Friday 24th August 2012
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Stocks fell in the US and Europe on concern European leaders aren't making as much progress as hoped in resolving the region's debt crisis and Hewlett-Packard led declines in tech stocks after forecasting earning that missed estimates.
The Dow Jones Industrial Average fell 0.9 percent in afternoon trading on Wall Street, led by a 7.8 percent drop in HP after the biggest maker of PCs said annual profit before items would be US$4.05 to US$4.07 a share, below the US$4.08 average estimate in a Bloomberg survey, as it contended with falling demand. Intel and Microsoft both dropped on the news.
Investors see another round of quantitative easing in the US as a certainty after the Federal Open Market Committee minutes yesterday showed many committee members see the need to further stimulate the US economy.
To underline the motivation for more stimulus, US Jobless claims rose to a higher-than-expected 372,000 last week, according to Labor Department figures.
Yet purchases of new homes in America beat economists' estimates last month by rising to a 372,000 annual pace. And Federal Bank of St. Louis President James Bullard told CNBC the world's biggest economy has picked up pace since the meeting covered by the FOMC minutes.
Still, his colleague at the Fed, Chicago Fed President Charles Evans, was definitive. Embarking on the so-called QE3 would signal to markets that the US is "intending to be accommodative for quite some time," he was reported as saying from Beijing.
"The Fed yesterday set the bar really high for not doing quantitative easing," Mary Nicola, a New York-based currency strategist at BNP Paribas SA, told Bloomberg. "The real focus is what's happening out of Europe, what's happening out of the Federal Open Market Committee. Those are the key things the markets are watching right now."
Markets are now looking ahead to the gathering of central bankers in Jackson Hole, Wyoming, at the end of the month, which gives Fed chairman Ben Bernanke a platform to signal what form further stimulus could take in the US ahead of the next FOMC meeting on Sept. 12-13.
That means September is shaping up to be an intense month for key central bank meetings, with the European Central Bank set to meet amid speculation it will return to its broad bond buying programmes and unroll other measure to resolve the debt crisis.
Investors won't have to wait until next month, though, to get an update on the euro-zone's collective will to tackle its issues. German Chancellor Angela Merkel is preparing to welcome Greek Prime Minister Antonis Samaras this week and will already have caucused with French President Francois Hollande on how to respond to the debt-laden nation's request for more time to meet terms for financial aid.
While Merkel says the euro-zone must "stand by our obligations" she also said solving the debt crisis is an "arduous" task.
Merkel and Hollande will also likely be discussing Spain's need for financial support after Reuters reported that nation is in talks with its euro zone partners over the terms of such aid, needed to bring its borrowing costs down to a sustainable level.
Reuters cited unnamed euro zone sources in a report that said the favored option was to use the existing European rescue fund to purchase Spanish debt at primary auctions while the European Central Bank would intervene in the secondary market to lower yields.
The yield on Spanish 10-year government bonds rose to 6.35 percent, still short of the 7 percent level seen as problematic in terms of borrowing costs.
The euro recently traded at $1.2566 against the greenback, the highest since early July, adding to the gains since the FOMC minutes were released. The yen was at 78.47 per dollar, the strongest since Aug. 13.
Economic data from Europe suggests the regional economy is misfiring. Markit Economics' composite index of services and manufacturing stood at 46.6 on a scale where a reading below 50 signals contraction. Manufacturing in Germany, the region's biggest economy, stood at 45.1 this month on the same basis.
With dimmed hopes of a quick solution in Europe, another leg of global growth looked weak yesterday when China's preliminary reading for the purchasing managers index, the so-called 'flash PMI', held below the level of 50 that separates contraction from expansion for a 10th straight month.
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