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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 July 31, 2014 17:18 GMT
WASHINGTON (AP) -- More people sought U.S. unemployment benefits last week, but jobless claims remain at pre-recession levels.
The Labor Department says weekly applications for unemployment aid rose 23,000 to a seasonally adjusted 302,000. The prior week's was revised down to 279,000 claims, the lowest since May 2000.
The four-week average, a less volatile measure, fell 3,500 to 297,250. That's the lowest average since April 2006, more than a year before the Great Recession began at the end of 2007.
Applications are a proxy for layoffs. When employers keep their workers, it suggests potential income gains, active hiring and confidence that the economy is growing.
Economists forecast that the employment report being released Friday will show that 225,000 jobs were added in July, according to a survey by the data firm FactSet.
WASHINGTON (AP) -- Average U.S. mortgage rates declined slightly this week, hovering near their lows for the year.
Mortgage company Freddie Mac says the nationwide average for a 30-year loan slipped to 4.12 percent from 4.13 percent last week. The average for the 15-year mortgage, a popular choice for people who are refinancing, declined to 3.23 percent from 3.26 percent last week.
Mortgage rates are below the levels of a year ago. They have fallen in recent weeks after climbing last summer when the Federal Reserve began talking about reducing the monthly bond purchases it was making to keep long-term rates low.
The Fed issued a statement Wednesday after a two-day policy meeting suggesting that it wants to see further improvement in the economy before it starts raising its key short-term interest rate.
SAN FRANCISCO (AP) -- A research firm says a record number of million-dollar homes were sold in the San Francisco Bay Area during the second quarter, another sign that affording a place to live is a growing challenge for anyone who isn't tied to the technology economy.
CoreLogic DataQuick said Thursday that more than 5,700 homes sold for at least $1 million from April through June, the highest since the Irvine, California-based firm began collecting data in 1988. More than 1,100 homes sold for at least $2 million in the nine-county region, also a record.
Santa Clara County, in the heart of Silicon Valley, and the city of San Francisco set records for million-dollar sales. Prices are highest in San Francisco, where the median sales price hit $1 million last month.
DATA SURVEILLANCE LAWSUIT
NEW YORK (AP) -- A judge has ruled against Microsoft Corp., saying U.S. law enforcement can force the company to turn over emails it stores in Ireland.
Loretta Preska, a federal judge in New York, ruled from the bench Thursday after hearing oral arguments.
The Redmond, Washington-based software company has said rulings forcing it to turn over emails threaten to rewrite the Constitution's protections against illegal search and seizure. It says it can also damage U.S. foreign relations. Its arguments were joined by four large technology companies including Apple Inc., Cisco Systems Inc., Verizon Communications Inc. and AT&T Inc.
The judge agreed to stay the effect of her ruling to give the company time to appeal.
Preska said she agrees with a magistrate judge who signed a warrant in December.
MADISON, Wis. (AP) -- The Wisconsin Supreme Court has upheld the 2011 law that effectively ended collective bargaining for most public workers, sparked massive protests and led to Republican Gov. Scott Walker's recall election.
The court upheld the law 5-2 Thursday under a challenge filed by the Madison teachers union and a union representing Milwaukee public workers. They had argued that the law violated workers' constitutional rights to free assembly and equal protection.
A federal appeals court twice upheld the law as constitutional.
The law prohibits public worker unions from collectively bargaining for anything beyond base wage increases based on inflation.
Walker introduced it shortly after taking office, and rose to national prominence as he defended it and won the 2012 recall election.
MEMPHIS, Tenn. (AP) -- A judge has ordered Kellogg to put employees at its Memphis, Tennessee, cereal production facility back to work.
The ruling on Wednesday came after the National Labor Relations Board filed a complaint in March against the company related to a lockout of about 220 employees.
Contract negotiations between the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and Kellogg failed in October.
WMC-TV reports U.S. District Judge Samuel Mays gave the Battle Creek, Michigan-based Kellogg five days to put the Memphis employees back to work with the same pay and working conditions that were in place when the lockout began.
MINNEAPOLIS (AP) -- Target has hired Pepsi executive Brian Cornell as its new chairman and CEO as it looks to recover from a huge data breach and troubles in Canada.
Cornell replaces interim CEO John Mulligan, who is chief financial officer for the Minneapolis company. Mulligan stepped into the interim CEO post in May when Target Corp.'s Gregg Steinhafel resigned following a large data breach in the runup to Christmas.
Cornell, 55, most recently served as CEO of PepsiCo Americas Foods. Prior to that, he was CEO and president of Sam's Club of Wal-Mart International and CEO of Michaels Stores Inc.
PepsiCo Inc. said in a statement Thursday that it expects to announce Cornell's successor soon.
Cornell is set to become Target's CEO on Aug. 12.
BEIJING (AP) -- China says Canada's accusation that it was behind the hacking of a Canadian technology development organization is groundless and irresponsible.
Foreign Ministry spokesman Qin Gang said in a statement issued Thursday that Canada should withdraw the accusation.
Canada's Treasury Board said on Tuesday that a "highly sophisticated Chinese state-sponsored actor" hacked into the National Research Council, which partners with private industry to bring new technologies to market.
The government said one of Canada's spy agencies detected and confirmed the cyberattack. The council's computers were isolated as a precaution. The government wouldn't release more information for security reasons.
In May, the U.S. accused China of vast business spying and charged five military officials with hacking into U.S. companies to steal vital trade secrets.
BRUSSELS (AP) -- The European Union has revealed the names of five Russian banks it is sanctioning over what the 28-nation bloc decries as Moscow's meddling in Ukraine.
The sanctions limit access to European capital markets for the banks, in which the Russian state holds a majority stake. The lenders are Russia's largest bank, Sberbank, Gazprombank, Rosselkhozbank, VEB and VTB bank.
The sanctions were first announced Tuesday, but the names of the targeted firms were only released Thursday.
The regulation says it will be "prohibited to directly or indirectly purchase, sell, provide brokering or assistance in the issuance" of debt instruments with a maturity of over 90 days.
Russia's state-owned banks last year issued debt worth 15.8 billion euros. About half of that, or 7.5 billion euros, was placed on European markets.
TOKYO (AP) -- American electric car maker Tesla Motors Inc. is teaming up with Japanese electronics company Panasonic Corp. to build a battery manufacturing plant in the U.S. expected to create 6,500 jobs.
The companies announced the deal Thursday, but they did not say where in the U.S. the so-called "gigafactory," or large-scale plant, will be built.
The plant will produce cells, modules and packs for Tesla's electric vehicles and for the stationary energy storage market, employing 6,500 people by 2020.
Under the agreement, Tesla, based in Palo Alto, California, will prepare, provide and manage the land and buildings, while Osaka-based Panasonic will manufacture and supply the lithium-ion battery cells and invest in equipment for manufacturing.
The project will cut costs to better meet mass production needs for electric vehicle batteries.
BERLIN (AP) -- Germany's Volkswagen, Europe's biggest automaker, says its net income rose 14.1 percent in the second quarter although revenues slipped even as unit sales pushed higher.
Volkswagen AG said its profit in the April-June period was 3.25 billion euros ($4.35 billion), up from 2.85 billion a year earlier. Revenue slipped 2.2 percent to 50.98 billion euros although there was a 5.6 percent increase in the number of vehicles sold, to 2.62 million.
Volkswagen said that revenue was hurt by "significant negative exchange rate effects" and also said that, while global demand for passenger cars continued to rise in the year's first half, "the pace of growth eased off" and regional trends were mixed.
The company maintained its full-year outlook.
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