US & World Daily Markets Financial Briefing 29-02-2008

Wall Street slides in early trading

In the first minutes of trading, the Dow fell 169.98, or 1.35 percent, to 12,412.20. Broader stock indicators also fell. The Standard & Poor's 500 index dropped 20.05, or 1.47 percent, to 1,347.63, and the Nasdaq composite index dipped 33.13, or 1.42 percent, to 2,298.44.

Bond prices rose sharply as stocks declined. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.58 percent from 3.67 percent late Thursday. The euro traded at $1.5188 in London, after reaching new highs on Thursday. The slide in the dollar has sent commodities prices soaring, and on Friday took oil to $103 a barrel for the first time.

Over all, stocks have performed better in February than in January, when credit market turmoil took a heavy toll on the major averages. But disappointing earnings results released late Thursday cast a pall over the market and cause stocks to end the month on a wary note.

Insurer AIG announced a $5.29 billion quarterly loss and took a massive charge to account for its exposure to credit derivatives. The loss caught analysts off guard, as many had expected the company to report a profit. Computer maker Dell had a 6 percent decline in quarterly profit, falling below analysts' expectations, and warned that its business could suffer from reduced customer spending.

Wall Street's pullback comes a day after stocks sank as investors fretted over a rise in unemployment claims and the prospect of more bank failures. Federal Reserve Chairman Ben Bernanke warned that while large U.S. banks will likely recover from the recent credit crisis, other banks are at risk of failing.

Some relief for the ailing bond insurance industry is on the way. Billionaire investor Wilbur Ross agreed to invest up to $1 billion in Bermuda-based reinsurer Assured Guaranty Ltd. Assured does not have as much exposure to bad subprime debt as some of its rivals, but the deal still shows investors are willing to pump capital into an industry where troubles have hurt many classes of normally stable debt. Assured Guaranty rose $3.27, or 14.4 percent, to $26.05.

Meanwhile, AIG was the steepest decliner among the 30 stocks that make up the Dow industrials, falling $2.74, or 5.5 percent, to $41.41. Dell slipped 19 cents to $20.68. In economic news, the Reuters-University of Michigan final consumer sentiment reading for February came in at 70.8, better than the figure of 69 that had been expected.

The Chicago purchasing managers index for this month came in at 44.5, a weaker reading than the 48.5 that had been expected, according to Dow Jones Newswires. The report indicated the factory sector is shrinking in that region. The figure is seen as a precursor of the national Institute for Supply Management report due out Monday.

There was muted reaction to news from the Commerce Department that consumer spending, after adjusting for inflation, was flat for the second straight month in January. The report could support the argument that the economy is at risk of recession.

Consumer spending posted a 0.4 percent monthly rise, which was more than economists had been expecting. However, all of that gain came from a surge in inflation during the month. Incomes in January posted a 0.3 percent increase, a bit stronger than expected, but down from a 0.5 percent gain in December.

A closely watched gauge of consumer inflation posted a 0.4 percent increase in January and was up 3.7 percent over the past 12 months, the biggest year-over-year gain since 1991. This result will intensify worries that inflation is accelerating even as the economy slows. Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 205.3 million shares.

The Russell 2000 index of smaller companies fell 8.77, or 1.24 percent, to 696.95. Overseas, Japan's Nikkei stock average closed down 2.32 percent. In afternoon trading, Britain's FTSE 100 fell 0.62 percent, Germany's DAX index fell 1.68 percent, and France's CAC-40 fell 1.38 percent

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Forex - Dollar remains near record lows vs euro after soft US data

LONDON - The dollar remained near record lows against the euro after the release of generally weak US consumer spending and inflation data for January.

Spending rose 0.4 pct on the month, but the entire rise was due to inflation, leaving consumption unchanged for the second month in a row. Meanwhile, the annual core PCE inflation rate rose to an annual 2.2 pct, well above the Federal Reserve's 1.5-2 pct comfort zone.

"That (inflation) has not yet been a barrier to aggressive interest rate cuts, because the Fed expects inflation to slow as the economy weakens and spare capacity increases," said Nigel Gault, economist at Global Insight. Indeed, Fed Chairman Ben Bernanke made it clear in his testimony to US lawmakers this week that growth risks still trump worries about inflation, and that another rate cut can be expected in March.

This was reinforced by a weak Chicago PMI indicator, which showed contraction for the first time in a year. The figure dropped to 44.5 from the 51.5 reading in January and lower than market expectations for a decline to 50.0.

A steady negative data flow from the US has contributed to the view that that the US economy is already in a recession, and along with Bernanke's comments, caused the dollar's sharp falls against all major currencies this week.

Meanwhile, low-yielding currencies like the Japanese yen and Swiss franc posted robust gains as fears of systemic problems in the US and global economies -- such as the credit-worthiness of bond insurers, overvalued property markets, and banks' difficulty in raising capital -- all hurt investors' risk appetite.

The yen and franc are typically sold in order to fund riskier trades, and with equity markets lower around the globe, an unwinding of such trades have given them a boost.

In the UK, the pound gave a mixed performance, succumbing to the euro and yen strength and gaining against the weaker dollar.

Economic data continues to show slowing growth -- the Nationwide house price survey showed a -0.5 pct monthly fall in February.

But the Bank of England is not expected to cut interest rates next Thursday after rate-setters recently stressed inflation worries.

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Euroshares open lower after Dow losses; financials lead fallers

At 9.01 am, the DJ STOXX 50 was down 7.29 points or 0.23 pct at 3232.29 and the DJ STOXX 600 was down 0.15 points or 0.05 pct at 323.19. In Europe, insurers were under pressure following downbeat comments from Bernanke and more pain from AIG overnight.

Allianz fell 1.84 pct, ING moveD 1,89 pct lower and Aegon was down 0.88 pct. Meanwhile, Swiss Re climbed 5 pct in morning deals thanks to the group's consensus-beating full year performance. "Overall it posted better than expected profits, and the mark-to-market loss of 240 mln sfr is relatively small. Some people were expecting more in the tune of a billion sfr," said a Zurich-based trader.

Staying with financials, Dexia outperformed -- down only 0.13 pct -- as analysts cheered the Franco-Belgian group's full year numbers.

France's Vivendi SA fell 0.68 pct as investors voiced their disappointment with in-line earnings for 2007 and lower than expected guidance from the media conglomerate. And shares in Corio were 1.8 pct higher after the Dutch property group reported better-than-expected full-year results after market close last night.

Petercam said Corio outperformed in all corners of its profit and loss sheet, highlighted by its like-for-like rental growth and revaluation result which were at all time highs.

Eiffage shed 3.9 pct after the group reported a "disappointing" set of full year numbers and issued a glum outlook statement, prompting SG Secs to downgrade the shares to 'hold'. Outside earnings news, NRJ Group rallied 16.9 pct higher on news that it is to refocus on its core, money-making media content activities.

Volkswagen shares were 0.96 pct higher amid rumours that the German group may release numbers ahead of schedule today.

Turning to broker action, shares in Novartis fell 3.3 pct following a downgrade at HSBC to 'underweight' from 'neutral'. The broker reduced its price target on the stock to 50.50 sfr from 67 sfr and said it thinks generic competition to the pharmaceutical company's major franchises is expected to be a drag on its valuation through 2008.

And pharma and chemicals giant Bayer moved 0.85 pct higher after Lehman Brothers raised its stance on the stock to 'overweight' from 'neutral' on valuation grounds while retaining its price target at 66 eur per share. Meanwhile, the University of Michigan survey of consumer sentiment is forecasted to increase in February to a level of 70.0 from 69.6 in the previous month.

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Asian stocks track Wall Street's decline as economic concerns weigh

The S&P/ASX 200 closed down 1.4 percent at 5,572.1 and All Ordinaries ended 1.2 percent lower at 5,674.7. Weaker-than-expected earnings from Insurance Australia Group Ltd (IAG), the country's largest general insurer, "sent a lot of fear back into the insurance and investment sector," Roadley said.

IAG said profit tumbled 68 percent to 110 mln dollars in the first half due to higher weather-related payouts and the turmoil in financial markets. On Thursday, another big insurer, Suncorp-Metway, reported a 27.5 percent decline in the first half earnings.

The Nikkei was down 2.3 percent at 13,603.02 and the broader Topix index declined 2.1 percent to 1,324.28. A sharp spike in the yen to a three-year high against the dollar weighed heavily on exporters, including Honda Motor and office equipment maker Canon. The dollar was last quoted at 104.64 yen, after touching a low of 104.58 yen, its lowest level since May 6 2005.

The Kospi fell 1.4 percent at 1,711.62 and the Kuala Lumpur Composite was down 0.8 percent at 1,357.40. The Singapore Straits Times fell 1.6 percent to 3,026.45. The Hang Seng lost 1.1 percent to 24,331.67, ending a three-day winning streak.

The Shanghai Composite bucked the trend, gaining 1.14 percent at 4,348.54. Traders said liquidity was boosted by a refund to investors who failed to obtain IPO shares in China Railway Construction. The Manila composite index gained 0.6 percent to close at 3,129.99 as political uncertainty added to broader economic concerns.

Taiwan's weighted index closed down 0.58 percent at 8,412.76. The Jakarta index also closed down 1.3 percent at 2,721.94. Banks were key decliners across the region. In Australia, Commonwealth Bank fell 4.4 percent to 42.13 dollars, National Australia Bank lost 3.73 percent to 28.85 dollars.

Insurance Australia Group (IAG) fell 1.1 percent to 3.77 dollars and Suncorp-Metway slid 2.8 percent to 13.91 dollars. Shopping center owner Centro Properties Group, which is struggling to repay billions of dollars of short-term debt, slumped 7 cents or 21.74 percent to 45.5 cents. The company reported a first-half loss of 1.1 billion Australian dollars largely due to write-downs on its US property investments.

In Tokyo, Mitsubishi UFJ Financial was down 4.1 percent to 946 yen and Mizuho Financial lost 6.3 percent at 446,000. Among exporters, Honda lost 3 percent to 3,260 yen, Canon fell 2.2 percent to 4,820 yen In Hong Kong, HSBC Holdings fell 1.9 pct at 120.7 dollars. Bank of China lost 1.5 percent to 3.34 dollars. Bank of Communications dropped 1.34 percent at 9.55 dollars.

China Life Insurance, the mainland's biggest insurer, shed 1.1 percent to 31.45 dollars. Smaller rival Ping An Insurance Group was down 1.1 percent at 60.80 dollars. China's second-biggest insurer is delaying its estimated 160 billion yuan capital-raising after Chinese regulators raised concerns about the impact of large fund-raising activities in the mainland stock market, said IFR.

The Bombay Stock Exchange's 30-share benchmark Sensex closed 245.76 points or 1.38 pct down at 17,578.72 and the National Stock Exchange's 50-share S&P CNX Nifty closed 61.9 points or 1.17 pct lower at 5,223.20.

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Metals - Gold close to high as dollar struggles; funds attracted to commodities

LONDON  - Gold stayed near a record price hit earlier today ahead of the weekend as the dollar remained weak and as investors continued to favour the commodity sector. In recent weeks investor interest in commodities has soared on the perception that raw materials are a hedge against ailing equity markets, roiled by recession fears.

Earlier today, gold hit a record 976.13 usd and the next target is seen at 1,000 usd. Any price dips are likely to be supported as most reckon the general trend is upwards, and buyers do not want to miss out on a rally.

Gold in particular has always been seen as a hedge against stock market weakness as the metal holds its value and is a safe asset. A weak greenback meanwhile boosts buying as dollar-denominated gold becomes cheaper for those trading in stronger currencies. Fears of inflation, with oil close to a record near 103 usd, also supported gold, which is bought as a hedge.

"A weak dollar and rising commodity prices generally continue to sponsor that bull market," said Dennis Gartman, editor of daily trading note The Gartman Letter.

At 2.04 pm, the precious metal was trading at 966.80 usd per ounce against 965.20 usd in late New York trade yesterday. This morning, gold rose to a record of 976.13 usd per ounce.

Meanwhile, platinum bounced back impressively and was at 2,144 usd against 2,140 usd an ounce in late New York trades yesterday. The metal, used extensively in catalysts and jewellery manufacturing, had dropped to as low as 2,085 usd yesterday on profit taking.

Platinum has risen sharply since the end of January, when state power utility Eskom caused a five-day closedown of mines after warning it could not guarantee electricity supply unless usage was cut.

Eskom later told miners that electricity supply would be kept at only 90 pct of usual requirements until 2012. As a result, analysts say the platinum market deficit could widen to between 400,000-500,000 ounces this year compared with 265,000 last year. There are currently no plans to change the 10 pct reduction, an Eskom spokesman has said.

Gerry Schubert, a director of metals at Fortis, said the shortage will cut supply significantly in the longer term, and the outage is likely to affect gold too as South Africa produces around 10 pct of the world's supply. Meanwhile, platinum's sister metal palladium fell to 562 usd this morning against 574 usd in late New York trades yesterday. Silver was up at 19.64 usd from 19.62 usd per ounce yesterday.

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