US & World Daily Markets Financial Briefing 28-01-2008

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Wall Street falls after housing data

NEW YORK - A jittery Wall Street lost more ground Monday, extending Friday's sharp drop after new home sales fell more than anticipated and earnings reports failed to impress investors.

The Commerce Department reported that sales of new homes in December fell by 4.7 percent, and that 2007 new home sales plunged by a record 26.4 percent compared to 2006.

The dismal results magnified investors' worries that there may be more massive write-downs by big banks for subprime loan losses, and that another potential rate cut by the Federal Reserve on Wednesday might not be enough to stoke the weakening U.S. economy.

The market discovered troubling clues about the economy in ostensibly upbeat profit reports. Fast food seller McDonald's, a Dow component, said its quarterly profit rose 3 percent due to tax benefits and strong sales, but December U.S. sales were flat with a year ago as cash-strapped consumers pared back spending. And while Verizon, another Dow component, reported a 3.9 percent improvement in profit, the results met analyst expectations but did not exceed them.

Verizon shares fell $1.43, or 3.9 percent, to $36.33, while McDonald's shares fell $4.34, or 8 percent, to $49.76. An hour after market open the Dow Jones industrial average fell 74.46, or 0.61 percent, to 12,132.71. Broader stock indicators also retreated. The Standard & Poor's 500 index fell 6.53, or 0.49 percent, to 1,324.08, while the Nasdaq composite index fell 16.39, or 0.70 percent, to 2,309.81.

A series of events this week, including anticipated references to the economy in President Bush's final State of the Union address Monday evening and the Federal Reserve's interest rate announcement, are expected to influence trading. The Fed lowered rates by 0.75 of a percentage point Tuesday, and traders are betting on another rate cut after the central bank's meeting lets out Wednesday afternoon.

Hopes for a very large cut, however, have been tempered by news that French bank Societe Generale sold European index futures to close positions taken by an alleged rogue trader. It is now thought that those trades may have aggravated the massive losses one week ago in Europe and Asian trading, when the U.S. markets were closed.

Overseas markets fell Monday amid continuing economic concerns and also in response to Friday's decline on Wall Street. In Tokyo, the Nikkei stock average dropped 4 percent and in Shanghai, plunged 7.2 percent. European bourses also were largely under pressure, as London's FTSE 100 fell 2.05 percent, Frankfurt's DAX gave up 1.22 percent and Paris's CAC 40 lost 1.54 percent.

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Forex - Dollar sinks further on weak US housing data

LONDON - The dollar continued to fall as a weak set of US housing data boosted expectations the Federal Open Market Committee will cut interest rates by a further 50 basis points.

New home sales fell 4.7 pct between December and November to an annual rate of 604,000; analysts had expected a smaller drop to 645,000. The median new home price also fell sharply, dropping by 10.9 pct from November to 219,200 usd.

The news indicated demand for new homes is still falling as tighter credit conditions and ailing consumer sentiment offset lower mortgage rates. "No matter which way you look at it, the December new home sales report is simply awful," ING analyst Dimitry Fleming said.

The Fed will set interest rates on Wednesday and markets see a roughly equal chance of borrowing costs falling by 25 or 50 basis points. The dollar's trading pattern has been extremely volatile recently -- weighed on by expectations that US interest rates will fall, but gaining support when investors look to it as a safe-haven currency during equity market falls.

"The foreign exchange market remains caught between the conflicting forces of risk aversion and dollar negative movements in short-term interest rate differentials," said Steve Pearson at HBOS.

Interest rate expectations have had the upper hand this afternoon, with a stronger than expected start to trade on Wall Street calming investors' nerves after a day of losses on Asian markets.

The positive open by US equity markets meant the yen moved lower against the euro and pound having risen fairly strongly earlier today. The yen is also seen as a safe-haven currency during periods of volatility, but tends to loose support as investors become less risk averse due to the fact that its yield is fairly low compared to other major currencies.

While it lost some ground this afternoon, further bouts of volatility on equity markets are expected in the coming days, meaning it shouldn't fall too far. "Regardless of talk of a Japanese recession, the yen will be expected to flex its safe haven-low yield-low risk muscle over the coming days," CMC Markets currency strategist Ashraf Laidi said.

Meanwhile, the euro continued to climb despite figures showing a slowdown in money supply growth in the 15-nation single currency zone. M3 money supply growth dropped to 11.5 pct year-on-year in December from the record level of 12.3 pct recorded in November, but it nevertheless remains too high to alleviate their worries about the impact on medium-term inflation.

"The ECB will be relatively relieved to see that M3 money supply growth slowed more than expected... nevertheless, money supply growth remains way above target and will continue to be a source of serious concern for the ECB even allowing for significant distorting factors," said Howard Archer of Global Insight.

In the UK, the pound continued to shrug off earlier dovish comments from David Blanchflower, a member of the Bank of England's Monetary Policy Committee. Blanchflower, a perceived dove on the MPC, said the central bank should follow the Fed's rate cuts to get ahead of the curve. "It is time for the MPC to lead, rather than follow," he said.

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Euroshares near day's lows midday as Dow seen lower ahead of US rate meeting

At 11.21 am, the STOXX 50 down 64.72 points, or 1.99 pct, at 3,181.29 and the STOXX 600 was down 6.35 points, or 1.97 pct, at 315.88.

Tomorrow and Wednesday, the Federal Reserve is expected to hold its first regularly scheduled meeting of the year, and then the Labor Department will weigh in on the state of the job market on Friday. The central bank's shock move to lower rates by 75 basis points last week helped to shore up investor confidence last week.

The Fed is widely expected to cut rates again this week with many analysts expecting a half-point cut. "The Fed faces a difficult decision this week. Not to cut the Fed Funds rate again might risk another bout of financial market panic and the need for more "emergency" action," said Citigroup strategists, in a note to clients. 

In Europe, Fortis bucked the wider trend, adding 4.77 pct, after it issued a reassuring update on its subprime position.

Dutch broker Theodoor Gilissen maintained its 'buy' advice on Fortis shares after the release, saying the statement should bring relief to the market. Fortis said 2007 net profit before divestments could be lowered to 3 bln eur from 4 bln because of its subprime exposure, depending on which market scenarios apply.

However, its capital and solvency position remains sound and it plans to maintain its dividend at last year's level of 0.59 eur a share, it said in a statement on its website. Selected other financials were also higher. Aegon and ING -- which tumbled late Friday -- rallied as fears of profit warnings proved unfounded.

Allianz was 0.21 pct higher as traders noted vague talk the German insurance group is planning to sell all or part of its holding in Dresdner Bank. although others pointed out the talk was sparked by comments by a JP Morgan analysts in Handelsblatt. The paper cited analyst Michael Huttner saying he got the impression Allianz might sell some Dresdner assets.

Elsewhere, though, financials were mostly lower with Societe Generale leading the pack lower as last week's shock news of a massive fraud at the French banking giant continues to weigh Citigroup cut its rating on the shares to 'sell' and WestlB cut its recommendation to 'hold'.

Shares had been even lower intra-morning as news broke that board member, Robert Day, raised 95 mln eur from the sale of shares in the troubled just days before the bank uncovered the fraud on its derivatives trading floors.

Dealers said the news further knocked confidence in the bank. Banco Espirito Santo shares slipped back 1.23 pct after the Portuguese banking group's full-year which analysts described as "neutral to positive".

Alliance & Leicester fell 0.2 pct after its shares were cut to 'sell' from 'hold' in a Dresdner Kleinwort UK banks note but were initiated as 'buy' at SG Secs. Irish banks Allied Irish and Anglo Irish were cut to 'sell' at UBS, while Bank of Ireland was downgraded to 'neutral'. Shares fell 4.69 pct, 6.84 pct and 4.37 pct respectively.

And Deutsche Boerse fell back 2.15 pct after sharp gains at the end of last week. Lafarge fell 3.67 pct as Credit Suisse cut its rating on the French cement group to 'underperform' from 'outperform' and on Holcim -- down 3.35 pct -- to 'underperform' from 'neutral' as it believes hoped for growth from the emerging markets is now priced in.

The broker therefore thinks any evidence of slowing growth in developing regions is likely to result in a significantly negative share price performance. Peer Saint-Gobain fell 3.81 pct as the cautious outlook for the sector going in 2008 continues to weigh. Natixis Securities cut its price target to 75 eur from 85 after the group's cautious update last week.

Shares in ABB fell back 2.66 pct after CEO Fred Kindle said he did not expect significant transactions in the future because of continuing market worries.

Technology shares were also hard hit as sector rotation weighs again with Philips down 2.48 pct as it said it expects 55 mln eur of acquisition and integrations charges related to its buy of Genlyte, of which 40 mln eur is seen impacting 2008 EBITA.

Siemens shares fell 3.09 pct amid reports it faces five years of monitoring by the US Security and Exchange Commission (SEC) after the company's supervisory board chairman Gerhard Cromme revealed both the SEC and the Department of Justice have agreed to begin talks with Siemens on resolving issues arising from bribery scandal, which is currently investigated.

Miners and oil and gas producers are also mostly lower today as weakening copper and crude prices and concerns about global economic growth weigh.

Anglo American fell 4.98 pct, Antofagasta was down 4.19 pct and Rio Tinto shares were 4.71 pct lower. BP shares fell 2.7 pct and Total shares were down 3.44 pct as a numbers of analysts suggest the upcoming earnings season will offer few reasons for optimism going forward.

But Xstrata is up 1.71 pct on the back of reports that Vale will end weeks of speculation by making an offer worth over 80 bln usd for the Swiss based miner later this week.

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Asian markets tumble ahead of Fed; Shanghai slumps more than 7 pct

The Shanghai Composite ended down 7.2 pct at 4,419.29, with transportation and utilities leading the rout. Sentiment was further hurt by the worst snowfalls in China for 50 years, which hit transport and coal supply as well as causing power cuts across more than half the country.
   
The Shanghai A-share Index fell 7.2 pct to 4,637.81 and the Shenzhen A-share Index was down 6.9 pct at 1,405.64. The Shanghai B-share Index fell 5.1 pct to 304.85 and the Shenzhen B-share Index lost 4.9 pct to 625.60.The Hang Seng ended down 4.3 pct to 24,053.61 as investors, discouraged by the wild swings in the market in recent sessions, opted to lock in gains.
   
The Hang Seng posted its biggest one-day loss last Tuesday, followed by its largest one-day gain Wednesday after the US rate cut. On Thursday, early gains were erased when news that Societe Generale had suffered a 4.9 bln eur loss on a position built by a rogue trader hit the wires in late trade. SocGen also announced another 2 bln eur in subprime-related writedowns.
   
"The market is fluctuating wildly," said Francis Lun, general manager at Fulbright Securities. "investors don't have the appetite to buy stocks now." Lun is sceptical that the Fed will move on rates again this week, arguing that it would be too much in too short a time.
   
The Fed was unaware that SocGen was unwinding a massive position on Monday and Tuesday, a move many expect contributed to the global market turmoil those days -- and to the Fed's decision to take preemptive action.
   
"There is a chance that the Fed may not cut rates, as last week's drastic reaction by the Fed appeared to be an inadvertent bailing out of the fraud-fraught Societe Generale's unwinding of long positions," said Vincent Khoo, head of research at Aseambankers Investment Bank.
   
Other regional benchmarks also fell Monday. The Nikkei closed down 4 pct at 13,087.91 and the Topix was down 3.9 pct at 1,293.03. "It is too early to say that the market has hit bottom as today's fall shows. The volatile market is expected to continue for the time being," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Securities.
   
The Kospi shed 3.9 pct to 1,627.19 and the Singapore Straits Times was down 3.7 pct at 3,041.06. The Taiwan weighted index closed down 3.3 pct at 7,485.79, as investors are already cautious ahead of the holidays and the release of earnings reports.
   
Local firms with China operations also took a hit from weakness in the mainland markets this morning given the worries about the disruptive effects of the heaviest snowfalls seen there for 50 years.
   
The Philippines Composite ended down a less severe 1.1 pct at 3,203.56. Investors are expecting the Philippine central bank to cut rates at a meeting this week. The Kuala Lumpur Composite Index (KLCI) closed down 1.8 pct at 1,380.54 as cautious investors took profits ahead of rate-setting meetings here and in the US this week.
   
Jakarta composite index closed down 1.5 pct at 2,582.05, with sentiment dampened by Wall Street's fall Friday and the slump in regional markets today. Investors were also cautious ahead of the Federal Reserve's two-day policy meeting which begins Tuesday.
   
The Stock Exchange of Thailand (SET) composite index fell 2 pct to 744.36.  The Australian market was closed for a public holiday. Financial stocks were lower across the region. In Tokyo, Mizuho Financial was down 3.9 pct at 489,000 yen, Mitsubishi UFJ Financial was down 5.3 pct at 985 yen and Sumitomo Mitsui Financial was down 5.3 pct at 799,000 yen.
   
The nation's largest brokerage firm Nomura Holdings shed 3.6 pct to 1,566 yen, while the second-largest Daiwa Securities dropped 5.8 pct to 890 yen. In Hong Kong, Bank of East Asia lost 5.9 pct to 44.40 hkd, Bank of Communications fell 5.3 pct to 9.37 hkd and HSBC was down 3.3 pct at 116.50 hkd.
   
China Life fell 6.3 pct to 31.40 hkd and Ping An Insurance was down 6.9 pct at 63.50. Bosideng International Holdings, a manufacturer of warm clothing, rose 14 pct on expectations for strong demand for its products.
   
In Shanghai, transportation and utilities were big decliners. China Southern Airlines fell by the 10 pct daily trading limit to 20.99 yuan and Air China lost 10 pct to 21.73. Dazhong Transportation tumbled 10 pct to 18.57 yuan. Guangdong Electric Power Development lost 10 pct to 11.53 yuan, while Huadian Power International fell 9.5 pct to 7.32.
   
Elsewhere, South Korea's KT Corp rallied 5.5 pct to 47,200 won as investors shrugged off its lacklustre fourth-quarter earnings and instead bet on hopes that it will pursue a merger with subsidiary KTF in the near term. KTF was up 1.1 pct at 27,900 won.
   
KT reported Friday that its net profit fell 15 pct to 115.5 bln won in the fourth quarter in the absence of one-off gains it made a year earlier from income tax refunds and divestiture of investment holdings. But its operating profit nearly doubled to 196.5 bln won, mainly because of lower labour costs.

The Bombay Stock Exchange's 30-share index closed 208.88 points down or 1.14 pct to 18,152.78 points and the National Stock Exchange's 50-share S&P CNX Nifty closed down a steep 109.25 points or 2.03 pct at 5274.10. Earlier, the Sensex plummetted to the day's low of 17,443.29, almost 709.49 points lower than its closing levels.

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Ofil prices fall below $90 a barrel

Oil prices dropped Monday as falling stock markets prompted traders to sell crude futures contracts. "The movements in the equity markets reflect the sentiment on the U.S. economy and how other economies in the world may be affected ... if it slides into a deep recession," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "In the near term, oil prices will continue to react to the gyrations of the global stock markets."
       
Brent crude fell US$1.19 to US$89.71 a barrel on the ICE Futures exchange in London. Oil futures were supported by expectations that the Organization of Petroleum Exporting Countries will not increase its production levels when it meets Friday in Vienna, Austria.
   
The oil cartel has been coming under increasing pressure in recent weeks from the United States, the world's biggest oil consumer, to raise its output to meet growing demand and help ease high oil prices.
   
OPEC officials have repeatedly asserted that high crude oil prices are largely the result of market speculation and geopolitical factors, not fundamental supply concerns, and are thus beyond its control.    The crude contract rose US$1.30 on Friday to settle at US$90.71 a barrel on a view that the recession worries that pulled prices lower in recent weeks may have been overblown.
   
"OPEC will meet on Feb. 1 and we still expect to see no change in the output policy, especially as they meet again in the beginning of March," said Olivier Jakob of Petromatrix in Switzerland in a market report. "The meeting of focus should be instead the Fed meeting on Wednesday and whether they implement the expected 50-basis-point cut."
   
Energy investors were heartened by recent moves by the U.S. Federal Reserve and a proposed stimulus package to shore up the U.S. economy, which could prevent oil demand from slowing as much as many had feared.
   
While investors believe the government's US $150bln  stimulus proposal and the Fed's rate cuts will stave off a serious economic slowdown, rate cuts also tend to weaken the dollar, giving investors another reason to buy oil futures. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.
   
Heating oil futures fell 3.85 cents to US$2.4806 a gallon (3.8 liters) while gasoline futures declined 2.82 cents to US$2.29 a gallon. Natural gas futures lost 3.3 cents to US$7.950 per 1,000 cubic feet.

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