US & World Daily Markets Financial Briefing 09-07-2008

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Stocks pull back in early trading as oil rebounds

NEW YORK - Wall Street pulled back Wednesday as a rebound in oil prices sapped the momentum from the previous day's big stock rally.

Investors were somewhat heartened by Alcoa Inc.'s earnings, which began the second-quarter earnings season after the market closed Tuesday. The alumnimum producer reported a profit decline of 24 percent due to increased production costs -- better than anticipated -- and its shares rose 97 cents, or 3 percent, to $33.30.

But following Tuesday's 152-point gain in the Dow Jones industrial average, investors were cautiously watching oil trading again. Having dropped by more than $9 a barrel over the last two days, crude rose $1 to $137.04 a barrel on the New York Mercantile Exchange. The rebound occurred after missile testing in Iran that rekindled worries about political unrest in the Middle East disrupting supplies.

In early trading, the Dow fell 40.30, or 0.35 percent, to 11,343.91. Broader stock indicators also dipped. The Standard & Poor's 500 index fell 3.01, or 0.24 percent, to 1,270.69, while the Nasdaq composite index fell 14.39, or 0.63 percent, to 2,280.05. Bond prices edged higher Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.88 percent from 3.89 percent late Tuesday.

The dollar fell against other major currencies. Gold prices also slid. A negative analyst note about Cisco Systems Inc. weighed on the technology sector. Cisco fell 61 cents, or 2.7 percent, to $22.27 after an RBC Capital Markets analyst cut his price target on the network equipment maker. The CEO recently said technology spending will recovery later than the company originally thought.

Meanwhile, government-sponsored lenders Freddie Mac and Fannie Mae resumed their tumble Wednesday. Freddie fell $1.18, or 8.8 percent, to $12.28, while Fannie fell $1.12, or 6.4 percent, to $16.50. The two companies dragged the broader stock market lower on Monday as worries arose about their cash levels.

Wednesday's calendar of economic data is light. The one notable report was the Mortgage Bankers Association's weekly application survey -- mortgage application volume rose 7.5 percent during the week ending July 4, the trade group said.

The Russell 2000 index of smaller companies fell 2.27, or 0.33 percent, to 680.45.Stock markets overseas rose. Japan's Nikkei stock average edged up 0.15 percent. In afternoon trading, Britain's FTSE 100 rose 1.70 percent, Germany's DAX index rose 1.44 percent and France's CAC-40 rose 1.53 percent.

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Forex - Dollar soft after Iran missile test

LONDON - The dollar eased against most currencies after Iran test-fired a long-range missile and world leaders wrapped up a key summit in Japan. The G8 powers wrapped up summit talks on the global economy today, with fresh warnings about the threat from soaring commodity costs but no quick fixes for jittery markets.

"The end of the G8 meeting in Japan, without anything further on the dollar, has coincided with a missile test from Iran, which has prompted some renewed dollar selling against most currencies," said Derek Halpenny, economist at the Bank of Tokyo-Mitsubishi UFJ in London.

Iran test-fired its Shahab-3 missile, whose longer range puts Israel within reach, amid growing fears that the standoff over the contested Iranian nuclear drive could lead to war.

The Shahab-3 was among a broadside of nine missiles fired off in the early morning from an undisclosed location in the Iranian desert, state-run Arabic channel Al-Alam and its English counterpart Press-TV reported.

"Overnight news of Iran testing nine long- and medium-range surface-to-surface missiles supported crude oil prices, which rebounded back above $138 a barrel, capping the greenback to the upside," said Manuel Oliveri, currency strategist at UBS.

At the G8 summit in Japan, the world's eight richest nations made no mention of the U.S. currency in their joint statements, although French President Nicolas Sarkozy said the leaders were united in their belief that a weak dollar was bad for the global economy. "There is now clearly a converging view of the economic damage that can be caused by currency imbalances ... a dollar that is too low, a yuan that is too low and a euro that is too high," he told reporters.

Traders see little immediate prospect of coordinated market intervention by the G8 to prop up the dollar, as European nations may be reluctant to see their own currencies fall too much because that could stoke inflation.

ECB president Jean-Claude Trichet meanwhile warned Wednesday that euro zone inflation was at the "worrying" level of 4.0 percent in June -- and risked staying high in the months ahead. "In the wake of renewed sharp commodities price increases, (inflation) arrived at the worrying levels of around 4.0 percent in mid-2008," Trichet told the European Parliament in Strasbourg.

"Looking ahead, the annual (inflation) rate is likely to remain well above the levels consistent with price stability for sometime, moderating only gradually in 2009. "Risks to price stability over the medium term remain clearly on the upside ... and have intensified in recent months," he added.

The ECB raised its main interest rate last Thursday by a quarter percentage point to 4.25 percent, despite the euro zone's weakening economic outlook as it sought to dampen inflation. Euro zone countries grew 0.7 percent in the first three months of 2008, the EU's Eurostat data agency said Wednesday, trimming back a previous estimate of 0.8 percent.

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Euroshares higher midday as banks rebound; Wall St set for modest opening losses

At 12.12 a.m., the DJ STOXX 50 was up 32.37 points, or 1.14 percent, at 2870.03 and the DJ STOXX 600 was up 3.44 points, or 1.24 percent, at 282.44.

Forward dated WTI crude for August delivery was trading $1.61 higher at $137.65. The upbeat mood continued after hours with better-than-expected second-quarter earnings from Alcoa. Banking stocks were back in favour in Europe, with Credit Agricole up 5.45 percent, Deutsche Bank up 4.38 percent and Unicredit up 2.54 percent.

Bradford & Bingley added 5.91 percent after the UK mortgage banks leading shareholders have lined up behind the group's 400 million pound cash call, amid fears that financial contagion could tear across the banking sector.

The Times said leading institutional fund managers said yesterday that any losses they might suffer on their investment in the group's rights issue would be dwarfed by their exposure to a potential collapse across the sector if the bank were allowed to fail. Shares, however, remained well below the 55p price of the upcoming rights issue.

Shares in London Stock Exchange Group Plc stormed 11.7 percent higher in early trade after the company said first-quarter revenue was up 8 percent at 178 million pounds, and that it performed well in the first quarter in spite of weaker markets.

Shares in German exchange group Deutsche Boerse added 3.72 percent. Arcelor Mittal shares added 1.99 percent and Thyssenkrupp shares moved up 0.74 percent after better-than-expected second-quarter earnings from Alcoa after the close.

BASF shares were down 1.08 percent after the chemicals conglomerate said at an analyst meeting on Tuesday that it sees the business environment becoming more difficult mid-term.

The company said it still aims to increase EBIT in 2008 slightly above last year's levels, but a revised projected earnings split should hurt the bottom line slightly due to a substantially higher tax rate, analysts said.

RWE, Suez and Iberdrola were lower as investors moved away from traditionally safe stocks. Shares fell 1.65 percent, 0.26 percent and 0.91 pct respectively. Among smaller companies, Agfa Gevaert soared 36.53 percent as traders noted market chatter the Dutch electronics company Philips NV is to launch a bid for the Belgian group. "Agfa's higher because we heard Philips might launch a bid," one trader told Thomson Financial News.

Another said he had heard the bid would be priced at 9 euros per share, well above Agfa's price of 5.23 euros. Boskalis rose 2.84 percent in morning trading after it won a large contract in Dubai as part of a joint venture with DEME. "This is a relatively large order for both Boskalis and DEME with a relatively short running time (30 months)," SNS added in a note.

But shares in TecDAX-listed Nordex AG tumbled 12.88 percent after the wind power specialist lowered its 2008 sales margin targets, while largely reaffirming other targets for the year.

The company said in light of monthly sales figures to date, it has corrected downwards its sales margin target to between 5.5 and 6 percent from its previous target of 7.0 percent. Frankfurt-based traders said the revised targets had shaken some investors trust in the company.

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Asian stocks rally after Wall Street rise, financials lead advance 

The Kospi was down 0.9 percent at 1,519.38, erasing early gains driven by the pullback in oil prices. Taiwan weighted index turned flat, ending down 0.1 percent at 7.048.25. The Nikkei 225 index gave back early gains to close 0.2 percent higher at 13,052.13. Topix ended up 0.2 percent at 1,285.53.

News of falling crude prices also encouraged investors to pick up bargains. Crude prices tumbled $5.33 to settle at $136.04 a barrel on the New York Mercantile Exchange overnight, bringing oil's two-day drop to more than $9.

Financial stocks ended off their highs for the day. Mizuho Financial closed 3.9 percent higher at 512,000 yen, after rallying nearly 6 percent earlier in the session. Mitsubishi UFJ Financial rose 2.3 percent to 955 yen, off its high of 978 yen, and Mitsui Sumitomo Financial Group gained 3.2 percent to 796,000 yen.

The Hang Seng index was up 2.8 percent at 21,805.81, while the Shanghai Composite gained 3.8 percent to 2,920.55. Hong Kong's financial stock index jumped 4 percent to 32,737.56, with Chinese lenders leading the rally.

Industrial and Commercial Bank of China (ICBC), the mainland's largest lender, gained nearly 5 percent to HK$5.40 and China Construction Bank advanced nearly 5 percent to HK$6.19. Bank of Communications jumped 5.1 percent to HK$9.21 and China Merchants Bank surged 5.4 percent to HK$25.30.

In Australia, the S&P/ASX 200 was up 1.6 percent at 5,011.9 and the All Ordinaries was up 1.3 percent at 5,089.4. "It remains to be seen whether this rush of blood can be sustained," said Hans Kunnen, head of investment markets research at Colonial First State.

"Earnings growth is likely to be modest simply because of the pace of the economy. Expectations six months ago were that the economy was booming and that's clearly not the case."

The Manila composite index was 1.3 percent higher at 2,481.53 The Jakarta index gained 0.3 percent at 2,286.03, while the Kuala Lumpur composite index closed up 1.7 percent at 1,139.81.

In Australia, financial firms rose as investors drew comfort from Bernanke's comments, which signalled the Fed's determination to end the credit crisis. National Australia Bank rose 4.7 percent to A$27.60 and Commonwealth Bank of Australia Ltd. was up 1.9 percent at A$41.49.

Airlines rose in Hong Kong and Korea as investors cheered the drop in oil prices. In Hong Kong, airlines found added support from the excitement over the Beijing Olympic Games next month. Tourists are expected to flock to China as early as this month for the Olympics. The Chinese government expects 500,000 tourists during the August 8 to 24 games.

China Southern Airlines, the nation's biggest carrier, increased 6 percent to HK$3.06, while among its smaller rivals China Eastern Airlines surged 5 percent to HK$2.32 and Air China advanced 5.4 percent to HK$3.88.

Hong Kong's Cathay Pacific Airways rose 4.9 percent to HK$14.52. "Chinese airlines have been oversold in recent sessions because of higher oil prices, so now funds are buying them back to cover their short positions. The recent decline in crude oil prices will be beneficial to the airlines," said Peter Lai, director at DBS Vickers.

Singapore's Straits Times Index (STI) closed up 1.1 percent at 2,917.62

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Metals - Aluminium continues lower; lead jumps almost 5 percent

LONDON - Aluminium continued lower on Wednesday in London, drifting further away from all-time highs seen at the start of the week as abundant supplies and weak demand knocked prices lower.
  
At 12:55 p.m., London Metals Exchange aluminium for 3-month delivery was down at $3,130 per tonne against $3,145 at the close on Tuesday. Prices hit a record $3,327 per tonne on Monday, with the energy-intensive metal buoyed by high crude costs and concerns over Chinese energy supplies, before reversing
sharply as oil prices came off and investors locked-in profits.
   
Growing inventories of the red metal and weaker than expected Chinese demand has overshadowed a rebound in oil prices on Wednesday, analysts said.
   
Lead was the strongest performer, jumping by over 5 percent. Traders attributed the move to short-covering by investors following the metal's recent decline drove prices higher. Price climbed to $1,715 from $1,640 per tonne, with fears the metal has been oversold as it has halved in price since March.
   
Copper was steady near $8,200, with the market remaining nervous following the red metal's steep drop from its all-time high of $8,940 seen last week. Reports that striking mine workers in Peru are returning to work has eased supply concerns, though London Metal Exchange monitored stocks remain at relatively low levels.
   
Inventories of the red metal currently stand at around 124,000 tonnes -- less than three days worth of global consumption -- having risen by 2,150 tonnes in Wednesday's report from the exchange. Slowing demand in China and concerns over the stumbling global economy have weighed on the red metal, with investors wary of chasing prices higher.

Strength in the U.S. dollar has also weighed across commodities priced in the greenback, as they become more expensive for holders of other currencies. "Base metals should fall, with mixed signals on the direction of the U.S. dollar and easing global growth expectations weighing on prices," said Mark Pervan at ANZ.
   
In other metals traded on the LME, nickel was up at $20,750 against $20,500 per tonne, while zinc rose to $1,815 against $1,783 per tonne. Tin rose by 2 percent to trade at $22,900 against $22,450 per tonne.

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