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California, which supposedly would be the world's eighth-largest economy if it were a standalone, might need to take some lessons in financial management from Brazil, which actually is the world's eighth-largest economy.
On the same day that the Golden State's credit rating was cut one notch closer to junk status by Fitch Ratings, Brazil was told by Moody's Investors Service on Monday that the country's credit grade may be raised from junk to investment-grade -- which would further burnish the nation's status as an emerging economic and financial power.
From Bloomberg News:
Brazil’s credit ratings were put on review for an increase to investment grade by Moody’s Investors Service, which cited the country’s “demonstrated resilience to shocks” in the global economy.
 Moody’s placed both the country’s foreign and local ratings of "Ba1," or one level below investment grade, on review for upgrade. Moody’s is the only one of the three major rating companies that has Brazil below investment grade. Both Standard & Poor’s and Fitch Ratings raised Brazil to "BBB-minus," the lowest investment-grade rating, last year.
An investment-grade rating from all three ratings firms could lower Brazil's cost of borrowing and widen the investor audience for its debt. California is facing just the opposite: Market yields on the state's bonds have jumped over the last six weeks as the budget crisis in Sacramento has worsened and investors have been less willing to hold the state's paper.
More from Bloomberg on Brazil:
Moody’s decision to signal it may raise Brazil to investment grade amid the global recession underscores President Luiz Inacio Lula da Silva’s success in stockpiling foreign reserves and extending debt maturities since taking office in 2003. Brazil had record reserves of more than $200 billion when the financial crisis deepened in September, allowing the central bank to sell dollars and contain [its currency's] decline while it cut interest rates to shore up a slumping economy.
The global credit crisis and recession have uncovered “underlying structural strengths” in Latin America’s biggest economy, Moody’s said.
“The Brazilian authorities’ policy response has been effective in containing the impact of the global crisis, thus providing evidence of increased resilience to shocks, a characteristic integral to an investment-grade credit profile,” Moody’s said.
The Brazilian stock market, by the way, was up 37% in the first half of the year, compared with the 1.8% gain for the U.S. Standard & Poor's 500 index.
-- Tom Petruno
Image: The Brazilian flag. The inscription reads, "Order and Progress."
Japan, which showed the world how awful a sustained bout of deflation can be, may be heading back into that vortex.
The country’s main index of consumer prices dropped 1.1% in May from a year earlier, the biggest decline since 2002, the government said Friday.
Oil is part of the explanation here: Because crude prices have fallen so far from their peaks a year ago, they’re exerting unusual downward pressure on inflation rates. In the U.S. the consumer price index, including food and energy costs, was down 1.3% in May from a year earlier, the biggest drop since 1950.
 But excluding food and energy the U.S. CPI was up 1.8% in May from a year earlier. In Japan, by contrast, the CPI ex-food and energy was down 0.5% in the same period, signaling more widespread price cutting.
Japan is much more sensitive to the risk of true deflation, which is a broad-based decline in prices that can feed on itself and have a severe debilitating effect on an economy.
From Bloomberg in Tokyo:
"Profits fall, then wages come down, then consumers stop shopping," said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. "And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of."
Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months.
Finance Minister Kaoru Yosano said an "extreme" slump in demand and production are causing the drop. "We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral," he said.
As Japan struggled in the aftermath of its real estate and banking system crashes of the early 1990s, the economy stagnated in the late 1990s and early 2000s.
That brought on deflation: Japan’s consumer price index fell every year from 1998 to 2002, was unchanged in 2003, then declined again in 2004. The index began to move modestly higher in 2005.
The policy responses of the Obama administration and Federal Reserve to last year’s economic and credit catastrophes have in large part been aimed at keeping the U.S. from falling into a similar deflationary cycle.
The Fed wants to believe it’s winning the battle, as I noted in this post on Wednesday. But many economists say the risk of sustained Japan-style deflation in the U.S. remains high.
-- Tom Petruno
Photo: Shopping in Tokyo. Credit: Toshiyuki Aizawa / Bloomberg News
Investors who've been hoping to buy stocks or commodities at lower prices are getting their wish.
Now, will they step up -- or keep waiting for better bargains?
The pullback in equity markets this month has been worldwide, with few exceptions, amid new jitters over the global economy's turnaround prospects.
At Monday's close, the U.S. Standard & Poor's 500 index was down 5.6% from its spring high reached June 12. That isn't much, but it's the biggest decline since the rally began on March 10.
U.S. indexes of smaller stocks have lost between 7% and 8% from their recent highs, but they had posted bigger gains in the rally than the S&P 500.
 The declines in many foreign markets have gotten closer to double-digit percentages, after the steep run-up of the last three months. The German market was off 8.8% through Monday from its spring high reached June 2. The Mexican market has lost 8.4% from its high.
The biggest loser so far has been the commodity-dependent Russian stock market, which dove 7.8% in Monday's global sell-off, leaving it down 22% from its spring peak on June 1.
As for commodity prices, oil fell $2.62 to $66.93 a barrel on Monday. It's down 7.9% from its eight-month high of $72.68 reached June 11. Wheat futures have tumbled 19% since June 1. The popular Pimco Commodity Real Return mutual fund is down 9.1% in the last seven sessions.
To hear the bulls tell it, there have been huge numbers of investors on the sidelines for the last three months, all eager to put money to work in stocks and commodities in anticipation of an economic upturn later in 2009. They've just been waiting for the first significant pullback in those markets to get a better deal, or so the thinking goes. . . .
Read on »
Risk takers are having a bad case of second thoughts today, egged on by the World Bank.
Fresh doubts about the global economy are hammering stocks and commodity prices worldwide, after the World Bank said it expected the global economy to shrink 2.9% this year -- a much worse performance than the 1.7% decline the bank previously forecast.
Russia’s stock market appears to have the dubious distinction of being first to fall into a new bear market since the winter dive gave way to a spring surge.
The World Bank’s downbeat tone may just be the excuse many traders and investors needed to pull back from bullish bets that had pushed share prices and commodities higher worldwide since early March. Stocks in many markets were sharply lower last week, suggesting that the spring rally had run out of gas.
 On Wall Street, the Dow Jones industrial average was off 161 points, or 1.9%, to 8,378 at about 11:30 a.m. PDT, after sliding 3% last week.
Crude oil futures were down $2.66, or 3.8%, to $66.89 a barrel in New York. Crude has fallen from $71.37 on Thursday, and was at nearly $73 a week earlier.
Copper, considered a bellwether of the global economy’s health, is down 5% to $2.15 a pound in futures trading today. The price now has tumbled 12% since June 11.
Russia, heavily dependent on sales of natural resources including oil, is the worst performer among equity markets today. The Micex stock index in Moscow plummeted 7.8%, pushing its decline since June 1 to 22.2%.
A drop of 20% or more is considered the threshold for a bear market, although wild volatility is nothing new in Russian stocks.
The Micex index had more than doubled between Jan. 23 and June 1, boosted in large part by the rebound in oil prices.
Among other recently hot emerging markets, Brazil’s IBOV stock index is down 3.1% so far today. It has fallen nearly 9% since June 1, but still is up 32% for the year.
The iShares MSCi Emerging Markets exchange-traded fund was down $1.03, or 3.2%, to $30.72 at about 11:30 a.m. PDT. It’s off 11% since June 1 but still up 23% this year.
-- Tom Petruno
Photo: Red Square in Moscow. Credit: Dmitry Kostyukov / AFP/Getty Images
If the U.S. dollar's spring slump continues to deepen this week, we can expect to hear the Obama administration try to shore it up with the boilerplate line about how "a strong dollar is in America’s interest."
But a strong greenback definitely is not in the interest of U.S. investors who have money overseas. The broad rally in other major and minor currencies against the dollar since early March has sharply boosted Americans’ returns on foreign assets.
The dollar's weakness is one reason why the average foreign stock mutual fund is up 14.4% year to date, more than twice the 6.7% gain of the average domestic stock fund, according to Morningstar Inc. data. Foreign diversification is working again for American investors, as it did for most of this decade.
Over the last three months the Canadian stock market has risen 28% in its own currency, but for U.S. investors the gain is a hefty 48% because of our dollar's dive against the Canadian dollar.
 The German stock market is up 28.5% in euros over the last three months but the gain is 43% measured in dollars. The story is similar across most of Asia and Latin America.
The math is straightforward: As the dollar sinks, securities denominated in rising foreign currencies automatically are worth more when translated into dollars.
As noted in this post, just about everything has been working against the buck this spring. As investors have begun to feel more confident about the global economy, some are shoveling money into traditionally riskier non-dollar assets, such as emerging-market stocks.
The dollar also has been victimized by the sell-off in Treasury bonds that was triggered at least in part by concerns about Uncle Sam's record borrowing binge. And as all that borrowing has fueled worries about potential inflation down the road, some investors have dumped dollars in favor of commodities -- which is why gold is again nearing $1,000 an ounce.
What's not to like about a falling dollar? It means we have less purchasing power abroad, of course, which will bite if you're planning a foreign vacation (another good reason for a staycation). And if the greenback weakens enough it could make its own inflation by raising the cost of imports.
For foreign investors, the dollar's slide means their U.S. assets are depreciating -- which is particularly aggravating to China, our biggest creditor.
Still, the current dollar swoon is just giving back some of what the buck gained in the second half of last year, when the global financial-market meltdown drove many investors into the perceived haven of the U.S currency. The euro, for example, plunged from $1.59 last July to $1.25 in February. It's now back to about $1.41.
So there's no dollar emergency at this point. For U.S. investors who held on to their foreign stocks and bonds through the September-to-March crash, the dollar's slide is just helping to speed the repair job on their mangled portfolios.
-- Tom Petruno
Photo credit: Associated Press
U.S. investors who've kept faith with emerging markets have been well-rewarded this year. They're getting another big payday today, after India's stock markets soared on news that the country’s ruling party won a sweeping election victory over the weekend.
The Sensex stock index in Mumbai rocketed 2,110 points, or 17.3%, to 14,284 on expectations that Prime Minister Manmohan Singh’s Congress Party will continue reforms aimed at speeding India’s economic growth.
The iShares MSCI Emerging Markets fund, an exchange-traded fund popular with U.S. investors, was up $1.41, or 4.7%, to $31.49 at about 9:50 a.m. PDT today, extending its year-to-date gain to 26%.
From Bloomberg News:
The ruling Congress party won the most seats since 1991, when then-finance minister Singh abandoned Soviet-style state planning and introduced free-market reforms that have helped India’s economy quadruple in size. With almost twice as many seats as the main opposition, Singh, 76, may further reduce barriers to foreign investment in insurers and retailers, plans that had been frustrated by communist lawmakers.
 Kamal Nath, trade minister in the outgoing administration, said in an interview the government "should aim" to boost growth to 8% in the business year that started April 1. The $1.2-trillion economy is expected by the central bank to expand 6%, compared with average growth of 8.6% in the previous five years.
"The election result is extremely positive and very, very bullish," Madhusudan Kela, head of equities at Mumbai-based Reliance Capital Asset Management, the nation’s largest money manager overseeing $18 billion of assets, said in an interview. "This will provide a government which is stable and has powers to take decisions."
Monday’s surge left the Sensex index up 48% this year, while the U.S. Standard & Poor’s 500 index still is slightly in the red.
Emerging markets crumbled last year amid the global financial crisis. The Sensex plunged 52% in 2008 after six straight annual gains. But since U.S. stocks turned up beginning March 10, money has poured back into many emerging markets as well in search of growth ideas.
The big four "BRIC" countries -- Brazil, Russia, India and China -- have led the way. Year to date, Brazil’s Bovespa index has rallied almost 35%, Russia’s Micex index has jumped 63% and China’s Shanghai market index is up 46%.
Among funds that focus on the BRIC markets, the iShares MSCI BRIC fund is up $2.02, or 6.4%, to $33.76 today, and the SPDR S&P BRIC 40 fund is up 77 cents or 4.2%, to $19.15.
-- Tom Petruno
Photo: Indian brokers in Mumbai celebrate the stock market's surge today. Credit: Sajjad Hussain / AFP/Getty Images
Stock markets worldwide went on a tear today, stoked by more optimism about the global economic outlook.
The advance on Wall Street pushed the benchmark Standard & Poor’s 500 index back into the black for the year, for the first time since Jan. 8.
The S&P jumped 29.72 points, or 3.4%, to 907.24. It’s now up 0.4% year to date, after plummeting as much as 25% between Jan. 1 and March 9.
The Dow Jones industrials gained 214.33 points, or 2.6%, to 8,426.76.
Rising stocks outnumbered losers by almost 6 to 1 on the New York Stock Exchange, although trading volume was relatively modest -- which could suggest the eight-week-old rally is running out of gas, some analysts warn.
 Asian markets soared overnight after an index of manufacturing activity in China jumped to 50.1 in April from 44.8 in March -- the first close above the 50 mark since July. Any reading over 50 indicates that activity is expanding.
The Shanghai composite stock index rose 3.3% to its highest level since early August. It’s up nearly 41% this year.
The Mexican market rocketed 5% to its highest since early January as fears ebbed that the swine flu outbreak would cause lasting damage to the economy. The government said most businesses that were shut down in recent days to help stem the outbreak would reopen Wednesday.
Stocks also surged across Europe. The German market jumped 2.8%. Russia's market rose 4.1%.
On Wall Street sentiment was helped by a report that pending home sales rose for a second straight month in March.
In recent weeks, "green shoots," or signs of improvement in the economy (the term was coined by Federal Reserve Chairman Ben S. Bernanke), have been eagerly received by investors who’ve been looking for reasons to jump back into equities after the long bear market. . . .
Read on »
Not even the threat of a global flu pandemic could knock the world's stock markets out of their bullish trajectories this week.
U.S. blue-chip indexes rose for the seventh week in the last eight. Indexes of some market sectors made it eight in a row.
"With everything that’s been thrown at the market, we think it’s holding up well," said Ryan Detrick, an analyst at Schaeffer’s Investment Research in Cincinnati.
 Wall Street’s bears insist that stocks are overdue for a sharp pullback, but modest setbacks this week just attracted more buyers. That’s what the bulls have been hoping to see.
The Standard & Poor’s 500 index fell 1% on Monday and 0.3% on Tuesday, then jumped 2.2% on Wednesday. After easing 0.1% on Thursday, the S&P gained 0.5% today to close at 877.52 -- its highest since Jan. 9.
The net gain for the week: 1.3%.
The Dow Jones industrials added 44.29 points, or 0.5%, to 8,212.41 today, the first close above 8,200 since Feb. 9. The Dow was up 1.7% for the week.
Investors continue to get bigger bang for their bucks in smaller stocks. The S&P small-cap index rose 1.9% for the week, its eighth straight weekly advance.
From their lows on March 9, the S&P small-cap is up 43.3% while the S&P 500 is up almost 30%.
Market optimists continue to latch on to reports that show the economy has stopped getting worse, even if it isn’t getting notably better.
Today, bulls were stoked by a jump in a key consumer confidence index to its highest reading since September. Also, a gauge of U.S. manufacturing activity posted a bigger-than-expected gain in April.
Importantly, U.S. stocks aren’t rising in a vacuum: The rally, like the new flu, remains a global affair. Japan’s Nikkei-225 index jumped 3.1% for the week, Germany’s DAX index was up 2% and Brazil’s Bovespa index rose 1.1%.
So if American investors are wrong about the global recession bottoming -- and about the flu’s economic impact ultimately being modest -- they have a lot of company.
-- Tom Petruno
Photo: An entrepreneur sells face masks on a street in Costa Rica. Credit: Jeffrey Arguedas / EPA
Another economic "green shoot" -- this one sprouting across the Pacific:
The Japanese government early Thursday said industrial output rose 1.6% in March, double the 0.8% gain that economists had expected.
From Bloomberg News:
Output rose for the first time in six months, adding to evidence the worst of the recession may be over.
 Companies plan to increase production in April and May to replenish inventories that fell 3.3% last month, the report also showed.
"We’ve passed the bottom in terms of the level of production," said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. "The negative side of things is that the recovery will be weak."
Overseas shipments gained 2.2% in March from February, the first month-on-month increase since May.
The pickup in output last month was tiny compared with the crash of the previous four months. Output had plummeted 9.4% in February after a dive of 10.1% in January.
Still, investors are simply looking for signs of stabilization at this point.
The Japanese stock market surged early Thursday on the heels of powerful rallies in Europe and the Americas on Wednesday. The Nikkei-225 index was up 340 points, or 4%, to 8,833 about three hours into the trading session.
The Nikkei has risen 25% from its low in early March, lagging the 29% rise in the U.S. Standard & Poor’s 500 index in this rally. . . .
Read on »
Mexico's financial markets have stabilized today after Monday's dive on fears of economic calamity from the swine flu outbreak.
U.S. airline and hotel stocks, which also plunged on Monday, are mixed.
The Mexican stock market's IPC index, which slid 3.3% on Monday, fell as much as 1.6% early today but was off just 53 points,or 0.2%, to 21,774 at about 11 a.m. PDT.
The peso has rallied back to 13.87 per dollar after tumbling to 14.05 per dollar on Monday from 13.34 on Friday.
 From Bloomberg News:
There is a sense "the government is taking the necessary measures so that things return to normal" by next week, said Antonio Magana, head of the foreign-exchange trading desk at Grupo Financiero Interacciones in Mexico City. "We’re going to begin to see less negative news."
Mexican authorities have ordered all schools shut nationwide until May 6 and some businesses to close as the number of cases suspected to be swine flu rose. The government has advised people not to congregate in large groups and to avoid shaking hands and kissing. The army is distributing face masks throughout Mexico City, where the disease has been concentrated, and the government has said it has enough antiviral medicine to treat the flu.
Facing a worsening economy even before the flu outbreak, Mexico earlier this month arranged with the International Monetary Fund for a standby $47-billion credit line. The line could be used to help defend the peso, which had been sinking fast in February and March and reached a record low of 15.6 per dollar on March 9.
The spreading disease "raises the odds of tapping the facility," Eduardo Levy-Yeyati, head of emerging-market strategy at Barclays Capital Inc. in New York, told Bloomberg. "The flu increases growth risks and currency pressures."
As for U.S. travel-related shares, Continental Airlines was up 18 cents to $11.26 at about 11 a.m. PDT, after tumbling 16% on Monday. AMR, parent of American Airlines, was up 14 cents to $4.84. But United parent UAL was off 19 cents to $5.31.
Carnival Corp., the cruise line operator, was up $1.33, or 5.4%, to $25.92 after sliding 13.5% on Monday.
-- Tom Petruno
Photo: Subway riders in Mexico City today. Credit: Joe Raedle / Getty Images
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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