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Investors remain cautious as central bank meetings loom

Traders work on the floor of the New York Stock Exchange, July 31, 2012. (REUTERS/Brendan McDermid)

NEW YORK: U.S. stocks were mixed Tuesday while European shares snapped a three-day winning streak and oil slipped on fear central banks may not deliver enough stimulus to quell concerns about a global slowdown.

Equities and oil had been climbing steadily since European Central Bank President Mario Draghi said last week he would do whatever it took to save the euro. Markets interpreted that to mean the ECB could announce at its Thursday meeting plans to lower Spanish and Italian borrowing costs by buying those countries’ bonds.

Flagging growth in the United States had also raised hopes the Federal Reserve, which begins a two-day rate-setting meeting Tuesday, would step up bond purchases of its own, though most economists expect it to hold its fire until September.

“The markets have run ahead of themselves. And I think certainly the ECB and the Federal Reserve will hold back from pumping in more money at this point in time,” said Manoj Ladwa, head of trading at TJ Markets.

Neither central bank is expected to stay on the sidelines for long, though, and that has helped pull the euro off two-year lows and underpin U.S. stocks’ best year-to-date rise since 2003.

The euro was last up 0.4 percent at $1.2311, while U.S. government bonds also rose, with the benchmark 10-year U.S. note up 6/32 in price to yield 1.48 percent.

But some traders said the ECB may not be able to live up to expectations, particularly if news from the debt-stricken eurozone continues to worsen.

Capital flight from Spain gathered pace in May while the central government’s deficit widened, raising fears that the country may soon need a full-scale bailout.

“Everybody is waiting for Thursday to see if Draghi can deliver,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets. “He’d better pull a big rabbit out of his hat.”

Internal debate within the ECB could mean that bold action is still weeks away. “There is a clear danger that expectations might be too high,” said Nick Parsons, head of market strategy at nabCapital in London.

The safe-haven German bond market reflected those concerns as the premium investors demand to hold Spanish or Italian 10-year bonds over German ones widened

European shares, which were heading for their best month since October after soaring more than 5 percent in the last three sessions, went into reverse, with the FTSE Eurofirst 300 index down 0.8 percent.

Investors were unnerved by weaker-than-expected earnings from Deutsche Bank and other major banks. The eurozone’s ongoing debt crisis has hurt revenues.

In U.S. markets, the Dow Jones industrial average was down 8.21 points, or 0.06 percent, at 13,064.80. The Standard & Poor’s 500 Index was down 0.35 points, or 0.03 percent, at 1,384.95. The Nasdaq Composite Index was up 7.21 points, or 0.24 percent, at 2,953.05.

With 303 of S&P 500 companies having reported quarterly earnings, 66 percent have beaten analysts’ expectations. The average over the past four quarters is 68 percent.

Incoming economic data has painted a mixed picture at best. A fourth straight monthly rise in U.S. single-family home prices offered some encouragement Tuesday, though a fall in inflation-adjusted consumer spending in June underscored the economy’s loss of momentum as the second quarter ended.

“Consumers are afraid,” said Matthew Lifson, analyst at Cambridge Mercantile Group in Princeton, New Jersey. “This data suggests the U.S. economy is stagnant overall.”

That should keep future Fed action in focus, analysts said. A separate report showed consumer confidence rose unexpectedly this month.

Commodity markets, too, are concerned about the health of the global economy as Europe’s debt crisis and slowing growth in China and the United States weigh on demand.

That has put stress on major Asian exporters, including Japan, Taiwan and South Korea.

But commodities got some support from an official Xinhua news agency report quoting Chinese Premier Wen Jiabao as saying that China would increase fiscal policy support to the economy in the second half of the year.

Brent crude, which chalked up its biggest monthly gain in July since February, was down 68 cents at $105.50 a barrel, while U.S. crude was down $1.11 at $88.67 a barrel.

Spot gold fell $2.55 to $1,617.90 an ounce in muted trade ahead of the ECB meeting. Prices were still on track for a second straight monthly rise.

 
A version of this article appeared in the print edition of The Daily Star on August 01, 2012, on page 6.

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