Stocks in the US and Europe saw their earlier rally shaken on Monday afternoon, after economic data showed manufacturing fell in July.The Dow Jones swiftly shed gains of up to 139 points earlier in the day to sit well in the red, while the FTSE 100, Germany’s Dax and France’s Cac 40 all tumbled into negative territory too.
 
In the US, ISM manufacturing data dropped sharply to 50.9 last month, compared to 55.3 in June.
 
Meanwhile, the UK’s CIPS/Markit report showed a contraction from 51.4 in June to 49.1 in July, the sixth monthly fall in a row, and the eurozone manufacturing purchasing managers’ survey also made for dismal reading.
 
All the eurozone nations apart from Italy showed a deterioration in manufacturing and as a whole the survey showed a reading of 50.4 for July, down at a 22-month low.
 
Howard Archer, chief European and UK economist at IHS Global Insight, said: 'Essentially stagnant manufacturing activity in July, especially the second successive and deeper contraction in orders, fuels concern the eurozone growth is now stuttering badly. The eurozone is clearly struggling in the face of tighter fiscal policy increasingly kicking in across the region, the European Central Bank raising interest rates twice and heightened sovereign debt issues.'

Earlier in the day, investors had breathed a sigh of relief after it emerged US political leaders had agreed a deal to raise the nation’s debt ceiling and prevent the default of Treasury bills.
 
Markets in Asia, the UK and on Wall Street all showed appreciation for the news and rallied hard after last week’s sentiment of risk aversion and uncertainty.
 
President Obama and senate leaders announced the deal late on Sunday night, just two days before the US risked defaulting on government debt and damaging its credit rating.
 
Congress is yet to vote on the proposal, but both the Democratic and Republican leaders have backed it.
 
The framework of the deal allows for an increase of $1 trillion (£615 billion) to the debt ceiling as long as an immediate cut of $1 trillion is made to discretionary spending.
 
In response, the dollar rose as much as 0.91 per cent against both the euro and pound to 0.7007 and 0.6142 respectively.
 
Even the poor manufacturing data could not put a dent in the greenback’s performance and actually extended its gains as investors reverted to safe haven positions.

 But Paul Dales, senior US economist at Capital Economics, said: 'The US ISM manufacturing report for July is a shocker and strongly suggests that the disappointing performance of the economy in the first half of the year was not just temporary. Overall with the debt ceiling drama seemingly drawing to a close, people are turning their attention back to the economic news and no one will like what they see.'

Andrew Morris, managing director of portfolio manager Signature, also warned: 'While markets have welcomed the US progress, the response of the credit rating agencies remains to be seen. Prior to the weekend, Standard & Poor’s were calling for cust of $4 trillion (£2.45 trillion), along with citing a 50 per cent chance of a rating downgrade from AAA even if an agreement is reached.
 
'The measures imposed do little to improve the US fiscal position, which like most of the Western world is over indebted and suffering from very tepid growth rates with an increasing risk of contraction.'
 
Another factor dragging sentiment lower following Monday’s short-lived boon is the bail-out concerns circling Cyprus.
 
The country is exposed to any crisis with Greek banks and suffered a power station explosion which is set to significantly damage manufacturing production for months.
 
Worries have emerged that the second Greek bail out didn’t do enough to lighten the country’s debt burden and the contagion has not been contained.
 
Ruth Lea, economic adviser to Arbuthnot Banking Group, said: 'The eurozone leaders have yet to provide a solution to the root problems of the deeply dysfunctional eurozone. They are muddling through, but this can’t last indefinitely. There are basically only two long-term options: fully-fledged fiscal union or a fundamental reconfiguration of the eurozone.'
 
Lea suggested fiscal union would be unacceptable politically and a reconfiguration could happen in either an orderly or disorderly manner.
 
One option is the division of the region into a northern currency union and a southern currency union, which could help bring stability and credibility back to the eurozone.
 
Lea concludes: 'Let’s hope the EU authorities are working on such a blueprint now. Alternatively currencies could splinter off in a disorderly manner, risking the apocalyptic break up of the eurozone.'