US & World Daily Markets Financial Briefing 25-02-2009

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US Stocks Decline After Home-Sales Report 

Stocks declined Wednesday as traders resumed selling bank stocks and a bleak report on home resales highlighted the continued poor health of the housing market.

The Dow Jones Industrial Average dropped about 144 points in recent trade to about 7,207, while the S&P 500 fell nearly 2% and the Nasdaq Composite Index slipped 1.6%.

The financial sector remained in the spotlight a day after remarks from Federal Reserve Chairman Ben Bernanke calmed fears that major banks could be on the verge of full-blown nationalization. Traders rolled back much of Tuesday's big rally in the sector, pushing the S&P 500's financial sector down more than 5%.

The market's losses piled up following the release of weaker-than-expected housing data. The National Association of Realtors said that sales of existing homes fell 5.3% in January to an annual pace of 4.49 million units, the weakest reading since July 1997. About 45% of home sales involved distressed property transactions, including foreclosures.

The ailing housing market is at the root of the financial sector and the broader economy's woes. The data caused housing stocks to fall - the PHLX Housing Sector Index was down by 4.3% in recent trading - and led to selling in other economically sectors such as industrials and energy stocks. The housing report also caused gold prices, which had been moving lower, to turn around.

Regulators are expected to begin putting banks through stress tests Wednesday to determine whether they have adequate capital. Citigroup, which is reportedly nearing an agreement to convert the U.S. government's preferred shares in the bank to common stock, was down 10%. Bank of America was down about 6%. Wells Fargo was down nearly 6% and U.S. Bancorp was lower by 8%.

Most veteran traders and analysts expect the market to remain in the doldrums. "It's like we're having death by a thousand cuts here," said S&P market analyst Rich Peterson.

Other market measures slipped on Wednesday. The Nasdaq Composite Index was down 1.6%. The Russell 2000 was off 2.9%.

Ambac Financial Group, the bond insurer, fell 5.5% after it said its financial-guarantee losses and provisions surged. Wynn Resorts shares fell 15% after it reported a deep quarterly loss amid a "dramatic deceleration" in gambling revenue. Discount retailer Dollar Tree was one of the market's few bright spots, rising 1.7% after reporting strong results.

The dollar, which has gained status as a safe-haven currency amid concern about economies worldwide, was stronger. Treasurys prices were narrowly mixed.

Asian markets were generally stronger Wednesday after Wall Street's gains on Tuesday. The Nikkei 225 climbed 2.7%, with exporters helped by the recent bout of yen weakness. European markets also started the day on a strong note but turned around after the U.S. housing report. The FTSE was recently up by about 0.4%, well off its highs for the session. Germany's DAX was off 0.9% after S&P's downgrade of Ukraine's debt rating led to renewed worry about a deepening financial crisis in Eastern Europe.

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Treasurys Little Changed Ahead Of Auction

Treasurys were mixed Wednesday before the government continues its record-sized auctions of U.S. debt. Yields on 10-year notes, which move in the opposite direction as prices, rose 1 basis point to 2.81%. A basis point is 0.01 percentage point

Two-year note yields declined 2 basis points to 1.01%, again testing whether it can stay above 1%. The securities haven't closed above that level since Feb. 9. The Treasury Department will accept bids until 1 p.m. Eastern time for $32 billion in 5-year noteS.

On Tuesday, the government saw decent demand for $40 billion in 2-year securities, though weak interest from a class of investors that includes foreign central banks. On Thursday, the government will sell $22 billion in 7-year notes, the first offering of the maturity since 1993.

Traders are also closely watching how U.S. equity markets react to President Obama's address to Congress late Tuesday. At 10 a.m. Eastern, an economic report is expected to show existing-home sales nudged up in January.

Federal Reserve Chairman Ben Bernanke will again be speaking to Congress. With prepared remarks a repeat of Tuesday's, analysts will be more interested in his answers to questions from lawmakers.

Continued signs of economic weakness in various data combined with "cautionary words from Bernanke have confirmed the underlying bullishness that is the primary offset to the estimated $1.5 trillion of net new Treasury issuance" in fiscal 2009, said strategists at RBS Greenwich Capital.

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European Stocks Advance On Banking Gains

European shares advanced on Wednesday, as remarks from Federal Reserve Chairman Ben Bernanke soothed bank-sector-nationalization worries and investors reacted positively to earnings from Deutsche Boerse and Henkel.

Picking up on a sharp rally for U.S. shares on Tuesday, investors pushed the pan-European Dow Jones Stoxx 600 index up 1.4% to 175.29.

Asia stocks also advanced, while U.S. stock futures were muted after the previous session's strong gains.

On a national regional level in Europe, the German DAX 30 index rose 1.6% to 3,958.76, the French CAC-40 index climbed 1.6% to 2,750.74 and the U.K. FTSE 100 index advanced 1.4% to 3,871.23.

Banks rose sharply on Wall Street on Tuesday after Bernanke played down any notion of nationalizing major U.S. banks.

Improved sentiment towards financials spread to Europe on Wednesday, with HSBC Holdings (HBC) shares up 4.9% in London, BNP Paribas shares up 8.9% in Paris and Santander shares up 4.9% in Madrid.

"Efforts are being taken by U.S., U.K. and other authorities to provide insurance against loans, which they hope will encourage increased lending," noted Darren Winder, head of macro and strategy research at Cazenove.

"The difficulty at the moment is that people generally have relatively little confidence in whether these measures will work," he noted. "There is an air of skepticism around, and that is why we are seeing markets move largish amounts on a daily basis."

"I think it will be some considerable time before we know whether the banking system has been stabilized to the point where lending growth has resumed to the real economy and has resulted in rising levels of economic activity," Winder added.

U.S. President Barack Obama attempted to address worries about the future of the U.S. economy on Tuesday when he said that the U.S. will emerge from the recession "stronger than before."

Shares of German consumer-products group Henkel jumped 11% after it said that fourth-quarter net income more than tripled to 863 million euros from 244 million euros a year earlier, boosted by the sale of its Ecolab operation. Henkel said that it expects difficult market conditions to continue through 2009 but expects to outperform its markets in terms of organic growth.

German stock-exchange operator Deutsche Boerse climbed 5.9% after reporting an 18% drop in fourth-quarter net income to 222.4 million euros ($286.1 million). That still was enough to beat market expectations.

Chocolate maker Cadbury (CBY) climbed 2.7%. Its fiscal-year net income declined to 366 million pounds from 407 million pounds a year earlier but came in ahead of analyst forecasts. Sales rose to 5.4 billion pounds from 4.7 billion pounds.

Rhodia shares climbed 11%. The French chemicals specialist reported a fourth-quarter net loss of 28 million euros, broadly in line with analyst forecasts. A year earlier, it reported a profit of 22 million euros. It also unveiled 150 million euros of cost cutting measures.

Shares of Royal Caribbean Cruises climbed 2.4% in Oslo while Carnival shares rose 7.6% in London after Credit Suisse upgraded both cruise operators to outperform from neutral.

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Dollar, Yen Recover From Sell Off Vs Euro

The dollar and yen are back to recent ranges versus the euro after a sell-off a day earlier following remarks by the Federal Reserve Chairman to Congress.

Chairman Ben Bernanke downplayed the notion of bank nationalization in the U.S. - a fear that has led to both sinking equities markets and risk appetite - and said it would be the course for only the weakest banks. This helped the euro rise as high as $1.29 overnight and Y125.16, its highest level in more than six weeks.

Bernanke has a second day of testimony Wednesday, beginning at 10 a.m. EST, at the same time as January U.S. existing home sales data will be released.

In short-term trading, currency analysts say the euro could advance back to those highs after breaking through key technical trading levels. In addition, after the dollar advanced versus the yen to its highest level since late November, analysts say it could surpass the session high of Y97.35 to reach Y100.0.

Wednesday morning in New York, the euro was at $1.2810 from $1.2850 late Tuesday, while the dollar was at Y96.68 from Y96.80, according to EBS. The euro was at Y123.86 from Y124.38. The U.K. pound was at $1.4399 from $1.4485, and the dollar was at CHF1.1610 from CHF1.1603 Tuesday.

While the European currencies rallied with U.S. stocks Tuesday, underlying economic fears are keeping the euro and U.K. pound confined.

Data released overnight confirmed economic contraction in Germany and the U.K.

Europe's largest economy experienced its worst quarter in the three months to Dec. 31 since Germany reunified in 1990. Germany's fourth-quarter gross domestic product contracted by 2.1% in adjusted terms on the quarter, according to a final reading from the federal statistics office. It was the third quarterly contraction in a row and was mainly due to a significant 2% decline in net exports, the office said. GDP shrank 1.7%, when compared with the fourth quarter of 2007.

Meanwhile, the U.K.'s Office for National Statistics reported that fourth-quarter gross domestic product contracted 1.5% from the third quarter and fell 1.9% from the year earlier period.

The cost of insuring Germany's debt hit a new high of 93 basis points Tuesday. The costs have been hitting highs in weaker euro-zone nations as well.

This, combined with doubts over the feasibility of stronger euro-zone nations being able to help struggling ones, led Chris Turner, head of foreign exchange strategy at ING Financial Markets in London, to call for the euro versus dollar to tread lower.

Elsewhere, Standard & Poor's Ratings Services lowered its long- and short-term foreign currency sovereign credit ratings on Ukraine Wednesday to 'CCC+/C' from 'B/B', and its local currency ratings to 'B-/C' from 'B+/B'. The outlook is negative.

Canada Morning
 
After gaining substantial ground on Tuesday, the Canadian dollar has lost direction and remains mired in recent trading ranges so far Wednesday.

"I'd say that it's a little bit directionless. People are on both sides of the fence," said C.J Gavsie, director of corporate and institutional foreign exchange sales at Bank of Montreal in Toronto.

The U.S. dollar has been trading in a broad range between the mid C$1.2400s and the mid C$1.2500s, although a break lower seems likely at some point, he said.

General U.S. dollar strength enabled the greenback to advance against the Canadian unit in early North American trading before it receded modestly, he said.

Gavsie said commodities are not providing much direction for the Canadian dollar, with the currency wobbling despite gains in crude oil futures. Wednesday morning, the U.S. dollar was at C$1.2457 from C$1.2408 late Tuesday.

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Spot Gold Dn On Profit-Taking, Eyes Equities
 
Spot gold traded to a six-day low Wednesday in European hours due to continued profit-taking, with equities in Asia and Europe rising following gains in the U.S. overnight on remarks from Federal Reserve Chairman Ben Bernanke.

Bernanke tried to assuage market fears that he doesn't believe more major banks are on the brink of collapse and need to be nationalized. And his comments about the rate of inflation - that it's likely to be lower than normal given the decline in commodity prices and spare productive capacity in the economy - were also not supportive of gold prices, said HSBC analyst James Steel.

At 1027 GMT spot gold was trading at $952.60 a troy ounce, down 1% from Tuesday's close. Spot silver was at $13.68/oz, down 0.6%. Spot platinum was at $1,034/oz, down 0.3%. Spot palladium was at $196/oz, down 1%.

"Gold is in a correction and consolidation mode," said Afshin Nabavi, head of trading and physical sales at MKS Finance. Along with higher equities, inflows into exchange traded funds stalled in recent days. That allowed investors to take some profits, but dips will be bought, Nabavi said.

Gold needs to hold above support at $950/oz to prevent further declines, Nabavi said. If U.S. stocks resume declining then he expects gold prices to resume rising.

Prices will recover in the coming days, said Standard Bank analyst Walter de Wet. A rise in risk appetite and higher equities is weighing on precious metals right now, he said, but data continues to show risks to the real economy which will keep investors interested in gold.

Spot platinum is trading along with gold prices and as long as important support at $1,000 a troy ounce holds then the metal will continue to get trading direction cues from gold, MKS' Nabavi said.

Crude Rally On Data Falters As Equities Slide 

Crude oil futures traded higher Wednesday, but an initial rally on oil and product inventory data fizzled as falling equities rekindled concerns about the economy.

Light, sweet crude for April delivery traded 24 cents, or 0.6%, higher at $40.20 a barrel on the New York Mercantile Exchange. April Brent crude on the ICE futures exchange traded 25 cents lower at $42.25 a barrel.

Oil inventories at Cushing, Okla., fell 400,000 barrels from a record 34.9 million barrels in the week ended Feb. 20, according to the U.S. Energy Information Administration. The draw indicated oil supplies are tightening after a steady rise that lasted nearly two months.

Crude stockpiles rose nationwide by 700,000 barrels, though the gains were primarily in the West Coast, a market geographically isolated from the rest of the country. Analysts had given an average forecast of a 1.2 million-barrel build in a Dow Jones survey.

Oil stocks fell despite a drop in refinery utilization to 81.4%, one of the lowest rates on record outside of hurricane season. Gasoline inventories also fell by 3.4 million barrels, where analysts had seen stocks unchanged, as demand rose by 1.7% from a year earlier. Distillate inventories, including heating oil and diesel, rose by 800,000 barrels, where analysts had anticipated a 1.2 million-barrel drop.

But a steep drop in U.S. equities halted an initial rally on the inventory data. Declines in share indexes pointed to further economic turmoil down the road, which would potentially prevent oil demand from recovering. The Dow Jones Industrial Average was recently down 2.6% at 7,159.

"The rally faltering ... has a lot to do with the U.S. stock markets," said Mike Zarembski, senior commodities analyst at optionsXpress, a brokerage in Chicago. "Crude oil was a bit higher yesterday with the turnaround in equities, and today's declines are putting a damper on what normally would be fairly bullish (inventory data)."

Front-month March reformulated gasoline blendstock, or RBOB, recently traded up 2.90 cents, or 2.7%, at $1.1127 a gallon. March heating oil traded 1.84 cents, or 1.5%, lower at $1.1898 a gallon.

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