.6%, respectively, as they launched artificial intelligence (AI) chatbots to the public after obtaining government approval.

More broadly, investor mood perked up in August, with a global confidence index (ICI) from State Street Global Markets surging 11.4 points to 107.7, led by North America which recorded the strongest reading in a year on easing recession fears.

HOT OIL

Wall Street had risen on Wednesday after a slew of U.S. economic indicators came in generally weaker than expected, adding to the sense that the Federal Reserve is done raising interest rates and could cut them again next year by more than 100 basis points.

Speaking in South Africa, Fed policymaker Raphael Bostic said monetary policy was now “appropriately restrictive”.

Additional rate hikes risked “inflicting unnecessary economic pain” he added, however, “that does not mean I am for easing policy any time soon”.

The Fed is widely expected to leave U.S. rates in their current range of 5.25%-5.5% when it next meets in a little under three weeks.

But financial markets are pricing in close to even odds that it will ultimately lift that rate another quarter of a percentage point by the end of the year, given still too-high inflation, stronger-than-expected economic growth and still-low unemployment, most recently measured at 3.5%.

Private payrolls on Wednesday clocked a 52.3% monthly drop, adding to signs of a softening in the labour market, while second-quarter GDP was also revised lower.

Attention now turns to inflation numbers as measured by the U.S. personal consumption expenditures (PCE) on Thursday – the Federal Reserve’s preferred gauge of inflation – and non-farm payrolls on Friday.

Action in the government bonds markets was muted on Thursday after a brutal sell-off earlier this month. German Bund yields were down in Europe while 10-year U.S. yields hovered at 4.1%, having steadied in the past few sessions.

They were nonetheless 16 basis points higher in August which will also be a fourth straight month of gains.

Europe’s data showed inflation in Germany and Spain barely slowed in August and it accelerated in France, raising the stakes for the euro zone inflation numbers later in the day.

Bets that the European Central Bank will have to hike in September saw the euro rise against on the yen, hitting a 15-year high of 159.76 yen overnight. It last hovered at 159.4 yen.

Oil prices were edging up again to cap a 14% rise this month, the biggest jump since the start of 2022. Brent crude futures were at $86 per barrel and U.S. West Texas Intermediate crude futures were at $81.7.

The gold price was slightly higher at $1,945.49 per ounce, but fractionally lower on the month.

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