Weak PMIs, uncertainty over the Spanish election dampen sentiment

LONDON, July 24 (Reuters) – Global stock markets fell on Monday, with weak data on business activity and an uncertain election result in Spain weighing on sentiment in Europe ahead of a central bank-filled week for markets.

German business activity slowed 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, fell to an eight-month low of 48.9 in July from June’s 49.9.

This, along with news that no clear winner had emerged from Spain’s snap election on Sunday, contributed to a gloomy mood as European markets opened.

The euro fell 0.4% against the dollar, government bond yields across the bloc fell while European stock markets fell, with Spain’s benchmark down more than 1% in a clear underperformer.

With the Federal Reserve, European Central Bank and Bank of Japan meeting this week, overall sentiment across global markets was tempered somewhat with caution.

“The upcoming meetings between the FOMC (Fed) and the ECB are expected to result in a 25 basis point increase in interest rates from both institutions, accompanied by hawkish forward guidance,” said Bruno Schneller, CEO of INVICO Asset Management.

“The decision on subsequent hikes in September depends on both the direction of growth and upcoming inflation data,” he said, adding that a significant slowdown in US economic GDP growth was likely and pointing to a pause in rate hikes.

The odd man 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 an adjustment to the yield curve’s control stance.

Reuters reported last week that BOJ policymakers would prefer to scrutinize more data to ensure wages and the inflation rate continue to rise before changing policy, although the decision could still be a close call.

Japan’s Nikkei (.N225) rose 1.2%, while MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.5%.

China’s Politburo meeting this week could see more stimulus announced, although investors have so far been underwhelmed by Beijing’s actions to shore up a sputtering post-pandemic recovery.

Chinese blue chips (.CSI300) fell 0.4%, while property developer Country Garden (2007.HK) fell on debt worries.

SPAIN UNDERPERFORMS

Spain faced political crisis on Monday after right-wing parties failed to win a decisive victory and no clear winner emerged in Sunday’s national election, leaving Basque and Catalan small regional parties as potential royalists.

Investors reacted by pushing Spain’s benchmark index IBEX (.IBEX) down over 1%.

Shares in major lenders Santander ( SAN.MC ), BBVA ( BBVA.MC ), Sabadell ( SABE.MC ) and Caixabank ( CABK.MC ) were down between 1.5% and 3.3%, ranking them among the biggest fallers across the European stock market.

“I don’t think it (the election) is necessarily part of a darker outlook for Spain in the longer term, but just think at the moment, we see uncertainty and markets hate uncertainty,” City Index strategist Fiona Cincotta said.

HOST FOR RECOVERY

On top of central bank meetings and economic data, investors also braced for a flurry of earnings from both sides of the Atlantic.

US stock futures rose slightly, suggesting a positive opening for Wall Street.

A who’s who of major companies 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 20 earnings multiple and its year-to-date gains of 19%.

“The performance of the current market can be attributed to the narrowest leadership seen in three decades,” said Schneller of INVICO Asset Management. “The S&P 500’s entire annual return of about 16.5% can be explained by just 31 stocks.”

Yields on 10-year Treasury notes were steady at around 3.82%, still below the recent peak of 4.094%.

The US dollar fell 0.25% to 141.48 yen, after jumping 1.3% on Friday after the BOJ report.

The euro was down around 0.4% at $1.1082 as government bond yields across the eurozone fell after the weak PMI data.

Oil prices trimmed earlier falls with Brent trading roughly flat on the day at $81 and US crude also little changed at around $77.

Reporting by Nell Mackenzie and Dhara Ranasinghe in London; Additional reporting by Wayne Cole in SYDNEY and Amanda Cooper in London.

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