US & World Daily Markets Financial Briefing 20-02-2008

Stocks slide after weak economic reports

In midmorning trading, the Dow Jones industrial average fell 90.78, or 0.74 percent, to 12,246.44. Broader stock indicators also declined. The Standard & Poor's 500 index fell 9.46, or 0.70 percent, to 1,339.32, and the Nasdaq composite index fell 9.77, or 0.42 percent, to 2,296.43.

Bond prices showed little movement. The yield on the 10-year Treasury note, which moves opposite its price, stood flat at 3.87 percent late Tuesday. The dollar was higher against most major currencies, while gold prices fell.

Light, sweet crude oil on the New York Mercantile Exchange fell $1.15 to $98.86 a barrel. Oil closed above $100 for the first time Tuesday, derailing a stock market rally and renewing Wall Street's inflation concerns.

Investors are concerned that inflation could accelerate at the same time the economy suffers under tough credit conditions. The phenomenon of slowing growth and surging prices is known as stagflation.

On Wednesday, the Financial Times reported that KKR Financial Holdings LLC, a listed affiliate of U.S. private equity group Kohlberg Kravis Roberts & Co., has delayed repayment of billions of dollars of commercial paper for the second time. Commercial paper are short-term bonds companies sell to quickly raise cash; demand for commercial paper began drying up last year, choking the credit markets.

KKR Financial fell 65 cents, or 4.5 percent, to $13.88.

While some banks have weathered the credit storm relatively unscathed -- Netherlands-based bank ING Groep NV reported an 18 percent gain in fourth-quarter net profit Wednesday -- most have seen significant losses. BNP Paribas SA confirmed that fourth-quarter net profit dropped 42 percent after its credit-related investments shed about 1.2 billion euros, or $1.76 billion, in value.

In other earnings news, Hewlett-Packard Co. late Tuesday posted a 38 percent surge in fiscal first-quarter profit thanks to an increase in computer sales. Hewlett-Packard shares rose $2.89, or 6.6 percent, to $46.84.

Meanwhile, a $20 billion deal to combine Delta Air Lines Inc. and Northwest Airlines Corp. is in danger, according to two people close to the discussions, because of an impasse among pilot negotiators over how to determine seniority for the 12,000 pilots involved. Delta fell 37 cents, or 2.2 percent, to $16.40, while Northwest declined 52 cents, or 3.1 percent, to $16.45.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 234.9 million shares.

The Russell 2000 index of smaller companies fell 3.89, or 0.55 percent, to 698.45.

Overseas, Japan's Nikkei stock average closed down 3.25 percent. In afternoon trading, Britain's FTSE 100 dropped 1.46 percent, Germany's DAX index lost 1.53 percent, and France's CAC-40 fell 1.33 percent.

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Forex - Dollar strengthens after faster-than-expected rise in US inflation

LONDON - The dollar strengthened after US data revealed a faster-than-expected rise in consumer price inflation in January, raising fears the Federal Reserve may not be able to keep cutting interest rates as aggressively as markets hope.

The Labor Department said overall prices rose 0.4 pct, slightly above the 0.3 pct rise expected by economists polled by Thomson's IFR Markets, and pushing the annual rate of inflation back up to November's two-year high of 4.3 pct.

Core inflation, which strips out volatile food and energy prices, rose 0.3 pct in January, slightly more than the 0.2 pct expected. On an annual basis, core inflation was up 2.5 pct year on year, the highest since Feb 2007.

"This rebound in inflation couldn't have come at a worse time for the Federal Reserve," said Paul Ashworth, senior US economist at Capital Economics. "Persistently high inflation could take away the Fed's flexibility to respond more aggressively to reduce borrowing costs, just at the time it needs that flexibility the most," he added.

US housing starts figures were also released by the Commerce Department and showed a modest rebound, rising 0.8 pct to a 1.012 mln unit annual rate, very slightly above Thomson IFR Markets' expectations for 1.010 mln units.

"This remains very low historically but the mere fact that starts did not fall any further may be seen as a relief," said Audrey Childe-Freeman, senior economist at CIBC World Markets.

The strength of the US data added to the pound's woes, pushing it briefly to a four-week low against the dollar at around 1.9360 usd. The pound had already come under pressure earlier after the Bank of England's latest interest rate deliberations, revealed this morning, suggested more rate cuts ahead.

The currency has been on the back foot all week, with the nationalisation of ailing mortgage lender Northern Rock adding a new sense of uncertainty at a time when the overall economy is predicted to slow rapidly. Also this week, two BoE rate setters appeared to signal that they remain in the rate cutting camp. Independent members of the rate setting panel, Tim Besley and Kate Barker both highlighted downside risks to the economy.

Today, it emerged that while the majority of rate setters chose to lower rates by a quarter point to 5.25 pct earlier this month, there was one dissenting vote for a more dramatic 50 basis point reduction from arch-dove David Blanchflower. Markets had been betting on a unanimous vote.

"The Bank of England remains on course for lower rates as the central Monetary Policy Committee concern remains the risk of weaker growth ahead," said David Brown at Bear Stearns. "The easing bias remains intact, especially while the MPC remain worried about the fall-out effects from the credit crunch on the economy," he added.

Attention will turn back to the US tonight, with the minutes to the Fed's last rate setting meeting of Jan 30 due, which will also be accompanied by its latest forecasts for GDP growth, inflation and unemployment.

"Since the forecasts are not quarterly, they will not clearly tell us whether the Fed is forecasting two consecutive quarterly growth contractions (ie recession), but markets could come under severe pressure once the Fed affirms further slowdown in its forecasts as chairman Ben Bernanke alluded to in last week's Congressional testimony," said Ashraf Laidi, chief FX strategist at CMC Markets.

In his testimony to the Senate Banking Committee, Bernanke had predicted there would be a "period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal policy stimulus begin to be felt".

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Euroshares open lower, reported KKR refinancing issues spark sell-off

At 8.49 am, the DJ STOXX 50 was 31.29 points or 0.97 pct lower at 3,209.70, while the STOXX 600 lost 2.96 points or 0.91 pct to 321.20.

In Europe, markets partly mirrored the sell-off seen in Asia overnight and banks and financials were the sharpest decliners. Regarding earnings news in the sector this morning, BNP Paribas outperformed the wider market this morning, down 0.12 pct, following the release of its full year results.

The figures were in line with analyst expectations and the group said write-downs related to the subprime crisis totaled 1.2 bln. It showed confidence for the remainder of 2008 and said it expects to continue to outperform in 2008.

Insurer ING Groep also bucked the trend, and moved 1.01 pct higher, after it reported lower than feared subprime or Alt-A impairments. Rabo Securities said ING's 194 mln eur pretax losses through the profit and loss sheet on subprime and related issues were below its forecast of 200 mln eur.

Over in the UK, Alliance & Leicester performed a 13 pct nosedive after reporting a slump in full year core operating profit, due to large scale write downs.

Banco Comercial Portugues on the other hand lost 6.68 pct following disappointing earnings news after the close last night. UBS reiterated its 'sell' rating and said the bank's 1.3 bln eur rights issue is "significantly larger than expectations".

Also among financials, MLP, Alliance & Leicester and Allied Irish Banks are presenting preliminary results today. Turning to utilities, France's EDF held its ground in morning trade, down 0.85 pct after the French utility beat expectations with its full-year earnings results.

In a note to clients, analysts at Natixis said the group's results came in above its expectations and noted that the outlook presented as well as the group's cost reduction and investment programmes were cautious. Spanish peer Iberdrola was also slightly outperforming its index -- the IBEX -- as it traded 0.9 pct lower, after it released a set of consensus-beating full-year results.

Elsewhere, Heineken was the biggest faller on the STOXX 200, down 5.92 pct, after the brewer reported full-year results broadly in line with analyst forecasts but failed to provide concrete guidance. Meanwhile, Fresenius Medical Care climbed 1.55 pct higher after the group exceeded expectations with its fourth quarter earnings report.

Analysts at Commerzbank reiterated their 'buy' rating and 47 eur target on the stock and said the results released this morning were a "favourable mix" and "better than expected". In addition, investors will mull over earnings results from Deutsche Boerse, Schneider Electric, TF1, Swedish Match, Espresso and Hagemeyer.

In other news, ArcelorMittal shares, up 1.17 pct, were boosted by news that the group bought back 25 mln of its own shares from key shareholder Carlo Tassara International for or 46.60 eur per share, as part of its buyback program.

Regarding economic data, the minutes to the Bank of England's Feb 7 meeting are set to reveal a unanimous vote of the nine-member Monetary Policy Committee to cut interest rates by a quarter point to 5.25 pct.

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Asian markets hit by report KKR unable to roll over commercial paper

The Nikkei closed down 3.3 percent at 13,310.37 and the broader Topix was down 3.2 percent at 1,302.72. Investors were further unsettled by a Nikkei report that the government will downgrade its view of the economy for the first time in 15 months in February, due to weak exports and a slowdown in production.

"There are also concerns about the sustainability of profit growth at Japanese companies due to higher material costs and uncertainty about the yen, which will prevent investors from buying actively into the stock market," said Yutaka Miura, analyst at Shinko Securities.

The S&P/ASX 200 closed down 2.2 percent at 5,496.5 and the All Ordinaries slid 2 percent to 5,577.3. The Shanghai Composite was down 1.8 percent at 4,582.03, while Hong Kong's Hang Seng index closed down 2.2 percent at 23,590.58.

The Kospi was down 1.9 percent at 1,687.91 and the Kuala Lumpur Composite closed down 0.8 percent at 1,414.32. The Singapore Straits Times slipped 2.3 percent to 3,026.83. The Philippines Composite was down 0.3 percent at 3,181.05.

The Jakarta index closed down 0.8 percent at 2,689.26, and Taiwan's weighted index closed down 1.6 percent at 7,894.47.

Metals prices rallied with oil -- gold futures gained almost 3 percent and platinum surged more than 4 percent to a record high.

The National Association of Home Builders reported a small improvement in their February survey although the rise to 20 from 19 was expected. 

The news weighed on financial stocks across Asia. In Hong Kong, Bank of China was down 1.82 pct at 3.24 Hong Kong dollars. HSBC was down 1.49 pct at 112.70 dollars. In Tokyo, Mitsubishi UFJ Financial fell 4.4 percent to 919 yen and Mizuho Financial Group lost 4.2 percent at 430,000 yen.

Commonwealth Bank of Australia slumped 4.3 percent to 43.33 Australian dollars, National Australia Bank dived 3 percent to 29.56 dollars, Westpac dropped 3 percent to 22.45 dollars and Australia & New Zealand Banking Group gave up 2.7 percent to 22.0 dollars.

Woodside Petroleum surged 4.6 percent to 53.59 dollars even after reporting full-year net profit fell 28 percent to 1.0 billion dollars as asset sale losses and strong Australian dollar outweighed higher production and commodity prices.

"Woodside is a long-term stock -- it's got absolutely quality assets. Even if its reports here and there aren't all that flash it's the longer term you look at for Woodside and that's what makes it attractive," said Michael Heffernan, a private client advisor at Austock Securities.

Santos increased 3.0 percent to 14.34 dollars and Oil Search added 0.7 percent to 4.41 dollars. CNOOC rose 0.8 percent to 12.78 Hong Kong dollars, while PetroChina was down 2.17 pct at 11.70 dollars. Refiner Sinopec was down 4.8 pct at 8.72 dollars.

The Bombay Stock Exchange's 30-share Sensex fell 458.06 points or 2.53 pct to 17,617.60 while the National Stock Exchange's 50-share S&P CNX Nifty dipped2.39 pct to 5,154.45 points.

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Metals - Copper retreats after hitting 4-month highs

The LME said in a daily report copper stocks held in bonded warehouses fell again, this time by 2,725 tonnes to total 137,625 tonnes, with 105,325 of that total available to the market. LME stocks are at their lowest points since mid-October last year and have fallen from nearly 200,000 tonnes at the start of the year to below 140,000 tonnes.

"Copper is fundamentally a very tight market, there no doubt about that... there's a lot of talk of high stocks in China but generally it's a tight market," Standard Chartered analyst Dan Smith said. He expects the market to trend lower today, especially as background concerns over the demand outlook remain, given the economic slowdown in the US and elsewhere.

In addition, a broad-based retreat in other commodities is also likely to pressure copper. Oil prices are trading down today having hit a new record high of 100.10 usd yesterday, while the precious metals are on the retreat, with gold falling sharply and platinum was off its recent all time peak.

At 9.54 am, LME copper for three-month delivery was down at 8,150 usd per tonne against 8,190 usd at the close yesterday, when it hit 8,225 usd, its best level since mid-October.

Analysts said while the 8,200 usd level remains a key resistance point, the market is clearly gearing up to test 8,300 usd and eventually the record high of 8,800 usd per tonne. "If stocks do continue to decline and nearby spreads remain steady, then any fresh buying from the Chinese or need for spot material can easily push the market to re-test those highs," analysts at RBC Capital Markets said.

"Only an inflow of spot material will elevate the short-term problem but be prepared that nothing really moves in one direction for too long and short-term profit-taking may cause some extra volatility for those just joining the party," they said.

Overall, however, the strong inflow of fund money into commodities is likely to keep the metals underpinned, especially if demand from top consumer China remains strong. Chinese players are currently restocking after Lunar New Year holidays. In addition, there are expectations buying might pick up as authorities move to rebuild power pylons damaged by last month's severe snow-storms.

Dresdner Bank analyst Peter Fertig said while China remains a plus for metals like copper, the major push seen yesterday afternoon was due to strong fund flows. "Rising inflation fears induced funds to pile money into commodities (yesterday) and thus, they just caused what they are concerned about," Fertig said.

Elsewhere, three-month lead was up slightly at 3,150 usd per tonne against 3,145 usd, having hit a three-month high of 3,189 overnight amid worries market balances are tightening.

"The lead price rose by 3.9 pct (yesterday), influenced by a fall in LME lead stocks and the perception that the lead market is likely to remain tight," Commonwealth Bank of Australia analyst David Moore said.

Aluminium fell to 2,861 usd against 2,872 usd, having revisited a recent nine-month high of 2,873 usd earlier amid ongoing concerns over whether aluminium smelters in South Africa will continue operating this year.

South Africa is currently in the grips of a power crisis that has led state utility Eskom to ask mines and major industrial users to reduce output to 90 pct of normal needs. In addition, there was speculation last week that the utility is planning to ask energy intensive aluminium smelters in South Africa and Mozambique to shut down for all of 2008.

Smith of Standard Chartered said he doubts such severe measure will ultimately be put in place. All the same, however, output will be constrained as Eskom, by its own admission, sees power shortages lasting through to 2012.

In other metals traded, zinc dropped to 2,400 usd a tonne against 2,445 usd, nickel fell to 28,100 usd against 28,200 usd while tin bucked the trend, trading flat at 17,050 usd.

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