By Corrie Driebusch
Stock markets from the U.S. to Europe to China took a beating on
Friday on fresh fears about Greece and wobbly corporate earnings,
with the Dow Jones Industrial Average giving up all but 3.23 points
of its gains for 2015.
Greece's international creditors signaled they are losing hope
that Athens will do what is needed to unlock bailout funds before
it runs out of money. Prices of Greek government bonds plunged as
concern increased about default and an exit from the eurozone,
which many analysts believe would hurt European banks and further
slow economic growth.
U.S. Treasury Secretary Jacob Lew said that Greece's new
government is running out time to reach an emerging-financing
agreement. "Not reaching agreement would create immediate hardship
for Greece and uncertainties for Europe and the global economy more
broadly," he said.
Finance ministers and central bankers from the Group of 20
leading economies warned Friday about an uneven global economic
expansion, expressing particular concern about emerging-market
economies.
Adding to investor unease were worrisome corporate earnings
developments in the U.S., led by card giant American Express Co.,
and news of new trading restrictions in China following this year's
stock-market run-up there.
The declines highlight the vulnerability of global stocks
following a roaring 2015 in Europe and parts of Asia, and a
yearslong rally in the U.S.
The Dow fell 279.47 points on Friday, or 1.5%, to 17826.30, its
biggest one-day percentage drop since March 25, snapping a two-week
winning streak for the index.
Before Friday's slump, the blue-chip index was up 1.6% this
year. It is now up only 3.23 points on the year, or 0.02%,
following a 7.5% advance last year and a 26.5% gain in 2013.
The S&P 500 declined 23.81 points, or 1.1%, to 2081.18, and
the Nasdaq Composite fell 75.98 points, or 1.5%, to 4931.81.
"It's weak today, but the markets were at lofty levels," said
Stephen Carl, head equity trader at Williams Capital Group. He
described Friday's drop as steep but not involving any panic
selling.
Many investors remain bullish on stocks, reasoning that growth
is picking up in Europe and that the U.S. expansion is entering its
seventh year. Ultralow bond yields, driven by expansive
central-bank policy, make stocks look more attractive by
comparison, these bullish investors say.
But price-to-earnings multiples are above long-term averages and
many traders say a sharp decline in oil prices and the rise of the
dollar will continue to hit U.S. corporate profits. Some said
stocks could pull back before continuing their ascent.
"The earnings picture is starting to degrade materially, and
that's making the stock market look expensive," said Frank Barbera,
co-portfolio manager at Sierra Investment Management, which manages
$1.8 billion. "Earnings are certainly going to be in the spotlight
going forward."
American Express fell 4.4% after saying its results were hurt by
the strong U.S. dollar, which reduced revenue booked in other
countries. Advanced Micro Devices Inc. tumbled 10% after saying its
first-quarter loss widened as revenue slumped.
The Stoxx Europe 600 index dropped 1.8%, its largest one-day
decline since early January, mirroring declines in other major
indexes across the continent. The Stoxx was up 20% for the year
through Thursday's close after lagging behind U.S. indexes in the
previous two years. Both the Stoxx and the Dow have surged to new
records this year.
European bond yields tumbled again to their lowest level on
record, underscoring strong demand for safe assets and the
continuing impact of European Central Bank bond purchases. The
yield on the 10-year German bund, the benchmark for portfolio
managers and consumer loans across Europe, slumped to 0.07%,
putting the debt within reach of a negative yield for the first
time. Low bond yields mean higher prices.
The yield on Greece's 10-year bonds was at 12.49%, close to a
two-year high, while two-year yields were at 26.28%, close to their
highest since being issued. Yields rise as bond prices fall.
The existence of an inverted yield curve, where shorter-term
debt yields more than longer-dated bonds, suggests that investors
foresee a very high risk of default.
"There are concerns about the stability of Europe, and we're
approaching some very critical dates here with Greece," said James
Liu, global market strategist at J.P. Morgan Asset Management.
Poul Thomsen, head of the IMF's European department and one of
the chief architects of Greece's bailouts, said: "There is
undoubtedly a need for the negotiations to gain notably further
momentum in the coming days and weeks in order for us to conclude a
review in a timely manner."
The worries about Greece come as global growth is facing fresh
headwinds.
The G-20 acknowledged concerns that likely Federal Reserve
tightening could send shock waves through markets around the globe.
"In an environment of diverging monetary policy settings and rising
financial-market volatility, policy settings should be carefully
calibrated and clearly communicated to minimize negative
spillovers," the group said.
Exacerbating Friday's stock selloff were fears surrounding
China. The country's securities regulator issued a strong warning
about its stock market and tightened rules on margin lending.
Buying stocks with borrowed money has been a major driver of
China's stock-market run. The main market has doubled in the past
12 months, and the riskiest index is up 70% this year.
Chinese stocks slumped more than 5% in post-close trading,
weighing on sentiment in Europe.
"From my perspective, it's healthy for the market that Chinese
regulators are trying to curb margin trading," said Michael Emery
of Rainier Investment Management, which manages $6.1 billion.
"Speculation in the Chinese market was getting too high."
Josie Cox contributed to this article.
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