US & World Daily Markets Financial Briefing 02-01-2007

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NEW YORK - U.S. stock markets are closed today to observe the national day of mourning for former President Gerald Ford. The first trading week of the year may be a short one, but it may help determine whether the stock market's record-breaking run will continue or melt down in 2007.
     
During the last trading week of 2006, despite thin holiday trading volumes, the Dow Jones industrial average rose above 12,500 for the first time after a promising report on new home sales suggested the economy may be turning around. If the first week of January brings good news, the Dow could hurtle further into record territory, extending its fourth-quarter rally.
   
Hearty economic growth may not line investors' pockets, however, if it leads the Federal Reserve to believe Americans can withstand an interest rate hike. Such a move by policy makers has the potential to stop the market's rally because of fears that higher rates will crimp consumer spending and deal a further blow to the housing market by making mortgages harder to pay off.
   
Economic Data
   
The first trading day of 2007 will kick off with the Insitute for Supply Management's December report on the manufacturing sector -- an area of the economy that cooled in 2006 due to a slowing housing market and struggling automakers, but that didn't faze the stock market.
   
The market expects the ISM's manufacturing index to come in at 50, indicating neither expansion nor contraction. That's above November's reading of 49.5; that was the first time the index showed contraction in nearly four years.
   
Investors will also be reading the Federal Open Market Committee's minutes from its meeting on Dec. 12, when the policy makers decided to keep interest rates unchanged. The markets widely believe the Fed will leave the benchmark rate steady again at 5.25 percent, as it's done since August, when it meets Jan. 18.

But expectations of a hike later in the year could rise if the minutes released Wednesday express heightened optimism about growth and concern about inflation.
   
Wednesday will also bring November data on construction spending and factory orders, as well as December auto sales figures. The market expects 2007 to be the year that Toyota Motor Corp. usurps General Motors Corp.'s title as the world's largest automaker.
   
On Thursday, the country's largest retailers announce their sales figures for December -- the biggest shopping month of the year, and a bellwether for consumer spending. Investors may be in for a disappointment; retail analysts brought their holiday predictions down a notch after Christmas, saying that while online and luxury item sales surged, most retailers saw shoppers spending conservatively.

The ISM will also release its December report on the service sector on Thursday. The index is expected to come in at 57.0, slightly below November's reading of 58.9. The service sector stayed strong relative to the manufacturing sector in 2006, suggesting that economic weakness is fairly isolated to the housing- and auto-related industries.

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The Labor Department caps the week with its reports on December nonfarm payrolls and the unemployment rate. The market expects the data Friday to show payrolls rose by 110,000 and unemployment held at 4.5 percent. The U.S. jobs picture has remained fairly stable in the face of an economic slowdown, which has helped buoy the stock market's confidence in Americans' spending power.
   
Earnings
   
After taking a holiday vacation last week from releasing financial results, major corporate earnings will start trickling in again on Thursday.
   
Wall Street expects Constellation Brands Inc., the world's largest wine maker, to report earnings Thursday of 60 cents a share for its fiscal third quarter. Constellation Brands closed at $28.98 on Friday, after hitting a 52-week high of $29.14 earlier in the session. Its shares hit a 52-week low of $23.32 in April.
   
Meanwhile, analysts predict herbicide and biotech seed producer Monsanto Co. will report earnings Thursday of 58 cents a share for its fiscal first quarter. The maker of herbicide RoundUp closed at $52.53 on Friday, at the upper end of its 52-week range of $37.91 to $53.49.

Forex

Dollar starts new year on weak note as old concerns dominate

LONDON - The new year began badly for the dollar as old concerns continued to dominate, suggesting in turn that the currency has further to fall in 2007.
   
The themes are familiar. Concerns about a slowdown in the US economy, the increasing likelihood that US interest rates have already hit a peak and worries that central banks will choose to keep their reserves in other currencies all continue to undermine sentiment on the dollar.
   
Analysts noted too that the dollar has been laid low despite some slightly stronger-than-expected economic figures in the run up to the new year -- a clear indication that the sentiment is at a low ebb.
   
For Daniel Katzive at UBS, the dollar's failure to thrive in what should be a healthy cyclical environment suggests "heightened concern about structural vulnerabilities heading into the new year, and associated focus on diversification by Asian and petro economy reserve managers."
   
"We think the dollar is likely to remain vulnerable to these themes, and that dollar downside will accelerate once markets begin to price Fed easing more aggressively once again," he added.
   
The dollar spent the last quarter of 2006 in a downward spiral which saw the euro and pound make serious headway on the US unit.
      
Even a weak euro zone manufacturing survey failed to help the dollar much.  The purchasing managers' index for the euro zone manufacturing sector slipped to 56.5 in December, a nine-month low, as growth in France faltered.
   
Analysts said the news was not as bad as it may look. Most believe the European Central Bank remains on course to hike interest rates further in 2007. The German Ifo survey just prior to Christmas and the euro zone money supply data just after Christmas, suggest faith in euro zone economic out-performance will be sustained for a while yet, said Pearson at HBOS.
       
The pound, meanwhile, was well supported, especially against the dollar, despite some weak UK data.
   

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The European Markets at 12.30 GMT

London - Leading shares held firm just off the morning peak at midday in a good New Year rally after a dull end to 2006, fuelled by heavyweight mining issues, although with New York markets closed today, interest could peter out this afternoon. At 12.07 pm, the FTSE 100 index was 67.5 points higher at 6,288.3, having drifted off the midmorning peak of 6,293.9.

Frankfurt - Shares were higher in midday trade, led by ThyssenKrupp as it benefited from M&A speculation and Metro, which saw a lift in Christmas shopping. At 12.18 pm, the DAX 30 index was 62.18 points or 0.964 pct higher at 6,659.10, after moving between a low of 6,614.73 and a high of 6,667.53 this session. The MDAX gained 96.81 points or 1.03 pct to 9.501.70, while the TecDAX added 6.90 points or 0.92 pct to 755.22.

Paris - Share prices were sharply higher in midday trade, topping the 5,600 mark for the first time since May 2001, as the market took a firmly optimistic stance on the prospects for equities in 2007. Suez rose after billionaire Francois Pinault confirmed his interest in the group, refusing to rule out a counter-bid for the company, which is in the process of merging with Gaz de France. At 11.15 am the CAC-40 index was up 68.31 or 1.23 pct at 5,610.07. Volume was 1 bln eur.

Amsterdam - Shares in Amsterdam were broadly higher at midday on the first day of trading in the new year, led by financials, and with Corus rising amid rumours that Tata Steel may be contemplating raising its takeover bid, At 11.53 am, the AEX was up 1.02 pct or 5.03 points at 500.37, surpassing. the 500 point mark for the first time since May 2002, after opening at 497.91.

Milan - Share prices were higher at midday in line with other major European markets, after a delayed start to trading due to technical problems, buoyed by strong performances from Parmalat and Alitalia. At 12.35 pm, the Mibtel index was up 0.72 pct at 32,122 points and the S&P/MIB was 0.96 pct higher at 41,830. Volumes were 224 mln shares.

Madrid - Share prices were higher in brisk midday trade as players began to build up positions at the start of the new trading year, with blue chips up across the board. At 12.32 pm, the IBEX-35 index rose 196.5 points to 14,346.7, after trading in a range of 14,157-14,371, on turnover of 2.7 bln eur.

Brussels - Shares were higher late morning, with investors positive while looking for leads at the start of the new year, with heavyweight financial stocks leading the blue chips. At 11.08 am, the Bel 20 was up 42.87 points or 0.98 pct at 4,431.40.

Stockholm - Shares remained in slightly positive territory in quiet midday trade, supported by hopes of continued strong European economic growth, but were off a touch from morning highs. At 12.05 pm, the OMX Stockholm index was up 0.46 pct at 376.19 points, while the OMX Stockholm 30 index was up 0.83 pct at 1,156.74.

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Asian shares start new trading year mostly higher on upbeat sentiment for 2007

MANILA - Asian share prices began the new trading year the way they ended the last, with most markets rising as investors took a broadly upbeat view of prospects for 2007.
   
Trading however was relatively light amidst a dearth of strong leads and with many bourses still closed for holidays.
   
The Japan, China, Singapore and Malaysian markets were all shut today.
   
Australia which finished 2006 in record beating form, continued its upward path, posting fresh highs. Resource stocks were again well bid, supported by expectations for continued firmness in metals prices, and strong global demand, but interest elsewhere was more subdued.
   
The S&P/ASX 200 added 0.3 points or 0.01 pct to finish at a new all time high of 5,670.2. It was the fourth consecutive record close for the benchmark index, while it also touched a fresh intraday all-time high of 5,690.7.
   
The All Ordinaries Index gained 1.6 points to end at a new record high of 5,645.9, also touching a fresh intraday record of 5,664.3.
   
"Volumes were extremely low which is synonymous with it still being the holiday period and particularly no trading in New York for four days. Resources stocks though seem to be showing some courage," Bell Potter Securities senior private client advisor Stuart Smith said, noting that gold counters, in particular, found support.
   
In Hong Kong, the market bounced back from mild losses last Friday to begin the new year on the front foot, supported by strong interest in China stocks following the mainland central bank's move to relax foreign exchange rules on individual investment in financial products overseas, including Hong Kong.
   
"The market rebounded strongly from Friday's slight losses, with liquidity-driven buying in selected blue chips, China related stocks and laggards like property counters providing support," Francis Lun, general manager at Fulbright Securities said.
   
At 4.08 pm, The Hang Seng Index was up 343.16 points or 1.72 pct at 20,307.88 .
   
In Taipei, solid turnover helped lift the market, with the weighted index closing up 97.08 points or 1.24 pct at 7,920.80.

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Oil prices recover slightly but remain subdued amid mild winter temperatures

LONDON - Oil prices recovered slightly after trading lower earlier in the session, but gains were limited by forecasts for continued mild winter temperatures in top energy consumer the United States.
   
Trade was extremely thin, as during the first trading day of the year the New York Mercantile Exchange closed its doors to observe a national day of mourning for former US President Gerald Ford.
   
At 1.50 pm in London, front-month Brent North Sea crude contracts for February delivery were up 44 cents at 61.32 usd a barrel, after rising 19 cents Friday to close the year at 60.86 usd - just 3 pct above 2005's closing levels.
   
Meanwhile, front-month New York light sweet crude contracts for February delivery rose 28 cents to 61.33 usd a barrel, after gaining 50 cents Friday to close the year at 61.05 usd - only a cent above the year-earlier closing levels.
   
"Gains are expected to be limited by the prospect of continued milder weather in the US, with forecasters calling for even milder weather by the weekend," said Sucden analyst Michael Davies.
   
The US is experiencing a very mild winter - average temperatures through December were the second warmest on record - and there are no signs as yet that temperatures are set to turn colder.
   
On the contrary, recent forecasts are calling for even milder temperatures in the US Northeast, the world's largest heating oil consumer. As a result analysts are expecting even lower heating oil demand near term.
   
"The most important factor remains the weather in the US Northeast," said Man Financial analyst Ed Meir, noting also that US energy inventories aside from gasoline remain ample.
   
Oil prices edged higher last Friday but closed the year on a weak note overall, with prices having declined some 20 pct off record high points touched in July and August.
   
Meir noted prices remained trapped in a tight range over the last three trading days of 2006 even after US data out last Wednesday showed a much larger than expected 8.1 mln barrel decline in crude stockpiles.   

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