US & World Daily Markets Financial Briefing 02-07-2007

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Stocks up ahead of manufacturing data

Stocks rose sharply Monday in the first day of trading for the third quarter as investors awaited a report on June manufacturing activity.

The Institue for Supply Management's June manufacturing index is expected to come in at 55.4, according to the median estimate of economists surveyed by Thomson Financial, indicating slightly stronger expansion than May's reading of 55.0.

Trading volumes are expected to be fairly low ahead of the Independence Day holiday on Wednesday, when U.S. stock exchanges will be closed. The markets are also closing early on Tuesday.

The Dow Jones industrial average was up 82.02, or 0.61 percent, at 13,490.64 in the opening minutes of trading. The Standard & Poor's 500 index rose 8.80, or 0.59 percent, to 1,512.15, while the Nasdaq composite index rose 17.40, or 0.67 percent, to 2,620.63.

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The euro struck a six-week high against the dollar after further solid economic data from the 13-nation single currency zone reinforced expectations the European Central Bank will raise borrowing costs at east twice more this year.

The purchasing managers' index for the euro zone's manufacturing sector rose in June to 55.6 points from 55.0 in May, beating a provisional estimate and economists' forecasts for 55.4 points.

The index showed the sector enjoyed its 24th consecutive month of growth in June, which is indicated by a reading over 50 points.

As a result, the euro reached 1.3594 usd, its highest level since May 16.

The ECB is expected to keep its key refi rate unchanged at 4.00 pct on Thursday, the same day that the Bank of England's rate-setting Monetary Policy Committee is forecast to hike its key repo rate by a quarter-point to 5.75 pct.

Today's PMI in the UK did little to alter those expectations, which has helped the pound sustain a move above 2 usd.

Even though the June PMI fell slightly to 54.3 from May's downwardly-revised 54.7, analysts highlighted the rise in the input price component, which is likely to worry rate-setters given they have indicated they will be looking closely at pricing pressures at firms.

Elsewhere, the yen remained strong after the release of the results of the Bank of Japan's latest Tankan survey of business conditions that analysts believe present few obstacles to an increase to Japanese interest rates by 25 basis points to 0.75 pct in August.

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Europe's leading exchanges lost ground in midday trading amid lacklustre trade, kicking off a rather quiet week on the economic data front, but Danone shares outperformed on reports it is in talks with Kraft Foods about selling its biscuit and cereal division to the US food group.

At 11.55 am, the DJ STOXX 50 Index was 21.47 points or 0.54 pct lower at 3,925.51, while the DJ STOXX 600 Index fell 2.15 points, or 0.55 pct to 391.56.

The DJ Euro STOXX 50 Index, which tracks the performance of blue-chip companies in 12 countries using the euro, fell 31.61 points, or 0.70 pct, to 4,458.16.

Looking ahead, Wall Street is set to open slightly higher, supported by M&A activity, but firm crude-oil prices and heightened terrorism fears are likely to keep a cap on gains.

According to spread bettors IG Index, the Dow Jones Industrial Average is expected to open up around 20 points at 13,429. Separately, S&P 500 futures rose 2.90 points to 1,518.30 while Nasdaq 100 futures dipped 0.25 of a point to 1,955.75.

Back in Europe, tourism and airline companies lost momentum this morning on the back of the security alerts in the UK on Friday and Saturday.

TUI dropped 1.95 pct, while Thomas Cook declined 4.40 pct. The travel group was also under pressure after Credit Suisse started coverage on the stock with an 'underperform' stance and a target of 255 pence. The broker said it is concerned that the company's package-holiday market is on the decline.

In a note to clients, Credit Suisse said it anticipates the charter-based operators to come under pricing pressure from no-frills airlines. Airlines declined as well, with British Airways losing 1.91 pct, while Lufthansa lost 1.78 pct and Air France-KLM was down 1.79 pct.

Elsewhere, Danone was in the limelight this morning after the UK's Financial Times reported that it is talking with Kraft Foods Inc about selling its biscuit and cereal products division to the US company.

Danone's biscuits and cereal products business had a turnover of 2.2 bln eur in 2006. Both companies declined to comment on the report, but French broker Chevreux noted that an announcement is imminent.

The broker added that a sale of the unit could pave the way towards a sizeable acquisition by Danone, but will almost certainly boost the stock, with speculation over a potential interest by Pepsico or Nestle likely to re-emerge.

In France, shares in Soitec SA tumbled as much as 16 pct to an 18-month low after the maker of semiconductor components warned of declining profit margins and a 20 pct decline in sales for the first half.

In the retail sector, shares in Karstadt Quelle AG dropped 2.87 pct. A spokesman for the company confirmed it had held talks with the struggling Debenhams department store chain but declined to comment on UK media reports
that the two retailers had discussed a possible merger. Debenhams shares declined 0.39 pct.

Shares in Belgian pharmaceutical group UCB SA fell 3.53 pct on uncertainty caused by the announcement of the impending departure of its chief financial officer Luc Missorten.

Over in the Netherlands, SBM Offshore gained 4.13 pct amid continued speculation that the company is on the verge of winning a major contract, trading sources said.

An Amsterdam-based trader at Eureffect said there is "continued talk of a big contract which should be within reach" of the Dutch offshore oil installation supplier.

The same speculation also lifted SBM Offshore's share price on Friday and the company confirmed that it has bid for a major contract to be awarded from BP in Angola.

Spanish construction company Grupo Ferrovial SA dropped 1.64 pct on concerns that its BAA airport operator unit may face rising security costs after this weekend's attempted terrorist attacks in the UK.

BAA brought in new security measures at its Glasgow airport after a burning car rammed the airport on Saturday, and at its six other airports of Heathrow, Gatwick, Stansted, Southampton, Aberdeen and Edinburgh.

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Shares higher on Wall Street cues; oil firmer on surprise drop in US inventories

Asian shares were higher today, with sentiment boosted by the overnight rebound on Wall Street.

Tokyo share prices were supported by a softer yen while Jakarta opened higher on a firmer rupiah.

Seoul shares were higher in early trade, recovering from a four session pullback.

Singapore was also higher, but investors were cautious ahead of the Fed interest rate decision today.

Hong Kong shares opened sharply higher benefiting from some portfolio sprucing-up activity as fund managers prepare to close their books for the first half of the year while Manila benefited from bargain-hunting.

Australian share prices were higher as investors took the view that a sell-off extending over the previous five trading sessions has been overdone.

However Manila shares were mixed as optimism after the Wall Street rebound was met with caution ahead of the Fed decision.

A-shares in Shanghai and Shenzhen were lower in early trade on liquidity fears after the government approved the issue of special bonds to buy foreign exchange.

Japanese government bond prices ended the morning session slightly lower, with investors cautiously awaiting the outcome of the FOMC meeting in the US later today and Japanese consumer inflation data tomorrow.
Analysts said weaker-than-expected May industrial output data initially prompted buying in bonds but this was short-lived and quickly replaced by a wave of selling, mostly by investors who had made losses on the recent rally in yields.
Earlier in the day, the Ministry of Economy, Trade and Industry said Japan's industrial output in May was down 0.4 pct from April on a seasonally adjusted basis, falling for the third straight month. Economists had forecast a sequential increase of 0.8 pct.

EVENTS:

• Australia 3 months to May job vacancies
• Japan May industrial production
• Japan June auto production
• Japan weekly capital flows
• SKorea May industrial output
• Hong Kong's Sa Sa International FY results
• Taiwan May bad check ratios
• Indonesia's Semen Gresik AGM & EGM
• Indonesia's Bank Panin AGM & EGM
• Indonesia's Gajah Tunggal AGM
• Euro zone May M3 (0800 GMT)

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Copper prices continued higher as stockpiles monitored by the London Metal Exchange slumped to their lowest in over eight months and on supply concerns linked to ongoing industrial unrest in South America.

At 12.16 pm, LME copper for three-month delivery stood at 7,640 usd per tonne against 7,560 usd at the close on Friday.

Copper inventories monitored by the LME dipped a further 2,100 tonnes this morning to 112,600 tonnes. LME inventories are down around 42 pct from Jan 4 this year, when they stood at 193,175 tonnes.

The decline follows news from the Shanghai Futures Exchange on Friday that SFE-monitored stocks of the metal dipped 3.7 pct week-on-week to 96,025 tonnes.

Meanwhile supply disruptions continued in South America.

Staff at Chile's state-owned Codelco continue to protest for higher wages and better working conditions. Workers caused 9.3 mln usd in losses at the company's Radomiro Tomic copper mine last week, according to reports in the
South American press.

Meanwhile workers at three Southern Copper Corp operations in Peru -- the Toquepala and Cuajone mines and Ilo smelter -- have agreed to resume negotiations with the company as of today, according to reports.

The union had previously agreed to a 6-day suspension of its strike action from last Thursday to reactivate talks.

Prices are also taking support from easing concerns over the demand outlook from China, the world's largest importer of the metal. Analysts had feared strong imports of the metal early in the year had created a glut of copper in the Asian giant.

However, the Chinese market appears to be "coping well with the significant volumes of imported material in the first five months of 2007," said analyst Michael Jansen at JP Morgan.

"On-going solid demand-side indicators suggest that copper should have a run higher in the short-term, likely testing 7,700 usd per tonne resistance," he added. "Dips are to be bought."

Lead meanwhile pushed through the 2,700 usd barrier once again and crept close to the per-tonne price of fellow base metal aluminium.

Lead for three-month delivery was trading at 2,720 usd per tonne against 2,660 usd on Friday.

The price of lead, chiefly used in the manufacture of car batteries, has soared in recent months after China introduced a new export tax on the metal in June, and as shipments of lead produced at Ivernia's Magellan mine in Australia were suspended on environmental concerns.

Prices have risen by around 50 pct since the beginning of the year, hitting an all-time intraday high of 2,745 usd per tonne last Tuesday. Gains may be sustainable, analysts say, as fundamentals continue to tighten.

The International Lead and Zinc Study Group earlier this year predicted a supply deficit of around 50,000 tonnes for 2007, while lead usage has outstripped production for the last four years, it said.

The other base metals rose in sympathy. Zinc climbed to 3,410 usd from 3,351 usd on Friday, while tin edged up to 13,975 usd from 13,900 usd.

Nickel rose to 37,050 usd from 36,200 usd, and aluminium was trading at ,744 usd against 2,725 usd.

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