Investors are bracing for a return to volatility when markets in the United States reopen on Tuesday as renewed gloom about the debt crisis in Europe threatens to end the calm that has prevailed on Wall Street in recent weeks.
“We’ve had a lull, but I expect the pressure to start growing again with a renewed round of financial market agitation,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of Geneva. “There will be a renewed sense of emergency, which doesn’t make for clearer thinking.”
Late last week, Standard Poor’s cut its ratings on shaky borrowers like Italy and Spain and stripped France of its once-sterling AAA debt rating. On Monday, it followed up with another downgrade, this time on a bailout fund aimed at shoring up weaker members of the euro zone. The rating on the European Financial Stability Facility was lowered to AA+ from AAA, and S. P. warned that more cuts could come if Europe failed to address its worsening fiscal situation.
Klaus Regling, chief executive of the facility, said the downgrade of the fund by a single agency would not reduce its lending capacity of 440 billion euros ($556 billion). The fund “has sufficient means to fulfill its commitments” until a permanent fund, the European Stability Mechanism, starts operating in July, he said.
Anxiety is also building over the fate of the country hardest hit by the European debt crisis, Greece. Representatives of the European Union, the European Central Bank and the International Monetary Fund resume negotiations with the Greek government Wednesday over the next step in a planned 130 billion euro bailout, even as they try to force hedge funds and other private holders of Greek bonds to accept large losses to make the country’s debt burden more manageable.
If Athens cannot secure concessions from the bondholders or the bailout money it needs from the so-called troika in the coming weeks, Greece could default by March 20, when 14.5 billion euros in debt comes due and must be repaid. The specter of a disorderly default, rather than the voluntary losses now being negotiated, unnerved stock markets around the world last fall and could prompt renewed selling now.
The next several weeks bring what are shaping up to be a series of turning points on both sides of the Atlantic. Even as the negotiations in Greece proceed, several debt sales by other European borrowers this week should provide clues to how seriously investors are taking the recent warnings by S. P. and other ratings agencies.
Highlighting the political stakes, European leaders are set to gather for a summit meeting in Brussels on Jan. 30. Investors had hoped for more clarity on Greece’s fate before they gathered, but that is looking much less likely, said Julian Callow, chief European economist at Barclays. What is more, Italy has 26 billion euros in debt coming due on Feb. 1, putting additional pressure on European leaders to reassure nervous markets.
In the first test of investors’ appetite for debt since the broader downgrade, France sold 8.6 billion euros ($10.9 billion) of short-term debt securities on Monday at yields slightly lower than in the previous auction. The yields on the country’s 10-year bonds had fallen 0.04 percentage point by late afternoon, to 3.011 percent.
The stability facility is set to auction bills Tuesday, while Spain and Portugal have debt sales later in the week, all of which will be closely watched by investors, said Ron Florance, the managing director for investment strategy at Wells Fargo Private Bank. “Everyone is just kind of holding their breath to see how these auctions go,” Mr. Florance said. “Investors are just going to have to be able to ride through the volatility; it’s going to be bumpy.”
Since late November, Wall Street has taken a more optimistic turn, with the Dow Jones industrial average rising by more than 1,000 points, to close at 12,422.06 on Friday. Signs of improvement in the job market have led some observers to conclude that what had been a very anemic recovery in the United States might be finally gathering some steam.
But if the European banking system seizes up and economies in the region go into a steep recession, the chances that United States can insulate itself are slim, analysts said. “It seems pretty clear to me that once Europe reaches a tipping point, nowhere else in the world can decouple,” said Benjamin Bowler, global head of equity derivatives research at Bank of America Merrill Lynch.
In addition to the news from Europe, American markets will also be affected by earnings news as large companies report their fourth-quarter results, including several financial companies over the next few days. Citigroup and Wells Fargo will announce earnings on Tuesday, with Goldman Sachs reporting on Wednesday and Bank of America on Thursday. Slow capital markets activity is expected to weaken profits across the board, but analysts will be looking for clues about the health of consumer spending and corporate borrowing in the latest results.
David Jolly and Peter Eavis contributed reporting.
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