US & World Daily Markets Financial Briefing 15-07-2008

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Stocks drop again amid fears about financials

NEW YORK  - Stocks were knocked lower again Tuesday as investors grappled with escalating instability in the financial sector and sobering comments from Federal Reserve Chairman Ben Bernanke. The Dow Jones industrial average fell about 180 points.

Bernanke told Congress the U.S. economy is faced with "numerous difficulties," such as strains in financial markets, a shaky job market and ongoing weakness in the housing market. These difficulties -- which are persisting despite the Fed's massive interest rate cuts and expanded lending efforts -- represent "significant downside risks" to economic growth, the Fed chief said.

U.S. officials' comments come only days after the Fed and the Treasury said they would lend financial support to mortgage financiers Fannie Mae and Freddie Mac if necessary. The well-being of the government-chartered companies has drawn Wall Street's attention in recent weeks as the companies together hold or guarantee more than $5 trillion in mortgages -- nearly half the nation's total.

Fannie and Freddie shares tumbled again Tuesday, along with most other financial stocks.

Investors are also nervous after a run on IndyMac Bancorp Inc. led to the California lender's takeover by the government Friday. IndyMac became the largest regulated thrift to fail.

In midmorning trading, the Dow Jones industrial average dropped 180.51, or 1.63 percent, to 10,874.68. Broader stock indicators also sank. The Standard & Poor's 500 index fell 23.46, or 1.91 percent, to 1,204.84, and the Nasdaq composite index fell 33.10, or 1.50 percent, to 2,179.77.

Treasury prices jumped as investors sought the safety of government-issued securities. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.79 percent from 3.86 percent late Monday.

Light, sweet crude fell $1.39 to $143.79 per barrel on the New York Mercantile Exchange.

In addition to the financial sector, Wall Street is concerned about U.S. consumers, who are monitoring their budgets more carefully in the face of higher energy prices, falling home values and an uncertain jobs climate.

The Commerce Department reported Tuesday that retail sales edged up by 0.1 percent -- a weaker amount than the 0.4 percent increase analysts expected in June. Total sales were dampened especially by plummeting sales at car dealerships.

Investors found little comfort in a Labor Department showing that core inflation at the wholesale level, which excludes energy and food prices, ticked up by just 0.2 percent. Overall wholesale prices jumped by a larger-than-expected 1.8 percent -- the biggest gain since November. For the past 12 months, wholesale prices including food and energy showed an increase of 9.2 percent, the largest increase since June 1981.

Wachovia Corp. fell $1.44, or 15 percent, to $8.39, after Oppenheimer Co. analyst Meredith Whitney downgraded Wachovia, citing a "very real scenario" of declining assets and rising losses.

Fannie Mae fell 2.55, or 26 percent, to $7.18, and Freddie Mac fell $2.28, or 32 percent, to $4.83.

In corporate news, General Motors Corp. announced plans to lay off salaried workers, reduce truck production, suspend its dividend and borrow $2 billion to $3 billion as it adjusts to a declining U.S. market. GM shares fell 48 cents, or 5.1 percent, to $8.90.

Johnson & Johnson said its second-quarter earnings rose 8 percent as sales increased for consumer health items and surgical and diabetes products. The health care company's earnings before a charge for an acquisition totaled $1.18 per share. Analysts, on average, expected the company would earn $1.12 a share before items. Johnson & Johnson shares rose $1.24 to $67.61.

The Russell 2000 index of smaller companies fell 14.16, or 2.13 percent, to 650.34. Declining issues outnumbered advancers by about 10 to 1 on the New York Stock Exchange, where volume came to 353.86 million shares.

Overseas,  Britain's FTSE 100 fell 2.60 percent, Germany's DAX index fell 2.91 percent, and France's CAC-40 fell 2.54 percent.

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Dollar hovers close to record lows as U.S. economic fears mount

LONDON - The dollar remained close to its fresh all-time low against the euro following a bleak assessment of financial markets from Federal Reserve chairman Ben Bernanke and weaker-than-expected U.S. retail sales figures.

In his semi-annual testimony before the Senate Bank Committee Bernanke said financial markets and institutions remain under considerable stress and stressed the Fed's "top priority" would be to keep financial markets functioning.

Analysts noted that Bernanke placed more emphasis on the downside risks to U.S. economic growth and the trouble in financial markets than inflation, boosting expectations the Fed is unlikely to raise interest rates anytime soon.

"Chairman Bernanke's testimony was relatively dovish compared to recent Fed rhetoric," said Dean Maki at Barclays Capital. "It appears he is guiding markets toward an extended period of Fed policy inaction, and suggests that the Fed is likely to be on hold for longer than our current forecast projects," he added.

Markets were also concerned earlier by figures showing U.S. retail sales rose by just 0.1 percent in June from July, well below expectations for a reading of 0.4 percent. Analysts warned the modest rise suggests the boost consumers' received from their tax rebate is already starting to fade.

"With confidence at rock bottom, employment shrinking, house prices and stock markets plummeting and prices for food and energy surging, the outlook for consumption in the second half of the year is incredibly grim," said Paul Ashworth at Capital Economics.

This meant the euro remained close to the all-time high of $1.6038 hit this morning as confidence on financial markets continued to plummet after the U.S. government on Sunday announced plans to shore up Fannie Mae and Freddie Mac.

Investors are nervous that a Federal Reserve bail-out could add billions of dollars to the U.S. national debt, and lower the country's credit rating. Attention will now turn to U.S. and euro zone inflation figures, both due for release tomorrow.

Elsewhere, the pound remained well bid against the dollar, having briefly hit a three-and-a-half month high against the dollar following stronger-than-expected CPI inflation data this morning.

Official figures showed the key annual CPI rate jumping to 3.8 percent in June from 3.3 percent in May, beating forecasts for a more moderate rise to 3.6.

"The punchy headline number is likely to ensure that the pound remains well bid for now," said Daragh Maher, senior forex strategist at Calyon.

The data has kept in place expectations that the Bank of England is unlikely to cut interest rates before the end of the year while inflation remains well above its 2.0 percent target. "Inertia appears the most likely monetary policy stance for now," said Maher.

However fears about slowing growth in the UK economy may flarae up again tomorrow with the release of the latest unemployment figures.

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London shares - midafternoon features

FTSE 100 risers

British Energy 718-1/2 up 12-1/2   Morgan Stanley ups target to 650 pence from 555

GlaxoSmithKline 1,186 up 4-1/2    Defensive qualities
  

FTSE 100 fallers

Carphone Warehouse 179.7 down 19  Merrill Lynch say Carphone will be 'casualty' from BT super-fast broadband

Royal Bank of Scotland 165 down 15 Rescue of U.S. mortgage banks fails to inspire sector
   
ITV 40.20 down 2.70   Lehman cuts target to 51 pence from 65
   
Barclays 255-1/2 down 14-1/4   Rescue of U.S. mortgage banks fails to inspire sector
   
Lloyds TSB 269 down 13-1/4  Rescue of U.S. mortgage banks fails to inspire sector  

Friends Provident 79.80 down 3.90  Morgan Stanley 'underweight' with tgt cut to 89 pence from 133

Prudential 480-1/4 down 21-3/4   Morgan Stanley cuts target to 696 pence from 752

Paris shares lower midday on fresh concerns for financial sector

At 12.46 pm the CAC-40 index was down 87.53 points, or 2.11 percent, at 4,055.00. On the Matif, July CAC-40 futures were trading at 4,068.
   
On Monday, Washington Mutual was obliged to reassure the markets that it has enough spare cash and a strong enough capital ratio to handle the downturn, after its shares hit a 17-year low during trading.
   
Washington Mutual has been among the U.S. financial names hit hardest by rising mortgage defaults, and recently raised $7.2 billion in cash to shore up its capital base.
  
The ZEW index dropped to -63.9 in July from -52.4 in June, declining for the fourth month in succession and setting a new record low for the series. The previous low dated back to December 1992, when the index hit -62.2.
   
Economists polled by Thomson Financial News were looking for a more modest drop to -57.0.
   
BNP Paribas fell 2.35 or 4.18 percent at 53.53, Dexia lost 0.55 or 6.44 percent at 7.99, Societe Generale was down 1.83 or 3.55 percent at 49.72, Natixis fell 0.55 or 9.84 percent at 5.04 and Axa was 0.90 or 4.97 percent lower at 17.19. Credit Agricole SA slid 0.40 or 3.37 percent at 11.46.

Milan shares lower at midday, led by Parmalat

At 12:21 p.m., the Mibtel was down 2.11 percent at 20,931 and the S&P/Mib fell 2.13 percent to 27,157.
   
Parmalat fell 7.19 percent to 1.51 euros. The company cut its guidance for full-year EBITDA to 350 million euros, down about 5 percent from 2007's 367 million, and against a previous 2008 forecast for up 7 to 10 percent.
   
Seat PG was down 6.15 percent at 0.0626, Mondadori down 4.42 percent at 3.35 and L'Espresso down 4.41 percent at 1.409 as media stocks were hit by concern about the evolution in advertising revenues as the economy slows down.
  
Mediaset was down 1.79 percent at 3.973, but outperforming other media shares after a survey by Nielsen Media Research showed that television groups performed better than newspaper publishers in collecting advertising. Advertising on television in the five months to May rose 1.5 percent to 2.242 billion euros, according to Nielsen Media Research, while advertising in the written press fell 1.9 percent to 1.291 billion euros.

German shares just above 6,000 in afternoon on financial jitters, strong euro

Shares were down in afternoon trade, with the DAX-30 index having fallen to just above 6,000 points to the lowest level the blue-chip gauge has seen since Oct. 2006.
   
Traders pointed to continued worries about the health of the financial sector, especially in the United States, and pressure from the strength of the euro against the U.S. dollar. A lower opening in the U.S. also weighed on the local market.
   
At 3:31 p.m., the DAX was down 138.80 points or 2.24 percent at 6,061.45, after trading in a range of 6,006.58 to 6,164.73. The MDAX fell 232.01 points or 2.77 percent to 8,154.61 and the TecDAX was down 24.73 points or 3.49 percent at 684.63.
   
DAX futures lost 104.00 points or 1.67 percent to 6,110.00 while bund futures added 0.23 or 0.2 percent to 112.60.

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Asian stocks tumble with Wall Street; financials lead rout

MUMBAI - Asian stocks extended losses Tuesday after U.S. equities fell amid persistent credit concerns, with banking stocks such as Mitsubishi UFJ Financial Group leading the decline.

Stocks got off to a weak start after the Dow industrials ended at a two-year low as the latest plan by the U.S. government to bail out the nation's two biggest mortgage financiers, Fannie Mae and Freddie Mac, failed to fully convince investors about its effectiveness.

"Washington's moves to shore up confidence in the mortgage companies didn't give as much comfort to investors as previously thought," said Kwak Joong-bo, an analyst at Hana Daetoo Securities in Seoul.

"Rather, they seemed to view the efforts as confirmation of the gravity of the troubles in the U.S. financial sector." More time is needed for the market to recover and short-term investors would be better off if they take a conservative stance, said Kwak.

"What investors can do for the moment is just hope that key U.S. investment banks would not deliver earnings shocks." Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. on Thursday are expected to report profit declines. Citigroup Inc. -- the nation's largest bank by assets -- is expected to post its third straight quarterly loss.

The Nikkei 225 index fell 2 percent to 12,754.56 and the Topix slipped 2.2 percent to 1,253.12. A Nikkei newspaper report that Japan's three megabanks had some 4.7 trillion yen ($44.2 billion) in debt securities issued by Fannie Mae and Freddie Mac as of March 31 added to the gloom.

Mitsubishi UFJ Financial lost 5.3 percent to 926 yen, Mizuho Financial Group fell 5 percent to 511,000 yen and Mitsui Sumitomo Financial Group lost 6.1 percent to 784,000 yen.

In South Korea, Shinhan Financial Group fell 5.2 percent to 42,650 won, Woori Finance Holdings tumbled 5.8 percent to 14,550 won and Hana Financial Group ended down 3.9 percent at 36,000 won. The Kospi closed down 3.2 percent at 1,509.33.

The S&P/ASX was down 2.1 percent at 4,815.7 and the All Ordinaries was down 2 percent at 4,910.1, with Commonwealth Bank down 3.6 percent at A$38.71, National Australia Bank sliding 3.1 percent to A$25.66, Australia and New Zealand Banking Group off 2.9 percent at A$17.29 and Westpac down 4.8 percent at A$18.46.

The Hang Seng index gave up 3.8 percent to close at 21,174.77 and the Shanghai composite index was down 3.4 percent at 2,779.45.

"Sentiment on banking stocks is sour. Investors are worried that Chinese banks have investments in the two U.S. mortgage lenders, Fannie Mae and Freddie Mac," said Yu Kei Lee, analyst at Core Pacific-Yamaichi in Hong Kong.

Concerns about investments in assets linked to the subprime mortgage market in the U.S. resurfaced this month after Lehman Brothers said Fannie Mae and Freddie Mac would need additional capital.

Elsewhere in Asia, the Philippine composite index was down 1.8 percent at 2,413.26, and the Jakarta composite index closed down 2 percent at 2,214.85.

The Taiwan weighted index fell 4.51 percent to 6,834.24. The Straits Times Index (STI) closed 2.5 percent lower at 2,830.75, while the Kuala Lumpur Composite Index (KLCI) closed down 1.4 percent at the day's low of 1,127.60.

India's main stock index, the 30-share Sensex of the Bombay Stock Exchange (BSE), plummeted 654.32 points or 4.91 percent to 12,676.19, recovering from its 52-week low of 12,605 points touched during the day. The 50-share S&P CNX Nifty of the National Stock Exchange (NSE) fell 178.60 points or 4.42 percent to 3,861.10.

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