US & World Daily Markets Financial Briefing 27-06-2007

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Lower on subprime woes, weak durable goods data 

US stock futures are pointing to a lower open amid ongoing concerns over the subprime mortgage market and weaker-than-expected durable goods data, but Oracle and Nike are set for early gains after the two companies posted strong quarterly results.

Dow futures were down 21 points to 13,375 while S&P 500 futures dropped 2.50 points to 1,495.50. Nasdaq 100 futures fell 5.25 points to 1,920.25.

"There is ongoing concern about the state of the housing market and the implications for consumer spending," said Hugh Johnson, chairman of Johnson Illington Advisors. "There is also concern about the Bear Stearns hedge fund problem and how that will resolve itself.

With these worries, portfolio managers seem to be "digging their heels in," especially in light of the market's strong run-up in the last couple of months, he added.
  
Yesterday stocks ended lower after unimpressive data on home sales and consumer confidence, with many investors also preferring to tread water ahead of a Federal Reserve decision on interest rates.
  
The Federal Open Market Committee's two-day meeting on interest rates gets underway in earnest later this morning.
  
The central bank's monetary policy body is widely expected to keep its key interest rate unchanged at 5.25 pct, but investors will be combing through the statement that accompanies its decision for clues on the future direction of
rates.
  
New orders for durable goods in the US fell 2.8 pct in May, depressed by drops in orders at Boeing and for business capital goods.
   
Ex-transportation new orders were down 1.0 pct.
   
The Commerce Department report today was far weaker than analysts had been expecting, with forecasts for a 1.0 pct drop overall and a 0.6 pct increase excluding transportation.     
  
Oil prices extended prior-session declines on expectations US weekly supply data will show a rise in crude and gasoline stockpiles.
  
New York light sweet crude for August delivery was last down 24 cents at 67.53 usd per barrel.
  
On the bond market, the yield on the 10-year Treasury note, a benchmark for setting mortgage rates, stood at 5.06 pct versus 5.09 pct yesterday.
  
The US dollar edged higher against the euro but continued to lose ground against the yen as the Japanese currency benefited from stronger-than-expected Japanese retail sales data overnight and a decline in carry trades.
  
Carry trades involve investors borrowing in low-yielding currencies in order to invest in higher-yielding assets elsewhere.
  
The dollar was last 0.5 pct lower against the yen at 122.35. The euro, meanwhile, dipped 0.1 pct to trade at 1.3434 usd.
  
In an attempt to reassure the markets about its exposure to the US subprime mortage sector, Bear Stearns Private Equity Ltd  a Bear Stearns publicly-traded  fund, said it has not invested in hedge funds exposed to the subprime mortgage market.
   
The company was responding to shareholder inquiries regarding media reports about two hedge funds managed by a team within Bear Stearns Asset Management that invests in asset-backed securities with exposure to the subprime mortgage market.
   
Bear Stearns Private Equity said it has no direct exposure to the US subprime mortgage market and added that its private equity holdings have no indirect exposure to this market.
   
Global markets have been unsettled by news that Bear Stearns is having to bail out two of its hedge funds that have suffered heavy losses as a result of their exposure to risky mortgage loans.
  
Oracle shares were up 1 pct at 19.35 usd in pre-market trading after the software maker posted a forecast-beating set of quarterly results, helped in part by a 25 bln usd acquisition spree.
  
In a key measure of a software maker's health, Oracle's sales of new product licenses rose 17 percent during the quarter to 2.48 bln usd. Management had forecast an increase of 5 percent to 15 percent.
  
It also said it expects its sales momentum to accelerate in the current quarter -- traditionally its most sluggish period.
  
Nike shares surged 4.9 pct to 56.40 usd in pre-market dealings after analysts cheered the sport shoe maker's fourth-quarter results and its raised revenue fiscal 2008 revenue outlook.
  
Lehman Bros lifted its 2008 earnings forecasts, saying Nike continues to have room for growth in the U.S. as well as ample growth opportunity in key geographic regions worldwide, notably China. Lehman holds an 'overweight'
position on the stock and 60 usd price target.
   
ConAgra Foods may also be looking at gains after it posted better-than-expected quarterly results, helped by a strong quarter from its commodities trading division.

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Yen still supported as investors re-assess risky trades 

The yen remained supported, as investors continue to re-assess the risk involved in trades where they borrow against the Japanese currency.

Carry trades -- where capital is borrowed in low-yielding economies like Japan to be placed in higher-yielding ones -- have been under pressure this week due to soft equity markets and rising bond prices, thereby helping the yen rise from historical lows.
   
"It remains to be seen whether the current recoil from risk will amount to a full retreat or a temporary consolidation in position," said Neil Mellor at Bank of New York.
   
The yen was specifically helped by strong retail sales data this morning, as well as a shift in rhetoric from the Japanese government, which yesterday sounded more aggressive in its currency policy by saying it was "carefully
watching" the yen's persistent weakness.
   
Markets will be very sensitive to see how long the current bout of risk aversion and the rise in the yen last, if it gains momentum for a sustained market run or is simply a temporary correction.
   
"It's inevitable that we're going to see some further unwinding of carry trades as the summer progresses but ... it's going to take a sustained rally from the yen if the market is to be convinced that the overall sentiment has
changed," said David Jones, chief market analyst at CMC Markets.
   
Elsewhere, the pound has been stable after weaker-than-expected retail sales data. The Confederation of British Industry said a balance of +17 pct of retailers saw retail sales rise in June, down from +31 pct in May, and cited
poor weather and higher borrowing costs as the culprits.
   
Karen Ward at HSBC believes the easing in retail sales growth is not large enough to keep the Bank of England from raising interest rates again.
   
"A moderation in activity no longer seems enough when rapid money and credit growth are still prominent in the background," and their primary concern will be their credibility to control the currently high inflation rates, said Ward.
   
Looking forward, the dollar will be sensitive to the durable goods data, due at 1330 BST. The consensus forecast is a 1.0 pct decline after a 0.6 pct April increase, due mostly to slower airplane sales.

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Euroshares fall midday as Wall St seen lower, M&A hopes offer some support

Leading European exchanges were lower midday as Wafll Street is seen posting new losses on uncertainty ahead of the FOMC rate-setting meeting that starts today. A swathe of M&A stories, though, helped limit losses.
   
At 9.19 am, the STOXX 50 was down 18.97 points at 3,881.22 and the STOXX 600 was down 1.89 points at 387.62.
   
Spread bettors, IG Index, said the Dow looks set to fall 40 points in opening deals.
   
Unilever jumped 2.37 pct -- as ongoing hopes of a bid and recent moves to offload assets continue to boost sentiment in the stock.
   
The Financial Times said Unilever is expected to make further disposals of underperforming assets following the sale of its Brazilian margarine brands and some factory machinery to Perdigao, the South American food company, for about 20 mln stg.
   
SAP gained 1.07 pct, in a falling market, on the back of solid fourth-quarter figures reported by US rival Oracle Corp and ahead of its second-quarter results, due mid-July, which analysts expect to be strong.
   
Merrill Lynch said the stronger database numbers released by Oracle indicate healthy IT spending across the board which should also benefit SAP.
   
Suez added 0.99 pct and Gaz de France added 2.89 pct as le Figaro said the proposed merger between the two should be announced in the next few days.
   
According to the paper, which did not cite any sources, the government now favours the Suez-GDF merger over a possible tie-up with Sonatrach or EDF.
   
However, the government still needs to decide on the actual form of the merger, the paper said, adding yesterday nothing had yet been settled.
   
The government faces a number of difficulties in this area, notably the valuation difference between GDF and Suez, which means in the event of an exchange offer Suez would need to receive an additional 7 bln eur in cash, thepaper explained.
   
French broker Cheuvreux reiterated its 'outperform' rating for Suez with a target of 47 eur and said that it believes that the French government is to give the go ahead to the merger very soon.   
   
Elsewhere, Repsol YPF and La Caixa said in a statement filed with bourse regulator CNMV last night they are not part of any pact with Suez following reports the French utility is building a stake in Gas Natural -- down 1.18 pct.
   
Repsol, which holds 30.85 pct of Gas Natural, and La Caixa, which has 33.06 pct, said they consider Suez's decision to build an 11.4 pct stake as "the exclusive decision of Suez."
   
Staying with utilities, Iberdrola, said this morning it is carrying out an 85 mln new share issue to finance the acquisition of US' Energy East announced yesterday.
   
The Spanish company said the acquisition will cost 6.4 bln eur, including debt.
   
The new share issue is being carried out through an accelerated bookbuilding process, with ABN Amro, Rothschild, Credit Suisse and JP Morgan acting as global coordinators.
   
Shares in Iberdrola were suspended earlier this morning and resumed trade 2.26 pct lower.
   
On other M&A news, the saga surrounding Dutch bank ABN Amro continues as the Financial Times reports that the consortium of Royal Bank of Scotland Group PLC, Fortis NV and Banco Santander Central Hispano may revise its bid if it cannot stop the sale of LaSalle, ABN's US operation, to Bank of America Corporation.
   
Shares in ABN Amro lost 0.23 pct as RBS dropped 0.70 pct with Fortis shedding 0.62 pct, while Banco Santander retreated 0.50 pct.
   
The sector was further under pressure by continuing concerns over interest rates ahead of tomorrow's FOMC meeting, with investors expecting clues about the Fed's next moves in the accompanying statement.
   
Deutsche Bank dropped 1.40 pct as Unicredito declined 1.81 pct.
   
Meanwhile, Banca Popolare di Milano soared 3.7 pct. Its board failed to clear statute changes necessary to its planned merger with Banca Popolare dell'Emilia Romagna, fuelling hopes it could become a takeover target.
   
In earnings news, Northern Rock slumped 9.55 pct as the bank said its 2007 underlying attributable profit for 2007 is set to rise about 15 pct, compared with the 17 pct increase penciled in by analysts.
   
ABN Amro downgraded its recommendation to 'hold' from 'buy' with a revised price target of 900 pence. Collins Stewart downgraded the shares to 'hold' from 'buy'.
   
Shares in Adidas AG -- up 0.55 pct -- received a boost after US rival company, Nike Inc issued a bullish outlook statement alongside its in-line quarterly numbers overnight.

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Shares lower on profit-taking

Asian shares were lower today on profit-taking. Tokyo shares ended the morning session lower as a firmer yen and weak US stocks overnight overshadowed upside prospects, prompting investors to lock in recent gains.

Fears that China will soon raise lending rates again and moves by the mainland to crack down on speculative fund inflows there also weighed on sentiment in Hong Kong. A-shares in Shanghai and Shenzhen finished the morning session higher on continued bargain-hunting after yesterday's late rebound.
   
Japanese government bond prices ended the morning session higher, bolstered by weak local stocks. However many investors chose to stay on the sidelines ahead of the US FOMC meeting and before key economic data releases both locally and in the US.

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• Indonesia's CP Prima AGM & EGM
  
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Gold flat at lower levels on risk aversion, weak energy prices

Gold continued to fall as risk averse traders shied away from the metal, while light physical demand failed to rally prices.
   
At 2.11 pm in London, spot gold was trading at 640.95 usd per ounce against 642.30 usd in late New York trade yesterday, having dipped to as low as 639.80 usd earlier in the session. Gold has lost 4 pct since the start of the month.
   
"US sub-prime mortgages market worries, exacerbated by weak housing and consumer data yesterday, continued to weigh on asset markets," said UBS analyst Robin Bhar. "Physical demand is seasonally light," he added.
   
Rising treasury bond yields also pressured gold lower because both investments are considered haven assets. If government bonds are yielding more, then gold is less attractive.
   
The 10-year Treasury note's yield rose to 5.10 pct yesterday from late Monday's 5.08 pct after the US Commerce Department's report on new home sales data showed a modest decline, beating dismal expectations.
   
"For now it seems rising treasury yields and high interest rates, and the guaranteed returns that they offer, are tempting investors away from more risky market sectors," noted TheBullionDesk.Com analyst James Moore.
   
"However, the scenario of high energy costs, high inflation and high volatility is still favourable for gold longer-term."
   
For now though, weaker energy prices left investors with little need to hedge against inflationary pressures. Later today, the US Department of Energy will release a weekly snapshot of fuel inventories at 3.30 pm London time, which is likely to move oil prices. Brent crude is trading at just under 70 usd, or 3.4 pct lower than the year-high struck last week.
   
"The market tracks more the movements of crude oil and thus, the weekly inventory data has probably a strong influence on the direction of gold today," Dresdner Kleinwort analyst Peter Fertig said.
   
"The fall of crude oil prices and shifting from risky assets into government bonds argue for lower gold prices," he noted.
   
In other precious metals, silver was down at 12.23 usd per ounce against 12.25 usd, palladium was lower at 362 usd per ounce against 365.20 usd while platinum also fell to 1,265 usd per ounce from 1,267 usd in late New York trades yesterday.

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