US & World Daily Markets Financial Briefing 02-04-2008

Stocks turn higher on Bernanke remarks

NEW YORK - Wall Street turned higher Wednesday after Federal Reserve Chairman Ben Bernanke said he didn't expect any more investment banks to suffer the same damage from the credit crisis as Bear Stearns Cos. did.

Bernanke, testifying before Congress, said he doesn't anticipate a repeat of the situation that had Bear Stearns coming close to collapse last month because of too many investments in extremely risky mortgage-backed securities. Bear Stearns ran into severe liquidity problems and had to be bailed out by the Fed and JPMorgan Chase & Co., which is now in the process of buying the troubled investment bank.

The Fed chairman's comments turned stock trading around from an earlier loss. Stocks had fallen at the opening after Bernanke said the economy may contract in the first half of this year -- a trend that would mean the U.S. is in a recesssion.

The credit crisis and the weak economy have both sent stocks tumbling over the past six months, but a new sense of optimism sent stocks hurtling higher on Tuesday, the first day of the second quarter. It was clear from Wednesday's trading that the credit crisis is a more serious concern on Wall Street.

In mid-morning trading, the Dow Jones industrial average was up 22.31, or 0.18 percent, at 12,676.67 after rising nearly 400 points on Tuesday.

The broader Standard & Poor's 500 index was up 4.74, or 0.35 percnet, at 1,374.92, while the Nasdaq composite index rose 13.62, or 0.58 percent, to 2,376.37.

The U.S. Labor Department will release its weekly initial jobless claims numbers, which are expected to total 366,000 claims, the same level as in the previous week.

"Last week's stunning jump in layoffs to near-recessionary levels probably wasn't repeated in the latest report week," said Roger Kubarych of Unicredit.  "But the signs are clear that labor market conditions are weakening, as respondents to the Conference Board's confidence survey insist," he said.

Consumer confidence in March dipped to 64.5, its lowest level in five years. Continuing claims numbers will also be released, which are expected to total 2.860 million in the week ending March 22, up from 2.845 million claims in the previous week.

US crude inventories rose by far more than expected in the week to March 28, jumping 7.4 million barrels in data released by the U.S. Energy Information Administration.  Analysts polled by Thomson Financial News had predicted a rise of just 2.8 million barrels.

Gasoline stocks fell by 4.5 million barrels, against market expectations for a fall of just 1.4 million barrels, while distillate stocks -- which include heating oil -- fell by 1.6 million barrels, more than the predicted 1.4 million barrel decline.

Refineries operated at 82.4 percent of their capacity, the EIA said, up from 82.2 percent in the previous week. Analysts had expected a rise of 0.3 percentage points.

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Forex - Dollar in focus ahead of Bernanke testimony

LONDON - Currency markets will be closely monitoring this afternoon's comments from U.S. Federal Reserve chairman Ben Bernanke in front of US lawmakers.

Particular focus will be on whether Bernanke highlights the upside risks to inflation and endorses the view that the worst of the credit crunch is over, which could bolster expectations of modest further rate reductions from the Fed. If he continues to highlight the risks to the economic outlook more so that inflation, then the markets may move to price in further aggressive rate cuts.

The Fed has cut its benchmark Fed funds rate aggressively down to 2.0 percent in recent months, and that has hit the dollar hard, especially as other central banks have done nothing on rates or reduced them modestly.

Before Bernanke's testimony, currency markets will be looking at the ADP Employer Services data, a precursor for the March jobs figures due out on Friday. At present, analysts think the non-farm sector lost 50,000 jobs in March, less than the 63,000 jobs that were shed off in February.

Since it began easing monetary policy in September after the subprime credit crisis erupted, the Fed has slashed its key interest rates by a cumulative 3 percentage points. The dollar gained overnight after a better-than-expected Institute of Supply Management reading on the U.S. manufacturing sector.

The ISM Manufacturing Survey recorded a small improvement in March, with the headline index rising to 48.6 in March from 48.3 in February, despite expectations of a decline to 47.5. Readings below 50 indicate contraction, while those above 50 show growth.

Meanwhile, the euro was little changed by a warning from a key rate-setter at the European Central Bank that the turmoil in financial markets is not over yet and that inflation remains a concern. In remarks to a German newspaper on Wednesday, Axel Weber said euro one inflation was too high, and that further financial turbulence was likely.

"The crisis of confidence is not over yet. As long as the price decline in the US property market continues, further turbulences have to be expected," Weber said in an interview with German newspaper Bild. He reiterated a call for more transparency in the banking sector, saying that banks which had taken great risks "have to disclose their losses".

Elsewhere, the pound was little changed after UK housing data did little to alter market expectations that the Bank of England will cut interest rates next week. Mortgage approvals -- a good indicator of future housing demand -- rose by 73,000, down from 74,000 in January, while net mortgage lending growth was unchanged at 7.4 billion pounds.

Stephen Lewis, analyst at Insinger de Beaufort, said the choice facing the Monetary Policy Committee (MPC) next week is whether to cut Bank Rate by 25 basis points or by 50. The problem with a big cut is that such bold action could create an impression that the MPC had changed gear and was looking to reduce rates over the medium term further than it really anticipates, said Lewis. "In line with this cautious approach, the MPC will probably cut by only 25 basis points, explaining the move as a response to the past month's unwanted rise in market," Lewis added.
                    

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Euroshares remain higher midday, financials offset weakness among auto stocks

At 12.07 p.m., the DJ STOXX 50 was up 19.55 points or 0.62 percent to 3,148.50, while the STOXX 600 added 1.30 points or 0.41 percent to 317.37.

Back in Europe, markets sported a modest advance, with traders taking a second look at current trends to determine whether Tuesday's rally was indeed the start-off to a long-term turnaround. "We are somewhat more cautious today and taking the time to evaluate," a Frankfurt-based trader said. "The financials are the only real advancers - the aftermath from yesterday which was driven short coverage -- and the question is whether this boost in sentiment will prove to be lasting," he added.

The banking sector advanced an aggregate 1.29 percent according to the DJ STOXX 600 for the industry. Credit Suisse was up 4.7 percent, while BNP Paribas added 3.2 percent and UBS was up 1.9 percent. The solid performance offset losses in the automotive sector -- the result of disappointing car registration figures in the U.S. for March.

As the sector retreated 1.42 percent overall, Porsche fell 3.73 percent and Daimler lost 2.6 percent. The German car maker was also under pressure from a downgrade at Morgan Stanley to 'underweight' from 'overweight'. In a note to clients this morning, the broker said it sees risks of further earnings cuts and believes that Daimler's cash-return strategy adds strong financial risks.

Over in the technology sector, semiconductor Infineon grabbed the early spotlight, up 1.85 percent, as rumours resurfaced that Taiwan's Nanya Technology may raise $1 billion to buy the 35 percent stake in the joint venture it operates with Infineon's Qimonda unit. Staying with M&A news, Colonial surged 5 percent higher after Banco Popular said it has studied the option of becoming a shareholder.

Meanwhile, shares in Sacyr Vallehermoso remained halted at the time of writing. Analysts expect the stock to advance when it resumes trading after a Paris court of appeal rejected French market regulator AMF's decision to force the Spanish builder to launch a public offer for France's Eiffage.

Trading in the shares of Sacyr and Eiffage was suspended ahead of the announcement. Over in France, TF1 rose 7.38 percent as analysts pointed to a report which suggests the broadcaster could benefit from a potential ban of advertising at France Televisions.

"France Televisions has advertising of around 80 million euros and the government is talking about cutting half of that," an analyst said, noting however that the report in Le Figaro today was highly speculative. "The implication is that this would go to other television channels. So, they will tax the private TV stations by only some 30 million euros which means they would gain significantly overall," he added.

Turning to economic news, euro zone producer prices for February came in marginally higher than expected. The PPI inflation rate accelerated to 5.3 percent year-on-year from 4.9 percent and compared with economists' forecasts of a 5.2 percent rise.

Month-on-month, the PPI rose 0.6 percent as expected by economists. Over in the U.S., factory orders, an indicator for business spending, are expected to show a decline in February by 0.6 percent, following the 2.5 percent decline in January. "Further spending declines are projected, as firms respond to weakening final demand and tightening credit conditions," said Peter Kretzmer and Mickey Levy at Bank of America.

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Asian stocks rally with Wall Street; financials lead advance

The Hang Seng closed up 3.2 percent at 23,872.43. Bank of Communications Co. Ltd. rose 6.5 percent to HK$9.86, BOC (Hong Kong) gained 3.1 percent to HK$19.34, and HSBC was up 1.94 percent at HK$131.50. The Shanghai Composite ended up 0.6 percent at 3,347.88. Industrial and Commercial Bank of China advanced 3.2 percent to 6.19 yuan.

The Nikkei closed up 4.2 percent at 13,189.36 and the Topix was up 4.2 percent at 1,282.07. Mitsubishi UFJ Financial rallied 9.8 percent to 962 yen and Mizuho Financial was up 10.1 percent at 404,000 yen.

The S&P/ASX 200 finished up 2.6 percent at 5,502.9 and the All Ordinaries was up 2.4 percent at 5,544.9. Investment bank Macquarie Group closed up 9.9 percent to A$57.02. Babcock & Brown rose 7.8 percent to A$15.44 on the Lehman and UBS reports.

The Kospi finished up 2.4 percent to 1,741.29 and the Singapore Straits Times closed up 2.6 percent at 3,124.61. Woori Finance Holdings rose 8.4 percent to 19,400 won, Kookmin Bank shares surged 11.1 percent to 64,200 won and Industrial Bank of Korea rose 9.6 percent to 16,600 won. Taiwan's weighted index closed up 2.2 percent at 8,605.32, and the Manila composite index rose 2.6 percent to 3,048.31.

The Jakarta index closed down 2.1 percent at 2,342.19 on inflation fears, while the Kuala Lampur Composite Index closed down 0.9 percent at 1,239.65 amid domestic political uncertainties.

The Asian Development Bank said Wednesday it expects growth in Asian economies excluding Japan to slow to an average 7.6 percent in 2008, with rising food and energy prices pushing inflation in the region to the highest level in a decade.

The Manila-based bank was forecasting growth of 8.2 percent for the region as recently as September. Asia grew 8.7 percent in 2007, its fastest pace since 1988.

"Developing Asia will not be immune to the global economic slowdown, nor will it be hostage to it," the bank said in a report. "In the near term, Asia's structural transformation, robust productivity growth, and favourable policy climate will continue to support healthy growth." Banking on gains

Among individual stocks, Australian lender Commonwealth Bank of Australia ended up 5.2 percent at A$44.29, National Australia Bank up 4.7 percent at A$30.55, ANZ Banking Group rose 5 percent to A$23.54 and Westpac Banking added 6.5 percent at A$24.92.

Weaker commodity prices clipped gains by major resources stocks. BHP Billiton was up 0.3 percent at A$36.75 while Rio Tinto was 1 percent higher at A$125.36.

In Tokyo, Toyota Motor rose 4.4 percent to 5,240 yen on a Nikkei report the carmaker has decided to boost its stake in Fuji Heavy Industries Ltd., the maker of Subaru brand cars, from 8.7 percent to around 17 percent. The companies said no decision on the move had yet been made.

Honda Motor climbed 7.4 percent to 3,110 yen, consumer electronic giant Sony rose 5.9 percent to 4,300 yen, office equipment maker Canon was 6 percent higher at 4,980 yen and game console maker Nintendo was up 5.6 percent at 54,800 yen.

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Metals - Gold edges higher on bargain-hunting below $900, dollar weakness

LONDON - Gold edged higher in early London trade, as bargain-hunting below $900 an ounce and renewed dollar weakness lent some support to the precious metal after recent losses.

At 10.15 a.m. spot gold was trading at $892.85 an ounce against $883.60 in late New York trades yesterday. Prices dropped sharply yesterday, falling by over 3.5 percent as the dollar rebounded and equity markets pushed higher. Gold's rally above $1,000 last month has been widely attributed to its role as an alternative investment to the U.S. currency and as a safe store of wealth during times of economic turmoil.

"Gold has had an absolutely massive, massive correction. The public has been liquidated out of their positions," noted Dennis Gartman, editor of The Gartman Letter daily trading note.

While funds reallocating investments away from commodities at the start of the second quarter could push gold down towards $850, buying from jewellers at lower price levels is expected to provide support, said James Moore at TheBullionDesk.com.

"The recent correction is likely to be viewed favourably by physical traders ahead of one of the key periods of jewellery purchases, and should help absorb further selling pressure," he said.

Looking ahead, traders will examine possible dollar-moving data from the United States, the world's biggest economy. Later today attention will shift to the United States and the testimony by U.S. Federal Reserve chairman Ben Bernanke to Congress.

Before Bernanke's testimony, markets will be looking at the ADP Employer Services data, a precursor for the March jobs figures due out on Friday. At present, analysts think the non-farm sector lost 50,000 jobs in March, fewer than the 63,000 jobs that were shed in February. "Gold prices have bounced this morning on expectations that the U.S. may hint at further rate cuts," said Fairfax analyst John Meyer.

Since it began easing monetary policy in September after the subprime credit crisis erupted, the Fed has slashed its key interest rates by a cumulative 3 percentage points.

In other precious metals, silver tracked gold higher to trade at $17.01 an ounce against $16.90. Platinum was higher at $1,936 an ounce against $1,921, while its sister metal palladium bucked the trend to trade down at $434 an ounce against $437.25

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