US & World Daily Markets Financial Briefing 18-09-2007

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Stocks advance ahead of Fed

NEW YORK - Stocks rose Tuesday as Wall Street, heartened by upbeat investment bank earnings, awaited the Federal Reserve's meeting on interest rates.
   
The focus will be the central bank when it issues its decision on rates and accompanying economic statement at 2:15 p.m. EDT. The slumping housing market, tightening credit market and volatile stocks have given investors reason to believe that monetary policy is in need of some loosening.
   
Most on Wall Street expect either a quarter-point cut in the benchmark federal funds rate or a half-point cut, given last month's decline in jobs and weakening retail sales. Equally important is how the Fed characterizes the housing, credit and stock markets' drag on the U.S. economy, and if it suggests there are more rate reductions to come.
   
As investors waited for the central bank's decision, they were pleased to see economic and corporate data come in better than expected.
   
Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, posted a 3 percent decline in third-quarter profit compared to the year-ago period as it struggled with the subprime-mortgage crisis. However, the results beat Street estimates. Lehman is the first of the major U.S. brokerages to report earnings from the most recent, tumultuous quarter.
   
The Labor Department's August producer price index was also more favorable than the market predicted. Wholesale prices fell 1.4 percent last month, the biggest decline in 10 months and led by a 6.6 percent drop in energy costs. Core inflation, which eliminates volatile food and energy prices, rose by a mild 0.2
percent, as expected.
   
The Dow Jones industrial average rose 42.76, or 0.32 percent, to 13,446.18. The broader stock indexes also advanced. Standard & Poor's 500 index rose 5.35, or 0.36 percent, to 1,482.00, while the Nasdaq composite index gained 7.98, or 0.31 percent, to 2,589.64.
   
Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.49 percent from 4.47 percent late Monday.
   
Lehman rose 75 cents to $59.38 after releasing higher-than-expected earnings.
   
In other positive earnings news, Best Buy Co. Inc., the country's largest consumer electronics retailer, said its second-quarter profit rose 8.7 percent, more than analysts expected, thanks to strong revenues overseas and tighter controls on spending.
   
Best Buy rose $2.08, or 4.5 percent, to $46.62. On Monday, stocks fell moderately on very thin trading volumes. Tuesday is expected to be another low volume session until the Fed's decision is released.
   
In August, commodity prices fell alongside stocks as investors pulled their money out of riskier assets and placed it in safer securities like Treasurys. But they have since bounced back. Crude oil prices rose above $81 a barrel Tuesday on the New York Mercantile Exchange to a new record.
   
Though the effect of high oil prices on the U.S. consumer is a concern -- especially given that the dollar is near record lows versus the euro -- the Fed tends to measure inflation with often-volatile food and energy prices stripped out.
   
Later, at 1 p.m. EDT, the National Association of Home Builders releases its housing market outlook, and the market is anticipating the index for September to weaken compared to August.
   
The Russell 2000 index of smaller companies rose 1.94, or 0.25 percent, to 777.75. In European trading, Britain's FTSE 100 rose 1.49 percent, Germany's DAX index fell 0.89 percent and France's CAC-40 rose 1.35 percent.

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Dollar a touch lower after PPI data; US rate verdict awaited

LONDON - The dollar was a touch softer after US producer prices came in on the soft side but market reaction stayed muted what with all eyes on the Fed's rate decision later this evening.
   
The producer price index for August, a signal of pipeline inflationary pressures, fell 1.4 pct in August -- four times faster than the 0.3 pct decline expected, and the sharpest fall since October last year.
   
The decline was due to a major fall in gasoline prices which pushed energy prices down by the sharpest amount in more than four years.
   
The figures come hours before the Federal Reserve is expected to put inflation concerns on the back burner and cut the federal funds rate for the first time in more than four years, from its current rate of 5.25 pct.
   
A quarter point cut to 5.00 pct is predicted but some chance of a 50 basis point cut to 4.75 pct also remains and against this backdrop investors appear to be tending towards caution.
   
Over in the UK, the pound eased a touch after a larger-than-expected drop in UK inflation rates, what with attention turning to overall growth prospects which may well benefit from a cut in interest rates.
   
In data out this morning, the headline CPI annual rate edged down to 1.8 pct in August, the lowest since Feb 2005.
   
"Inflation is tracking below where the BoE envisaged when it released its Quarterly Inflation Report only just over a month ago," said Daragh Maher at Calyon. "With inflation tracking lower than expected, the BoE could now argue that rates should be lower, irrespective of what is happening in the banking sector
or the money market," he added.
   
In the meantime, this softer data may undermine some of this morning's gains in the pound that the rally in banking shares and the overall stock market has prompted, he added.
   
Earlier though, the pound got a mild boost after the government pretty much guaranteed all bank deposits late last night in the light of the continued run on ailing Northern Rock.
   
The news dominated headlines today and on an encouraging note, Northern Rock shares have risen slightly in today's trading.
   
The Bank of England has offering cash-strapped financial institutions another 4.4 bln stg of reserves in order to deal with short-term liquidity problems that may have been exacerbated by the crisis engulfing Northern Rock PLC.

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Euroshares higher midday as Wall St seen gaining; all eyes on Lehman, FOMC

LONDON - Shares in Europe's largest bourses were higher midday as Wall St is expected to post modest opening gains with all eyes on earnings from US banking group Lehman and this afternoon's federal Reserve rate decision.
   
At 12.40 am, the Dow Jones STOXX 50 was 0.48 points or 0.01 pct higher at 3,677.3 while the STOXX 600 added 0.35 points or 0.1 pct to 362.53.
   
In Europe, banks were making up for recent losses with Alliance & Leicester charging ahead -- up 23 pct -- after the UK mortgage lender sought to reassure investors last night, telling news agencies it will not suffer the same fate as Northern Rock -- which had to ask the BoE for a bail-out last week.
   
Today, influential broker Cazenove upgraded Alliance & Leicester shares to 'outperform' from 'neutral' and Dresdner lifted its rating to 'buy' from 'hold'.  Northern Rock -- for its part -- rebounded 7.52 pct.
   
But the sector remains jittery as Deutsche Bank issued a bearish note on UK banking stocks, Merrill Lynch cut its forecasts on Spanish banks and Morgan Stanley cut its estimates for Nordic banks. Morgan Stanley also downgraded Danske Bank -- down 1.37 pct -- to 'equal-weight'.
   
Commerzbank fell 0.33 pct after reports that the banking group's subprime loss is greater than the 80 mln eur first reported.
   
However the shares bounced from intra-morning lows after a spokesman for the bank reiterated the bank's previous estimate of 1.2 bln eur sub-prime exposure and write-offs of 40 mln eur in the second quarter and 40 mln eur in the third quarter.
   
ABN Amro was up 1.45 pct after Dutch Finance Minister Wouter Bos approved the proposed takeover of Dutch bank ABN Amro by a three-bank consortium, consortium member Fortis announced last night.
   
Bos issued a declaration of no-objection but imposed conditions which the consortium is "confident" can be satisfied, Fortis said. The Fortis consortium includes Royal Bank of Scotland and Banco Santander Central Hispano SA.
   
Heavyweight oil sector plays climbed after the price of crude hit a new, all-time high in Asian trade. BG was up 2.19 pct. Eni added 0.52 pct. Total added 0.29 pct.
       
In other news, Sogecable was knocked 5.22 pct amid fears that it could lose broadcasting exclusivity for the football matches this weekend, with a downgrade by SocGen to 'sell' from 'hold' further weighing on sentiment. However TF1 added 2.27 pct after Credit Suisse upgraded the French TV group to 'outperform' from 'neutral'.
       
Saipem shares moved up 2.51 pct as ABN Amro initiated shares in the oil services group with a 'buy' rating and a 32.40 eur a share target. Shares in Lonmin tumbled 5.11 pct in midmorning deals as Credit Suisse lowered its volume estimates for the company.
   
Roche slipped 0.44 pct after broker Goldman Sachs removed the Swiss drugs group from its 'Conviction Buy List' and Credit Suisse lowered its price target on the stock to 240 sfr from 258 sfr.
   
Elsewhere in broker action, the telecoms sector was underperforming this morning as Morgan Stanley cut its stance on the European telecoms industry to 'in-line' from 'attractive' on valuation grounds.
   
The broker downgraded Telenor, down 2.41 pct, to 'equal-weight' from 'overweight'. It lowered its recommendation on Belgacom -- down 0.96 pct -- and Bouygues -- down 0.85 pct -- to 'underweight' from 'equal-weight'. JP Morgan downgraded Belgacom to 'underweight' from 'neutral'.     

Meanwhile Credit Suisse reiterated its 'outperform' stance on the sector and lifted its target on Telefonica -- up 0.59 pct -- to 20.5 eur.    

EON led the STOXX 50 fallers -- down 0.93 pct -- after Goldman Sachs removed the German utility from its 'Conviction Buy List'. But peer RWE was up 1.64 pct after recent selling pressure.

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Asian markets dragged lower by financials as credit worry resurfaces

SINGAPORE - Stock markets across Asia mostly fell Tuesday amid renewed concerns about global credit markets and caution ahead of the US Federal Reserve's much-anticipated interest rate decision later today.
   
The Bank of Japan kicks off a two-day meeting today but investors are expecting Japanese policymakers to leave rates unchanged at 0.5 pct. The Nikkei 225 Stock Average fell 2 pct to 15,801.80 and the broader TOPIX index fell 2.2 pct to 1,510.95.
       
In Sydney, the S&P/ASX 200 fell 1.3 pct to 6,192.5 and the All Ordinaries index fell 1.2 pct to 6,208.0.
   
Bell Potter Securities private client advisor Stuart Smith said investors remained worried that the credit crunch would reduce liquidity in the banking sector.
   
Smith said Adelaide Bank, a regional bank which had specialised in providing subprime finance, had been heavily sold even though it had not mentioned difficulties at its operations. "We're not through this yet," Smith said. Adelaide Bank ended down 7 pct at 13.71 aud.
   
The rest of the banking sector was also down with sector leader Commonwealth Bank off 0.7 pct at 55.00 aud and National Australian Bank down 3.1 pct at 37.25 aud.
   
South Korea's KOSPI index closed down 1.8 pct at 1,838.61. Telecom stocks were weak following the industry regulator's string of punitive measures. The Korea Communications Commission (KCC) said it is proposing to ban KT Corp from signing up new cellphone subscribers for one month for alleged violation of regulations.  
   
Hong Kong's Hang Seng fell 0.1 pct to 24,576.85. Property stocks remained in focus after a government auction on Monday. A consortium of Sino Land Co, Nan Fung Development, K Wah International and USI Holdings Ltd paid 4.55 bln hkd for a 238,164-square-foot residential site in the New Territories.
   
China's benchmark Shanghai Composite Index ended up 0.1 pct at 5,425.21. The Shanghai A-share Index rose 0.1 pct to 5,694.31 while the Shenzhen A-share Index was down 0.2 pct at 1,584.38. The Shanghai B-share Index fell 0.1 pct to 358.51 and the Shenzhen B-share Index was down 1.2 pct at 775.74.
   
The Singapore Straits Times index rose 1.44 points to 3,477.75, Malaysia's Kuala Lumpur Composite Index fell 0.1 pct to 1,277.33, and Indonesia's Jakarta Composite rose 0.8 pct to 2,239.86.
   
Manila's composite index was down 0.5 pct at 3,289.75, while Taiwan's financial markets were closed due to Typhoon Wipha.

Indian markets shrugged off the cautious stance taken by most Asian markets ahead of the US Federal Reserve's meet on interest rates later today, and closed 1 pct higher led by banking and energy stocks.
   
Sensex heavyweights boosted the market with the Bombay Stock Exchange's main index closing 164 points, or 1.06 pct higher at 15,669. The National Stock Exchange's S&P CNX Nifty closed up 1.15 pct at 4,546.

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Gold hits fresh 16 month high ahead of Fed meeting

LONDON - Gold rose to a fresh 16 month high above 720 usd an ounce, still underpinned by expectations the US Federal Reserve will cut interest rates at its meeting later today.
   
In addition, the metal was also underpinned by reports in the Financial Times that the Bank of Spain is not planning any more gold sales in the current year of the central bank gold agreement.
   
The bank was previously the biggest seller of gold this year under the CBGA, and analysts say Spanish gold sales might fall next year as well, further underpinning gold prices.
   
For now, however, the main focus remains on the rate verdict this evening, with markets expecting the Fed to cut by at least 25 basis points in a bid to shield the economy against the current housing and credit woes.
   
The rate cut is expected to benefit gold in the mid to longer term, as bullion is seen as an alternative asset to the US dollar and often moves in an inverse relationship to it.
   
In the short-term, however, TheBullionDesk.com analysts James Moore says gold might need to consolidate recent gains before breaching the 26 year high of 730 usd an ounce struck in May last year.
   
Gold rose to a fresh 16 month high of 721.75 usd an ounce before retreating back to 720.00 usd by 11.51 am. Yesterday, gold was quoted at 717.10 usd in late New York trades.
   
Among other precious metals, platinum was little changed at 1,301 usd an ounce against 1,302 usd an ounce, while its sister metal palladium eased to 328 usd against 330.75 usd. Silver was little changed at 12.94 usd versus 12.78 usd.

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