September 25, 2020

Markets Stumble on Debt and Deficit Worries

In Europe, the euro weakened and the bond yields of indebted nations climbed as investors worried about the degree of political will to overcome the region’s debt crisis.

Investors also remained concerned about events in the United States, where President Obama is trying to get lawmakers to agree to a deficit-reducing package before an Aug. 2 deadline for increasing the debt ceiling.

“People are very concerned about the length of the process in the debt-ceiling debate,” said Russell Price, a senior economist with Ameriprise Financial, adding that there were also concerns about contagion in the euro zone debt crisis.

On Wall Street in late afternoon, the Dow Jones industrial average was down 124.31 points, or 1.00 percent, to 12,355.42 and the Standard Poor’s 500-stock index lost 13.80 points, or 1.05 percent, to 1,302.34.

Stocks also may have been reacting to a Goldman Sachs report Friday that cut the outlook for real United States economic growth in the near term. Goldman Sachs economists cut their forecasts to 1.5 percent in the second quarter from 2 percent, and to 2.5 percent in the third quarter from 3.25 percent.

In Europe, the market jitters marked the start of an important week for the European Union as its leaders attempt to stem full-blown market contagion.

The leaders will hold a special summit meeting Thursday, but there appears to be no agreement yet over the terms of a second bailout for Greece, especially on the nature of a private sector contribution.

The lack of clarity along with recent investor sales of Italian and Spanish bonds have led analysts to become increasingly pessimistic.

“The euro zone crisis has recently worsened significantly, exacerbated by disagreements between the E.U.’s key politicians,” said Ruth Lea, an economic adviser to the Arbuthnot Banking Group in London. “It is becoming increasingly clear that there will have to be major steps towards fiscal union or the euro zone will begin to disintegrate.”

She added that the “debt crisis can fairly be described as having morphed into a political crisis.”

Further complicating the latest Greek rescue, the European Central Bank’s president, Jean-Claude Trichet, reiterated during an interview with The Financial Times Deutschland published Monday that the bank would not accept bonds from any defaulting country as collateral. That could leave Greek banks without financing if credit agencies deem a restructuring, even a voluntary one, to be a default.

The Euro Stoxx 50, a benchmark index of blue-chips stocks in the region, closed down 1.98 percent in late afternoon trading, and the CAC 40 in Paris lost 2.04 percent for the day. The euro weakened to $1.4044 from $1.4157 late Friday.

Perceived as a haven, the Swiss franc surged to a record high against both the euro and the dollar Monday. The euro declined to 1.14848 francs and the dollar dropped to 0.8177 francs. The price of gold for August delivery also touched a new nominal high, rising above $1,600 a troy ounce, as investors sought safer assets.

Further clouding the picture were the stress tests on the region’s banks carried out by regulators . The results were released after markets closed Friday. The threshold to pass the test was set at a core Tier 1 capital ratio, which encompasses safe assets, at 5 percent.

Of the 90 banks, eight failed, with an aggregate capital shortfall 2.5 billion euros. But the exercise left unanswered many questions about how many healthier lenders would survive a deepening of the debt crisis, given their exposure to Greek, Italian and Spanish bonds. A sovereign default case was excluded from the tests.

Also on Monday, the European Central Bank made no use of its program to buy government bonds last week despite market speculation that it had weighed in to support Italian and Spanish bonds, The Associated Press reported. The bank said in a statement Monday that it purchased no bonds. It’s the 11th consecutive week the bank has left the program idle.

Yields on riskier Italian 10-year bonds pushed higher — up 0.20 percentage point, at 5.941 percent — alongside rising yields on Spanish, Portuguese and Greek equivalents.

Last week, Italy accelerated a deficit-cutting plan, aware that investors had been selling its debt fearing it might need outside support.

Matthew Saltmarsh reported from London and Christine Hauser reported from New York.

Article source: http://www.nytimes.com/2011/07/19/business/Daily-Stock-Market-Activity.html?partner=rss&emc=rss

Speak Your Mind