US & World Daily Markets Financial Briefing 21-01-2009

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US Stocks Stage Early Recovery, Financials Higher

Financial names again led the stock market Wednesday, this time prompting a rally following a round of mixed earnings news.

The Dow Jones Industrial Average, which slid 332 points in the previous session due to worries about major banks, recently recouped 86.9 points to trade at 8035.99, up 1.1%. The S&P 500 rose 1.3% to 815.73. All its sectors were higher, led by financials, up almost 7%.

Among the Wall Street bellwethers announcing earnings, Northern Trust rallied almost 24% after saying that its fourth-quarter profit nearly doubled. PNC Financial Services Group rose 19% after forecasting a quarterly loss due to its acquisition of National City. However, PNC said it doesn't plan to seek additional capital beyond the $7.6 billion it has received from the U.S. Treasury Department's bailout fund.

Hudson City Bancorp reported a jump in earnings, while BlackRock reported a plunge. But both companies' shares slipped more than 1% in recent action.

U.S. Bancorp was down almost 11% after saying that its earnings fell 65% due to rising credit costs and securities losses. But the company still posted a profit.

Veteran traders and analysts say the fate of the sagging financial industry is still largely in the hands of government officials. With that in mind, many market participants are paying attention to Treasury Secretary-designee Timothy Geithner's Senate confirmation hearing, which is just underway.

Geithner, who currently serves as president of the Federal Reserve's New York branch, is expected to face tough questions about why the previous $700 billion bailout of the financial sector didn't work and more funds are required to clean up the mess.

Among stocks to watch outside the financial sector on Wednesday, a pair of blue chips put in a mixed performance despite announcing solid quarterly profits. International Business Machines was up nearly 8% after bucking the trend of high-tech competitors by posting a 12% increase in fourth-quarter profit late Tuesday. IBM also gave an upbeat outlook for 2009.

Industrial conglomerate United Technologies slipped 1% despite beating analysts' expectations by a penny as its quarterly profit jumped 8%.

The Nasdaq Composite Index was up 1.5%, trading at 1462.56 in recent action. The Russell 2000 was up 1%, at 438.11. Most overseas stock markets fell as financials declined overseas, echoing the drop seen in the U.S. Tuesday.

The British pound was battered again versus the dollar amid fear about that nation's ailing banks and the government's costly efforts to assist them. However, the dollar weakened versus the euro and Japanese yen.

Commodity prices were mixed. Crude-oil futures inched up 52 cents to $41.36 a barrel. Gold contracts were down $1, trading at $854.20 per ounce in New York.

Bond prices fell. The two-year note slipped 4/32 to yield 0.765%. The 10-year note was off 28/32, yielding 2.475%.

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Sterling Still Falling, Risk Aversion Rising

LONDON -- Sterling is down by nearly another cent against the dollar in Europe Wednesday as rising risk aversion and concerns about financial stocks continue to dominate market sentiment.

Hopes that the inauguration of the new U.S. president would bring a so-called "Obama bounce" proved unfounded, with investors continuing to pull out of equities.

Paul Robson, a foreign exchange strategist with the Royal Bank of Scotland Group PLC, described conditions as perfect for selling the pound. "Synchronized fear over capitulating financials, deepening recession and massive bond issuance spells a perfect storm for sterling," he said.

Since the start of the week, the pound has lost nearly 12 cents against the dollar, falling from over $1.4900 on Monday.

Market sentiment is dominated largely by the concern over financials. News that State Street Corp. (STT), a largely U.S. custodian bank, had $9.1 billion of unrealized losses at the end of last year injected fresh concerns over the banking system as a whole.

Geoffrey Yu, a currency strategist with UBS AG in London, asked: if a bank that is generally considered as being in a "relative safe harbor" business clocks up losses like that, what are fourth quarter results of other global financials going to be like?

The euro also rebounded from its lows, largely because of profit-taking with investors anxious to cash in on the single currency's recent slide.

Additional support could also have come from European Central Bank President Jean-Claude Trichet's latest comments that the risks to euro-zone growth remain on the downside and that the risk of inflation has continued to diminish. This suggests that the ECB might be more prepared to continue lowering interest rates.

By 1002 GMT, the pound was down at $1.3833 from $1.3932 late in New York Tuesday, according to EBS. The dollar was up a little at Y89.81 from Y89.71 while the euro rose to $1.2934 from $1.2900. The euro was also up at Y116.15 from Y115.72 while the dollar was down at CHF1.1413 from CHF1.1470.

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London Shares Lower; Lloyds, Barclays slide

Lloyds Banking Group and Barclays dropped sharply again in London on Wednesday, with the move keeping downside pressure on the broader market.

Lloyds Banking Group (LYG) shares fell 14.7%, while Barclays (BCS) shares dropped 20.4% in the FTSE 100 index.

It's been a week of sharp losses in the sector as investors fretted that the government will be forced to take full control of lenders, a move that could wipe out equity holdings.

So far, the British government has nationalized Northern Rock and Bradford & Bingley, and on Monday it upped its stake in Royal Bank of Scotland to roughly 70%, a move that prompted a drop of more than 65% in the lender's shares on that day.

Royal Bank of Scotland shares were trading up 4.9% at 11 pence in London on Wednesday.

Meanwhile, J.P. Morgan analysts noted that Standard & Poor's and Fitch lowered their ratings on RBS hybrid debt to sub-investment grade late Tuesday and said that this could have implications for life insurers.

"The risk factor for U.K. insurers would be a widespread re-rating of hybrid debt for U.K. banks/insurers that would lead to higher provisions for defaults and reported losses," they said.

Aviva shares fell 4% and Friends Provident shares fell 2.9%.

The government and the Bank of England will continue to try and boost lending to support the financial sector and Bank of England Governor Mervyn King said in a speech Tuesday night that the bank will soon have a plan to buy assets if needed.

King also said, according to remarks delivered to a business group in Nottingham, that the economy's downward momentum likely intensified in the fourth quarter, and warned that the contraction would probably continue at a "marked" pace over the first half of this year.

The British pound fell to another all-time low against the Japanese yen and hit its lowest level versus the U.S. dollar since 2001 on Wednesday. It recently traded down 0.9% at $1.3746 against the dollar.

Overall, the U.K. FTSE 100 index dropped 1.8%, or 71.65 points, to 4,019.81. Other European shares also fell.

Back in London and shares of mineral extractor BHP Billiton (BHP) dropped 2.5%. It said that it will indefinitely suspend its Ravensthorpe nickel operations in Australia and reduce the rate of mining at its Mount Keith operation.

BHP's chief financial officer Alex Vanselow said the Melbourne-based company will cut about 6,000 workers because of weakening demand for its commodities.

Most other mineral extractors and oil producers were trading lower in London on Wednesday, with BP (BP) down 4.8% and Royal Dutch Shell (RDSA) shares down 3.9%.

However, Tullow Oil bucked the lower trend, rising 1.5% after it said that it will sell new shares representing around 9.1% of its existing issued share capital to finance growth opportunities in Ghana and Uganda. Separately Tullow said that production averaged 66,000 barrels of oil equivalent per day in 2008, in line with previous guidance.

Shares in household goods and food group Unilever (UL)(UN) rose 1.1% after Citigroup upgraded it to buy from hold. The broker said that it expects the company to report stronger margins in 2009 as input costs decline. Citigroup said margin could improve by 4.1 percentage points compared to 2008.

"Notwithstanding consumer down trading, retailer pressures and the need for reinvestment, we believe that operational earnings risk is distinctly biased to the upside," the broker said.

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Asian Shrs End Lower Led By Banks; BHP Declines

Asian markets ended lower Wednesday, with financial stocks again taking the lead as investors abandoned regional banking and insurance shares amid growing concerns over their earnings outlooks.

Shanghai gave up earlier gains to end in the red, while only Taiwan managed to avoid the region's decline as merger talks among domestic chip makers helped lift the overall mood. In Sydney, BHP Billiton Ltd and Rio Tinto Ltd both fell after the two miners said they'd cut output.

Anxiety in the region was stoked by China Life Insurance Co. after it said late Tuesday that it expects its 2008 net profit to decline by more than 50% because of declines in holdings of investment securities, competition, and higher payouts related to natural disasters last year. Shares of China Life ended 7.5% lower in Hong Kong.

"There's a lot of worry out there at the moment," said Andrew Sullivan, a sales trader at Main First Securities in Hong Kong. "Some people had been hoping there would be a small euphoric rise in the U.S. on Obama's inauguration, but the reality is I think that people are looking more at the downside, and expecting more bad news and perhaps waiting to see the effects of the policies that he is going to address."

Japan's Nikkei 225 Average fell 164.15 points, or 2%, to 7901.64, ending below the 8000-point mark for the first time since early December.

Hong Kong's Hang Seng Index ended 2.9% lower, giving up 376.14 points to 12583.63, hurt by selling in heavyweight HSBC Holdings PLC. South Korea's Kospi Composite fell 2.1% to 1103.61, and Shanghai's Composite Index eased 0.5% to 1985.02.

Australia's S&P/ASX 200 closed 1% lower at 3442.80 and New Zealand's NZX-50 slipped 0.2%. "Unfortunately things don't look that different from last year," said Bryon Burke, adviser at ABN Amro Holdings in New Zealand. "Now that everyone is back from holidays, markets are facing up to the same problems."

Singapore's Straits Times Index fell 1.1% as the government downgraded its 2009 growth forecast, predicting a contraction of as much as 5%. It also released revised data showing the economy contracted an annualized 16.9% in the October-December period from the previous quarter, the biggest fall since comparable data was published in 1976.

"Spending plans, to be announced tomorrow, will likely help ease the burden of unemployment," said Moody's economist Alaistair Chan.

India's Sensitive Index dropped 3.5% to close at 8779.17, weighed by a 7.1% drop in shares of ICICI Bank, India's biggest private-sector lender by assets.

Taiwan's Taiex index ended 0.1% higher at 4,247.97 on reports Elpida Memory, Japan's largest chip maker, is holding merger talks with three Taiwanese DRAM chip makers, leaving open the possibility of a partial or four-way merger. Discussions currently ongoing between Elpida and Promos Technologies Inc, Powerchip Semiconductor Corp, and Rexchip Electronics Co., if successful, would create the world's second-largest DRAM chipmaker.

Elpida's shares ended up 2.3% at 545 yen on the Tokyo Stock Exchange, while the Nikkei benchmark index closed down 2%. Powerchip closed up by its 7% daily limit at NT$3.07 and ProMOS ended up 6.3% at NT$1.51.

In Sydney, BHP Billiton fell 1% after it said it would ramp down and suspend its operations at its Ravensthorpe Nickel operation in Western Australia amid slowing economic conditions. Fellow miner Rio Tinto was down 2% after it said it would cut production at its Rio Tinto Alcan operations.

Among banks, ANZ Bank fell 3.9%, while retailer David Jones sank 5.3% after it lowered its second-quarter forecast due to the deteriorating economy.

Financials and exporters were weak in Tokyo, with Mizuho Financial Group down 4.8%, MUFG off 3.8% and Sony down 1.8%. South Korea's telecom firm KT Corp. was up 5.9% while its unit KT Freetel added 3.6% after KT Tuesday announced its plan to absorb KT Freetel on May 18, pending regulatory approval.

HSBC fell 4.3% in Hong Kong, adding to a string of recent declines. Analysts said investors in Shanghai were concerned that deepening global problems could swamp prospects for a domestic-led recovery. Shanghai's composite ranked as the only leading regional gainer Tuesday. "The weak economic performance in overseas markets has triggered worries over the domestic economy, including concerns over further declines in exports and domestic demand," said Guosen Securities analyst Wang Junqing.

Philippine stocks finished down 3.1% for their seventh straight losing session. Malaysia's KLCI lost 0.8% and Indonesian shares fell 1.7%.

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Gold Up As Bank Concerns In Europe Mount

LONDON - Spot gold prices were up Wednesday and poised to extend the large rally from the previous session as banking concerns mounted in Europe and the sterling fell further.

At 1003 GMT, spot gold was trading at $862.30 a troy ounce, up 0.9% from Tuesday's close. Spot silver was at $11.49/oz, up 3.3% with one bank being cited as a heavy buyer. Spot platinum was at $931/oz, down 0.7%. Spot palladium was at $181/oz, down 0.5%.

In the wider markets, European stocks fell. The banking sector faced a third straight day of declines and sterling weakened more against the dollar after hitting an all-time low against the yen on Tuesday and a seven-year low against the dollar.

In the environment of growing risk aversion, gold buying is picking up, traders and analysts said, which could push gold prices up to the mid-$880s an ounce in the coming sessions.

Banking shares are under further selling pressure Wednesday and the "deterioration of banks" is causing a pickup in gold buying, said UBS analyst John Reade. The general theme of risk aversion is expected to continue and support gold, he said.

Holdings in gold exchange traded funds are rising with the largest SPDR rising another 1% as of Tuesday. If ETF flows continue to rise, then gold prices should as well, Reade said.

Traders said the dire outlook for the pound could cause more gold buying as the financial crisis begins to affect Europe more.

Looking ahead, Morgan Stanley said investment demand for gold will continue to support a $900/oz gold price in 2009 and over $1,000/oz for 2010.

"A globally synchronous and aggressive fiscal and monetary stimulus may be needed to reinflate the global economy, and we think this continues to present significant upside to gold prices," said Hussein Allidina, analyst at Morgan Stanley.

In the near term, he said there is a risk of a rally in the dollar and concerns over deflation could drive prices to as low as $750/oz in the first half of 2009.

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