US & World Daily Markets Financial Briefing 16-07-2008

Stocks waver after Wells Fargo, inflation reports

NEW YORK - Stocks fluctuated in volatile trading Wednesday after Wells Fargo's decision to boost its dividend offset some of the market's concerns about a jump in inflation last month.
   
The San Francisco-based bank's move to raise its payout to investors is being seen as a bullish sign for the troubled banking sector. Still, the Labor Department's report that consumer prices shot up in June at the second fastest pace in 26 years is reminding investors that rising prices still pose a threat to economic growth.
   
Stocks did draw some support from oil prices that pulled back for a second straight day on concerns that a slowing economy will damp demand. Light, sweet crude fell $1.07 to $137.67 on the New York Mercantile Exchange. Weekly government figures on domestic inventories are due during the session.
   
But despite somewhat cheaper oil, investors remain worried about the economy and specifically the financial sector. This week has brought fresh attention to potential trouble spots in the mortgage market. Fannie Mae and Freddie Mac, the government-chartered mortgage giants, remain a concern, as do regional banks that have could have a large amount of bad mortgage debt on their books.
   
In the first hour of trading, the Dow Jones industrial average rose 48.28, or 0.44 percent, to 11,010.82 after dipping in and out of positive territory. On Tuesday, stocks ended mostly lower on continuing worries about the financial sector and the Dow logged its first close below 11,000 since July 2006.
   
Broader stock indicators also rose after moving in and out of negative territory. The Standard & Poor's 500 index rose 0.45, or 0.04 percent, to 1,215.36, and the Nasdaq composite index rose 10.56, or 0.48 percent, to 2,226.27.
   
The Labor Department's report that its Consumer Price Index rose 1.1 percent in June came as economists had expected a gain of 0.8 percent. Two-thirds of the increase is linked to surging energy prices. The core reading, which excludes often volatile food and energy costs, ticked up 0.3 percent.
   
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.88 percent from 3.82 percent late Tuesday.

Beyond the inflation reading, which follows a report Tuesday that showed a 1.8 percent increase in wholesale prices for June, investors are digesting a Federal Reserve report that industrial production rose 0.5 percent in June after declining 0.2 percent in May. The increase was the highest since a 0.6 percent gain in July of last year.
   
Wall Street is also awaiting minutes from the last meeting of the Federal Open Market Committee, the arm of the Fed that sets interest rates. The Fed last month broke a string of reductions by leaving rates unchanged at its last meeting, a recognition that lower rates had weighed on the dollar and led to increases in commodities such as oil and food.
   
In corporate news, Wells Fargo said its second-quarter earnings fell 22 percent as more customers at the nation's fifth-largest bank failed to pay back their loans. But Wells Fargo's results beat Wall Street expectations, and investors appeared pleased by the company's decision to raise its quarterly stock dividend to 34 cents from 31 cents. Wells Fargo rose $3.33, or 16 percent, to $23.84.
   
Cleveland-Cliffs Inc., an iron and coal miner, said it agreed to acquire coal producer Alpha Natural Resources Inc. for nearly $10 billion in cash and stock in a move to boost its role as a supplier to the global steel industry. Cleveland Cliffs fell $8.85, or 7.9 percent, to $102.61, while Alpha Natural surged $19.44, or 20 percent, to $114.36.
   
Delta Air Lines Inc. rose 37 cents, or 7.9 percent, to $5.04 after reporting that high fuel prices led to a hefty second-quarter loss despite a strong increase in sales. The results topped Wall Street estimates, which excluded one-time items.
   
Overseas, Britain's FTSE 100 fell 1.45 percent, Germany's DAX index rose 0.06 percent, and France's CAC-40 fell 0.07 percent.

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Dollar off day lows after staggering rise in U.S. inflation

LONDON  - The dollar was a touch higher after the annual rate of inflation in the world's biggest economy was revealed to have hit a 17-year high in June.

Consumer prices increased by a monthly 1.1 percent in June alone, the biggest monthly gain in 26 years, taking the annual inflation rate up to a 17-year high of 5.0 percent. The staggering figures led to some renewed expectations that U.S. rate-setters will have to hike interest rates before too long.

Analysts at Lehman Brothers said that an acceleration in the core rate of inflation, if sustained, would significantly complicate the Fed's policy decisions.

Meanwhile, Paul Ashworth at Capital Economics said the Fed would only raise rates if it saw evidence of these higher prices for basic goods being passed through into other prices and wages.

"That is never going to happen in the current economic environment even if, as we expect, headline CPI inflation hits 5.5 percent in the next couple of months," he added. Against this backdrop, the dollar was unable to make any serious headway.

Separately, also helping the dollar come off lows was news that U.S. industrial production figures for June rose unexpectedly after two months of declines. The Fed reported a 0.5 percent rise in June industrial output following an unrevised 0.2 percent decline in May and a 0.7 percent decline in April.

On the other hand the latest portfolio flows data, kept the dollar from rising too far. Treasury Department reported that foreign investors were net sellers of U.S. securities in May.  Net long-term capital inflows totaled $67.0 billion, down from last month's revised $111.9 billion.

Elsewhere, euro zone headline inflation was confirmed at 4.0 percent in June. The euro gained slightly on the news but falls in oil prices meant it remained well off the all-time high it hit against the dollar yesterday.

The price of crude oil fell by around $10 on Tuesday and has remained well below $140 a barrel in trade Wednesday as fears for global economic growth escalate.

"Oil's almost $10 dive reversed Friday's equally swift rise, reducing equity market and dollar weakness in the process," said Gavin Friend, currency strategist at Commerzbank.

Analysts said part of the reason for oil's sharp price drop was the gloomy economic outlook provided by U.S. Federal Reserve chairman Ben Bernanke at his semi-annual testimony to the Senate on Tuesday. Bernanke had a more dovish tone than markets were expecting, noting there were "significant downside risks" to growth.

The Fed chairman stressed the central bank's main priority is to help financial markets return to normal, undermining expectations it will hike interest rates sometime soon.

The pound was off earlier highs after weaker-than expected UK labour market data boosted expectations that the next move in interest rates will be down.

The Office for National Statistics said the claimant count, measuring the number of Britons claiming the jobseekers' allowance, rose by 15,500 in June, the biggest rise since December 1992, when it rose by a massive 71,400. The rise is well above forecasts for a smaller rise of 11,000.

"Rising unemployment should keep a lid on pay growth ... so the next move in interest rates should be down - albeit not for a few months," said Vicky Redwood, UK economist at Capital Economics.

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Euroshares weaker again midday as Dow set for more losses; banks still weak

LONDON - Europe's largest exchanges were lower again midday as the opening rally proved impossible to sustain given ongoing jitters about the financial sector, Wall Street futures, nervousness about global inflation rates and as ASML cut its sales guidance.

At 11.57 a.m., the DJ STOXX 50 was down 44.62 points, or 1.65 pct, at 2,666.23 and the DJ STOXX 600 was down 3.41 points, or 1.28 percent, at 263.1 after EU statistics office Eurostat confirmed that headline inflation jumped to 4.0 percent in June from 3.7 percent in May, as expected.

Back in Europe, financials were weak once again as concerns about the extent of the credit crunch and the likelihood of capital raising efforts weighed once more.

Natixis tumbled 13.86 after Les Echos said the banking group is considering launching a capital increase plan. "New depreciations in its second-quarter accounts could, in fact, exceed 1 billion euros," the paper said.

The bank's stock has lost more than 70 percent of its value, the paper said. A source close to the matter also confirmed to Agence France-Presse that a capital increase is being studied. The source said it could take place in September.

BNP Paribas shares fell back 5.07 percent. Fortis, which denied it needs to raise more money as recently as yesterday, fell 6.15 percent.

Credit Agricole, though, outperformed after it said late Tuesday that its board of directors has reiterated its "full confidence" in chief executive Georges Pauget as the bank seeks to implement its 2008-10 action plan.

SE Banken shares, though, added 0.72 percent as the Swedish group reported a better-than-expected set of second-quarter earnings.

Among insurance groups, Swiss Re fell 6.59 percent after it said it had exposure of $4.4 billion to Fannie Mae and $5.2 billion to Freddie Mac at the start of July.

The shares were already down ahead of the statement as Dresdner Kleinwort cut its rating to 'hold' from 'buy', saying it has cut its 2008/2009 EPS estimate by 20 percent per annum to reflect lower gains and further investment losses.

But market watchers said today's fall implies the two U.S. mortgage banks will go under and will not repay this debt and does not account for news over the weekend that the U.S. government is ready to take action to shore up the two groups.

Among technology stocks, ASML Holding NV shares dropped 14.78 percent after the Dutch semiconductor group warned full-year sales might fall by up to 20 percent, much lower than its earlier forecast for a 10 percent decline.

STMicroelectronics fell 1.74 percent. But the bullish outlook and better-than-expected numbers from Intel overnight helped shore up Infineon, whose shares were down 0.8 percent. Shares in oil groups tracked crude lower as oil prices have now fallen nearly nine dollars in 24 hours.

According to NYMEX, future dated crude is now down $2.16 at $136.58, having fallen $6.44 to settle at $138.74 yesterday. Eni fell 3.78 percent, BP fell 1.62 percent and Repsol YPF was down 0.59 percent.

Car stocks were mostly lower after European car sales fell again in June, falling 7.9 percent to 1.43 million vehicles. Peugeot fell 1.54 percent, Daimler shares fell back 2.14 percent and Fiat dropped 4.1 percent.

But Continental shares added to recent gains after rejecting a bid from Schaeffler, with traders hoping the group will secure a higher offer.

Continental rejected the offer of 69.37 euros, saying it "does not come close to the true value" of the company. Shares were trading at 74.32 euros. Separately, a source told Thomson Financial News the group is considering raising fresh capital as a possible way of thwarting a hostile bid from ball-bearing company Schaeffler.

Utilities also gained as they continued to benefit from rotation out of banks.

International Power shares added 1.55 percent. JP Morgan initiated the shares with an 'overweight' stance and Evolution Securities repeated its 'buy' stance, saying risks over Australian carbon dioxide trading have diminished.

Suez shares added 1.82 percent and Gaz de France moved 1.53 percent higher as the groups hosted their EGM to vote on their merger.

Vivendi added 1.1 percent, RWE moved up 0.89 percent and Iberdrola was 1.02 percent higher.

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Asian stock market summary

Japan
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The Nikkei 225 Stock Average closed 0.05 percent higher at 12,760.80 after better-than-expected earnings from U.S. semiconductor chip giant Intel Corp boosted high-tech issues, while lower crude prices pushed down oil-related stocks. The broader Topix fell 0.3 percent to 1,249.28.

South Korea
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The KOSPI closed 0.1 percent lower at 1,507.40,� extending losses to a third day, as Kookmin Bank tumbled on a possible delay in its plan to set up a financial holding company.

Australia
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The benchmark S&P/ASX 200 index closed 1.1 percent higher at 4,870.6, as the big banks bounced back after recent hefty losses, while retailer Woolworths Ltd. gained after it stuck to its full-year outlook.
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China
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The benchmark Shanghai Composite Index closed down 2.65 percent at 2,705.87 as property and financial stocks continued their slide amid uncertainty over the direction of domestic monetary policy and continuing turmoil in the U.S. financial sector.
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The Shanghai A-share Index was down 2.65 percent at 2,838.10, while the Shenzhen A-share Index fell 4.20 percent to 847.18. The Shanghai B-share Index fell 2.56 percent to 208.93, while the Shenzhen B-share Index declined 3.10 percent to 449.13.

Taiwan
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The weighted index closed down 1.81 percent at 6,710.64, as investors continued to worry about the exposure of local financial firms to troubled U.S. mortgage lenders Fannie Mae and Freddie Mac.
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Philippines
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Manila's 30-company composite index closed down 1.6 percent at 2,373.70, extending the previous day's losses as investors fretted over the possibility of a more serious global economic downturn following gloomy comments by Federal Reserve Chairman Ben Bernanke about the U.S. economy.

India

India's main stock index, the 30-share Sensex of the Bombay Stock Exchange, closed 100.39 points or 0.79 percent down at 12,575.80 and the 50-share S&P CNX Nifty of the National Stock Exchange pared 44.40 points or 1.15 percent to end at 3,816.70. The Sensex swung more than 420 points during the day, between 12,514 and 12936 points.

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India spot gold prices fall on global cues, weak domestic demand

MUMBAI  - India spot gold prices fell on Wednesday, tracking international bullion markets amid a lack of physical buying support in the domestic market.

At 1.50 p.m. in London, gold was trading at $978 an ounce, as weaker crude-oil prices battered the appeal of the precious metal, which is bought as a hedge against inflation.

"The market is very volatile and buyers are staying on the sidelines waiting for prices to fall to $920, only when some buying will be witnessed," said Bharghav Vaidya, proprietor of Mumbai-based trading house Bharghav Vaidya and Associates.

In Mumbai, gold of 0.995 purity closed 120 rupees lower at 13,560 rupees per 10 grams and gold of 0.999 purity closed 115 rupees lower at 13,625 rupees per 10 grams.

Silver of 0.999 purity closed 360 rupees lower at 25,890 rupees per kg.

Precious Metals Summary - London AM Fixings

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