US & World Daily Markets Financial Briefing 29-04-2008

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Consumer confidence drops in April on inflation, job worries

NEW YORK - Soaring gas prices and weaker job prospects made Americans gloomier about the economy in April, sending a widely watched measure of consumer sentiment to a five-year low, a private research group said Tuesday.

The New York-based Conference Board said that its Consumer Confidence Index, which had plummeted in March, fell again to 62.3 in April, down from the revised 65.9 last month and 76.4 in February. While the reading was a little better than the 61.0 expected by analysts, the index remains at its weakest point since March 2003, when it registered 61.4, ahead of the U.S. invasion of Iraq.

"This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but the economic conditions may have slowed even further," Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement. "And not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns."

The Present Situation Index, which measures shoppers' current assessment of economic conditions, dropped to 80.7 in April from 90.6 in March. The Expectations Index, which measures the outlook over the next six months, was little changed at a depressed 50.1, compared to 49.4 in March.

Eroding consumer confidence foreshadows weakening consumer spending, which could further hurt the already deteriorating economy since consumer spending accounts for more than two-thirds of the nation's economic activity.

Investors were unfazed, however, by the fourth straight month of declines in the consumer sentiment reading. In midmorning trading, the Dow Jones industrial average fell 0.32, or less then 0.01 percent, to 12,871.43. Broader markets were narrowly lower.

The downbeat news on confidence came as the widely watched Standard & Poor's/Case-Shiller index showed that housing prices dropped in February at the fastest rate ever, showing that the housing slump is gaining momentum.

Franco noted that consumers' worries about inflation are still rising and that measure now matches the all-time high reached in the aftermath of Hurricane Katrina in the fall of 2005 when gas and oil prices soared after the hurricane and other storms devastated New Orleans and shut down a large chunk of the nation's oil refineries.

She added that the percentage of respondents surveyed who intended to take a vacation over the next six months has fallen to a 30-year-low, another indications that consumers are turning more frugal.

The dismal reading is another big blow to retailers, which have struggled with a spending malaise that has worsened in recent months. Shoppers are being confronted with a number of economic problems as soaring gas and food bills are outpacing meager wage gains. Consumers are also faced with an escalating credit crisis and slumping housing values.

A big worry is the employment market, which has been shedding jobs in recent months. The Labor Department is expected to show another loss of 75,000 when it releases its April report Friday; that follows a 80,000 job loss in March. Analysts also estimate that the unemployment rate will tick up to 5.2 percent from 5.1 percent in March.

Meanwhile, money from the government's economic stimulus plan have begun dropping into bank accounts -- but with rising gas and groceries bills, early indications suggest that shoppers will focus on catching up on basics like meat or eggs, instead of buying a new TV or clothes. That means that grocery stores and discounters could be the few beneficiaries in the retail world of the stimulus plan.

The Consumer Confidence report -- derived from responses through April 22 -- is based on a representative sample of 5,000 U.S. households.

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Forex - Pound falls sharply on weak CBI retail sales survey

LONDON  - The pound fell sharply as a key survey showed an unexpectedly steep drop in UK retail sales in April, suggesting that the credit crunch and the slowdown in the housing market are taking their toll on the wider economy.

The Confederation of British Industry reported that retail sales were their weakest since November 2005, with the net balance of retailers reporting a rise or fall in sales slumping to -26 percent from +1 percent in March.

The reading was way below forecasts for a more moderate deterioration to -4 percent, boosting the prospect that the Bank of England will cut interest rates again sooner rather than later.

"The woeful CBI number is good news for doves calling for another UK base rate cut as early as next week," said Robert Howard, currency analyst at Thomson IFR Markets.

Most in the market, however, expect that the central bank will wait until June before cutting rates again and there was no hint of an early cut when BoE governor Mervyn King gave evidence before the Treasury Select Committee this morning.

King continued to stress the central bank's remit to target inflation and warned that the annual CPI rate may well go back above 3 percent, well above the 2 percent target.

Meanwhile, the dollar steadied against the euro after earlier hitting its strongest level since the beginning of this month at $1.5538, as markets looked ahead to the heavy event calendar this week, including the U.S. rate verdict on Wednesday and non-farm payrolls data on Friday.

U.S. rate setters are expected to deliver one more rate cut but also signal that their eight-month campaign of lowering borrowing costs may be soon coming to an end.

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Euroshares down at open on Dow losses, mixed earnings; BP, Shell shine

World oil prices eased slightly Tuesday as Scottish refinery workers prepared to end a two-day strike which helped send prices to record highs. The industrial action by around 1,200 workers at Grangemouth, west of Edinburgh, was set to end at 05.00 GMT after helping to push New York oil to a record of $119.93 a barrel on Monday, a gain of more than 80 percent from a year ago.

New York's main oil futures contract, light sweet crude for June delivery, eased 22 cents to $118.53 per barrel on Tuesday. Brent North Sea crude for June delivery fell 22 cents to $116.52 a barrel. The contract struck an all-time high of $117.56 last Friday.

But this failed to curb the enthusiasm for the sector in morning deals. UK oil majors BP and Royal Dutch Shell climbed 3.72 percent and 3.32 percent respectively after the pair issued much better than forecast first quarter results.

Merrill Lynch said BP's numbers were 25 per cent above both the consensus and Merrill's forecast. "A very strong quarter for BP. Management appears to have the company on the road to recovery," the broker said.

But it repeated its 'neutral' stance pointing out the group trades at a premium to its European peers and said the shares are already discounting almost perfect execution. Petercam upgraded Royal Dutch Shell to 'buy' from 'add', lifting its price target to 31.5 euros. The broker described today's numbers as "outstanding".

The news lifted other sector plays, with Total up 1.91 percent and Eni up 1.43 percent. STMicro opened nearly one percent lower after a disappointing first-quarter performance but soon turned 4 percent higher as the group reassured investors about its prospects in the third quarter.

But Dassault Systemes remained 1.32 percent lower after it cut its full-year EPS and sales guidance, citing the weak dollar.

Michelin fell 9.42 per cent after it slashed its full-year forecasts overnight. Citigroup cut its recommendation to 'hold' from 'buy', having cut its forecasts by 12 percent and its target to 'hold' from 'buy'.

Shares in Continental AG fell 1.07 percent despite reporting a mixed set of numbers, as Michelin's outlook statement weighed. "While the adjusted Q1 2008 group EBIT was above consensus expectations, the FCF was significantly below our and market expectations," the broker said in a first reaction.

Nokian Tyres fell 1.99 percent as Scandinavian dealers suggested there is definitely some read across from the cautious outlook. "Michelin warned due to raw material prices, there will likely be a spill over to Nokian Tyres," said one, adding Michelin's inability to pass on these costs to consumers is another negative.

But shares in Bayerische Motoren Werke AG. were 1.51 percent higher in early morning trade after the automaker reported a smaller than feared fall in first-quarter pretax profit.

Ciba dropped 12.75 percent as it issued weak first-quarter numbers and cut its outlook to reflect rising raw material costs, prompting UBS to cut its rating to 'sell' from 'neutral' and Cheuvreux to downgrade the shares to 'underperform' from 'outperform'. The news knocked others like Clariant, down 4.42 percent.

But Kemira added 1.63 percent after its numbers beat consensus forecasts. The Finnish chemicals group reported a lower year-on-year first-quarter figure due to higher raw materials and energy costs and the weaker U.S. dollar. First-quarter pretax profit came in at 21.9 million euros, down from 37.3 million euros a year ago, but beat a market consensus of 17 million euros according to an eight-analyst poll conducted by Thomson FirstCall.

And DSM stormed 3.49 percent after its strong quarterly performance and upbeat outlook. SNS Securities said DSM's outlook on EBIT of 870 million euros, plus or minus 5 percent is very positive and added that its previous estimate of 834 million euros can now be increased.

The broker concluded that DSM gave a "strong set of results and strong outlook in these uncertain times". Financials were largely lower with Allianz down 1.17 percent after the insurance giant unexpectedly released first-quarter key numbers this morning which included a first-quarter operating profit that dropped to 1.8 billion euros from the 2.9 billion euros last year.

The insurance company said the drop was largely due to 900 million euros in mark-downs its Dresdner Banking unit will post due to the ongoing financial crisis. But losses were limited as the company said reaching its 2008 targets remains feasible.

DNB Nor slumped three percent after the firm posted first-quarter figures well wide of expectations, but dealers said falls are likely to be limited by the "underlying strength" of the numbers and a bullish outlook. And Deutsche Bank slipped 0.51 percent after Germany's largest bank posted its first quarterly loss in five years as net after minorities turned to a loss of 131 million euros from a gain of 2.121 billion.

Banco Santander fell 0.38 percent as concerns over higher-than-expected provisions offset an otherwise solid first-quarter operating performance.

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Asian markets mixed on caution ahead of FOMC meeting

South Korea's KOSPI index closed 0.6 percent lower at 1,811.51, while the Singapore Straits Times index closed down 0.9 percent at 3,178.20. Bucking trend Markets in Hong Kong and in mainland China bucked the regional falls, with the Hang Seng index closing higher by 0.97 percent at 25,914.15 and the Shanghai composite index closing 1.40 percent higher at 3,523.41.

"There is not a lot of upward momentum in the market today but neither do we have a strong downward pressure. Also the Shanghai market has been trading higher, pushing local stocks along," said Ben Kwong, research head with KGI Securities. Financial stocks led the Hong Kong market higher.

Bank of China closed up 1.29 percent at HK$3.94 after the bank reported an 85 percent increase in first-quarter net profit despite a 198 million yuan write-off on its subprime mortgage-backed securities. Earnings came in at 21.7 billion yuan on higher interest income and bigger revenue from fees and commissions.

Gains in BOC helped boost shares in other lenders. China Construction Bank closed 2.03 percent at HK$7.05. The bank's net profit in the January-March period came in at 32.1 billion yuan ($4.6 billion). CCB did not provide comparative figures for the previous year.

Bank of Communications rose 1.42 percent at HK$11.46. But in Australia, financial stocks retreated from yesterday's gains.

"The market is fairly flat today as there was not really much of a lead from Wall Street with investors a little bit wary ahead of the FOMC's two-day meeting starting tonight," said Juliette Saly, an equities analyst with CommSec in Sydney.

National Australia Bank closed up 0.2 percent at A$30.30. ANZ closed 0.6 percent to A$22.06, Westpac closed 1.5 percent higher at A$25.55 and St George Bank lost 0.9 percent to A$26.85. The S&P/ASX 200 closed 0.07 percent higher at 5,606.9. The All Ordinaries finished up 0.04 percent at 5,672.6.

Elsewhere, the Jakarta composite index closed 2.2 percent higher at 2,303.53, while the Kuala Lumpur composite index closed down 0.9 percent at 1,283.65. The Philippine composite index finished 0.5 percent higher at 2,754.29, while the Taiwan weighted index ended 2.1 percent lower at the day's low of 8,891.74.

The Tokyo market was closed for a public holiday.

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Metals - Copper falls ahead of Fed decision; low inventory limits losses

LONDON - Copper fell ahead of a key U.S. rate decision and expectations the Federal Reserve's rate-cutting policy may soon come to an end.

Low inventories limited losses, however. Commodities across the board were lower, in part because the dollar was climbing against the euro, weakening the appeal of dollar-priced commodities. While most market players are expecting U.S. rate setters to cut the funds rate by 25 basis points to 2.0 percent, they also expect to see a desire to hold rates there for the time being.

The dollar is gaining some ground on this expectation. LME-monitored copper inventories, meanwhile, fell 675 tonnes to 109,650 tonnes, a fresh low since early-August last year.

At 10:20 a.m., London Metal Exchange copper for three-month delivery was trading at $8,585 per tonne against $8,650 per tonne at the close on Monday.

"Expect another day of quiet trading which may well see prices drift as sentiment seems to be focusing on the likelihood that the Fed will make one more cut, but then say it's on hold for a while as it frets about inflation," said BaseMetals.Com analyst William Adams.

Elsewhere, a strike at Chile's Codelco, the world's leading copper producer, was shut for a second week. "An early resolution to the Chilean mine strikes looks less likely, fuelling increased concerns of tight supply," said Mark Pervan, senior commodity strategist at ANZ. "Copper looks the best placed if Chilean mine strike activity continues, while aluminium will be well supported if oil prices remain near record high levels."

Oil was lower on the day but remained in sight of a record near $120 hit yesterday.

Elsewhere, tin was trading at $23,775 per tonne against Monday's close of $23,775 per tonne. Lead for delivery in three months was trading at $2,752 per tonne against $2,765 per tonne, while nickel eased to $28,840 per tonne from $29,290 per tonne.

Aluminium was lower at $2,984 per tonne against $3,011, while zinc fell to $2,276 per tonne against $2,305.

Many analysts expect base metals prices to slip in the months ahead. "Prices over the coming months are likely to be choppy to weaker, with sliding U.S. economic conditions dictating sentiment," said Pervan at ANZ. "Currency markets may also provide less support for metals, with early signs of a floor in the dollar."

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