US & World Daily Markets Financial Briefing 22-05-2008

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Stocks advance after two-day plunge; oil off highs

NEW YORK - Stocks rebounded modestly Thursday after two sessions of steep declines brought by the surging price of oil.

Oil prices set another trading record overnight -- moving above $135 per barrel for the first time -- but pulled off their highs, offering some relief for investors. And the Labor Department said the number of workers seeking unemployment benefits declined by 9,000 last week to 365,000. The market expected a slight increase.

But the economic fallout from ascendent energy prices remained Wall Street's focus. The advance in stocks followed a decline in the Dow Jones industrial average that totaled about 427 points, or 3.3 percent, over the course of Tuesday and Wednesday. It was the steepest two-day loss since late February. Stocks have declined in three of the past four sessions.

The spike in oil prices has fanned investors' uneasiness about inflation. One big fear is that consumers worried about rising prices for everything from gasoline to food will be less willing to reach into their wallet for other items. A pullback could deal a major blow to the economy as consumer spending accounts for more than two-thirds of U.S. economic activity. And rising oil drives up transportation costs and many other expenses for businesses that aren't directly dependent on consumers.

Light, sweet crude rose 34 cents to $133.51 a barrel on the New York Mercantile Exchange. Earlier, oil topped $135.

In the first hour of trading, the Dow rose 37.78, or 0.29 percent, to 12,638.97. Broader stock indicators also moved higher. The Standard & Poor's 500 index rose 2.81, or 0.20 percent, to 1,393.52, and the Nasdaq composite index rose 8.34, or 0.33 percent, to 2,456.61.

Still, even with the declines of more than 2 percent in the major indexes this week, stocks are still well off their mid-March lows. The Dow industrials are about 7.4 percent above where they closed on March 10, when investors were preoccupied with worries over the soundness of the credit markets. Since then, Wall Street has reshuffled its list of concerns, placing greater emphasis on the well-being of the overall economy, not just the troubled financial sector.

Bond prices fell Thursday. The yield on the benchmark 10-year Treasury note rose to 3.88 percent from 3.81 percent late Wednesday.

The dollar was mixed against other major currencies, while gold prices fell.

In corporate news, Ford Motor Co. warned that it no longer expects to return to profitability by next year and that it is trimming North American production of pickups and SUVs for the rest of this year because of high gas prices and a shaky economy. The automaker also lowered its forecasts for U.S. sales for 2008. Ford fell 57 cents, or 7.3 percent, to $7.23.

Power wholesaler NRG Energy Inc. said it offered to acquire rival Calpine Corp. for about $11.3 billion in stock. Calpine, which has dual headquarters in San Jose and Houston, released details of the unsolicited bid Wednesday. NRG fell $1.39, or 3.3 percent, to $41.12, while Calpine jumped $1.56, or 7.3 percent, to $22.84.

Advancing issues outnumbered decliners by about 8 to 5 on the New York Stock Exchange, where volume came to 167.4 million shares.

The Russell 2000 index of smaller companies rose 5.35, or 0.74 percent, to 732.46.

Overseas, Japan's Nikkei stock average rose 0.37 percent. In afternoon trading, Britain's FTSE 100 fell 0.35 percent, Germany's DAX index declined 0.51 percent, and France's CAC-40 fell 0.52 percent.

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Forex - Pound boosted by retail sales, industrial sector data

Sales on the UK high street dropped 0.2 percent in April from March, far below analysts' forecasts for a 0.5 percent fall, while March's 0.4 percent decline was revised to a less serious 0.2 percent shortfall.

Meanwhile, the Confederation of British Industry said industrial activity continued to decline, but that the number of manufacturers intending to raise their prices jumped to a 13-year high in May. The combination of today's data releases have further diminished the chances of a rate cut in June, supporting the pound.

"It currently seems highly unlikely that the Bank of England will be prepared to trim interest rates again until August at the very earliest; and, even for that to happen, the bank will want clear evidence that wage moderation is continuing and that muted economic activity is undermining companies' pricing power," said Howard Archer at Capital Economics.

The retail sales figures will be treated with some caution by both the BoE and market watchers, since the more closely-watched surveys suggest a sharp slowdown in consumer spending the pipeline.

"Nevertheless, the data does little to revive hopes of a near-term interest rate cut," particularly since the BoE has specifically stated that a slowdown will be required to dampen inflation, said Archer.

Elsewhere, the euro was somewhat weaker after a 1.0 percent drop in industrial orders in March, well beyond analysts' expectations of a 0.2 percent decrease.

The data reminded investors that the strong euro and record commodity prices are now causing trouble in the much-praised manufacturing sector, which has so far been more resilient than the financial sector -- where confidence has been hit by the credit crisis.

The dollar, meanwhile, will be in focus for the rest of the day ahead of jobs and housing data. Weekly jobless claims are expected to have stabilised at a low level of about 370,000, but the house price index should remind markets that the U.S. real economy is still suffering.

Markets are looking for a 1.3 percent quarterly fall in house prices -- the sharpest on record -- implying that the property market has not yet seen the bottom. "A continued excess of supply over demand in the housing market would suggest that we have not yet seen the bottom in this cycle," although some measures hint that declines may start to moderate, said Henrik Gullberg at Calyon.

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Euroshares open lower after Wall St losses; banks, airlines slump

At 9:19 a.m., the DJ STOXX 50 was down 4.14 points, or 0.13 percent, at 3212.42 and the DJ STOXX 600 was down 0.79 points, or 0.24 percent, at 322.37. Banks and financials were mostly lower as the losses on Wall Street and a flurry of downbeat broker notes on the sector dragged on sentiment.

Allianz fell 4.78 percent, Banco Santander fell 1.81 percent and Axa was 1.71 percent lower. Dutch broker Theodoor Gilissen downgraded Aegon N.V. down 1.73 percent, to 'hold' from 'buy'. And Panmure Gordon said the investigation of Moody's alleged cover-up of ratings errors could have much broader implications for ratings and write-downs in structured credits.

UBS fell another 1.63 percent after it announced the terms of its recently announced 15 billion Swiss francs capital hike. And Airlines slumped as oil prices remained close to the $135 a barrel level, continuing its astonishing rise following unexpected drops in U.S. crude and gasoline stocks yesterday and this in turn pushed gold higher.

Air France-KLM issued what some described as a profit warning for operating performance in 2009, saying it expects oil to average at around $120 per barrel over the year. The news pulled British Airways down 1.85 percent.

Austrian Airlines added 2.521 percent, though, as Lufthansa's chief executive Wolfgang Mayrhuber said his company would be prepared to look into the possibility of acquiring Austrian Airlines AG. but the latter would have to show its interest first.

Shares in Richemont added 0.54 percent after the Swiss luxury goods group reported a better-than-expected full year performance and announced it is thinking about splitting its business. Cheuvreux repeated its 'outperform' stance, saying the results were a touch higher than the broker's forecasts and April sales were strong.

And Galp added another 3.27 percent after the company announced that the consortium in which it holds a 14 percent stake has struck oil in Block BM-S-8 (Bem-te-vi) offshore Brazil. Royal Dutch Shell, which holds a 20 percent stake in the block, added 0.93 percent.

The news also lifted shares in Repsol YPF SA. Goldman Sachs raised its 2008 copper, nickel and thermal coal price forecasts and said Anglo American Plc., up 1.65 percent, is the most attractive stock in its coverage and lifted its target for the group as well as for Xstrata Plc. and Lonmin Plc.

Sanford Bernstein also raised its price targets on Rio Tinto, up 2.05 percent,  BHP Billiton, up 2.08 percent, Xstrata, up 1.86 percent, and Anglo American. But Vedanta fell back 2.14 percent after Goldman Sachs cut its rating to 'neutral' from 'buy', on valuation grounds. It did, however, lift its target to 3,000 pence from 2,660 pence.

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Asia shares fall on record oil, but off lows on Japan, Australia rebound

Energy up, airlines fall In Tokyo, the Nikkei finished up 0.4 percent at 13,978.46 points, recovering from the day's low of 13,658.02. The broader Topix rose 0.7 percent to 1,379.67.

Banking stocks reversed early losses, with Mizuho Financial up 2.9 percent at 529,000 yen and Sumitomo Mitsui Financial Group gaining 4 percent at 854,000 yen. Mitsubishi UFJ Financial Group turned 0.9 percent higher at 1,017 yen, after falling 3.5 percent to 973 yen earlier in the day.

Shares in Shinsei Bank rallied 3.3 percent to 406 yen. The Nikkei newspaper reported that the company is expected to be the leading candidate to acquire the Lake consumer loan business put up for sale by GE Consumer Finance.

In Sydney, the S&P/ASX 200 firmed 0.1 percent to 5,826.9, after it hit a low of 5,738.9, as investors snapped up energy stocks and index leader BHP Billiton moved back into positive territory along with takeover target Rio Tinto. The broader All Ordinaries index closed up 0.1 percent at 5,920.0.

BHP finished with a gain of 1.8 percent at A$47.70, while Rio Tinto added 0.6 percent to A$151.01. Energy sector leader Woodside Petroleum ended up 3.7 percent at a record A$70.01, Santos jumped 4.0 percent to A$20.60, Oil Search advanced 3.2 percent and Roc Oil rallied 4.7 percent.

South Korea's Kospi lost 0.7 percent to close at 1,835.42, off the day's low of 1,810.68. Hong Kong's Hang Seng index closed down 1.64 percent at 25,043.12 as airline stocks continued their downward trend and investors locked in recent gains in oil refiners.

Inflationary risks are likely to keep the city's de facto central bank from cutting rates again, depressing property stock prices. Hong Kong usually follows the Fed's cuts because its currency is tied to the U.S. dollar.

The city's top developer Sun Hung Kai Properties retreated 2.17 percent to HK$126.20. Tycoon Li Ka-shing's Cheung Kong (Holdings) declined 1.10 percent to HK$126.10. Sino Land slumped 3.96 percent to HK$18.90.

Sinopec slid  3.17 percent to HK$7.33, eroding Wednesday's 4.3 percent gain; and PetroChina skidded 1.58 percent to HK$11.18.

The mainland's top carrier China Southern Airlines plunged 5.98 percent to HK$4.40, while smaller rival China Eastern Airlines tumbled 5.57 percent to HK$3.22. Air China, the nation's biggest international airline, retreated 3.79 percent to HK$5.33. Hong Kong's biggest airline Cathay Pacific Airways Ltd. dropped 2.19 percent to HK$15.16.

The Shanghai composite index closed down 1.65 percent at 3,485.63. while Taiwan's Taiex lost 0.1 percent to 9,008.03. Singapore's Straits Times Index was down 1.1 percent at 3,160.86.

The Kuala Lumpur Composite index was off 0.3 percent at 1,277.57, little changed as gains in the oil and gas sector provided some support. The Philippine Composite was down 1.2 percent at 2,838.58 and the Jakarta Composite lost 0.4 percent to 2,503.95. 

The 30-share benchmark Sensitive Index, or Sensex, of the Bombay Stock Exchange (BSE) fell 336.05 points or 1.95 percent to 16,907.11, its first below 17,000-close since May 14, when it ended at 16,978.35. The broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) pared 92.20 points or 1.80 percent to 5,025.45.

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Metals - Copper rises amid supply fears as oil climbs to record

LONDON - Copper stayed higher in early afternoon trade after climbing overnight in Asia amid talk that stockpiles of the red metal monitored by the Shanghai Futures Exchange fell last week, and as rising oil prices boosted interest in commodities.

Aluminium too took support from soaring crude prices, which touched a new all-time high of $135.09 a barrel in New York on Thursday morning. Aluminium smelting is one of the most energy-intensive industrial processes, and may suffer from rising power prices, analysts said. "Concerns over energy costs and the risk of production disruptions in China (have) supported the aluminium price," said David Moore, an analyst at the Commonwealth Bank of Australia.

At 12:37 p.m., London Metal Exchange aluminium for three-month delivery was trading at $3,038 against $3,020 a tonne at the close on Wednesday. Meanwhile copper for three-month delivery was trading at $8,295 per tonne against $8,240 per tonne at the close.

Shanghai copper futures traded higher overnight "on the back of talk that SHFE-monitored stocks will decline more than 5,000 tonnes this week", analysts at RBC Capital markets said in a note.

The London Metal Exchange said on Thursday morning that the inventories it monitors rose 250 tonnes yesterday, but reported a 4.8 percent increase in cancelled warrants, or metal booked for removal from warehouses. Meanwhile, April imports data showed China's refined copper imports fell 31 percent from a year ago to 127,977 tonnes, but rose 1.2 percent from March, analysts said.

"Imports were lower year-on-year because there was more restocking last year than this, but imports have risen month-on-month ... while some market participants expected them to fall," said Lehman Brothers analyst Michael Widmer. "That may have influenced the price."

The combination of rising oil and gold prices and a weaker dollar is also lending some support to the market, analysts said.

Although in the long term, higher oil prices will crimp metals demand if they weigh on economic activity, in the short-term they are encouraging investors to move funds into commodities as an asset class, underpinning base metals prices.

The metals, which are priced in dollars, are also becoming cheaper for holders of other currencies as the greenback weakens. Among other metals traded on the LME, tin rose to $24,350 against $24,255.

Elsewhere, lead was lower at $2,114 per tonne against $2,148 per tonne at the close on Wednesday, having earlier touched a one-year low of $2,100. Nickel sank to $24,550 from $25,200, and zinc was trading at $2,200 against $2,205.

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