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Stocks drop as Europe posts weak growth

By Cezary Podkul,

Stocks ended their three-day rally Tuesday after weak economic data from Europe raised concerns about leaders’ ability to bring the continent’s debt woes under control and stave off a global economic crisis.

The Dow Jones industrial average ended the day down 76 points, or about 0.7 percent. The Standard & Poor’s 500 shed 11 points, or nearly 1 percent, to close below the 1,200 level after breaking through it Monday for the first time in more than a week. The tech-heavy Nasdaq fell 31 points to end the day down about 1.2 percent.

The steep decline ended a streak that had lasted three days and propelled each index up more than 7 percent, erasing losses from last week’s roller-coaster ride.

Markets were down from the opening bell after the European Union’s statistical office reported only a 0.2 percent rise in gross domestic product, the broadest measure of economic growth, in the second quarter across the union’s 27 member countries. That’s down from an already anemic 0.8 percent in the first quarter.

“They can do all they want to do in terms of fiscal austerity measures, but without growth, these measures are not going to deliver what’s needed, which is an improvement in the debt to GDP ratios,” said Rob Carnell, chief international economist at ING Bank in London.

Of particular concern was a sharp slowdown in the German economy, which had been among the continent’s leading strengths but saw its second-quarter GDP rise only 0.1 percent, compared with 1.3 percent in the previous quarter.

“The one bit that was providing some potential for growth for the rest of Europe is sputtering now,” Carnell said.

Germany has been at the forefront of the bailouts being orchestrated for heavily indebted Greece and Portugal, which share the euro currency. If the German economy weakens, the country might not be so willing to foot a significant part of the bill to rescue it neighbors.

After meeting in Paris on Tuesday afternoon, German Chancellor Angela Merkel and French President Nicolas Sarkozy called for the 17 eurozone countries to enact balanced-budget laws and proposed a “new economic government,” a European economic council made up of the heads of the euro nations that would meet twice a year. But they did not say what kind of power the council might wield, and they did not seek the kind of strong action — such as replacing individual nations’ bonds with a common euro bond -- that experts say could help control Europe’s runaway debt. The announcement sent the euro lower in late Tuesday afternoon trading against the dollar, down 0.26 percent to 1.44 dollars per euro.

Germany’s blue-chip DAX index ended the day down 0.45 percent after the two leaders’ meeting. Major indexes in France, Spain and Italy were also down, though Britain’s FTSE 100 index turned positive late in the trading day and ended up .13 percent.

In the United States, two reports released Monday were also downbeat.

The Commerce Department said builders began construction on 604,000 homes in July, about 1.5 percent fewer than in June. The figure beat economists’ expectations of 600,000 housing starts, but is still about half the 1.2 million monthly starts that indicate a healthy economy. Permits for new homes also fell in July, the Commerce Department said.

“Clearly, we’re on the later part of this recovery, and housing is still barely helping out and remains weak,” said Anika Khan, housing economist at Wells Fargo in Charlotte, N.C.

The housing market could drag through 2014, Khan said, since builders don’t have much incentive to build a lot of new homes while existing home prices remain depressed.

An earnings report from Wal-Mart showed that consumers were still hesitant to spend. Sales at Wal-Mart stores fell 0.9 percent in the second quarter, though the firm’s profit was still up over the same period last year.

“We remain concerned about the economic pressure on our customers and the uncertain impact it can have on their shopping behavior,” Bill Simon, the company’s U.S. president and chief executive, said in a statement.

Wayne Hood, U.S. retail analyst at BMO Capital Markets in Atlanta, pointed to the retailer’s clientele: “I think they reach mainstream America, and their customer base represents the groups that have the highest unemployment rate and are the most stretched right now, so you would look for them to have their pulse on the economy.” With Wal-Mart’s stores now posting nine consecutive quarters of decreasing sales, “it just signals we’re still just bouncing along the bottom” of the economic recovery, Hood said.

Investors also found little solace in a report from credit rating agency Fitch saying that the company would keep the U.S. government’s top-notch credit rating. A downgrade by rating agency Standard & Poor’s triggered massive selloffs last week.

But there was positive news in a data on industrial production from the Federal Reserve, which pointed to a slight pickup in manufacturing, one of the driving engines of the economic recovery. Manufacturing output rose 0.6 percent in July, the Fed said, as demand increased for cars and car parts.

As stocks fell, investors continued to pour money into gold. Gold futures ended the day up 1.5 percent to 1,784.10 per ounce, a new all-time nominal high.

Investors also sought Treasurys. Yields on the 10-year Treasury fell to 2.23 percent from 2.31 percent Monday. A lower yield reflects investors’ willingness to accept a lower return in exchange for the safety of holding government debt.

The economic fears drove down prices of oil, whose demand tracks the economic outlook. Oil futures retreated $1.01 to $86.87 per barrel in late afternoon trading Tuesday.

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