Thursday, February 25, 2010

Global Economic Crisis Update: Unemployment Claims Rise in US; Greece Crisis Threatens Euro Zone; Stocks Risk Another Triple-Digit Fall

Stocks Risk Third Triple-Digit Fall This Month

Wall Street Journal

NEW YORK—U.S. stocks dropped broadly as a surprise jump in jobless claims cast doubt over the economic recovery and concerns deepened over the stability of euro zone debt.

The Dow Jones Industrial Average was recently down 161, or 1.6%, at 10209, with all of its 30 components in the red. The Dow's worst performing component was Coca-Cola, which sank 4.2%, after agreeing to buy most of its largest bottler, Coca-Cola Enterprises, in a deal estimated to be worth between $12 billion and $13 billion.

Industrial machinery stocks slipped as investors fled the cyclical stocks tied closest to the economy's performance. Caterpillar dropped 2.2%, while industrial crane maker Terex, which isn't a Dow component, fell 2.4%.

The Dow's financial components also sank after Federal Reserve Chairman Ben Bernanke told a U.S. Congressional Senate panel the central bank was looking into derivative transactions that U.S. banks, including Goldman Sachs Group, made with Greece, amid concerns that they might have been used to help the government hide its debt. Goldman Sachs, which isn't a Dow component, fell 2.1%. Bank of America dropped 1.2%.

J.P. Morgan's slide steepened after its investment banking chief said the bank expects a return on equity of 17% this year and doesn't expect to make changes due to regulations. Its shares fell 2.6%.

Both the Nasdaq Composite and the Standard & Poor's 500-share index slid 1.4%. Economically sensitive industrials and technology stocks led the tumble.

The Dow industrials' early losses put it on pace for its third triple-digit point decline this month and its worst one-day drop since a 268-point slide on Feb. 4 as investors registered deep fears about Greece's heavy debt load and how it might affect Europe more broadly.

"The focus has definitely turned back towards the problems in Greece," said Mark Turner, head of sales trading at Instinet. "That, along with the economic data this morning, has certainly caused the selloff in the market."

The Labor Department said weekly jobless claims unexpectedly surged last week by 22,000 to 496,000, their highest level in over three months. Economists had expected initial claims to decrease by 13,000.

Even the four-week average of claims, which are viewed as a more dependable barometer of the job market than volatile week-to-week readings, shook investors.

"The fact that the moving average has turned higher is a cause for near-term concerns," said Brian Belski, chief investment strategist at Oppenheimer Asset Management. "Investors are quite jittery, quite reactive. Many are worried that the majority of the recovery is already priced into the market," thanks to big gains in stocks in 2009.

The four-week average of claims rose by 6,000 in Thursday's report, to a total of 473,750, up from the previous week's revised average 467,750.

A separate report from the Commerce Department showing that durable-goods demand rose 3.0%, or twice what was expected, did little to boost the market.

Concerns over the euro zone intensified after Standard & Poor's said Wednesday that Greece was on the verge of junk status within a month, while Moody's said it would keep the rating unchanged if promised spending cuts by the government are enacted. Greece now plans to issue a 10-year bond next week, after the government announces a new austerity package worth between €2 billion and €2.5 billion ($2.70 billion and $3.37 billion), people familiar with the situation said.

Among stocks in focus, Palm tumbled 14% after the company acknowledged its new smart phones aren't selling as well as hoped, which will leave its revenue for the year "well below" what the struggling company had forecast.

Dr Pepper Snapple Group jumped 8.1% after reporting slightly better-than-expected fourth-quarter earnings and predicted 2010 sales would rise 3 to 5%. Grocery chain Safeway slid 2.3% after swinging to a fiscal fourth-quarter loss on $1.97 billion of goodwill write-downs as the grocery-store company's sales remained weak.

Dynegy's fourth-quarter loss widened on asset sales and mark-to-market losses, as the electricity generator reported a steeper-than-expected decline in revenue. Shares of Dynegy tumbled 4.2%.

In other markets, the dollar weakened against the yen, but strengthened against the euro. Treasurys climbed, with the 10-year note up 3/8 to yield 3.648%. Crude-oil prices slid to just above $78 per barrel and gold futures also fell.

—David Benoit contributed to this article.
Write to Kristina Peterson at

Fed probes Goldman role in Greek crisis

By Alan Rappeport in Washington
February 25 2010 15:35

Ben Bernanke, chairman of the Federal Reserve, said on Thursday that the US central bank was looking into Goldman Sachs’ role in creating credit default swaps for Greece.

The remarks came in response to a question from Chris Dodd, the Democrat senator from Connecticut, in his second day of testimony before congress.

“We are looking into a number of questions relating to Goldman Sachs and other companies and their arrangements with Greece,” Mr Bernanke said, noting that the Securities and Exchange Commission was also interested in the issue.

Mr Bernanke called any financial instruments that destabilise a company or country “counterproductive”.

Goldman Sachs has come under fire this month from European regulators for structuring transactions that helped Greece to trim its debt figures after it joined the European monetary union in 2001. Goldman has said that the the swaps played a minimal role in Greece’s current financial crisis. However, a senior Goldman banker said it ”could have and should have” been more transparent in the transactions.

Copyright The Financial Times Limited 2010.

Euro tumbles amid flight to havens

By Jamie Chisholm, Global Markets Commentator
February 25 2010 15:40

Worries about the Greek debt crisis and concerns the US labour market is deteriorating saw investors flee riskier assets on Thursday.

The FTSE World equity index tumbled 1.6 per cent, and oil led the commodity complex lower as traders pared back bets on global economic growth. The yen soared and the dollar challenged recent highs as investors sought perceived havens such as US Treasuries.

The nervousness had its genesis in the Asian session when news that Moody’s was joining Standard and Poor’s in considering to downgrade Greek sovereign debt caused the yen to soar against the euro, pushing the single currency down against a swathe of major crosses.

Investors have been extremely sensitive of late to moves in major currencies – particularly the euro/dollar cross, which they have used as a proxy for global risk appetite.

“The risk-on, risk-off trade is being driven largely by euro-area specific factors, ie the volatility surrounding sovereign credit ratings. We expect these concerns to remain a weight on the euro/US dollar in the near term,” said David Forrester, currency economist at Barclays Capital.

The Market Eye

Amid all the worry about the euro, it is interesting to note that sterling is down 0.7 per cent today to 88.41p against the ailing single currency. It is also off 0.9 per cent at $1.5275, having broken through but then regained a technical support level seen at $1.5272. News that business investment in the UK fell in the fourth quarter of 2009 at a record annual rate of 24.1 per cent has added to the pressure on the pound, which is also at a four-month low on a trade-weighted basis.

It had been thought that comments from Bank of England governor Mervyn King, which implied quantitative easing could be resuscitated if economic conditions don’t improve, were also weighing on sterling. However, a Reuters poll shows that only 10 per cent of economists surveyed expected the Bank to revive QE.

This is intriguing, because the return of QE was also being used to partly explain the more than 20 basis point fall in 10-year gilt yields this week and the contraction of the spread with Bunds. Perhaps the traders are paying no attention to the economists. Surely not!

Sentiment took a further knock after US weekly jobless claims came in much higher than expected, increasing fears that the US economy was facing a tepid, jobless recovery, at best.

Wall Street slumped nearly 1.5 per cent as the opening bell rang, with traders also keeping a wary eye on a second day of testimony from Federal Reserve chairman Ben Bernanke and a Whitehouse healthcare summit.

The Vix index, a gauge of expected equity market volatility, jumped 11 per cent to 22.41.

● The yen’s gains were broad-based as selling of the euro by Japanese exporters, and the worries over Greece, pushed the yen through stop-loss orders, exacerbating the move. Haven flows following the US data pushed the yen higher still and it breached the Y120 level, below which lurked a further batch of “stops”, said traders.

It was later trading up 1.3 per cent at Y120.30 against the single currency and up 1.2 per cent to Y89.02 versus the dollar.

The buck rose 0.2 per cent to $1.3508 versus the euro and climbed 0.2 per cent on a trade-weighted basis, just shy of a recent eight-month peak.

“The euro has tried to strengthen this week, but keeps getting knocked back by deteriorating news surrounding Greece,” said strategists at Royal Bank of Scotland.

“It is trading like the market is well short, which of course creates the risk that if something breaks positively for Greece, there will be a short-covering rally. However, it is far from clear that either Greece or the euro will catch a break any time soon”.

● Greek sovereign debt came under pressure, with the yield on the 10-year note rising 18 basis points to 6.67 per cent. Ten-year German Bund yields fell 1 basis point to 3.12 per cent, pushing the Greek/German yield spread to 355 basis point. Greek credit default swaps, which track the cost of protecting against a debt default, rose 4 basis points to 386 basis points.

Supposed haven government bonds were in demand. The yield on US 10-year notes fell 5 basis points to 3.64 per cent. The Treasury will auction $32bn of seven-year notes later.

“After a rather sluggish US 5-year Treasury sale yesterday, the question will be what concession will be needed to achieve a better result today,” asked Marc Ostwald at Monument Securities.

● Asian stock markets turned tail as traders saw the “haven” proxies – the yen, and on the day to a lesser extent, the dollar – start to gain ground and the US futures tumble. The FTSE Asia-Pacific index lost 0.7 per cent, with the Nikkei 225 in Tokyo off 1 per cent. The Hang Seng in Hong Kong fell 0.3 per cent but the Shanghai Composite was typically maverick and gained 1.3 per cent, a one-month closing high.

European bourses faltered in the wake of the heightened risk aversion. The FTSE Eurofirst 300 fell 1.5 per cent and London’s FTSE 100 slipped 1.2 per cent after a bank-inspired rally dissolved and miners fell back on weakness in commodities. Turkey’s ISE National 100 fell 2.6 per cent as investors fretted about tensions between the government and the military.

● The stronger dollar and concerns about technical weakness saw more selling in gold. The bullion dropped 0.3 per cent to $1,094. Oil succumbed to the risk aversion sweeping bourses, slumping 2.4 per cent to $78.14.

The Reuters-Jefferies CRB index, a commodities basket, fell 1.5 per cent.

Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

US jobless claims show surprise rise

By Alan Rappeport in Washington
February 25 2010 14:10

The number of US workers making new claims for jobless benefits recorded a surprising increase last week, offering more evidence that the labour market’s recovery will be rocky.

Initial jobless claims rose by 22,000 to 496,000, the labour department said on Thursday. Economists were expecting jobless claims to fall during the week.

The less volatile, four-week average of claims rose, climbing by 6,000 to 473,750 while those continuing to claim unemployment benefits also rose by 6,000 to 4.61m.

The disappointing jobless figures follow a sharp drop in consumer confidence earlier this week, which was pulled back by growing anxiety about the labour market.

Some relief could be in sight, however, as the US senate on Wednesday passed a $15bn jobs bill that will provide tax incentives to businesses that hire new workers. The legislation is expected to create about 250,000 jobs.

Meanwhile, the commerce department said on Thursday that new orders for durable goods jumped last month thanks to greater demand for aircraft. The rise is another sign that the manufacturing sector will show continued strength.

Durable goods orders rose by 3 per cent to $175.7bn. That was the biggest increase since last July and was fuelled by a 126 per cent surge in new orders for civilian aircraft.

Excluding transportation orders, which tend to be volatile, demand for long-lasting goods was down by 0.6 per cent.

Copyright The Financial Times Limited 2010.

Weak investment data damp recovery hopes

By Daniel Pimlott
February 25 2010 11:08

Business investment declined at an accelerated pace in the final quarter of last year and was much lower than expected, raising fresh fears over the fragility of the recovery in the UK economy.

Investment – which ranges from spending on new machinery to IT to construction of new offices – fell by 5.8 per cent in the final three months of the year to £27bn in the quarter, compared with an expected rise of 0.1 per cent. That compares with a 1.8 per cent decline in the third quarter.

Business investment fell in almost every sector and was down by 24.1 per cent compared with a year earlier, by far the biggest year-on-year fall in more than 40 years of data ignoring a one-off blip in 2006.

The sharp further drop-off in investment, even as the economy appeared to leave the recession in the fourth quarter, is likely to raise concerns about the extent to which the availability of credit is hitting companies, as well as whether the recovery in the UK will prove sustainable. However, the business investment data is often subject to substantial revisions over time.

“The substantial fall in business investment in the fourth quarter of 2009 is a horrible surprise and extremely disappointing,” said Howard Archer, economist at IHS Global Insight.

Although the figures have no direct impact on revised fourth quarter GDP figures to be reported on Friday morning – because national income estimates rely on output figures rather than spending numbers – they do suggest an upwards revision is less likely.

“It dilutes hopes of an upward revision on Friday to UK GDP growth of 0.1 per cent quarter-on-quarter in the fourth quarter of 2009 and even raises the spectre that this minimal growth could be revised away,” Mr Archer added.

The figures come after other data on retail sales and mortgage lending at the start of this year have been extremely weak, albeit probably hit by the heavy snow in January.

Manufacturing saw an 8.2 per cent fall in investment in the quarter and services investment fell by 8.4 per cent. Construction investment collapsed by a further 24.5 per cent in the quarter and has fallen by 54 per cent since the recession began in the sector at the beginning of 2008.

Recent surveys of businesses report that plans for new investment were limited, but that companies did not expect to cut back much further.

The Bank of England’s regional agents reported in February that “investment plans continued to be widely described as muted, with very few contacts anticipating significant growth in capital expenditure. But while the level of investment remained lower than before the recession, there were few reports of plans for a further round of sharp cuts following the previous year’s reductions.”

The fall in investment deals a blow to the Bank’s recent argument that low interest rates could potentially help foster lower inflation by encouraging businesses to expand capacity. More importantly it threatens to undermine the supply side of the economy, reducing the ability of the economy to produce strong growth in the future and potentially boosting inflationary pressures.

“There is still no sign of an export and investment-led recovery, which the BoE has hoped for, materialising any time soon,” said Colin Ellis, economist at Daiwa Europe.

Copyright The Financial Times Limited 2010.

Fiscal fears put euro under pressure

By Peter Garnham
February 22 2010 23:06

The euro lost ground on Monday, trading close to a nine-month low against the dollar, as concerns over Greece’s fiscal problems, and those of other countries on the periphery of the eurozone, continued to put pressure on the single currency.

Analysts said any relief for the euro from weekend press reports that Germany was preparing to lead a bail-out of Greece, with the European Union providing up to €25bn ($34bn) in financial assistance, was likely to prove short-lived.

Hans Redeker at BNP Paribas said that since German banks were reported to hold about €522bn in periphery eurozone debt, a German-led bail-out for Greece should not come as a surprise if matters took a turn for the worse.

“While such an outcome may provide some initial support for the euro, the longer term implications are likely to prove even more negative for the single currency,” he said.

Mr Redeker said that the adjustment process in Europe would have strong deflationary pressures, suggesting that the European Central Bank would keep monetary policy much looser than the market was expecting.

The euro was also undermined as positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed bets against the euro were extended to fresh record levels.

Late in New York, the euro, which dropped to a nine-month low of $1.3442 against the dollar on Friday, was flat at $1.3601. It had eased 0.1 per cent to £0.8785 against the pound and was down 0.4 per cent at Y124.10 against the yen.

Meanwhile, the dollar eased back but remained close to an eight-month high on a trade-weighted basis as expectations of an early interest rate rise from the Federal Reserve receded.

The dollar rallied sharply on Thursday after the Fed caught the market off guard with a surprise decision to raise its discount rate, the emergency rate at which it lends to banks.

That triggered speculation that the central bank was gearing up to raise the Fed funds rate, its main lending rate, sooner than expected.

Officials were keen to play down such a move, while a surprise fall in January core US consumer price inflation announced on Friday also damped speculation of an early US rate rise.

The dollar index, which tracks its progress against a basket of six leading currencies, eased 0.2 per cent to 80.499, but still remained within sight of the eight-month high of 81.342 that it hit on Friday.

The dollar also eased 0.4 per cent to Y91.18 against the yen and lost 0.1 per cent to $1.5494 against the pound.

Copyright The Financial Times Limited 2010.

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