Debt deal boosts Europe, Asia markets, but U.S. rally short-lived

Relief over the U.S. debt limit deal swept around the world on Monday, pushing Asian and European markets higher but providing only brief gains in the U.S., where concerns over the health of the economy quickly nixed an early market rally.

The Dow Jones Industrial average opened up 1.08 percent on news of the debt deal. The Standard & Poor’s 500, a broader measure of market performance, was initially up 1.14 percent while the Nasdaq, a more tech-heavy index, began trading up .72 percent.

Video

Michael Gapen, a senior U.S. economist at Barclays Capital, talks about the outlook for a vote on the U.S. debt accord and the prospect for a credit-ratings downgrade. He speaks from New York with Francine Lacqua on Bloomberg Television's \

Michael Gapen, a senior U.S. economist at Barclays Capital, talks about the outlook for a vote on the U.S. debt accord and the prospect for a credit-ratings downgrade. He speaks from New York with Francine Lacqua on Bloomberg Television's "Last Word."

Gallery

More on this Story

View all Items in this Story

Debt-ceiling drama unfolds

Timeline of negotiations

But optimsim soon faded as a fresh data from the Institute of Supply Management showed activity in the manufacturing sector slowing to its lowest level since July 2009, when the recession ended. Stocks turned sharply negative, with the Dow down 1.14 percent in late morning trading, the S&P down 1.18 percent and the Nasdaq down 1.13 percent.

The quick turn-around means the the debt deal is “almost irrelevant” to the markets, said Philip Roth, chief technical market analyst at trading firm Miller Tabak in New York. “Once it’s done, people focus on the economy. And it’s slowing,” he added.

One element of the debt deal has significant relevance to the defense industry, which relies on government spending for much of its business. The deal’s calls for up to $600 billion in cuts to the U.S. defense budget, sending the Standard & Poor’s 500 Aerospace & Defense Index into negative territory shortly after market open. It remained down more than 1.6 percent in late morning trading.

Stocks of Lockheed Martin and Northrop Grumann, two flagship U.S. defense contractors, traded down 2.09 percent and 2.38 percent, respectively, to $74.15 and $59.07 per share in late morning trading.

Investors also headed back to their safety bets in late morning trading Monday, reversing an earlier retreat on news of the debt deal. Spot gold prices retreated somewhat from Friday’s $1,627.88 per Troy ounce but remained high at $1,619.20 in afternoon trading. Yields on the 10-year Treasury reached a new low for the year of 2.74 percent after retreating higher over the weekend. A lower yield means investors are willing to accept a lesser return in exchange for the safety of holding government debt.

The U.S markets’ reaction contrasted with an earlier rally in Asia, where major stock markets posted across-the board gains on news of the debt deal. Disaster-hit Japan saw a particularly strong gain as the country’s Nikkei 225 stock posted its largest gains since June, making up for a steady decline last week. The Nikkei opened at 9907.04, spent most of day above the critical 10,000 mark, then fell a bit in the final hour of trading, closing at 9965.01 — still up 1.34 percent. Later in the day, Hong Kong’s Hang Seng index had risen 1.6 percent and Australia’s ASX/200 Index had jumped 1.65 percent.

European markets also jumped on the news of the U.S. debt deal, with early gains in key indexes in London, Paris and Frankfurt. But economists warned that the boost could be short-lived. The deal in Washington did nothing to relieve fundamental concerns that the U.S. economy is fragile, as shown in the slower-than-expected growth reported last week, and may yet tip back into recession. And Europe has yet to definitively cure its own debt crisis, with concerns lingering about the details of a major deal on Greece and fear that the massive but troubled economies of Spain and Italy could get swept more deeply into the crisis.

But experts in Europe also sounded a cautionary note over the continent economic prospects. Across the eurozone, the manufacturing PMI for July — a key measure of economic activity — clocked in lower than expected on Monday, suggesting a significant cooling of the region’s economy.

 “It points to a marked loss of momentum in the previously healthily expanding core northern eurozone economies, as well as deepening growth problems in the struggling southern periphery eurozone economies and Ireland,” said Howard Archer, an economist with IHS Global Insight in London.

In Asia, markets squirmed last week as U.S. lawmakers struggled to reach a bipartisan deal; China and Japan rank as the U.S.’s two biggest international creditors. Yukio Edano, Japan’s Chief Cabinet Secretary, said Japan “welcomes the announcement that an agreement was made to avoid default. ... We expect the deal will lead to the stabilization of markets.”

But after markets closed Monday in Tokyo, analysts pointed out that Japan still has plenty of its own problems to confront — particularly with the yen valued at roughly 77.66 against the dollar, within range of the post-World War II high of 76.25.

Most of Japan’s major exporters, in predicting their annual profits, had forecasted that the yen this year would sit in the low 80s against the dollar. Companies such as Toyota can lose more than $380 million for every one-yen rise against the dollar.

“The news of a settlement [in the U.S.] — and we’ll see if it actually goes through — is definitely a relief,” said Robert Feldman, Morgan Stanley’s chief economist for Japan. “That said, we still have the yen/dollar in the 77 or 78 range. We have clouds over the U.S. economy. So yes, there is relief. But we have all the problems we were dealing with before.”

The dollar has lost more than 11 percent against the yen during the past year, squeezing Japanese companies that have also suffered supply chain disruptions and energy shortages in the wake of the devastating earthquake and tsunami in March.

Japan’s finance minister, Yoshihiko Noda, had warned Friday that Tokyo would discuss a solo intervention in the foreign exchange market to protect its fragile economy. Noda reiterated that possibility Monday.

Harlan reported from Toyko. Correspondent Anthony Faiola in London contributed to this report.

 
Read what others are saying