US & World Daily Markets Financial Briefing 19-03-2008

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Stocks pause after huge rally

NEW YORK -    Stocks wavered Wednesday as investors paused a day after the market's huge rally and digested better-than-expected results at Morgan Stanley that eased concerns about the investment banking sector.

News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, also quelled some of the market's fears.

Investors sent stocks charging higher Tuesday on stronger-than-expected investment bank results and several moves from the Federal Reserve, including a 0.75 percentage point rate cut, aimed at jump-starting the credit markets. Some profit-taking was to be expected after the gains that saw the Dow Jones industrials shoot up 420 points.

Morgan Stanley's earnings indicated that the bank is relatively healthy like Lehman Brothers Holdings Inc. and Goldman Sachs & Co., rather than at risk of failure like Bear Stearns Cos. JPMorgan Chase & Co. struck a deal Sunday to acquire Bear Stearns, which was on the verge of succumbing to credit troubles.

Meanwhile, the Office of Federal Housing Enterprise Oversight said the changes at Fannie and Freddie should result in an immediate infusion of up to $200 billion into the market for mortgage-backed securities. This could mean greater demand for mortgages -- an aid for struggling homeowners hoping to refinance at more favorable terms.

In midmorning trading, the Dow Jones industrial average fell 2.93 or 0.02 percent, to 12,389.73. Broader stock indicators also declined. The Standard & Poor's 500 index rose 1.72, or 0.13 percent to 1,332.46 and the Nasdaq composite index fell 2.87 or 0.13 percent, to 2,265.39.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, slipped to 3.41 percent from 3.50 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell $2.99 to $106.43 per barrel on the New York Mercantile Exchange as the dollar gave off some signs of stability after a recent slide and following the rate cut Tuesday that was smaller than some investors expected. Rate cuts hurt the dollar and a weaker greenback, in turn, drives up prices of commodities priced in dollars.

Investors' relief over Morgan Stanley follows better than expected earnings news from Lehman and Goldman on Tuesday that gave the Dow its biggest point gain in more than five years. The Dow got an extra boost after the Fed's rate cut. Morgan Stanley rose $2.64, or 6.2 percent, Wednesday to $45.50.

The Fed has slashed key rates by more than half since last summer, when the mortgage crisis claimed its grip on the global credit markets. But the housing and lending industries are still hurting.

Late Tuesday, Visa Inc. launched the largest initial public offering in US history, selling 406 million shares at $44 each to raise $17.9 billion. The world's largest credit card processor is not a lender, and many investors are betting that it will easily survive the faltering US economy and credit climate. The stock traded up $14.50, or 33 percent, to $58.50.

Overseas, Japan's Nikkei stock average increased 2.48 percent, while Hong Kong's Hang Seng index rose 2.26 percent. In afternoon trading, Britain's FTSE 100 fell 0.06 percent, Germany's DAX index fell 0.43 percent, and France's CAC-40 slipped 0.20 percent.

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Forex - Pound under pressure from banking rumours, BoE minutes

LONDON  - The pound was under sustained pressure as rumours swirled of UK banks in financial difficulty, with further downward momentum coming from a dovish set of minutes to the Bank of England's (BoE) last rate-setting meeting. Market rumours that UK bank HBOS may be in funding difficulties and engaged in talks with the BoE were vehemently denied by the BoE and the bank alike, but HBOS' shares fell sharply.

Though it denied any commercial banks are in trouble, the BoE confirmed governor Mervyn King is to meet leading officials from some of the UK's main financial institutions by tomorrow. The pound took a battering in this environment, falling below the 2 usd threshold. It dipped under that level earlier in the morning after minutes to the BoE's March meeting revealed a dovish tilt.

The Bank's Monetary Policy Committee (MPC) voted 7-2 to keep rates on hold in March, with Deputy Governor John Gieve surprising analysts by voting for a cut, alongside perceived arch-dove David Blanchflower. The minutes, alongside market turmoil and continued credit constraints, mean the BoE is set to come under increased pressure to cut rates sooner rather than later.

"With two MPC members already voting for a rate cut in March, amid further deterioration in global financial markets, heightened funding pressures in sterling markets and growing distress in the UK housing market, we see a serious risk that the BoE could cut rates by 25 basis points next month already," said Matthew Sharratt at the Bank of America.

The BoE last cut borrowing costs in February, putting the benchmark rate at 5.25 pct, with the pace of easing hitherto seen to be limited by the Bank's concerns on inflation. Prior to the latest bout of market distress, sparked by the weekend fire sale of US bank Bear Stearns, most analysts had predicted the BoE would wait until May to cut rates.

Simon Derrick at the Bank of New York Mellon said the pound's weakness could persist for some time. "The fresh outflows we have monitored in recent days from UK equities and the increasingly negative UK-centric news-flow bodes ill for sterling," he said.

"Indeed, we are increasingly starting to wonder whether it could even start to underperform the ailing dollar in the days ahead." Also weighing on the currency were labour market data this morning that showed a smaller-than-expected fall in jobless numbers.

Elsewhere on currency markets, the dollar remained weak, having shed most of the gains it made yesterday following the Federal Reserve's 75 basis point cut in interest rates to 2.25 pct.

After the Fed's rate cut, which was slightly less than the market consensus for a full 100 basis point reduction, the Dow Jones index of leading US shares enjoyed its best day in five years, helping the US currency to rally too.

The euro fell down towards the 1.56 usd mark, while the dollar climbed back above 100 yen. "This rally hasn't been sustained and there's already a bit of a hangover after yesterday's celebrations creeping in," said James Hughes, analyst at CMC Markets.

The Fed's accompanying statement proved to be more hawkish than many had expected. It signalled it is giving increased attention to elevated inflation levels, hinting that an end to the current rate cut cycle was fast approaching.

The euro's gains against the dollar were capped, though, after the chief economist at the Ifo research institute called for lower interest rates in the euro zone. Gernot Nerb urged the European Central Bank to join forces with other major central banks to ease monetary conditions in response to the current financial crisis.

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Euroshares turn lower in opening deals, Ericsson falls on JV warning 

At 8.59 am, the DJ STOXX 50 fell 12.52 points or 0.42 pct to 2,974.22, while the DJ STOXX 600 lost 1.26 points or 0.42 pct to 299.31.

European equity markets were more cautious in opening deals and traders expect the major indices to settle ahead of earnings results from Nike and Morgan Stanley.

In corporate news this morning, profit warnings from Sony Ericsson and Seat dampened the mood further this morning. Sony Ericsson led the technology sector lower, which shed 2.6 pct according to the DJ STOXX 600 for the industry, "This is the first very clear indication that demand in the end market is weakening and that is clearly negative for the sector," Thomas Langer, analyst at WestLB, said.

"It would be naive to think that Nokia will not be affected," Langer said, adding however that the news may also indicate that it was Sony Ericsson and not Nokia that was behind a profit warning by Texas Instruments on March 10. Ericsson shares were 7.6 pct lower while peer Nokia lost 3.4 pct.

In Italy, shares in Seat slumped 17 pct after the group announced that it would not pay a dividend on 2007 results and also issued a profit warning. Seat, which instead of paying the dividend will focus on the repayment of its debt and invest in online activities, said it expects EBITDA in 2008 to fall to about 610 mln eur because of a one-off charge and investments to expand in Italy and abroad.

Meanwhile, the banking sector remains in the spotlight today ahead of earnings results from Morgan Stanley and an announcement by France's BNP Paribas that it is ruling out a bid for troubled rival Societe Generale.

BNP Paribas gained 4.68 pct on the news, while Societe Generale shed 4.79 pct. UK peer HBOS fell back 8.59 pct as vague rumours circulated on trading floors the bank is facing liquidity problems.

Staying with M&A related news this morning, ailing airline Alitalia shed 9.96 pct this morning and was suspended from trade, following a report that union talks between its employees and Air France-KLM broke down. Italian economy minister Tommaso Padoa-Schioppa said that liquidation of the airline is the only alternative to a sale.

In other news, Deutsche Post AG retreated 1.39 pct after a report in Frankfurter Allgemeine Zeitung, which said the European Union is strongly opposed to tax privileges the logistics group is enjoying and has formally expressed its opposition to the German government.

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Asian stocks higher on Fed rate cut, US banks' earnings

The main Australian indexes rose the most, with the S&P/ASX 200 gaining almost 4 percent to close at 5,289.1 points and the All Ordinaries up 3.6 percent at 5,349.2 after banks such as National Australia Bank and ANZ Banking Group surged.

Japan's Nikkei 225 Stock Average jumped 2.5 percent to close at 12,260.44 points and the broader Topix rose 2.8 percent to 1,196.30. Hong Kong's Hang Seng Index closed up 2.26 pct at 21,866.94, shrugging off the impact of the recent monetary tightening measures in China.

Beijing has moved to curb growth in credit by raising banks' reserve requirement to 15.5 percent, the highest on record, from March 25. The Hong Kong Monetary Authority lowered its base interest rate by 75 basis points to 3.75 percent this morning, matching the Fed's move.

South Korea's KOSPI closed up 2.1 percent at 1,622.23 points and Singapore's Straits Times Index slipped 0.37 points to close at 2,833.21.

The Philippine composite index closed up 1.5 percent at 2,817.58 and the Indonesian composite index closed down 0.7 percent at 2,323.57. Banks rally

In Sydney, National Australia Bank closed up 2.06 Australian dollars or 7.4 percent at 29.80 dollars and ANZ Banking Group rose 1.69 dollars or 8 percent to 22.69 dollars. Commonwealth Bank of Australia was up 2.43 dollars or 6.5 percent at 40.00 dollars and Westpac Banking was 1.52 dollars or 6.8 percent higher at 24.00 dollars.

Australia's leading investment bank, Macquarie Group, surged 6.18 dollars or 13.7 percent to 51.25 dollars, while its second-largest, Babcock & Brown, added 85 cents or 6.7 percent at 13.55 dollars.

In Japan, Mizuho Financial rose 15,000 yen or 4 percent to close at 386,000, Mitsubishi UFJ Financial gained 44 yen or 5.4 percent at 853 and Sumitomo Mitsui Financial rose 32,000 yen or 5 percent to 678,000.

Japanese exporters rallied after the yen weakened against the dollar. Toyota Motor rose 190 yen or 3.9 percent to 5,080 yen, Honda Motor climbed 140 yen or 5.3 percent to 2,770, Sony rallied 270 yen or 6.8 percent to 4,240, Komatsu was up 105 yen or 4.2 percent at 2,595 and Nintendo was up 2,500 yen or 5 percent at 52,100.

The Bombay Stock Exchange's 30-share benchmark Sensex closed up 161.37 points or 1.09 pct at 14,994.83 and the National Stock Exchange's 50-share S&P CNX Nifty closed up 40.95 points or 0.90 pct at 4,573.95.

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Metals - Copper falls as risk aversion, volatility outweigh low stocks

LONDON  - Copper fell as risk aversion and heightened volatility outweighed dwindling inventory and some short-lived euphoria after the US Federal Reserve cut interest rates yesterday.

Players sold copper as equity markets looked set for further weakness as they feared that demand for industrial commodities would slump as market turmoil continues. They also sold metals in a bid to cover losses on the stock markets.

After a US interest rate cut, which yesterday managed to boost sentiment, Wall Street is now looking at a lower open as some investors lock in profits after yesterday's sharp gains inspired by better-than-expected results at two investment banks and the Fed's decision. The DJIA enjoyed its best rally in five years as the Federal Reserve cut interest rates by three-quarters of a percentage point, which boosted sentiment across the board. The Fed has now cut rates by three percentage points since mid-September, including two points this year, with the benchmark rate now 2.25 pct.

"We think market attention will soon shift...towards the fact that the US credit crisis still remains well-entrenched, and that more importantly, the sharp slowdown in the US economy is bound to impact metals demand in other areas of the globe," said MF Global Ed Meir.

At 12.33 pm, LME copper for three month delivery was down at 8,100 usd a tonne, slightly lower than 8,216 usd at the close yesterday. After this morning's LME report copper jumped to 8,265 usd.

The LME reported today that copper stocks in its warehouses across the globe fell to their lowest level since August last year by 1,600 tonnes to 122,975 tonnes, in a daily note. Analysts said 8,000 usd per tonne is a key support level for copper.

The dollar, meanwhile, has come off lows seen in the past week, which is also weighing on the commodity sector. Raw materials priced in the greenback become more expensive as the dollar strengthens, and so it limits buying. Elsewhere, gold and oil were also down.

Sentiment towards metals has swung since the start of this year. Most analysts had warned that base metals' prices were set for sharp falls as the credit crunch lingered which meant players would sell off their holdings to raise cash and cover losses.

But, in recent weeks, commodities have become tipped as useful assets in the wake of the crisis as raw materials hold their value on a tight supply/demand balance, unlike equity markets which can crash completely. It is that perception that helped copper hit its highest ever price of 8,820 usd on March 6 at the same time as gold and oil prices tested record highs.

But, the latest trading pattern shows metals have been sold in a crisis and players continue to see them as risky assets to be liquidated in times of economic weakness.

"Base metals have once again reverted to equity watching due to the recent financial turmoil and nervousness of the markets," said Alex Heath, head of base metals at RBC Capital Markets.

In other metals, tin was at 20,720 from 20,750 usd, having hit a record 20,950 yesterday. Prices were underpinned by falling stocks and supply concerns in China, Indonesia and the Democratic Republic of Congo.

Meanwhile, aluminium was lower at 2,930 usd against 2,992 usd at the close yesterday. Nickel was lower at 30,000 from 30,100 usd, zinc was lower at 2,463 from 2,520 usd yesterday, while lead fell to 2,850 against 2,945 usd yesterday.

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