US & World Daily Markets Financial Briefing 12-09-2008

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US STOCKS-Wall St drops on Lehman uncertainty

NEW YORK - U.S. stocks fell on Friday as investors sold off financial shares due to uncertainty about what form any deal to rescue Lehman Brothers will take as fears about the investment bank's survival grow.

Sources with direct knowledge of the talks said U.S. authorities were in intensive discussions with Lehman on options including an outright sale. But a source familiar with U.S. Treasury Secretary Henry Paulson's thinking said he is "adamant" no government money be used in any deal to resolve that crisis.

Shares of Lehman Brothers dropped 10 percent to $3.79 on the New York Stock Exchange after dropping nearly 42 percent on Thursday. Other shares taking a blow on the financial front included insurer American International Group, down more than 19 percent, and Merrill Lynch, down 9 percent.

The S&P financial index was off 1 percent. "Lehman is a proxy for the U.S. markets to some extent," said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis. "Where Lehman goes so will the market in the short term."

The Dow Jones industrial average .DJI dropped 117.57 points, or 1.03 percent, to 11,316.14. The Standard & Poor's 500 Index .SPX declined 9.46 points, or 0.76 percent, to 1,239.59. The Nasdaq Composite Index .IXIC dropped 23.49 points, or 1.04 percent, to 2,234.73.

Bank of America Corp, the No. 2 U.S. bank, will likely win any auction for Lehman, said analyst Richard Bove of Ladenburg Thalmann. Shares of Bank of America edged up 0.4 percent to $33.17. The U.S. Treasury and Federal Reserve were engaged in the talks, which could wrap up this weekend, one source said.

Lehman's woes underscore the severity of the credit crisis which began more than a year ago as the U.S. housing slump swelled losses stemming from soured mortgage investments.

Concerns about Lehman's survival were accentuated after the bank's failure to announce deals to raise desperately needed capital when it posted quarterly results on Wednesday. On the economic front, a government report showed retail sales unexpectedly fell in August, adding to concerns about the impact of the housing slump and a faltering labor market on household spending.

U.S. consumer confidence soared unexpectedly to an eight-month high in September as lower fuel prices soothed inflation fears and made Americans more hopeful about the economy, the Reuters/University of Michigan Surveys of Consumers showed.

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Sterling rallies on dollar slide, UK rate view boosts

LONDON - Sterling rose on Friday, bouncing off a 2 1/2-year low against the dollar as weak U.S. economic data stalled a broad rally in the U.S. currency, while investors trimmed bets on an imminent UK interest rate cut.
   
Bank of England policymaker Paul Tucker said that inflation expectations were flashing an "amber light", adding to the view that the central bank is in no hurry to cut rates just yet to help the ailing economy.
   
Speaking in London, he said that the outlook for demand and inflation was to the downside, although this would be offset by sterling's weakness, suggesting that the BoE is still not in a position to loosen monetary policy.
   
Tucker's comments supported an argument made by BoE Governor Mervyn King on Thursday when he told the UK parliament's Treasury Committee that higher inflation could force wages higher in the new year pay round.
   
A rapidly deteriorating economy -- also underscored in the BoE's testimony -- has prompted markets to price in dramatic rate cuts in the coming months, but analysts said that King's statement has resulted in a scaling back of some of those bets.
  
"The tone of comments from King and Tucker show that the MPC as a whole isn't in a desperate hurry to cut rates, and this is probably helpful for sterling," said Philip Shaw, chief economist at Investec.
   
Some analysts believe the BoE will keep rates steady through year-end, but investors remain glum on the pound given that the UK economy looks to be on the verge of a recession, as a limping housing market exacerbates a slowdown in overall growth.
   
BoE policymaker David Blanchflower emphasised this point on Thursday when he said that the economy's decline would be deeper than most believe, while the nation will see a large increase of unemployment.
   
Sterling rallied 1 percent higher to $1.7794 by 1405 GMT, recovering from a tumble to $1.7445 on Thursday, the pair's weakest since April 2006. Also helping the UK currency was a broad slide in the dollar, which dragged the dollar index down half a percent 
   
Sterling rallied against the euro, which fell half a percent to 79.35 pence. Market participants said the dollar was weighed by weak U.S. retail sales figures and a big drop in wholesale prices, although stronger-than-expected consumer confidence figures helped the currency to trim some losses.
   
Currencies offered limited initial reaction to a Financial Times report that Bank of America Corp, JC Flowers & Co. and China investment Co. are considering a possible joint bid for embattled investment bank Lehman Brothers Holdings Inc.

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European shares climb as banks, commodities rise

LONDON -  European shares jumped early on Friday, as investors bought banking shares on optimism that talks about a possible sale of U.S. investment bank Lehman Brothers would help ease the financial sector's woes.
      
Energy shares advanced, tracking crude prices, which jumped 1 percent to trade above $102 a barrel as the market kept a watchful eye on the path of Hurricane Ike that could disrupt refineries and production in the United States for weeks.
      
By 0907 GMT, the FTSEurofirst 300 index of top European shares was up 1.2 percent at 1,154.80 points. The benchmark closed 0.65 percent lower on Thursday and is down 24 percent so far this year.
      
European stock markets were hit in the previous two sessions after Lehman posted a record quarterly loss of about $4 billion and said it planned to sell a majority stake in its investment management division and spin off commercial real estate assets.
      
"Lehman is up in Frankfurt, which is a good sign. There are persistent rumours of an offer waiting in the wings for the bank. Investors are also hunting for bargains," said Tom Hougaard, chief market strategist at City Index.
      
Lehman shares rose as much as 23 percent in Frankfurt after plunging more than 40 percent in the U.S. market on Thursday. The shares have lost more than three-quarters of their value since Monday and more than 90 percent since last November.
      
Banks were one of the top weighted gainers on the index, with BNP Paribas gaining 2.7 percent, Dexia rising 3.5 percent and Credit Agricole advancing 3.4 percent. "The whole banking sector will be thrown into the spotlight in Europe, with Spain's Banco Santander muscling in on Deutsche Bank's bid for Postbank," said David Buik, strategist at BGC Partners.
      
Shares in Deutsche Postbank rose 2.6 percent in a flurry of excitement about an expected sale of a big stake to Deutsche Bank that could be announced on Friday. Breaking weeks of silence, Banco Santander said it was interested in buying 100 percent of Postbank and could make an indicative offer subject to
looking at the books.
      
Britain's FTSE rose 1.5 percent, Germany's DAX gained 1 percent and France's CAC was up 1.6 percent. Mining shares gained on a rebound in metals prices and a boost in sentiment. Copper rose 2 percent, aluminium was up 1.2 percent and gold advanced 2 percent. The DJ Stoxx European basic resources index climbed 4.4 percent and the UK mining index rose 5.2 percent.
      
Xstrata was up 5.7 percent and Anglo American climbed 5 percent. Takeover target Rio Tinto and its suitor BHP Billiton rose 6.3 percent and 5.6 percent respectively.
      
Oil shares also strengthened with a rise in crude prices. BP , Royal Dutch Shell, gas producer BG Groupand Tullow Oil added between 1.4 and 3.5 percent.
      
ASML fell 1.8 percent as JPMorgan cut its price target on the group to 12 euros from 16 euros. Shares in German mail and logistics group Deutsche Post rose 1.9 percent, making them among the top gainers on the DAX on expectations it will announce on Friday the sale of a big stake in subsidiary Deutsche Postbank.

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JAPAN
The Nikkei 225 Stock Average finished the session up 112.26 points or 0.9 percent at 12,214.76,  off a high of 12,277.57.  It was slightly higher from the previous week.
  
The broader Topix gained 14.48 points or 1.3 percent to 1,177.20. It gained 0.5 percent over the week.

CHINA
The benchmark Shanghai Composite Index closed up 0.69 points or 0.03 pct at 2,079.67 after touching a 21-month intraday low of 2,064.29.

The index finished the week down 5.57 pct, the seventh successive week of losses. Turnover fell to 22.72 bln yuan from 27.24 bln  yesterday.

The Shanghai B-share Index fell 2.67 points or 1.93 pct to 135.19, while the Shenzhen B-share Index was down 4.29 points or 1.30 pct at 326.56.

AUSTRALIA
The benchmark S&P/ASX 200 index gained 1.9 percent, or 89.5 points, to end at 4,903.8, according to the lastest available data. The index rose 0.5 percent over the week.
   
New Zealand's NZX-50 index rose 0.8 percent to 3,361.6 points, after figures showing a fall in July retail sales supported expectations of another cut in interest rates.

HONG KONG
The Hang Seng index closed down 35.82 points or 0.18 pct at 19,352.90, off a low of 19,157.73 and high of 19,525.55.  For the week, the index is down 580.38 points or 2.9 pct

INDIA
The 30-share benchmark Sensitive Index of the Bombay Stock Exchange tumbled 323.48 points or 2.26 percent to 14,000.81, down 3.33 percent this week. The broader 50-share S&P CNX Nifty of the National Stock Exchange pared 61.85 points or 1.44 percent to 4,228.45.

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Oil near $102, awaits Hurricane Ike

LONDON - Oil rose to around $102 a barrel on Friday, underpinned by Hurricane Ike which could threaten oil refineries in the United States, the world's biggest energy consumer.

U.S. crude for October delivery was up $1.28 at $102.15 a barrel by 1413 GMT, having settled $1.71 lower on Thursday, when prices dipped as low as $100.10, their weakest since early April.

London Brent was up 89 at $98.53 a barrel, after a fall to around a six-month low of $96.99 on Thursday. "We are on hurricane watch, as Ike takes aim at the U.S. refining sector this weekend," said Edward Meir of broker MF Global.

"We expect Friday's session to end on a positive note. However, the markets could open sharply lower on Monday if Ike -- similar to (Hurricane) Gustav before it -- ends up being a 'bust'."

The U.S. coastal areas under threat from Ike are lined with oil refineries that process about 25 percent of the nation's fuel.

Ike is likely to come ashore late on Friday or early on Saturday as a Category 3 storm with winds of more than 111 mph (178 kph), according to the National Hurricane Center.

Oil has seen a six year rally, driven partly by growth in demand from emerging market countries such as China and India. The market reached a record peak of $147.27 a barrel on July 11 but has fallen about 30 percent since then.

The prospect of lower demand for fuel from the United States and Europe, due to faltering economic growth, has contributed to the slide. A rebound in the U.S. dollar has also put pressure on oil and some other U.S. dollar-denominated commodities.

U.S. crude oil prices came close to breaching the $100 mark on Thursday, despite the threat from Hurricane Ike.

A report that Saudi Arabia had no plans to cut output, despite OPEC's agreement in Vienna this week to trim supply, also undermined prices. Saudi Arabia, the world's largest oil producer, has no intention to reduce production at present unless customer demand falls, Saudi-owned daily Al Hayat reported on Thursday.

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