European shares hit an over two-month low on Wednesday as weak economic data from China fuelled concerns about a global slowdown and countered optimism from signs of easing inflation in some of the major euro zone economies.
factory activity in the Asian country shrank faster than expected in May on weakening demand. China is Germany's main trading partner.
"China recovery will continue but it will be much slower because it was less helped by fiscal and monetary intervention, at least not to the same degree we had in the U.S. and Europe," said Michele Morganti, senior equity strategist at Generali Investments. "The global macro environment is not so strong at the moment. It reiterates our view that we should be cautious on equities in the short term."French inflation cooled more than expected in May, while German state North Rhine-Westphalia also saw easing price pressures this month.
Euro zone government bond yields dropped as the data raised the possibility that the European Central Bank may be closer to the end of the tightening cycle than previously thought. Money market traders now price in a peak in the ECB's deposit rate in September from December previously. "Overall, we think core inflation is quite slow in going down. The direction is good but momentum is slow, so we think core will remain around 5% at the end of 2023," said Generali's Morganti.
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