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BW Businessworld

Euro Zone Factory Cutbacks Reverse Share Gains

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European shares erased early gains and the single currency fell after data showed a downturn in the euro zone's manufacturing sector had deepened in April, undermining hopes for a global recovery inspired by a strong rise in US factory activity.

The Markit Eurozone Manufacturing Purchasing Managers' Index (PMI) showed factories in the euro zone cut workers at the fastest pace in more than two years in April after new orders fell for the 11th straight month.

The euro fell 0.5 per cent against the dollar to a session low of $1.3160, safe-haven German Bund futures pared early losses to stand flat on the day, and the FTSE Eurofirst index of top European shares cut its gains to be up just 0.4 percent from 0.9 per cent near the open.

"Manufacturing in the euro zone took a further lurch deeper into a new recession in April," said Chris Williamson, chief economist at data compiler Markit.

The PMI for Germany, Europe's largest economy, showed its manufacturing sector had contracted for a second successive month and it was a similar picture in neighbouring France.

In Italy, the bloc's third-largest economy, the sector contracted for the ninth month while in Spain, facing deep government spending cuts in a battle to trim the public deficit, activity declined at the fastest pace since June 2009.

The data took some of the shine off Tuesday's numbers from the United States which showed the pace of growth in manufacturing last month at the strongest rate in 10 months.

Earlier data out from Asia had also raised hopes that the global economy was recovering and the worst had probably passed for China.

Growth Policies Eyed
The latest bleak news from the euro zone adds to growing pressure on the region's political leaders and the European Central Bank to shift towards supporting growth and give less emphasis to imposing tough fiscal austerity measures.

ECB President Mario Draghi called last week for governments to agree a "growth compact", and his comments after Thursday's monthly policy meeting, where the bank is expected to leave interest rates unchanged, will be key.

The ECB's injection of cheap money in the European banking system in December and February did much to ease tensions in the financial markets and lift asset prices in the first quarter.

To many investors the central bank remains the key to ensuring another sharp selloff doesn't occur over the summer months. A recent poll by Reuters of 60 market economists found three quarters of the respondents expect the ECB to restart its government bond-buying programme within the next three months.

Weekend elections in Greece and France, which could see the arrival of more pro-growth governments, are also adding to fears of rising political tension over future policy direction at the heart of Europe.

Francois Hollande, front-runner and first-round winner in the French presidential race, has promised to shift the debate in Europe towards promoting growth if he is elected, raising concern about tensions between Germany and France.

However, others have played down such fears, saying Germany appears to be relaxing its focus on austerity.

In financial markets global growth is seen as the only long-term solution to Europe's woes and attention will soon switch to the US private payrolls figures due later, which are an indicator of the health of the jobs market before the non-farm payrolls numbers on Friday. ECONUS

"The next jobs data (on Friday) will be more important than usual. If it is strong, it could cement expectation of strong recovery at least in the United States," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

In share markets, solid gains across Asia coming after the Dow Jones Industrial Average posted its highest level in more than four years, helped keep the MSCI world equity index largely steady at 329.60.

The euro settled down to trade around 0.5 percent lower against the dollar at $1.3170, well below its one-month peak of $1.3284. The dollar index, a measure of the dollar against a basket of major currencies, rose 0.3 percent to 79.11.

Oil markets dipped as the weak economic data from Europe hit the demand outlook, countered the more positive figures from China and the United States.

Brent crude for June slipped 10 cents to $119.56 a barrel. U.S. crude for June CLc1 was down 34 cents at $105.82.


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