December 1, 2023

Federal Reserve’s Easing of Stimulus Could Hamper a European Recovery

Recent fears that the Federal Reserve could begin withdrawing its economic stimulus have prompted interest rates to rise around the world, putting business loans further out of reach for companies in Spain, Italy and France.

For the United States, the Fed easing on stimulus efforts would signal that the American economic rebound has enough momentum to continue on its own. But for most of Europe, still struggling through a recession, the Fed’s moves could make a recovery even harder to achieve.

The problem is evident to companies like Herbert Kannegiesser, which makes equipment here for large commercial laundries. It is the kind of niche industrial business that has continued to grow even during the economic crisis and helped sustain German exports. But laundry systems costing hundreds of thousands of euros are a tougher sell when loans are more expensive.

“Europe is our home market,” Martin Kannegiesser, son of the company’s founder, said in an interview in this rural corner of northwestern Germany. “Banks, especially outside of Germany, are very reluctant to give loans and financing to small and medium-size businesses. That is a problem.”

The Kannegiesser problem is a microcosm of the broad issue confronting Mario Draghi, president of the European Central Bank. He must keep trying to find ways to steer the euro zone out of recession even as his American counterpart at the Fed, Ben S. Bernanke, contemplates how soon to take his foot off the accelerator of the United States economy.

Unfortunately for European executives and central bankers, what happens in Washington does not stay in Washington. Rising yields, or market interest rates, on United States Treasury bonds have had worldwide repercussions.

The yield on the 10-year Treasury bond is now 2.66 percent, compared with 2.19 percent before remarks by Mr. Bernanke on June 19 raised expectations that the Fed would soon begin to taper off its stimulus program of buying government securities.

The better return available on American debt draws money away from Europe and pushes up rates for euro zone government bonds as well as commercial loans. Yields on Spanish and Italian government bonds rose sharply after Mr. Bernanke’s remarks. Euro zone yields have retreated somewhat since but are still higher than they were before June 19. The Spanish 10-year bond is at 4.79 percent, compared with 4.5 percent in early June.

“From the European point of view, the worst thing that could happen is an increase in long-term interest rates, which is what the Fed action is threatening to do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva.

The timing is terrible for Europe. The European Central Bank is still fighting a severe credit crisis in Southern Europe, which is making it difficult for countries like Spain to emerge from a prolonged recession that has pushed the unemployment rate to 27 percent.

Even before Mr. Bernanke mentioned the word “taper,” lending in Europe had been in a slump. In May, the most recent month for which data is available, loans to corporations excluding banks fell at an annual rate of 3.1 percent, according to European Central Bank data.

The central bank in early May cut its main interest rate to 0.5 percent, a record low. Last week, in an unprecedented step, Mr. Draghi assured investors that the rate would not rise above 0.5 percent for an extended period and could be cut further.

European political leaders are a long way from addressing the causes of the euro zone crisis and need all the help they can get from low interest rates. On Wednesday, European Union officials announced a plan to deal with failing banks that would include centralized decision making and an emergency fund. But the plan, considered essential to prevent bank failures from taking down entire nations, could face resistance from Germany and other countries wary of giving up control over their banks.

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News Analysis: A Fit of Pique on Wall Street

The temptation is not to take Wall Street’s truculence too seriously and treat it as an inevitable, but passing, reaction to a world with less easy money.

But if stocks and bonds keep declining, doubts about the Fed’s withdrawal could deepen, leading to a situation in which even the real economy suffers.

In a pivotal communication, the Fed on Wednesday clearly laid out the steps it would take to reduce the extraordinary stimulus it has injected into the financial system and economy since the financial crisis of 2008. It stressed it would withdraw its support only if the economy were strong enough. The Fed’s chairman, Ben S. Bernanke, sounding not unlike a soothing parent, even said the central bank would reverse course if it mistakenly pared back too soon.

Such placating words hardly satisfied investors. The benchmark Standard Poor’s 500-stock index dropped 2.5 percent on Thursday, its steepest one-day decline since November 2011, and ended the week down 2.1 percent. The 10-year Treasury bond also plunged in price, which pushed up its yield to 2.54 percent at the end of the week, capping a sharp run-up over the last month.

Wall Street finds itself in an uncomfortable place. Perhaps more than at any time since the crisis, it knows it must prepare for a world without the Fed’s largess, one that is also facing uncertainty about tightening credit in China and continuing debt woes in Europe. Of course, stocks and bonds were always going to sell off when it became evident that the Fed was changing course.

In the past, markets have panicked initially when investors anticipated a tightening of interest rate policy by the central bank. Prices soon recovered as investors realized a stingier central bank need not spell doom. In 1994, investors sold off in the face of a toughening of Fed policy, but stocks recovered and rallied in the next years. To the optimists, the week’s instability may have merely been the market wobbling as it tried to stand on its own two feet again.

“I think it’s very fair to describe what’s going on in the markets as very normal,” said David Bianco, an equities strategist at Deutsche Bank. “Normal for when there are big changes in interest rate policies.”

Though talk about withdrawing support unnerved some investors, it may turn out to be a necessary step to build further confidence, Mr. Bianco said. After several years of Fed support, investors are not quite sure whether the searing rally in stock prices since 2009 is entirely genuine. But if stocks recover now and keep climbing, the jibes that the markets are riding on a “sugar high” could lose credibility.

Stocks are vulnerable to a tightening of Fed policy when they are overvalued. But the corporations in the S. P. 500 are reporting historically strong profits.

“The second quarter is still estimated to be an all-time record,” said Howard Silverblatt, a senior analyst at Standard Poor’s. And because of those strong earnings, stocks do not look overvalued, he said. The companies in the S. P. 500 have a stock market value that is 15 times as large as their expected combined earnings for this year. That multiple is well below the 19 times that is the average for the last 25 years, Mr. Silverblatt said.

As strong as earnings might look, the stock market reacts negatively to any hint that profits may fall below expectations.

Stocks did recover a bit on Friday, with the S. P. 500 rising 4.24 points, or 0.3 percent, to 1,592.43, and the Dow Jones industrial average climbing 41.08 points, or 0.3 percent, to 14,799.40. But it is highly unlikely that the markets have seen the last of extreme volatility. The sell-off in the bond market has caused interest rates to rise, which could depress economic activity and weigh on corporate profits. Weakness in foreign economies could also take a toll on earnings. Seeing that coming, investors might very well dump stocks.

It is these crosswinds that have convinced some people that the Fed should have waited to talk about an exit until the economic signals at home and abroad looked stronger.

James B. Bullard, president of the Federal Reserve Bank of St. Louis, who is on the Fed committee that shapes monetary policy, dissented to the Fed’s statement on Wednesday and registered his disagreement with some of the committee’s decisions. On Friday, the St. Louis Fed took the somewhat unusual step of explaining his opposition at length in a news release, saying that Mr. Bullard thought the economy was not yet strong enough to start a stimulus withdrawal. That view is widely shared on Wall Street.

“Bullard is saying it’s important to look at economic conditions now — and they are fairly weak,” said Kenneth B. Petersen, a portfolio manager at Laffer Investments.

One area of the economy that investors will be following closely is housing. The Fed’s policies led to historically low mortgage rates, and a revival in house prices. But a rapid reversal in rates has taken place. House prices still look affordable on a historical basis, so the higher cost of borrowing may not hurt too much, said Michael Cudzil, a portfolio manager at Pimco. But he added, “This will create a little more of a headwind for the economy.”

Despite the Fed’s efforts to reassure the markets, it is still essentially leaving them to comfort themselves. And as with any unsteady recovery, the risk remains of a tumble or two before footing can be fully regained.

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Wall Street Slump Lingers

The Standard Poor’s 500-stock index was down 2.85 percent, or 32.19 points. The Dow Jones industrial average was off 258.08 points, or 2.36 percent, to close at 10655.30, and the Nasdaq composite index dropped 3.29 percent. The yield on the 10-year Treasury bond fell to 1.75 percent.

European markets fell after Asian stocks closed sharply lower.

Greece’s acknowledgment over the weekend that it would miss its deficit-reduction targets for this year and next, despite additional cuts in the public payroll, weighed on market sentiment, analysts at the French investment bank Crédit Agricole CIB wrote in a note.

Finance ministers from the 17 European Union nations that use the euro were meeting Monday in Luxembourg, but no decision was expected this week on whether to release the next installment of Greece’s bailout package.

The Purchasing Managers’ Index, a survey measuring economic activity in the euro zone, gave a dim outlook of the Continent’s economy. It registered at 48.5, its lowest measure in over two years. A figure of below 50 shows contraction. New orders fell to their lowest levels in 27 months. The only country in the euro zone to show any growth was Germany.

The worsening economic picture in Europe is driving down the euro, said Brian Dolan, chief currency strategist at, a unit of the trading firm Gain Capital. It dropped to $1.3281, its lowest level since January.

“The euro zone has no growth solution to their debt crisis, and whatever they do in terms” of establishing a rescue fund, he said, “it’s not going to be a long-term solution,” he said.

Investors are awaiting a meeting of the European Central Bank on Thursday, and many expect the bank to cut interest rates. Analysts say such action could push the euro lower.

The dollar gained against most major currencies, as traders moved out of relatively risky assets. Its price in Swiss francs rose to 0.9183, up from 0.9082 francs. But it fell to 76.67 yen, down from 77.06 yen.

Meanwhile, in the United States, a report from the Institute for Supply Management showed stronger growth in factories in September than had been expected. The index registered 51.6 points, showing expansion — a reading over 50 — for the 26th consecutive month. But the index was still lower than a year ago and new orders contracted slightly, hinting at continued troubles ahead.

Construction spending increased 1.4 percent in August, according to the Commerce Department, driven largely by gains in the public sector.

And General Motors, Ford and Chrysler reported increases in sales of new vehicles last month, one of few areas of sharp growth in the domestic economy.

The stock prices of airlines were driven sharply lower by general concern about the American economy and speculation that AMR, the parent company of American Airlines, may be headed for bankruptcy. The concern about AMR stemmed from a report that an unusually large number of pilots have retired in recent months, said Ray Neidl, an analyst with Maxim Group. AMR’s stock price was down over 33 percent to $1.98. Delta’s stocks were down 11 percent, US Airways Group’s stocks were down almost 16 percent and Alaska Air Group’s shares fell about 9 percent. Airlines share prices are particularly sensitive to fears of economic downturn, because air travel drops sharply in times of economic strain.

Global equities, as tracked by the MSCI World Index, are down 14 percent so far this year, with many major indexes just concluding their worst quarterly drops since the world’s banks were teetering on the brink in 2008.

The broad American market, as measured by the S. P. 500, was down 10 percent in the first three quarters of 2011.

On Monday, the Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 1.9 percent, while the FTSE 100 index in London gave up 1 percent. The DAX in Frankfurt fell 2.3 percent.

Banks led the declines in Europe. Shares of Dexia, a French-Belgian lender that has struggled since it was bailed out in 2008, had fallen more than 9 percent after Moody’s Investors Service said it was considering a downgrade of the bank’s credit ratings. Investors were concerned about the bank’s exposure to Greek debt.

Asian shares were lower across the board. The Sydney market benchmark index fell 2.8 percent. In Hong Kong, the Hang Seng index closed down 4.4 percent.

Markets in mainland China and South Korea were closed for holidays.

In Japan, the Nikkei 225 stock average closed 1.8 percent lower despite news that business confidence had improved somewhat during the third quarter as the country continued its recovery from the devastating earthquake and tsunami that struck on March 11.

The Bank of Japan’s Tankan, a survey that tracks business sentiment, found confidence among large manufacturers as it rose to plus 2 in September, from minus 9 in June. Though the number remains weak, a reading in positive territory indicates that optimists outweigh pessimists.

American crude oil futures for November delivery were down 2.7 percent, at $76.93 a barrel. Comex gold contracts for December delivery were up 1.87 percent, at $1,654.20 an ounce.

David Jolly, Stephen Castle and Bettina Wassener contributed reporting.

This article has been revised to reflect the following correction:

Correction: October 3, 2011

Because of an editing error, an earlier version of this article misstated the price of oil. It is trading slightly above $77, not $777.

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Stocks Gain for Third Day on Late Surge

With a late-day surge, all of the sectors of the Standard Poor’s 500-stock index closed higher, led by a nearly 3 percent rise in financial stocks, capping off a day that wavered between modest gains and losses.

It was the third consecutive session that the major indexes had pushed ahead, partly as investors scooped up stocks that had become cheaper after recent sell-offs. Gold futures fell more than 5 percent, or more than about $100 an ounce, on the Comex in New York, and prices of the benchmark 10-year Treasury bond fell.

Some investors have been betting on the likelihood of more stimulus from the Federal Reserve, whose chairman, Ben S. Bernanke, will speak at the Fed’s symposium at Jackson Hole, Wyo., on Friday. Mr. Bernanke outlined stimulus options at the same meeting in 2010 in response to the economic slowdown.

At the close of trading, the S. P. was up 15.25 points, or 1.3 percent, at 1,177.60. The Dow Jones industrial average was up 143.95 points, about 1.3 percent, at 11,320.71. The Nasdaq composite index was up 21.63 points, or 0.88 percent, at 2,467.69.

The rally in stocks eased demand for bonds. The Treasury’s 10-year note fell 1 7/32, to 98 16/32. The yield rose to 2.29 percent, from 2.16 percent late Tuesday.

“You are seeing a lot of people, rightly or wrongly, sitting on the sidelines until they see what Bernanke says in Jackson Hole,” said Brian Lazorishak, portfolio manager at Chase Investment Counsel, before the day’s final kick.

“People are adopting a wait-and-see attitude,” he added.

The financial sector was led by Bank of America, up about 11 percent at $6.99.

Bloomberg News reported that the bank had sent a memo to employees dismissing speculation that it was considering a merger with JPMorgan Chase, and described as “just wrong” a report that it needed to raise as much as $200 billion.

Gold, which sagged sharply on Tuesday only to rise in Asian trading, fell further on the Comex exchange. It was down $104.20 to $1,754.10 an ounce for the August contract. The metal had been used as a safe haven in recent market volatility and risen to record nominal highs, and some analysts saw Wednesday’s decline as a technical reversal.

Jeffrey Nichols, the managing director of the American Precious Metals Advisors, said that the recent run-up in gold had been “so large in magnitude and fast” that “to have a significant correction here really makes sense.”

“Some of the rally was a function of speculative demand by short-term-oriented institutional traders,” he said, adding that the consequence would be for them to sell, take profits and move on to other instruments. But he said that the long-term economic outlook was basically unchanged.

On Wednesday, the Commerce Department reported that overall orders for durable goods rose 4 percent last month, the biggest increase since March. But a category that tracks business investment plans fell 1.5 percent, the biggest drop in six months.

Analysts noted that, considering recent talk of another recession, it would take more than one economic data point to convince investors that the economy was on solid footing. But Abigail Huffman, director of research at Russell Investments, added that some of Wednesday’s early gains may have been a result of the durable goods numbers and the market’s momentum from the previous day.

Stocks in Europe rose as some investors bet that the Federal Reserve would act soon to strengthen the economy and that the sharp stock market drops earlier this month were overdone.

The Euro Stoxx 50 index closed 1.8 percent higher in Europe, while Germany’s DAX index increased 2.7 percent and France’s CAC 40 index rose 1.8 percent.

Stock markets in Asia slipped as investors took in the downgrade by Moody’s Investors Service of its rating on Japanese government debt.

The Nikkei 225-stock index ended down 1.1 percent at 8,629.61 points. Similarly, the yen remained persistently strong in the international currency markets, hovering at about 76.60 yen per United States dollar.

In Hong Kong, the Hang Seng index was 1 percent lower by midafternoon, the Straits Times index in Singapore fell 0.4 percent, and in India, the Sensex was down 0.8 percent by the afternoon.

Julia Werdigier and Bettina Wassener contributed reporting.

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Reuters Breakingviews: S.&P. States the Obvious

S. P.’s shift on Monday to a negative outlook on the country’s AAA credit shouldn’t come as any surprise. But it should provide a reality check.

S. P. doubts that President Obama and Congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which it believes could push the nation’s debt load above 90 percent of gross domestic product by 2013. And even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future.

Markets, which should be well acquainted with America’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 percent while the yield on the 30-year Treasury bond spiked as much as 0.11 of a percentage point. However brief, there’s a chance such a jolt could help refocus the myopic obsession of many investors on short-term performance with the somewhat more distant but still real challenges.

Austan Goolsbee, a White House economic adviser, called S. P.’s decision a political judgment. But the heart of the rating firm’s reasoning is that without decisive action, America will soon look measurably sicker in financial terms than other AAA-rated countries and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultralow interest rates make doomsday predications seem abstract, even to supposedly rational market players. That’s even more true inside the Beltway, where budget dogma on both sides of the aisle still persists instead of a pragmatic assessment of revenue and spending — and the communication to voters of the hard realities — that should be under way.

S. P. and its peers would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S. P. is right to up the ante. Any lawmakers living in Washington’s spendthrift past should perhaps heed the lyrics of “Once Upon a Time,” the song one participant reported hearing while waiting on hold for the credit rater’s conference call: “How we always laughed, as though tomorrow wasn’t there.”

The ‘Fair’ Price for Oil

The rulers of Saudi Arabia have long thought they could tell what a “fair” price for oil should be. Before the unrest on its borders, the country repeated its long-held view that the figure was $70 to $80 a barrel.

A recent pledge for a huge increase in spending on everything from housing to the religious police, however, is pushing Saudi Arabia to its largest budget. No wonder it now thinks that the market is “oversupplied,” as Saudi’s oil minister, Ali al-Naimi, said this weekend. What’s “fair” may prove more costly.

The kingdom will need an average oil price of at least $80 a barrel to balance its budget during 2011, according to various estimates. This is one of the highest break-even prices within the bloc of six Persian Gulf nations.

Supply disruptions in Libya, a country that produces a type of sweet crude that Saudi Arabia cannot easily replace, and the threat of similar problems erupting elsewhere, have pushed prices well above Saudi Arabia’s needs, to around $120 a barrel for Brent crude and $110 for West Texas Intermediate crude.

It is not in Saudi Arabia’s interests to keep prices so high that they threaten the global economy, irk Western allies and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and the kingdom wants to avoid taking on new debt or eating into its foreign reserves, then it must adjust its view of what’s fair.

The previous margin between the country’s break-even requirements and its stated price target suggests a fair price closer to $90 to $100 a barrel. But even if spending comes down later, higher price expectations will be supported by another domestic factor: the country’s explosive growth in domestic oil consumption.

Speculation has long swirled about the longevity of Saudi Arabia’s reserves. Record spending and its own oil consumption, which amounts to about 15 percent of production by some estimates, suggest that domestic issues will probably force it to shift its consideration of what’s “fair” to something closer to $100 a barrel. Importers should take note.


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