Wall Street falls after Ireland bailout
Markets in Europe and the United States fell on Monday as the initial enthusiasm over a plan to bail out Ireland gave way to concerns that the sovereign debt crisis in Europe could spread.
European indexes initially rose Monday on news that European Union officials, who had been pushing Ireland to accept help, had agreed to the aid package late Sunday. The package, which several European officials said would be worth 80 billion to 90 billion euros, or $109 billion to $123 billion, was made necessary by soaring borrowing costs for the Irish government and ebbing confidence in the country’s troubled banks.
European exchanges lost their early momentum in afternoon trading. The Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 1.4 percent, while the FTSE 100 index in London dropped 1.1 percent. The CAC 40 in Paris was 1.2 lower, and the DAX in Frankfurt was down 0.5 percent.
Following the lead from Europe, the Dow Jones industrial average was down 87.49 points, or 0.78 percent, while the Standard & Poor’s 500-stock index fell 7.89 points or 0.66 percent. The technology heavy Nasdaq dropped 2.78 points, or 0.11 percent. On Friday, the Dow Jones industrial average rose 0.2 percent, while the Standard & Poor’s 500 index rose 0.3 percent.
The euro, which initially strengthened against the dollar, also slipped as traders began to worry whether other European countries would need assistance.
“News that the Irish government were going to accept assistance with a debt bailout package certainly gave traders something to cheer about at the start of the week, but there seems to be a creeping realization that this won’t necessarily mark the end of the euro zone sovereign debt crisis,” Will Hedden, a sales trader at IG Index, told The Associated Press.
In addition, the euro and equities markets were affected by the possibility of a credit downgrade, said Eric Viloria, a senior market strategist for Forex.com.
Moody’s Investors Service said Monday in a statement that its current review of Ireland’s credit rating could result in a “multi-notch downgrade” as a result of the bailout, although it would still be investment grade.
“And now there is a lot of talk about contagion,” Mr. Viloria said, adding that the concern was whether the debt problem could shift to Portugal and possibly Spain.
The bailout has also raised questions about the credibility of the European banks stress tests, conducted during the summer, which showed that 7 of the region’s 91 largest banks needed to raise more capital to withstand an unexpected fall in economic growth or a sharp deterioration in the perceived safety of government bonds issued by debtor nations like Greece, Portugal and Spain.
The Irish banks that the Dublin has agreed to bailout and are at the root of the country’s financial struggles “are those that have passed the E.U. stress tests,” Mr. Viloria said. Just over six months ago, officials worked out a similar package to aid Greece amid fears that the problems of the euro zone “periphery” could undermine the common currency.
Although the deal with Ireland was inevitable, “there are still hurdles ahead for other countries, particularly next year,” Nick Stamenkovic, rate strategist at RIA Capital Markets, told Reuters.
Jason Pride, director of investment strategy for Glenmede, said: “I think the markets are recognizing this as an ongoing problem.”
Bond prices reacted mildly to the Irish bailout news, which had been expected since last week. The Irish 10-year yield fell 4 basis points, but — at 7.87 percent — still carried a hefty premium to the comparable German bond, the European benchmark, which ticked fell 6 basis points to 2.64 percent. The yield on Greek bonds was 11.64 percent.
The dollar fell against other major currencies in early trading in Europe, and then recovered lost ground in the afternoon. The euro, at $1.3672, and the British pound, at $1.5979, were both down slightly. The dollar slipped to 83.46 yen from 83.55 yen, and to $0.9893 Swiss francs from $0.9923 francs.
In addition to the European developments, investors in the United States will also look at fresh economic indicators scheduled for a week that is shorter because of Thanksgiving on Thursday.
The figures include a second estimate for third-quarter gross domestic product growth, which some economists estimate is likely to be revised up to around 2.4 percent from the initial estimate 2 percent. But Mr. Pride noted that G.D.P was “backward looking,” and as a result more focus would be concentrated on housing, consumer spending and income, and the four week average for weekly jobless claims “which will probably continue to come down.”
While new and existing home sales figures will probably be sluggish, “I think the result of all that is still going to be net positive,” Mr. Pride said of the week’s economic releases in general.
Asian shares were mostly stronger. The Tokyo benchmark Nikkei 225 stock average rose 0.9 percent. The main Sydney market index, the S.&P./ASX 200, rose 0.3 percent. In Hong Kong, the Hang Seng index fell 0.4 percent as the Shanghai composite index fell 0.2 percent.
Crude oil futures for January delivery rose 35 cents to $82.33 a barrel. Comex gold rose $8.90 to $1,361.20 an ounce.
Source: The New York Times