Published: May 25, 2010
Wall Street traveled a long way on Tuesday, but the journey was circular.
Uncertainty in Europe and Asia spilled over into the American market Tuesday, pushing stocks lower for most of the day and stirring concerns that the debt crisis could stall a recovery.
The Dow tumbled at the opening and languished below 10,000 until the last half hour, when shares staged a comeback. At one point, the major indexes were down more than 2 percent losses.
The Dow ended mostly flat, down 0.2 percent, or 22.82 points, at 10,043.75. The Standard & Poor’s 500-stock index was 0.38 points, 0.04 percent, higher at 1,074.03. The Nasdaq slipped 2.60 points, or 0.1 percent, at 2,210.95.
The drop followed equity markets in Asia and Europe, where most major markets were down at least 2 percent.
As investors had feared for months, the uncertainty over the sovereign debt crisis in Europe exacerbated concerns about the health of the global economy.
“If there was a doubt about it, there isn’t any more,” said Marc Chandler, the global head of currency strategy for Brown Brothers Harriman & Company.
“The European debt crisis is not simply a Greek phenomenon,” he said in a research note.
Fiscal troubles have circulated in Greece, reached Spain, where the central bank has taken over a failing lender, and hit home in Portugal, which has taken steps to make cuts. The government in Italy was also announcing spending cuts.
Germany, which last week banned some forms of financial market speculation in banning naked short-selling, went further Tuesday, proposing a law that would broaden restrictions on instruments investors use to bet against stocks, bonds and currencies.
As the American markets tumbled, investors fled equities for the relative safety of United States securities, pushing the benchmark 10-year Treasury note lower to 3.14 percent, its lowest level in a year.
The president of the St. Louis Federal Reserve Bank, James B. Bullard, said in a speech in London that he did not think the current situation would lead to a repeat of the financial crisis seen after the collapse of Lehman Brothers in 2008.
The United States “may actually be an unwitting beneficiary of the crisis in Europe, much as it was during the Asian currency crisis of the late 1990s.”
“This is because of the flight to safety effect that pushes yields lower in the U.S.,” he said. “Of course the U.S. also has its own fiscal problems that must be directly addressed in a timely manner if the nation is to maintain credibility in international financial markets.”
He also addressed concerns that the crisis could lead to a recession, saying it would probably fall short of becoming “a worldwide recessionary shock,” partly because governments are working to contain the risks. “In most cases,” Mr. Bullard said, “there is little reason to think that such events by themselves have the power to trigger global recessions.”
“Of course, it is always possible that ‘this time will be different’ and maybe it will be,” he said
There were also renewed tensions on the Korean Peninsula.
President Lee Myung-bak of South Korea said Tuesday that he would redesignate North Korea as his country’s archenemy, as the South Korean and American militaries announced plans for major naval exercises.
Asian indexes closed lower as a result.
Adrian Cronje, chief investment officer of Balentine, said however, that problems on the Korean peninsula aside, the fiscal troubles in Europe were overriding confidence.
Mr. Cronje said markets needed more than the nearly $1 trillion European support package to restore confidence. Instead, he said, investors are looking for a credible plan for sustainable public finances in Europe.
“What is happening now is people are starting to wake up to the fact that this stands a chance of derailing the robust economy,” Mr. Cronje said.
The euro continued to weaken on Tuesday, falling to $1.2347 from $1.2371 late Monday.
“The fundamental fallout of all this is an increasing risk of recession again in the U.S. and global economies,” said Allen Sinai, president and chief global economist of Decision Economics Inc.
“The way the U.S. is getting hit at the moment is sneaking in via the stock market. It is like water flooding the house; water seeps, finds a way.”
Domestic economic indicators were watched closely for any sign that events in the Euro-zone were having an impact on the United States, said James O’Sullivan, chief economist for MF Global.
The Standard & Poor’s/Case-Shiller 20-city home price index released Tuesday showed a 0.5 percent drop in March compared to February, a sign that the housing market was weakening despite low mortgage rates and government tax credits.
But more important than the March housing statistics were more current figures showing consumer confidence rose this month, Mr. Sullivan said,
The Conference Board index of consumer confidence rose to 63.3 in May, from 57.7 in April, according to a report released Tuesday.
“The decent rise in U.S. consumer confidence in May suggests that the turmoil in financial markets and lower house prices have yet to have an impact on the real economy,” said Paul Dales, United States economist for Capital Economics.
Interbank lending is coming under increasing pressure. Conditions in the credit markets deteriorated further on Tuesday, with the London interbank offered rate, or Libor, for three-month dollar loans rising for a 12th consecutive day, to 0.53625 percent from 0.50969 percent Monday. It was the Libor’s highest rate since late July 2009.
Bettina Wassener, David Jolly and Sewell Chan contributed reporting.
http://www.nytimes.com/2010/05/26/business/26markets.html?src=me&ref=business
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