US & World Daily Markets Financial Briefing 21-04-2008

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Stocks decline after Bank of America profit falls short

NEW YORK - Wall Street pulled back Monday after a weaker-than-expected profit report from Bank of America Corp. stirred concerns about the health of corporate earnings.

Bank of America's report that its first-quarter earnings fell 77 percent on write-downs and widening credit losses comes after a week in which big-name companies in general turned in better-than-expected numbers for the first quarter. Wall Street has at times worried that a slowing economy and a potentially hesitant consumer would crimp profit-making in the first three months of the year.

The reports helped drive the major indexes to gains of more than 4 percent last week so some profit-taking likely didn't come as a surprise to investors Monday.

With little in the way of economic data scheduled to arrive this week, investors are looking at a big flow of corporate reports for insights into the well-being of the economy. Beyond Bank of America, Merck & Co. reported a stronger-than-expected first-quarter profit. Both Bank of America and Merck are among the 30 stocks that comprise the Dow Jones industrial average.

In midmorning trading, the Dow fell 83.37, or 0.65 percent, to 12,765.99. Broader stock indicators also declined. The Standard & Poor's 500 index fell 6.80, or 0.49 percent, to 1,383.53, and the Nasdaq composite index fell 5.85, or 0.24 percent, to 2,397.12.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.74 percent from 3.70 percent late Friday. The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude fell 1 cent to $116.68 per barrel on the New York Mercantile Exchange. Oil jumped to a record $117.40 per barrel after a rocket struck a Japanese oil tanker near Yemen and as militants in Nigeria said they had attacked pipelines. An OPEC official said over the weekend that the group isn't likely to increase production also supported prices.

In corporate news, Bank of America said its profit totaled $1.21 billion, or 23 cents per share. Analysts had been expecting the company, which recently acquired mortgage lender Countrywide Financial, to report earnings of 41 cents per share, according to Thomson Financial. The stock fell 85 cents, or 2.2 percent, to $37.71.

Merck said its profit nearly doubled in the first quarter because of a $1.4 billion distribution from a partner drug company. Merck rose fell 20 cents to $39.56.

Eli Lilly and Co. fell $1.99, or 3.8 percent, to $50.08 after reporting that strong sales helped double the drug maker's first-quarter earnings. Earnings rose to $1.06 billion from $508.7 million a year earlier, when the company booked a big charge. Still, the results missed Wall Street's expectations.

Mattel Inc. said higher product costs and legal fees led the company to post a loss for the first quarter. The world's largest toymaker, which makes Barbie dolls, Fisher-Price toys and Matchbox cars, said it saw a loss of $46.6 million compared with earnings of $12 million a year earlier. The results fell short of what Wall Street had been expecting and the stock fell $1.60, or 7.4 percent, to $20.18.

Beyond corporate results, investors also weighed action by the Bank of England on Monday to ease tightness in the credit markets. The bank said it would enact a $100 billion plan that would allow banks to swap mortgage-backed securities for British Treasury bills.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 182.2 million shares.

The Russell 2000 index of smaller companies fell 4.66, or 0.65 percent, to 716.41. Overseas, Japan's Nikkei stock average slipped 0.13 percent. In afternoon trading, Britain's FTSE 100 fell 0.23 percent, Germany's DAX index declined 1.01 percent, and France's CAC-40 fell 1.14 percent.

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Forex - Pound stays on back foot amid focus on beleaguered UK banking system

LONDON - The Bank of England's 50 billion pound lifeline for the UK banking system failed to bring the pound much help with at least as much attention falling on the Royal Bank of Scotland's expected rights issue.

Both factors bring to the fore the dire state of circumstances facing the financial system in the UK and as such led to falls for the pound. To some extent, today's plans announced by the Bank of England had been anticipated. Just to what degree it is hard to tell but going by the reaction on currency markets, there was little by way of surprise.

Peter Stoneham at IFR Markets said some sections of the market are worried about the effectiveness of the BoE initiative. Additionally, the pound rose last week in anticipation of today's announcement and Monday may will mark "profit taking on the confirmation," Stoneham said. "It remains to be seen if the 50 billion proves to be enough given that the mortgage market is far greater in size. The injection could clear up the infection but a strong inoculation is what is really needed," he added.

Analysts at UBS also said the pound tumbled on market disappointment with the plan. "It is probably too early to judge whether the BoE plan will be a success. It is clear, however, that the UK central bank is trying to avoid the Fed's mistakes at its first TSLF auction," they added.

They added that high costs and barriers will likely make sure only those with genuine funding issues will have access to the facility and maintained their bearish stance on the pound. Some believe the BoE will have to up its offer up to 100 billion pounds before there is any significant impact on the wider economy. The reaction on the interbank market where banks lend to each other was also muted with the LIBOR rates at key maturities all staying hardly changed from last week and well above the current 5.00 percent benchmark BoE rate.

Separately, attention also fell on Royal Bank of Scotland Group PLC's plans for a rights issue. RBS, the UK's second-biggest bank, said in a brief statement that it was considering a rights issue, adding that it would make a further announcement "in due course." Reports put the rights issue at up to 12 billion pounds, in order for the bank to replenish its capital reserves which have been depleted by write-downs related to the credit crunch and its acquisition of parts of Dutch rival ABN Amro last year.

Elsewhere, the euro was boosted by hawkish rhetoric from the European Central Bank, which continued to express caution over inflation. ECB governing council member Erkki Liikanen said "inflation risks are real" in an interview with the Wall Street Journal. "Our prime mandate is price stability. And history shows that if you fail there, it's a long negative impact on growth and it's very hard to get back," he said, suggesting the ECB will not cut interest rates for the time being.

For the dollar, corporate earnings data was crucial. To this end, Bank of America Corp's 77 percent drop in profits in the first quarter, weighed on the dollar.

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Euroshares open down, breather after Friday's rally; Novartis Q1 in focus

At 9:00 a.m., the DJ STOXX 50 was 0.69 points, or 0.02 percent, lower at 3,197.74, while the DJ STOXX 600 was down 0.61 points, or 0.19 percent, at 320.08.

Back in Europe, markets were mixed, but largely fluctuating around the flatline. "We are consolidating on a high level right now and are awaiting further news," asset manager Stefan de Schuetter at Alpha Trading said.

Miners outperformed slightly on the back of the strong oil price, while banks were in the spotlight as investors await further information on a reported rights issue by Royal Bank of Scotland, as well as on the rescue package the Bank of England unveiled earlier this morning.

Earnings from Novartis and Nestle grabbed the early spotlight, with Novartis rallying 5 percent after the Swiss pharma group beat expectations with its first-quarter earnings report.

"The results are looking very good in terms of operational development but also the sales performance was strong," analyst Annette Blumenthal at Bayerische Landesbank said.

Meanwhile, Nestle was 1.46 percent lower, on the back of profit taking, as a strong set of earnings results, released this morning, were largely anticipated by the market, with some also voicing disappointment over the group's outlook.

Over in France, Schneider Electric shed 6 percent after the electrical equipment group disappointed with its first-quarter sales report, prompting Societe Generale to cut its stance to 'hold' from 'buy', and Oddo Securities to downgrade the stock to 'reduce' from 'add'.

Societe Generale analysts in a note to clients, said that first-quarter sales of 4.311 billion euros were 3 percent below their expectations.

Also among fallers, Panalpina slumped 8.5 percent after the logistics group said consolidated net earnings decreased by almost 40 percent in the first quarter compared to the record first quarter a year earlier.

Turning to M&A talk, TietoEnator was 1 percent lower after its board formally recommended shareholders reject a 15-euros-per-share takeover bid by private equity firm Nordic Capital.

The 1.1-billion-euro offer, which Nordic Capital launched through its Cidron Services bid vehicle, does "not reflect the true value of the company", TietoEnator's board said in a statement to the stock exchange.

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Asian stocks rally on earnings hopes, financial stocks advance

The S&P/ASX200 was up 3.1 percent to close at 5,600.3 and the All Ordinaries finished up 2.9 percent at 5,664.2. National Australia Bank rose 6.2 percent to A$29.45, Commonwealth Bank of Australia added 5.4 percent to A$43.90, Westpac advanced 6.5 percent to A$23.78 and St. George Bank was 4.4 percent higher at A$25.10.

The Nikkei 225 Stock Average ended up 1.6 percent at 13,696.55, a seven-week high, helped by a weaker yen which lifted exporters. The broader Topix advanced 2.1 percent to 1,331.51.

Japanese financials mostly advanced. Mitsubishi UFJ Financial climbed 3.5 percent to 1,045 yen and Sumitomo Mitsui Financial Group was up 3.5 percent at 797,000 yen. Sumitomo Trust & Banking gained 4.8 percent to 844 yen while Mizuho Financial Group was flat at 470,000 yen.

In South Korea, the benchmark KOSPI rose above 1,800 points for the first time in more than three months, ending 1.6 percent higher at 1,800.48. The Hang Seng closed up 2.17 percent to 24,721.67 with index heavyweight HSBC Holdings gaining 1.30 percent to HK$132.40.

The Shanghai Composite closed up 0.7 percent at 3,116.98. Industrial and Commercial Bank of China advanced 4.2 percent to 5.99 yuan. Taiwan's weighted index was up 0.1 percent at 9,083.32, and the Jakarta index was closed down 0.6 percent at 2,335.89.

The Kuala Lumpur index ended up 1 percent at 1,280 while the Manila composite index fell 0.9 percent at 2,890.92 as investors locked in recent gains. The Singapore Straits index closed up 1.5 percent at 3,171.09. 

The futures market now gives less than full odds of a 25-basis-point rate rate cut at the end of this month, he said. A weaker yen boosted interest in exporters in Tokyo. Toyota Motor jumped 5.1 percent to 5,370 yen and Honda Motor advanced 8.8 percent to 3,330 yen.

Sony rose 5.7 percent to 4,640 yen and Canon gained 6.1 percent to 5,380 yen. In Sydney, BHP gained 3.7 percent to A$43.99 and its takeover target, Rio Tinto, was 3.3 percent higher at A$144.55.

Oil and gas stocks rose on higher oil prices, with second-ranked Santos leading the way, climbing 7.1 percent to A$16.89 and recovering from recent weakness, while sector leader Woodside was 1.3 percent higher at A$58.10.

In Hong Kong, PetroChina, Asia's largest oil firm, jumped 3.1 percent to HK$10.12 and CNOOC Ltd. added 2.1 percent to HK$13.82.

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Metals - Gold firm as dollar softens, oil rises but risk aversion caps gains

LONDON - Gold stayed firm in early afternoon trade as the softening dollar and stronger oil continued to lend support, but gains were capped by risk aversion after Friday's price slide.

The precious metal has clawed back some of the losses it posted on Friday after the dollar bounced in value, pushing gold lower, but is still trading some $15 below the level it reached in New York late Thursday.

Gold tends to move in an inverse relationship with the U.S. currency. A weaker greenback makes dollar-priced gold cheaper for holders of other currencies, and boosts the metal's appeal as an alternative investment.

A softer tone to the dollar this morning and record high oil prices -- which increase gold's attractiveness as an alternative investment -- have supported a rise in prices this morning.

But investors are still largely sticking to the sidelines after Friday's slide and ahead of key U.S. economic data due later in the week, which could impact the dollar. "Caution remains in order," said Kitco Bullion Dealers analyst Jon Nadler.

At 2.34 p.m., spot gold was trading at $920.28 an ounce against $912.30 in late New York trade on Friday. The precious metal continues to take support from the same factors that have sent it to a new record high above $1,000 an ounce -- a historically weak U.S. dollar, high inflation and instability in the financial markets.

Gold prices have benefited from the turmoil in the financial markets over the last six months, as the metal is seen as a safe store of value at a time of volatility in other asset prices.

With a lack of immediate impetus, gold is expected to consolidate around its current level until further direction is lent by the currency markets. "We expect the process of consolidation to continue over the next few days, provided that the dollar remains below 1.60 to the euro," said Commerzbank analysts.

Among other precious metals, platinum was trading at $2,024 an ounce against $2,042 in late trade on Friday. Silver meanwhile eased to $17.64 an ounce against $17.82, while  slipped to $448 an ounce from $456.

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