Investors Keep Faith in U.S. in Crisis after Crisis
By Bernard Condon, AP Business Writer
NEW YORK (AP) -- Global investors have stayed remarkably confident in the U.S. despite one budget crisis after another. But they're starting to wonder if the latest political impasse will tarnish America's Teflon image.
So far, the nation's reputation as the world's best place to invest remains unshaken. The 10-year Treasury note, the bedrock of the government's debt market, has attracted more money in recent weeks, not less, and the stock market is still close to record highs.
Still, the squabbling in Washington over the debt ceiling, which follows squabbling over automatic spending cuts earlier this year, is severely testing investor patience. Many fear a default would be a tipping point, sending bond and stock prices plunging.
The repeated budgetary brinkmanship is making some question their faith in the U.S.
"The more times you give politicians a chance to completely muck something up, the more chance ... they will do it," says Gary Jenkins, managing director of Swordfish Research in London. "If this were to become a regular occurrence, then, who knows?"
The U.S. Treasury has warned it will run out of money if Congress does not agree to raise a $16.7 trillion cap on borrowing by Oct. 17 and allow it to issue more debt. That has raised the specter that the U.S. won't be able to pay interest on its debt. Republicans say they won't allow more borrowing unless Democrats agree to restructure benefits programs or cut the deficit; the White House has ruled out negotiations tied to the debt cap.
The Treasury says a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession.
Even with such a dire scenario, investors continue to buy Treasurys. On Tuesday, the yield on the 10-year note, which falls when investors buy, was 2.63 percent, near a two-month low.
U.S. stocks fell again on Tuesday, the 11th drop in the last 14 trading days. Still, the Standard and Poor's 500 index reached an all-time high just three weeks ago and is only 4 percent below that peak.
The debt ceiling fight echoes the Congressional standoff over the same issue in the summer of 2011.
Experts say the U.S. attracts money now for the same reason it did back then: Many other countries are faring worse than the U.S. China, India and Brazil are slowing dramatically. Japan is struggling to shake off a two-decade slump. The 17 countries of the eurozone have just emerged from a recession.
"We're the best of worst," says David Sherman, head of Cohanzick Management, a manager of bond funds. He adds that the U.S. tends to "bounce back" from crises.
In the 2011 crisis, for example, U.S. stock prices dropped, but recovered most of their losses by the end of the year.
Many investors think the costs of a default are too high for politicians not to raise the borrowing cap before the deadline. But they're still worried. Congress hasn't agreed on a spending bill for the new budget year that began Oct. 1. A lack of funding led to a partial shutdown of the government, which entered its ninth day on Wednesday.
"If we're having trouble with this government shutdown, and no negotiation, what's going to happen in two weeks?" asks Talley Leger, a strategist Macro Vision Research, an investment consultancy.
Leger thinks it may take a further drop in stocks, perhaps a big one, to force lawmakers to compromise.
The precedent for this is the 778-point drop in the Dow Jones industrial average on Sept. 29, 2008, after Congress rejected a $700 billion bailout bill, known as Troubled Asset Relief Program. The TARP bill was passed within days.
"This whole shutdown could easily drag out to the debt deadline," says Bill Strazzullo, chief market strategist of Bell Curve Trading.
His guess is that the Dow falls to 14,200 - down 576 points from Tuesday's close.
The prospects for U.S. bonds are more complicated.
When investors anticipate a crisis, they tend to buy U.S. bonds. Treasurys are one of the mostly widely held assets in the world, so it's easy to buy and sell them, even when people are panicking.
"People crave Treasurys because it is the most liquid market," says Mark Vitner, a senior economist at Wells Fargo.
After the rating agency Standard and Poor's stripped the U.S. of its top credit rating in August 2011, people bought more U.S. debt. The yield on the 10-year Treasury fell below 2 percent for the first time in a half century.
"For all its theatrical problems, the U.S. is still a haven," says Marshall Mays, director of Hong Kong-based Emerging Alpha Advisors. Mays says money should continue to flow to the U.S. from Asia.
There is another reason to buy Treasurys. The worse things get, the less likely it is that the Federal Reserve will slow its economic stimulus. The Fed is buying $85 billion in Treasury and other bonds each month, driving bond prices up and their interest rates down. The goal is to lower rates on consumer loans, which are pegged to Treasurys.
The Fed extended that program last month, partly because it though the economy still needed help. Now, with the shutdown dragging on the economy, the Fed could keep buying bonds, continuing to make them attractive investments.
Randall Warren, chief investment officer of Warren Financial Service in Exton, Penn., says the Washington standoff might not be bad for another reason.
If Americans are made aware of their large debt, he says, they may be more willing to accept an increase in taxes or a cut in spending. "The easier it will be for Congress to dish out the medicine."
A default on Treasurys would be a step too far, though, says Dariusz Kowalczyk, Hong Kong-based senior Asia economist at Credit Agricole CIB. "People would be just afraid of holding Treasurys and to a smaller degree in holding the dollar."
AP Business Writers Steve Rothwell in New York, Kelvin Chan in Hong Kong and Sarah DiLorenzo in Paris contributed to this report.
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Last Update on July 07, 2015 07:36 GMT
PARIS (AP) -- Eurozone nations will hold an emergency summit today to discuss how to proceed following the `no' result in Greece's bailout referendum.
In the meantime, Germany's EU commissioner says he's optimistic that a new Greek finance minister and opposition parties' backing for Prime Minister Alexis Tsipras (TSEE'-prahs) could smooth negotiations between Athens and its European creditors.
Greece's polarizing finance minister, Yanis Varoufakis, resigned Monday and was replaced by Euclid Tsakalotos. Three opposition parties offered backing for Tsipras in the bailout negotiations.
Commissioner Guenther Oettinger told Deutschlandfunk radio Tuesday that Tsakalotos "doesn't have the same attitude as his predecessor. He knows the figures, the facts, he knows our reform proposals ... and he knows that we are flexible."
German officials insist that, even after its voters rejected more austerity in a referendum, Greece must accept conditions for any new aid.
Earlier, Chancellor Angela Merkel said "time is of the essence," after discussing the Greek crisis with French President Francois Hollande in Paris. She said that Greece must advance proposals to the table this week.
Greece's banks are facing the risk of collapse within days unless a rescue deal is reached. The European Central Bank maintained its level of cash assistance to Greek banks ahead of today's emergency meeting.
ECONOMY-THE DAY AHEAD
WASHINGTON (AP) -- A few economic reports are due out from the federal government later this morning. The Commerce Department will release international trade data for May and the Labor Department will release its job openings and labor turnover survey for the same month. This afternoon, the Federal Reserve releases May consumer credit data.
WASHINGTON (AP) -- U.S. service firms grew at a slightly faster pace in June, as business activity and new orders increased.
The Institute for Supply Management says its services index edged up to 56 in June from 55.7 in May. Any reading over 50 indicates that services firms are expanding.
Steady hiring over the past year has fueled a consumer spending rebound from a winter slump. Many economists say the economy will expand at an annual rate of 2.5 per cent in the second quarter, after shrinking during the first three months of 2015.
Still, the index's hiring component slipped in June to 52.7 from 55.3 in May, which indicates that the rate of job growth might slow.
The report corresponds with economic growth of around 3 percent annually in the second quarter, Lee said.
SEOUL, South Korea (AP) -- Samsung Electronics Co. forecasts its second-quarter profit has dropped 4 percent from a year earlier.
The maker of Galaxy smartphones said in its earnings preview Tuesday that its April-June operating profit was 6.9 trillion won ($6.1 billion). The consensus among analysts was 7.23 trillion won, according to financial data provider FactSet.
Samsung said sales fell 8 percent over a year earlier to 48 trillion won. The company is scheduled to disclose its net profit and breakdown figures among its business divisions later this month.
The announcement shows that recovery at Samsung's smartphone division was not as strong as expected.
Analysts have lowered profit forecasts on Samsung in recent weeks, citing the weaker-than-expected sales of its flagship smartphones, the Galaxy S6 and S6 Edge, which went on sale in April.
NEW YORK (AP) -- Starbucks says it's hiking prices again starting today, with the increases ranging from 5 to 20 cents for most affected drinks.
The Seattle-based company also raised prices nationally about a year ago.
The company says that a small and large brewed coffee will each go up by 10 cents in most areas of the country. That would bring the price of a large coffee to $2.45 in most U.S. stores.
Some other coffee sellers are cutting prices. Last week, The J.M. Smucker Co. said it would cut prices for most of its coffee products because of declines in future prices for unroasted coffee beans. In an emailed statement yesterday, Starbucks Corp. said coffee costs are only part of its expenses, which also include rent, labor, marketing and equipment.
Sheryl Sandberg joins SurveyMonkey board of directors
UNDTED ( AP) -- SurveyMonkey will add two new members to its board of directors, including Facebook's chief operating officer, Sheryl Sandberg.
Sandberg is the widow of David Goldberg, who was CEO at SurveyMonkey from 2009 until he died in an accident while exercising in May.
The Palo Alto, California, company said Monday its other new director is David Ebersman, the CEO of Lyra Health and former chief financial officer at Facebook.
SurveyMonkey, which operates an online survey platform, also said Zander Lurie, its acting executive chairman, will take on the role on a permanent basis.
WAL-MART-ARMORED CAR HEIST
BRISTOW, Okla. (AP) -- Investigators say they have no suspects in the theft of $75,000 from an Oklahoma Wal-Mart by a man disguised as an armored truck driver.
Authorities say the suspect entered the Wal-Mart store in Bristow about 10:30 a.m. Saturday dressed similarly to a Loomis armored transport employee. The suspect strolled to the cash office, signed for the deposit and walked out of the store.
Wal-Mart employees called police after the real Loomis employee arrived about 45 minutes later. Bristow is about 35 miles southeast of Tulsa.
Bristow Police Chief Wayne Williams said Monday investigators have not identified the suspect whose image was captured by a video surveillance camera. Williams says officials don't believe the suspect lives in the area.
Williams says Wal-Mart has alerted its other stores about the theft.
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