US & World Daily Markets Financial Briefing 27-02-2008

Stocks edge up on Bernanke comments

In midmorning trade, the Dow Jones industrials rose 29.64, or 0.23 percent, to 12,714.56. Broader stock indexes were also higher. The Standard & Poor's 500 index rose 3.25, or 0.24 percent, to 1,384.54; and the Nasdaq composite index rose 8.48, or 0.36 percent, to 2,353.47.

The euro climbed to a record high of $1.5057 as sentiment increased that the Fed would continue its rate cut campaign. The greenback was mixed against other major currencies.

The dollar's continued slide drove more money into commodities -- especially into oil and gold. Oil prices broke through a new intraday high of $102 a barrel in overnight trading, but retreated and was down 22 cents at $100.66 a barrel on the New York Mercantile Exchange. Meanwhile, gold futures set a new high of $961.30 an ounce.

The 10-year Treasury note was lifted by weak economic data reports, which generally stirs demand for safe assets like government bonds. The yield on the benchmark 10-year note, which opposite of the price, fell to 3.83 percent from 3.86 percent late Tuesday.

Treasuries were further boosted after another government report showed business investment in durable goods weakened more than forecast at the start of the year, playing into the nervousness about economic slowing. The Commerce Department reported durable goods orders dropped 5.3 percent in January, exceeding forecasts.

Beyond economic data, investors paid close attention to Bernanke's comments. Clark said the Fed first has to work to right the economy and can afford to worry about inflation later. "If the economy goes down the drain with rising prices, that's stagflation," he said. "Rising prices aren't a big deal if everyone is employed and the economy is growing."

The Russell 2000 index of smaller companies fell 4.13, or 0.58 percent, to 713.19. In Tokyo, the Nikkei closed 1.49 percent higher. But there were losses on European bourses, as London's FTSE 100 fell 1.37 percent, Paris' CAC 40 gave dropped 1.20 percent, and Frankfurt's DAX lost 1.32 percent.

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Forex - Dollar steadies after sharp overnight falls ahead of Bernanke testimony

LONDON - The dollar steadied against major currencies after sharp falls overnight as market players awaited today's testimony by Federal Reserve Chairman Ben Bernanke, as well as US durable goods data.

The dollar plummeted against a range of currencies in Asian trade, with the euro surging through the all-important 1.50 usd level. The move came as yesterday's very weak consumer confidence and housing market data emphasised the dangers of a recession in the US, while very strong PPI inflation data added stagflation fears into the mix.

Markets had also jumped on comments yesterday by Federal Reserve vice-chairman Donald Kohn that even aggressive interest rate cuts in the US For now, however, the market has calmed ahead of Bernanke's testimony, where investors will be looking to see whether he echoes the concerns expressed by Kohn.

Given the European Central Bank's resolutely hawkish stance and its emphasis on the need to tackle inflation, the euro was one of the major gainers against the dollar, hitting a new all-time high of 1.5087 usd, helped by solid euro zone M3 and German consumer confidence data this morning.

The other winners have been the Australian and New Zealand dollars, where interest rates are among the highest in the developed world and in Australia are expected to rise further still.

These currencies, along with the Canadian dollar, have also benefited from a massive rise in commodity prices overnight in the wake of falls in the US dollar. The Australian dollar was hovering just below the important 0.94 usd level which would take it to a 23-year high, the New Zealand dollar hit a 24-year high of 0.8213 usd, while the Canadian dollar hit a 14-week high of 0.9756 per US dollar.

Elsewhere, the pound remained under pressure. The UK currency had come close to the 2 dollar mark again overnight but fell back on rumours of trouble at a UK bank.

The first estimate to UK fourth quarter GDP were released today and as expected left growth unrevised at a quarterly 0.6 pct. The details of the release were disappointing, however, with UK household spending coming in below forecasts while government spending was above forecasts.

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Euroshares down in opening deals, banks weigh, mixed earnings reports

At 9.02 am, the DJ STOXX 50 was down 16.85 points, or 0.51 pct, at 3291.76 and the DJ STOXX 600 was 2.04 points, or 0.62 pct, lower at 327.97.

A surge in oil prices to new all-time highs also weighted on sentiment this morning, with Brent crude futures making their first break above 100 usd a barrel and as the dollar slumped in the wake of poor economic data, spurring buying of commodities.

Back in Europe, the mood was subdued this morning with traders noting that concerns over further writedowns linger and record high oil prices also weighing on sentiment.

In addition, disappointing full-year earnings results at HBOS, the UK's largest mortgage lender had a negative impact. The stock dropped 6.38 pct with traders also pointing to the group's glum outlook statement. Merrill lynch repeated its 'neutral' stance.

Peers fell in sympathy, with BNP Paribas down 1.86 pct, Deutsche Bank down 0.83 pct and BBVA 0.92 pct lower.  And UBS slipped back 0.38 pct ahead of its shareholder meeting today amid fears the group may issue another profit warning. Rumours that HSBC is mulling a bid for Societe Generale sent shares in the French bank 1.50 pct higher.

Meanwhile, the consumer sector grabbed the early spotlight with Henkel KgaA adding 5.5 pct. While the maker of NIVEA products released slightly disappointing fourth quarter earnings this morning, the group surprised investors with plans to sell its 29.4 pct stake in US hospital cleaning company Ecolab Inc in part or in whole.

Analysts at Sal Oppenheim said the sale was a 'major positive' and remove any fears over a potential, future capital increase at the group. It reiterated its 'buy' rating for the stock and 41 eur targe. French peer PPR was also outperforming this morning, up 2.4 pct, after it posted full-year profits ahead of expectations and said it is "confident" of achieving further growth in its results in 2008.

Meanwhile, Agfa-Gevaert NV shed 6.7 pct in opening deals after the Belgian imaging technology company's fourth-quarter results disappointed investors.

Elsewhere, earnings were mixed with Wolters Kluwer retreating 2.83 pct, Bouygues falling 4.33 pct, Holcim down 1.44 pct and Accor down 2.35 pct after their full year numbers. In other news this morning, SAP AG added 0.96 pct with dealers pointing to bullish comments made by the software company's chief executive Henning Kagermann.

In broker action, Vallourec gained 2.56 pct after Merrill Lynch raised its stance on the stock to 'buy' from 'neutral'. Later in the day, investors are expected to cast an eye over to the US where New home sales in January are expected to have totaled an annual rate of 600,000 compared to the 604,000 rate in the previous month.

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Asian stocks gain after Wall Street's positive close; Hang Seng leads 

The Nikkei closed up 1.5 percent at 14,031.30 and the Topix was up 1.3 percent at 1,364.52 with commodity-sensitive stocks leading the advance after oil spiked to another record above 101 dollars a barrel. Inpex rose 3.4 percent to 1.20 million yen and Nippon Oil rose 2.5 percent to 748 yen.

The S&P/ASX 200 closed up 1.8 percent to 5,767.2 and the All Ordinaries added 1.7 percent to 5,842.5.
BHP Billiton closed up 2.8 percent at 39.85 dollars and Rio Tinto added 1.9 percent to 136.20. The Kospi closed up 0.7 percent at 1,720.89, paring some of its early gains as the commodity price rally raised inflation fears.

The Singapore Straits Times ended 0.5 percent higher at 3,094.45. The Shanghai Composite closed up 2.26 percent at 4,334.05 and the Taiwanese Taiex ended up 1.9 percent to 8,462.08.

The Hang Seng was the strongest performer in the region, closing 3.24 percent to 24,483.84 after Financial Secretary John Tsang unveiled a series of tax cuts that are expected to increase disposable income and boost spending. Ping An Insurance closed up rose 8.21 percent to 60.6 dollars.

Standard Chartered rose 7.64 percent to 259.2 after it said net profit from its Hong Kong operations rose 22 percent to 7.4 bln dollars in 2007.

In Tokyo, Sony rose 2.3 percent to 5,320 yen. Toyota Motor gained 1.5 percent to 6,060 yen after the Nikkei newspaper reported the country's largest automaker plans to hike production of its Lexus luxury vehicles by about 35 percent to 850,000 units a year in 2009, to deal with rising demand in emerging markets.

Shares of Hong Kong-based commodities supplier Noble Group were higher in Singapore after the company said net profit surged 92 percent to 258.12 mln US dollars in 2007. Noble rose 11.5 percent to 2.32 dollars.

The Bombay Stock Exchange's 30-share benchmark Sensex closed up 19.80 points or 0.11 pct at 17,825.99 and the National Stock Exchange's 50-share S&P CNX Nifty closed down 1.65 points or 0.03 pct at 5,268.40.

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Metals - Copper stays higher as dollar weakness, inflation fears fuel buying

LONDON - Copper remained higher in early afternoon trade as fund buying continued against a backdrop of a weaker dollar and rising fears over inflation, which are encouraging investment in all commodities.

Yesterday's speech from Federal Reserve vice chairman Donald Kohn raised expectations that the Fed will press on with rate cuts despite rising inflation, possibly further weakening the dollar.

Commodities priced in dollars such as copper and aluminium become cheaper for holders of other currencies as the greenback loses value.

They also benefit from rising inflation, against which they can be bought as a hedge. US inflation is currently at 7.4 pct year-on-year, analysts said, while oil prices, a precursor to higher inflation, hit a new record above 100 usd a barrel today.

Taking into consideration rising inflation and low GDP growth, "we see an economic backdrop eerily similar to the late 1970s -- one of rising inflation and low growth, also known as stagflation," said MF Global analyst Ed Meir. "We should note that in this type of environment, commodities do quite well, since participants turn to hard assets to protect themselves against eroding purchasing power," he said.

But in the longer term buying commodities in response to rising inflation in fact exacerbates the issue, as it drives up raw material prices, fuelling further inflation. Copper prices also benefited from a decline in LME-monitored inventories this morning. Stocks of the red metal dipped a further 2,525 tonnes to 146,600 tonnes after strong gains earlier this week.

At 2.40 pm, LME copper for three-month delivery rose to 8,430 usd per tonne against 8,210 usd at the close yesterday.

Elsewhere tin reached a new all-time high of 18,140 usd a tonne in early trade, amid expectations that supply will remain tight throughout the year after production outages in Indonesia and Africa. LME-monitored stockpiles of the metal have slipped to a nine-month low. Tin later eased back to trade at 18,060 usd against 17,775 usd at the close yesterday.

Aluminium also posted strong gains today, rallying to a 21-month high of 3,110 usd against 2,903 usd. It is feared that production outages in China due to heavy snow earlier this year and restrictions on power supplies to smelters in South Africa due to the republic's electricity crisis will crimp supply.

"We have been forecasting for a while now for that the aluminium market would go into deficit in the second quarter of 2008 and recent production losses are likely to hasten the forecast market tightness," said analysts at Barclays Capital.

Among other base metals, lead was trading at 3,370 usd per tonne against 3,225 usd, zinc strengthened to 2,672 usd against 2,498 usd and nickel was trading at 29,150 usd against 28,260 usd.

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