US & World Daily Markets Financial Briefing 26-02-2009

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DJ US Stocks Higher Despite Poor Economic Data, GM Results

U.S. Stocks were higher, led by the financial sector, despite three dismal economic reports and bleak results at General Motors.

The Dow Jones Industrial Average was higher by around 94 points to about 7,365 in recent trading. The S&P 500 rose 1.4% amid a 5.7% jump in its financial sector. The Nasdaq Composite Index gained 0.8%.

Strategist Bill King, of M. Ramsey King Securities in Burr Ridge, Ill., said the market is due for a short-term bounce that could last through Thursday's close following a dismal performance in the last few days. But he, like many other financial-industry veterans, remains skeptical that federal officials have yet found the right mix of policies needed to get major Wall Street firms on stable footing for good.

"They still seem to be grasping at straws," King said. "The administration has just taken office, they're confronted with this serious recession, and it's not getting any better yet."

Financial stocks were again dominating traders' attention amid a stream of developments at major lenders around the globe.

European financial stocks rose amid a leadership change at UBS and results at Royal Bank of Scotland Group that weren't as bad as feared. UBS soared 15% after naming ex-Credit Suisse chief Oswald Grübel as CEO, succeeding Marcel Rohner, who is leaving the bank unexpectedly. RBS, now at the brink of being nationalized by the U.K. after agreeing to a massive infusion of new capital and government insurance on more than $400 billion in assets, surged 21%.

Among U.S. banks, J.P. Morgan Chase shares climbed about 9% amid its annual shareholder meeting. The bank said Thursday it will eliminate about 12,000 jobs as it integrates the operations of Washington Mutual. Bank of America rose 11% on reports that it is looking to sell First Republic Bank, a private bank it inherited in the Merrill Lynch deal. Citigroup climbed 6%.

American International Group shares surged in early trading on a report in the Financial Times that it is in talks on a government rescue plan that would split the sprawling insurer into at least three government-controlled units. According to the FT, the plan would swap the government's 80% stake in the company for large stakes in the divisions. AIG was recently up about 21%.

Elsewhere, General Motors was up 2% despite the embattled auto maker's report of a $9.6 billion loss in the fourth quarter as it burned through $6.2 billion in cash and sought government help to avoid running out of funds.

New U.S. claims for state unemployment benefits unexpectedly jumped last week to a 26-year high of 667,000, while total claims cracked the 5 million mark for the first time, the Labor Department reported. Durable-goods orders meanwhile dropped 5.2% in January and were down 26.4% in annual terms. A gauge of business spending in the report declined 5.4%. Also, new-home sales last month plunged more than 10% to a new record low.

Crude-oil futures built on Wednesday's rise, climbing to nearly $44 a barrel. Gold futures fell about $25 an ounce. The dollar rose against the Japanese yen and fell against the euro. Treasurys were lower.

Asian markets ended mostly lower Thursday. The Shanghai Composite index tumbled 3.9% to 2,121.25 and the Nikkei 225 ended little changed in Tokyo. In Europe, the FTSE 100 and German DAX 30 saw strong gains.

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Treasurys Down With Auction, Deficit In Focus

Treasurys prices declined Thursday, sending yields higher for a fourth consecutive session, as the government got ready to sell $22 billion in 7-year notes, the last of three record-sized note auctions this week and the first for this maturity since 1993.

Growing government-debt issuance is in sharp focus as President Barack Obama releases his first budget amid plans to also attempt to come to grips with a yawning federal deficit.

Short-term U.S. debt pared their declines, however, as a pair of economic reports indicated an even weaker-than-expected labor market and as well as declining orders for manufactured goods.

Ten-year note yields rose 5 basis points, or 0.05%, to stand at 2.98%. Yields earlier had topped 3% for the first time since Feb. 9.

Two-year note yields were little changed at 1.08%. Bond prices move inversely to their yields.

On the data front, first-time applications for state unemployment benefits rose 36,000 last week, reaching a seasonally adjusted 667,000, the highest since October 1982. And for the week ended Feb. 14, the number of people collecting benefits climbed to a record 5.11 million, the Labor Department reported.

Separately, orders for durable goods fell a more-than-predicted 5.2% in January, the Commerce Department said. Orders had never fallen six months in a row since the data collection began in 1992.

Economists expect a report at 10 a.m. Eastern time to show the pace of new-home sales declined to 320,000 in January.

The weak data aren't helping bonds, and any rise in equities has pressured fixed-income though weaker stocks have not helped recently, said strategists at RBS Greenwich Capital.

"It's possible that the market has reached the point where there is more supply than demand all other things being equal," they wrote in an email.

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European Shares Advance; RBS Shares Surge

European shares advanced on Thursday, with lender Royal Bank of Scotland soaring as it unveiled the terms under which it will participate in the U.K. government's asset protection scheme at the same time as posting a record annual loss.

The pan-European Dow Jones Stoxx 600 index rose 0.4% to 173.07, with banks at the forefront of those gains. Regionally, the U.K. FTSE 100 index climbed 0.5% to 3,869.80, the German DAX 30 index advanced 0.3% to 3,856.80 and the French CAC-40 index rose 0.1% to 2,700.43.

U.S. stock futures were higher, after shares closed with losses on Wednesday. Asian shares were mixed. "Volatility is the name of the game in the current market. There's uncertainty and we're trading on any news out there," noted Peter Dixon, strategist at Commerzbank.

On Thursday, Royal Bank of Scotland shares surged 23.8% to 29 pence a share, with the gains paring losses made since the start of the year to 43%. Twelve months ago, the bank's shares were trading over 330p.

The lender recorded the biggest-ever U.K. annual corporate loss in 2008 -- 24.1 billion pounds ($34.2 billion) -- although this was still smaller than the 28 billion pound loss the bank had warned it could report.

RBS also announced a sweeping restructure that will move 240 billion pounds of assets into a non-core division and said it intends to raise a further 13 billion pounds ($18.4 billion) of capital from the U.K. Treasury as part of a deal to participate in the U.K.'s asset protection scheme.

"The terms of the scheme look favorable for equity holders," noted Robert Sage, analyst at Macquarie Securities.

Lloyds Banking Group, which is also expected to participate in the scheme and reports Friday, rose 27%, while Barclays, which is considered a possible candidate for the scheme, climbed 9.1%.

HSBC Holdings, up 5.8%, reports earnings on Monday. Also in the sector, UBS (UBS) shares climbed 10.9% in Swiss trading. The firm announced that ex-Credit Suisse chief Oswald Gruebel will take over as its chief executive.

"We view the announcement of Gruebel as CEO positively," said analysts at Merrill Lynch. "At Credit Suisse, Gruebel was a vocal advocate of the integrated business model. He repeatedly stated his belief that significant synergies exist between investment banking and private banking...We expect a similar integrated business model at UBS," they said.

Apart from banks, insurers were also helping sentiment on Thursday, with Germany's Allianz (AZ) chalking up a 9.4% gain.

The insurer swung to a worse-than-forecast fourth-quarter loss of 3.1 billion euros ($3.9 billion). Much of the losses were racked up at Dresdner Bank, now part of Commerzbank, as discontinued losses made up 2.92 billion euros of the red ink.

"Allianz reported FY 2008e figures, at first glance broadly in line with our expectations operationally but with a higher than expected deconsolidation effect from the Dresdner sale," noted analysts at Equinet.

Elsewhere in the sector, Munich Re shares climbed 6.9%, Zurich Financial Services advanced 5.8% and Legal & General shares surged 14.3%.

Other companies reporting earnings included Spanish gas and oil firm Repsol . Shares jumped 1.9% after fourth-quarter adjusted operating profit excluding inventories of 1.05 billion euros beat analyst forecasts.

Also in Spain, telecommunications giant Telefonica climbed 5% after it posted an 89% increase in fourth-quarter profit to 2 billion euros ($2.54 billion).

"The defensive nature of the telecom sector has been further highlighted by Telefonica's report today. We reiterate our buy rating on Vodafone (VOD) and it remains our top pick in the telecom sector," noted analysts at Dolmen Securities.

Vodafone Group shares climbed 3% in London. On the downside, shares of Dragon Oil dropped 19% in Dublin as the company said it's started an investigation into certain possible irregularities identified in its procurement procedures.

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Dollar Down On Rebound In Risk Appetite

The dollar is down in another volatile trading session against the euro and sterling as risk appetite experiences a bounce with buoyant global equities Thursday morning.

U.S. stock futures are up in a rebound from day earlier losses and following gains in Europe, despite deteriorating economic data. Investors are more positive after U.S. officials provided more clarity on bank rescue plans.

Federal Reserve Chairman Ben Bernanke repeatedly said in testimony to Congress Tuesday and Wednesday that authorities prefer not to nationalize banks, although they may need to take substantial shares in institutions if necessary.

Also lifting sentiment is a U.K. government scheme to protect banks against further losses from so-called toxic assets, which U.K. Chancellor of the Exchequer Alistair Darling said Thursday provides "certainty" that banks will keep lending. Royal Bank of Scotland Group announced its intention to participate Thursday, in conjunction with an additional GBP13 billion capital raising.

However, currency analysts warn that gains in the euro and sterling versus the dollar are narrow and subject to reversal inside the range established throughout this week, as more news may unfold on the banking system and ahead of U.S. President Barack Obama's budget review.

Strategists at BNP Paribas have adopted a new short-term strategy to sell rebounds in the euro.

Thursday morning in New York, the euro was at $1.2787 from $1.2733 late Wednesday, and the dollar was at Y97.83 from Y97.55, according to EBS. The euro was at Y125.08 from Y124.22. The U.K. pound was at $1.4338 from $1.4222, and the dollar was at CHF1.1602 from CHF1.1701.

Disappointing U.S. data released Thursday morning did little to change the direction of currencies. Durable goods orders in January plunged and new claims for state unemployment benefits unexpectedly jumped last week to a 26-year high.

Overnight, the European Central Bank reported broad money supply growth in the euro zone cooled sharply in January and was below economists' forecasts, while lending to the private sector also eased. The annual growth rate of M3 broad money supply declined to 5.9% from 7.5% in December, compared to forecasts of 6.9% growth.

Other data showed business and consumer confidence in the 16 countries that use the euro weakened to a record low in February as new orders dried up and concerns about job losses mounted.

Meanwhile, February U.K. house prices fell more than expected, also to a record low in annual terms.

Canada Morning
 
The Canadian dollar is significantly higher Thursday morning as renewed appetite for risk is reflected in stronger stocks and commodities.

A broadly weaker U.S. dollar also help underpin gains in the Canadian currency, said Matthew Strauss, senior currency strategist at RBC Capital Markets.

The U.S. dollar had dropped to the C$1.2410 area in morning trading but bounced briefly to the C$1.2450 area after the weak U.S. data sent a tremor of risk aversion through the markets.

It quickly relinquished its gains and slipped back towards the C$1.2400 area, which some analysts see as providing technical support for the U.S. dollar.

The U.S. dollar was at C$1.2410 Thursday morningfrom C$1.2548 late Wednesday.

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LME Metals Extend Equity Inspired Short-covering

Base metals on the London Metal Exchange held recent gains and some traded higher Thursday in Europe helped by a rally in equities which contributed to boosting sentiment in the metals, traders and analysts said.

"The slightly better tone in equity markets is helping base metal prices to form a base," said Citi metals analyst David Thurtell.

At 1037 GMT LME copper was trading at $3,470 a metric ton, up 2.1% from Wednesday's kerb close. LME aluminum was trading at $1,351/ton, up 0.7%; LME nickel was at $10,300/ton, up 2.5%; LME zinc was at $1,152.50/ton, up 0.8%; LME lead was at $1,035/ton, up 0.5% and LME tin was at $10,775/ton, up 0.3%.

Traders said with the markets calmer for the moment, investors are taking the opportunity to book some profits in the precious metals, such as gold and silver, and cover short positions in the base metals.

LME copper could next target the 100-day moving average of $3,620/ton, said Citi's Thurtell. However, he said in the past few months $3,550/ton proved to be strong resistance.

Traders and analysts said rising canceled warrants, particularly for zinc and copper, could be a sign of some interest in physical metal or pre-positioning on the hopes China's State Reserve Board will want to it for their stockpiling plans.

Leon Westgate, an analyst at Standard Bank, said reports show China's SRB bought 100,000 tons of zinc and could buy more.

However, economic data out later in the day in Europe and the U.S. and overnight in Japan could keep trading activity "choppy," said BaseMetals Will Adams.

"There is still a lot of uncertainty about, but at the same time if a more meaningful short-covering rallies get underway then some sharp moves could be seen," Adams said.

Crude Firms; Slimming Supply Spurs Buying

Crude oil futures rose Thursday in London as the gradual erosion of oil supplies spurred buying interest. "I think we're finally seeing the onshore impact of the OPEC cuts," said Mike Wittner, head of global oil market research at Societe Generale in London. "That's becoming clear and that's quite constructive."

At 1239 GMT, the front-month April Brent contract on London's ICE futures exchange was up $0.51 at $44.80 a barrel.

The front-month April contract on the New York Mercantile Exchange was trading $0.84 higher at $43.34 a barrel.

The ICE's gasoil contract for March delivery was up $15 at $391.75 a metric ton, while Nymex gasoline for March delivery was up 213 points at 118.80 cents a gallon.

The market's attention zeroed in on supply as it tried to gauge the impact of the Organization of Petroleum Exporting Countries' latest oil production cuts.

Thursday, the United Arab Emirates became the first OPEC member to announce supply allocations for April, with state-owned Abu Dhabi National Oil Co. slashing its shipments between 10-15% in accordance with OPEC cuts.

Slimmer OPEC exports could tighten up global inventories and relieve the heavy pressure on oil prices witnessed in recent months.

"The trend of rising stocks in the U.S. is starting to peak and reverse...we believe that the peaks of stock buildings in Europe have also been reached and we wouldn't be surprised if some of the crude oil stocks that have been hidden in some emerging economies are also starting to be gradually reduced," said Olivier Jakob, managing director of Petromatrix, a consultancy based in Switzerland.

Despite increasing evidence of OPEC cuts, oil market fundamentals weren't yet balanced, said Tony Machacek, a broker at Bache Commodities in London.

"Stocks are still reasonably plentiful, particularly for crude (and) we've had some pretty consistent builds over the last few weeks," he said. "On the face of it, the last couple of days have been quite positive for prices... (but there is) skepticism as to whether this is a new trend developing."

The crisis in the global economy - and its negative implications for oil demand - still loom over the market. "Oil prices are now very much in the grip of the overall economic picture," he said.

Despite Thursday's gains, prices remained within their recent range and it may be too soon to predict a sustained rally, Wittner said.

Crude was also helped by firmer equity markets, which have recently been a strong indicator of sentiment in broader financial markets.

"All attention will be back on the equity markets and the important macro releases at the end of the week, with a good chance for consolidation near recent levels," said Andrey Kryuchenkov, vice president of commodities research at VTB Capital in London, noting that the market was anticipating key macroeconomic data releases like the U.S. fourth quarter gross domestic product Friday, and the ISM surveys in early March.

"Risk sentiment and demand concerns are prevalent on the energy markets, so the upside continues to be limited," Kryuchenkov said.

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