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Wall Street Recovers After Worldwide Slump

May 23, 2013 by Leave a Comment

The worst drop was in Tokyo, where the Nikkei index fell 7.3 percent, the most since the 2011 tsunami there. In New York, the benchmark Standard Poor’s 500-stock index was down 0.9 percent in morning trading, but regained ground by early afternoon. Leading indexes closed down 2.1 percent in Germany and France.

The pessimism that overtook global investors on Thursday was a sharp reversal from months of steady advances in share prices around the world. Many investors had voiced concern that the rally was due for a break, but it had not been clear what would serve as a catalyst for a downturn.

The dip began on Wednesday afternoon, after the Federal Reserve chairman, Ben S. Bernanke, testified before Congress that the Fed could pull back on its monetary stimulus programs if the economy continued to show progress. Later on, an index of Chinese manufacturing showed that activity actually slowed in May for the first time in months.

The Chinese purchasing managers index, released by HSBC, fell to 49.6 points in May from 50.4 a month earlier. A reading below 50 signals a contraction.

China’s slowing momentum has been long in the making and has been, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets around the globe.

The response was particularly stark in Japan, where the government is in the early stages of an aggressive effort to prop up the long-suffering economy. High hopes that the bold economic policies of Prime Minister Shinzo Abe will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year.

Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed on Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.

“The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.”

Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.

One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the last few weeks have shown that the economy has begun to pick up speed.

Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent on Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous.

Given the indebtedness of the Japanese government, there are worries about the effect that this could have if sustained, Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”

The sell-off on Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 points from 46.7, while the services index rose to 47.5 from 47. While that points to continuing contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half.

The economic data coming out of the United States on Thursday also looked better than expected. The number of people filing for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before.

Signs of a strengthening economy could amplify the talk about the Fed slowing down its bond-buying program. But Fed officials have been emphatic that they will not pull back unless it is clear the economy can handle it. Some strategists said on Thursday that investors were overstating the risk of a Fed drawdown.

James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech in London on Thursday that the Fed was likely to “continue with the present quantitative easing program.”

David Jolly contributed reporting from Paris and Hiroko Tabuchi from Tokyo.

Article source: http://www.nytimes.com/2013/05/24/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Japan’s Policy to Weaken Yen Has a Global Effect

April 8, 2013 by Leave a Comment

PARIS — The Bank of Japan’s extraordinary new anti-deflation policy was making waves throughout the global financial system Monday, driving down the yen and lifting share prices in Tokyo, but economists said the effect has yet to be fully felt overseas.

The most visible sign of the central bank’s move was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225 stock average. The dollar was trading at ¥98.905 on Monday afternoon in New York, a four-year high. The euro traded at ¥128.75, its highest level in more than three years.

“They’re taking a page out of the quantitative easing playbook, multiplied two and a half times what the Fed is doing,” said Michael Strauss, chief investment strategist at Commonfund in Wilton, Connecticut.

That, he said, creates a situation where both institutions and individuals are facing pressure to buy equities, at home and overseas.

The shake-up was touched off Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies, saying the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as the institution tries to raise the annual inflation rate to its new 2 percent target.

Mr. Kuroda’s plan calls for the central bank to inject nearly ¥62 trillion, or $630 billion, into the economy this year, new money that must find a home. Some of that will undoubtedly end up overseas.

“This is a very big new injection of money into the global system,” said Thomas Mayer, senior adviser to Deutsche Bank in Frankfurt, and overseas bonds and equities will be among the beneficiaries.

U.S. bonds and stocks, which are already trading near record levels, are one obvious target for investors with yen to spend, he said. Core European countries like Germany, France and Britain are also favored destinations for Japanese capital, as are Australia and New Zealand.

Debt of governments in the developed world is already trading at very low yields, Mr. Mayer noted, but as long as the euro zone crisis continues, struggling southern euro countries like Spain, Italy and Portugal may attract rather less investor interest because of concern about political risk.

While the size of the Japanese intervention is perhaps unprecedented relative to the size of the country’s economy, the Bank of Japan is not alone. The Federal Reserve, the Bank of England and the European Central Bank have all poured in liquidity and worked to hold interest rates down as the global financial sector creaks along year after year. That money is credited with helping to keep government borrowing costs low and to push the Dow Jones industrial average to a record high this month.

A weakening Japanese currency opens a window for international investors to profit on two fronts. With the central bank’s main interest rate target near zero, they can borrow the Japanese currency cheaply, then lend it abroad.

This “carry trade” offers the possibility of higher returns overseas — and if the yen falls, investors also reap a foreign-exchange gain since they can repay the loan in cheaper yen.

Of course, a rising yen would bring the opposite result, but the magnitude of the central bank’s plan could convince investors that the currency is set to fall further.

Julian Jessop, chief global economist at Capital Economics in London, estimated that the dollar would continue strengthening to ¥110 this year and to ¥120 next year.

“The Bank of Japan’s new policy stance surely does amount to a game-changer,” he noted, “at least for the currency markets.”

The weakening yen may also be felt by companies operating outside Japan — like American and German automakers and South Korean gadget manufacturers, which compete head-to-head with Japanese corporations. Those companies may find themselves under pressure to squeeze profit margins to compete against suddenly flush Japanese competitors.

“Some of these Japanese companies were profitable at ¥78 to the dollar,” Mr. Strauss said, so the dollar at ¥100, or “parity,” will be a boon for the corporate sector.

“This will provide a reliquidification of the Japanese market,” he said.

It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned there were larger concerns to consider: “By injecting such a large amount of money into the global financial system, you may end up distorting prices in such a way that it causes distortions in the real economy.”

Mr. Strauss said the biggest impact would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than four-tenths of a percent, or could take on a little more risk in stocks.

The lesson after the Japanese investment bubble collapsed in 1990 was “never own equities again,” he said, but the moment may have arrived where that no longer holds true — with a payoff for the country and markets overseas.

But Japanese investors are more cautious than those of a generation ago, he added.

“I don’t think they’re going to go out and buy Pebble Beach,” Mr. Strauss said, referring to the legendary golf course in California acquired by a Japanese business owner in 1990 at a wildly inflated price.

Article source: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Banks Retrench in Europe While Keeping Up Appearances

December 22, 2011 by Leave a Comment

That includes Santander, the Spanish banking giant that European regulators say has the biggest capital hole to fill: at least 15 billion euros.

So why, then, is Santander still planning to pay its shareholders 2011 dividends worth at least 2 billion euros in cash and even more in stock? That question goes to the heart of the economic challenge that Europe faces in the year ahead. A combination of government austerity, and the imposition of bigger capital safety cushions that are leading banks to retrench, seem all but certain to plunge the Continent back into recession less than three years after emerging from the last one.

 

But many banks are taking actions that will only intensify the blow. To preserve their allure as global brands, while trying to compensate for their battered share prices, big European banks like Santander remain intent on maintaining rich dividend payouts to shareholders. At the same time, they are selling assets, curbing lending and taking other belt-tightening measures to satisfy regulators’ demands for more capital.

 

“Our dividend is a sign of our expected future profits,” said José Antonio Alvarez, the chief financial officer of Santander. “Unless our expectations change we try not to cut the dividend.”

Santander, though by many measures the most generous, is not the only bank paying dividends as it scrambles to raise capital.

Its rival, the Spanish lender BBVA, plans to pay out nearly half its profits to shareholders, despite being under regulators’ orders to raise 6.3 billion euros in capital. To a lesser but still significant extent, Deutsche Bank and BNP Paribas will also be paying out dividends as they try to take in money to build their capital cushions.

All this is a sharp contrast to the way capital-short banks in the United States slashed dividends to conserve cash during the depths of the financial crisis that followed the Lehman Brothers collapse in 2008. The American government also injected cash into the banks, as Britain did with its weaker institutions.

So far, European governments have shown no inclination to do likewise for their banks. And critics say the contrast with the American experience shows how much European regulators are out of step, or even out of touch, with the banks they supervise — with potentially disturbing ramifications for the European economy.

“I do not think Europeans understand the implications of a systemic banking crisis,” said Richard Koo, the chief economist at the Nomura Research Institute in Tokyo and an expert on the financial stagnation in Japan in the 1990s. “When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession — if not depression.”

A paper Mr. Koo wrote on the subject has gone viral on the Web, with many picking up on his recommendation that the banking crisis will not be solved until European governments inject large amounts of money into their banks.

“Government intervention should be the first resort, not the last resort,” Mr. Koo said in an interview.

There is little doubt that European banks need shoring up right now. That fact was made clear Wednesday, when 523 banks tapped the European Central Bank for a record 489 billion euros (nearly $640 billion) in loans. Compared with their American peers, they have been much more dependent on borrowing in recent years to finance their lending binges.

On average, European banks’ loan books exceed their deposits by 1.2 times. In the United States the average loan-to-deposit ratio is 0.70. The upshot is that it will probably take much longer for Europe’s banks to unwind their bad loans and debt than it has for American banks.

The European Banking Authority, after a third round of stress tests in October, has ordered Europe’s fragile banks to raise more than 114 billion euros in fresh cash in the next six months. By June 2012, the region’s financial institutions will need to increase their so-called core Tier 1 capital ratio — the strictest measure of a bank’s ability to resist financial shocks — to 9 percent of assets.

That ratio, higher than the 5 percent preliminary target that the Federal Reserve set for American banks this week, reflects the acute capital strains that European banks are facing.

Article source: http://www.nytimes.com/2011/12/23/business/global/european-banks-retrench-while-keeping-up-appearances.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

U.S. Jobless Claims Increased by Striking Verizon Workers

August 26, 2011 by Leave a Comment

Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 417,000, the Labor Department said. Analysts see 400,000 as the level where the economy is creating net new jobs.

Striking Verizon workers filed 8,500 claims for jobless benefits last week, after submitting 12,500 applications the previous week, which covered the period for the August nonfarm payrolls survey.

That suggests that the strike would reduce the monthly payroll count, which will be reported on Sept. 2. The strike against Verizon ended on Monday.

Economists polled by Reuters had forecast claims would be 405,000 last week. The previous week’s claims were revised up to 412,000 from the previously reported 408,000.

The claims showed little sign that companies were laying off workers in droves in response to the recent tumble in share prices. Fears that the economy is on the brink of slipping back into recession have rattled stock markets, helping to lower business and consumer confidence.

While the labor market regained some ground in July, a new wave of layoffs, coupled with the deterioration in business sentiment, could reverse the trend in the months ahead.

Employers added 117,000 jobs in July after increasing payrolls by only 99,000 in May and June combined. The unemployment rate fell to 9.1 percent in July from 9.2 percent in June.

A Labor Department official said there was nothing unusual in the state-level data released Thursday. The four-week moving average of claims, considered a better measure of labor market trends, rose 4,000 to 407,500.

The number of people still receiving benefits under regular state programs after an initial week of aid fell 80,000, to 3.64 million, in the week ended Aug. 13.

The number of Americans on emergency unemployment benefits fell 43,827, to 3.09 million, in the week ended Aug. 6, the latest week for which data is available.

A total of 7.29 million people were claiming unemployment benefits during that period under all programs, down from 45,989 the previous week.

Article source: http://feeds.nytimes.com/click.phdo?i=8bab3e381ebdf562cc988eaa7f660fc6

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