March 2, 2021

Relief Rally Disappears After Fresh Economic Data

Stocks on Wall Street followed European and Asian financial markets higher Monday but their sigh of relief over the last-minute agreement in Washington to raise the United States debt limit was short-lived.

After a short burst that put the three main Wall Street indexes up more than 1 percent, they turned negative as the reality of the challenges ahead for the recovery caught up with investors.

That dip also coincided with the release of new data that showed American manufacturing growing more slowly. The Institute for Supply Management reported that its index registered 50.9 percent in July; with a reading over 50, that means the manufacturing sector expanded for the 24th consecutive month. But it did so at a slower rate, registering below the 55.3 of June, the survey showed. Production and employment also showed continued growth in July, but at slower rates than in June.

The latest ISM index was particularly bad news on the heels of the government’s report last week that the nation’s gross domestic product grew at an annual rate of less than 1 percent in the first half of 2011, with the first quarter and the second quarter at 0.4 percent and 1.3 percent, respectively. The G.D.P. data was revised going back to 2003, showing the recession was deeper and the recovery weaker than originally thought.

“I think when the market opened up, there was a sigh of relief,” said Nick Kalivas, vice president of financial research at MF Global. “There was some expectation that a deal would get done, so the reaction was not extreme or overly strong.”

But now, he said, “The market is focusing on the global growth picture.”

By midmorning, the benchmark Standard Poor’s 500-stock index was down 6.65 points, or 0.51 percent, to 1,285.63. The Dow Jones industrial average, after gaining 125 points, was off 46.17, or 0.38 percent, to 12,097.07 , and the Nasdaq fell 9.85 points, or 0.36 percent, to 2,746.53.

In London, the FTSE 100 index was up 0.45 percent to 5,841.57, although concerns about the outlook for Europe remained apparent.

Speaking before the American markets opened, Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt, said: “We’re seeing a relief rally on the U.S. debt deal, which was the cause of much uncertainty last week. There’s more of an appetite for risk today. But if we look ahead, we’ll see a return to the focus on the economic problems in Europe.”

The key index in Japan jumped 1.3 percent and the Hang Seng index in Hong Kong added 1 percent, picking up steam after the deal in Washington was announced by President Obama.

In Japan, investors were also encouraged by the fall of the yen against the United States dollar after the debt deal.

The debt woes in the United States had undermined the dollar’s value in international currency markets in recent weeks, especially against the yen — a worrying trend for Japanese exporters, as a strong yen makes their goods more expensive for shoppers overseas.

Around midday in London on Monday, the dollar bought 77.1 yen, about 1 yen more than on Friday in New York.

The euro rose slightly against the dollar as some investors moved into currencies previously perceived to be higher risk. The euro stood around $1.4426 in London on Monday.

Expressing a general sense of guarded optimism about the debt deal, Yukio Edano, Japan’s chief cabinet secretary, said Monday, “We welcome the deal, which we hope will lead to market stability.”

Similarly, Wayne Swan, the Australian treasurer, said the debt agreement was an important first step, but that United States fiscal consolidation was necessary to ensure global growth.

Aside from the details of the debt reduction plans, analysts said uncertainty remained about the subsequent ratification by Congress and the reaction of the ratings agencies.

“Last night’s deal is a good step forward but uncertainty will remain,” said Elsa Lignos, a senior currency strategist at Royal Bank of Canada in London.

The debt-ceiling debate, said David Carbon, an economist at DBS in Singapore, “has made people realize just how much there is left to do on the fiscal front.”

United States economic growth has been slow over several quarters, Mr. Carbon said, and the risk of a double-dip recession is now much greater than it appeared a year ago.

Gold, which has struck multiple record highs amid the uncertainty of the past weeks, fell nearly 1 percent to $1,613 an ounce. Oil rose about $1 to $97 a barrel.

The announcement of a deal between the Republicans and Democrats “could take some of the froth out of the gold market,” said Caroline Bain, economist with the Economist Intelligence Unit in London. “However, we expect the market to remain strong at least until 2013 when we expect the normalization of O.E.C.D. monetary policy to start in earnest.”

Christine Hauser reported from New York and Matthew Saltmarsh reported from London. Bettina Wassener contributed reporting from Hong Kong and Hiroko Tabuchi contributed from Tokyo.

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