US & World Daily Markets Financial Briefing 18-08-2008

Financial shares roil Wall St on credit worry

NEW YORK - U.S. stocks fell on Monday as investors fretted about the prospect of more losses from the mortgage crisis, sending shares of the two big U.S. home finance providers and other financial companies lower.

Investors were hit with a one-two punch from news pointing to no let up in the credit crisis stemming from the U.S. housing slump.

Shares of mortgage buyers Fannie Mae  and Freddie Mac  each fell more than 10 percent following a Barron's newspaper report that the U.S. Treasury is increasingly likely to recapitalize the beleaguered companies, a move that will potentially would dilute the value of stock holdings.

The S&P financial index fell nearly 2 percent. The Wall Street Journal reported that some analysts are girding for investment bank Lehman Brothers  to announce a third-quarter loss of $1.8 billion or more. Its stock declined 2 percent. For details.

"We are still in the throes of the credit crisis," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut. "There's risk that Fannie Mae and Freddie Mac may require capital from the government. Those companies are what's at issue."

The Dow Jones industrial average slid 59.19 points, or 0.51 percent, to 11,600.71. The Standard & Poor's 500 Index declined 5.70 points, or 0.44 percent, to 1,292.50. The Nasdaq Composite Index dropped 11.52 points, or 0.47 percent, to 2,441.00.

Freddie Mac shares declined to $5.22 on the New York Stock Exchange, while those of Fannie Mae slid to $7.03. Merrill Lynch slashed its price target on Freddie Mac to $5.75.

Lehman Brothers shares declined to $15.84. According to the Wall Street Journal, if losses keep piling up, Lehman could need to raise additional capital beyond the $6 billion it got in June.

Shares of Bank of America , the No. 2 U.S. bank, fell 3.1 percent to $29.74 on the NYSE, making the stock the top S&P 500 drag.

Technology services company International Business Machines  was a top drag on the Dow, falling nearly 1 percent to $125.26. On Nasdaq, shares of Google , the Web search company, fell 1.2 percent to $504.06.

A bounce in oil prices added to the jittery tone. U.S. front-month crude  rose 34 cents to $114.11 on the New York Mercantile Exchange.

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Dollar falters on profit-taking following oil/commodity price rises

LONDON - The dollar shed some of its recent gains as traders locked in gains amid higher oil and commodity prices.

At one stage earlier, oil rose by more than $1 to over $115 a barrel and gold bounced off a nine-month low to test $800 an ounce. Higher energy and commodity prices tend to be U.S. dollar-negative as they fuel inflation pressure at a time when the U.S. economy is slowing sharply in the wake of a year-old global credit market crisis.

"The dollar seemed to overshoot the macro adjustments last week...with the massive liquidation in the commodity markets. But we're seeing some signs of stability there and second thoughts about how far oil will fall is allowing the dollar to take a breather," ING head of FX research Chris Turner said.

As a result, the euro, which fell to a six-month low of $1.4645 in early Asian trade recovered to $1.4712, up 0.1 percent from late Friday U.S. trade.

The euro has tumbled nearly six percent against the dollar in two weeks due to increasing investor concern that the slowdown in the U.S. economy will be replicated in Europe and globally.

Data last week showed euro zone growth contracted in the second quarter for the first time ever, helping scotch any expectations of euro zone rate increases.

A dearth of data today is unlikely to alter market expectations about the interest rate outlook on either side of the Atlantic.

"It is a quiet start to the week for the markets in terms of economic data, and indeed for the week as a whole, things could be relatively patchy which should mean little prospect of a re-think in terms of the interest rate outlook in developed markets," said Calyon analyst Daragh Maher.

Markets will get a better idea about what's going on in the euro zone tomorrow, when the ZEW Institute publishes its survey into business confidence in Germany, the single currency zone's largest economy.

The dollar has been buoyed by growing speculation that the European Central Bank could begin cutting interest rates next year to boost the euro zone economy, which shrank by 0.2 percent in the second quarter.

Fresh clues on the state of the troubled US property market may come tomorrow too from data on housing starts.

Elsewhere, the Bank of Japan started a two-day meeting on interest rates Monday, with traders bracing for a more cautious assessment by the central bank on prospects for Asia's biggest economy.

With inflation at a decade-high and Japan's economy in a downturn, the Bank of Japan is expected to leave interest rates on hold at 0.5 percent for now.

The ECB decided to leave its key lending rate at 4.25 percent and the US Federal Reserve kept American interest rates at 2.0 percent earlier this month.

Meanwhile, the British pound remained pressured by mounting expectations that the Bank of England will soon be in a position to cut interest rates from their current level of 5.0 percent.

The BoE's bleak assessment of the UK economic outlook pushed sterling down to a two-year low against the dollar on Friday and is now trading around the 1.8670 dollar mark.

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European shares up by midday helped by oil, miners

FRANKFURT - European shares were up by midday on Monday in volatile trade as firmer commodity prices helped oil and mining shares offset declines in retailers and airlines stocks, which were hit by a decline in the dollar.

By 1112 GMT, the pan-European FTSEurofirst 300 index  was up 0.4 percent at 1,195.50 points, having fallen earlier by as much as 0.91 percent.

"The stock market is looking for direction, and it is looking towards currencies and commodities as it has become more quiet on the macro and earnings front," said Markus Steinbeis, head of European equities at Pioneer Investments in Munich.

He said stocks benefiting from a firmer dollar were surrendering gains as the U.S. currency eased from recent peaks.

The dollar retreated from a six-month high against the euro on Monday as an overnight recovery in oil and commodity prices prompted a pause in the U.S. currency's dramatic recovery this month. Aerospace group EADS  fell 2.4 percent.

Oil rose more than $1 to top $115 a barrel and was up $0.34 at $114.11 at 1102 GMT, as investors eyed a potential supply threat from Tropical storm Fay to oil and gas production in the Gulf of Mexico.

Oil majors Total  and Royal Dutch Shell  were both up over 2 percent, while the European travel and leisure index  and the DJ Stoxx European retail index fell 0.4 percent and 0.2 percent, respectively.

Air France-KLM  fell 0.4 percent, Lufthansa  fell 0.5 percent, and British Airways  dropped 1.7 percent.

Commodities, which as an asset class have shed around 20 percent since peaking in early July, drew strength from the dollar, and mining stocks rose as a result.

Anglo American  rose 3 percent, Rio Tinto  rose 2.1 percent, and Antofagasta  rose 1.3 percent.

Erik Nielsen, chief economist at Goldman Sachs, said in a note that Europe was suffering from a global oil price shock first and foremost.

"Although contrary to previous oil price shocks, this time around the pain is coming primarily via a consumer strike in reaction to higher prices," he said.

"The bad news is that this might last a few quarters; the good news is that the European private sector is protecting their balance sheets, setting the stage for a healthier (and wealthier) recovery next year," he added.

Around Europe, Britain's FTSE 100 index rose 0.6 percent, Germany's DAX index added 0.4 percent, and France's CAC 40 gained 0.9 percent.

Shares in AS Roma  were suspended after rising above the daily limit on speculation fresh suitors may eye the Italian soccer team following the death of club President Franco Sensi.

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Asian stock market summary

Japan
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The benchmark Nikkei 225 Stock Average rose 1.1 percent to close at 13,165.45, after investors bought back shares in the financial and real estate sectors, while export-oriented shares benefited from a weaker yen.
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But the recovery in the market was limited amid ongoing worries about the global economy, while investors stayed cautious ahead of the release of economic data from the U.S. and Japan. The broader Topix index ended 1.3 percent higher at 1,263.75.

South�Korea
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The Korea Composite Stock Price Index closed 0.28 percent lower at 1,567.71 points, after a rebound in oil prices sent exporters lower, while Daewoo Shipbuilding tumbled after Doosan Group said it would not bid for the South Korean shipbuilder.

Australia
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The benchmark S&P/ASX 200 closed up 0.07 percent at 4,985.0, as resources stocks advanced, with miner BHP Billiton Ltd gaining ahead of reporting a record annual profit. All Ordinaries closed up 0.09 percent at 5,043.5.

China
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The benchmark Shanghai Composite Index closed down 5.34 percent at 2,319.87, amid pressure on liquidity from IPO stock China South Locomotive & Rolling Stock Corp, which debuted today in Shanghai with a sharp rise.
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The Shanghai A-share Index was down 5.33 percent at 2,435.12, and the Shenzhen A-share Index fell 5.92 percent to 687.62.
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The Shanghai B-share Index fell 7.53 percent to 151.36, and the Shenzhen B-share Index lost 4.28 percent to 371.43.

Taiwan
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The weighted index closed down 2.72 percent at 7,000.74, after news that the government launched an investigation into allegations of money laundering by former president Chen Shui-bian and his family.
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Steep falls on mainland China bourses also dented sentiment.���

Singapore dropped 0.7 percent to sink below its March lows, Malaysia gave up 1 percent, while Thai stocks were down 1.5 percent on political worries.

Singapore

Singapore stocks fell to their lowest in 20 months on Monday as fresh data confirmed fears that a slowdown in developed economies is dragging on exports, while most other Southeast Asian markets were
lower on growth concerns.
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Singapore's non-oil exports fell unexpectedly in July as trade dropped sharply with its biggest markets the United States and Europe."The numbers just confirmed everybody's worst fears that things are going dodgy. That, plus China falling some 5 percent on worries that the Chinese economy is on a similarly slippery slope," said Song Seng Wun, regional economist at CIMB-GK Research in Singapore, referring to the 5.3 percent decline on the Shanghai Composite Index�
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Philippines

The Philippine index closed flat, while Vietnam rose 3.9 percent after its securities commission widened the trading band to 5 percent from 3 percent previously. Singapore-listed Chinese stocks were the worst-hit on the benchmark Straits Times index, with shipbuilding and repair firm Cosco Corp� plunging 7.9 percent, and compatriot Yangzijiang� easing 2.4 percent.
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Malaysia

A fall in Malaysian crude palm oil futures, part of a worldwide commodity price correction, also weighed on plantation giant Sime Darby , which gave up 3.8 percent and Singapore's Wilmar , which was down 1.5
percent. Malaysia's KL Kepong, however, rose 2.6 percent.�

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Gold firmer but off highs as dollar steadies

LONDON - Gold prices were firmer in Europe on Monday, but retreated from highs hit in Asian trade as the dollar steadied against the euro.
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The yellow metal climbed more than 2 percent to above $800 an ounce in early trade as the dollar slipped and oil prices rose, triggering a wave of short covering. But the metal failed to hold on to those gains as the dollar steadied amid expectations it could be due another leg higher.
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"Most of the gold price movement is strongly correlated with what is happening in the U.S. dollar," said Lehman Brothers analyst Michael Widmer.� "One thing that is keeping gold prices under pressure is the view that the dollar is going to be (stronger) going forward."
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Gold typically moves in the opposite direction to the U.S. currency, as it is often bought as a hedge against dollar weakness.
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At 1013 GMT, spot gold� was trading at $796.95/797.95 an ounce, up from $787.65/789.25 late on Friday in New York, but off its earlier session high of $803.65. Gold slipped around $70 an ounce, or 8 percent, last week as a broad strengthening in the dollar led investors to sell commodities.
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A wave of short-covering inspired by the weaker dollar and some bargain hunting pushed prices higher early on Monday. The dollar retreated from a six-month high against the euro as a recovery in oil and commodity prices arrested its recovery.
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However, gold remains susceptible to further downward moves if the dollar resumes its upward trend.
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"We are going to see a further retracement in the gold market, in particular on dollar strength," said Saxo Bank analyst Philip Carlsson. "Even though the dollar has already (made) quite a large movement, people are predicting dollar strength will be the subject going forward."
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An uptick in oil prices on Monday is also supporting prices. Oil rose more than $1 to above $115 a barrel as investors worried Tropical Storm Fay would disrupt supply in the Gulf of Mexico.�
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PLATINUM ETF HOLDINGS SLIP
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Platinum firmed more than 5 percent in Asian trade, but has since slipped back to trade little changed from its level in New York late Friday. The market remains under pressure from fears over demand from carmakers, which consume over half of the world's platinum every year.
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London-based ETF Securities said holdings of its Physical Platinum� exchange-traded commodity, which issues securities backed by physical metal, fell 30 percent in the week to Sunday, to their lowest level since February.
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Its Physical Palladium� ETC also saw an outflow of 10 percent, or just over 25,000 ounces.
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Platinum� was trading at $1,377.00/1,397.00 an ounce, up slightly from $1,365.00/1,385.00 in New York. Earlier it reached a session high of $1,438.00.
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Meanwhile, spot palladium was trading at $283.50/291.50 against $281.00/289.00. Among other precious metals, spot silver was at $13.11/13.16 an ounce against $12.74/12.84. Earlier it climbed almost 5 percent to a session high of $13.32 an ounce.

World oil prices rose as traders fretted about the potential impact of Tropical Storm Fay on energy facilities in the Gulf of Mexico.

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