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 03, 2015 17:40 GMT
WASHINGTON (AP) -- More Americans applied for unemployment benefits last week, but applications remain at historically near low levels in a positive sign for the U.S. economy amid a broader global slowdown.
The Labor Department says weekly applications for unemployment aid rose 12,000 to a seasonally adjusted 282,000. The four-week average, a less volatile measure, increased 3,250 to 275,500. That average has fallen 9.2 percent over the past 12 months.
The relatively meager number of layoffs generally corresponds with strong hiring levels in the monthly jobs report being released Friday.
Economists expect that employers added 207,500 jobs in August as the unemployment rate dips to 5.2 percent from 5.3 percent. Hiring at that pace suggests the U.S. economy has been insulated from uncertainty about China's financial health that sparked a recent stock sell-off.
WASHINGTON (AP) -- U.S. services companies expanded at a healthy pace in August, lifted by robust consumer spending resulting from steady job gains.
The Institute for Supply Management says that its services index slipped to 59 from 60.3 in the previous month. July's reading was the highest in a decade, and any reading over 50 indicates expansion.
The index remains at a high level despite the decline and suggests that Americans have been spending freely at retail stores, hotels, restaurants and other firms that make up the index. The ISM is a trade group of purchasing managers. Its services survey covers businesses that employ 90 percent of workers.
A measure of sales and production fell one point but remained at a solid level of 63.9. A gauge of new orders also fell slightly.
WASHINGTON (AP) -- Average long-term U.S. mortgage rates rose this week after a sharp drop the previous week, as global markets continued to whipsaw amid economic disruption in China and uncertainty over Federal Reserve interest-rate policy.
Mortgage giant Freddie Mac says the average rate on a 30-year fixed-rate mortgage increased to 3.89 percent from 3.84 percent a week earlier. The rate on 15-year fixed-rate mortgages advanced to 3.09 percent from 3.06 percent.
The rates remain well below their levels of a year ago, when the 30-year loan rate was 4.10 percent and the 15-year rate was 3.24 percent.
Mortgage rates have been tracking the yield on the 10-year Treasury bond, as investors have fled turbulent stock markets in recent weeks for the safety of U.S. government bonds, and then markets have sharply recovered.
WASHINGTON (AP) -- The U.S. trade deficit fell in July to the lowest level in five months as exports posted a small gain while imports declined, reflecting a big drop in shipments of consumer goods such as cell phones.
The Commerce Department says the deficit narrowed to $41.9 billion in July, a 7.4 percent decline from a June imbalance of $45.2 billion. Exports were up a small 0.4 percent to $188.5 billion, helped by stronger sales of U.S.-made autos and machinery, while imports declined 1.1 percent to $230.4 billion.
So far this year, the deficit is running 3.6 percent above last year's level, reflecting weaker export sales. The concern is that U.S. growth will be hurt by further declines in exports, reflecting a stronger dollar and overseas weakness in nations such as China.
FRANKFURT, Germany (AP) --
The European Central Bank says it's ready to give the eurozone a bigger dose of stimulus should inflation across the 19-country bloc fail to pick up, President Mario Draghi said. Along with lower interest rates, the ECB is pumping 60 billion euros a month into the economy through purchases of government and corporate bonds. The program is slated to run at least through September 2016.
European markets jumped on the news. Germany's DAX added 2.3 percent, France's CAC-40 rose 2.1 percent and U.K.'s FTSE 100 rose 1.6 percent.
The stimulus is intended to help get consumer price inflation back toward the ECB's target of just below 2 percent. In the year to August, it stood at 0.2 percent. Draghi said it could go negative in coming months following the recent drop in oil prices.
WASHINGTON (AP) -- The Obama administration says it wants to end discrimination against transgender people throughout the health care system.
The new protections are part of a much broader proposed regulation released Thursday by the Department of Health and Human Services.
The long-delayed rule amounts to a manual for carrying out the anti-discrimination section of President Barack Obama's health care law.
That law prohibits bias in medical care on the basis of race, color, national origin, sex, age, or disability. Those underlying provisions are in effect.
The latest proposal clarifies that gender identity is covered under the law's ban against sex discrimination.
Hospitals that accept Medicare would have to comply with the rule, as well as most doctors.
The rule doesn't require insurers to cover gender transition surgery.
SAN JOSE, Calif. (AP) -- A federal judge has approved a $415 million settlement to resolve a class-action lawsuit alleging Apple, Google, Intel and two other Silicon Valley companies illegally conspired to prevent their workers from getting better job offers.
The settlement will pay more than 64,000 technology workers about $5,800 apiece.
The approval granted Wednesday by U.S. District Judge Lucy Koh ends a lengthy legal saga that exposed internal emails that cast former Apple CEO Steve Jobs in an unflattering light. Koh had rejected an earlier $324.5 million settlement of the case reached last year as inadequate.
The lawsuit accused Apple, Google, Intel and Adobe Systems of forming a secret cartel that agreed not to recruit each other's workers. Lawyers for the employees argued the pact illegally suppressed the wages of the affected technology workers.
INTERNET SEX TRAFFICKING
SEATTLE (AP) -- The Washington Supreme Court has ruled in favor of three young girls who sued Backpage.com after they were sold as prostitutes on the site.
Thursday's ruling says the Communications Decency Act does not protect Backpage from state lawsuits because of allegations that the company didn't just host the ads, but helped develop the content.
The lawsuit claimed Backpage.com markets itself as a place to sell "escort services" but actually provides pimps with instructions on how to write an ad that works.
Backpage had filed a motion to dismiss the suit. A lower court denied that request and the company appealed, saying it was immune from liability.
But the Supreme Court says the case should proceed because the girls have alleged facts that, if proved, would show that Backpage helped produce illegal content.
GULF OIL SPILL
NEW ORLEANS (AP) -- BP is going back to a federal appeals court in a case involving businesses' damage claims from the 2010 oil spill in the Gulf of Mexico.
The oil giant wants restitution of some of the money it paid in claims to businesses as part of a 2012 settlement. BP eventually won a revision in the way losses were calculated after arguing the settlement claims administrator wasn't correctly matching business's revenues and expenses.
Now, BP is seeking restitution and interest on some of the money paid out prior to October 2013 -- before the revision was approved. In court documents, the company says hundreds of millions of dollars are at stake.
A three-judge panel of the 5th U.S. Circuit Court of Appeals will hear arguments Thursday. A ruling isn't expected immediately.
MISSISSIPPI RIVER-OIL SPILL
Part of Mississippi River closes; 2 boats collide, spill oil
PADUCAH, Ky. (AP) -- The U.S. Coast Guard says part of the Mississippi River has been closed as crews investigate and clean up an oil spill caused by the collision of two tow boats.
The Coast Guard says the collision Wednesday evening near Paducah, Kentucky, damaged at least one barge carrying clarified slurry oil. The cargo tank was ruptured, causing an unknown amount of oil to spill into the river.
Officials say the river is closed from mile markers 938 to 922.
The Coast Guard said Thursday that the maximum amount of oil that could have spilled is 250,000 gallons. The agency says it's working with the barge owner and an oil spill response organization to determine the exact amount of oil that poured into the water.
The cause of the collision is being investigated.
GREEN ENERGY-PONZI SCHEME
PHILADELPHIA (AP) -- Prosecutors have charged three people with running a $54 million Ponzi scheme they say was built on promises of a green energy technology that would turn trash into fuel that they never developed.
Federal prosecutors in Philadelphia unsealed an indictment Thursday against 34-year-old Troy Wragg, of Georgia, 32-year-old Amanda Knorr, of Pennsylvania, and 52-year-old Wayde McKelvy, of Colorado. They were charged with wire and securities fraud and conspiracy.
It wasn't immediately clear if they had attorneys who could comment on their behalf.
Prosecutors say they lied to investors that their "biochar" technology and "carbon-negative" housing in Tennessee made millions, but they had almost no earnings and used the money to repay earlier investors and for themselves.
Wragg and Knorr were ordered to pay $37 million each after losing a Securities and Exchange Commission civil suit in 2012.
OVATION GUITAR FACTORY
HARTFORD, Conn. (AP) -- A Connecticut factory that produced Ovation guitars for nearly a half century before closing last year will be making the renowned instruments once again, thanks to factory employees' efforts.
Fender Musical Instruments Corp. closed the New Hartford facility in June 2014, citing market conditions, while continuing to make them in Asia. More than 40 workers lost their jobs.
Darren Wallace was among a few workers who were retained by Ovation. He kept up part of the plant on his own time with the hope it would reopen someday. Fender sold Ovation in December to Drum Workshop of Oxnard, California.
The new owners have decided to resume production at the plant with Wallace and five other workers, who will be turning out new instruments in a few weeks.
STUDENT LOAN DEBT
WASHINGTON (AP) -- Almost 12,000 students are asking the federal government to forgive their college loan debt, asserting their school either closed or lied to them about job prospects.
The figure represents an unprecedented spike in what's called a "borrower's defense" claim following the collapse Corinthian Colleges for-profit college chain, which had become a symbol of fraud in higher education. Under higher education law, students who believe they are victims of fraud can apply to have their loans discharged.
Officials say they know of five or so such cases in the past 20 years; some 4,140 have been filed since the Education Department's June announcement that it would make the debt-relief process easier.
Officials say an additional 7,815 Corinthian students have filed claims for debt-relief because their school closed.
GENERAL MILLS-GREEN GIANT
MINNEAPOLIS (AP) -- General Mills is selling its Green Giant and Le Sueur vegetable businesses to B&G Foods Inc. for about $765 million in cash.
The transaction includes the Green Giant and Le Sueur businesses in the U.S., Canada and some other markets.
General Mills will still run Green Giant's European business and certain other export markets under license from B&G Foods.
The food company said Thursday that it plans to use net proceeds from the deal to lower debt and buy back stock.
General Mills Inc. anticipates the transaction adding about 5 cents to 7 cents per share to fiscal 2016 earnings, excluding transaction costs and a one-time gain on the sale.
The deal is targeted to close by year's end.
BANGLADESH-FACTORY FIRE CHARGES
DHAKA, Bangladesh (AP) -- A court in Bangladesh's capital indicted the two owners of a garment factory and 11 others on homicide charges Thursday for a 2012 fire that killed 112 workers.
It is the first time that factory owners have been prosecuted in Bangladesh's lucrative garment industry, the world's second largest after China.
Delwar Hossain and his wife Mahmuda Akter, the owners of Tazreen Fashions Ltd., pleaded not guilty to the charges. The factory produced clothing for large international retailers including Wal-Mart.
Prosecutor Mizanur Rahman said the judge also indicted 11 factory managers and security guards. Eight of the accused were present in court while five remain at large and will be tried in absentia. The trial will begin Oct. 1, Rahman said.
Prosecutors argued that the owners and the others were responsible for the deaths of the workers because the factory outside Dhaka had no emergency exits and the main exit was locked when the fire broke out in November 2012. The defendants' lawyer argued that the fire was an accident and that they should not be indicted.
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