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| Wall Street Recovers After Worldwide Slump | |
| (about 2 hours later) | |
| After market declines around the world, Wall Street recovered from initial losses on Thursday after global investors were rattled by signs of a slowdown in Chinese manufacturing and a potential easing of central bank support for the economy. | |
| The worst drop was in Tokyo, where the Nikkei index fell 7.3 percent, the most since the 2011 tsunami there. In New York, the benchmark Standard & Poor’s 500-stock index was down 0.9 percent in morning trading, but regained ground by early afternoon. Leading indexes closed down 2.1 percent in Germany and France. | |
| The pessimism that overtook global investors on Thursday was a sharp reversal from months of steady advances in share prices around the world. Many investors had voiced concern that the rally was due for a break, but it had not been clear what would serve as a catalyst for a downturn. | |
| The dip began on Wednesday afternoon, after the Federal Reserve chairman, Ben S. Bernanke, testified before Congress that the Fed could pull back on its monetary stimulus programs if the economy continued to show progress. Later on, an index of Chinese manufacturing showed that activity actually slowed in May for the first time in months. | |
| The Chinese purchasing managers index, released by HSBC, fell to 49.6 points in May from 50.4 a month earlier. A reading below 50 signals a contraction. | |
| China’s slowing momentum has been long in the making and has been, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets around the globe. | |
| The response was particularly stark in Japan, where the government is in the early stages of an aggressive effort to prop up the long-suffering economy. High hopes that the bold economic policies of Prime Minister Shinzo Abe will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year. | |
| Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed on Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added. | |
| “The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.” | “The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.” |
| Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets. | Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets. |
| One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the last few weeks have shown that the economy has begun to pick up speed. | One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the last few weeks have shown that the economy has begun to pick up speed. |
| Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent on Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore. | |
| Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. | |
| Given the indebtedness of the Japanese government, there are worries about the effect that this could have if sustained, Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.” | |
| The sell-off on Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 points from 46.7, while the services index rose to 47.5 from 47. While that points to continuing contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half. | |
| The economic data coming out of the United States on Thursday also looked better than expected. The number of people filing for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before. | The economic data coming out of the United States on Thursday also looked better than expected. The number of people filing for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before. |
| Signs of a strengthening economy could amplify the talk about the Fed slowing down its bond-buying program. But Fed officials have been emphatic that they will not pull back unless it is clear the economy can handle it. Some strategists said on Thursday that investors were overstating the risk of a Fed drawdown. | |
| James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech in London on Thursday that the Fed was likely to “continue with the present quantitative easing program.” | James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech in London on Thursday that the Fed was likely to “continue with the present quantitative easing program.” |
David Jolly contributed reporting from Paris and Hiroko Tabuchi from Tokyo. | David Jolly contributed reporting from Paris and Hiroko Tabuchi from Tokyo. |