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U.S. plays down European crisis but China worried


China worried about European crisis

U.S. Treasury Secretary Timothy Geithner (2nd L) speaks next to Federal Reserve Chairman Ben Bernanke during the opening ceremony of the U.S.-China Strategic and Economic Dialogue at the Diaoyutai State Guesthouse in Beijing May 24, 2010.
Credit: Reuters/Frederic J. Brown/Pool




BEIJING/MADRID (Reuters) - The United States suggested Europe's debt crisis would have minimal impact on global growth, but China took a more pessimistic view, warning it would impact demand for its exports and other regions would suffer too.
China
The two countries, meeting in Beijing for high-level talks, set the differing tones as eurozone leaders sought to conquer doubts that they can cut fiscal deficits and stimulate growth to overcome the crisis.
Global markets have been gripped by fears that a debt crisis engulfing Greece will spread to other highly indebted nations, particularly in southern Europe, dragging down the continent's economy and hitting trade with the United States and Asia.
"The euro zone problems haven't been cleaned up yet," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"And even though the global economy is definitely showing more signs of recovery than it did 6 months ago, worry continues that the euro zone's woes will put a brake on this growth."
Greece's prime minister on Sunday ruled out defaulting on payments or restructuring its debt and his Spanish counterpart vowed to push through an austerity plan despite union threats to strike.
In Beijing, where officials from the world's No.1 and No.3 economies were meeting for U.S.-China Strategic and Economic Dialogue, there were contrasting messages about the dangers Europe's woes posed to the global recovery.


U.S. Treasury Secretary Timothy Geithner, who flies to Europe on Tuesday for talks in Britain and Germany on stabilizing the continent's economy and financial markets, said on Monday the global economy had been strengthening faster than expected.
At the weekend, a senior U.S. Treasury official, who declined to be identified, had said the European crisis would have minimal impact on the world economy.


China's state planning commission seemed less optimistic, saying on Monday that the crisis would affect demand of Chinese goods. On Sunday, Finance Minister Xie Xuren had warned that Europe's debt woes could hit other regions.
"At present, risks from European sovereign debt have increased factors of instability in the course of global economic recovery," Xie wrote an essay published in the Washington Post and on his Ministry's website (www.mof.gov.cn).

Some analysts suggest China may delay letting its yuan currency rise in value -- as Washington has urged -- out of concern that its exports to Europe will suffer.
"China is unlikely to de-peg the yuan anytime soon," Standard Chartered Bank said in a note to clients.
Citing, among other factors, the need to see some stabilization in global markets and a sustained trade surplus, the bank said Beijing is likely to wait until the third quarter to unleash the yuan. It had previously predicted May.


POLITICAL WILL
Japan's government also raised concerns, saying in its monthly economic report that attention should be paid to the potential risks of a slowdown in overseas economies, particularly in Europe.
European leaders have sought to deal with a crisis that has pushed many euro zone member states' borrowing costs sky high through a 110 billion euro bailout of Greece and the setting up of a $1 trillion safety net to stabilize the single currency.

But after riots on the streets of Athens and with strikes looming elsewhere, investors remain concerned about whether Europe has the political will to rein in bulging government deficits and tackle sluggish growth.
"Europe is trying to solve a debt problem with further debt," said Domenico Lombardi, president of the Oxford Institute for Economic Policy.
Greek Prime Minister George Papandreou said in an interview published on Sunday in a Spanish newspaper that EU governments had been slow to act in order to prevent the Greek crisis spreading to other members of the 16-country euro zone.

"The EU took time to realize that speculators' attacks on Greece were just a step before attacking other countries and even threatening the stability of the euro zone," he said.
But he insisted Greece was not sliding toward insolvency.
"We have no need for defaulting on payments or restructuring," Papandreou told El Pais. "We have opted not to do so. We have opted to pay back the loans we have requested."
Spain's Prime Minister Jose Luis Rodiguez Zapatero is also under pressure to make spending cuts and implement long-awaited labor reforms to avoid a Greek-style loss of confidence.
The country's largest union has said it may call a general strike, but Zapatero insisted on Sunday he would not revise a 15 billion euro austerity plan.
"I know there are protests by those who do not share them (government views), like the unions, but we will not change," Zapatero told his Socialist party in Elche, southeast Spain.


"No one can doubt at any time that Spain is a strong country and an economic power that will meet its obligations and pay debts.
The euro was under pressure again on Monday, after posting its first weekly gain against the dollar in six weeks last week as investors bought back the currency following its long slide.
The euro fell close to 20 percent against the dollar between a high in November and last week's 4-year low of $1.2143. Since then it has rebounded almost 3 percent to $1.2504 on Monday.
Adding to worries about government debt were concerns about the health of Spain's banking system, after the central bank said on Saturday it had taken over the running of savings bank CajaSur after a planned merger with another small lender failed.

The country's largely unlisted savings banks -- accounting for about half of the financial system -- are most exposed to struggling property developers and have seen their capital eroded by soaring bad loans.
(Writing by Alex Richardson; Editing by Neil Fullick)

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It's Looking a Lot Like a Correction ... or Worse

by Dave Kansas
Monday, May 24, 2010
provided by

Stock prices stabilized on Friday, but it felt like the selling ended more because of exhaustion than because of some return of optimism.
Since early May, the Dow Jones Industrial Average has lost almost 10% of its value — officially known as a market correction. But the big question on everyone's mind: Is this just a correction or the start of something worse, a new bear market?
More from WSJ.com:

• Financial Overhaul Puts Bank Ratings at Risk

• Inflation's Toll on Annuity Payouts

• Legendary Investor Is More Worried Than EverDespite Friday's rally, the Dow ended the week down 4% and firmly in the red for the year. The results were just as bad for the Nasdaq Composite (down 5% for the week) and the Standard & Poor's 500-stock index (down 4.2%). European and Asian markets logged similar declines; oil and gold prices were also down.
So what's going on? Is it 2008 all over again? Or is this just a pause in the market recovery that began over a year ago and, until now, hadn't seen any serious setbacks at all?
Bulls point to rebounding growth in the U.S., robust corporate profits and a very friendly interest-rate environment. Bears talk darkly about Europe's fiscal problems, signs of a slowdown in China and the headwinds of new financial-industry regulation.
More from Yahoo! Finance:

• Is Your Money Safe? Big Banks Are the "Riskiest," Prechter Says

• Are Bank Stocks Doomed?

• FMore Predictable: A Financial Disaster or an Earthquake?
Visit the Banking & Budgeting Center During the past few weeks, the bears have had the better of the argument. But Friday's modest recovery shows the bulls can still score points. During tense times such as these, Wall Street professionals often look for key "tells" that will provide a clue as to the market's future direction. Good "tells" are key skirmish points in the market between bulls, who generally want to see prices go up, and bears, who want to see them go down. The winners of these skirmishes tend to win the bigger battle.
Here are four "tells" that will, ah, tell us which way the market is headed.
1 Oil prices: When the global economy hums, it needs more of the black stuff. Thus, oil prices are widely seen as a proxy for global growth. When oil prices rise, quickening growth is on the horizon. When prices decline, look out below.
Oil prices also reflect a lot of other issues. Since oil is priced in dollars, a rally in the greenback, all things being equal, will reduce prices. Also, if folks fear unrest in the Middle East or in other volatile oil-producing locales, such as Nigeria, prices could spike.
For the past year, oil prices as a global growth proxy, despite the other issues, have held up well. Oil prices bottomed early in 2009 at just over $30 a barrel and then zoomed higher even before it became apparent that a global recovery was under way.
Oil is down about 20% from its recent high of $86.84 a barrel. But even at around $70 a barrel, it is up about 14% from a year ago. If oil can hold above $70 and edge back toward $80, that would indicate that fears of a global slowdown are receding.
2 GE stock: In March 2009 as the stock market cratered and panic raced through the system, General Electric shares headed sharply lower, closing at the devilish level of $6.66 a share. GE, the only original member of the Dow Jones Industrial Average still in the measure, traded as though it was headed into oblivion.
But GE recovered from those lows. Investors came to understand that the maker of everything from jet engines to light bulbs wasn't about to go out of business, despite some curious and ill-considered actions at its financial unit. Since that time, GE stock more than tripled, rising to $19.49 in late April.
Since then, though, it has pulled back to $16.42, a jaw-dropping fall of 16% in less than a month. GE is an important tell for two reasons. First, it has a huge global footprint and is in many different industries. Second, its finance arm isn't completely out of the woods. When concerns arise about the banking system, GE gets another kick in the shins.
GE has already dropped quite far. If it continues to fall, even just a little bit, it's painting a dark picture of the future.
3 The euro: Up until recently, most people in the U.S. got along fine without thinking about the euro much. Sure, a trip to Paris might spark an examination of exchange rates, but otherwise the euro just kind of moseyed along in its own European way. That's all changed, of course.
Today we see headlines about riots in Greece, austerity measures in Ireland, fiscal issues in Spain and problems in Portugal. It's like the great summer vacation has moved from the travel section to the business pages.
It can be distracting keeping track of European issues (Did you know Malta is in the euro zone? Did you know Malta is a country?), so the easiest way to make sense of all the grim European headlines is to simply track the euro.
The key element is the pace of the euro's move. It's not necessarily problematic if the euro is dropping (it is down 14% against the dollar this year). It is, however, not a good sign if it is dropping very quickly.
The euro is at about $1.25. If it stabilizes or even drifts lower at a leisurely pace, that would indicate that the euro-zone crisis is abating, which would help U.S. stocks. A fast move down will prompt chatter of intervention and make a bear market more likely in the U.S.
4 The KBW Bank Index: The financial crisis began as a credit crunch that eviscerated the banking sector. When things are bad in Europe, bank stocks, especially the big European bank stocks, fall most sharply. When things look better, they put in outsized gains.
Tacked on top of this, but frequently overlooked amid the civil unrest in Athens and jitters stemming from the Flash Crash of a couple weeks ago, is the fast-approaching new regulatory environment for the financial system. The Senate last week passed its reform bill and now both houses of Congress will hammer out a final law. The G-20 group of nations is working on global banking reforms.
The KBW Bank Index — which tracks big banks — will tell us if those regulations are going to bite very hard or merely sort of hard. A really sharp bite will create one more headwind for the broader market. Given how Germany's unilateral move against short-selling rattled investors last week, we shouldn't overlook how new finance-industry regulations might affect the broader market.
The KBW Bank Index fell 16% in the last month. On Friday, however, it was up nearly 4%. That would be a positive indication in what is still a "fulcrum sector" in the market.
Write to Dave Kansas at [email protected]