On Monday, the three main indexes jumped then slumped for most of the day and closed lower as the reality of the challenges ahead for the economy set in.
This is a trend that some analysts say is likely to persist, even after any resolution in the debt ceiling debate and its prospects for downgrade or default. The main reason is worry about the nation’s economic recovery, which recent data shows to be more fragile than originally thought. On Monday, the manufacturing sector showed signs of losing steam in July.
“Now that the debt ceiling deal, assuming it passes, has averted an imminent catastrophe, attention can return to the underlying state of the economy,” said Nigel Gault, the IHS Global Insight chief United States economist.
“The news there isn’t good.”
On Monday, the stock market in the United States briefly followed European and Asian markets higher, lifting more than 1 percent shortly after the opening. But any relief over the last-minute agreement on the debt deal framework was fleeting.
After the first half-hour of trading, the three main Wall Street indexes turned negative and mostly stayed in the red, bringing the broader market as measured by the Standard Poor’s 500-stock index down more than 4 percent over the past six consecutive days of declines.
Much of the slump was attributed to a report from the Institute for Supply Management showing a slowdown in the nation’s factories. The index registered 50.9 percent in July, down from 55.3 percent in June. A reading over 50 percent means the manufacturing sector expanded for the 24th consecutive month. Production and employment showed continued growth in July, but at slower rates than in June. However, the new orders component fell to 49.2 percent, hitting a notch below 50 percent for the first time since June, 2009, when it was 48.9 percent.
The news was particularly bad on the heels of the Friday report 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.
“July’s I.S.M. report was a shocker,” said economists from Capital Economics in a research note. “The index is not flagging up another recession, at least not yet, but it suggests that the easing in G.D.P. growth in the first half of the year is looking more and more like a sustained slowdown than a short-lived soft patch.”
Nick Kalivas, vice president for financial research at MF Global, said the weekend’s debt deal developments took some risk and “a little” uncertainty from the market.
The deal, he said, “kind of pushes the longer-term issues out to be taken up at another time.”
The S. P. was down 5.34 points, or 0.41 percent, to 1,286.94. The Dow Jones industrial average was off 10.75 points, or 0.09 percent, to 12,132.49, and the Nasdaq index fell 11.77 points, or 0.43 percent, to 2,744.61.
Noting that the American stock market has performed well this year largely because of record corporate profits, James Swanson, the chief investment strategy for mutual-fund company MFS Investment Management in Boston, said that “the economy is disappointing investors because the general assumption has been that U.S. growth would be in the twos to threes and it’s clearly not.”
While bond markets may rally in response to the fact the debt ceiling crisis was averted, some analysts say the size of the agreement is likely to disappoint investors over the long term.
“Foreigners, in particular, are going to look at this deal and say, ‘I thought the U.S. was capable of more than this,’ ” said Zane Brown, the fixed-income strategist at Lord Abbett. “We may find that foreign owners of U.S. Treasury securities may look for opportunities to move elsewhere.”
Another issue weighing on investors is whether America will retain its sterling credit rating.
“I think we’re going to be watching for the reactions of the rating agencies,” said G. David MacEwen, chief investment officer at mutual-fund company American Century Investments in Kansas City, Mo. Pointing to the stance of Standard and Poor’s that suggested it may downgrade the country to a AA rating from a AAA if spending was not reduced by about $4 trillion, Mr. MacEwen said it was a “big question” whether it and the other rating agencies will be satisfied with this deal.
Noting that the manufacturing report followed “terrible” G.D.P. and jobs data, Matt Freund, the senior vice president of investment portfolio management for USAA Investment Management, said, “We think it is a glass half-full economy, but it is getting harder to tell where the water line is.”
Yields have fallen as a result, he noted. The benchmark 10-year Treasury was down slightly at 2.75 percent.
In addition, there have been continued concerns about the outlook for Europe. Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt, said the initial reaction in Europe to the news in the United States was one of relief but he also said European investors remained cautious.
“If we look ahead,” he said, “we’ll see a return to the focus on the economic problems in Europe.” The FTSE 100 in London was down 0.70 percent to 5,774.43, the CAC 40 in Paris lost 2.27 percent to 3,588.05, and the DAX in Frankfurt was off 2.86 percent to 6,953.98, its biggest percentage drop since March.
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.
Julie Creswell contributed reporting.
Article source: http://www.nytimes.com/2011/08/02/business/asian-markets-rally-after-us-debt-deal.html?partner=rss&emc=rss
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