US & World Daily Markets Financial Briefing 01-11-2007

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Stocks plunge on oil, credit worries

NEW YORK - Wall Street plunged Thursday as concerns about the credit markets and slower growth in consumer spending and manufacturing erased optimism about the Federal Reserve's positive take on the economy just a day earlier. The Dow Jones industrials skidded more than 200 points.
   
Inflation fears also revived as crude oil vaulted to a record $96 a barrel before easing. Meanwhile, a report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. Also, a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.
   
That combination led investors to retreat from Wednesday's rally, in which the Dow climbed 137 points after the Fed -- while cutting interest rates a quarter point -- said the economy had weathered the summer's credit crisis. The assessment temporarily put to rest Wall Street's concerns that tighter credit was crippling the economy.
   
But the Fed also warned that inflation remained a concern, and oil's ascent to another record raised the prospect not only that the Fed might stop cutting rates, but that might even consider raising them.
   
Stocks also moved lower after Exxon Mobil Corp., posted a second-straight retreat in quarterly profit for the first time in five years. Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks, were downgraded by CIBC on worries about the credit markets -- causing financial stocks to tumble.
   
The Dow plunged 230.70, or 1.66 percent, to 13,699.31. The Standard & Poor's 500 index was off 28.36, or 1.83 percent, at 1,521.02, while the Nasdaq composite index dropped 44.08, or 1.54 percent, to 2,815.04.
   
Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note fell to 4.36 percent from 4.47 percent late Wednesday.
   
The Commerce Department's report that consumer spending rose by 0.3 percent in September, slightly lower than the 0.4 percent increase that analysts expected, raised concerns about a slowing economy, and worries that the Fed might still consider inflation a more important issue.
   
In addition, the performance of the manufacturing sector in October suggested that ongoing troubles in the housing and credit markets have seeped into the industrial sector. The Institute for Supply Management, a Tempe, Ariz.-based trade group, reported its manufacturing index registered 50.9, down from 52.0 in September and below expectations for 51.8. A reading above 50 indicates growth; below that spells contraction.
   
Also Thursday, the Labor Department said the number of people filing for unemployment benefits declined by a larger-than-expected 6,000 last week to total 327,000.
   
Crude prices pulled back after surpassing $96 per barrel in overnight trading, but that decline did not ease Wall Street's worries. A barrel of light sweet crude fell $2.21 to $92.32 on the New York Mercantile Exchange.
   
Wall Street was also troubled by the day's corporate news, including Exxon's report that its profit fell 10 percent during the third quarter because of lower refining and chemical margins. Shares of the Dow component dropped $2.54, or 2.8 percent to $89.45.
   
Financial stocks fell on lingering worries about the after effects of the credit crisis. CIBC World Markets on Thursday downgraded both BofA and Citigroup on concerns about sluggish growth in 2007.
   
Bank of America, the nation's second-largest bank, dropped $1.48, or 3 percent, to $46.80. Citi, the nation's largest financial institution, dropped $3.15, or 7.7 percent to $38.21 -- its lowest level in four years.
   
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 229.3 million shares. The Russell 2000 index of smaller companies was down 24.45, or 2.93 percent, at 803.77.

The plunge in U.S. stocks caused European bourses to tumble. In afternoon trading, Britain's FTSE 100 was down 1.66 percent, Germany's DAX index fell 1.33 percent, and France's CAC-40 dropped 1.80 percent. 

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Dollar steady despite figures showing pick-up in US inflation

LONDON - The dollar was steady despite figures showing a pick-up in US inflation, with the market still digesting last night's interest rate cut.
   
Core PCE inflation, excluding food and energy, rose 0.2 pct in September from August, compared to 0.1 pct the previous month. While this left the annual core rate unchanged at 1.8 pct, the headline measure of inflation climbed to 2.4 pct from 1.8 pct in August.
   
However analysts said the figures mean little since the Fed focuses on the core measure which remains at a relatively low level.
   
"Rightly or wrongly, the Fed focuses on the core measure which is low enough to give it the flexibility to cut interest rates again to counter weakness in the real economy," said Paul Ashworth at Capital Economics.
   
Meanwhile figures also showed first time claims for unemployment insurance in the US fell for the second straight week, dropping to 327,000 new claims for the week ending October 27, a drop of 6,000 from the prior week.    
   
Later this afternoon the ISM Manufacturing Index may provoke more of a reaction, with analysts expecting the figures to show industrial activity slowing.
   
Last night's decision by the Fed to cut interest rates was accompanied by a fairly neutral statement, suggesting the timing on the next move in rates will depend on how the data turns out.  In the statement, the FOMC gave little away, saying "the upside risks to inflation roughly balance the downside risks to growth". Analysts said while the statement does not signal any further cuts, the deteriorating growth outlook is likely to force their hand.
   
"This does not mean the Fed is done with easing, but a pause on Dec 11 is possible; it remains our view however that data will deteriorate further in coming months to allow further cuts," said Gavin Friend, currency strategist at Commerzbank. 
   
Elsewhere, the pound shrugged off soft manufacturing figures to post significant gains across the board, including a fresh 26-year high against the dollar.
    
The Institute of Purchasing and Supply's manufacturing index fell to 52.9 in October, its lowest level since December 2006 and below analyst expectations for a reading of 54.1. A reading above 50 indicates expansion.
   
Analysts said that while the figures showed activity is definitely slowing, it is unlikely to prompt the Bank of England to cut interest rates next week.
   
"It is unlikely to be enough to force a rethink at November's Monetary Policy Committee, where we continue to believe that rates will be left unchanged," said Daragh Maher, currency strategist at Calyon.

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Euroshares down midday, banking sector weighs, Wall St headed for lower open

LONDON - Europe's leading exchanges lost ground midday, led down by the banking sector in lacklustre trading as US futures point to a lower open on Wall Street amid continued high oil prices and concerns over
inflationary pressures overseas.
   
At 12.17 pm, the Dow Jones STOXX 50 fell 27.53 points or 0.71 pct to 3,857.37 as the STOXX 600 was 2.02 points or 0.52 pct lower at 386.41.
      
In corporate news, Europe's banking sector shed an aggregate 1.83 pct as subprime worries inspired yet another sell-off, with Dexia and Anglo Irish Bank leading their peers lower.
   
Dexia fell 4.25 pct after its US subsidiary FSA last night reported a larger than expected net loss and signalled additional exposure to the US housing crisis.
   
In addition, Credit Suisse, down 2.70 pct, disappointed with its third quarter earnings news. "As opposed to UBS and Merrill Lynch, Credit Suisse did not post a net loss. However, the group's results were impacted by one-off effects and are of poor quality," Zuercher Kantonalbank analyst Andreas Venditti said, adding that he might revise his full year forecasts.
   
Meanwhile, Commerzbank shed 3.11 pct with traders pointing to a couple of larger sell-offs. "It's nothing dramatic, but it does raise concern over the company's subprime exposure," one trader said. "I wouldn't be surprised if people started speculating about the bank's subprime exposure again later," he added. Commerzbank will report third quarter earnings on Nov 7.  
   
Staying in the German market, Deutsche Boerse AG surged 6.62 pct after the stock market operator released consensus-beating figures last night and reiterated that it is on track to seeing a record-setting performance this year.
   
Elsewhere, Unilever gained 5.72 pct in Amsterdam, after posting third quarter numbers that broadly met analysts forecasts and which Collins Stewart said supported its 'buy' rating 1,850 pence target and current forecasts.
   
Gestevision Telecinco SA, meanwhile, lost 2.47 pct amid concern of slower earnings growth in the fourth quarter compared to the third following a conference call with analysts on nine-month results late yesterday. "(Third quarter) results were good, but there's no reason to get over-excited on the stock," a dealer at a leading Spanish brokerage said.
   
Turning to M&A news, Tele Atlas is still in focus, with hopes for a bidding war between TomTom and Garmin sending the stock 2.25 pct higher. ABN Amro, in a note to clients, said it expects to see a "potentially bloody" bidding war, but added that it does not expect TomTom to raise its bid indefinitely, as it has the technology and know-how to make its own maps.
   
In terms of broker action, MAN AG rose 1.58 pct after several brokerages raised their price targets for the heavy manufacturer's stock after yesterday's strong third quarter results. Citigroup increased its price target to 140 eur per share from 188, while reiterating a 'buy' rating, UBS increased its target to 140 eur from 126, while confirming a 'buy' rating, and Merrill Lynch raised it price target to 140 from 135.
   
Temenos gained 6.98 pct after Deutsche Bank upgraded the stock to 'buy' from 'hold' with a price target rise to 36 sfr from 30 sfr.

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Asian stocks mostly higher on US rate cut but record oil price caps gains

SINGAPORE - Asian stock markets ended mostly higher Thursday as investors cheered the US Federal Reserve's decision to cut interest rates by another quarter point, although gains were capped as record oil prices ignited inflation and growth concerns.
   
In Tokyo, the Nikkei closed up 0.8 pct at 16,870.40 and the Topix was up 1 pct at 1,635.78.
   
In Sydney, the S&P/ASX 200 ended up 1.1 pct at 6,828.7 and stretched to a record high of 6,851.5 in the last hour of trade as resource stocks rallied. The All Ordinaries was up 1.1 pct at 6,853.6.

The Australian dollar broke through the 93 US cents barrier for the first time since the currency was floated in 1984. The Aussie found further support in high commodity prices which are expected to boost the country's resource-rich economy.
   
In Hong Kong, the Hang Seng rose 0.45 pct to 31,492.88 with oil stocks powering ahead after China raised fuel prices. The Hong Kong Monetary Authority followed the Fed with a rate cut that brings its base rate to 6 percent.
   
But markets in South Korea, Malaysia, Shanghai and Taiwan lost steam and traded in the red.
   
The KOSPI closed down 0.1 pct at 2,063.14 after climbing to a record 2,085 in early trade. "The Fed's monetary easing brought relief to investors, which helped the market continue with its record-breaking rally at the opening," said Lim Dong-Min, an analyst at Dongbu Securities.
   
But with the rate cut already priced in, investors were left to ponder more bearish factors such as high oil prices and the strength of the local currency, the won, he said. "The market will see a tug of war between those mixed leads for a while," said Lim.
 
In Singapore, shares of container shipping company Neptune Orient Lines, or NOL, added 20 cents to 5.30 sgd after the company posted better-than-expected third quarter results, easily weathering the problems in the US, a key market. The transpacific route accounts for over 30 pct of the container volumes the group handles.
   
"NOL has not felt the effects of any purported slowdown, and claims to be experiencing continued strong demand on the transpacific headhaul. Meanwhile, the depreciation of the US dollar has helped increase demand for backhaul shipments," said CIMB-GK Research analyst Raymond Yap.
   
Singapore Airlines gained 10 cents to 19.70 sgd after it said its September quarter net profit jumped 73 pct to 508 mln sgd, as revenue grew 8 pct to 4 bln sgd.
       
Elsewhere, the Kuala Lumpur Composite was down 0.3 pct at 1,409.16.
   
The Shanghai Composite fell 0.7 pct at 5,914.29 after its recent rally. The Taiwanese Taiex closed down 1.2 pct at 9,598.23.
   
The Philippine market was closed for a two-day holiday.

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Gold falls off multi-year high near 800 usd

LONDON - Gold fell off a multi-year high near 800 usd as the dollar recovered from recent record lows and as oil prices came off their all-time peaks.
       
The metal has rallied some 25 pct since mid-August, but analysts say with the lack of any meaningful pullback in the past 40 usd ascent, the metal is starting to look vulnerable.
   
"Gold continues to defy gravity with frothy crude and a wilting dollar helping sentiment. But barring a rapid adjustment by the fundamental gold market the metal looks set for a correction," said UBS Investment Bank analyst John Reade.
   
He added that with investors now eyeing the all-time record of 850 usd an ounce, momentum may yet take gold sharply higher, but that this will only make the correction all the more devastating when it does occur.
   
At 1.24 pm, spot gold was trading at 788.88 usd an ounce against 791.70 usd in late New York trade yesterday. Earlier it hit 799.25 usd, its highest level since 1980.
   
Gold has rallied by well over 150 usd since mid-August, due to safe haven buying stemming from the sub-prime crisis, a historically weak dollar, US interest rate cuts and record crude prices.
   
The metal hit an all-time high of 850 usd an ounce in 1980 due to high oil prices, and concerns over the fallout from the Iranian revolution and the Soviet invasion of Afghanistan. In real terms, having adjusted for inflation, the 1980 price would be equal to 2,079 usd today.
   
Among other precious metals, silver was trading down at 14.09 usd against 14.47 usd in New York yesterday. Platinum rose to 1,445 usd against 1,441 usd, while palladium was little changed at 368 usd from 369 usd.

Base metals were steady in early London trade as market players assessed the impact of the Federal Reserve's decision to cut rates yesterday.
   
"A rate cut has two prongs for base metals," said Barclays Capital analyst Sudakshina Unnikrishnan. "While it is generally seen as bullish as it's designed to spur growth it also highlights problems in the economy. "Concerns about US growth and the macro-economy are still weighing on base metals at the moment. In copper, we're also seeing little strong demand out of China."
   
At 11.00 am, LME copper for three-month delivery was up slightly at 7,740 usd from 7,725 at the close yesterday. Copper has weakened from above 8,000 usd in recent weeks, as Chinese demand was weakened above the key price point.
       
Elsewhere, zinc fell to 2,795 usd per tonne from 2,825 usd at the close yesterday. Rising stocks were the main driver after the LME said inventories rose 5,350 tonnes to 77,075 tonnes in its daily report.
   
Sentiment towards zinc remains weak with healthy supplies, analysts said.
   
In other base metals, nickel was up at 32,651 usd from 32,050 usd per tonne yesterday, aluminium was up at 2,565 usd from 2,545 usd, tin was steady at 16,640 from 16,740 while lead rose to 3,666 from 3,660 usd per tonne at yesterday's close.

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