US & World Daily Markets Financial Briefing 05-06-2007

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Stocks fall after Bernanke comments

NEW YORK - Stocks slipped in early trading Tuesday as investors interpreted comments from Federal Reserve Chairman Ben Bernanke as suggesting the central bank has little reason to lower interest rates.
   
Bernanke's speech by satellite to the International Monetary Fund in South Africa Tuesday spurred traders to sell a day after the Dow Jones industrial average and Standard & Poor's 500 index edged up to new highs. Bernanke said in prepared comments that the economy will recover from its recent feeble performance, despite a housing slump that "appears likely to remain a drag on economic growth for somewhat longer than previously expected."
   
Bernanke's forecast of rebounding growth, as well as his comments that inflation is "ebbing" but remains "somewhat elevated," made it appear unlikely the Fed will lower rates anytime soon, a disappointment for Wall Street.
   
Later Tuesday morning, investors will be examining the Institute for Supply Management's May index on non-manufacturing industries. According to the median estimate of economists surveyed by Thomson Financial, the market expects the index to hold steady at 56.0, the same reading as in April.
   
A reading above 50 indicates expansion in the service sector, a diverse group of industries that represents about 80 percent of U.S. economic activity and includes retailing, banking, construction and agriculture. Investors are hoping the report will indicate that the service sector is still expanding. Growth that is too robust could stoke worries about the Fed raising interest rates later in the year, however. On Friday, the ISM's manufacturing index came in above expectations.
   
In the first hour of trading, the Dow fell 58.11, or 0.42 percent, to 13,618.21.
   
Broader stock indicators were also lower. The S&P 500 index lost 6.13, or 0.40 percent, to 1,533.05, and the Nasdaq composite index decreased 9.18, or 0.35 percent, to 2,609.11.
   
Bonds slipped after Bernanke's comments, with the yield on the benchmark 10-year Treasury note rising to 4.94 percent from 4.93 percent late Monday. The Russell 2000 index of smaller companies was down 3.70, or 0.43 percent, to 851.39.
   
Britain's FTSE 100 was down 0.42 percent, Germany's DAX index was down 0.86 percent, and France's CAC-40 was down 0.51 percent.

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Euro stronger as upcoming ECB meeting overshadows soft retail sales

LONDON - The euro strengthened against the dollar after soft retail sales data did little to sway expectations for rising euro zone interest rates. Euro zone retail sales for April were up 0.2 pct from March, missing expectations for a 0.9 pct rise following March's 0.5 pct gain.
   
Madeleine de Villiers, European economist at Capital Economics, said the data are "much weaker than we had expected" but nonetheless pave the way for retail sales to be stronger in the second quarter than the first.
   
"Even if retail sales stagnate in May and June, they would still increase by 0.6 pct in Q2 -- much stronger than the 0.1 pct fall seen in Q1," she said. Furthermore, "the outturn was driven by the smaller economies, while sales in Germany showed a marked improvement," she added.
   
Earlier, the May PMI survey of the euro zone's services sector came in just above expectations at 57.3, while the pricing measure eased to a five-month low of 53.1.
   
The data did nothing to dispel expectations that the European Central Bank will hike its benchmark repo rate by a quarter point to 4 pct tomorrow, following a string of robust economic figures. After that, more and more Bank watchers think the ECB will hike again, possibly as soon as September.
   
"Weaker-than expected retail sales growth in April will not deter the ECB from hiking interest rates by a further 25 basis points to 4 pct tomorrow," said Howard Archer at Global Insight.
   
Meanwhile, a similar picture in the UK helped the pound strengthen against the dollar, with this morning's data unlikely to alter market expectations that the Bank of England will keep its key repo rate unchanged at a six-year high of 5.5 pct on Thursday.
   
The services PMI for May came in slightly better than expected at 57.2, although pricing pressures appeared to ease, while the British Retail Consortium reported that May sales growth came in well below expectations at just 1.8 pct, the lowest since November.
   
"Today's data suggests that while higher interest rates are having a relatively limited impact on services sector activity, services firms' pricing power and retail sales growth are both softening," said Vicky Redwood, UK economist at Capital Economics.
   
Earlier, the pound also benefited at the dollar's expense after Syria announced it will change its currency peg from the dollar to a basket of currencies set by the International Monetary Fund.
   
In terms of the dollar, the focus today will be on the ISM non-manufacturing index for May, predicted to be unchanged from April with a reading of 56.
   
Meanwhile, the Australian dollar and the New Zealand dollar were markedly stronger against the yen, with a swell in risk appetite fuelling the yen carry trade -- where investors borrow the cheap Japanese currency to invest in higher yielding assets elsewhere. The Reserve Bank of Australia will announce its latest decision on interest rates overnight, along with first-quarter GDP data.

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Euroshares in lacklustre trade ahead of an expected lower Wall Street open

LONDON - Europe's leading exchanges experienced lacklustre trade this afternoon, taking a breathe from recent highs, ahead of an expected lower opening on Wall Street, dealers said. However, market watchers are anticipating positive momentum to pick up again in the coming days.
   
At 12.34 pm, the Dow Jones STOXX 50 was down 5.14 points at 3,956.10 but the DJ STOXX 600 tacked on 0.63 points to 398.39. The DJ Euro STOXX 50 Index, which tracks the performance of blue-chip companies in 12 countries using the euro, was down 9.59 points to 4,528.77.
   
One of the main losers today was Ryanair, which, after presenting solid earnings, which exceeded expectations, took a tumble after it warned investors that a sharp slowdown in growth over the coming year may lie ahead. Ryanair said it expects yields to fall by up to 5 pct, with unit costs seen rising by 6-7 pct due in part to longer journey lengths and higher airport charges at Stansted and Dublin, partly offset by lower fuel costs.
   
"As a result we expect profit growth over the coming year to be more modest, with... maybe even small losses being recorded during quarters 3 and 4," the company said in a statement. At last check, Ryanair shares were off 6.83 pct.  The announcement had an immediate effect on rival Easyjet, which dropped
3.82 pct.
   
Over on the automotive sector, Renault was once again one of the sharpest gainers, after Deutsche Bank was one of the last in a long list of brokers to put out a bullish note on the stock, which jumped 2.26 pct. The German broker lifted its price target on the car maker to 144 eur from 117 eur and reiterated its 'buy' rating. Since the start of the year, Renault shares are up about 25 pct.  Shares in rival Peugeot SA gained in sympathy, up 0.72 pct.
   
Air Liquide gained momentum midday, up 1.51 pct, as rumours circulated that the chemicals company might be the target of a leveraged buyout.  A Paris-based dealer said, "The rumour's coming out of Geneva, and we're hearing it's Wendel Investissement because it's placing Bureau Veritas in the market."
   
Another rumour circulating the French market was speculation that Bouygues may be considering selling its stake in TF1 to fund a potential acquisition of Areva. While the stock was 1.80 pct higher at last check, traders and analysts discarded the possibility and the company denied that it is mulling a sale.
   
Market watchers were convinced however that a buy out of Areva was on the books eventually, but stated that the company would find other means to fund such an acquisition.
   
Over on the German market, shares in MDAX-listed Merck KGaA were leading their index as they gained 5.42 pct, after rumours emerged that the company may soon be joining blue-chips on the DAX.
   
Traders also pointed to new data released yesterday that showed that Merck's UFT therapy in combination with leucovorin has an "excellent response rate" as a first-line treatment for patients with matastatic colorectal cancer. The release followed other positive statements about Merck anti-cancer drugs yesterday.
   
In Britain, the focus was also on a potential indices reshuffle, with the UK's biggest house builder Barratt Developments looking more likely to replace Bradford & Bingley on the FTSE 100, based on yesterday's closing price.
   
Drax's fate remains uncertain ahead of today's close after it was only just saved from demotion by M&A talk at the beginning of the month. Barratt added 0.85 pct, while Bradford & Bingley gained 0.24 pct and Drax 2.06 pct.
   
On the M&A front, AEM SpA and ASM Brescia SpA, the two northern Italian utility companies that yesterday announced plans to merge, rallied thanks to an upbeat note by Morgan Stanley. At last check, AEM was up 5.4 pct while shares in ASM Brescia added 4.0 pct.
   
In the Netherlands, the banking sector was the main focus of attention today, and ING gained 1.02 pct on the back of its 5 bln eur share buy-back programme announcement last night. ABN Amro, on the other hand, declined 0.38, with investors showing disappointment over the ending of talks between the Royal Bank of Scotland and Bank of America on the sale of ABN's LaSalle unit in the US. Successful talks could have simplified the ongoing bidding war for the Dutch bank.

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Asian shares close mostly higher on Wall St; China shares rebound

HONG KONG - Shares across the Asia-Pacific region closed mostly stronger after Wall Street nudged higher to a new record overnight, with China markets rebounding on rumors of government intervention to stabilize the market.
   
Tokyo shares closed higher for the fourth straight session, after rises on Wall Street overnight added to optimism domestically about the outlook for the Japanese economy.
   
The blue-chip Nikkei 225 Stock Average finished 80.39 points or 0.45 pct higher at 18,053.81, closing above 18,000 points for the first time in more than three months. It hit a high of 18,071.72. The TOPIX index of all first-section issues rose 3.72 points or 0.21 pct to 1,776.56, off a high of 1,778.41.f
   
Strong data for corporate capital spending in the first quarter, released yesterday, continued to encourage investors, creating hope that the data will mean the revised figures for first-quarter GDP will be higher than the preliminary estimates.
   
The effect of uncertainty about the outlook for the Chinese stock markets was limited because the falls in Chinese share prices yesterday did not stop Wall Street gaining.
   
Hiroichi Nishi, an equities information manager at Nikko Cordial Securities, remarked: "The firmness of Wall Street added to growing optimism about Japan's economic outlook, while investors apparently came to the conclusion that the recent weakness in Chinese shares was an isolated case."
   
Australian shares ended lower, with investor sentiment hit by volatility in China amid fears that Beijing could act further to cool its buoyant equity markets.
   
The Shanghai composite index was lower for most of the Australian trading day although just as Australian markets were closing, the index touched positive territory. Banking stocks were under pressure while the resources sector was resilient after base metal prices rose in overnight trading.
   
The S&P/ASX 200 closed down 22.1 points or 0.35 pct at 6, 370.8, slipping from yesterday's record close of 6 ,392.9.
   
Hong Kong shares were higher in afternoon trade, recovering from a morning sell down by investors locking in profits in blue chips and China-related counters on continued weakness on mainland bourses. At 3.25 pm the Hang Seng Index was up 136.26 points or 0.66 pct at 20, 865.85.
   
In mainland China, A-shares in Shanghai and Shenzhen shrugged off early weakness, closing higher in a technical rebound amid rumors that the government has ordered fund managers to support the market.
   
Analysts said there were rumors that the China Securities Regulatory Commission last night summoned fund managers and asked them to take action to avert further falls after a series of volatile sessions beginning from last Wednesday when the government announced a tripling in the stamp duty on share
trading.
   
The Shanghai A-share Index was up 99.51 points or 2.58 pct to 3, 949.89 and the Shenzhen A-share Index was up 25.42 points or 2.34 pct at 1, 113.58.
   
Seoul shares closed higher, touching another record, with investors banking on hopes that the market is set for a sustained rally amid ample liquidity. The KOSPI index has reached a record high for the seventh session in a row. The KOSPI index closed up 4.60 points or 0.26 pct at a record 1, 742.19. The low for the day was 1, 721.02 and the high was 1, 745.99. Financial markets will be closed tomorrow for a public holiday.

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Copper dips after early gains, fundamentals continue to support
 
Copper prices dipped this morning as investors took profits after yesterday's gains, but remained at high levels, supported by declining stockpiles and supply fears linked to the threat of strike action in Mexico.
   
At 10.56 am, LME copper for three-month delivery had fallen to 7,560 usd per tonne against 7,625 usd at the close yesterday.
   
"There was some early buying of copper which lifted prices this morning, but (as) there has been no follow-through, they have drifted back," said Martin Hayes, an analyst at BaseMetals.com. "However, they are still looking well-supported," he added.
   
Copper prices rose strongly yesterday as global stockpiles of the red metal continued to decline, stoking supply fears. Stocks of the metal monitored by the LME dropped a further 600 tonnes this morning to 123,300 tonnes, and are down some 40 pct from February, analysts said.
   
News workers at Mexico's largest mining company, Grupo Mexico, are threatening to strike has also buoyed prices. Staff at nine mines and processing plants said they will begin strike action on June 10. The strike is expected to affect Mexico's largest copper mine, Cananea, which produces 186,000 tonnes of copper per year.
   
The other base metals dropped in sympathy. Nickel fell to 46,500 usd against 47,650 usd, lead dipped to 2,303 usd from 2,370 usd, and tin eased to 13,950 usd from 14,000 usd. Zinc dropped to 3,775 usd from 3,840 usd, while aluminium fell to 2,805 usd against 2,826 usd.

Gold steadied above 670 usd as a fall in the dollar against the euro increased the appeal of the metal as an alternative asset to the US currency.
   
"A slightly weaker dollar is supporting gold today although we're still rangebound. We need to get above 673-675 usd on the charts," said Richard England, a trader at Standard Bank.
   
At 10.25 am, spot gold was trading flat at the 670.80 usd level seen in late New York trades yesterday, when the metal hit a three-week high of 673.90 usd. On Friday, gold hit a two-week high of 671.70 usd, driven in part by news the ECB is not planning further sales until September at the earliest.
   
"We've come a long way from the low 650s in more or less a straight line, but it was perhaps a relatively poor performance yesterday given weakness in the dollar and given copper was going up," England said.
   
He added, however, that he remains fairly friendly to gold, which has risen nearly 3 pct since hitting a low of 651.50 usd on May 24. The metal has gained some 5.6 pct in the year to date.
   
In other precious metals, silver was at 13.68 usd against 13.67 usd, platinum fell to 1,291 usd against 1,297 usd, while palladium dropped to 364 usd against 372 usd.

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