US & World Daily Markets Financial Briefing 09-08-2007

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NEW YORK - Wall Street plunged in early trading Thursday, yanking the Dow Jones industrials down more than 180 points after a French bank said it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market.

The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone -- institutions, investors, companies, individuals -- can't get money when they need it unnerved a stock market that has suffered through weeks of intense volatility triggered by concerns about available credit.

A move by the European Central Bank to provide more cash to money markets intensified Wall Street's angst -- although the bank's loan of more than $130 bln in overnight funds to banks at a bargain rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems.

The Federal Reserve followed suit, adding $12 bln to U.S. markets to help ease liquidity constraints, according to Dow Jones Newswires.

Bonds rose sharply as investors again sought the relative safety of Treasurys, with the yield on the benchmark 10-year note falling to 4.78 percent from 4.89 percent late Wednesday. Light, sweet crude fell $1.03 to $71.12 per barrel on the New York Mercantile Exchange

Thursday's plunge continued an erratic pattern of triple-digit moves in the Dow for several weeks. There has been more panic and gambling in those moves rather than conviction -- even when the Dow has finished up more than 280 points in a session, those gains have evaporated at the first mention of trouble in housing, subprime lending or the credit markets.

In early trading, the Dow fell 185.02, or 1.35 percent, to 13,472.84 after falling more than 200 points.

The Dow on Wednesday finished 2.45 percent below the record close of 14,001.41 reached on July 19. Since passing 14,000, the blue-chip index has been highly volatile -- in the 14 trading days since that record close, 10 have seen a triple-digit gain or loss.

Also Thursday, the broader Standard & Poor's 500 index fell 24.25, or 1.62 percent, to 1,473.24, while the Nasdaq composite index lost 28.58, or 1.09 percent, to 2,584.40. In afternoon trading, Britain's FTSE 100 fell 2.08 percent, Germany's DAX index fell 2.32 percent, and France's CAC-40 fell 3.12 percent.

News that Home Depot Inc. might amend the terms of the sale of its HD Supply business added to Wall Street's foul mood. The company said it could end up making substantial changes to the terms and financing of the deal and could reduce the $10.33 billion price tag. Home Depot said in June it would sell the business, which serves contractors, homebuilders and other business customers, to a group of private equity firms.

Home Depot, which fell $2.56, or 6.7 percent, to $35.24, also said it plans to lower the price of a modified Dutch tender offer to $37 to $42 per share from $39 to $44. In July, Home Depot announced the tender offer to repurchase up to 250 million shares.

In corporate news, American International Group Inc., one of the world's largest insurers, said Wednesday its second-quarter profit jumped 34 percent amid growth in its general and life insurance businesses and its asset management group. The company said it remains comfortable with its exposure to the U.S. residential mortgage market. AIG fell $1.73, or 2.6 percent, to $64.75.

Internet telephone company Vonage Holdings Corp. on Thursday reported a narrower second-quarter loss as it trimmed marketing costs. However, the company also saw a sharp drop in new subscribers. The decline now puts Vonage behind cable company Comcast Corp. in the number of Internet-based telephone customers.

Declining issues outnumbered advancers by about 6 to 1 on the New York Stock Exchange, where volume came to 163.2 million shares. The Russell 2000 index of smaller companies fell 12.25, or 1.54 percent, to $783.41.

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LONDON - The yen has enjoyed one of its best days this year, as the market's appetite for risk slumped following the news that France's biggest bank has frozen three asset-backed securities funds, worth some 1.6 bln eur.

In a statement, BNP Paribas said "the complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly, regardless of their quality or credit rating".

Adding to the risk-averse tone generated by BNP, the European Central Bank said there are tensions in the euro money market, which will be closely monitored. It added that it is ready to act to ensure orderly conditions.

The combination has ratcheted up the market's fears about a credit crunch and a marked reduction in liquidity, further eroding the appetite for risk. "The yen has been the main beneficiary of this increase in risk aversion," said Neil Mackinnon, chief economist at ECU Group.

The dollar has fallen about a yen to a low of 118.65, while the euro has fallen over two yen to a low of 163.03, while the pound has fallen over four yen to a low of 240.46.

He explained that hedge funds and other financial institutions are looking at ways of reducing their exposure to risk and one clear way of doing that is by unwinding carry trades, which have seen the yen on the defensive for much of the year.

Carry trades had been back in vogue earlier this week, as stock markets around the world have recovered following this week's rate-setting meeting at the US Federal Reserve. Though the FOMC did not indicate that borrowing costs will be falling any time soon, it painted a relatively positive picture about the US economy.

The yen has suffered on the foreign exchanges for much of this year, on the expectation the Bank of Japan will not aggressively raise interest rates any time soon, thus allowing investors to borrow at the super-low rates in Japan in the pursuit of higher-yielding rewards elsewhere.

Analysts said risk appetite and developments on credit and equity markets are likely to remain the main drivers in currency markets over the rest of the week, given the dearth of major economic news.

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Euroshares lower midday, pulled by subprime fears, financials lose

LONDON - At 12.10 pm, the Dow Jones STOXX 50 was 57.50 points or 1.50 pct lower at 3,765.57 while the DJ STOXX 600 slid 5.39 points or 1.41 pct to 375.66.

BNP Paribas, WestLB and IKB were in the spotlight this morning. Shares in BNP Paribas were 3.03 pct lower after its Investment Partners unit said it had temporarily, and until further notice, suspended three of its funds due to lower liquidity some US securitisation markets.

Meanwhile, the European Commission has asked the German government to provide details of the rescue of IKB Deutsche Industriebank AG within 20 working days.

Germany's Bundesbank, said it is discussing details of a plan to rescue the IKB, which slashed its full-year earnings forecast and replaced its chief executive after the US sub-prime market led investors to pull money out of IKB-managed Rhineland Funding at the end of last month.

Meanwhile, state bank WestLB dissipated earlier market rumours and reports that it is in the middle of a crisis related to its US unit Brightwater Capital Management. "There is no liquidity crisis in WestLB. This is true for the whole WestLB group including (US unit) Brightwater," a spokesman told Thomson Financial News.

Commerzbank disappointed, down 4.37 pct, when its second-quarter figures largely beat analysts' expectations, but showed an income mix which traders said was unsatisfying.

In the insurance sector Axa, which enjoyed a boost yesterday on the back of high expectations following ING's results, revealed underlying earnings for the first half at the lower end of analysts' forecasts. The insurer's underlying earnings rose 29 pct to 2.688 bln eur, up from 2.079 bln and net profit was 3.180 bln, up 16 pct from 2.732 bln.

Air France-KLM slumped 4.90 pct, after it said first quarter operating profit was 415 mln, up 1.0 pct from 411 mln, but well short of the 421-429 mln expected by analysts.

EPS however was 1.49 eur up 62 pct from 0.92 Peer SAS AB also fell sharply --down 6.29 pct-- after its second quarter pretax profit came in well below consensus as it was hit by strike action costs, losses on the sale of aircraft, and losses from the joint venture with Lufthansa and the European Cooperation Agreement partnership. Pretax profit amounted to 800 mln skr, up from 442 mln skr a year earlier, but well below market forecasts of 1.143 bln skr as recorded by SME Direkt.

Tourism and shipping group TUI declined 2.58 pct after it said its operating profit in the second-quarter plunged 95 pct due to investment and restructuring costs.

Utility RWE also missed analysts' expectations this morning and dropped 1.24 pct. The group revealed a 2 pct drop in sales to 22.6 bln eur compared with analysts' forecasts of 23.61 bln eur. BAE Systems PLC however rose 2.92 pct as it reported a 17 pct rise in first-half EBITA to 700 mln stg from 600 mln last time, prompting brokers to suggest increases to earnings estimates are imminent.

BAE also forecast good growth from its US-led Land & Armaments and UK Programmes in the full year. Evolution Securities said that in a market requiring catalysts and visibility, BAE can deliver both.

Elsewhere, Deutsche Telekom gained 0.54 pct after the telecom giant released second-quarter figures, which aside from net profit, beat expectations across the board.

Telecommunications, media and construction conglomerate Bouygues will report late this afternoon that sales growth has slowed somewhat in the second quarter after mixed weather conditions hit its road building and construction activities and previously reported weak revenues at its TF1 division weighed on group sales.

In M&A, the Financial Times reports that J Sainsbury has decided to give Delta Two, the Qatari-backed investment fund, more time to see if it can improve the terms of its 10.6 bln stg proposed takeover offer.

The two sides, which have been locked in meetings since news of the bid approach emerged in mid-July, have agreed to keep talking to see if agreement can be reached, it said.

Nordic bourse owner OMX AB added 6.46 pct after Borse Dubai confirmed market rumours as it said in a press statement that it has started a book building process to acquire 25 pct of the shares in OMX AB at a price of 230 skr per share.

Borse Dubai said it has also entered into options for OMX shares at an exercise price of 230 skr by way of book building process with selected investors.

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MUMBAI - Shares across the Asia-Pacific region closed mostly higher Thursday after another rally on Wall Street overnight eased concerns about the US credit market.

Tokyo shares closed higher also because a retreating yen helped some exporters. However, trade was cautious ahead of Friday's special quotation fixing for August index options and key economic data next week in Japan and the US.

The blue-chip Nikkei 225 Stock Average rose 141.32 points or 0.8 pct to close at 17,170.60. The broader TOPIX index was up 14.77 points or 0.9 pct at 1,683.81, off a high of 1,696.67.

In Australia, shares ended higher as investor sentiment continued to recover from last week's sell-off, mirroring the rebound in confidence on Wall Street. Banking stocks led the way up after regional banks Adelaide and Bendigo agreed to merge to create the seventh-largest lender in Australia.

The S&P/ASX 200 closed up 64.8 points or 1.1 pct at the day's high of 6,165.6. The All Ordinaries index advanced 63.0 points or 1.0 pct to settle at 6,187.7.

In mainland China, A-shares closed at a record for the fifth straight trading day, as investors continued to build positions in financial stocks. The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, closed up 90.93 points or 1.95 pct at 4,754.10.

The Shanghai A-share Index was up 95.61 points or 1.95 pct at 4,989.19 and the Shenzhen A-share Index was up 21.21 points or 1.53 pct at 1,411.23. The Shanghai B-share Index was up 4.57 points or 1.45 pct at 320.41 and the Shenzhen B-share Index up 7.25 points or 0.92 pct at 792.12.

However, in Hong Kong, shares closed lower as caution resurfaced and triggered nervous selling in late trade following news that French bank BNP Paribas and a US-German joint venture financial institution have been caught up in problems in the US subprime mortgage market. The Hang Seng index closed down 97.31 points or 0.43 pct at 22,439.36, off a high of 22,796.73.

Meanwhile, South Korean share prices closed up, but well off early highs, after the central bank caught investors by surprise with an unexpected increase in its call rate target earlier in the day. The 25 basis points hike to 5 pct, which follows a similar increase last month, reflects the Bank of Korea's concern at the level of excess liquidity in the financial system. The KOSPI index closed up 5.27 points or 0.3 pct at 1,908.68.

In Taiwan, shares also closed higher on Wall Street's sustained advance overnight. However, the market's upside was capped by profit-taking amid lingering concern over any further deterioration in the US subprime mortgage and credit industry. The weighted index closed up 83.14 points or 0.91 pct at 9,182.60.

Philippine share prices also closed firmer after earnings reports by key companies in the main index such as Universal Robina Corp and International Container Terminal Services Inc (ICTSI) encouraged buying. The composite index finished 9.29 points or 0.3 pct higher at 3,385.20. The all-share index rose 18.55 points or 0.9 pct to close at 2,181.58.

In Malaysia, shares closed mixed, with early gains met by profit-taking, reflecting lingering caution over credit concerns in the US.

The Kuala Lumpur Composite Index (KLCI) closed up 6.22 points or 0.5 pct at 1,313.39.

In Indonesia, shares closed lower after a volatile session, with the main index giving up all its early gains. The composite index closed down 21.23 points or 0.9 pct at 2,241.40, after

Indian shares halted in their tracks and slipped on renewed worries about a credit crunch, as European shares fell after France's BNP Paribas froze three of its funds investing in asset-backed securities.

The Bombay Stock Exchange's benchmark Sensex closed 1.36 pct, or 207.83 points lower, at 15,100.15. It had surged by as many as 234.42 points in the morning to a high of 15,542.40 points. The National Stock Exchange's S&P CNX Nifty tumbled 1.32 pct, to 4,403.20 points.

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LONDON - Gold fell as traders once again reduced their exposure to risky assets amid lower equity markets worldwide. The precious metal headed towards 665 usd, having earlier reached as high as 674.23 usd this morning.

A slightly stronger dollar against major currencies, meanwhile, did little to boost sentiment, as the US currency is seen as an alternative asset. A stronger dollar also makes the metal more expensive for those trading in other currencies.

"Lower US and European equity futures may take the gloss off gold and silver today," said UBS analyst John Reade. "We continue to expect elevated volatility across broad asset markets, and while investor positioning in gold and silver is relatively low, any quick increase in risk reduction could see both metals move lower."

At 12.59 pm, spot gold was trading down at 667.08 usd an ounce, against 674.90 usd in late New York trades yesterday. Earlier today, gold hit an intraday low of 666.60 usd.

In recent weeks, ongoing concerns over the troubled US housing sector have sent jitters through the financial markets;which has sparked a bout of risk aversion.

Forex analysts said risk appetite and developments on credit and equity markets are likely to remain the main drivers in currency markets over the rest of the week, given the dearth of major economic news.

At the end of July gold rose to 687 usd, less than 1 pct off its year high of 693 usd set in April, before falling victim to risk aversion.

David Moore, an analyst at the Commonwealth Bank of Australia, said gold's historic value as a safe haven asset when financial markets look shaky has not yet come into play.

"Rather, gold now appears to be viewed by investors as a 'risk' asset," he said.

Elsewhere, platinum was also lower, as recent wage agreements with South African trade unions at the world's top two producing companies, Anglo and Implats, raised hopes that supply might not be disrupted. South Africa is world's biggest platinum producer, accounting for around 80 pct of global supply.

"With the likelihood of supply disruptions greatly reduced, the white metal does remain vulnerable to further selling pressure in the coming sessions," said TheBullionDesk.Com analyst James Moore.

Platinum was down at 1,267 usd from 1,285 usd yesterday. In other precious metals, silver was lower at 12.90 usd from 13.14 usd and palladium fell to 355 usd from 361 usd.

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