US & World Daily Markets Financial Briefing 02-06-2008

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Stocks down after tepid economic data, bank shakeups

NEW YORK - Wall Street retreated sharply Monday on more signs of economic weakness and on executive shake-ups at two major banks -- reminders of the ongoing fallout from the credit crisis. The Dow Jones industrial average fell more than 100 points.

Two economic reports indicated that the economy is still struggling. As expected, the Institute for Supply Management's manufacturing index for May showed its fourth straight monthly decline, while the Commerce Department said construction spending dipped in April for the sixth time in seven months due to a drop in home construction.

Meanwhile, the market drew little comfort from news that Wachovia Corp. chief executive Ken Thompson has been forced out and that Washington Mutual Inc.'s chief executive Kerry Killinger will be replaced as chairman.

Thompson has become the third CEO of a major financial institution to lose the top job as a result of the credit crisis. His departure from the nation's fourth-largest bank was not entirely unexpected, after being stripped of his chairman title just about a month ago. Still, his stepping down was a reminder that the financial system is still contending with the aftermath of the nation's prolonged credit problems.

In mid-morning trading, the Dow Jones industrial average fell 119.36, or 0.94 percent, to 12,518.96. Broader stock indicators also dropped. The Standard & Poor's 500 index fell 12.83, or 0.92 percent, to 1,387.55. The Nasdaq composite index fell 29.16, or 1.16 percent, to 2,493.50.

Wachovia shares fell 81 cents, or 3.5 percent, to $23.00, and WaMu shares traded flat at $9.02. Shares of ImClone Systems Inc. weighed on the Nasdaq, falling $2.50, or 5.7 percent, to $41.08 on disappointment over trial data for its drug Erbitux as a treatment for lung cancer and colorectal cancer.

Government bonds rose as stocks pulled back. The 10-year Treasury note's yield, which moves opposite its price, fell to 4.04 percent from 4.06 percent late Friday.

The dollar traded mixed against other major currencies, while gold prices edged higher.

Last week, the stock market rose in reaction to a dip in oil prices, a better-than-expected reading on durable goods orders and an upwardly revised estimate of first-quarter gross domestic product. The Dow rose 1.27 percent, the S&P 500 rose 1.78 percent, and the Nasdaq rose 3.19 percent.

But investors remain unsure about the direction of the economy and inflation. Crude oil prices are under especially close scrutiny. Even after its recent retreat, the price of oil is up significantly for the year and buoying energy costs for consumers.

Light, sweet crude fell $1.33 to $126.02 a barrel Monday on the New York Mercantile Exchange. Wall Street will be monitoring a speech later Monday in Jacksonville, Fla., on the economy by Atlanta Federal Reserve President Dennis Lockhart for signals about whether the Fed plans to keep interest rates on hold.

Meanwhile, the Financial Times reported that the private equity firm Cerberus Capital Management has sold more than half its equity in its deals for GMAC and Chrysler to other investors. Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 209.4 million shares.

The Russell 2000 index of smaller companies fell 9.68, or 1.29 percent, to 738.60. Overseas, Japan's Nikkei stock average closed up 0.71 percent. In afternoon trading, Britain's FTSE 100 fell 0.82 percent, Germany's DAX index fell 0.89 percent, and France's CAC-40 fell 1.34 percent.

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Forex - Major currencies stay range bound; U.S data eyed

LONDON - Major currencies stayed range bound with all eyes now looking to the day's key U.S. figures as a data heavy week got underway. The Institute of Supply Management's index of manufacturing conditions in the United States is expected to drop to a level of 48.5 in May from 48.6 in the previous month.

But despite the expected weak data and the dismal run of other recent figures, the increasingly slim chances of a U.S. rate cut has been keeping the dollar propped up. More bad news is predicted to follow on this week when the U.S. jobs report due Friday is expected to continue its downward spiral, falling by 60,000 in May after falling 20,000 in April.

"This alone would speak for further monetary easing. However, short-term inflation expectations are on the rise and we see risks of long-term measures (gauges) following suit," UBS analysts said. Indeed, concerns about inflation will likely override, keeping the dollar from falling too far. In addition to the data due out this week, Tuesday's speech by Fed Chairman Ben Bernanke will be crucial.

"The importance of Bernanke's speech lies in the fact that his views on the economic outlook have not been revealed since his last Congressional testimony in April 2-3," Ashraf Laidi at CMC Markets pointed out. "Since then, most FOMC officials have stepped up their anti-inflation rhetoric, with the more hawkish ones -Kohn, Fisher and Kroszner- implicitly dismissing the case for further rate cuts," he added.

Earlier, the euro got a fleeting boost from an upward revision to its area-wide manufacturing sector PMI. The headline figure was revised up to 50.6 in May from 50.5 the previous month. Despite the improvement, the figure signals that the sector is growing at its slowest rate in nearly three years.

Data for the various economies of the area showed a growing divergence, with Spain and Italy in recession while France and Germany fared better. On the whole, the data weighed on risk appetites and this theme is predicted to continue as the week progresses. "This week is likely to be a defining one for financial markets as a number of different themes collide," said Steve Pearson at HBOS.

"First and foremost the flow of data is heavy. The purchasing manager surveys alongside the U.S. Employment Report tend to define investor views with regard to the outlook for growth over the ensuing weeks," he added. "Already manufacturing PMI data in the euro zone, Australia, China, Russia and India have slipped back, but this afternoons U.S. ISM report is pivotal," he said.

Over in the UK, the manufacturing sector PMI came in very weak, weighing on the pound. But the effects of the dismal headline reading was to some extent cancelled out by steep rises in the prices charged component.

The Chartered Institute of Purchasing Managers' manufacturing index fell to 50.0 in May from 50.8 the previous month. The latest reading is the weakest since July 2005. Analysts polled by Thomson Financial had predicted a more modest fall to 50.6. The 50.0 level is the cut-off between growth and contraction. Meanwhile, prices components rose sharply. The output price index rose to 62.0 from 61.9 in April. The rise was the 34th in a row.

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Euroshares tick lower at open after Dow losses; ahead of rate decisions

At 8:58 a.m., the DJ STOXX 50 was down 22.26 points, or 0.7 percent, at 3160.56 and the DJ STOXX 600 was down 2.75 points, or 0.85 percent, at 319.42.

Back in Europe, the healthcare sector was one of the few sectors to post gains as JP Morgan re-initiated coverage on the sector after the completion of its merger with Bear Stearns. Selected stocks were also boosted by newsflow from the The American Society of Clinical Oncology (ASCO) conference over the weekend.

The new JP Morgan launched coverage of the healthcare sector with 'overweight' recommendations on Roche, up 2.57 percent, Novartis, up 1.74 percent, also adding Roche to the JP Morgan analyst Focus List.

GlaxoSmithKline and Sanofi-Aventis, down 0.58 percent, were launched with 'underweight' recommendations. GlaxoSmithKline shares added 0.36 percent, though, after the UK group announced positive results from three phase II trials of Tykerb as a treatment for women with advanced breast cancer.

Novartis said new study data shows that RAD001 may offer a novel treatment strategy for breast cancer by enhancing the efficacy of, and overcoming resistance to, several commonly used breast cancer treatments.

Shares in Merck KGaA, though, fell 2.1 percent as analysts said news over the weekend on key cancer drug Erbitux had been mixed. JP Morgan cut its 2008 and 2009 estimates for Erbitux by 8 percent, although the broker said the prospects for the drugs further out had improved.

And shares in Grupo Ferrovial SA rose 2.27 percent after an Expansion report said the construction group is set to sign a 9.5 billion euro long term loan with eight banks and finalise debt restructuring in July or August.

UK mortgage lender Bradford & Bingley, though, plunged 25.21 percent after it confirmed Texas Pacific Group is to buy a 23 percent stake in the bank as part of a re-capitalisation programme which will also see the group cutting the price of a previously-announced rights issue.

B&B, the U.K.'s biggest buy-to-let lender, said it will receive 179 million from the TPG deal, and will raise a further 258 million pounds by selling new shares to existing investors. Both TPG and the existing shareholders will pay 55 pence per share.

B&B had originally hoped to raise 300 million pounds by selling new shares to existing investors at 82 pence each. Axa fell 2.18 percent as influential broker Cheuvreux cut its recommendation on the French insurance group to 'underperform' from 'outperform'

Vedanta Resources slipped 1.12 percent lower after one of its subsidiaries agreed to buy the operating assets of U.S.-based copper producer Asarco Llc. for $2.6 billion in cash. "We believe that the Asarco transaction will leave some investors and sell side analysts who have been supporters and promoters of the story asking why buy a second tier copper assets in the U.S., a geography in which the group has no demonstrated ability to operate let alone turn around assets," said Merrill Lynch.

Alstom fell 1.56 percent after reports it is mulling a possible alliance with Rolls Royce Group as an alternative to a merger with Areva. The engineering group denied the report, saying "We formally deny all the information" in the article.

And shares in Deutsche Postbank AG fell back 0.85 percent after a report in WirtschaftsWoche said Dutch banking group ING Groep N.V. is not interested in bidding for Germany's largest retail bank, should its parent company Deutsche Post decide to sell it.

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Asian stocks turn higher as Nikkei hits 5-month high, inflation weighs

The Nikkei rose 0.7 percent to 14,440.14 while the broader Topix gained 1.2 percent to 1,425.10. Trading was volatile in the morning session as a weak yen boosted interest in major exporters such as Sony Corp., while profit-taking elsewhere in the market limited the overall advance.

In afternoon trade, stocks extended their gains as investors took comfort in upbeat trade in Asian markets, particularly in Hong Kong and Shanghai, as well as in a stable yen.

Sony climbed 4.6 percent to 5,520 yen while banking and other financial stocks rebounded from a recent selloff. Mitsubishi UFJ Financial gained 4.7 percent to 1,129 yen. Mizuho Financial Group rallied 6.7 percent to 591,000 yen. Sumitomo Mitsui Financial Group jumped 4 percent to 947,000 yen.

In Sydney, the S&P/ASX 200 closed up 0.1 percent at 5,662.3 while the All Ordinaries index rose 0.1 percent to 5,781.2.

Index leader BHP Billiton rose 4.6 percent to A$45.57 on expectations that it, together with Rio Tinto, will win massive increases in prices for iron ore sold under contract. Rio Tinto added 2.7 percent to A$141.70. Australia's newest iron ore exporter Fortescue closed up 5.5 percent at a record $11.24.

The benchmark contract had closed at $127.35 on Friday at the New York Mercantile Exchange. The Reserve Bank of Australia, which holds its monthly policy meeting on Tuesday, is expected to hold rates on hold as data since the central bank board's May meeting has been consistent with slowing growth, said Shane Oliver, head of investment strategy at AMP Capital Markets.

But the central bank is likely to emphasise that it will increase rates again should growth in spending resume or wages growth pick up, Oliver said. South Korea's KOSPI index closed down 0.2 percent at 1,847.53, after trading between 1,831.66 and 1,853.50, with chipmakers and automakers leading the decline.

The government said the consumer price index rose 4.9 percent in May from a year earlier on record-high crude oil costs, faster than the 4.4 percent increase the market had expected and breaching the Bank of Korea's inflation target for the sixth straight month.

The Bank of Korea has been facing calls to cut interest rates to boost Asia's fourth-largest economy, but rising domestic inflation has left it no choice but to stay put. "The [May] reading was truly surprising, nobody expected the price gain to turn out this fast," said Shin Dong-su, a fixed-income analyst at NH Investment & Securities.

Earlier in the day the market was lifted by data showing South Korea's gross domestic growth grew faster in the first quarter than previously estimated, driven by the manufacturing sector, and strong exports helping the trade balance turn into a surplus in May.

Seasonally adjusted, South Korea's GDP grew 0.8 percent in the first quarter from the previous quarter, compared to the initial estimate of 0.7 percent, the Bank of Korea said. It was the slowest pace of expansion since the fourth quarter of 2006 when growth also stood at 0.8 percent. In the fourth quarter, GDP grew 1.6 percent from the third. Annual growth was 5.8 percent in the first quarter, up from the earlier estimate of 5.7 percent.

The BoK's official growth forecast for this year is 4.7 percent, but Governor Lee Seong-tae has said the economy will likely grow by "4.5 percent or less," citing the impact of rising oil prices on consumer spending and corporate earnings.

Hong Kong's Hang Seng index was up 1.2 percent at 24,831.36. The Shanghai Composite gained 0.75 percent to 3,459.04 and Taiwan's Taiex advanced 1.2 percent to 8,724.47. Singapore's Straits Times Index was up 0.1 percent at 3,188.05, while Malaysia's KLCI was down 1.1 percent at 1,262.49.

The Philippine Composite was down 0.1 percent at 2,825.89 while the Jakarta Composite was down 0.7 percent at 2,427.77. The Indonesian central bank may hike its key interest rate by 25 to 75 basis points when policymakers meet Thursday given rising inflation, according to economists polled by Thomson Financial News.

The Indonesian consumer price index rose 10.38 percent in May from a year ago and was up .41 percent from April, said Rusman Heriawan, chairman of the Central Bureau of Statistics. Rising inflation is also strengthening the case for the Philippine central bank to hike rates, for the first time since October 2005, when policymakers meet Thursday, the same day that inflation data for May is due for release.

The main stock index of the Bombay Stock Exchange, the 30-share Sensex, fell 352.39 points or 2.15 percent to 16,063.18, its worst close in about seven weeks after ending at 15,807.64 on Apr. 11. The broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) pared 130.50 points or 2.68 percent to close at 4,739.60.

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Metals - Gold steady near $890/oz on firm dollar

LONDON - Gold steadied near $890 per ounce in London on Monday, with the dollar's firmer tone over the weekend and a slight retreat in the price of oil failing to provide the market with fresh direction.

At 10:39 a.m., spot gold was trading at $891.43 per ounce against $888.00 in late New York trade on Friday. The precious metal rose on Friday due to inflation fears and renewed weakness in the U.S. dollar, as investors bought into bullion in an attempt to hedge against the dangers of rising costs and the reduction in value of the world's predominant form of currency reserves.

Analysts said while high oil prices continue to stoke inflation fears, movements in the U.S. dollar were likely to dominate precious metals this week.

The dollar has held firm against the euro due to the heightened possibility of a rate hike in the United States, as the Federal Reserve struggles to keep a handle on inflation following its large rate-cuts over the past year.

Standard Bank metals analyst Walter de Wet said: "With EU inflation rising to 3.6 percent year-on-year in May (against expectations of a 3.5 percent rise) it does put the possibility of an interest rate cut by the European Central Bank this year further out of reach.

"Although this has lead to the euro strengthening against the greenback, the U.S. is experiencing similar inflationary pressures. This is recognised by the market with the U.S. yield curve rising last week as possibilities of a Fed rate hike are considered -- something that should provide support to the dollar."

A rash of economic data out in the United States this week should help set the dollar's next moves. On Monday, the release of May's ISM U.S. manufacturing index and U.S. construction figures for April at 2 p.m. BST will be in focus for the markets, as traders try and gauge how well the world's largest economy has weathered recent financial storms. The main event of the week could prove to be U.S. employment figures on Friday, analysts said.

Gold has taken support from bargain hunting by jewellers attracted by the precious metal's move back beneath $900 an ounce at the end of May.

However, the end of the Indian marriage season, which runs from January to May, may reduce seasonal demand for gold, analysts said. Gold demand is traditionally strong in India during the wedding season as jewellery is given to brides by parents as a gift of financial security.

Among other precious metals, platinum was trading at $1,995 per ounce against $2,009 in late New York trades on Friday. Platinum is expected to find good support due to a shortfall in supplies this year created by rolling power outages in key producer South Africa.

"Given the substantial increase in supply deficit expected this year (platinum) should continue finding strong demand, both investment and end-user, below $2000," said James Moore at TheBullionDesk.com.

Platinum's sister metal, palladium, dipped in line to trade at $428 per ounce from $435.50, while silver was up slightly at $16.94 per ounce against $16.84.

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