European markets are expected to open lower again on Wednesday, following a negative lead from the U.S. and Asia overnight and some disappointing PMI data from China.
Chinese growth fears are nothing new although they do continue to weigh on global investor sentiment. The Caixin and official PMI data released overnight for August showed a further slowdown in the manufacturing sector, still a very important source of growth for China, while the services sector also slowed.
The official manufacturing PMI which focuses primarily on large state-owned firms fell into negative territory for the first time in six months and to the lowest level in three years. The Caixin reading, which focuses more on the small and medium sized enterprises, showed the sector contracting at its fastest rate since March 2009.
At a time when the People’s Bank of China is already making big efforts to shore up the economy, this is very concerning. It’s no surprise that people expect the economy to slow well below 7% in the second half of the year, unless of course we see further monetary and fiscal stimulus measures, which is likely.
Manufacturing and unemployment data will continue to flow throughout the day, starting with the euro area this morning. These are predominantly revised figures so the market reaction may not be a big as we see with the flash readings a week and a half earlier. Still, the numbers are expected to be quite encouraging, especially in Spain and Italy where the outlook for the sector appears particularly positive. France continues to experience sluggish growth and based on the growing contraction in the sector, the same is likely to continue for some time yet.
Eurozone unemployment is expected to remain at 11.1% in July but conditions are generally improving and while the number remains far too high, it is slowly moving in the right direction, assisted by declines in Spain and Italy, where it appears to have peaked at the start of 2013 and the end of 2014, respectively.
U.K. manufacturing PMI data will also be released this morning and is expected to be unchanged from last month at 51.9. The marks a significant slowdown in growth from mid-2013 to mid-2014 but that was coming from a much lower base and while it has slowed, we are at least continuing to good growth numbers in the PMIs. This is also against the backdrop of challenging conditions including slow growth in the U.K.s largest export market and a strong pound which negatively impacts the U.K.s competitiveness.
We continue with the manufacturing PMI data later on this afternoon, with the official and ISM readings due out of the U.S.. As with the U.K., the U.S. continues to experience challenging conditions as a result of slowing global growth and the strong dollar and yet, both PMIs are expected to remain comfortably in growth territory at 52.9 and 52.6, respectively.
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