US & World Daily Markets Financial Briefing 05-03-2008

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Stocks rise on service sector report

NEW YORK - Stocks posted sizable gains Wednesday after a stronger-than-expected reading on the health of the service sector calmed some investors' fears about the frailty of the economy.

The Institute for Supply Management reported that activity in the service declined in February though the decrease wasn't as steep as Wall Street had feared. The ISM index of non-manufacturing activity came in at 49.3. Analysts had expected a reading of 46.5, according to Dow Jones Newswires.

The ISM report was particularly gratifying to Wall Street after a stunning drop in the January service sector index had sent stocks plunging when it was released a month ago.

Investors seemed unfazed by a Commerce Department report that factories witnessed demand drop in January by the largest amount in five months.

The service sector findings offset some unease about a Labor Department report that showed labor costs rose at a 2.6 percent annual pace in the fourth quarter. Rising prices draw concern from investors because they can make it harder for the inflation-weary Federal Reserve to justify cutting interest rates to boost the economy. It was the fastest cost increase rate since the first quarter last year.

However, the report also found that productivity -- the amount than a worker produces for every hour on the job -- rose at an annual pace of 1.9 percent.

In midmorning trading, the Dow Jones industrial average rose 101.60, or 0.83 percent, to 12,315.40. Broader stock indicators also carved out gains. The Standard & Poor's 500 index rose 12.79, or 0.96 percent, to 1,339.54, while the Nasdaq composite index rose 22.46, or 0.99 percent, to 2,282.74.

The move higher comes a day after uncertainty about the economy prompted erratic trading. Stocks recovered from a sell-off to finish mixed amid rumors that plans to help bond insurer Ambac Financial Group Inc. are moving ahead and on comments from Cisco Systems Inc. about its business.

Bond prices fell Wednesday as stocks rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.68 percent from 3.63 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices rose. Light, sweet crude rose $2.05 to $101.57 on the New York Mercantile Exchange.

In corporate news, Pfizer Inc. affirmed its 2008 sales and profit forecasts and said it plans to outsource more drug manufacturing and reduce its global real estate holdings to lower costs. The drug maker, one of the 30 stocks that make up the Dow industrials, is cutting costs ahead of generic competition for its blockbuster cholesterol drug, Lipitor. Pfizer rose 7 cents to $22.31.

BJ's Wholesale Club Inc. jumped $2.71, or 8.1 percent, to $35.99 after saying it expects first-quarter same-store sales, or sales at stores open at least a year, will rise 4 percent to 6 percent excluding gas sales.

Saks Inc., parent of the high-end Saks Fifth Avenue department store chain, said its fiscal fourth-quarter profit rose 83 percent to $39.5 million from $21.5 million a year earlier. Saks rose 66 cents, or 4.2 percent, to $16.15. Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where volume came to 244.4 million shares.

The Russell 2000 index of smaller companies rose 4.85, or 0.71 percent, to 685.83. Overseas, Japan's Nikkei stock average closed down 0.16 percent. In afternoon trading, Britain's FTSE 100 rose 1.17 percent, Germany's DAX index rose 1.81 percent, and France's CAC-40 advanced 1.72 percent.

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Forex - Dollar steady ahead of key US news

LONDON - The dollar remains steady against the euro ahead of some key US economic data this afternoon and on the eve of an interest rate decision from the European Central Bank.

Earlier, the US currency recovered some ground as traders squared up positions ahead of a raft of US economic data. The euro's move as high as 1.5250 usd during yesterday's session proved short-lived as investors awaited further clues on the health of the US economy and what the Federal Reserve will do at its next rate-setting meeting on March 18.

The most important news today is likely to be the Institute for Supply Management services index for February. Though this is expected to have risen to 47.5 from 44.6, it still remains in contraction territory. The monthly ADP employment report, a closely-watched gauge of the US labour market, will also be at the forefront of the market's attention.

"If these data show that the credit crunch is starting to affect corporate activity and the labour market more severely than had been expected, the dollar may resume its nosedive," said Mitsubishi UFJ Securities forex manager Minoru Shioiri. Both the upcoming data and the corporate news may well determine whether the Fed cuts its benchmark funds rate by 75 basis points to 2.25 pct or by 50 basis points to 2.50 pct.

Elsewhere, attention will focus on Thursday's interest rate decision from the European Central Bank. Though the ECB is unlikely to follow the lead across the Atlantic, there are growing expectations that the central bank's president Jean-Claude Trichet will sound a more dovish tone in his ensuing press conference.

Anything he says about possible intervention to stem the export-sapping rise in the euro will be particularly important to the near-term levels of the single currency. Both EU Commission and Eurogroup lawmakers have fired warnings about the euro's level in recent days.

"Given the ECB's mandate to ensure price stability and the Fed's willingness to see further improvement in export growth, the risk of unilateral or coordinated intervention to precipitate a euro adjustment against the dollar is low at this stage," said Ashley Davies, currency strategist at UBS.Elsewhere, the pound recovered its poise after a key survey into the services sector saw output growth accelerate and price pressures elevated.

Analysts said the prospect of another imminent rate cut from the Bank of England is likely to diminish further by the news that output in the UK services sector unexpectedly rose during February. The survey from the Chartered Institute of Purchasing and Supply also showed that price pressures in the sector, which accounts for over two-thirds of UK GDP, are at their highest since records began more than a decade ago.

"The combination of faster growth and stronger price pressures shown in February's CIPS report on services undoubtedly supports the case for the MPC to be cautious about how quickly it cuts interest rates," said Vicky Redwood, economist at Capital Economics. Despite the sharp rise in the CIPS index, the euro is still trading near its new all-time high of 0.7689 stg.

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Euroshares near highs midday, Credit Agricole, Vallourec rally, Wall St seen up

At 12.06 pm, the DJ STOXX 50 was 33.53 points or 1.08 pct higher at 3,128.90, while the DJ STOXX 600 was up 4.02 points or 1.30 pct to 314.28.

Among European blue chips Credit Agricole remained firmly in the spotlight this morning, up 5.11 pct at last check, as its worse-than-expected earnings results showed improvements at the group's operating level and as market watchers voiced relief that rumours of a much larger writedown proved unsubstantiated.

In addition, the group reassured investors by stating it is ruling out major acquisitions for now. And insurer CNP Assurances climbed 3.7 pct ahead as investors welcomed a solid set of full-year earnings and evidence of a limited impact from the ongoing credit crisis.

UBS said net and operating earnings from the insurance group were both ahead of consensus estimates, while the 31 pct jump in recurring net profit was ahead of the group's previous guidance for a rise of over 26 pct. Staying in France, Vallourec added 5.2 pct as the market shrugged off disappointing figures and margin guidance to focus on the prospect of higher pricing power and cost savings.

Telecommunications group Swisscom shed 2.5 pct as the group's full-year results and outlook failed to impress the market. The group also disappointed those who had hoped for the announcement of a share buyback programme.

Unibail-Rodamco added 3 pct after it announced it has won the right to develop a Stockholm shopping centre. Weak fourth quarter results from Adidas finally caught up with the stock and investors, albeit praising the group's strong backorder position, sent the stock 0.6 pct lower.

Turning to M&A talk, EDF was under pressure today, down 2.1 pct, as rumours resurfaced that the French utility has acquired a 6 pct stake in Iberdrola. "The rumours aren't new and I think it came up again because Albert Frere said yesterday that it reduces its stake," analyst Per Lekander at UBS said.

Elsewhere, shares in Norwegian paper producer Norske Skog retreated 4.8 pct as investors began to lose faith in market speculation that a takeover bid is imminent. In addition, news of major cost overruns at a project in Brazil was also weighing on the stock today. Among second-tier groups, Eurotunnel gained 5 pct following reports that Goldman Sachs is to take a 20 pct equity stake in the group according to the Daily Telegraph.

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Asian stocks mostly lower on US recession worries

The Shanghai Composite ended down 0.99 percent at 4,292.65 and Hang Seng fell 5.53 points to 23,114.34. Japan's Nikkei index closed down 0.2 percent at 12,972.06 following data showing that the combined capital investment of Japanese non-financial companies fell 7.7 percent in the fourth quarter of 2007, the biggest fall since July-September 2002.
   
The S&P/ASX 200 declined 0.1 percent to 5,376.60 and the All Ordinaries was down 0.1 percent at 5,471.60. The Singapore Straits Times index closed down 0.3 percent at 2,910.77, while South Korea's KOSPI ended nearly flat at 1,677.10. The Philippine composite index lost 0.5 percent to 3,092.65 and Malaysia's key index was down 2.6 percent at 1,280.23 ahead of the general elections on Saturday. Taiwan's weighted index closed up 0.16 percent at 8,483.95, and Indonesia's composite index also closed up 0.2 percent at 2,639.65.
   
Earlier in the session, the market sank after Merrill Lynch lowered its full-year earnings prediction for Citigroup Inc, which a Dubai fund executive said will need to raise more cash to stay in business. Intel Corp, which lowered its forecast for first-quarter profit margins, added to the gloom.

Financial stocks were lower. Mitsubishi UFJ Financial slipped 2.3 percent to 881 yen, Sumitomo Mitsui Financial shed 1.4 percent to 707,000 yen and Mizuho Financial lost 3.1 percent at 403,000 yen. Non-life Insurer Millea rose 0.3 percent to 3,810 yen.

In Australia, the major banks ended mixed, with National Australia Bank up 2.2 percent at 28.10 Australian dollars. Commonwealth Bank of Australia shed 0.1 percent to 39.95 dollars, Westpac Banking was down 31 cents or 1.4 percent to 22.43 dollars and ANZ was off 0.6 percent at 21.31 dollars. The energy sector weighed on the broader market after crude prices slipped overnight, with Santos down 2.7 percent at 12.04 dollars and Caltex Australia down 7 percent at 11.90 dollars.

In Hong Kong, Chinese financial stocks fell on fear further credit tigthening will limit earnings growth. Industrial and Commercial Bank of China, the mainland's largest lender, ended flat at 5.20 Hong Kong dollars, China Construction Bank closed down 0.04 dollars or 0.71 percent at 5.63 and Bank of Communications was down 0.10 dollars or 1.13 pct at 8.78.

China Unicom, the smaller of two mobile carriers on the mainland, rallied 7.46 percent to 17 dollars and China Netcom Corp, a fixed-line phone company, advanced 6.18 percent to 24.05 dollars. China Southern Airlines, the nation's biggest airline by fleet size, also gained 2 percent at 7.68 dollars.

The blue chip buying was evident, as the Bombay Stock Exchange's 30-share benchmark Sensex closed 202.19 points or 1.24 pct up at 16,542.08 and the National Stock Exchange's 50-share S&P CNX Nifty closed 57.15 points or 1.17 pct higher at 4,921.40.

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Oil rises to 100 usd after falling sharply, all eyes on OPEC

LONDON - Oil rose to 100 usd having fallen sharply yesterday with all eyes now on OPEC's meeting in Vienna where ministers are expected to keep production levels unchanged. Yesterday, crude dropped by over 3 pct as traders cashed in on oil's rally which took prices to a record 103.95 usd earlier this week.

"Whilst prices were technically overbought, the volume of selling was well absorbed," said MF Global senior energy broker Rob Laughlin. OPEC, he said, will most likely rollover quotas and could schedule another meeting in May.

OPEC's official daily output quota is now 29.67 mln barrels. Some members including Iran, Venezuela and Algeria have said they would favour a cut in output levels as demand fades going into the second quarter.

In remarks at the opening of the OPEC production meeting, Algerian oil minister and OPEC president Chakib Khelil said the rise in the price of crude oil was down to factors other than supply.

The US, the world's biggest oil consumer, has again called on OPEC to release more oil to bring down the price of crude and save its ailing economy. President George Bush said it would be a 'mistake' for the cartel to leave production unchanged.

"I expect OPEC members will ignore his call, especially having seen yesterdays price action," said Laughlin at MF Global. OPEC, which pumps well over a third of the world's oil, kicks off its meeting at 10.00 am CET. At this time of year, it would be feasible for the cartel to cut as winter demand for heating oil fades.

"The cartel would normally want to trim (output) but the high price basically precludes such a proactive move," said Citigroup analyst Tim Evans. "We think prices have to fall first...before OPEC will risk reducing output," he added.

Earlier this week, Qatar's oil minister, Abdullah bin Hamad Al Attiyah, said the cartel has no choice but to keep output steady.

"If OPEC is correct and this market is trading on speculators psychology rather than the fundamentals then the group has no choice (but to rollover). While a production cut would be the correct fundamental decision, it would the wrong psychological one," said Stephen Schork, editor of daily trading note The Schork Report.

At 9.38 am, New York's WTI crude for April delivery was up 80 cents at 100.33 usd per barrel. On Monday WTI hit 103.95 usd, its highest ever price but yesterday dropped to 98.87 usd, its lowest price since Feb 26.

Meanwhile in London, Brent crude for April delivery was up 79 cents at 98.31 usd per barrel. Elsewhere, the US Energy Information Administration (EIA) will release a weekly fuel inventory snapshot today at 3.30 pm.

US crude oil stocks are likely to have risen for the eighth week in a row last week, according to analysts polled by Thomson Financial News. The analysts expect crude stocks rose by about 2.07 mln barrels in the week to Feb 29. Elsewhere in the report, analysts expect to see a 344,000-barrel gain in gasoline stocks and a 2.1 mln-barrel fall in distillate stocks, which include heating oil, as the colder weather spurs demand.

Oil prices have almost doubled since this time last year, with the recent sharp run up supported as investors have been buying commodities as a hedge against weak equity markets. A weaker dollar, meanwhile, has also induced buying from those trading in stronger currencies as it has made commodities denominated in the greenback cheaper.

Yesterday's fall was partly because the dollar came off its lows, said Standard Bank analyst Walter De Wet. "The sell-off in oil and other commodities can be partly attributed to the greenback strengthening to 1.5194 usd against the euro after European officials expressed concern over the currency's strength," he said.

"Giving further support to the dollar, credit market jitters -- when (Federal Reserve chairman) Ben Bernanke announced that mortgage delinquency was likely to worsen -- prompted a flight to the safety of US treasury securities." Today, the dollar continued its recovery as traders squared up positions ahead of a raft of US economic data.

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