US & World Daily Markets Financial Briefing 22-01-2008

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Stocks plunge on recession fears

NEW YORK  - Wall Street plunged at the opening of trading Tuesday, propelling the Dow Jones industrials down about 300 points after an interest rate cut by the Federal Reserve failed to assuage investors fearing a recession in the United States.

U.S. markets joined stock exchanges around the globe that have fallen precipitously in recent days amid concerns that a downturn might spread around the world. U.S. bonds were mixed, with investors seeking safer investments as stocks plummeted. The price of oil, meanwhile, fell amid expectations that a downturn would depress demand for energy.

The Fed's decision to cut its federal funds rate to 3.50 percent and the discount rate, the interest it charges to lend directly to banks, came a week before the central bank's regularly scheduled meeting, a sign that the Fed recognized the seriousness of the world financial situation. But there were already fears in the markets before the Fed move that an interest rate could wouldn't be enough to prevent a recession.

In the first hour of trading, the Dow was down 293.70, or 2.43 percent, at 11,805.60. The Dow was last below 12,000 in March 2007. The broader Standard & Poor's 500 index was off 32.49, or 2.45 percent, at 1,292.70, while the Nasdaq composite index fell 66.82, or 2.86 percent, to 2,273.20.

It was the first time the Fed altered the target federal funds rate between scheduled meetings since the markets reopened after the Sept. 11, 2001 terrorist attacks. The cut was the biggest one-day rate move by the Fed since it lowered rates by a full percentage point in December 1991, when the country was trying to emerge from recession.

The Fed said in a statement that it took the steps to address a "weakening of the economic outlook" and "increasing downside risks to growth." The bank also said it will act in a timely way to address future risks. "They seemed to react to the markets rather than anticipate the markets, but they did the right thing," said economist Edward Yardeni, who runs his own research firm.

It's been a black year so far for stocks. The S&P 500 index, the broadest measure of the stock market, has suffered its worst annual start ever, giving up about 13 percent in just three weeks. The Dow is down about 12 percent since the beginning of the year, and the Nasdaq is down approximately 15 percent.

Government bond prices surged as stocks fell and investors fled to safer securities. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.53 percent from 3.63 percent late Friday.

Crude oil prices tumbled below $89 a barrel on the New York Mercantile Exchange on the concern that a weak economy will dampen energy demand. The prospect of a U.S. recession dragging down the global economy has infected markets around the world, which plunged on Monday -- when Wall Street was closed for Martin Luther King Jr. Day.

In Asia on Tuesday, Japan's Nikkei stock average closed down 5.65 percent -- its biggest percentage drop in nearly a decade. Hong Kong's Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, attacks.

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Forex - Dollar falls on speculation of emergency rate cut

LONDON - The dollar fell back as markets awaited the opening of US stock markets with rumours swirling of a possible emergency interest rate cut from the Federal Reserve. European equity markets have stabilised after plunging yesterday and on the open this morning. However analysts said they could move sharply lower again if markets on Wall Street open lower this afternoon.

The latest rout in the stock markets has prompted speculation that the Federal Reserve will announce an emergency interest rate cut possibly as soon as today. We would not rule out the Fed acting if US equity markets go into free-fall, but the proximity of next week's meeting may deter such action, said Hans Redeker at BNP Paribas -- the Fed has a scheduled interest rate decision next Wednesday.

This speculation has weighed on the dollar, which had been firming over recent days as investors pulled their money out of a range of assets and converting it back into the US currency. With little US data scheduled this afternoon, currency markets will be focused on events on Wall Street, along with comments from US Treasury secretary Henry Paulson.

Meanwhile the yen was lower, having gained sharply yesterday due to the rise in risk aversion. The Bank of Japan kept interest rates on hold this morning, but said the the country's economic growth had been below potential in 2007. Analysts said the chances of a rate hike this year look increasingly unlikely.

"All this leaves the yen weak from a cyclical and structural point of view," said Michael Klawitter, currency strategist at Dresdner Kleinwort, adding that the yen could fall back sharply once global risk aversion has peaked. Finally the pound was stronger, boosted by a relatively strong manufacturing survey.

The CBI's industrial trends survey showed manufacturing firms' total orders balance in January was +2 pct, unchanged on the previous month. Analysts had expected the reading to fall to 0 pct.

Of particular note was the survey's price balance, which showed the balance of firms expecting to raise prices in the coming months jumped to a 13-year high of +21 pct from +14 pct. Analysts said rising prices could limit the number of interest rate cuts from the Bank of England over the coming months.

"This highlights the fact that still significant inflation risks currently constrain the Bank of England's ability to respond to mounting growth risks by cutting interest rates aggressively," said Howard Archer at Global Insight.

BoE governor Mervyn King speaks in Bristol this evening, and markets will be poring over his comments to see his assessment of the latest falls in stock markets. However analysts at Barclays Capital said he is likely to try to put the week's events on financial markets into perspective.

"Mr King may take the opportunity to reiterate the Monetary Policy Committee's concerns about inflation, in an attempt to provide some counterweight to the market view that the growth outlook warrants aggressive rate cuts," they said.

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Euroshares end lower; STOXX 50 down over 6 pct on credit, recession woes

The DJ STOXX 50 Index fell 213.17 points, or 6.4 pct to 3,138.48. The one-day point drop was bigger even than the fall registered after the terrorist events of 9/11 when the index plunged 204.90 points. The DJ STOXX 600 Index fell 18.76 points, or 5.7 pct to 308.77.

Since the start of the year, the STOXX 50 is down 14.8 pct while the STOXX 600 has fallen 15.2 pct. French banks were particularly hard hit as Credit Suisse cut its price targets by 7-8 pct. Societe Generale shares fell 8 pct. BNP Paribas was 9.6 pct lower and Credit Agricole was down 9 pct.

The sector was also hit by news of a further write-down at WestLB. The German banking group said it expects to post a full-year 2007 net loss of around 1 bln eur, but said that its shareholders will inject fresh capital to offset the anticipated loss.

Northern Rock proved a bright spot as the ailing UK mortgage lender's shares soared 46.1 pct on hopes that the ailing UK mortgage lender is now in a better position to be taken over after UK finance minister Alistair Darling floated a plan to convert the company's 25 bln stg Bank of England loan into bonds and then selling them off. Northern Rock would also pay a fee to the Treasury to guarantee the notes, as well as all arrangement fees and expenses.

The UK Treasury said potential bidders now have until February 4 to submit their takeover proposals. Virgin Group chief executive Richard Branson, who is leading a consortium to buy the company, said he believes the sale options outlined for Northern Rock by the UK Treasury are "workable".

Olivant Partners, led by former Abbey National chief Luqman Arnold, is also looking into buying the lender. In other merger and acquisition talk, shares in Friends Provident rose 3.6 pct following weekend media reports that JC Flowers could make a bid for the UK life insurer. ABN Amro this morning also repeated its 'buy' stance on the stock.

Other insurers, however, moved sharply lower on concerns that the credit crisis may be reaping new victims after Moody's late last week said it was putting the credit ratings of US bond insurers Ambac Financial Group and MBIA under review.

Among the leading decliners, Axa and Swiss Re dropped 10.1 pct apiece, Allianz shed 10 pct while Old Mutual gave up 8.5 pct. ING Groep dropped 10.5 pct to its lowest level in nearly three years after broker Cazenove downgraded the bankassurer to 'in-line' from 'outperform' citing its exposure to the "Alt A" mortgage market.

Alt A mortgages refer to loans made to customers with a risky credit history, although they have been deemed to be of lower risk than someone with a sub-prime mortgage. Mining and metal stocks were also pressuring the major indices on concern a global slowdown sparked by a recession in the US would lead to fall-off in demand for iron ore, alumina and other raw materials.

Even BHP Billiton's announcement of record iron ore production and sales for 2007 failed to dispel the gloom. Merger and acquisition talk was another feature of the sector as shares in Rio Tinto dropped 7.6 pct as a improved takeover offer from BHP Billiton failed to materialize over the weekend.

BHP Billiton slumped 11 pct. Among other major fallers, Vedanta Resources tumbled 12.1 pct, Anglo American shed 9.2 pct while steel group ArcelorMittal dropped 11.3 pct ThyssenKrupp gave up 8.9 pct. In a similar vein, oil and gas stocks fell as crude prices dropped on concern over the possibility of weakening global demand in 2008.

Royal Dutch Shell was down 5.6 pct, BP fell 6.3 pct, while Total was off 6.1 pct. On the earnings front, Philips held onto gains for most of the session before capitulating to the broader market downdraft.

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Asian stocks swept up in global selloff as US recession fears mount

The Hang Seng plunged 8.7 pct to 21,757.63. The S&P/ASX 200 was down 7.1 pct at 5,186.8 and the All Ordinaries lost 7.3 pct to end at 5,222, their worst performance since October 1997. The Australian market has fallen for twelve straight sessions.

The Nikkei slipped 5.7 pct to 12,573.05, trading below 13,000 for the first time since October 2005. South Korean shares fell sharply but closed off their intra-day lows, with the benchmark KOSPI managing to claw its way back above 1,600 points after a brief suspension of program trading. The Kospi closed down 4.4 pct at 1,609.02.  

The Shanghai Composite lost 7.22 pct to end at 4,559.75 and the Taiwanese Taiex was down 6.51 pct at 7,581.96. The Philippines Composite was down 5.5 pct at 2,978.41 and the Singapore Straits Times 1.7 pct at the intra-day high of 2,866.55. The Jakarta Composite dropped 7.7 pct at 2,294.52.

Asian stock markets have fallen hard in 2008 so far. The Nikkei has lost 17.5 pct, extending the 11 pct decline suffered in 2007. The Indian Sensex is down 22 pct, the Philippines down 18 pct and the Kospi off 16 pct.

Even the Shanghai Composite, the market darling for the last two years, is down 12 pct so far. Financials battered Against this background, financial stocks slumped across Asia. Bank of China, which has the biggest subprime exposure among Chinese lenders, lost 8.6 pct to 3.08 hkd.

China's biggest bank Industrial and Commercial Bank of China fell 8.85 pct to 4.43 dollars. HSBC Holdings shed 8.1 pct to end at 104.4.

Ping An Insurance Group extended its fall, down 12.49 pct at 59.55, as investors feared its plan to sell new shares and bonds worth about 160 bln yuan may dilute earnings. In Australia, ANZ Bank lost 7.1 pct to end at 24.35 aud and National Australia Bank slumped 6.5 pct to 32.90 aud.

In Tokyo, Mizuho Financial Group was down 8.2 pct at 426,000 yen, Mitsubishi UFJ Financial down 5.7 pct at 863, and Sumitomo Mitsui Finanical Group down 7.8 pct at 700,000. Japan's biggest stock broker Nomura Holdings was down 5 pct at 1,400.

Exporters were hurt by the strong yen. Sony declined 6.9 pct to 5,110, printer maker Canon shed 5 pct to 4,220, construction machinery maker Komatsu slipped 8.5 pct to 2,195  and Toyota Motor was down 7.2 pct at 4,880.

Indian shares close nearly 5 pct lower, join the Asian carnage

The National Stock Exchange's 50-share S&P CNX Nifty plummeted 630.45 points or 12.10 pct to 4,578.35.The Sensex rallied back from the day's low of 15,332.42 points to provisionally close down 801.52 points, or 4.55 pct, at 16,803.83 while the Nifty provisionally ended down 309.50 points, or 5.94 pct, to 4,899.30, off the day's low of 4,448.50 points.

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Metals - Gold drops below 870 usd on dollar strength

LONDON - Gold dropped below the 870 usd mark after the dollar climbed to a one-month high against the euro, reducing the precious metal's appeal as an alternative to the most common form of currency reserves.

Widespread profit taking has also knocked the metal, with investors continuing to lock in gains following the move above 900 usd last week. With equities also taking another hammering today, commodities have been pressured further by fund margin calls, with profitable positions being closed out to cover losses elsewhere.

"Risk aversion appears in full flight again this morning with emerging market currencies suffering long liquidation and the dollar firming as equity futures slump," UBS analyst John Reade said earlier in a trading note. "Precious metals, with the very large positioning we have highlighted on many occasions, are vulnerable to profit taking in this environment."

With US markets closed for Martin Luther King Day, there may also be an element of price drift due to reduced buying interest, analysts said. At 1.43 pm, spot gold was trading down at 869.70 usd per ounce, against 882 usd in late New York trades Friday.

While prices have come off since last week's all-time high of 914.20 usd, many market watchers believe the metal is consolidating before another rally, with the fundamental picture remaining supportive for the metal. "The gold market still remains top heavy following the recent surge in buying interest," TheBullionDesk.com analyst James Moore said.

"But given the continued slowdown in the US housing market and fears that this will drag the US into a recession it seems investors are still seeking to build some form of protection into their portfolios, and consequently dips are still viewed as buying opportunities."

Gold has gained more than 200 usd since the onset of the credit crunch last summer, with investors buying the precious metal due to its traditional safe haven appeal as a store of wealth during times of turmoil. Rising inflation and historic weakness in the dollar have also contributed to the rally, as investors look to hedge against soaring costs and the diminishing value of the US currency.

The outlook for the dollar still remains lower in the short-term, analysts said, with further large interest rate cuts expected from the US Federal Reserve. Downside risks are posed by faltering jewellery demand with physical buying in India -- the world's largest gold consumer -- stalling as a result of high prices.

"We have seen slightly more demand from the jewellery sector this week but still very low volumes," Reade at UBS said. "Indian imports are falling." Elsewhere, platinum was lower at 1,542 usd per ounce, against 1,560 usd. Palladium was down at 362 usd per ounce, from 369 usd, while silver eased to 15.77 usd per ounce against 15.83 usd.

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