US & World Daily Markets Financial Briefing 20-01-2009

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US Stocks Lower As Financial Fears Remain Amid UK Bailout

A new round of glum announcements from financial firms on both sides of the Atlantic rekindled investors' nervousness about the sector, which led the broader stock market lower Tuesday.

The Dow Jones Industrial Average was recently down 132 points, or 1.6%, at 8149.33, hurt by declines in all its financial components. Bank of America was the weakest, off 17%, while American Express was the strongest, relatively speaking. It was down nearly 4%.

The worst news in the financial industry, however, came from companies not in the Dow. State Street shares fell more than 50% after the asset manager late on Friday said in a regulatory filing that it's sitting on $5.5 billion of unrealized after-tax losses on its investment portfolio and $3.6 billion in unrealized losses in conduits. The company said on Tuesday that its fourth-quarter earnings dropped 71%.

Regions Financial reported a $6.2 billion loss. Its shares were down almost 11%.

The S&P 500 was recently down 2.3%, trading at 830.24, led by an 8% slide in its financial sector. All its other categories have also wallowed in the red throughout Tuesday's session, except consumer staples, a traditional defensive play that has teetered between gains and losses.

The Nasdaq Composite Index was down 2.5%, trading at 1490.83. The Russell 2000 was down 3.3%, trading at 451.22.

U.S. investors were also spooked by developments overseas, especially in London, where the British government announced an aggressive expansion of its financial-rescue plan amid continued signs of pain at major British firms. The New York-listed shares of Royal Bank of Scotland, which forecast a 2008 loss of up to $40.5 billion, recently plummeted 69%. Barclays tumbled 39%. HSBC Holdings slid almost 15%.

Worries about the U.K. government's exposure to the nation's troubled banking sector sent the British pound to historic lows against the dollar and the yen on Tuesday. The pound traded below the $1.40 level for the first time since 2001.

In recent action, the dollar strengthened against other major rivals as well. The U.S. Dollar Index, which measures the greenback's value against a basket of six overseas denominations, was up more than 1%.

As trading resumes on Wall Street following a day off in recognition of Martin Luther King Jr.'s birthday, President-elect Barack Obama will be sworn in as America's 44th president at noon EST. Over the weekend, Obama adviser Larry Summers said that the second half of a $700 billion U.S. bailout fund will come with more strings attached.

Commodity prices were mixed. Crude-oil futures held steady at $36.50 a barrel in New York. Gold futures climbed $16.90 to $856.80 per ounce. The broad Dow Jones-AIG Commodity Index rose 1.3%.

Treasury prices fell. The two-year note was down 1/32, yielding 0.749%. The 10-year note fell a full point to yield 2.448%. The 30-year bond fell 2-25/32 to yield 3.032%.

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Pound Nearly In Freefall, Dollar's Obama Bounce

LONDON -- The pound is nearly in freefall in Europe Tuesday as concern over the U.K. banking system continues to eat away at investor confidence.

The dollar, meanwhile, is mostly higher, lifted by apparent optimism over the inauguration of President-elect Barack Obama later in the day.

The withdrawal from U.K. assets sent gilt prices tumbling as Jim Rogers, chairman of the Singapore-based Rogers Holdings, warned that the "U.K. is finished." Rogers was a cofounder of the Quantum Fund with George Soros.

The decline in the pound has taken it down to a new record low under Y127.00. Sterling has also fallen to $1.3940, its lowest level against the dollar since July 2001.

Negative sentiment has mounted over the last day or so as the U.K. Treasury's latest bailout of the country's banks, announced Monday as the Royal Bank of Scotland warned of a possible GBP28 billion loss in 2008, has failed to convince investors that the worst is over for the U.K. economy.

Analysts said that investors were selling gilts not only because of the fall in the pound but also because gilt supply is set to explode as the government seeks to fund its various economic rescue packages.

As investors pored over the details of the U.K. bailout and watched the RBS share price collapse by nearly 70%, risk appetite quickly declined.

Although the U.S. was closed for a holiday Monday, Dow futures were marked lower and the Nikkei Index fell 2.3% on general concerns over the global economy. High-yielders were generally depressed with even the dollar starting the European day lower against the yen.

However, as European trading got underway, some optimism crept in as investors started to bet on the so-called "Obama bounce" -- a general hope that the new president will inject fresh vigor into the U.S. economy. This helped to turn the dollar higher against most other major currencies, but only accelerated the pound's decline against the U.S. currency.

The euro was also a major loser. The single currency had already been under pressure because of Monday's downgrade by S&P of Spain's sovereign debt.  Poor European Union Commission growth forecasts and expectations of a further deterioration in German consumer confidence later in the day are all adding to the euro's woes.

By 0945 GMT, the pound had fallen to $1.3984 from $1.4502 late Monday in New York, according to EBS. The dollar rose to Y90.92 from Y90.61, while the euro fell to $1.2948 from $1.3125. The single currency also fell to Y117.80 from Y119.01 while the dollar rose to CHF1.1447 from CHF1.1311.

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European Shares Mixed; Banks Slide Again

Most banks dropped again in Europe on Tuesday, weighing on the broader market, as investors continued to worry about the prospect of write-downs and government stakes.

The pan-European Dow Jones Stoxx 600 index declined 0.8% to 188.25 as the banking sector dropped 2.6%.  Shares of Credit Suisse fell 5.3%, and shares of Lloyds Banking Group (LYG) slumped 22.3%. "The sector started to rally this morning, but that ended as everyone's extremely nervous," said Philippe Gijsels, strategist at Fortis.

"Overall, it's clear that we're not at the end of the write-downs. It's a sector problem and they will have to continue to raise capital which is extremely difficult in this market or governments will have to step in," said Philippe Gijsels, strategist at Fortis.

Royal Bank of Scotland, which dropped more than 65% on Monday after the U.K. government said that it would take a larger stake in the lender and the bank said it would report a huge loss, rose 12.9%. "What the market was fearing especially was that RBS would be totally nationalized which would wipe out the shareholders," noted Gijsels.

BNP Paribas shares dropped 7.9%. Societe Generale slashed its rating on BNP Paribas to sell from buy, saying it believes there's a high probability the group will have to make a capital increase given the bad market conditions and the likely difficulty of selling assets.

"As long as you have this bad news for the financial sector, it will be very hard for the market to have a decent rally," added Gijsels. Still, national markets weren't performing as badly as the Stoxx 600 index, helped by gains from telecoms such as Vodafone Group, up 2.5%.

Overall, the French CAC-40 index declined 0.1% to 2,985.28, the German DAX 30 index rose 0.1% to 4,318.68 and the U.K. FTSE 100 index climbed 0.6% to 4,132.80.

Asian markets traded lower on Tuesday as did U.S. stock futures. Meanwhile, U.S. trading resumes Tuesday after a holiday weekend. Barack Obama takes power as the 44th U.S. president on Tuesday and his inauguration speech is expected to lay out an agenda for change in troubled times.

"We already have details of the $825 billion fiscal stimulus package. On some estimates the package will raise GDP by around 3% to 4% over the next couple of years and save or create around 3.5 million jobs. Success will crucially depend on the bank lending channel," noted economists at UBS.

European companies detailing on Tuesday how they are coping with the economic downturn included Burberry Group , up 10.3%.

Revenue in the three months to Dec. 31 rose 30%, boosted by currency moves. Merrill Lynch noted that the revenue came in 14% above expectations. Burberry is aiming cut costs further and plans to restructure its Spanish operations and consolidate U.K. manufacturing, with the potential loss of up to 540 jobs.

German supermarket operator Metro rose 5.8% after it also launched a cost-cutting and restructuring program, which it said has the potential to improve its profit by 1.5 billion euros ($1.9 billion) through 2012.

Alstom shares jumped 6% in Paris as the French power systems and transport firm said that third-quarter sales totaled 4.6 billion euros, up 11% compared to the same point a year ago. Orders booked in the quarter totaled 6.1 billion euros, a level Alstom termed "very satisfactory." "All the focus is on orders and here the number was well ahead of consensus," noted Merrill Lynch analysts.

However, shares in Air France-KLM dropped 8.8%. The company said it will record an operating loss in the third quarter of fiscal 2009 due to a slight weakening in passenger unit revenue and a strong decline in cargo revenue.

For fiscal 2009, the airline said operating income should remain positive, but the level of profit will depend on how the economic situation develops in the coming weeks. Logitech International shares slumped 10.5% as the Swiss-American computer mouse maker reported a 70% profit fall in its fiscal third quarter.

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Asian Shares End Lower; Fincl Sector Woes Take Center Stage

SINGAPORE - Shares in HSBC Holdings and other banks slumped across Asia Tuesday, leading to red ink around the region.

Techs were among big decliners in Tokyo as the yen gained ground against the euro, making Japanese exports less competitive on global markets. Only China bucked the overall negative trend, with stocks on the mainland ending in positive territory.

Analysts said the declines in Asia were largely a reaction to the U.K. government's latest steps to rescue its banking system and growing concerns there will be no quick fixes to the most serious banking and credit crisis in a generation.

"The plan highlighted the depth of problems of the global banking sector despite the write-downs that have already occurred. The focus is now on the remaining write-downs, which will probably be of the same magnitude that we have seen so far," said Dariusz Kowalczyk, chief investment strategist with SJS Seymour in Hong Kong.

Japan's Nikkei 225 finished 191.06 points lower, or 2.3%, at 8,065.79. South Korea's Kospi Composite was off 2.1% at 1,126.81, Taiwan's main index ended 2.8% lower at 2,242.61, and Shanghai's Composite index was up 0.4% to 1,994.11.

Hong Kong's Hang Seng Index eased 3.3% at 12,959.77, and Australia's benchmark S&P/ASX 200 index ended down 3.1% at 3476.6.

Singapore's Straits Times index ended 1.8% lower, Malaysia's Composite index fell 1.1%, Philippine shares were down 1.3% and Thailand's main index was down 1.1%. Indonesian shares were down 0.5%.

"The selloff in financials shows it is premature to call time on sector-based risk aversion," said analysts at UBS. "There are plenty of factors arising from the banking sector and the economy globally that (may) sharply limit or force an unwind in risk-seeking flows."

There was some stop-loss selling in Japan and elsewhere; risk aversion was also hitting currencies with the euro and British pound falling against the U.S. dollar, hurt by dismal euro-zone economic data and weakness in the U.K. banking sector.

Some analysts said regional Asian stocks were likely to firm up in the coming days as Mr. Obama's economic team takes office. "Markets will trade on hope the new administration will bring out fresh solutions that should help avert a deepening of the crisis," said SJS Seymour's Kowalczyk.

But others warned the euphoria attached to the new administration and a coming fiscal stimulus package was overdone. One of Mr. Obama's biggest initial tasks could be managing expectations, with his administration unlikely to be able to quickly improve the consumer mood.

The same holds true elsewhere: In Australia, Harvey Norman chairman Gerry Harvey told local radio the government's stimulus package had helped December sales but "I've looked at my first couple of weeks (of January sales and) they're not good."

Singaporean shares were lower even as investors anticipated large-scale spending in the government's budget Thursday. "The bullish impact of budget goodies could dissipate within days amid renewed bearish developments in the U.S., on top of a slew of likely earnings shocks during the reporting period," said AmFraser Securities head of retail research Najeeb Jarhom.

Among banks in Sydney, ANZ Bank was down 5.1% with Commonwealth Bank of Australia falling 3.9 %. Credit Suisse lowered its recommendation on banking stocks in Australia to underweight.

In Japan, Mizuho Financial Group fell 6.2% with Sumitomo Mitsui Financial Group down 3.8%, while Korea's KB Financial was down 5.3% and Cathay Financial fell 4%.

Techs dropped in Tokyo, Seoul, and Taiwan, with Samsung Electronics off 2.3%, Sony down 2.6% and Taiwan Semiconductor Manufacturing off 3.4%.

Shares of Toyota Motor Corp. shrugged off the gloom, rising 2.3%. Late afternoon the Nagoya-based automaker said worldwide sales of Toyota vehicles fell 5% in 2008 to just shy of 8 million units and announced a management shuffle that will see founding family member Akio Toyoda appointed to helm the company, pending a shareholder vote in June.

Hong Kong heavyweight HSBC was a large drag on the Hang Seng for another day, ending down 7.7%, its seventh-straight session of losses. The bank said in a statement to the local stock market Tuesday it was not seeking capital support from the British government.

New Zealand's market ended 1.4% lower as Contact Energy closed out the session down 9.4% after warning of lower profits for the current fiscal year. Origin Energy, which owns 51.4% of Contact, fell 5.3% in Sydney.

In Hong Kong, shares of Foxconn International Holdings closed 7.3% lower after the maker of cellular handsets for companies such as Nokia Corp warned its net profit for 2008 would show a "significant decline" from a year earlier. Shares of TPV Technology fell 10.5% after the flat-screen monitor maker also issued a profit warning.

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Gold Down, Tracking Weaker Euro

LONDON -- Spot gold was lower in European trading Tuesday, weighed by euro weakness against the dollar.

At 0921 GMT spot gold was trading at $827.67 a troy ounce, down 1% from Monday's close. Spot silver was at $10.97/oz, down 1.4%. Spot platinum was at $938.50/oz, down 1.1%. Spot palladium was at $179.50/oz, down 1.4%.

European stocks opened cautiously higher despite expectations for a lower opening. The dollar was stronger against the euro and crude oil was trading lower.

Barack Obama will be inaugurated Tuesday, and that could give the U.S. markets a temporary boost, traders said.

Spot gold and the precious metals complex as a whole were lower Tuesday, tracking the euro lower against the dollar, said a London-based trader. He said the short-covering rally at the end of last week was showing no signs of follow-through so traders decided to sell.

Gold prices could be pressured further if the euro is weakened by poor eurozone data and lower equities in Europe, said Standard Bank analyst Walter de Wet. He also said the dollar could find support with Barack Obama's inauguration Tuesday, which would push gold prices down.

Precious metals, and particularly gold, will continue to trade as a reflection of the currency basket, Goldman Sachs' Jeff Currie said. A basket of the euro, yen, Australian, Canadian and U.S. dollar and the rupee is a "very good reference of where the gold price goes," he said.

Unless there is a "radical" change in the financial markets the precious metal will remain connected to currency moves, Currie said.

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