US & World Daily Markets Financial Briefing 10-03-2008

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Stocks dip on mixed data, surging oil

NEW YORK  - Wall Street extended its decline Monday as investors reacted to surging oil prices and a mostly negative batch of reports on how companies are handling a slumping economy and tight credit markets.

As crude briefly soared above $107 a barrel, corporate news Monday came in mixed. McDonald's Corp. said sales at stores open for at least a year jumped by 8.3 percent year-to-date in February. But Blackstone Group, the private equity firm, posted a loss for the first quarter. The worse-than-expected results came amid tough credit conditions and losses from a big stake in the troubled bond insurer Financial Guaranty Insurance Co.

A letter to shareholders Monday from MBIA Inc.'s chief executive saying it was starting to write new business failed to lift the strugging bond insurance sector. MBIA and other bond insurers fell. Mortgage lenders also plunged, as Thornburg Mortgage Inc. was downgraded by a Jefferies & Co. analyst and Countrywide Financial Corp. was reported to be under investigation by the government for securities fraud.

After last week's thumping, the stock market was restless as it awaited key economic data: Thursday's report on retail sales and Friday's report on consumer prices. Those two readings will give Wall Street a better idea of how much the average American is struggling with falling home values and rising costs, and how aggressively the Federal Reserve will need to act when it meets next week.

"The next three days, there aren't any set, big, market-moving reports," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "The economic data Thursday and Friday is going to be the last bit of news, the last showing, before seeing what the Fed will do on the 18th."

By late morning, the Dow Jones industrial average fell 47.95, or 0.40 percent, to 11,845.74. Broader stock indicators also retreated. The Standard & Poor's 500 index fell 7.17, or 0.55 percent, at 1,286.20, while the Nasdaq composite index fell 13.43, or 0.61 percent, to 2,199.06.

Last week, increasing worries about the economy and the continuing fallout from the credit crisis pounded the stock market. The Dow ended down 3.04 percent, the S&P 500 index was off 2.80 percent, and the Nasdaq composite index closed with a loss of 2.60 percent.

In positive economic news Monday, the Commerce Department said U.S. wholesale inventories increased in January by 0.8 percent, more than expected, and U.S. wholesaler sales rose 2.7 percent, their widest jump since March 2004.

Recent record-breaking surges in commodities prices have worried many investors about whether the Federal Reserve might hesitate to lower key rates by as much as they want -- at least a half percentage point. Over the past few months, policy makers have cited the staggering economy as a greater risk than inflation.

There is great concern that the Fed's moves might not be enough to keep the sagging economy out of recession. News from the Labor Department Friday that the economy lost 63,000 jobs last month set off another steep drop in stocks.

On Monday, gold slipped, the dollar traded mixed, and crude oil soared $1.70 to $106.85 a barrel on the New York Mercantile Exchange. Early Monday, JPMorgan analysts slashed their year-end target for the S&P 500 index and earnings for S&P 500 companies, after the bank's chief economist said he believes a recession began in January.

The Russell 2000 index of smaller companies fell 3.91, or 0.59 percent, to 656.20. Declining issues outnumbered advancers by nearly 2 to 1 on the New York Stock Exchange, where volume came to a light 415.6 million shares.

McDonald's, a Dow component, rose 87 cents to $53.14. Blackstone fell 54 cents, or 3.7 percent, to $14.04. Thornburg Mortgage sank 59 cents, or 32 percent, to $1.20. MBIA fell 74 cents, or 6 percent, to $11.26, while rival bond insurer Ambac Financial Group Inc. fell $1.92, or 20 percent, to $7.58.

Countrywide fell 33 cents, or 6.5 percent, to $4.74. Most Asian markets sank Monday, some in response to Wall Street's losses last week, with Tokyo's market falling to a 2 1/2-year low. In Tokyo, the Nikkei 225 stock average tumbled 250.67 points, or 1.96 percent, to 12,532.13 points, its lowest since September 2005.

Hong Kong's market bucked the trend, with a recovery in afternoon trading driven by bargain-hunting and gains at the bank HSBC. The Hang Seng Index rose 203.72 points, or 0.9 percent, to 22,705.05. Stocks slipped on European exchanges. In afternoon trading, Britain's FTSE 100 fell 0.42 percent, Germany's DAX index fell 0.29 percent, and France's CAC-40 fell 0.48 percent.

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Forex - Euro a touch lower as Trichet warns against disorderly movements

LONDON - The euro was a touch lower after European Central Bank chief Jean Claude Trichet warned about excessive volatility in currency markets. The ECB last week decided to keep interest rates unchanged at 4.00 pct due to rising inflationary pressures, which in turn pushed the euro to a series of life-time highs against the dollar. Now, some sections of the market view the euro's rise as too fast.

"Trichet's remarks hit the wires indicating his concern about excessive currency moves, which we believe could drag euro to as low as 1.5250 usd," said Ashraf Laidi at CMC Markets. Despite this late development, the dollar remains on the back foot amid relentlessly weak US data. Investors bet the US Federal Reserve will cut key interest rates more aggressively.

The Labor Department reported on Friday the US economy unexpectedly shed 63,000 jobs in February, the most in five years. That followed news on Thursday that home foreclosures have risen to a record high in the fourth quarter of 2007. "The significantly weaker than expected US employment report confirmed that the US economy is in a recession," said BNP Paribas analysts.

They said the market is now pricing in a 75-basis point cut in Fed interest rates at the March 18 meeting, which would bring the benchmark rate down to 2.25 pct. "The likelihood of such aggressive rate cuts should see the dollar remain weak for now," they added.

Elsewhere the pound was steady, holding on to the 2 usd level, after data on producer prices and industrial production this morning. Producers' input prices jumped by 1.7 pct in February from January, bringing the annual rate to 19.3 pct -- the largest annual increase since records began in 1986.

Meanwhile, output prices, which are monitored by the Bank of England as a signal of pipeline inflation, rose a monthly 0.3 pct following January's 1.0 pct increase, keeping the annual rate at 5.7 pct -- its highest since July 1991. "Sterling/dollar has run-up to an intra-day peak of 2.0212 usd since the disclosure that annualised UK producer price input inflation rose to a 22-year high," said Robert Howard at Thomson's IFR Markets.

Elsewhere on currency markets, the yen was well supported. Private sector machinery orders unexpectedly surged a seasonally-adjusted 19.6 pct in January from the previous month, the fastest gain since August 2000. "The surge in machinery orders was eye-catching," said Dereck Halpenny at the Bank of Tokyo-Mitsubishi UFJ.

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Euroshares off lows midday as Dow seen higher; on gains by utilities

At 12.21, the STOXX 50 was down 5.74 points, or 0.19 pct, at 3051.19 and the STOXX 600 was 0.7 point, or 0.23 pct, lower at 307.28.

"Europe pares early weakness to trade broadly unchanged as weakness in mining stocks is offset by strength in utilities," said one London based trader. European indices were also boosted by hopes of a slight recovery on Wall Street after last week's sell-off, with IG Index suggesting the Dow will open 6 points higher.

In Europe, utilities are in focus as some observers say the re-election of Jose Luis Rodriguez Zapatero in Spain points to further sector consolidation. UBS said the news is positive for Iberdrola and Union Fenosa as Zapatero said last week there are favourable conditions for EDF to enter the Spanish market.

The broker also expects further growth for renewables and further tariff liberalisation. Iberdrola shares added 2.92 pct and Union Fenosa shares were 2.08 pct higher. Gas Natural surged 4.5 pct and EDF was up 0.77 pct.

EON added 0.74 pct after upbrat notes from JP Morgan and Citigroup. Financials were mixed with Dexia up 2.76 pct after bullish comments from Cazenove and HSBC up 2.18 pct after Keefe, Bruyette and Woods upped its recommendation to 'outperform' from 'market perform'.

BPI, though, slumped 9.33 pct after reports it will cut its forecasts at an upcoming strategic meeting.
Mining stocks tracked their Asian peers lower, as declines in the price of copper and gold weighed and on concerns a slowdown in global growth will hit demand.

Arcelor Mittal was down 4.53 pct, BHP fell 4.53 pct and Thyssenkrupp was down 2.66 pct. Autogrill gave up opening losses to tick 0.04 pct higher as analysts said initial concern about the high price paid for two acquisitions today should be offset by hoped-for synergies.

Earlier, the Italian services group said it has bought a 49.95 pct stake in Spain-based airport duty free retailer Aldeasa from Imperial Tobacco Group PLC's Altadis SA and a 100 pct stake in World Duty Free Europe Ltd (WDF) from BAA Ltd for an overall enterprise value of 1.070 bln eur.

Merrill Lynch said the World Duty Free deal looks expensive but noted Autogrill said there is potential for synergies. "Some investors may be alarmed by the high headline multiple being paid for World Duty Free; however, Autogrill's claim that the deals will be earnings neutral in 2008 and accretive in 2009 should provide some reassurance," the broker told clients in a note.

Dufry added 4.69 pct on the read across and Imperial Tobacco added 1.32 pct as investors welcomed the price received for its business. Shares in the UK group were also boosted by 'buy' notes from Deutsche Bank and Goldman Sachs.

On the earnings front, Swiss logistics group Kuehne & Nagel International AG reported a weaker-than-forecast full-year net profit after minorities of 531.2 mln sfr, compared to 458.3 mln in the previous year. Analysts had forecast net profit to reach 580.8 mln sfr on average.

Its shares fell 3.63 pct. Bovis Homes shares dropped 8.92 pct, as the housebuilder warned volumes in 2008 will likely be well below those achieved in 2007 if decisive action is not taken to reduce interest rates. Cazenove said it is forecasting a 10 pct decline in completions in the year to 2,650.

Elsewhere, Merrill Lynch said it believes since Bovis has always been very reluctant to concede on selling price/margin to "secure a deal", it will be struggling more than most in the current market. But shares in peer Brixton moved 5.23 pct higher after the housebuilder reported a better-than-expected full year adjusted NAV of 545 pence per share. Citigroup repeated its 'buy' rating.

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Asian stocks sag on US recession fears, Malaysia dives on election shock

The Shanghai composite index closed down 3.59 percent at 4,146.30, while South Korea's KOSPI closed down 2.3 percent at 1,625.17. Australia's S&P/ASX 200 index slipped 1.6 percent to finish at 5,180.4, while the All Ordinaries index dropped 1.7 percent to 5,275.7.

In Tokyo, the Nikkei 225 ended down 2.0 percent at 12,532.13, its lowest level since September 2005. "Japan's economy lacks a domestic driving force," said Tomoko Fujii, head of economics and strategy for Japan at Bank of America. "So a US recession-like state is boding ill for Japan's business cycle."

Investors are increasingly nervous about the recent strength of the yen against the dollar, which is bad for Japanese exports. The dollar briefly hit an eight-year low of 101.40 yen in New York on Friday before rebounding to the 102-yen levels today.

Singapore's Straits Times index ended down 1.0 percent at 2,836.59, while the Philippine composite index fell 4 percent to close at 2,908.88, The Jakarta composite index closed down 4.8 percent 2,527.87.

Hong Kong stocks bucked the regional decline, with the Hang Seng index closing up 0.9 percent at 22,705.05. The index fell to as low as 22,034.76 during the day but a rumor that the Fed may slash rates later today, ahead of their regular meeting next week, triggered late bargain-hunting.

Financial stocks across the region led decliners. Investors were avoiding financial stocks on fears of more write-downs following news last week of troubles at Thornburg Mortgage and a bond fund affiliated to Carlyle Group. Thornburg said Friday it did not have enough cash to cover current margin calls and that it would restate past financial results to account for a decline in the value of its mortgage securities.

"With more stories emerging about large firms facing margin calls in the US, we may see investors fleeing equities," said CIMB-GK Research in a note to clients.

In Australia, all the big banks were lower, with Westpac Banking down 0.6 percent at 21.02 Australian dollars, Australia and New Zealand Bank down 1.3 percent at 19.99 dollars, National Australia Bank down 1.6 percent at 26.50 dollars and Commonwealth Bank of Australia down 1.7 percent at 38.70 dollars.

Japanese banks were also weaker, with Mizuho Financial shedding 0.5 percent to 388,000 yen. Mitsubishi UFJ Financial declining 1.4 percent to 850 yen and Sumitomo Mitsui Financial retreating 0.6 percent to 680,000 yen.

Chinese banks traded in Hong Kong were mostly lower on worries China may again raise the reserve requirement on bank deposits to curtail lending, which would cut their earnings. The Chinese central bank has been raising interest rates and curtailing bank lending to tame inflation.

China's biggest lender, Industrial and Commercial Bank of China was down 0.39 percent at 5.08 Hong Kong dollars, China Construction Bank was down 0.18 percent at 5.55 dollars and Bank of China was up 0.32 percent at 3.15 dollars.

The Bombay Stock Exchange's 30-share benchmark Sensex closed 51.80 points or 0.32 pct down at 15,923.72 and the National Stock Exchange's 50-share S&P CNX Nifty closed 28.80 points or 0.60 pct higher at 4800.40.

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Metals - Gold weakens as players take profits to cover other asset losses

LONDON - Gold slipped as market players cashed in the yellow metal after recent price gains to increase funding liquidity and to cover losses in other assets.

Equity markets and the dollar weakened substantially last week after a series of weak US data increased fears that the world's largest economy may already be in recession, pushing gold prices to an all-time high of 992.95 usd an ounce, as risk-averse investors shifted into safe haven assets.

However, with gold prices now looking overbought at record levels, profit-taking has kicked in, as investors use gold funds to increase liquidity and cover positions.

"As markets are now even more convinced that the US economy is in a recession and tensions in the financial system prevail, as hedge funds failed on margin calls, position liquidation might not only weigh on stock markets but also on gold," said Peter Fertig, research analyst at Dresdner Kleinwort.

At 1.57 pm gold was trading at 963.00 an ounce against 975.00 usd in late New York trades on Friday. Gold came under further pressure after the dollar pared losses against the euro, following reports that ECB president Jean-Claude Trichet said after a meeting of the G10 group that he is concerned by "excessive forex volatility", and that a strong dollar policy is in the US' interests.

Gold is usually seen as an alternative investment to the US dollar, and has thus benefited from the US currency's recent series of all-time lows against the euro.

The combination of profit-taking and a slightly stronger dollar have worked against gold prices getting any closer to the much-hyped 1,000 usd mark for now.

"The metal's failure to break higher Friday (after weak US payrolls data) suggests the market may, just for the short-term, be in need of a phase of consolidation before challenging 1,000 usd," said James Moore, analyst at The Bullion Desk.

With a spate of US data due this week, market attention should focus on fundamentals to provide further indications on the state of the US economy.

The first of this week's US data releases will be wholesale inventories today at 3.00 pm GMT, followed by trade deficit figures tomorrow. The consumer price index will be released on Friday, and will be closely watched for signs of rising inflationary pressures.

Gold has taken support recently from record high oil prices and higher inflation, as investors look to protect themselves from the damaging effects of rising costs.

In other precious metals, silver was trading at 19.40 usd an ounce from 20.17 usd on Friday. Platinum reversed earlier gains to fall to 1,931 usd from 2,038 usd, as sentiment continued to be dampened by last week's news that top producer South Africa will increase its power allocation to the mining sector.

Platinum prices have soared since a national energy shortage in South Africa led to supply constraints in the mining industry. Palladium was at 456 usd per ounce compared to 486.25 usd on Friday.

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