Signs recession is deepening in the euro zone and an impasse in U.S. budget talks subdued global shares and Europe's bond markets on Friday, taking some of the shine off a week of mainly steady gains in risk assets.
Disappointing German manufacturing sector figures and a rise in euro zone unemployment overshadowed a small pick-up in wider purchasing manager data which polls around 5,000 businesses across the bloc and is viewed as a reliable growth indicator.
The German manufacturing sector slipped to 46.3 in December from 46.8 the previous month, remaining well below the 50 threshold that divides growth from contraction and missing the consensus Reuters poll forecast for a rise to 47.2.
European shares .FTEU3 were down 0.1 percent at 1133.77 points at 8:20 a.m. ET as the disappointment lingered, although rises earlier in the week left them on course for a 0.4 percent weekly gain.
"All in all, the picture for the EMU (euro zone) economy has not changed much after today's data," said Annalisa Piazza, an economist at Newedge Strategy in London. "EMU GDP is expected to continue to contract in Q4-12 and there are no signs of improvement for the first part of next year."
Following a similarly mixed session for Asian equities, global stocks .MIWD00000PUS were down fractionally at 336.73 points, nibbling away at a 6 percent rise over the last three weeks.
U.S. stock futures briefly turned negative after consumer prices data pointed to muted inflation pressures but S&P 500 futures rose 0.2 points by 8:45 ET.
A lack of progress in budget talks in the United States over $600 billion of tax hikes and spending cuts scheduled to start in January also continued to hang over markets.
President Barack Obama and House of Representatives Speaker John Boehner held a "frank" face-to-face meeting late on Thursday. Failure to avert the "fiscal cliff" as it has been dubbed, could derail the struggling U.S. economic recovery and also snuff out encouraging signs fromChina.
"We had the big Obama meeting yesterday and nothing seems to have come out of it," said Philip Marey, a U.S. focused economist at Rabobank.
"Christmas is getting closer but it doesn't seem like they are going to get there before then and it could take until early next year."
BANKING PROGRESS
The news was not all gloomy, however. After more than eight hours of late-night talks at a summit in Brussels, EU leaders promised to push ahead with a pan-euro zone mechanism to wind down problem banks.
It is something many crisis observers believe could help finally break the toxic link between troubled banks and national finances and the crippling impact their bailouts typically have.
China shares also outperformed Asian peers after the HSBC flash purchasing managers' index hit a 14-month high of 50.9, the fifth straight monthly gain, underlining the world number two economy's improving growth prospects.
Commodity markets reacted positively, with copper and oil both edging up, albeit staying within their tight recent ranges. Brent crude, up at just under $109 barrel, was on course to eke out its first weekly gain this month.
"Oil is particularly dominated by Chinese potential demand, and any sign of an upturn in China tends to have a positive effect," Tony Machacek, a broker at Jefferies Bache in London, said.
YEN WEAK
Data from Japan was less good, however, as business sentiment deteriorated.
The slide bolstered expectations that the Bank of Japan will ease policy further to support the weak economy next week and pushed the yento a near 9-month low against the dollar and an 8-month low against the euro.
Japan holds elections on Sunday with conservative Liberal Democratic Party (LDP) set for a resounding victory according to polls. It has cemented speculation its leader, Shinzo Abe, will be in a position to push for bold BoJ easing.
"Abe has been making pretty strong comments about inflation targeting and if we look at the economy Japan needs a lower currency without a doubt," said Maurice Pomery, managing director at consultants Strategic Alpha.
"This is going to put pressure on the BoJ. It's the start of a move lower in the yen that has a long way to go."
The euro fell below $1.31 after the PMI data before steadying at around $1.3080 and staying on course for its biggest weekly gain against the dollar in three weeks.
European bond markets were also quiet with German government bonds little changed and Spanish and Italian bonds slightly higher as the EU banking progress offset the PMI and U.S. budget talk worries.
© Thomson Reuters.
