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Sovereign Debt Worries Flare Again in Europe

September 2, 2011 by Leave a Comment

European stocks were sagging even before a disappointing U.S. jobs report added to concerns about the global economy, dragged lower by those companies most tied to growth like car makers, banks and insurers.

Yields on 10-year Italian bonds rose almost a tenth of a percentage point to 5.21 percent — well above the 5 percent level that is considered to be the top rate desired by policy makers.

The yield on Spain’s 10-year securities climbed slightly to 5.06 percent, despite passage in the lower house of the Spanish Parliament on Friday of an amendment that will enshrine stricter budgetary discipline in the Constitution.

The E.C.B. on Aug. 8 began the extraordinary step of buying Italian and Spanish debt to help calm markets after 10-year rates had spiked to around the 6 percent level.

David Schnautz, interest rate strategist at Commerzbank in London, said many investors had chosen to use the E.C.B.’s recent bond buying program to offload those bonds, and that was causing yields to drift up now.

“There’s still no genuine investor demand for Spanish and Italian government bonds,” he said.

Sentiment was hit after the team of European and International Monetary Fund officials pulled out of Athens early as they apparently disagreed over the country’s deficit figures and how to make up for a growing budget shortfall.

The mission had been sent to determine whether Greece would meet the conditions for the next tranche of emergency loans, due in September.

The representatives of the European Commission, the European Central Bank and the I.M.F. said in a statement that “good progress” had been made, but that they wanted to allow time for the Greek government to complete technical work on the 2012 budget and reforms.

The delegates, who had been scheduled to leave next week, said they would return to Athens by mid-September, “when we expect the Greek authorities to have completed the technical work, to continue discussions on policies needed to complete the review.”

An initial loan package, agreed to last year, has since been supplemented by a second bailout deal that was hammered out in Brussels in July, but which now hangs in the balance amid demands by some euro zone countries for guarantees from Greece in the form of collateral. Without that fresh aid, Athens could default on its obligations.

The Greek Finance Minister Evangelos Venizelos denied that there was a rift with the auditors over the country’s ability to meet deficit reduction targets set by the foreign creditors.

The minister said at a news conference that talks were continuing with auditors in “a very friendly and constructive climate,” and that he expected the team back on Sept. 14 for a second phase once Athens had finalized a draft of the national budget for 2012.

Greek officials had not previously suggested that there would be a break in negotiations with the inspectors, whose previous audits have lasted two weeks.

One issue that dominated talks, which concluded in the early hours of Friday morning, was a deeper-than-expected recession in Greece that would necessitate “some additional elaboration to ensure there is no divergence” from deficit reduction targets, Mr. Venizelos said.

A European official, speaking on condition of anonymity because the talks were confidential, said that without additional information, there was a risk that some euro zone countries might not agree to releasing the next tranche.

Mr. Venizelos also said that Greece’s economy was expected to contract by “up to 5 percent” but would not give a figure for the Greek budget deficit, broadly expected to overshoot a deficit target of 7.6 percent for 2011 by up to one percentage point.

Article source: http://www.nytimes.com/2011/09/03/business/global/sovereign-debt-worries-flare-again-in-europe.html?partner=rss&emc=rss

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Profit Lag May Dampen Stock Rally

July 5, 2011 by Leave a Comment

Stocks have seesawed much of this year as investors worried about higher commodity prices, the Japanese tsunami’s impact on global supply lines and Europe’s debt crisis.

Now a string of second-quarter corporate earnings announcements due over the next few weeks could confirm that companies are beginning to have a harder time.

Higher gas prices are soaking up already weak consumer spending, banks are struggling and labor costs may be starting to pick up, squeezing business’s profit margins meaningfully for the first time.

All of that could spell more trouble for the stock market. Stocks rallied sharply last week after the Greek Parliament passed austerity measures. But some analysts question how long the rally will last. If it does not endure, it could complicate the economic picture as these two pistons of the already sputtering economy, profits and the stock market, fire less powerfully.

“For the first time in this economic cycle, there is going to be a fair number of disappointments,” said Doug Cliggott, an analyst at Credit Suisse, referring to the earnings reports. “The economy is going to be without those drivers.”

Europe’s debt crisis may be far from over. Standard Poor’s, the credit rating agency, said on Monday that a plan promoted by France for French and German banks to roll over their large holdings of Greek government debt would in fact amount to a default by Greece, raising questions about how the indebted nation could qualify for a much-needed second bailout.

On the other hand, some analysts are predicting a relatively rosy United States profits season that belies the continued grim domestic economic news. They think companies will do well, since consumers have made some progress in trimming their debt and may be prepared to start spending again. Energy prices have at least stopped going up.

“We are going to get good news out of the corporate sector and markets can move higher,” said Jack Caffrey, equity strategist at J.P. Morgan.

The 5.4 percent jump in the Dow Jones industrial average last week, in one of its strongest weeks in two years, seemed to support that optimism.

Already some investment professionals are predicting that the Standard Poor’s 500-stock index may be back at 1,400 or higher by year-end, if not sooner; it closed at 1,339.67 on Friday. Some are making comparisons with last year, when after a few rocky months markets touched lows in the first week of July — and soared for most of the rest of the year.

“With the exception of the bust of late 2008/early 2009, U.S. stocks are now the cheapest they have been in 20 years,” Steve Sjuggerud, editor of True Wealth, an investment newsletter, wrote in June. He forecasts that the S.P. 500 will be back at 1,450 by year’s end.

But the bears believe that optimism is overdone.

In addition to Europe’s troubles, they point to continued poor United States economic numbers.

Last month the Federal Reserve revised its expectations for economic growth down to a range of 2.7 percent to 2.9 percent, from 3.1 percent to 3.3 percent in April. Many independent economists are more pessimistic. There is a risk that the economy will struggle further from budget and job cuts at the local and state levels, and even at the federal level, depending on the debate about the debt ceiling.

A further drag could be the end of the Fed’s $600 billion asset buying program, which had been buoying stocks since last fall.

Companies had been socking away profits by, among other things, keeping down labor costs and increasing productivity, but their profit margins may now be squeezed as both their unit wage costs and investment spending begin to rise.

Credit Suisse expects the stock market to end the year below its current level, with the S.P. 500 at about 1,275.

“Analysts are expecting blockbuster earnings numbers, but I am not so sure,” said Jeffrey Kleintop, chief market strategist at LPL Financial. “We have a defensive strategy.”

Mr. Kleintop said corporate leaders would most likely reduce their earnings guidance for the second half of this year when they announce their results for the second quarter.

The early earnings reports have been mixed. FedEx reported net income up 33 percent for its fourth quarter, which ended May 31, compared with the same quarter a year earlier — heartening the bulls who see the company as a good bellwether for the rest of the economy.

Frederick W. Smith, FedEx’s chairman, said in a conference call with analysts that the economy had been through a brief soft patch.

Eric Dash contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=3a9f7bcb75c275454e43d03704829ff7

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Fundamentally: The Markets and Greece: Variations on a Theme

July 3, 2011 by Leave a Comment

HOW worried are investors about Greece’s financial mess? Could it take a huge toll on Europe and upend the global recovery? A standard way to answer such questions is to turn to the financial markets, which are often thought to reflect and foreshadow the underlying health of the economy.

Yet in recent weeks, the stock, bond and currency markets have seemed to be painting different pictures about the severity of the threat.

Until last week, bond market investors were racing feverishly into 10-year Treasuries amid growing signs that Greece was on the brink of defaulting on its debt. The market calmed down last week, though, upon learning that the Greek government had agreed to make sharp spending cuts and would be receiving billions in debt relief from Europe.

Even with this news, though, yields on those Treasuries have still fallen from 3.62 percent in April to 3.20 percent now — not far from where rates were in the depths of the financial crisis in late 2008.

In the stock market, investors have responded more quietly. Although the Standard Poor’s 500-stock index had been slumping for more than two months, stock prices recovered last week, and the S. P. is now down only around 2 percent from its April peak.

And currency markets haven’t panicked at all. More than a year ago, when Greece’s fiscal troubles first hit the headlines, the euro plummeted nearly 20 percent against the dollar. This time around, though, the euro has dropped only around 2 percent.

These messages may seem confusing. But upon further examination, all of these markets are probably pointing to the same thing, said Michael J. Cuggino, manager of the Permanent Portfolio, a mutual fund that invests in stocks, bonds, currencies and alternative assets.

Mr. Cuggino summarizes the global outlook this way: “It’s unmistakable that the economy is slowing, but it won’t be a material slowdown, and growth will probably resume in the second half of the year.”

Consider the bond market. While it’s true that Treasury yields nearly sank to November 2008 levels, the reason may not be all that ominous. “In terms of depth and breadth, there are really just two big buckets of government bonds in the world — Treasuries and European bonds,” said Carl P. Kaufman, co-manager of the Osterweis Strategic Income fund. To some extent, what we have seen is “a flight to safety from one bucket to the other,” he said.

Mr. Kaufman noted that until last week, the flow of money from European bonds to Treasuries had been especially pronounced among shorter-term securities. As much as yields on 10-year Treasuries fell, he noted that rates on two-year notes fell faster, dropping as low as 0.35 percent, from 0.85 percent in April. That’s mainly because investors fleeing the European market were “simply looking for a short-term place to park their cash,” he said.

But those yields reversed course last week; the two-year yield is now at 0.49 percent, and the so-called yield curve — a term that describes the spectrum or interest rates paid out by bonds of varying maturities — had steepened slightly. “Historically, steep yield curves signal recoveries,” Mr. Kaufman said.

George Strickland, a portfolio manager and managing director at Thornburg Investment Management in Santa Fe, N.M., agrees. “I’d be much more concerned if the yield curve had flattened — that would be a very bearish signal for all risk markets.”

He said that while Treasury yields did fall to near financial-crisis levels, the credit markets haven’t been experiencing the liquidity problems of a few years ago. For instance, he said, companies are not having problems rolling over commercial paper, a form of short-term debt that companies use to fund their basic obligations.

How should we interpret the relative stability in the currency market?

David C. Wright , managing director of Sierra Investment Management in Santa Monica, Calif., said that “it’s been somewhat surprising that we haven’t seen more stress on the euro.” But we’re still in the early stages of the crisis, he said. And market strategists say that other factors are probably also at work.

Harry W. Hartford, president of Causeway Capital Management in Los Angeles, recalled that when the euro plunged a year ago, there were concerns about whether a common currency could be sustained. Such fears put even more pressure on the euro. But this time around, the currency’s relative stability probably reflects confidence “that the euro will be sustained by policy makers and politicians,” he said.

Mr. Hartford added that the more muted reaction in currency markets might reflect the view that because Greece accounts for only around 2.5 percent of the euro zone’s gross domestic product, its troubles can be contained. “In the grand scheme of things, assuming this crisis doesn’t spread, it’s not a massive issue,” he said.

Of course, if it does spread — to Ireland and Portugal and beyond — all bets on the euro are off. And the debate about the health of the recovery will start anew.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

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France’s Lagarde Named New Head of I.M.F.

June 28, 2011 by Leave a Comment

Treasury Secretary Timothy F. Geithner had announced earlier Tuesday that the United States would back Ms. Lagarde, France’s influential finance minister, over the Mexican central bank governor, Agustín Carstens, her only competitor for the job, a move that all but sealed her victory.

“Minister Lagarde’s exceptional talent and broad experience will provide invaluable leadership for this indispensable institution at a critical time for the global economy,” Mr. Geithner said in his statement. “We are encouraged by the broad support she has secured among the Fund’s membership, including from the emerging economies.

The I.M.F. executive board met Tuesday in Washington to decide between Ms. Lagarde and Mr. Carstens. But having secured the backing of China, most countries in Europe and then the United States — which holds the largest number of votes at the fund — Ms. Lagarde’s appointment for a five-year term was effectively a foregone conclusion.

Ms. Lagarde will be taking over at a delicate time, following the resignation last month of Dominique Strauss-Kahn after his indictment on charges of the attempted rape of a hotel maid in New York.

As the finance minister of one of Europe’s most powerful economies, she has been at the forefront of efforts to contain the European debt crisis, which has led Greece, then Ireland and Portugal, to seek bailouts to help them pay their huge sovereign debts.

But a year after Greece secured a €110 billion, or $140 billion, rescue package from the I.M.F., the European Union and the European Central Bank, the country’s debt problems have now re-emerged with a vengeance.

Financial markets have see-sawed in recent weeks as the Greek government was buffeted by widespread social unrest stemming in part from the I.M.F.’s demands for greater austerity measures as a condition of releasing more aid. The Greek Parliament is to vote on the measures Wednesday.

Although emerging markets fought to claim the I.M.F. leadership from Europe, which has produced every managing director since the fund’s inception more than 40 years ago, Ms. Lagarde received substantial backing from Europe, the United States and China. Her key argument was that only another European could continue the I.M.F.’s leadership in managing Europe’s deepening debt crisis.

Yet Ms. Lagarde also came under fire from critics who say she and other top European policy makers mishandled the crisis from the beginning and are now having to scramble to clean up problems of their own making.

“For the I.M.F. to be devoting so much financial and human capital to try to combat a problem in Europe which is largely political in origin and can only be solved by political agreement is controversial,” said Simon Tilford, the chief economist of the Center for European Reform in London. “It threatens the I.M.F.’s credibility.”

What is more, French banks have the largest exposure of any in Europe to Greece, having loaded up on sovereign debt over the years, while Ms. Lagarde has been a major player in negotiating the bailout for Greece. She has adamantly opposed a full-blown debt restructuring or any solution other than a voluntary restructuring by banks.

That has led some analysts to raise questions about whether her impartiality on the issue would be clouded as she leads the fund.

“There is a risk that her perceived objectivity will be brought into question because of this,” Mr. Tilford said. On the other hand, “it’s possible she will come to believe debt restructuring could be in France’s interest, and that kicking the can down the road could ultimately cost the French more than an earlier move to lance the boil.”

Article source: http://feeds.nytimes.com/click.phdo?i=843e8a75a6b25ae8de3ffd097da325a1

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Markets Move Ahead as Greece Worries Subside

June 21, 2011 by Leave a Comment

Around midday on Wall Street, the Dow Jones industrial average put on 101.23 points, or 0.8 percent, at 12,181.61. The Standard Poor’s 500-stock index advanced 15.87 points, or 1.2 percent, at 1,294.23. The Nasdaq composite index jumped 48.14 points, or 1.8 percent, at 2,677.80.

Euro zone finance ministers said the Greek government had until July 3 to approve new steps to get the next installment of 110 billion euros in aid from the European Union and International Monetary Fund.

The market expects a vote of confidence in Prime Minister George Papandreou’s new cabinet to pass on Tuesday — the first of three hurdles the Greek government must clear to avert the euro zone’s first sovereign debt default. The vote was due around 5 p.m. E.D.T.

“The impact from the Greece vote will surely be positive on the market, but I believe it will be relatively short. Yes, we will see a follow-through for a couple days, but the fundamental problem is that the global economy is slowing. Everyone is pointing fingers at Greece for every tick up and down, but that’s day-to-day trading. I don’t see this resolving the fundamental issue,” said Jack De Gan, chief investment officer at Harbor Advisory Corp. in Portsmouth, N.H.

In Europe, the CAC 40 stock index in Paris rose 2 percent for the day, adding 77.41 points at 3,877.07. The FTSE 100-stock index in London rose 81.92 points, or 1.4 percent, to 5,775.31, while the DAX in Frankfurt gained 135.30 points, or 1.9 percent, to 7,285.51.

In the United States, the Federal Reserve Open Market Committee was to begin a two-day meeting later Tuesday. Economists expect the Fed to cut its growth forecast for 2011, but the central bank and its chairman, Ben S. Bernanke, will probably continue to argue that the slowdown is temporary and that the economy will pick in the second half of the year.

Adding to the positive sentiment, sales of existing homes fell to a six-month low in May, but the decline was less than expected.

On Monday, stocks erased early losses as the Standard Poor’s 500-stock index dipped toward 1,259.78, its 200-day moving average, which is often viewed as a pivotal point in determining market direction.

Article source: http://www.nytimes.com/2011/06/22/business/22markets.html?partner=rss&emc=rss

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Greek Leaders Fail to Reach Consensus on Austerity

May 28, 2011 by Leave a Comment

“Essentially, there are many points on which we can agree,” he said, speaking to the nation in a televised speech. “But there is a need for political will from all sides.”

“Over the next few days we will continue efforts to reach a consensus,” he continued, adding that “the government has assumed the responsibility to extract the country from the crisis and will do this with or without consensus.”

But leaders of the opposition parties have refused to fall in behind the president, Karolos Papoulias, who had called the meeting. The measures have been proposed by Mr. Papandreou’s Socialist government.

The aim of Friday’s meeting was to convince officials of the European Union and International Monetary Fund that Greece is serious about repairing its finances, and has the political will to impose more tax increases and spending cuts on a public already weary after a year of belt-tightening. The effort came amid mounting speculation about the Greek government’s ability to avert a default, which would very likely lead to a new financial crisis across the euro zone.

Olli Rehn, Europe’s commissioner for economic and monetary affairs, said in a statement that the commission “regrets the failure of Greek party leaders to reach consensus on economic adjustment to overcome the current debt crisis.”

“An agreement has to be found soon,” Mr. Rehn said. “Time is running out.”

Earlier in the day, Antonis Samaras, the leader of the country’s main conservative opposition party, New Democracy, said he would not back a program that would “raze Greece’s economy and destroy its society.”

He called for the renegotiation of the terms of an agreement with the union and the I.M.F., which last May pledged 110 billion euros in loans to Greece in exchange for the country’s getting its fiscal house in order.

Mr. Samaras also reiterated calls for an alternative approach to Greece’s finances, one that favored the lowering of taxes and faster privatization of state assets.

Other leaders also criticized the Socialists’ plan. Among them was the leader of the Communist Party, Aleka Papariga, who said Greeks were being subjected to “ideological terrorism” and should not give in to “coercive dilemmas.”

On Thursday, the head of the group of euro zone finance ministers, Jean-Claude Juncker, said again that the European Union would be unlikely to step in if the I.M.F. withheld its portion of a fifth installment of emergency funding to Greece — 12 billion euros ($17 billion) scheduled to be disbursed next month.

Greece’s lenders are demanding additional measures after the country missed its deficit-reduction target for 2010, putting the goals for this year and beyond further out of reach. A mission from the European Commission, the I.M.F. and the European Central Bank is currently compiling a much-anticipated report on the Greek government’s progress, after which European ministers will have to decide how to react.

The situation is difficult because public opinion in creditor countries is hardening and some euro zone governments, including that of the Netherlands, have made it clear that they will not step in and fill the funding gap if the I.M.F. does not believe that it can justify releasing its portion. That has increased pressure on the Greek government to agree to revenue-raising measures, including privatization, that will be sufficient to win over the I.M.F.

At the Group of 8 meeting in Deauville, France, on Friday, the United States expressed support for European efforts to prevent a renewed debt crisis in Greece from mushrooming into a larger problem for the euro monetary union, said two European diplomats who were present during the discussions but did not want to be named.

The Americans said that Europe’s ability to manage these problems was important to the United States, but that President Obama did not specify what kind of help the United States would be willing to extend, other than statements of support, the diplomats said.

The European leaders said during the discussions that Europe’s problems were limited to Greece and that they did not believe Greece risked infecting the rest of the euro zone, which covers 17 countries. They pointed to the continued strength of the euro vis-à-vis the dollar as proof that the situation was still under control.

The leaders agreed, however, that Greece needed to be more aggressive in adjusting its own finances, and said they believed that the country would ultimately be able to avoid defaulting on or restructuring its debts.

Greek media has speculated in the last week that the country will hold snap elections or possibly return to the drachma. The European marine affairs commissioner, Maria Damanaki, who is a Greek Socialist, added fuel to the fire when she suggested on Wednesday that talks were already taking place about Greece’s possible exit from the euro zone.

Apart from tax increases and public spending cuts, the Greek government’s proposed austerity program also includes a privatization drive that foresees sales in stakes of state utilities and assets including the state telecommunications company OTE.

On Friday, Deutsche Telekom, which already has a 30 percent stake in OTE, confirmed the receipt of a letter from the Greek finance ministry asking to arrange talks to discuss increasing its stake.

But a few dozen employees of the phone company protested a further sell-off by blocking one of Athens’s busiest roads, in front of the company’s headquarters, during the morning rush hour Friday.

Larger protests have been held over the last three days as Greeks, facing a deepening recession and mounting unemployment, seek to air their grievances.

Article source: http://feeds.nytimes.com/click.phdo?i=36344ecf29ead27f1da7568ad164bd25

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