Indexes in idle mode: Stock rally fed by Europe deal slows
— -- Reality set in Friday as investors weighed the significant challenges that still face Europe despite an important deal to cut Greece's debt and prevent larger countries from falling down the same hole.
A day after a strong market surge, the Dow Jones industrial average closed up a scant 0.2%, while rthe S&P 500 eked out a 0.03% gain. The Nasdaq lost 0.05%.
The retreat followed the euphoria, especially in European markets, that greeted Thursday's agreement to greatly increase the firepower of the continent's bailout fund and to knock 100 billion euro ($140 billion) off of what Greece owes.
Analysts were quick to raise questions about the lack of detail in the plan, and the euro and oil prices began pulling back on Friday. Stock markets weren't far behind.
"Enthusiasm, so evident yesterday with the huge market rallies seen around the world, appears to have a taken a backseat to the question 'How on earth is all of this going to work?'" said Jennifer Lee of BMO Capital Markets. "The details, or the implementation of the grand plan, will be extremely difficult to carry out."
Of particular concern is exactly how the bailout fund's new powers will work. The hope is that by using the 440 billion euro ($615 billion) European Financial Stability Facility to insure against some losses on the bonds of wobbly countries like Italy and Spain, Europe will be able to avoid ever having to mount a rescue again.
A first test of how much this has reassured investors came Friday — and the marks weren't great. In a bond auction, Italy saw its borrowing rates rise to 6% from 5.86% in a similar debt sale a month ago. With Italy's yields rising, the fear is it eventually might be unable to afford to borrow from markets, as Greece is.
"It is all too obvious that the outlook for Italian bond yields is closely intertwined with the fate of EMU (European Monetary Union)," said Jane Foley, an analyst with Rabobank. "If Italian bond yields can be contained the chances that EMU can continue to stumble forward are good. If not, the outlook is dire."
Although the deal threw a lifeline to Greece, it asks banks to shoulder much of the cost by accepting losses of 50% on the Greek bonds they hold. Many of the continent's banks are already struggling with tighter access to the loans they need to run their day-to-day operations, and the prospect of substantial losses could further weaken them.
Britain's FTSE 100 closed 0.2% lower at 5,702.24. Germany's DAX eked out a 0.1% rise to 6,346.19 but France's CAC-40 fell 0.6% to 3,348.63.
The euro pulled back after a meteoric rise in the hours after the deal was agreed. It was down 0.2% to $1.4163 on Friday.
In the U.S., shares of appliance maker Whirlpool fell 12% after the company said it will cut 5,000 jobs, citing weak demand and higher costs for materials. Another household name, Newell Rubbermaid, soared 12% after its adjusted earnings beat Wall Street's expectations. The maker of tubs and markers maintained its outlook for the year.
Cablevision Systems fell after reporting that its third-quarter net income dropped sharply and it lost cable TV subscribers.
The government said Friday that consumer spending increased in September at three times August's rate, but incomes were nearly flat and savings decreased. The result was in line with analysts' expectations.
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