US & World Daily Markets Financial Briefing 20-05-2008

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Stocks stumble after record oil, inflation worries

NEW YORK - Wall Street fell sharply Tuesday after oil prices spiked to a new record above $129 a barrel and a government report raised investors' concerns about inflation. The Dow Jones industrials fell more than 150 points.

Crude jumped after OPEC's president was quoted as saying his organization won't increase its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high of $129.31 on the New York Mercantile Exchange.

Meanwhile, the government reported that higher energy and food prices might be seeping into other parts of the economy. The Labor Department reported wholesale inflation edged up by 0.2 percent in April following a 1.1 percent jump in March.

Outside of food and energy, prices rose by a faster 0.4 percent -- double what analysts expected.

Rising prices for gasoline and utilities prices are affecting both companies and consumers, and the government report shows price pressures are expanding. Wall Street is concerned that a dropff in consumer spending could ensue if wholesale price increases are passed along; consumer spending is critical because it accounts for more than two-thirds of the U.S. economy.

In midmorning trading, the Dow fell 152.42, or 1.17 percent, to 12,875.74. Broader market indexes also retreated. The Standard & Poor's 500 index shed 10.69, or 0.75 percent, to 1,415.94, and the Nasdaq composite index dropped 23.95, or 0.94 percent, to 2,492.14.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, fell to 3.80 percent from 3.83 percent late Monday.

Gold prices were higher, and the dollar was mixed against other major currencies. Concerns about rising inflation, spurred by higher prices for commodities, was the topic of a speech by Federal Reserve Vice Chairman Donald Kohn. The policymaker said he was cautiously upbeat that the economy will recover, and that the central bank "appears to be appropriately calibrated" to manage inflation over the medium term.

Meanwhile, the Federal Reserve Bank of Chicago issued a report that showed U.S. economic activity weakened further in April and reached its lowest level since the 2001 recession.

In addition, the International Council of Shopping Centers and UBS Securities showed chain-store sales fell 0.4 percent during the week of May 17, down from 1 percent the previous week. Investors also mined earnings reports from Home Depot Inc., Target Corp. and Staples Inc. for clues about consumer spending.

Home Depot fell 95 cents, or 3.2 percent, to $27.94 after it reported first-quarter profit fell 66 percent amid a continued housing slump. Target reported that profit dropped almost 8 percent on higher costs, but it was still able to beat expectations. Shares rose 30 cents to $55.22. Staples said profit rose 1.5 percent during the quarter, and reaffirmed its outlook. Shares rose 14 cents to $23.71.

Banking stocks fell after Oppenheimer & Co. analyst Meredith Whitney said she expects the credit crisis to extend into 2009, and "perhaps beyond." She said firms like JPMorgan Chase & Co. and Citigroup Inc. have set aside $25 billion to cover losses, but might have to set aside about $170 billion by the end of next year.

Citi fell 34 cents to $22.66. JPMorgan, which is holding its annual meeting on Tuesday, dropped 95 cents, or 2.1 percent, to $45.05.

Mortgage finance firm Fannie Mae was in focus after Senate banking committee leaders late Monday announced they are close to a housing bill deal that would help prevent foreclosures. They also plan to change the way the government oversees both Fannie Mae and Freddie Mac.

Fannie Mae fell 72 cents, or 2.5 percent, to $28.23. Freddie Mac declined 72 cents, or 2.6 percent, to $28.23. Advancers led decliners by a 2 to 1 basis on the New York Stock Exchange, where volume came to 126.5 million shares.

The Russell 2000 index of smaller companies fell 4.31, or 0.58 percent, to 734.14. Overseas, Japan's central bank kept interest rates steady Tuesday amid lingering worries about a global slowdown. Tokyo's Nikkei closed down 0.77 percent.

In Europe, London's FTSE dropped 1.84 percent, Frankfurt's DAX fell 1.32 percent and Paris' CAC 40 shed 1.54 percent.

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Forex - Euro lifted by ZEW chief's hawkish tone

LONDON - The euro clawed back some losses against the dollar after the head of a leading research institute in Germany suggested that the European Central Bank should raise borrowing costs if inflation remains high.

The ZEW's president Wolfgang Franz, a prominent academic, said that the ECB will raise interest rates in the coming months if inflation remains elevated in the euro zone, even though the survey from his institute suggested that the German economy is feeling the impact from the strength of the euro and high energy and food prices.

"More precisely, Franz explained that, in his view the ECB should keep rates constant until the financial market crisis ends but that the ECB may then need to raise rates to fight inflation," said Holger Schmieding, analyst at Bank of America. "As Franz seems to hope that the financial crisis could end soon, he thus seems to believe in higher ECB rates in the foreseeable future," he added.

Initially, the euro suffered a knee-jerk drop from survey. ZEW said its economic expectations index for Germany dropped to minus 41.4 points in May from minus 40.7 points in April, largely because of the strength of the euro and high oil and food prices.

The decline was unexpected. Economists polled by Thomson Financial News had expected the index to rise to minus 38.0 points. Following the data's release, the euro fell from $1.5605 to a low of $1.5536, before climbing up to a day's high of $1.5674 following Franz's comments.

Before the ZEW, the euro had been buoyed after forecast-busting German producer price inflation further cemented market expectations that the European Central Bank will not be cutting interest rates any time soon.

Figures from the Federal Statistics Office showed that producer prices in Germany rose 1.1 percent in April from March for a 5.2 percent annual gain. Both were higher than expectations. Economists polled by Thomson Financial News had expected a 0.5 percent increase month-on-month and a rise of 4.7 percent year-on-year.

The ECB has kept its rate at a six-year high of 4 percent since last June and is widely anticipated to maintain its rate until the end of the year as inflation concerns remain to the fore. The single currency has been underpinned of late by hawkish comments from the ECB, which continues to sound worried about inflation.

Last week, ECB president Jean-Claude Trichet said the central bank must be "extraordinarily attentive" to inflation and that it "is paying particularly close attention to wage negotiations in the euro area".

After the ZEW, attention will move to the U.S., where producer price data will also be published. April's Producer Price Index is expected to have increased 0.4 pct following a 1.1 pct increase in the previous month, while the core rate, which excludes highly volatile food and energy costs, is expected to have increased 0.2 pct in April, the same rate as in March.

Since it began easing rates in September, the Fed has lowered rates by a cumulative 325 basis points to 2 percent, the lowest since December 2004. The inflation data will be key to any further rate reductions from the Fed.

Elsewhere, the Australian dollar rose to a 24-year high of $0.9615 this morning after the Reserve Bank of Australia (RBA) said it stands ready to hike interest rates further if domestic demand doesn't cool sufficiently to bring annual inflation back within its target range of 2-3 percent, according to minutes from the central bank's May 6 policy meeting released on Tuesday.

The minutes showed the central bank board members spent considerable time discussing the case for a further rise in the RBA's cash target rate, currently at a 12-year high of 7.25 percent,following a series of tightening moves, the last one done in early March.

"The Aussie dollar is likely to remain in the favourites list given that the minutes of the last RBA meeting reveal a central bank that clearly came within a whisker of hiking rates again," said Simon Derrick, currency strategist at Bank of New York Mellon.

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Euroshares open down on Wall St, Asia losses; banking sector in focus

At 9:05 a.m., the DJ STOXX 50 was down 28.64 points, or 0.87 percent, at 3276.73 and the DJ STOXX 600 was off 3.12 points, or 0.94 percent, at 329.75.

Oil prices were higher in Asian trade as concerns over tight supplies overshadowed the impact of a move by Saudi Arabia to boost output. New York's main oil futures contract, light sweet crude for June delivery, was up 19 cents at $127.24 per barrel.

Barclays fell back 1.51 percent after a report it is considering a daring takeover for a rival as part of a move to raise capital from shareholders, according to The Daily Telegraph. The article suggests that Bob Diamond has looked at Lehman Brothers and UBS or a smaller target such as Alliance & Leicester.

And BNP Paribas and Deutsche Bank were 1.48 percent and 1.09 percent lower respectively after the pair both declined comment on a Dutch newspaper report that they are interested in acquiring parts of ABN Amro Holding NV that Fortis NV is obligated to sell.

Shares in interdealer broker Icap PLC were 2.99 percent lower as comments from the group that it may seek to buy rivals in the year ahead outweighed a better-than-expected set of full-year results.

Infineon fell 1.97 percent and ASML fell 2.56 percent.

And shares in Soitec SA were further weighed down after the semiconductor components maker said the conditions that led to February's full-year 2007-8 profit warning are still in place and that sales for the first quarter to June are likely to fall around 5 percent on a constant currency basis.

But Astrazeneca added another 3.98 percent after news a U.S. court will make a summary judgement on its Seroquel patent today. The date is earlier than some had been hoping and has sparked hopes no full trial will be needed.

Today's market report in the Financial Times also reported talk yesterday of a bid for the group from Schering-Plough.

Shares in BioAlliance Pharma rose 1.3 percent after the pharmaceuticals developer said it has acquired European commercial rights to ondansetron oral spray, a nausea and vomiting treatment being developed by NovaDel Pharma Inc.

And selected oil groups were also gaining as oil prices surged to new highs in Asian trade on Tuesday as concerns over tight supplies overshadowed the impact of a move by oil kingpin Saudi Arabia to boost output. In afternoon trade, New York's main oil futures contract, light sweet crude for June delivery, was up 29 cents at $127.34 per barrel.

ENI added 0.19 percent and Total added 0.14 percent.

Premier Oil added 0.97 percent after it said it found oil, gas in Vietnam's Chim So North well and as Credit Suisse upgraded the shares to 'outperform'.

Credit Suisse also upgraded Venture Production, up 2.29 percent, and Soco International, up 0.2 percent, to 'outperform' but cut Neste Oil, down 0.87 percent, to 'underperform'.

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Asian stocks retreat as inflation concerns weigh, Shanghai down 4 pct

MANILA - (Adds closing levels throughout) Stock markets across Asia ended lower on Tuesday as concerns about inflation, with oil prices hovering near a record peak above $127 a barrel, and Wall Street's mixed showing overnight prompted investors to lock in recent gains.

The Shanghai composite index slipped 4.5 percent to close at 3,443.16 as last week's devastating earthquake in Sichuan continued to dampen sentiment, while Australia ended a four-day winning streak on profit-taking in resources stocks.

Benchmarks in Hong Kong and Taiwan also fell sharply. The Hang Seng closed down 2.23 percent at 25,169.46 and Taiwan's Taiex lost 2.4 percent to end at 9,068.89, after Taiwan President Ma Ying-jeou's inaugural speech failed to inspire buying in Taipei stocks.

"The weak showing in Taiwan sparked caution in the local market," said Eugene Law, research head at Celestial Asia Securities in Hong Kong. "Investors were sort of expecting the rally to continue even after the speech, and when that didn't happen, they worried about how swiftly Ma could deliver improved (Taiwan-China) relations."

The report raised hopes that the overall economy is poised for a recovery. Healthy correction In Tokyo, the Nikkei closed 0.8 percent lower at 14,160.09 and the broader Topix was down 0.3 percent at 1,399.84. "The market paused for breath as technical data indicated signs that valuations for the companies were becoming overheated," Investrust technical analyst Hiroyuki Fukunaga said.

"I think the pause was natural and a sound one, because supply-demand conditions are seen to be improving amid extreme pessimism about a credit crunch receding," Fukunaga said.

In Seoul, the KOSPI was down 0.7 percent at 1,873.15 as investors grabbed profits in high-tech companies. Samsung Electronics lost 2.1 percent to 713,000 won and LG Electronics was down 1.4 percent at 146,500 won, both falling for a third session after they touched record highs on Thursday.

Oil stayed close to a record peak of $127.82, struck on Friday, following comments from OPEC president Chakib Khelil, who said he did not think there would be an increase in output at the cartel's next meeting in September. Expectations of higher oil demand from China following last week's earthquake also pushed the oil price higher.

In Sydney, the S&P/ASX 200 was down 0.7 percent at 5,908.1, while the All Ordinaries index lost 0.7 percent to 5,994.9.

The nation's largest investment bank, Macquarie Group, fell sharply after disappointing the market with its year to March results, which showed that earnings growth stalled in the second half as the global credit crunch reduced the group's deal-making ability.

"Expectations were that Macquarie was going to pull another rabbit out of the hat but there was no rabbit today," said Justin Gallagher, head of sales trading at ABN Amro.

Macquarie reported a 23 percent rise in annual net profit to a record A$1.8 billion ($1.7 billion) but earnings in the second half rose just 1.4 percent from a year earlier. Incoming chief executive Nicholas Moore also warned of a challenging environment in the year ahead, sending the stock more than 7 percent lower.

Macquarie Group closed down 7.3 percent at A$7.34. Index leader BHP Billiton was down 1.9 percent at A$48.61, retreating from record highs reached on Monday, while its takeover target Rio Tinto slipped 0.7 percent to A$155.00.

Elsewhere, Singapore's Straits Times Index closed down 1.3 percent at 3,199.88, while the Kuala Lumpur Composite Index slipped 1.0 percent to close at 1,287.43. Bucking the trend, the Philippine composite index rose 0.7 percent to 2,896.15.

"The market is playing catch-up with its neighbours we have lagged behind in recent rallies. There are also no major negative catalysts so far and that is providing the market with a little bit of comfort," said Jose Vistan Jr., research director at AB Capital Securities in Manila.

Indonesia's stock market was closed for a public holiday.

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Metals - Copper steadies as firm oil, weak dollar help balance demand fears

LONDON - Copper steadied midafternoon after spending much of the day in the red as a sharp rally in oil prices boosted sentiment towards commodities as a whole, and as the dollar weakened further, making the metal cheaper for holders of other currencies.

The red metal has languished for most of today as investors worried about slowing Chinese demand. Prices moved a touch higher in later trade but were unable to gain much traction as sentiment remains muted, analysts said. "Stocks and the weak state of nearby physical demand in China seem to be troubling the market right now," said Ed Meir of MF Global.

At 3:30 p.m. London Metal Exchange copper for three-month delivery was trading at $8,315 per tonne against $8,320 per tonne at the close on Monday.

Aluminium meanwhile was pressured by a 22,175 tonne rise in LME stockpiles. Added to yesterday's rise of over 10,000 tonnes, this led to aluminium stocks touching a four-year high this morning. Prices dipped to an intraday low of $2,958 a tonne before recovering in later trade to stand at $3,000 per tonne against $2,997.

Overall, the upward momentum that benefited copper and aluminium earlier in the year has eased, analysts say, as investors turn increasingly to the longer term economic forecast for direction.

With U.S. growth still sluggish and with Chinese demand for copper particularly muted at these price levels, analysts are expecting some correction in the market.

While some metals such as copper, which has been hit by a string of supply disruptions, are likely to remain well supported by underlying fundamentals, others such as aluminium, which boasts relatively healthy stockpiles, may come under pressure.

"Supply disruptions are still likely in some metals and where that is the case, prices may still have further to rise," said William Adams, an analyst at BaseMetals.com. "But where supply is adequate, where stocks are high enough to cushion against unexpected disruptions, then the likelihood of slower economic growth may well keep prices under pressure," he added.

Among other metals traded on the LME, tin fell as investors chose to lock in profits following recent gains. The grey metal slipped to $23,750 against $24,050.

Elsewhere, lead was steady at $2,188 per tonne from $2,231 per tonne at the close on Monday, nickel was flat at $26,100, and zinc was trading at $2,270 against $2,290.

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