US & World Daily Markets Financial Briefing 06-06-2007

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Stocks Fall for 2nd Day on Rate Concerns

NEW YORK  - Stocks fell for a second straight session Wednesday as U.S. investors' uneasiness about interest rates grew after a rate hike in Europe.
   
Data showing that productivity waned in the first quarter did little to alleviate investors' worries that the inflation-wary Federal Reserve might lean toward raising rather than lowering rates later this year.
   
The European Central Bank lifted its key interest rate by a quarter of a percentage point to 4 percent, as expected, and the bank's president Jean-Claude Trichet said European economic growth is significantly stronger than expected, and that inflation risks are on the rise. The comments pushed stocks in Europe lower.
   
In midmorning trading, the Dow Jones industrial average fell 84.03, or 0.62 percent, to 13,511.43. Broader stock indicators also fell. The Standard & Poor's 500 index fell 10.29, or 0.67 percent, to 1,520.66, and the Nasdaq composite index fell 21.58, or 0.83 percent, to 2,589.65.
   
The decline Wednesday came a day after the three major indexes slumped after remarks from Fed Chairman Ben Bernanke and service sector data hinted that the economy is on the rebound, lowering the chance of an interest rate cut.
   
Wall Street will be keeping a close eye on the Treasury market Wednesday as the 10-year note's yield approaches 5 percent, a level not seen since August 2006. Bonds were little changed, with the yield on the benchmark 10-year Treasury note flat at 4.98 percent from late Tuesday.
   
Light, sweet crude rose 20 cents to $65.81 per barrel on the New York Mercantile Exchange, ahead of the U.S. government's weekly oil inventory report.
   
Richmond Fed President Jeffrey Lacker, speaking in Frederick, Md, remained concerned about inflation but said the economy appeared poised for increased growth. Kansas City Fed President Thomas Hoenig is expected to speak Wednesday afternoon in Cody, Wyo., about the U.S. economy and monetary
policy.
   
In the most recent takeover news, shareholders of the owner of the Outback Steakhouse restaurant brand late Tuesday voted to approve a sweetened $3.2 bln offer from a private investor group. Outback rose 1 cent to $41.01. 

Meanwhile, two hedge funds that own stakes in TD Ameritrade Holding Corp. are pushing the online brokerage firm to join forces with either E-Trade Financial Corp. or Charles Schwab Corp. TD Ameritrade jumped 70 cents, or 3.5 percent, to $20.65.
   
In other corporate news, Panera Bread Co. fell $7.47, or 12.8 percent, to $50.84 after the restaurant chain reduced its forecasts for second-quarter profits and same-store sales, or sales at stores open at least a year.
   
XTL Biopharmaceuticals Ltd. fell 63 cents, or 18 percent, to $2.90 after the company halted development of a hepatitis C drug candidate after determining it was no more effective than a placebo in reducing patients' viral load in an early stage clinical trial.
   
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 265.4 million shares.
   
The Russell 2000 index of smaller companies fell 7.63, or 0.90 percent, to 840.62.
   
In other overseas trading, Britain's FTSE 100 fell 1.11 percent, Germany's DAX index fell 1.65 percent, and France's CAC-40 fell 0.88 percent.

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Euro slips below 1.35 usd after Trichet comments

LONDON - The euro slipped back below 1.35 usd after the market interpreted the latest comments from European Central Bank (ECB) president Jean-Claude Trichet as suggesting that two more rate hikes from the central bank may be one too many.
   
Though Trichet told a press conference after the ECB's widely-expected quarter point rate hike in the refi rate to 4.00 pct that borrowing costs are "still accommodative", he did not raise the central bank's inflation forecast of 2.0 pct for 2008 but did revise lower the 2008 growth forecast to 2.3 pct.
   
"By keeping inflation forecast for 2008 at a 2.0 pct mid-point the ECB has chosen not to send a hawkish signal," said Divyang Shah, chief strategist at the Commonwealth Bank of Australia.
   
The market is fully pricing in a hike to 4.25 pct in September. The key question is whether they will hike again after that and that will depend on a number of issues, including the strength of the euro and the resilience of economic growth in the 13-nation single currency zone.
   
The euro has remained firm against the dollar recently despite strong US data. Yesterday's non-manufacturing ISM index surprised on the upside and a speech from the US Federal Reserve chairman Ben Bernanke was seen as implying that rates were not going to be cut anytime soon given continued concerns over inflation.
  
However, with the US housing market still struggling there is little expectation the key Fed funds rate will rise from its current 5.25 pct. Today's US data did little to alter that prospect.
   
While the efficiency of US workers was revised lower in the first quarter, the cost of hiring workers was higher than earlier thought, the Labor Department said today.
   
US workers increased their productivity by a revised 1 pct in the first quarter, as economists had expected, and down from the 1.7 pct increase in the initial estimate. As a result, unit labour costs were revised higher, increasing by 1.8 pct, higher than the 1.4 pct gain economists had expected and triple the 0.6 pct gain in the earlier estimate.
   
Meanwhile, the pound was solid after the release of strong wage and consumer confidence surveys. The KPMG/REC survey revealed permanent staff salaries rose at an 83-month high rate in May, while a Nationwide survey revealed consumer confidence rose for the fifth consecutive month during May.
   
The data came as the Bank of England's rate-setting Monetary Policy Committee (MPC) began its two-day interest rate deliberations.

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Euroshares lower midday as Dow seen adding to losses, ECB lifts rate by 25 bps

LONDON - Europe's leading exchanges fell in midday trade as Wall Street is expected to add to overnight losses amid ongoing concern about rising US bond yields. News the ECB has lifted interest rates by 25 basis points was widely anticipated.
   
At 13.07 am, the STOXX 50 was down 22.57 points at 3,918.03 and the STOXX 600 was down 3.61 points at 393.   
   
Bouygues added 1.47 pct after it raised its full year sales guidance to 28.8 bln eur from 28.6 bln. The announcement came as the French conglomerate announced first quarter net profit was 189 mln eur, up 28 pct from 148 mln a year earlier. The rise was above a Thomson Financial consensus forecast of 168 mln. Speculation continues that the group will sell some of its non-core assets, with La Tribune reporting Orascom has expressed an interest in its telecoms business.
   
The defence sector was in the spotlight this morning, after Societe Generale reshuffled its ratings in the aerospace and defence universe and named MTU as its 'preferred' pick and EADS-- down 0.35 pct -- as its 'least preferred'.
   
In a note to clients it said the sector has underperformed the European equity market by 20 pct in the past year and noted that the current problems at EADS as well as the weakening dollar can further affect the industry.
   
The broker upgraded Zodiac -- up 1.7 pct -- to 'buy' from 'hold' with a target of 64 eur and cut Thales -- down 3.36 pct -- to 'sell' from 'hold'.
   
Cobham was cut to 'hold' from 'buy' and Rolls-Royce was reiterated with 'buy'. MTU fell 2.45 pct, as Zodiac addeed 2.2 pct and Thales fell 3.4 pct. Rolls Royce added 0.98 pct. Cobham fell 1.03 pct.
   
Deutsche Bank was down 2.29 pct. In mid-morning trade, dealers noted talk that the bank had made a significant proprietary loss related to Altana's special dividend. Others noted a large number of stop loss contracts.
   
But others said the news on the loss was not unexpected and was unlikely to have had a significant effect on the banking group's shares. "I think the worry is ahead of US investment banks quarterly figures (next week). People are nervous again about figures in mortgage-related products and reduced profits in fixed income," said another dealer.
    
Renault, meanwhile, was 0.75 pct lower, on profit taking. A number of leading brokers have recently revisited their Renault models and have lifted their price targets or recommendations to reflect their more bullish outlook for the car group. Shares have risen 31 pct since the end of March.
    
Merck slipped 0.65 pct after Deutsche Boerse confirmed it will replace Altana in the DAX.
    
But GlaxoSmithKline climbed 1.17 pct after the UK healthcare group released data last night which claimed there was no increased cardiovascular risks for Avandia, the diabetes drug, with broker reaction mixed on the group, dealers said.
    
Astrazeneca added 0.11 pct after news its chief financial officer Jon Symonds will leave the company at the end of July to join Goldman Sachs as a managing director sparked vague takeover interest.

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Asian shares close mixed; China shares up on bargain hunting, yuan rise

HONG KONG - Shares across the Asia-Pacific region closed mixed, with Wall Street's retreat overnight dampening enthusiasm but China A-shares rising on bargain hunting and a higher yuan.
   
Tokyo shares closed flat, after the effect of a lower Wall St overnight was countered by buoyancy created by recent economic data. The blue-chip Nikkei 225 Stock Average closed 12.88 points or 0.07 pct lower at 18,040.93, off a low of 17,991.19. The TOPIX index of all first-section issues closed 1.94 points or 0.11 pct higher at 1,778.50, off a high of 1,781.53.
       
Australian shares closed lower after data showed the economy in the March quarter expanded at its strongest quarterly rate since December 2003, raising investor fears the central bank may need to raise interest rates before the end of the year.
   
Gross domestic product rose 1.6 pct over the three months to March and was up 3.6 pct year-on-year, the highest annual growth since the June quarter of 2004. The quarterly outcome was well above market expectations for GDP growth of 1.2 pct.
   
The S&P/ASX 200 closed down 33.7 points or 0.53 pct at 6,337.1, widening ground to Monday's record close of 6,392.9. The key index closed off a low of 6,315.2.
   
Banking stocks bore the brunt of selling for the second straight trading day, despite the Reserve Bank of Australia earlier keeping official interest rates at 6.25 pct for its seventh straight meeting.
   
Hong Kong shares were firmer in afternoon trade, led by China-related counters as worries eased to some extent over a bubble in the mainland markets following the recent correction there. Wall Street's retreat overnight, however, put a lid on the market's gains. At 3.20 pm the Hang Seng Index was up 31.84 points or 0.15 pct at 20,873.99.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher on bargain-hunting in the wake of recent sharp falls, with the rising yuan proving favorable for property stocks.
   
The Shanghai A-share Index was up 9.75 points or 0.25 pct at 3,959.64 and the Shenzhen A-share Index was up 21.74 points or 1.95 pct at 1,135.32.
   
Seoul shares were closed for a holiday and will reopen tomorrow.
   
Taipei shares closed at near a seven year-high in active trade led by recent capital inflows and gains on mainland China markets. However, late profit-taking put a lid on the earlier rally as the market closed off highs.
   
While extended gains on mainland China markets during the morning session outweighed Wall Street's overnight weakness, some technology stocks on the local bourse encountered profit-taking following their recent strong showing.
   
The weighted index closed up 10.69 points or 0.13 pct at a new near seven-year high of 8,314.68, the highest level since the 8,411.88 points posted on July 19, 2000.

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Copper eases on technical factors, strike threat underpins

LONDON - Copper eased on technical factors but threat of strike action in Mexico meant losses were limited. Dwindling LME inventories worldwide also helped provide a floor for prices but at the same time sentiment was dampened by lingering concerns China was oversupplied with the red metal.
   
At 2.08 pm, LME copper for three-month delivery eased slightly to 7,500 usd per tonne against 7,540 usd at the close yesterday.
   
"The move is really technical," said Basemetals.Com analyst Martin Hayes. "It often happens once options declarations are out the way." Options declaration expired earlier today. Hayes added traders saw chart support at 7,500 and 7,530 usd.
   
Falls were limited amid falling LME inventories, which have fallen for the thirteenth day in a row, and the threat of strike action at Grupo Mexico -- the world's seventh largest copper producer.
   
"Copper remained range-bound underpinned by falling LME stocks and threats to supply due to labour unrest which could affect production at Grupo Mexico," said UBS analyst, Robin Bhar. He added sentiment was dampened as "the bears point to the over supply of copper in China and the stock build in other parts of Asia."
   
Copper prices have been rising steadily since the end of May, however, supported by low global inventories and some modest declines in Shanghai copper stocks.
       
In other metals, nickel fell as speculation mounted demand is likely to dip in the near future, and as stocks are rising steadily over the last month.
   
Inventories at the beginning of June stood at 8,460 tonnes, up nearly 90 pct on the past month and nearly triple the low of 2,982 tonnes in February. Nickel was down at 45,900 usd against 46,200 usd yesterday.
   
"Cutbacks by some stainless steel producers, thus displacing nickel units to the market, is thought to be partly behind the sharp increase in LME nickel inventory," said Moore.
   
The metal, used mostly in stainless steel production, hit a high of around 52,000 usd early May when stocks worldwide were so low they not even satisfy a day's worth of global consumption.
   
Meanwhile, aluminium was down at 2,778 usd against 2,805 usd, zinc was lower at 3,690 usd from 3,780 usd, lead was down at 2,315 usd against 2,325 usd, while tin was relatively flat at 13,970 usd against 14,000 usd.

Spot gold dipped to an intraday low of 666.70 usd following the announcement, but recovered to trade at 670.90 usd at 2.49 pm, against 669.60 usd in late New York trade yesterday.

Among other precious metals, platinum was trading flat at 1,291 per ounce, while its sister metal palladium eased to 364 usd from 366 usd in late New York trades yesterday. Silver was trading at 13.70 usd against 13.69 yesterday.

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