News Column

Iraq crisis and weak eurozone hit markets

June 24, 2014

Phillip Inman Dominic Rushe New York

Global stock markets were hit yesterday by concerns over growing turmoil in Iraq and a weakening picture in the eurozone, which offset strong manufacturing production in the US and China.

The FTSE 100 ended a week-long rally to fall 24 points to 6800, while the German Dax finished 66 points lower on the day as investors digested more bad news from Iraq, where the country's largest oil field has fallen into the hands of Isis insurgents.

France added to the gloomy outlook with figures that showed its activity shrank at the fastest rate in four months.

A broader measure of activity across the eurozone dropped to 52.8 points from 53.5 in May, indicating growth continued in the second quarter, but at modestly. A rating above 50 represents expansion.

The European Central Bank (ECB) cut interest rates at its last meeting to head off a period of deflation that many economists believe is threatening the currency zone's growth prospects. But with oil prices close to a nine-month high and growing instability in some commodity markets, there is increasing concern that Europe's fragile recovery could be derailed.

That weakness was emphasised by financial data firm Markit's composite purchasing managers index (PMI) measure of output prices, which held below the 50 mark for the 27th month, coming in at 49.7 as firms continued to cut prices despite soaring input costs.

Martin van Vliet, an economist at Dutch bank ING, said the eurozone was in danger of entering a period of falling prices and weak growth like the one that has gripped Japan for more than two decades.

"The further weakening of the PMI vindicates the ECB's recent decision to implement further monetary easing and will keep fears of a Japanification of Europe firmly alive," he said.

Earlier, a similar report in China by HSBC was more upbeat. It showed activity in China's manufacturing sector expanded for the first time this year, a sign that the effects of recent mini-stimulus measures unleashed by Beijing were filtering through the economy.

The US manufacturing sector also grew faster than expected in June, reaching levels unseen in four years, according to a key industry report.

After shaking off the after-effects of the US's unusually harsh winter, Markit's preliminary US manufacturing PMI rose to 57.5 in June, above economists' expectations of 56.5, the highest since May 2010.

"The strong reading also rounds off the best quarter for factories for four years, adding to indications that the US economy rebounded strongly in the second quarter from the weather-related weakness seen at the start of the year," said Chris Williamson, chief economist at Markit.

At the end of May, the commerce department said the US economy shrank at an annual rate of 1% in the first quarter, dragged down by the freezing winter. It was the first time in three years there had been a contraction in US GDP - the broadest measure of the economy's health.

Williamson said the report pointed to a strong bounceback and that GDP should now rise 3%. "Hiring also continued at a robust pace as firms boosted capacity in line with the strong demand, broadly consistent with factories taking on another 12,000 staff during the month," he said.


A toy factory in Ganyu in Jiangsu province. Chinese manufacturing is growing, an HSBC report found Photograph: AFP/Getty

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Source: Guardian (UK)

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