US & World Daily Markets Financial Briefing 04-03-2008

Stocks fall on bleak corporate forecasts

NEW YORK  -  The stock market fell sharply Tuesday as troubling outlooks for Citigroup Inc. and Intel Corp. raised the anxiety level on Wall Street. The Dow Jones industrial average fell more than 100 points at times.

Merrill Lynch has reduced its full-year earnings prediction for Citigroup because it believes the bank could write down another $18 billion of debt tied to souring mortgages, according to Dow Jones Newswires. Intel, meanwhile, lowered its first-quarter earnings forecast, a move that heightened worries about the technology sector.

Wall Street also remained cautious as it awaited a series of speeches from Federal Reserve officials. Fed Chairman Ben Bernanke already warned in a speech in Florida early Tuesday that more home foreclosures are coming. Meanwhile, Federal Reserve Vice Chairman Donald Kohn in prepared remarks to U.S. senators said banks face obstacles, but their cash levels are strong enough to face them.

The disappointing earnings forecasts and comments from Fed officials come as Wall Street tries to determine whether the economy is in recession -- and whether investors have been a bit too optimistic about companies' profits bouncing back in the second half of the year.

The Dow Jones industrial average fell 103.96, or 0.85 percent, to 12,154.94. Broader stock indicators also dropped. The Standard & Poor's 500 index fell 9.96, or 0.75 percent, to 1,321.38, while the Nasdaq composite index fell 18.68, or 0.83 percent, to 2,239.92, reflecting concerns about the high-tech sector following Intel's news.

Citigroup, one of the 30 companies in the Dow, fell $1.15, or 4.9 percent, to $21.94 to new nine-year lows. Intel, another Dow component, slipped 11 cents to $19.90.

Bond prices edged higher. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 3.55 percent from 3.56 percent late Monday. The dollar fell against most other major currencies, while gold prices rose.

Light, sweet crude rose 5 cents to $102.50 a barrel on the New York Mercantile Exchange. Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 267.2 million shares.

The Russell 2000 index of smaller companies fell 6.82, or 1.00 percent, to 677.38. Overseas, Japan's Nikkei stock average edged up less than 0.01 percent. In afternoon trading, Britain's FTSE 100 fell 1.22 percent, Germany's DAX index fell 1.26 percent, and France's CAC-40 declined 1.14 percent.

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Forex - Euro edges higher as dollar recovery loses momentum

LONDON  - The euro edged higher against the dollar as the US currency's recovery overnight began to lose momentum.

The dollar had gained after both European and Japanese officials expressed concern about the recent sharp rises in their currencies against the US unit. Market players, however, are sceptical about the prospect of actual intervention to prop up the dollar, while there are still no fundamental reasons to buy the US currency.

"It is very difficult to make any case for the dollar to strengthen at the moment," said Robert Howard at Thomson IFR Markets. "The ECB will have to actually intervene or to surprise the market with an interest rate cut on Thursday," he said.

In this respect, Thursday's interest rate decision by the European Central Bank -- where rates are fully expected to be left at 4.00 pct -- and president Jean-Claude Trichet's accompanying press conference will be closely watched, particularly for any comments by Trichet on the euro, Howard said.

The other factor to consider is whether there is any consensus within Europe on a need for intervention, particularly from Germany, while rate-setters may consider that a strong currency will help keep inflation down.

Speaking late yesterday, euro group president Jean-Claude Juncker said current exchange rates do not reflect economic fundamentals and that excessive volatility is not desirable for growth. He tempered these comments this morning, however, by saying the real economy is not being hurt by the euro's strength.

European Central Bank Governing Council member Guy Quaden meanwhile called on the US to reiterate that it favours a strong dollar, while Japanese officials warned about the strong yen's impact on consumption and company earnings.

Among other currencies meanwhile, the Canadian dollar was steady ahead of the Bank of Canada rate decision this afternoon. The currency came under pressure yesterday after very weak GDP data increased speculation that the BoC could opt for a 50 basis point rate cut.

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Euroshares open up as miners gain; Bayer, techs fall on outlook woes

At 09.05 am, the DJ STOXX 50 was up 13.1 points or 0.42 pct to 3,157.98, while the DJ STOXX 600 rose 1.54 points or 0.49 pct to 316. Metal and mining groups tracked their US peers higher after strong gains in raw material prices overnight, with ArcelorMittal up 1.94 pct, Eramet up 7.09 pct. Anglo American added 2.23 pct and Outokumopu added 1.5 pct.

Financials also got a boost, taking heart from the recovery in the global markets and after a strong performance by UK asset manager Schroders. The UK asset manager moved 3.51 pct higher after it reported a better-than-expected 35 pct rise in its annual profit, helped by stronger sales of high-margin products, but said 2008 will be "less favourable" because of the US sub-prime crisis and the associated credit crunch.

In reaction, Merrill Lynch said the results were good, with pretax profit, at 392.5 mln stg, 5 pct ahead of its 375.1 mln estimate, while Core asset management pretax profit was 4 pct ahead at 308 mln stg, including private banking. Among the other sectors plays gaining were Societe Generale, up 1.05 pct and Fortis, up 0.95 pct.

But shares in Bayer AG fell 4.44 pct after the healthcare and chemicals giant lowered the margin guidance for its Healthcare unit after a US court ruled the patent on Bayer Schering Pharma's Yasmin oral contraceptive drug to be invalid.

Shares in ASML fell 1.84 pct while Infineon lost 1.12 pct and STMicroelectronics was down 0.43 pct. The mood also weighed on the wider tech sector with Nokia down 1.5 pct and SAP down 0.91 pct. Earnings results from staffing groups Adecco and Michael Page won a mixed reaction to their full year statements.

Adecco rose 0.4 pct in early deals after the Swiss staffing company presented a solid set of earnings result this morning which showed a particularly strong improvement in the group's EBIT. "Overall, the numbers are pretty good and in particular cost control was better than expected," analyst Marc Zwartsenburg at ING said.

Peer Michael Page slumped 1.81 pct as analysts expressed concern about the short-term outlook. Deutsche Bank said "we can't lose the feeling that the wider slowdown is coming", in a note to clients this morning.

The media sector was also mixed with ProSiebenSat.1 Media AG up 1.72 pct after the German television media group's full-year results as it announced a small share buyback programme and analysts pointed out the group is one of the cheapest stocks in its sector.

But M6 shares slipped back 0.66 pct as full-year figures from the broadcasting group provoked a subdued response from investors with all eyes on this afternoon's meeting as investors awaits guidance on the outlook.

Citigroup analysts said operating profit of 236.1 mln eur was in line with their estimate of 235.4 mln, although net profit missed slightly, coming out at 168.6 mln versus their forecast of 175.2 mln. They noted that M6 had made no comment on its outlook for 2008, adding that this is likely to in focus at this afternoon's meeting.

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Asian stocks end mostly lower after lacklustre Wall Street

Tokyo's Nikkei index closed up 0.10 points at 12,992.28, off a high of 13,110.39 as some investors were unnerved by the dollar's fall and kept to the sidelines to await a speech later in the day by US Federal Reserve chairman Ben Bernanke.

Hong Kong's Hang Seng index closed down 1.97 percent at 23,119.87, tracking losses on the Shanghai market on worries China will announce more credit tightening measures during the two-week session of the National People's Congress from tomorrow.

The Shanghai Composite slumped 2.3 percent to 4,335.45, led by financial stocks. Australia's S&P/ASX eased 0.5 percent to 5,380.30 and the All Ordinaries was down 0.6 percent at 5,479.20. Losses in bank stocks kept Australia under pressure. The Reserve Bank of Australia announced it has raised its official cash rate by 25 basis points to 7.25 percent, just a month after the rate was hiked to a 12-year high in a bid to curb inflation.

South Korea's KOSPI index was up 0.3 percent at 1,676.18, off a high of 1,686.59. South Korea's industrial output rose a seasonally-adjusted 2.5 percent in January from December, better than the average forecast of a rise of 0.9 percent by economists polled by Thomson Financial.

The Singapore Straits Times closed down 0.2 percent at 2,919.68, while the Philippines Composite closed up 0.9 percent at 3,108.72 after index leader Philippine Long Distance Telephone Co (PLDT) rebounded after tumbling 3.5 percent on Monday.

Core net profit, which strips out exceptional items, came in at 35.2 billion pesos, exceeding its forecast of 34.5-35.0 billion pesos. The Kuala Lumpur Composite Index closed down 1.3 percent at 1,314.02 and Jakarta's composite index fell 0.7 percent to 2,634.75. Taiwan's weighted index closed up 2.51 percent at 8,470.11 

Banks were a key focus in Australia following the central bank's rate decision. National Australia Bank added 32 cents or 1.2 percent to 27.50 dollars and Australia & New Zealand Banking Group rose 51 cents or 2.4 percent to 21.44 dollars. Westpac Banking Corp closed flat at 22.74 dollars and Commonwealth Bank of Australia was steady at 40.00 dollars.

In Hong Kong, investors dumped China-related and property stocks. HSBC Holdigns PLC outperformed after announcing strong full-year results Monday.

HSBC, Europe's biggest bank, yesterday said its full-year pretax profit rose 10 percent to 24.2 billion US dollars, lifted by its Asian operations. Net profit at its US division slumped to 91 million dollars last year from 4.7 billion dollars in 2006 after it set aside 17.2 billion dollars as provision for losses mainly due to its subprime-related exposure. But the bank reported 21 percent growth in net profit for 2007 despite the massive provision for bad debts.

HSBC was up 1.10 Hong Kong dollars or 0.92 percent at 120.40 dollars. In Tokyo, gainers included the shipping and non-ferrous metal sectors. In the shipping sector, Nippon Yusen rose 29 yen or 3 percent to 991, Mitsui OSK Lines climbed 38 yen or 2.9 percent to 1,363 and Kawasaki Kisen Kaisha advanced 20 yen or 1.9 percent to 1,062.

Major non-ferrous metal smelter Sumitomo Metal Mining gained 95 yen or 4.6 percent at 2,180 and top smelter Mitsubishi Materials was up 1 yen or 0.2 percent to 466.

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Metals - Gold edges back to yesterday's record; platinum hits another peak

LONDON - Gold edged up as the dollar turned back towards yesterday's record lows against the euro, and as fund interest remained strong amid rising global inflation risk. Platinum meanwhile hit a series of record peaks before retreating down slightly on profit-taking and as dollar weakness faded slightly.

At 1.45 pm, spot platinum was quoted at 2,263 usd an ounce, having earlier surpassed morning records to hit a new 2,299.00 usd an ounce peak in midday trades. It closed at 2,226 usd in late New York trades yesterday.

Analysts said platinum is finding support from strong fund flows into commodities, overall dollar weakness and supply disruptions linked to power constraints in top producer South Africa. "Given the ongoing supply disruptions in South Africa and the scale of deficit in the market this year it seems platinum will continue pushing higher," said TheBullionDesk.com analyst James Moore.

He added the next target on platinum is around the 2,400 usd level. Analysts expect the global platinum deficit will this year reach between 400,000 and 600,000 ounces, after a 5 day mine shutdown in South Africa in January, and more output constraints expected this year.

Mines in South Africa are currently operating with 10 pct less electricity supply than usual. State utility Eskom has itself admitted it may need to keep power supply to mines at these reduced levels until 2012.

Elsewhere, gold edged back up to trade at 983.40 usd per ounce against 981.40 usd in late New York trades yesterday, when the metal hit an all-time record high of 989.33 usd an ounce. The metal was steady again as dollar weakness seen midday started fading slightly, stumping gold's midday climb towards yesterday's all time record peaks. Overall however, the dollar is under pressure, trading near record and multi-year lows against the major currencies as markets expect the US Federal Reserve will cut rates again this month in a bid to avert a possible US recession.

Rate cuts weaken the dollar and benefit gold by increasing its appeal as an alternative asset to the US currency. They also raise inflation worries, thus raising the appeal of precious metals as a hedge against rising prices. "1,000 usd seems likely in the near term, with global inflation expectations being fuelled by the current commodity bull run," said analysts at Standard Bank. "Net investment demand for gold should remain well supported as dollar weakness continues to enhance gold's appeal," they added.

In other markets, oil remained in positive territory, having earlier attempted to head back towards yesterday's all time record peak of 103.95 usd a barrel, and raising concerns about global inflation risk. "Super-high oil, gas and industrial metals will keep headline inflation risks to the upside: growth is noticeably slowing and banks' balance sheet worries are unlikely to disappear soon.

"Our FX colleagues also suggest that EUR/USD has some limited upside. Consequently, we throw in the towel on gold and upgrade our short-term forecasts to 1,025 usd an ounce for one month and 1,075 usd an ounce for three months," said analysts at UBS Investment Bank.

Elsewhere, silver was up at 20.27 usd from 20.06 usd per ounce yesterday, when it hit a 27 and a half year high of 20.60 usd an ounce amid strong demand from investors who see it as a cheaper alternative to gold. Palladium rose to 580 usd this morning against 557.00 usd, having earlier hit a 6 and a half year high of 592.50 usd amid record gains in its sister metal platinum.

Palladium, which usually trades in a tight range, has surged in recent weeks as fund interest has picked up. Meanwhile, demand from consumers has picked up, as the metal can also be used instead of platinum in jewellery and auto catalysts as the two have similar qualities.

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