Archive for April, 2010

Stocks bounce back, rise in early trading (AP)

Wednesday, April 28th, 2010 | Finance News

NEW YORK – Stocks rose early Wednesday after European leaders tried to reassure skittish investors that Greece would receive bailout money to help it with its debt problems.

Another strong batch of earnings is also boosting stocks Wednesday. Comcast, Corning, Northrop Grumman and Dow Chemical all posted better-than-expected results. Investors will also keep an eye on the Federal Reserve Board, which is wrapping up a two-day meeting later in the day.

Markets tumbled globally in the past couple of days after Standard & Poor's slashed its rating on Greece's debt to junk status. Portugal's debt rating was also cut by S&P.

German leaders said that country's portion of a bailout for debt-burdened Greece could be approved by the end of next week. Germany, the biggest of the 16 countries that use the euro, has been slow to approve rescue measures to bail out its fellow eurozone member.

Investors are worried that Greece hasn't been able to tap nearly $60 billion in bailout money from the European Union and the International Monetary Fund. If it doesn't get money soon, Greece could default on $11.3 billion in debt payments due on May 19.

Germany is expected to provide $11 billion of the bailout package.

The market's gyrations in the past couple of days follows a similar pattern that has been seen periodically since January: investors get spooked by Greece's burdening debt problems one day only to get reassurances from European leaders the next day.

The Dow Jones industrial average plunged 213 points Tuesday — its worst day in three months — after Greece and Portugal's debt ratings were slashed.

There are fears that Greece's debt problems will spread across the continent and stunt a global economic recovery.

Fears of excessive government debt could also drive up borrowing costs for many of the countries using the euro. Market rates for Greece's two-year notes have already spiked above 20 percent. U.S. rates for two-year notes are around 1 percent.

The euro rose slightly against the dollar Wednesday, a day after plunging to its lowest level in about a year. European stock markets mostly fell, but were off their lows for the day.

In early morning trading, the Dow Jones industrials average rose 38.69, or 0.4 percent, to 11,030.68. The Standard & Poor's 500 index rose 5.47, or 0.5 percent, to 1,189.18, while the Nasdaq composite index rose 12.15, or 0.5 percent, to 2,483.62.

Earnings have provided a boost to stocks early in the day, after similarly strong results failed to impress investors on Tuesday. Cable company Comcast Corp., Corning Inc., Northrop Grumman Corp. and Dow Chemical Co. were the latest companies to top earnings expectations.

Investors will also pay close attention to the Fed's interest rate-setting committee meeting that ends later in the day. The Fed is expected to hold a key interest rate at historic lows. The group, though, is expected to reassure the market that an economic recovery has taken hold.

The Fed isn't expected to raise rates at this meeting, so investors will keep a close eye on the language of the committee's statement. Traders will want to see if the Fed provides further insight into when it might raise rates, which is expected to happen later in the year as the economy continues to get stronger.

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European debt crisis looms over meeting (AP)

Wednesday, April 28th, 2010 | Finance News

BERLIN – Financial markets reacted violently to a gathering government debt crisis in Europe — and awaited clear word from Germany that it would come to the aid of Greece to keep its financial troubles from spreading to other countries.

Markets were looking for reassurance from a meeting Wednesday by Chancellor Angela Merkel, the International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet in Berlin.

Greece has said it can't pay debts coming due May 19 without euro45 billion ($59.8 billion) in bailout loans from the countries that use the euro as well as the International Monetary Fund. But Germany, which would be the biggest single contributor with some euro8.4 billion, has delayed approving its share of the money, calling for strict conditions and parliamentary approval that could take time.

That raised fears Greece might not get the money it needs to stave off collapse.

That comes on top of Tuesday's downgrade of Greek bonds to junk status and the lowering of Portuguese bonds two notches. The move by the Standard & Poor's ratings agency fueled fears that Greece's crisis will spread to countries with troubled finances such as Spain and Italy that are too large to be bailed out.

The downgrade "has sent the bond markets into meltdown and equity investors toward the exits," said Michael Hewson, an analyst with CMC Markets in London.

Yet many Germans oppose the Greek bailout; a poll by Dimap, for German newspaper Die Welt and French broadcaster France 24, showed that 57 percent of Germans thought that aid was a bad decision while just 33 percent favored such a move. The survey was conducted earlier this month and surveyed 1,009 people. No margin of error was given.

Underscoring the German debate is an important election in Germany's most populous state on May 9. Merkel is also coming under pressure from within her own party, the conservative Christian Democratic Union, over her handling of the Greek issue.

Finance Minister Wolfgang Schaeuble stressed in an interview with the Handelsblatt daily Germany is committed to helping Greece.

"The German government is not riding the brakes," Schaeuble said. "We are pushing for a quick decision."

A government spokesman, who refused to give his name because of the sensitivity of the issue, said the Finance Ministry had already prepared draft legislation for parliament to approve the loan guarantees — a critical and necessary step for the German contribution to go through.

In the meantime, stocks sagged and markets sold off Greek bonds with a vengeance. Investors appeared to anticipate Athens would eventually have to default or restructure its debt payments at some point even if the bailout gets it past May 19, when it has debt coming due.

A key indicator of risk — the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent — hit an astonishing 9.63 points, a massive jump from around 6.4 points on Tuesday. It translates into borrowing costs at the moment of nearly 13 percent for a 10-year bond, four times what Germany pays to borrow.

Authorities in Athens halted short-selling of stocks for two months as the Athens stock exchange continued a six-day losing streak Wednesday, with the benchmark general index down 0.92 percent at 1,681.07 points in midday trading. The bourse took a hammering Tuesday, losing 6 percent.

The ban on short-selling of shares — in effect, betting they will go down — will remain in force until June 28.

In Athens, German lawmakers met with Greek Finance Minister George Papaconstantinou, while some 200 people protested the government's hiring freeze on civil servants.

In Lisbon, Portuguese Prime Minister Jose Socrates and the leader of the main opposition party were set to hold emergency talks on steering the country out of its financial crisis as the Lisbon stock market plunged for a second day, sliding 6.2 percent.

"There is a very serious risk of contagion, it's something like post-Lehman period. Everybody is panicking and there is a lot of fear in the market," Nicholas Skourias, chief investment officer at Pegasus Securities in Athens told AP Television News. He was referring to the 2008 collapse of U.S. investment bank Lehman Brothers, which sped up the world financial crisis.

"I think that today we will have a lot of pressure as well because there is this fear of contagion."

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Associated Press Writers Juergen Baetz in Berlin, Barry Hatton in Lisbon, Nicholas Paphitis and AP Television Producer Nathalie Rendevski Savaricas in Athens contributed to this report.

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Fed likely to sound confident note on recovery (AP)

Wednesday, April 28th, 2010 | Finance News

WASHINGTON – Federal Reserve policymakers are likely to deliver a fresh vote of confidence in the staying power of the recovery as signs multiply the economy is strengthening.

Fed Chairman Ben Bernanke and his colleagues wrap up their two-day meeting Wednesday afternoon and are all but certain to keep holding rates at record lows to help the economy grow. However, they'll also expected to discuss when and how they'll reverse course and start boosting rates once the recovery is firmly rooted.

The Fed meets as the economy flashes growing signs of improvement.

Employers are creating jobs. Americans' confidence is rising and they are spending more. Manufacturers are boosting production. And an increasing number of companies — such as Ford, Caterpillar and UPS — are seeing their profits grow. By those measures, the economy is in better shape now than when the Fed last met in mid-March.

Still, there are continuing strains: high unemployment at 9.7 percent, loans are hard for people and businesses to obtain, and the housing and commercial real-estate markets are fragile. Greece's debt crisis also is roiling Wall Street. U.S. stocks lost 2 percent on Tuesday.

"The Fed's confidence in the recovery has clearly improved, and they'll communicate that," said Bill Cheney, chief economist at John Hancock. "But they are still going to be cautious because certainly nothing about the economy is cast in stone. I don't think the Fed wants to create any image that it's ready to boost rates," he added.

For now, the Fed is poised yet again to leave its key bank lending rate between zero and 0.25 percent, where it's remained since December 2008.

Assuming the Fed leaves rates alone, commercial banks' prime lending rate, used to peg rates on certain credit cards and consumer loans, will stay about 3.25 percent. That's its lowest point in decades.

Rock-bottom rates serve borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.

Still, if super-low rates spur Americans to spend more, they will help invigorate the economy. That's why the Fed also is expected to repeat its pledge — in place for more than a year — to keep rates at record lows for an "extended period."

Some concern has emerged inside the Fed that that pledge could limit its ability to quickly raise rates when necessary. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for two straight meetings has opposed the Fed's decision to retain the "extended period" pledge.

Hoenig said he fears keeping rates too low for too long could lead to excessive risk-taking by investors, feeding new speculative bubbles. He's also expressed concern that low rates could eventually unleash inflation.

Yet Bernanke and other Fed officials in recent weeks have made clear that the Fed's pledge to keep rates at record lows for an "extended period" is linked to the economy's performance — not to a specific period. The Fed will raise rates whenever it decides it's necessary, Bernanke has said.

Higher rates for millions of American borrowers are still months away at best, many economists predict.

The timing and execution of a Fed policy shift is a high-stakes game.

The Fed needs to hold rates at record lows long enough to make sure the recovery is lasting, especially once the bracing effects of the government's massive fiscal stimulus fades later this year.

On the other hand, the Fed must be nimble to start tightening credit to prevent inflation from becoming a problem or sowing the seeds of new speculative excesses such as in the prices of stocks, bonds or commodities.

One tricky question is when the Fed should start selling some of its vast portfolio of mortgage securities. The Fed bought $1.25 trillion of these securities to drive down mortgage rates and aid the housing market. Its challenge is to sell those assets in a way that doesn't weaken home prices and push up mortgage rates.

"My expectation is that sales would be slow, gradual, announced in advance, and would not create undue market impacts," Fed Chairman Ben Bernanke told Congress recently.

The Fed's balance sheet has exploded, reflecting the central bank's action to fight the financial crisis. It stood at $2.3 trillion for the recent week, more than double the level before the crisis struck.

"I think we would like to bring the balance sheet back to something consistent with where it was before the crisis," Bernanke told lawmakers. "And that would suggest something under a trillion dollars, I think, would be appropriate."

Besides selling securities outright, the Fed has a number of other tools to shrink its balance sheet when it moves to tighten credit. Those include selling securities from its portfolio with an agreement to buy them back later. Those operations are called reverse repurchase agreements. The Fed also is moving forward on a plan to let banks set up the equivalent of certificates of deposit at the central bank. That would give banks an incentive to park money at the Fed, rather than lending it out.

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