October 25, 2020

Stocks and Bonds: Markets Stumble on Debt and Deficit Worries

Financial stocks led Wall Street lower on Monday and European stocks fell more than 1 percent.

In Europe, on the first day of trading after the publication of the stress tests late Friday, the euro weakened and the bond yields of indebted nations climbed as investors worried about the degree of political will to overcome the region’s debt crisis.

The euro weakened to $1.4109 from $1.415 late Friday. The market worries came at the start of an important week for the European Union as its leaders try to stem full-blown market contagion.

The leaders will hold a special summit meeting Thursday, but there appears to be no agreement yet over the terms of a second bailout for Greece, especially on the nature of a private sector contribution.

The lack of clarity along with recent investor sales of Italian and Spanish bonds have led analysts to become increasingly pessimistic.

“The euro zone crisis has recently worsened significantly, exacerbated by disagreements between the E.U.’s key politicians,” said Ruth Lea, an economic adviser to the Arbuthnot Banking Group in London. “It is becoming increasingly clear that there will have to be major steps towards fiscal union or the euro zone will begin to disintegrate.”

Investors also remained wary about events in the United States, where President Obama is trying to get lawmakers to agree to a deficit-reducing package before an Aug. 2 deadline for increasing the debt ceiling.

“People are very concerned about the length of the process in the debt-ceiling debate,” said Russell Price, a senior economist with Ameriprise Financial, adding that there were also concerns about contagion in the euro zone debt crisis.

On Wall Street, financial shares, which fell more than 1.3 percent, led the broader market down. The Dow Jones industrial average dropped 94.57 points, or 0.76 percent, to 12,385.16.

The Standard Poor’s 500-stock index lost 10.70 points, or 0.81 percent, to 1,305.44, and the Nasdaq composite index was down 24.69 points, or 0.89 percent, to 2,765.11.

Bond prices were also down. The Treasury’s 10-year note declined 6/32, to 101 21/32. The yield rose to 2.93 percent, from 2.91 percent late Friday.

In the United States, the News Corporation, which is in the midst of a deepening scandal, fell more than 4 percent, to $14.97. Banks fell, with Citigroup down 1.67 percent, to $37.74, and Bank of America down 2.8 percent, to $9.72. But some analysts said that Europe was the main driver of the down market. Some relatively positive corporate earnings, however, helped offset the negative sentiment in the United States.

“I think it is kind of a tug of war,” said James W. Paulsen, the chief investment strategist for Wells Capital Management. “You look at Europe, and then we are in the midst of a pretty good earnings seasons.”

But analysts also noted a flight to precious metals, including gold, as the reverberations from Europe and the debt talks were gauged against the bigger picture of an uneven economic recovery.

The price of gold for September delivery rose above $1,600 an ounce, as investors sought safer assets. And crude oil rose $1.35 a barrel, to $96.25.

Economists for Goldman Sachs reported after the market closed on Friday that they were cutting their outlook for real United States economic growth in the near term, to 1.5 percent in the second quarter from 2 percent, and to 2.5 percent in the third quarter from 3.25 percent.

In Europe,

further clouding the picture were the stress tests on the region’s banks carried out by regulators. Of the 90 banks tested, eight failed, with an aggregate capital shortfall of 2.5 billion euros. But the exercise left unanswered many questions about how many healthier lenders would survive a deepening of the debt crisis, given their exposure to Greek, Italian and Spanish bonds. A sovereign default case was excluded from the tests.

The Euro Stoxx 50, a benchmark index of blue-chip stocks in the region, closed down 1.98 percent on Monday, and the CAC 40 in Paris lost 2.04 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=bbc643d90658246a6082c95317201657

Economix: Podcast: Good Euros, Bad Euros and Market Worries

Gresham’s Law is a centuries-old economic principle that is often defined quite simply as “bad money drives out good money.”

Because gold is more valuable on the open market than copper, for example, copper coins with the same nominal value as gold coins would quickly drive the gold coins out of circulation; the gold coins would be hoarded or melted down, to extract every last bit of value from them.

There’s more to Gresham’s Law than that, though, and Tyler Cowen says it helps to explain some of the problems in the euro zone.

In the Economic View column in Sunday Business and in a conversation in the new Weekend Business podcast, Professor Cowen, who is based at George Mason University, says that many bank depositors in Ireland have begun to doubt that country’s commitment to the euro.

As a result, depositors have begun moving money from Ireland to banks elsewhere within the euro zone. In effect, euros held in a bank in, say, Germany, are being perceived as being more valuable than euros held in Ireland.

Gresham’s law is relevant in this case because it holds that if two assets — in this case, euros held inside and outside Ireland — are deemed by traders to have different values, sooner or later the legally fixed price parity will break down. This breakdown is already occurring, Professor Cowen says, and it is causing enormous problems within the euro zone. The various patches being applied won’t be enough to cure this problem, in his opinion.

The financial problems in Europe are part of the “wall of worry” that investors have been climbing in the long rally under way in many stock markets around the world since March 2009. Calamities abound, as I write in the Strategies column in Sunday Business, but markets have been rising anyway.

As I explain in the podcast, the markets have been weighed down by a host of troubling issues. These include the weak economic recovery in the United States, turmoil in the Middle East and North Africa, the rising price of oil, and the prospect of budget cuts in the United States and an end to the Federal Reserve’s expansionary monetary policy. On the other hand, corporate profits are rising, and even if the economy is less than robust, it is certainly growing. Whether you emphasize the pros or the cons will go a long way toward determining your market outlook.

Compared to the dark days of the financial crisis in 2008, the markets have become calm and stable. But after a series of investigations into what went wrong, no high-level participants in the disaster have been prosecuted, as Gretchen Morgenson and Louise Story wrote this week in The Times.

In a discussion of the financial crisis on the podcast, they say that the current situation differs markedly from other periods in history. In the aftermath of the savings and loan crisis of the late 1980s, for example, more than 800 bank officials went to jail. But financial regulators have referred very few cases stemming from recent events to the various prosecutors.

The podcast covers a lot of ground this week. It also includes a discussion between David Gillen and Adam Bryant of the lessons that C.E.O.’s have given over the last several years in Mr. Bryant’s Corner Office column in Sunday Business. Mr. Bryant’s book about these lessons is excerpted in the section this Sunday.

And Randall Stross discusses apps that show where sobriety checkpoints are located, a subject that he covers in the Digital Domain column in Sunday Business. In his view, this may be one of those rare occasions when too much information is being made available for the public’s own good.

The podcast also updates the week’s business news, including President Obama’s proposal for paring down the budget deficit.

You can find specific segments of the show at these junctures: prosecutors and the financial crisis (28:59); news headlines and the “wall of worry” (21:02); lessons from the Corner Office (16:50); 4. Tyler Cowen on the euro (11:05); Randall Stross on controversial apps (6:45); the Week Ahead (2:04).

As articles discussed in the podcast are published during the weekend, links will be added to this posting.

You can download the show by subscribing from the New York Times podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=49160a4d2a561bebf1a7ef00183333b8