European shares experienced a decline to one-week lows on Tuesday, driven by a selloff in economically sensitive sectors following disappointing services sector data from China and the euro zone. This data heightened concerns about a slowdown in global economic growth.
The pan-European STOXX 600 index dropped by 0.7%, marking its fifth consecutive session of losses. Sectors with significant exposure to China, such as luxury goods and construction & materials, were among the primary contributors to the downturn in Europe. Data revealed that China’s services sector expanded at its slowest pace in eight months in August.
Simultaneously, business activity in the euro zone contracted at a faster rate than initially estimated last month. The dominant services industry fell into contraction, signaling the possibility of a recession in the bloc. The final Composite Purchasing Managers’ Index (PMI) for the euro zone, compiled by HCOB, declined to 46.7 in August from July’s 48.6. This marked the lowest reading since November 2020.
Michael Hewson, Chief Market Analyst at CMC Markets, commented, “Not only is manufacturing in contraction, but services have also followed suit. Services had been an outlier when it came to the performance of the European economy until this month.”
The calls for the European Central Bank (ECB) to maintain its current monetary policy stance are expected to grow louder in light of this data.
Money markets have shifted their expectations, with a reduced probability of a 25 basis point rate hike at the ECB’s September 14 meeting. Before the PMI data release, the likelihood of a rate hike stood at around 30%, but it has since eased to approximately 25%.
Furthermore, an ECB survey indicated that consumer expectations for euro zone inflation in the coming years have slightly increased. This development has raised concerns that the decline in price growth may stall above the ECB’s 2% target. The ECB’s Consumer Expectations Survey revealed that inflation expectations for three years ahead rose to 2.4% in July, up from 2.3% in June.
In addition to the economic data, a series of brokerage downgrades weighed on European stocks. Swiss pharmaceutical firm Roche saw a 1.3% decline after Berenberg downgraded the company from “buy” to “hold,” citing a lack of catalysts to boost the stock.
French bank Credit Agricole experienced a 2.7% drop following a “sell” rating from Goldman Sachs, while Commerzbank, a German lender, slid by 4.5% after Barclays downgraded its stock to “underweight.”
Retailers were not immune to the downturn, with a 1.2% decline following J.P. Morgan’s downgrade of food retailers. The downgrade cited the potential for grocery pricing deflation as a contributing factor.