US durable goods disappointment weighs on markets

By PAN PYLAS AP Business Writer

LONDON (AP) - An unexpected decline in U.S. durable goods orders weighed on stock markets Wednesday as it reinforced concerns that the U.S economic recovery is running out of steam - and fast.

In Europe, the FTSE 100 index of leading British shares was down 26.85 points, or 0.6 percent at 5,338.82 while Germany's DAX fell 34.76 points, or 0.6 percent to 6,172.55. The CAC-40 in France was 0.1 percent lower at 3,662.27.

Wall Street was also expected to open lower - Dow futures were down 28 points, or 0.3 percent, at 10,466 while the broader Standard & Poor's 500 futures fell 2.7 points, or 0.2 percent, to 1,108.20.

European markets and Wall Street futures had been trading largely flat up until the Commerce Department reported that U.S. durable goods orders fell by 1 percent in June, confounding market expectations for a near-equivalent increase.

June's decline was the largest in ten months and the second in a row, adding weight to the argument that the U.S. economic recovery slowed dramatically during the second quarter.

The figures could well prompt analysts to further revise down their forecasts for second-quarter growth. The first estimate of second-quarter U.S. economic growth is due Friday. Before the durable goods figures were expected to show that the U.S. economy grew by an annualized rate of around 2.5 percent.

Paul Ashworth, senior U.S. economist at Capital Economics, said the data weren't as bad as they looked at first glance as the consensus forecast beforehand suggested that many forecasters had been "fooled" by Boeing Co.'s big increase in bookings to 49 aircraft last month from only 5 in May.

"We have no doubt this data will play badly in the markets, but it isn't actually that terrible." said Ashworth. "The bottom line is that it shows business investment had a very strong second quarter and, although the recovery in manufacturing may be losing a little momentum, it is hardly collapsing."

The data also prompted a fall in the value of the euro against the dollar.

By mid afternoon London time, the euro was down 0.2 percent at $1.2978. Before the data it was trading around $1.30 in its latest attempt to sustain a move above that mark.

The dollar's gain may seem counter-intuitive, but the worry in the markets is that a slowdown in the U.S. will do nothing for a European economy, which is trying to grow at a time a number of its governments are reeling from the debt crisis and introducing austerity measures.

With mounting uncertainty about the outlook for the U.S., investors rein in their more risky investments - the dollar is widely considered one of the safest assets to hold at times of uncertainty and therefore benefits when the appetite for risk declines.

The euro has been buoyed in recent days by a raft of stronger than anticipated European economic data, notably out of Germany, relief that last Friday's bank stress tests did not highlight any systemic problems, and buoyant bank earnings from the likes of Deutsche Bank AG and UBS AG.

Most analysts expect the U.S. Federal Reserve's monthly economic assessment later, known as the Beige Book, to echo the findings from the recent dataflow, which shows a slowdown across most sectors despite a largely positive set of quarterly corporate earnings. A release Tuesday showed U.S. consumer confidence on the wane - that's a concern because U.S. retail spending accounts for around 70 percent of the economy.

Earlier, Japan led the advance in Asia, with the Nikkei 225 stock average closing 2.7 percent higher at 9,753.27 after laser printer and digital camera marker Canon reported a surge in quarterly earnings. Investors were also relieved that the yen's recent export-sapping appreciation against the dollar was reversing somewhat - by mid afternoon London time, the dollar was down 0.3 percent at at 87.63 yen, still quite a way higher than where it started the week.

China's main Shanghai index rose strongly after China's central bank said it believes the mainland's economy is unlikely to suffer a "double dip" and the International Monetary Fund said growth would likely be robust. The index closed up 2.3 percent at 2,633.66, its highest finish since May 14.

Hong Kong's Hang Seng gained 0.6 percent to 21,091.18 and South Korea's Kospi advanced 0.3 percent to 1,773.47. Australia's benchmark added 0.7 percent to 4,529.90. Markets in Singapore, Taiwan, Indonesia and New Zealand also rose.

Oil prices hovered above $77 a barrel after a report showed U.S. oil supplies unexpectedly rose last week, suggesting demand remains subdued. Benchmark crude for September delivery was down 21 cents at $77.29 a barrel in electronic trading on the New York Mercantile Exchange.

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Associated Press Writer Pamela Sampson in Bangkok contributed to this report.