US & World Daily Markets Financial Briefing 07-06-2007

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Stocks fall after 10-year yield climbs

NEW YORK - Stocks fell Thursday, with the Dow Jones industrials briefly edging into positive territory following two days of declines, after investors tried to look beyond rising yields in the bond market and mixed retail sales reports.
   
The 10-year Treasury note's yield surpassed 5 percent in overnight trading, stoking concerns among investors that the possibility of a rate cut later in the year is diminishing. Yields hit levels not seen since late July.
   
With rates rising in the market, the Federal Reserve is expected to be less inclined to cut rates. And a dip in applications for unemployment benefits last week, which indicates a healthy labor market, also made a rate cut seem less likely.
   
Additionally, mixed May sales reports from major retailers indicated that consumer spending remained uncertain. Many retailers who reported their sales early in the day fell short of expectations, including Wal-Mart Stores Inc. and Target Corp.
   
In morning trading, the Dow Jones industrial average fell 12.92, or 0.10 percent, to 13,452.75 a day after falling nearly 130 points. Declining issues outnumbered advancers by about 5 to 2 on the New York Stock Exchange, where volume came to 183.8 million shares.
   
Broader stock indicators fell. The Standard & Poor's 500 index fell 3.76, or 0.25 percent, to 1,513.62, and the Nasdaq composite index fell 4.51, or 0.17 percent, to 2,582.67.

The Russell 2000 index of smaller companies fell 3.83, or 0.46 percent, to 837.38.
   
In overseas trading, Britain's FTSE 100 rose 0.02 percent, Germany's DAX index fell 0.88 percent, and France's CAC-40 fell 0.87 percent.
   
Bonds fell sharply, with the yield on the benchmark 10-year Treasury note jumping to 5.04 percent from 4.97 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices fell.
   
Interest rate moves abroad contributed to the declines in the U.S. credit markets. On Thursday, the Bank of England decided to leave its benchmark rate steady, after New Zealand's central bank surprised markets by raising its rate to a record high 8 percent from 7.75 percent to curb inflation. On Wednesday,
the European Central Bank raised its own rate as well.
   
Light, sweet crude rose 84 cents to $66.80 per barrel on the New York Mercantile Exchange.
   
On Wednesday, the three major indexes declined for the second day in a row after a rise in labor costs stoked inflation worries. The Dow lost more than 210 points over the two sessions.
   
The market will also keep an eye on the Commerce Department's report on wholesale inventories, which are expected to have gained 0.4 percent in April after increasing 0.3 percent in March, and international interest rates.
   
In corporate news, Wal-Mart's same-store sales, or sales at stores open at least a year, rose 1.1 percent in May as the world's largest retailer saw an increase at its Sam's Club warehouse division lend a boost to overall results. Wal-Mart, one of the 30 components of the Dow industrials, fell 16 cents to $50.59.
   
Target Corp. fell 55 cents to $63.55 after reporting results that fell short of Wall Street's forecast, though the company said sales met its expectations.
   
Saks Inc. jumped 97 cents, or 5.1 percent, to $19.99 after the luxury retailer posted stronger-than-expected sales.

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Pound falls after BoE leaves rates unchanged

LONDON - The pound was weaker after the Bank of England left interest rates unchanged at 5.50 pct, as expected, but disappointing a minority of investors who were betting on a hike.
   
Although the BoE's decision was expected by analysts, there was a 20 pct probability priced into fixed income markets for a hike, leaving the pound vulnerable to the verdict of unchanged rates.
   
Despite today's verdict, however, interest rates are still expected to rise in coming months.
   
"The BoE's decision to leave interest rates unchanged may well prove to be only a temporary reprieve, as we suspect that another 25 basis point hike to 5.75 pct could arrive as soon as July," said Howard Archer at Global Insight.
   
He said firms' confidence in raising prices, high money growth and capacity constraints are likely to offset some gradual easing in house price inflation. "While it is very possible that interest rates will eventually reach 6.00 pct, we currently forecast 5.75 pct to mark the peak," he said.
   
The pound was also hurt by news released just before the BoE announcement that North Korea has test-fired some short-range missiles. The news, reported by a South Korean wire, have yet to be confirmed, but add to geopolitical tensions in the area.
   
It has also increased investors' risk aversion, hurting higher-yielding currencies like the pound and helping the dollar, traditionally a safe-haven in times of market jitters.
   
"We're seeing some very moderate risk aversion, which has brought the pound down and has given markets an excuse to sell the euro back down to yesterday's lows," said Daragh Maher, currency strategist at Calyon.
   
He noted, however, that other high-yielding currencies, like the New Zealand dollar, have remained robust, suggesting investors are not flocking to undo risky trades.

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Euroshares at lows mid-afternoon after US retail sales; Ahold shines after Q1

LONDON - Leading European exchanges turned sharply lower mid-afternoon as Wall St is expected to add to yesterday's strong falls after the release of disappointing May sales data by Wal-Mart.
   
At 13.24 am, the Dow Jones STOXX 50 was up 9.25 points at 3,896.34 while the DJ STOXX 600 edged up 0.02 point to 390.09.
   
Ahold climbed 3.86 pct as investors cheered the supermarket group's first-quarter numbers, which made a good showing across all brands.
   
JP Morgan, in particular, noted a better-than-expected performance for its US chains Stop and Shop and Giant Landover. The broker also cheered the performance at Albert Heijn, but said Giant Carlisle's underlying margin was weaker than anticipated at 4.5 pct.
   
Bouygues shares tacked on 0.12 pct as JP Morgan and HSBC became the latest brokers to lift their price targets on the French conglomerate after strong quarterly results, with both houses cheering the profit margins at its telecoms business.
   
In the telecoms sector, Vodafone Group shares gained 0.64 pct after the telecoms group confirmed it has received a letter from an activist shareholder group asking it to consider a number of restructuring options, adding weight to recent speculation the group may sell assets or be taken over.
   
But France Telecom shares fell 5.35 pct as the stock traded ex div 1.20 eur. Investors, however, are also likely to be pondering the telecom operator's operational strategy after it said last night it has bought Spanish internet operator Ya.com for 320 mln eur.
   
It also confirmed that it is studying an offer by Deutsche Telekom for the purchase of its unit, Orange Netherlands. Sources say Deutsche Telekom has offered 1.3 bln eur for the unit.
   
Shares in FKI PLC fell 8.78 pct on disappointment among some investors that the company gave no further details, in its full-year results, on a takeover bid it received last week. The company did say it was in "active discussions" with a number of parties regarding the sale of the group as a whole.
   
FKI said due diligence access was provided to a small number of parties, with active discussions continuing with one -- as yet -- unnamed party.
   
Volvo shares dropped 3.37 pct after JP Morgan downgraded the company to 'underweight' from 'neutral' on valuation grounds. The comments came in a truck sector review focusing on growth opportunities in Eastern Europe.
   
As part of the review, it lifted its price target on MAN to 120 skr. Volvo's price target was also raised to 125 skr. At last check MAN shares edged up 0.1 pct.
   
Shares in Rhodia were down 6.46 pct but off earlier lows as the French chemicals group reiterated its profit guidance and said it knows of no reason for this morning's 14 pct plunge. Earlier, shares slumped amid market talk of a tougher-than-expected statement on carbon dioxide at the G8 summit in Heiligendamm.
   
Dealers said other rumours around Rhodia today included developments in corruption allegations connected with the company or a simple profit warning. "Profit warning....corruption scandal....take your pick!" one trader said.

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Asian shares close mixed, weakened by Wall St fall

HONG KONG - Shares across the Asia-Pacific region closed mostly lower after a sharp fall on Wall Street overnight, although China A-shares rose after the government scotched rumors of a capital gains tax on stock trading profits.
   
Tokyo shares ended flat after the strength of the China markets prompted bargain-hunting that offset the effect of the falls in the US markets overnight and in Europe yesterday. The main indices might have closed higher, if not for technical selling linked to the fixing tomorrow morning of special quotations for settling the June index options and futures contracts.
   
The blue-chip Nikkei 225 Stock Average finished 12.45 points or 0.07 pct higher at 18,053.38, off a low of 17,866.52 and a high of 18,053.38. The TOPIX index of all first-section issues closed 1.22 points or 0.07 pct higher at 1,779.72, just off a high of 1,780.66.
   
Some investors passed up the bargain-hunting opportunities in light of the technical selling pressure, and while they awaited the release tomorrow of the machinery orders data for April and the release Monday of the revised GDP figures for the first quarter.
   
Kazuhiro Takahashi, an equities marketing manager at Daiwa Securities SMBC, said: "Sentiment is strong, underpinned by positive expectations about the upcoming machinery orders and GDP data."
   
Australian shares ended lower as investor fears of higher interest rates were heightened further by data showing the jobless rate fell to a new record low of 4.2 pct in May from the previous low of 4.4 pct in April.
   
The data followed yesterday's GDP release, showing growth of 1.6 pct for the March quarter to a solid 3.8 pct for the year, the highest rate since the June quarter of 2004.
   
Investor sentiment was also affected by the overnight sell-off on US share markets after data there showed an increase in labor costs which stirred US investor concerns about inflation. The S&P/ASX 200 closed down 26.0 points or 0.41 pct at 6,311.1 but closed well off the day's low of 6,258.3.
   
Hong Kong shares were flat in afternoon trade with the mood dampened by US economic data which gave rise to fresh concerns over interest rates. Hong Kong property stocks were hit by fears that the US Federal Reserve might raise rather than lower rates later this year after data released overnight showed that unit labor costs in the US rose a higher-than-expected 1.8 pct in the first quarter, they added.
   
At 3.20 pm the Hang Seng Index was up 1.58 points at 20,820.18.
   
In mainland China, A-shares in Shanghai and Shenzhen closed broadly higher as sentiment recovered after official denials of a rumored capital gains tax on stock trading profits. The Shanghai A-share Index was up 120.64 points or 3.05 pct at 4,080.27 and the Shenzhen A-share Index was up 43.49 points or 3.83 pct at 1,178.82.
   
Seoul shares finished higher, extending their record-breaking runs for an eighth straight day, with the initial caution due to Wall Street's overnight decline quickly offset by South Korea's solid consumer confidence data.
   
Investors largely shrugged off any fears of a possible rate hike in the US and instead focused on the recovery momentum for the local economy, driving up stocks sensitive to local demand, they added.
   
The KOSPI index closed up 10.85 points or 0.62 pct at a new record of 1,753.04, off a high of 1,753.24 and a low of 1,717.30.

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Base metals weaken across the board as nickel price dips to 10-wk low

LONDON - Base metals weakened across the board in early afternoon trade, weighed down by nickel prices, which dropped to a 10-week low following the LME's implementation of new trading rules that will effectively make more metal available to the market.
   
The new rules, put in place to prevent collusion between dominant players, lower the limit at which holders of dominant long trades are required to lend to the rest of the market.
   
Two or more companies that hold 25 pct or more of LME-monitored nickel stocks will be required to lend stocks of the metal to other parties at no more than the nickel cash price.
   
"The changes have made it cheaper for people to short the market in the short-term," said William Adams, an analyst at BaseMetals.com.
   
The rule changes, which analysts say will help ease backwardation -- the premium paid for the cash metal over the three-month price -- added to a further build in LME-monitored stocks this morning to help push prices down to their lowest level since the end of March.
   
At 2.15 pm, LME nickel for three-month delivery was trading at 44,000 usd per tonne against 45,600 usd at the close yesterday. Prices earlier dipped as low as 43,402 usd.
   
"Nickel prices have been looking for an opportunity to correct and that is what we are seeing now," said Adams.
   
With fundamentals looking weak going forward, a recovery in prices is unlikely to happen soon, analysts said. "We anticipate further downside risk to nickel prices in line with changed supply and demand fundamentals of the market, highlighted by moderating stainless steel activity in the US and Europe (and) strong Chinese output of low-nickel pig iron coupled with rising LME stocks," noted Barclays Capital.
   
Copper prices dipped in sympathy. The red metal continued to take some support from fears over strike action in Mexico, coupled with dwindling stock levels, however.
   
Workers in Mexico for Grupo Mexico, the world's seventh-biggest copper producer, have threatened a strike for June 15 unless a resolution is reached.
   
Elsewhere, copper stocks worldwide in LME warehouses fell 775 tonnes to 122,275 tonnes, the LME said in a daily report. Copper was trading at 7,406 usd against 7,420 usd at the close yesterday.
   
Among other metals, lead eased to 2,290 usd against 2,300 usd, aluminium dropped to 2,740 usd from 2,743 usd, and zinc dipped to 3,655 from 3,680 usd. Tin was steady at 13,900 usd.

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