Stock markets in Europe edged back into positive territory on Friday at the end of a choppy week, as investors now turn their attention to second-quarter earnings to gauge how companies are weathering the impact of surging prices.
The euro came under pressure after a key survey suggested the single-currency area could be on the verge of recession due to slumping demand and rising costs.
A bigger-than-expected hike in interest rates by the European Central Bank failed to provide a lasting boost to sentiment, as political turmoil in Italy clouds the outlook.
Nevertheless, following a mixed showing in Asia, stock prices in Europe were showing modest gains, with London's FTSE 100 adding 0.2 per cent, and both Frankfurt's DAX and Paris' CAC 40 rising by 0.3 per cent.
Economic activity in the eurozone plummeted in July, the closely watched purchasing managers' index, or PMI, showed, with a big drop in manufacturing and consumers' post-lockdown spending sprees braked by high prices.
The barometer fell from 52.0 in June to 49.4, below the 50-point level that indicates growth and the lowest level in 17 months.
The data "point to a fall in gross domestic product of 0.5 per cent to 1.0 per cent at the start of the third quarter, supporting our view that the eurozone economy is headed for a technical recession come the fourth quarter," said Melanie Debono, economist at Pantheon Macroeconomics.
The data "point to a fall in gross domestic product of 0.5 per cent to 1.0 per cent at the start of the third quarter, supporting our view that the eurozone economy is headed for a technical recession come the fourth quarter"- Melanie Debono, economist at Pantheon Macroeconomics
Andrew Kenningham, economist at Capital Economics, agreed. "The eurozone is teetering on the brink of recession. The ECB will have to follow up on yesterday's historic rate hike with several more in the coming months even though this will worsen the downturn," he said.
It has been a rollercoaster week as investors try to gauge the outlook – corporate earnings have so far been relatively positive, but economic data mixed and geopolitical events are clouding sentiment.
Earlier in Asia, markets had started brightly but lost some of their lustre as the day wore on. Tokyo, Hong Kong, Mumbai, Taipei, Singapore, Manila and Jakarta all posted gains, but were off their highs, while Sydney was flat, and Shanghai, Wellington and Seoul edged down.
OANDA analyst Jeffrey Halley said that a meeting next week by the US Federal Reserve would be watched closely by the markets. "The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks," he said in a note.
"Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can't see how that is a productive environment for equities, and that's before the rest of big-tech reports quarterly earnings."