Dow pushed to record high as markets shrug off slow US growth figures

Dow breaks previous record set in October 2007 as investors absorb signs of recovery in US and better figures in Europe

The Dow Jones Industrial Average on Tuesday surged to its highest closing level ever, erasing the index's loses during the financial crisis even as Washington's fights over its debts and Main Street seem far from mended.

The Dow closed at 14,254, passing its previous high of 14,164.52 in
October 2007.

Better-than-expected news from the service sector bolstered the rally that had begun even before the market opened. Dow futures, a somewhat unreliable indication of the direction the market is likely to take, pushed the index higher before the opening bell as investors absorbed better-than-expected retail figures from Europe.

On Monday, the Dow closed at 14,127.82, up 38.16 points, or 0.27%, a 52-week high. The index has risen for four of the past five trading days.

The Dow has not touched these levels since before Barack Obama's first election victory. Global stock markets went into freefall shortly after, as the implosion of housing market and Europe's woes dragged the world into the worst financial crisis in living memory.

Massive issues remain, however. Unemployment, especially among the young, remains high, and in Washington politicians are still at loggerhead over America's $16tn debt. Last Friday the government started making $85bn of cuts - known as the sequester - in a move Obama and others predicted would cause widespread chaos and financial hardship. In Europe, major US companies including GM and Ford are being hit by the region's continuing economic crisis.

But these are old debates now - and Wall Street doesn't seem to be worried.

The latest figures from the Institute of Supply Management (ISM), released Tuesday morning, showed positive growth in the service sector. The ISM index stood at 56 in February. Anything above 50 indicates growth, and the number was ahead of analysts' forecasts. US markets were also buoyed by rallies in Europe and Asia. In London the FTSE closed up 86.32 points.

The Dow Jones index has now more than doubled since a low point in March 2009, stunning many market watchers and coming against a still lacklustre economic recovery. Corporate profits hit record highs last year, fuelled largely by cost cuts. Economists and market watchers said the Federal Reserve's massive bond-buying programme has fueled the market but that beneath that there were concrete signs of improvement.

Gus Faucher, a senior economist for PNC Financial Services Group, said Washington still mattered and warned that if the sequester drags on, the Dow's gains could be at risk. "That said, the fundamentals are better. Profits are at an all-time high, business balance sheets have improved, interest rates are low. The markets are expecting more growth through 2013."

Jack Ablin, chief investment officer at BMO Bank, said investors fed up with low yields from the bond markets were looking for better returns in equities. Bonds were also being issued in order to buy shares, he said. He said the wider economy looked like it was steadily improving, but warned there could be problems ahead.

"Investors are embracing progress. They weren't shaken by the tax hikes at the end of the year and not by the sequester either," he said. "The Dow looks fairly priced now."

But he warned that the Federal Reserve's massive bond-buying policy could drive more people into equities. "If you want to see a swift end to monetary easing, another 10-20% hike in the Dow will probably do that," he said.

Minutes of the Fed's last meeting revealed a split in the central bank's rate setting committee. While the Federal Open Markets Committee's members were still worried about unemployment, "many participants also expressed some concerns about potential costs and risks arising from further asset purchases", according to the minutes.

Friday may prove the next test for the markets, and the Fed, when the latest nonfarm payroll figures are released. The US added 157,000 new jobs in January. Average job creation for 2012 was around 181,000, a number just above the benchmark economists calculate is enough for the unemployment rate to stabilise, but not fall.

Eurozone recession set to continue

European commission backtracks on previous forecasts, blaming a lack of bank lending and record unemployment for the delayed economic recovery

The eurozone will remain mired in recession in 2013 and leading nations such as France and Spain will miss debt-cutting targets, the European commission has admitted, backtracking on forecasts that the 17- country bloc will grow this year.

The European Union's executive body blamed a lack of bank lending to households and businesses, and record joblessness, for delaying the recovery. Unemployment in the eurozone is set to peak at 12% in 2013, or more than 19 million people, it said. Greece and Spain will be the worst-hit countries, with jobless rates of 27% this year.

The estimate highlights the widening chasm between Germany and France, the two largest eurozone economies, amid warnings this week that France is drifting closer to the bloc's periphery than its main economic rival. The commission predicts that Germany will grow by 0.5% this year, while France is expected to eke out just 0.1% growth. Joblessness among the French is expected to hit 10.7%, compared with 5.7% in Germany.

A senior ally of German chancellor Angela Merkel accused France of being a "problem child" in the eurozone. Michael Fuchs told German radio the French needed to save, implement economic reforms and work longer hours. "Other countries have done their homework a lot more intensively, for example Spain and Italy ... but the French believed they could escape this," he said.

Marco Buti, the commission's director general for economic and financial affairs, said unemployment remained unacceptably high. This had grave social consequences, he said, and could weigh on growth in the future if it becomes entrenched. The figures also have consequences for the UK because the eurozone is the economy's largest trading partner and is the fulcrum of hopes for an export-led recovery in Britain's finances.

The commission said the threat of a breakup of the eurozone had receded and financial market conditions had improved substantially, but the impact had not yet fed through into the real economy. As a result, it said the 17 eurozone economies would contract by 0.3% in 2013 rather than grow by 0.1%, as previously predicted.

The figures harboured bad news for Spain and France's debt-cutting targets. Under EU budget rules, eurozone states can face fines if they fail to take action to meet deficit targets - the difference between income and spending - set by EU finance ministers. The main strggler is Spain, which badly missed the deficit target of 6.3% of GDP for 2012 with a result of 10.2%. This year, Madrid will have a deficit of 6.7% rather than the 4.5% it has been set. And unless government policies change, Spain will have a gap of 7.2% in 2014 against the target of 2.8%, the commission said.

France will also miss its targets. This year's shortfall will be 3.7% rather than the 3% agreed with the EU, because of weaker-than-expected growth.

There was a silver lining in the figures for the wider zone, however. The commission said the region has bottomed out and it expects economic activity to gradually accelerate, with GDP 0.7% higher in the last quarter of 2013 than in the same period last year. The commission expects domestic demand to rebound in 2014 and take over from exports as the main driver of strengthening GDP growth.

Economists said the grim forecasts could prompt the commission - which is part of the troika of lenders to crisis-hit countries - to ease its demands of austerity from eurozone governments, while the European Central Bank may be moved to adopt measures to boost the economy.

Chris Williamson, chief economist at Markit, said: "A downward revision to the EC's economic growth forecasts for the eurozone suggest that governments will be given more time to reduce budget deficits without implementing harsher austerity measures, while at the same time putting more pressure on the European Central Bank to provide a further boost of stimulus, perhaps via a cut in its main policy rate."

Williamson said the weaker forecasts were a blow for the UK, which depends on the eurozone for export growth. "Given the outlook of persistent weak demand at home and a further year of contraction in the eurozone, there appear to be few drivers of UK economic recovery in 2013," he said.

The commission predicts that the UK economy will grow by 0.9% this year, although joblessness will rise to 8%. The wider European Union of 27 member states is expected to grow by 0.1% this year, with a jobless rate of 11%.