US & World Daily Markets Financial Briefing 19-02-2008

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Wall Street rises in early trading

In mid-morning trading, the Dow Jones industrial average rose 93.86, or 0.76 percent, to 12,442.07 following the three-day Presidents Day weekend.

Broader stock indicators also advanced. The Standard & Poor's 500 index rose 8.96, or 0.66 percent, to 1,358.95, while the Nasdaq composite index rose 14.61, or 0.63 percent, to 2,336.41.

Government bonds fell as stocks gained. The yield on the 10-year Treasury note, which moves opposite its price, jumped to 3.87 percent from 3.77 percent late Friday.

The dollar slipped against most major currencies, while gold prices rose.

WalMart shares rose 56 cents to $50.

In addition to consumer spending, Wall Street is concerned about credit problems facing financial institutions. British bank Barclays Group PLC revealed credit-related losses totaling $3.13 billion, up from a smaller write-down in November, while Credit Suisse, Switzerland's second-largest bank, said it has suspended "a handful" of traders in connection with the overvaluation of asset-backed securities by $2.85 billion.

Also, The Wall Street Journal reported that Lehman Brothers Holdings Inc. could see big losses due to its significant investments in commercial real estate loans.

There have been some signs that troubled financial institutions are finding ways to regain their footing, however.

Bond insurer Ambac Financial Group Inc. is discussing a plan to raise at least $2 billion in capital to maintain its superior credit rating, the Journal reported, citing people familiar with the matter. The move would mirror a $3 billion cash-raising effort by rival bond insurer MBIA Inc., which said Tuesday that its former chairman and chief executive has returned to the lead the company.

Ambac rose 30 cents, or 3 percent, to $10.52, while MBIA slipped 10 cents to $12.14.

"We're heading to some sort of, perhaps, dare we say, closure on the bond insurance situation," Cardillo said. "If that does occur, the market does start to price in economic recovery."

The National Association of Home Builders later Tuesday was releasing its February housing index.

In corporate news, Microsoft Corp. chairman Bill Gates said the software company is not privately haggling with Yahoo over its rejected $31-per-share buyout offer. Microsoft Corp. made an unsolicited offer to buy the struggling Internet company just over two weeks ago.

The Russell 2000 index, which tracks smaller company stocks, rose 3.41, or 0.49 percent, to 704.93.

Overseas, Japan's Nikkei stock average closed up 0.90 percent. In afternoon trading, Britain's FTSE 100 rose 0.77 percent, Germany's DAX index rose 0.88 percent, and France's CAC-40 rose 0.96 percent.

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Forex - Aussie dollar emerges trumps in quiet trade

LONDON  - The Australian dollar emerged as the day's biggest gainer as the market settled down to a quiet day's trade, fuelled by the continent's strong growth and high interest rates.

The currency has been a firm favourite, buoyed by the revelation that the Reserve Bank of Australia (RBA) considered hiking interest rates by 50 basis points at its last meeting. In the event, the RBA delivered a 25 basis point increase to 7.00 pct.

The Aussie dollar was just under a four-month high against the dollar.

"The Aussie dollar appears to have it all. Australia continues to enjoy a pretty positive economic backdrop and a hawkish central bank," said Simon Derrick at Bank of New York Mellon.

While some chinks have started to appear in the run of strong Australian data, underlying strength remains intact. Last week, a poor consumer confidence report from the Westpac-Melbourne Institute showed that Aussie households are not immune to events outside their fair country.

This could well dent future spending levels, but thus far there are no such signs: Aussie retail sales have grown by an average 0.7 pct month-on-month in the last two months, added Derrick.

Analysts at BNP Paribas noted that the Aussie dollar has been the "outperformer" at the start of the week, but that with every gain the currency is becoming vulnerable to falls.

"We believe that these gains are likely to be short lived. Although some further near-term gains cannot be ruled out, gains above the 0.9150 usd level are viewed as a selling opportunity," they said in a research note.

Elsewhere, the euro nudged higher reflecting the market's focus on yield in the absence of other pointers. Interest rates in the euro zone have remained on hold for the time being, while those in other leading economies like the US and the UK are heading lower -- giving the euro a yield advantage.

However analysts expect the European Central Bank to change tack at some point in the coming months if economic indicators continue to come in weak -- starting with this week's purchasing managers' indices (PMIs) for the manufacturing and services sectors. Cuts in euro zone interest rates could spark a rout in the euro.

"The eurozone PMIs, especially the services sector PMI, have been on a strong downward trend providing evidence that the eurozone economy is now slowing down," said BNP Paribas analysts.

"Another negative reading this week will fuel speculation that the ECB could be forced into an early rate cut," they added.

BNP's analysts say the euro still has potential to gain on the dollar in the near term, towards the 1.4760 or 1.4800 levels, but say this strength is a selling opportunity.

Separately, the Swedish krona fell as the country's inflation figures came in below expectations.

Figures out this morning showed the annual rate of CPI inflation dropped to 3.2 pct in January from 3.5 pct the month before - analysts had forecast an increase to 3.5 pct.

Last week, the Riksbank raised interest rates a quarter point due partly as a result of inflation concerns, so today's numbers have dented expectations that any further hikes are on the cards.

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Euroshares open lower as write-down fears return to banking sector

At 8.58 am, the DJ STOXX 50 was 20.87 points or 0.64 pct lower at 3,215.83 and the DJ STOXX 600 fell 2.39 points or 0.74 pct to 321.14.

While the sector shed some 1.38 pct in aggregate according to the DJ STOXX 600 for the industry, Credit Suisse fell 8.63 pct after the Swiss banking group announced fresh write-downs of 2.85 bln usd which will hit net income by around 1 bln usd.

"After posting expectation-beating full year results, on the back of limited subprime exposures, the bank had managed to regain significant trust helping the stock to gain some 3.2 pct yesterday," a Zurich-based trader said.

Meanwhile, Credit Agricole was 3.08 pct lower on the back of a report in Les Echos, which said the group's investment banking arm Caylon, could soon announce new asset write-downs due to its exposure to ailing bond insurer FGIC, the troubled monoline insurer.

A downgrade by Bear Stearns to 'underperform' from 'outperform' also weighted on the stock.

Barclays was also amongst the steepest fallers in the sector, down 2.45 pct, after the group reported a 1 pct decline in its 2007 profit, slightly ahead of analysts' estimates, but not quite the positive surprise investors were looking for after reports over the weekend suggested the group would raise its dividend.

Peer Deutsche Postbank, on the other hand, rose 1.22 pct, amid reports that HSBC and Royal Bank of Scotland have also signalled their interested in acquiring the German retail bank, which is controlled by Deutsche Post.

Traders noted a sale may be more likely after the latter appointed management board member Frank Appel as its new chief executive with immediate effect.

Turning back to earnings news, Norwegian aluminium producer Norsk Hydro ASA shed 6.04 pct after it posted fourth-quarter profits that came in below expectations due to lower aluminium prices, weakening markets for downstream operations and unfavourable currency developments.

And the consumer sector is in focus this morning, with Cadbury Schweppes down 4.98 pct, after it warned there will be no return of capital to shareholders following the de-merger of the group's confectionary and beverage businesses later this year.

Scottish & Newcastle and Carlsberg both traded rather flat after presenting full-year earnings results this morning.

Carlsberg and Heineken are also in focus as the two brewer's await regulatory clearance for their 7.6 bln stg takeover of the UK-based S&N.

And shares in Ducati Motor Holding SpA, the Italian motorcycle company, have been temporarily suspended from trading pending the release of the statement, a bourse official said.

According to the Il Sole 24 Ore daily, Ducati's majority shareholder Investindustrial plans to launch a takeover bid and delist the company. The paper said no price details were available.

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Asian stocks take cue from firmer Europe but US caution remains

The S&P/ASX 200 closed up 1.1 percent at 5,619.1 and the All Ordinaries was up 1 percent at 5,688.6.

The Australian benchmarks slumped Monday as the problems at US bond insurers moved Down Under with the news that the country's third-biggest bank Australia and New Zealand Banking Group was booking 200 mln dollars in provisions on a loss relating to a US bond insurer. Banks recovered some of their prior-session lows during Tuesday's session.

The Nikkei ended up 0.9 percent at 13,757.91 and the broader Topix added 0.9 percent to 1,345.29 with a weaker yen propping up exporters. Foreign investors appeared to be returning to the Japanese market -- pre-opening buy orders topped sell orders for the second day in a row.

The Hang Seng closed up 1.53 pct at 24,123.17, as investors moved back into stocks after Monday's decline.

The Shanghai Composite ended firmer by 2.10 percent at 4,664.30. The index traded at a low of 4,544.94 in the morning session after the government said that Chinese inflation rose 7.1 percent in January, the most in more than 11 years. The rise was expected following the recent severe snow storms on the mainland.

The Taiwanese Taiex added 1.7 percent to 8,024.41 and the Indian Sensex provisionally closed 0.16 percent lower at 18,018.48. The Kospi was up 1.4 percent at 1,720.52 and the Malaysian Kuala Lumpur Composite rose 0.9 percent to end at 1,425.49.

Jakarta's composite index ended up 1.0 percent at 2,711.87.

The Philippines Composite closed up 0.9 percent at 3,190.67. The index struggled early in the day as the Senate and the anti-corruption authorities continue to investigate allegations of kickbacks in a controversial 329 mln USD telecommunications deal between the government and Chinese company ZTE Corp in which President Gloria Arroyo's husband and a political ally have been implicated.

Fitch has already cut Ambac to 'AA' vs 'AAA' and the other ratings agencies have it on review for a possible downgrade. MBIA has managed to raise 2.5 bln dollars in fresh capital but it is also on review for possible downgrades. Banking on gains ANZ shares closed up 0.6 percent at $22.60. Other Australian banks also gained with NAB up 3.2 percent at $30.46, Commonwealth Bank up 2.9 percent to $45.27 and Westpac gaining 2.9 percent to $23.15.

BHP Billiton and Rio Tinto, among the world's biggest iron ore producers, strengthened on news that Japanese and Korean steel makers have agreed to a 65 percent increase in iron ore prices with Brazilian miner CVRD. Chinese steel makers have indicated they will follow suit.

BHP closed up 1.9 percent at $39.70 and Rio finished 1.9 percent higher at $136.50 as investors bet on the two miners scoring similar, or even larger, price increases.

In Hong Kong, Bank of China rallied 7.8 percent to $3.31 after chairman Xiao Gang reiterated that China's second-biggest bank has made sufficient provisions to cover all its exposure to the US mortgage market. The executive said the bank is also aiming to buy a life insurance company.

Export-oriented auto and high-tech issues led the advance in Tokyo. Toyota Motor closed up 1.8 percent to 6,310 yen. Honda added 3.7 percent to 3,401 and Nissan Motor rose 2.1 percent to 978.

Office equipment and digital camera maker Canon rose 4.2 percent at 4,930, consumer electronics giant Sony climbed 2.2 percent to 5,010.

Nippon Steel rose 2.3 percent to 588 yen and South Korea's POSCO gained 1 percent to 520,000 won after the two companies announced their joint agreement on iron ore prices.

The Bombay Stock Exchange's 30-share Sensitive Index closed 27.61 points or 0.15 pct higher at 18,075.66, off the day's high of 18,314.10, while the National Stock Exchange's S&P CNX Nifty edged up 0.07 pct to 5,280.80 points.

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Metals - Copper jumps above 8,000 usd on Chinese demand, falling stocks

London Metal Exchange (LME) monitored inventories have drawn down sharply as a result in recent weeks, falling to their lowest level since mid-October. Inventories dropped by 4,025 tonnes to stand at 140,350 tonnes today, almost 30 pct below their levels at the beginning of the year.

"Chinese imports of the red metal used widely in the power and construction industries rose by 6.7 pct in January from the previous month and analysts think the numbers will continue on an upward trend until power problems recede," said Alex Heath at RBC Capital Markets.

At 10.13 am, LME copper for 3 month delivery was up at 8,050 usd a tonne against 7,974 usd in late New York trades. Earlier the red metal hit a 4-month peak of 8,088 tonnes.

Strong Chinese demand has pushed concerns over the health of the world economy to one side for now, but analysts have cautioned that further poor economic news out of the US could still weigh on sentiment. Fears of a recession in the US have weighed on prices in recent months, with the demand outlook for industrial metals closely linked to global economic growth.

Tighter economic policies in China may also go some way to reigning in buoyant Chinese demand for copper and other industrial metals, with rapidly rising inflation forcing the central government to take action to cool the economy.

"China inflation hit 7.1 pct in January which might prompt some further tightening," said Fairfax analyst John Meyer.

Elsewhere, aluminium was up at 2,835 usd a tonne against 2,825 usd at the close yesterday. On Friday, aluminium hit a 9-month high of 2,873 usd amid ongoing jitters over possible supply outages in South Africa due to power shortages in the key producer.

Lead was up at 3,093 usd against 3,030 usd, supported by a 525 tonne decline in LME inventories. Yesterday, the International Lead and Zinc Study Group reported that lead usage outstripped production of the metal by 70,000 tonnes in 2007.

Global demand for refined lead grew by 2 pct according to the group, with fast rising Chinese consumption more than making up for falling usage in the US, Europe and Japan.

In other metals, three month zinc was at 2,388 a tonnes versus 2,365 usd, while tin rose to 17,100 usd a tonne from 17,075 usd with a 185 tonne drop in stockpiles held by the LME. Finally, nickel was unchanged at 27,650 usd.

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