Stocks hit as traders await debt plan

AP News
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Posted: Oct 13, 2011 11:39 AM
Stocks hit as traders await debt plan

Stocks fell Thursday as investors awaited more details on exactly how European officials plan to tackle their debt crisis and Chinese trade figures stoked concerns over the outlook for the world economy.

U.S. corporate earnings provided little support, with banking group JP Morgan Chase & Co. reporting lower net profit, while a weekly jobless claims report showed the labor market remains sluggish there.

Stocks have been buoyed this week as eurozone officials finally indicated they are willing to take decisive action such as larger write-downs on Greek debt and a push to make banks strengthen their capital against resulting losses.

New steps to quell the debt crisis are seen as positive for stocks because a disorderly default by Greece and resulting losses to banks on its government bonds could cause a wider banking crisis, choking off credit to the wider economy and causing a recession.

But key details are lacking as officials rush to put their plans together ahead of a European summit 10 days from now and a Group of 20 summit of rich and developing countries in early November. Officials have not worked out how large any additional losses to Greek bondholders _ many of them banks _ would be. Nor have clear plans been laid out about how to buffer banks against the losses that would result from a Greek restructuring.

"To be fair to the optimists, European politicians have moved away from outright denial, but we are still a long, long way from an all encompassing solution," said Louise Cooper, market analyst at BGC Partners in London.

A group of leading economist institutes in Germany said the debt crisis was still the major risk for growth in Europe's lynchpin economy, predicting growth would sag to 0.8 percent next year from 2.9 percent this year.

Stocks were also hurt by news that China's trade surplus narrowed for a second straight month in September, suggesting further cooling in the Chinese and global economies. The country's trade surplus fell to $17.8 billion in August, well below July's 30-month high of $31.5 billion, largely on the back of lower export growth _ a sign that the global economic recovery is stalling and could weigh on China's growth.

In Europe, Britain's FTSE 100 closed down 0.7 percent at 5,403.38, while Germany's DAX fell 1.3 percent to 5,914.84. France's CAC 40 ended 1.3 percent lower at 3,186.94.

In the U.S., Dow industrials fell 0.9 percent at 11,420 while the broader Standard & Poor's was off 1.1 percent at 1,194.

The euro has also suffered a reverse after enjoying big gains recently on the back of hopes of a comprehensive solution to Europe's debt crisis _ it was trading 0.4 percent lower at $1.3736.

Adding to investor concerns on Thursday, JP Morgan reported that third-quarter net income fell 4 percent on weaker investment banking results as fewer companies went to financial markets to borrow. Net profit was $4.3 billion, and the company's shares fell 1.1 percent _ even though the results beat analyst estimates. It also set aside $1 billion for lawsuits over poorly-rittten mortgage loans and securities.

U.S. jobs data, meanwhile, disappointed. The number of people seeking unemployment benefits barely changed last week, reflecting a weak labor market. Applications for unemployment fell to 404,000. They need to remain under 375,000 per week to indicate job growth. The number hasn't been that low since February.

News on Wednesday of the European proposals to help banks helped Asian shares overnight. Japan's Nikkei 225 index climbed 1 percent to 8,823.25. Hong Kong's Hang Seng jumped 2.3 percent to 18,757.81 and South Korea's Kospi index rose 0.8 percent to 1,823.10.

Australia's S&P/ASX 200 gained 1 percent to 4,244.50. The Shanghai Composite Index advanced 0.8 percent to 2,438.79.

On Wednesday, European Commission President Jose Manuel Barroso called for European banks to raise billions in new capital and for a stricter accounting of their exposure to sovereign debt. Barroso also called for a permanent bailout fund to come into force by mid-2012, one year ahead of schedule.

European officials are also talking about reopening a July 21 deal in which banks agreed to take 21 percent losses on Greek debt by getting longer-dated bonds with lower interest rates. Officials have indicated a revised deal could impose much larger writedowns on bondholders, potentially getting Greece back on its feet _ but risking crippling losses to banks.

Oil prices meanwhile tracked European equities lower _ benchmark oil for November delivery was down $1.31 to $84.28 per barrel in electronic trading on the New York Mercantile Exchange.

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AP Business Writer Pamela Sampson in Bangkok contributed.