US & World Daily Markets Financial Briefing 06-05-2008

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Stocks drop on disappointing earnings

NEW YORK - The stock market fell Tuesday for a second straight session after government-sponsored mortgage company Fannie Mae, homebuilder D.R. Horton Inc. and Swiss bank UBS reported quarterly losses. A new record for crude oil prices also pulled stocks lower.

The disappointing first-quarter results from the financial and homebuilding industries suggested to investors that a rebound in the economy and corporate profits later this year might not come as easily as many have hoped.

In recent weeks, stronger-than-expected results from companies outside the battered financial and housing sectors helped the stock market rebound late last week to levels not seen since early January. But investors' confidence has eroded in the the past two sessions, with banks still on the mend and oil prices threatening to weigh on the consumer well into the summer.

Crude oil rose to a record $121.49 on the New York Mercantile Exchange -- the first time oil has traded above $121 -- due to the weakening U.S. dollar and the possibility of supply threats.

In mid-morning trading, the Dow Jones industrial average fell 92.41, or 0.71 percent, to 12,877.13. Broader stock indicators also dropped. The Standard & Poor's 500 index fell 7.85, or 0.56 percent, to 1,399.64, and the Nasdaq composite index fell 16.28, or 0.66 percent, to 2,447.84.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 3.81 percent from 3.87 percent late Monday.

Fannie Mae posted a quarterly loss of $2.2 billion and said it would lower its dividend and raise $6 billion in additional capital. Its shares fell $1.16, or 4.1 percent, to $27.13.

UBS reported a loss of nearly $11 billion and said it is reducing its work force by about 7 percent. UBS shares fell 99 cents, or 2.9 percent, to $33.32.

Meanwhile, Wachovia Corp. said it is nearly doubling its previously reported loss for the first quarter to $708 million after reviewing its portfolio of bank-owned life insurance. Wachovia's stock fell 61 cents, or 2 percent, to $29.18.

D.R. Horton reported a quarterly loss of $1.3 billion and halved its dividend to 7.5 cents a share. The homebuilder's shares fell 41 cents, or 2.6 percent, to $15.56.

Gold climbed, while the dollar fell against most other major global currencies. The Russell 2000 index of smaller companies fell 4.24, or 0.59 percent, to 720.11.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 191.8 million shares.

Overseas, Japan's stock market was closed for a holiday. By afternoon trading in Europe, Britain's FTSE index fell 0.92 percent, Germany's DAX index fell 0.98 percent, and France's CAC-40 fell 0.87 percent.

Walt Disney Co., one of the 30 companies that make up the Dow, and computer networking equipment maker Cisco Systems Inc. are scheduled to release quarterly results after the market close Tuesday.

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Forex - Dollar firm against euro as markets reassess U.S./euro zone prospects

LONDON - The dollar remained firm against the euro, trading in narrow ranges, with investors turning more positive on the United States's economic prospects compared with the outlook for the euro zone. Data out of Europe on Tuesday added to markets' belief that growth in the euro zone economy could slow sharply in the coming months.

Though the April purchasing managers' index (PMI) for the euro zone's service sector was revised up to 52.0 from 51.8, the figures revealed a major divergence in growth, with Germany performing well but Spain, France and Italy showing major signs of weakness.

Ben May, European economist at Capital Economics, said the signals of a flagging economy should ultimately push the European Central Bank to drop its hawkish tone and lower borrowing costs. "Softening activity should ultimately prompt the bank to cut interest rates twice by the end of the year," he said.

Nonetheless, the ECB's concerns about inflation were underscored by data that showed pipeline price pressures are still acute, with the annual rate of producer price inflation hitting 5.7 percent in March, above expectations for a rate of 5.5 percent and the firmest since August 2006.

With euro zone rates thought to be heading lower, albeit with some months' delay due to inflation worries, investors seem to re-evaluating the euro/dollar rate. This reflects the fact that a a lot of bad news in the United States has been priced into the greenback.

"While nobody would deny the severity of the U.S. downturn, it is now, to a reasonable degree, a known factor that investors can factor into their thinking," said Simon Derrick, currency strategist at the Bank of New York Mellon.

Adding support to the dollar was Monday's ISM non-manufacturing index, which jumped almost 4 points to 52.0, easily beating expectations.

The market's focus will now likely turn to interest rate decisions in the euro zone and the United Kingdom. Both the ECB and the Bank of England (BoE) are expected to hold borrowing costs this month, although the chances of a cut in UK rates will grow if data continues to be weak.

Figures on Tuesday showed the UK's services sector, which accounts for around two-thirds of the economy, nearly slipped into recession in April. The services PMI reading for the month dipped to 50.4 from 52.1 in March, just barely above the 50 threshold that separates expansion from contraction.

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Euroshares open flat after Wall Street decline, Swiss Re falls after Q1

At 09:15 a.m., the DJ STOXX 50 was down 2.40 points or 0.07 percent to 3,278.94, while the DJ STOXX 600 fell 0.32 points or 0.10 percent to 327.96.

In Europe, markets were largely hovering around the flatline after last night's lacklustre trade on Wall Street and with gains among oil and gas stocks offset by disappointing earnings results in other sectors.

"We are settling within a range now and although the newsflow this morning is predominantly negative, we can see some support among financials," a trader in Frankfurt said, pointing to news that UBS will sell Alt-A and subprime positions worth $20 billion to BlackRock.

News that U.S. retailer Target Corp will sell nearly half its credit-card receivables to JP Morgan for $3.6 billion was also capping losses in the sector this morning, he added. "It indicates that things are settling down and the banks are getting back to business as usual," the trader said.

Meanwhile, the world's largest reinsurer Swiss Re shed 5.6 percent after it missed consensus forecasts with its first quarter earnings report. Analysts at Sal Oppenheim highlighted the group's combined ratio of 96.9 percent, worse than the 95 percent expected by the broker.

Analysts at Landsbanki Kepler said in a note to clients that the additional write-down unveiled today was unexpected after management reassured several times on the quality of their portfolio.

Still in Switzerland, UBS lost 4.3 percent after it unveiled a first quarter net loss of 11.535 billion Swiss francs, largely in line with analyst expectations of 12 billion francs following the bank's profit warning on April 1.

The negative newsflow is set to continue as the bank said it expects the currently difficult environment to remain. It also announced 5,500 job cuts by mid-2009.

Swiss engineering group Rieter Holding AG fell more than 7 percent after issuing a profit warning after the market-close last night. Over in France, Veolia Environnement fell 4.47 percent after it too reported a lower-than-expected operating profit for the first quarter of 2008.

In other earnings-related new this morning, Swiss staffing group Adecco SA was a top performer today, up 3 percent, after the Swiss staffing group released first quarter earnings which beat expectations and showed good cost control, according to analysts.

A London-based analyst also noted that the group reiterated its long-term targets, which is reassuring following speculation in the media that a downward adjustment would be unveiled today. Other companies reporting earnings this morning included Adidas, Swiss Life and Holcim.

In other news this morning, Tullow oil stormed more than 16 percent higher after the group said a "significant" column of light oil has intersected at the Mahogany - 2 well in the Jubilee field offshore Ghana, suggesting the company was right to believe this is a significant discovery.

Among tech-stocks, Infineon rallied 4.2 percent as traders said they were indications that chip prices would increase in May.

Among one of several analysts talking of increased prices, Lazard Capital analyst Daniel Amir said in a note to investors that contract prices for NAND memory chips should increase 10 percent to 15 percent in May.

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Asian stocks mixed; Australia trims losses after rates held steady

The Reserve Bank of Australia (RBA) kept its cash rate at 7.25 percent but policymakers left open the possibility of raising interest rates in the near term if inflationary pressures persist.

The benchmark S&P/ASX 200 ended down 0.5 percent at 5,701.4, off the day's low of 5,608.3. The All Ordinaries index dropped 0.3 percent to 5,777.9.

St. George ended down 2.7 percent at A$26.98 but off a low of A$26.50. National Australia Bank lost 0.6 percent to A$31.42, Westpac dropped 1.5 percent to A$25.60 and Commonwealth shed 2.2 percent to A$43.25.

In South Korea, the Kospi index rose 0.6 percent to 1,859.06, extending gains for a third session as investors snapped up POSCO and LG Display on expectations of healthy earnings.

POSCO jumped 3.3 percent to 510,000 won on hopes South Korea's largest steelmaker will lift prices again this year to recover rising material costs. LG Display surged 6.3 percent to 46,750 won, supported by an optimistic outlook for its TV panel sales.

In Hong Kong, stocks closed higher, led by Foxconn International Holdings and Citic Resources Holdings Ltd., on hopes earnings will remain upbeat in the second half of 2008.

The Hang Seng Index gained 0.3 percent at 26,262.13, with index heavyweight China Mobile Ltd. up 1.4 percent at HK$136.30.

Fixed-line phone companies, which may be allowed to offer mobile phone services under a restructuring, soared in late trade. China Telecom Corp. rose 3 percent to HK$5.55 and China Netcom Group (Hong Kong) added 2.2 percent at HK$25.05.

The Shanghai composite index closed down 0.7 percent at 3,733.50. The Singapore Straits Times Index closed up 0.71 point at 3,248.75. The Philippine composite index ended down 0.9 percent at 2,727.70 as investors cut positions after data showed inflation hit a three-year high last month, raising concern the central bank may lift rates.

"The inflation data was a negative surprise. Investors already discounted a 7 percent inflation figure which was already bad, but at 8 percent it was actually even worse and it caused such a reaction," said Jose Vistan Jr., research director at AB Capital Securities in Manila.

Before the opening bell, the National Statistics Office said that annual inflation accelerated to 8.3 percent in April from 6.4 percent in March, with rice prices surging nearly 25 percent.

Elsewhere, the Jakarta composite index closed down 0.7 percent at 2,371.83 and the Malaysia's  Kuala Lumpur Composite Index  closed up 0.1 percent at 1,276.09. Taiwan's weighted index ended up 0.2 percent at 8,857.37.

Japanese markets were closed Tuesday for a public holiday.

The 30-share Sensex of the Bombay Stock Exchange (BSE) pared 117.89 points or 0.67 percent to 17,373.01 and the broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) fell 47.60 points or 0.92 percent to 5,144.65.

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Copper up as fund money pours into commodities amid record oil

Base metals jumped as fund money poured into the commodity complex with oil hitting a series of record highs. Meanwhile, bargain hunting after last week's lower prices and improved demand prospects helped the rally.

Yesterday, while the London Metal Exchange was closed for a public holiday, U.S. copper futures surged on short covering.

"Perhaps not surprisingly, we are somewhat higher in copper, as yesterday's COMEX shockwave runs through the system," said MF Global analyst Ed Meir.

In industry news, Codelco, the world's largest copper producer, will restart output at its second-biggest mine in Chile today after contract workers ended an almost three-week strike and protest that pushed the price of the metal to a record.

While that may calm some supply fears, demand prospects have picked up after a week of better than expected U.S. data last week and some signs the world's biggest economy might avoid a recession. Meanwhile, copper stocks across the globe remain at their lowest levels since August, according to LME data.

At 3:43 p.m., London Metal Exchange copper for three-month delivery was trading at $8,490 per tonne against $8,410 per tonne at the close on Friday.

Looking ahead, the market will track any U.S. data to gauge whether recent calls that the world's biggest economy may avoid a recession are accurate. It is that belief, in part, that has strengthened the dollar from the lows but also lifted demand prospects for most metals.

Industrial commodities, like oil and metals, tend to trade counter to the dollar in short-term trading as they are seen as alternative assets. However, they also trade in line with rising equity markets and as economic sentiment picks up because the demand prospects improve.

Elsewhere, tin was trading up at $24,000 from $23,150 per tonne and aluminium was up at $2,45 against $2,920.

Lead for delivery in three months was trading at $2,595 per tonne against $2,585 per tonne, while nickel was up at $28,625 per tonne against $28,400. Zinc was higher at $2,267 against $2,220.

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