European shares start August on sour note as global factory activity falters

European stocks fell on Tuesday, with the German DAX pulling back from record highs as shrinking factory activity in the eurozone, China and the United States underscored growing risks to the global economy from rising interest rates. The pan-European STOXX 600 index closed down 0.9 per cent, in its biggest one-day percentage loss in nearly a month. Carmakers, financial services firms and miners led sectoral declines, down between 1.3 per cent and 1.6 per cent.

Losses accelerated across eurozone 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. Considerable weakness was seen in Germany, Europe's largest economy, while France and Italy, the second-and third-largest eurozone economies, also recorded marked deteriorations since June.

Surveys showed Asian factory activity also shrank in July, highlighting the impact of weak demand from China, while U.S. manufacturing activity also stayed in contractionary territory for the ninth straight month. "It is (not) anything particularly out of keeping with what we've been seeing for a number of months now, which is industrial activity surveys suggesting ongoing contraction. The market is basically trying to get a handle on when that troughs out," said Tom O’Hara, European equities portfolio manager at Janus Henderson. "We may be reaching the point to which the Chinese Government steps up its efforts to stimulate the economy."

China-exposed luxury firm LVMH was the biggest drag on the STOXX 600, down 2.3 per cent. The auto-heavy German DAX fell 1.3 per cent after touching a record high in the previous session, with BMW down 5.4 per cent and among top losers after the company's quarterly profit margin for its car division fell below expectations. Rival Mercedes Benz was down 2.4 per cent. Also weighing on the DAX, German logistics and mail group DHL slumped 5.2 per cent after reporting a slide in quarterly revenue and earnings due to a slump in freight volumes.

Speculation that the Federal Reserve and the European Central Bank were close to the end of their tightening had helped the STOXX 600 notch gains in July, with some upbeat second-quarter earnings reports providing added upside. Analysts now see a 5.8 per cent contraction in quarterly profit for STOXX 600 companies, according to Refinitiv IBES data, an improvement from an 8.1 per cent decline seen last week. In Britain, HSBC Holdings climbed 1.3 per cent as the lender raised its key profitability target. Nexi dropped 6.9 per cent after the Italian payments giant confirmed its 2023 guidance, defying speculation about an upgrade.