US & World Daily Markets Financial Briefing 28-01-2009

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US Stocks Rise On Reports Of 'Bad Bank' Plan; DJIA Up 140

U.S. stocks jumped on Wednesday following reports that the Obama administration is nearing a deal to buy illiquid or bad assets from banking firms.

The Dow Jones Industrial Average was up about 140 points at 8316. The S&P 500 gained 2.4%, driven by a 10% surge in its financial sector, while the Nasdaq Composite Index bounced up by 2.5%.

Late on Tuesday, CNBC reported that President Barack Obama was nearing a "bad bank" plan. Bloomberg News reported on Wednesday that the Federal Deposit Insurance Corp. may manage the plan, citing people familiar with the matter. Some estimates are that the government could take on $1 trillion of bad assets.

A day of sustained momentum for stocks would be a boon, says Gordon Charlop, managing director at Rosenblatt Securities. "We're looking for one of those powerful days to get people to buy into what's happening. People seem to be working on the problems - Davos, the new administration - but there's no confidence yet."

Traders sold the dollar and the yen on reports of the plan while leaving the safe haven of gold, which was well below $900 an ounce. Longer-term Treasurys found some buyers, pushing yields down at the long end of the curve, while the prices of shorter maturities fell slightly.

Banking stocks, which have been extremely volatile in recent weeks, surged in morning trading. Citigroup shares jumped 21% and Bank of America rose 18%.

Adding steam to the sharp rally for banks, Wells Fargo, which reported a $2.55 billion quarterly loss and said Wachovia's quarterly loss was over $11 billion, gained more than 22% after maintaining a 34-cents-a-share dividend.

Gains Wednesday are "obviously driven by financials," says Doreen Mogavero, president of floor-brokerage firm Mogavero, Lee & Co. "All the earnings are out, no more bad news on that front for a while, and it looks like we'll have the program to buy bad assets.

"But we tend to be very euphoric when there's good news - you're probably going to get an overreaction," she added.

The fix for the banking system is crucial "because financing is so important for most companies in this country," said Cleve Rueckert, research analyst at Birinyi Associates. "They need to get financing to expand. They need to get financing to conduct operations. The banking system is the backbone of the economy."

Financial stocks also rallied in Europe, with companies like Lloyds Banking Group, Deutsche Bank and BNP Paribas seeing impressive gains. The pan-European Dow Jones Stoxx 600 gained more than 3%. Asia shares ended higher, with indexes in South Korea and Singapore rallying after a long holiday break.

The Federal Reserve meeting will also be a market focus on Wednesday. Some economists are calling for the Fed to push the federal-funds rate, effectively at zero already, lower still and for the Fed to demonstrate that it's pulling out all the stops to help the economy.

"The Fed's job is going to be to convince markets and the broader public that they can still support the economy ... even with the funds rate at zero," said Al Broaddus, the former president of the Richmond Fed, in a television interview.

Among other stocks to watch, Yahoo shares rose 7.9% after the Internet giant swung to a loss but still beat analyst expectations.

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FOREX-Yen, dollar in retreat as focus turns to Fed

LONDON - The dollar and yen fell broadly on Wednesday, with rallying world share prices reflecting a cooling of risk aversion as investors turned their attention to the U.S. Federal Reserve's policy meeting later in the day.

Positive earnings on Wall Street the previous day helped to drive up European and Asian shares, while a key U.S. Senate panel expanded a proposed economic stimulus package to about $887 billion on Tuesday.

The euro found support as consumers in France and Germany showed surprising resilience to widespread business pain with confidence indicators bucking dire expectations.

Although U.S. policymakers seem to have run out of interest rate ammunition with the benchmark rate already targeted at zero to 0.25 percent markets will be looking for any announcement of new policy measures, such as purchasing long-dated Treasuries.

Such a move would lower borrowing rates, seen as vital to stabilising the recession-hit U.S. economy. "Everyone is quite rightly expecting something -- especially as the Treasury started talking about buying purchasing mortgage backed securities, which they already started doing, and evaluating the merits of buying Treasuries," said Chris Turner, head of FX research at ING in London. "Maybe they have to show more details -- they can't just say they are still evaluating," he added.

Turner also said that markets would be expecting more from new Treasury Secretary Timothy Geithner on the proposed stimulus package and talk that the U.S. will set up a "bad bank" to mop up toxic assets. By 1210 GMT the euro was up 0.7 percent against the dollar at $1.3273 and 1.1 percent versus the yen at 118.52 yen. The dollar gained 0.3 percent to 89.25 yen.

The pound bounced after its slump to a 23-year low last week, hitting a one-week high of around $1.4325. The euro lost 0.4 percent against sterling to 92.77 pence.

Mirroring ebbing risk aversion, world stocks rose 0.9 percent on the day.

Investors were taking heart from positive signs on U.S. President Barack Obama's planned stimulus plan to stem the recession in the U.S., with Democrats hopeful they have enough votes to push it through.

But analysts warned that the global economic outlook remained bleak and that slightly more positive sentiment seen this week could quickly turn.

"Global growth and demand are still the key and confidence is shot," IDEAGlobal strategist Maurice Pomery said in a note to clients. "The bigger themes remain and I still believe the dollar will do well and yen strength with continue".

The International Monetary Fund (IMF) is due to release revised forecasts later in the day, and a Group of 20 finance official told Reuters on Monday the fund would slash its projection for 2009 global growth to 0.5 percent from 2.2 percent in its last economic outlook in November.

The Swiss franc fell to its lowest level so far this year against the euro after the key KOF economic barometer on Switzerland fell to its lowest since the series began in 1991. The euro hit its highest since late December at 1.5156 Swiss francs.

Meanwhile, data out of Australia overnight showed consumer prices fell by their biggest amount in a decade during the fourth quarter, justifying talk of another aggressive interest rate cut next week. The Australian dollar initially dipped after the data, but the higher-yielding currency later recovered, helped by the pick-up in equities. It was last trading up 1 percent at $0.6691 versus the U.S. dollar.

The New Zealand dollar fell, however, ahead of a Reserve Bank of New Zealand rate decision overnight, where analysts expect a large rate cut, possibly of 100 basis points, from the current level of 5.00 percent.
The currency was last quoted at $0.5298 versus its U.S. counterpart.

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European Shares Climb On Hopes For Banks

European stocks advanced on Wednesday, with advancers far outnumbering decliners as banks grew on hopes that bad assets would be taken off the books of U.S. peers and that European governments wouldn't nationalize them.

The pan-European Dow Jones Stoxx 600 climbed 1.6% to 191.22, with most sector indexes advancing.

Banks were particularly strong, with Lloyds Banking Group (LYG) advancing 40%, Deutsche Bank (DB) adding 13.6% and BNP Paribas rising 11.9%.

The gains came as Bloomberg News reported that the Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up. A bad bank would absorb the troubled assets from banks' balance sheets.

It also comes as nationalization fears receded. "I think what we are seeing is a retreat of the nationalization fears which gripped markets last week, people are buying into what they see as opportunity," said Patrick Gordon, a market strategist at the U.K. brokerage Killik & Co.

By region, the U.K. FTSE 100 rose 1.7% to 4,265.80, the German DAX 30 added 2.7% to 4,441.09 and the French CAC 40 climbed 2.4% to 3,023.96.

SAP (SAP), which reported a 13% profit rise on in-line license sales growth, said it would cut 3,000 jobs. Shares of the Oracle rival climbed 6%.

Microchip maker STMicroelectronics (STM), which reported a $366 million loss, said it would cut 4,500 jobs. Shares of the Texas Instruments rival slipped 0.1%.

"It will be crucial for ST how fast the company will be able to reduce its high operating expenses following the recent acquisitions," analysts at UniCredit said in a note to clients.

Novartis (NVS) shares fell 3.3% as the group's operating profit didn't rise as fast as analysts forecast. Novartis also pushed back its plan to submit a vaccine for approval.

"What is concerning about Novartis growth is that it mostly stems from older products that will soon lose patent protection," said analysts from Swiss brokerage Sarasin.

Tate & Lyle shares dropped 4.5% as results for the year to March 31 will be at the lower end of market expectations, which the company blamed on its U.S. ingredients arm and to a lesser extent on ethanol demand.

Rio Tinto (RTP) dropped 6.2% as the miner admitted it may sell shares to help cut its debt by $10 billion.

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Asian Shares End Up;Chip Stks Lift Kospi 5.9%; Nikkei Higher

Asia shares ended mostly higher Wednesday, with indexes in South Korea and Singapore posting large catch-up gains after an extended holiday break.

Tokyo and Sydney were also higher, as semiconductor makers, banks and mining companies benefited from some improvement in investor sentiment. But the markets' gains trailed Tuesday's strong performance in Tokyo, Sydney and Mumbai.

Trading volume in the region was light, with markets in China, Hong Kong and Taiwan still shut for the extended Chinese New Year break.

Japan's Nikkei 225 ended 45.22 points higher, or 0.6%, to 8106.29, building on Tuesday's 4.9% rally. Turnover was moderate at just over 1.9 billion shares.

South Korea's Composite index jumped 5.9% to 1157.98, while Singapore's Straits Times Index surged 4.8% to 1766.08. Wednesday's session was the first day of trade for both markets since Friday.

Sydney's S&P/ASX 200 index closed up 51.5 points, or 1.5%, at 3495.50, easing back slightly after hitting a five-day high of 3505.9. New Zealand's NZX-50 was up 0.4% at 2747.90, India's Sensex added 2.8% to 9257.47 and Malaysia's Composite was up 0.8% at 879.63.

Thailand turned higher to add 0.8%, but shares in the Philippines were down 0.6% while those in Indonesia fell 1.1%.

Investors were awaiting the outcome later Wednesday in the U.S. of a meeting of the Federal Open Market Committee. Economists weren't expecting a change in interest rates, though the post-meeting statement would be closely watched for any comments on the U.S. economic outlook, or any indication the Fed would buy long-term Treasurys.

For now, despite gains over the past two days, investors remained cautious and some analysts suggested caution. "We believe any gains will likely be capped given the rising global job cuts," said Westcomb research head Goh Mou Lih in Singapore. "We would advise investors to sell into strength."

South Korean markets were led by chip stocks as investors there had their first chance to react to Friday's news that German memory chip maker Qimonda had filed for insolvency as the global slump in memory chip prices scuppered a bailout plan.

Investors viewed this as likely to reduce oversupply and bid up shares in the sector, though analysts at UBS said "we believe stability in demand is a prerequisite to an industry recovery."

Samsung Electronics gained 10.5% and Hynix Semiconductor had risen by its daily limit of 15%. In Japan, Tokyo Electron was up 7.9%. Shares of Advantest were 5% higher ahead of its earnings release. After the market close the maker of testing equipment for use in the semiconductor industry said it posted quarterly loss of $87.5 million.

Financial stocks gained in Tokyo with hopes for U.S. action to support its banking sector and thus inject confidence into global markets. Sumitomo Mitsui Financial Group was up 1.2% and Mitsubishi UFJ Financial Group ended 1.2% higher.

But Sumitomo Mitsui said after the close of trading that its net income in the April-to-December period tumbled 74% because of losses from equity holdings and higher credit costs. Also, Nomura Holdings fell 2.2 % after saying Tuesday it lost nearly $3.8 billion in the quarter ended December, partially due to losses from Icelandic investments and financier Bernard Madoff's alleged Ponzi scheme as well as weak financial markets.

Car makers were largely flat in Tokyo after some recent gains, with Toyota Motor ending little changed at 2,980.00 yen.

In Sydney, bank and mining shares were mostly higher. Westpac rose 5.2% and ANZ up 3.9%. Lihir Gold gained 4% after its fourth quarter report surpassed market expectations.

But mining giant Rio Tinto fell 3.9% after it said it wouldn't rule out a potential equity issue to help pay down its debt. Property company Westfield Group shares fell 1% after it warned its 2009 earnings were likely to be flat at best amid deteriorating retail conditions in many of its key markets.

And building products maker Boral dropped 15% after it slashed its annual earnings guidance 40%, pointing to worsening housing market conditions in the U.S., Australia and Asia. That weighed on its peers with James Hardie Industries down 6.6%.

Australia stocks were also boosted by expectations the Reserve Bank of Australia will further loosen money policy next week after data Wednesday showed consumer prices dipped 0.3% in the fourth quarter, marking the first deflation two years.

"It looks like they are headed for their first recession in 18 years. They are clearly feeling the drag from lower global export demand," said David Cohen, director of Asian forecasting at Action Economics in Singapore, referring to the Australian economy.

In currency markets, the dollar remained weaker against the euro, with the shared currency fetching around $1.32, and moved further south against the yen to around 89.23 yen. Other Asian currencies were mostly higher.

Spot gold was down $1.90 at $895.800 a troy ounce from New York levels. March Nymex crude oil futures gained 33 cents to $41.91 a barrel on the Globex platform, after sliding $4.15, or 9.1%, in New York.

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Spot Gold Eases Further On Profit-taking

LONDON -- Spot gold slid below a support level Wednesday on follow-through profit-taking.

Gold's inability to close above $900 a troy ounce Tuesday prompted the selling, as other factors were mostly favorable to the metal, traders said.

At 1017 GMT, spot gold was trading at $887.50/oz, down 1% from Tuesday's close. Spot silver was 0.4% lower at $11.99/oz.

Spot platinum dropped 0.5% to $942.50/oz, and spot palladium fell 1.3% to $188.50/oz. "We couldn't hold above $900 (yesterday) so it looks like we're seeing profit-taking," said Commerzbank precious metals trader Michael Kempinski in Luxembourg.

Higher crude oil prices and a weaker dollar against the euro failed to provide support to gold, confirming gold's pullback was largely technical.

Despite a second consecutive day of losses, trader said gold's outlook remained positive. Given the size of gold's rally since the end of last week, the metal could retreat to $850/oz before the short-term trend turns bearish, said Kempinski.

The fundamental factors that underpinned the rally also still remain in place, said a London-based trader. Investor concerns about the banking industry's solvency and the possible inflationary impact of government monetary and fiscal stimulus measures will continue to drive investors towards gold, the trader said.

While those concerns have eased slightly, putting pressure on gold and giving a boost to equity markets, they haven't gone away. Traders said they expected gold to consolidate between $870 to $925 seems in the near term.

Gold's weakness put pressure on the platinum group metals. The metals may draw support from a better-than-expected reading Germany's GfK consumer sentiment, which would suggest the decline in industrial demand has slowed, Standard Bank analyst Manqoba Madinane, in a daily report.

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