US & World Daily Markets Financial Briefing 17-09-2007

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Stocks slip as Fed rate decision looms

NEW YORK - Stocks fell moderately Monday as Wall Street traded nervously and lightly ahead of Tuesday's decision by the Federal Reserve on interest rates.
   
Most investors are betting on a quarter-point cut in the benchmark federal funds rate Tuesday. And with recent weak economic data -- such as a decrease of 4,000 jobs in August and weaker-than-expected retail sales -- some anticipate a half-point rate cut. It's still possible, though, that the Fed might not go through with a rate cut at all, if it believes the economy is still growing moderately and that inflation remains a threat.
   
Keeping Wall Street anxious about the financial sector, Northern Rock, Britain's fifth-largest mortgage lender, saw its stock plummet for the second straight session Monday, after issuing a profit warning Friday and getting cash from the Bank of England.
   
In early trading, the Dow Jones industrial average fell 33.98, or 0.25 percent, to 13,408.54.
   
Broader stock indicators also dipped. The Standard & Poor's 500 index was off 5.34, or 0.36 percent, to 1,478.91, and the Nasdaq composite index decreased 12.68, or 0.49 percent, to 2,589.50. Bonds slipped, pushing the yield on the 10-year Treasury note up to 4.49 percent from 4.48 percent late Friday.
   
Trading volumes were lower than normal, indicating that many market participants were staying on the sidelines ahead of the Fed's decision.
   
Last week, stocks saw sizable gains, due largely to high expectations of a rate cut. The Dow ended up 2.51 percent, the Standard & Poor's 500 index rose 2.11 percent, and the Nasdaq composite index rose 1.42 percent. The Dow is just 4 percent below its all-time high of 14,000.41, reached in July before fears escalated about bad loans and excessive leveraged debt.
   
The prospect of a recession has been keeping the markets volatile.
   
Alan Greenspan, the former Fed chairman, said in an interview with NBC before the markets opened Monday that the risk of a recession is higher than it was at the beginning of the year, but not by much.
   
Meanwhile, U.S. Treasury Secretary Henry Paulson said in Paris that regulators should not rush to impose new rules on the market because of the recent tightening in credit.
   
In corporate news, a European Union court dismissed Microsoft Corp.'s appeal against an EU antitrust order to share communications code with rivals and sell a copy of Windows without Media Player. The order also upheld a $613 million fine for the company. Microsoft, one of the 30 Dow components, fell 29 cents to $28.75.
   
Crude oil prices rose 6 cents to $79.16 a barrel on the New York Mercantile Exchange, hovering near last week's record levels above $80.
   
In European trading, Britain's FTSE 100 fell 1.18 percent, Germany's DAX index rose 0.05 percent, and France's CAC-40 fell 1.14 percent.

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Pound drops towards 0.70 per euro mark; dollar steady ahead of FOMC

LONDON - Sterling's woes resulting from worries over the fallout from the Northern Rock crisis continued as the UK currency edged closer to the 0.70 stg per euro mark, a level not seen since April last year.
   
The pound has come under massive pressure since the news filtered through to markets late last week that Northern Rock had to seek emergency funding from the Bank of England. The pictures of panicked consumers queuing outside branches to withdraw savings has led to speculation of a crisis in consumer confidence and a knock-on effect on the housing market and the economy in general.
   
Market commentators are now expecting that the Bank of England will cut interest rates sometime over the coming months, a marked contrast to the expectation only a few weeks ago that they would raise rates. By contrast, most market commentators expect that euro zone rates will at least stay unchanged.
   
"The most obvious cause for this (the spike in euro/sterling) would appear to be the differing outlooks for monetary policy in the euro zone and the UK," said Simon Derrick at the Bank of New York Mellon. "The net result of all this has been that euro/sterling has not only now broken out of the narrowing range that had defined trading since 2003 but is also accelerating rapidly. Indeed, last week's move was the largest weekly rally since November of 2005," he said.
   
The euro today hit a high of 0.6950 against the pound, its highest level in fourteen months. The pound, meanwhile, also fell below the two dollar mark for the first time since the end of August.
   
Against other currencies, the dollar was steady after strengthening slightly against the euro and dipping against the yen overnight as market players awaited tomorrow's interest rate decision in the US.
   
Markets are expecting the Federal Open Market Committee to deliver a 50 basis point rate cut, but some are warning that the Fed could easily disappoint with only a 25 basis point cut.
   
HBOS analyst Steve Pearson noted that inflation concerns have by no means gone away and the Fed will not want to risk the "moral hazard" of appearing to bail out those who have made flawed investment decisions.
   
"The US Federal Reserve and other central banks will have to be cautious. In the context of surging food and energy prices they dare not risk inflation expectations slipping anchor. This means that risk asset markets will not get the full adrenaline shot they are looking for," he said.

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Euroshares lower midday, sell-off in banks, caution ahead of Fed rate decision

LONDON - Europe's leading exchanges continued to fall midday with the Northern Rock debacle taking its course as clients withdraw their funds and ahead of tomorrow's interest rate decision by the Federal
Reserve.
   
At 12.21 pm, the Dow Jones STOXX 50 fell 45.02 points or 1.21 pct to 3,678.37, while the STOXX 600 retreated 5.51 points or 1.50 pct to 362.24.
   
As Northern Rock fell 33.39 pct, Bankinter shed 6.05 pt and Banco Espanol de Credito lost 6.25 pct.  Alliance & Leicester were 14.49 pct lower and Bradford & Bingley lost 11.30 pct.
   
The banking sector took a further knock as Citigroup lowered its price target on 33 European banks and cut its earnings estimates for them by an average of 4.3 pct for 2007 and 7.4 pct for 2008.
   
Credit Suisse, meanwhile, downgraded a slew of French and German banks, citing the impact of the current crisis in the credit markets on their corporate and investment banking activities.
   
Technology and utilities holding their ground, meanwhile, with the likes of EON and RWE advancing 0.91 and 0.68 pct respectively. EON earlier said it will pay about 4.1 bln eur for its stake of roughly 70 pct in Russian state-owned electricity company OGK-4 in order to enter into the lucrative Russian electricity market.
   
The utility giant is also keeping the option to make further acquisitions in Russia's electricity market, chief executive Wulf Bernotat said during a conference call.
   
Elsewhere, EDF Energies Nouvelles fell 3.11 pct as it unveiled lower-than-expected first-half net profit. News of a contract for 30 megawatts of solar panels shows that EDF EN's ramp-up of solar is turning into the next leg of growth, the Nomura analysts said.
   
In the technology sector, senior lawyers and analysts are split on the key effects of today's landmark ruling of the EU's second-highest court, the European Court of First Instance, which essentially upheld a European Commission 2004 antitrust decision against US software giant Microsoft Corp.
   
The ruling had some positive impact on other software companies, but was largely left uninterpreted by the market.
   
Meanwhile, shares in Business Objects climbed 4.63 pct on Le Figaro report that the business software developer is putting itself for sale, with the French paper citing Germany's SAP as the company's preferred bidder. SAP shares were off 0.53 pct.
   
Nokia climbed 2.01 pct after US weekly Barron's offered an upbeat outlook on market share gains for the Finnish handset maker due to a strong line-up of products. Broker HSBC also upgraded the company to 'overweight' from 'neutral'.

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Asian shares in holding pattern ahead of Fed; Japan closed for holiday

SINGAPORE - Stock markets across Asia were stuck in a holding pattern on Monday with Japan closed for a public holiday and other markets treading water ahead of a much-anticipated US Federal Reserve decision on interest rates.
    
Morgan Stanley said the Asian markets should continue to gain in the medium-term although they will be buffeted by developments overseas. "We foresee a tug-of-war between the positives of Fed rate cuts, buoyant Asian liquidity conditions, economic momentum and funds flow, and deteriorating G7 economic indicators and earnings forecasts on the other," said analyst Malcolm Wood in a note. "Eventually the bulls should prevail."

Backing that outlook, the Asian Development Bank on Monday revised its 2007 growth projections for Asia's developing economies to 8.3 pct from 7.6 pct earlier. The Manila-based multilateral financial institution said solid growth in China and India is supporting the whole region.
  
So far, the storm in global credit markets has created only a slight turbulence in developing Asia, with equity markets falling by an average of 6 pct in August, said the bank.
   
In Sydney, the S&P/ASX 200 ended down 0.6 pct at 6,271.4, and the All Ordinaries index dropped 0.5 pct to 6,283.7. CommSec equities analyst Savanth Sebastion said investors were on the sidelines ahead of the Fed, while weaker commodity prices were pressuring the resources sector.
   
In Seoul, the Kospi closed up 0.1 pct at 1,871.68 as hopes that the benchmark index will finally be included in the FTSE developed world indices later this week and the the Asian Development Bank's upgraded growth forecast for South Korea boosted sentiment.
   
In China, the benchmark Shanghai Composite Index ended up 2.1 pct at a record 5,421.39, with investors shrugging off China's latest interest rate hike.
   
"This (rate hike) is consistent with our expectation, as the August CPI inflation figure obviously posed additional pressure for the central bank to act," said Jun Ma, chief economist at Deutsche Bank.
    
The Shanghai A-share Index rose 2.1 pct to 5,690.23 and the Shenzhen A-share Index was up 2 pct at 1,587.63. The Shanghai B-share Index rose 2.1 pct to 358.90 and the Shenzhen B-share Index was up 2.2 pct at 785.37.
   
In Hong Kong the Hang Seng Index closed down 1.2 pct at 24,599.34, after closing at record levels for three straight days last week.

Indian markets reacted to the tumble in Europe and Asia, led by banking stocks after UK mortgage lender Northern Rock PLC, crashed to a seven-year low. The bank, hit by a credit squeeze, was bailed out by the Bank of England late last week.
   
The BSE Sensex ended down 99 points, or 0.66 pct, at 15,504, while the National Stock Exchange's S&P CNX Nifty closed down 0.52 pct at 4,494 points. The Sensex saw 11 stocks advancing and 19 declining, with 1,134 stocks advancing in the broader market and 1,081 declining.
   
Elsewhere in the region, the Singapore Straits Times Index closed down 1.7 pct at 3,476.31, Malaysia's Kuala Lumpur Composite fell 0.9 pct to 1,278.34, Indonesia's Jakarta Composite lost 0.1 pct at 2,223.22, while Taiwan's weighted index fell 1.5 pct to 8,899.91. In Manila, the Philippines Composite rose 0.4
pct to 3,307.43.

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Gold continues higher as dollar slips ahead of Fed rate meeting

LONDON - Gold continued higher, trading less than 2 usd short of last Friday's 16 month high, as the dollar started to weaken ahead of tomorrow's rate setting meeting by the US Federal Reserve.
   
Markets expect the Fed will cut rates by at least 25 basis points at the meeting, but there is a chance it will cut by 50 basis points as it attempts to defend the economy against current housing and credit woes.
   
Such a move would reduce the dollar's value longer term, and would benefit gold, which is seen as an alternative asset to the US currency and often trades in an inverse relationship to it.
   
At 2.35 am, spot gold was trading up at 715.15 usd an ounce against 708.90 usd in late New York trades Friday. Earlier, the metal hit 715.90 usd an ounce, less than 2 usd short of Friday's 16 month high of 717.20 usd.
   
Mitsubishi analyst Tom Kendall said today's price action in gold is a continuation of the recent strong trend, adding many players now expect the metal to top last May's 26 year high of 730 usd an ounce.
   
"People's perspective is still quite bullish on gold ... (they're) following the trend. There a bit of safe haven (buying) and you know the other supportive factors are still in place - oil is still very high," he said.
   
Gold has risen some 10 pct since mid-August, as investors take the view that gold will prove its worth as a safe haven asset amid the current financial market turmoil.
   
On Friday, bullion rose to a fresh 16 month high, partly on reports that current financial market turmoil had claimed yet another victim - UK mortgage lender Northern Rock.

Elsewhere, platinum dipped to 1,295 usd an ounce against 1,296 usd, while its sister metal palladium eased to 327 usd against 328.50 usd. Silver edged up to 12.68 usd versus 12.55 usd.

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