Manufacturing hiccup hurts world markets overnight

Specialists James Ahrens, left, and Robert Tuccillo work on the floor of the New York Stock Exchange. The success of a Greek debt swap overnight has pushed Wall St up. File photo / AP

Stocks in Europe and on Wall Street dropped as data showed that manufacturing contracted in China as well as the euro zone, underpinning worries that the economic outlook might not support equity valuations.

In China, a preliminary measure of manufacturing dropped to 48.1 in March, according to HSBC Holdings and Markit Economics. And in Europe, services and manufacturing output shrank more than expected this month as a composite index based on a survey of purchasing managers in both industries fell to 48.7, according to Markit. A result below 50 indicates a contraction.

In early afternoon trading in New York, the Dow Jones Industrial Average dropped 0.52 per cent, the Standard & Poor's 500 Index declined 0.65 per cent and the Nasdaq Composite Index fell 0.30 per cent.

In Europe, the Stoxx 600 Index shed 1.2 per cent, declining for a fourth straight session. National benchmark indexes fell in all of the 18 western European markets, according to Bloomberg.

"The stock market has been residing in this fantasy land, ignoring the bad data and only looking at the good ones, but it is now clear that Europe is entering a recession with Germany probably joining, and China could have a hard landing," James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania, told Reuters.

"We are not going to have a collapse like the '08, but there is a good chance that we have experienced the new highs and the market is starting to roll over to what may be the start of a bear market."

On Wall Street, shares of FedEx dropped 4.5 per cent after the company warned that the economy wasn't as strong as it had anticipated, paring its earnings forecast.

"What we're seeing at the moment ... is we just don't have as strong an economy as we would have hoped it would be a year ago," Chief Financial Officer Alan Graf told analysts on a conference call, according to Reuters.

Even so, the latest data on the world's biggest economy keep pointing to strength.

A report from the New York-based Conference Board showed its leading economic index rose 0.7 per cent during February, gaining for a fifth straight month.

The labour market also remains on track for improvement, as jobless claims unexpectedly fell. Initial claims for state unemployment benefits slid 5,000 to a seasonally adjusted 348,000 last week, the lowest level since February 2008, according to the Labor Department. Economists polled by Reuters had forecast claims rising to 354,000.

"The economy is entering a phase where more of the gains from growth accrue to labour rather than capital and we believe that stronger job creation will be sustained throughout 2012," John Ryding, chief economist at RDQ Economics in New York, told Reuters.