US & World Daily Markets Financial Briefing 18-02-2009

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US STOCKS-Recession worry, housing gloom drag on Wall St

U.S. stocks fell to three-month lows on Wednesday as investors confronted fresh signs that the recession is deepening after data showed the U.S. housing market deteriorated further last month.

News of the Obama administration's plan to stem foreclosures was met with skepticism, sending the Dow Jones home construction index .DJUSHB down nearly 6 percent.

Investors worried the plan would be no quick fix and there was uncertainty about how it would work. Shares of luxury home builder Toll Brothers fell 6.5 percent to $16.74 while D.R. Horton declined 2.5 percent to $8.70.

"You could make a good argument that the home plan is having the opposite effect of what they wanted," said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas. "Our opinion on housing is that you can't stop it from going down, it's going to take care of itself."

The Dow Jones industrial average shed 29.62 points, or 0.39 percent, to 7,522.98. The Standard & Poor's 500 Index fell 4.34 points, or 0.55 percent, to 784.83. The Nasdaq Composite Index lost 6.84 points, or 0.47 percent, to 1,463.82.

Shares of Deere & Co dropped 3 percent after the farm equipment maker posted a quarterly profit that missed forecasts and slashed its outlook. Shares of other big manufacturers also slid, with Caterpillar Inc a top drag on the Dow, off 3.5 percent to $27.98.

Treasurys Mostly Down After Housing Plan Details Released

Treasurys fell slightly early Wednesday, sending yields higher after the Obama administration released details of a $50 billion program to help up to a million "at risk" homeowners modify their mortgages.

Down slightly ahead of the plan, yields on benchmark 10-year Treasury notes rose 3 basis points to 2.684%.

Two-year notes were also lower, with their yields rising 4 basis points, or 0.04 percentage point, to 0.911%. Yields on 30-year bonds, however, fell 2 basis points to 3.459%.

Treasurys had rallied Tuesday as stocks plunged amid concerns about credit deterioration in East Europe and Russia. But stocks regained some ground early Wednesday before turning slightly negative, with the Dow Jones Industrial Average down 29 points to 7,523.

"Profit taking [on bonds] has been ... evident this morning after yesterday's big gains," analysts at Action Economics said in a note.

Bond investors, they said, now wanted to get "firm details" on the Obama housing plan.  The administration's plan seeks to help homeowners who took out loans that were owned or guaranteed by Fannie Mae or Freddie Mac to refinance through the two institutions. It also allows certain families to refinance at lower interest rates.

The program also includes a $75 billion homeowner stability initiative that the administration believes could help 3 million to 4 million homeowners. Data released early Wednesday continued to paint a grim picture for the U.S. economy.

Construction on new U.S. homes plunged 16.8% in January, much worse than expected. Housing starts have dropped at double-digit rates for three straight months.

Starts were also down a record 56% in the past year and down 79% from their peak three years ago. Building permits fell 4.8% to a seasonally adjusted annual rate of 521,000, also a record low.

Industrial production slumped 1.8% in January, roughly in line with the forecasts of economists surveyed by MarketWatch.

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Key US Dollar Libor Rises

The cost of borrowing longer-term U.S. dollars in the interbank market rose Wednesday as risk aversion remained at heightened levels after equity markets headed sharply lower amid growing concerns that the global economic recession will be deep and broad, despite large-scale government stimulus programs.

One trader noted reduced liquidity in term markets was beginning to "pose problems", while central bank operations eased lending pressures in shorter tenors.

Data from the British Bankers' Association showed three-month U.S. dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, fixed at 1.25125%, up from Tuesday's 1.24563%.

Since peaking at 4.81875% on Oct. 10, the three-month rate has fallen significantly, having based at 1.0825% on Jan. 14. The steep decline has been aided by aggressive monetary easing by the Federal Reserve.

The one-month Libor rate rose to 0.47% from 0.46625% but the overnight rate fell to 0.30438% from Tuesday's 0.3125%.

The three-month BOR/OIS spread, a gauge of stress in the money markets, widened to 98.1 basis points from 97.8bps Tuesday.

The spread has tightened significantly from its widest point of 366bps, seen on Oct. 10 when interbank market tensions peaked.

As part of coordinated action aimed at alleviating money market funding pressures, the Bank of England and the European Central Bank conducted unlimited U.S. dollar repurchase operations in seven-day fixed-rate tenders.

The ECB allotted $65.85 billion in seven-day funds at 1.25%, while the BOE received no bids. Lending rates in Europe and the U.K. were mixed Wednesday.

The key three-month sterling Libor fixed at 2.0675%, up from Tuesday's 2.0625%, while the one-month rate nudged lower to 1.425% from 1.42625%.

The three-month rate has fallen steadily since peaking at 6.3075% on Oct. 1.

Meanwhile, increased demand for short-term funding drove the overnight rate up to 1.1475% from Tuesday's 1.125%, remaining above the BOE's Bank Rate, which currently stands at 1.00%.

Term euro Libor fixings were lower Wednesday.

The key three-month rate fell to 1.89875% from Tuesday's fixing of 1.91125%, marking another record low and remaining below the ECB's refinancing rate of 2.0%, while the one-month dropped to 1.58125% from 1.59125%.

But the overnight rate rose to 1.1475% from 1.14375%, below the ECB's refinancing rate but above the 1.0% ECB deposit facility rate.

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London Shares Lower On Insurance Firms

Insurers fell in London's top index on Wednesday, pressuring the broader market, as investors continued to fret about capital positions.

Legal & General shares fell 7.5%, while Aviva shares fell 2.9% and Prudential shares dropped 5.6%. Worries about capital positions have pressured the sector recently and resurfaced again on Wednesday.

J.P. Morgan analysts said that they expect further erosion of Legal & General's capital buffer and a 300 million pound hit to 2009 IFRS profits. "We remain underweight on L&G as we believe its business is less able to withstand the current market conditions," the broker said.

L&G defended its capital position in a statement on Tuesday, saying that it had a 1.6 billion pound capital cushion.

Overall, London's FTSE 100 index declined 0.8%, or 32.03 points, to 4,002.10. Elsewhere in Europe shares were also trading lower.

U.S. stock futures pointed to a better day in the U.S. equity markets, with Dow Jones Industrial Average futures up 37 points after the shellacking taken on Tuesday.

Mineral extractors also fell in London, with BHP Billiton (BHP) down 2.5% and Vedanta Resources down 2.7%.

In the banking sector, Royal Bank of Scotland shares fell 7.7%. The lender was downgraded to neutral from outperform at Exane BNPParibas.

Property in focus

Outside the top index, two more U.K. listed property investment trusts said that they are considering raising capital to shore up balance sheets on Wednesday and saw their shares diverge sharply.

Brixton said that it's pursuing options to increase its financial flexibility, including sales and share issues. Shares dropped 12%.

Segro , up 1.6%, also said that it's mulling financing options. The firm was upgraded to buy from sell at Societe Generale on Wednesday.

"If we assume a rights issue of 300 million pounds, the loan to value peak would be cut from 65% to 57%, a level much more manageable with banks," the brokerage said.

Away from real estate and shares of Sports Direct Group rose 1.3%. The retailer said that 13 week sales to Jan. 25 rose 12% to 355 million pounds. It also stuck to its fiscal-year adjusted operating profit forecast.

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Nikkei hits 4-mth closing low on bank, economy worries

Japan's benchmark Nikkei average shed 1.5 percent on Wednesday to hit its lowest close in nearly 4 months as financial shares sank amid worries about European banks and credit concerns hurt property firms.

In a sign of wide-ranging worries that include a rapidly weakening Japanese economy and increased political uncertainty after the finance minister resigned, the broad-based Topix index ended only a few whiskers away from marking its lowest close in 25 years.

"Foreign investors have lost their appetite for buying Japanese stocks because it's probably the only country in the world, except for some emerging economies, to see its economy shrink by double digits," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"The market also can't expect effective economic measures from the government as it's not in a position to do so right now," he said.

Data this week showed Japan's economy shrank at an annualised rate of 12.7 percent in the final quarter of 2008, and Japan's finance minister resigned on Tuesday after being forced to deny he was drunk at a G7 news conference, dealing a huge blow to the country's already unpopular administration.

The Nikkei fell 111.07 points in moderate trade to 7,534.44, its lowest finish since Oct. 27. The broader Topix ended 1 percent lower at 749.26, after touching a low of 744.37 at one point. Had it finished at that level, that would have been its lowest close since 1984.

That pushed Japanese banks lower and Mitsubishi UFJ Financial Group, Japan's top lender, shed 3.1 percent to 437 yen.

Sumitomo Mitsui Financial Group, Japan's No. 3 bank, lost 4.6 percent to 3,120 yen and second-ranked Mizuho Financial Group fell 1.5 percent to 197 yen.

Mitsui Fudosan, Japan's largest real estate developer, declined 2.6 percent to 1,068 yen while Sumitomo Realty & Development retreated 2.7 percent to 977 yen and Mitsubishi Estate gave up 2.7 percent to 1,060 yen.

Sapporo Holdings extended losses and tumbled 8.1 percent to 350 yen after U.S. fund Steel Partners withdrew a $548 million bid to raise its stake in the Japanese brewer to a third, citing the beer maker's deteriorating earnings.

The stock closed down 9.7 percent at 381 yen ahead of the announcement on Tuesday.

But Toyota Motor Corp added 1.7 percent to 3,060 yen after a newspaper said the automaker plans to boost production in Japan by about 30 percent in May compared with average output of the three preceding months as it makes progress in cutting inventory levels.

Trade was moderate on the Tokyo exchange's first section, with 1.96 billion shares changing hands, compared with last week's daily average of 1.92 billion. Declining shares outnumbered advancing ones, 988 to 606.

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Crude Steady; Eyes On Equities, Inventories

Crude oil prices strayed little from previous closing levels Wednesday as traders waited for latest updates on U.S. crude inventory data, and to see how U.S. equities fare after steep stock market falls weighed on crude Tuesday.

Ahead of the Nymex March contract's expiry Friday, any further builds in U.S. crude stocks could help push prices towards their year lows below $33 a barrel analysts warned.

Meanwhile, U.S. equity markets will be under the microscope after falling to near three-month lows Tuesday amid skepticism over the U.S. administration's latest stimulus plan. With the crude market eyeing equities as a gauge of economic activity and the associated crude demand, any further falls could lead oil prices lower again.

In Europe, bourses traded lower as fears about banks' exposure to Eastern Europe still weighed on sentiment.

"The U.S. stock market will be key to watch on Wednesday, as equities are precariously poised at current levels," said Edward Meir, analyst at MF Global in New York. "Should we test the November intraday lows, and fail to bounce off (them), we could see another leg lower in both stock and commodity markets."

At 1233 GMT, the front-month April Brent contract on London's ICE futures exchange was up 51 cents at $41.54 a barrel.

The front-month March light, sweet, crude contract on the New York Mercantile Exchange was trading 13 cents lower at $34.80 a barrel.

The ICE's gasoil contract for March delivery was up $1.25 at $380.25 a metric ton, while Nymex gasoline for March delivery was up 127 points at 112.45 cents a gallon.

Oil markets will be able to focus on their own fundamentals later Wednesday and Thursday when two sets of weekly U.S. oil and products inventory data are due.

American Petroleum Institute data are due 2130GMT Wednesday, delayed a day due to the U.S. Presidents Day holiday Monday. The release of weekly U.S. Energy Information Administration inventories is pushed back to Thursday.

Gasoline inventories are seen falling by 400,000 barrels, according to the analysts' average, while stocks of distillate, which includes heating oil and diesel, are expected to have fallen by 1 million barrels.

However, crude stocks at Cushing, Okl. the delivery point for Nymex futures, are already at record highs, and remain a threat to Nymex crude price upside, some said.

"The high level of crude stocks in Cushing will continue to weigh on WTI pricing," said Torbjorn Kjus, oil market analyst at DnB NOR in Oslo. The Nymex contract was likely to remain at a discount to ICE Brent until regional U.S. refinery maintenance season ends in March "and thus crude demand starts to pick up at the same time as imports from OPEC decrease", he added.

U.S. crude stocks have built for seven straight weeks despite Organization of Petroleum Exporting Countries' cutbacks as economic slowdown trims consumption.

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