By Sruthi Shankar
(Reuters) -European stocks slipped on Tuesday, with the German DAX pulling back from record highs as shrinking factory activity in the euro zone and China underscored growing risks to the global economy from rising interest rates.
The pan-European STOXX 600 index was down 0.5%, with carmakers, real estate and miners leading sectoral declines.
Losses accelerated across euro zone markets after a survey showed manufacturing activity in the bloc contracted in July at the fastest pace since May 2020 as demand slumped despite factories cutting their prices sharply.
There was considerable weakness seen in Germany, Europe’s largest economy, while France and Italy, the second- and third-largest euro zone economies, also recorded marked deteriorations since June.
Surveys earlier showed Asia’s factory activity also shrank in July, a sign slowing global growth and weakness in China’s economy were taking a toll on the region’s fragile recovery.
The auto-heavy German DAX fell 0.8% after touching a record high in the previous session, with shares of BMW and Mercedes Benz falling 4.4% and 1.8%, respectively.
“We’re quite defensive in our sector allocation,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen, warning that the impact of aggressive interest rate hikes is yet to be felt.
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“The cyclicals have been much stronger than the PMIs. The risk-on rally has been sometimes out of line with the fundamental factors.”
Signs of easing inflation have spurred hopes that the Federal Reserve and the European Central Bank are near the end of their monetary tightening, boosting stock markets across both sides of the Atlantic in recent weeks.
The second-quarter reporting season also kicked into high gear. Analysts see an 8.1% contraction in quarterly profit for STOXX 600 companies, according to Refinitiv IBES data, a slight improvement from the 9.2% drop forecast at the start of the earnings season.
Among companies that reported, DHL Group fell 4.7% after the freight forwarder reported a slump in quarterly earnings as high inflation, the war in Ukraine and the ongoing energy crisis weighed on consumer demand and freight rates.
In the UK, HSBC Holdings climbed 2.4% after the lender raised its key performance target, while BP gained 1.2% after the energy giant boosted its dividend by 10%.
Fresnillo tumbled 6.9% as the Mexico-focused miner posted a near 24% slump in half-year core profit.
(Reporting by Sruthi Shankar in Bengaluru; Editing by Sohini Goswami and Eileen Soreng)
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