US & World Daily Markets Financial Briefing 11-02-2008

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Wall Street mixed on AIG worries

NEW YORK - Wall Street was mixed Monday as investors reacted well to strong earnings from Hasbro Inc. but also were concerned that American International Group Inc. may have more mortgage debt to write off. The Dow Jones industrial average fell about 100 points.
   
AIG, one of the 30 companies that make up the Dow, said in a regulatory filing that it would need to alter the way it values its credit default swaps involving collateralized debt obligations. Credit default swaps are insurance policies against defaults, and CDOs are funds that contain slices of bonds, some of which are backed by mortgages.
   
The insurer said auditors found it "had a material weakness in its internal control over financial reporting and oversight" regarding how it valued certain credit default swaps. The filing raised concerns that there will be further losses at AIG, and that other financial companies might reveal similar problems. AIG tumbled $4.78, or 9.4 percent, to $45.90.
   
"The AIG news pulled the rug out from under hopeful investors," said Jack Ablin, chief investment officer at Harris Private Bank.
   
Meanwhile, Yahoo Inc.'s board rejected a $44.6 billion takeover offer from Microsoft Corp. Yahoo said its board concluded that Microsoft's unsolicited offer "substantially under-values" the Internet search company. Microsoft, another Dow component, fell 56 cents, or 1.9 percent, to 28.00, while Yahoo rose 19 cents, or 0.6 percent, to $29.38.
   
The Dow fell 40.72, or 0.33 percent, to 12,141.41. Dow Jones & Co. said it was replacing two of the blue chip index's 30 components -- Altria Group Inc. and Honeywell International Inc. -- with Bank of America Corp. and Chevron Corp., effective Feb. 19.
   
Broader stock indicators were mixed. The Standard & Poor's 500 index fell 1.07, or 0.08 percent, to 1,330.22, and the Nasdaq composite index rose 8.05, or 0.35 percent, to 2,312.90.
   
AIG's filing overshadowed investor optimism about a profit report from Hasbro Inc., the world's second-largest toymaker. Hasbro said fourth-quarter income soared 24 percent, thanks to a 16 percent increase in sales. Its shares rose 73 cents to $26.61.
   
Last week, the Dow fell 4.40 percent, the S&P's 500 index declined 4.60 percent, and the Nasdaq dropped 4.50 percent. The Dow is about 15 percent below its Oct. 9 record close of 14,164.53, and about 4 percent above the 15-month lows it hit in January.
   
Bond prices rose Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.61 percent from 3.65 percent late Friday.
   
Light, sweet crude oil rose 20 cents to $91.97 per barrel on the New York Mercantile Exchange.

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Euro fails to sustain earlier gains as risk aversion sets in again

The euro fell in afternoon trade with rising risk aversion and a lack of data wiping out earlier gains.
   
The currency had risen earlier in the day following comments from European Central Bank president Jean-Claude Trichet that there had been no discussion of interest rate cuts at the governing council's meeting last week when rates were left on hold at 4.00 pct. However analysts said that other recent comments from ECB officials coupled with evidence that euro zone economic activity is starting to wane mean the comments did little to later expectations that rates are set to fall in the coming months.
   
"While Trichet might have been trying to temper rate cut expectations, the less hawkish hue of the ECB last week suggests that the ground work is being prepared for a rate cut," said analysts at BNP Paribas.
   
Several major European banks, including UBS and Commerzbank are due to publish results this week which will be closely eyed to see to what extent the subprime losses of US banks are mirrored across the Atlantic.
   
"Rising risk aversion through greater write-downs would provide support for the dollar against the euro," said the BNP Paribas analysts.
   
Stocks on Wall Street have also opened down this afternoon, with the dollar and yen gaining on the back of rising risk aversion. This was partly driven by an announcement from American International Group Inc that it has more mortgage debt to write off then previously announced.
   
Ashraf Laidi, currency strategist at CMC Markets, said Wednesday's release of US January retail sales figures will be key in determining the direction of equity markets this week, which will have a knock-on effect on risk aversion and currencies.
   
If sales recover after posing a 0.4 pct fall in December then stocks could well receive a much-needed boost.
   
Meanwhile the pound slipped back a touch after earlier gains, which came on the back of figures showing UK producer prices soared during January.
   
Output prices rose a monthly 1.0 pct after a 0.4 pct increase in December, the highest monthly rise since January 1995 and well above analyst expectations for another 0.4 pct increase. Input prices rose by 2.6 pct in January from December, far above analyst expectations for a 1.3 pct rise.
  
Tomorrow sees the release of consumer price inflation data for January, with the annual headline rate expected to have risen to 2.3 pct from 2.1 pct in December.

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Euroshares still down midday; Dow seen adding to losses; economic concerns weigh

LONDON - Europe's leading bourses remained lower midday as the DJIA is expected to post further losses in opening deals as concerns about the health of the US economy continue to weigh.
   
At 12.03 am, the STOXX 50 was down 19.6 points, or 0.62 pct, at 3,148.39 and the STOXX 600 was down 2.18 points, or 0.68 pct, at 313.34.
      
Over the weekend the Group of Seven (G7) finance chiefs conceded that global economic prospects have deteriorated since they last met in October and that they stand ready to take collective and individual action to boost prospects.
   
"The G7 comments are weighing on the market this morning," one senior trader said. "It's unsettling but on a day such as this one needs to selectively nibble at certain shares."
   
Financials were among the worst hit. Societe Generale fell 3.14 pct after it announced the terms of its planned 5.5 bln eur capital increase, said its subprime writedown will be larger than previously forecast and said its full-year net profit was 947 mln eur for 2007.
   
And Northern Rock -- which had been higher -- turned 2.55 pct lower as a report Royal Bank of Scotland, Barclays and Citigroup have offered to securitise half the Bank of England's 25 bln stg emergency loan to the beleaguered UK mortgage bank failed to generate confidence in the group's prospects.
   
Other UK banks were hit by HSBC target downgrades. Barclays and HBOS fell 1.58 pct and 1.6 pct respectively as the pair are rated 'underweight'.  Credit Suisse was 0.44 pct lower ahead of its earnings update tomorrow.
   
Shares in Repsol YPF SA were 1.63 pct higher in morning trade, with dealers citing threats to US oil supply made by Venezuelan President Hugo Chavez as well as ongoing speculation about M&A moves in the Spanish energy sector.
   
And Iberdrola added 1.49 pct after reports Germany's EON may make a bid for the Spanish group and El Economista says Iberdrola is in talks with La Caixa to organise defensive moves against a possible EDF/ACS led takeover -- which could potentially involve a merger with Gas Natural.
   
Nomura points out that la Caixa's stake in Repsol also points to a sector wide merger and the creation of a "national energy champion", which the broker said has long been hoped for by many investors and said the government might also prefer.
   
In earnings news, Nordex, down 1.34 pct; OPG, down 0.77 pct; and Faurecia, down 1.06 pct, gave up opening gains to turn lower after their full-year updates failed to impress.
   
Construction and housebuilding stocks shared mixed fortunes after Goldman Sachs upgraded Berkeley, up 2.89 pct, to 'neutral' from 'sell', but downgraded Persimmon, down 3.25 pct, and FCC, down 3.28 pct, to 'sell' from 'neutral'.  The broker also initiated coverage on Strabag, up 3.28 pct, with a 'buy' rating and a 51.80 eur target.
   
In other changes, Goldman added Taylor Wimpey and Barratt to its 'conviction sell' list, saying these two are the most highly geared to the housing slowdown expected in 2008 and 2009. Taylor Wimpey shares fell 4.8 pct and Barratt shares were down 3.8 pct.
   
In other broker news, Schneider Electric and Legrand fell 2.16 pct and 3.85 pct respectively after UBS cut the pair to 'sell' from 'neutral'.
   
Telecom Italia shares fell 1.27 pct after it was cut to 'hold' from 'buy' at Goldman Sachs. And Unilever fell 0.84 pct after its shares were cut to 'neutral' vs 'buy' at UBS.

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Asian stocks slump on renewed subprime worry, Australia hit by rate fears

SINGAPORE - Stock markets across Asia fell Monday as investors returned from the Lunar New Year break to the continued gloom on Wall Street, while Australian benchmarks fell after the central bank cautioned that high inflation may require further rate hikes.
   
The S&P/ASX 200 closed down 2.1 pct at 5,537.6 and the All Ordinaries fell 2.1 pct to close at 5,603.1, after the Reserve Bank of Australia said there's a strong likelihood that inflation will remain uncomfortably high for some time. Barring a sharp slowdown, monetary policy will probably need to be tightened again, it said in its quarterly monetary statement.
   
The RBA hiked its target cash rate a quarter percentage point to 7 pct last Tuesday following two quarter percentage point rises in August and November last year. The rate is now at the highest level in 12 years.
   
"The statement on monetary policy released by the Reserve Bank did not brighten the market at all with warnings of future interest rate rises, which goes down like a lead balloon in the market at the moment," said Michael Heffernan, a private client advisor at Austock Securities in Sydney.
   
Adding to the downdraft, Macquarie Fortress Investments said a leveraged fund it manages may not be able to refinance debt before existing financing arrangements mature, reigniting concerns about the financial sector.
   
"It looks like people are playing a game of roulette at the moment, putting it on one day and taking it off the next, rather than staying in for the long term," said Juliette Saly, an equities analyst at CommSec in Sydney.
   
In other news, the group of seven finance ministers and central bankers are expecting losses from securities linked to the US subprime sector to reach 400 bln usd, far more than the 100-150 bln usd that the Federal Reserve has predicted, the Financial Times reported Monday.
   
G7 officials at a weekend meeting in Tokyo highlighted their concerns about the subprime crisis and subsequent crunch in global credit markets.
   
"All these problems about economic recession and subprime losses are not yet over," said Francis Lun, general manager at Fulbright Securities in Hong Kong.
   
The Hang Seng closed down 3.6 pct at 22,616.11 and the Kospi ended down 3.3 pct at 1,640.67.
   
The Strait times closed down 2.2 pct at 2,868.29, Manila's composite index finished lower 1.9 pct to close at 3,179.48, Kuala Lumpur Composite Index closed down 0.6 pct at 1,407.38 and the Jakarta composite index closed down 1.9 pct at 2,589.38.
   
The Bombay Stock Exchange's benchmark Sensitive Index fell 833.98 points or 4.78 pct at 16,630.91 while the National Stock Exchange's 50-share S&P CNX Nifty lost 5.14 pct to 4,857 points.
   
On the BSE Sensex Reliance Energy Ltd was the top loser as it plunged more than 19 pct to 1,582.30 rupees. The company is a majority stake-holder of Reliance Power, which ended the day at 372.50 rupees off its issue price of 450 rupees a share.

The Japanese, Chinese and Taiwanese markets were closed. The Shanghai bourse will reopen on Wednesday and the Tokyo exchange will resume trade on Tuesday.

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Platinum hits series of record highs on SAfrican supply squeeze

LONDON - Platinum hit a series of record highs as South African mining problems looked set to squeeze supply further while palladium and silver also rose to fresh highs. Gold, meanwhile, was also strong, trading at its highest value in over a week and near a record high seen last month.
   
South Africa is currently in the grips of a power crisis that has forced mining companies to reduce power usage by some 10 pct. Eskom, the national power utility, has appealed to mining companies for help in cutting electricity consumption to ease a shortage.
   
In line with other South African miners, production at Anglo Platinum Ltd, the world's biggest producer of the metal, has been disrupted from Eskom's inability to supply sufficient power. As a result the company expects refined platinum production to fall to 2.4 mln ounces in 2008.
   
"This latest production shock suggests that the platinum price in 2008 ought to easily trade 2000 usd/oz and is biased higher again, and palladium as a result will continue to remain attractive," said JP Morgan analyst Michael Jansen.
   
Strikes, safety issues and supply shortages have hampered many of South Africa's miners. Eskom, which is the country's biggest electricity provider, is still providing only 90 pct of normal supply after halting power supplies to many companies at the end of last month.
   
"With state energy provider Eskom forecasting the problems to continue for several weeks, further gains seem inevitable with the metal potentially testing 2000 usd/oz in the not too distant future," said TheBullionDesk.Com analyst James Moore.
    
At 12.20 pm, platinum was up at 1,905 usd per ounce against 1,881 usd in late New York trades Friday, having earlier hit a record 1,917.50 usd an ounce earlier in today's session.
   
Elsewhere, palladium was trading up at 442 usd against 436 usd an ounce Friday, having earlier touched 445 usd -- its highest value in six years.   

Palladium and platinum can both be used in manufacturing jewellery and auto catalysts.
   
Silver was up at 17.30 usd against 17.09 usd per ounce, having earlier hit 17.37 usd an ounce -- its highest price since 1980. Overall precious metal price-strength boosted the metal.
   
Meanwhile, gold was trading up at 926.10 usd per ounce against 918.20 in late New York trades Friday, underpinned by strength in platinum and an overall positive outlook for the precious metal.

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