US & World Daily Markets Financial Briefing 31-01-2008

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Stocks fall amid economic worries

NEW YORK - Stocks pulled back in early trading Thursday as investors fretted over a heavy loss by bond insurer MBIA Inc. and the prospect of new downgrades in the bond insurance industry.
   
In addition, new reports on sluggish consumer activity and higher jobless claims were worrisome reminders of the seriousness of the continuing economic slowdown.
   
A sizable 0.50 percentage point rate reduction from the Federal Reserve on Wednesday was not enough to propel stocks higher. An initial relief rally after the Fed announcement gave way to a new selling wave as speculation mounted that insurers that guarantee municipal and corporate debt may soon receive downgrades from credit rating agencies.
   
If such downgrades are issued, it will set off a new round of uncertainty in a financial system already battered by the subprime mortgage crisis. This new threat appears at a time when some economists believe the economy has entered a recession and when many recent earnings reports have been disappointing. A loss reported by bond insurer MBIA Inc. added to the market's uneasiness.
   
In midmorning trading, the Dow Jones industrial average fell 66.33, or 0.53 percent, to 12,376.50. The Dow had been down more than 190 points in early trading. Broader indexes also fell. The Standard & Poor's 500 index fell 8.68, or 0.64 percent, to 1,347.13, and the Nasdaq composite dropped 12.25, or 0.52 percent, to 2,336.75.
   
Government bond prices rebounded as stocks fell. The 10-year Treasury note's yield, which moves opposite its price, fell to 3.61 percent from 3.63 percent late Wednesday.
   
Oil prices slid after Wall Street's decline and a report that U.S. crude stockpiles rose last week. A barrel of light sweet crude fell $2.23 cents to $90.10 a barrel on the New York Mercantile Exchange.
   
Investors remained concerned during the session that problems stemming from the ongoing credit crisis will spread. This clutch of worries makes it harder to get stocks to rally, although investors are pleased by the latest rate cut and believe many stocks are now attractively priced thanks to recent selloffs.
   
Standard & Poor's downgraded or warned it might downgrade more than 8,000 mortgage investments. The ratings agency also forecast a widening array of financial institutions would ultimately face mortgage-securities losses totaling more than $265 billion.
   
Meanwhile, MBIA announced a $2.3 billion overall fourth-quarter loss, after being forced to write-down heavy sums on the subprime mortgage assets it guarantees. Shares fell 80 cents, or 6.2 percent, to $13.16.
   
And investors also weren't getting much help from economic data. The Commerce's Department's personal consumption and income report for December underscored the fact that the economy continued to weaken as 2007 ground to its end. Consumer spending in December -- the year's peak shopping season -- had its weakest performance since September 2006.
   
The report's price index for personal consumption expenditures, a gauge of inflation carefully monitored by the Fed, rose 0.2 percent in December from November levels. The department said personal incomes rose 0.5 percent last month.
   
Separately, the Labor Department reported a startling jump of 69,000 new jobless claims in the latest week, pushing the total to 375,000. That the highest level since early October and the largest increase since September, 2005. Thomson/IFR had forecast a much smaller gain of just 14,000 new claims to 315,000.
   
The Russell 2000 index of smaller companies fell 0.70, or 0.10 percent, to 694.79. In Europe, London's FTSE 100 fell 2.15 percent, Frankfurt's DAX lost 2.02 percent and Paris' CAC 40 lost 1.35 percent.

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Dollar supported by weak opening on Wall Street after soft US data

The dollar was slightly stronger after a weak set of US data weighed on stocks in Wall Street, prompting a fresh set of safe-haven flows to the US currency.
   
"The jump in initial jobless claims could be an indicating that the economy is headed for a recession after all," said Paul Ashworth at Capital Economics.  However he added that the figures could have been exacerbated by the fact there was a public holiday in the week preceding these figures.
   
Currently analysts expect the number of people on payrolls during January to have increased by 58,000 from the month before after a meagre 18,000 rise in December, but several now fear it could come in below this.   
   
The news was taken as a further sign of economic gloom by the markets and prompted stocks on Wall Street to open lower. While weak data would normally weigh on the dollar its effect was muted due to the heightened sense of risk aversion on Wall Street meaning investors turned to the dollar as a safe haven
currency.
   
Meanwhile figures out this afternoon showed US personal consumption remained muted in December but held up better then many analysts had feared.  The Commerce Department reported a 0.2 pct increase in nominal consumer spending for smallest increase since September 2006. 
   
This meant the euro fell back having risen earlier following a strong set of inflation figures.   
   
Euro zone annual consumer price inflation rose 3.2 pct in January, the highest level since the single currency zone was established in January 1999 and well above the ECB's target rate of just under 2.0 pct.
   
ECB rate setters have continued to stress in recent weeks that rising inflation rather than the prospect of falling growth remains their key concern, and numbers like these mean they're unlikely to change their tone anytime soon.
   
However the euro's gains were limited as other figures showed that economic confidence in the 15-nation single currency zone is waning, with analysts warning that the bank can't continue to place such strong emphasis on price pressures and ignore the downside risks to growth.
   
"The mixture of high CPI but low confidence sends an unhelpfully confusing signal in the short-term," said Stuart Bennett, currency strategist at Calyon adding that he believes inflation will gradually come down.  "Consequently, the tug of war between upside inflation risks and downside growth risks should eventually be won by the latter," he added.
  
Elsewhere the pound firmed following a slightly stronger than expected consumer confidence reading.
   
GfK NOP's monthly consumer confidence barometer for January came in at -13, only a slight improvement on December's -14, but above analyst expectations for a further deterioration to -15.
   
However analysts warned that the slight improvement does not change the picture of a deteriorating economic outlook and pointed out the December's interest rate cut from the Bank of England failed to significantly boost consumer's optimism.
    
"Overall consumers remain gloomy and there are now signs that this is translating into weaker spending on the high street," said Vicky Redwood, UK economist at Capital Economics.    
   

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Euroshares open lower as banks, insurers struggle on credit woes

At 9.03 am, the Dow Jones STOXX 50 Index was down 50.23 points, or 1.6 pct at 3,187.54 while the DJ STOXX 600 Index fell 4.96 points, or 1.5 pct at 317.07.
   
In Europe, banks and insurers struggled as their exposure to the ailing US subprime mortgage crisis once again loomed large. Overnight, Standard & Poor's said it is considering slashing its rating on more than 500 bln usd of investments tied to bad mortgage loans.
   
Among the leading decliners, Dexia tumbled 6.2 pct amid concern over the European bank's US bond insurance unit in the wake of the Fitch downgrade of rival FGIC Corp. Other fallers include Royal Bank of Scotland, off 4.7 pct, UBS down 4.6 pct, and Barclays down 4.6 pct.
   
On the earnings front, Royal Dutch Shell rose 0.7 pct as a decision to lift its quarterly dividend helped temper disappointment over results that failed to live up to analyst estimates due to weakness in its production and downstream businesses and higher costs.
   
Among other large-cap companies to report, Vodafone Group tacked on 0.3 pct as the telecom operator posted a 4.4 pct rise in organic revenue growth in the three months to end-Dec and reiterated its full year guidance.
   
Akzo Nobel was up 3 pct after a surprise trading update which revealed a better-than-expected fourth-quarter performance at recently acquired Imperial Chemical Industries.
   
In the media sector, Vivendi edged up 0.3 pct after the company posted an 8.5 pct rise in fourth quarter sales and confirmed it will meet its full year target of more than 2.7 bln eur in adjusted net income, estimating it will be around 2.8 bln.
   
"As we expected, performance was driven by the telcos," said ING in a note to clients, referring to the company's SFR mobile phone unit. "These numbers confirm that Vivendi is very resilient."
   
Shares in M6-Metropole TV, the owner of the M6 television channel in France, traded off 1.95 pct as analysts said full year numbers came in slightly shy of consensus forecasts and the outlook for the French TV group remains uncertain.
   
Staying in the sector, shares in Mediaset were off 1.9 pct on a news report that the European Court of Justice is expected to ask Italy to impose the transfer of Mediaset's Rete 4 channel from terrestrial to satellite broadcast.
   
In other news, Hennes & Mauritz AB fell 1.4 pct after the clothing retailer reported weaker-than-expected fourth quarter profits and gross margins. And Tod's was down 6.8 pct as brokers Goldman Sachs and Cheuvreux downgraded the company.
   
In a note to clients, Goldman said its downgrade comes on the back of disappointing fourth-quarter 2007 sales for the Tod's brand and leather goods, which it believes will have negative implications for margins.
   
In merger and acquisition talk, Iberdrola put in another day of strong gains, up 3.4 pct, after a Spanish news report said Germany utility EON AG is planning to acquire a stake in the company through derivative operations ahead of a potential bid for the utility.
   
France's EDF, which is said to be teaming up with Spain's ACS to launch a bid for Iberdrola, has reportedly already built up a 2.99 pct stake in the utility through derivative acquisitions.

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Asian markets mixed after rate cuts, US economic worries remain

The Hang Seng closed down 0.8 pct at 23,455.74 and the Shanghai Composite closed down 0.8 pct at 4,383.39. India's Sensex closed down 0.4 pct, at 17,687.25, Mixed bag

In Tokyo, the blue-chip Nikkei 225 Stock Index finished up 1.9 pct at 13,592.47. The broader Topix ended up 2 pct at 1346.31.

The KOSPI index finished up 2.2 pct at 1,624.68. Australian shares were choppy, with the S&P/ASX 200 closing up 0.6 pct at 5,650.3 and the All Ordinaries ending up 0.6 pct at 5,697.0.

The Straits Times Index closed slighted down 0.6 pct at 2,981.75 while the Kuala Lumpur Composite Index (KLCI) ended up 0.7 pct at 1,393.25.

The Jakarta composite index closed up 0.7 pct at 2,627.25 while the Taiwan weighted index closed down 0.3 pct at 7,521.13.

The Manila composite index ended up 0.3 pct at 3,266.00, as investors cheered positive domestic news but remained concerned about the deteriorating US economy. The Philippine government announced that the domestic economy expanded by a forecast-beating 7.3 pct in 2007, its fastest pace in 31 years.

Economists polled by Thomson Financial were looking at growth of between 6.5-7.0 pct for the past year. The Economic Planning Secretary Augusto Santos said the government is maintaining its forecast that growth will ease to 6.3-7.0 pct in 2008 given the expected slowdown in the US, the biggest market for Philippine exports.

Among individual shares, South Korean shipbuilders rebounded on bargain hunting after falling sharply on Wednesday. Shares in Hyundai Heavy Industries Co, the world's largest shipbuilder, surged as investors were encouraged by the company's stronger-than-expected fourth-quarter results. Hyundai Heavy ended up 9.1 pct at 312,000 won.

Japanese Daihatsu Motor surged 10.2 pct to 1,082 yen after raising its earnings outlook, while its parent company Toyota rose 5.4 pct to 5,820 yen.

Honda Motor was up 0.6 pct at 3,320 yen. Japan's second-largest automaker by sales said its operating profit in the third quarter rose 35 pct, buoyed by brisk sales overseas and raised its full-year forecast. Isuzu Motors was up 2.3 pct at 444 yen.

Singapore Property heavyweights were lower, with CapitaLand down 9 Singapore cents at 5.9 sgd, Keppel Land 8 cents lower at 6.2 sgd and City Developments fell 26 cents to 11.30 sgd.

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Oil falls to $91 on economic concerns

Oil prices slid close to $1 a barrel Thursday after Wall Street's overnight decline and a report that U.S. crude stockpiles rose last week.

Wall Street -- despite initially advancing after the U.S. Federal Reserve cut interest rates half a percentage point -- closed lower Wednesday as investors collected profits after two positive sessions.

"These days, there's a pretty strong tie-in between movements of the oil market and the equities markets," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"The equities market drops because of expectations of slower economic activity in the U.S. and also in other markets globally, and so if the economies slow down, oil demand may also slow down," Shum said.

Light, sweet crude for March delivery fell 85 cents to $91.48 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

On Wednesday, the contract rose 69 cents to settle at $92.33 a barrel. In London, Brent crude futures lost 96 cents to $91.57 a barrel on the ICE Futures exchange.

The Federal Reserve lowered the fed funds rate, or the interest banks pay one another for overnight loans, to 3 percent, the lowest level since spring 2005. It also lowered the discount rate, or the interest the Fed charges on loans to banks, by a half-point to 3.50 percent.

"The rate cut announced yesterday in the U.S. was actually expected and had already been priced into crude futures," Shum said. Analysts said the cut had already been priced into stock values as well. Asian markets were mixed after the Dow Jones industrial average dropped 0.3 percent overnight, while the leading markets in Europe were all lower.

At midday, London's FTSE and the CAC-40 in Paris were both down around 1 percent, while Frankfurt's DAX had lost 1.3 percent on Wednesday's close.

A report of growing U.S. crude stockpiles also weighed on oil prices. In its weekly inventory snapshot, the U.S. Energy Department's Energy Information Administration said crude and gasoline stocks rose 3.6 million barrels each during the week ended Jan. 25. Analysts had expected crude stockpiles to rise 2.3 million barrels and gasoline inventories to rise 1.9 million barrels.

Supporting prices were expectations that the Organization of Petroleum Exporting Countries would not raise its production quotas when it meets Friday in Vienna, and word that a 315,000 barrel a day Canadian oil sands field has been temporarily shut down due to freezing temperatures. Canada is the single largest supplier of crude oil to the U.S.

"OPEC leaving things unchanged at this meeting is fully priced-in," said Olivier Jakob of Petromatrix in Switzerland, warning that "some OPEC voices are starting to make the claim that they should consider trimming production."

Heating oil futures lost 1.83 cents to $2.5310 a gallon (3.8 liters) while gasoline prices fell 3.56 cents to $2.2984 a gallon. Natural gas futures declined 0.9 cent to $8.036 per 1,000 cubic feet.

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