US & World Daily Markets Financial Briefing 27-05-2008

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Stocks advance after surprise gain in home sales

NEW YORK  - Wall Street advanced Tuesday after the government reported the first gain in new home sales in six months, news that offset disappointing data about consumer confidence

The Commerce Department reported that sales of new homes rose 3.3 percent in April to a seasonally adjusted rate of 526,000 units. In March, sales fell 11 percent to their weakest pace since 1991.

This pleasant surprise helped assuage investors after the Conference Board said its Consumer Confidence Index dropped for the fifth straight month. The index is now at its lowest level since October 1992.

Investors are uneasy about the effect of soaring energy and food prices on consumers, who account for more than two-thirds of U.S. economic activity. With gas prices up sharply from a year ago, many on Wall Street are worried that nervous consumers will stop reaching into their wallets for discretionary purchases.

But the gain in home sales raised hopes that the housing industry, whose problems have pummeled the economy, might be recovering.

In midmorning trading, the Dow Jones industrial average rose 58.54, or 0.47 percent, to 12,538.17. Broader stock indicators were also higher. The Standard & Poor's 500 index rose 6.52, or 0.47 percent, to 1,382.45; the Nasdaq composite index rose 25.60, or 1.05 percent, to 2,470.27.

WASHINGTON - Home prices continued to plunge in March, as three key measures of home prices fell at the fastest annual pace since the influential survey was started more than two decades ago.

The S&P/Case-Shiller 20-city home price index fell a record 14.4 pct to 172.12 for the year through March, the 15th straight month of yearly price declines. The 10-city index fell even further, declining a record 15.3 pct to 176.00.

The 20-city index fell 2.6 pct from February to March, while the 10-city index fell 2.8 pct. The index, which has a baseline of 100 for prices in January 2000, showed yearly price declines in 19 of the 20 cities surveyed. Only Charlotte, North Carolina eked out a 0.8 pct annual gain.

The quarterly national home price index of existing single family homes fell a record 14.1 pct in the first quarter from a year earlier. "There are very few silver linings  that one can see in the data. Most of the nation appears to remain on a downward path," said David Blitzer, chairman of the index committee at Standard & Poors.

For comparison, Blitzer noted that during the 1990-91 housing recession, the steepest annual decline was just 2.8 pct. The steepest annual decline was in Las Vegas, which fell 25.9 pct. Miami declined 24.6 pct and Phoenix dropped 23.0 pct in the twelve months through March.

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RPT Forex - Dollar seen vulnerable ahead of U.S. economic data

LONDON - The dollar was somewhat stronger against other currencies, but analysts noted it remains vulnerable to U.S. economic data, expected to confirm consumer spending and property sales are falling. The Conference Board's survey of consumer confidence is expected to have dipped in May to 60.0 from 62.3 in the previous month.

"Falling house prices, soaring energy and food costs, and mounting job losses have consumers in a deep funk," said Sal Guatieri of BMO Capital Markets, noting that the University of Michigan's survey showed similar sharp drops in optimism.

"Going back three decades, consumer confidence has rarely fallen as much as it has in recent months," he added. That view is going to be exacerbated by an expected deterioration in new home sales, expected to have dipped to an annualised 522,000 unit rate in April from a 526,000 rate in March.

"Although affordability has clearly improved and lower interest rates have meant that mortgage servicing costs are not as onerous it is difficult to envisage buyers returning to the market until there is a semblance of stability in house prices," said Mitul Kotecha at Calyon.

Meanwhile, the euro was somewhat weaker against other currencies after data showed confidence in the economy dropped in France and Germany.

Germany's GfK consumer confidence indicator fell to 4.9 points in June compared with 5.6 points in May and against analysts' forecasts for an improvement to 5.8. In France, the Insee business confidence dropped to 102 in May from 106 in April, beyond estimates for a more modest fall to 104.

The figures dragged the euro lower, but analysts warned that these may be short-lived ahead of inflation data from Germany's states later today. "(The figure) is expected to signal a notable increase of price pressures, thus adding fuel to already existing European Central Bank rate hike expectations," said Carsten Fritsch at Commerzbank.

In the United Kingdom, the pound was weaker across the board after the country's main business lobby warned that the services sector is suffering, with profitability is dropping sharply.

The Confederation of British Industry's quarterly survey of the sector showed that levels of business volumes and values remained weak, and neither consumer nor business services firms are positive about business expansion over the coming year.

The pound's losses were limited, however, by the wide-spread view in markets that the Bank of England is in no rush to cut interest rates because of the threat of inflation.

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Euroshares weaker, opening gains reversed as banks drop led by UBS

At 9:34 a.m. BST, the DJ STOXX 50 index was 6.57 points easier at 3,155.59, while the DJ STOXX 500 index was off 0.91 points at 317.36. Oil majors in Europe benefited from the fresh crude price rise, with France's Total adding 0.12 percent at 56.32 euros.

On the downside, however, European banking issues were again a drag on sentiment led by fresh falls from UBS after the Swiss bank revealed in the prospectus for its recently announced 7-for-20 rights issue, published late Friday that it holds positions related to property markets in countries other than the United States on "which it could suffer losses".

UBS shares dropped a further 6.9 percent to 1.94 Swiss francs, after closing 5.8 percent lower yesterday. Merrill Lynch today cut its price target for UBS to 36.00 Swiss francs from 41.97.

France's Societe Generale was also a big STOXX faller, down 1.58 percent to 61.11 as investors braced themselves for today's AGM, which will be the first chance for shareholders to question the company since the Jermome Kerviel rogue trader scandal.

BNP Paribas shares fell back as well, losing 1.26 percent at 65.76 euros, but Credit Agricole benefited from some switching, rallying 1.61 percent higher to 17.65 euros. Insurers were also weak today as financial issues suffered, with Aegon losing 1.58 percent at 9.337 euros, Axa down 1.32 percent at 21.65 euros, and Generali off 1.07 percent at 25.95 euros.

And in the tech sector, shares in Infineon shed 6.66 percent at 5.89 euros on profit taking after early gains after the German chipmaker's announcement late yesterday that chief executive Wolfgang Ziebart will resign from the company effective June 1 2008.

But on the upside, selected telecom issues were positive led by UK mobiles giant Vodafone, up 2 percent to 166 pence after its full-year revenue beat expectations at 35.5 billion pounds, an increase of 14.1 percent and organic growth of 4.2 percent.

This was slightly higher than the market consensus, provided by the company, of 35.2 billion pounds to 35.4 billion pounds.

The group also said its chief executive Arun Sarin is to leave the group after five years at the helm to be replaced by deputy CEO Vittorio Colao. Merrill Lynch said it sees Colao as more focused on Vodafone's core business and also sees the change as a sign that no large M&A deals are on the cards in the near term.

Merrill Lynch reiterated its 'buy' stance and 217 pence target on Vodafone. Other European telecos were pulled higher in sympathy with the Vodafone news, with France Telecom gaining 1.27 percent at 20.68 euros and Telecom Italia adding 0.78 percent at 1,423 euros.

On the macro front, a raft of European economic news should attract attention later today, with German Q1 GDP and the GfK institute's consumer climate index for June the main interest. France's business climate indicator is also due today, together with the Italian manufacturing confidence index.

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Asian stocks higher as investors seek bargains after sell-off

The Nikkei closed up 1.5 percent at 13,893.31 and the broader Topix was up 1.8 percent at 1,368.25. Financials and exporters led the advance with Mitsubishi UFJ Financial ending up 3.8 percent at 1,013 yen, and Mizuho Financial adding 4.1 percent to 534,000 yen. Insurer Sompo Japan climbed 4.5 percent to 1,119 yen.

The S&P/ASX 200 finished up 0.1 percent to 5,714.4 and the All Ordinaries was up 0.2 percent at 5,818 .4. The Australian market fell in four out of the past five sessions. St. George closed up 3.4 percent at A$33.60. But suitor Westpac was the only major bank to decline, easing 0.8 percent to A$22.49 as investors worried about the costs of the deal.

Westpac said Monday that the integration costs would be around A$700 million if its friendly 1.31-for-1 all paper offer for St. George wins regulatory approval. Analysts had expected integration costs closer to A$500 million.

The Kospi closed up 1.4 percent to 1,825.33, rebounding from a five-month low hit Monday. Kwak Joong-bo, analyst at Hana Daetoo Securities, said investors are betting that crude prices will ease from their recent highs.

Elsewhere, the Hang Seng Index closed up 0.64 percent at 24,282.04 and the Shanghai Composite closed up 0.32 percent at 3,375.41. The Singapore Straits Times rose 0.4 percent at 3,115.35 and the Philippines Composite was up 0.5 percent at 2,855.98. The Taiwanese weighted index rose 0.8 percent to 8,778.39. But the Malaysian KLSE slipped 0.1 percent to 1,274.24.

China and Singapore remain Macquarie's top picks in the region, China because of its strong growth and Singapore for its valuations. "We believe China will deliver the strongest earnings growth in the region this year (we think around 15-20 percent), while in Singapore a U.S. recession is fully priced in," said the analyst.

Taiwan is the bank's strongest underweight rating, mostly because of the grim outlook for its big technology companies. "Moreover, as reality bites, and disappointment about the speed of, and tangible benefits from, rapprochement with China grow, we expect a lot of money to leave domestic Taiwan," said McCormack.

Macquarie has raised its weighting for Korea as it expects the weak won to boost export earnings and stock prices. The bank has cut its India weighting, due to rising inflation and slowing growth. India remains the second most expensive market in the region and "downside risks are growing."

Resource stocks were key gainers in Australia Tuesday. Gold stocks posted gains as the precious metal rose above $927 an ounce in Asian trading, pulled up by higher oil prices. Newcrest Mining added 1.1 percent to A$33.83, Lihir Gold gained 0.9 percent to A$3.29 while Kingsgate climbed 4.1 percent to A$5.62.

Merger and acquisition activity among iron ore stocks saw Midwest Corp. gain 0.4 percent, while its suitor Murchison lost 4.5 percent. Fortescue Metals surged 7.0 percent to a record A$10.59 as talk continued that China's Sinosteel was about to buy a stake in the company.

Emerging iron ore miner Gindalbie Metals added 9.8 percent to A$1.625 while competitor Mount Gibson Iron added 1.5 percent to A$3.44. Mineral sands miner Bemax surged 38.6 percent to $0.305 after its directors recommended a A$0.32 share offer from Saudi Arabia's national Titanium Dioxide Co.(Cristal).

In Tokyo, exporters were firmer, with Nissan Motor finishing up 1.9 percent at 892 yen after the Nikkei newspaper said the company plans to produce a pickup truck in South Africa and to start marketing it in neighboring countries in October.

Toyota Motor gained 1.8 percent to 5,100 yen, major construction machinery maker Komatsu rose 2.8 percent to 3,260 yen and consumer electronics giant Sony was up 1.2 percent at 4,970 yen. Takeda Pharmaceutical closed up 2.8 percent at 5,930 yen after a trial of a diabetes treatment produced positive data.

In Hong Kong, China Mobile rose 0.4 percent to HK$115.40 as investors continued to mull news that Beijing is planning to overhaul the telecommunications sector, a move expected to increase competition for the mainland's largest mobile phone company. The stock fell 8 percent Monday on the news.

"The market overreacted to the news about the restructuring," said Castor Pang, investment strategist at Sun Hung Kai. "The stock's fundamentals remain sound despite regulatory changes."

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Oil rises above $133/bbl following Nigerian pipeline attack

LONDON - Oil prices climbed back above $133 a barrel on Tuesday, after news of further militant attacks in Nigeria heightened global supply fears.

At 10.25 a.m., New York-traded West Texas Intermediate crude for July delivery was up 98 cents at $133.17 a barrel. On Thursday, prices hit an all-time high of $135.09 a barrel. In London, Brent crude for July delivery was up 22 cents at $132.59 a barrel, having hit a record high of $135.14 last week.

Prices rose in electronic trading on Monday -- with volumes light due to public holidays in the U.S. and U.K. -- as Royal Dutch Shell said it was forced to cut production in Nigeria after rebels blew up an oil pipeline.

Oil prices have risen by almost 40 percent since the beginning of the year, on a combination of long-term concerns over global supplies, short-term tightness in diesel and heating oil markets, and financial speculation.

Weakness in the U.S. dollar has also supported prices, as commodities priced in the greenback become relatively cheaper for holders of other currencies -- in addition to becoming an attractive hedge against the dollar's decline. Opec president Chakib Khelil said yesterday that oil prices would continue to climb unless there was an improvement in the outlook for the U.S. dollar.

"We are going to witness a price rise," especially if the economic situation in the United States persists and the dollar continues to decline," he said.

The Organization of Petroleum Exporting Countries -- which controls almost 40 percent of global crude supplies -- has consistently blamed financial speculation, weakness in the U.S. dollar, and geopolitical tensions for the doubling in oil prices seen in the last year, rather than a lack of crude in the market.

The oil producer's cartel has come under intense political pressure from the U.S. and other consumer nations to increase output to help calm spiraling prices, with motorists, airlines and the broader economy all feeling the pinch.

Khelil insisted recent price gains were due to "factors beyond the control" of OPEC. "If OPEC decides to raise production ... these hikes will not really lower the price," said Khelil, who is also the Algerian energy minister.

The world's most prominent hedge fund investor said that: "Speculation ... is increasingly affecting the price. The price has this parabolic shape which is characteristic of bubbles," adding that the bubble would not burst until both the U.S. and U.K. were in recession.

Murmurings about restricting the role of financial players in crude and other commodity markets have been heard from politicians in the U.S. and Germany, but many analysts have argued that restricting speculative investment could exacerbate price spikes due to the reduction of liquidity in the market.

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