US & World Daily Markets Financial Briefing 08-01-2008

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Wall Street rises in early trading

The Dow Jones industrial average rose 54.87, or 0.43 percent, to 12,882.36. Broader indexes also rose. The Standard & Poor's 500 index gained 8.89, or 0.63 percent, to 1,425.07, and the Nasdaq composite index added 12.77, or 0.51 percent, to 2,512.23.

There could be some pressure on stocks, however, as gold prices surpassed their 1980 levels and reached a record above $875 an ounce and oil prices resumed their climb. Oil had slipped in the previous session to a two-week low on worries about the U.S. economy, but on Tuesday, light, sweet crude for February delivery rose $1.92 to $97.01 a barrel on the New York Mercantile Exchange.

Bond prices weakened as stocks rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.87 percent from 3.84 percent late Friday. The dollar fell against most rival currencies, except the yen.

Investors will be watching Bear Stearns to see if the fifth-largest U.S. investment bank will announce the resignation of James Cayne as chief executive. He is expected to retain the chairman title, according to a report in The Wall Street Journal, and to be replaced by Bear Stearns President Alan Schwartz, a 57-year-old investment banker. Bear Stearns rose 79 cents to $77.04.

The report came after Starbucks Corp. -- the world's largest chain of coffee shops, which has seen sales plateau -- announced late Monday it replaced its chief executive officer with former CEO and Chairman Howard Schultz. Starbucks rose $1.64, or 8.9 percent, to $20.02.

Overseas, Japan's Nikkei stock average closed up 0.19 percent, and Hong Kong's Hang Seng index fell 0.25 percent. Britain's FTSE 100 fell 0.20 percent, Germany's DAX index added 1.08 percent, and France's CAC-40 rose 0.96 percent.

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Forex - Dollar steady ahead of US housing data, sterling off earlier highs

The dollar was steady ahead of this afternoon's release of housing figures, with a weak reading likely to confirm expectations that the Federal Reserve will cut interest rates by half a point at the end of the month.

The pending home sales index for November is expected to drop to -0.5 pct from 0.6 pct in October, indicating that the US property market's woes are not over yet. "Pending home sales should be a reminder that the housing slowdown has still not reached the bottom," said Niels From, currency analyst at Dresdner Kleinwort.

However he added that the dollar is unlikely to move significantly lower as investors are already expecting most upcoming US data to be on the weak side. "The market is already pricing in a US recession scenario and consequently Fed expectations may no longer be moved by weak second-tier US data events," he added.

Markets will also be paying close attention to speeches by Federal Reserve members Charles Plosser and Eric Rosengrenn this afternoon, for their assessment of the economy's prospects. Elsewhere the euro was steady, with a strong set of German manufacturing figures offsetting soft euro zone retail figures.

German manufacturing orders rose 3.4 pct in November after an October increase of 4.0 pct, boosted partly by a large number of big ticket items. The November rise confounded market expectations for a 2.1 pct decline and meant that orders were up 13.6 pct year-on-year.

"The upside surprise was bullish for the euro prompting a temporary move higher in the currency against the dollar, suggesting that perhaps the credit crisis and strong euro is not having the negative effect on activity that some had feared," said Stuart Bennett, senior FX strategist at Calyon.

This meant the euro shrugged off earlier figures showing euro zone retail sales fell 0.5 pct in November from October, and were down 1.4 pct year-on-year. Meanwhile the pound was off earlier highs, with a stronger than expected house price survey unable to lift the gloom surrounding the UK economy.

The UK's largest building society, Halifax, reported UK house prices rose 1.3 pct in December from the previous month, confounding expectations for a drop of 0.5 pct following three previous monthly declines. Sterling had rallied on the numbers as it firmed expectations that the Bank of England will refrain from cutting interest rates this week.

But Geoffrey Yu, currency strategist at UBS, said while there may not be a cut this week, future ones are still on the cards and the pound remains vulnerable. "We believe a sustained dovish monetary policy outlook, combined with stress in UK and global financial markets will keep sterling exposed to more weakness up ahead," he said.

Earlier this morning the British Retail Consortium reported that UK retailers had their worst Christmas for three years, with December like-for-like sales up 0.3 pct year-on-year, well down on the previous month's 1.2 pct. Finally the yen was weaker this morning, due to stronger equity markets. This tends to weigh on the yen as it reduces risk aversion, meaning investors move away from safe-haven currencies.

However the expected slowdown in the US economy over the coming year means the yen is expected to firm over 2008 as a whole. "International macro themes are playing well to yen strength, with a slowing US economy occurring in the context of ongoing inflationary pressures in the global economy," said Ashley Davies, currency strategist at UBS.

"In addition Japan's lethargic economic outlook is at least very stable in contrast to the heightened uncertainty over the outlook for the US and European economies," he added.

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Euroshares gain in opening trade as defensive sectors remain in favour

At 9.14 am, the Dow Jones STOXX 50 Index was up 23.23 points, or 0.7 pct at 3,616.86 while the DJ STOXX 600 Index gained 2.21 points, or 0.6 pct to 353.50. "It really feels like it could stop very suddenly," said a London-based dealer, referring to this morning's gains. "No-one has any confidence in the rally."

The airline sector grabbed the early spotlight as shares in EasyJet fell 5.7 pct to their lowest level in over three months after the company's December load factor - how full its aircraft were -- was down 2.2 percentage points at 78.9 pct compared to the same period a year ago.

Ryanair Holdings fell 2.9 pct, hurt by the load factor decline of one of its main competitors. The company is also holding a conference in Milan today.

Air France-KLM pared early gains, up just 0.7 pct, after the carrier said its December load factor fell 0.8 percentage points at 78.6 pct. The decline was due in part to a 4.1 pct capacity increase. Turning to another form of transport, shares in Peugeot gained 2 pct as the car maker reported in-line vehicle sales for 2007, but analysts were mixed about its 2008 outlook.

One analyst said the company's forecast of 5 pct growth in worldwide sales in 2008 was above its own forecast of 4.7 pct. Another said the car maker's comment that most of the growth would come in the second half of the year was a "mild negative" given the recent launch of a number of new models.

Staying in the sector, Valeo was up 1.7 pct on a Goldman Sachs upgrade to 'neutral' from 'sell.' The broker said the auto parts maker faces short-term operational challenges, but they will be offset by the benefits from volume recovery at its key French customers, particularly Renault, during 2008.

In other broker action of note, shares in Deutsche Post rose 3 pct after Morgan Stanley lifted its recommendation on the company to 'overweight' from 'equal-weight', saying it expects management changes while a share price level close to the 2000 IPO price of 21 eur have "introduced a new urgency among management" to effect change.

On the corporate takeover front, shares in Premiere gained for a second day, up 4.7 pct, buoyed by rumours of a counterbid from Vivendi for the German media group following News Corp's acquisition of a 14.5 pct stake in the company. Many market participants, however, were sceptical such a bid would emerge.

"We don't think it likely. They have already said that the stock was too expensive at 16 eur and they'd look stupid for missing out on the 15 pct stake that News Corp bought," said a trader at a leading European brokerage.

Staying in the media sector, Lagardere shares rose 4.3 pct  after UBS upgraded the company to 'buy' from 'neutral' saying it is increasingly likely the French financial markets regulator AMF may abandon or change the focus of its EADS insider dealing investigation.

The staffing sector also posted solid morning gains, helped by an upbeat outlook from UK group Michael Page International. Michael Page was up 8.4 pct. Among other sector gainers, Hays rose 6.4 pct, Adecco climbed 1.7 pct while Randstad added 1.7 pct and Vedior gained 1.1 pct.

Investors will be looking to see if Wall Street can overcome investor jitters over the US economic outlook to post its first solid day of gains. Stock futures are currently pointing to a higher open for the Dow, Nasdaq and S&P 500.

But sentiment may take a knock with fresh data expected to confirm the US housing market remains in the doldrums. The Pending Home Sales Index is expected to have fallen 0.5 pct in November after rising 0.6 pct in the prior month, according to the median estimate of economists polled by Thomson's IFR Markets. Speeches from Federal Reserve officials will also punctuate the US trading session.

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Asian stocks end mixed after uneven Wall Street; Japan reverses losses
   
The Nikkei ended up 0.2 pct at 14,528.67, after earlier hitting an 18-month low of 14,365.86. The broader Topix was up 0.7 pct at 1,403.06, with financials leading the advance.Taiwan and the Philippines were higher in a rebound from Monday's lows, while South Korea and Australia remained under pressure from worry the US is headed for a recession.
   
The South Korean KOSPI closed down 0.3 pct at 1,826.23, after zigzagging between positive and negative territories through the session. The S&P/ASX 200 ended down 0.5 pct at 6,128.1 and the All Ordinaries was down 0.6 pct at 6,205.7.
  
The Singapore Straits Times closed down 0.4 pct at 3,338.27, while the Philippines Composite ended up 0.9 pct at 3,420.56 and the Jakarta index closed up 0.3 pct at 2,785.63. The Hang Seng index closed down 0.25 pct at 27,112.9, the Shanghai Composite Index ended lower 0.1 pct at 5,386.53, while Taiwanese Taiex closed up 1 pct at 7,962.91, recouping part of Monday's 4 pct decline.
   
The Malaysian market also held up on expectations a general election will be held soon -- historical trends over the past two decades suggest that the market enjoys a strong rally in an election year. The Kuala Lumpur Composite Index (KLCI) closed up 1.3 pct at 1,489.74.

Airlines were a key focus in Hong Kong after Cathay Pacific said it is prepared to team up with Air China and its parent to bid for China Eastern if a bid by Singapore Airlines and Temasek is rejected by shareholders at a meeting later today.
   
Cathay Pacific Airways rose 1.3 pct to 20.25 hkd and Air China fell 3 pct to 10.20 hkd. Shares of China Eastern have been suspended. In South Korea, POSCO fell 1.1 pct to 540,000 won ahead of its fourth-quarter earnings on Thursday. The market is expecting weak fourth-quarter numbers due to a sharper-than-expected decline in stainless steel prices.
   
In Tokyo, financials rebounded in late trade, with Mitsubishi UFJ ending up 3.1 pct to 1,020 and Mizuho Financial up 5.2 pct to 529,000.

Indian shares close up but off highs; IT shares back in positive territory

The Bombay Stock Exchange's 30-share Sensex gained 60.68 points or 0.29 pct to 20,873.33, while the National Stock Exchange's 50-share S&P CNX Nifty closed up 8.75 points or 0.14 pct to 6,287.85. The Sensex touched an all-time intraday high of 21,077.53 points in early trade while the Nifty rose to its lifetime high of 6,357.10 before receding to the closing levels.

Among banking shares, HDFC Bank Ltd rose 3.58 pct to 1,716.30 rupees and State Bank of India, the largest bank by assets, edged up 2.59 pct to 2,465.25 rupees, off the 52-week high of 2,509.00 rupees it touched during the day.

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Metals - Gold hits all-time high above 875 usd on weak dollar, oil bounce

At 10.03 am, spot gold was up at 872.90 usd an ounce against 859.30 usd in late New York trades yesterday, having earlier hit a fresh all-time high of 875.80 usd. Gold has risen by over 200 usd since the onset of the credit crunch in mid-August last year, as a trinity of factors have collided propelling it to a series of record highs.

The weak US dollar and a skyrocketing oil price have boosted the precious metal as market players look for an alternative to the most common source of cash reserves and a hedge against inflationary pressures, while the economic uncertainty emanating from the subprime debacle has seen gold reassert itself as a store of wealth in times of turmoil.

Oil prices have rebounded towards 96 usd today after retreating from the 100 usd mark on profit taking and economic slowdown fears over the previous two sessions. The dollar has slipped throughout the morning as market players weigh the possibility of further interest rate cuts from the US Federal Reserve at the upcoming meeting on January 30.

Additional buying motivation today is coming from the start of gold future contract trading within China tomorrow, with some market players positioning ahead of the launch. "There may be some buying ahead of these futures going live overnight," said JP Morgan analyst Michael Jansen, adding that he expects gold to trade in a range between 800 usd and 950 usd an ounce in Q1 08.

In other precious metals, silver tracked gold higher up at 15.42 usd against 15.18 usd in late New York trades yesterday. Hochschild Mining today said it maintains its stance on both the silver and gold price. "We remain positive on the fundamentals for silver and gold given continued US dollar weakness, heightened geopolitical tensions, depleted above ground stocks and increasing investment demand," the company said in its Q4 07 production results. "In addition to macroeconomic drivers, we believe strong industrial demand for silver will continue in 2008 and will reflect positively on its price."

Elsewhere, platinum was rising once more at 1,538 usd per ounce against 1,525 usd in late trades yesterday, after a period of consolidation since the metal hit a historic high of 1,553.50 usd an ounce last week. Its sister metal palladium held steady at 370 usd per ounce.

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