US & World Daily Markets Financial Briefing 10-06-2008

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Wall Street is mixed as crude oil prices rebound

NEW YORK - Wall Street traded mixed Tuesday as oil prices ratcheted higher and as speculation grew that the Federal Reserve might raise interest rates to fight inflation.

The International Energy Agency said oil-producing nations outside OPEC are having a tough time keeping up with demand. The agency lowered its forecast for global oil demand because of the recent surge in prices, but said China might need more for reconstruction in the aftermath of May's earthquake.

This sent a barrel of light, sweet crude up $2.71 to $137.06 on the New York Mercantile Exchange. Crude prices last week climbed to a record $139.12.

Meanwhile, comments from Federal Reserve Chairman Ben Bernanke that a substantial economic downturn seems unlikely have raised expectations that the central bank might raise interest rates to fight inflation.

In midmorning trading, the Dow Jones industrial average rose 14.90, or 0.12 percent, to 12,295.22.

Broader stock indicators declined. The Standard & Poor's 500 index fell 0.77, or 0.06 percent, to 1,360.99, and the Nasdaq composite index fell 8.53, or 0.35 percent, to 2,450.93.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.06 percent from 3.99 percent late Monday. The dollar was mixed against other major currencies, while gold fell.

The rise in energy remains a concern for Bernanke, who on Monday reiterated during a speech that higher energy prices "suggest that growth risks remain to the downside." His assertion that the chance of a substantial downturn has decreased is raising Wall Street's expectations that the central bank might soon be comfortable in raising interest rates.

The central bank is worried that escalating commodities prices might curb consumers' appetite to buy discretionary items. This would pose a serious threat to the U.S. economy, as consumer spending accounts for more than two-thirds of economic activity.

In other economic news, the Commerce Department reported that the U.S. trade deficit had a larger-than-expected jump in April. Higher oil prices and an increase in consumption for crude offset a climb in exports, the government said.

The deficit in international trade of goods and services increased by 7.8 percent to $60.90 billion from March's revised $56.49 billion. The trade gap was forecast to rise to $59.5 billion, according to economists surveyed by Thomson/IFR.

In corporate news, Texas Instruments Inc. fell 62 cents, or 2 percent, to $30.71 after narrowing its second-quarter revenue and earnings expectations late Monday.

Billionaire Kirk Kerkorian's investment company said its tender offer for 20 million additional shares of Ford Motor Co. attracted a huge response and will easily enable it to increase its stake in the automaker to about 5.5 percent. The Dearborn, Mich.-based automaker said last month it no longer expected to return to profitability by 2009. Ford fell 23 cents, or 3.6 percent, to $6.13.

XTO Energy Inc. said it is acquiring privately held Hunt Petroleum Corp. for $4.19 billion in cash and stock. XTO said Hunt's assets, plus last month's acquisition of Headington Oil Co., prompted it to increase its 2008 production growth target to 28 to 30 percent. XTO rose $2.42, or 3.6 percent, to $70.14.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 244 million shares. The Russell 2000 index of smaller companies fell 0.73, or 0.10 percent, to 734.52.

Bernanke's comments caused selling overnight in Asia, where the Nikkei 225 average closed 1.1 percent lower. In afternoon trading, Britain's FTSE 100 index lost 0.12 percent, Germany's DAX index gave up 0.33 percent, and France's CAC-40 declined 0.22 percent.

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Dollar steadies after Bernanke rally

The dollar steadied after rallying throughout this morning following last night's hawkish speech by Federal Reserve President Ben Bernanke.

Bernanke said that "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so" and that the Fed "will strongly resist an erosion of longer-term inflation expectations," suggesting interest rates may actually be raised later this year.

Analysts said this speech could well signal the start of a sustain rally in the U.S. currency, as the U.S. central bank tries to talk-up its currency in a bid to push down import-price inflation. "With this change in emphasis now confirmed we believe that the dollar is undergoing a sustained recovery that will persist over the medium to longer term," said analysts to BNP Paribas.

Meanwhile the Canadian dollar surged after the country's central bank surprised markets by leaving its key interest rate unchanged. Investors had widely expected borrowing costs to be cut a quarter point but the recent rise in global energy prices appeared to stay the bank's hand.

The move has added to the idea that central banks across the developed world are shifting their emphasis from slowing economic growth to rising inflation. "This clearly has a broader global context - with the ECB's threat to raise rates last week, and Bernanke's shift to bang on the inflation drum over the past week," said Marc Ostwald at Monument Securities.

The euro remained stable against other currencies, helped today by a rare breath of good news on growth, with French industrial output up 1.4 percent in April, way above the consensus for a 0.2 percent increase. Meanwhile, Italian first quarter GDP growth was revised up to 0.5 percent from 0.4 percent previously.

In the UK, the pound continued to slide, losing all the gains it made on Monday when high producer price data boosted the currency.

Despite upbeat surprises this morning in retail sales and house prices -- which improved in May against market expectations of a further deterioration -- as well as manufacturing activity in April, the pound fell heavily.

Market watchers said this has been driven in part by profit-taking on Monday's rally as well as the view that the Bank of England has recently been less vocal about inflation than the Fed or ECB.

BoE governor Mervyn King failed to discuss monetary policy in a speech in London today, disappointing some market watchers who were ready for hawkish statements about inflation.

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Euroshares still down midday as Dow seen lower; banks recover on ECB cash news

LONDON - Leading European bourses remained lower midday as the Dow looks set for more falls in opening deals although a recovery in banks helped most indices to pull back opening losses.

At 12:48 a.m., the DJ STOXX 50 was down 10.53 points, or 0.35 percent, at 3,030.44 and the DJ STOXX 600 was down 1.52 points, or 0.49 percent, at 307.19.

In Europe, banking stocks rallied mid-morning as investors cheered news the European Central Bank is injecting a massive 191 bln euros into the interbank market, with traders also noting talk that a major fund is switching out of commodities into financials.

BNP Paribas added 1.31 percent, SocGen added 0.81 percent and Banco Santander was up 0.73 percent .

Fortis, though, slumped 4.24 percent as Merrill Lynch downgraded the banco-assurer to 'neutral' from 'buy' based on concerns about the group's capital risk and the market environment for banks.

"Our confidence on the capital position has weakened, for a number of reasons," the brokerage said in a note, citing a tougher stance from the market, ratings agencies and regulators, management's attitude to core capital, and the 3 bln euros of "capital support" Fortis needs.

Among telecoms, France Telecom continued to recover from last week's losses, up 2.12 percent, as fears it will be drawn into a bidding war for TeliaSonera faded. And shares in Telenor moved 1.7 percent higher as analysts continue to play down talk it would bid for its Scandinavian peer.

Shares in Eurasian Natural Resources Corp. Plc. jumped 6.49 percent after Kazakhmys Plc -- up 1.72 percent -- made a surprise move to acquire a further 7.66 percent stake in the company from the government of Kazakhstan. Last week there was market speculation that Kazakhmys was looking to sell its stake in ENRC, one of the world's largest producers of ferrochrome, when a lock-up period expired on June 6.

Peter Hambro mining added 1.54 percent after the mining small cap said the Peter Hambro Mining-led syndicate has made an $80 mln strategic investment in Rusoro Mining Ltd through a secured exchangeable loan. Cazenove reiterated its 'outperform' stance.

Anglo American ticked up 0.55 percent amid renewed M&A hopes in the mining sector after Estado reported Vale is raising $30 bln for an acquisition, with either Anglo American or Alcoa seen as possible targets.

In oils, Tullow Oil added 1.03 percent after announcing the successful test of the Mahogany-2 appraisal well; and the sale of its 51.9 percent interest in the Hewitt unit fields for 420 mln Canadian dollars.

ABN Amro repeated its 'buy' stance and lifted its price target to 1,310 pence from 1,280 pence.

But shares in heavyweight BP Plc. were 1.01 percent lower as uncertainty over its 50 percent holding in its joint venture TNK-BP continued as prosecutors continue to probe suspected labour law violations.

Total fell 0.7 percent and ENI was 1.98 percent lower as oil ticked pulled back some of the losses made yesterday but remained below $136.

Royal Dutch Shell outperformed, down only 0.07 percent, as Exane BNP Paribas upgraded the shares to 'outperform from 'underperform' and Citigroup lifted its rating to 'buy' from 'hold', citing higher oil price forecasts.

Shares in Sanofi-Aventis were down 1.83 percent in Tuesday morning deals amid market talk that oil giant Total is considering selling its 12.6 percent stake in the pharmaceuticals group.

UK supermarkets group Tesco fell 1.57 percent after it reported disappointing UK underlying sales growth for its first quarter as consumers cut back on spending in non-food areas.

Also in the UK, housebuilders tumbled as the Royal Institution of Chartered Surveyors said the number of chartered surveyors reporting falls in house prices fell slightly during May, but the quantity of transactions completed fell to its lowest level for 30 years.

Barratt Development shares fell 10.97 percent and Berkeley Group shares fell 6.27 percent while Taylor Wimpey shares were down 12.66 percent. Redrow Plc. shares fell back 8.48 percent after Goldman Sachs cut its rating to 'sell' from 'neutral'.

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Asian stocks slump on rising energy costs, credit crisis worries

HONG KONG - Stock markets across Asia accelerated their losses Tuesday afternoon, with the Shanghai Composite leading the rout with a more than 7 percent decline, as investors unloaded stocks amid concerns over rising energy costs and continuing fallout from the credit crisis.

Many investors also returned from an extended weekend break to continued gloom on Wall Street, where the Dow barely recovered from a nearly 400-point plunge on Friday after oil prices surged to near $140 and the jobless rate spiked to a worse-than-expected 5.5 percent.

"We've got two days of catching up to do. We're really reacting to the nearly 400-point loss on the Dow on Friday and ignoring the 0.6 percent gain we had overnight," said Juliette Saly, an equities analyst at CommSec in Sydney.

Markets in Australia, Hong Kong, China and the Philippines were closed on Monday for a public holiday.

Financial stocks were leading the decline as investors were unnerved by China's recent credit tightening and Lehman Brothers Holdings Inc. posting an unexpectedly large quarterly loss of $2.8 bln -- the investment bank's first since it spun off from American Express Co in 1994.

The Shanghai Composite slumped 7.7 percent to 3,072.33 after the People's Bank of China over the weekend raised the reserve requirement on bank deposits by a bigger-than-expected full percentage point this month to a record 17.5 percent.

The reserve ratio hike, its fifth this year, is part of China's continuing efforts to bring down the nation's inflation rate which is at its highest level in more than a decade.

"That is a very sharp rise. The market was expecting China to loosen its tight monetary policy due to the earthquake. This latest move dashed that hope. That is why the market sentiment has turned sour," said Yu Kei Lee, an analyst at Core Pacific-Yamaichi. "This will be negative on banks' earnings because their lending capability will be restricted."

The Hang Seng index closed down 1,026.66 points or 4.21 pct at 23,375.52, off a low of 23,343.19 and high 23,741.09.

Among China banks, China Construction Bank lost 0.34 hkd or 4.93 pct at 6.55, Bank of Communications was down 0.49 hkd or 4.81 pct at 9.69, ICBC down 0.27 hkd or 4.72 pct at 5.45, China Merchants Bank down 1.35 hkd or 4.95 pct at 25.95, and Bank of China lost 0.13 hkd or 3.32 pct at 3.79.

The Taiwan weighted index lost 2.5 percent to 8,370. The Nikkei 225 index was 1.1 percent lower at 14,021.17 and the Topix index was down 1 percent at 1,383.20.

Australian benchmarks were lower. The S&P/ASX 200 declined 2.8 percent to 5,437,5, and the All Ordinaries lost 2.6 percent to 5,544.3.

Financial stocks were lower across the region. National Australia Bank dropped 5.3 percent to A$27.95, Westpac lost 5.1 percent to A$21.60, Commonwealth Bank shed 3.5 percent to A$41.87 and ANZ slipped 3.5 percent to A$41.87.

In Japan, Mitsubishi UFJ Financial Group shed 1.8 percent to 1,066 yen as Mizuho Financial Group lost 1.3 percent to 553,000 yen.

In South Korea, the Kospi lost 1.9 percent to 1,774.38, the lowest level in two months, after Yonhap news agency reported that the nation's cabinet members had offered to quit, taking responsibility for weeks of public uproar over U.S. beef imports.

Manila's 30-company composite index lost 3.4 percent at 2,645.95, its lowest finish since Oct. 23, 2006 when it settled at 2,625.52.

The Kuala Lumpur Composite Index (KLCI) edged down 0.02 of a point to close at 1,230.96, off a high of 1,239.06, and the Jakarta composite index closed down 1.5 percent at 2,373.82. The Straits Times Index lost 1.7 percent to close at the session's low of 3,033.05.

The main stock index of India, the 30-share Sensex of the Bombay Stock Exchange, fell 176.85 points or 1.17 percent to 14,889.25, recovering about 244 points from the day's low of 14,645.31, the lowest trough the Sensex hit in 2008.
   
This was the Sensex's first close below the 15,000-mark after more than two-and-half months. It had closed at 14,809.49 points on March 17. The 50-share S&P CNX Nifty of the National Stock Exchange declined 51.15 points or 1.14 percent to end the day at 4,4449.80.

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Copper drops on dollar strength, zinc hits 2.5 yr low

LONDON - Copper fell on dollar strength, which also battered other industrial metals with zinc hitting a two and a half year low.

Prices were lower even as China, the world's biggest copper consumer, returned to trading after a national holiday Monday. Dollar strength sparked selling as it made base metals more expensive for those trading in weaker currencies.

"The base metals complex is lower thus far and continues to take directional cues from moves in oil, gold and the dollar plus the summer slowdown continues to aid bearish short-term sentiment," said Alex Heath, head of base metals trading at RBC Capital Markets."

Direction is most likely to be drawn from inventory numbers from the LME, released daily, currency markets and data from the United States which may confirm the world's biggest economy is headed or in recession.

Today's LME data showed copper stocks across the world fell 600 tonnes which went some way in limiting losses.

Meanwhile, the dollar continued to make gains against other currencies as the start of trading in the United States saw investors buy into the greenback after some hawkish comments by U.S. Federal Reserve chairman Ben Bernanke overnight.

"The dollar is up sharply again ... and this time, taking its toll on metals," said MF Global analyst Ed Meir. "Given the quiet conditions in terms of news, we expect the price bias in metals to be on the downside over the next few days, as the dollar should continue to gain ground," he added.

At 1:10 p.m., LME copper for three-month delivery was at $7,940 a tonne from $7,980 at the close on Monday.

Tin rose fell to $21,365 from $22,050 a tonne. Lead traded at $1,964 from $1,960, while aluminium was down at $2,938 from $2,952. Nickel rose to $22,600 from $21,995, while zinc dropped to $1,935 from $1,984, having hit $1,913 earlier in the session, a 2.5-year low.

Gold fell as the the dollar retained positive momentum after hawkish comments overnight by Federal Reserve chairman Ben Bernanke, who stressed that inflation is a prime concern for the central bank.

The precious metal moves in the opposite direction to the U.S. currency as it is seen as an alternative asset.

"(Gold) looks set to remain in a volatile mood in the coming sessions, working around the $880-920 area as traders appear torn between the likelihood of higher U.S. interest rates, offsetting inflation/recessionary pressures, as well as market fundamentals."

At 11:42 a.m., spot gold was trading at $883.00 per ounce against $895 in late New York trade on Monday.  Among other precious metals, platinum was trading lower at $2,004 per ounce against $2,055 in late New York trades on Monday. Platinum's sister metal palladium was down at $418 from $422, while silver was down to $16.97 per ounce from $17.19.

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