European shares hit two-month lows as China factory activity falters

By Sruthi Shankar

(Reuters) -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.

The pan-European STOXX 600 index fell 0.4% to hit its lowest level since March 31.

The main regional stock markets were set for monthly losses, with London's FTSE 100 and Paris' CAC 40 among the worst hit. Both the indexes were also trading at a two-month low on Wednesday.

China-linked luxury firms, automakers and industrial goods and services led sectoral losses in Europe after data showed 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."

Easing some concerns, however, data showed 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 (ECB) 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. [GVD/EUR]

"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.

Defensive sectors that tend to be favoured during times of economic uncertainty, such as utilities and telecoms, rose, limiting broader declines in the market.

Leading declines on the STOXX 600, shares of troubled Swedish real estate firm SBB sank 8.3% after its largest shareholder IB Invest postponed interest payments on loans.

Heineken NV slipped 1.7% after Mexican bottler FEMSA offered 3.3 billion euros ($3.63 billion) worth of its shares in the company, the second-largest offering in its divestment of holdings in the Dutch brewer.

B&M rose 5.9% as the British discount retailer forecast higher core earnings for its 2023-24 financial year, as customers snap up budget food and goods amid a cost-of-living crunch.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips and Sonia Cheema)