US & World Daily Markets Financial Briefing 07-09-2007

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Stocks plunge after weak jobs report

NEW YORK - Stocks plunged in early trading while bonds surged higher Friday after the government reported payrolls in August fell for the first time in four years rather than rising as had been expected. The Dow Jones industrial average fell more than 150 points.
   
Investors were unpleasantly surprised by the Labor Department's report that payrolls fell by 4,000 in August, the first decline since August 2003, while the unemployment rate held steady at 4.6 percent as expected.
   
Wall Street has been awaiting the report as it tries to determine how well the economy is holding up under the weight of a faltering housing market, a rise in mortgage defaults and tightening availability of credit. While the report is backward looking and not predictive, investors regard it as an important reading of the economy's health.
   
In the first minutes of trading, the Dow fell 151.77, or 1.14 percent, to 13,211.58.
   
Broader stock indicators also fell. The Standard & Poor's 500 index fell 18.72, or 1.27 perecent, to 1,459.83, and the Nasdaq composite index fell 39.17, or 1.50 percent, to 2,575.15.
   
Bonds, meanwhile, rose sharply following the jobs report as investors sought safety. The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell to 4.42 percent from 4.51 percent late Thursday.
   
The dollar fell sharply following the employment report and as the likelihood of an interest rate cut appeared to increase. Dollar-based assets would earn less interest if the Fed were to cut rates. In addition, gold prices rose because some investors would be expected to abandon a weakening dollar and move into gold if the central bank cuts rates.

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Dollar slumps after weakest payrolls report in four years

LONDON - The dollar plunged after a key employment report came in much weaker than expected, cementing expectations for a cut in interest rates and aggravating fears that the US is heading into a recession.
       
US employers in August unexpectedly posted their first monthly payroll decline in four years, with manufacturing and construction sectors both posting sharp declines, the Labor Department said today.
   
The economy lost 4,000 jobs in August, compared with the gain of 118,000 expected by analysts. The August decline is the first drop in non-farm payrolls since August 2003. Furthermore, the figures for June and July were revised down sharply by 81,000 to a cumulative total of 137,000.
   
The dollar's weakness appears to reflect the fears of a recession rather than the prospect of a rate cut, which is widely seen as necessary to stave off a slowdown. The Fed's base rate is currently 5.25 pct.
   
Recent comments from Federal Reserve officials have broadly supported expectations for a cut. William Poole, head of the St Louis Fed, said he thinks "the probability of recession is higher than it used to be".
   
The US data dominated currency markets which had earlier been moving on central bank rhetoric. The high odds of a cut in US interest rates contrast sharply with the monetary policy outlook in the UK and the euro zone, where rates look at least stable and some chances of a hike remain.
   
European Central Bank officials added their voices to the Bank's relatively hawkish stance today and yesterday, with executive board member Juergen Stark saying the central bank needs to remain "continuously vigilant" in identifying risks.
   
Yesterday, after the ECB left interest rates unchanged at 4.00 pct, president Jean-Claude Trichet gave a rather hawkish description of the economy, describing the inflation outlook as still being subject to upside risks and the ECB's monetary policy stance as on the accommodative side. However, he said the ECB's position on price risk is no longer 'strong vigilance'.
       
The BoE also gave a hawkish account of inflationary risks to the economy, after it left its base rate on hold at 5.75 pct.

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Euroshares lower midday, led lower by financials, Wall St set to mirror losses

LONDON - Europe's leading exchanges continued lower in midday trading with Wall Street unlikely to provide positive momentum upon open and as investors worry over rising borrowing costs in the banking sector as well as subprime exposure.
       
At 11.54 am, the Dow Jones STOXX 50 Index was 13.27 points or 0.35 pct lower at 3,747.87 while the STOXX 600 Index shed 1.30 points, or 0.35 pct to 372.54.
   
Societe Generale slumped by 4.49 pct amid market speculation that the French bank may issue a profit warning, while other dealers noted talk that the it is actively guiding down the market consensus.
   
"We're hearing vague rumours they'll issue weak numbers," said a London-based trader. "Probably big proprietary losses." The bank declined to comment.
   
Other banks suffered as well with Natixis shedding 4.59 pct and Capitalia dropping 4.01 pct. Capitalia was in the spotlight, and was also among the five most traded stocks in Milan, after the bank revealed a 5.7 pct drop in net profit last night.
   
Morgan Stanley said it expects analysts across the board to cut their forecasts for 2007 earnings per share by 15-20 pct. Capitalia is set to merge with Unicredito on Oct 1.    

Staying in the sector, HSBC outperformed its peers, down 0.56 pct, as it became the focus of activist shareholder Knight Vinke, which is calling for strategic changes and said it has held talks with the global banking groups finance director about a complete review of the banks direction and has secured the support of Californian state pension fund Calpers, The Financial Times and other newspapers reported.
   
Over in the technology sector, good news continued to boost the industry and Nokia spiraled 1.81 pct higher still supported by news that Apple's iPhone may not be selling as well as hoped, and with traders citing rumours of another share buyback programme.
   
SAP was trading 0.99 pct higher after the software manufacturer announced late yesterday that it will decrease its capital stock by cancelling 23 mln treasury shares, or 1.8 pct of its capital stock. After the decrease, treasury shares will represent about 3.1 pct of the capital stock, SAP said in a statement.
   
Peer Sage Group gained 3.25 pct after UBS raised its stance on the software provider to 'buy' from 'neutral', and raised the target on the shares to 285 pence from 265, citing solid growth opportunities.
   
Elsewhere, Pirelli was outperforming, up 0.67 pct, as investors began to consider how the group will use the 3.3 bln proceeds from the sale of a share of Telecom Italia to Telco.
   
In earnings news, Swiss insurer Helvetia fell 4.43 pct as its first half earnings results came in below expectations, with costs from Kyrill and other storms weighing on its non-life business.
   
Pay-TV broadcaster Premiere retreated 1.85 pct after it said it will sell 14.06 mln new shares to raise funds for the upcoming bidding for rights to broadcast the German Bundesliga soccer matches.
   
Shares in Deutsche Post fell 1.76 pct, with traders citing statements by the head of Deutsche Post's express unit DHL, Hans Hickler, who warned on the potential effects of a weakening US economy on the group's US unit.

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Asian stocks to move sideways next week as traders await FOMC
 
SINGAPORE - Asian shares are expected to move sideways next week as investors mark time ahead of a key Federal Reserve meeting on Sept. 18, with investors pinning their hopes on a rate cut that will help cushion the world's biggest economy from the turmoil in financial markets.
   
With few major Asian economic releases on tap and the second-quarter earnings season drawing to a close, investors will continue to monitor events in the US. Traders remain uncertain about the extent to which the credit crunch sparked by massive defaults in the subprime market has impacted the US economy, a major market for Asian goods.
   
The Japanese market fell for the first three sessions of the week before rebounding on Thursday. There was gloomy news in a government survey of investment by non-financial companies, which led economists to revise downward their second-quarter GDP forecasts. The Nikkei lost 2.7 percent this week and is expected to remain rangebound next week.
   
Arbitrage trading of futures contracts by hedge funds may create some volatility ahead of the fixing Friday morning of special quotations for settling the September contracts.
   
The Australian stock market fared better with the benchmark S&P/ASX 200 index gaining 0.5 percent on the week, buoyed by stronger-than-expected second-quarter growth data and talk of a deal in the mining sector.
   
Shares are expected to remain hostage to events elsewhere next week with few major corporate events on the calendar. The financial sector will be in focus on worry that earnings will be squeezed by the global credit crunch.
   
In neighboring New Zealand, the central bank's interest rate decision on Thursday will be a focus. Economists are widely expecting the bank to keep interest rates on hold.
   
New Zealand rates currently stand at 8.25 percent after four rate hikes this year, making the New Zealand dollar a popular destination currency for carry-trades.

Elsewhere, investors will peruse the latest inflation data from China when the August consumer price index is released on Friday. IFR economists are forecasting a 5.9 percent rise from the year-earlier period. The rise is mostly due to stubbornly high food prices.
   
UBS said core inflation, excluding food and energy, is closer to 1.5 percent year-on-year and expects the headline figure to come back to 3 percent by the fourth quarter.
   
The Shanghai Composite fell more than 2 percent Friday after the government raised reserve requirements for the seventh time this year in an effort to drain liquidity from the system. The index gained 1.1 percent on the week.
   
There were conflicting reports on the status of the government's plan to allow its citizens to invest in overseas markets, creating volatility in Hong Kong, expected to be the key beneficiary of the scheme. The Hang Seng was almost unchanged on the week.
   
In South Korea, the Kospi ended the week with a 0.6 percent gain. Hyundai Motor rose after negotating a wage contract with workers, averting a strike for the first time in ten years.
   
In Singapore, the Straits Times Index gained 2.8 percent on the week, led by oil and gas stocks, telecommunications companies and other defensive stocks. The index has recovered about three quarters of the losses suffered at the peak of the recent selloff.
   
Among the smaller regional bourses,  Malaysia's Kuala Lumpur Compsite gained 2.4 percent on the week. Gains were driven by excitement ahead of the government's 2008 budget, released after Friday's close. Investors were expecting the budget to be positive for property stocks.
   
The budget surprised with a  further cut in the corporate tax rate in 2009, surprising those who were expecting a personal tax cut instead.
   
Indonesian shares are expected to gain next week as investors continue to hunt for stocks that are expected to post strong third-quarter earnings, such as telecom and mining stocks.
   
In India, The Bombay Stock Exchange's benchmark Sensex fell 0.17 pct, or 25.89 points, at 15,590.42 after it surged to a high of 15,716.06, just 0.96 pct short of a record 15,868.85 points set in late-July. The National Stock Exchange's S&P CNX Nifty lost 0.20 pct to 4,509.50 points.

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Gold rallies through 700 usd/oz level as US payrolls fall

LONDON - Gold rallied sharply in afternoon trade, breaking through the 700 usd level for the first time since May 2006, after US payrolls fell for the first time in four years, sparking a drop in the dollar.
   
The precious metals surged through 700 usd per ounce within minutes of the data being released, and later set a fresh 16-month high of 704.60 usd.
   
"It was a rather unexpected figure. With it we've gone through that 700 usd figure quite easily so it seems gold is off to the races," said Commerzbank analyst Rory McVeigh.
   
"Gold has been gunned to take on its position as an inflationary hedge. With the numbers we're seeing today we could see it push up higher, but it is rather choppy out there."
   
At 1.52 pm, spot gold was trading at 701.90 usd an ounce against 695.70 usd in late New York trade yesterday.
   
Silver meanwhile rose in sympathy to 12.57 usd from 12.42 usd. Speculative long positions in the metal, or commitments to buy, are at their lowest for several years, leaving plenty of scope for prices to rise, analysts said.
   
Among other precious metals, platinum was steady at 1,288 usd against 1,285 usd per ounce, as was palladium at 332 usd against 333 usd.

Copper prices slipped after US employment figures fell for the first time in four years, spooking investors who fear this could be one of the first signs of the recent financial markets turmoil spilling into the broader economy.
       
"It's come off and we'll probably see more selling coming through this afternoon," said UBS analyst, Robin Bhar. "However, it could be viewed as a double edged sword. If US job data is weak and the economy is losing momentum, we could see demand for metals come down. But, the Fed may now be forced to cut interest rates to stop the economy slipping into recession, which could stimulate demand for metals."
   
He added that he tended to come down on the side of the former view, although the base metals complex is taking some support from the fact an interest rate cut by the Federal Reserve now appears to be more likely.
      
At 2.08 pm, copper for three-month delivery was trading at 7,230 usd against 7,300 usd at the close yesterday.
   
In other base metals, lead prices eased following the US payrolls data, to 2,910 usd from 2,912 usd. However, lead is taking some support from reports that Magellan Metal's potential lead exports from Western Australia's Fremantle port are meeting with local government opposition.
   
Magellan had previously been exporting from the Esperance port before thousands of birds were killed by contamination.
   
Elsewhere, aluminium dipped to 2,455 usd against 2,466 usd, while tin crept higher to 14,900 usd from 14,750 usd. Nickel meanwhile eased to 27,300 usd against 27,350 usd. Zinc stood fell to 2,810 usd a tonne versus 2,830 usd at the close yesterday. 

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