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While you were sleeping: Italy, Spain and Buffett

Tuesday 15th November 2011

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Stocks on both sides of the Atlantic dropped, as did the euro, after investors demanded the highest yield since 1997 to buy Italian debt and Spanish bonds hit the radar.

Italy’s Treasury auctioned 3 billion euros of September 2016 notes, the maximum target. The yield was 6.29 percent, up from 5.32 percent at the previous auction. Demand rose to 1.47 times the amount on offer, from 1.34 times last month, according to Bloomberg News. Spanish 10-year bond yields rose through the 6 percent level ahead of this week’s national elections.

Today’s economic data highlighted the consequences of the lingering debt crisis as the euro zone’s industrial production declined in September, boosting concern the region might be headed for a recession. Output at factories in the 17-nation group dropped 2.0 percent for the month, the most since early 2009.

In afternoon trading in New York, the Dow Jones Industrial Average dropped 0.80 percent, the Standard & Poor's 500 Index fell 1.16 percent and the Nasdaq Composite Index shed 0.89 percent.

"We are not an island. We are dependent ... and Europe's not likely to escape a recession," Steve Goldman, principal at Goldman Management in Short Hills, New Jersey told Reuters.

The European debt crisis is raising the odds of a US recession, with economic contraction more likely than not by early 2012, Reuters reported, citing research from the San Francisco Federal Reserve Bank.

While it was difficult to gauge the odds precisely, an analysis of leading US economic indicators suggested a rising chance of a recession through the end of the year and into early next year, researchers at the regional Fed bank wrote on Monday. The risk of recession receded after the second half of 2012, they found.

Separately, the Organisation for Economic Co-operation and Development said on Monday that growth in all the world's major economies was at risk of slowing.

The OECD's composite leading indicator (CLI) for its members fell for the seventh straight month to 100.4 in September, down from 100.9 in August and hitting the lowest reading since December 2009.

"Compared to last month's assessment, the CLIs point more strongly to slowdowns in all major economies," the OECD said in a statement.

The debt crisis and bleak economic outlook may lead to a rethink on the euro zone after all.

German Chancellor Angela Merkel said at her political party’s annual conference that "Europe is in one of its toughest, perhaps the toughest hour since World War Two" and that it may be time to update the euro zone to reflect changes since the EU was founded.

The euro was last 1.1 percent weaker against the greenback and had shed 1.2 percent against the yen to 104.86 yen.

Europe’s Stoxx 600 Index dropped 1 percent on the day. The biggest decliner was Hochtief after the German construction company said the “macroeconomic situation” had delayed the sale of its airport-operating unit, forecasting a net loss if the sale wasn’t concluded this year.

Among the bright spots today was Boeing’s US$26 billion deal with Emirates airline, bolstering the plane maker’s shares.

IBM also received a big vote of confidence. Warren Buffett told CNBC that his Berkshire Hathaway had accumulated a 5.5 percent stake in IBM.

"I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM," Buffett told CNBC in an interview on Monday.


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