European stocks followed Asia lower on Wednesday, after service sector data from China fell below expectations, raising concerns that the world’s second-largest economy was struggling to recover after years of severe pandemic restrictions.
Europe’s region-wide Stoxx 600 lost 0.4 per cent, dragged down by declines in basic materials and technology stocks, while France’s Cac 40 slipped 0.3 per cent and Germany’s Dax fell 0.7 per cent.
The declines echoed Asian markets, where investors grew cautious after data pointed to China’s services sector activity expanding slower than expected in June, adding to signs that the economy was struggling to recover after three years of Covid-19 restrictions.
The closely watched Caixin services purchasing managers’ index came in at 53.9 on Wednesday, down from 57.1 for May and below consensus estimates of 56.2. Readings above 50 indicate an expansion in activity.
“The services sector recovery appears to be slowing, after the initial strong burst of growth immediately after China dropped zero-Covid policy,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
“This warrants a measured easing approach but not a mega stimulus. Limited fiscal, quasi-fiscal and targeted monetary policy measures are likely to follow,” he noted.
The People’s Bank of China last month cut its benchmark lending rates for the first time in almost a year, as policymakers extended cautious monetary support in an effort to spur more robust growth.
China’s CSI 300 dropped 0.8 per cent and Hong Kong’s Hang Seng index lost 1.4 per cent following the data release. Japan’s Topix was flat.
Meanwhile, geopolitical tensions between the US and China raised investors’ concerns over the technology sector, as Beijing earlier in the week placed new export controls on gallium and germanium products used in semiconductors.
Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 lost 0.5 per cent, and those tracking the tech-focused Nasdaq 100 lost 0.7 per cent, as traders prepared for US markets to reopen after the Independence Day holiday.
Investors awaited minutes from the June meeting of the Federal Open Market Committee, released later on Wednesday, for further insights into the US central bank’s outlook on interest rates.
“The Fed is looking to err on the side of caution, it does not want to be perceived by anyone as being soft on inflation,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.
“We don’t expect an adverse reaction from markets, because markets are fully prepared for that [hawkish] tone from the Fed in the minutes”, he noted.
Oil prices were mixed after rising steadily in the previous session, spurred by the announcement that two of the world’s top producers, Saudi Arabia and Russia, planned to cut supply in August.
Brent crude, the international benchmark, gave back some gains, dropping 0.5 per cent to $75.89 per barrel. However, West Texas Intermediate, which is based on US oil prices, rose 1.8 per cent to $71.06.