February 27, 2024

Stocks Decline a Day After Fed Announced Stimulus Measure

Several factors contributed to the heightened gloom, including new signs of political paralysis in Washington, Europe’s continued failure to resolve its debt crisis and indications of economic stress in developing countries that had been strong.

While the Fed’s measures to lower interest rates could increase growth a bit, some economists worry that the scale of the problems call for more stimulus efforts globally, but other countries are not cooperating.

With investors so nervous, the markets may rebound over the next few days, as volatility and big swings of 3 and 4 percent have become more common. On Thursday a downcast mood appeared across the board.  Stocks plunged about 5 percent across Europe and in Hong Kong, and more than 3 percent in the United States.

“Today, we really seem to be stuck in a negative spiral,” said Matthias Jasper, head of equities at WGZ Bank in Düsseldorf. “Investors just want to keep their exposure low and watch from the sidelines.”

Financial markets beyond stocks also reflected growing anxiety. Commodities like oil fell, and even gold dropped sharply in price. As investors continued to seek havens, United States bond prices soared for a fifth consecutive trading session, pushing the 10-year benchmark yield to a new low of 1.72 percent.

The cost of insuring the government bonds of Western European nations against default rose to a record high. The extra yield investors demand to hold Italian government debt also rose, pointing to lingering worries about debt levels in the euro currency region. Despite steps taken last week by central banks to help banks in Europe borrow dollars, there were signs of rising borrowing costs for these institutions.

It is not only economies in the United States and Europe that are faltering. Financial markets in developing countries are showing levels of stress last seen during the financial crisis, a senior World Bank official said Thursday.

The official said that problems in the developed world increasingly were shaking the economies of developing nations, not because of a drop in trade flows or capital investment, but because a sense of gloom was spreading around the world, shaking the confidence of domestic investors.

“We are increasingly worried about the possibility of global contagion,” said the official, who shared the World Bank’s assessment of the global situation on condition of anonymity.

“At some point the global mood changes. Just like the realization that even big banks are vulnerable” shook world markets in 2008, the official said, “the idea that even the U.S. is vulnerable means that many investors have lost an anchor.”

The market downturn was set in motion on Wednesday after the Fed announced that a complete economic recovery was still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed also announced it would buy long-term Treasury bonds and sell short-term bonds to help stimulate lending and growth.

Some analysts were disappointed the Fed did not act more forcefully and they had little faith that policy tools like lower interest rates were encouraging consumers and businesses to spend more or to start creating jobs.

“The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to ‘ride it out’ over a long period of time,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company. The policy conundrum is illustrated by the fact that despite lower rates people are not taking up new mortgages or refinancing existing ones. Rates on 30-year fixed mortgages dropped after the Fed’s announcement, falling to 4.05 percent from 4.21 percent on Wednesday, according to HSH.com, which publishes mortgage and consumer loan information.

But the number of new mortgage applications is running at the lowest level since August 1995, according to the Mortgage Bankers Association. Guy Cecala of Inside Mortgage Finance, which monitors mortgage activity, said the volume of new mortgages this year would probably be about $1 trillion, down from $1.5 trillion in 2011, which was already anemic.

Companies, too, are holding back on spending even though they have built cash reserves to 6 percent of their total assets, the highest level since at least 1952, according to Credit Suisse.

The proportion of United States companies’ cash flow being spent on new equipment and other investments has not rebounded since the financial crisis and is stuck at the lowest level since the late 1950s, said Doug Cliggott, an analyst at Credit Suisse. A survey by the bank of 60 large American companies published Thursday found that two-fifths actually planned to cut spending in the next six months.

In what may be a bellwether trend, FedEx, the logistics company, on Thursday cut its expectations for earnings for the entire fiscal year, citing a slowdown in global growth and sending its stock down 8 percent.

The markets on Thursday homed in on a darkening economic outlook in the euro zone and concerns that China’s growth rate would start to slow. A closely watched gauge of private sector activity from the euro zone — the composite purchasing managers’ index — fell to 49.2 points in September from 50.7 in August, according to Markit, a financial data provider.

Analysts said the fall in the euro area index reflected a combination of slowing global growth, significant belt-tightening in the euro area and growing concern about the escalating sovereign debt crisis.

A review on Thursday by Standard Poor’s showed that the market capitalization of publicly traded equities around the world had fallen by more than 17 percent, or $9.2 trillion, since July 1.

In the United States, without greater stimulus, the dollar headed sharply higher on Thursday, catching investors off guard and causing rapid selling of investment positions, like gold, that had relied on a cheaper currency.

“I think that the market had performed so bullishly across all the precious metals that a correction was probably in the offing,” said James Steel, an analyst at HSBC. “And it may have been used as a convenient place for some profit-taking.”

When the price of gold moved so quickly below $1,800, he added, it encouraged further selling. With sustained losses in stocks, investors could be using gold as it was meant to be used — to raise cash.

“This might sound perverse but gold is actually fulfilling its traditional role allowing you to raise cash in uncertain times,” Mr. Steel said.

Reporting was contributed by Matthew Saltmarsh and Binyamin Appelbaum.

Article source: http://feeds.nytimes.com/click.phdo?i=0097ecf6f2e80310a6a7698d4b4b385a

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