US & World Daily Markets Financial Briefing 05-02-2008

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Stocks drop on service sector weakness

In mid-morning trading, the Dow fell 223.79, or 1.77 percent, to 12,411.37. Broader stock indicators also dropped sharply. The Standard & Poor's 500 index fell 25.39, or 1.84 percent, to 1,355.43, while the Nasdaq composite index fell 33.07, or 1.39 percent, to 2,349.78.

Bond prices jumped as investors sought the safety of government-backed debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.53 percent from 3.64 percent late Monday.

The biggest losers in the stock market were banks, which already suffered huge losses in their investment portfolios last year and are now socking billions of dollars away to prepare for debt-burdened consumers to stop making payments.

Citigroup Inc. fell 98 cents, or 3.4 percent, to $28.24; Washington Mutual Inc. fell $1.30, or 6.8 percent, to $17.86; Bank of America Corp. fell 93 cents, or 2.1 percent, to $43.10; and Wachovia Corp. fell $1.50, or 4.2 percent, to $34.03.

"When you have the financials in intensive care such as they are, for any economy like ours, they must heal," said Quincy Krosby, chief investment strategist at the Hartford. "They drew us into this; they must lead us out."

Meanwhile, Wall Street's enthusiasm over Microsoft Corp.'s bid for Yahoo Inc. -- which had helped investors brush aside Friday's wretched jobs data -- started to dissipate. Banc of America Securities lowered its rating on Yahoo to neutral from buy, saying the proposed acquisition could run up against regulatory challenges, according to Dow Jones. The bank said regulatory difficulties could be steepest in the European Union.

Yahoo slipped 13 cents to $29.20. Microsoft fell 49 cents to $29.70. Light, sweet crude oil was down $1.61 at $88.40 a barrel on the New York Mercantile Exchange, as traders bet that a slower economy could dampen energy demand. An extended drop in energy prices could buoy businesses that are finding their supply costs are rising, but that their customers are having trouble taking on price increases.

The dollar rose against most other major currencies, while gold prices fell. The Russell 2000 index of smaller companies fell 8.63, or 1.19 percent, to 714.83.

Stocks also retreated overseas. Japan's Nikkei stock average closed down 0.82 percent and Hong Kong's Hang Seng index fell 0.89 percent. In afternoon trading, Britain's FTSE 100 fell 1.84 percent, Germany's DAX index fell 2.54 percent, and France's CAC-40 fell 2.72 percent.

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Forex - Euro slips further after weak euro zone retail sales, services PMI

LONDON  - The euro slipped further after a weak services sector PMI survey was followed by an equally dismal retail sales data in the single currency zone, raising concerns about growth prospects.

Eurostat said euro zone retail sales fell 0.1 pct in December from November, and were down 2.0 pct year-on-year, worse than expectations for a 0.3 pct monthly rise and a 0.6 pct decline from a year earlier.

This came after the euro zone services PMI for January was revised down to 50.6 from the flash estimate of 52.0, the weakest level since July 2003 and taking the index close to the 50 level, below which would indicate contraction in the sector.

"Today's weak euro-zone retail sales and final PMI data provide further evidence that the economy is not rebalancing away from the industrial and external sectors towards the consumer and service sectors as hoped," said Ben May at Capital Economics.

The weak readings may increase speculation that the European Central Bank will have to temper its hawkish stance and look to cut interest rates sometime over the coming months.

"While the ECB is unlikely to relax monetary policy in the near term due to inflation concerns, we suspect that markedly weaker euro zone growth and a strong euro will lead to the ECB trimming interest rates by mid-year," said Howard Archer, chief European economist at Global Insight.

The pound, in contrast, was supported by an unexpected rise in the equivalent services sector survey for the UK. The UK services PMI index rose to 52.5 in January from 52.4 in December, beating expectations for a fall to 51.8.

This has held in place views that the Bank of England will only cut interest rates by a quarter point to 5.25 pct on Thursday, rather than a bigger 50 basis points, particularly as inflationary pressures from rising raw materials and factory gate prices remains high.

"The upward price pressures will add to the view that the BoE will likely go (down) by 25 basis point and not 50 basis points on Thursday," said Jodie Tiller, European economist at CIBC World Markets.

Later this afternoon, the dollar will move into focus when the US services ISM is released. The ISM Non-Manufacturing index is expected to ease slightly in January to 53.0 from 53.9 in December. The market will also be keeping half an eye out for the election results on "Super Tuesday" in the US.

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Euroshares open lower on Wall St losses overnight; BP outperforms 

At 9.00 am, the Dow Jones STOXX 50 Index was down 15.67 points, or 0.5 pct at 3,284.68 while the DJ STOXX 600 Index fell 1.88 points, or 0.6 pct to 327.26. 

Nevertheless, other European oil majors banked gains on the back of BP's results, with Total gaining 1.7 pct while Royal Dutch Shell added 1.2 pct.

Giving a further boost to the oil sector, shares in  Norwegian oil services group Subsea 7 Inc rose 4.7 pct after it posted fourth quarter earnings before interest, tax, deprecation and amortization (EBITDA) of 102.6 mln usd that was more than the market expected, and gave a positive outlook.

In other earnings news, Man AG ticked up 0.6 pct after the heavy truck maker released full-year figures which largely trumped market expectations and gave indications of another strong year in 2008.

KPN was up 2.2 pct as investors welcomed a cost savings plan designed to boost profit, in the wake of fourth quarter results that were largely in line with estimates.

But on a less positive note, shares in ARM Holdings plunged 14.4 pct after the UK microchip designer said it expected revenue growth in 2008 at a similar level to 2007 after reporting flat fourth-quarter revenues. It also offered up a cautious outlook for the semi-conductor industry.

ARM's cautious view of the industry sent other chip makers lower, with STMicroelectronics and Infineon Technologies both down 1 pct apiece. Chip equipment maker ASM International was down 4 pct while Wolfson Microelectronics dropped 3.1 pct.

Heidelberger Druckmaschinen AG dropped 6.7 pct after the printing and paper specialist reported third-quarter figures in which both sales and profit numbers came in slightly below analyst estimates.

SABMiller was down 1.1 pct after the brewer posted net profits of around 1.86 bln usd in calendar year 2007, according to figures revealed in the annual report of Altria Group Inc, which owns a 28.6 pct stake in the London-based beer company.

Due to the size of the investment, Altria is required under US law to disclose SABMiller's summary financial results in its annual report.

Northern Rock was another faller, giving up 5.1 pct after the UK government received only two takeover proposals to acquire the embattled mortgage lender following buyout firm Olivant's decision to pull out of the bidding process.

The two remaining bidders are a consortium led by Sir Richard Branson's Virgin group and an in-house proposal, under which Northern Rock would relaunch itself as a scaled down lender backed by the proceeds of a 500 mln stg rights issue.

Societe Generale was off 0.1 pct, but outperforming a weak banking sector as market speculation continued to swirl over potential bidders for the French bank.

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Asian markets fall with Wall Street, Australia lifts rates to 12-yr high

The S&P/ASX 200 closed down 1.3 pct at 5,792.9 and the All Ordinaries ended down 1.2 pct at 5,852.1 after the Reserve Bank of Australia raised rates by 25 basis points to 7 pct.

Last month the IMF cut its 2008 growth estimate for the US to 1.5 pct from 1.9 pct. The Shanghai Composite closed down 1.5 pct at 4,599.70, while the Hang Seng closed down 0.9 pct at 24,808.70. 

The Kospi closed slightly higher, up 0.4 pct at 1,696.57, and the Strait times closed down 1.3 pct at 3,038.42. The Nikkei 225 index ended down 0.8 pct at 13,745.50 as investors awaited quarterly earnings to be released by Toyota Motor. Toyota fell 2 pct at 5,780 yen.

After the closing bell, Toyota Motor reported a record operating profit for the fiscal third quarter to December as strong sales overseas countered the impact of a strong yen and higher costs. Japan's top car maker is keeping unchanged its operating profit forecast of 2.30 trln for the year to March.

Besides Toyota, Hitachi, Nikon, Sanyo Electric Co, Tokyo Electron, Orix and Mitsubishi Motors were all due to announce their quarterly earnings later today.

Mitsubishi Estate Co Ltd, Japan's second-largest property developer, said today its net profit fell 13 pct to 43.5 bln yen compared with a year earlier, when profit was boosted by sales of huge commercial buildings. Mitsubishi Estate shares ended 4.5 pct down at 2,770 yen.

In Australia, Rio Tinto fell on expectations that its suitor, BHP Billiton, will at best formalize its three-for-one share offer for the world's third-largest miner ahead of Wednesday's deadline set by the UK Takeovers Panel for it to "put up or shut up."

"There's a real possibility that BHP might walk away for six months, as there's no rush. They're prepared to play the game over a long time," said Ric Klusman, head of institutional trading at Aequs Securities.

Rio closed down 0.6 pct at 127.35 aud after Aluminium Corp of China (Chinalco), together with Alcoa Inc, said they were not interested in increasing their combined stake beyond the 12 pct of Rio's London-listed shares acquired in last week's share raid. BHP rose 0.8 pct to 39.65 aud.

In Hong Kong, China Life Insurance, the mainland's biggest insurer, closed down 1.1 pct at 31.9 hkd. Industrial and Commercial Bank of China (ICBC) was down 1.52 pct at 5.20. ICBC has set aside provisions covering up to 30 pct of its exposure to unpaid housing mortgages in the US, according to mainland media reports. China's biggest bank held about 1.2 bln usd worth of securities linked to subprime mortgages.

Elsewhere, Manila's composite index finished 1.2 pct lower at 3,283.56 and the Kuala Lumpur Composite Index closed up 0.9 pct at 1,432.35.

Jakarta's composite index closed up 0.1 pct at 2,704.25, reversing early losses as gains in coal mining stocks propped up the index. "The coal sector is outperforming the market because of soaring coal prices. I think analysts may have to revise up their coal price assumptions again," said Krishna Dwi Setiawan, an analyst at Valbury Asia Securities.

The Bombay Stock Exchange's Sensitive Index closed 35.77 points or 0.19 pct at 18,696.09 while the National Stock Exchange's 50-share S&P CNX Nifty provisionally gained 0.54 pct to 5,492.90 points.

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Oil down almost 1 usd as slowing global growth weighs on sentiment

LONDON - Oil fell almost 1 usd on the expectation that demand ahead will be softer because of slowing global economic growth.

The strength prices had garnered yesterday from Middle East and Nigerian geopolitical tensions and from a statement from the White House announcing it will buy more barrels for the US Strategic Petroleum Reserve faded. Meanwhile thick fog which slowed crude-carrying ships into the Houston Channel cleared -- helping the supply picture today.

"The sharp deterioration in the recent US macro statistics will remain the predominant influence on energy prices over the short-term," said MF Global analyst Ed Meir. "Given how weak the recent stats have been looking thus far, and the potential drag they could have on energy demand, sizable price rallies in crude still look very suspect to us and should be sold into."

Leading European shares were down in midday trading with Wall Street headed for a lower open. In recent weeks oil has tracked volatile equity markets. Worries of a global slowdown in growth has seen oil lose some 10 pct since hitting a record 100.09 usd at the start of this year.

"We are of the opinion this is the near-term floor in NYMEX crude oil. Failure to hold this area sets the table for weakness later in the year towards the mid-60s," said Stephen Schork at The Schork Report trading note.

At 12.48 pm, New York's WTI crude for March delivery was down 88 cents at 89.14 usd per barrel.

In London, Brent crude for March delivery was down 98 cents at 89.49 usd per barrel. Expectations crude oil stocks in the US, the world's top consumer, grew last week also weighed on prices. The Energy Information Administration will release the data tomorrow afternoon.

Meanwhile, players are aware peak winter demand for oil is abating now the coldest part of the season is coming to an end in the Northern Hemisphere.

Prices had staged an impressive rebound yesterday, partly as geopolitical tension in Nigeria sparked worries over the security of supply.

The most prominent armed group in southern Nigeria has claimed responsibility for an attack on a navy outpost protecting a Royal Dutch Shell unit facility which killed three soldiers at the weekend.

"In the early hours of Sunday, February 3, 2008, fighters from the Movement for the Emancipation of the Niger Delta (MEND) attacked a military houseboat stationed at the Shell Petroleum Tora manifold in Bayelsa state of Nigeria," it said in an email to Agence France-Presse.

"The group which has desires to control all the wealth from oil in the delta region have pledged more attacks in the near future," said MF Global senior energy broker Rob Laughlin. "Years of experience tell me that Nigeria is a tinder pot that could well erupt this year into a major problem."

Looking ahead, all eyes will be fixed on equity market volatility which is likely to spill into commodities as traders try to cover losses and hedge against weakness. On the fundamental side, the OPEC cartel will hold a meeting on March 5 to decide on supply levels.

At its gathering last Friday ministers left output unchanged. Officials are sending mixed signals to the market about the next meeting and there seems to be no consensus yet over the decision.

Kuwait has said an increase is on the cards while Venezuela and Iran are likely to support a cut. Others, meanwhile, including Saudi Arabia, the defacto head of OPEC, have said it is too early to reach a decision on output and that stock levels must be monitored in the weeks ahead of the meeting

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