US & World Daily Markets Financial Briefing 11-12-2008

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U.S. Stocks Open Lower Amid Auto Bailout Uncertainty

U.S. stocks opened lower Thursday, pressured by ongoing concerns about a bailout of the auto industry and after the Labor Department reported jobless claims jumped to a 26-year high last week.

Late Wednesday, the U.S. House of Representatives approved a $14 billion federal loan package to the Big Three automakers in a 237-170 vote. "The bill now has to go through the Senate where it is expected to face a tougher challenge," said Robert Kavcic, an analyst at BMO Capital Markets.

The Dow Jones Industrial Average (DJI) fell 52 points, or 0.6%, to 8,704, with 26 of its 30 components opening lower. Shares of General Motors Corp. (GM) slumped 10%, while those of Ford Motor Co. (F) fell 5.5%. Also among blue chips, household products giant Procter & Gamble lowered its sales growth forecasts for the current quarter. The company, however, said it still expects to meet its previously earnings forecasts.

The S&P 500 index (SPX) fell 1.3% to 887, while the Nasdaq Composite (RIXF) fell 25 points, or 1.6%, to 1,540. Stocks also came under pressure after the Labor Department reported that initial unemployment claims jumped to a 26-year high last week.

First-time filings for state unemployment benefits jumped by 58,000 to a total of 573,000. The number of people collecting unemployment benefits rose by 338,000 to 4.43 million, also the highest since late 1982, the Labor Department said. The 338,000 increase in the week ending Nov. 29 was the most since 1974.

Separate reports showed that import prices fell and the U.S. trade deficit unexpectedly increased. Stocks futures had edged higher in earlier activity, buoyed in part by continued optimism over prospects for a $14 billion loan package for the troubled U.S. auto industry.

Stocks closed higher Wednesday on Wall Street, boosted by progress on the bailout, though opposition to the plan from several Senate Republicans shaved earlier gains. The Dow Jones Industrial Average ended the session up 70 points, while the S&P 500 gained 10 points and the Nasdaq Composite Index climbed 18 points.

The dollar fell against its main rivals, losing 1.7% to stand at 91.15 Japanese yen, while the euro rose 1.7% to $1.3234. Oil stepped higher as the dollar declined, with light crude for January delivery gaining $2.94 to trade at $46.53 a barrel.

Costco Wholesale Corp. (COST) reported on Thursday that fiscal first-quarter net income was about flat, reflecting bargain-hunting shoppers looking for deals in a downbeat economy. Same store sales edged up 1% and total sales rose 3.6%.

Shares of Sprint Nextel Corp. (US-S) slumped 12% after Moody's Investors Service cut the company's unsecured debt to "junk" status. The downgrade comes as the telecom carrier's market position has weakened significantly and as Sprint Nextel continues to seek a turnaround in its wireless operations, the debt-rating agency said.

Also on the telecom front, the $41 billion leveraged buyout of Canadian carrier BCE Inc. (BCE) ended after auditors KPMG concluded the company that would have emerged from the deal wouldn't be solvent. Overnight, Japan's Nikkei 225 average rose 0.7%, while London's FTSE 100 index was down 0.2%.

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FOREX-Dollar falls broadly; euro surges

LONDON - The dollar fell broadly on Thursday as doubts surfaced whether demand for the U.S. currency, which has remained high during times of financial market stress, will hold up.

The U.S. currency hit a 7-week low against the yen and a 6-week low versus the euro. Against a basket of currencies, the dollar was down 1.5 percent at 84.188, its lowest since early November. "The only factor that has been supporting the dollar over the last few months has been repatriation of funds out of overseas equity markets," Nick Parsons, head of markets strategy at nabCapital.

"As you start to see some stabilisation in asset markets, the only support for the dollar is being gradually eroded."

World stocks as measured by MSCI's all-country index has risen 2.1 percent so far this month, while the dollar has fallen around 2.5 percent on the month to date against a basket of six major currencies.

Implied interest rate spreads also moved in the euro's favour after European Central Bank Executive Board member Juergen Stark said late on Wednesday the bank did not have a lot of room for manoeuvre on rates after its cut last week.

Having climbed on a wave of risk aversion in recent months in tandem with the low-yielding Japanese yen, some analysts said further dollar demand into the year-end from deleveraging flows might be showing some sign of cooling. A fall in volatility also indicated that extreme risk aversion may be easing.  "We're seeing some year-end position adjustment. With volatility coming down, it may prompt some investors to dabble in risk," said Geoffrey Yu, strategist at UBS in London.

By 1259 GMT, the dollar was down 1.2 percent at 91.49 yen, closing in on a 13-year low of 90.87 yen. The euro was up 1.6 percent on the day at $1.3233, having hit a six-week high of $1.3246. Implied volatility on one-month dollar/yen currency options fell below 20 percent on Thursday compared with that level seen at the start of the week.

The single currency spiked late on Wednesday after the Stark comments, while implied euro/U.S. rate spreads reflected a cooling in ECB rate cut expectations. By contrast, the U.S. Federal Reserve is expected to cut rates again next week.

"If the euro zone is being perceived to still have rates at substantially higher levels then obviously there's a positive rate spread, but I'm not convinced that its ultimately going to be positive as the dynamics of the euro zone economy are pretty weak," Rabobank markets strategist Jeremy Stretch said.

The euro also hit a record high against sterling, rising to a high of 88.97 pence, according to Reuters data. The Swiss National Bank became the latest leading central bank to cut interest rates, but its impact was limited as the 50 basis point move paled in comparison with more dramatic reductions from other central banks last week.

The dollar dipped to 1.1890 Swiss francs compared with 1.1905 francs just before the SNB rate decision, and the euro rose to 1.5736 francs from 1.5625 francs. There was little reaction in FX markets to the approval of a $14 billion auto industry bailout plan by the U.S. House of Representatives.

While the House stuck to its plan, uncertainty was seen in the Senate, where a razor-thin Democratic majority cannot ensure passage. A vote could come as early as Thursday, but some Republicans have vowed to slow or even block the legislation.

Elsewhere, cracks were appearing in the global effort to drag the world out of recession on Thursday with Germany attacking Britain ahead of an EU summit for rushing into debt to bail out industries and pump up growth.

In an interview with Newsweek magazine, Finance Minister Peer Steinbrueck urged governments to pause before pledging to spend billions of dollars to try to push their economies out of trouble.

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Oils limit losses for Europe shares at midday

LONDON - European shares were down at midday on Thursday, driven lower by financial shares on renewed fears of global economic weakness, and by autos stocks on uncertainties over the proposed U.S. bailout package. Falls, however, were offest by oil stocks, which tiptoed higher on stronger crude prices.

At 1202 GMT, the pan-European FTSEurofirst 300 index was down 0.5 percent at 855.68 points, snapping a three-session winning run.

The index has lost more than 42 percent this year, battered by the credit crisis, which has helped push several major economies into recession.

Crude oil futures rose more than 5 percent to $45.74 a barrel, after the International Energy Agency predicted global demand would grow in 2009 and on expectations OPEC would cut supplies at a meeting next week.

Heavyweight energy stocks were outstanding gainers. Total, BP, Royal Dutch Shell and Statoil rose between 1.4 percent and 5.3 percent.

Tullow Oil surged 15.4 percent, boosted by its announcement on new oil finds in Ghana and Uganda. "I think the commodities sectors are making sense, from the point of view of valuations, with miners down to four times (earnings) and oils down to six," said Philip Isherwood, strategist at Dresdner Kleinwort.

"The industry is waking up to Rio's announcement, and rediscovering self-discipline. We've moved up to 'overweight' on commodities."

Isherwood said the "problem with the policy initiatives is that the response is proportionate to the economic problems. You're getting a lot because you've got a lot of problems." The U.S. House of Representatives approved a rescue plan legislation on Wednesday to help embattled U.S. automakers, but the plan has to be approved by the Senate where prospects for passage appeared grim.

BMW, Peugeot and Fiat were down between 1.7 percent and 3.2 percent. Among banks, BNP Paribas, Banco Santander, HSBC and UBS were down between 0.9 percent and 1.9 percent. Fortis soared 20 percent after reports the Belgian government no longer rules out handing its 11.6 percent stake in French bank BNP Paribas to Fortis.

BNP Paribas declined to comment, while no one at Fortis could immediately comment. Insurer Standard Life fell 4.9 percent. AstraZeneca fell 1 percent after dropping two experimental cancer treatment drugs. Other pharmaceutical stocks continued declines from yesterday, including GlaxoSmithKline, which fell 1.3 percent.

Belgian supermarket group Delhaize was up 1 percent on news it was one of 17 companies being promoted to the FTSEurofirst 300. Others promoted include Ryanair, up 0.3 percent. All three Irish banks in the index -- Allied Irish Banks, Anglo Irish and Bank of Ireland will be ejected. The index changes will take effect from Dec. 22.

However, the Irish banks were mixed, with Anglo Irish Banks up 16.7 percent. Negative corporate news weighed on the market, especially on retailers. Finland's top magazine paper maker UPM-Kymmene Oyj said its fourth-quarter operating profit is expected to be less than the same quarter a year ago after sales slowed more than expected. Shares in UPM were down 9.9 percent.

Within the sector, Stora Enso shed 7.6 percent Shares in Zara fashion store owner Inditex rose 4.9 percent despite the company's nine-month net profit missing estimates.

Across Europe, the FTSE 100 index was up 0.5 percent, the German DAX index was down 0.3 percent and France's CAC index was down 0.2 percent.

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Nikkei edges up on hope for economy, but yen weighs

TOKYO - Japan's Nikkei average rose 0.7 percent on Thursday as hopes that global stimulus measures will prop up the economy won out over a stronger yen and worry whether a U.S. auto bailout will be passed by the Senate.

Honda Motor Corp soared after the U.S. House of Representatives approved bailout legislation that would shore up Detroit's Big Three for now, but Canon Inc and other exporters slipped as the yen edged up against the dollar.

Sumitomo Mitsui Financial Group, Japan's third-largest bank, extended gains after saying it would raise $5.8 billion in capital by issuing preferred securities.

"The market has risen on hope -- hope of infrastructure projects as part of economic packages in the United States and China, and reassurance that the auto bailout has passed the House," said Hideyuki Ishiguro, a supervisor at the investment strategy department of Okasan Securities.

"But it also seems that markets have risen too far, given the economic fundamentals, with further rises on expectation alone very hard. And the autos bill has yet to pass the Senate."

The U.S. House of Representatives approved bailout legislation that would force automakers to restructure or fail, sending the measure to the Senate, where prospects for passage appeared grim.

Still, some in the market said expectations were growing that the Nikkei may have bottomed out, noting that recent gains in other Asian markets as well suggested that foreign investors may be buying into Asia. "I think it's probably safe to say that the Nikkei's hit bottom," said Masayoshi Okamoto, noting that the Nikkei has managed to reach and break over 8,500, previously a key psychological level.

The benchmark Nikkei gained 60.31 points to 8,720.55 after going in and out of negative territory all day, extending its winning streak to four days with a gain of 10 percent.

The broader Topix rose 1.8 percent to 849.25.

The yen advanced slowly throughout the day. By the close the dollar was fetching 92.29 yen, pressuring exporters, whose overseas profits fall when repatriated.

Canon lost 0.7 percent to 2,750 yen and Hitachi Ltd fell 2.4 percent to 414 yen.

But autos held on to gains, with Honda up 7.9 percent at 2,195 yen, becoming the biggest contributor to the Nikkei by volume weight. Toyota Motor Co rose 4.8 percent to 3,070 yen.

Hope that economic stimulus packages mean infrastructure work helped power shippers higher after a key freight index rose for the second straight day.

Mitsui O.S.K. Lines powered up by 7.8 percent to 593 yen and Kawasaki Kisen rose 8.4 percent to 427 yen. Nippon Yusen gained 8.7 percent to 574 yen.

Sumitomo Mitsui Financial Group surged 9.6 percent to 342,000 yen, and other banks also gained, partly on a sense the sector had been slower to recover than others, market players said.

Top bank Mitsubishi UFJ Financial Group rose 6.8 percent to 500 yen and second-ranked Mizuho Financial Group rose 4.1 percent to 235,000 yen. But these rises were countered by profit-taking that hit a wide range of domestic demand shares.

KDDI Corp fell 4.5 percent to 598,000 yen and Fast Retailing lost 2.6 percent to 12,930 yen. Cosmetics and personal care product maker Kao Corp slid 1.9 percent to 2,660 yen. Trade was active on the Tokyo exchange's first section, with 2.25 billion shares changing hands, compared with last week's daily average of 1.81 billion.

Advancing stocks beat declining ones by nearly 3 to 1.

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PRECIOUS-Gold extends gains by 1 percent on weak dollar

LONDON - Gold extended gains by more than 1 percent on Thursday, tracking losses in the dollar, after posting its biggest percentage climb in almost three weeks the previous session.

Platinum and palladium also ticked higher but remained rangebound as traders awaited the outcome of Congress' discussions of a $14 billion plan to bail out U.S. carmakers.

Spot gold was quoted at $822.10/824.10 an ounce at 1017 GMT, up from $809.90 an ounce late in New York on Wednesday, when the precious metal climbed 4 percent on rising oil prices and dollar weakness.

"The main driver yesterday was the dollar, and this morning it has weakened again. That is supporting gold," said BNP Paribas analyst Michael Widmer. "You would expect gold prices to perform well in an environment of a falling dollar."

The precious metal is often bought as an alternative asset to the U.S. currency and tends to move in the opposite direction to it. The dollar hit a six-week low against the euro, as doubts crept in over whether projected pent-up demand for the currency would materialise over year-end.

The other main external driver of gold, the oil price, was also supportive, ticking up nearly 3 percent as signs emerged that top exporter Saudi Arabia had slashed January supplies ahead of next week's meeting of oil cartel OPEC.

Crude also received a fillip from the International Energy Agency's monthly report, which said it saw global demand growing in 2009 and expected OPEC to cut supplies next month.

Rising oil prices help support interest in commodities as an asset class, and can boost gold's appeal as an inflation hedge. "Precious metals may get further support today if such oil price volatility is repeated," said Standard Bank analyst Manqoba Madinane.

However, soft equity markets may keep a lid on gold's gains. European shares were lower in early trade as worries over the health of the global economy weighed, and as investors awaited the outcome of a $14 billion U.S. proposal to bail out carmakers.

The proposal passed the House of Representatives but is likely to hit resistance in the Senate. Platinum and palladium traders in particular awaited the outcome of the plan. Carmakers account for more than half of annual global consumption of the metals, which are chiefly used in the manufacture of catalytic converters.

Until more definite news on the bailout package emerges, the metals are likely to remain rangebound, analysts said. "With the final decision on the U.S. bailout packages now unlikely till after the weekend it is more than likely platinum will remain in the $780-882 range," noted James Moore, an analyst at TheBullionDesk.com.

Spot platinum was quoted at $834.50/854.50 an ounce, up from $822 an ounce late in New York on Wednesday. Palladium was at $180/185 an ounce against $177.50. Among other precious metals, spot silver rose to $10.40/10.48 an ounce from $10.21.

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