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Markets Fall as Global Worries Multiply

August 5, 2011 by Leave a Comment

Investors continued to pull funds away from stocks — including from emerging markets with their solidly growing economies — and shifted instead into the perceived safety of assets like U.S. Treasury bonds, German bunds and gold.

In London, traders were awaiting an important jobs report from Washington later in the day for more clues on the health of the U.S. economy. A weak number, they said, had the potential to intensify the downward selling spiral seen this week.

Luc Van Heden, chief strategist at KBC Asset Management in Brussels, said fears of a “double dip” in U.S. growth, where the recovery falters and turns into a second recession, were becoming even more of a concern than the sovereign debt crisis in Europe.

“We’ve known about the euro’s debt crisis for months,” he said. “Fears of a double dip in the U.S. are making the market very, very nervous at the moment.”

Mr. Van Heden said he thought it would take a really strong labor report — perhaps with the addition of 150,000 or so jobs in July — to durably lift investor sentiment.

China, as the United States’s largest foreign creditor, is closely watching developments there and the impact these may have on the value of China’s holdings. On Friday, the Chinese foreign minister, Yang Jiechi, said he hoped the United States would take “responsible monetary policies” to support the global economy, and “take tangible measures to protect the safety of assets” held by foreign nations.

China has increased its holdings of euro bonds in recent years, Mr. Yang said in a written response to questions from the Polish press during a visit to that country. He added that China believed Europe could overcome its “temporary difficulties,” and would continue to support Europe and the euro in the future.

Chancellor Angela Merkel of Germany and the French president Nicholas Sarkozy were interrupting their vacations Friday to hold a telephone conference on the euro zone debt crisis.

Stock markets in Europe opened sharply lower after steep losses at the end of the trading day on Thursday, then struggled to regain ground.

The FTSE-100 in London and the DAX in Frankfurt were each down around 3 percent in morning trading, while the CAC40 in Paris and the Euro Stoxx 50 Index of euro-zone blue chips were both off about 1.5 percent. Yields on Italy and Spanish 10-year yields whipsawed, as in recent days, but remained above the stressed level of 6 percent.

Futures on the Standard Poor’s 500 were also down, indicating another weak opening in New York.

The Nikkei 225 in Tokyo and the Kospi in Seoul both closed 3.7 percent lower. The Taiex in Taipei slumped 5.6 percent, and the Australian market shed 4 percent. The Hang Seng in Hong Kong closed down 4.3 percent.

Neither the Japanese central bank’s efforts on Thursday to dampen the rise of the yen, nor the European Central Bank’s move to buy bonds of some European countries served to reassure the markets.

The bank intervened with a show of support to buy bonds of some smaller countries, but not Italy and Spain, whose mounting troubles have come into the spotlight. This was taken as a sign that the recent rescue packages by Europe could soon be overwhelmed by the huge debt burdens in those two countries.

Analysts said the market still might have further to fall, as investors reassess the dimming economic prospects. And some in the markets are already questioning whether the Federal Reserve has done enough to mend the U.S. economy and whether it could soon take further steps to stimulate growth.

Wall Street saw the worst day in more than two years Thursday, with the Dow Jones industrial average ending down 4.3 percent, and the broader Standard Poor’s 500 finishing 4.8 percent lower.

The S. P. 500 has now fallen 10.7 percent from 1,345 on July 22, underlining the new negative investment sentiment.

“We are now in correction mode,” said Sam Stovall, chief investment strategist at Standard Poor’s. “We could have another couple of weeks to go before it bottoms.”

The yen, which had weakened against the U.S. dollar after the Japanese central bank intervened in the currency markets on Thursday to halt the Japanese currency’s ascent, crawled higher again on Friday, to 78.6 yen per dollar.

The Japanese Economics Minister, Kaoru Yosano, suggested on Friday that more interventions may follow.

“We will continue to intervene at the most effective moments,” Mr. Yosano told reporters. “It would be rash to assume a one-off action, and we will continue to assess the situation going forward.”

Elsewhere in the region, the Australian central bank underlined the general unease by lowering its economic growth forecast for this year. Although ravenous demand from China will continue to buoy Australia’s commodities sector, the bank cited the sovereign debt problems in other parts of the world as a risk.

With investors in the United States already focusing anew on fragile economic growth and high unemployment, waves of selling of stocks began late in the trading day in Europe and continued throughout the day Thursday in the United States.

The last time the market was in a correction was last summer, when it fell 16 percent before recovering.

Analysts said credit markets were still healthy and the United States was now stronger than just a few years ago, so that a repeat of the financial crisis was unlikely.

“There is a huge difference — during the financial crisis the banking sector broke down. Right now it’s a crisis of confidence based on weak economies but the banking sector is not broken,” said Reena Aggarwal, professor of finance at Georgetown University.

The Vix, which measures the implied volatility of options on the S. P. 500 index, and is called the fear index by traders, spiked on Thursday, though it is still much lower than during the depths of the financial crisis in 2008.

Washington’s reaction to the market’s tumble was muted. The Treasury Department said it did not plan to issue any statements or provide officials to comment.

“Markets go up and down,” said the White House spokesman, Jay Carney. “We obviously are monitoring the situation in Europe closely.”

Graham Bowley contributed reporting from New York, Hiroko Tabuchi from Tokyo and David Barboza from Shanghai.

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Article source: http://www.nytimes.com/2011/08/06/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Worries Rise Over Spain and Italy Debt

August 3, 2011 by Leave a Comment

Two weeks ago, the markets seemed to be on firmer footing after the new bailout of Greece was structured to prevent contagion. But on Tuesday, traders renewed their attacks on Italy and Spain pushing their borrowing costs, at least for now, to the tipping point that led Greece, Ireland and Portugal to apply for bailouts.

Some people now fear that Italy and Spain could run out of cash to meet their debt obligations in a matter of months if, like the others, they are shut out of international markets.

JPMorgan is warning its clients that Italy and Spain have thin margins of safety. The countries “will run out of cash in September and February respectively, if they lose access to funding markets,” the investment bank said. Those fears risk leading to “a self-fulfilling negative spiral,” the bank added.

The rescue fund negotiated last month as part of the bailout of Greece was intended to increase powers to assist countries that have not been bailed out, like Spain and Italy. It was described by some as a new Marshall Plan for Europe and was supposed to keep those nations safe from the spreading fire and, by extension, cushion the many European and American banks that hold their debt.

However, some skeptics had warned that the fund would not do enough, particularly if larger economies were devoured by the debt crisis. While the economies of Greece, Ireland and Portugal are relatively small, European leaders would face challenges of a different magnitude if Italy and Spain were engulfed by the same forces. For instance, if Italy’s economy stalls, higher interest rates could make it too costly to service Italy’s heaving debt, which, at 119 percent of gross domestic product, is one of the world’s largest.

With many Europeans off for their summer holidays, thin trading conditions may be exaggerating the market’s movements this week. Still, the sense of urgency was palpable in Rome, where Giulio Tremonti, Italy’s finance minister, held an emergency meeting of the country’s financial authorities as interest rates on Italy’s benchmark 10-year bond touched a 14-year high of 6.21 percent on Tuesday.

A leadership vacuum at the highest levels of the Italian government has further unnerved investors. Prime Minister Silvio Berlusconi has been silent on the debt crisis for nearly a month as he battles a sex scandal and grapples with court cases. He was scheduled to address the matter on Wednesday in a speech on the economy before Parliament.

In Madrid, Prime Minister José Luis Rodríguez Zapatero delayed the start of his vacation Tuesday to cope with Spain’s problems even as he agreed last week to step down early to take responsibility for Spain’s economic crisis.

The yield for the Spanish 10-year bond rose to 6.45 percent, the highest level since Spain joined the euro club, before retreating a bit. The surge is ill-timed because the government needs to raise as much as 3.5 billion euros (nearly $5 billion) in a bond auction Thursday.

The governments of Germany and France, the euro zone’s largest economies, can hardly afford a bigger cleanup bill for Europe’s debt crisis. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France hinted as much last month, telling Mr. Berlusconi in separate brief conversations that they felt sure he would do the right thing for the economy, according to a person with knowledge of the discussions.

Both Italy and Spain still need to tackle a mountain of debt and show they are making real progress toward straightening out their finances. Until that happens, investors are likely to keep driving their borrowing costs higher.

Markets are also unnerved by the prospect that creditors would share additional pain should other countries go the way of Greece. With German and French politicians pressured to show that taxpayers will not be the only ones saddled with the bailout costs, banks in those countries agreed to take some losses in the most recent bailout of Greece.

Liz Alderman reported from Paris, and Matthew Saltmarsh from London. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=65ef67aabf23c6e92cac4ba6661ff433

Filed Under: Business News Tagged With: , ,

Economix: Consumer Spending: The Chicken or the Egg

July 19, 2011 by Leave a Comment

Yet more on the consumer bust, this time from David Backus (via Andrew Gelman):

The suggestion … is that the economy is growing slowly because consumers aren’t spending money. But how do we know it’s not the reverse: that consumers are spending less because the economy isn’t doing well. As a teacher, I can tell you that it’s almost impossible to get students to understand that the first statement isn’t obviously true. What I’d call the demand-side story (more spending leads to more output) is everywhere, including this piece, from the usually reliable David Leonhardt.

We can’t know, for sure. But here’s an important clue:

If a weak economy inexorably led to weak consumer spending, which in turn led to an even weaker economy, we would never escape recessions. We’d enter an inescapable spiral. You often hear warnings of such a cycle in the latter stages of a typical economic slump. Unemployment is high and even rising. Income growth trails inflation. Bankers and corporate executives are uncertain about when the recovery will begin.

Robert Barbera, an economist and author, will sometimes tick off this list of the grim realities in the late stages of a recovery and then conclude by bellowing, “And it was ever thus!”

His point is that recoveries are able to begin even when consumers seem to have little available money, and he’s absolutely right.

After the 2001 recession, the economy did not begin adding jobs until 2003 — but consumer spending was rising again by the end of 2001. Likewise, in the early 1990s, job gains did not start until the spring of 1992, but consumer spending began to recover in 1991. In 1982, consumer spending started to pick up speed in the summer, while the economy was still shedding hundreds of thousands of jobs.

How does this happen? Even before employers begin adding jobs again, the pent-up demand that exists in the late stages of a recession — for new cars, appliances, even vacations — asserts itself. People start shopping again.

The absence of this dynamic is what distinguishes the bursting of a bubble, like the one we’re experiencing now. There is not as much pent-up demand, because of the earlier bubble excesses. Even more important, consumers are not able to fulfill the pent-up demand they do have, because they are still paying down debts and trying to rebuild their finances.

Ultimately, this issue is not either/or. An improving job market would, of course, play a big role in lifting consumer spending and the economy. But I think it’s a mistake to view consumer spending as merely, or even predominantly, an effect of other economic changes.

Mr. Gelman notes this question may not be the most important one anyway:

Regarding the causal question, I’d like to move away from the idea of “Does A cause B or does B cause A” and toward a more intervention-based framework … in which we consider effects of potential actions.

That is, what steps should the government now be taking to help put people back to work?

Article source: http://feeds.nytimes.com/click.phdo?i=5eec36283511f6b1a51da70d388f53ba

Filed Under: Economy News Tagged With: , ,