Wall Street Rally Quickly Fizzles

While markets were lower, by midday it was not the terrible day that some had expected after a global dive the day earlier.

United States employment growth accelerated more than expected in July as private employers stepped up hiring.  The key nonfarm payrolls number rose by 117,000, the Labor Department said, above market expectations for a gain of  85,000. And the unemployment rate dipped to 9.1 percent from 9.2 percent in June.  

“There’s still a recovery but it’s teetering on the edge,” said Robin Marshall, director of investment management at Smith Williamson in London. More than two years into a recovery, he said, much stronger labor data should be expected.

Though the major indexes on Wall Street were 1 percent higher in at the start of trading, all quickly turned negative. A day after a 512-point plunge, the Dow Jones industrial average was down a further 94.87 points, or 0.83 percent, to 11,288.81 in morning trading. The broader Standard Poor’s 500-stock index was down 1.07 percent and the Nasdaq composite was down 1.54 percent.

The Euro Stoxx 50 index zigzagged: In afternoon trading, it was down 0.67 percent, after reversing early losses and shooting up 1.6 percent. The DAX in Frankfurt moved briefly into positive territory then fell again, down 2.2 percent. The French CAC 40 was off 0.55 percent.

“It’s an encouraging figure but it’s hardly booming,” said Ryan Sweet, an economist at Moody’s, about the number of new jobs created. “Right now, the recovery is lacking vigor.”

“The only good thing you can say about the July payroll employment report is that it is not as bad as the Street had feared,” said Steven Ricchiuto, chief economist of Mizuho Securities, said in a research note.

In addition, slowing manufacturing and service activity and the prospect of spending cuts to reduce debt loads and balance budgets are raising questions about where future growth will come from.

Investment banks have been cutting their forecast for United States growth. ING lowered its to 1.8 percent this year from 2.3 percent and to 2.6 percent next year from 2.8 percent.

Luc Van Heden, chief strategist at KBC Asset Management in Brussels, said the prospect of a “double dip” recession in the United States was 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.”

Chancellor Angela Merkel of Germany and President Nicholas Sarkozy of France were interrupting their vacations Friday to hold a telephone conference on the euro zone debt crisis. Mr. Sarkozy’s office also confirmed that he would speak by telephone with Prime Minister José Luis Rodríguez Zapatero of Spain to discuss market turmoil. There were no immediate details about the discussion.

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 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 on Thursday.

The E.C.B. bought bonds of some smaller euro area countries, but not those of Italy and Spain, whose mounting troubles have been a focus for investors. 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.

“One assumes the E.C.B. doesn’t want to give governments a free pass and wants them to make appropriate structural reforms first,” analysts at Deutsche Bank said in a research note. “The longer they leave it to intervene aggressively, the more they may actually have to do as more and more investors flee the euro government bond arena.”

This week, Germany, the biggest economy in Europe, saw its 10-year bond yields drop below the inflation rate of 2.5 percent for first time since the 1960s.

This suggests that investors were willing to sacrifice a return on their investment to hold the least risky bonds in Europe.

Matthew Saltmarsh reported from London and Bettina Wassener reported from Hong Kong.

Article source: http://feeds.nytimes.com/click.phdo?i=299f698a941601e6b4f510890b978a23