Stocks and oil slipped on Tuesday as declining factory activity in the euro zone and China tempered investors' optimism over global economic prospects and a likely end to U.S. rate hikes.
European stocks (.STOXX) fell 0.6%, deepening losses through the morning and stepping back from a 2% increase in July, its second month of gains.
UK stocks (.FTSE) turned negative, losing 0.4%, though HSBC (HSBA.L) climbed as much as 3% after announcing a $2 billion share buyback and raising its key profitability target.
Losses accelerated across European markets after data showed manufacturing activity in the bloc contracted in July at the fastest pace since May 2020 amid slumping demand even as factories cut their prices sharply.
The data collided with optimism among investors who are readying for an end to a series of U.S. Federal Reserve interest rate hikes, with an increase last week widely seen as one of the last in its current tightening cycle.
Market players put Tuesday's losses down to a combination of profit taking at the start of the month, as well as nerves over the durability of the global economy.
"The economy is a little bit weaker than perhaps people would like, and I think that's a concern for earnings growth heading into the second half of the year," said Michael Hewson, chief market analyst at CMC Markets.
Wall Street futures indexes were set to open down 0.3%. The MSCI world equity index (.MIWD00000PUS), which tracks shares in 47 countries, fell 0.2% after gaining 3.5% last month.
Oil prices traded near a three-month high hit on Monday amid signs of tightening global supply. Also buoying prices were producers cutting output and demand in the United States, the world's biggest fuel consumer, remaining resilient.
Brent crude futures were down 0.5% at $84.99, losing ground during London trading. Energy giant BP (BP.L) gained 1.8% and boosted its dividend by 10% after reporting a second-quarter profit of $2.6 billion.
The dollar, meanwhile, hit a three-week high against the yen as investors continued to seek clarity on the Bank of Japan's recent adjustment to its yield curve control and what that might mean for monetary policy.
MSCI's broadest index of Asia-Pacific shares (.MIAP00000PUS) traded down 0.2%, just below the high reached Monday, which was its strongest since April last year.
Still, many investors remain positive.
"Markets are fully focusing on the bright side of the puzzle," said Sandrine Perret, portfolio manager at Unigestion. "The market reaction since last week, after the Fed rally, has been really strong and resilient."
NARRATIVE TESTS
Signs of a peaking out in European inflation on Monday echoed the narrative in the United States, providing more evidence that the biggest central banks are nearing the end of their tightening cycles.
Yet other data gave cause for caution on prospects for the global economy.
China's stumbling post-pandemic recovery remained in focus, for instance, after a surprise contraction in manufacturing in a private-sector survey released Tuesday.
Hong Kong's Hang Seng (.HSI) turned negative, closing down 0.3%. An index of mainland Chinese blue chips (.CSI300) fell 0.4%.
"We remain sceptical that there will be any big-bang stimulus package forthcoming," said Alec Jin, investment director of Asian equities at Abrdn.
The positive U.S. narrative also faces some crucial tests this week, with several closely watched jobs reports due, culminating with monthly payrolls on Friday.
The Australian dollar was set for its sharpest one-day drop in a month, falling 1.4% to $0.6628 after the Reserve Bank of Australia held interest rates for a second month.
The U.S. dollar index - which measures the currency against six major peers - rose 0.3% to as high as 102.20 for the first time since July 10.
