US & World Daily Markets Financial Briefing 17-06-2008

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U.S. May industrial production down 0.2%, capacity utilization 79.4%

WASHINGTON - U.S. industrial production continued to fall in May, dragged down by weather that cut utility output, while capacity use at factories, mines and utilities fell to its lowest rate in almost three years.

The Federal Reserve reported a 0.2% drop in May industrial output following and unrevised 0.7% decline in April.

Capacity utilization fell to 79.4%, its lowest level since September 2005 right after Hurricane Katrina. That followed a downwardly revised 79.6% rate in April.

Economists polled by Thomson Reuters IFR Markets expected a 0.1% drop in production and a 79.7% capacity rate, which would have been unchanged from the first report for April.

May manufacturing output was unchanged. The April figures were driven down by the American Axle strike and related General Motors plant closures.

"The rebound in May (if no change can be termed a rebound) was aided by an end to that strike. However, with automotive sales on a solid downtrend, it would be foolish to expect the post-strike May gains in automotive output to be replicated anytime soon," said Joshua Shapiro of MFR.

May's industrial production decline came instead from a 1.8% drop in utility output. Analysts were expecting a reduction because of unusually cool weather.

"This will likely be unwound in June when the heat wave in the Northeast likely triggered a surge in electricity consumption," predicted Anita Markowska of Societe Generale.

Although the auto plants were re-opening last month, manufacturing excluding vehicles and parts fell 0.1%, following on a 0.5% drop in April. High-technology manufacturing was up, but products related to housing and construction were down.

Harm Bandholz of UniCredit said "this industrial production report is a good reflection of the current situation of the US economy. First, the remaining strength is concentrated in export industries; the recent GDP report revealed that during the last four quarters net exports were responsible for about 45% of total GDP growth. In contrast, domestic demand is struggling, which weighs in particular on the production of consumer goods."

Mining output was up 0.1% after two straight monthly declines, based on increased coal production and oil drilling.

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Forex - Pound slides further as BoE's King suggests rate hike unlikely

LONDON - The pound continued to fall after the publication of the letter from Bank of England (BoE) governor Mervyn King to Chancellor of the Exchequer Alistair Darling, in which King said inflation "is likely to remain markedly above the target until well into 2009", while also suggesting a rate hike is not likely any time soon.

Published after annual CPI inflation shot up to 3.3 percent in May -- beyond the market consensus for a 3.2 percent reading -- the letter also noted that inflation is mainly due to higher oil and food prices, and has not yet spread to the rest of the economy, such as wages.

Although King effectively ruled out any chance of an imminent rate increase on the grounds that the economy simply could not handle it, his letter served as a reminder to markets that the UK economy is facing the worst of both worlds -- slower growth and higher inflation -- and that the BoE will be unable to assist the economy with rate cuts.

"Although the Monetary Policy Committee harbours fears over inflation, it is not aiming to drive it down quickly," said Philip Shaw at Investec. This has pushed money markets to scale back their expectations for a rate increase later this year, which weighed on the pound's value.

The euro also lost most of its gains against the dollar and yen after an unexpectedly sharp decrease in the German ZEW economic expectations indicator. This dropped to -52.4 in June from -41.4 in May, a 15-year low and well below the market expectations for a slight decline to around -43.5.

The data "confirms that investors are very concerned about the potential effects of the credit crunch, the strong euro and a likely European Central Bank rate hike," said Jennifer McKeown at Capital Economics.

She noted that the indicator is not a reliable measure of future growth and that euro zone growth is easing only gradually, making a rate hike next month very likely -- particularly after Monday's spike in the euro zone inflation rate to a record 3.7 percent.

"But if financial markets are right in expecting a marked slowdown in the region in the coming months, a July hike should still prove to be a one-off," McKeown said.

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Euroshares up at open as banks, techs gain, offsetting mixed Wall St

At 08.55 a.m., the DJ STOXX 50 was up 19.7 points, or 0.65 percent, at 3,029.06 and the DJ STOXX 600 was up 1.73 points, or 0.57 percent, at 306.63.

In Europe, Deutsche Bank, up 1.49 percent, is due to present its capital markets outlook this morning and Societe Generale, up 2.18 percent, gained after the group's private banking arm bought a stake in Rockefeller Financial Services with a view to forming a global alliance.

The French banking group was further boosted by renewed, but vague and unsourced, speculation the group is set to announce plans to merge with BNP Paribas, up 1.39 percent.

Elsewhere in the sector, the Telegraph reported that Barclays, up 2.58 percent, is lobbying the government to relax rules that give existing shareholders first-refusal rights on new share issues as it bids to win new investor interest.

Alcatel-Lucent led the technology pack higher, up 2.08 percent, after it signed a $1 billion framework agreement for 2008 with China Mobile to provide the group with mobile communication equipment and services.

Semiconductor plays tracked their U.S. counterparts higher with Infineon up 2.85 percent and STMicroelectronics up 1.47 percent. Soitec, up 4.66 percent, was further lifted by a bullish Exane BNP Paribas note. The broker has a 9 euros target on the French group, implying 100 percent upside.

Still on the second line, Infogrames added 1.18 percent after the games group said its full year net loss was halved and operating loss narrowed from 45.5 million euros compared with a net loss of 61.8 million euros the previous year.

Gross margin stood at 111.1 million euros, representing 38.2 percent of net sales, Infogrames said. The group said it is now "confident" it can achieve 12-18 percent net sales growth in 2008/2009

Air Berlin, up 2.2 percent moved higher on hopes the group is soon to announce a new costing cutting scheme. And ADP added 3.21 percent after the airports group said passenger traffic at its airports rose 6.7 percent year-on-year to 7.7 million in May, boosted by returning spring holiday travellers.

Schindler added 2.52 percent after it lifted its prices and Beneteau added 1.74 percent after its upbeat outlook comments.

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Asian stocks mixed as oil, U.S. concerns spark caution

The contract was trading at the $134 levels during Asian hours on Tuesday. Japan's Nikkei index ended a listless session down just 6 points at 14,348.37, following a 470-point gain in the previous two sessions. The broader Topix edged up 0.29 point to 1,401.98.

The Hang Seng index in Hong Kong closed 0.1 percent higher at 23,057.99. The Shanghai Composite fell 2.75 percent to 2,931.83, while Taiwan's Taiex was up 0.39 percent at 8,201.79. Inflation, political risks South Korea's Kospi closed down 0.6 percent at 1,750.71, with growing anti-government sentiment adding to concerns about the economy.

The militant Korean Confederation of Trade Unions said a majority of members have voted for a general strike next month in protest at the U.S. beef import deal and other government policies. "Inflation risks from costlier energy are continuing to scare away investors, with the recent tepid performance of Chinese shares also weighing on sentiment," said Bae Sung-young, an analyst at Hyundai Securities in Seoul.

In Sydney, the S&P/ASX 200 ended up 1.0 percent at 5,422.7 while the All Ordinaries index was 0.9 percent higher at 5,525.9.

"Banks, which have been smashed of late, found a bit of a footing today - there was a bit of technical bounce as investors took the view that there's been enough punishment even though confidence remains fragile," said Lucinda Chan, a director at Macquarie Private Wealth.

National Australia Bank rose 1.5 percent to A$27.97, ANZ added 1.8 percent to A$19.75, Westpac rose 0.3 percent to A$21.76 but Commonwealth Bank fell 1.3 percent to A$41.30.

Investment firm Babcock & Brown clawed back 13 percent to end at A$5.93 after losing more than half its value last week as hedge funds short-sold the stock, triggering margin calls that sent the stock further south. The company has been doing the rounds assuring investors and its bankers that its financial position remains sound despite the market rout.

Singapore's Straits Times Index closed down 0.3 percent at 3,028.24 while Malaysia's KLCI fell 0.8 percent to 1,227.76. The Philippine Composite closed 0.6 percent higher at 2,637.26.

"What we have is a relief rally after the market was oversold last week, but there is no real smart money coming back into the market. Concerns about inflation and higher interest rates still hover and opportunity in the near term to make decent returns is difficult," said Conrado Bate, president of brokerage Citiseconline in Manila.

The Jakarta Composite was down 0.8 percent at 2,377.98

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Metals - Copper steady after 2 and a half week high; dollar weakness supports

LONDON - Copper was steady after hitting a two and a half week high on Monday, well supported by dollar weakness, low inventories and as investors bought back into commodities as inflation hedges.

The dollar continued to weaken against other currencies on reports that the Federal Reserve is not prepared to increase its interest rates imminently despite its tough talk on inflation, which made commodities priced in the greenback cheaper for those trading in stronger currencies.

"What lies ahead is likely to be dependent on how the market reacts to copper's tightness, but also with oil and the dollar in the driving seat and volatile and a host of economic data out it is likely to be another choppy day of trading," said BaseMetals.Com analyst William Adams. "Overall given recent weakness there may be some further room on the upside for the metals."

Elsewhere copper inventories remain at multi-month lows, according to data from the LME.

Meanwhile, the investment community has piled back into commodities as inflation woes have resurfaced, as raw materials are often used as a hedge.

At 10:32 a.m., LME copper for three-month delivery was at $8,065 a tonne up from $8,100 at the close on Monday.

Tin was flat at $21,950 a tonne. Lead traded slightly lower at $1,835 from $1,811, while aluminium was up at $3,000 from $2,975 Nickel eased to $23,900 from $23,950, while zinc was steady at $1,886 from $1,880.

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