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Euro falls as concerns about European deal grow

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Investors fled from the euro and Italian bonds as concerns grew about Europe's most recent effort to deal with its debt crisis.

The euro's value against the dollar fell for the third straight day and was recently below $1.30 for the first time since January. The drop plays into fears that the euro itself may not survive the current crisis.

A deal announced at the end of last week by European Union members was supposed to help prop up struggling European economies and the euro itself. This week, though, has been filled with reports from analysts and economists saying that the agreement did not do enough to stop the spread of the ongoing debt crisis to Europe's larger economies.

Italy and Spain have been the major flash points for the latest fears. Last week's agreement was supposed to provide new support for both countries so that they can go out and borrow more money from the public in order to pay off old bonds.

At a sale Wednesday morning of Italian five-year bonds, though, investors showed that they are not confident in Italy's ability to pay back investors. The yield that investors demanded at the bond sale was up significantly since the last sale in November, and the yield on benchmark 10-year Italian bonds is up for the third straight day. Investors will be watching again when Spain conducts its own bond sale Thursday.  

The concerns drove down stock prices across Europe, with leading indexes finishing the day down 3.3% in France and 1.7% in Germany.

U.S. indexes were down less sharply. The Dow Jones industrial average was recently trading down 132.60 points or 1.1% to 11822.57.

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Photo: Outside the headquarters of the European Central Bank. Credit: Kai Pfaffenbach / Reuters

 

 

California wine exports heading toward a record year

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 California's international wine exports are booming and on pace to set a record in 2011.

According to the Wine Institute, a San Francisco trade group, the value of exports shipped in the first 10 months of the year already equal last year's record of $1.14 billion. This year's exports are 23% greater than their value at the same time last year, said Linsey Gallagher, the Wine Institute's director of international marketing.

The strong push in 2011 is part of a developing trend.

"California wines for the last couple of years have come into their own, offering quality, diversity and value, Gallagher said.

This year's surge is benefiting from a weak dollar, which adds to the value of California vintages, she said. A bottle that might have cost the equivalent of $10 a few years ago now sells for $7 to $8.

While the bulk California wine bottles go to Europe, the growth in sales to China have been increasing at a rapid pace. Exports to China, which account for about 5% of the total, increased 35% compared with the same 10-month period in 2010, the Wine Institute reported.

California's full-bodied red wines are particularly popular in China, Gallagher said, because their "fruit-forward, bold" taste matches well with often spicy Chinese cuisine.

U.S. wine sales in China are benefiting from a strong economy and a growing middle class that is buying more luxury items, such as automobiles and wine, she said. At the same time, European consumption of California wines remains strong despite the continuing economic crisis.

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Photo: Zinfandel grapes growing in the Napa Valley at October harvest. Credit: Lisa Baertlein / Reuters

Stocks fall as European optimism fades

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One day.

That seems to be how long the optimism about Europe's new plan to deal with its financial crisis lasted.

The deal was marketed as a solution to Europe's lingering debt crisis, and after it was announced on Friday stocks rose.

But when markets opened again Monday morning, investors seemed to have thought better of their initial optimism, driving stocks prices down and yields on European bond prices up, indicating that there is still fear about lending money to some of Europe's most troubled economies.

The Dow Jones industrial average was recently down 224.02 points or 1.8%  to 11959.33. European markets closed down even more sharply, with leading indexes down 3.4% in Germany and 2.6% in France.

The big blow to confidence Monday morning was a report from Moody's credit rating agency stating that Friday's agreement did little to help the credit situation of European economies -- and that Moody's may still downgrade the credit ratings of European countries.

"The communique offers few new measures, and does not change our view that risks to the cohesion of the euro area continue to rise," the Moody's report says, referring to Friday's agreement.

Meanwhile, in Israel, Standard & Poor's chief economist expressed his own reservations about the European deal.

Friday's agreement, announced by German Chancellor Angela Merkel and others, strengthened emergency crisis funds and created new measures to ensure the fiscal discipline of European Union members. But critics questioned if the measures would be put into effect quickly enough, and if there are sufficient avenues for enforcement.

The agreement was supposed to give investors faith that Spain, Italy and other European nations would be able to pay back lenders, despite their big national debts and deficits. On Monday, though, investors fled from these bonds, driving the yield on the 10-year Italian bond up to 6.54%, from 6.33% on Friday.

"The fiscal and economic prospects of Italy and the other southern Eurozone countries remain very precarious," John Higgins, an economist with Capital Economics, wrote in a note to clients Monday. "Indeed, we think that Italy will have to go through years of severe pain if it is to reduce its public debt to a sustainable level and thrive within the region even if it is provided with years of major financial assistance."

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Photo: German Chancellor Angela Merkel. Credit: Michael Sohn / Associated Press

Economy boosted by narrowing trade deficit

The U.S. economy, which has been picking up steam recently, got another boost from the latest trade numbers.

The Commerce Department said Friday that the nation’s trade deficit in October narrowed to $43.5 billion, the lowest level since December 2010.

The improvement, from an upwardly revised deficit of $44.2 billion in September, was due almost entirely to higher exports and lower imports of petroleum, a volatile category.   

Still, the smaller trade shortfall prompted analysts to mark up their projections for gross domestic product, the broadest measure of economic activity.

Macroeconomic Advisers raised its GDP growth forecast for the quarter by two-tenths of a percent, to an annual rate of 3.7%. That’s a significant pickup from 2% most recently estimated for the third quarter. If such an acceleration could be sustained, it would give a big boost to job creation.

But that’s a very big if.

Some analysts expect the U.S. trade deficit to widen again as oil prices have ticked back up. What’s more, there are hints that American exporters are starting to feel the pinch from Europe’s debt troubles and weakening economy.  While shipments of capital goods continued to grow, the rate of increase has slowed. Europe accounts for about one-fifth of all U.S. exports.

Meanwhile, the recent uptick in American consumer spending could lead to gains of imports in the near future.

Despite worries about the Eurozone debt crisis and the slow growth of jobs in the U.S., consumers are clearly feeling better about the  economy. In the latest sign of that, the early December reading of the University of Michigan consumer sentiment index increased to 67.7, from 64.1 in November, according to a report Friday. It marked the fourth straight month of improvement and was slightly better than what many analysts were expecting.

-- Don Lee

Investors greet European deal with cautious optimism

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Investors and economists are responding cautiously to a deal worked out in Brussels that is supposed to solve the European debt crisis.

The summit in Brussels was billed as the last chance to end a crisis that has wreaked havoc on the European economy for over a year.

The deal announced early Friday is designed to draw the European Union closer together fiscally, and to punish member nations that run large deficits. But important details of the deal have not been worked out and a number of European Union members, including Great Britain, have not signed on.

"The fiscal language looks to be copied and pasted from the original Stability and Growth Pact with a few bells and whistles added to imply that 'this time we mean it,'''  Citigroup strategist Steven Englander wrote in a note to clients.

The deal has been enough to send stocks up modestly Friday morning, but investors are not signaling that they see an immediate end to the troubles in Europe. The Dow Jones industrial average was up 154.32, or 1.29%, to 12,105.90 in early trading. Leading indexes were up 1.8% in Germany and 2.1% in France.

Much of the attention now turns to the European Central Bank and its president, Mario Draghi, who has been cautious about committing the bank's resources to helping prop up the continent's weaker economies. Draghi greeted the deal with careful optimism.

"It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," Draghi said. "We came to conclusions that will have to be fleshed out more in the coming days."

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Photo: France's President Nicolas Sarkozy, left, talks with Germany's Chancellor Angela Merkel  and European Commission President Jose Manuel Barroso at a European Union summit in Brussels on Friday. Credit: Yves Herman / Reuters

Anxious investors watching and waiting for Europe

Worried trader  justin lane epa

In a quiet before the storm, investors have been sitting on their hands waiting for a European summit Friday that some commentators say is a do-or-die moment for the European economy.

European Union leaders will meet in Brussels to consider a plan put together by German and French leaders aimed at integrating the continent's finances more fully.

There is hope that the plan can finally resolve the debt crisis that has been roiling the European economy for more than a year. After a number of piecemeal solutions have failed to stop the spread of the crisis, many economists say that a large-scale change in the structure of the European Union provides the only possible solution. As the meetings approach, each rumor out of one of the European camps has had the ability to shake investors.

"It’s extremely hard to keep up at the moment and extremely hard to analyse as even if ideas never see the light of day their mere discussion seems to have the ability to move markets," said Jim Reid, a strategist at Deutsche Bank.

The latest such comment to cause waves came from a German politician, who told reporters hours ago he was skeptical that leaders would be able to reach a deal.

"I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal," Reuters reported the anonymous official as saying. "My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for."

These comments helped send European markets down at the end of the day, and American markets down at the beginning -- though they quickly headed back up and began wobbling again. The Standard & Poor's 500 was recently down 1.4 points or 0.1% to 1,257.06, while the Dow Jones industrial average was up 25.80 or 0.2% to 12,175.93.

Leading indexes ended the day down 0.6% in Germany and 0.1% in France.

In addition to the EU meeting Friday, the European Central Bank will be meeting Thursday to consider steps they might take to help the situation. But while the bank could lower interest rates to help boost the economy, officials have said that they will not pull out their big guns until a more comprehensive fiscal agreement is reached.

"The bank looks set to announce at least some further action soon (perhaps next week) but the idea that it is about to fire a 'silver bullet' right into the heart of the debt crisis still looks very optimistic," said John Higgins, an economist at Capital Economics.

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Photo: A trader on the floor of the New York Stock Exchange. Credit: Justin Lane / European Pressphoto Agency

Standard & Poor's warns of downgrade on Eurozone credit ratings

StandardandPoor's
Standard & Poor's warned Monday that it might lower its ratings on the long-term debt of nearly all countries in the Eurozone, including economic powerhouse Germany, because of the ongoing debt crisis.

The rating firm said it put the sovereign debt of the 15 nations on a negative "credit watch" because "systemic stresses" in the European monetary union have risen to the point that they are putting "downward pressure" on the region as a whole.

Among the reasons cited by S&P are tightening credit, continued disagreements among policymakers about how to handle crisis, high levels of government and household debt and a "rising risk" of a recession in the region in 2012.

"Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the Eurozone as a whole," S&P said.

The news, which began leaking out before U.S. markets closed, rattled investors and cut into a rally by the Dow Jones industrial average that had been fueled by the announcement by French and German leaders that they would push for a plan to force Eurozone countries to stick to tough spending limits.

S&P's move shortly after markets closed in New York caused stock-index futures prices to drop across the board, indicating a lower open for stocks Tuesday.

The negative credit watch means that S&P could downgrade the ratings of all the Eurozone countries -- except for Greece and Cyprus -- within 90 days. Greece wasn't warned because its low CC rating indicates "a relatively high near-term probability of default." Cyprus was already on negative credit watch.

S&P said it would review the credit ratings of the 15 nations after the European Union summit at the end of the week and hope to announce all the results at the same time.

"We are of the view that the upcoming European summit ... provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far toward restoring investor confidence," S&P said of its decision to make the downgrade warning before the meetings.

Germany's long-term AAA rating is at risk, along with the AAA ratings of France, Finland, Austria, Luxembourg and the Netherlands. In August, S&P downgraded U.S. government long-term debt one notch, from AAA to AA+, because of the inability of leaders in Washington to strike a deal to rein in the nation's growing debt.

The company said it believes that the long-term ratings of Germany, Austria, Belgium, Finland, Luxembourg and the Netherlands are unlikely to fall more than one notch if they are downgraded. The other nine Eurozone nations would be unlikely to fall more than two grades.

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-- Jim Puzzanghera in Washington

Photo: Standard & Poor's headquarters in New York. Credit: Getty Images

 

Geithner headed to Europe to meet with Sarkozy and key officials

Treasury Secretary Timothy Geithner
Treasury Secretary Timothy F. Geithner will head to Europe next week to meet with French President Nicolas Sarkozy, new Italian leader Mario Monti, and other key government officials to discuss their efforts to resolve the debt crisis

Geithner, who has been urging European leaders to take more forceful action, will travel there for three days beginning Tuesday "for discussions with his counterparts on their efforts to reinforce the institutions in the Euro area," the Treasury Department said Friday.

In addition to meetings with Monti and Sarkozy, a key player along with German Chancellor Angela Merkel in trying to address the European debt crisis, Geithner will meet with European Central Bank President Mario Draghi and Jens Weidmann, president of Germany's central bank.

Geithner also has meetings scheduled with the finance ministers of Germany and France, as well as with Mariano Rajoy Brey, the prime minister-elect of Spain.

The Federal Reserve joined with the European Central Bank and four other central banks this week to ease the crisis. In a coordinated move, the central banks made it easier for European leaders to access U.S. dollars cheaply in hopes of avoiding a freeze in credit markets.

Geithner told reporters Thursday that he supported the action.

"I think this was a responsible, sensible way for the Federal Reserve and other central banks to try to diminish some of the pressures you're seeing on European financial institutions," he said. The U.S. has an interest in doing that to reduce the need of European banks to shed assets, which could harm global economic growth, Geithner said.

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Photo: Treasury Secretary Timothy F. Geithner, left, French Central Bank Governor Christian Noyer and French Finance Minister Francois Baroin at the G20 finance summit in Paris in October. Credit: EPA

Bond yields tumble in Europe as crisis fears ease

Draghi
Europe continued to pull back from the brink Thursday as government bond yields fell for a fourth day in France, Italy, Spain and other countries.

The drop in yields followed a move by six major world central banks on Wednesday to pump more money into the global financial system, a strategy aimed particularly at assisting cash-strapped European banks.

Bond buyers also got gutsier as European Central Bank President Mario Draghi hinted that the ECB could take more aggressive action to help ease the continent’s debt crisis -- if countries pledge to keep spending in check.

The ECB has been under enormous pressure to boost its purchases of Eurozone bonds as a way to push yields down, after many investors abandoned the debt market in recent months amid fears of a wave of sovereign defaults.

But investors showed a renewed appetite for European debt Thursday as France and Spain successfully sold new bonds.

In debt trading, the market yield on two-year French bonds slid to 1.13%, down from 1.29% on Wednesday and a recent high of 1.90% a week ago.

Spanish two-year bond yields tumbled to 4.78% from 5.37% on Wednesday and 6.09% a week ago.

The euro currency continued to edge up, rising 0.2% to $1.347. The euro hit an eight-week low of $1.324 last week.

European stock markets ended modestly lower after Wednesday’s big gains. The German market fell 0.9% after surging 5% on Wednesday. The French market eased 0.8%, Italian stocks slipped 0.2% and the Spanish market was off 0.3%.

Wall Street was largely flat at about 11:30 a.m. PST. The Dow Jones industrial average was off 13 points to 12,031 after rocketing 490 points, or 4.2% in Wednesday’s global rally.

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Photo: European Central Bank President Mario Draghi. Credit: Jock Fistick / Bloomberg News


Fed says it takes no risk in lending dollars for Europe

Fedeccles
Stocks soared Wednesday as global markets lauded central banks’ decision to funnel more money into the financial system, a move mainly aimed at assisting struggling European banks.

But the agreement to expand so-called currency liquidity swap arrangements among the Federal Reserve, the European Central Bank and four other central banks could be viewed another way: an act of desperation.

“It suggests that policymakers’ concerns about the outlook are significant and have increased substantially,” economists at Nomura Securities International wrote in a report.

For its part, the Fed insisted that it's taking no real risk under the program.

Europe is the epicenter of global financial worries, of course. Soaring market interest rates on government bonds across the continent over the last month have further weakened European banks. That’s because their bond holdings have dropped in value with each rise in rates.

In shades of 2008, fear of a new round of bank failures has made lenders worldwide increasingly reluctant to do business with European banks. That has made it more difficult for some banks to get the dollars they need to repay their own debts -- for example, when a U.S. money market fund calls in a loan it previously made to a European bank.

To avert a new global credit squeeze, the Fed agreed to make more dollars available to the ECB and other central banks, and to cut the interest rate for such loans. That, in turn, will allow the ECB to lower the cost of dollars it lends to individual commercial banks.

The Fed noted on its website that it lends only to other central banks under these arrangements, and that the borrowing central bank “therefore bears the credit risk associated with the loans.”

In other words, the Fed isn’t on the hook if the ECB’s dollar loans to individual banks go bust.

The Fed also said it doesn’t bear any risk of currency loss on the loans, if for example the euro’s value were to fall against the dollar. (The euro rose Wednesday, gaining 1% to $1.345.)

The swap program doesn’t attack the most pressing problem in Europe, which is the surge in government bond yields. The central banks aren’t directly funneling money to cash-strapped European governments.

“These actions do not address solvency issues in European sovereigns,” analysts at Keefe Bruyette & Woods wrote in a note to clients.

Still, bond yields fell across most of Europe on Wednesday. The yield on two-year French bonds slid to 1.29% from 1.58% on Tuesday. Italian two-year bond yields eased to 6.93% from 7.10%, the third straight drop after reaching a euro-era high of 7.66% on Friday.

Despite the Fed’s assurances, one of the central bank’s harshest critics -- Rep. Ron Paul (R-Texas) --  attacked the swap agreements.

“Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis,” Paul said in a statement.

“The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending” in Europe,  Paul said.

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Photo: The Federal Reserve building in Washington. Credit: Andrew Harrer / Bloomberg News

A third straight annual gain for stocks? Just maybe . . .

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Wednesday's big rally on Wall Street puts the stock market back within striking distance of posting a gain for 2011 -- if the bulls can stay in control in December.

That's a big "if," of course, given the still-dangerous situation in Europe.

But the U.S. market’s relative resilience in November, compared with most foreign markets, hinted that many investors were reluctant to bail out of American equities despite Europe's woes.

Looking solely at U.S. economic data for the month, stock investors had a decent reason to stay put: Most of the reports showed the recovery continuing, although at a modest pace.

That was reinforced by data Wednesday on Chicago-area manufacturing, private-sector payroll growth and the Federal Reserve’s latest “beige book” report on U.S. economic conditions.

Those reports, along with the Fed’s surprise move with other major central banks to try to bolster Europe’s struggling banking system, drove the Dow Jones industrial average up 490 points, or 4.2%, to 12,045.68.

That lifted the Dow back into the black for 2011. The 30-stock index is up 4% for the year as November ends.

But most broader indexes still are in the red. The Standard & Poor’s 500 is down 0.8% for the year. The Nasdaq composite is down 1.2%, and the Russell 2,000 small-stock index is off 5.9%.

If the market continues to advance it could put more pressure on hedge fund managers and other big-money players to hop aboard, hoping to salvage their performance for 2011. They also know that December historically has been a good month for the market.

Just by the math, U.S. stocks should have an easier time finishing the year with gains compared with most foreign markets.

The average European blue-chip stock is down 16.6% this year. The Japanese market is down 17.5%, Brazilian stocks are off 17.9% and the Canadian market is down 9.2%.

If Wall Street can rally in December, major stock indexes could post their third-straight annual gain.

The Dow industrials rose 11% in 2010 after an 18.8% jump in 2009. Those gains followed the 33.8% crash in 2008.

The S&P 500 index was up 12.8% last year after a 23.4% advance in 2009. The S&P plunged 38.5% in 2008.

The Russell 2,000 index will have a harder time getting close to its gains of 2009 and 2010. It was up 25% in both of those years after tumbling 34.8% in 2008.

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-- Tom Petruno

Photo: On the New York Stock Exchange floor Wednesday. Credit: Justin Lane / EPA

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