S&P warns Mexico on debt rating as oil revenue falls

The Mexican peso is sliding against the dollar for a sixth straight session today after Standard & Poor’s warned that it might cut the country’s credit rating.

From Bloomberg News:

Mexican President Felipe Calderon must create new sources of revenue to offset declining oil income if the country is to avoid a downgrade of its debt rating, Standard & Poor’s analyst Lisa Schineller said.

S&P may cut Mexico’s BBB-plus status before the end of the year, depending on how Calderon and legislators address ways to boost tax collection when they discuss the 2010 budget next week, Schineller said in an interview. That’s more important in assessing the country’s capacity to pay debt than any increase in the budget deficit, which economists say may widen to 3.5% of gross domestic product from 3% this year.

"It’s the concept of strengthening the medium-term revenue base in a permanent manner that can generate revenue to help offset the decline in oil revenue over the coming years," Schineller said in a telephone interview from New York.

Mexico’s contracting economy, a 50% drop in oil prices over the last year and declining production by the state oil monopoly have exposed lawmakers’ failure to raise taxes and reduce dependence on petroleum for 40% of revenue. S&P wants Mexico to address this without resorting to temporary measures aimed at getting it through next year, Schineller said.

Mexico’s rating, at BBB-plus, still is considered investment grade. A rating of BB or lower would push the country to "junk" credit status.

Concerns about the ballooning budget deficit have weighed on the peso in recent days. It eased today to 13.34 to the dollar, down from 13.25 on Friday and down from 12.83 on Aug. 21, which was its best level against the buck since November.

The peso still is in far stronger shape than in early March, when it fell to a record low of 15.57 per dollar amid the final stage of the winter plunge in global financial markets.

-- Tom Petruno

Photo: Mexican President Felipe Calderon. Credit: Fernando Bizerra Jr. / European Pressphoto Agency

Chinese stocks plunge again, leading global rout

China's stock market led the rest of the world higher in the spring rally. Now it's leading again -- as investors bolt for the exits on fresh doubts about the global economy.

The Shanghai market sell-off that began Aug. 5 accelerated today, driving the main index down 176.34 points, or 5.8%, to 2,870.63, in the biggest one-day slump since November.

The index now has plummeted 17% from its 2009 high on Aug. 4, after rocketing 91% since Dec. 31.

China's dive has helped fuel selling around the globe. Stocks slid 3.1% today in Japan, 2% in Germany, and prices are down sharply on Wall Street, with the Dow Jones industrials off 153 points, or 1.6%, to 9,163 at about 9:15 a.m. PDT.

Chinese speculators who've been looking for an excuse to cash out found plenty today: Ping An, the country's No. 2 insurance firm, reported weaker-than-expected first-half earnings; Yunnan Copper reported a first-half loss and said there were “no clear signs” of a recovery; and the government said foreign direct investment in China plunged nearly 36% in July from a year earlier.

From Bloomberg News:

“These disappointing earnings from big companies have reaffirmed concerns that share prices have moved ahead of fundamentals,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “The correction will continue.”

The Shanghai gauge trades at 31 times the reported profit of its companies, compared with a price-to-earnings ratio of 18 times for the MSCI Emerging Markets Index.

“Valuations are at such a stretched level that a correction is overdue,” said Yan Ji, who helps oversee about $850 million at HSBC Jintrust Fund Management Co. in Shanghai. “There may be another 20% or 30% downside for the index.”

The U.S. stock market, too, has been flashing classic warning signs in recent weeks that at least a short-term sell-off was imminent after the heady gains since July 10.

-- Tom Petruno

Photo: An investor at a Shanghai brokerage today. Credit: Eugene Hoshiko / Associated Press

 

Japan's economy returns to growth, but can it last?

Japan emerged from recession in the second quarter, the government reported Monday. But the economy’s growth was slightly below expectations, and investors have turned wary after the Tokyo stock market hit a 10-month high on Friday.

Germany and France also reported last week that their economies resumed growth in the second quarter. The data raised hopes that the global recession has run its course.

But the sustainability of any rebound remains highly suspect, for reasons including the  renewed slide in the confidence of U.S. consumers -- the intended buyers for much of the world's exports.

From Bloomberg News:

Japan’s economy grew for the first time in five quarters as a revival in exports and consumer spending helped the country climb out of its worst postwar recession.

Gross domestic product expanded at an annual 3.7% pace in the three months ended June 30, following an 11.7% decline in the previous quarter, the Cabinet Office said. The median estimate of 22 analysts surveyed by Bloomberg News was for 3.9% growth.

The recovery may not be sustained once the $2 trillion in worldwide stimulus that propped up sales for exporters from Toyota Motor Corp. to Kubota Corp. runs out. Some 40% of factories still sit idle, forcing companies to cut costs and leaving the winner of an Aug. 30 election with the challenge of staving off unemployment that’s approaching a record high.

"The growth we’re seeing is based on government spending and a rebound from the very low level in the previous quarter," said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. "Companies are burdened with huge overcapacity in terms of equipment and people. It’s much worse than in previous recoveries."

The Nikkei-225 stock index was down 235 points, or 2.2%, to 10,361 in early trading Monday. The index hit 10,597 on Friday, its highest since Oct. 6.

Through Friday the Nikkei’s year-to-date gain was 19.6% compared with an 11.2% rise for the U.S. Standard & Poor’s 500 index.

-- Tom Petruno

Photo: Japanese cars lined up for export from Yokohama near Tokyo. Credit: Koji Sasahara / Associated Press

 

Sacramento might want to call Brasilia for some advice

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."

Price-cutting in Japan points to repeat of deflation misery

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

Stocks just got cheaper. Are buyers still interested?

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. . . .

Bulls retreat worldwide; in Russia, the bear is already back

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

 

How the weak dollar may be rescuing your 401(k)

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

Emerging-markets comeback gets fresh boost from India

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

Stocks soar worldwide as 'green shoots' lure hungry bulls

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. . . .