US & World Daily Markets Financial Briefing 21-05-2008

Stocks mixed after oil passes $130, inventories drop

NEW YORK  - Wall Street traded mixed Wednesday, with investors trying to rebound from a big drop a day earlier but still concerned about oil prices that keep reaching new record highs.
   
Crude oil shot past $130 a barrel for the first time, briefly in pre-market trading and then again after the Energy Department reported a surprising decline in crude inventories last week following four straight weeks of gains. By mid-morning, oil traded at $129.87 a barrel on the New York Mercantile Exchange.
   
High energy prices have been a source of anxiety for investors, as many retailers and credit card companies have noticed consumers paring back spending on discretionary items, including clothing and jewelry, to buy necessities such as gasoline and groceries, which have been soaring in price.
   
Wall Street was also hesitant as it awaited minutes from the Federal Reserve's April 29-30 meeting, which should provide more insight into whether policymakers regard rising energy prices as a serious threat. The Fed cut its benchmark federal funds rate by a quarter-percentage point to 2 percent at that meeting, marking the seventh cut in an easing cycle that started in September. Its accompanying economic statement left open the possibility of an end to rate cuts.
   
In midmorning trading, the Dow Jones industrial average slipped 34.93, or 0.27 percent, to 12,793.75, after rising in earlier trading. The Dow lost nearly 200 points on Tuesday amid concerns about rising oil prices and inflation.
   
Broader stock indicators were mixed Wednesday. The Standard & Poor's 500 index fell 0.28, or 0.02 percent, to 1,413.12, and the Nasdaq composite index rose 1.16, or 0.05 percent, to 2,493.42.
   
Bond prices edged lower early Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, rose to 3.81 percent from 3.78 percent late Tuesday.
       
In corporate news, media conglomerate Time Warner Inc. and cable television arm Time Warner Cable Inc. said their boards approved the companies' legal separation. Time Warner Cable expected to pay a hefty $10.9 billion one-time dividend to shareholders. Time Warner shares rose 25 cents to $16.40.
   
Hewlett-Packard Co. reported late Tuesday that second-quarter profit rose 16 percent, saying strong growth abroad offset some weakness in the U.S. But with concerns remaining about the computer and printer maker's growth potential and its planned buyout of technology services provider Electronic Data Systems Corp, HP shares fell 77 cents to $45.69.
   
BJ's Wholesale Club Inc., the nation's third-largest warehouse club operator, posted higher first-quarter profit. The company said customers were attracted to discounts on both food and fuel. Its shares, however, slid 78 cents, or 2 percent, at $38.07.
   
General Motors Corp.'s string of labor problems could soon come to an end with a tentative agreement at a key assembly plant in Kansas City, Kan. GM reached the deal on a local contract with United Auto Workers Local 31 at the plant Tuesday evening, company spokesman Dan Flores said. GM rose 3 cents to $19.88.
   
The Russell 2000 index of smaller companies rose 3.04, or 0.41 percent, to 738.68. Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 283.1 million shares.
   
In Europe, London's FTSE rose 0.19 percent, Frankfurt's DAX declined 0.99 percent and Paris' CAC 40 fell 0.46 percent.

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Euro gets a boost from Ifo

LONDON - The euro surged to its highest in nearly a month against the dollar after a key German survey of confidence showed a surprise improvement.

The Ifo institute's business climate index rose to 103.5, confounding predictions of a fall to 101.9.

"May's rise in the German Ifo index provides some encouragement that German businesses are seeing economic activity hold up pretty well," said Jennifer McKeown, at Capital Economics.

She said although the rise did not fully offset the previous month's fall, it leaves the index far above its long-run average and at similar levels to those reached in the second half of last year.

The data runs against the grain of other recent findings. Yesterday, another key German sentiment survey by ZEW dropped to minus 41.4 points in May from minus 40.7 points in April, pointing to pessimism all around.

"This suggests that, while May's fall in the ZEW survey showed that financial market investors are very concerned about the outlook for the economy, businesses themselves have seen only a moderate slowdown," added McKeown.

While German GDP growth is still likely to slow markedly in the second quarter, this survey supports the view that the slowdown in underlying activity will be only moderate, she said.

That aside, concerns about inflation dominated the currency market as the price of oil closed in on $130, putting the dollar on the backfoot ahead of some key data today.

As inflationary pressures take off, markets appear to be plumping for currencies where inflation targeting has been upheld better -- namely the euro and the pound. Both currencies inched higher on the dollar. The European Central Bank has yet to reduce interest rates and looks likely to avoid doing so.

"The correlation between oil and euro-dollar has steadily increased over recent years with the cheerleaders of the ECB's inflation dogmatic approach providing the intellectual reasoning for this correlation," BNP Paribas analysts said. 

Meanwhile, the pound held steady against the dollar but weakened on the euro after the release of the minutes of the Bank of England's last meeting which as expected revealed only vote for a rate reduction -- from arch dove, David Blanchflower.

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Euroshares down again as oil climbs above $130, Wall St seen lower

LONDON - Europe's leading bourses moved back into the red in midday deals as oil surged to a new record high, pushing Wall St futures lower and offsetting upbeat German Ifo data.

At 12.20 a.m., the DJ STOXX 50 was down 17.36 points, or 0.54 percent, to 3224.27, and the DJ STOXX 600 was down 1.86 points, or 0.57 percent, to 324.1.

Oil plays dominated the leader boards across Europe as the price of crude hit a new all-time record of $130.30 ahead of today's U.S. stockpile data, as the dollar remained weak and several investment banks and major market players upgraded their price predictions.

Expected strong diesel demand from China after the Asian nation suffered a devastating earthquake last week and higher gasoline purchases from the U.S., the world's biggest energy consumer, ahead of the driving season also lifted crude's value.

This lifted Repsol YPF up 1.11 percent, ENI up 21.45 percent and Total up 1.65 percent.

Galp Energia SGPS, SA moved 4.21 percent higher after its first-quarter update overnight as analysts said the group's EBITDA was 8 percent higher than forecasts but a higher than expected tax rate meant net income came in only in-line.

Separately, chief executive Manuel Ferreira de Oliveira said Galp's consortium exploring Block BM-S-8 in Brazil's Santos Basin, in which it holds a 10 percent stake, has completed a test drill in the area and is awaiting the green light from the authorities to release the results.

BM-S-8 is located near the sites of two of the largest oil strikes in recent years, and has led the offshore Santos Basin come to be known as "North Sea of the south" due to its reserve potential.

BG Group, which also holds stakes in the basin, added 4.24 percent. Car stocks, though, were knocked by the high oil price and broker caution.

Merrill Lynch downgraded Porsche AG, down 5.18 percent, and Nokian Renkaat OYJ, down 1.18 percent, to 'sell' from 'neutral', saying raw material costs are up about 200 euros per car year-to-date, representing about 4 billion euros in headwinds for European automakers.

The brokerage also reduced its price targets for Renault SA., down 4 percent, to 90 euros per share from 100. On Fiat SPA, down 2.57 percent, it cut its target to 18 euros from 21. Continental AG fell 3.62 percent as its target was cut to 100 euros from 120. Valeo shares fell 1.88 percent as the broker cut its target to 36 euros per share from 40.

SocGen shares fell 2.53 percent as fears the French banking group may yet make a rights issue before the end of the year circulated.

Oddo Securities said the worst of the credit crisis may have passed but further writedowns could lie ahead, saying banks' provisions are well below estimates for the total impact of the crisis, suggesting that other players in the financial sector could be sitting on losses.

In Switzerland, shares in UBS AG tumbled 3.47 percent after the bank announced it has closed the sale of securitized debt worth $15 bln to BlackRock at a discount of 32 percent, with investors nervous ahead of news on the conditions of UBS' recently proposed 15 billion Swiss francs capital hike, which some are expecting as early as Thursday.

Corporate Express was 1.85 percent lower after a shock move to buy larger rival Lyreco in a bid to fend off the hostile bid from Staples.

Cheuvreux said the deal was expensive but puts the ball back in Staples' court. Traders said the shares are being supported by hopes of a higher bid and on speculation that Staples will buy up shares in the market at anything below its latest offer of 8 euros per share.

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Asian stocks mostly lower on high oil prices; Shanghai, Hong Kong reverse losses

HONG KONG - Stock markets across Asia ended mostly lower Wednesday, tracking losses on Wall Street after oil prices climbed to a fresh record, although Shanghai and Hong Kong rebounded from lows as energy stocks rallied.

The Nikkei dropped 1.7 percent to close at 13,926.30 and the broader Topix shed 2.1 percent to 1,370.09, with the market's fall led by financial companies.

Mizuho Financial Group shed 5 percent to 514,000 yen, and Mitsubishi UFJ Financial declined 4.5 percent to 1,008 yen, tracking the weak performance by their U.S. peers 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.

The South Korean Kospi ended 1.4 percent lower at 1,847.51, with Kookmin Bank retreating 2.9 percent to 64,300 won, and Shinhan Financial Group sliding 2.2 percent to 50,100 won.

The S&P/ASX200 finished down 1.4 percent at 5,823.4 and the All Ordinaries fell 1.3 percent to 5,916.4 on concern about the health of the financial sector.

Macquarie Group was off 4.5 percent at A$58.50, adding to a 7.3 percent fall on Tuesday after Australia's top investment bank warned that the market environment remained challenging when it reported a 23-percent rise in year to March net profit to a record A$1.8 billion ($1.7 billion).

National Australia Bank slid 0.9 percent to A$33.47, and Commonwealth Bank dropped 2.7 percent to $42.58

Philippines 30-company composite index fell 0.8 percent to 2,872.45, off the day's low of 2,859.38.

The Kuala Lumpur Composite Index finished down 0.5 percent at 1,281.20, off a low of 1,279.05 and a high of 1,288.93.

The Straits Times Index fell 0.1 percent to close lower for a second straight session at 3,196.90, though off the day's low of 3,153.75.

Jakarta's composite index closed down 0.7 percent at 2,494.71, off a low of 2,472.67.

The Hang Seng index closed up 1.16 percent at 25,460.29 led by oil stocks, after trading in negative territory earlier in the day.

The Shanghai composite index jumped 2.9 percent to 3,544.19, reversing early losses driven by uncertainty about the mainland's economic outlook after last week's devastating earthquake. "Oil stocks led the charge on speculation that Beijing will revise soon the threshold for calculating windfall tax," said Francis Lun, general manager at Fulbright Securities.

The Chinese government collects a windfall tax of 40 percent on the portion of crude revenue above $60. The market expects the government to raise that threshold to $80 following recent spikes in oil prices.

PetroChina Co Ltd. rose about 2.2 percent to HK$11.36 in Hong Kong, and was 6.6 percent higher at 17.86 yuan in Shanghai. CNOOC Ltd, was up 5.9 percent at HK$15.90.

Indian shares closed almost unchanged, recovering from early losses on firm openings of European indices despite rising crude prices, dealers said. They said investor sentiment was also dampened by worries about domestic inflation.
   
The 30-share benchmark Sensex of the Bombay Stock Exchange (BSE) closed up 12.98 points, or 0.08 percent, at 17,243.16, recovering from the day's low of 17,041.63, and slightly off the intra-day high of 17,293.34 points. The broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) gained 12.70 points or 0.25 percent to 5,117.65.

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Copper languishes as demand fears outweigh stronger oil, weaker dollar

LONDON - Copper continued to languish midafternoon as investors fretted over the impact of the bleak economic outlook on demand, with strength in other commodities such as gold and oil and weakness in the dollar having little impact.

Only tin made a significant push higher, supported by concerns over falling supply from China and Indonesia and dwindling stockpiles.

"The underlying cost drivers for the base metals are favourable for headline prices this morning, with crude oil over $130 a barrel and the US dollar softer, especially against the (renminbi)," JP Morgan analyst Michael Jansen said. "However, the base metals are trading in a mixed fashion with demand concerns carrying slightly more weight today than the other factors."

Dealers fear the bleak economic outlook in the U.S. will crimp demand for copper, which is used extensively in construction, industry and manufacturing.

Meanwhile the price differential between copper traded in London and Shanghai points to relatively lacklustre demand from China, which it was hoped would continue to support copper. High prices may be putting off Chinese consumers, analysts said.

At 2:05 p.m., London Metal Exchange copper for three-month delivery was trading at $8,230 per tonne against $8,330 per tonne at the close on Tuesday.

The fact that other assets such as oil are outperforming today -- U.S. traded crude futures hit a new all-time high of $130.47 a barrel earlier in the session -- may also mean some fund money is being directed away from the base metals, analysts said.

"Open interest in the metals has fallen in recent days, so we wonder actually if there were some long base metals/short oil and gold strategies that were put on and forced to stop out," said analysts at RBC Capital Markets in a note.

"Also, we have not really seen the presence of so-called 'hot money' players in the base metals markets in recent days and would imagine they are very active in the oil markets, at least helping to propel prices there," they added.

Among other metals traded on the LME, tin rose to $24,250 against $23,700. LME-monitored tin stocks dipped a further 25 tonnes this morning to 7,545 tonnes, down from 12,150 tonnes at the beginning of the year.

Elsewhere, lead slipped to $2,129 per tonne from $2,175 per tonne at the close on Tuesday, nickel edged down to $25,550 from $26,000, and zinc slid to $2,214 against $2,275. Aluminium was trading at $3,010 against $2,998 a tonne.

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