US & World Daily Markets Financial Briefing 12-03-2008

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Stocks rally on Fed move, oil price dip

NEW YORK  -  Wall Street rose Wednesday, extending the huge rally a day earlier triggered by the Federal Reserve's plans to pump liquidity into distressed financial markets. The Dow Jones industrials rose more than 100 points.

An unexpectedly large increase in crude oil supplies last week also helped calm investors. If increasing inventories help oil prices pull back from record levels, inflation pressures should ease -- which would give the Federal Reserve greater opportunity to lower interest rates and boost lending efforts to spur the economy.

Crude oil fell back below $108 a barrel on the New York Mercantile Exchange, after reaching a trading record of almost $110 a barrel the day before. On Tuesday, the Dow surged 416 points, the blue chips' biggest one-day point gain since 2002.

The tone in markets around the world has clearly improved as investors appear hopeful the Fed's plan can help jump-start the moribund credit markets. The ability of the stock market to extend its gains Wednesday allowed some investors the hope that perhaps the rally will hold and not go down as a one-day pop.

But there's no guarantee the recent market optimism will stick. "We're still in a great deal of flux here. The fact that the Fed has gone from lender of last resort to lender of first resort worries me," John O'Donoghue, co-head of equities at Cowen & Co.

The Fed on Tuesday said it would lend Treasurys in exchange for mortgage-backed securities and other battered debt that all but collapsed in the subprime mortgage crisis. Global financial institutions have written down almost $200 billion due to the credit crisis, and big U.S. investment banks next week are expected to report more losses when they issue first-quarter results.

Wall Street largely regarded the Fed's plan -- conducted alongside other big central banks outside the U.S. -- as an innovative way to bring relief to the credit markets without simply further cutting interest rates and risk sparking inflation.

In late morning trading, the Dow Jones industrial average rose 106.73, or 0.88 percent, to 12,263.54, recovering from an earlier loss. Broader stock indicators also shot up after falling earlier. The Standard & Poor's 500 index rose 8.46, or 0.64 percent, to 1,329.11, and the Nasdaq composite index rose 20.36, or 0.90 percent, to 2,276.12. Treasury prices rose.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 3.56 percent from 3.59 percent late Tuesday. The dollar was mixed against other major currencies, and the dollar sank to another record low against the euro. Gold prices rose.

Investors remain cautious about economic data due out later this week, and what the Fed will do when it meets next Tuesday. Wall Street still wants rate cuts but is concerned about inflation and that even rate cuts might not be enough to help the economy.

In corporate news, Caterpillar Inc. advanced $3.22, or 4.4 percent, to $75.83 after it raised its sales forecast for 2010 by 20 percent, exceeding analysts' expectations. Declining issues outnumbered advancers by nearly 2 to 1 on the New York Stock Exchange, where volume came to 515 million shares.

The Russell 2000 index of smaller companies rose 7.02, or 1.04 percent, to 680.83. Overseas, Japan's Nikkei 225 stock average jumped 1.60 percent, while Hong Kong's market closed up 1.86 percent higher. In afternoon trading, Britain's FTSE 100 rose 1.86 percent, Germany's DAX index rose 1.78 percent, and France's CAC-40 added 2.06 percent.

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Forex - Euro close to record highs against dollar after strong European data

LONDON - The euro continued to trade close to record highs against the dollar after euro zone industrial production data came in well above forecasts, suggesting that the European Central Bank will not be cutting interest rates any time soon.

Data show industrial output for the region rose by 0.9 pct from December for a very strong 3.8 pct annual gain, far above the forecasts for much more moderate increases of 0.3 pct and 2.5 pct, respectively. "By itself the industrial production data is not a major market mover, but the upside surprise does help consolidate a renewed upward move in euro/dollar," said Calyon analyst Stuart Bennett.

Most of the individual country data were already available and the risks to the euro zone figure had therefore been assumed to be to the upside, but the apparent strength of economies other than Germany is encouraging, he said. "The resilience in French, Italian and Spanish provides some hope that the euro zone economy is not merely flying on one engine, namely Germany."

The dollar has now lost all of the gains enjoyed since yesterday's announcement of measures by major central banks to shore up liquidity. The moves, particularly the Federal Reserve's injection of 200 bln usd into financial markets against a wider range of collateral, had allowed risk appetite to pick up again.

The increase in risk appetite proved to be short-lived, however, with many feeling that the move will not do more than ease the situation slightly and the low-yielding yen and Swiss franc reversed some of their earlier losses. "At the core of this crisis is unprecedented erosion in the value of what has become the primary collateral underpinning credit creation-property. Yesterday's action does little to change the outlook for housing," said Steve Pearson, currency analyst at HBOS.

Elsewhere, the pound was in focus as market players awaited today's Budget presentation by UK Chancellor of the Exchequer Alistair Darling. This is not expected to have any notable effect on markets, however, with the need to bolster the public finances preventing too many sweeteners and the current downturn in the economy limiting Darling's scope for raising taxes or duties.

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Euroshares add to gains midday as Wall St rally set to continue

At 12.00 pm, the STOXX 50 was up 51.62 points, or 1.69 pct, at 3,110.91 and the STOXX 600 was 4.8 points or 1.56 pct higher at 312.62. This morning, Societe Generale put in a strong performance after Merrill Lynch added the French banking group to its "feature stocks list" and as daily La Tribune re-sparked talk of a takeover from peer BNP Paribas. The shares added 5.98 pct.

Others were not far behind, with Credit Agricole up 5.13 pct and Deutsche Bank 3.69 pct higher. "The injection of liquidity gave us a healthy boost, although the probability of a 75 basis point cut is now diminishing," a Frankfurt-based trader said. "Banks are benefiting, but so are basic materials companies and industrials -- the ones with the highest short exposure," he added, pointing to K&S AG which added 4.95 pct, as an example.

In M&A related news, Inmobiliaria Colonial SA surged 15.31 pct as it resumed trade this morning after Investment Corporation of Dubai (ICD) agreed to acquire 50 pct of the group for 1.19 eur per share in cash. ICD has said it will then acquire the remaining 50 pct of the property group, as required under Spanish regulations. "We don't know how much they are offering for the other 50 pct ... but it shouldn't be much less than 1.19 eur per share," a trader at a leading local brokerage said.

And Belgo-Dutch bancassurer Fortis NV grabbed the early spotlight, up 1.7 pct, following a report in De Standaard, which said the group is to receive 2 bln eur from the partial sale of its fund managing unit Fortis Investments to Chinese insurer Ping An.

UK peer Prudential moved 3.28 pct higher as traders said the news could mean Ping An has turned its attention away from the UK life insurance and pensions group, leading to a short squeeze. Others noted vague takeover speculation.

In earnings news this morning, outdoor advertising firm JCDecaux was 5.48 pct lower after it cut its guidance for 2008. Shares in Ascom Holding AG fell 4.13 pct after the Swiss telecoms group posted a worse-than-expected full year net loss due to one-off costs.

Celesio fell 4.46 pct as the group released fourth-quarter figures that came in inline to slightly better than expected, but released what traders said was a disappointing 2008 outlook. Italian broadcaster Mediaset was 0.38 pct lower after it issued a glum outlook statement overnight. Landsbanki Kepler analysts said the planned buyback is the best way to use the group's cash flow, but pointed out the market remains cautious on the stock because of its cyclical nature.

In other news, Lottomatica fell 8.43 pct after a setback in the company's bid to supply online products to the Pennsylvania lottery prompted Citigroup and Cheuvreux to downgarde the shares to 'hold' from 'buy' and to 'underperform' from 'selected list' respectively.

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Asian markets off highs after Fed's liquidity boost, Shanghai bucks trend 

Australia's S&P/ASX 200 index gained 2.4 percent to close at 5,257.9, off a high of 5,369.7. The All Ordinaries index finished up 2.4 percent at 5,334.1, off the day's peak of 5,441.9.

In Tokyo, the Nikkei 225 index rose 1.6 percent to close at 12,861.13, off a high of 13,071.22. "The Fed's liquidity measure helped remove extreme pessimism towards the market, urging investors to buy back shares," Shinko Securities market analyst Yutaka Miura said. "But, after a round of short covering, investors would not buy up stocks in the absence of more incentives other than a softer yen and strong US stocks," Miura said.

Hong Kong's Hang Seng Index closed up 1.9 percent at 23,422.76, off a high of 23,737.65, while the South Korean KOSPI rose 1.1 percent to 1,658.83. Singapore's Straits Times index closed up 2.0 percent at 2,917.94, off a high of 2,976.09.

The Philippine composite index finished up 1.5 percent at 2,953.39, off a high of 3,004.71, while the Jakarta composite closed down 0.2 percent at 2,523.53, off a low of 2,446.23. The Malaysian market extended its gains for a second day, with the Kuala Lumpur Composite index rising 2.2 percent to close at 1,232.59, off a high of 1,251.35.

The market plunged 9.5 percent on Monday when investors dumped shares after the ruling political coalition suffered its worst-ever electoral defeat over the weekend.

In Sydney, National Australia Bank rose 1.15 Australian dollars or 4.2 percent to 28.35 dollars, Commonwealth Bank of Australia added 2.16 dollars or 5.5 percent to 41.82 dollars, ANZ climbed 1.20 dollars or 5.8 percent to 22.05 dollars, while Westpac Banking was 1.33 dollars or 6.1 percent higher at 23.26 dollars.

Australia's leading investment bank Macquarie Group added 3.50 dollars or 7.5 percent to 50.50 dollars. Financial services group City Pacific Ltd surged 44.5 cents or 45.6 percent to 1.42 cents on resumption of trade after the company clarified that its 100 million dollar banking facility has no market capitalisation or share price covenants that would trigger repayment.

In Tokyo, Mizuho Financial rose 16,000 yen or 4 percent to 413,000 yen, Mitsubishi UFJ Financial climbed 41 yen or 4.7 percent to 906 yen and Sumitomo Mitsui Financial was up 44,000 yen or 6.4 percent to 731,000 yen.

The Bombay Stock Exchange's (BSE) 30-share benchmark edged up 4.83 points or 0.03 pct at 16,127.98 and the National Stock Exchange's 50-share S&P CNX Nifty closed 6.1 points or 0.13 pct higher at 4,872 points.

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Metals - Gold rises as dollar wilts, oil holds near record high

LONDON - Gold rose midafternoon, supported by renewed weakness in the US dollar, which failed to hold on to gains sparked by news of the Fed's plan to pump more liquidity into distressed financial markets yesterday, and by near-record oil prices.

Continued fears over inflation, which have been buoyed by stronger oil, and turbulence in the equity markets are underpinning gains, analysts said, and could push the metal up towards the 1,000 usd an ounce mark.

Meanwhile the greenback remains near historic lows against the euro, boosting gold's appeal as an alternative investment. "The factors that have led to the recent gold price rally remain in place -- global inflation risks are high as WTI crude oil prices have consolidated above 105 usd a barrel," said Standard Bank analysts. "This should provide support to precious metals."

At 1.57 pm, gold was trading at 979.85 usd an ounce against 974.50 usd in late New York trade yesterday, having earlier touched an intraday high of 980.00 usd.

The precious metal has reached a series of record highs in recent weeks as the dollar has sunk to fresh lows against the euro and as investors have poured money into commodities as an alternative to the volatile equity markets. Yesterday the metal retreated, dropping further from the all-time high of 992.90 usd an ounce it hit last week, as both the dollar and equity markets firmed after the Fed announced plans to inject liquidity into the financial system.

The bank said it planned to offer 200 bln usd of treasury securities to primary dealers and others to combat stress in the credit markets. However the dollar's bounce on the news was short-lived. "Markets returned to 'worry' mode less than 24-hours after (the announcement)," said Kitco Bullion Dealers analyst Jon Nadler.

"While the Dow and overseas equity markets enjoyed rallies, the greenback was back to 72.53 on the index and 1.5469 against the euro in a vote of 'no confidence' on the Fed's offer to accept mortgage-backed securities from and extend terms to troubled institutions." "The current reading indicates that dollar selling remains a relatively 'safe' activity for speculators," he added. "Buying gold, therefore, remains safe as well for the moment."

Elsewhere silver tracked gold higher to trade at 19.98 usd an ounce against 19.66 usd yesterday. Among other precious metals, platinum was steady at 2,045 usd. The metal is likely to remain well supported amid fears over production outages linked to an electricity shortage in major supplier South Africa, analysts said. Meanwhile palladium slipped to 489 usd from 494 usd at the close yesterday.

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