Political bickering over the debt crises in Europe and the U.S. is driving up fear levels in global markets, leaving some investors worried that the worst is yet to come.
That’s sending another torrent of money into precious metals — a classic vote of no-confidence in governments. Gold topped $1,600 an ounce Monday for the first time after rising for 10 straight days, the longest winning streak since 1980.
Wall Street closed broadly lower Monday, though U.S. losses were modest compared with the latest plunge in Europe.
Stock markets across Europe have tumbled for most of the last week as investors have lost faith that governments can keep the “contagion” of debt woes in Greece, Ireland and Portugal from causing grave harm to Spain and Italy, which are far larger economies.
Investors again bailed out of Spanish and Italian government bonds Monday, driving yields to new multiyear highs, as European leaders remained at odds over how to structure a planned second bailout of Greece. A summit meeting is set for Thursday in Brussels.
The continent’s debt crisis “seems like it’s coming to a head,” said Nick Raich, director of research at Key Private Bank in Cleveland.
One measure of European investors’ pain: Italian stocks suffered the biggest decline Monday of any major market, falling 3.1%. Italy now is in a new bear market, with its key share index down 22.8% from the 52-week high reached in February. A 20% drop in stock prices is the traditional threshold for a bear market.
Stocks tumbled 2% in France on Monday, 1.6% in Germany, 2.1% in Sweden and 2.3% in Portugal.
Wall Street also slid but share prices pulled up from their lows. The Dow Jones industrial average closed down 94.57 points, or 0.8%, to 12,385.16, its lowest since June 29. The index was down as much as 183 points early in the session.
U.S. stocks were rattled by Europe’s slide and by renewed concerns about the political face-off in Washington over the federal debt ceiling.
The White House and Republican leaders appeared no closer to a deal to slash federal spending and boost the $14.3-trillion debt ceiling. If the debt limit isn’t lifted by Aug. 2 the Treasury says it won’t be able to pay all of its bills, raising the specter of a potential default that could trigger a downgrade of the nation’s credit rating.
Senate Democratic and Republican leaders have proposed an interim measure to give President Obama the power to raise the debt limit on his own, while giving GOP conservatives the ability to vote on the record against an increase.
That wasn’t enough to buoy stocks Monday, but it may have helped keep U.S. Treasury bond yields suppressed. The 10-year T-note yield ended at 2.92%, up slightly from 2.91% on Friday.
“The Aug. 2 date is there, but the concern just isn’t too heavy right now” in the bond market, said Justin Lederer, an interest-rate strategist at bond dealer Cantor Fitzgerald in New York.
Treasury yields showed little reaction last week even as two major Wall Street credit-rating firms, Moody’s Investors Service and Standard & Poor’s, warned that they might lower America’s debt rating from the current top grade of AAA if the debt ceiling isn’t raised.
Europe’s situation is so serious it’s making U.S. Treasury bonds look like a haven despite the debt-ceiling risks, analysts said.
“We represent stability in a world that is getting shakier,” said Michael Farr, head of money management firm Farr Miller & Washington in Washington, D.C.
European leaders have agreed to bail out Greece for the second time in 14 months, but they’re battling over whether to force private Greek bondholders to share in the pain by restructuring their debt. A restructuring, such as a permanent cut in interest payments, could wreak havoc with European banks, which own large chunks of government debt across Europe.
And as investors continue to demand ever-higher interest rates on Portuguese and Irish bonds, second bailouts of those countries seem inevitable as well — as does the risk of forced debt restructurings.
“Bond yields are just blowing out in Europe,” Raich said.
The greatest fear centers on Italy, the world’s third-largest bond market after the U.S. and Japan. The yield on two-year Italian bonds jumped to 4.57% on Monday from 4.22% on Friday. The yield was just 3.04% two weeks ago. Rising market yields mean older bonds fall in value.
By contrast, the U.S. Treasury pays just 0.36% on two-year notes.
With so much uncertainty facing stock and bond markets, more investors are hiding in precious metals. Near-term gold futures in New York rose $12.30, or 0.8%, to $1,602.10 an ounce Monday, a record high unadjusted for inflation. Gold has rallied 12.7% this year, compared with the 7% price gain of the Dow Jones industrials.
Traders say gold buyers are attracted by the metal’s historical role as a shelter in times of market turmoil, and by concerns that governments might opt to print more money to dig themselves out of debt, devaluing paper currencies and driving inflation higher.
“There are just so many reasons why you can justify owning gold now,” said Frank Cholly Sr., a commodities analyst at trading firm Lind-Waldock & Co. in Chicago.
Silver also has resurged in recent weeks after crashing in May. Futures gained $1.27, or 3.3%, to $40.33 an ounce, the highest since May 3. The price hit a three-decade high of $48.58 on April 29.
On Wall Street, optimists continue to hang their hopes on second-quarter earnings reports that are beginning to pour out. Market bulls believe that, despite a softer economy, many companies will continue to post decent sales and earnings growth.
Farr said he was holding on to stocks such as Google Inc., which soared 12% last week after reporting quarterly results that far exceeded expectations.
Still, even he worries that investors will lose patience if there is no agreement on the U.S. debt ceiling.
“If there’s no deal by next weekend, Monday could be ugly” for markets, he said.