US & World Daily Markets Financial Briefing 01-04-2008

Stocks up on bank, manufacturing news

NEW YORK - Wall Street rallied Tuesday, the first day of the second quarter, on news that two banks slammed by the credit crisis are working to raise cash and that U.S. manufacturing is faring better than expected. The Dow Jones industrial average soared more than 200 points.

Investors were pleased to hear that Swiss bank UBS AG said it will issue up to $15 billion in new stock and that its chairman, Marcel Ospel, had quit. Investors chose to look past the bank's announcement that it will take a fresh $19 billion write-down due to additional declines in the value of its mortgage assets and other credit instruments, following an $18 billion write-down last year.

UBS's decision to issue new stock arrived on the heels of a similar announcement by Lehman Brothers Holdings Inc. late Monday. The U.S. investment bank said it would sell 3 million convertible preferred shares due to "investor interest."

The pair of announcements buttressed the view that financial services companies are taking aggressive action to improve their capital bases. Shares of both UBS and Lehman surged Tuesday along with the rest of the financial sector. UBS's U.S. shares rose $2.99, or 10 percent, to $31.79, and Lehman rose $3.47, or 9 percent, to $41.11.

Meanwhile, Wall Street got another boost when the Institute for Supply Management said its March index of national manufacturing activity rose to a reading of 48.6 -- indicating a contraction, but a slower one than in February and tamer than many analysts had predicted.

Government data on construction spending for February also came in better than expected. The average economist was anticipating a drop of about 1 percent; instead, construction spending fell 0.3 percent in February compared to January.

The Dow Jones industrial average rose 217.48, or 1.77 percent, to 12,480.37. Broader stock indicators also gained sharply. The Standard & Poor's 500 index rose 21.96, or 1.66 percent, to 1,344.66, and the Nasdaq composite index rose 40.57, or 1.78 percent, to 2,319.67.

Treasury bonds fell as investors pulled their money out of the safety of government securities and placed it into riskier assets. The 10-year Treasury note's yield, which moves opposite its price, rose to 3.52 percent from 3.43 percent late Monday.

On Monday, Wall Street had managed a moderate gain in the final session of a dismal first quarter. Stocks prices and the major indexes ended the first three months of 2008 with massive losses, the casualties of the still continuing credit crisis. It was the worst quarter for the major indexes since the third quarter of 2002, when Wall Street was approaching the lowest point of a protracted bear market.

The stock market appeared revived on Tuesday, however. In addition to optimism about the financial sector, Wall Street was relieved to see the feeble dollar regain some strength against the euro. The euro fell to $1.5596 from $1.5785 late Monday in New York.

Investors also found solace in retreating commodities prices. Crude oil fell by $1.45 to $100.13 a barrel on the New York Mercantile Exchange, while gold dropped back below $900 an ounce.

The Russell 2000 index of smaller companies rose 10.29, or 1.50 percent, to 698.26. Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange. In overseas trade, Tokyo's Nikkei closed up 1.04 percent. There were gains in Europe too, with London's FTSE rising 1.50 percent, Frankfurt's DAX gaining 2.02 percent and Paris' CAC 40 advancing 2.02 percent.

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Forex - Euro continues to slip against U.S. dollar as market awaits ISM data

LONDON - The euro continued to slip against the U.S. dollar after figures earlier showed a slump in German retail sales, while market players awaited the release of the latest U.S. ISM manufacturing index this afternoon. The weak German data, combined with the announcement of writedowns from UBS A.G. and Deutsche Bank A.G., has undermined any lingering hopes that Europe will not be badly affected by the sharp slowdown in the U.S.

"Negative news from the financial sector and a further deterioration in European macroeconomic data support the view that the euro zone economy cannot decouple from the U.S., and this is weighing on the single currency," said Manuel Oliveri, currency analyst at UBS.

Data released this morning revealed that high street sales in Europe's largest economy tumbled by 1.6 percent month-on-month in February on a real, seasonally adjusted basis, way below the 0.5 percent increase forecast by analysts. "This gives the lie to any suggestion that internal demand is driving the euro zone's largest economy," said Steve Pearson at HBOS.

Meanwhile, the sharp falls in commodity prices has also been cited as indicating a possible reversal in fortunes for the U.S. dollar. Neil Mellor at the Bank of New York Mellon pointed out that the drop in the gold price suggests that the market's focus is switching back towards growth worries and away from inflation worries, which previously had provided support to both gold and the euro.

"The fall in gold overnight has been matched one-for-one by the single currency's retreat," he said. Attention this afternoon will now turn to the latest ISM report on U.S. manufacturing, but if investors' concerns have switched to growth then a negative reading would provide little support for the euro, he believes. "If the pendulum of investor concerns over inflation and growth has indeed tipped more towards the latter, then the aforementioned associations could well mean that we have seen the peak in euro/dollar," he said.

Elsewhere, the yen was weaker across the board, with the U.S. dollar settling well above the 100 yen mark on growing pessimism about the outlook on the Japanese economy, highlighted by the latest quarterly corporate survey by the Bank of Japan. The Tankan survey, released overnight, showed that the business sentiment index fell more than forecast to 11 in March from 19 in December. It was the worst reading since December 2003.

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Euroshares extend gains midday, NY seen up, hopes subprime crisis bottomed out 

At 12.15 p.m., the DJ STOXX 50 was up 50.64 points or 1.68 percent to 3,068.62, while the DJ STOXX 600 gained 4.80 points or 1.57 percent to 310.76.

In Europe, investors took massive writedowns from Swiss banking giant UBS in their stride, hoping that the announced 19 billion Swiss francs write-off implies that the worst of the crisis may soon be over. Shares in the stock rose 6.79 percent, and peers Barclays and Credit Suisse also advanced among others, up 4.6 percent and 5.14 percent respectively.

Deutsche Bank, which announced that it expects write-downs of around 2.5 billion euros related to leveraged loans and loan commitments in the first quarter, gained 3.2 percent. Traders said that while the news from UBS and Deutsche Bank was not positive, it was not unexpected and confirmed to many that the banking sector may be oversold.

Traders also noted a short squeeze in technology stocks today, with the sector advancing 3.70 percent in aggregate according to the DJ STOXX 600 for the industry. Nokia rose 5.64 percent, while Infineon gained 6.7 percent and Arm Holdings added 3.13 percent. The two chip makers were also given a boost by persistent talk that a recovery of chip prices may be imminent.

In earnings-related news, French video games maker Ubisoft Entertainment S.A. rallied 6.25 percent as investors welcomed news the group has raised its sales and margin guidance for the current financial year. As Natixis Securities analysts pointed out, last night's statement from Ubisoft was the fourth consecutive increase in sales and margin guidance from the video games group, maker of the blockbuster Assassin's Creed.

Anglo-Swedish drug maker AstraZeneca added 5.10 percent after it announced that positive results for its Crestor statin were supported by a US cardiovascular conference last night that showed Crestor showed a small benefit in cutting arterial plaque while Schering-Plough and Merck & Co's Vytorin fared no better than a generic rival.

In a note to clients, analyst Peter Cartwright at Evolution Securities said that AstraZeneca was the obvious beneficiary to negative data over Vytorin. In Germany, Heidelberger Druck slumped 10 percent after the printing machine manufacturer said it no longer expects to reach its guidance for the full-year which ended on March 31, due to a difficult market environment.

Turning to M&A talk, Alitalia jumped 9.17 percent as its fate rests on the success of a meeting between Air France-KLM management and the stricken airline's unions, which is due to take place on Wednesday at noon according to news agency Radiocor. Among chemicals, rumours of a 99 euro bid from DuPont for Germany's BASF resurfaced and sent shares in the latter 2.23 percent higher.

Meanwhile, France's Pernod Ricard added 5.33 percent in midday trading as bullish comment on the Vin & Sprit acquisition from analysts such as Citigroup, Lehman and Cheuvreux, helped offset concerns about the group's high leverage.

In broker action, BP was one of the heaviest underperformers on the STOXX 50 on Tuesday, down 1.76 percent, following a target cut at JP Morgan to 600 pence from 650 pence. The broker reiterated its 'neutral' stance on the stock and said there is a possibility that BP will end up as a minority shareholder in TNK-BP, its Russian joint-venture, as recent events have raised speculation of an attempt at a takeover of the latter by a state-controlled group.

The March purchasing managers index for the euro zone manufacturing sector confirmed that growth slowed a touch from the previous month, although price pressures continued to grow. They said the final reading of the purchasing managers' index for March was 52.0, unchanged from the flash estimate released last month, and down on February's 52.3. It was also the lowest reading since October.

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Asian stocks track Wall Street's rise; Japan shrugs off weak Tankan

The Nikkei 225 closed up 1 percent at 12,656.42 and the Topix was up 1.5 percent at 1,230.49. The Bank of Japan's latest Tankan survey showed that business sentiment among large manufacturers deteriorated in the first quarter as executives worried about a stronger yen, a weakening U.S. economy and rising oil prices.

The diffusion index for big manufacturers fell to 11 in March from 19 in December. Economists polled by Thomson Financial News were expecting, on average, a reading of 13. "In addition, the exchange rates predicted by manufacturers look very optimistic, which may mean the downward revision later of earnings forecasts and capital spending," Shimamine said.

The Tankan found that large manufacturers are predicting that the dollar will buy, on average, 109.21 yen in the fiscal year ending March 2009. The dollar was last trading at 100.33 yen. Still, investors in Tokyo snapped up export stocks, including Canon, which was up 2.4 percent, Sony up 2.3 percent, and Toyota Motor, up 1 percent.

The Kospi closed 0.1 percent lower at 1,702.25 as investors turned cautious after UBS AG announced plans for a fresh capital hike of 15 billion Swiss francs to make up for a further $19 billion in writedowns on US real estate and related structured credit positions.

Meanwhile, chipmakers extended their heavy gains for a third day on reports that major global chipmakers will raise memory chip prices in April. Samsung Electronics climbed 2.1 percent to 636,000 won. "We're considering a plan to raise dynamic random access memory (DRAM) chip prices slightly," Internet service edaily quoted investor relations chief Cho Woo-Sik as saying.

Rival Hynix shares were 0.2 percent higher at 27,900 won. The Hang Seng index closed up 1.26 pct at 23,137.46, as institutional investors bought large-caps at the start of the second quarter, helping the market end on a positive note despite further falls on mainland bourses.

The Shanghai Composite closed down 4.13 percent at 3,329.16 after the People's Bank of China said Monday it will continue to tighten monetary policy because credit and liquidity are growing too quickly and fixed-asset investment is rebounding.

The Australian benchmarks turned around, with the S&P/ASX 200 closing higher by 0.1 percent at 5,361.2 and the All Ordinaries index finishing up 0.1 percent at 5,414.5, after investors sought out bargains in the resources sector. The Philippines Composite closed 0.5 percent lower at 2,969.83. Taiwan's weighted index closed down 1.78 percent at the day's low of 8,419.72.

The Singapore Straits Times Index closed 1.3 percent higher at 3,056.54, and the Kuala Lumpur Composite Index (KLCI) finished up 0.2 percent at 1,250.41. The Jakarta composite index closed down 2.2 percent at 2,393.25. 

The Bombay Stock Exchange's (BSE) 30-share Sensitive Index, or Sensex, ended 17.82 points or 0.11 percent lower at 15,626.62 and the National Stock Exchange's (NSE) broader 50-share S&P CNX Nifty showed the a similar percentage movement on the other side, edging up 0.11 percent to close at 4,739.55 points.

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Metals - Copper down amid firm dollar, commodity sell off

LONDON  - Copper fell as investors pulled out of the commodity sector amid dollar strength but falling stocks limited losses.

Sentiment was weak across the board as a firmer dollar made commodities priced in the greenback relatively more expensive for those trading in stronger currencies. The euro fell to a six-day low against the U.S. dollar after figures released earlier today showed an unexpected slump in German retail sales.

Enduring strong fears of weak demand ahead while the credit crunch persists also hammered copper's price. "It looks like the metals are starting on a weak note and that is likely to lead to consolidation possibly at lower numbers, but overall we would expect some bargain hunting before too long," said BaseMetals.Com analyst William Adams.

This morning, the LME reported copper stocks fell to a fresh eight-month low, which should go some way in limiting losses.

"LME inventory levels have fallen to just 3.5 days of global consumption. Copper prices should remain relatively high on this basis alone while further funding of commodity futures could pull prices higher," said John Meyer, Fairfax analyst. "Chinese traders staying out of market in anticipation of lower prices despite falling inventories in LME warehouses and official Shanghai warehouses."

At 11.20 a.m. BST, LME copper for three-month delivery was down at $8,200 per tonne against $8,390 at the close yesterday.

Looking ahead, players will track the dollar's movements and watch markets for any more bad news over the economy to gauge its impact on future metals demand. With the release later today of the ISM numbers and U.S. Fed chairman Ben Bernanke's testimony to Congress tomorrow, players are likely to sit on the sidelines until the data is released.

So far this year, commodity prices including copper have hit new records as investors favoured raw materials in the wake of an economic slowdown. "The run up in commodities in Q1 has seen volatility readings soar and as such some of the froth probably needs to come out of the market before investors see value again, while the relatively weak equities probably offer a better opportunity for a run to the upside in the short-term," said Adams at Basemetals.Com.

Elsewehere in other metals traded on the LME, lead for delivery in three months was down at $2,765 per tonne against $2,790, aluminium eased to $2,920 per tonne from $2,990 and zinc was down to $2,274 per tonne from $2,320 at the close on Monday. Three-month nickel dipped to $29,225 per tonne from $29,755, while tin fell to $20,150 per tonne from $20,550.

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