Stocks rose Tuesday as investors appeared to anticipate progress on two fronts: efforts to resolve debt problems in Greece, and efforts by Federal Reserve policy makers to stimulate the United States economy, analysts said.
The gains also suggested that investors had shrugged off the downgrade of Italy’s debt by the credit ratings agency Standard Poor’s late on Monday. The S.P. move took aim at the euro region’s most indebted member after Greece and opened up the latest development in the European sovereign debt crisis.
Jason Pride, director of investment strategy at Glenmede, said that the S.P. move was “emblematic” of the already known and, in some cases, priced-in problems in the euro zone. The European Central Bank has already been buying Italy’s bonds.
“The markets have backed off a good amount on these concerns,” Mr. Pride said. “To have one additional downgrade, where the E.C.B. is already out there purchasing the bonds? We are telling our clients that you have got to take the backdrop as it is. There is a lot of risk out there.”
In addition, many investors have concluded that the central bank will announce new steps to promote economic growth after a highly anticipated meeting of the Fed that ends on Wednesday.
“The thought is that Operation Twist is going to be announced tomorrow,” said Michael A. Mullaney, a vice president, of the Fiduciary Trust Company, using an insider phrase to describe when the Fed sells shorter term securities for longer term ones. “Quite frankly, most likely it is going to be ‘buy the rumor, sell the news.’ ”
Such a move by the Fed would reflect an effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Already, long-term interest rates have moved as if the Fed had already announced the decision.
Investors could also be reacting to hopeful signals on discussions about aiding Greece.
Greek Finance Minister Evangelos Venizelos described the talks on Monday with a so-called troika of foreign creditors — the International Monetary Fund, the European Commission and the European Central Bank — as productive. The talks were to continue later Tuesday. The troika would be the one to release the latest tranche of loans, which the country needs by mid-October to avoid running out of cash to pay its bills.
Keith B. Hembre, the chief economist and chief investment strategist at Nuveen Asset Management, said equities also could be responding also to the news that Greece had made an interest payment, lessening the possibility of immediate default.
Overall, “It seems like probably a very calm, low-volume day, based on the market moves,” said Mr. Hembre. “You get these moves that are unexplained, and it sort of appears to be movements are more flow-related as opposed to reaction to information.”
The Euro Stoxx 50 index of euro zone blue chips ended trading up 2.1 percent. The FTSE 100 in London rose 1.9 percent. In afternoon trading on Wall Street, the Dow Jones industrial average and the Standard Poor’s 500-share index were up just over 1 percent, and the Nasdaq composite was up by 0.7 percent.
United States government 10-year Treasury yields were 1.95 percent, about the same as levels on Monday. Yields on the benchmark 10-year note fell to a record low of 1.88 percent earlier this month.
S.P. cited Italy’s weakening economic growth prospects and higher-than-expected levels of government debt as reasons for cutting its debt rating by one notch to A from A+.
S. P. said Italy’s fragile governing coalition and policy differences in Parliament would continue to limit the government’s ability to respond decisively to economic head winds. It also cast doubt on whether the government’s projected 60 billion euros, or $82 billion, in fiscal savings would be realized because growth prospects are weakening, the budgetary savings rely on revenue increases, and market interest rates are anticipated to rise.
The Italian government reacted angrily, describing the move as out of touch with reality.
Prime Minister Silvio Berlusconi’s office issued a statement early Tuesday noting that his government had a solid majority in Parliament. It said the government was preparing steps to lift growth and recently passed measures to control public finances through tax increases and spending cuts.
“The evaluations of Standard Poor’s seem dictated more by behind the scenes reports in newspapers than reality and seem influenced by political considerations,” the statement said. The yield on Italian 10-year bonds was up slightly Tuesday, but at more than 5.6 percent, Italy’s borrowing costs are more than three times what Germany, the euro-zone anchor, pays. S. P.’s A rating for Italy is still five steps above junk status, but it is three below that given by another agency Moody’s Investors Service, which is currently assessing Italy.
Investors have also been scrutinizing economic data to gauge to what extent the economy is slowing. The latest on Tuesday showed a decline of 5 percent in housing starts in the United States in August, a steeper decline than forecast. Problems in the housing and construction sector, while well known, still put a dampening effect on sentiment, but it is usually confined to related trading sectors rather than the overall market.
A research note from Capital Economics said that the statistics suggest demand for new homes remains close to “rock bottom.”
“This goes some way to explaining why equity prices of homebuilders have recently fallen by more than the wider market,” the economists said.
Matthew Saltmarsh reported from London. Elisabetta Povoledo contributed reporting from Rome.
Article source: http://www.nytimes.com/2011/09/21/business/daily-stock-market-activity.html?partner=rss&emc=rss
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