US & World Daily Markets Financial Briefing 11-01-2008

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Stocks fall amid credit market concerns

NEW YORK - Stocks slid in early trading Friday amid renewed fears that financial companies will suffer larger-than-expected writedowns from credit market troubles.

The start of earnings season has investors worried about how banks and brokerages have fared after suffering losses in the collapse of the subprime mortgage market. The nation's biggest financial institutions will report results next week, including Merrill Lynch & Co., Citigroup Inc. and JPMorgan Chase & Co.

Adding to investors' unease, Merrill Lynch might take a $15 billion hit from its exposure to soured subprime mortgage investments, according to a report in The Wall Street Journal. The nation's largest brokerage is also said to be seeking another capital infusion to help shore up its balance sheet.

Bank of America Corp. agreed Friday to buy Countrywide Financial Corp. for $4 billion, a deal that rescues the country's largest mortgage lender. It comes just months after BofA invested $2 billion in Countrywide.

Investors were also nervous after American Express Corp. warned late Thursday that slower spending and more delinquencies on credit card payments will hamper profit throughout 2008. This follows a similar announcement from rival Capital One Financial Corp., which set aside $650 million to prepare for unpaid credit card bills.

In early trading, the Dow Jones industrial average fell 129.81, or 1.01 percent, to 12,723.28. Broader stock indicators also declined. The Standard & Poor's 500 index fell 12.85, or 0.90 percent, to 1,407.48, and the Nasdaq composite index fell 20.66, or 0.83 percent, to 2,467.86.

Stocks have skidded lower in the new year, with the Dow often falling by triple digits in a single session amid increasing anxiety about a possible recession as well as the continuing fallout from the mortgage crisis.

Corporate news weighed on investors. Bank of America fell 59 cents to $38.71, while Countrywide fell $1.07, or 14 percent, to $6.68. American Express fell $5.28, or 11 percent, to $43.64, while Capital One fell $1.37, or 3.2 percent, to $41.55.

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Forex - Dollar steadies after Bernanke-fuelled falls

The dollar was steadier after tumbling yesterday on expectations of further cuts to US interest rates while the pound recovered slightly after hitting a new all-time low against the euro.

Profit-taking helped the US currency recover today after sharp drops yesterday, when US Federal Reserve chairman Ben Bernanke said the US central bank was ready to trim interest rates again amid lingering economic uncertainty.

"Bernanke delivered more dovish than expected remarks in his speech yesterday, causing the dollar to fall and money markets to price in further fed rate cuts," ABN Amro analyst Melinda Smith said.

Lower interest rates typically weaken a currency as speculators prefer to invest in currencies where interest rates are higher, or are perceived to be heading higher, in a bid to reap higher returns on their investments.

Traders ratcheted up their expectations that the US central bank would unleash a 50 basis point cut to 3.75 pct at a policy meeting scheduled Jan 29-30.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

He spoke after the European Central Bank decided to keep its main interest rate at 4.00 pct against a background of rising inflation and slowing economic growth.

Going forward, analysts said the ECB is not expected to cut rates owing to worries about creeping inflation. The ECB's president Jean-Claude Trichet sounded a warning bell about the prospect of rising euro zone inflation yesterday, cautioning that interest rates could actually rise if pricing pressures do not subside.

In the news conference following the ECB decision to keep rates on hold, Trichet said the bank would be willing to act "preemptively" to curb rising inflationary pressures.

Though the ECB is expected to keep rates elevated, the Bank of England is expected to lower borrowing costs in February because of its concerns about slower growth. The central bank yesterday left its benchmark rate unchanged at 5.50 pct.

These rate cut expectations continue to trouble the pound, which fell to a fresh low against the euro earlier of 0.7586 stg sterling Friday

"With the futures markets implying a 53 basis points narrowing in the 3-month yield spread between the euro zone and the UK over the next six months, it isn't that surprising that the euro continues to sprint higher against the pound," said Simon Derrick, currency strategist at Bank of New York Mellon.

Elsewhere, the yen remained firm as fresh concerns about losses caused by the sub-prime crisis re-emerged. A report in the New York Times yesterday said US bank Merrill Lynch is expected to announce a larger than expected write-down when it publishes fourth-quarter earnings next week.

"The yen has been firm on the back of heightened global risk aversion," said Ashley Davies, currency strategist at UBS.

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Euroshares extend losses midday, broker downgrades weigh on sentiment 

At 11.40 am, the DJ STOXX 50 fell 16.25 points or 0.46 pct to 3,537.98 as the STOXX 600 lost 1.98 points or 0.57 pct to 343.40.

Merrill Lynch is in focus following a report in the New York Times which said the bank is expected to suffer 15 bln usd in losses stemming from soured mortgage investments -- almost double its original estimate.

In Europe, markets also extended earlier losses. "There is a lot of pressure to sell today and although the US gains (overnight) helped initially, concerns over the economy persist," one Frankfurt-based trader said.

Several downgrades on consumer staples groups did nothing to elevate the mood, indicating that even confidence in the demand for everyday products is under pressure.

Unilever lost 5.04 pct, after Morgan Stanley cut its stance on the shares to 'underweight' from 'equal-weight', noting that short-term concerns for the group include potential volume impact from recent price increases and input-cost-related margin pressure, particularly in the first half of 2008.

Clarins and L'Oreal were cut to 'sell' from 'hold' at Deutsche Bank and shed 4.42 pct and 4.09 pct respectively. Danone was down 2.64 pct after it was also cut to 'sell' from 'hold' in the ABN Amro HPC and food producers note.

And food producer Premier Foods fell nearly 14 pct yesterday and as much as 19 pct today after its uninspiring update prompted fears the group will have to resort to a rights issue. Dealers also noted rumours were circulating that Cadbury-Schweppes, down 3.47 pct, will issue a profit warning.

Elsewhere, Infineon was in the spotlight, down 3.72 pct, following a downgrade of the sector by Credit Suisse to 'marketweight' from 'overweight'.

The broker said monthly integrated circuit unit growth is expected to peak in the first quarter of 2008 and noted that the sector has historically not performed well when IC unit growth peaks.

Weak results from Swiss-listed Austriamicrosystems last night as well as low expectations for the fourth quarter of Samsung, due out on Tuesday, are also pressing on the stock.

Amongst outperformers this morning, British Airways added 4.76 pct as traders reported rehashed talk that Middle Eastern peer Emirates was considering a bid, although some pointed to a note on the airline sector from SG securities which was more likely to be behind the share move.

Over in France, engineering group Alstom rose 3.83 pct, buoyed by a recommendation upgrade from Goldman Sachs to 'neutral' from 'sell' and a report of a major contract win to sell next generation high-speed trains to Italy.

Over in the banking industry, Northern Rock gained 5.57 pct after the group said it had sold a mortgage portfolio to JP Morgan at a 2.25 pct premium to its book value.

German midcaps were in good form today with SGL Carbon adding 9.66 pct after CEO Robert Koehler upgraded his full-year 2008 sales growth target to 10-15 pct from above 5 pct.

The company also said earlier it will invest about 200 mln eur in the expansion of its Malaysian graphite electrode plant, which is currently under construction.

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Asian stocks mixed as investors weigh US recession fears vs rate hopes

The Kuala Lumpur Composite Index struck a fresh intraday record at 1,521.56, though traders said the rise was mostly due to expectations the government will call a general election shortly. Historically, the market has rallied strongly in election years. The index finished up 1.7 pct at 1,516.22.

The Philippine Composite closed up 1.4 pct at 3,503.70, with miners advancing as gold climbed close to 900 usd an ounce. After early gains led by the property sector, the Hang Seng closed down 1.3 pct at 26,867.01. The Shanghai Composite was up 0.5 pct at 5,484.68.

The KOSPI index closed down 2.3 pct at 1,782.27. Singapore's Straits Times Index closed down 0.7 pct at 3,287.34, while Taiwan's weighted index closed down 0.4 pct at 8,029.31.

The Nikkei finished down 1.9 pct at 14,110.79, while the Topix ended at 1,377.58, down 1.7 pct. The S&P/ASX 200 closed down 1.6 pct at 5,981.6 and the All Ordinaries was off 1.5 pct at 6,054.4.

"It is a fairly disappointing start after strong gains in New York following Ben Bernanke's words soothing the market there. It hasn't worked over here," said Michael Heffernan, a private client advisor at Bell Potter Securities in Sydney.

The Australian market has suffered its worst start to a new year ever, with the benchmarks down almost 6 pct so far. Among major markets, only Tokyo has fared worse, with the Nikkei slumping 7.8 pct.

By comparison, the Shanghai Composite has gained 3.7 pct, the Indonesian JSX is up 3 pct and the main Malaysian benchmark is up 5 pct.

Today's performance "defies logic, especially as there's a chance that the Fed could cut rates tonight and we'll be seeing another bounce on Wall Street," said Ric Klusman, head of institutional trading at Aequs Securities in Sydney.

Even Australia's two listed gold miners failed to find support from the rallying gold price. The precious metal hit a high of 898 usd an ounce in early Hong Kong trade before falling back to 894.00-894.50 usd.

Australia's leading gold stock, Newcrest Mining, gave back some of its recent gains, falling 0.7 pct to 37.99 aud. Lihir Gold rose 0.8 pct to 3.94 aud. Bernanke's dovish tone

Among individual stocks, Australian mining giant BHP Billiton lost 2 pct to 38.30 aud and Rio Tinto fell 1.9 pct to 125.60 aud after a sell-off on the London Metals Exchange and concerns a US recession will reduce demand for commodities.

Funds management Group MFS Ltd pared some early losses to close down 9.9 pct at 3.55 aud after announcing a proposal to manage 35 unlisted closed-end property syndicates owned by troubled Centro Properties Group.

Centro Properties, which has put itself up for sale in an attempt to refinance 3.9 bln aud in maturing debt, and Centro Retail Group were placed on trading halts at their request pending the announcement.

In Tokyo, retailers were key decliners following weak earnings reports this week. Department store and supermarket operator Seven & I Holdings said its group operating profit will likely fall for the year ending February, its first decline in six years, due to weak sales of clothing and other items.

Seven & I closed down 6.3 pct at 2,885 yen, casual clothing chain store operator Fast Retailing was down 1.9 pct at 7,650 yen and department store operator Isetan lost 3.3 pct to 1,359 yen.

In Hong Kong, China Unicom advanced 6.6 pct to 18.68 hkd after a newspaper reported that the mainland government had approved the long impending restructuring in the telecom sector.

Under the plan, the nation's largest mobile phone operator, China Mobile, would be merged with fixed line company China Tietong, the South China Morning Post reported Friday, citing unnamed sources.

The GSM business of China Unicom, the smaller cellular phone operator, would be merged with fixed line company China Netcom Group. China Telecom Corp, the country's biggest fixed-line phone operator, would acquire Unicom's CDMA mobile phone business.

But other telecom majors, China Telecom, China Mobile and China Netcom, closed lower as these stocks have run up sharply in 2007 on expectations of restructuring, while some investors dismissed Friday's report as speculation.

The Bombay Stock Exchange's 30-share Sensex recovered from yesterday's losses, gaining 245.37 points or 1.19 pct to 20,827.45, while the National Stock Exchange's 50-share S&P CNX Nifty closed up 43.15 points or 0.70 pct to 6,200.10.

"All sector leaders like ICICI and SBI from the banking, ITC from FMCG, and Reliance Industries from the oil and gas sectors were the key scrips which kept the market up today. Midcaps and small caps came under pressure because of continued profit booking since the last 2-3 trading sessions," said Gurudatta Dhanokar, technical analyst & derivatives strategist at Almondz Global Securities.

Among the 30 companies that make up the benchmark index, 15 advanced led by ICICI Bank Ltd, which touched a 52-week high of 1,450.00 rupees during the day before retreating to 1,439.90, a 6.13 pct gain over yesterday's close. The largest private-sector lender in the country has risen 12.02 pct since last Friday.

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Oil falls as supply threats ease, fears over possible US recession linger

At 12.53 pm, New York's WTI (West Texas Intermediate) crude for February delivery was down 58 cents at 93.14 usd per barrel, having fallen 1.96 usd yesterday.

Meanwhile, London's Brent crude for February delivery was down 54 cents at 91.68 usd per barrel. Prices were up in earlier trade amid hopes the US Federal Reserve will cut interest rates aggressively in a bid to shore up the ailing US economy and prevent a recession.

Fed chairman Ben Bernanke said in a speech yesterday US economic prospects for the year have worsened and that the central bank stands ready to take "substantive additional action" to support growth.

Laughlin said oil might struggle to climb higher in the medium term because the US economy could well slip into recession even if the Fed cuts rates sharply.

"(Bernanke) said clearly the US economy is in a worse position than was first thought and it is deteriorating week by week. The recessionary woes are the biggest worry (for oil) at the moment," he said.

Oil prices have fallen some 7 usd after hitting an all time record of 100.09 usd in New York last Thursday on increased fund buying, warm weather forecasts and worries over falling US crude stocks.

US crude stocks are currently at their lowest levels in 3 years. However, market attention is slowly shifting to increasing fuel stocks and higher refinery runs.

As such, supply fears are easing slightly and in their place, worries over demand are rising amid increasingly gloomy economic prospects in the US, the world's largest oil consumer.

Elsewhere, traders are looking forward to Feb 1, when the OPEC cartel meets to set output quotas. The cartel, supplier of nearly 40 pct of the world's oil, left quotas unchanged at its December meeting.

"We think the most severe part of the price decline in energy -- when and if it should occur -- will most likely take place by month's end, when the markets start to discount the OPEC meeting," said MF Global analyst Ed Meir.

Meir believes OPEC could well opt to raise output at its Feb 1 meeting in Vienna, especially if US crude stocks keep declining while demand growth stalls shows little sign of stalling.

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