Chinese manufacturing suppresses equities

Trading volumes remain light, but it hasn’t been a great start to the year for the FTSE 100, particularly when taken in context with other European benchmarks which floated near five-and-a-half-year highs before retreating this morning.

The rally witnessed in the past week has been subjected to profit-taking. Factory activity growth in China has blighted sentiment and helped to cap gains in equities. Both the official Chinese PMI number and the HSBC metric showed a slowing in the country's manufacturing sector in December.

Over in Europe, PMI manufacturing readings continue to show a general improvement, with Spain and Italy both exceeding analyst expectations. France is starting to become a concern: factory output there posted a seven-month low, which tends to indicate that any recovery in 2014 will be weak-to-moderate at best.

The attraction of mining stocks seen over the past couple of weeks has worn off. Anglo American, Vedanta and BHP Billiton have all registered losses amid fears that 2014 will bring weakening demand for basic materials. The UK’s manufacturing output missed expectations slightly but has still succeeded in printing its ninth consecutive month of expansion.

Fiat is expected to complete the deal to buy the remaining 41.5% of Chrysler by 20 January. The negotiations have taken some time but ultimately spell good news for the Italian car manufacturer. The avoidance of a disruptive IPO is certainly a bonus, and the additional exposure to the US car market that Fiat will gain from the acquisition should offset some of the losses in European trade. The shares have gained 15% in early trade.

The holiday season normally provides department stores with a last-gasp boost, yet the contrasting fortunes of the British retail sector have been very apparent today. The profit warning from Debenhams earlier this week saw the stock hit badly, with declines totalling 12% on New Year’s Eve. The share price saw slight recovery on news that CFO Simon Herrick would be departing, but has since fallen another 1.6%. Meanwhile, John Lewis has reported strong trading over the Christmas period with like-for-like sales up 6.9% on the year.

We’ll get to see manufacturing data from the US later this afternoon, along with unemployment claims. Given that the scaling-back of asset purchases by the Fed has been well flagged, investors will still be watching US economic data very closely in order to assess whether tapering is likely to become a monthly event.

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