US & World Daily Markets Financial Briefing 17-03-2008

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Stocks waver in aftermath of Bear deal

NEW YORK - Wall Street clawed back from sharp losses Monday, with investors snapping up bargain stocks after JPMorgan Chase & Co. bought stricken Bear Stearns & Co. in a deal backed by the government. The Dow Jones industrials, down nearly 200 points in the early going, fluctuated in and out of positive territory.

A buyout of Bear Stearns was certainly more appealing than the alternative: letting the investment bank collapse and causing huge losses for anyone linked to it.

Moves by the Federal Reserve also seemed to give the market a floor Monday. Besides supporting the buyout, the Fed took the extraordinary step of lowering the rate it charges to loan directly to banks on Sunday night -- two days before its scheduled meeting Tuesday. The central bank lowered the discount rate by a quarter point to 3.25 percent.

And in another unusual move, the Fed said it set up a lending option for big investment banks to secure short-term loans.

The Fed's recent actions were seen as a pledge that the central bank would do everything in its power to keep the credit crisis from destroying the financial industry and the economy, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

Still, the market remained extremely volatile, and a steeper drop Monday was still quite possible. The sale of Bear Stearns -- and the fact that JPMorgan is valuing the fifth-largest Wall Street investment bank at a minuscule $2 a share, or $236 million -- stirred fear among investors worldwide about other banks' exposure to the troubled credit markets.

"Our economy needs to substantially delever. You're going to have some very weak players pushed out of business," Battipaglia added, saying JPMorgan's buy of Bear Stearns and Bank of America Corp.'s acquisition of mortgage lender Countrywide are probably not the only rescues the industry will witness during this credit crisis.

The Dow recovered to trade down 15.88, or 0.13 percent, to 11,935.21. Broader indexes also made up some lost ground. The Standard & Poor's 500 index fell 9.29, or 0.72 percent, to 1,278.85, while the Nasdaq composite index fell 22.85, or 1.03 percent, to 2,189.64.

JPMorgan is one of the Dow components, and rose $3.92, about 10 percent, to $40.46. The Fed essentially guaranteed JPMorgan that it would backstop the risk in taking over the 85-year-old Bear Stearns, which has 14,000 employees worldwide.

Bear Stearns shares fell 86 percent to $4.20 -- still above the buyout price, implying that some shareholders believe the deal terms might change. Bond prices rose as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.37 percent from 3.44 percent late Friday.

The dollar sank to a record low against the euro and hit a 12 1/2 year low against the yen, while gold prices surged to another record high.

Light, sweet crude dropped $1.89 to $108.33 per barrel on the New York Mercantile Exchange, after rising to nearly $112 a barrel in premarket trading.

Overseas, Japan's Nikkei stock average fell 3.71 percent, while Hong Kong's Hang Seng index fell 5.18 percent. In afternoon trading, Britain's FTSE 100 fell 2.32 percent, Germany's DAX index dropped 3.29 percent, and France's CAC-40 lost 2.52 percent.

The pain for investors in Bear Stearns, which succumbed to losing bets on souring mortgages for borrowers with poor credit, will be sizable. JPMorgan is buying Bear, including its midtown Manhattan headquarters, for about 1 percent of the investment bank's worth little more than two weeks ago. Bear Stearns' buyout arrives after a short-term bailout Friday that JPMorgan led and that the Fed backed.

The market's concern wasn't limited to the Bear sale. DBS Group Holdings Ltd., a large bank based in Singapore, instructed traders via e-mail Monday to disregard an earlier e-mail barring new transactions with Lehman Brothers Holdings Inc., according to Dow Jones Newswires. Earlier Monday, DBS emailed traders and said not to engage in new transactions with Lehman or Bear, according to two people familiar with the situation, Dow Jones reported.

Lehman fell $7.28, or 18.5 percent, to $31.98. Wall Street's worries about the financial sector come in a week in which the major investment banks are slated to report quarterly results. Investors will likely be focusing on comments from the companies for insights about their financial well-being.

While investors were focused on the financial sector, fresh economic news offered little solace. The Fed said output at the country's factories, mines and utilities fell by one-half percent in February, the biggest decline last October. Many analysts had been expecting a slight increase of one-tenth of one percent.

The Commerce Department also said Monday the broadest measure of foreign trade fell slightly in 2007 as stronger growth in U.S. exports helped make up for a spiking foreign oil bill. The deficit in the current account, which covers not only goods and services but also investment flows between the United States and other countries, dropped by 9 percent last year to $738.6 billion.

Also, the New York Fed's Empire State Manufacturing Survey indicated that conditions for New York manufacturers deteriorated further in March.

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Forex - Dollar, pound under pressure as credit fears escalate

LONDON  - The dollar was under pressure but off lows on profit-taking following its rapid plummet on news US bank Bear Stearns is to be sold at a knock-down price, while the pound was under heavy pressure after the Bank of England injected money into the banking system.

The dollar dropped to a record low against the euro and a 12-year low against the yen overnight following yesterday's news that JP Morgan will buy Bear Stearns for just 2 usd per share -- way down on its Friday close of 30 usd -- in a move backed by the Federal Reserve. Bear Stearns was forced to seek emergency funding from the Fed on Friday as it could no longer obtain the money it needed to operate from the credit markets.

The news has fuelled fears the credit crunch is set to worsen as institutions become increasingly nervous to lend to one another. The Fed tried to support the sector yesterday by cutting its discount rate -- the rate at which it lends to financial institutions -- by a quarter point to 3.25 pct and eased the requirements needed to obtain access funding.

Analysts said the move underlines the extent of the concern the US central bank has for financial system, and say market sentiment is very fragile as a result. "Fears of systemic failure in the banking sector have increased... because the US remains epicentre of market turbulence, investors continue to display a preference for reducing exposure to US assets and this is hurting the dollar," said Geoffrey Yu at UBS.

The news powered the euro to a record high of 1.5903 usd, while the greenback fell against the yen to a 12-year low of 95.72 yen -- consolidating below the crucial 100 yen threshold.

Now markets are looking for the Federal Reserve to provide further support by cutting its key Fed Funds rate by 100 basis points to 2.00 pct tomorrow. Last week markets were expecting rates to be cut by 50 or 75 points but the latest news has sent these expectations sharply higher.

Meanwhile, the pound fell after this morning's announcement by the Bank of England of an exceptional fine-tuning open market operation designed to calm short-term money markets. The auction, announced around 10 am and carried out just an hour later, was of 5 bln stg via a three-day repo. It was oversubscribed by five times, indicating the demand for such liquidity in the current climate.

The BoE said the move was "in response to conditions in the short-term money markets this morning" and it is closely monitoring market conditions along with other central banks. The interbank lending market tightened sharply today, as banks' concerns about the solvency of their peers grew.

Notably, the overnight rate, which the BoE was attempting to supplement with its 5 bln stg auction, jumped to 5.59 pct from 5.31 pct on Friday. The overnight rate is normally closely aligned to the BoE's benchmark rate, currently 5.25 pct.

Philip Shaw at Investec said the pound's weakness illustrates market fears over the UK's exposure to the aftershocks from the credit crunch. "Sterling, one of few currencies to fall against the beleaguered dollar overnight, has weakened further. One reason is that today's BoE actions highlight the extent to which the UK is vulnerable to the dislocations in credit markets," he said.

The thinking is that if technical measures to reintroduce liquidity to markets fail to have the desired effect, the Bank of England may be prompted to cut interest rates more aggressively, he said.

Looking ahead, market attention may fix on a speech by Juergen Stark, member of the European Central Bank. His colleagues Christian Noyer and Axel Weber both cancelled speeches today for personal reasons, sparking speculation the ECB is modifying its strategy on the fly amid escalating credit worries.

"Although both ECB members cited private reasons, the market thinks that the ECB has to go back to the drawing board," said BNP Paribas analysts.

Meanwhile, on the US data calendar, the Empire State Manufacturing survey and US current account balance will also be in view, but focus is likely to remain on the credit and equity markets and the run-up to tomorrow's Fed interest rate decision.

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Euroshares open lower, banks knocked by Bear Stearns collapse

At 09.11, the STOXX 50 was down 109.37 points, or 3.62 pct, at 2,907.94 and the STOXX 600 was 10.25 points, or 3.37 pct, lower at 293.90.

And crude prices soared to new highs above 111 usd per barrel in Asian trading as the US currency slumped to another a new low of 1.5903 against the euro, sparking a rush of funds into commodities. Banks and insurance groups remain in the spotlight in Europe ahead of earnings week in the US banking sector and following the Bear Stearns announcement.

The sector fell some 4.2 pct this morning, according to the DJ STOXX 600 for the industry, with UBS shedding 5.8 pct as Societe Generale fell 5.45 pct, Deutsche Bank fell 4.61 pct and Unicredit was down 4.75 pct.

Meanwhile, a profit warning by Siemens AG dampened the mood further this morning and the stock slumped 11 pct in early deals. Siemens cut its earnings forecast following a review of major projects, focusing on fossil power generation in its energy division as well as on the mobility division in the industry sector and its IT Solutions and Services unit.

Merrill Lynch reiterated its 'buy' rating and 130 eur per share target price, noting the 900 mln eur charge Siemens announced was related to old contracts that were poorly negotiated on price. The news also hit French engineering firm Alstom, which lost 5.6 pct. "The Siemens warning is raising fears that the entire sector could be in difficulty, and Alstom shares have performed strongly recently," a Paris-based dealer commented.

Elsewhere, Royal Dutch Shell PLC was one of very few risers in the European landscape this morning, up 0.8 pct after it said its overall reserve replacement rate climbed above 100 pct.

In a strategic statement this morning, the group said organic reserves additions for 2007, excluding acquisitions, divestments and year-end price effects, were 1.5 bln boe, compared to 1.2 bln boe of production, while reserves replacement was 124 pct.

Reacting to the update, a trader said this was a very positive statement, showing the group is investing in 50 large projects bringing on 10 bln barrels of resources and adding 1 bln barrels per day.

Peer Imperial Energy outperformed, down 1 pct, as it said its Russian registered reserves have increased by over 15 pct after receiving the latest approval from the Ministry of Natural Resources, with further material increases expected during the course of the year.

Shares in retail giant Metro were also experiencing some demand this morning, up 0.1 pct as investors have high hopes for the group's earnings results tomorrow. Turning to corporate takeover talk, British Energy rallied 13.7 pct after the group said it could face a takeover or a business combination with another European utility.

And M&A speculation continues to support shares in TUI AG, which were 0.3 pct higher. The group's supervisory board is expected to meet today to discuss a possible break-up of the company's tourism and shipping operations.

Reports that Russia's Alexei Mordashov is also in favour of the idea and seeking to up his stake in the group to gain a seat on the supervisory board also lifted the stock. Staying with M&A related news, shares in Alitalia were suspended limit-down after a 38 pct drop as the ailing airline accepted a bid from Air France-KLM at 0.10 eur per share, which analysts at Landsbanki Kepler called "a pretty low proposal".

In broker action, Portugal Telecom SGPS lost 4.09 pct after JP Morgan downgraded the stock to 'underweight' from 'neutral' and cut its price target to 6.90 eur per share from 8.80 eur.

In a note to clients this morning, JP Morgan analysts said they expect "2008 be a tough year for PT's domestic business units" and outlined risks such as the proposals by the telecoms regulator to cut mobile termination rates by 40 pct as well increased competition in the fixed-line segment.

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Asian stocks tumble as credit crisis deepens, dollar slumps

The Hong Kong market was among the hardest hit, the Hang Seng index closed down 5.18 percent at 21,084.61. Japan's benchmark Nikkei index slumped 3.7 percent to finish at 11,787.51, falling below 12,000 for the first time since August 2005.

"The financial crisis is deepening and in addition to that, Hong Kong has to worry about China," said Francis Lun, general manager at Fulbright Securities in Hong Kong.

China is expected to further tighten its monetary policy as it struggles to contain soaring inflation, which rose to an almost 12-year high of 8.7 percent last month. The Chinese central bank raised interest rates six times in 2007.

The Shanghai Composite index was down 3.6 percent at 3,820.05, while South Korea's KOSPI index finished down 1.6 percent at 1,574.44. Singapore's Straits Times index ended down 1.6 percent at 2,792.75, while the Taiwan benchmark closed off 1.9 percent at 8.005.46.

Australia's S&P/ASX 200 index fell 2.3 percent to end at 5,087.0, its lowest level since September 2006. The All Ordinaries index was 2.2 percent lower at 5,173.20. Australia's leading investment bank, Macquarie Group, was down 6.3 percent at 44.50 Australian dollars, while the second largest, Babcock & Brown, slumped 10.1 percent to 12.26 dollars.

National Australia Bank fell 2.9 percent to 26.85 dollars, Commonwealth Bank of Australia declined 6.1 percent to 37.35 dollars, ANZ Banking Group lost 4.9 percent to 20.54 dollars, while Westpac Banking was 3 percent lower at 22.30 dollars.

Among Japanese banks, Mizuho Financial shed 3.4 percent to 367,000 yen, while Mitsubishi UFJ Financial declined fell 4.8 percent to 789 yen.

In Hong Kong, China's top bank ICBC lost 5.49 percent at 4.65 Hong Kong dollars, China Construction Bank tumbled 6.52 percent to 5.02 dollars, Bank of China was down 4.52 percent at 2.96 dollars and Bank of Communications was down 6.72 percent at 7.91 dollars.

The mainland's biggest insurer, China Life Insurance, slid 7.4 percent to 25.70 dollars. Ping An Insurance plunged 7.6 percent to 53.20 dollars.

Elsewhere, the Philippine composite index closed down 3.9 percent at 2,793.68, while Malaysia's Kuala Lumpur Composite Index was off 1.5 percent at 1,177.53. The Jakarta composite fell 3.0 percent at 2,312.32.

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Metals - Copper turns sharply lower as risk aversion takes hold across the board

LONDON - Copper turned sharply lower, dragging the other metals down with it as the dollar recovered slightly, profit taking set in and as the current global credit crisis sparked risk aversion across the board, even in commodities.

Oil prices fell sharply lower midday having hit all time highs earlier this morning, while gold came off historic peaks set overnight as funds took profits and reassessed their preference for commodities in the current market turmoil.

European equities were down nearly 4 pct meanwhile, still reacting to weekend news that the US Federal Reserve had unexpectedly lowered the discount rate - at which it provides short-term lending to banks - by 25 basis points.

The move, which came along with a new emergency lending facility for banks - not used since the Great Depression - was made in a bid to protect US lenders from facing a liquidity crises the likes of Bear Sterns.

The investment bank, whose money supplies started to seize up last week, was bailed out this weekend by rival JP Morgan Chase, which bought Bear for just 2 usd a share compared to the 70 usd it would have had to pay last week.

At 1.44 pm, LME copper for three-month delivery was down at 8,114 usd a tonne against 8,360 usd at the close Friday. Tin meanwhile dropped to 20,300 usd a tonne against 20,600 usd - off Friday's new record of 20,900 usd.

"We are wary that we may be seeing a shift into risk reduction mode. We have seen similar situations on a handful of occasions over the past 12 months when even though you would expect the safe-haven assets to do well, the initial reaction is to see everything sell-off.

"The second reaction is then to see the safe-haven investments rally strongly," said BaseMetals.com analyst William Adams.

Metals were up overnight, while commodities like oil and gold rallied to new record levels as the dollar plunged to historic lows against the major currencies in reaction to the Fed news.

A weak dollar makes dollar priced commodities cheaper for holders of stronger currencies. Although the dollar has recovered slightly in European trades, possibly weighing on commodities, it remains vulnerable ahead of the FOMC meeting, at which the bank is expected to lower rates by up to 100 basis points.

Dollar weakness aside, metals might yet recover on continued strong fund flows. Funds have been piling into commodities this year on the view that real assets offer a safe haven in the current financial crisis. Of all the commodities, however, base metals are the most vulnerable in the current financial market crisis, as demand for them is very strongly tied to the global economic cycle.

Also, betting on continued weakness in the dollar and buying metals as a result is an increasingly risky prospect. "There is talk that the Fed could engineer a round of currency intervention with other central banks in order to wrong-foot speculators and break the weak dollar/high commodity price spiral, even temporarily.

"Other factors that are giving us pause about the upside potential in metals is the current state of the equity markets; if markets do not stabilize, the weakness could call into question the viability of other financial institutions and conceivably impact the global growth picture," said MF Global analyst Ed Meir.

In other metals traded, lead was down at 2,935 usd a tonne against 3,085 usd, nickel dropped to 31,400 usd against 32,550 usd, zinc fell to 2,490 usd against 2,600 usd while aluminium dropped to 2,987 usd against 3,088 usd.

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