Euro data hits stocks, China reading soothes commodities

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LONDON (Sept 23): More downbeat data from Europe left shares on course for a third day of losses on Tuesday, though commodities got a break from recent selling after a reading on China's massive factory sector outpaced the market's bleak expectations.

In data likely to dishearten European policymakers, euro zone business activity expanded at a slightly weaker pace than expected this month, with firms also cutting prices for a 30th month in a row to drum up business.

The manufacturing PMI for Germany, Europe's largest economy, slumped to 50.3, its lowest reading since June 2013 and below all forecasts in a Reuters poll of 32 economists, while a services industry PMI for France, the bloc's second-biggest economy, faltered after just two months in growth territory.

Stock markets in London, Frankfurt and Paris fell 1, 0.8 and 1.3 percent respectively as new tax pressures also hit pharmaceutical and UK tobacco firms. Vienna slumped 2 percent as Raiffeisen Bank warned it was likely to see its first ever annual loss due to problems in Ukraine and Hungary.

"Although there was some relief that the French PMI number wasn't worse, the fact that activity in Germany is only just expanding must be a worry," said Gavin Friend, a strategist at National Australia Bank.

In China the news had been slightly better. HSBC's flash survey on manufacturing (PMI) rose to 50.5, from 50.2 in August, confounding forecasts for a dip to 50.0.

The mixed data - comforting from China, less so in Europe - and the start of U.S.-led air strikes on Islamic State strongholds in Syria gave a fillip to safe-haven U.S. and German government bonds, while the high-flying dollar edged lower against its currency basket.

Economists had been braced for something worse from Beijing following the recent run of soft data from the world's number two economy and the relief also helped offset nerves over the fresh bout of political tensions in the Middle East .

Chinese stocks bounced 0.7 percent to lead Asia marginally higher. The Australian dollar also hopped up. The Asian giant is Australia's single biggest export market and investors often use the currency as a liquid proxy for China plays.

Annette Beacher, head of Asia-Pacific research at TD Securities, noted the flash PMIs had averaged 50.9 for the third quarter, a pickup over the previous quarter's 49.6.

"After the dismal industrial production print for August, financial markets were increasingly of the view that China is slowing at a more rapid pace than desired, so today's print provides a welcome offset," said Beacher.

Australia's main index swung smartly higher to be up 1 percent, while MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.2 percent. Japanese markets were shut for a holiday.

Wall Street's took a tumble overnight. A 0.8 percent drop for the S&P 500 was the biggest one-day decline since early August and was caused in part by a soft reading on U.S. existing home sales. Early futures prices also pointed to another 0.2 percent dip later.

Dollar rests

U.S. Treasuries and other global bond markets were also still benefitting from comments from New York Federal Reserve bank president William Dudley on Monday that there was still excessive slack in the U.S. economy so any increase in interest rates should be done cautiously.

Yields on 10-year Treasury notes dipped to 2.56 percent, from 2.59 percent late Friday, while German Bunds and other core euro zone bond yields were barely budged just above their recent lows.

Dudley also said the steady rise in the dollar could complicate the Fed's job, potentially hurting U.S. economic performance and pushing down inflation.

The currency has been on a hot streak recently thanks to the diverging outlook for U.S. rates and those in Europe and Japan, where policy is set to remain super-easy and might even be loosened further.

Measured against a basket of currencies the dollar had climbed for 10 straight weeks, the longest run since the index was created in 1971. The index traded at 84.521, having peaked at 84.861 on Monday.

The dollar was also taking a breather against the yen at 108.74 after peaking at a six-year high of 109.46 last week. The euro was hanging on at $1.2862 having hit a new 14-month low at $1.2814 the previous day.

The Australian dollar recouped just a little of its recent losses on the China survey and nudged up to $0.8913. Likewise, copper and gold inched higher, the latter having touched its lowest since January at $1,208.36 on Monday.

Brent crude oil for November delivery bounced 20 cents to $97.17 a barrel, having fallen sharply overnight to be uncomfortably close to its recent trough of $96.21. U.S. crude rose 15 cents to $91.01 a barrel.

Ample supply and slowing economic growth in Europe and China had been outweighing expectations of a cut in oil output from the Organization of the Petroleum Exporting Countries (OPEC).

"The market was really oversold earlier and there was not much room for prices to go further down," said Avtar Sandu, senior manager for commodities at Phillip Futures, after the Chinese data.

(WrapUp 5: Tues 23/09/14 16:53:54)