Five years ago this weekend, March 9, the U.S. stock market hit its crisis bottom. Since then the S 500 has more than doubled, but the economy still remains a sputtering engine. Lindsey Piegza, chief economist at Sterne Agee, discusses on MoneyBeat.
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Russian President Vladimir Putin’s decision to deploy military forces in Ukraine rattled world financial markets on Monday, as investors warily eyed the increased instability in the region.
Russian markets took the biggest hit with the Moscow Exchange tumbling nearly 11 percent over the course of the day, while the country’s official currency, the ruble, also plunged against the U.S. dollar.
The escalating volatility in Ukraine hit markets around the globe.
The Dow Jones industrial average was down around 200 points, or 1.2 percent, in early afternoon trading. European markets also opened the week lower— Germany’s DAX index is down close to 3.5 percent, while Britain’s FTSE has fallen about 1.5 percent.
(Also on POLITICO: Why Russia no longer fears the West)
Market analysts said the Ukrainian situation would likely have limited impact on the U.S. economy and markets unless the conflict deepened into full-scale war or spread to other areas such as Lithuania or Estonia.
“Markets reacting as they are, especially given the big advance last year, is rational because the risks are high,” said David Kotok, chief investment officer at Cumberland Advisors. “This is the worst tension between the West and Russia since the end of the Cold War and it shows there is real weakness in the West’s ability to respond. But as long as this stays in Ukraine the U.S. is very insulated.”
Ukraine represents a very small slice of the global economy and its default, should it occur, would probably not cause more than a temporary ripple in bond and equity markets. The United States is also much less reliant on foreign oil than in the past. And the rise in oil prices impacting European economies should be limited given the current ample global supply, experts said.
“Of course you are going to have an immediate reaction but markets right now are much more driven by what the Federal Reserve is doing than by what is going on in eastern and central Europe,” said James Rickards, an expert on geopolitical market risk at merchant bank Tangent Capital. “Ukraine is a tiny economy. It’s not like distress in Spain or Italy that we saw in recent years,” Rickards said. “Where it gets tricky is spillover. Does the [European debt crisis] come back to haunt us now? We really have no way to know.”
Russia acted quickly on Monday to try and blunt the damage to its economy resulting form its move into the Ukraine with its central bank increasing its key lending rate to 7 percent from 5.5 percent.
“The decision is aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility,” the Russian central bank’s board of directors said.
As world powers weigh how to respond to Russia seizing Crimea, a peninsula in Ukraine where Moscow has a naval base, Treasury Secretary Jack Lew over the weekend discussed potentially imposing economic sanctions on Russia.
Russia’s economy is hugely dependent on oil and natural gas, and some market watchers warn that economic sanctions could lead to an increase in certain commodity prices.
“If the West agrees on any economic sanctions, it has the potential to significantly drive up the price of oil (especially Brent) and natural gas as well as wheat and potash,” Robbert Van-Batenburg, director of market strategy at the brokerage firm Newedge, said in a research note.
Rickards and others noted that it made sense for the United States. to let Germany take the lead on pressuring Russia because the Germans have oil production technology the Russian’s need. And the two are now partners in the Nord Stream gas pipeline that runs through the Baltic to Germany.
Also, the United States and other leading economies are considering how to boost the struggling Ukrainian economy to help the country’s new government.
Lew said that the centerpiece of any aid package should come from the International Monetary Fund, which is sending officials to Ukraine this week on a “fact-finding” trip.
Some market analysts wondered whether the situation in Ukraine could lead Federal Reserve Chair Janet Yellen to pause the central bank’s current policy of cutting back, or “tapering,” asset purchases at each policy setting meeting. The Fed has been reducing the purchases, initially begun as an effort to stimulate the economy during the last recession, by $ 10 billion at each meeting.
The general consensus on Wall Street is that the unless the situation in Ukraine worsens, the Fed will continue to taper following its next meeting that concludes March 19th. “It will take more bad U.S. employment reports,” to get a pause in the taper, Rickards said.
Target’s fourth-quarter profit was nearly halved, cut down by a weak holiday season and a massive data breach that spooked customers. But the stock is up today on the news. Spencer Jakab joins MoneyBeat. Photo: Getty Images.
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Target’s fourth-quarter profit was nearly halved, cut down by a weak holiday season and a massive data breach that spooked customers. But the stock is up today on the news. Spencer Jakab joins MoneyBeat. Photo: Getty Images.
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Facebook shocked the market Wednesday with its $19 billion acquisition of texting service WhatsApp. Was it a canny move, or a sign that prices in Silicon Valley have finally lost touch with reality? S Capital IQ’s Scott Kessler joins MoneyBeat. Photo: Getty Images.
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Asian markets enter a second week of volatility, this time on news that U.S. manufacturing slowed in January. The WSJ’s Jake Lee tells us why things may not settle down anytime soon.
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Asian markets declined after the Fed announced a pullback on its bond-buying program, the second time in six weeks. The WSJ’s Deborah Kan speaks with Jake Lee about the ripple effect it has had on global markets.
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Adam Shell
USA Today
January 28, 2014
Are the Federal Reserve’s fingerprints on Wall Street’s latest 911 call?
If there’s been a traceable pattern to the U.S. stock market’s biggest dips in recent years, including the latest swoon driven by turbulence in emerging markets, it is this: Sell-offs have coincided with periods when the Federal Reserve was ending or pulling back on its market-friendly stimulus programs.
Ever since the Fed began its unprecedented bond-buying program in late 2008, stocks have tended to go up when the central bank has been in the market supporting asset prices. In contrast, stocks have declined whenever the Fed has been out of the market or cutting back on its asset purchases.
This article was posted: Tuesday, January 28, 2014 at 3:32 pm
Specialist Vincent Surace works on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Specialist Vincent Surace works on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Traders work on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Trader Gregory Rowe, center, works on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Traders Thomas Donato, left, and Ronald Madarasz work on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
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Fear is back in the market.
Investors are worried about slower economic growth in China, a gloomier outlook for U.S. corporate profits and an end to easy-money policies in the United States and Europe. They’re also fretting over country-specific troubles around the world — from economic mismanagement in Argentina to political instability in Turkey.
Those fears converged this week to start a two-day rout in global markets that was capped by a 318-point drop in the Dow Jones industrial average Friday. It was the blue-chip index’s worst day since last June. The Dow plunged almost 500 points over the two days.
The Dow finished down 2 percent at 15,879 Friday. The Standard & Poor’s 500 index fell 38 points, or 2.1 percent, to 1,790. The Nasdaq composite fell 90 points, or 2.2 percent, to 4,128.
As investors shunned risk, small-company stocks fell even more than the rest of the market, and bond prices rose.
Despite the sell-off, U.S. stocks remain near all-time highs after surging 30 percent last year. The S&P 500 is 3 percent below its record high of 1,848 on Jan. 15.
U.S. stocks have not endured a correction — a drop of 10 percent or more over time — since October 2011.
The turbulence coincides with a global economic shift: China and other emerging-market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the Great Recession.
The trouble began Thursday after a January survey showed a drop in Chinese manufacturing activity. Days earlier, China reported that its economic growth last year matched 2012 for the slowest pace since 1999.
“It is interesting how even a mild tremor in China’s growth causes such anxiety around the world,” said Eswar Prasad, professor of trade policy at Cornell University.
In Asia, Japan’s Nikkei 225 slipped 1.9 percent Friday to close at 15,391.56; Hong Kong’s Hang Seng shed 1.2 percent to 22,450.06; and Seoul’s Kospi dropped 0.4 percent to 1,940.56.
Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world’s second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.
Here’s a look at the forces buffeting global financial markets:
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THE END OF EASY MONEY
Since the global financial crisis hit in 2008, the Federal Reserve has flooded markets with cash to push interest rates lower and encourage U.S. businesses and consumers to borrow and spend. But last month, as signs of growing economic strength emerged in the U.S., the Fed cut back — reducing its monthly bond purchases to $ 75 billion from $ 85 billion. It also said that it expected to reduce the bond-buying further “in measured steps” at upcoming meetings.
The Fed meets again Tuesday and Wednesday. Many economists expect the central bank to cut the purchases again — perhaps to $ 65 billion a month.
The scaling back of the Fed’s easy-money policies has hit some emerging markets hard. When the Fed was pushing U.S. rates lower, emerging markets had seen an inflow of capital from investors seeking higher returns than they could get in the United States. Now investment is flowing back to America, hammering currencies in emerging markets.
The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso — which fell 13 percent Thursday — have been “trounced,” said Jane Foley, a currency strategist at Rabobank. “Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week … (is also) contributing to a loss of confidence in some emerging markets,” she said.
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POLITICAL TURMOIL
In some countries, concerns over the local political or financial situation have worsened the market volatility dramatically. That was most obvious in Argentina, where the peso this week suffered its sharpest fall since the country’s 2002 economic collapse. The government, running short of reserves it could use to buy the currency and keep it from falling, has let the peso drop instead. The country’s economic fundamentals are grim: Inflation is believed to be running at about 25 percent to 30 percent.
The peso fell 16 percent in two days, easily the worst performer among emerging markets.
Turkey’s national currency, the lira, hit multiple record lows in recent weeks as investors worried about the fallout of a corruption scandal that threatens to destabilize the government. Having a stable government for the past 10 years has been one of the key ingredients in the country’s economic revival.
The lira hit an all-time low of 2.33 against the dollar on Friday — from around 2 per dollar in December — despite a $ 3 billion-intervention by the central bank in foreign exchange markets.
Beyond political problems, the countries that have seen their currencies fall most are those that rely heavily on exports of raw materials used in manufacturing. The Russian ruble was trading at 34.58 per dollar, from below 34 on Thursday. The South African rand weakened to 11.13 per dollar, from 10.98 the day before.
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CHINA AND GLOBAL GROWTH
Since the recession, the global economy has relied heavily on China and other emerging markets as the developed economies of the United States, Europe and Japan struggled.
But China’s economy is decelerating. It grew 7.7 percent in October-December 2013 from a year earlier, down from the previous quarter’s 7.8 percent growth. Factory output, exports and investment all weakened. On Thursday, the preliminary version of HSBC’s purchasing managers’ index of Chinese manufacturing fell to 49.6, the lowest reading since July’s 47.7. Anything below 50 signals a contraction.
China’s growth is still far stronger than the United States, Japan or Europe, but is down from the double-digit rates of the previous decade.
Many economists are troubled less by the slower growth numbers than by China’s over-reliance on trade and investment instead of spending by its consumers.
“China, and the world at large, would benefit from its shift to a lower but more sustainable pattern of growth that is not so heavily dependent on investment-led growth fueled by bank credit,” Cornell’s Prasad said.
China’s growth is slowing just as the world’s rich economies begin to gain momentum.
The 17 countries that use the euro currency appear to be recovering from a debt crisis that tipped them into a double-dip recession in late 2011.
In the United States, households have reduced crippling debt levels and are in better shape to start spending again. The International Monetary Fund expects the U.S. economy to grow 2.8 percent this year, up from 1.9 percent in 2013, and for the eurozone economy to grow 1 percent in 2014 after contracting 0.4 percent in 2013 and 0.7 percent in 2012.
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CORPORATE PROFITS
In the U.S., the outlook for corporate profits has already been weakening, and the turmoil in emerging-market currencies could make matters worse.
About two-thirds of the 123 S&P 500 companies that have reported fourth-quarter earnings so far have beaten analysts’ estimates, according to S&P Capital IQ, in line with the historical average. But the forecasts for income growth have been falling and could decline further.
As recently as this summer, analysts predicted earnings growth of more than 11 percent for the fourth quarter, but now they expect just half that — 5.9 percent.
Some companies are becoming more pessimistic, too. For the January-March quarter, seven out of every 10 that have talked about their prospects have cut projections, more than average, according to FactSet. The stocks have tanked as a result. Since United Continental lowered revenue estimates on Thursday, for instance, its stock has fallen 6 percent.
U.S.-based multinational companies posted some of the biggest declines on Friday as investors worried about overseas sales. Oracle and 3M have warned that their results could take a hit because of the strengthening dollar. Shares of the companies fell 3 percent.
Companies that rely on overseas sales will bring home fewer dollars if the dollar continues to appreciate against foreign currencies, especially in emerging markets that have been hammered this week. In Argentina, for example, the same amount of pesos buys fewer dollars today than it did last week.
On Tuesday, Europe-based consumer goods giant Unilever said fourth-quarter sales slowed because of weakness in emerging markets. The decline was mostly because of unfavorable currency moves.
“So when emerging markets sniffle,” said Lawrence Creatura, a portfolio manager with Federated Investors, “large-cap companies can catch a cold.”
____
Associated Press writers Bernard Condon in New York, Toby Sterling in Amsterdam and Suzan Fraser in Ankara, Turkey, contributed to this story.
Need a new career in 2014? How about trying to be a Navy SEAL? Former Navy SEAL and author Rorke Denver discusses what it takes to join the elite group, and tips on how normal folks can be more disciplined. Photo: Rorke Denver.
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Trader Gregory Rowe, center, works on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Trader Gregory Rowe, center, works on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
Traders Thomas Donato, left, and Ronald Madarasz work on the floor of the New York Stock Exchange Friday, Jan. 24, 2014. (AP Photo/Jason DeCrow)
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Fear is back in the market. Investors are fretting about China’s growth, a plunge in Argentina’s peso and the profit outlook for U.S. companies.
Those worries have converged to set off a two-day rout in global markets, and have sent the Dow Jones industrial average down more than 260 points Friday, its biggest daily point decline since June 20, 2013.
Investors are dumping risky assets like stocks and currencies in countries with troubled governments. They are buying safer ones like bonds and the Japanese yen
KEEPING SCORE: The Dow Jones industrial average was down 237 points, or 1.5 percent, to 15,960 as of 2:40 p.m. Eastern time Friday. The Standard & Poor’s 500 index fell 28 points, or 1.5 percent, to 1,800. The Nasdaq composite was down 72 points, or 1.7 percent, at 4,146.
FLIGHT FROM RISK: The downturn began Thursday following signs that manufacturing was contracting in China, a major importer of raw materials and a key driver of global economic growth. The values of currencies in several emerging markets have dropped. Those markets include Turkey, Russia, South Africa and Argentina.
“All of that is making the market very sensitive and very vulnerable to growth expectations in emerging markets,” said with Anastasia Amoroso, global market strategist at J.P. Morgan Funds.
DOW DOWNER: The Dow has fallen every day this week, leaving it down 3.1 percent. That decline is the Dow’s worst weekly performance since mid-May 2012. Meanwhile, the S&P 500 is down 2.2 percent since last Friday. That’s the index’s worst weekly slide since November 2012.
SMALL CAPS HIT HARD: In another sign that investors are avoiding risk, stocks of smaller companies had even larger declines than broader U.S. market. The Russell 2000 index of small-company stocks fell 2.6 percent, compared with the Dow’s decline of 1.6 percent.
BIGGEST LOSERS: Railroad operator Kansas City Southern fell the most in the S&P 500 index, plunging $ 18.43, or 16 percent, to $ 98.85 after its earnings fell short of what analysts’ forecasts. Tool seller W.W. Grainger Inc. dropped $ 12, or 5 percent, to $ 244.66 after reporting income that also disappointed investors. Engine-maker Cummins Inc. fell $ 5.16, or 4 percent, to $ 126.88.
BROAD DECLINES: Declining U.S. stocks outnumbered rising ones 6-to-1 on the New York Stock Exchange. All 10 industry groups in the S&P 500 fell. Utilities, telecommunication services and consumer staples stocks fell the least. Traders tend to buy those stocks when they want relatively stable, lower-risk stocks that pay high dividends.
SEATTLE’S BEST: Two leading companies from Seattle, Microsoft and Starbucks, were among the bright spots in an otherwise gloomy market. The software maker rose 86 cents, or 2.4 percent, to $ 36.92. Its quarterly revenue and earnings beat Wall Street expectations because of strong sales of its new Xbox One console and Surface tablet. Starbucks, meanwhile, was the third-biggest gainer in the S&P 500 index. It rose $ 2.24, or 3 percent, to $ 75.63, because its quarterly earnings benefited from lower coffee costs and growing global sales.
EUROPE AND ASIA: The worries about emerging markets also sent overseas markets lower. Japan’s yen surged, which hurts the prospects for Japan’s export-driven economy. The Nikkei 225 fell 1.9 percent. France’s CAC-40 index fell 2.8 percent and Germany’s DAX lost 2.5 percent.
TREASURIES AND COMMODITIES: Bond prices rose as investors moved money into lower-risk assets. The yield on the 10-year Treasury note declined to 2.74 percent from 2.78 percent late Thursday.
UC Berkeley Professor Laura Tyson at the World Economic Forum in Davos, Switzerland says the economic outlook for the U.S. is looking up. But it still may take years to claw back all the jobs needed to get back to pre-crisis levels. Photo: Getty Images
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Why do so many on both Main and Wall Streets still feel uncomfortable with the way markets are behaving? Maybe it’s because valuations aren’t what matter. Maybe the real problem is that markets are no longer doing what they’re supposed to do. Michael Casey reports on MoneyBeat.
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After nearly three years of haggling between regulators and bankers, the so-called Volcker rule is on the cusp of becoming law. But even after years of debate, big questions remain about this rule. Neil Barofsky, the former special inspector general of the TARP program, joins MoneyBeat.
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Even with a few weeks left in 2013, it’s clearly going to be a red-letter year for the stock market. Can equities maintain their torrid pace in 2014? Jim Browning says that while the market isn’t likely to match 2013’s pace, investors don’t have much to worry about. Photo: Getty Images.
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WSJ Horizons columnist Michael Casey explains there’s a very valid reason why Bitcoin critics are evoking Tulip Mania as the digital currency’s price soars to new heights. Photo: Getty Images.
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