U.S. a safer haven amid global financial turmoil
Amid the turmoil in global financial markets, hiding out at home has been a decent strategy for U.S. investors.
Escalating social unrest in the Middle East and North Africa over the last few weeks has triggered a rush of money into U.S. Treasury securities, driving their interest rates down sharply.
And in recent days, while most major stock markets around the world have been battered in the aftermath of Japan’s devastating earthquake and tsunami, U.S. stocks have held up surprisingly well.
On Tuesday, Japan’s Nikkei-225 stock index plunged 10.6% — its biggest one-day drop since October 2008 — as investors panicked over rising levels of radiation escaping from the stricken Fukushima nuclear power complex.
The sell-off in Japan dragged down markets across Asia and in Europe. Yet U.S. stocks climbed back from steep early losses to finish with relatively modest declines. The Dow Jones industrial average ended down 137.74 points, or 1.2%, to 11,855.42, paring what had been a loss of nearly 300 points at the opening bell.
Global upheaval “makes the U.S. a better safe haven,” said Gail Dudack, head of Dudack Research Group in New York.
Investors often gravitate to the biggest and most liquid securities in times of trouble, which typically means markets in the U.S., Japan and Europe.
But Japan can’t play that role now, given the massive uncertainty about its economy in the near term.
And concerns about Europe’s government debt crisis still pervade those markets, despite the European Union’s decision last week to beef up a bailout fund for the most financially distressed countries.
Late Tuesday, Moody’s Investors Service downgraded Portugal’s debt rating to A3 from A1 and said the outlook was negative. Although the country may be able to reduce its crushing debt costs by using the EU’s bailout fund, “Questions would remain as to when the government would be able to re-access the capital markets and on what terms,” Moody’s said.
Although the U.S. government’s soaring debt burden remains a source of deep concern to many investors, Uncle Sam still has no trouble borrowing. And as stock markets have crumbled in recent weeks, safety-seeking investors have flocked back to Treasury securities, pushing their yields down.
The annualized yield on five-year T-notes plunged to a six-week low of 1.98% on Monday from 2.05% on Friday. The yield fell further early Tuesday before ending at 1.96%.
Falling interest rates mean bonds are rising in value.
On Wall Street, stocks have pulled back over the last three weeks after surging early in the year on optimism about the economic recovery. But the losses have been far smaller than the declines in Japan and Europe.
With Tuesday’s drop, the Dow is down 4.3% from its multiyear high reached Feb. 18. By contrast, the Japanese market has plunged 21% in the same period and the average European blue-chip stock is down 8.6%.
Some emerging markets also have weathered the latest market turbulence better than investors might have expected. The Brazilian market has eased just 1.6% since Feb. 18 after being hit harder earlier in the year.
Still, it isn’t clear that U.S. stocks can avoid deeper losses, particularly if oil prices resume their climb because of conflict in the Middle East and North Africa.
“The risks for the U.S. market are more subject to what happens in the Middle East than what is occurring in Japan,” said Alan Ruskin, chief foreign currency strategist at Deutsche Bank in New York.
Oil prices tumbled Tuesday amid a general sell-off in commodities, as investors and traders dumped high-risk assets across the board.
Crude futures in New York fell $4.01 to $97.18 a barrel, the lowest closing price since Feb. 28, despite a declaration of a state of emergency in Bahrain as its government sought to put down the popular uprising challenging the monarchy.
Traders said worries about Middle East oil supplies were being offset, for now, by expectations of lower demand from Japan as its economy reels from the earthquake and tsunami.
Prices of corn, wheat, cotton and coffee also plummeted Tuesday.
“It’s just, ‘Get out of the risk’ — because you don’t know what’s going to happen” in Japan, said Frank Lesh, a trader at FuturePath Trading in Chicago. “You don’t stand in the way of this.”
Even gold — usually a popular haven in times of turmoil — slid as some investors took profits from the metal’s recent surge. Near-term gold futures in New York fell $32, or 2.2%, to $1,392.60 an ounce.
Rising raw-material costs stoked inflation pressures worldwide in recent months, but traders now are uncertain about commodity demand as Japan’s woes raise fresh concerns about global growth.
“This gives us some breathing room” on commodity prices, said Jim Swanson, chief investment strategist at MFS Investment Management in Boston.
U.S. stocks also were buoyed Tuesday after Federal Reserve policymakers, holding a regularly scheduled meeting, said in their post-meeting statement that the domestic economy appeared to be on “firmer footing, and overall conditions in the labor market appear to be improving gradually” since late January.
However, the Fed also pledged to continue with its program of buying Treasury bonds to help suppress interest rates and underpin growth. That $600-billion program will end as planned in late June, the Fed said.
Many stock market bears say Wall Street’s powerful rally since late August has been fueled more by the central bank’s easy-money policies than by economic fundamentals. Cheap money, critics say, has encouraged speculation in stocks and other high-risk assets.
But market bulls side with the Fed’s view that the economy is gradually improving, which could underpin continued growth in corporate earnings. Analysts expect first-quarter operating earnings of the Standard & Poor’s 500 companies to be up 13.5% from a year earlier, according to Thomson Reuters.
“The recipe is still there for the profit story to continue,” Swanson said.
Some analysts say investors could soon begin focusing on the potential lift that Japanese rebuilding could give the global economy.
“When it comes to natural disasters, they destroy a lot, but in the effort to rebuild they generate a lot of new activity,” said Jim Glassman, senior economist at JPMorgan Chase & Co. in New York. “The rebuilding effort is what really dominates in the long run.”
Chris Rupkey, chief financial economist at Bank of Tokyo Mitsubishi in New York, said the panic that struck Tokyo shares Tuesday should subside as investors get more information about the extent of the damage at the Fukushima reactors and the threat it poses to the environment.
“If the radiation risk becomes known, this situation could calm down very quickly, and the Nikkei could come back an easy thousand points,” Rupkey said.
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