US & World Daily Markets Financial Briefing 28-10-2008

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US STOCKS-Market cuts gains as financials drop

NEW YORK - U.S. stocks sharply cut gains on Tuesday, and the S&P 500 briefly turned negative, as shares of financial services companies dropped and a report showed a plunge in consumer confidence.

Shares of Goldman Sachs fell 9 percent to $84.44 and Morgan Stanley was down 15 percent to $11.55.

The Dow Jones industrial average was up 44.28 points, or 0.54 percent, at 8,220.05. The Standard & Poor's 500 Index was up 1.44 points, or 0.17 percent, at 850.36. The Nasdaq Composite Index was up 3.29 points, or 0.22 percent, at 1,509.19. 

Goldman, Morgan Stanley shrs fall on VW exposure talk

NEW YORK - Shares of Morgan Stanley  and Goldman Sachs Group Inc tumbled on Tuesday on speculation the banks might be caught on the wrong side of a trade involving German automaker Volkswagen AG, traders said.
      
Morgan Stanley shares were down $1.67, or 12 percent, at $12.06 after falling as low as $10.15. Goldman slid $5.98, or 6.3 percent, to $87.01, after dropping as low as $82.24.
      
Morgan Stanley spokesman Mark Lake said the company does not have any exposure to Volkswagen. Goldman declined to comment, citing its policy of not responding to market speculation.
      
Sources inside Goldman told Reuters the company had no significant losses tied to Volkswagen. "There have been several 'black swan' events occurring in the markets, and there are concerns that they will lead to large losses," said James Ellman, president of Seacliff Capital. He said he does not have positions in Goldman or Morgan Stanley.
      
"Black Swan" events are considered hard to predict and sometimes appear to have elements of randomness.
     
Earlier Tuesday, Volkswagen briefly became the world's largest company by market value, following weekend news that Porsche Automobile Holding SE had taken a stake of more than 74 percent after buying much of the floating stock.
      
This prompted a short squeeze, forcing investors who had bet on a decline in VW shares to buy the stock. Shares of Societe Generale, the French bank, fell as much as 17.5 percent on speculation it also made a bad bet on VW stock.
      
David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said Morgan Stanley shares might also be down because of "problematic 'self-fulfilling fear.'" "Like peers that have either gone bankrupt or were forced to sell, we believe fundamentals were sound enough to overcome problem asset exposures, but there is no antidote for unbridled fear," Trone wrote. "Trading counterparties are crucial, because this revenue flow keeps the lights on."
      
Meanwhile, the cost to insure Goldman and Morgan Stanley debt rose. Credit default swaps on Goldman widened 15 basis points to 310 basis points, or $310,000 per year for five years to insure $10 million of debt, according to Phoenix Partners Group said. For Morgan Stanley, the cost widened 15 basis points to 415 basis points.

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FOREX-US dollar, yen pull back as risk appetite edges up

NEW YORK - The yen fell across the board  and the dollar retreated on Tuesday, as a recovery in global  stock markets prompted investors to lock in steep recent gains  in those two currencies.
   
The moves were seen as technical, analysts said, as there  has been no major catalyst to change the market's perspective  on risk-taking, even as the unwinding of leveraged trades away  from risky assets remained entrenched.
   
Shares in Europe rose nearly 4 percent, following a 6.4  percent jump in Japan's Nikkei share average from a 26-year  low. Those gains boosted the euro and Australian dollar, two of  the currencies most battered recently against the yen.
   
But the stock markets' relief rally and the yen's fall were seen as a temporary pause from the recent sell-off as the  specter of a prolonged global recession should keep investors  in risk-averse mode. "The FX market is still completely driven by equities. We  did see a rebound in Asian and European shares while U.S.  stocks are also up and that's why we've seen the yen and dollar  weaken a bit," said Vassili Serebriakov, senior currency  strategist, at Wells Fargo in New York.
   
"But I don't think there is any major reason to expect that  this fall in the yen and dollar would be pronounced and  long-lasting. Economic fundamentals are still weak all over the  world," he added.
   
In midday trading, the dollar jumped 2.6 percent to 95.20  yen, moving away from a 13-year low just above 90 yen  struck on Friday. The dollar trimmed gains against the yen after a gauge of  U.S. consumer confidence plunged to a record low this month.

"It's a dismal reading," said David Watt, senior currency  strategist at RBC Capital Markets in Toronto. "Lowest on  record. I was wondering how low it might go, but it blew through my worst expectations."
   
The euro, meanwhile, edged up 0.1 percent on the day to  $1.2521, after hitting a 2-1/2-year low earlier.  European Central Bank President Jean-Claude Trichet on Monday  said the bank could cut rates from the current 3.75 percent at  its policy meeting next week.
   
The Fed is also seen easing the fed funds rate -- currently  at 1.50 percent -- by at least half a percentage point at its  two-day meeting starting on Tuesday.
   
The euro was up 2.6 percent at 118.87 yen, having  earlier topped 120 yen. The euro hit a 6-1/2 year low of 113.79  yen on Friday, according to electronic trading platform EBS. Traders said the yen's fall has eased intervention risks  from the Bank of Japan to weaken the currency for trade  purposes, but remained a threat given the surge in volatility.
   
The yen's one-month implied volatility hit more  than 39 percent on Monday, Reuters data show, and while it  eased on Tuesday, it remained elevated at 32 percent. Distressed stock prices and the yen's rapid rise succeeded  in getting the Group of Seven rich nations' attention as they  warned against excessive yen volatility on Monday. That was  seen as opening the way for the BoJ to intervene if warranted.
   
While the prospect of intervention loomed, some analysts  were doubtful such a move could limit the yen's surge unless  any central bank action was globally coordinated. Analysts at BNP Paribas said the mere threat of  intervention would not be sufficient to halt the yen's advance since current market flows were a result of forced position liquidations amid increased volatility and falls asset prices.
   
"It will not be the case of monetary authorities 'scaring'  speculative investors out of positions to deflate a speculative  bubble, but more a case of having to change the supply dynamics  of the yen market, providing much-needed liquidity for investors to unwind positions and repatriate capital."
   
The Australian dollar climbed 3.6 percent against the U.S.  dollar to US$0.6236 after the Reserve Bank of Australia  intervened to prop up the Australian currency for a third  straight day. The Aussie dollar has lost more than 35 percent  against the greenback since peaking in July.

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Europe shares rise early on fresh VW surge, BP

LONDON - European shares rose in early trade on Tuesday to break a five-day losing streak, helped by a surge in Volkswagen and sharp gains in heavyweight oil group BP after quarterly profits jumped.
     
At 0955 GMT, the FTSEurofirst 300 index of leading European shares was up 2.1 percent at 833.00 points, and had been as high as 839.86. The index has lost 21.6 percent in October, hurt by a credit crisis and recession worries.
     
Volkswagen was up 64 percent, following its 146 percent surge on Monday. Short sellers piled into the stock to sew up their speculative positions after Porsche bought up nearly all VW's remaining free float.
      
BP rose 4.2 percent after it reported a 148 percent rise in third-quarter replacement cost profit, at $10.03 billion, boosted by higher oil prices.
     
Total, ENI, and Royal Dutch Shell were up between 0.3 and 3.1 percent.  "It's no real surprise that bargain-hunters are coming into these markets, despite the fact that expectations for the economy are tumbling and the outlook on the corporate front is gloomy," said Henk Potts, strategist at Barclays stockbrokers.
      
"There's too much bad news priced into these markets. Long-term investors can look through the dark clouds ... and can see the cheap valuations."
      
BG Group was up 2 percent after launching a A$5.6 billion ($3.4 billion) friendly takeover bid for Australia's Queensland Gas Co Ltd(QGC) as it tries to secure gas to boost its position in Asia's lucrative liquefied natural gasmarket.
      
Most miners were higher as metals prices in London and Shanghai recovered after early falls, bouncing off lows on the back of losses by the dollar ahead of a U.S. central bank meeting later in the day.
    
London Metal Exchange copper for delivery in three months rose 0.75 percent to $4,030, having dipped almost 5 percent earlier. BHP Billiton, Rio Tinto, and Xstrata were up between 3.3 and 6.8 percent. 
      
But Eurasian Natural Resources Corp. and Kazakhmys were down 5.9 and 4 percent respectively after the Kazakh government said the two companies would reduce output due to the global economic turmoil.
      
Later in the session, the U.S. Federal Reserve starts a two-day meeting expected to cut the fed funds rate -- now at 1.50 percent -- by at least a further 50 basis points. "That should set the tone for the Bank of England and the ECB to cut rates," said Potts of Barclays. "The inflation picture has improved."
       
Britain's FTSE 100 was up 2.1 percent, Germany's DAX was up 9 percent, boosted by Volkwagen, and France's CAC-40 was up 0.3 percent. Aviva surged 10.8 percent after the insurer said it had had no discussions with the UK government about capital support and reported a 12 percent rise in sales for the nine months to September.
      
Its rival Aegon was up 0.9 percent after saying that the Dutch government would provide 3 billion euros capital. The company said it will scrap its final 2008 dividend, as it reported a third-quarter loss of 350 million euros. 
      
Terms of the injection are nearly identical to the deal between the Dutch government and financial group ING announced last week. ING was one of the biggest losers in the index on Tuesday, down 8.9 percent, after Fitch cut its outlook to "negative" from "stable".
       
Other banks that fell included Deutsche Postbank, down 9.7 percent after JP Morgan slashed its price target to 16.5 euros from 52.3 euros while maintaining a "neutral" rating.
      
French bank Societe Generale was down 2.2 percent despite moving to reassure investors after a sharp fall in its share price on Monday, saying it was sticking by its profit forecast and had no bad surprises in its market operations.
       
Spain's biggest bank, Santander, was up 2 percent after posting a 5.5 percent rise in net profit for the first nine months to September, underpinned by robust recurrent earnings from its core retail banking business.  

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Asian market Summary

The Nikkei .N225 gained 459.02 points to 7,621.92. It earlier fell as much as 2.3 percent to 6,994.90, its lowest since 1982.

It is down 32 percent so far this month and has lost half its value since the start of this year.

The broader Topix rose 5 percent to 784.03 after falling 3 percent at one stage.

Trade was active on the Tokyo exchange's first section, with 3.2 billion shares changing hands, compared with last week's daily average of 2.4 billion.

The Korea Composite Stock Price Index ended at 999.16 points, off the day's peak of 1,012.73 points but well up from the morning low of 901.49 points.
   
The KOSPI has fallen 31 percent on the month to be down 47 percent on the year as investors ignored repeated financial support moves from the South Korean government and a total one percentage point cut in domestic interest rates during October.

"Despite the ongoing concerns about economies and such, investors are slowly getting the idea that shares at the current levels are affordable. Also gains in regional markets helped," said Kim Seong-joo, a market analyst at Daewoo Securities.

The benchmark Shanghai Composite Index closed up 48.47 points or 2.81 pct at 1,771.82, bouncing back from a 25-month intra-day low of 1,664.93 points in morning trading. The index had lost 12.7 pct in the previous five trading days.
   
Turnover rose to 39.75 bln yuan from 32.21 bln yuan yesterday.
   
The Shanghai A-share Index was up 51.04 points or 2.82 pct at 1,861.47, while the Shenzhen A-share Index rose 11.08 points or 2.23 pct to 508.42.

The Hang Seng index closed up 1,580.45 points or 14.35 pct at 12,596.29, off a low of 11,133.94. It marked the biggest one-day percentage gain for the index since Oct 29, 1997, when it surged 18.82 pct.
   
Turnover was 66.05 bln hkd.

TAIPEI - Share prices closed firmer as purchases by government-related funds and some bargain-hunting helped the market recover from steep early losses driven by margin calls and recession fears.
   
The weighted index closed up 33.10 points or 0.76 pct at 4,399.97, off a low of 4,110.09 and high of 4,425.90.
   
Turnover was 71.99 bln twd.

Today's intraday low was the lowest level for the index since the 4,108.67 recorded on May 2, 2003, when the region was gripped by SARS outbreak.

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Gold up 3 pct on softer dollar, firmer equities

LONDON - Gold climbed more than 3 percent in Europe on Tuesday as the dollar softened against the euro and a recovery in equities curbed selling of bullion to cover losses on other markets.

Platinum also rallied, cheered by the recovery in gold prices, rising more than 6 percent to a session high of $821.50.

Spot gold rose to a session high of $755.00, before slipping back to $743.75/745.75 at 1041 GMT. Late in New York on Monday it was quoted at $729.60 an ounce.

European shares rose in early trade to break a five-day losing streak, which had prompted investors to sell gold to cover losses on the equity markets.

"There is some more confidence coming into the system that deleveraging is almost done," said Commerzbank analyst Eugen Weinberg. "There was no reason to liquidate gold except for deleveraging, because it is still a safe haven."

"We expect the Fed and the European Central Bank to cut rates over the coming months, and that will put real interest rates into more negative territory. There is a very positive environment behind the gold price."

The dollar slipped almost 1 percent against the euro after earlier hitting a 2-1/2 year high versus the single currency.

Traders are eyeing the two-day rate-setting meeting of the U.S. Federal Open Market Committee, which is expected to deliver a decision on Wednesday.

The Fed is expected to cut lending rates by half a percentage point to 1 percent, the lowest since June 2004, in a bid to calm turmoil in the financial markets.

"Investors might prefer the sidelines ahead of the Fed's interest rate decision, due tomorrow," said Standard Bank analyst Manqoba Madinane.

"With interest rate futures pricing in a 66 percent probability of a 50 basis point Fed rate cut, the greenback's movements today will hog the limelight."

Oil prices also ticked higher, rising by $1 in Asian trade, tracking a rebound in stock markets. Firmer crude prices typically support gold, which is often bought as a hedge against oil-led inflation.

Platinum rebounded, climbing by 6 percent to its session high of $821.50, as the softer dollar boosted interest in the precious metal.

The metal has been pressured to multi-year lows amid fears over falling demand from carmakers, who account for around 50 percent of annual platinum consumption.

Major platinum producer Aquarius Platinum Ltd said in its first-quarter earnings report it has closed a shaft of its Marikana mine for care and maintenance against a backdrop of falling prices.

"This might help turn attention back onto supply-side issues," said Tom Kendall, precious metals strategist at Mitsubishi Corp. "Though undoubtedly (there is) more bad news to come from auto sector too in the weeks ahead."

Traders are also awaiting results from the world's number three platinum miner Lonmin later in the week.

Spot platinum was quoted at $793.50/813.50 an ounce, up from $772.50 in late New York trade on Monday. Palladium climbed more than 4 percent to a session high of $175 an ounce before settling to $170/180 an ounce from $167.50.

Spot silver dipped to $8.88/8.98 an ounce from $9.01. Holdings of the world's largest silver-backed exchange-traded fund, the iShares Silver Trust, fell a further 1 pct on Monday and are down 144 tonnes week-on-week.

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