US economic data helps world markets recover but recovery concerns remain

World markets rebound on strong US economic news

LONDON — European and U.S. stock markets rose Thursday after a run of stronger than anticipated U.S. economic data renewed investors’ hopes that the world’s largest economy may recover from recession this year.

The FTSE 100 index of leading British shares closed up 0.1 percent at 4,280.86, France’s CAC-40 index rose 1 percent to 3,194.06, and Germany’s DAX finished 0.8 percent higher at 4,837.48.

Earlier, shares in Europe had fallen as investors worried that a global economic recovery later this year — hopes for which have driven a rally since March — could be choked off at birth by rising interest rates and oil prices.

However, strong U.S. data eased those concerns somewhat and also buoyed Wall Street. Financial shares also gained as Treasury Secretary Timothy Geithner appeared before a Congressional panel to discuss details of the regulatory overhaul announced the day before by President Barack Obama.

In midday trading in New York, the Dow Jones industrial average was up 0.7 percent at 8,557.80 and the broader Standard & Poor’s 500 index rose 0.7 percent to 917.06.

The turnaround started with the news from the U.S. Labor Department that the total unemployment insurance rolls fell by 148,000 to 6.69 million, the first drop since January and a sign that layoffs are easing.

The optimistic tone generated by the jobless claims data was accentuated by the news from the Philadelphia Reserve Bank that manufacturing around the mid-Atlantic region is not far from growing again. Its main index of manufacturing conditions rose to minus 2.2 in June from minus 22.6 in May. Any reading below zero indicates contraction, but the nearer to zero, the smaller the rate of the contraction.

Further good news came from the Conference Board, a private research group, which said economic activity probably rose in May, the second straight gain after seven months of declines. Its index of leading economic indicators, designed to forecast activity in the next three to six months, rose 1.2 percent, above expectations of a 0.9 percent increase.

“The U.S. is moving in the right direction; it’s not massive but enough to give one confidence that the actions by government and the central bank are working,” said Howard Wheeldon, senior strategist at BGC Partners.

The stock market rally since March had been fueled by hopes that the U.S. economy will recover from recession sooner than anticipated. As equities usually start rising 6 to 9 months before actual recovery emerges in the official data, this suggests investors believed the massive sell-off in markets during the most acute phase of the financial crisis was overdone. Some of the world’s major equity indexes are now in positive territory for 2009.

That optimism has dissipated in recent days, and despite the relatively upbeat claims data, analysts say investors need clearer evidence that the world economy and company earnings are recovering to make sense of stock valuations. In March, many investors saw valuations around the world as particularly cheap and started buying into the market.

Interest rates, particularly on U.S. government bonds have been rising steadily over recent weeks on expectations that the U.S. Federal Reserve will raise borrowing costs sooner than previously anticipated. Meanwhile, oil prices have more than doubled over the past couple of months on hopes that a global economic rebound will boost demand for crude. Oil prices remained above $70 a barrel Thursday, with benchmark crude for July delivery up 17 cents to $71.20 in European trading.

“Some justification for equity gains is evident from less negative economic data, but going forward less negative news will not maintain positive momentum — instead, it will need positive as opposed to less negative to keep the rally going and it is difficult to see where this will come from,” said Mitul Kotecha, an analyst at Calyon Credit Agricole.

Earlier in Asia, Japan’s benchmark Nikkei 225 stock average fell 137.13 points, or 1.4 percent, to 9,703.72, and Hong Kong’s Hang Seng dropped 307.94, or 1.7 percent, to 17,776.66.

Elsewhere in Asia, South Korea’s Kospi lost 1.1 percent, while Australia’s key index was down 0.3 percent and Taiwan’s benchmark pulled back 0.8 percent.

But Shanghai shares defied the losses, with the benchmark climbing 1.6 percent to a 10-month high, as the World Bank raised its China 2009 economic growth forecast from 6.5 percent to 7.2 percent and the country’s premier said the economy was showing “positive changes.”

The World Bank said Beijing’s stimulus-driven investment boom would help shield the world’s third-largest economy from the downturn, but cautioned it was too soon to say a sustained recovery was on the way.

China’s ability to prosper as overseas economies slump has been a popular theme among investors, helping drive mainland and Hong Kong shares — as well as certain commodities — to huge gains in recent months.

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Associated Press writers Louise Watt in London and Jeremiah Marquez in Hong Kong contributed to this report.