Global equity markets started the new month on the back foot on Wednesday, undermined by lackluster economic data and an oil price slide that took the edge off energy and mining shares.
The pan-European FTSEurofirst 300 and the STOXX Europe 600 both fell more than 1 percent, led by the resources sector, while U.S. equity futures pointed to a weak opening for Wall Street.
The catalyst for the moves lower was Chinese manufacturing data that showed the economy still struggling to regain traction, while euro zone factory growth languished at a three-month low.
Oil slid more than 1 percent too, hurting resources stocks and risk appetite in general. The MSCI world index, which tracks shares in 45 countries, shed 0.2 percent, pulling away from a one-month high hit earlier this week.
Markus Huber, a trader at the City of London Markets brokerage, said equities were also seeing follow-through selling after disappointing U.S. data on Tuesday.
“Furthermore, several (factory) data readings out of China overnight painted only a mixed picture possibly indicating that economic growth momentum is already in the process of slowing again,” Huber added.
Wall Street suffered a reversal late on Tuesday when soft readings on consumer confidence and Midwest manufacturing eclipsed strong retail sales indicators, and raised worries that recovery was again stuttering in the world’s biggest economy.
The risk off mood boosted safe-haven government bonds, with Germany’s 10-year yield falling to within 10 basis points of record lows. U.S. Treasury yields slipped a touch after falling from multi-week highs late on Tuesday [US/].
The dollar floundered against the yen and the euro as the data prompted investors to reconsider the most likely timing of the Fed move – they now price a 22.5 percent probability of a rate move in June, down from around 32 percent factored in a few days back, according to the CME Group FedWatch program.
Much now depends on the upcoming manufacturing survey from the Institute of Supply Management (ISM), with a weak reading further eroding chances of a June rate hike. The Fed will also release its Beige Book report on business activity at 1800 GMT (2.00 p.m. ET).
“We are looking at the ISM and what the Fed says in the Beige Book today and if they deliver a surprise or a positive outlook, I would expect markets to price in more than they currently are in terms of a June rate hike,” said Daniel Lenz, a strategist at DZ Bank.
The dollar fell almost 0.4 percent against a basket of currencies, pulling away from two-month highs set on Monday, while against the yen it slipped around 1 percent, pulling away from a one-month peak of 111.455 set on Monday.
The Japanese currency was boosted by an announcement that a planned sales tax hike would be delayed.
However, the Chinese yuan approached a five-year low against the dollar after the central bank fixed the exchange rate midpoint lower for the third straight day, adding to fears that authorities saw the need for currency weakness to offset weaker growth.
Politics is also an issue in many parts of the world, weighing especially on sterling which hit a two-week low of $1.4439 against the dollar, adding to Tuesday’s 1 percent losses.
The moves were driven by latest polls that showed the percentage of voters supporting leaving the European Union may be increasing ahead of the June 23 referendum [GBP/].
“With the referendum three weeks from tomorrow, the pound could come under increasing downward pressure as the ‘Leave’ camp regains momentum,” James Reddiman, director at FX consultancy Audere Solutions, said.
(Additional reporting by Sujata Rao, Atul Prakash and Dhara Ranasinghe; Editing by Robin Pomeroy)