US & World Daily Markets Financial Briefing 15-01-2009

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US STOCKS-BofA, Citi outlook fears sink Wall Street

NEW YORK - U.S. stocks tumbled on Thursday as news of a push by Bank of America for more government aid added to worries about mounting credit losses in the financial sector.

Shares of Bank of America, the largest U.S. bank, were a top drag on the Dow, with a drop of 27 percent to $7.44. Shares of Citigroup tumbled 23 percent to $3.49 a day before the bank was due to report its quarterly results and new strategic direction.

Investors feared a need for more government aid in the financial sector pointed to mounting credit losses as the year-long recession deepens. The S&P financial index fell 7.6 percent.

"I think it's tremendously disappointing that the banks continue to flounder," said Carl Birkelbach, head of Birkelbach Management in Chicago.

"What's going on here is that the first batch of the (financial rescue bailout) funds was supposed to put out the fire, but now it looks like the fire is coming up again."

The Dow Jones industrial average slid 155.23 points, or 1.89 percent, to 8,044.91. The Standard & Poor's 500 Index tumbled 18.22 points, or 2.16 percent, to 824.40. The Nasdaq Composite Index plummeted 26.37 points, or 1.77 percent, at 1,463.27.

Citi shares have been on the defensive since the bank announced the sale of a controlling stake in its Smith Barney retail brokerage business, a crown jewel, to Morgan Stanley to replenish capital.

 US Jobless Claims 54K To 524K In Jan 10 Week; Survey 46K

WASHINGTON - The number of idled workers filing new claims for jobless benefits jumped last week as the recession forces companies to cut costs.

Initial claims for unemployment insurance benefits increased by 54,000 to 524,000, after seasonal adjustments, in the week that ended Jan. 10, the Labor Department said Thursday.

The increase was the first in three weeks. The four-week average of new claims last week fell to 518,500 from 526,500.

The number of new jobless claims filed nationwide was bigger than Wall Street had expected. Economists surveyed by Dow Jones Newswires was for claims to rise by 46,000 to 513,000 for the week ending Jan. 10.

Non-farm payrolls shrank throughout 2008 as companies laid off workers in a deepening recession. Corporate profits have been falling because people and businesses are cutting spending. To protect the bottom line, firms have had to unload employees.

New jobless claims for the week ending Jan. 3 were revised slightly upward to 470,000. Originally, claims for that week were reported at a seasonally adjusted 467,000.

The Labor Department data Thursday on new unemployment claims included the total number of workers drawing unemployment benefits in the week that ended Jan. 3, the latest period for which that particular data are available. The number - known as continuing claims - fell by 115,000 to 4,497,000. The unemployment rate for workers with unemployment insurance held at 3.4%.

New York state reported the largest increase in new claims the week of Jan. 3, at 24,465, due to layoffs in the construction, service, and transportation industries. California reported the biggest decrease, at 14,796, because of fewer layoffs in the construction and service industries.

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FOREX-Euro struggles, yen pushes higher; spotlight on ECB

LONDON - The euro struggled to make headway versus the dollar on Thursday, while the yen rose with global economic pressure mounting and investors focused on the European Central Bank's rate decision.

Japan's low-yielding currency hit its highest in six weeks versus the euro and four weeks against the dollar, with pressured stocks reflecting escalating fears over the battered banking sector and ongoing risk aversion.

The state of the single currency bloc's economy and public finances moved into sharp focus this week with Standard and Poor's cutting its credit rating on Greek sovereign debt on Wednesday, stoking fears downgrades to other members of the 16-country euro zone could follow.

Wariness over the outlook for Ireland also lingered after Prime Minister Brian Cowen denied a report that he might call on the International Monetary Fund (IMF) for economic help.

Data summed up a bleak picture in Europe, showing Germany's economy grew at its slowest pace in three years in 2008. The euro zone's biggest economy contracted by between 1.5 percent and 2.0 percent in the final three months of the year.

Oil price falls pulled down euro zone inflation to a 26-month low in December, data confirmed on Thursday. The ECB is expected to lower interest rates on Thursday for the fourth month running and traders are betting the ECB will cut interest rates by least 50 basis points, in line with economists' consensus, taking its benchmark rate to 2.0 percent.

The euro overnight index average  curve shows a bigger move but that is distorted by the steep fall in overnight rates thanks to central banks having flooded the financial system with cash.

"The ECB's communication and actions diverged in December and this has allowed the market to ignore recent comments about a move towards a more gradual pace of easing and a possible pause," said Lena Komileva, senior G7 economist at Tullett Prebon in London.

"The big risk, based on recent ECB comments, is that they don't want to move towards the zero (rates) mark too early," she added. The rate verdict is expected at 1245 GMT, while ECB President Jean-Claude Trichet will hold a post-decision press conference at 1330 GMT.

The euro was flat at $1.3165 , hovering above a one-month low of $1.3093 on EBS the previous day. It was down 0.3 versus the yen at 117.07 yen, having fallen to six week lows earlier at 116.45 according to Reuters data -- fuelled by investors continuing to cut exposure to risk.

Yen strength also saw the dollar fall 0.2 percent to 88.88 yen after hitting a four week low earlier. The severity of the crisis of confidence in the euro area was also reflected in bond markets, with euro zone government bonds surging to a record high.

Benchmark German Bunds outperformed as aversion to risk and credit jitters raised the relative cost of debt issuance for other euro zone governments.

Analysts said that ECB President Trichet's press conference would have to acknowledge the situation facing the region. "Our general feeling is that Mr Trichet will bow down to the reality of the economic news coming through -- it is across the board atrocious," Credit Suisse FX strategist Martin McMahon said.

Calyon strategists said in a note to clients that if expectations for the ECB were not met, it could see the single currency sinking further.

The Australian dollar briefly dropped to a one-month low against the U.S. dollar and the yen after data showed a steep drop in full-time jobs and a rise in the jobless rate last month, reinforcing the case for further rate cuts.

The kiwi fell to 47.20 yen, the lowest since September 2001, before regaining some ground. The Aussie touched a one-month low of 58.18 yen.

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European stocks edge up ahead of ECB rate decision

LONDON - European shares were slightly higher in choppy trade on Thursday ahead of an expected European Central Bank interest rate cut at 1245 GMT. At 1155 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 percent at 805.19 points.

On Wednesday, the index closed 4.3 percent lower, falling for a sixth successive session, with banks sliding on worries about the strength of their balance sheets. "There's no great urge to buy. Not yet", said Giuseppe-Guido Amato, strategist at Lang & Schwarz in Germany.

"We know the banks are in trouble. We were expecting bad figures from Deutsche Bank, but they were worse. Investors are cautious. We might get a rebound, if the ECB cuts three quarters of a point."

Referring to Man Group's statement on Wednesday, he said: "What is good is that stock exposure form hedge funds is very low. They have to buy if the market goes up. And there's not so much selling pressure any more."

A Reuters poll found analysts expect the ECB to cut interest rates by 50 basis points to 2 percent. Investors will also await remarks from ECB president Jean-Claude Trichet for clues about future cuts. Banks were again a drag on the index, with HSBC down 3 percent, BNP Paribas down 6 percent and HSBC down 4 percent.

Deutsche Postbank dived 18 percent amid downbeat analyst comments on revised terms of a deal under which Deutsche Bank  is buying a stake in Postbank from Deutsche Post. But gains for commodities helped prop the market up.

With crude oil rising more than 1 percent to $37.67 a barrel, oil shares gained. ENI and Statoil  were up 0.9 percent and 5.1 percent respectively. Amid a mixed picture for metals prices, miners recouped some of the ground lost on Wednesday when they slumped. Anglo American, Antofagasta, BHP Billiton, Rio Tinto, and Xstrata rose between 1 and 6.4 percent.

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC-40 were down between 0.4 and 0.5 percent. Swiss food giant Nestle was up 2.4 percent after Goldman Sachs upgraded the shares to "buy" from "neutral" saying the stock looks cheap following a recent fall.

Continental dived 19 percent on news the automotive parts and tyre maker was considering a 1 billion euro ($1.31 billion) capital increase.

Home Retail, owner of Britain's Argos chain, fell 7.3 percent after it said gross margins fell 125 basis points in the 18 weeks to January 3, as it cut prices to move stock.

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HK shares drop to 7-wk low; HSBC at 10-year low

Hong Kong shares dropped 3.4 percent to a seven-week low on Thursday, as the global credit crises hit the spotlight again sending shares in HSBC to a 10-year low and wiping out nearly $11 billion of the bank's market capitalisation in a two-day slide.

But the main index, which slipped below 13,000 points earlier, closed off lows helped by short covering in select Chinese financials which have corrected sharply in the last week.

The Hang Seng Index ended the morning session points 461.65 points lower at 13,242.96 off its session low of 12,904.05. "The honeymoon period is over and the credit crises is back in focus. The quarterly earnings which start in February/March will probably signal the second wave of the tsunami," said Peter Lai, director with DBS Vickers.

Mainboard turnover dropped to HK$49.4 billion from HK$66.2 billion by midday Wednesday. Concerns over steep losses this year and signs of a mounting recession beat down stocks across the board with only 132 of the total 1,097 issues trading higher on Thursday.

China Enterprises Index of top mainland stocks fell 2.5 percent to 7,042.36 but losses were cushioned by gains in steel stocks after China vowed to stop expansion in sector, mitigating overcapacity fears. Angang Steel rose 4.9 percent while Maanshan Iron & Steel jumped 4.2 percent.

Rechargeable battery maker BYD Company gained 1.9 percent after China announced sweeping steps to prop up its auto industry, which has been battered by the economic downturn. Amid other measures like sales tax reductions, China also introduced funding for electric and alternative fuel vehicles.

HSBC shrank 5.7 percent to HK$66, still reeling from a Morgan Stanley report that cut its earnings estimates and target and warned that the UK-based lender may need $20 billion to $30 billion to shore up its capital. "Investors are worried about the dividend cut HSBC will announce and also its need to raise money," said Patrick Shum, strategist with Karl Thomson Securities.

"The stock may fall to HK$58 before its rebounds a bit but it is already oversold and long term investors looking to hold the stock for 2-3 years should get in now," he said.

Shares in London-based lender Standard Chartered dived 6.7 percent on Wednesday, underperforming other regional banking stocks after Mervyn Davies stepped down as chairman of the Asia-focused bank.

Davies, who led the bank as chief executive from 2001 to 2006 and is credited with playing an important role in restructuring the bank following the setbacks it suffered during the Asian financial crises of 1997-1998, will take up a role as UK minister for trade and investment.

"This is nonetheless an unexpected if not unwelcome development, amidst unsettled markets and uncertain macro outlooks for several of Standard Chartered's key markets," said Goldman Sachs analyst Roy Ramos.

China Southern Airlines, the country's largest carrier by fleet size, fell 2.3 percent after the air carrier said it estimated it would report a loss for 2008. Losses were limited by a 10 percent slide in the stock in the past week.

The airline blamed its poor performance on the slowdowns in the global and Chinese economies, which cut its passenger volume growth to single digits for the first time in five years, as well as high domestic fuel prices during the year.

Rival Air China dropped 8.1 percent. But China Eastern Airlines soared nearly 11 percent on Thursday on talk that it may sell stakes in smaller regional carriers and was likely to trim or delay new aircraft orders.

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PRECIOUS-Gold steady ahead of ECB rates decision

LONDON - Gold was steady in Europe on Thursday as traders awaited the European Central Bank's interest rate announcement later in the day, which could put pressure on the euro and consequently on gold.

Spot gold rose to $810.70/812.70 an ounce at 1015 GMT from $810.55 in New York late on Wednesday.

The ECB is widely expected to cut rates for the fourth month in a row by between 25 and 50 basis points as dismal economic data raises the prospect of a prolonged recession.

The decision should have a significant effect on the foreign exchange markets, and consequently on gold. "A lot is still influenced by euro/dollar," Wolfgang Wrzesniok-Rossbach, head of sales at precious metals group Heraeus, said.

The dollar was firmer versus the euro in early trade, with the single currency eroded by a spate of poor economic news. The ECB announcement is at 1245 GMT.

"All eyes will be on the ECB's interest rate decision," Standard Bank analyst Walter de Wet said. "Standard Bank expects a 50 bps cut. This, combined with increased risk aversion since the start of the week...should continue to support the dollar."

A firmer dollar usually pressures gold, which is often bought as an alternative investment to the U.S. currency.

Lower oil prices are also weighing on gold. Bullion typically moves in the opposite direction to crude, as it is often bought as an inflation hedge, and the direction of the oil market is an indicator of interest in commodities.

Oil fell more than 2 percent or $1 a barrel after bleak figures from world markets pointed to weak demand.

However, investor interest in gold remains strong. Bullion holdings of the SPDR Gold Trust in New York, the world's largest gold-backed exchange-traded fund, rose to a record for the second time this year.

Demand for gold in India, the world's largest bullion market, was also picking up as prices fall, dealers said. Rahul Gupta, director at Delhi-based PP Jewellers, said he expected demand to spurt due to lower prices as the wedding season, which starts mid-January, gets underway.

On the supply side, South African gold output fell 8.7 percent in volume terms in Nov 2008 from a year before. The country's gold output has fallen since the electricity grid suffered a near collapse last January.

The market is awaiting the second update of an annual market report from metals consultancy GFMS, due at 1500 GMT, for further guidance on gold supply and demand.

Among other precious metals, spot silver was quoted at $10.45/10.53 an ounce against $10.54 late in New York on Wednesday.

Platinum and palladium prices fell, with the spate of poor economic data from the United States and Europe pressuring all industrial metals.

The platinum group metals, which are mainly used in car manufacturing, have fallen dramatically from their highs of early 2008 as the auto sector has come under pressure.

"There is a danger in platinum if the sales misery continues in the car industry that we might go even lower, even though the production side is going down as well," Wrzesniok-Rossbach said.

Spot platinum slipped to $916.50/921.50 an ounce from $933 late in New York on Wednesday, while palladium fell to $174.50/179.50 an ounce from $180.50.

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