US & World Daily Markets Financial Briefing 14-03-2008

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Stocks fall sharply on credit fears

NEW YORK  - Stocks fell Friday but pulled off their lows as investors digested a plan to alleviate a liquidity crisis at Bear Stearns Cos. that has touched off concerns about the severity of credit troubles. Each of the major indexes lost more than 1 percent; the Dow Jones industrial average gave up about 150 points.

Investors at various times appeared both comforted by and unnerved by a plan by the New York Federal Reserve and JPMorgan Chase & Co. to provide secured funding to Bear Stearns. The move offers Bear Stearns relief from a sudden liquidity crunch that analysts quickly surmised could have felled the bond house. At the same time, Bear's position on the precipice of financial disaster seemed to leave investors shaken and spoiled some hopes that troubles in the moribund credit market were on the mend.

Stocks showed moderate gains in the early going after a Labor Department report showed the Consumer Price Index remained flat for February. Wall Street has been expecting inflation would show an increase. But the gains quickly disappeared after investors learned more about the severity of troubles at Bear Stearns.

"The Bear Stearns news reversed the early positive sentiment from the inflation data," said Peter Cardillo, chief market economist at Avalon Partners. "There had been nervousness about Bear Stearns for some time and now the market's concerns about the company have been proven true."

In late morning trading, the Dow fell 148.00, or 1.22 percent, to 11,997.74 after having fallen as much as 300 points. Broader stock indicators also declined. The Standard & Poor's 500 index fell 19.91, or 1.51 percent, to 1,295.57, and the Nasdaq composite index fell 33.25, or 1.47 percent, to 2,230.36.

Bond prices jumped as stocks retreated. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.43 percent from 3.54 percent late Thursday. Comments from the Fed might have helped corral some of investors' nervousness Friday. The central bank said it voted unanimously to sign off on the arrangement between JP Morgan and Bear Stearns and that it is ready to provide further resources to stave off further credit troubles.

Still, investors remained nervous. The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 11.2 percent. Declining issues outnumbered advancers by nearly 5 to 1 on the New York Stock Exchange, where volume came to 582.7 million shares.

Friday's stock market pullback comes a day after an anxious stock market rebounded from an early plunge following a Standard & Poor's prediction that financial companies are nearing the end of the massive asset write-downs that have pummeled the stock and credit markets for months. The S&P projection had given investors some hope that the seemingly unrelenting losses from the mortgage and credit crisis could have been bottoming out.

The Bear Stearns news rekindled investors' nervousness about the troubles in the financial sector and raised concerns over whether other banks might soon face similar liquidity stresses. Bear Stearns shares fell sharply after an initial run-up on the news. Bear skidded $24.10, or 42 percent, to $32.90, while other financial names such as Lehman Brothers Holdings Inc. fell $3.89, or 8.5 percent, to $42.10.

Stock market investors Friday were also eyeing the dwindling dollar and events in the soaring commodities market. Gold prices touched another fresh record Friday. Light, sweet crude, which set a fresh record Thursday, recently fell 50 cents to $109.83 per barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies fell 10.44, or 1.54 percent, to 669.27. Overseas, Japan's Nikkei stock average fell 1.54 percent. In afternoon trading, Britain's FTSE 100 fell 1.05 percent, Germany's DAX index fell 0.70 percent, and France's CAC-40 fell 1.12 percent.

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Forex - Dollar a touch higher but respite likely to be short-lived

LONDON - The dollar was a touch higher than at the start of the day but still well under pressure amid what looks increasingly likely to be a recession in the world's biggest economy. The respite is predicted to be short-lived as the afternoon will bring two key pieces of US data which are likely to lead to renewed dollar losses.

The latest set of inflation figures will show just how far the Fed's rate cutting stunts have fuelled price pressures. If inflation picks up, worries about stagflation will likely resurface, to the detriment of the dollar. February core CPI inflation is predicted to rise 0.2 pct after the previous month's 0.3 pct.

Separately, the University of Michigan's confidence survey is expected to dip to 69.5 in March from 70.8 in February -- already the lowest since the 1991 recession. Both pieces of data could be the death knell for the dollar which has been setting life-time lows against the euro all week. Geoffrey Yu at UBS warned that the risk aversion which has weighed on it has not reached its peak as yet.

"Although the majority of market opinion believes that a recession is unavoidable for the US, the Fed and congress have stepped up efforts to prevent further deterioration in asset markets," he noted, adding that these factors may not be enough, of themselves, to soothe market nerves.

Indeed, continued fears about the US economy have fuelled risk aversion and with more deep cuts in US interest rates in prospect, the dollar has been rapidly losing support.

"With risk aversion back on the agenda, amid fears of hedge fund collapses and more troubles for the banks exposed to mortgaged backed securities, it is almost as if the recent decision by the Fed and other central banks to boost liquidity never happened, with the markets back to their position prior to announcement," said Stuart Bennett, senior European strategist at Calyon.

Markets expect the Fed to cut by as much as 75 basis points at its upcoming monetary policy meeting on March 18, which would put the Fed Funds rate at 2.25 pct from 3.00 pct currently.

"The market is now pricing an 88 pct chance of a 75 basis point Fed cut next week, so with the European Central Bank still erring on the hawkish side further euro strength looks inevitable," said Bennett.

The euro meanwhile has gone from strength to strength, hitting a new all-time high of 1.5650 this morning. Final Euro zone inflation figures for February this morning could provide further hints as the timing of a shift in ECB policy. The Bank has signalled inflation as its chief concern and until price pressures begin to wane, cuts in euro zone rates look unlikely.

Analysts expect euro zone CPI inflation to be confirmed at a 3.2 pct annual rate, with the harmonized HICP rate also unrevised at 1.7 pct. Elsewhere the yen remained firm, around its 12-year highs of about 100 to the dollar, sparking speculation Japanese officials could intervene to combat an excessively quick strengthening.

"Given the weakness in the (Japanese) economy, the speed of recent moves and the pick-up in FX commentary by Japanese officials, markets will remain wary of pushing the yen too far too quickly," said UBS analyst Ashley Davies.

ECB president Jean-Claude Trichet has also spoken out against "excessive" moves in currency markets, and analysts say more warnings to markets could emerge at next month's meeting of finance ministers from the G7 countries. "Given the dramatic moves in FX markets and early signs that policy maker tolerance levels are being tested, the upcoming G7 meeting on April 11-13 will be a key event," said Davies.

Meanwhile the pound was also well bid against the dollar, reflecting the US currency's broad weakness. There is no UK data on the calendar today.

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Euroshares remain volatile midday, Wall St headed for mixed open

At 12.06 am, the DJ STOXX 50 was 3.93 points or 0.13 pct higher at 3,059.74, while the DJ STOXX 600 added 0.63 points or 0.21 pct to 307.89.

In Europe, data on inflation was also in focus this morning as Eurostat revised the euro zone inflation rate for February upwards to 3.3 pct from a provisional estimate of 3.2 pct, dampening hopes of an interest rate cut by the European Central Bank.

"The data was quite amiss and extremely negative news this morning. We are just not in a position to talk up the economy at the moment and pretend we're looking at a healthy financial sector," a Frankfurt-based trader said.

Initial enthusiasm following yesterday's statement by S&P evaporated steadily in morning trading and investors are still too uncomfortable to hold on to large positions over the weekend. Standard & Poor's yesterday predicted financial companies are nearing the end of the massive asset writedowns that have devastated the stock and credit markets.

Turning to company news, M&A chatter was providing some momentum, with Fiat trading 3.5 pct higher as the car maker's CEO Sergio Marchionne did not rule out the possibility of spinning off its car division in the future if the holding structure of the group under-values the asset.

"Marchionne's comments accentuated a technical rebound. It still has to be seen how such a spin off would be carried out and what value added it would provide," a dealer said. Over in Germany, TUI AG climbed 5.8 pct following reports that its chief executive Michael Frenzel is prepared to break up the company's tourism and container shipping operations.

Major shareholder John Fredriksen raised his stake to just under 10 pct, broadcaster n-tv said, and won over enough supporting parties to agree on the spin off of shipping unit Hapag Lloyd. In the UK, healthcare group Shire rose 5.5 pct on the back of talk that US giant Pfizer is casting an acquisitive eye over the company.

A London-based trader said he had heard talk of a 1,300 pence per share bid. Mike Ward, an analyst at Nomura Code Securities, an investment bank specialising in life sciences, said he thought 1,300 was a good price for the company, but added he believed a bid was unlikely.

Elsewhere, Vallourec shares were lifted by read-across from SSAB's sale of its IPSCO Tubulars unit, as well as upbeat comments from Italian peer Tenaris on the outlook for the seamless tube sector. Vallourec added 4.6 pct, while SSAB gained 5.3 pct and Tenaris was underperforming, down 0.7 pct.

Over in Zurich, Swatch Group shed 6 pct as the watch maker warned that the weak US dollar and yen as well as rising gold, diamond and raw material prices create "new challenges".  Analysts at Landsbanki Kepler also noted that they had been hoping for a new share buyback programme and that the consensus did likely not factor in a negative 8 points currency headwind.

Over in Italy, shares in eyewear maker Luxottica were 3.3 pct lower as it disappointed investors with with its full-year results.

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Asian markets lower on US recession woes; Singapore, Australia buck trend

Japan's benchmark Nikkei index ended down 1.5 percent at 12,241.60 while the broader Topix fell 1.9 percent to 1,193.23. South Korea's KOSPI was down nearly 1 percent at 1,600.26, with a falling won and fears of credit tightening in China dragging the key index below the critical 1,600 support level at one point.

The Hang Seng Index closed down 0.3 percent at 22,237.11, and the Shanghai composite slipped 0.22 percent to 3,962.67. China's central bank has already warned interest rates may continue to go up to curb inflation which soared to a near 12-year high of 8.7 percent in February.

China last year increased its key rates six times and in January raised the reserve requirement on bank deposits to its highest level since the 1980s.

Taiwan's weighted index closed down 0.60 percent at 8,161.39. Singapore, Australia outperform Benchmarks in Singapore and Australia rose. The S&P/ASX 200 closed up 1.4 percent at 5,206.9 and the All Ordinaries rose 1.4 percent to 5,288.5, supported by gains in the resources sector as gold and oil prices hit fresh highs.

The Singapore Straits Times Index ended up 1.2 percent at 2,839.01 as investors cheered the better-than-expected domestic retail sales data. Higher fuel prices helped Singapore's retail sales rise 7.8 percent in January from a year earlier. Economists polled by Thomson Financial had forecast retail sales growth of between 3.2 and 7.6 percent, after December's 2.5 percent gain.

Elsewhere in Asia, Malaysia's Kuala Lumpur Composite Index closed down 0.5 percent at 1,194.84, the Jakarta composite was down 2.3 percent at 2,383.42 while the Philippine composite fell 1.2 percent to finish at 2,906.53. Gainers in the region include Australian mining giant BHP Billiton which advanced 4.2 percent to 337.92 Australian dollars, while rival Rio Tinto rose 5.1 percent to 130.80 dollars.

Iron ore miner Midwest Corp jumped 30.8 percent to 5.43 dollars after China's state-owned Sinosteel Corp made a 1.2 billion dollar, or 5.60 dollars per share, unsolicited takeover bid for the company.

Sinosteel, which owns 19.89 percent of Midwest, said it has received approval from the Australian Foreign Investment Review Board for the unsolicited offer.

In Tokyo, the big banks reversed early gains to close lower. Sumitomo Mitsui Financial Group was down 1.5 percent at 668,000 yen, Mizuho Financial Group fell 1.3 percent to 380,000 yen, and Mitsubishi UFJ Financial was down 1.8 percent at 829 yen.

In Seoul, shipbuilders led decliners. Hyundai Heavy dipped 3.7 percent to 335,000 won and Samsung Heavy was off 2.9 percent to 28,650 won. POSCO fell 4.1 percent to 442,000 won due to fears of higher import prices

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Metals - Copper up as oil, gold, hover near records; tin hits new peak

LONDON - Copper edged up as other commodities like oil and gold hovered near historic highs, boosting sentiment in the complex as a whole, and as the LME reported further falls in inventories. Tin meanwhile hit another new record peak of 20,275 usd a tonne as traders remained unconvinced Indonesia, the world's second largest tin producer, will be able to adequately supply the market.

This was despite reports that Indonesian police have allowed PT Koba tin, the country's second biggest smelter, to resume operations while their investigation into alleged illegal tin mining continues.

At 10.03 am, tin was quoted at 20,275 usd a tonne against 19,950 usd at the close yesterday, with traders still worried about supply from Indonesia, China and Africa.

Copper meanwhile was up at at 8,535 usd a tonne against 8,380 usd at the close yesterday. The LME said earlier copper inventories have fallen by another 2,725 tonnes to total 125,225 tonnes, still near 7 month lows. At the start of the year, LME copper inventories stood at around 200,000 tonnes.

In Shanghai, however, copper stocks are rising strongly and this is partly offsetting the tight supply picture from the LME. Data out earlier showed stocks rose 16 pct to 61,623 tonnes in the week the Thursday.

The increases are capping gains in copper, but moreover, worries over the impact of the global financial market turmoil on economic growth and metals demand going forward are creeping into the market. "The base metals are hesitating whether they should be acting like industrial metals or as safe-havens as they seem to be showing some concern about the plight of equities and the message that is giving out.

"It is easier to be bullish for gold and some of the base metals with tight fundamentals, notably copper, tin and possibly lead, but even these... are likely to suffer if global economic growth slows," said BaseMetals.com analyst William Adams.

For now, however, renewed dollar weakness is boosting the metal by making them cheaper for holders of stronger currencies. The dollar hit another record low against the euro overnight and stayed near 12 year lows against the yen. As a result all metals are currently trending higher, while oil and gold are staying close to historic peaks as players see further weakness in store for the beleaguered US currency.

Next week, the US Federal Reserve is expected to cut interest rates by up to 75 basis points in a bit to prevent the world's largest economy from sliding into recession.

The dollar has little hope of recovering near term then, while the sharp US rate cuts are also heightening inflation pressures and increasing the appeal of commodities as an inflation hedge. Equities on the other hand are faring badly, prompting funds to divert more and more money into commodities as an alternate asset that has stronger returns in the current shaky macro-economic environment.

In other metals traded, lead rose to 3,140 usd against 3,100 usd, nickel inched up to 32,850 usd against 32,150 usd, zinc climbed to 2,660 usd against 2,630 usd while aluminium increased to 3,167 usd against 3,115 usd.

The metal is showing surprising strength considering the huge increases in LME inventories. Exchange data out earlier showed inventories rose 19,275 tonnes to total 1,006,600 tonnes - their highest since June 2004.

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