Wall Street tumbles on US growth slowdown

Friday 20:00 GMT. Global stocks and core government bond yields were lower heading into the weekend as worries over US and global growth, uncertainty over Greece and concerns about eurozone deflation prompted an increase in risk aversion.

On Wall Street, the S&P 500 capped a miserable January with a 1.3 per cent dip to 1,995, in spite of a strong rally for oil prices. The US equity benchmark was left nursing a loss of 3.1 per cent for the month.

Brent crude finally pierced resistance at the $50 a barrel level as it settled at $52.99 a barrel, up $3.68, or nearly 8 per cent, on the day. The increase came as reports of a sharp fall in the number of oil rigs in operation in the US prompted talk of a slowdown in shale production.

A disappointing report on US fourth-quarter GDP was widely blamed for the equity sell-off in New York. Growth slowed to an annualised pace of 2.6 per cent, from 5 per cent in the third quarter, as a strong pick-up in consumer spending was offset by weak business investment.

The employment cost index, meanwhile, indicated that earnings growth had failed to accelerate in the final three months of the year.

"Both reports hint at the disinflation pressure building in the economy and the fact that even though the jobless rate has declined to pre-crisis levels the economy still has a large pocket of excess supply," said Steven Ricchiuto, chief economist at Mizuho Securities USA.

But Anthony Karydakis, chief economic strategist at Miller Tabak, argued that the GDP figure was still healthy, given that it came on the back of two very strong quarters that had averaged an impressive 4.8 per cent.

"For the whole of 2014, GDP grew at an annual rate of 2.5 per cent, which should be viewed as broadly consistent with its long-term sustainable trend."

Others in the markets highlighted that the European Central Bank's programme of quantitative easing should help boost business and consumer confidence in Europe, which remains a major export market for the US.

But a key risk remained the potential for another flare-up of the eurozone debt crisis following the anti-austerity Syriza party's success in the Greek elections.

The ECB's bold QE plan helped European stocks sharply outperform their US counterparts in January, and although the FTSE Eurofirst 300 index fell 0.6 per cent on Friday, it was up a hefty 7.1 per cent for the month.

The end-of-week decline came as investors' initially sanguine view of the Greek election outcome was tested by the new government's plans to roll back economic reforms, and a pledge by the new finance minister that it will no longer co-operate with its international lenders.

Indeed, analysts at Barclays said the latest political events meant the likelihood of a Greek exit from the eurozone was now significantly higher than at any point in 2012, the height of the region's debt crisis.

"EU-IMF financial support for Greece is still a possibility, but it would require Greece to take a U-turn and move away from the current proposals," said Francois Cabau, economist.

"The Europeans and Greece will try to find a way to keep Greece in the EMU but it is increasingly becoming a close call."

The uncertainty over the country's future was reflected by a 14 per cent slide for Greek stocks over the week and a surge in government bond yields.

By contrast, US and German yields fell sharply over the week as bond markets interpreted the latest Federal Reserve policy statement as dovish and eurozone consumer price inflation fell further into negative territory.

The 10-year Treasury yield was down another 10 basis points to 1.66 per cent, the lowest since May 2013, taking its fall over the week to 16bp. The two-year yield, at 0.46 per cent, was down 6bp on the week.

Although the Fed upgraded its assessment of economic activity, markets noted a reference to "international developments" - which some felt might make the central bank more cautious over the timing of any rate rise.

Meanwhile, eurozone consumer prices fell 0.6 per cent in the year to January after a 0.2 per cent decline in the previous month.

The German 10-year Bund yield hit a record low beneath 0.30 per cent, leaving it 7bp down over the week.

Worries about falling inflation prompted further unexpected policy easing moves this week in Denmark, New Zealand and Singapore.

Russia's central bank took the markets by surprise on Friday as it cut interest rates by 2 percentage points to 15 per cent in an effort to bolster an economy battered by falling oil prices and sanctions on Moscow.

The dollar rose as high as Rb71.78 before falling back to Rb68.80, down 0.2 per cent on the day, as oil prices rallied.

The US currency flat against a basket of its major peers, but in sight of an 11-year high reached last week and up about 5 per cent since the start of the year.

The euro was down 0.3 per cent at $1.1290, but well clear of Monday's 11-year low of $1.11.

Gold bounced $26 to $1,283 an ounce after sliding $28 on Thursday.

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