US housing concerns weigh on world markets

AP News
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Posted: Nov 18, 2009 11:41 AM

European stocks pared most of their gains Wednesday and Wall Street traded lower after a sharp fall in U.S. housing starts in October fueled concerns the U.S. economic recovery will not be as strong as some expected.

In Europe, the FTSE 100 index of leading British shares closed down 3.8 points, or 0.1 percent, at 5,342.13, while Germany's DAX rose 9.18 points, or 0.2 percent, at 5,787.61. The CAC-40 in France ended less than a point lower at 3,828.16.

All three indexes had been higher earlier but a retreat on Wall Street saw most of the gains wiped out.

The Dow Jones industrial average was down 40.06 points, or 0.4 percent, at 10,397.36 around midday New York time while the broader Standard & Poor's 500 index fell 3.26 points, or 0.3 percent, to 1,107.06.

Market moods were darkened by news that housing starts in the U.S. unexpectedly tumbled 10.6 percent in October to a six-month low of 529,000 units. Analysts had been expecting a 3 percent rise to 600,000.

Though the figures have a history of being volatile, they fed into growing concerns that economic recovery in the U.S. is not yet sustainable, especially with unemployment on the rise. Stock markets have rallied strongly since March as investors reined in economic doomsday expectations partly because of a recovery in the property market.

The state of household spending in the U.S. is also key for recovery _ it accounts for around 70 percent of the nation's economy. A mixed bag of earnings so far this week from some of the country's leading retailers have only added to the skepticism and contributed to the tepid performance in stock markets over the last couple of days.

"Equities have rallied from extreme lows on the back of extraordinary liquidity and hopes surrounding the economic recovery," said Georgina Taylor, equity strategist at Legal & General Investment Management.

"While we believe the rise we've seen in equity markets to date is justified, in order to achieve significant upside from here, market participants will need to see evidence that economic growth can be sustained," she added.

One bright spot for investors is that the weak economic data has cemented market expectations that U.S. borrowing costs will not be rising any time soon. Much of the rally in stocks in recent months has been due to investors borrowing cheap dollars to finance potentially more lucrative purchases _ any indications that U.S. rates are heading up could bring this sort of investment, called a carry trade, to a grinding halt.

"The main concern for investors at this stage is that the currently lucrative carry trade _ in which people are taking advantage of low rates on the dollar to invest in equities _ might blow up and send equities downhill," said Anthony Grech, market strategist at IG Index.

In the currency markets, the dollar gave up a large chunk of its recent gains, particularly against the euro, which was trading 0.7 percent higehr at $1.4983. However, it was steady at 89.25 yen.

The pound was volatile after minutes to the last rate-setting meeting at the Bank of England showed there was a three-way split over whether to expand the money supply program and by how much.

Initial reaction was to send the pound sharply down _ within minutes of the release of the minutes, the pound had fallen around half a cent to fall to $1.6870, but that was soon more than made up as investors said the likelihood of further asset purchases was unlikely given the three-way split on the Monetary Policy Committee.

Earlier, Japan and Hong Kong led the Asia's declines, with Tokyo's Nikkei 225 stock average losing 53.13 points, or 0.6 percent, to 9,676.80 and Hong Kong's Hang Seng shedding 73.82, or 0.3 percent, to 22,840.33.

Markets in Indonesia, Singapore and Thailand also fell.

South Korea's key index rose 1.1 percent to 1,603.97 and Shanghai's benchmark was up 0.6 percent to 3,303.23. Shares in Taiwan and Australia were modestly higher as well.

Oil prices rose on the back of the weaker dollar and a report showing an unexpected drop in U.S. crude supplies. Benchmark crude for December delivery was up 67 cents to $79.81 a barrel in electronic trading on the New York Mercantile Exchange.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.