Stocks rally on Congress deal but economic worries impact
Output trails forecast as fears grow rating cut can't be avoided
Published 02/08/2011 | 05:00
SHARES rose yesterday after US President Barack Obama announced a compromise deal in Washington, but the rally fizzled out and the US treasury prices gained later in the day as fears of a downgrade to US debt lingered and reports showed weakness in the world's manufacturing sectors.
US stocks turned negative in afternoon trading after rising more than 1pc at the open as the Institute for Supply Management's (ISM) manufacturing index hit its lowest point in two years. By the close the Dow was broadly neutral.
The slow pace of growth cast doubt on expectations the faltering recovery would regain steam in the second half of the year. Similar data also pointed to stagnant factory growth in China and the eurozone.
"The ISM figures got people concerned about the third quarter," Peter Jankovskis, who helps manage about $2.6bn (€1.8bn) at Oakbrook Investments in Lisle, Illinois, said. "Thus far, we had seen strong manufacturing figures. That was certainly a negative surprise offsetting the optimism about a final vote on the debt ceiling."
The dollar hit a record low against the Swiss franc. Against the yen, the greenback was down 1.1pc. The euro also fell to a record low on the Swiss franc.
The dollar slid against most of its major counterparts as investors speculated the plan Mr Obama and congressional leaders agreed on to prevent a default and lower the deficit will slow the nation's growth.
The greenback fell as investors also speculated that the accord won't be enough to avoid a rating downgrade. The yen dropped as stocks rose amid bets that chances of a US default were lower and authorities said currency movements haven't reflected Japan's fundamentals.
New Zealand's dollar reached a record high after data showed China's manufacturing grew more than forecast.
"The fact the US has gotten itself into a difficult situation where it has to come up with savings and spending cuts raises serious concerns about the US growth outlook," said Paresh Upadhyaya, head of America's G-10 currency strategy at Bank of America in New York.
"The markets may also be disappointed that this package doesn't deal with the long-term structural issues and what that might mean for the US credit outlook."
Crude for September delivery rose as much as 2.9pc to $98.43 a barrel in New York. The euro has dropped against most of its major counterparts in the past three months on concern the debt crisis in Greece is spreading to bigger nations, threatening recovery. Gold fell more than 1pc earlier but cut losses after equity markets turned.