Spain offers dour prediction, but US stocks rise

By Spain offers dour prediction, but US stocks rise Updated at 2012-06-05 18:35:57 +0000


NEW YORK (AP) — As U.S. stocks struggled for direction, world finance leaders struggled for a way out of Europe's mounting debt crisis.

Major market indexes ricocheted between slight gains and losses in morning trading, then settled into modest gains by mid-afternoon. European markets were mixed and the euro edged lower against the dollar.

Trading volume was light and the stock moves were small, a sign that traders were moving to the sidelines because they weren't sure how to interpret developments in Europe and elsewhere.

Finance ministers and central bank presidents from the world's seven wealthiest nations held an emergency conference call to discuss how Europe can heal its weakest countries without alienating the stronger ones that have to foot the bill. Leaders are worried that Spain and Cyprus, which are scrambling for money to prop up their troubled banks, will soon need to be bailed out by their richer counterparts.

"As we saw in Lehman Brothers, when fear hits the banking system, it shuts down," said Jim Millstein, CEO of the advisory firm Millstein & Co. and a former Treasury official who oversaw the agency's investments in AIG and other troubled financial institutions.

Spain isn't part of the Group of Seven, the countries that held the conference call, but the U.S. and Germany are. As the G-7 leaders met, Spain's prime minister issued a plea for Europe "to support those that are in difficulty." Just beforehand, Spain's finance minister said the country was in danger of not being able to borrow money on the open market.

The yield on Spain's 10-year bonds crept down to 6.31 percent, but the rate is still dangerously high. Other countries including Greece and Portugal were forced to seek bailouts once their borrowing costs hit 7 percent.

Patrick O'Keefe, director of economic research at the accounting and consulting firm J.H. Cohn, was a little surprised that markets didn't react more forcibly to Spain's warning flags.

"A couple of years ago, a statement like that by any sovereign would have roiled the market," O'Keefe said. He guesses that the market, used to bad news by now, has already priced in European calamity.

"We were saying, 'We're on the brink' in 2008,'" O'Keefe said. "We're not all that far from the brink now."

In the U.S., indexes briefly popped higher in midmorning trading after the Institute for Supply Management reported that U.S. service companies grew at a slightly faster pace in May.

Otherwise, indexes were moving in narrow ranges. The Dow Jones industrial average fell as much as 29 points and rose as much as 35. That range of 64 points signaled a calm day. In the past year, the Dow has moved an average of about 180 points each day, pushed higher by last August's volatility when Standard & Poor's cut the U.S.'s credit rating.

The Dow was up 28 points around 2 p.m., at 12,129. The S&P 500 index was up six to 1,284, and the Nasdaq composite index was up 13 to 2,773.

O'Keefe said the market is waiting for a blueprint about what to do in Europe.

"I think the markets are looking and saying, 'Where is the political leadership?" O'Keefe said. "And that's true around the world. The Europeans just happen to be out of the frying pan and into the fire right now."

A central problem in Europe is whether the best solution means spending less money or more. Any solution is sure to irritate at least some countries. The German finance minister said again Tuesday he would oppose watering down budget cuts that stronger countries like his own want to impose on weaker countries like Greece.

Some leaders have pushed for a central body that would have more authority over banks in all 17 countries that use the euro. A deposit-insurance program, like the one run by the Federal Deposit Insurance Corp. in the U.S., could keep fearful customers in Spain and Greece from yanking their money out of banks there.

Spain on Tuesday pushed for a European "banking union" that could give bailouts to European banks directly, possibly bypassing national governments and the strings they want to attach to any rescue loans.

European markets were mixed. Greece's main stock index plunged 5 percent, but Germany's benchmark index was virtually flat. Stocks rose in France and Spain.

Starbucks fell 2 percent a day after announcing it will remake its food offerings. Starbucks is facing stiff competition from fast-food chains that do their own specialty coffees.

US Airways rose 3 percent after announcing that per-seat passenger revenue rose 6 percent in May compared to a year ago.

Homebuilders Lennar and PulteGroup each rose more than 4 percent after being hammered in the past two trading sessions.