US & World Daily Markets Financial Briefing 03-01-2008

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U.S. stock futures get a lift from ADP employment data

U.S. stock futures improved Thursday after the release of the ADP National Employment Report, which indicated that the government's jobs report on Friday will be close to expectations.

S&P 500 futures were up 4.10 points at 1,462.50. Just prior to the release of the ADP data, the futures were trading down slightly at around 1,456. Nasdaq 100 futures were up 2.50 at 2,072.50, vs. pre-ADP data levels of about 2,062.50.

The ADP report showed employment increased by a total of 40,000 in December. Adding in the typical growth in government jobs, which ADP doesn't track, the report suggests nonfarm payrolls grew by about 59,000 in December, compared with the median estimate of economists surveyed by IFR Markets of 70,000, and IFR's estimate of 50,000.

US factory orders increased three times as fast as expected in November, although this increase was fueled in large part by orders for nondurable goods, whose value tends to increase as the price of oil rises.

The Commerce Department reported new factory orders rose 1.5 pct in November, which is the largest monthly increase since July. Factory orders excluding transportation equipment were up 1.4 pct, the largest gain since September and also above expectations for the month.

Economists polled by Thomson's IFR Markets had predicted a 0.5 pct gain in overall orders and a 0.6 pct gain ex-transportation.

Commerce also revised upward factory orders and factory orders ex-transportation to a 0.7 pct gain in October.

Orders for non-durable goods, where the higher price of oil drives up the reported dollar value, were up 3.0 pct in November, the largest gain since March 2005.

These reported increases were tempered by Commerce's downward revision of November durable goods orders to a 0.1 pct loss. Commerce initially reported a 0.1 pct gain in durable goods orders for the month. Durables orders ex-transportation fell 0.8 pct in November.

In addition, a key indicator of business investment, orders for non-defense capital goods excluding aircraft, fell 0.1 pct in November. Commerce also revised these orders in October to a decline of 3.0 pct, more than the 2.0 pct drop it initially reported.

Economists have increasingly used orders of non-defense capital goods excluding aircraft as a proxy for business capital spending and a sign of the health of the economy.

Manufacturers' shipments fell 0.1 pct in November, while unfilled orders rose 1.0 pct. Inventories increased by 0.7 pct, the largest monthly gain since October 2006.

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Forex - Dollar fall gathers pace on US economic concerns

The dollar remains under pressure, particularly against the yen, which has risen to a three-week high against the US currency, after disappointing US economic news yesterday fuelled fears the world's largest economy may be heading into recession.

Yesterday's manufacturing PMI from the Institute for Supply Management slumped to a recessionary level of 47.7 in December, its lowest level since April 2003, fuelling expectations the US Federal Reserve will be cutting borrowing costs quite aggressively in the months to come.

The minutes to the US Federal Reserve's last rate-setting meeting, also published yesterday, further reinforced those expectations, pushing US stocks sharply lower and the dollar down too.

Since yesterday afternoon, the dollar has fallen from around the 111.50 yen mark to a low of 108.22, while the euro has climbed back from around 1.4650 usd to a high of 1.4780 usd.

"Talk of the growing possibility of a manufacturing, and hence broader US recession, is therefore doing the rounds, and in view of the ongoing deterioration of the housing market, the prospect is clearly being taken far more seriously," said Neil Mellor, currency strategist at Bank of New York Mellon.

However, Mellor noted that if investors lose faith in the integrity of the global economic outlook as a whole, then "they may no longer be quite as confident in swapping dollars for those currencies that thrived amidst perceptions of a strong economic backdrop in 2007".

So far, the biggest beneficiary from the uncertain economic outlook in the US has been the Japanese yen, which has benefited from its defensive status. "The bullish US curve steepening will keep low yielding currencies such as the yen supported," said Hans Redeker, global head of FX strategy at BNP Paribas.

The remainder of this week's US data will likely keep attention on the growth outlook. Today's focus will be on the monthly jobs report from payrolls firm ADP, ahead of tomorrow's official figures from the Labor Department.

"Clearly Friday's non farm payroll reading will be seen as the most significant number this week for many, but ahead of that a steady stream of numbers should ensure that at least some volatility is seen in the interim," said James Hughes, market analyst at CMC Markets.

While the Fed is seen as near-certain to cut interest rates further over the coming months, the European Central Bank faces a more challenging dilemma that may see it keep borrowing costs more elevated than they would otherwise be. With inflation high, the ECB has little room to cut its benchmark refi rate from the current 4.00 pct and may in fact have to raise it again.

Elsewhere, the pound's new year slide continued this morning as negative sentiment regarding the UK economy dominates sentiment for the currency. A profits warning from DSG International PLC, the electrical retailer, stoked further concerns about the outlook for the UK economy.

DSG's warning comes hard on the heels of yesterday's sharp drop in the monthly CIPS survey into the manufacturing sector. Whether the Bank of England will ease policy further next Thursday could well hinge on tomorrow's equivalent survey into the services sector.

"As such the pound remains under pressure, with the euro continuing to break to new highs," said Steve Pearson, chief currency strategist at HBOS. "This upward trend is supported by UK/euro zone interest rate spreads -- the spread in 2 year interest rate swaps is narrowing, now at its lowest since 2001," he added.

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Euroshares open lower on oil jitters, DSG International warning

At 9.14 am, the Dow Jones STOXX 50 Index was down 13.11 points, or 0.4 pct at 3,621.60 after kicking off the New Year with a 1.3 pct decline on concern over rising oil prices and the outlook for the US economy.

The DJ STOXX 600 Index dropped 1.77 points, or 0.5 pct to 358.31. "I think we are poised for a longer period uncertainty than many had anticipated before Christmas," said Howard Wheeldon, strategist at BGC Partners. "We underplay oil but for the Americans it is hugely important to their fears or sense of well-being." He said sentiment had not been helped by a profit warning from DSG International.

By sector, oil and gas stocks bucked the downtrend, helped by the high level of crude. Utilities also outperformed on the sector's defensive nature in times of uncertainty. Financial services companies, auto makers and construction companies were the leading decliners.

Out of the gate, shares in DSG International tumbled 21 pct after Europe's largest consumer electronics retailer warned on full year profit, blaming disappointing Christmas trading and a more cautious outlook for the balance of the year.

"Given our expectation of a tougher 2008/09 UK consumer environment, there remains the potential for further EPS declines in the year ahead," said Citigroup in a note to clients. Weakening earnings would also raise the possibility of a dividend cut, the broker said.

Staying in retail, Next fell 4.6 pct as it forecast a year to Jan 26, 2008, pretax profit "slightly ahead" of market expectations but warned it is "extremely cautious" about the new year.

Deutsche Boerse was under pressure for a second day in a row as concern persisted over a news report that it may buy a stake in the Taiwan Stock Exchange. Separately, the German exchange operator said turnover on its on Xetra trading platform and on the trading floor rose 20 pct year-on-year in December to 151.0 bln eur. The stock was off 1.7 pct.

"The figures in themselves are not too bad although it was definitely quieter this Christmas than in the last couple of years," said a London-based dealer. The dealer said the figures are probably being used as an excuse to lock in some profits given the sharp rise in Deutsche Boerse's stock in the last four months of last year.

Shares in Aeroports de Paris continued to rise, taking their two-day gains to as much as 14 pct after Vinci bought a 3.3 pct stake and reiterated its interest in closer ties with the airports operator. Analysts at CA Cheuvreux said Vinci is not the only potential bidder for ADP, which might also interest Spanish companies or insurance groups. They reiterated a '2 Outperform' rating and 88 eur target. Vinci shares were off 2.5 pct.

Staying in France, Sanofi-Aventis was down 1.2 pct as investors reacted negatively to a US lawsuit over its anti-obesity drug Acomplia, known in the US as Zimulti. Shares in TietoEnator rose 3.5 pct after the company announced details of its restructuring plans.

In broker action, shares in EON AG were up 1.7 pct after Lehman Bros lifted its price target on the German utility to 165 eur from 140 eur and kept an 'overweight' rating, citing the prospects for an increase in EON's earnings guidance and a possible growth in dividends.

Later in the session investors will be looking to see if Wall Street can stage a recovery after kicking off the New Year with heavy losses. US stock futures are currently pointing to a flat open. Weekly jobless claims, factory orders and domestic auto sales for December are all slated for release. Earnings from Bed, Bath & Beyond will also offer a snapshot on the health of consumer spending over the last three months.

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Asian stocks fall with Wall Street as oil prices spike, weak data weighs

The Philippine Composite closed down 3.2 pct at 3,501.38 for its biggest single-day drop since October 22. "A weak manufacturing index report has heightened fears that the US economy is slipping into recession, which could stall the (Asian) region's and, more specifically, the Philippines' own economic expansion," said Francisco Liboro, president of PCCI Securities in Manila.

The Hang Seng closed 2.44 pct lower at 26,887.28, Taipei's weighted index ended down 1.7 pct at 8,184.20 and the Straits Times ended 1.9 pct lower at 3,397.06.

The weak start to the US trading year ignited concern for Asia, with analysts worried that a sharp slowdown, or even worse, a full-blown recession in the US, would weigh on regional markets. The US remains a key market for Asian electronics equipment, clothing and cars.

The first quarter of 2008 is likely to be a period of heightened volatility, said Vincent Khoo, head of research at the Kuala Lumpur-based Aseambankers Investment Bank. "Global equities' northward expedition could temporarily reverse as global markets sail into uncharted waters, given the potential sharp slowdown in the US and escalating inflation," he said in a note.

Meanwhile, DBS Vickers Securities cut its rating on the Singapore market to 'neutral' against a backdrop of slowing economic growth and potential earnings downgrades. "Mounting uncertainties from the US, a depreciating US dollar, high oil prices and inflationary pressures suggest rising risks to our earnings forecasts," an analyst said. Gloomy start to new year The S&P/ASX 200 closed down 1 pct at 6,290.7 and the All Ordinaries was down 1 pct at 6,372.6.

But the Shanghai Composite reversed most of its early losses to close up 0.89 pct at 5,319.86. The Kuala Lumpur Composite was down 0.3 of a point at 1,435.38. Jakarta's composite index closed down 0.6 pct at 2,715.07. The Kospi also reversed most of its losses to close down 0.04 pct at 1,852.73.

Woodside Petroleum was up 1.6 pct at 51.76 Australian dollars and Santos was 2.8 pct higher at 14.72 dollars. Gold miner Newcrest closed up 10.2 pct at 37.25 dollars and Lihir gained 5.8 pct to 3.82 dollars. Also in Australia, troubled shopping centre owner Centro Properties Group advanced 7.7 pct to 1.12 dollars after yesterday announcing that the entire group is up for sale.

In Malaysia, Sime Darby, the world's largest listed palm oil producer, jumped 3.5 pct to 12.00 ringgit and IOI Corp, the second largest palm oil stock on the local bourse by market value, gained 4 pct to 7.75 ringgit. Airline stocks fell across the region as the higher oil price means they will pay more for fuel. Singapore Airlines was down 10 cents at 17.10 dollars.

Indian shares open lower tracking Asian cues, Wall Street fall

At 1020 GMT, the Bombay Stock Exchange's 30-share Sensex dipped 18.45 points, or 0.09 pct, to 20,446.85 while the National Stock Exchange's 50-share Nifty bounced from early losses to rise 0.25 pct to 6,194.90 points.

Reliance Energy Ltd was the top gainer among BSE-30 companies rising 4.59 pct to 2,474.00 rupees while software exporter Wipro Ltd dipped 1.38 pct to 504.00 rupees to lose the most in early trade.

Among the Nifty companies, Reliance Energy gained 6.26 pct to 2,514.00 rupees to be the top gainer and Tata Group-owned telecom service provider Videsh Sanchar Nigam Ltd lost the most as it fell 2.18 pct to 734.40 rupees.

State-run telecom service provider Mahanagar Telephone Nigam Ltd, which is reportedly close to getting a pan-India mobile licence from the government, rose 1.80 pct to 241.70 rupees.

Shares of pharma company Dr Reddy's Labs fell 1.10 pct to 738.90 rupees and Steel Authority of India Ltd, India's largest state-run steel producer, edged up 0.16 pct to 281.00 rupees. Both the company's got Indian government approval to set up special economic zones yesterday.

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Metals - Copper up in line with record gold, oil; lower LME stocks buoy

At 10.58 am, LME copper for three-month delivery was trading at 6,825 usd a tonne against 6,755 usd at the close yesterday. Meanwhile, weakness in the greenback spurred buying as it made dollar-denominated commodities cheaper for those trading in other currencies.

The dollar remains under selling pressure, particularly against the yen, after disappointing US economic data fuelled fears the world's largest economy may be heading into recession and that the US Federal Reserve will have to cut interest rates more aggressively than previously thought.

The first drop in global copper stocks in several days, as tracked by the LME in a daily report, also helped underpin the price of the red metal. Copper stocks in LME certified warehouses across the globe fell 750 tonnes and now stand at 198,175 tonnes, according to the exchange's daily report.

Among other metals, lead was flat at 2,620 usd a tonne. The metal was the biggest loser of 2007, shedding some 44 pct of its value over the course of the year amid ample supply. Nickel edged higher to 27,950 usd a tonne against 27,250 usd, tin was flat at 16,400 usd and aluminium was virtually unchanged at 2,458 usd against 2,440 usd. Zinc was up at 2,475 usd from 2,451 usd per tonne.

However, in the longer term, analysts are not convinced that the rally in other commodities will be replicated in the base metals. Base metals are more affected by industrial than investment trends when compared to assets such as gold, and are therefore more sensitive to economic weakness, which should translate into lower demand.

"Aside from the supportive rebasing (of the DJ-AIG commodity index), there is very little apart from a weak dollar to suggest sustained strength in base metals," said UBS analyst John Reade.

"We recommend selling the rallies amid weakening global growth expectations underscored by bearish ISM manufacturing data and poor growth prospects for the tiger economies." "Physical interest remains subdued (but) investor buying of metals on the back of higher gold and oil may prove supportive.

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