By: Zain Shah
Analyst – Delphus Xinhua Finance Corp.
You have to go back four years to 2006, to find economic policymakers in the West in an upbeat, confident mood.
Since then they have been battered by waves, ranging from collapsing banks to frozen financial markets, culminating in 2009 with the first drop in world annual output since the 1930s depression.
During 2010 there has been a return to overall global growth.
But skeptics say the world's politicians are simply papering over the cracks, and the big fault lines in the global economy remain.
China's big trade surplus and fixed currency system appear to be unreformed, Americans continue to spend money they do not have, while in parts of Europe the situation is still worsening with the International Monetary Fund (IMF) being called in to provide emergency loans, first in May to Greece, and then to the Irish Republic.
Ghost towns
Supporters of the banking status quo insist that the complex multi-purpose banks and their financial derivatives trading desks are necessary to ensure that cash is invested in the most productive places in the world.
That particular argument wilts somewhat if you travel to Ireland.
While many parts of the world desperately need basic infrastructure, the Irish Republic simply has far too much of it. Vast so-called ghost estates built in the boom times now lie empty.
According to reporter Henry McKean, "Ireland won the lotto and everyone wanted a property portfolio".
Houses were built in isolated parts of the country.
"County Leitrim in North West Ireland has 21 ghost estates and an oversupply of 401%," Mr McKean says.
The money to fuel the Irish property boom came mostly from the banks. But were they solely responsible for the rush to build new homes across the Irish Republic?
Local councilor John McCarten believes others must share the blame.
"Councilors and planners are to blame, but you also have to acknowledge that there was blind greed on behalf of builders and landowners around the country," he says.
The blame game
Critics of Europe's single currency system say the euro was at least partly to blame.
Ireland was unable to dampen its property boom by setting its own interest rates because its rates are set by Europe's Central Bank, which has to consider conditions across 16 different nations.
Some wondered if the answer might be to allow the stronger euro economies to split from the weaker ones, allowing countries such as Ireland more economic freedom, while many in Germany became increasingly angry that they were footing much of the bill to rescue Ireland, as well as Greece which was bailed out earlier in the year.
But Germany's leader, Chancellor Angela Merkel, reiterated her commitment to the euro.
"If the euro fails, Europe fails. But if we avert this danger, the euro and Europe will come out stronger than before," she declared.
Even in the boom times, most governments in Western Europe spent more than they collected in taxes.
Now, after a severe recession, public finances everywhere are stretched and in the UK, a new Conservative-Liberal Democrat coalition government announced sharp spending cuts in the coming years.
The age of austerity had arrived.
Banking on reform
But what about reforming the system that produced the boom and bust?
The big banks were targeted by US President Barack Obama in January as he upped the rhetoric by announcing a new levy to claw back money from institutions which had been bailed out during the financial crisis.
"My commitment is to recover every single dime the American people are owed and my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people," he said.
Then bank shares tumbled after President Obama turned for advice to the former US central bank boss, the 83-year-old Paul Volcker.
The President embraced Mr Volcker's view that banks holding cash deposits from ordinary Americans should be banned from so-called proprietary trading, where the banks take big bets in financial markets.
"I'm proposing a simple and common sense reform, which we're calling the Volcker rule," President Obama announced.
"Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers."
Some reform of the banks was eventually passed in Congress with the Dodd-Frank Wall Street Reform Act, although the Volcker rule was watered down.
So did the reforms go far enough?
Peter Morici at the University of Maryland thinks not and says that "until we separate the banks from the investment banks, so that banking is again banking, as opposed to trading, the banks are going to be much more interested in trading than banking, simply because they can make a lot more money that way.
"Goldman Sachs is not interested in America, Goldman Sachs is interested in Goldman Sachs."
But Goldman Sachs has clever people and are doing very clever things and at the end of the year, they make a profit. So what is wrong with that?
"Well, they did clever enough things to thrust the entire global economy into the great abyss," says Mr Morici.
"Bank of America and Morgan Stanley made profits every day on trading in the last quarter - they didn't have a negative day," he says.
"Unless you think traders are perfect there is something wrong with the information that they are getting," he maintains.
However, when somebody gains, somebody else is losing.
"Americans are losing. The ordinary stock holder is losing. They are not creating wealth on Wall Street, they are trading on it," Mr Morici asserts.
"If you are looking for aristocrats that should be beheaded, they are probably on Wall Street, though I wouldn't do it using a guillotine, I'd just take their toys away."
Chinese conundrum
America has lost many manufacturing jobs and the US unemployment rate is still nearly 10%.
Mr Morici is pretty angry about that too. "Certainly, there are things that China should be exporting to the US because of its cheap labour," he says.
He believes, however, that it would not be cost effective to make certain things in China, but for the fact that its currency is 40% undervalued.
"The idea behind free trade is that it be in two directions so that we each get to specialise in what we do best and we grow from there," he says.
"But China is exporting products where it has a comparative advantage and protecting those where it doesn't."
He points out that China has enough surplus labour to replace all the manufacturing workers in Europe, the US, Australia, New Zealand and Mexico.
"Do we really want to live in a world where everything is made in China and the rest of us just borrow money from the Chinese?" he asks.
Jim O'Neill from Goldman Sachs has an alternative perspective.
He is not responsible for the company's trading tactics - his job is to forecast accurately and he has a great record of correctly predicting the rise of China and the rebound of the euro after earlier troubles.
Mr O'Neill says the US trade deficit with China is now falling sharply.
"The US current account deficit year-to-date is running about half what it was before the crisis and the Chinese trade surplus is not much more than 3% of GDP."
He believes, however, that due to the rather emotional atmosphere in Washington, such data seems to be completely ignored by Congress.
"It is slightly scary because they are talking about things which are a little bit out of date," he says.
"I've come across people that quite bizarrely - in my judgement - blame China for the loss of every manufacturing job in the United States in the past 20 years and that is ridiculous," he says.
"If you look at some of the big companies that have grown so strongly in the US in the past 20 years, a lot of it has been because of the ability of the US to import from China - WalMart being a particularly good example," he explains.
"The unemployment situation linked to the US economic cycle, and the weakness of the past two years, is very severe and of course it is understandable that not only US politicians, but also workers, blame other people - and China seems to be a convenient scapegoat," he says.
There is also criticism that job losses have gone too far in America because the Chinese currency is not at a fair "market clearing" value, but Mr O'Neil has no sympathy with that viewpont.
"The Chinese currency has risen by over 20% the past five years. Chinese import growth is rising at over 40% - in the year to date, Chinese import growth has been close to $400bn.
Many people would argue that such figures are mainly due to the import of raw materials.
"No it is not," says Mr O'Neil.
"Look at countries that are really good at exporting, like Germany.
Some of Germany's top companies are employing people on overtime purely because of exports to China."
He points out how many branded goods companies around the world, Louis Vuitton being a particularly good example, are literally being transformed by the strength of Chinese demand and Chinese imports.
Eternal hope
The spotlight was diverted from the big banks for a while when an explosion at a BP oil rig in the Gulf of Mexico led to 11 deaths and created the biggest offshore oil spill in US history.
BP set aside $40bn to cover the cost.
Google had its own issues with Beijing - this time over censorship. It moved its China web search to its Hong Kong site in March.
And the hopes of the US seed firm Monsanto to introduce genetically modified crops into India were dashed, when the Indian government blocked the plan after protests from environmental groups and some scientists.
The US stock market overall rose around 10% in the past year, although historically American share prices have made no overall gains at all in the past 11 years.
By contrast, gold has soared over that period, leaping from $300 an ounce to $1,400, with this year's rise for gold being 25%.
There is always money to be made somewhere in the global economy.
Wednesday, January 12, 2011
Tuesday, January 11, 2011
2011: A YEAR OF SUBSTANTIAL ECONOMIC RISKS
By: Zain Shah
Analyst – Delphus Xinhua Finance Corp.
Economic concerns rank high as we enter 2011, though the problems vary in different parts of the world.
Robert Ward, a director with the Economist Intelligence Unit, talks about risks that keep him awake at night and insists "they should keep you awake at night as well". One major risk facing the world economy at the moment is related to a slow transition of economic power from the West to the East.
The rise of the emerging world, in particular China, and the coinciding weakening of the West, in particular the US, has resulted in a "collapse of consensus of how the global monetary system should be run", Mr. Ward continues.
In simple terms, China favors tight controls of the economy whereas the US prefers free market solutions, "hence the volatility here", he says.
The tension has resulted in a currency war, where major economies seek to devalue their own currency in order to boost their own competitiveness; China through central controls, the US by way of "printing money on a scale we've never seen before".
In turn, this has made life tough for small countries, which have responded by introducing capital controls. Add a high risk of deflation in the US, which could result in more quantitative easing (essentially printing money) and thus more pressure towards currency wars and capital controls, and there are reasons to be concerned about whether the world economy can cope, Mr. Ward reasons.
Asian inflation
An additional risk comes in the form of inflationary pressure in China and elsewhere in Asia.
"There's a high risk that inflation in China will get out of hand," predicts Mr. Ward.
MF Global senior analyst Edward Meir says inflation is a threat across the region. He warns that "central banks, particularly in Asia, will have to step up the pace of tightening in order to stave off inflationary pressures".
And if the response is monetary tightening, reasons Mr. Ward, the result could be a slowdown in the Chinese economy so severe that it has a negative impact on the rest of the world.
"Last year, the wealth that China added to the economy is bigger than Ireland, Greece and Portugal combined," he says.
At home, meanwhile, Beijing may want to deflate the ballooning housing market, thus threatening the finances of many in the vast middle class.
So, both for China and the rest of Asia, the key goals must be "keeping inflation under control and ensuring that rapid capital inflows do not lead to macroeconomic imbalances and/or asset price bubbles that might in time jeopardize financial stability", according to Capital Economics.
"The internal effects of China coming off the rail don't bear thinking about," the EIU's Mr. Ward says.
European woes
With Greece and Ireland having received multi-billion euro-loans to bolster their economies, and amidst much concern about Portugal's ability to cope without assistance, many fear there could be even worse to come - especially if Spain's troubles worsen.
"The European crisis is yet another source of concern for us," says Mr. Meir, and Mr. Ward agrees.
"Spain is the really big one, and it is really sick as well," he says.
"If Spain wobbles and collapses, it'll be very bad news for everyone, not just in Europe but all over the world," reasoning that it could result in the collapse of the euro.
"If the euro did collapse, it would make Lehman Brothers look like a tea party.
"It could tip the euro zone into a depression."
A year of austerity
Major macro economic problems in the US, Asia and Continental Europe do little to lift the spirit in the UK, where all eyes are on the economy.
Inflation is a big worry here, with prices rising while wages fall or stay the same.
"The things that are going up are essentials like utility bills, food and clothes," says Howard Archer, chief economist at IHS Global Insight.
And BGC Partners strategist Howard Wheeldon agrees, predicting "a grim year for consumers".
Add to that the sting of swingeing government spending cuts - in the UK and other Western countries - and it becomes clear that the year ahead will be difficult.
"One of the dangers for 2011 is the risk of political damage as governments use blunt fiscal austerity measures to reduce deficits," reason Redmayne-Bentley's stockbrokers and investment managers.
"That could choke off recovery and result in a year when a rich world struggles with a weak and jobless recovery, and an emerging world growing four times as fast."
Analyst – Delphus Xinhua Finance Corp.
Economic concerns rank high as we enter 2011, though the problems vary in different parts of the world.
Robert Ward, a director with the Economist Intelligence Unit, talks about risks that keep him awake at night and insists "they should keep you awake at night as well". One major risk facing the world economy at the moment is related to a slow transition of economic power from the West to the East.
The rise of the emerging world, in particular China, and the coinciding weakening of the West, in particular the US, has resulted in a "collapse of consensus of how the global monetary system should be run", Mr. Ward continues.
In simple terms, China favors tight controls of the economy whereas the US prefers free market solutions, "hence the volatility here", he says.
The tension has resulted in a currency war, where major economies seek to devalue their own currency in order to boost their own competitiveness; China through central controls, the US by way of "printing money on a scale we've never seen before".
In turn, this has made life tough for small countries, which have responded by introducing capital controls. Add a high risk of deflation in the US, which could result in more quantitative easing (essentially printing money) and thus more pressure towards currency wars and capital controls, and there are reasons to be concerned about whether the world economy can cope, Mr. Ward reasons.
Asian inflation
An additional risk comes in the form of inflationary pressure in China and elsewhere in Asia.
"There's a high risk that inflation in China will get out of hand," predicts Mr. Ward.
MF Global senior analyst Edward Meir says inflation is a threat across the region. He warns that "central banks, particularly in Asia, will have to step up the pace of tightening in order to stave off inflationary pressures".
And if the response is monetary tightening, reasons Mr. Ward, the result could be a slowdown in the Chinese economy so severe that it has a negative impact on the rest of the world.
"Last year, the wealth that China added to the economy is bigger than Ireland, Greece and Portugal combined," he says.
At home, meanwhile, Beijing may want to deflate the ballooning housing market, thus threatening the finances of many in the vast middle class.
So, both for China and the rest of Asia, the key goals must be "keeping inflation under control and ensuring that rapid capital inflows do not lead to macroeconomic imbalances and/or asset price bubbles that might in time jeopardize financial stability", according to Capital Economics.
"The internal effects of China coming off the rail don't bear thinking about," the EIU's Mr. Ward says.
European woes
With Greece and Ireland having received multi-billion euro-loans to bolster their economies, and amidst much concern about Portugal's ability to cope without assistance, many fear there could be even worse to come - especially if Spain's troubles worsen.
"The European crisis is yet another source of concern for us," says Mr. Meir, and Mr. Ward agrees.
"Spain is the really big one, and it is really sick as well," he says.
"If Spain wobbles and collapses, it'll be very bad news for everyone, not just in Europe but all over the world," reasoning that it could result in the collapse of the euro.
"If the euro did collapse, it would make Lehman Brothers look like a tea party.
"It could tip the euro zone into a depression."
A year of austerity
Major macro economic problems in the US, Asia and Continental Europe do little to lift the spirit in the UK, where all eyes are on the economy.
Inflation is a big worry here, with prices rising while wages fall or stay the same.
"The things that are going up are essentials like utility bills, food and clothes," says Howard Archer, chief economist at IHS Global Insight.
And BGC Partners strategist Howard Wheeldon agrees, predicting "a grim year for consumers".
Add to that the sting of swingeing government spending cuts - in the UK and other Western countries - and it becomes clear that the year ahead will be difficult.
"One of the dangers for 2011 is the risk of political damage as governments use blunt fiscal austerity measures to reduce deficits," reason Redmayne-Bentley's stockbrokers and investment managers.
"That could choke off recovery and result in a year when a rich world struggles with a weak and jobless recovery, and an emerging world growing four times as fast."
Thursday, July 1, 2010
Dell's declines lead UBS analyst to raise stock's rating
The market hasn't been kind to Dell Inc. of late, with its stock down almost 26% over the last two months, but UBS analyst Maynard Um believes that the recent sell-off has created an opportunity for the investors interested in the world's No. 3 PC company.
On Thursday, Um raised his rating on Dell's stock to buy from neutral, saying he continues to believe Dell will benefit from an increase in corporate PC spending that should start in the second half of this year and continue into 2011. Um also said that Dell is less likely to suffer sales declines from softness in the consumer PC market than other computer makers.
Um's upgrade comes a week after Dell (DELL 12.01, -0.05, -0.42%) met with financial analysts to say the company is focused on improving its earnings and diversifying its business operations. Um is the only analyst to raise his rating on Dell's stock over the last few months.
Since Dell's analyst meeting, the company's shares have fallen almost 15%, which Um said has created a "compelling opportunity" for the company's stock.
Um said "market growth dynamics", such as strong demand from Dell's corporate customer base, remains strong and should help Dell going into next year.
"Concern over PC industry softness [is] being driven more by the consumer rather than the enterprise," Um said, in a research note. "Enterprise upgrades are becoming more of a necessity."
Um said Dell, with only 22% of its business coming from the consumer market, and just 20% from Europe, "should be better positioned and buffered against any potential consumer weakness."
Despite Um's upgrade, investors didn't jump on the Dell bandwagon Thursday. The company's stock remained near its breakeven point of $12.06 a share as the overall tech sector slumped along with the broader market.
Even though Um was mostly upbeat about Dell's potential, he still remained a bit conservative about the company. Um cut his price target on Dell's stock to $15.50 a share from $17.50, and also lowered his 2011 fiscal-year forecast on Dell to a profit of $1.24 a share on $62.7 billion in revenue from an earlier forecast of $1.28 a share and sales of $63.1 billion.
Um said he lowered his forecasts on Dell to account for possible share loss in the PC marker and limited gross-margin growth.
On Thursday, Um raised his rating on Dell's stock to buy from neutral, saying he continues to believe Dell will benefit from an increase in corporate PC spending that should start in the second half of this year and continue into 2011. Um also said that Dell is less likely to suffer sales declines from softness in the consumer PC market than other computer makers.
Um's upgrade comes a week after Dell (DELL 12.01, -0.05, -0.42%) met with financial analysts to say the company is focused on improving its earnings and diversifying its business operations. Um is the only analyst to raise his rating on Dell's stock over the last few months.
Since Dell's analyst meeting, the company's shares have fallen almost 15%, which Um said has created a "compelling opportunity" for the company's stock.
Um said "market growth dynamics", such as strong demand from Dell's corporate customer base, remains strong and should help Dell going into next year.
"Concern over PC industry softness [is] being driven more by the consumer rather than the enterprise," Um said, in a research note. "Enterprise upgrades are becoming more of a necessity."
Um said Dell, with only 22% of its business coming from the consumer market, and just 20% from Europe, "should be better positioned and buffered against any potential consumer weakness."
Despite Um's upgrade, investors didn't jump on the Dell bandwagon Thursday. The company's stock remained near its breakeven point of $12.06 a share as the overall tech sector slumped along with the broader market.
Even though Um was mostly upbeat about Dell's potential, he still remained a bit conservative about the company. Um cut his price target on Dell's stock to $15.50 a share from $17.50, and also lowered his 2011 fiscal-year forecast on Dell to a profit of $1.24 a share on $62.7 billion in revenue from an earlier forecast of $1.28 a share and sales of $63.1 billion.
Um said he lowered his forecasts on Dell to account for possible share loss in the PC marker and limited gross-margin growth.
Global Manufacturing Shows Weakening From China to Europe, U.S. -
Manufacturing growth from China to the euro region and the U.S. slowed in June, suggesting the global export-led recovery is losing strength.
In China, manufacturing growth slowed more than economists forecast, and a gauge of factory output in the 16-member euro region weakened for a second month, two surveys showed. The U.S. Institute for Supply Management’s manufacturing index fell more than economists forecast to 56.2 from 59.7 in May.
Asian, U.S. and European stocks fell on concern that a Chinese economic slowdown combined with deepening budget cuts from Spain to the U.K. may undermine the global recovery. While the Organization for Economic Cooperation and Development on May 26 raised its global growth forecast for this year, it said that a “boom-bust scenario cannot be ruled out” in some countries.
“We expect data to soften from here,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “It’s going to raise some question marks about the outlook, about a double dip. It’s an environment with significant downside risks.”
The MSCI Asia Pacific Index dropped 1 percent today. The Euro STOXX 50 Index was down 1.4 percent at 3:01 p.m. in London. The Standard & Poor’s 500 Index has shed 4.2 percent over the past month, bringing its year-to-date decline to 8.1 percent.
The economy of the OECD’s 30 members will grow 2.7 percent this year instead of a previously projected 1.9 percent, the Paris-based group said on May 26. China may expand more than 11 percent this year compared with growth of 3.2 percent in the U.S. and 3 percent in Japan, according to the OECD. The euro- region economy may expand 1.2 percent, it said.
G-20 Statement
Limited demand in advanced economies has left the world reliant on emerging markets, led by China, to drive a recovery that Group of 20 leaders this week described as “uneven and fragile.” Signs of a slowdown as the Chinese government clamps down on property speculation and the effects of its stimulus package fade have unsettled investors.
Baosteel Group Corp., China’s second-biggest steelmaker, this week scaled back its growth plans, cutting its target for capacity in 2012 by 38 percent and forecasting a “bumpy, unpredictable and long” global recovery.
China’s economic growth will slow over the second half of this year, which is welcome news “given the slight uptick in inflation recently,” Stephen Roach, Morgan Stanley’s Asia chairman, said in Beijing yesterday. A pace of 8 percent or 9 percent would be “much more sustainable than the overheated growth rate in the first quarter,” he said.
ISM Index
In the U.S., the Tempe, Arizona-based ISM’s gauge dropped beyond the median forecast of 59 in a Bloomberg News survey of 81 economists. More Americans unexpectedly applied for jobless benefits last week, Labor Department figures showed today in Washington.
An index of U.K. manufacturing also declined last month. The gauge by Markit Economics dropped to 57.5 from a 15-year high of 58, signaling slower expansion.
Japan’s Tankan index of manufacturing sentiment climbed more than economists forecast. Bank of Japan board member Yoshihisa Morimoto said in Tokyo today that the economy has yet to achieve a “full-fledged” recovery and there are still “many risk factors” at home and abroad.
German Investors
In the euro region, a recovery is also showing signs of weakening. German investor confidence plunged in June and euro- region unemployment rose to 10.1 percent in April, the highest in almost 12 years. In France, consumer confidence weakened for a fifth straight month in June.
“Europe has shown signs of life,” Carl-Peter Forster, chief executive officer at Tata Motors Ltd., India’s largest truckmaker and owner of Jaguar, told Bloomberg Television in an interview yesterday. “The recovery is somewhat brittle.”
With households holding back spending and governments cutting budget deficits, European companies have been reliant on exports to boost earnings. The euro has shed 14 percent against the dollar this year, making goods more competitive abroad.
Siemens AG, Europe’s largest engineering company, on June 29 predicted “continued strong profitability” in its third quarter on reviving demand. Pirelli & C. SpA CEO Francesco Gori said on June 24 that the euro’s weakness against the dollar had a “moderately positive” impact on the Italian tiremaker’s second-quarter revenue.
An index of euro-area services, which will be released on July 5, probably declined to 55.4 in June from 56.2 in the previous month. A composite index of manufacturing and services probably fell to 56 from 56.4.
In China, manufacturing growth slowed more than economists forecast, and a gauge of factory output in the 16-member euro region weakened for a second month, two surveys showed. The U.S. Institute for Supply Management’s manufacturing index fell more than economists forecast to 56.2 from 59.7 in May.
Asian, U.S. and European stocks fell on concern that a Chinese economic slowdown combined with deepening budget cuts from Spain to the U.K. may undermine the global recovery. While the Organization for Economic Cooperation and Development on May 26 raised its global growth forecast for this year, it said that a “boom-bust scenario cannot be ruled out” in some countries.
“We expect data to soften from here,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “It’s going to raise some question marks about the outlook, about a double dip. It’s an environment with significant downside risks.”
The MSCI Asia Pacific Index dropped 1 percent today. The Euro STOXX 50 Index was down 1.4 percent at 3:01 p.m. in London. The Standard & Poor’s 500 Index has shed 4.2 percent over the past month, bringing its year-to-date decline to 8.1 percent.
The economy of the OECD’s 30 members will grow 2.7 percent this year instead of a previously projected 1.9 percent, the Paris-based group said on May 26. China may expand more than 11 percent this year compared with growth of 3.2 percent in the U.S. and 3 percent in Japan, according to the OECD. The euro- region economy may expand 1.2 percent, it said.
G-20 Statement
Limited demand in advanced economies has left the world reliant on emerging markets, led by China, to drive a recovery that Group of 20 leaders this week described as “uneven and fragile.” Signs of a slowdown as the Chinese government clamps down on property speculation and the effects of its stimulus package fade have unsettled investors.
Baosteel Group Corp., China’s second-biggest steelmaker, this week scaled back its growth plans, cutting its target for capacity in 2012 by 38 percent and forecasting a “bumpy, unpredictable and long” global recovery.
China’s economic growth will slow over the second half of this year, which is welcome news “given the slight uptick in inflation recently,” Stephen Roach, Morgan Stanley’s Asia chairman, said in Beijing yesterday. A pace of 8 percent or 9 percent would be “much more sustainable than the overheated growth rate in the first quarter,” he said.
ISM Index
In the U.S., the Tempe, Arizona-based ISM’s gauge dropped beyond the median forecast of 59 in a Bloomberg News survey of 81 economists. More Americans unexpectedly applied for jobless benefits last week, Labor Department figures showed today in Washington.
An index of U.K. manufacturing also declined last month. The gauge by Markit Economics dropped to 57.5 from a 15-year high of 58, signaling slower expansion.
Japan’s Tankan index of manufacturing sentiment climbed more than economists forecast. Bank of Japan board member Yoshihisa Morimoto said in Tokyo today that the economy has yet to achieve a “full-fledged” recovery and there are still “many risk factors” at home and abroad.
German Investors
In the euro region, a recovery is also showing signs of weakening. German investor confidence plunged in June and euro- region unemployment rose to 10.1 percent in April, the highest in almost 12 years. In France, consumer confidence weakened for a fifth straight month in June.
“Europe has shown signs of life,” Carl-Peter Forster, chief executive officer at Tata Motors Ltd., India’s largest truckmaker and owner of Jaguar, told Bloomberg Television in an interview yesterday. “The recovery is somewhat brittle.”
With households holding back spending and governments cutting budget deficits, European companies have been reliant on exports to boost earnings. The euro has shed 14 percent against the dollar this year, making goods more competitive abroad.
Siemens AG, Europe’s largest engineering company, on June 29 predicted “continued strong profitability” in its third quarter on reviving demand. Pirelli & C. SpA CEO Francesco Gori said on June 24 that the euro’s weakness against the dollar had a “moderately positive” impact on the Italian tiremaker’s second-quarter revenue.
An index of euro-area services, which will be released on July 5, probably declined to 55.4 in June from 56.2 in the previous month. A composite index of manufacturing and services probably fell to 56 from 56.4.
Recovery Worries
Stocks, commodities and the dollar slumped and Treasuries gained as data on manufacturing, jobless claims and home sales fueled concern the economic recovery is faltering.
The Standard & Poor’s 500 Index fell for the fourth straight day, losing 1.4 percent to 1,016.51 at 12:12 p.m., below its lowest close since Sept. 4, 2009. The MSCI World Index of 24 developed nations lost 1.1 percent, approaching a 10-month low. Oil and copper sank at least 3 percent and the 10-year Treasury yield slipped three basis points to 2.91 percent. The euro rallied against the dollar as a Spanish bond sale met targets and pessimism surrounding European banks diminished.
The slide in riskier assets came as reports showed manufacturing growth slowed in China, Europe and the U.S., while American jobless claims unexpectedly rose to 472,000 last week. Pending sales of existing U.S. homes fell at twice the rate economists forecast as the absence of a tax credit hurt demand. The S&P 500 has lost 17 percent from its 2010 high and yesterday completed its first quarterly drop in more than a year.
“It’s a data-dependent market, the leading indicators are turning down and growth is slowing,” said Mike Morcos, senior money manager at Old Second Wealth Management in Aurora, Illinois, which oversees about $1.1 billion. “It now turns out the recovery is weaker than the market thought earlier in the year.”
Financial shares in the S&P 500 slumped 2.2 percent as a group and were the biggest drag on the index among 10 industries after Bank of America Corp. analysts reduced second-quarter earnings estimates for Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc., sending each of their shares down.
Russell 2000 Bear Market
An index of smaller U.S. companies entered a bear market today, with the benchmark Russell 2000 Index extending its slide from a peak in April to more than 20 percent.
Stock returns trailed bonds by the widest margin in nine years during the first six months of 2010 on signs growing government budget deficits may stunt the global economic recovery. A monthly Labor Department report on non-farm payrolls tomorrow is forecast to show the unemployment rate probably rose in June as the U.S. lost jobs for the first time this year.
The extra yield investors demand to hold Treasury 10-year notes over 2-year debt fell to the lowest level since October amid concern the slowing rebound will trigger deflation.
The 10-year note yield stayed below 3 percent for a third day after breaching that level this week for the first time in more than a year. The 2-year yield was little changed at 0.6 percent.
‘Horrific’
“The information is horrific and expectations for how weak the economy is have been underestimated,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada in New York, one of 18 firms that trade directly with the Federal Reserve. “The market is defensive because of expectations for non-farm payrolls. Construction numbers, housing numbers and other numbers have all been horrific.”
The euro rallied 1.8 percent to $1.2456 and the yen climbed to a seven-month high versus the dollar. The European Central Bank said it will lend banks 111.2 billion euros ($136.5 billion) for six days to help them cope with the expiration of its landmark 12-month loan today. Banks need to repay 442 billion euros in 12-month loans, the biggest amount ever awarded by the ECB. Banks asked for 131.9 billion euros in three-month loans yesterday, less than economists expected.
Spanish Bond Sale
Spain sold 3.5 billion euros ($4.3 billion) of five-year notes, with demand falling to 1.7 times the amount of securities offered, from 2.35 times at the previous auction on May 6. The notes were sold at an average yield of 3.657 percent, compared with 3.532 percent a May 6 auction. The country’s top credit ranking yesterday was put on review for a possible cut by Moody’s Investors Service, which cited “deteriorating” growth prospects, challenges in meeting deficit targets and the risks posed by higher borrowing costs.
“They did fill it at pretty much the maximum of their guidance, and when you consider the backdrop, you’d have to say that’s encouraging,” Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said of Spain’s bond sale.
Europe, Asian Stocks
More than 11 shares declined for every one that advanced in the Europe’s Stoxx 600 index. Deutsche Bank AG, Germany’s biggest bank, and Credit Agricole SA of France lost at least 3.9 percent. BHP Billiton Ltd., the world’s largest mining company, decreased 3.4 percent in London.
The MSCI Asia Pacific Index lost 0.7 percent. Nissan Motor Co., which gets 13 percent of its revenue in Europe, slid 3.2 percent in Tokyo. China’s Shanghai Composite Index decreased 1 percent. Markets in Hong Kong are closed today for a public holiday.
Crude oil fell the most in almost five months on concern growth in the U.S. and China will slow. Crude for August delivery declined $3.40, or 4.5 percent, to $72.23 a barrel in New York. The contract touched $72.05, the lowest level since June 9.
Copper futures for September delivery dropped 3 percent to $2.8625 a pound on the Comex in New York.
Gold futures for delivery in August fell $27.40, or 2.2 percent, to $1,218.50 an ounce in New York as signs that Europe’s financial industry may be in better shape than investors estimated curbed the appeal of the precious metal as a haven. A close at that price would mark the biggest drop for a most-active contract since Feb. 4.
The Standard & Poor’s 500 Index fell for the fourth straight day, losing 1.4 percent to 1,016.51 at 12:12 p.m., below its lowest close since Sept. 4, 2009. The MSCI World Index of 24 developed nations lost 1.1 percent, approaching a 10-month low. Oil and copper sank at least 3 percent and the 10-year Treasury yield slipped three basis points to 2.91 percent. The euro rallied against the dollar as a Spanish bond sale met targets and pessimism surrounding European banks diminished.
The slide in riskier assets came as reports showed manufacturing growth slowed in China, Europe and the U.S., while American jobless claims unexpectedly rose to 472,000 last week. Pending sales of existing U.S. homes fell at twice the rate economists forecast as the absence of a tax credit hurt demand. The S&P 500 has lost 17 percent from its 2010 high and yesterday completed its first quarterly drop in more than a year.
“It’s a data-dependent market, the leading indicators are turning down and growth is slowing,” said Mike Morcos, senior money manager at Old Second Wealth Management in Aurora, Illinois, which oversees about $1.1 billion. “It now turns out the recovery is weaker than the market thought earlier in the year.”
Financial shares in the S&P 500 slumped 2.2 percent as a group and were the biggest drag on the index among 10 industries after Bank of America Corp. analysts reduced second-quarter earnings estimates for Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc., sending each of their shares down.
Russell 2000 Bear Market
An index of smaller U.S. companies entered a bear market today, with the benchmark Russell 2000 Index extending its slide from a peak in April to more than 20 percent.
Stock returns trailed bonds by the widest margin in nine years during the first six months of 2010 on signs growing government budget deficits may stunt the global economic recovery. A monthly Labor Department report on non-farm payrolls tomorrow is forecast to show the unemployment rate probably rose in June as the U.S. lost jobs for the first time this year.
The extra yield investors demand to hold Treasury 10-year notes over 2-year debt fell to the lowest level since October amid concern the slowing rebound will trigger deflation.
The 10-year note yield stayed below 3 percent for a third day after breaching that level this week for the first time in more than a year. The 2-year yield was little changed at 0.6 percent.
‘Horrific’
“The information is horrific and expectations for how weak the economy is have been underestimated,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada in New York, one of 18 firms that trade directly with the Federal Reserve. “The market is defensive because of expectations for non-farm payrolls. Construction numbers, housing numbers and other numbers have all been horrific.”
The euro rallied 1.8 percent to $1.2456 and the yen climbed to a seven-month high versus the dollar. The European Central Bank said it will lend banks 111.2 billion euros ($136.5 billion) for six days to help them cope with the expiration of its landmark 12-month loan today. Banks need to repay 442 billion euros in 12-month loans, the biggest amount ever awarded by the ECB. Banks asked for 131.9 billion euros in three-month loans yesterday, less than economists expected.
Spanish Bond Sale
Spain sold 3.5 billion euros ($4.3 billion) of five-year notes, with demand falling to 1.7 times the amount of securities offered, from 2.35 times at the previous auction on May 6. The notes were sold at an average yield of 3.657 percent, compared with 3.532 percent a May 6 auction. The country’s top credit ranking yesterday was put on review for a possible cut by Moody’s Investors Service, which cited “deteriorating” growth prospects, challenges in meeting deficit targets and the risks posed by higher borrowing costs.
“They did fill it at pretty much the maximum of their guidance, and when you consider the backdrop, you’d have to say that’s encouraging,” Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said of Spain’s bond sale.
Europe, Asian Stocks
More than 11 shares declined for every one that advanced in the Europe’s Stoxx 600 index. Deutsche Bank AG, Germany’s biggest bank, and Credit Agricole SA of France lost at least 3.9 percent. BHP Billiton Ltd., the world’s largest mining company, decreased 3.4 percent in London.
The MSCI Asia Pacific Index lost 0.7 percent. Nissan Motor Co., which gets 13 percent of its revenue in Europe, slid 3.2 percent in Tokyo. China’s Shanghai Composite Index decreased 1 percent. Markets in Hong Kong are closed today for a public holiday.
Crude oil fell the most in almost five months on concern growth in the U.S. and China will slow. Crude for August delivery declined $3.40, or 4.5 percent, to $72.23 a barrel in New York. The contract touched $72.05, the lowest level since June 9.
Copper futures for September delivery dropped 3 percent to $2.8625 a pound on the Comex in New York.
Gold futures for delivery in August fell $27.40, or 2.2 percent, to $1,218.50 an ounce in New York as signs that Europe’s financial industry may be in better shape than investors estimated curbed the appeal of the precious metal as a haven. A close at that price would mark the biggest drop for a most-active contract since Feb. 4.
Financials fall on jobless data, recovery worries
Slumping large-capitalization financial stocks were led lower by sliding regional banks Thursday amid disappointing U.S. economic data and worries about a sputtering global recovery.
All the top ten decliners were regional banks, with Huntington Bancshares Inc. (HBAN 5.38, -0.16, -2.89%) , KeyCorp (KEY 7.33, -0.37, -4.75%) , and Regions Financial Corp. (RF 6.32, -0.26, -3.95%) down the most, falling about 4% to 5%.
Bank of America Corp. (BAC 13.79, -0.58, -4.04%) was the worst performer of the largest
The Financial Select Sector SPDR exchange-traded fund (XLF 13.48, -0.33, -2.37%) , which tracks the financial stocks in the S&P 500 Index (SPX 1,017, -13.41, -1.30%) , was down about 2%.
Financials started out largely neutral after the U.S. Labor Department on Thursday morning said weekly jobless claims rose 13,000 to 472,000, compared to economist estimates of 455,000 claims this week. This followed weaker-than-expected private sector employment report from ADP released Wednesday. Republicans in the Senate also filibustered a bill Wednesday night that would allow for an extension of unemployment benefits. Read about the jobless report here
Losses in the broader market mounted after the Institute for Supply Management manufacturing index fell more than expected and a report showed pending sales of existing homes tumbled by almost a third from last month, the biggest drop since 2001. Read about the manufacturing report here.
M&T Bank Corp. (MTB 86.14, +1.19, +1.40%) and Goldman Sachs Group Inc. (GS 131.19, -0.08, -0.06%) were among the more moderate decliners, staying roughly flat. Research firm Collins Stewart wrote in a note released Thursday it is "increasingly more constructive" on M&T Bank, repeating its hold rating.
Shares of Citigroup Inc. (C 3.71, -0.05, -1.33%) were down about 1%. The Treasury Department said premarket Thursday it has sold about 1.1 billion more shares of Citi, bringing to total to about 2.6 billion shares sold, or a third of the total 7.7 billion shares the government took in return for assistance.
The House of Representatives approved the financial-legislation bill on 237-192 vote late Wednesday with almost no Republican support. While a Senate vote isn't expected until the week of July 12, the bill is unlikely to change. Read more about the bank bill here.
All the top ten decliners were regional banks, with Huntington Bancshares Inc. (HBAN 5.38, -0.16, -2.89%) , KeyCorp (KEY 7.33, -0.37, -4.75%) , and Regions Financial Corp. (RF 6.32, -0.26, -3.95%) down the most, falling about 4% to 5%.
Bank of America Corp. (BAC 13.79, -0.58, -4.04%) was the worst performer of the largest
The Financial Select Sector SPDR exchange-traded fund (XLF 13.48, -0.33, -2.37%) , which tracks the financial stocks in the S&P 500 Index (SPX 1,017, -13.41, -1.30%) , was down about 2%.
Financials started out largely neutral after the U.S. Labor Department on Thursday morning said weekly jobless claims rose 13,000 to 472,000, compared to economist estimates of 455,000 claims this week. This followed weaker-than-expected private sector employment report from ADP released Wednesday. Republicans in the Senate also filibustered a bill Wednesday night that would allow for an extension of unemployment benefits. Read about the jobless report here
Losses in the broader market mounted after the Institute for Supply Management manufacturing index fell more than expected and a report showed pending sales of existing homes tumbled by almost a third from last month, the biggest drop since 2001. Read about the manufacturing report here.
M&T Bank Corp. (MTB 86.14, +1.19, +1.40%) and Goldman Sachs Group Inc. (GS 131.19, -0.08, -0.06%) were among the more moderate decliners, staying roughly flat. Research firm Collins Stewart wrote in a note released Thursday it is "increasingly more constructive" on M&T Bank, repeating its hold rating.
Shares of Citigroup Inc. (C 3.71, -0.05, -1.33%) were down about 1%. The Treasury Department said premarket Thursday it has sold about 1.1 billion more shares of Citi, bringing to total to about 2.6 billion shares sold, or a third of the total 7.7 billion shares the government took in return for assistance.
The House of Representatives approved the financial-legislation bill on 237-192 vote late Wednesday with almost no Republican support. While a Senate vote isn't expected until the week of July 12, the bill is unlikely to change. Read more about the bank bill here.
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