GLOBAL MARKETS-Stocks off as US data disappoint; eyes on Fed, ECB

by on September 4, 2012 6:53 pm GMT

Tue Sep 4, 2012 2:53pm EDT

* U.S. manufacturing shrinks for third straight month

* ECB bond-buying hopes cut Spanish and Italian bond yields

* U.S. markets reopen after long holiday weekend

By Luciana Lopez

NEW YORK, Sept 4 (Reuters) – Global stocks fell on Tuesday
as data showed U.S. manufacturing shrank at the sharpest clip in
more than three years last month, adding to worries that the
global economy is slowing as the euro zone debt crisis continues
to roil world markets.

Though Spanish and Italian yields fell on expectations the
European Central Bank could buy more bonds to stem the effects
of the crisis, other markets took a more cautious approach, with
the euro falling against the dollar.

The U.S. manufacturing data, along with a separate report
showing U.S. construction spending fell in July by the most in a
year, fueled concerns that the U.S. economy continues to

“What people saw with today’s U.S. ISM and the manufacturing
data in Asia and Europe yesterday is that the global economy is
still slowing down. In particular, cyclical stocks are pretty
weak today,” said Peter Boockvar, equity strategist at Miller
Tabak & Co in New York.

The disappointing data come just days before Friday’s
nonfarm payrolls report, which could shed light on the state of
the faltering U.S. job market.

Friday’s payrolls data are key to any Fed decision on
whether they will follow through with a third round of bond
purchases, known as quantitative easing or QE3, said Kevin
Giddis, head of fixed income capital markets at Morgan Keegan in
Memphis, Tennessee.

“In my opinion, this is the number that creates a ‘go/no go’
decision from the Fed on QE3,” he said.

Those expectations got a boost last week when Fed Chairman
Ben Bernanke left the door wide open to a further easing of
monetary policy, saying the stagnation in the U.S. labor market
was a “grave concern,” though he stopped short of immediate

The Dow Jones industrial average dropped 16.19
points, or 0.12 percent, to 13,074.65. The Standard & Poor’s 500
Index gained 1.80 points, or 0.13 percent, to 1,408.38.
The Nasdaq Composite Index gained 13.74 points, or 0.45
percent, to 3,080.70.

The euro also slid against the dollar, dropping to $1.2575
, having risen as high as $1.2627 earlier in the session.

Investors were also eyeing possible action across the
Atlantic from the European Central Bank, with hopes for more
bond buys from the ECB helping drive Spanish and Italian bond
yields to multi-week lows.

Spanish two-year yields dropped to 3.038
percent, the lowest since early April, while their Italian
counterparts fell to 2.43 percent, the lowest since
late March.

The benchmark 10-year U.S. Treasury note was
down 12/32 in price to yield 1.5892 percent.

The ECB is expected to unveil a new debt-purchasing plan to
tackle the region’s debt crisis at a policy meeting on Thursday,
when it may also cut interest rates as the 17-nation euro area
heads toward a recession.

Mario Draghi, the ECB’s president, told European lawmakers
on Monday that buying short-term sovereign debt did not breach
any European Union rules, which investors took as a sign the
bank would resume buying short-dated Spanish and Italian bonds.

“Markets are taking a bit of confidence from Draghi, who
apparently indicated that purchases of up to three years
maturity wouldn’t be in contravention of EU policies on
financing of sovereigns,” said Brian Barry, a strategist at

Still, European equity investors have turned more cautious
over the impact of the ECB plan, having enjoyed a strong rally
since Draghi pledged on July 26 to do “whatever it takes” to
protect the euro.

The weak U.S. data also knocked European shares, adding to
market uncertainty.

The FTSEurofirst 300 ended down 1.1 percent at
1,079.12, albeit in thin trading volume of just 62 percent of
the 90-day daily average.

“If the ECB disappoints, the reaction would be on the
negative side. But I don’t expect a dramatic sell-off as focus
will shift to other events,” said Christian Stocker, equity
strategist at UniCredit.

The MSCI world equity index, which gained
late last week on renewed hopes of more monetary stimulus by the
Federal Reserve, was down 0.36 percent at 321.54.

Oil prices fell as concerns about slowing economic growth
and curbed demand for petroleum countered hopes for more
monetary stimulus from central banks in the United States and

Front-month Brent crude futures were down 1.23
percent to $114.36 a barrel. U.S. crude futures were down
1.06 percent to $95.45 a barrel from Friday’s settlement.

“You need to see demand coming through,” said Michael
Hewson, a markets analyst at CMC Markets in London. “And the
only way you are going to get demand growth is if oil prices
fall. Any upside in oil is going to be limited.”