|Stocks edge lower, oil drops again|
|Tuesday, 18 September 2012 15:14|
Shares in Europe and the United States edged lower on Tuesday, dropping for a second straight day as investors looked for reasons to extend a recent rally amid signs of slowing economic growth.
Doubts grew over Spain's willingness to ask for an aid package, raising new concerns about Europe's debt crisis and the euro, while bellwether FedEx cut its profit forecast, darkening the corporate earnings outlook.
In addition, the Swiss government cut its growth forecast for this year and next.
Equities are coming off strong gains last week, when the Federal Reserve promised to keep pumping money into the U.S. economy and the euro zone's bailout fund got crucial backing from a German court. The S&P climbed to multi-year highs while European shares reached a 14-month peak.
Many investors said the pullback this week was to be expected as investors took profits, especially in the absence of fresh catalysts. European shares .FTEU3 closed 0.4 percent lower while the S&P lost 0.3 percent. Global stocks .MIWD00000PUS fell 0.53 percent.
"Economic data is where the immediate focus is going to be, but remember we are almost at the end of the quarter here - it is a quarter where there is some concern about earnings and the economic recovery going forward, at least in the near-term," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
FedEx Corp (FDX.N) cited weakening global economic conditions for its reduced 2013 profit outlook. Its stock fell 2.7 percent.
However, Apple Inc (AAPL.O), the most valuable U.S. company, continued its meteoric rise as consumers sign up for the new iPhone. Its shares, up more than 70 percent so far this year, reached an all-time high and topped $700 at its session high.
Investors are becoming worried that Spain may try to avoid accepting what would be a politically unpopular EU/IMF bailout. Requesting aid is a condition for the European Central Bank to start buying bonds of any troubled euro zone government.
"We take the view that delaying tactics by the Spanish government to request aid could backfire and lead to renewed upward pressure on yields because markets are effectively assuming that an aid request is more or less a done deal," said Rabobank economist Elwin de Groot.
Uncertainty was evident in bond markets. German Bund prices rose 0.27 percent as the reversal of the recent falls continued, though borrowing costs for Italy and Spain eased.
Ten-year Spanish bond yields dipped back below the 6 percent barrier that was breached on Monday and were 5 basis points lower at 5.97 percent.
The euro dropped 0.6 percent, putting it back below $1.306. The yen was also pressured, with speculation that the Bank of Japan might loosen policy on Wednesday following last week's move by the U.S. central bank.
The Dow Jones industrial average .DJI was down 7.66 points, or 0.06 percent, at 13,545.44. The Standard & Poor's 500 Index .SPX was down 3.86 points, or 0.26 percent, at 1,457.33. The Nasdaq Composite Index .IXIC was down 4.63 points, or 0.15 percent, at 3,174.05.
The benchmark 10-year U.S. Treasury note was up 12/32, the yield at 1.8013 percent.
Inflation expectations spiked on Friday after the Fed's QE3 announcement but have retreated from their highest level since 2006 with weaker equity and oil prices, according to analysts.
A measure of longer-term inflation expectations is the yield premium, or inflation breakeven rates, on regular Treasuries over Treasury Inflation-Protected Securities, or TIPS. The 10-year TIPS breakeven rate, which gauges investors' inflation expectations, was 2.54 percentage points, down 5 basis points from Monday's close. It rose above 2.70 points on Monday, analysts said.
Sterling, as well as the Australian and New Zealand dollars, softened against the U.S. currency after all three had made recent sharp gains. The Aussie slipped after the Australian central bank left the door open for a rate cut.
"Unless we get this (Spanish) uncertainty out of the way, we expect the euro to face some resistance around its highs," said Adam Myers, senior currency strategist at Credit Agricole.
Comments by Belgian ECB policymaker Luc Coene also put downward pressure on the euro. He said on Monday that an interest rate cut, charging banks to deposit cash and a new offer of ultra-cheap long-term funding were all potential options for the ECB.
Coene also warned that Spain's borrowing costs would jump again unless it accepts an aid program.
But Madrid, which is trying to cash in on the current benign conditions with two bond auctions this week, saw its borrowing costs fall slightly at a 4.5 billion euro sale of short-term debt. Greece also sold three-month T-bills.
A more serious test will come on Thursday when Spain attempts to sell the same amount of 3- and 10-year debt. It has not tried to auction as much in one sale since early March, when an ECB decision to flood the banking system with cheap three-year loans had temporarily calmed the markets.
Oil prices, up almost 10 percent since early August, extended Monday's decline by dropping 1.2 percent on economic grown concerns, which could weigh on demand prospects. Brent crude is down 3.6 percent over the past two session. Gold prices edged lower.
"Investors are really in defensive mode today, and probably will stay that way until Thursday, when we get the fresh read on manufacturing out from China," said Juliana Roadley, a market analyst at Commonwealth Securities. A flash reading of China's purchasing managers' index for September is due on September 20.
Brighter news came from Germany, where the ZEW index of analyst and investor morale rose more than expected in August following the ECB's promise to preserve the euro.
"The rise clearly reflects the positive reaction to the ECB's announcement of the new bond-buying program, which has boosted financial market sentiment and significantly reduced the big systemic risks to the euro," said Aline Schuiling, senior economist at ABN Amro.