Markets bounce again but storm clouds gather

Better economic news from China was just sufficient to help global stock markets post a second consecutive day of gains yesterday, despite a rise in the oil price and decidedly mixed data from much of the rest of the world.

In Europe, the FTSE 100 Index of leading UK stocks rose by 0.6 per cent, while markets in Germany and France also rose. In the US, the Dow Jones rose by almost 2 per cent in early trading.

The gains, in stark contrast to the sell-offs seen during much of last week, came despite a rise in the oil price. In London, the price of a barrel of oil rose 1 per cent to a little above $109 after Monday's euphoria about the prospect of a restoration of supplies from Libya, amid the realisation it may be several years before that hope is realised.

The biggest boost to share prices came from China, where new data suggested a slowdown in the country's manufacturing sector may be less serious than previously thought. HSBC, which helped compile the data, said the "hard landing risk is still remote" for China's all-important industrial base.

In Europe, however, the data was less reassuring. Markit, the markets and economic analyst, said the manufacturing sector in the eurozone actually shrank during July, the first contraction seen for two years, while growth in the services sector also slowed.

The setbacks were particularly acute in Germany, where other indicators have also begun to dip sharply. Chris Williamson, Markit's chief economist, said: "The near stagnation in Germany suggests the region's main engine of growth has stalled."

The closely-watched ZEW index of economic sentiment has fallen to its lowest level since December 2008, German data showed yesterday, while the European Commission said its eurozone-wide consumer confidence indicator has fallen more sharply this month than in the weeks following the collapse of Lehman Brothers in October 2008.

The UK provided some comfort amid the gloom, with the CBI's latest report on British manufacturers suggesting that 31 per cent now expect production to rise over the next three months, with only 17 per cent forecasting a fall. That was an improvement on previous CBI surveys of the sector, though the index is regarded as a lagging indicator.

Lee Hopley, chief economist of the EEF, the manufacturers organisation, said: "It does seem there are some tentative reasons to be cheerful, though that isn't to say there isn't an element of caution out there that may be feeding through into employment andinvestment intentions."

Moreover, despite the more upbeat mood on global stock markets, stress indicators also continued to rise.

In particular, the price of gold, still regarded as the ultimate safe haven asset, broke through $1,900 an ounce for the first time in history, peaking at $1,911 before falling back to $1,876 inafternoon trading.

The nervousness about the health of Europe's banks is also continuing. Markit said the cost of insuring against a debt default by leading banks, as measured by its index of 25 European banks and insurers, hit an all-time high yesterday. In the sovereign debt market, Greek bond yields also rose sharply.