A slowdown in manufacturing growth in China and a warning that Moody's may downgrade Spain moved investors away from equities and dragged the FTSE 100 to its lowest level in almost 10 months.
Official reports from China showed manufacturing growth easing in June. The Purchasing Managers' Index (PMI) fell to 52.1 in June from a previous reading of 53.9 in May. A reading above 50 indicates an expansion in manufacturing activity. The slowdown in manufacturing growth is really playing on investors' minds as the current momentum suggests that a slide back into recession is becoming more of a possibility. The fall in manufacturing growth, by and large, should be expected, as the recent fears sparked by the European debt crisis is likely to have an impact on growth expectations. However, as there is such a massive reliance on China to drive global demand and growth, any signs that the country may be faltering is unnerving to investors.
In a market that's starving for some positive indicators, headlines that Moody's is putting Spain's Aaa sovereign debt rating on review do not help the situation. Spain has already lost its top rating with Standard and Poor's and Fitch Ratings, so last night's announcement by Moody's should really come as no surprise. However it does add to the general pessimism that is driving the market at the moment and reinforces the grim picture Europe faces. The outcome of today's Spanish bond auction, where the sale of up to €3.5 billion in five-year notes is planned, will be watched closely by investors to gauge the markets tolerance for European bonds. The outlook for the rest of this week may also be bleak with US jobs date due for release, starting with jobless claims this afternoon and new job starts along with the official unemployment rate tomorrow. Economists aren't too optimistic, particularly after the ADP employment change yesterday came in far lower than expected. A large part of the slide in equities over the last week could be due to investors pricing in the expectation of disappointing US employment figures.
By 11am (London time) the FTSE 100 index was 57.81 points lower (-1.19%) at 4859.06, while the broader FTSE 250 index had lost 169.61 points (-1.84%) to 9196.51.
Sterling retreated against the US dollar, after Bank of England policy maker David Miles said that, in his view, tightening of monetary policy is not the right thing to do at this stage, suggesting that interest rates will be on hold for the time being. A broad fall in metal and energy commodities hit Xstrata, Lonmin and Petrofac, which fell between 2.7% and 3.12%. The slowdown in China's manufacturing growth also weighed on Australian miners BHP and Rio Tinto, which lost 1.85% and 0.84% respectively.
Banking stocks retreated today over nervousness ahead of Spain's bond auction. Leading the fall was Barclays with a drop of 2.9%, followed by Royal Bank of Scotland and HSBC, which shed 2.12% and 1.69% respectively.
UK retailers were also weaker over concerns the UK budget will end up crimping domestic spending. Marks and Spencer, Home Retail Group and Next were lower between 1.8% and 2%.
