US & World Daily Markets Financial Briefing 03-03-2008

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Stocks pull off early lows

NEW YORK - Stocks came off their steepest losses Monday after a key manufacturing indicator came in better than expected.

Investors trying to determine whether recent pessimism has been well-founded or overwrought examined the Institute for Supply Management's survey on U.S. manufacturing index. The reading came in at 48.3 -- stronger than the 48 Wall Street had been expecting. However, the government reported that construction spending in January fell by the steepest amount in 14 years.

In morning trading, the Dow Jones industrial average fell 42.66, or 0.35 percent, to 12,223.73. Broader stock indicators also dropped. The Standard & Poor's 500 index declined 1.78, or 0.13 percent, to 1,328.85, and the Nasdaq composite index fell 5.23, or 0.23 percent, to 2,266.25.

Monday's decline comes after a sizable pullback Friday amid an unwelcome mix of economic and corporate reports. The news dashed hopes from early last week that the economy would soon show signs of a nascent recovery. The major indexes lost more than 2.5 percent Friday, with the Dow industrials losing 315 points.

Bond prices slipped Monday after jumping sharply amid Friday's stock market losses. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.54 percent from 3.53 percent late Friday.

Rising oil prices remained on some investors' minds after light, sweet crude futures rose as high as $103.95 a barrel on the New York Mercantile Exchange, reaching an inflation-adjusted record high. The dollar was mixed against other major currencies, while gold prices rose.

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Forex - Euro comes off highs as inflation data meets expectations

LONDON  - The euro came off its near record highs against the dollar and pound after inflation data came in line with expectations, easing fears of a spike higher ahead of the European Central Bank's policy announcement on Thursday.

Euro zone HICP inflation remained at 3.2 pct in February, the same as in January and in line with the market consensus. Although the indicator remains significantly above the ECB's 2.0 pct target, the release calmed worries that inflation could set a new series increase.

At the same time, the euro zone manufacturing PMI was confirmed at its preliminary reading of 52.8 in February, showing a particular weakness in Spain.

"Overall, while the further signs of a slowdown in activity suggest that the ECB is likely to soften its hawkish language a bit further at Thursday's press conference, the high rate of inflation probably means that it will be unwilling to cut interest rates for a few more months yet," said Jonathan Loynes at Capital Economics.

The data caused the euro to soften somewhat as investors took profits on its morning rally. Lower-yielding currencies, particularly the Japanese yen, continued to perform well on increased risk aversion, as traders undid one-way bets in which they used these currencies for funding.

The dollar -- victim to views that the economy is already in a recession and to comments by rate-setters who have suggested that more rate cuts are on the agenda -- has fallen to its lowest level in three years against the yen.

Meanwhile, eyes will turn to the manufacturing ISM data later today, with it expected to decline to 48.1 in February from 50.7 in the previous month. A level below 50 denotes contraction.

In the UK, the pound was mostly higher after an increase in the domestic manufacturing PMI. The indicator rose to 51.3 in February from 50.7 in January and above analyst forecasts for a more modest increase to 51.0.

The sub-components for prices were particularly strong, confirming the current market view that the Bank of England will leave interest rates on hold on Thursday. "Indeed, we believe that the BoE will be reluctant to cut interest rates by a further 25 basis points to 5.00 pct until May, given current inflation risks," said Howard Archer at Global Insight.

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Euroshares open lower after sharp overseas falls; EADS rallies

At 9.04 am, the DJ STOXX 50 was down 54.97 points or 1.72 pct at 3133.85 and the DJ STOXX 600 was down 5.15 points, or 1.61 pct, at 313.8 eur. European investors took these concerns to heart this morning, and only four stocks managed to stay out of the red among the STOXX 200.

EADS grabbed the early spotlight, up 6.9 pct, after the group said Friday its Airbus unit won a joint 35 bln eur contract with Northrop Grumman Corp to build airborne refuelling planes for the US Air Force. The broker said it is valuing the contract at 3.5 eur per share.

Turning to M&A news, truck makers are in focus after Volkswagen announced that it was acquiring the complete stockholding of Wallenburg Foundation and Investor AB in Scania, increasing its voting rights to 68.60 pct from 37.98 pct and its share capital to 37.73 pct from 20.89 pct.

The move boosted shares in Scania by 7.97 pct and sent shares in MAN AG, in which VW holds a nearly 30 pct stake, 4.6 pct higher.

In earnings news this morning, HSBC bucked the trend, up 0.6 pct, after the UK's biggest bank delivered a 10 pct increase in full-year profit, with a strong performance in Asia helping to offset a sharp rise in bad debt charges at its troubled US division.

And among airlines, Vueling Airlines SA surged more than 6 pct after Clickair's managing director said it and Vueling are negotiating a possible merger. Daily Expansion reported that both low-cost airlines have hired investment banks to coordinate the merger talks, citing unnamed sources close to the deal.

UK peer Easyjet was also holding its ground this morning, down only 0.6 pct, after the Sunday Times reported the budget airline is planning its first share buyback with a proposal to purchase and cancel up to 10 pct of outstanding stock.

But Air Berlin fell 2.6 pct after WirtschaftsWoche reported that Alltours has threatened to create its own airline should Air Berlin increase its prices following the takeover of rival carrier Condor. Danone was up 0.67 pct after Citigroup upgraded its recommendation on the stock to 'buy' from 'hold' and increased its price target to 62 eur from 60 as part of a European Food Manufacturing note this morning.

Citigroup said it believes, while the doom-mongers have been touting the pressure of commodity cost increases and expensive relative valuations as reasons to exercise caution on the sector, it thinks the basis for these concerns are generally unfounded.

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Asian stocks slump on renewed US recession worry, strong yen hits Tokyo

The Nikkei was the worst performer, finishing down 4.5 percent at 12,992.18 amid pressure from the yen's rise and increasing worries about the health of the US economy. The Hang Seng lost 3.1 percent to 23,584.97 as property and finance stocks tumbled.

In Sydney, the S&P/ASX 200 closed down 3 percent at 5,405.80 and the All Ordinaries down 2.9 percent at 5,510.70 with news of the merger between mining companies Oxiana Ltd and Zinifex Ltd failing to lift sentiment.

Zinifex gained 9.2 percent to 12.15 Australian dollars after it agreed to merge with Oxiana to create the third-largest diversified mining company on the stock exchange. Oxiana finished 1.8 percent lower at 3.90 dollars.

South Korea's KOSPI closed 2.3 percent lower at 1,671.73, after falling to as low as 1,657.79. The Indonesian composite index ended down 2.6 percent at 2,652.31, while Singapore's Straits Times index was down 3.3 percent at 2,926.55.

Manila's composite index fell 1.6 percent to close at 3,079.99, while the Kuala Lumpur composite declined 2 percent to 1,330.61. while Taipei's weighted index closed down 1.78 percent at 8,262.87.

The mainland Chinese stock market bucked the decline, with the Shanghai Composite index rising 2.06 pct to close at 4,438.27 after news that the securities regulator approved three more equity funds, paving the way for more capital being injected into the local bourse. 

Oil prices continued to stir concern about inflation after pushing past 103 dollars per barrel for the first time on Friday. Prices hovered near 102 dollars in Asian trading Monday ahead of an OPEC meeting this week in which the cartel is expected to maintain current output levels.

Computer maker Dell posted a 6 percent decline in its quarterly profit, falling below analysts' expectations, and warned that its business could suffer from reduced customer spending. Dell slid 4.7 percent to 19.90 dollars. Across the region, computer makers were lower, with Taiwan's Acer Inc skidding 3.5 percent to 55.70 Taiwan dollars.

In Hong Kong, the earnings season is in full swing with HSBC Holdings PLC and Hang Seng Bank Ltd reporting their full-year results later today, while Cathay Pacific Airways and Hong Kong Exchanges and Clearing are due on Wednesday.

HSBC Holdings, Europe's largest bank by value, was down 1.2 percent to 119.30 and unit Hang Seng Bank was down 2 percent to 147.10 dollars.

In Tokyo, those hit among exporters include consumer electronics giant Sony, which fell 220 yen or 4.4 percent to 4,770 yen, Toyota Motor, which shed 190 yen or 3.3 percent to 5,560 yen and Honda Motor which dropped 190 yen or 5.8 percent to 3,070 yen.

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Metals - Gold hits new record after weak US data

LONDON - Gold hit a series of fresh record highs on the back of a weak dollar, which came under renewed pressure as the relentless spate of weaker US data continued for yet another day.

Gold hit a record high of 989.33 usd this afternoon after the ISM manufacturing index showed there was a contraction in the sector in February. Data from the Commerce Department also revealed that total construction spending saw the largest one-month drop since 1994.

The raft of bad data from the world's largest economy briefly pushed the dollar to a new all-time low against the euro, and oil prices to rise above 103 usd. Gold benefits from a weak dollar as bullion is seen as an alternative asset.

And with inflation fears rising due to record high oil prices, gold also benefits from its safe-haven status, as it is bought to hedge against oil-led inflation. Barclays Capital analyst Suki Cooper said that, with more negative data expected out of the US this week, gold prices could rise even further if the dollar consequently weakens even more again.

"US data releases this week are expected to be weak for the US dollar, and continued dollar weakness will certainly help buoy gold prices," said Cooper. The dollar has remained at very weak levels, suffering also against safe haven currencies like the yen and Swiss franc since US Federal Reserve policymakers made it clear last week that rates would continue to fall to support growth despite high inflationary pressures.

By 3.44 pm, the precious metal was trading at 984.93 usd per ounce against 972.20 usd in late New York trade Friday. Meanwhile, silver was up at 20.31 usd from 19.78 usd per ounce Friday, having earlier touched a new 27-and-half-year peak of 20.60 usd as gold's stellar rally to historic levels sparked investor interest in silver.

Platinum was up at 2,208.00 usd an ounce against 2,168 usd, having hit a new record level of 2,232.50 after the US data. Prices were also underpinned by ongoing supply constraints in South Africa. Sister-metal palladium rose to 576 usd against 567 usd.

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