US & World Daily Markets Financial Briefing 05-12-2007

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Stocks up after strong economic data

Wall Street rose sharply higher in early trading Wednesday after a pair of reports indicated the economy is in good shape but also left open the possibility of an interest rate cut.

Investors snapped two sessions of losses after a report showed hiring in the U.S. private sector expanded at a faster pace in November. ADP Employer Services said 189,000 jobs were added during the month -- an increase that bodes well for consumer spending.

The report raised hopes for a strong November jobs report from the Labor Department on Friday. Investors were also encouraged Wednesday after the department reported worker productivity advanced by an annual rate of 6.3 percent in the summer, the fastest pace in four years, while wage pressures eased.

Wall Street is still waiting for gauges on factory orders and manufacturing later this morning. This week's economic reports are being closely watched by the Federal Reserve, which meets next Tuesday to discuss interest rates.

It is widely expected central bankers will lower rates to help pump up the economy and head off a recession. However, some investors are betting the Fed will go beyond the generally anticipated quarter percentage point cut, and lower rates by a half point.

Further, central banks globally appear to be more open to interest rate cuts, a trend that would give the Fed more room to move. The Bank of Canada cut rates on Tuesday, while the Bank of England and European Central Bank will make rate decisions on Thursday.

The Dow Jones industrial average rose 120.47, or 0.91 percent, to 13,369.20.

Broader indexes also moved higher. The Standard & Poor's 500 index added 14.72, or 1.01 percent, to 1,477.51, while the Nasdaq composite index rose 31.97, or 1.22 percent, to 2,651.80.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.94 percent from 3.88 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.

OPEC decided Wednesday to keep output ceilings steady for now, a move that briefly propelled crude prices above $90 a barrel. Wall Street is also waiting for government data that is forecast to show that crude oil inventories fell last week for the third straight week.

Fannie Mae shares rose $1.04, or 3 percent, to $36.22 after it rival mortgage financer Freddie Mac in cutting its dividend and selling special stock to raise capital. The government-sponsored lender hopes to cushion against mounting losses from high-risk home loans.

Comcast Corp. shares plunged $1.78, or 8.6 percent, to $18.95 after the cable operator said it won't generate as much cash flow and revenue for the year because of a difficult economic environment.

The Russell 2000 index of smaller companies rose 12.12, or 1.61 percent, to 764.18.

Overseas, Japan's Nikkei stock average closed up 0.83 percent, while Hong Kong's Hang Seng index rose 1.61 percent. Britain's FTSE 100 added 1.34 percent, Germany's DAX index rose 0.79 percent, and France's CAC-40 increased 0.87 percent.

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Forex - Pound steadies after sharp falls as odds shorten of UK rate cut tomorrow

The pound steadied following sharp falls as a string of very disappointing UK data increased speculation that UK interest rates will be cut tomorrow, while the dollar was steady against the euro ahead of US ISM services data this afternoon.

As a result, concerns about a slowing economy may now be sufficient to push the Bank of England to cut interest rates at tomorrow's meeting, particularly because the UK interbank lending rates remain unsustainably high. "Falling house prices, declining consumer confidence and sharp weakening in service sector activity: all ingredients are in place for a BoE rate cut tomorrow," said Audrey Childe-Freeman at CIBC World Markets.

Following the data, the euro hit a fresh four-year high against the pound of 0.7232 stg, while the pound fell to a 19-day low against the dollar of 2.0351 usd, though it has since steadied just above those levels.

Mic Mills at TradIndex.com said the pound is is likely to have seen the worst of the falls for the time being. "There is not much more downside for the pound at the moment. If anything, it might rally," he said. Current levels, nevertheless, suggest the market has already factored in a quarter-point rate cut by the Bank of England tomorrow and it could see a "marked reaction" if they leave rates on hold, he said.

Elsewhere, the dollar was steady against the euro and other major currencies as market players awaited the release of key US ISM services data this afternoon. Data released today, meanwhile, provided some encouraging news on the euro zone economy, suggesting the region is holding up well despite the negative impact of the credit crunch, although downside risks to growth remain.

Euro zone retail sales data were disappointing, however, showing a fall of 0.7 pct in October from September, below forecasts for a smaller 0.3 pct drop.

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Euroshares higher at midday, Wall St seen up, Infineon and GDF rise

At 11.53 am, the STOXX 50 gained 21.74 points or 0.59 pct to 3,712.56, while the STOXX 600 added 2.52 points or 0.69 pct to 365.86.

Meanwhile, the Dow Jones Industrial Average is headed for a small advance of around 14 points to 13,312, according to spread bettors IG Index. Separately, S&P 500 futures climbed 8.70 points to 1,472 while Nasdaq 100 futures rose 10.25 points to 2,072.50.

In European corporate news, shares in Infineon gained ground, up 5.08 pct, on trade data showing that semiconductor prices, including DRAM chips, posted strong recent gains and a healthy year-on-year increase in October.

Over in France, France Telecom fell 2.60 after the French telecom operator's 2008 guidance failed to inspire. "There is disappointment, in my opinion, that they were not more specific about the dividend they are going to pay out, and comments about the stability of operating margin in 2008, when some, clearly, were hoping for an increase," said a Paris-based trader.

And Gaz de France advanced 2.4 pct, with traders citing a report in La Tribune this morning which said the utility group is pushing for substantial rises in gas prices for industrial and retail customers.

In the Danish market, Vestas Wind Systems rose 2.86 pct as investors hope that the wind turbine maker's US sales will receive a boost from upcoming US legislation in support of wind power.

Turning back to the German market, Deutsche Boerse clocked up 4.65 pct after Morgan Stanley raised its price target to 145 eur per share from 122, saying that the company continues to benefit from high market volatility. The broker also reiterated its 'overweight' rating on the German stock exchange operator.

The insurance sector was underperforming, after Merrill Lynch cut its stance on the industry to 'neutral' from 'overweight', citing reduced visibility.

Allianz fell 0.73 pct, ING Groep dropped 0.12 pct and Standard Life was off 0.76 pct. The broker downgraded all three groups to 'neutral' as part of its sector review.

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Asia ends mixed as investors weigh weak US markets, await Fed verdict

Stock markets across Asia ended mixed Wednesday as investors weighed weakness in US markets following a spate of downgrades of financial companies against expectations the US Federal Reserve will cut rates at its policy meeting next week.

The Australian benchmarks came under added pressure after the Reserve Bank of Australia warned inflation would be above 3 pct in the first half of 2008, fuelling expectations of another rate hike in February. The Reserve Bank of Australia's decision to leave its target cash rate unchanged at 6.75 pct was in line with expectations and failed to jumpstart the market.

The S&P/ASX 200 closed down 0.3 pct at 6,508.1 and the All Ordinaries was down 0.3 pct at 6,568.4.

The Korean Kospi reversed early losses even after the Bank of Korea published a downbeat economic outlook for next year. The Kospi closed up 1.1 pct at 1,938.20.

The Hang Seng index closed up 1.6 pct at 29,345.45, and the Singapore Straits Times rose 0.9 pct to 3,560.05. The Nikkei also changed direction to finish up 0.8 pct at 15,608.88 as the yen weakened against the dollar. The broader Topix was up 0.7 pct at 1,526.63.

The Shanghai Composite outperformed as PetroChina Co Ltd staged a strong rebound from close to its record low. The stock gained 2.8 pct to 31.44 yuan, while the index closed up 2.6 pct at 5,042.65. Financials downgraded

Deutsche Bank, JP Morgan and Punk Ziegel cut estimates for the major brokerages, citing concerns about further write-offs of bad mortgage debt . Punk Ziegel cut Bear Stearns, Goldman Sachs and Lehman Brothers to "sell" from "market perform" and kept his "sell" rating on Merrill Lynch and Morgan Stanley.

Bond prices also fell, giving back some of their recent sharp gains, but they remain supported by rate cut expectations. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.90 pct from 3.85 pct late Monday.

Among individual stocks, Matsushita Electric Industrial rose 3.1 pct to 2,335 yen. Toshiba Corp advanced 2.1 pct to 883 yen and Canon Inc rose 0.9 pct to 5,790 yen. Mizuho Financial Group was up 1.8 pct at 614,000 yen, Sumitomo Mitsui Financial Group edged down 1.1 pct to 911,000 yen, and Mitsubishi UFJ Financial gained 2.7 pct at 1,152 yen.

Nippon Express added 5 yen at 574 yen on a report that the transportation company plans to spend 50 bln yen to convert some of its prime real estate holdings into rental properties.

In Australia, Rio Tinto Ltd was up 0.5 pct at 143.82 aud on speculation that Chinese steel maker Baosteel will start a bidding war for the miner. Rio, the world's third-largest miner, has already rejected a three-for-one share offer from BHP Billiton Ltd on the grounds that the offer under-values its assets and growth potential.

BHP Billiton was down 0.9 pct at 42.70 aud, in line with the rest of the market.

Elsewhere in the sector, Resource Pacific was 3.4 pct higher at 3.01 aud after Xstrata Coal made an unconditional 2.85 aud a share cash offer for the coal miner, valuing the company at about 960 mln aud. The proposal trumps a rival 780 mln aud offer from Queensland coal miner New Hope.

Xstrata's tilt at Resource Pacific turned the spotlight back onto base metals miner Zinifex, which jumped 3.3 pct to 15.10 aud. There has been speculation that Xstrata may be interested in buying Zinifex.

Indian shares close higher buoyed by late Asian rally

The Bombay Stock Exchange's benchmark Sensex closed 208.57 points or 1.07 pct higher at 19738.07, while the National Stock Exchange's S&P CNX Nifty closed 1.39 pct higher at 5,940 points.

Stocks of smaller companies extended their gains, with the BSE's midcap index rising 148.29 points or 1.67 pct to 9052.83, and the smallcap index surging 315.45 points or 2.88 pct to 11271.96 points.

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Oil prices rise back near $90 a barrel

Oil prices rose sharply to around US$90 a barrel Wednesday as OPEC members said they would keep output ceilings steady. Expectations that a weekly U.S. petroleum supply report due later Wednesday would show a small decrease in crude inventories also supported prices.

Libya's chief oil official, Shokri Ghanem, said the Organization of Petroleum Exporting Countries, meeting in the United Arab Emirates, had agreed to keep production unchanged.

Other delegates said the 13-nation group will meet again in January for a review of winter demand and the world economy, which seemed to indicate that OPEC was prepared to increase quotas should prices go much higher.

Light, sweet crude for January delivery added US$1.34 to US$89.66 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. In London, January Brent crude futures rose US$1.71 to US$91.24 a barrel on the ICE Futures exchange.

Ghanem appeared to reflect OPEC concerns that it would be counterproductive to raise production ceilings at a time when prices had retreated about 10 percent from recent record highs.

It also seemed to suggest that OPEC now viewed prices near or above US$90 -- an increase of about US$40 since the start of the year -- as acceptable.

A number of reports have suggested that several OPEC countries are already exceeding their output quotas. With the OPEC decision "putting a floor on the price decline," analysts said other issues would determine the chances of a new rally in the coming days.

"The focus will now shift back to the weekly statistics and the Fed meeting next week and its repercussion for the dollar index," said Olivier Jakob at Petromatrix in Switzerland.

Traders are also waiting for the U.S. Department of Energy's weekly petroleum inventory report, which is closely watched in the energy markets as a guidepost for demand.

U.S. crude stockpiles are likely to fall by 800,000 barrels and gasoline stocks to grow by 900,000 barrels, according to an average estimate of analysts surveyed by Dow Jones Newswires.

Refinery use is expected to rise 0.2 percentage point to 89.6 percent of capacity, according to the survey. Distillate stocks, which include heating oil and diesel fuel, are expected to drop by 300,000 barrels, analysts predict.

Heating oil futures added 4.21 cents to US$2.5539 a gallon (3.8 liters) on the Nymex, while gasoline prices rose 3.17 cents to US$2.2834 a gallon. Natural gas futures fell 0.8 cents to US$7.147 per 1,000 cubic feet.

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