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.”
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Associated Press writers Bernard Condon in New York, Toby Sterling in Amsterdam and Suzan Fraser in Ankara, Turkey, contributed to this story.
HELSINKI |
HELSINKI (Reuters) – After decades of pursuing trade with western Europe, Finland is becoming dependent on Russia again as that country’s burgeoning middle class and wealthy investors provide opportunities for growth lacking in recession-hit Europe.
While some Finns still view their eastern neighbor and former ruler with suspicion, expectations of only a slow European recovery mean more businesses are likely to embrace closer ties with Russia, signaling a readjustment after two decades of close commercial relations with Europe.
Recent trade data show a shift has already begun. Finnish exports to the rest of the European Union fell 4 percent year-on-year in the first five months of 2013, while those to Russia rose 4 percent.
Judging from second-quarter corporate results, which showed a wide range of companies hit by uncertainty in Europe, Finland may become even more dependent on Russia. Top companies such as retailer Kesko (KESBV.HE) and department store chain Stockmann (STCBV.HE) have cited Russia as their strongest card.
Kesko, which controls about 35 percent of Finland’s grocery and hardware trade, opened its second Russian food store in May and plans eight more in the next three years.
The expansion, which capitalizes on strong consumer trends as well as Finland’s high reputation for food safety and product quality, comes as Kesko has cut hundreds of jobs in Finland and lowered its profit forecasts.
“The growth potential that the Russian markets offer to Finland is truly remarkable in the longer term,” chief financial officer Jukka Erlund told Reuters.
Stockmann on Friday reported a surprise rise in quarterly operating profit, saying strong earnings in Russia, particularly at its department store in St. Petersburg, offset weak spending in Finland.
Tyre maker Nokian Renkaat (NRE1V.HE) started production in Russia in 2005, and has since been boosting capacity at its Vsevolozhsk factory near St Petersburg, enough to make it Russia’s market leader in passenger vehicle tyres.
“Finland and Finnish products have an excellent reputation in the country. Culturally, we are considered honest, almost naive,” the tyre maker’s chief executive Kim Gran said. “Finland’s small businesses should make a stronger effort to establish operation in Russia.”
Exports to Russia have almost tripled since 2000, led by growing demand for a range of goods including mining machinery, wood products and chemicals in addition to gadgets such as Nokia’s (NOK1V.HE) mobile phones.
While Russia’s growth has recently shown signs of slowing down amid falling oil and gas prices, economists say it still provides much-needed support for the small Finnish economy that is running a current account deficit and is expected to contract in 2013 for the second year in a row.
HISTORIC GRUDGES
Historically, Finland’s dependence on its powerful neighbor, which was also its ruler through the 19th century, – is not particularly new. Postwar Finland relied heavily on trade with the Soviet Union.
But the Soviet Union’s collapse in 1991 triggered a deep recession in Finland, prompting its leaders to turn westward and seek greater integration with Europe by joining the EU and the euro in a switch that economists say helped Finland become one of the world’s richest economies per capita.
While official relations with Russia are now mostly cordial, there is still a feeling of mistrust, particularly among older generations who experienced the 1939-1940 Winter War and subsequent Continuation War against the Soviet Union.
Finnish men still spend up to a year in compulsory military service, training to defend their 1,340-km (840 miles) border to the east.
Businesses, however, are putting aside such historic grudges as roubles make up for a lack of domestic and European funds.
For example, Russia’s Rosatom recently emerged as the primary candidate to supply a reactor for Finland’s nuclear consortium Fennovoima. Rosatom has said it may invest in the project, estimated to cost around 4 to 6 billion euros, which would put to rest funding concerns after German utility E.ON (EONGn.DE) announced its exit from the consortium.
In another high-profile deal, Russian-Finnish billionaire Gennady Timchenko and other associates of President Vladimir Putin agreed in June to buy Finland’s biggest ice hockey and concert venue in Helsinki, and the local Jokerit team is expected to join Russia’s KHL hockey league.
Russian wealth is also becoming more visible at street level.
The number of Russian visitors rose 10 percent last year to 3.6 million, accounting for nearly half of all foreign visitors. To accommodate such customers, many on tax-free shopping expeditions, Stockmann’s flagship store in downtown Helsinki recently started accepting roubles.
An increasing number of Russians are also investing in Finnish property, drawn by the country’s safety and abundance of lakeside cottages. A recent government study showed Russian consumers could spend 2.4 billion euros on Finnish real estate through 2030.
The same report, however, also showed over half of those Finnish lawmakers who were surveyed support restrictions on Russian property ownership.
“They have to be carefully evaluated, near military sites,” one anonymous politician wrote. “Overall, security has to be taken into account.”
(Reporting By Jussi Rosendahl; Editing by Giles Elgood)
A man pushes his shopping cart down an aisle at a Home Depot store in New York, July 29, 2010.
Credit: Reuters/Shannon Stapleton
WASHINGTON |
WASHINGTON (Reuters) – A drop in government spending dragged more on the U.S. economy than initially thought in the first three months of the year, although consumer spending looked relatively resilient to Washington’s austerity drive.
Other reports on Thursday showed the number of new jobless claims rose modestly last week while contracts on previously owned homes climbed to a three-year high in April.
Together, the reports pointed to an economy that has held up reasonably well despite government constraints, but nevertheless faced headwinds severe enough to dissuade the U.S. Federal Reserve from trimming its monetary stimulus in the immediate future.
“(The reports) paint the picture of an economy with strengthening fundamentals that is facing significant fiscal drag,” said Ellen Zentner, an economist at Nomura in New York.
Gross domestic product, a measure of the country’s total economic output, expanded at a 2.4 percent annual rate during the first quarter, down a tenth of a point from an initial estimate, the Commerce Department said.
Analysts had forecast a 2.5 percent gain.
Government spending tumbled at a 4.9 percent annual rate, which was faster than the 4.1 percent rate initially estimated. Also holding back growth during the quarter, businesses outside the farm sector stocked their shelves at a slower pace.
Washington has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in January and slashing the federal budget in March.
“We are dramatically under-spending in Washington,” said Michael Strauss, a market strategist at Commonfund in Wilton, Connecticut.
U.S. stocks rose and the dollar weakened as some investors bet the data could dissuade the Fed from rushing to taper a bond buying program that has acted as a bulwark against government belt tightening. Prices for U.S. government debt pared losses.
Despite the signs of a substantial fiscal drag, the GDP report also highlighted a resilience that has surprised many economists.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity. rose at a 3.4 percent annual rate, up two tenths of a point from the government’s previous estimate.
Excluding the volatile inventories component, GDP rose at an upwardly revised 1.8 percent rate, slightly higher than analysts had forecast. This suggests that an improvement in hiring and incomes over the last year has helped keep economic momentum intact.
“(It’s) steady as she goes,” said Stephen Stanley, an economist at Pierpont Securities in Stamford, Connecticut
HOUSING RECOVERY
Most economists still expect economic growth will slow around the middle of 2013 as budget cuts are enacted. But growth is seen picking up by year end, propelled by consumer spending and an apparently entrenched housing market recovery.
In April, the National Association of Realtors’ index of signed contracts for home resales rose 0.3 percent to 106.0, the highest reading since April 2010.
The housing market recovery is being driven by the Fed’s very easy monetary policy stance, which has kept mortgage rates low. Although speculation the Fed could begin to curtail its bond buying within a few months has driven mortgage rates sharply higher in recent days, economists say the fundamentals of the housing recovery still appear strong.
A separate report showed the number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but not enough to suggest a shift in the recent pattern of steady job gains.
Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 354,000, above analysts’ expectations, Labor Department data showed.
(Additional reporting by Lucia Mutikani in Washington and Richard Leong in New York; Editing by Andrea Ricci)
A woman goes down an escalator at a Toys R Us store in New York, December 14, 2010.
Credit: Reuters/Shannon Stapleton
WASHINGTON |
WASHINGTON (Reuters) – Consumer spending fell in April for the first time in almost a year and inflation pressures were subdued, pointing to a slowdown in economic activity that should see the Federal Reserve maintaining its monetary stimulus for a while.
The Commerce Department said on Friday consumer spending fell 0.2 percent, the weakest reading since May last year, after edging up 0.1 percent in March. Economists had expected a 0.1 percent gain.
Consumer spending, which accounts for about 70 percent of U.S. economic activity, was held down by weak demand for utilities and weak receipts at gasoline stations on the back of a drop in gasoline prices at the pump.
When adjusted for inflation, spending nudged up 0.1 percent last month after rising 0.2 percent. The sixth straight month of gains in the so-called real consumer spending came as a key inflation gauge fell in April by the most since July last year, pushed down by declining gasoline prices.
The economy has been hit by higher taxes and deep government spending cuts as the government tries to slash its budget deficit.
It grew at a 2.4 percent pace in the January-March period, but is expected to slow to a rate of between 1.5 percent and 2.2 percent this quarter because of the government budget cuts, which are already putting a strain on manufacturing.
A price index for consumer spending fell 0.3 percent last month after dipping 0.1 percent in March. A core reading that strips out food and energy costs was flat after rising 0.1 percent the prior month.
Over the past 12 months, inflation has risen just 0.7 percent, the smallest gain since October 2009 and pushing further below the Federal Reserve’s 2 percent target. The index had increased 1.0 percent in the period through March.
Core prices are up 1.1 percent, the smallest rise since March 2011 and slowing from 1.2 percent in March.
The weak spending and the lack of inflation pressures could dampen market speculation the U.S. central bank might start scaling back monetary easing later this year.
Fed Chairman Ben Bernanke said last week a decision to start tapering the $ 85 billion in bonds the Fed is buying each month could come at one of its “next few meetings” if the economy appeared set to maintain momentum.
(Reporting By Lucia Mutikani)
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While the sell-side has been vociferous about the fact that earnings are troughing, that consensus growth expectations are not miraculous, that equities are discounting that awesome reality; it appears Goldman Sachs’ ‘Swirlogram” – which we initially discussed here – is pointing to what we have been seeing for months – a slowdown in their global leading indicator dead-ahead.
The GLI is rotating from expansion to slowdown rapidly… the drivers of the weakness are the Baltic Dry Index, Global PMIs, Global New Orders Less Inventories, and Goldman’s Aussie and Canadian Dollar TWI.
This is Goldman remember… not some tin-foil-hat wearing blog…
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