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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.
More Business News
Last Update on September 30, 2014 17:13 GMT
WASHINGTON (AP) -- U.S. home prices in July increased at the slowest pace in 20 months, reflecting sluggish sales and a greater supply of houses for sale.
The Standard & Poor's/Case-Shiller 20-city home price index rose 6.7 percent in July from 12 months earlier. That's down from an 8.1 percent gain in June and the smallest increase since November 2012.
Nineteen of the 20 cities in the index reported lower annual gains than in June. And a new national index of home prices compiled by S&P rose just 5.6 percent.
Lower price gains should make homes more affordable for would-be buyers. Sales of existing homes picked up over the summer but then dipped in August. Sales have fallen 5.3 percent in the past year.
WASHINGTON (AP) -- U.S. consumer confidence dropped in September after hitting the highest level in nearly seven years in August.
The Conference Board says its confidence index fell to 86.0, the first decline after four months of gains. It fell from a revised 93.4 in August, which had been the highest level since autumn 2007 before the Great Recession officially began in December 2007.
Conference Board economists say the decline reflected a less positive view of the current state of the job market.
WASHINGTON (AP) -- President Barack Obama will deliver an economic address this week, hoping to promote the recovery as the campaign season heads into its final weeks before midterm congressional elections.
Obama plans to deliver a speech Thursday at Northwestern University's Kellogg School of Management in Evanston, Illinois, drawing attention to economic advances since he took office. The White House says he will also press for additional steps that the government can undertake to create jobs and improve wages.
The speech comes amid polls that still show the economy is the top issue with voters and that a majority of voters disapprove of Obama's handling of the economy. The speech marks a shift from Obama's recent attention to international crises, particularly the start of a new bombing campaign against Islamic extremists.
SAN JOSE, Calif. (AP) -- PayPal is splitting from EBay Inc. and will become a separate and publicly traded company next year.
The separation is expected to occur in the second half of 2015.
EBay says its board decided that the separation was the best path for growth and shareholder value creation for each business.
Dan Schulman, the president of the enterprise growth group at American Express, will be the new president at PayPal, effective immediately. The 56-year-old will become PayPal's CEO once the separation takes place.
BRUSSELS (AP) -- Official figures show inflation across the 18 European Union countries that use the euro dipped further toward zero in September, a move that's likely to maintain pressure on the European Central Bank to back further stimulus measures.
Eurostat, the EU's statistics office, says consumer prices in the eurozone rose only 0.3 percent in the year to September against the previous month's 0.4 percent.
Inflation, which is at its lowest level since October 2009, is way below the ECB's target of just below 2 percent.
One reason behind the ECB's recent interest rate reductions has been to prevent a sustained bout of falling prices -- so-called deflation, which can make consumers delay purchases.
Eurostat also said unemployment in the eurozone was unchanged at 11.5 percent in August.
LONDON (AP) -- The U.K. economy grew faster in the second quarter than previously estimated, with official figures revising up the quarter-on-quarter growth rate by 0.1 percentage points to 0.9 percent.
The Office for National Statistics revision came at the same time as officials put into place data and methodological changes meant to make Britain comply with international norms.
Joe Grice says that despite the changes the country's long-term average growth rate is little changed, though the economic downturn ended about nine months earlier than thought.
He notes that "the recent downturn continues to be the deepest since ONS records began." Chris Williamson, analyst at Markit.com, says the new statistics show the economy is now 2.7 percent larger than it pre-crisis peak.
LONDON (AP) -- Taxpayer-owned Royal Bank of Scotland says strong economic conditions are boosting its finances and that it expects to take a smaller hit from bad investments this year.
The bank, which was rescued by the British taxpayer during the 2008 financial crisis, issued an unscheduled trading update today to report it would "significantly outperform" its previous guidance of 1 billion pounds ($1.6 billion) in impairment charges. It says it now expects to put aside only half a billion pounds for bad loans.
Rising property prices in Ireland have helped its Ulster Bank unit. RBS Capital Resolution, which contains toxic investments, has improved with the economy. RBS says uncertainties remain, however.
The bank is undergoing a sweeping restructuring to focus on its core business in the U.K.
BRUSSELS (AP) -- The European Union's competition watchdog says tax rebates that Ireland granted iPhone maker Apple appear to amount to illegal state aid and may have to be recouped.
Apple Inc. funnels the bulk of its international sales through subsidiaries in Ireland, where it benefits from low, negotiated tax deals.
In a letter to the Irish government published Tuesday, the 28-nation bloc's executive Commission said the tax treatment granted to Apple raises "doubts about the compatibility" with EU law.
The Commission says tax deals struck with Apple in 1991 and then 2007 show "several inconsistencies" and may not comply with international taxation standards.
The EU first announced the probe in June. It's now requesting further documents from Ireland before making a decision, which is likely to take several months.
DEERFIELD, Ill. (AP) -- Walgreen Co. (WAG) reports a loss of $239 million in its fiscal fourth quarter.
On a per-share basis, the Deerfield, Illinois-based company says it had a loss of 25 cents. Earnings, adjusted for non-recurring costs and amortization costs, came to 74 cents per share.
The results met Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was also for earnings of 74 cents per share.
The drugstore chain posted revenue of $19.06 billion in the period, exceeding Street forecasts. Analysts expected $19.02 billion, according to Zacks.
Walgreen shares have increased nearly 4 percent since the beginning of the year, while the S&P 500 has climbed 7 percent. The stock has climbed slightly more than 9 percent in the last 12 months.
JOHNSON & JOHNSON-ACQUISITION
Johnson & Johnson buying Alios for $1.75B
NEW BRUNSWICK, N.J. (AP) -- Johnson & Johnson is buying the biopharmaceutical company Alios BioPharma Inc. for about $1.75 billion.
Alios is a privately held company that focuses on developing therapies for viral diseases.
The deal includes Alios' portfolio of potential therapeutics for viral infections including compound AL-8176, an orally administered antiviral therapy currently in Phase 2 studies for the treatment of infants with respiratory syncytial virus. RSV typically causes only mild, cold-like symptoms in most children. But it is also the most common cause of pneumonia in U.S. infants.
The acquisition is targeted to close in the fourth quarter.
Johnson & Johnson is based in New Brunswick, New Jersey.
NEW YORK (AP) -- News Corp. is spending about $950 million to buy the online real estate business Move Inc., in a deal that aims to speed up the media company's digital expansion.
News Corp. says it will pay $21 per share in cash for each outstanding share of Move. That represents a 37 percent premium over the stock's closing stock price of $15.29 on Monday.
Move operates the website realtor.com and News Corp. says it displays more than 98 percent of all for-sale properties listed in the United States. The media company says Move's network of websites reaches about 35 million people per month.
New York-based News Corp., which is controlled by Rupert Murdoch, expects the deal to close at the end of the year. Move's board has unanimously approved the acquisition.
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