Surprise contraction in Chinese manufacturing weighing on investor sentiment

• Surprise contraction in Chinese manufacturing weighing on investor sentiment;

• Improvement expected in eurozone PMI data;

• France remains a concern, with the data expected to remain comfortably in contraction territory;

• Spanish unemployment finally stabilising at around 26%.

Chinese data is weighing on investor sentiment this morning, with European index futures trading slightly in the red after Asian indices recorded small losses over night.

The preliminary reading of this month’s HSBC manufacturing PMI posted its first contraction figure since July last year, which has knocked investor sentiment a little. The fact that we’re only seeing small losses suggests investors aren’t overly concerned about this reading. The general consensus appears to be that this should be seen as a potential warning of slowing activity this year in the world’s second largest economy, rather than confirmation of it.

Hopefully we’ll get better numbers out of the eurozone this morning, with manufacturing and services PMI data being released for Germany, France and the eurozone. The numbers coming out of Germany and the eurozone have been very encouraging over the last six months or so and have been very consistent with people’s expectations for the coming year, small amounts of growth in the euro area driven predominantly by accelerating growth in Germany.

The concern once again is France, which has seen its PMI reading deteriorate after showing signs of picking up in the third quarter of last year. Unfortunately, this highlights the problem with these PMI readings as this is the same quarter that the country posted a small contraction in GDP which could lead to it falling back into recession. The recent slide in the numbers looks like more than a bump in the road for the data and suggests it’s going to be another rough year for the euro area’s second largest economy.

The data is expected to show a slight improvement this morning, although the French numbers are expected to remain comfortably in contraction territory, marking a third consecutive month of negative growth in the services sector and a far more concerning 30 months without growth in the manufacturing sector.

Over in Spain things are far worse, although we are seeing signs that the country is turning a corner. Spain recently exited its bank bailout program after borrowing much less than the €100 billion figure that was initially being talked about. It’s also beginning to find its feet again in the debt markets, as seen yesterday by the success of its 10-year bond auction which saw yields fall to 3.845%.

Conditions in the country are still very bad though, but these are hopefully an early indication that it is turning a corner. The rapid increase that we’ve seen in the unemployment rate since the start of the crisis appears to have come to a halt, for now at least. In the third quarter we saw a larger than expected drop in the figure and in the fourth, we’re expected it to remain at 26%.

Later on the focus will be on the US, where we have jobless claims, manufacturing and housing data being released. Among all of these releases though we also have the January consumer confidence figure for the eurozone, which is expected to improve again to -13, although this is still deep in negative territory highlighting just how pessimistic consumers still are.

Ahead of the open we expect to see the FTSE down 15 point, the CAC down 6 points and the DAX down 22 points.