Investors want to believe eurozone policymakers can resolve the debt crisis. But the risk of a prolonged recession is rising, and with it the chances that more action will be needed to shore up the currency area.
A full 86% of fixed-income investors surveyed by Fitch Ratings said the European Central Bank’s commitment to buy bonds of troubled eurozone nations, and European Union’s plans for a banking union represent major positive steps, although 81% acknowledged “significant economic, financial and political risks remain.”
Private forecasters think the European Commission is overly optimistic in its view that the eurozone will return to growth next year, after contracting by 0.4% in 2012, as deep spending cuts and tax rises take effect.
A weaker-than-expected performance would undermine those and other assumptions underpinning bailout programs in Greece and Portugal. It would also pile pressure on Spain to seek a formal bailout and further hobble core economies, such as France and Germany.
“The view embodied in our forecast is essentially that 2013 is going to be another extremely challenging year,” said James Nixon, economist at Societe Generale, which sees the eurozone economy shrinking by 0.3% next year.
“The governments of Greece, Spain and Italy have embarked on multi-year consolidation programmes and next year is the second of three,” he said.
Oxford Economics recently forecast a shallower eurozone contraction in 2013, but predicted overall domestic demand would fall by 0.7%.
“We’re already in the (fiscal) cliff this year and there is further fiscal tightening to come in 2013,” said Marie Diron, director of macro forecasting at Oxford Economics.
Spending by governments on goods and services, which has a direct impact on economic activity, would fall by 0.8%, compared with just 0.1% in 2012, Diron said, pointing to cuts in Spain and Italy that have not yet been implemented.
Southern Europe’s woes have already begun to affect the core. Germany has seen growth slow, and Moody’s stripped France of its AAA credit rating Tuesday, citing its exposure to shocks from the eurozone periphery.
Reaction was muted — the euro dipped and French government bonds were broadly stable — but Moody’s warned that any further deterioration in France’s economic prospects or ability to implement reform could trigger another cut.
The downgrade could presage cuts for those top-rated countries, said Steven Englander, global head of G10 FX Strategy at , Fortune 500).
“Little of what they cite is new and the downgrade reflects a reality that has probably long applied to France and applies to a number of the remaining AAA countries as well,” said Englander.
Germany, the Netherlands and Austria are feeling the effects of the eurozone slowdown and like France, are also funding existing bailouts.
Market nerves were calmed in September when the ECB announced its bond-buying program. The program, known as outright monetary transactions or OMT, requires governments to seek a formal bailout first.
Spain, which has already received pledges of support to recapitalize its banking system, has held off asking for a bailout but has a mountain to climb in 2013 to meet its fiscal targets.
“The government’s plan so far seems to have been to wait-and-see and it is unclear why this should change unless markets were to sell off more broadly or economic activity to fall even more sharply, creating a stronger sense of urgency,” UBS FX strategist Beat Siegenthaler said in a note.
“The risk of a broader sell-off has certainly increased over recent weeks as the OMT-induced rally has run its course and, apart from a favorable Greek review decision, there seems little on the policy horizon in terms of supportive events,” he added.
Underscoring the challenges facing southern Europe, Moody’s also kept a negative outlook on Italy’s banks, and said the ratio of problem loans was rising faster than it expected, driven by the impact of the recession on companies.
“This trend shows no sign of abating; combined with bank deleveraging and a corresponding contraction in the supply of credit, further pressures on asset quality are inevitable,” the agency said.
Apple may be ecstatic about the landmark $1 billion patent war it won against Samsung, but a recent report shows that Apple is a lightweight contender in a much more crucial battleground.
Apple’s share of the Chinese smartphone market was just a measly 7.5% during the first half of 2012, according to IHS iSuppli. That put the company in seventh place, behind Samsung (No. 1), ) (No. 5) and a host of native brands, including Lenovo, Coolpad, Huawei and ZTE.
That’s not a position , Fortune 500) is accustomed to — in nearly every other region of the world where it sells iPhones, Apple is in either first or second place.
Seventh certainly not where the company wants to be in the critical Chinese market. China is set to become the largest smartphone market in the world later this year, after more than doubling the number of devices sold in 2011, IHS iSuppli says.
If Apple wants to grab a larger slice of that rapidly growing pie, it may have to make some concessions to Chinese consumers.
Price is a big issue — the iPhone is a big-ticket item by Chinese standards. Phones aren’t commonly subsidized by wireless carriers in China like they are in the United States, putting a top-tier device like the iPhone outside the price range of many Chinese consumers.
For those customers who would have to save up months of paychecks to purchase an iPhone, many instead opt for an array of pre-owned devices and knock-offs, which are widely popular in China.
But Apple CEO Tim Cook has said that the company has no plans to offer a less feature-rich device to compete with lower-cost smartphone manufacturers in the country.
“I firmly believe that people in the emerging markets want great products like they do in developed markets,” Cook told analysts on a conference call in July. “And so we’re going to stick to our knitting and make the best products. And we think that if we do that, we’ve got a very, very good business ahead of us.”
Another strategy could be to develop an iPhone compatible with China Mobile’s network, which has nearly 700 million subscribers.
“Among all the international smartphone brands competing in China, Apple is the only one not offering a product that complies with [China Mobile’s] air standard,” said Kevin Wang, the IHS report’s author, in a press release. “For Apple, this is a huge disadvantage.”
There have been rumblings and rumors of negotiations between China Mobile and Apple for years, but nothing has come of those talks yet.
Still, it’s not an insurmountable problem for Apple. No single smartphone maker has a dominant lead in China — No. 1 Samsung controls only 21% of the market.
Another research firm, IDC, is reporting somewhat rosier numbers for Apple. IDC puts Apple in fourth place — not seventh — with 10.1% of the Chinese smartphone market. That’s still far behind Samsung (19%), but much closer to Lenovo (11%) and ZTE (10.4%).
“When you get right down to it, China is a gigantic freaking market,” said Ramon Llamas, analyst at IDC. “And to have double-digit market share is a testament to the strength of your brand and your devices. It’s something that’s not born overnight.”
In such a huge market, even 7.5% market share, he noted, is worth billions.
“Apple is in a very golden position right now, in that it’s a hot brand and a lot of people want it,” said Llamas. “There are a ton of vendors who don’t even have one percent market share. They would love to have 10.1% market share.”
Mortgage borrowing got cheaper again this week, as rates on 30-year and 15-year fixed-rate loans fell to record lows.
The 30-year mortgage dropped to 3.53% from 3.56% last week, Freddie Mac said in its weekly report. The 30-year fixed rate has matched or hit new lows for 12 of the past 13 weeks. Twelve months ago, the 30-year fixed rate stood at 4.52%.
Meanwhile, the 15-year fixed rate fell to 2.83% from 2.86% last week, Freddie Mac said. A year ago, it was 3.66%.
The consistently low rates are having a positive impact on the still-recovering housing market, according to Federal Reserve chairman Ben Bernanke.
More signs of a housing rebound
"In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward," he said in testimony before Congress on Tuesday.
First-time homebuyers and others who want to minimize their monthly payments usually choose 30-year fixed-rate mortgages. Those who take out a $200,000 loan at the current rate would have payments of $901 a month and would pay less than $125,000 in interest over the life of the loan.
For some trade-up buyers and many homeowners looking to refinance their loans, the 15-year fixed-rate mortgage is the more popular choice. The higher payments enable borrowers to pay the loan off quicker and minimize the total interest paid.
At the current rate, a borrower financing $200,000 with a 15-year mortgage would pay $1,365 a month and spend a total of just under $46,000 in interest.
Related: Where home prices are rising fastest
Rates have been in a steady, slow decline all year, going above 4% for the 30-year only once, back in March. Otherwise, the weekly average rate has moved between 3.53% and 3.99%.
According to Keith Gumbinger of HSH.com, a mortgage information company, that kind of stability helps homebuyers plan, execute and complete their transactions.
"Knowing that the mortgage rate you will get at the end of the buying transaction will be the same or even better than when you started can provide a potential homebuyer a strong boost of confidence, making it easier to want to start the process in the first place," he said.
The flip side is that loans are often hard to get. Since the mortgage meltdown began in 2007, banks have moved from very liberal to very strict lending standards. Now, they closely scrutinize employment records, income and other debt, which can disqualify many borrowers.
In 2009, with default rates soaring, mortgage giants Fannie Mae and Freddie Mac hiked minimum credit scores for conventional loans to 620 from 580, presenting another potential hurdle.
Banks are also more careful about the value of the property backing the mortgage.
About 20% to 25% of home sales in contract don’t close because the homes fail to appraise at the value needed to obtain a mortgage or because of inspection problems, according to Lawrence Yun, chief economist for the National Association of Realtors.
"The appraisal issue is very frustrating," he said.
Many of those sales eventually complete but may require buyers to come up with extra cash or sellers to drop their prices to reflect the conservative appraisal values.
European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.
While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank
China’s central bank announced a rate cut Thursday — its latest move to try and spur its slowing economy.
In its first rate cut since 2008, the People’s Bank of China trimmed a quarter percentage point off its deposit and lending interest rates. China’s one-year lending rate is now 6.31%, which is much higher than interest rates in the United States, Europe and Japan.
.staticLauncher {width:218px;border:1px solid #e8e8e8;} .staticLauncher a {font:normal 12px Arial; text-decoration:none;} .staticLauncher a:hover {text-decoration:underline;} .staticLauncher .staticLauncherHeader {clear:both; color: #000;padding:10px 10px 5px 10px; letter-spacing: -1px;} .staticLauncher .staticLauncherHeader a { font:bold 18px Arial;} .staticLauncher .imageContainer {width:218px;height:120px;} .staticLauncher .imageContainer img {display:none;position:absolute;} .staticLauncher .imageContainer img.show {display:block;} .staticLauncher .staticLauncherMore {float:right;}
10 largest economies
Economists and investors worldwide are concerned about China’s recent slowdown because it is an important driver of global growth. China is now the world’s second-largest economy behind the United States.
The central bank had most recently sought to spur growth on May 12 by reducing the amount of cash banks must hold in reserve, an effort to free up funds for lending and investment.
But China’s economy has continued to cool over the past month.
A purchasing managers’ index compiled for banking company HSBC earlier this month showed that Chinese manufacturing declined in May for the seventh straight month. The index fell to 48.4 in May from 49.3 in April. A reading of above 50 indicates growth in the sector.
Chinese exports have been hit by the European sovereign debt crisis, which has caused 11 countries on the continent to fall into recession and hurt demand from China’s largest market.
China’s gross domestic product, the broadest measure of its economic health, grew at an 8.1% annual rate in the first quarter. But that was sharply lower than the 8.9% growth at the end of last year.
"We believe that the rate cut will be effective in meeting the short-term objective of getting credit and the economy moving," said Mark Williams, chief Asia economist for Capital Economics. "There could be no stronger signal that policymakers are focused on growth. That alone should prompt more activity by the large state-owned sector."
Given the higher interest rates already in place, China’s central bank has much more room to work with to stimulate its economy than its Western counterparts have.
The key interest rate for the Federal Reserve has been near 0% since December 2008. The Fed has made massive asset purchases to try to pump additional cash into the economy since then. Fed Vice Chairman Janet Yellen said Wednesday that the Fed might need to take additional action to stimulate the U.S. economy.
But Fed Chairman Ben Bernanke did little to signal the central bank might provide additional stimulus in his testimony before Congress on Thursday.
The Bank of England left its key interest rate unchanged at 0.5% at its regular meeting Thursday, even though the United Kingdom has fallen into a new recession.
On Wednesday, the European Central Bank also left its interest rate at 1%. President Mario Draghi said a few members of the bank’s rate-setting committee would have preferred an immediate rate cut, and that the ECB is prepared to act if necessary.
Jay Bryson, international economist with Wells Fargo Securities, said Chinese leaders can tell bankers to what industries they want lending increased, far more directly than in Western economies. So the rate cut itself is somewhat less important in China than it is for other central banks’ monetary policy.
"The important thing here is they’re explicitly signaling they’re easing," said Bryson. "It’s a green light (that) probably means there will be more easing steps coming."
Related: China’s most powerful businesspeople
Bryson said that while 8% growth, or even the 7.5% growth target recently set by the Chinese goverment, would be considered fantastic in the West, the Chinese have to be concerned about unrest if their economy slows too much.
"Back in 2009, the growth rate got down to 6%, and you had factory closings and people losing jobs," he said. "They don’t want that to happen."
While investors had been hoping for some kind of action by the Chinese government to stimulate the economy, the timing of the rate cut announcement came as a surprise. Unlike the central banks in the United States and Europe, the People’s Bank of China does not have scheduled rate announcements.
So the rate cut announcement at 7 a.m. ET Thursday resulted in a sharp move higher for U.S. stocks in morning trading, as well as European stock markets. Asian markets had already closed for the day by the time the cut was announced.
JPMorgan Chase’s multibillion trading loss will be forgotten before the year is through, Chief Executive Jamie Dimon predicted Monday at the Deutsche Bank Global Financial Services Investor Conference.
Dimon called the losing trades "an isolated event" and said he both hopes and expects that it will be "something we don’t have to talk about by the end of the year."
He declined to explain why, or how the bank’s chief investment office could erase the losses. Dimon also said the bank would not give a public running tally of the losses.
Several sources recently told CNNMoney that losses could be as high as $6 billion to $7 billion. That’s a big jump from the $2 billion bandied around when Dimon first announced the losing trades on May 10.
JPMorgan’s (, Fortune 500) trades were built around contracts tied to corporate bonds. Specifically, the firm sold huge amounts of protection on an index of 125 highly rated corporate bonds that stood a better chance of paying off if the market had continued to rally.
While refusing to disclose details of what he called "this synthetic credit thing," Dimon said JPMorgan now has the right team in place to make things better.
He specifically cited Matt Zames, who replaced Ina Drew as chief investment officer, as the right person to unwind the trades. Zames was formerly a senior trader at Long-Term Capital Management, the failed hedge fund that placed massive bets on the trajectory of interest rates and required a $3.6 billion bailout from the Federal Reserve in 1998.
JPMorgan Chase loss only going to get worse
Throughout his hour-long speech before investors, Dimon continually tried to frame the loss as minute within the context of the bank’s overall balance sheet. He cited JPMorgan’s $1.1 trillion of liabilities, $700 billion in loans and the chief investment office’s $8 billion in unrealized gains.
"We are still a very conservative company," he added, citing the bank’s risk aversion several times during the talk.
Meanwhile, Dimon said the bank would suspend its share buyback program but will continue paying its dividend. The buyback suspension was simply a way to shore up capital to meet regulatory requirements, said Dimon. "Don’t interpret that [as a comment] on the size of the losses."
Shares of JPMorgan have declined roughly 18% since the loss was first announced, and the stock was down more than 2% Monday.
Dimon had been among the most outspoken critics of post-financial crisis regulation. Now, he appears to be walking a fine line in his criticism.
"I don’t disagree with the intent of the Volcker rule," he said, referring to the law that would prohibit banks from using their own capital to make bets on the direction of the market. It’s unclear whether JPMorgan’s trades would be considered bets along these lines.
His offered significantly more muted critiques of the new banking regulations, simply addressing how they might limit competitiveness of U.S. banks on the global stage. More regulation, he said, could force banks like JPMorgan to charge higher fees for trading and other banking activities.
"Market making is a critical thing to do right," he said. "America has the widest deepest most transparent capital markets in the world."
He said he worries about how JPMorgan would compete with Deutsche Bank () or other European banks if costs rise because of regulation.
Gas prices are coming down for most of the nation, but not for Lynnae McCoy and other residents of the West Coast.
While supplies of gasoline are flush in much of the country, due to a combination of increased domestic production and reduced consumption, supplies are at the tightest point since the early 1990s west of the Rockies. That means that while gas prices have fallen about 5% in the last month nationally, they’ve barely moved up and down the West Coast.
McCoy, who lives outside Medford, Ore., with her husband Jim and three children, is spending about $65 a week fueling a Toyota minivan to take kids to schools and various other activities. Her husband, a sports broadcaster, spends about $50 on gas to get to and from work.
The $115 or so they’re spending at the pump each week is more than many items in their household budget, including tuition to her 9-year old son’s school.
"It does make me angry," she said. "It cuts into our lifestyle where we have to make hard decisions. Do I have to work more hours freelancing? How can we cut the grocery budget? We’re fairly frugal anyhow. Gas prices are making it really hard to survive."
West Coast prices are typically among the most expensive in the nation anyway. State taxes and strict environmental regulations are two factors. Another is limited supply — the West Coast is far from domestic sources such as the Great Plains and the Gulf Coast, as well as from the Middle East.
"Gasoline stocks in the country are OK, but if you look at inventories on the West Coast, they’re lower than they’ve been in May since 1992," said Tom Kloza, chief oil analyst of the Oil Price Information Service, the firm that compiles the pump price averages for AAA. "People are going to be complaining out there."
AAA’s reading of gas prices typically shows California pump prices about 30 cents a gallon higher than what’s paid by motorists nationally. Oregon and Washington State have prices comparable to California.
But as prices nationally have fallen 21 cents a gallon since early April, the gap between that average and the California average has swelled to more than 60 cents — $3.722 a gallon for unleaded nationally, compared to $4.366 in California. Other West Coast states are paying about 50 cents above the national average — $4.239 in Washington State and $4.215 in McCoy’s Oregon.
Gas prices down and heading lower
Hawaii has the most expensive gas in the country at $4.546, followed by Alaska, which has plenty of oil but no refineries. Gas there costs $4.487.
But no other state is paying more than $4 a gallon although three are within a few pennies of that pain threshold — New York and Connecticut, the two states with the highest gas taxes, and another western state, Nevada, where the average price is $3.968.
Prices are likely to decline on the West Coast once refineries are done switching over to the cleaner summer blend of gasoline that meets environmental rules. But there’s going to be more pain for the West Coast drivers before they see meaningful relief later this summer.
"I won’t be surprised to see the West Coast actually rebound above some of the highs we saw in March," said Kloza.
Indonesia
U.S. stocks moved higher Friday, capping a weekly gain, as upbeat corporate results outweighed a weaker-than-expected report on first-quarter economic growth.
The Dow Jones industrial average () rose 28 points, or 0.2%, to end at 13,228. Procter & Gamble (, Fortune 500) was the biggest drag on the Dow after the consumer staple company lowered its outlook for full-year earnings. The stock fell 4%.
The S&P 500 () rose 4 points, or 0.3%, to 1,403. The Nasdaq () added 18 points, or 0.6%, to 3,069.
Stocks started the week on a sour note, with a sharp selloff on Monday. But the Dow & S&P 500 have climbed for four days in a row, driven mainly by better-than-expected corporate earnings.
For the week, the Dow gained 1.5%. The S&P 500 advanced 1.8% and the Nasdaq is 2.3% higher for the week.
On Friday, the top performers on both the S&P 500 and Nasdaq were Expedia () and Amazon (, Fortune 500). Expedia surged 23% after the travel booking website reported strong earnings late Thursday. Amazon jumped 15% after its results beat expectations and eased concerns about the online retailer’s expansion.
Ford Motor (, Fortune 500) shares fell 2% after it reported a 45% plunge in quarterly profit, because of losses in Europe and a slight dip in sales. But the automaker still managed to beat expectations.
As of Thursday, 300 companies in the S&P 500 had reported earnings, and 70% of them beat estimates, according to Capital IQ.
Overall, Capital IQ expects earnings to grow 6.6% in the first quarter, or 4.5% excluding the profit machine that is Apple (, Fortune 500).
While that would be down from the fourth quarter, such earnings growth would still suggest that "the world isn’t ending," said Jack Ablin, chief investment officer at Harris Private Bank.
"The market is trading at distrust discount, and increased confidence should allow stock prices to move higher, even if earnings don’t," Ablin added.
Meanwhile, the U.S. government said first-quarter gross domestic product — the broadest measure of the nation’s economic health — rose at an annual rate of 2.2%.
The report was weaker than expected. Economists surveyed by CNNMoney forecast that GDP grew at a 2.5% rate in the first quarter, down from 3% in the fourth quarter of 2011.
"While the economy continued to grow in the first quarter, the expansion remains modest in pace and subpar from a historical perspective," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors credit reports free.
After Thursday’s closing bell, the S&P announced that it was downgrading Spain’s credit rating from "A" to "BBB+," citing numerous drags on growth and an ailing banking sector that might require further government support.
Fixing China’s banks
On Friday, the Spanish government said unemployment rose to 24.4% in the first quarter.
U.S. stocks ended with gains Thursday as hopes for more Federal Reserve stimulus and positive housing data overtook worries about the job market and mixed corporate earnings.
Companies: Dow component Procter & Gamble (, Fortune 500) reported quarterly earnings of 93 cents per share, which beat expectations by one cent. Sales rose by 2% to $20.2 billion.
But the company, which makes everything from batteries to laundry detergent, lowered its forecast for full-year profits.
P&G now expects 2012 earnings per share to be in the range of of $3.63 to $3.74, down from a range of $3.85 to $4.08.
Behind Apple’s App Store curtain
The drug giant Merck (, Fortune 500) reported that its quarterly earnings jumped 8% to 99 cents per share, excluding certain charges. But the company fell short of forecasts by Thomson One Analytics projecting earnings of $1.03 per share.
Economy: A measure of consumer sentiment inched up to 76.4 in April, roughly in line with estimates. The University of Michigan Consumer Sentiment Index stood at 76.2 in March.
World markets: European stocks closed higher. London’s FTSE 100 () rose 0.5%, the CAC 40 () in Paris gained 1.1% and the DAX () in Frankfurt rose 0.9%.
Asian markets lost ground, despite steps by the Bank of Japan to further ease monetary policy there by announcing ¥5 trillion of additional asset purchases. The Shanghai Composite () shed 0.4%, while the Hang Seng () in Hong Kong slipped 0.3% and Japan’s Nikkei () fell 0.4%.
Currencies and commodities: The dollar fell against the euro, the Japanese yen and the British pound.
Oil for June delivery rose 38 cents to $104.93 a barrel.
Gold futures for June delivery rose $4.30 to $1,664.80 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury edged higher, pushing the yield down to 1.95%.
TORONTO
Powered by WordPress -- XHTML 1.0