US & World Daily Markets Financial Briefing 11-06-2008

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Stocks decline as oil prices rebound

NEW YORK - Wall Street fell sharply Wednesday as oil prices rebounded, aggravating concerns that inflation may lead the world's central banks to raise interest rates. The Dow Jones industrial average fell more than 160 points.

Investors have been uneasy about oil prices, which surged above $136 a barrel on the New York Mercantile Exchange after dropping a day earlier. Having breached $139 a barrel last week, record-high crude has increasingly posed both an inflationary risk and a threat to growth.

Energy Department data Wednesday showed that gasoline supplies grew last week but that crude oil inventories fell more than analysts expected. The weekly report suggested no let-up in U.S. energy demand, even as consumers adjust their budgets to accommodate $4-a-gallon gasoline.

Other data Wednesday that could tell investors how Americans are faring financially is the Federal Reserve's Beige Book, which provides readings on the U.S. economy by region.

In midmorning trading, the Dow Jones industrial average fell 169.11, or 1.38 percent, to 12,120.65. The biggest loser among the 30 Dow components Wednesday was Alcoa Inc., after a JPMorgan analyst said the aluminum producer is not planning to sell itself or spin off part of its business. Alcoa fell $2.80, or 6.5 percent, to $39.92.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 16.40, or 1.21 percent, to 1,342.04, and the Nasdaq composite index fell 33.48, or 1.37 percent, to 2,415.46.

The stock market finished mostly lower on Tuesday on inflation-related jitters. Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 4.07 percent from 4.11 percent late Tuesday.

The dollar slipped against other major currencies, while gold prices rose. In addition to the Fed's Beige Book, investors will be paying attention to a speech Wednesday by Fed Governor Donald Kohn.

In corporate news, Corporate Express NV, the Dutch office supplies distributor, accepted a sweetened $2.7 billion buyout bid from U.S. office supplies retailer Staples Inc. Staples rose $1.11, or 4.8 percent, to $24.26.

The Russell 2000 index fell 8.43, or 1.15 percent, to 1,538.52. Declining issues outnumbered advancers by about 3 to 1 on the New York Mercantile Exchange, where volume came to 327.6 million shares.

Overseas, Japan's Nikkei 225 average closed 1.16 percent higher. In afternoon trading, Britain's FTSE 100 index fell 0.42 percent, Germany's DAX 30 index fell 0.27 percent, and the French CAC-40 index fell 0.47 percent.

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Forex - Euro rises after early setback

LONDON - The euro came back after a slight wobble earlier as European Central Bank rate setter Jeurgen Stark was reported as saying the central bank is not considering a series of rate rises even though one may well come in July.

The news put the euro under pressure but its losses proved fleeting and later it was the dollar which lost some of the gains it garnered in the Asian session. As Benedikt Germanier at UBS pointed out, investors should prepared for more verbal intervention and the comments from the various cental banks -- European Central Bank, Bundesbank and Fed -- should all be closely watched.

Germanier believes the euro will rise from current levels. "The ECB is widely expected to deliver a hike July - and may not hesitate to signal more tightening. In contrast, the Fed can only afford to stay hawkish and hope that capitulation in energy and commodity prices can finally anchor inflation expectations," he said.

"Rising yield expectations are already tightening monetary conditions and economic data is still softening. Ahead today, the Beige Book is expected to indicate that economic conditions have continued weakening," he said. He sees short-term upside bias for the euro while looking for a gradually stronger dollar in the medium term, as both economic and inflation expectations stabilise.

In the meantime, market players have been trying to make sense of the competitive hawkishness adopted by the various central banks. Yesterday, U.S. Fed chief Ben Bernanke painted a somewhat rosy picture of the world's biggest economy, saying that the rise in the country's jobless rate does not signal the start of a recession, and that the risk of one has actually diminished.

And, if the economy is on the mend, rate setters will have room to push through rate hikes to fight inflation. After all, Bernanke has already gone on record to express worry about the inflationary impact of a weak dollar.

Additionally, there is some nervousness that the upcoming G8 meeting may result in measures to curb both energy prices and dollar weakness. Last week, ECB chief Jean-Claude Trichet put markets on alert for a July interest rate hike. "The dollar remains upbeat despite the prospect of rate hikes now being played out on a much wider basis," said James Hughes at CMC Markets.

Over in Europe there were more signs of rising inflation but with little impact on the euro. The French consumer price index rose 0.5 percent in May from April and was up 3.3 percent year-on-year, statistics office Insee said.

Meanwhile, the pound off lows after data this morning showed a worrying rise in the number of Britons claiming benefits. Further evidence has emerged that the credit crunch and the economic slowdown is now feeding through into the labour market, with the claimant count rising for the fourth month in a row during May, official figures showed.

The Office for National Statistics said the claimant count, measuring the number of Britons claiming the jobseekers' allowance, rose by 9,000 in May, well above forecasts for a much smaller rise of 6,700. Of further concern was that the increase in the April claimant count was revised up substantially to 11,200 from the previous estimate of a 7,200 rise. April's rise is the largest rise since April 2006.

"There's certainly chatter emerging amongst London traders suggesting that a tighter monetary policy may be seen from the Bank of England, but arguably it's going to take some real evidence that this is under consideration before the pound can start to realistically price in this option, said Hughes at CMC Markets.

"As a result, expect next week's BoE meeting minutes to be under close scrutiny for any clues but in the interim, any real support may be difficult to establish although readings such as today's trade balance and unemployment data could present the opportunity for some posturing amongst traders," he added.

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Euroshares advance at open, tracking DJIA and Asia up on oil's retreat

At 08.42 a.m., the DJ STOXX 50 was up 12.26 points, or 0.41 percent, at 3038.1 and the DJ STOXX 600 was up 0.89 points, or 0.29 percent, at 307.53. Falling oil prices offered investors some relief from ongoing uncertainty about the economic prospects for the rest of 2008.

Oil prices rose in Asia on Wednesday, albeit after heavy drops on Tuesday. New York's main oil futures contract, light sweet crude for July delivery, was 69 cents higher at $132.00 per barrel. Brent North Sea crude for July delivery rose 87 cents to $131.89 per barrel.

This helped to boost car stocks in European trade, with Renault up 2.4 percent, Daimler up 1.34 percent, Peugeot up 1.15 percent and Fiat up 0.53 percent.

Banking stocks also continued their rally as news yesterday of a cash injection from the ECB and ongoing support from a large programme buying trade led some to look for value in the sector after heavy selling.

Credit Agricole  was up 3.04 percent and HBOS was 4.28 percent higher. RBS added 2.57 percent as it said its business had been hit be deteriorating market conditions but it is still on track to meet its first half guidance.

Deutsche Bank added 2.1 percent, while Credit Suisse added 0.74 percent and UBS moved up 2.37 percent after reports suggested that the worlds 47th richest man Suleiman Kerimov may be looking to buy shares in the trio and in Morgan Stanley.

Santander added 1.2 percent as JP Morgan resumed coverage of the Spanish banking group with an 'overweight' rating. Inditex added 2.19 percent as news of a strong recovery in sales at the beginning of the second quarter helped to overshadow a slightly disappointing set of first quarter numbers.

Corporate Express added 1.54 percent after it agreed to be taken over by U.S. group Staples Belgacom slipped back 0.72 percent and Telenet tumbled 3.5 percent after Belgacom said it made an offer of 420 million euros to television clients of Belgian cable company Interkabel Group from rival operator Telenet.

Dexia downgraded the pair to 'hold' from 'add' and 'buy' respectively. On the economic front, The U.S. trade deficit is expected to have deepened in April to $59.5 billion from $58.2 billion in March. "Both exports and imports declined in March substantially, so there is a good chance that both rebounded in April," said Roger Kubarych of Unicredit.

"However, commodity price increases probably boosted imports to a greater extent, generating a somewhat higher monthly trade deficit," he said.

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Asian shares mixed amid inflation concerns; Shanghai extends losses

Benchmarks in Japan, Australia and South Korea closed higher, but investor sentiment remained weak in Shanghai following Tuesday's 7.7 percent slump.

In China investors were also focused on inflation, with the producer price index in May rising 8.2 percent from a year earlier, faster than the 8.1 percent rise in April, government data released early Wednesday showed.

Data on the consumer price index is due on Thursday. "If the annual inflation rate in China for 2008 exceeds 6 percent, compared with one-year lending and deposit rates currently standing at 7.47 percent and 4.14 percent respectively, it is not unreasonable to project that hikes in domestic rates would resume," DBS Bank said in a note.

"We now look for a 27 basis-point hike in the fourth quarter and another 27 basis-point increase in the first quarter of 2009."

The Shanghai Composite closed down 1.6 percent at 3,024.24, extending Tuesday's losses which followed the People's Bank of China's move over the weekend to raise the reserve requirement on bank deposits by a bigger-than-expected full percentage point this month to a record 17.5 percent.

The central bank's move is part of China's continuing efforts to bring down its inflation rate, which is currently at its highest level in more than a decade.

In Hong Kong, the Hang Seng index closed down 0.21 percent at 23,327.60. Softer yen Tokyo's benchmark Nikkei 225 rose 1.2 percent to 14,183.48, while the broader Topix added 0.5 percent to 1,390.03, with exporters leading the rebound.

"If the dollar continues to keep its upward pace, Japanese exporters may be able to announce upward revisions to their earnings forecasts," said Ryuta Otsuka, strategist at Toyo Securities.

Among exporters, Toyota Motor rose 2.4 percent to 5,550 yen, Nissan Motor gained 2.5 percent to 959 yen, Honda Motor climbed 2.7 percent to 3,800 yen and Isuzu Motors advanced 2.5 percent to 575 yen.

In Sydney the S&P/ASX 200 was up 0.6 percent at 5,467.3 after trading in negative territory for most of the day, as investors chased bargains in the financial sector. The All Ordinaries index gained 0.3 percent at 5,561.9.

"Overall the market performed relatively well though there's a fairly negative mood because of the slowdown in the U.S. -- we've also got a slowdown in the Australian economy with high interest rates and inflation still in the system," said Dominic Vaughan, a senior dealer at CMC Markets.

Commonwealth Bank rose 2.3 percent to A$42.84, National Australia Bank advanced 3.0 percent to A$28.80, ANZ climbed 1.6 percent to A$20.40 while Westpac gained 3.0 percent to A$22.25 and its takeover target, St. George, added 1.7 percent to A$30.05. Australia's top investment bank, Macquarie Group, recovered 3.7 percent to A$53.70 after dropping 7.5 percent on Tuesday on concerns about the impact of still tight credit markets on its ability to generate fees through deal-making.

With bargain hunters stepping in, other Asian markets also managed modest gains. South Korea's Kospi was up 0.4 percent at 1,781.67 and Singapore's Straits Times Index closed up 0.5 percent at 3,046.77.

The Kuala Lumpur Composite Index (KLCI) was down by a marginal 0.1 percent at 1,229.28. The Philippine Composite lost 2.5 percent to close at a 20-month low of 2,579.28 as investors worried that soaring inflation would further crimp consumer spending and corporate earnings.

Taiwan's weighted index closed down 0.29 percent at 8,345.49, while Jakrta's composite index closed up 0.97 points at 2,374.79. The main stock index, the 30-share Sensex of the Bombay Stock Exchange, closed up 296.07 points, or 1.99 percent, at 15,185.32, points and the National Stock Exchange's S&P CNX Nifty closed up 73.80 points, or 1.66 percent, at 4,523.60 points.

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Crude oil stockpiles fell again last week

WASHINGTON - Crude-oil inventories fell last week for the fourth straight period, according to government data released Wednesday.

For the week ended June 6, crude-oil inventories fell by 4.6 million barrels, or 1.5 percent, to 302.2 million barrels, which was 13.5 percent below year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.

Analysts expected a draw of only 1.4 million barrels, according to a survey by Platts, the energy research arm of McGraw-Hill Cos.

Gasoline inventories rose by 1 million barrels, or 0.5 percent, to 210.1 million barrels, which was 3.4 percent above year-ago levels. Analysts expected stockpiles of the motor fuel to grow by 1.1 million barrels.

Demand for gasoline over the four weeks ended June 6 was 1.3 percent lower than a year earlier, averaging over 9.3 million barrels a day.

At the same time, U.S. refineries ran at 88.6 percent of total capacity on average, a drop of 1.1 percentage points from the prior week. Analysts expected capacity to rise by 0.6 percentage point.

Inventories of distillate fuel, which include diesel and heating oil, rose by 2.3 million barrels to 114 million barrels for the week ended June 6. Analysts expected distillate stocks to rise by 1.7 million barrels.

At the pump, gas prices rose about a penny overnight to a record high national average of over $4.05 a gallon Wednesday, and are well above the year-ago average of $3.07 a gallon, according to AAA and the Oil Price Information Service. Diesel prices also set a record at more than $4.79 a gallon.

In morning trading, light, sweet crude for July delivery rose $4.36 to $135.67 a barrel on the New York Mercantile Exchange.

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