US & World Daily Markets Financial Briefing 08-06-2007

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Stocks little changed after selloff

NEW YORK - Wall Street, trying to reverse three days of sharp losses, turned narrowly mixed Friday as Treasury yields retreated from overnight highs.
   
Before the market open, stock futures stabilized after Chicago Federal Reserve President Michael Moskow said in an interview with CNBC that while inflation is the predominant concern for the Fed, inflation expectations are well contained and the current benchmark interest rate is appropriate for now.
   
A narrowing of the trade deficit also calmed the markets a bit. The Commerce Department reported that the gap narrowed by 6.2 percent to $58.5 billion in April, after widening to a six-month high of $63.9 billion in March.
   
The 10-year Treasury note's yield shot up briefly in overnight trading to 5.25 percent -- the Federal Reserve's current benchmark interest rate -- then pulled back to 5.16 percent in early New York trading, still up from late Thursday's level of 5.13 percent. It has not traded consistently at 5.25 percent or above since 2002. Higher yields make home mortgages and corporate dealmaking more expensive.
   
In early trading, the Dow Jones industrial average rose 1.38, or 0.01 percent, to 13,268.11.
   
Broader stock indicators slipped after opening higher. The Standard & Poor's 500 index fell 3.22, or 0.22 percent, to 1,487.50, and the Nasdaq composite index fell 6.41, or 0.25 percent, to 2,534.97.
   
After the U.S. stock's big sell-off on Thursday, triggered primarily by interest-rate jitters, Japan's Nikkei stock average fell 1.52 percent; Hong Kong's Hang Seng Index dropped 1.4 percent; Singapore's stock market lost 1.2 percent and Australian stocks declined 1.3 percent. However, China's benchmark Shanghai Composite Index rose 0.6 percent, its fourth straight gain.
   
In European trading, Britain's FTSE 100 fell 0.10 percent, Germany's DAX index rose 0.06 percent, and France's CAC-40 fell 0.14 percent.
   
Many investors are wondering whether an extended rise in rates would cork the huge flow of takeover activity that has been on pace to beat last year's record $4 trillion, according to Dealogic. So far, corporate America is still making deals.

Stocks in focus
   
On Thursday, Biomet Inc. said a private equity consortium upped its bid for the maker of orthopedic products by 4.5 percent from $10.9 billion to $11.4 billion.
   
Dow Jones & Co. could be closer to a buyout by Rupert Murdoch's News Corp; it said in a filing late Thursday that it has expanded a severance program for senior executives in the event the company is sold.
   
Also late Thursday, Tyco International Ltd. said its board has formally approved the industrial conglomerate's breakup into three separate companies through a tax-free dividend distribution to shareholders.

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Dollar remains strong after narrowing in US trade deficit

LONDON - The dollar remained stronger, after jumping overnight with higher Treasury yields, on the publication of data showing the US trade deficit narrowed in April.
   
The trade deficit narrowed to 58.5 bln usd from 62.4 bln in March and against expectations for a widening to 63.4 bln usd. Exports remained roughly unchanged, while imports fell.
   
"This has implications for the GDP data as the second quarter shapes up to be much stronger than the first," said Jamie Coleman at IFR Markets.
   
The dollar had risen strongly since yesterday as interest rate markets have eliminated the probability of a rate cut in the US any time this year. In Europe and Japan, on the other hand, rate hikes are already fully priced in.
   
"With this in mind, for the dollar to really kick higher, interest markets need to cross the line and price in a Fed rate hike," said Steve Pearson at HBOS.
   
A strong housing market report could be enough to make this happen, he said, although next week's retail sales and CPI data will likely be the next key drivers for dollar markets.
   
The ongoing equity market weakness -- a reaction to the prospect of higher global rates -- is likely to continue to support the dollar. The prospect of higher risk in the economy typically moves investors away from their bets on high-yielding currencies -- such as the euro, pound, or emerging markets -- and into safer trades, including the dollar.
   
For its part, the euro was also weighed by weak German industrial production data, which showed a 2.3 pct fall in April from March, far below the 0.5 pct increase expected by markets.
   
Meanwhile, the pound also succumbed to the dollar's rise although it found a brief moment of respite with decent manufacturing output data, which rose 0.3 pct in April from March and 1.3 pct compared with a year earlier.

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Euroshares down midday as Wall St set to lose, BNP up on SocGen bid reports

LONDON - Leading European exchanges were lower midday as Wall Street is set to fall further in opening deals as rising bond yields continue to deflate hopes of a US interest rate cut later in the year. At 13.00 am, the STOXX 50 was down 4.44 points at 3,849.05 and the STOXX 600 was down 1.47 at 383.99.
   
The banking sector took centre stage with BNP leading the STOXX 50 gainers -- up 2.63 pct -- after reports Societe Generale -- up 0.25 pct -- has asked two US investment banks to advise on a possible bid for its larger rival.
   
Societe Generale refused to comment on the report in business daily Les Echos. A hostile bid is not ruled out, the business daily said. Yesterday, rumours resurfaced of a possible merger between SocGen and Italy's UniCredit, on which the bank also declined to comment. Unicredit shares fell 0.21 pct.
   
Les Echos cited its unnamed sources as saying the bank's management is split over merger opportunities and that SocGen chairman Daniel Bouton is against a deal with UniCredit, favouring an all-French deal.
   
Elsewhere in the sector, Lloyds TSB slipped 0.18 pct after its update, as traders said the tone on unsecured lending is less positive than the comments from some of the other banks. They said this is particularly worrying since Lloyds TSB has the most exposure to this type of lending of all the UK banks.
   
In other M&A news, La lettre de l'Expansion said Cap Gemini has hired BNP to make a bid for Atos Origin -- which failed to find a private equity buyer earlier this year. Shares in Atos gained 1.4 pct as Cap Gemini fell 1.32 pct.
   
The Financial Times said Kelda Group is a potential buyer for Thames Water Utilities' services division -- which is being sold by Macquarie Bank Ltd. But other utilities were in demand as traders note a flight to safety. RWE added 0.37 pct. Endesa added 0.18 pct.
   
And EON was pushed 2.27 pct higher thanks to a bullish note from Goldman Sachs which added the shares to its "Conviction Buy List".
      
Oils shares were also higher after sharp gains in the price of crude in the US yesterday. ENI added 0.76 pct. Repsol added 0.27 pct. Royal Dutch Shell gained 0.67 pct after Merrill Lynch upgraded its recommendation to 'buy' from 'neutral' and set a price target of 2,150 pence.
   
Shares in French leisure group Club Mediterranee gained 1.2 pct in a falling market, after it said net profit for the first half to April 30 was stable at 2 mln eur, as a strong operating improvement in the leisure business was outweighed by negative operating income from assets due to closures of its holiday villages.
      
Danone shares were outperforming -- down only 0.23 pct -- after Wahaha chief executive Zong Qinghou said he was forced to resign from the joint venture owned with Danone.
   
In an open letter addressed to Danone CEO Franck Riboud and published in the Chinese press, Zong Qinghou claimed he "can no longer endure the slander and tyranny of the two managers appointed by Danone, which has profoundly hurt (his) reputation and feelings".
   
Cheuvreux said the forced resignation was good news and added it is confident that the company will be able to fix the Chinese situation in the coming months. It added that the move will enable Danone to regain full control of Wahaha again.

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Asian shares close mostly lower on Wall St drop, rate and inflation fears

HONG KONG - Shares across the Asia-Pacific region closed mostly lower, with some sharp falls after the Dow Jones Industrial Average closed down 1.49 pct overnight and concerns about global inflation and interest rate rises hit the markets.
   
Tokyo shares finished lower as investor sentiment took a hit from the sharp losses in US stocks and weak Japanese machinery orders data for April.
   
Market watchers forecast the Nikkei 225 will move between 17,500 and 18,000 next week with all eyes on the release of the revised gross domestic product data for the three months to March on Monday and the Bank of Japan's policy meeting later in the week.
   
The Nikkei 225 Stock Average closed down 274.29 points or 1.52 pct at 17,779.09, off the day's low of 17,696.51. The index slipped 1.0 pct over the week. The TOPIX index of all first-section issues fell 23.56 points or 1.32 pct to 1,756.16, off a low of 1,746.89. It shed 0.66 pct during the week.
      
The yield on the 10-year US Treasury note closed at the session high of 5.13 pct on Thursday, its highest level since mid-July last year.
   
The disappointing machinery orders data also dampened investor sentiment. Before the market opened, the Cabinet Office said core private-sector machinery orders rose a seasonally adjusted 2.2 pct in April from March, just half the market's consensus forecast growth of 4.4 pct.
   
Investors also decided to take profits ahead of the Bank of Japan's policy board meeting late next week amid expectations the central bank could soon lift interest rates amid rising global rates.
       
Australian shares ended sharply lower as local investors followed their counterparts in Europe and US where equity markets fell on heightened inflation fears. Overseas investors have become increasingly concerned about rising inflation which could prompt central banks to rise interest rates.
   
Bullish jobs and growth data released in Australia this week have raised pricing to a 40 pct probability of a 25 basis point interest rate hike here in July,  Banking Corp strategist Jonathon Cavenagh said.
  
The S&P/ASX 200 closed down 79.4 points or 1.26 pct at 6,231.7 but closed off the day's low of 6,199.3. The key index dropped 101.8 points or 1.61 pct over the trading week. Australian share markets are closed on Monday for the Queens Birthday holiday.
   
Hong Kong shares were weaker in afternoon trade following the losses on Wall Street. At 3.25 pm the Hang Seng Index was down 317.96 points or 1.53 pct at 20,482.20.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher on recovering investor confidence as well as on optimism that most companies will report strong first-half results.
   
The Shanghai A-share Index was up 23.48 points or 0.58 pct to 4,103.75 and the Shenzhen A-share Index was up 19.50 points or 1.65 pct at 1,198.32.
   
Seoul shares closed sharply lower, in line with other regional markets, with foreign investors cashing in gains following the slump on Wall Street and after a run of record-breaking rallies. Yesterday, the main index reached a new high for the eighth consecutive session.
   
The Bank of Korea's decision this morning to keep its call rate target for June on hold at 4.5 pct failed to provide a boost, with the governor's comments on ample liquidity sparking fears of a possible rate hike in coming months, they noted.
   
The KOSPI index closed down 25.76 points or 1.47 pct at 1,727.28, after moving between 1,717.18 and 1,739.14. It ended the week higher with a gain of 11.04 points or 0.6 pct.

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Gold falls further in line with other commodities, equities markets

LONDON - Gold extended losses in afternoon trade, in line with other commodities and equities markets, as the dollar held onto yesterday's gains and inflation worries in the US weighed.
   
"Higher interest rate-driven apprehensions have dented stock markets, bond markets, and the precious metals complex," said Jon Nadler, an analyst at Kitco Bullion Dealers. "There was no way gold was going to sit idle on the back of a more than 400 point drop in the Dow, the biggest such decline since 2001," he added.
   
At 2.13 pm, spot gold was trading at 656.38 usd against 659.75 usd in late New York trade yesterday. The precious metal earlier hit a low of 652.40 usd.
   
The precious metal plunged over 10 usd per ounce yesterday after the dollar strengthened in line with US treasury yields, a rise which blew the chances of a rate cut out of the water.
   
Strength in the US currency put pressure on gold, which is seen as an alternative investment to the dollar and typically moves counter to it. The precious metal has gained strongly in recent months on dollar weakness.
   
Among other precious metals, platinum was broadly flat, trading at 1,288 usd per ounce against 1,289 usd in late New York trade yesterday. Its sister metal palladium dipped to 364 usd from 368 usd. Silver shed 12 cents from yesterday's late New York price to trade at 13.32 usd per ounce.

Copper continued lower as risk aversion triggered by weaker equity markets and higher bond yields in the US outweighed signs of tighter supply. And a receding deadline for a strike in Mexico by workers at Grupo Mexico, the world's seventh largest copper producer, did little to boost sentiment.
       
At 1.53 pm, LME copper for three-month delivery was trading at 7,205 usd per tonne against 7,430 usd at the close yesterday.
   
Stronger-than-anticipated activity data in the US and ongoing concerns about inflation have lengthened the odds of a rate cut by the Federal Reserve, harming bonds but pushing the dollar higher.
     
Elsewhere, nickel was down following copper's lead and still pressured by growing stockpiles reported by the LME. The exchange said inventories of the metal rose 252 tonnes to 8,856 tonnes in its daily report.
   
Prices of the metal rose sharply from the start of the year up until the end of May on critically low stocks which, at times, were so low they would not satisfy eight hours of global consumption. Supply tightness has been easing recently, while demand has taken a hit with prices at higher levels. Nickel was down at 42,600 usd at 42,900 usd from yesterday.
   
In other base metals, aluminium was down at 2,710 usd from 2,736 usd, lead was lower at 2,260 usd from 2,275 usd, tin fell to 13,850 usd against 13,875 usd, while zinc also slid to 3,606 usd from 3,645 usd.

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