US & World Daily Markets Financial Briefing 07-03-2008

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Stocks turn mixed in early trading

NEW YORK - Stocks bounced around Friday after the government's much-anticipated February employment report came in weaker than expected and after the Federal Reserve announced steps to aid the credit markets.

The Labor Department's report that employers cut jobs by 63,000 last month -- the most since March 2003 -- unnerved investors worried about the health of the economy and who had been expecting a 25,000 gain in jobs. While the unemployment rate fell to 4.8 percent, the decline reflects people leaving the labor force.

The payroll numbers came minutes after the Federal Reserve announced it would take fresh steps to ease credit troubles, including boosting the amount of money it will auction to banks.

The central bank said it will increase the size of its March 10 and 24 auctions to banks to $50 billion each. The auctions had been slated for $30 billion each and Fed officials said they plan to even bigger amounts for future auctions if need be. Also, the Fed said that it will, starting Friday, begin a series of repurchase transactions expected to reach $100 billion.

Steven Lehman of Federated Investors was doubtful of the effectiveness of the Fed's latest plans. "There is a profound lack of understanding of markets and economies, and there is still persistent lingering faith that the authorities effectively have a magic wand they can wave to make everything fine," he said. "Economies and markets do go down -- particularly after a multi-decade credit boom."

Investors still clearly harbored concerns about the economy. Even the expectation of a rate cut later this month, which Wall Street widely expects, didn't appear to quell investors' concerns.

In the first hour of trading, the Dow Jones industrial average fell 15.06, or 0.13 percent, to 12,025.33 after being down more than 100 points in the early going. Broader stock indicators were mixed. The Standard & Poor's 500 index rose 2.37, or 0.18 percent, to 1,306.71, and the Nasdaq composite index rose 12.89, or 0.58 percent, to 2,233.39.

Bond prices jumped. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.51 percent from 3.59 percent late Thursday. The dollar hit a fresh record low against the euro following release of the payroll numbers, while gold prices rose.

Light, sweet crude fell 22 cents to $105.25 per barrel in premarket electronic trading on New York Mercantile Exchange after the jobs report. A slowing economy could dampen demand for oil.

Wall Street had been eager for a read on the jobs picture. While unemployment remains low by historical standards the increase in unemployment stirred concern among investors worried that it will result in a consumer slowdown. The well-being of the consumer, whose spending accounts for more than two-thirds of economic activity, is key to investors' hopes of avoiding more economic pain amid the ongoing pullback in home values and credit troubles.

Paul Nolte, director of investments at Hinsdale Associates, said the job losses in February weren't surprising. "The trend for the last year and a half has been either job losses or very small gains. That is what you would expect in a contracting economy and we think the economy has been in a recession for two or three months," he said.

The employment figures weren't welcome news a day after concerns about home foreclosures and credit woes rippled through Wall Street. The Dow lost nearly 215 points Thursday, while the broader S&P 500 index fell 2.20 percent. Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 140.6 million shares.

The Russell 2000 index of smaller companies rose 4.90, or 0.74 percent, to 667.68. Overseas, Japan's Nikkei stock average closed down 3.27 percent after Wall Street's decline. In afternoon trading, Britain's FTSE 100 fell 0.93 percent, Germany's DAX index lost 1.66 percent, and France's CAC-40 slid 1.75 percent.

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Forex - Dollar remains weak ahead of payrolls, rumours of US rate cut

London  - The dollar remained woefully weak ahead of the crucial US labour market data, with rumours continuing that the Federal Reserve may implement an emergency interest rate cut this afternoon.

The US currency plunged to a fresh all-time low against the euro early this morning, and after a short-lived recovery is on the backfoot as expectations mount that the February non-farm payrolls figure will be much weaker than initially expected.

The initial consensus was that the number of jobs created during the month would be up by 25,000 after falling by 17,000 in January. However the ADP survey of private sector payrolls released earlier this week posted a 23,000 fall during the month and analysts now expect today's data could show a second consecutive fall.

"There are clear indications there could be another drop in payrolls such as the rising trend in jobless claims, deterioration in the household survey of job market conditions, softening in the employment components in both the ISM manufacturing and non-manufacturing surveys and last but not least the drop in the ADP survey," said Mitul Kotecha, currency strategist at Calyon.

These fears have fuelled the rumours of an emergency rate cut in the key Fed Funds rate this afternoon. Simon Derrick, currency strategist at Bank of New York Mellon, said this seems unlikely on the face of it given that the next official rate decision is just a week-and-a-half away. But he added that the same could have been said before the 75-basis point emergency cut in January.

"Despite the already extraordinarily aggressive policy easing already seen from the Fed since August of last year, perhaps the Fed could feel justified in easing policy again were today's number to prove as bad as is being rumoured," he said.

Meanwhile the euro's ascendency was helped further along this morning by a set of stronger than expected German industrial production figures.

German industrial output rose 1.8 pct on the month in January, the sharpest rise since last August and well above Thomson Financial forecasts for a more modest rise of 0.2 pct. "For now, though, the news on the German economy looks encouraging," said Jennifer McKewon at Capital Economics.

Comments from European Central Bank member Axel Weber that the prospect of weaker growth in the euro area does not pose enough reason to expect a dampening of inflation pressures in the foreseeable future also proved supportive.

Yesterday the euro surged higher following comments by ECB president Jean-Claude Trichet after the bank's decision to keep interest rates on hold at 4.00 pct. Trichet dashed hopes that a rate cut could be on the cards sometime soon, reiterating that the medium-term inflation outlook is still subject to upside risks and that the ECB will do whatever is necessary to ensure price stability.

He also refused to address questions on whether the euro's recent climb higher reflected economic fundamentals. "ECB President Trichet had the opportunity to take the steam out of the euro's rampant gains at yesterday's post council meeting press conference, instead he appeared determined to do just the opposite," said Gavin Friend, currency strategist at Commerzbank.

Meanwhile the yen was firmer, rising as equity markets in Europe were all lower following yesterday's sell-off on Wall Street. Analysts said investors were cautious ahead of this afternoon's US data, which tends to support the yen as it is generally regarded as a safe store of value.

"The sell-off in US major indices has led the yen higher, as news from the credit sector sparked fear of another round of credit crisis and put a squeeze on the risk appetite," said analysts at BNP Paribas.

Finally the pound was up against the dollar though steady against the euro, with little UK data to provide direction. Sterling climbed yesterday following the Bank of England's decision to keep interest rates on hold at 5.25 pct but analysts said the currency is likely to weaken in the coming months as economic growth slows.

"We believe risks to growth in the UK remain to the downside, and expect the BoE to resume cutting rates as soon as in May," said Ashley Davies, currency strategist at UBS. "Sterling will likely remain weak across the board and against the euro in particular in the near term," he added.

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Euroshares remain lower midday, Wall St seen lower ahead of data, earnings weigh

At 11.58 am, the DJ STOXX 50 was down 45.27 points, or 1.47 pct to 3,044.73, while the DJ STOXX 600 lost 4.17 points or 1.34 pct to 307.25.

Over in France, Veolia Environnement shed 6.5 pct after weaker-than-expected full-year results. "The earnings are around 1 or 2 pct below expectations, but the second factor weighing is that they've cut their medium term sales guidance to 8-10 pct, after guiding for at least 10 pct growth when they launched their capital increase in June," said Stephane Radiguet of Raymond James Asset Management.

And staffing group USG People dropped 7.06 pct as it also issued a glum outlook for 2008 when releasing an uninspiring set of numbers despite a favourable tax environment.

In contrast, shares in Fortis turned around in mid-morning deals as investors speculated about a possible capital injection, overshadowing initial disappointment on the Belgo-Dutch bancassurer's fourth-quarter results. A trader at Eureffect in Amsterdam said the shares rebounded after "mysterious talk from Fortis about some new strategically and financially important plan".

At last check, shares in Fortis were 2.3 pct higher. Staying with financials, EFG International plunged 12 pct lower amid reports that the Swiss-based international banking group has incurred substantial losses in its function as financial advisor to a number of public clients in Sweden.

Other financials were also under pressure as credit woes linger in the market. ING Groep lost 2.5 pct, Hypo Real Estate was 5.3 pct lower, Axa fell 2.8 pct and UBS lost 2.1 pct while Barclays retreated 2.2 pct. Another sector underperforming this morning was the mining industry, with profit taking following gains on the back of high demand for commodities overall.

BHP Billiton lost 4.6 pct and Rio Tinto and Anglo American fell 3.5 pct each. In other news this morning, Accor added 1.3 pct as investors welcomed yesterday's strong January statistics for the French hotel industry. "The figures confirm Accor's own upbeat comments on the start of 2008," said one analyst, adding that this is reassuring in a market that is on the lookout for bad news and catastrophe scenarios.

On the economic front, all eyes will fall on a key US Feb employment report in early afternoon deals. The report is expected to show non-farm payrolls rose by 25,000, after the surprise 17,000 decline in the previous month. However, some sections of the market have revised their forecasts lower since Wednesday's dismal ADP private sector job survey.

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Asian markets tumble as Wall Street retreats

South Korea's KOSPI index closed down 2 percent at 1,663.97. "There's really nowhere to hide in this market. All sectors are down," said Marcus Droga, an advisor at Macquarie Private Wealth in Sydney.

Australian shares closed sharply lower, with the S&P/ASX 200 index falling 3.2 percent to 5,264 and the All Ordinaries index down 3 percent at 5,368.9. Apart from the worsening credit crisis, investors were worried about the impact of stronger Asian currencies on the region's export competitiveness.

"In addition to uncertainty over the credit crisis and the health of the US economy, investors seem reluctant to make fresh moves because of the stronger yen and weaker earnings prospects for Japanese companies like Nippon Steel," said Yumi Nishimura, manager for equities marketing at Daiwa Securities SMBC in Tokyo.

The dollar was last trading around 102.65 yen. Nippon Steel, Japan's biggest steel maker, said Thursday that it is expecting to post its first decline in pretax profit in six years due to the surging cost of raw materials. The stock was down 5.1 percent at 484 yen.

Japan's Nikkei 225 Stock Average closed down 3.3 percent at 12,782.80 and the broader Topix index declined 3.1 percent to 1,247.77. Interest rate moves The Bank of Japan has kept its overnight call rate target unchanged at 0.5 percent, reflecting the central bank's continuing concern about the turbulence in the global financial markets.

"Given the unstable financial markets stemming from the unabated credit woes, what is important for the Bank of Japan is to sit still and not take any action that can dilute or undo the effect of policy actions of other central banks, such as the Fed," said Tokai Tokyo Securities chief economist Mitsuru Saito.

The South Korean central bank similarly decided to leave interest rates unchanged. Bank of Korea governor Lee Seong-Tae expressed equally strong concern about both higher prices and slower growth, which may disappoint those expecting the central bank to adopt a bias towards monetary easing to shore up the economy.

"The economy is currently maintaining its upward trend on brisk exports. But external conditions are deteriorating gradually as the US economy is in a very bad shape and growth forecasts for advanced countries have been revised down. Raw material prices also continue to creep up," Lee told reporters after the bank decided to keep its key interest rate steady.

Lee sees growing downside risk to the bank's growth forecast for Asia's fourth-largest economy. For now, the Bank of Korea is sticking to its forecast that growth will be 4.7 percent this year, compared to an estimated 4.9 percent in 2007.

Hong Kong's Hang Seng Index was down 3.6 percent at 22,501.33, while the Shanghai Composite index was down 1.39 percent at 4,300.52.

Fears of monetary tightening in China are adding to investor concern after Chinese central bank governor Zhou Xiaochuan warned of the possibility of a further increase in interest rates. China raised interest rates six times in 2007 in a bid to curb inflation.

Elsewhere, Manila's composite index finished 2.8 percent lower at 3,028.73, Malaysia's KLCI closed down 0.3 percent at 1,296.33 and Singapore's Straits Times Index was down 1.8 percent at 2,866.28. Taiwan's weighted index closed down 1.47 percent at 8,531.38. The Indonesian stock market is closed for a public holiday.

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Oil down as market takes a breather but losses limited

LONDON  - Oil fell on profit-taking as the market took a breather after crude hit a record near 106 usd yesterday but a weak dollar, lower US inventories, OPEC's refusal to release more oil and geopolitical tension limited losses. New York's main WTI benchmark has rallied over 3 pct this week to hit a series of records, the latest at yesterday's 105.97 usd, as fund interest in commodities has surged.

Wednesday's OPEC decision to refuse consumers more oil and an unexpected drop in US crude inventories reported the same day helped the rally. Meanwhile, a weak dollar, which today yet again sank to fresh depths against major currencies, has induced buying. Dollar-denominated commodities have become relatively cheaper for those trading in other currency.

Funds are buying on these factors and on the belief that amid continuing global economic weakness and poor equity markets, commodities are a good hedge.

"The commodity boom continues with oil, gold and copper all hitting fresh highs. I see this trend continuing at present," MF Global senior energy broker Rob Laughlin said. Gold this week has risen to a record 992.90 usd while copper hit a peak 8,820 per tonne.

The dollar, meanwhile, fell to a record low against the euro earlier on market talk that the US Federal Reserve may cut its key Fed Funds rate after the release of this afternoon's crucial non-farm payrolls data. "The well planned scenario for today is for weak US employment number, further fall in the dollar and further gains in oil," said PetroMatrix analyst Olivier Jakob.

Also supporting prices was some political tension as key crude producer Venezuela moved 10 army battalions close to the border with Colombia Wednesday as South American diplomats struggled to defuse a regional crisis triggered by Bogota's cross-border attack in Ecuador.

At 9.47 am, New York's WTI crude for April delivery was down 57 cents at 104.90 usd per barrel. Meanwhile in London, Brent crude for April delivery was down 50 cents at 102.11 usd per barrel.

OPEC this week has continued to insist that it is not responsible for higher prices, that the fundamentals do not support record levels and there is no need to pump more crude. "Speculation in futures market is determining prices," Saudi Arabian oil minister Ali al-Naimi told Asharq al-Awast newspaper in Morocco. "Today there is no link between oil (market) fundamentals and prices."

"The duty of oil exporters is to make sure that fundamentals are healthy," said Naimi. "If these fundamentals were stable and fulfil market needs, then there is no need to raise or decrease production," he added. The cartel next meets Sept 9 but may discuss output levels at a conference in April.

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