Dow to Sink: China and Eurozone Slow Down

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LONDON -- The Dow Jones Industrial Average (INDEX: ^DJI) is expected to fall on opening today in response to confirmation that China's manufacturing sector is shrinking, while the economic contraction of the eurozone continues.

Domestic economic data could prove more positive, but after a week of disappointment that has seen CNN's Fear and Greed index reach a new "extreme fear" low of 11, it is unlikely to be strong enough to stem the tide of bad news from abroad.

A raft of domestic economic data is due today, including nonfarm payrolls and construction spending, both of which are expected to rise slightly. Also due are May's unemployment rate, as well as personal income, consumer spending and core price index data for April, all of which are expected to be broadly unchanged from the previous month. Motor vehicle sales data for May is also due and may show a marginal increase.


Abroad, the economic news is worse. Overnight, confirmation came that China's manufacturing sector is slowing. The latest official Purchasing Managers' Index fell from 53.3 in April to 50.4 in May. Numbers below 50 signify contraction, and HSBC's alternative China PMI survey for May came in at 48.4, suggesting a contraction is already underway.

In Europe, it was a similar story. Bond yields for the U.K., Germany and other safe-haven countries continued to shrink, and Brent Crude oil dropped below $100 per barrel as investor sentiment weakened further. Data released this morning showed that European unemployment remained at record highs in April, averaging 11% across the eurozone. Figures were unavailable for Greece, leaving Spain the worst performer with an unemployment rate of 24.3%. Austria had the lowest unemployment rate, with just 3.9% of its workforce out of a job.

One cause of rising unemployment is the ongoing contraction of the EU manufacturing sector. The latest eurozone manufacturing PMI was published this morning, showing contraction in every eurozone country (including Germany) except Ireland and Austria. The story was bad in the U.K., too, where the manufacturing PMI reading dropped to 45.9 in May, down from 50.2 in April.

European markets fell through the morning. By 7 a.m. EDT, the FTSE 100 (INDEX: ^FTSE) was down by 0.7%, the DAX down by 2.5%, and the CAC 40 down 1.5%. One of the few real gainers in London trading was BP (NYS: BP) , which announced that it was seeking to sell its stake in its troubled Russian partnership, TNK-BP.

In company news, metal stocks Alcoa (NYS: AA) and Freeport-McMoRan Copper & Gold both sank in German trading this morning, while banking stocks, including Citigroup (NYS: C) and Bank of America, were weak in premarket trading.

However, Coca-Cola, one of Warren Buffett's longest-held and most successful investments, was up slightly in premarket trading -- and you can read about a similar but more recent investment made by the billionaire investor in a U.K. blue-chip giant in this special free report.

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At the time this article was published Roland Head owns no shares of the companies mentioned. The Motley Fool owns shares of Citigroup, Bank of America, Coca-Cola, and Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of Coca-Cola. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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