Investors wary of Chinese strategy

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Published: January 21,2010

Tags: global economy, recession, stocks and bonds

NEW YORK — The stock market slumped Wednesday on concerns that tighter lending standards in China will prolong an economic recovery. Disappointing earnings results from IBM Corp. and Morgan Stanley added to the market’s angst.

At the same time, a spike in the dollar pushed commodity prices sharply lower, hurting stocks of energy companies and materials producers.

The Dow Jones industrial average fell 185 points from a 15-month high, its biggest drop since Oct. 30. Demand for safe havens like government debt jumped, pushing yields lower in the Treasury market.

Concerns grew that China’s efforts to keep its economy under control could hurt a global recovery. A top banking regulator said Wednesday that China will tighten its monitoring of banks as it tries to prevent speculative bubbles in areas like real estate. It would be the latest effort by China to restrict runaway lending and cool that country’s overheated growth.

Stocks fell sharply last week after China tightened its monetary policy and boosted the amount banks must hold in reserve. Investors are worried about how badly a slowdown in China’s huge economy would affect other countries.

“The China news is a disappointment and a continuation of the trend,” said Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Connecticut, referring to last week’s moves.

Meanwhile, IBM Corp. led the Dow industrials lower after the company’s results, which many analysts praised, nonetheless disappointed investors who had hoped profits would be stronger.

Banks posted mixed results. Bank of America Corp. reported better results and said credit conditions were improving, but also said the economic environment “remain fragile.” Wells Fargo & Co. sounded an optimistic note on consumer resilience, but Morgan Stanley fell short of expectations.

As the corporate earnings gets into full swing, traders have been hoping to see greater reassurances from major companies that the economy is strengthening. So far the results have been mixed at best, and some investors are seeing the early indications for the economy as troubling.

“We’re going to be in the dance of one step forward and one step back as people digest all these earnings reports,” said Frank Ingarra, co-portfolio manager at Hennessy Funds.

In early afternoon trading, the Dow fell 185.23, or 1.7 percent, to 10,540.20, a day after rising 116 points to a 15-month high.

The broader Standard & Poor’s 500 index fell 18.55, or 1.6 percent, to 1,131.68, and the Nasdaq composite index fell 43.36, or 1.9 percent, to 2,277.04.

IBM said after the end of trading Tuesday that its earnings rose 9 percent from a year earlier, while sales rose nearly 1 percent. Traders were hoping for even better results, and IBM’s shares fell $4.73, or 3.5 percent, to $129.41.

Bank of America said it lost $5.2 billion in the fourth quarter, mostly from costs related to repaying $45 billion in government bailout money. It set aside $10.11 billion for loan losses during the quarter, an 18 percent jump from the same quarter a year earlier. The stock rose 13 cents to $16.45.

Despite improving bottom lines from Bank of America and Wells Fargo, many investors remain pessimistic about bank shares. Over the past few days two major banks, JPMorgan Chase & Co. and Citigroup Inc., both said they’re still cautious about the economy and aren’t sure when loan losses will start to shrink.

Wells Fargo fell 33 cents to $27.95, even though its earnings per share of 8 cents beat analyst forecasts of 1 cent per share, according to Thomson Reuters.

Meanwhile Morgan Stanley fell 45 cents to $30.71. It was the second straight quarter of profits after a year of losses, but the results still came in below analysts’ expectations for both earnings per share and revenue.

Bond prices rose, driving their yields lower. The yield on the benchmark 10-year Treasury note fell to 3.65 percent from 3.70 percent late Tuesday.

The dollar rose, reaching a five-month high against the euro. Gold prices fell. The gain in the dollar pushed commodity prices lower because a stronger greenback makes them more expensive for foreign buyers.

Crude oil fell $1.62 to $77.40 per barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies fell 13.89, or 2.1 percent, to 635.26.

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