Treasury prices and the dollar rose. Asian and European shares were lower after developments in Greece, Spain, and Italy refocused attention on the euro zone’s fiscal uncertainty. Manufacturing statistics released by Germany and China were softer than forecast, raising the prospect of slower growth in Europe and in China, which has the world’s second largest economy, and unsettling investors.
“It is a bit of a risk-off environment right now,” said Eric Viloria, senior technical strategist for Forex.com. “Markets are risk averse, and the U.S. dollar is benefiting.”
In afternoon trading, the Dow Jones industrial average was down 124.80 points, or 1 percent, at 12,387.24. The Standard Poor’s 500 stock index was down 15.01 points, or 1.1 percent, at 1,318.26, and the Nasdaq was down 41.06 points, or 1.5 percent, at 2,762.26.
Most market sectors tumbled more than 1 percent, including energy, materials, industrials and information technology, tumbled more than 1 percent.
The Nikkei index fell by more than 1 percent and the Hang Seng was down by just over 2 percent. In Europe, the CAC 40 closed down by 2.1 percent, the DAX in Germany was 2 percent lower, and the FTSE ended the day down by 1.9 percent.
Analysts said recent news from Europe has not instilled confidence in the continent’s ability to handle its fiscal challenges. Last week, Fitch Ratings said it downgraded Greece’s credit ratings by three levels to B+, a rating that is below investment grade. Standard Poor’s lowered its outlook on Italy’s debt to “negative” from “stable” over the weekend, citing lower prospects for the country’s ability to trim its debt and because of a weaker outlook for growth.
And Spain caught headlines after its Socialist Party lost on Sunday in regional and municipal elections as tens of thousands of Spanish protesters, their anger partly fueled by the debt crisis and joblessness, are trying to force an overhaul of the political system.
Declines in Asia’s markets followed the HSBC preliminary purchasing managers’ index reading, a gauge of the manufacturing sector activity, for China, which fell to a 10-month low of 51.1 in May, according to news agencies, signaling a slowdown in expansion. Still, the Chinese government is poised to continue fiscal tightening. A similar gauge for Germany dropped to 54.9 in May, below forecasts.
Bruce McCain, the chief investment strategist of Key Private Bank, said the signs of weaker economic activity in China were counterbalanced by high inflation, with the possibility that they will have to continue to raise rates.
In Europe, he added, “not only are they again grappling with the sovereign debt issue, but inflation remains uncomfortably high and they seem determined to raise rates again.”
He said that although the overall picture was not “the best of outlooks,” the markets appear to have discounted the worst and economic improvements are in store.
“We would not throw in the towel yet,” Mr. McCain said.
The European Commission said in a recent forecast that prospects for this year looked “slightly better” than six months ago, but that the rate of recovery would be uneven across the 17-nation group, with continued concerns about inflation and joblessness.
Concerns over Europe reawakened the potential for oil demand to decline, causing crude prices on Monday to slip.
Treasury prices rose on Monday. The yield on 10-year Treasury notes has fallen by over 40 basis points in a little more than a month, from just under 3.6 percent to about 3.15 percent, analysts noted.
In the United States market, investors are juggling economic concerns as food and energy prices rose, although corporate results have been mostly stronger than forecast. Also on the horizon is the end of the Federal Reserve’s program to buy $600 billion in Treasuries, also known as its second round of quantitative easing, or “QE2” in market jargon.
Steven Ricchiuto, the chief economist for Mizuho Securities, USA, suggested that the domestic financial markets may “trade sideways” for an extended period, as the continued deterioration in the European sovereign debt crisis largely offsets the lowering of the outlook on the United States credit rating to negative by Standard Poor’s last month.
“This decline in long-term rates was generally unexpected as most market participants had been focused on the inflation risks associated with rising food and energy prices, and the growing belief that the Fed might begin the process of tightening reserve market conditions shortly after the end of their large scale asset purchase program,” Mr. Ricchiuto said.
“Evidence of an economy not living up to the optimist’s growth expectations and speculation that commodity and equity markets would decline once the Fed stopped pumping liquidity into the system appears to have prompted this sharp shift in market sentiment,” he said in a research note.
There were also other seasonal factors to consider. Doug Roberts, chief investment strategist for the Channel Capital Research Institute, said that this was the time of year that large investors cut risk to step aside, or “go away to the beach.”
“Everybody is nervous about liquidity,” he said. “The end of QE2 is coming up and no one knows what is going to follow that.”
Article source: http://www.nytimes.com/2011/05/24/business/24markets.html?partner=rss&emc=rss
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