US & World Daily Markets Financial Briefing 11-03-2008

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Stocks up sharply after Fed credit plan

NEW YORK - Wall Street rebounded sharply Tuesday after the Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis. The Dow Jones industrials surged about 200 points.

The program is part of a worldwide effort to help struggling banks and mortgage providers. The Fed -- acting in concert with the European Central Bank, the Bank of Canada and the Swiss National Bank -- agreed to loan banks money in exchange for debt that includes slumping mortgage-backed securities.

The Fed's latest move was seen as a direct boost to struggling banks by avoiding having to dramatically slash interest rates when the central bank's policymaking Open Market Committee meets next week. Economists continued to be concerned about the unrelenting rise in oil prices and the dollar's weakness, which contribute to inflation -- and cutting rates only add to these pressures.

The market's reaction contrasts with its more skeptical view during the past few weeks about the central bank's ability to keep the economy out of a recession. However, this latest step was seen as a direct lifeline to investment banks -- which previously couldn't borrow in past Fed liquidity plans.

"The big problem has been the financials, and this helps supply money directly to the banks and may take some of the need for aggressive rate cutting off the table," said Peter Dunay, chief investment strategist at Meridian Equity Partners. "The Fed is basically going to take the bad loans off the banks' books, and the market seems to be loving that idea."

In late morning trading, the Dow rose 202.31, or 1.72 percent, to 11,942.46. The index -- which lost more than 500 points in the last three sessions -- is still down more than 2,100 points from its October 2007 record high. Standard & Poor's 500 index rose 20.81, or 1.63 percent, to 1,294.18, while the Nasdaq composite index added 42.04, or 1.94 percent, to 2,211.38.

Government bond prices fell as stocks rallied. The yield on the 10-year Treasury note, which moves opposite its price, spiked to 3.62 percent from 3.46 percent late Monday.

Oil prices rose as high as $109.72 in premarket trading on the New York Mercantile Exchange before falling back to $107.34, down 56 cents. Speculation that rising prices for oil and other commodities will offset the falling dollar has driven oil's rally from $87 a barrel in January.

Gold prices were higher, and the dollar was mixed against other major currencies.

The Fed's announcement overshadowed a report from the Commerce Department that showed the United States' trade deficit grew larger in January. The latest snapshot of the economy showed that the trade gap increased to $58.2 billion -- the highest since November.

In corporate news, WellPoint Inc. fell after Goldman Sachs trimmed its ratings in the managed care sector to neutral from attractive. The investment bank singled out WellPoint's performance amid pricing pressures. The stock plunged $17.25, or 26.2 percent, to $48.64.

Texas Instruments Inc., which makes chips used in about half the world's cell phones, lowered its profit projections late Monday due to a key customer's decision to cut orders. The company did not identify the customer other than to say it is a maker of wireless phones, and shares fell $1.14, or 3.8 percent, to $28.51.

Google Inc. shares spiked after European Union regulators cleared the Internet company's $3.1 billion bid for online ad tracker DoubleClick. Shares of Google rose $17.29, or 4.2 percent, to $430.91.

The Russell 2000 index of smaller companies rose 15.28, or 2.37 percent, to 669.25. Advancing issues surpassed decliners by a 4 to 1 basis on the New York Stock Exchange, where volume came to 514.9 million shares. Stocks overseas rebounded. Japan's Nikkei 225 stock average rose 1.01 percent, while Hong Kong's market closed up 1.28 percent higher. In afternoon trading, Britain's FTSE-100 rose 1.7 percent, Germany was up 1.9 percent, and France added 2.13 percent.

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Forex - Euro just off record high against dollar on strong ZEW survey

LONDON - The euro was trading just off its all-time record high against the dollar following a stronger-than expected German economic sentiment survey.The ZEW's economic expectations index climbed to - 32.0 in March from February's - 39.5, much stronger than the - 40.0 analysts had been forecasting.

This helped the euro regain its upward momentum against the dollar, soaring to a fresh all-time high of 1.5495 usd on the back of the news. Analysts said the firmer-than-expected reading indicates that investors in the euro zone's largest economy are becoming a touch more optimistic that they can avoid the worst of the fallout from the US slowdown. "It looks as though investors have come to realise that their previous expectations perhaps were a bit too gloomy," said Martin van Vliet at ING.

Meanwhile comments from Bundesbank president Axel Weber also added to the euro's climb higher. Weber said the German economy continues to be on a solid up-trend, and that while there is now a downside risk to growth, inflation pressures remain a key cause for concern. Julian Callow at Barclays Capital said his comments show he's unlikely to support any cut in euro zone interest rates in the near term.

"Mr Weber has not only repeated his opinion on the lack of prospects for rate cuts, but also he has seized on the latest evidence that euro area - and German - GDP growth might well not be as weak as nearly everyone has thought in the first quarter", said Callow.

Elsewhere while the dollar was on the back foot against the pound and the euro, it remained relatively firm against the yen as risk appetite picked up, partly driven by rumours the US Federal Reserve is considering a series of new measures to improve conditions in the credit markets.

The Fed is widely expected to cut US interest rates by 75 basis points when it meets next week but reports are now circulating that it could also implement a series of other measures to improve liquidity conditions. These include the Fed purchasing mortgage-backed securities issues and offering to lend directly to non-banks.

These reports have helped lift stocks markets in Asia and Europe, pushed up the yields on US Treasuries as investors' worries about the state of the American financial sector subside slightly. Ashley Davies, currency strategist at UBS, said the reports could provide the dollar with some short-term support due to the rise in bond yields and drop in concern about the banking sector. However, he said even if the measures do come to fruition they are unlikely to prevent the US currency continuing to depreciate in the medium term.

"To the extent that the policy measures are being inspired by concerns that banks have insufficient capital then it seems unlikely that the US dollar would be out of the woods by any stretch of the imagination and surely risk appetite will remain fragile," he said.

The only major US release due out this afternoon is the January trade balance, which is expected to show a slight widening in the deficit to 59.6 bln usd from 58.8 bln in December. Also of note though, will be speeches from Federal Reserve board member Randall Kroszner and Treasury Secretary Henry Paulson.

Finally the pound was trading mixed, lower against the euro but up against the dollar and the yen. Earlier sterling dropped following gloomy news on the UK housing and retail sectors. The Royal Institute of Chartered Surveyors said a balance of 64.1 pct of its members reported house prices fell during February, coming close to lows not seen since 1990.

The Council of Mortgage Lenders brought more bad news on the housing market, reporting that the number of loans taken out for house purchase fell by 19 pct in January from December. Meanwhile the British Retail Consortium reported that like-for-like shop sales were up 1.5 pct on the year in February, well down on January's 2.6 pct.

James Knightley at ING said data such as these reinforce expectations that UK interest rates will fall further this year, although inflation concerns will ensure cuts will happen at a gradual pace. "There are obvious implications from these numbers for the broader economy given the high correlation between UK consumer spending and house prices," he said.

"While the BoE, in the near-term, looks set to keep policy on hold, we continue to believe that the weaker growth environment will force the Bank of England's hand with the policy rate down to 4.25 pct (from the current 5.25 pct) in the first quarter of 2008," he added.

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Euroshares higher midday as Dow set to rise; techs still pressured by TI warning

At 12.08 pm, the DJ STOXX 50 was up 12.03 points, or 0.4 pct, at 3035.28 and the DJ STOXX 600 was up 1.25 points, or 0.41 pct, at 305.4. Spread bettors,

Oil's surge above 108 usd a barrel added to the gloom. Turning to company news, technology stocks were under pressure this morning, down 2.3 pct in aggregate according to the DJ STOXX 600 for the industry, and led lower by Nokia, which lost 5.77 pct.

Shares fell on concerns over demand after US customer Texas Instruments cut its profit and sales outlook for the first quarter because of a sharp fall in orders from a large customer. The news prompted Cazenove to downgrade the shares to 'in-line' and Cheuvreux to downgrade the shares to 'outperform'.

A Paris-based trader said Nokia accounts for some 20 pct of STMicro's earnings. "When Texas is in trouble, the market automatically thinks Nokia is in trouble and that STMicro is going to be hit too," the dealer said.

In a note to clients this morning, Cazenove named ARM, STMicro, CSR and Imagination Technologies as the semiconductors likely to be most affected by Texas' announcement overnight. In earnings news this morning, EADS shed 6.54 pct after the aerospace and defence group reported a larger than forecast full-year loss and as observers said the outlook also disappointed.

Over in Norway, Norske Skog lost 9.57 pct as the Norwegian paper manufacturer warned on profits and said that a continued rise in input costs combined with falling sales prices will result in a "significantly weaker" first quarter result compared to the fourth quarter of 2007.

Meanwhile, Ferrovial climbed 5.38 pct higher after the UK's Civil Aviation Authority bowed to pressure from the UK airports operator BAA, which is owned by Ferrovial, to increase the amount it can charge passengers. Turning to M&A related news, Iberdrola added 4.68 pct on the back of reports that EDF has been given the green light by the Spanish government to make a bid for the utility.

According to daily Negocio, the bid could come in at some 15 eur per share. And Gas Natural added 1.67 pct after El Confidencial said Caixa and Iberdrola a deal between Iberdrola and Gas Natural.

In the UK, Cairn Energy stormed 6.65 pct higher amid talk that Italy's ENI is preparing a bid for the UK exploration group. "There are rumours ENI are set to bid, but the rumoured 4,000 pence per share price-tag sounds too high," a dealer said. Fortis was 3.64 pct higher after a report on financial website elConfidencial saying Banco Santander SA could buy a 6 pct stake in the Belgo-Dutch bancassurer.

But shares in Colonial remained suspended pending an announcement. Newspapers said Colonial presented an update on Investment Corporation of Dubai (ICD)'s bid to its board last Friday, though no news on the bid has yet been released by the beleaguered realtor.

Confectionary and drinks manufacturer Cadbury Schweppes gained 3.8 pct after the group set a date, May 7, for its planned demerger. Market watchers had been doubting whether the deal could go ahead in the currently difficult market environment.

And UK mining group Xstrata was trading 2.5 pct lower following a report in the Times that Brazilian peer Vale is close to pulling the plug on its 43 bln stg takeover bid after falls in its share price knocked billions of pounds off the value of the deal.

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Asian markets rebound on bargain hunting

The Kuala Lumpur Composite gained 2.8 percent to close at 1,206.54, regaining some ground after losing 9.5 percent on Monday on panic selling after the long-ruling Barisan Nasional coalition lost control of four of the country's 13 states as well as its two-thirds majority in parliament in weekend elections.

Wai Kee Choong, research head of Citigroup in Malaysia, said Monday's slump was a knee-jerk reaction to the outcome of the general election.

In Japan, the benchmark Nikkei index closed up 1 percent at 12,658.28, as investors shopped for bargains after the blue-chip gauge fell nearly 180 points at one stage to hit its lowest level since August 2005. "The rebound was expected as while trading volumes remained thin, major issues such as Nippon Steel stopped falling and that was a sign of the change in trend," said Investrust technical analyst Hiroyuki Fukunaga in Tokyo.

South Korea's KOSPI closed up 1.0 percent to close at 1,641.48. Hong Kong's Hang Seng Index closed up 1.3 percent at 22,995.35 and the Shanghai composite closed 0.5 percent higher at 4,165.88. .Singapore's Straits Times Index gained 0.9 percent to close at 2,860.85.

Australia's S&P/ASX 200 index dropped 0.9 percent to end at 5,134.2 while the All Ordinaries index fell 1.2 percent to 5,211.1. The Jakarta composite index closed down 0.2 percent at 2,523.53, while the Philippine composite closed almost flat at 2,909. Most banking shares rebounded.

In Tokyo, Mizuho Financial rebounded by 2.3 percent to close at 397,000 yen, even as investors found little comfort from a Nikkei newspaper report that its retail banking unit Mizuho Bank has decided to sell about 100 billion yen in loans made to Goodwill Group Inc to an alliance consisting of US equity fund Cerberus Group and US brokerage Morgan Stanley.

Other Japanese banks rebounded by close, with Mitsubishi UFJ Financial ending up 1.8 percent at 865 and Sumitomo Mitsui Financial up 1 percent at 687,000 yen.

In Hong Kong, Chinese banks and insurers reversed early losses. Industrial and Commercial Bank of China was up 1.18 percent at 5.14 Hong Kong dollars. China Life Insurance, the nation's largest insurer, gained 0.35 percent to close at 28.50 dollars.

Among Australian banks, National Australia Bank rose 2.6 percent to 27.20 Australian dollars, Commonwealth Bank of Australia was up 2.5 percent at 39.66 dollars, ANZ was up 4.3 percent at 20.85 dollars, while Westpac Banking was 4.3 percent higher at 21.93 dollars.

"The banks are in the green and it is a good sign given the fact that the lead from America was anything but positive," said Michael Heffernan, a private client advisor at Austock Services in Sydney. "People realized that there are a few bargains around and it is about time they showed a bit of courage," he said. "The only reason to be hesitating I would think is if the banks are going to be reducing their dividends, but certainly they have given no inkling of that at the moment."

Nonetheless, the Australian market is expected to remain volatile and will continue to take direction from the US. "The bottom line is the whole market is still in a very fractious and in an uncertain state," Heffernan said.

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Metals - Copper rises on bargain hunting, large stock-fall

LONDON - Copper prices rose, having fallen sharply yesterday on bargain hunting and as tightening stocks sparked supply fears. Prices tumbled yesterday on resurgent fears of dented demand ahead amid persistent economic weakness on profit taking after the red metal hit a record 8,820 usd per tonne, basis three months, late last week and as Chinese buying abated amid higher prices.

This morning, a large 1,675-tonne fall in global stocks, which took inventory down to its lowest level since September last year, as reported by the LME in its daily report, underpinned the metal.

"The metal we remain most bullish for is copper as stocks are low and still falling and therefore vulnerable to supply disruptions," said BaseMetals.Com analyst William Adams. "Until demand slows enough to allow supply to catch up and for inventory to be replenished, copper is likely to remain vulnerably to bouts of tightness."

At 10.30 am, London Metals Exchange copper for three-month delivery rose to 8,440 usd per tonne from 8,315 usd at yesterday's close. Supply concerns out of key producer Chile are also lending support following reports a severe drought is affecting power supplies.

"Central Chile is facing its biggest drought in a century and water is at dangerously low levels at hydroelectric generation centres," said Fairfax analyst John Meyer. "Energy-saving measures in all public buildings have been introduced. Copper miners in northern Chile also face difficulties due to a curtailment of natural gas supply from Argentina impacting gas-fired power stations," he added.

Any curtailment in power supplies could severely affect energy-intensive mining operations, cutting global production in what is already viewed by many as a tight market.

Concerns about a looming recession in the US, the second largest consumer of the red metal after China, have been keeping price gains in check. Many Chinese exports are destined for the US so a faltering US economy could deal a double blow to copper demand.

In other metals traded on the LME, aluminium for delivery in three months was flat up at 3,160 usd per tonne against 3,140 usd.

Three-month Tin was up at 19,200 usd per tonne against 19,050 usd, while nickel slipped to 32,350 usd per tonne from 32,455 usd. Zinc rose to 2,620 usd per tonne, basis three months, from 2,561 usd and lead was up at 3,044 usd per tonne usd from 3,000 usd.

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