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

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Stocks slip as investors mull economy

In midmorning trading Monday, the Dow fell 56.25, or 0.44 percent, to 12,686.94. Broader stock indicators also lost ground. The S&P 500 index fell 8.34, or 0.60 percent, to 1,387.08, and the Nasdaq fell 13.36, or 0.55 percent, to 2,400.00.

The Dow stands 10 percent below its record close of 14,164.53 from Oct. 9, but has regained almost 10 percent from the 15-month lows it hit in January. The Federal Reserve's second interest-rate cut in about a week helped boost stocks last week.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.63 percent from 3.60 percent late Friday.

The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude oil fell 17 cents to $88.79 per barrel on the New York Mercantile Exchange.

In corporate news, Google Inc. said Sunday that Microsoft Corp.'s $42 billion bid for Yahoo Inc., announced Friday, amounts to an attempt to gain illegal control over the Internet.

Google fell $11.30, or 2.2 percent, to $504.60, Microsoft rose 6 cents to $30.51 and Yahoo rose 70 cents, or 2.5 percent, to $29.08.

Financial and homebuilder stocks, which helped drive last week's gains, fell. American Express Co., one of the 30 stocks that make up the Dow industrials, fell $1.32, or 2.7 percent, to $48.28 after UBS lowered its rating on the credit card company to "sell," according to Dow Jones Newswires.

Other financial stocks lost ground as well and were among the steepest decliners Monday. Lehman Brothers Holdings Inc. fell $1.73, or 2.6 percent, to $64.27, while Citigroup Inc., which like American Express is a Dow component, declined 67 cents, or 2.3 percent, to $29.02.

Homebuilders, which in recent months had come off their lows after investors fled housing-related investments, lost ground Monday. Lennar Corp. fell $1.21, or 5.6 percent, to $20.19, while KB Home fell $1.81, or 6.3 percent, to $26.94.

Agricultural producer Archer Daniels Midland Co. said Monday its fiscal second-quarter profit rose 7 percent amid increased volumes and selling prices; it just missed Wall Street forecasts. ADM fell $1.55, or 3.4 percent, to $43.95.

Wendy's International Inc. fell 78 cents, or 3.1 percent, to $24.40 after reporting its fourth-quarter earnings rose 42 percent amid increased profit margins but missed expectations.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 205.9 million shares. The Russell 2000 index of smaller companies fell 9.06, or 1.24 percent, to 721.44.

Overseas, Japan's Nikkei stock average closed up 2.69 percent, while Hong Kong's Hang Seng index jumped 3.77 percent and China's benchmark but often-volatile Shanghai Composite index jumped 8.13 percent after reports indicated the economic effects from harsh winter storms in China might not have been as bad as feared.

In afternoon trading, Britain's FTSE 100 rose 0.04 percent, Germany's DAX index rose 0.69 percent, and France's CAC-40 fell 0.17 percent.

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Forex - Yen suffers from risk appetite revival

LONDON - The yen continued to weaken through the morning, undermined by a resurgence in risk appetite. Investors appear to be embracing some riskier strategies again following a recent run on safer assets like bonds, leading to some sharp increases on Asian stock markets today.

The Hang Seng rose 3.8 pct and the Nikkei ended 2.3 pct higher. European bourses are also modestly higher. Though the risk of a sharp slowdown in the US remains high, markets seem reassured by the US Federal Reserve's aggressive response -- it cut rates 125 basis in January alone, to 3.00 pct -- and the yen, traditionally viewed as a safe haven, is suffering as risk aversion wanes.

"Asian stocks set the tone and although European bourses are only marginally firmer the appetite for risk appears to be shaping a weaker Yen once more," said Peter Stoneham at Thomson's IFR Markets.

Also appearing to weaken the yen was speculation the Bank of Japan (BoJ) could cut its benchmark interest rate, which is currently at 0.5 pct, the lowest of the developed nations.

Last week, BoJ policy board member Kiyohiko Nishimura signalled that the central bank could be open to lower interest rates, telling businessmen it would be "flexible" in its monetary policy to stimulate the local economy.

Elsewhere, the dollar remained under pressure following Friday's weak payrolls data. Non-farm payrolls were down 17,000 in December, falling far short of expectations for an increase of 70,000.

Despite this recessionary signal, and the prospect of even lower US interest rates it implied, the dollar was surprisingly stable, and was even firmer for some time after the report -- indicating markets are prioritising central banks' growth-supportive actions above currency yields.

"That the dollar rose on the back of a report that would previously have served to undermine it (on the basis of interest rate differentials) highlighted the shift in preference for growth-orientated policies that occurred at around the turn of the year," said Neil Mellor at the Bank of New York.

The dollar, indeed, barely weakened in January following the Fed's emergency interest rate cut of 75 basis points, and the scheduled 50 basis points cut that followed. According to normal market logic, such a loss in yield should have sparked a major sell-off.

Later today, US factory orders will give a further signal on the health of world's largest economy. A rise of 2.3 pct is penciled in for December, following November's 1.5 pct gain.

Further out, central bank decisions will take the spotlight. The Reserve Bank of Australia (RBA) announces its decision first, at 0430 GMT tomorrow. Many analysts expect the RBA to hike rates by a quarter point to 7.00 pct, a prospect that has helped the Aussie dollar to a two-month high above the 0.90 usd level.

"Despite continued inflationary pressures, the RBA can't ignore increasing medium-term downside risks for the domestic economy," said Gavin Friend at Commerzbank. "Since the market has priced in a rate hike for this meeting, Australian dollar gains should be limited, especially given the jittery nature of markets," he added.

On Thursday the European Central Bank (ECB) and the Bank of England (BoE) reveal their latest decisions, with the ECB seen on hold at 4.00 pct and the BoE fully expected to cut by a quarter point.

While the stubborn euro zone inflation means the ECB is widely expected to leave interest rates on hold on Thursday, analysts nonetheless believe the Bank will cut rates later in the year as growth risks crystallise.

"Our central forecast remains one of rates on hold for the foreseeable future, but risks are skewed to the downside and it is possible to envisage cuts occurring towards the second half of the year," analysts at Goldman Sachs said.

The BoE, meanwhile, is fully expected to cut its benchmark rate by a further quarter point on Thursday, to 5.25 pct, following December's quarter-point reduction Another key release for the pound, released at some point this week, will be the Halifax (HBOS) house price report for January.

The month-on-month rate is seen at -0.3 pct from the previous month's +1.3 pct, pushing the annual rate of growth down to 4.5 pct from 5.2 pct. "HBOS house prices will shortly show house price inflation slipping relentlessly closer to 0 pct, adding to the sense of gloom," said Daragh Maher at Calyon.

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Euroshares rise in opening trade on M&A talk; Ryanair underperforms 

At 9.01 am, the Dow Jones STOXX 50 Index was up 3.57 points, or 0.1 pct at 3,304.54 while the DJ STOXX 600 Index climbed 0.85 point, or 0.3 pct to 329.26.

"American markets held up well Friday and Asian markets have managed solid gains," said Ronald Petitjean, fund manager at Sarasin Expertise, in explanation for today's early gains.

Petitjean said investors have been reassured by rescue talk for beleaguered US bond insurers, and by the upsurge in merger and acquisition activity on both sides of the Atlantic.

Shares in Ryanair Holdings Plc fell as much as 11.7 pct to their lowest level in over two and a half years after the low-cost airline posted a 27 pct fall in third quarter profits and warned earnings for 2008-09 could decline by as much as 50 pct due to the impact of higher oil prices.

Investor concern that rival discount carrier Easyjet may be facing similar fuel pressures sent the company's shares down 5.1 pct.

In the financial sector, Deutsche Boerse climbed 3.1 pct as dealers pointed to increased trade levels in January, which stymied fears of a possible slowdown in turnover at the German Stock market operator.

Staying in Germany,  Daimler AG was up 2.5 pct after the car maker said US sales of its Mercedes-Benz brand rose 7.1 pct in January. Broker WestLB also upgraded the company to 'buy' from 'add'.

In merger and acquisition developments over the weekend, the Chinese government is preparing to launch an unprecedented legal challenge against BHP Billiton's planned 130 bln usd takeover bid for Rio Tinto, The Observer reported.

High-ranking officials from the Chinese embassy in London have been approaching top City law firms over the past month for help in blocking what would be the world's second-largest takeover, the paper said.

The report comes just a few day after aluminium companies Chinalco and Alcoa bought a 12 pct stake in Rio Tinto, a move which was viewed by some as a spoiler to BHP Billiton's bid. Rio Tinto shares were last off 0.8 pct while shares in BHP Billiton dipped 0.1 pct.

Elsewhere in the mining sector, prospective buyers from Asia, Europe and South America, including one of China's biggest state-controlled banks, have made secret approaches to buy Glencore's 14 bln stg stake in Xstrata, the London-listed mining group. Xstrata was down 0.7 pct.

Meanwhile, shares in Northern Rock were up 5.5 pct. Richard Branson's Virgin Group is not planning to offer additional sweeteners to the UK mortgage lender's shareholders as it prepares to submit its business plan for the stricken bank by a government deadline today, The Times reported, citing sources.

Elsewhere in the UK, shares in ITV rose 3.9 pct after the Observer newspaper in the UK said three private equity groups are pondering a 3 bln stg bid for ITV, citing investment bankers.

Apax, Provident and KKR are 'running the numbers' and considering an opportunistic offer of about 100p a share, said the newspaper.

Shares in Solaria Energia y Medioambiente SA rose 9 pct after a report that Iberdrola SA could be eyeing the smaller renewables group as part of a defensive strategy to ward off a hostile takeover bid by EDF and ACS.

In the construction sector, Hochtief shares climbed 4.6 pct amid vague takeover talk. In broker action of note, shares in Salzgitter rose 5.9 pct  after Credit Suisse raised its price target on the steel and pipe specialist to 189 eur per share from 150 and maintained. its 'outperform' rating.

"We see Salzgitter as a strong play on the upside risk of a global steel shortage," the brokerage said in a note to clients. It added that investors should also take advantage of an attractive valuaion.

Later in the session, investors will be looking to see if Wall Street can build on a solid gains logged last week. December factory orders and the Institute for Supply Management latest snapshot on the health of the US services sector will help provide direction.

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Asian markets rise with Wall Street but US economic woes cap gains

The Hang Seng closed up 3.8 pct at 25,032.08 and Kuala Lumpur composite index ended up 1.9 pct at 1,419.66. The Shanghai composite index finished up 8.1 pct at 4,672.17, while Kospi ended up 3.4 pct at 1,690.13.

The Philippine composite index finished higher 0.9 pct at 3,323.25 while the Jakarta composite index closed up 2.1 pct at 2,701.63.

Worries about the US economy will continue to cap gains in equities. "The January jobs report confirmed the job correction is spreading to the broader economy from the housing and finance sectors," Goldman Sachs chief economist Tetsufumi Yamakawa said in a note to clients.

"The US economy is likely to contract both in the January-March and April-June quarters, thereby eventually slipping into a recession," he said.

The Nikkei 225 index closed up 2.7 pct at 13,859.70 and the Straits Times index closed up 2.3 pct at 3,077.08. Gains in mining stocks powered the Australian market. The S&P/ASX 200 closed up 0.4 pct at 5,867.4 and the All Ordinaries ended up 0.7 pct higher at 5,921.7.

"That early euphoria on the back of the resources activity has dissipated a little bit," said Justin Gallagher, head of sales trading at ABN Amro.

Rio Tinto closed up 2 pct at 39.22 aud after Aluminium corp of china and US miner Alcoa Inc teamed up to buy a 12 pct stake in Rio in a deal believed to be worth 14.05 bln usd.

Rio is already the target of a three-for-one share offer by BHP Billiton, which has until Wednesday to formalize its offer. BHP closed 0.6 pct higher at 128.11 aud.

In the currency market, the Australian dollar surged to a near-three-month high against the US dollar as currency traders bet on the Reserve bank of Australia (RBA) raising interest rates to a 12-year high tomorrow and as foreign investors increased their positions in the Australian stockmarket as the battle for Rio Tinto heats up.

The RBA is expected to raise its official cash rate by 25 basis points to 7.0 pct, its third rate hike in six months, extending the Australian dollar's yield advantage against the greenback.

Many markets in Asia will have a shortened trading week due to the Lunar New Year holidays. Hong Kong will be closed on Thursday and Friday and will trade half-day on Wednesday.

Singapore will close early on Wednesday and will be closed on Thursday and Friday, along with the Malaysian and Indonesian markets. The Chinese market will be closed from Feb 6 to 12.

Taiwan was closed today and will remain closed till Feb 11. South Korean markets will be closed from Wednesday to Friday.

The Bombay Stock Exchange's benchmark Sensex closed 417.74 or 2.29 pct higher at 18,660.32 while the National Stock Exchange's 50-share S&P CNX Niftym gained 2.75 pct to 5463.50 points.

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Metals - Copper rises on supply disruptions ahead of Chinese New Year

At 10.22 am copper was up at 7,303 usd a tonne against 7,231 usd a tonne on Friday. On Friday, copper hit a day-low of 7,195 usd as weak US data battered confidence and reignited fears demand for metals would be hurt in the long run.

"Concerns over availability due to power shortages in China affecting smelting refining operations has supported copper prices this morning. With the week long Lunar New Holiday currently taking place in China, Shanghai trading is closed and prices could be volatile over the week ahead," said Fairfax analyst John Meyer.

Lower than normal rainfall in the world's top copper consumer has restricted hydropower capacity exacerbating power issues as industrial production continues to grow at around 18 pct.

South African mine production and metal output, meanwhile, still remains vulnerable to the national power company Eskom's implemented powercuts. Eskom last week said it was able to supply 80 pct of power to gold, platinum, diamond and coal miners having initially promised to meet 90 pct of their needs.

"The power difficulties taking place show no signs of abating with miners still not receiving sufficient power to run at full rates," said Meyer.

Elsewhere, LME aluminium for three month delivery was up at 2,687 usd a tonne against 2,655 usd at the close Friday.

Zinc was was down at 2,500 usd a tonne against 2,515 usd. "Power interruptions have led to investors covering short metals positions and while there are good reasons to believe that aluminium below 2,500 usd per tonne was too cheap, it is harder to make the case that the zinc market will tighten in light of the large increase in mine supply (13 pct) expected this year and still-elevated price compared to marginal production costs," said UBS analyst Robin Bhar.

Finally, nickel was down at 27,600 usd a tonne against 28,000 usd, lead climbed to 2,860 usd against 2,830 usd, while tin rose to 16,950 usd against 16,900 usd.

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