US & World Daily Markets Financial Briefing 11-04-2008

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Stocks fall after GE results disappoint

NEW YORK - Wall Street fell Friday after a disappointing first-quarter report from General Electric Co. stoked concern about the health of corporate profits and the wider economy. The major indexes lost more than 1 percent. A weaker-than-expected consumer confidence reading also weighed on investors.

GE, which is regarded as a bellwether of big business, said its financial-services divisions have been challenged by the slowing U.S. economy and difficult capital markets. The company, whose orbit extends into entertainment, consumer and industrial manufacturing, finance and health care, also lowered projections for the entire year.

The results stirred worries that companies still to report first-quarter results will paint a similarly dreary pictures. The smaller-than-expected profits from GE appeared to inject anxiety into a market that earlier this week saw disappointing results from the likes of aluminum producer Alcoa Inc. and a warning from chip maker Advanced Micro Devices Inc.

Consumer sentiment fell again in April, adding to recent reports showing Americans' confidence in the economy at new lows, dragged down by worries about mounting job losses, record-high home foreclosures and zooming energy prices. Investors fear nervous consumers will pare their spending -- an unwelcome prospect as consumer spending accounts for about 70 percent of economic activity.

In midmorning trading, the Dow Jones industrial average fell 159.67, or 1.27 percent, to 12,422.31. GE was by far the steepest decliner among the 30 stocks that comprise the Dow. The stock was off $3.86, or 10.5 percent, at $32.89. Broader stock indicators also fell. The Standard & Poor's 500 index fell 16.52, or 1.21 percent, to 1,344.03, and the Nasdaq composite index fell 34.31, or 1.46 percent, to 2,317.39.

Bond prices jumped as stocks declined and investors took up defensive positions in government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.45 percent from 3.55 percent late Thursday.

Light, sweet crude fell 48 cents to $109.63 on the New York Mercantile Exchange. Gold prices rose, while the dollar was mixed against other major currencies.

The preliminary Reuters/University of Michigan index of consumer sentiment fell to 63.2 for April from 69.5 in March. Investors had expected a reading of 68, according to a consensus estimate of Wall Street economists surveyed by Thomson/IFR.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 200.9 million shares.

The Russell 2000 index of smaller companies fell 12.21, or 1.73 percent, to 695.21. Overseas, Japan's Nikkei stock average rose 2.92 percent. Britain's FTSE 100 fell 1.20 percent, Germany's DAX index fell 1.34 percent, and France's CAC-40 declined 1.73 percent.

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Forex - Dollar struggles as risk appetite falls

LONDON - The U.S. dollar has been struggling against the yen as risk appetite has fallen following a slide in US stocks, prompted by weak earnings at the world's biggest industrial conglomerate General Electric Co. GE's profits warning raised fears on the stock markets that the credit crunch is severely impacting the manufacturing sector in the US and is not just a concern among finance companies.

A worse than expected survey into US consumer confidence stoked concerns further. Sentiment, as measured by the Reuters/University of Michigan index, fell to 63.2 in early April from a reading of 69.5 in late March. Economists polled by Thomson's IFR Markets had expected sentiment to fall to 68.0.

"This has fuelled fresh losses in dollar/yen, which has fallen to new session lows of 100.63," said Rhonda Staskow, analyst at Thomson IFR Markets.

Adding to the pressure has been a fall in US ten-year bond yields to session lows of 3.451 percent, Staskow said. "The US 2-year yield spread over JGBs has collapsed to 113 basis points today, down from 124 basis points yesterday and this is adding to the dollar/yen selling pressure," said Staskow.

The market's main point of interest is this weekend's G7 meeting of finance ministers and central bankers in Washington. Analysts said that with the focus likely to be on improving liquidity conditions to help ease the economic impact of the credit crunch, currency issues are likely to take a back seat.

Moreover, market participants noted that China is allowing its currency, the yuan, to appreciate relatively quickly -- at an annualised rate of 18 percent in the first quarter of the year.

In addition, a weak dollar will support exports from the near recessionary US and that a strong euro will help dampen down inflationary pressures in the euro zone, to the likely relief of the ECB, which yesterday kept borrowing costs unchanged, in contrast to the Bank of England.

Thursday's comments from Jean-Claude Trichet, the European Central Bank's president, that he deplores volatility in currency markets suggest that the Europeans will at least bang the drum for tighter language in the communique. Overnight, the euro climbed to a new all-time high of 1.5895 dollars.

Despite Trichet's concerns, the U.S. is unlikely to agree to any tougher language and may note that the dollar's rate of collapse has stalled. "If the G7 fails to harden its language at least on FX volatility then the knee jerk reaction on Monday would likely be to sell the dollar," said Benedikt Germanier, currency strategist.

"Trichet's comments that he deplores FX volatility suggest that at least the Europeans will be arguing for tighter language,"  he added. Elsewhere, the euro struck a new all-time high of 0.8037 pounds amid ongoing concerns about the state of the UK economy following yesterday's Bank of England quarter point rate cut.

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Euroshares turn lower midday as GE warning drags on U.S. futures 

At 12:17 a.m., the DJ STOXX 50 was down 38.83 points, or 1.18 percent, at 3117.21 and the DJ STOXX 600 was down 3.44 points, or 1.09 percent, at 311.8. The GE news also dragged on stock prices in Europe, with Siemens dropping 3.62 percent on the news. Consumer electronics group Philips dropped 3.32 percent. Schneider fell 1.84 percent and ABB fell 1.47 percent.

Chip makers were also in the spotlight, following news that STMicroelectronics and NXP, in which Philips holds a 19 percent stake, are consolidating their wireless chip operations. According to reports, STMicro will pay 1.55 billion euros for an 80-percent venture it will create with NXP.

Shares in STMicro were down 0.07 percent. Infineon, on the other hand, gained on the news, up 2.17 percent at last check. ABN Amro welcomed the deal but said STM has paid a high price for it. "Although we welcome the intention to gain scale and improve their product portfolio, we see this deal as expensive and risky," said ABN Amro, in a note to clients.

It said that STM has paid 2 times full-year sales whereas Infineon paid 1.5 times full-year sales for LSI's chip handset business.

The telecommunications sector held its ground in early deals, adding an aggregate 0.77 percent according to the DJ STOXX 600 for the industry, with France Telecom advancing 2.59 percent following a report in Le Figaro that the French government decided not to issue a fourth 3G licence.

An attempt last year to issue a fourth licence attracted just one bidder, Iliad, whose offer was rejected amid opposition from existing operators Orange, a unit of France Telecom, SFR, a unit of Vivendi SA and Vodafone Group, and Bouygues Telecom, part of Bouygues SA.

Separately, La Tribune reports France Telecom is considering a share buyback where it would buy 10 per cent of its shares from the government, but a spokesman told TFN there are no plans for a major share buyback.

Bouygues added 4 percent after its shares were upgraded to 'overweight' from 'equal weight' at Morgan Stanley, which raised the target to 55 euros from 43 euros.

Over in Italy, Telecom Italia was up 2.60 percent ahead of a meeting between its shareholders and on the back of a report that Marco Fossati, the group's second-largest shareholder, favours a merger between the group and Telefonica by 2011.

In other M&A news, shares in Fiat SpA rebounded after Thursday's declines on renewed talk of the group spinning off its auto business as a way to increase the value of the share, sparked by an article in weekly Il Mondo. British Energy added another 1.62 percent as talk circulated that RWE would be willing to pay 775 pence per share for a stake in the group, but traders were sceptical.

This morning, reports suggested rival EDF is preparing a full takeover offer for British Energy Group of more than 700 pence per share, suggesting the rumoured offer from RWE is too high. "It's probably just an attempt to drive down RWE shares, one London-based trader said.

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Asian stocks mostly higher on Wall St rebound, Tokyo surges on G7 hopes

Hong Kong's Hang Seng Index closed up 1.99 percent at 24,667.79 as investors cheered upbeat earnings guidance from China Merchants Bank and Industrial and Commercial Bank of China.

South Korea's KOSPI closed up 0.9 percent at 1,779.71, a three-month high, led by automakers and technology counters. Taiwan's Taiex rose 0.9 percent to 8,909.58 and the Shanghai Composite closed up 0.69 percent at 3,492.89.

In Australia, the S&P/ASX 200 finished down 0.1 percent at 5,439.3 and the All Ordinaries shed 0.2 percent to 5,505.2, weighed down by heavy losses in Tabcorp and Tatts Group after the state of Victoria ended their duopoly in the state's A$5 billion ($4.6 billion) gaming industry.

Tabcorp fell 21.3 percent to A$11.31 and Tatts Group plunged 26.8 percent to $2.68 and after the state government of Victoria decided not to renew their gaming licenses in 2012 and instead to allow pubs and clubs to bid for licenses from 2010.

The Singapore Straits Times ended up 2 percent at 3,126.87. The Jakarta Composite closed up 3 percent at 2,303.93, but the Kuala Lumpur Composite Index was down 0.1 percent at 1,246.79, on profit-taking after recent gains.

The Philippine Composite closed down 0.5 percent at 2,940.98, ending in the red for the sixth straight session on persistent concerns about rising inflation and a looming U.S. recession.

Mizuho Financial jumped 5.2 percent to 407,000 yen as investors shrugged off news that Japan's second-largest banking group incurred a loss of 565 billion yen from subprime-related investments, bigger than the earlier estimate of 395 billion yen.

Takeda Pharmaceutical lost 2 percent at 5,300 yen, off the day's lows, after Japan's largest drugmaker announced the $8.8 billion acquisition of U.S. biotech company Millennium Pharmaceuticals.

Takeda shares fell as low 5,060 yen intraday on concern that the company may be paying too much to boost its global oncology portfolio by adding Millennium's flagship product, Velcade. The $25 a share purchase price represented a 53 percent premium to the closing price of Millennium shares on Wednesday.

In Hong Kong, investors chased banking issues and Chinese stocks after the yuan broke through the 7 to a U.S. dollar barrier on Thursday, making companies that benefit from the yuan appreciation, such as importers, more attractive.

The yuan may gain further strength against the dollar this year as the government struggles to bring its inflation rate down from an almost 12-year peak, according to economists and analysts. The Chinese currency has gained 4.3 percent against the dollar so far this year, helping bring down the costs of imported goods and raw materials such as oil.

"Bank counters are announcing positive earnings estimates. Investors will be more confident on the outlook for earnings this year," said Tony Tong, deputy head of research at China Everbright Securities in Hong Kong.

China Merchants Bank was up 4.55 percent at HK$29.85. China's sixth-largest lender expects net profit to more than double in the first quarter from 2.46 billion yuan a year ago on higher interest income and fees and lower taxes.

Bank of Communications rallied 4.99 percent to HK$10.52. Industrial and Commercial Bank of China rose 2.84 percent to HK$6.15. The nation's biggest lender this week said its first-quarter profit probably jumped 50 percent from a year ago. China Construction Bank, which is to announce its 2007 earnings later in the day, rose 2.76 percent to HK$6.71.

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Oil rises on dollar weakness; markets ignore signs of slowing demand

LONDON  - Oil prices moved higher as a fresh bout of dollar weakness overshadowed concerns about slowing demand, with investors continuing to buy into commodities to hedge against the tumbling U.S. currency.

The International Energy Agency today cut its 2008 oil product demand forecast by 310,000 barrels per day in light of fears the U.S. led economic slowdown could reduce consumption.

However, MF Global analyst Ed Meir said that with the dollar remaining on the backfoot, market participants are ignoring oil's uninspiring fundamental backdrop.

"We do not see energy markets decoupling from the important dollar relationship anytime soon, and since dollar rallies are inevitably being sold into these days, we suspect that energy prices will, in turn, get bid up as a response," he said, adding that at some point investors would have to refocus on oil's weakening demand outlook.

At 10.26 a.m., New York's West Texas Intermediate crude for May delivery was up 19 cents at $110.30 a barrel. On Wednesday, WTI hit an intraday record high of $112.21.

Brent crude for May delivery was up 58 cents at $108.78 a barrel, having yesterday posted an all time high of $109.98.

Prices have posted record highs over the previous two sessions due to a combination of dollar weakness and a surprise drop in U.S. crude and gasoline inventories reported by the Department of Energy this week.

While U.S. fuel stocks declined, many in the market viewed this more of a symptom of short-term supply disruptions, such as fog in the Houston shipping channel, and refiners running down stocks rather than any real strength of U.S. demand.

Saudi Arabian oil minister Ali al Naimi on Thursday repeated the message that global supplies are comfortable and that the world's largest crude producer would be happy to put more oil on the market if there was demand from buyers.

Fears of supply short-falls and the unwillingness of the Organisation of the Petroleum Exporting Countries to raise output quotas has been cited as one of the key reasons for oil's move above $100. Saudi Arabia is seen as the one OPEC member with enough spare production capacity to significantly influence global supply balances.

Citigroup analyst Tim Evans said that the latest comments from al Naimi "constitutes a supply reaction to the latest rise in prices." While prices have ticked higher early in the session, week end profit taking following crudes strong run this week could keep a lid on any gains today, analysts said.

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