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Dangers ahead for U.S. markets

Economic reports due out this week could be key as consumers fret about employment and $4 gas nationwide.

June 09, 2008|Tom Petruno, Kathy M. Kristof and E. Scott Reckard | Times Staff Writers

Global financial markets open this week still in shock from Friday's dramatic surge in oil prices and plunge in stock prices -- and facing new doubts about the U.S. consumer's ability to help spur a recovery in the struggling economy.

Asian stock markets were falling early today and the battered dollar continued to lose ground against other major currencies as investors braced for Wall Street's starting bell.

There was a bit of relief in energy prices: Crude oil futures slipped $1.14 a barrel to $137.40 in electronic trading Sunday evening in New York. But that was just a sliver of the $10.75-a-barrel jump Friday to an all-time high of $138.54.

And in another reminder of what unprecedented oil prices are doing to Americans' pocketbooks, AAA on Sunday said the nationwide average price of gasoline crept up to a record $4 a gallon -- a level California already had surpassed.

The latest tumult in energy prices and financial markets is likely to focus a harsher spotlight on this week's economic reports, including the number of contracts signed to buy existing homes in April, May consumer price inflation and the first June survey of consumer confidence.

"It shouldn't be a surprise that the economy is weak. The question now is whether it's accelerating to the downside," said Don Rissmiller, chief economist at investment research firm Strategas Research Partners in New York.

That was the message some investors took away Friday after the government reported a fifth straight month of job losses in May and a leap in the unemployment rate to 5.5% from 5% in April -- the biggest one-month jump in 22 years.

Robert Brusca, head of Fact and Opinion Economics in New York, said that although the rise in the jobless rate was blamed on an increase in teenage unemployment, "the fact is that unemployment -- for just about every category -- [was] up in May, just not as sharply as for teenagers."

On Wall Street, where stocks have rallied since mid-March on hopes that the economy would improve in the second half of the year, some investors quickly threw in the towel Friday, driving shares down sharply at the start of trading.

The losses were soon compounded by dire news from the commodities market, where crude prices rocketed after pulling back earlier in the week. The buying frenzy was fueled in part by brokerage Morgan Stanley's prediction that oil could hit $150 a barrel by July 4.

The Dow Jones industrial average finished the day down almost 400 points, or 3.1%, to 12,209.81, its largest one-day drop since February 2007.

A major fear in the markets is that a vicious circle is underway: As weak economic data further undermine the value of the dollar, that helps drive up prices of commodities such as oil as global investors look for alternatives to U.S. assets. Higher oil prices, then, slam the consumer, posing a graver threat to the economy and driving more investors away from the dollar.

In Asian trading early today the euro was at $1.578, up from $1.577 on Friday and the highest in nearly three weeks.

Asian stock markets opened lower today, although the drop wasn't as sharp as some analysts had expected after Friday's tumble on Wall Street. At midday, Japan's Nikkei-225 index was down about 2%, as were stock indexes in South Korea, Taiwan and Singapore.

Markets in Australia, China and Hong Kong were closed today for public holidays.

Record oil prices, of course, pose a threat to growth around the globe. Asian countries including Indonesia and Taiwan, and more recently India and Malaysia, have announced fuel-subsidy cuts to reduce the strain on government budgets. Rising crude, combined with burgeoning costs for food, has contributed to much higher inflation, triggering unrest in the streets and forcing central bankers to grapple with whether to raise interest rates at a time of slowing global growth.

Against that backdrop, "volatility will remain high" in markets, warned Tim Condon, an economist at ING Financial Markets in Singapore.

Still, analysts note that despite the gloomy May employment report, other recent data suggest the U.S. economy hasn't fallen off a cliff.

Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, said he expected this week's economic reports to reinforce that idea.

"It's not like we're going to get a wave of positive data, but I think most of it is going to be consistent with what we have been seeing," Schlossberg said. That is an economy that's not crashing but isn't growing either, he said.

For consumers, however, a key risk now is a continuing dive in stock prices. If the market falls below its lows reached in March -- when the Dow bottomed at 11,740 -- it would deal a fresh blow to the value of millions of Americans' retirement savings accounts.

With stock portfolios losing value and home prices continuing to drop, particularly in California, it's going to be hard for consumers to spend freely enough to end the economic doldrums, said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.

Until recently, Levy had predicted the California economy would pick up steam going into 2009 because of a rebound in construction, as well as tourism and exports, both helped by the weak dollar. He now believes that lower household wealth and higher energy costs will slow things down for a year.

"It may be not a technical recession," he said, "but an extended period of the blahs."

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tom.petruno@latimes.com

kathy.kristof@latimes.com

scott.reckard@latimes.com

Times staff writer Don Lee in Shanghai contributed to this report.

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