US & World Daily Markets Financial Briefing 06-02-2008

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Stocks edge up after Tuesday's plunge

NEW YORK  - Stocks rose tentatively Wednesday as investors, still uneasy about the economy, wrestled with whether to buy back into a market battered a day earlier by recession worries.

Better-than-expected profit results from Walt Disney Co. handed Wall Street some good news. Disney posted a 26 percent decline in profit late Tuesday, but the results beat expectations. The company -- one of the 30 companies that make up the Dow Jones industrials -- reported a 9 percent rise in revenue, thanks in part to the success of brands such as ESPN, "High School Musical" and "Hannah Montana."

Disney shares rose nearly 4 percent. But Wall Street is still anxious about the shaky economy. The stock market had plummeted Tuesday, giving the Dow on its biggest percentage drop since Feb. 27, 2007, after the Institute for Supply Management reported a surprising January contraction in the U.S. service sector -- news that bolstered the argument that the nation is in recession.

Government data Wednesday was more positive -- fourth-quarter productivity rose by a better than expected 1.8 percent and that labor costs rose by a fairly low 2.1 percent. The results were worse than they were in the third quarter, though, when productivity shot up 6 percent and costs fell by 1.9 percent.

In the first hour of trading Wednesday, the Dow rose 30.08, or 0.25 percent, to 12,295.21. Broader stock indicators also rebounded. The Standard & Poor's 500 index rose 3.68, or 0.28 percent, to 1,340.32, and the Nasdaq composite index rose 5.53, or 0.24 percent, to 2,315.10.

Government bond prices declined. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.60 percent from 3.56 percent late Tuesday.

In other earnings news, Time Warner Inc. posted a profit decline in its fourth quarter. But excluding the effect of a year-ago gain from the sale of AOL's online access business in Europe, profit rose due to better results at the media conglomerate's cable TV and movie operations.

Time Warner rose 15 cents to $15.55. Toll Brothers Inc. said revenues fell 22 percent during its fiscal first quarter, and that is not "seeing much light at the end of the tunnel."

Toll fell 42 cents, or 2 percent, to $21.45. And late Tuesday, the fiscal second-quarter earnings of JDS Uniphase Corp., which makes communications test and fiber-optic network equipment, fell slightly year-over-year but widely surpassed Wall Street estimates. JDS Uniphase shot up $2.76, or 27 percent, to $12.92.

In addition to earnings, investors will be paying attention Wednesday to speeches by Fed officials Jeffrey Lacker, Randall Kroszner and Charles Plosser, as well as Treasury Secretary Henry Paulson, who will be testifying before the Senate Budget Committee.

Politics could also come into play on Wall Street in the coming days and weeks. Investors have been trying to determine who the presidential nominees will be, and while Republican John McCain and Democrat Hillary Clinton are leading the delegate counts after Tuesday's primaries, nothing is certain yet.

The dollar was mixed against other major currencies, while gold prices rose. Light, sweet crude oil rose 35 cents to $88.76 a barrel on the New York Mercantile Exchange. The Russell 2000 index of smaller companies was up 0.24, or 0.03 percent, at 701.82.

Overseas stocks were mixed. Japan's Nikkei stock average dropped 4.7 percent and Hong Kong's Hang Seng index fell 5.4 percent. In Europe, Britain's FTSE 100 slipped 0.15 percent, Germany's DAX index rose 0.72 percent, and France's CAC-40 rose 0.69 percent.

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Forex - Dollar steady ahead of US productivity figures

LONDON  - The dollar was steady against the euro after rising firmly overnight, with movements in equity markets continuing to dictate currency movements.

Equity markets in Asia fell strongly overnight on fears that the US is entering a recession and taking other major economies with it. These were fuelled by a set of weak service sector surveys out yesterday for the euro zone and US which showed activity is slowing on both sides of the Atlantic.

This in turn caused a pick-up in risk aversion prompting many investors to pull out of overseas investments and convert them back into dollars. "In this environment, US investors who in the past heavily invested abroad (more than 300 bln usd over the past 12 months alone), are likely to scale down their euro zone equity holdings," said Michael Ramon Klawitter, currency strategist at Dresdner Kleinwort.

Today European bourses all opened lower, although they have since pared back some of their losses meaning the dollar failed to make much further headway this morning.

Markets are now waiting for the release of fourth quarter US productivity figures, which are expected to show productivity slowed to an annual growth rate of 0.5 pct in the fourth quarter from 6.3 pct in the third quarter, although unit labour costs are expected to have edged up slightly.

Daragh Maher, currency strategist at Calyon, said the figures are unlikely to have a major impact, although rising costs could limit some US rate setters' enthusiasm for more aggressive cuts in borrowing costs.

"Unit labour costs are set to rise, echoing the expected decline in productivity, but the Fed's focus is firmly on the downside risks to growth for now, so the policy implications of higher costs are minimal," he said.

Later today close attention will also be paid to speeches from Federal Reserve members Jeffrey Lacker and Randall Kroszner will be carefully scrutinised.

Meanwhile the pound was also steady after a sharp dip this morning, with the falls in equity markets weighing on high-yielding currencies such as sterling.

The British Retail Consortium's shop price index showed the annual rate of shop price inflation was up 1.2 pct in January, compared to 1.0 pct in December due to rising food prices. The figures are unlikely to quell Bank of England rate setters' concerns about inflation, meaning the central bank is unlikely to cut interest rates by more than a quarter point when it announces its decision tomorrow.

"The odds seem to be stacked markedly in favour of the Bank of England limiting its interest rate cut to 25 basis points on Thursday," said Howard Archer, UK economist at Global Insight.

Expectations that rates will be cut were cemented this morning following the release of gloomy consumer confidence and job creation surveys.

Nationwide building society reported its sentiment index dropped four points to 81 in January, its lowest level since the survey began in 2004.

KPMG and the Recruitment and Employment Confederation said demand for staff rose at its weakest rate in 26 months during January while pay rises for permanent staff weakened further to a 22-month low

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Euroshares mixed in early deals, Postbank rallies, telecoms outperform

At 9.16 am, the DJ STOXX 50 fell 7.52 points or 0.23 pct to 3,194.99, while the STOXX 600 was 0.39 points or 0.12 pct lower at 318.34.

Meanwhile, the DAX 30 added 0.06 pct, while the CAC 40 rose 0.05 pct and Spain's Ibex rose 0.40 pct. "We already accounted for a lot of the overseas declines in after hours trading last night," one Frankfurt-based trader noted.

"The markets are still very volatile and we'll have to wait and see what the US exchanges will do later today," he added, also pointing out that individual stocks such as Deutsche Postbank and Allianz as well as France Telecom were adding some momentum this morning.

In the otherwise underperforming banking sector this morning, Deutsche Postbank surged 10.61 pct, fuelled by renewed takeover speculation following a report in Financial Times Deutschland, which said the bank's parent company Deutsche Post World Net AG has held talks about merging the bank with another major European bank.

According to the report, Deutsche Post is planning to merge its Postbank unit with another large bank and has assigned investment bank Morgan Stanley to hold talks with potential partners, which include Allianz SE, Deutsche Bank AG and ING.

Allianz also gained 2.24 pct with traders noting that there were hopes that a deal with Postbank could be in favour of the insurer's Dresdner division. Over in the mining sector, BHP Billion shed 4.82 pct after the group raised its offer for rival Rio Tinto and presented a "disappointing" set of interim results this morning.

"While BHP Billiton remains one of our top picks in the mining sector, shares are likely to underperform in the near-term due to its somewhat disappointing earnings, and the offer for Rio Tinto," said a trader at a leading US brokerage.

BHP sweetened its original bid approach overnight, offering 3.4 of its shares for each Rio Tinto share, up from a previous 3-for-1 proposal.

Elsewhere, TUI AG added 3.60 pct, edged on by a report in the Financial Times which said the German group and Singapore sovereign wealth fund Temasek Holdings and TUI AG of Germany are in talks to merge their shipping operations in a deal that could see Temasek holding more than 20 pct of TUI.

In a note to clients, Sal Oppenheim said such a deal would catapult the combined entity to the 3rd position in global container shipping, however cautioned that it sees "no need to be invested in such a cyclical earnings profile currently".

Turning to company earnings, France Telecom was amongst outperformers on the CAC this morning after the telecommunications giant released a strong set of full year results along with an encouraging outlook for the full year 2008.

A Paris-based dealer also highlighted the announced dividend, which at 1.3 eur per share came in higher than the 1.25 eur anticipated by the market.

Staying in France, Vallourec did not fare so well, down 6.68 pct, as investors expressed their disappointment with the seamless tube-maker's cautious guidance for the year ahead.

In reaction, Cheuvreux cut its recommendation for the stock to 'underperform' from 'outperform' and Societe Generale reiterated its 'sell' stance, noting that the outlook presented was rather ''uninspiring'.

Over in Sweden, appliance maker Electrolux AB jumped 6.31 pct as the appliance maker beat expectations with its fourth quarter earnings results. Operating profit, excluding items affecting comparability, amounted to 2.007 bln skr, well above the 1.768 bln seen by analysts.

Meanwhile, Volvo lost 3.20 pct as it missed expectations when presenting fourth quarter profit after financials of 5.609 bln skr, well below the 6.176 bln expected by the market, and with a drop in operating margins to 6.8 pct from 7.6 pct adding to investors' disappointment.

In neighbouring Finland, Rautaruukki was in the spotlight, sliding 7.89 pct after it said fourth-quarter pretax profits fell to 109 mln eur from 158 mln a year earlier, impacted by unutilised capacity, destocking and strikes. Analyst had expected the figure to rise to 181 mln eur on average.

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Asian stocks tumble as US recession fears mount ahead of Chinese new year

In Asia, the Hang Seng closed down 5.4 pct at 23,469.46 with financials and retailers leading the slide. "Selling pressure ahead of the Lunar New Year holiday, with most investors cashing in on recent gains, will weigh on markets," said Conita Hung, research head at Delta Asia Securities.

The Hang Seng traded for just half a day today and will remain closed on Thursday and Friday for the Chinese new year holiday.      The Shanghai, Taiwan and South Korea markets are already closed and will resume trade next week.

The Singapore, Malaysia and Indonesian markets will also remain closed on Thursday and Friday. The Nikkei closed down 4.7 pct at 13,099.24 and the Topix ended down 4.2 pct to 1,298.41.

Financial stocks were weaker as Japan's largest general leasing company, Orix, was a limit-down at 16,030 yen, after Goldman Sachs downgraded its investment rating on the stock and lowered its target  from 22,400 yen to 18,500 yen.

Big banks were major losers, with Mizuho Financial down 5.2 pct at 460,000, Mitsubishi UFJ Financial down 4.4 pct at 977 yen and Sumitomo Mitsui Financial down 3 pct at 811,000 yen.

In Australia, the S&P/ASX 200 closed down 3.2 pct at 5,609.4 and the All Ordinaries ended down 3 pct at 5,677.6.

Index heavyweights BHP Billiton and Rio Tinto were in focus after BHP raised its offer for Rio to 3.4 of its own shares for each Rio share. BHP's original proposal was a 3-for-1 offer. BHP closed down 7.5 pct at 36.66 aud and Rio ended 0.2 pct lower at 127.14 aud. 

Among the smaller South Asian markets, Manila's composite index fell 1.7 pct to close at 3,228.84, the Straits Times Index ended half-day trading down 3.5 pct at 2,932.

The Jakarta composite index closed down 2.4 pct at 2,639.09 and the Kuala Lumpur Composite Index ended down 1.2 pct at 1,415.94.

PICC Property & Casualty was down 5.67 pct at 7.98 hkd as China's biggest non-life insurance provider fell after news that mainland insurers paid 680 mln yuan in claims for property losses caused by the worst snowstorm in China in the last five decades. PICC holds 45 pct of China's non-life insurance market.

China Life Insurance, the mainland's biggest insurer, was down 7.84 pct at 29.40 hkd. Smaller rival Ping An Insurance tumbled 7.95 pct at 56.70 hkd.

Aluminum Corp of China (Chalco) was down 7.24 pct at 12.309.4 hkd after BHP raised its offer for Rio. Chalco parent Chinalco and partner Alcoa Inc acquired a combined 9 pct stake in the world's third-largest miner, Rio Tinto, last week.

In Tokyo, Tokyo Electron was down 5.3 pct at 6,100 yen, after Japan's largest maker of semiconductor manufacturing equipment said Tuesday that its net profit for the nine months to December jumped 37.1 pct as sales expanded in Taiwan and Japan. Japan Tobacco(JT) dropped 0.9 pct to 572,000 and Nissin Food Products retreated 7.8 pct to 3,300.

The Bombay Stock Exchange's 30-share Sensex fell 523.67 points or 2.81 pct to 18,139.49 while the National Stock Exchange's 50-share S&P CNX Nifty dipped 2.94 pct to 5,322.55 points.

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Metals - Base metals decline on recession fears

At 10.44 am, copper for delivery in three months was trading at 7,077 usd per tonne against 7,130 usd per tonne yesterday.

A slowing business cycle in the US and heightened recession fears globally have weighed on metals recently, due to concerns demand could slacken should world economic growth stagnate.

Prices have found some support, however, because of the tightness still prevalent in many markets, with the effects of any slowdown still feeding through to immediate demand, analysts said.

Copper stockpiles at LME monitored warehouses fell by 2,800 tonnes yesterday to 171,975 tonnes, with the majority of shipments leaving South Korean stores.

Growth in China remains a key driver for the market, though the Lunar New Year holiday has reduced buying interest this week.

"The prospects of China being on holiday for a week seems to have unnerved the market," said BaseMetals.com analyst William Adams.

Yesterday, data out in the US showed an economy slowing markedly, with the Institute for Supply Management's figures falling sharply.

"The ISM showed a reading of 41.9, well below the 53 expected and below the 50 dividing line between expansion and contraction. This bodes ill for the US economy and therefore not surprisingly the metals suffered," said Adams at BaseMetals.com.

Tin bucked the trend in early trade today, pushed higher by continued stockpile falls after a spate of supply outages.

"Tin prices are... supported by the downtrend in LME tin inventories as well as news that the adverse weather conditions in China, the world's largest tin producer, have impacted tin output in the country's southern provinces," said analysts at Barclays Capital.

However, some profit-taking came into the market as investors eyed weakness in other metals, pushing tin down slightly to 16,600 usd per tonne against 16,675 usd.

Among other metals, aluminium was trading at 2,597 usd per tonne, down from 2,623 usd yesterday, while lead dipped to 2,755 usd from 2,779 usd.

Three-month nickel eased to 26,500 usd per tonne from 26,800 usd, while zinc was flat at 2,370 usd per tonne.

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