US & World Daily Markets Financial Briefing 13-06-2008

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Wall Street rises as data point to stable rates

NEW YORK - Wall Street extended its gains Friday after a pair of economic reports pointed to the Federal Reserve keeping interest rates stable when it meets later this month. The Dow Jones industrials rose more than 100 points and Treasury prices rose after the reports.

The Labor Department's report on May core inflation, which measures price increases but strips out volatile food and energy costs, met investor expectations. Meanwhile, the Reuters/University of Michigan preliminary reading on consumer sentiment for June has fallen to 56.7 from 59.8 last month. The market had expected the reading would remain unchanged.

Taken together the reports seem to make the case for the Fed to keep rates unchanged, rather than raising them, when it meets June 24-25. The Fed has shown an increasing concern about the impact of more expensive commodities such as oil on the economy.

The so-called core inflation reading, which excludes items like oil, gas and food because of their volatility, appeared to ease some investor concerns about the effect of rising prices on consumer spending, and in turn, the economy as a whole. While overall inflation showed its biggest one-month gain since November, the fact that the run-up seems largely contained to food and energy appeared to give investors some solace.

The Labor Department's Consumer Price Index grew 0.6 percent last month, which was just above the 0.5 percent economists had expected. The core inflation reading edged up a more moderate 0.2 percent. That raised investor hopes that consumer spending -- which accounts for more than two-thirds of the U.S. economy -- won't be hurt as much as the market has feared by record oil and gasoline prices.

In midmorning trading, the Dow rose 121.31, or 1.00 percent, to 12,262.89. Broader stock indicators also rose. The Standard & Poor's 500 index rose 16.72, or 1.25 percent, to 1,356.59, and the Nasdaq composite index rose 46.22, or 1.92 percent, to 2,450.57.

Bond investors fear inflation because it lowers the value of fixed-income securities, so short-term Treasurys, the most vulnerable to the effects of rising prices, moved higher. The 2-year yield was fell to 2.95 percent from 3.05 percent late Thursday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 4.19 percent from 4.22 percent.

The dollar rose against other major currencies, while gold prices rose. Oil prices fell, following a sharp rebound in the previous session. A barrel of light, sweet crude declined $2.95 to $133.75 in premarket electronic trading on the New York Mercantile Exchange.

In corporate news, Anheuser-Busch Cos. is holding preliminary talks with rival Grupo Modelo SAB, according to a report in The Wall Street Journal. The maker of Budweiser, Bud Light and other brands has received an unsolicited $46 billion bid from Belgian brewer InBev SA. Anheuser-Busch rose 46 cents to $61.86.

Lehman Brothers Holdings Inc. rose $1.25, or 5.5 percent, to $23.95 following reports that Chief Executive Richard Fuld is looking for outside capital, possibly from a sovereign wealth fund or a U.S. investor. The investment bank's shares have fallen about 30 percent this week after reporting a nearly $3 billion second-quarter loss, and the company ousted its chief financial officer and chief operating officer on Thursday.

Yahoo Inc. is now turning to rival Google Inc. to help squelch a rebellion among its shareholders who believe it should have accepted Microsoft Corp.'s $47.5 billion buyout offer while it was still available last month. Late Thursday, Yahoo announced talks with Microsoft had ended with no deal.

Yahoo fell $1.38, or 5.9 percent, to $22.14, Google rose $11.79, or 2.1 percent, to $564.74 and Microsoft rose 61 cents, or 2.2 percent, to $28.85.

Overseas, Japan's Nikkei 225 average closed 0.61 percent higher. In afternoon trading, Britain's FTSE 100 index fell 0.30 percent, Germany's DAX 30 index rose 0.03 percent, and the French CAC-40 index dropped 0.54 percent.

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Forex - Euro falls on reports Irish have voted against Treaty of Lisbon

LONDON - The euro fell after unofficial vote tallies from the Ireland referendum on the Treaty of Lisbon signalled a victory for the no-campaign.

If the Irish have rejected the treaty then it is likely to scupper the European Union's political integration process as all 27 member states need to ratify it for it to take effect. The euro has dipped sharply as a political crisis in the euro zone could also spell trouble for its economic policy.

Geoffrey Yu, currency analyst at UBS, said: "It will be damaging for the euro as euro zone leaders have warned economic integration cannot be optimised without political integration."

The euro has traded down to 1.5307 dollars, its lowest level since May 5th. With U.S. inflation figures due out Friday afternoon and the possibility that the weak dollar will be discussed at this weekend's G8 finance minister meeting, analysts said there is a strong possibility the euro could fall as low as 1.50 dollar over the course of the next few days.

U.S. inflation figures out Friday afternoon are expected to show consumer price inflation was up 0.5 percent in May from April, which after Thursday's strong retail sales figures will bolster expectations the Federal Reserve will consider raising interest rates.

Rob Carnell at ING said: "With the Fed getting increasingly concerned about headline inflation and the effect this will have on the inflation expectations - an above-consensus outcome like this could well firm market expectations for Fed tightening."

Attention is also turning to the G8 finance meeting in Osaka this weekend, with markets keen to see whether the group will back the United States' efforts to strengthen the dollar. Recent talk from Treasury secretary Henry Paulson and Federal Reserve rate-setters has signalled the U.S. is determined for the greenback to appreciate to bring import price inflation under control.

Japanese finance minister Fukushiro Nukaga has hinted that he has foreign exchange issues with Paulson, although analysts are doubtful ministers will go as far as to sanction intervention in the currency markets, especially since central bank governors will be absent from the meeting.

"We believe that there could be stronger language on forex in the communique but it is likely to stop short of indicating that intervention is likely, which could still be enough to boost the dollar," said Mitul Kotecha, head of currency research at Calyon.

Elsewhere the yen was lower following the Bank of Japan's decision to leave interest rates unchanged at 0.5 percent.

While BoJ governor Masaaki Shirakawa noted rising inflation is posing a threat to the global economy, he added the bank remains concerned about downside growth risks to the economy.

Finally the pound recovered from earlier lows, as speculation builds the Bank of England may signal next week it too may consider raising interest rates. However analysts at BNP Paribas said the pound is unlikely to rise significantly as any show of strength is likely to trigger a bout of selling.

"The lack of growth boosting measures from the Bank of England is having an adverse impact on sterling as the spectre of stagflation continues to fuel selling interest whenever the pound firms," they said.

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Euroshares open lower after Wall St pares gains amid bouncing oil price

At 9:17 a.m., the Dow Jones STOXX 600 was down 2.86 points, or 0.94 percent, at 301.24, while the Dow Jones STOXX 50 dropped 23.92 points, or 0.81 percent, at 2,975.50.

Oil prices traded flat in morning deals, after an overnight rally that saw levels push well above $136 per barrel as global concern mounted over the record-high price of crude.

New York's main oil futures contract, light sweet crude for July delivery, eased 8 cents to $136.66 a barrel from its close of $136.74 on Thursday at the New York Mercantile Exchange.

Siemens took on 1.63 percent at 73.7 euros, while Peugeot added 3.01 percent at 37 euros, Michelin gained 3.58 percent at 49.73 euros and BMW lost 1.76 percent at 32.99 euros.

On the M&A front, EDF fell back 2.89 percent at 63.12 euros after the Financial Times reported it could be prepared to nudge up its 11 billion pound bid for British Energy, but only if the board of the UK nuclear group moves quickly to recommend the offer. "Either it happens quickly or there will be no deal," the newspaper quoted a person familiar with the situation as saying.

EDF shares were also hit by Cheuvreux downgrading the utility to 'underperform' from 'outperform' and slashing its target to 66 euros from 80, due to a lack of visibility on regulated tariffs.

Turning to financials, several Italian banking plays fell back, weighing on the wider sector. The Dow Jones 600 Banks lost 0.50 percent at 309.50, with Deutsche Bank telling investors in a note on Italian banks that entering into a downturn suggests caution.

The broker said it has cut 2009 and 2010 EPS estimates by 2 and 3 percent, respectively, and lowered dividend forecasts by 9 percent on average. Unicredit was off 1.18 percent at 3.9725 euros, Intesa Sanpaolo retreated 0.93 percent at 3.7875 and Banco Popolare lost 1.73 percent at 11.27 euros.

Oil & gas heavyweights outperformed, fuelled by the overnight bounce in crude prices, with BG Group adding 2.41 percent at 1,273 pence, helped further by an oil find in Brazil, and DNO surging 14.7 percent to 12.04 Norwegian crowns on reports the Kurdish Regional Government and central government officials have agreed a deal that will see it awarded its long-awaited license to export oil from the country, according to dealers.

Elsewhere, Novartis dropped 1.61 percent to 51.95 Swiss francs, hit by news its phase III Glivec trial missed its primary endpoint, and also under pressure from an HSBC downgrade to 'underweight' from 'neutral' with the price target cut to 49 Swiss francs from 52.

Finally, among those reporting results on Friday, resort operator Club Mediterranee pared gains in morning deals as analysts questioned the group's ability to maintain the positive trends seen in its first-half results.

The shares climbed 0.15 percent to 33.70 euros, having initially risen to a high of 34.49 euros. Although the group's net loss for the first half of the year was larger than expected at 9 million euros, sales for the period were higher than forecast thanks to the acquisition of 20,000 new clients, and the group reported a strong trend in bookings for the summer, Natixis Securities said.

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Asian stocks turn mostly higher on bargain-hunting, Shanghai extends fall

The Nikkei was up 0.6 percent at 13,973.73, after touching a low of 13,810.38, its weakest level since mid-May. The broader Topix index rose 0.6 percent to 1,371.57.

Toyota rose 1.7 percent to 5,490 yen and Honda Motor gained 3.2 percent to 3,840 yen after a weaker yen prompted investors to scoop export-oriented stocks. The Australian benchmarks also rebounded, with the S&P/ASX 200 up 0.9 percent at 5,378.10 and the All Ordinaries up 0.9 percent at 5,479.6.

Index leader BHP Billiton led gains which broadened late in the session as investors picked up bargains, reversing morning losses. BHP gained 3.0 percent to A$43.04 and Rio Tinto added 3.6 percent to A$134.50, boosted by talk that Chinese steel mills were about to agree on big rises in prices for iron ore sold under contract. "We saw some recovery from midday with the resources sector and some retail stocks showing some gains," said Vaughan.

But financial services stocks continued to drag on the market, with investment firms caught up in the furore surrounding Babcock & Brown, he said. The stock lost nearly 24 percent to $5.25 as investors fret about its funding position following a review of its debt. Over the week its share price more than halved, reducing its market capitalisation to just A$1.8 billion, well below the A$2.5 billion level that triggered the debt review.

Australia's top investment bank Macquarie Group fell 3 percent to $49.17. In South Korea, the Kospi was 0.5 percent higher at 1,747.35. The Hang Seng index fell 1.9 percent to close at 22,592.30, tracking the 3 percent fall in the Shanghai bourse. The benchmark Shanghai Composite Index closed down 3.00 percent at 2,868.80.

Inflationary pressures from rising oil prices and the prospect of higher interest rates in the mainland prompted further selling in the Chinese markets.

Elsewhere in the region, the Philippine composite index gained 0.4 percent to 2,554.7, lifted by bargain-hunting, and the Taiwan weighted index rose 0.5 percent to 8,105.59.

The Kuala Lumpur Composite Index (KLCI) up 0.3 percent at 1,229.35, while Jakarta composite index was down 0.4 percent at 2,397.42. Singapore's Straits Times index fell 1.3 percent to close at a three-month low of 2,979.56.

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Metals - Copper rises as positive data boosts demand prospects

LONDON - Copper rose as some positive data out of the United States improved the metal's demand prospects and as lower prices earlier in the week encouraged some bargain hunting.

Data from the Commerce Department on Thursday showed overall U.S. retail sales rose 1.0 pct in May, well ahead of expectations of a 0.5 pct gain. The latest figure is the largest increase since November.

Stripping out auto sales, retail sales in May were also stronger than expected, rising a robust 1.2 pct, also the largest gain since November.

Traders will continue to examine U.S. data and inventory levels for fresh direction. "With some positive economic data and some bullish insight into China's likely demand following the tragic earthquake, plus disruptions in metal supply, the fundamentals seem tighter if anything," said BaseMetals.Com analyst William Adams.

"Indeed with lead and zinc now down heavily from their earlier trading levels some value does seem to be in these metals, as has been seen in nickel," he added.

Metals this week have been weak, mainly as the dollar has gained some strength. "We would not be surprised if these lower prices attract a mixture of bargain hunting and restocking," said Adams.

Friday's U.S. data includes CPI at 1:30 p.m BST followed by Consumer Sentiment at 2:55 p.m. BST which could move the dollar and nudge the metals too.

At 11:09 a.m., LME copper for three-month delivery was at $7,900 a tonne up from $7,840 at the close on Thursday. Tin rose to $21,300 from $21,100 a tonne. Lead traded slightly lower at $1,820 from $1,830, while aluminium was up at $2,959 from $2,950. Nickel jumped to $24,750 from $24,500, while zinc rose to $1,895 from $1,870.

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