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Prospects daily: U.S. service sector growth disappoints market expectations

Global Macroeconomics Team's picture

Important developments today:

1.  Mixed performance in global markets

2.  IPO of China's third largest bank, the Agricultural Bank of China (AgBank), was met with strong demand

3.  U.S. services sector activity gauge shows a cooler pace of growth

 

 

Mixed performance in global markets. US stocks declined slightly following the news related to slower than expected June growth rate in the services sector, while European and Asian markets rebounded from their lows of last couple of weeks. European shares bounced back hitting their highest close in a week. The FTSEurofirst 300 index closed 2.3% up, after losing 9% in two weeks. Banks featured among the top performer rebounding from recent weakness over worries over the industry stress tests. Similarly Asian markets reversed a course, turning positive as a strong rebound in Chinese stocks lifted sentiment. The MSCI Asia Pacific Index advanced 1.8 %, its biggest gain in two weeks. Shares in China outperformed their Asian peers, led by property and banking stocks, with the closing of subscriptions for Agricultural Bank of China's massive IPO (see below).

 

IPO of China's third largest bank, the Agricultural Bank of China (AgBank), was met with strong demand. AgBank is raising $19.2 billion in an initial public offering in Hong Kong and Shanghai stock exchanges and IPO was oversubscribed by institutional investors. Agricultural Bank has an option to increase the IPO by 15% to meet excess demand, which would boost the size of the sale to $22.1 billion. An official announcement on AgBank's pricing will come on Wednesday but if it tops $22 billion as expected, it will be the largest IPO ever, after Industrial & Commercial Bank of China's record-breaking $21.9 billion offering in 2006.

 

 

Source: Institute of Supply Management
 

 

 

U.S. services sector activity gauge shows a cooler pace of growth. The Institute of Supply Management’s index for activity in the non-manufacturing sector for June dropped to a four-month low of 53.8, down from a reading of 55.4 in the previous month. While any reading above 50 in the index signals expansion in overall activity, the June value was below the median market forecast of 55, and taken along with last week’s report of slower activity in the manufacturing sector, indicates that the U.S. economy is entering a period of softer growth. Indeed, the ISM’s index for new orders in the service sector declined to 54.4, the lowest this year, while the employment gauge (which points to purchasing managers’ expectations of job growth) slipped below the 50 level to 49.7. The service sector, which covers the housing and retail sectors, has generally lagged behind manufacturing in the strength of the recovery since late 2009. However, the recent cooling in both manufacturing and non-manufacturing is likely to add to concerns that the Euro Area’s debt problems are having an impact on demand and production in the U.S.