US & World Daily Markets Financial Briefing 10-11-2008

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US STOCKS-Wall St opens up on China's spending boost

NEW YORK - U.S. stocks opened higher on Monday, with big U.S. exporters including General Electric  leading gains following China's plan of a multibillion economic stimulus to shore up the world's fourth-largest economy.
     
The Dow Jones industrial average rose 211.95 points, or 2.37 percent, to 9,155.76. The Standard & Poor's 500 Index  jumped 20.84 points, or 2.24 percent, at 951.83. The Nasdaq Composite Index lifted 31.32 points, or 1.90 percent, at 1,678.72.

WRAPUP 1-US government restructures AIG bail-out

WASHINGTON - The Federal Reserve said on Monday the U.S. government would buy $40 billion of shares in insurer American International Group as part of a restructured bail-out package intended to prevent the firm from collapsing.
      
The new package will allow the Fed to cut to $60 billion from $85 billion the total available to AIG under a credit facility set up in September.
      
The U.S. government would lower the interest rate on loans to the firm and establish two facilities to buy mortgage-backed securities from AIG and collateralised debt obligations on which AIG has written credit default swap contracts, the Fed said in a statement.
      
"The U.S. Treasury ... will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program," the Fed said.  "This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York on September 16, 2008."
      
The government gave AIG, once the world's largest insurer by market value, $85 billion in bail-out financing in September after counterparties and rating downgrades forced it to post large amounts of collateral for credit derivatives positions.
      
It later offered additional financing to bring the support extended to AIG up to $123 billion. The Fed lowered the interest rate on the credit facility established Sept. 16 to three-months LIBOR plus 3 percentage points from the current LIBOR plus 8.5 percentage points.
      
"These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plans to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers," the Fed said.
      
Credit default swap agreements have led AIG to record $18 billion in losses over the past three quarters. Mounting collateral calls left it so severely short of cash that it was veering towards Liquidation.
      
The U.S. Treasury said its $40 billion investment would subject AIG -- which it called a "systemically important company" -- to the same curbs on executive bonuses and golden parachutes as other financial institutions that receive government capital injections.
      
The rescue package was announced as the insurer posted its largest-ever quarterly loss, hurt once more by write-downs on assets linked to subprime mortgages and capital losses.  AIG said its third-quarter net loss was $24.47 billion, or $9.05 a share, compared with a year-earlier profit of $3.09 billion, or $1.19 a share.
     
AIG shares rose about 14 percent to $2.41 in response.  A year ago, AIG stock was trading at about $57 a share. It closed at $2.11 on Friday, off an all-time low of $1.25 in the hours before the federal government stepped in on Sept. 16 with an $85 billion loan.

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FOREX-Euro, high-yielders climb as stocks rally on China

LONDON - The euro climbed on Monday after China announced major initiatives to stimulate its economy, which cooled risk aversion and boosted share prices while putting the dollar and the yen under selling pressure.

Risk demand also improved after financial officials from the Group of 20 nations at a weekend meeting said they would take "all necessary actions" to get financial markets back to normal and counter the backlash of the credit crisis.

China launched an economic stimulus package on Sunday worth nearly $600 billion in what could mark the start of a round of big spending or interest rate cuts to stave off a recession in many countries.

Analysts said that the initiative was unlikely to provide an immediate fix to the struggling global economy, while acknowledging that it was a step in the right direction and highlighted the potential for fiscal stimulus from countries that are not hampered by big budget deficits.

"Risk appetite seems to be a bit better because nations are doing more to boost their economies," said Paul Robson, a strategist at RBS. "Moves like China's could focus attention on countries who have room to tweak or change fiscal policy quite aggressively."

Countries around the world have been slashing interest rates to buffer their economies against the negative impact of the global downturn, while many nations are mulling fiscal measures to essentially spend their way out of recession.

The Bank of England shocked markets last week by lopping 1.5 percentage points off its benchmark rate to 3.0 percent, its lowest since the 1950s, while the European Central Bank cut rates by 0.5 percentage points to 3.25 percent.

ECB President Jean-Claude Trichet said on Monday the central bank won't change its inflation-focused strategy. On Sunday, Trichet reiterated that the ECB does not exclude cutting rates in December, underscoring market expectations that the central bank will continue to cut rates to shore up its economy.

At 1124 GMT, the euro rose roughly 1.4 percent against the dollar to a session high of $1.2927. Sterling also rose, climbing 0.8 percent to $1.5870. The yen fell broadly, pushing the dollar up one percent to 99.30 yen, while the euro rose two percent to 128.03 yen.

The Australian dollar rose 2.7 percent against the dollar, and climbed 2.2 percent against the yen. The high-yielding Aussie dollar was among the biggest beneficiaries of the lull in risk aversion, even as the Reserve Bank of Australia cut its growth forecast on Monday.

Despite share price rallies, currency markets remain jittery, with ongoing worries about a global recession ensuring any recovery in risk appetite remains tentative. Analysts also expressed concern that China has had to take such drastic action to tackle the economic crisis.

"Even this huge package will hardly prevent the global recession. Euro/dollar should therefore end the current correction phase with a break to the downside," analysts at Commerzbank said in a note to clients. On Friday, key U.S. data emphasised the problems facing the world's largest economy as it lost 240,000 jobs during October.

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European shares rise, boosted by Chinese package

FRANKFURT - European share prices rose by  midday on Monday, boosted by mining stocks which jumped after  China unveiled a nearly $600 billion economic stimulus plan to  boost domestic demand.
   
At 1151 GMT, the FTSEurofirst 300 index of top  European shares was up 2.8 percent at 940.64 points, on track  for its eighth day of gains in the last 10.
   
The DJ Stoxx European basic resources index jumped  12.7 percent, tracking metal prices. Rio Tinto,  Kazakhmys, Xstrata and Antofagasta  recorded gains of 9-16 percent.  Steelmaker ArcelorMittal jumped 16.6 percent, and a  5.8 percent rise in oil prices lifted BP, Total  and Shell by 2.9-5.3 percent.
   
China approved a $586 billion government spending package  and announced a shift to "moderately easy" monetary policy  despite having already made three interest rate cuts since  mid-September.
   
"Governments clearly understand this is very serious and are  working on two fronts: Keynesian, with fiscal stimulus, and  Friedman with cutting interest rates and putting liquidity into  the system," said Philippe Gijsels, strategist at Fortis Bank,  in Brussels.
   
Gijsels pointed out that U.S. stocks rallied on Friday after  the European close, despite weak U.S. jobs data, which indicated  that bad news was now factored into share prices. 
    
"This market is very much oversold, we have been very  cautious on the markets since January .. the chances are very  good for a bear market rally from now," he said.
   
European shares have risen 15 percent over the past two  weeks but are still down 38 percent this year, hammered by a  credit crisis that piled up losses at top banks and slowed the  economy.
   
Around Europe, Britain's FTSE was up 3 percent,  Germany's DAX up 3.4 percent and France's CAC  was 3.5 percent higher.
    
"Commodity stocks are rising, on the other hand you see that  financial stocks are having further problems, so while there is  a little hope for the economic scenario, we still come back to  the same old problems," said Hans-Juergen Delp, investment  strategist at Commerzbank in Frankfurt.
   
Santander fell 5.6 percent to 7.87 euros after it  unveiled a surprise 7.2 billion euro rights issue at 4.5 euros a  share.
   
Europe's biggest insurer Allianz fell 1.6 percent  after reporting worse-than-expected third-quarter operating  figures, and abandoning its operating earnings targets for this  year and next. "Share prices are going to remain extremely volatile and we  will continue in a bottoming-out phase -- we are a long way from  reaching a correction upwards," said Commerzbank's Delp.
   
Markets should brace for poor economic data from the euro  zone this week, Goldman Sachs economist Erik Nielsen warned in a  note. "In the euro zone, this week will be dominated by GDP and  industrial production data," he said. "Fasten your seat belts -  its going to be an unpleasant ride."
   
Data released on Monday showed that Italian industrial  output plunged 2.1 percent in September, the steepest fall in  almost a decade, pointing to a recession which analysts said may  prove deep and long lasting.

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Asian Market Summary

Japan's Nikkei ended 5.8 percent higher, while Hong Kong's Hang Seng was up 3.7 percent as of 0633 GMT.

The main TAIEX stock index fell 2.06 points to close  at 4,740.27, despite gains in regional markets following moves by  China and other G20 nations to fight the economic slowdown by  lending support to exporters.

China A-shares closed sharply higher after the government announced a 4 trln yuan stimulus package to boost domestic demand. Construction-related stocks led an across-the-board rally after the State Council said last night that the government would spend about 4 trln yuan by the end of 2010 on social welfare, infrastructure, environmental protection and reconstruction projects.
   
Banks and property developers were also in demand after the government shifted its monetary stance to "appropriately loose."
   
The benchmark Shanghai Composite Index closed up 127.09 points or 7.27 pct at 1,874.80, the biggest percentage rise since late September. Around that time, the government announced a series of market-supporting measures, including the removal of stamp duty on share purchases and sovereign wealth fund support for shares of major state-owned banks.
   
Turnover nearly doubled to 56.87 bln yuan from 28.64 bln on Friday. The Shanghai A-share Index was up 133.40 points or 7.27 pct at 1,969.44, while the Shenzhen A-share Index rose 31.56 points or 6.43 pct to 522.66.

The Korea Composite Stock Price Index ended up 1.58 percent at 1,152.46 points, but shed part of an earlier 2.6 percent gain, partly due to a ratings outlook downgrade by Fitch.

The 30-share BSE index ended up 571.87 points at 10,536.16, its highest close since Tuesday, with all but two of  components gaining. It rose as much as 6.1 percent during trade.
   
The benchmark has risen 37 percent from a three-year low hit  on October 27, although it is still down 48 percent in 2008 to be  one of the worst performers in Asia this year.

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Gold climbs as commodities rally on China

LONDON - Gold rose 2 percent in Europe on Monday, lifted by gains across commodities after China announced a $600 billion economic stimulus package, and by weakness in the dollar against the euro.

Spot gold hit a peak of $753.10 an ounce, before easing to $751.80/753.30 by 1021 GMT, against $735.95 late in New York on Friday.

Oil climbed more than $2 a barrel and base metals prices surged after the Chinese announcement, boosting interest in all commodities, traders said.

Copper surged 8 percent, nickel more than 10 percent and zinc and lead around 6 percent each following the news, clawing back a little of the substantial ground they have lost in recent months.

Oil also rallied, climbing 4 percent a barrel to above $163 a barrel as traders hoped the Chinese stimulus package would benefit demand.

Firmer crude prices tend to benefit gold because the precious metal is often bought as a hedge against oil-led inflation, and because they support interest in commodities as an asset class.

Among other precious metals, silver tracked gold higher to $10.30/10.38 an ounce from $9.99. Platinum prices climbed more than 3 percent as fears abated that the demand picture for industrial precious metals will continue to worsen.

The white metal is also being helped by fresh fears over supply after major producer Anglo Platinum said last week it may lose up to 200,000 ounces of output this year due to a smelter shut-down.

However, all the platinum group metals remain well off highs after posting sharp losses in recent months on waning demand from carmakers, who account for more than 50 percent of PGMs consumption.

"Platinum continues to consolidate having broken out of the steep down-channel on the charts, in place since mid-July," said James Moore, an analyst at TheBullionDesk.com.

"But, with gold and silver showing signs of slippage the white metal is at risk of another test lower in the coming session, potentially dragging the metal back below $800/oz."

Spot platinum rallied to a high of $875 an ounce, before easing to $861.50/881.50, against $845. Its sister metal palladium was at $226/231 an ounce against $220.

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