China data upbeat; Russia to cut US debt share

(Agencies)
Updated: 2009-06-11 09:38

NEW YORK -- Data from three major economies on Wednesday suggested the worst of the global recession may be over, but signs that confidence in US government debt may be slipping highlighted the difficulties that still lie ahead.

In China, an engine of world growth in recent years, newspapers said factory output rose in May at the fastest pace since last September, while official data showed British industrial output rose in April for the first time in more than a year. Italian output rose after 11 straight monthly falls.

But a lackluster US Treasury auction and comments from Russia that it will reduce the share of government debt it holds fueled worries that confidence in America's fiscal health could be waning on concerns about its massive deficit stemming from bailout and stimulus spending.

"The auction was weak. It wasn't shocking. There's some negative psychology," said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York.

Investors have been keen for evidence that the global economy is stabilizing, with increasing optimism the worst is past spurring markets higher.

However, policymakers have suggested risks remain and any recovery will take hold only slowly. This was reinforced by a report from the US Federal Reserve that showed economic conditions were weak or got worse through May. But some areas of the country saw signs the contraction was moderating.

Budding stability appeared to be tenuous. Sweden's central bank said on Wednesday it was taking out a hefty loan from the European Central Bank to safeguard financial stability, although the country's financial watchdog said Swedish banks could cope with "extreme" pressures.

In Asia, Japanese machinery orders fell unexpectedly in April. French industrial output, too, fell more sharply than forecast, following news of weak German output on Tuesday.

"It seems that we are really hitting rock bottom now and there doesn't seem to be much further to go," said Alexander Law, chief economist at consultancy Xerfi in Paris.

In the United States, a 10-year note auction on Wednesday raised concerns about the US budget deficit and helped pull US stock markets lower on worries rising interest rates could throw more cold water on consumer and business spending.

A Russian senior central bank official said Russia will reduce the share of US Treasuries in its foreign exchange reserves. Russia is the third-largest single country holding Treasuries and has been questioning the role of the dollar as the world's main reserve currency.

As well, falling exports and weaker imports underlined how much the world's biggest economy is struggling to sell its goods abroad and revive the domestic consumer demand that helps power the global economy.

April data showed US exports weakened again, falling 2.3 per cent to $121 billion. Imports also declined for a ninth straight month but by a smaller amount than exports, resulting in a wider trade gap of $29.2 billion.

The surprise rise in UK industrial output in April raised the prospect that Britain could be the first major industrialised nation to beat recession.

The Office for National Statistics said industrial output rose 0.3 percent on the month, the first increase since February 2008. However, doubt remains about how sustainable any British recovery will be because banks remain reluctant to lend.

British interest rates could stay low for some time, Bank of England policymaker Kate Barker said.

The euro zone's third biggest economy, Italy, reported that its industrial output grew again in April after 11 consecutive monthly declines.

European stocks rose, boosted by banking shares, while oil stocks benefited from crude oil's rise.

"I think the market is going up in advance of a recovery. I am not sure if this is sustainable," said Peter Dixon, economist at Commerzbank.

Asian shares rose, led by resource companies on a rally in oil and metals prices. Tokyo's Nikkei climbed 2.1 percent to its highest close in eight months, while MSCI's index of shares elsewhere in Asia gained 2.7 percent.