US & World Daily Markets Financial Briefing 10-05-2006

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U.S. stocks open lower ahead of the Fed rate decision

NEW YORK - U.S. stocks moved lower in opening trade Wednesday amid some nervousness ahead of a Federal Reserve decision on interest rates, with Cisco Systems a notable decliner after the data networking company offered up a tepid profit outlook.
   
The Dow Jones Industrial Average fell 10 points to 11,630. The Nasdaq Composite Index was down 6 points at 2,332 while the S&P 500 Index was off 1.5 points at 1,323.60.
   
"It's all about the Fed today and a 25 basis point hike is a done deal," said Peter Cardillo, chief market analyst at S.W. Bach.
   
The Federal Open Market Committee, the Fed's interest-rate setting body, is widely expected to raise its key fed funds rate by a quarter percentage point to 5%. Its decision is due around 2.15 p.m. Eastern Time.
  
Stocks in focus
   
Cisco Systems Inc. fell 2% to $21.23 after the data networking giant issued a tepid profit outlook for the current quarter. The company, nevertheless reported solid earnings for the third quarter, with revenue jumping 18%, helped by improved demand for its networking gear in the U.S. and contributions from Scientific-Atlanta.
  
Walt Disney Co. added 17 cents to $29.75 after the media giant surprised analysts with better-than-expected earnings. Gains at its ESPN sports television channel helped overcome a lackluster performance at its consumer products and studio divisions.
   
In the car sector, Toyota Motor Corp. rose $1.05 to $122.86 after the auto maker posted a 39% rise in fourth-quarter profit, driven by upbeat sales, costs reductions and a weaker yen. The company also forecast a 6% rise in global vehicle sales.
   
Despite the upbeat sales projection, the company said it expects profit to dip 4.5% in the fiscal year ending March 2007, due to the recent weakness in the dollar. Analysts say a weaker U.S. dollar works against exporters such as Toyota, by tending to erode overseas earnings when they are converted into yen.
   
Also, shares in DaimlerChrysler AG rose 1.8% to $57.04 after Deutsche Bank upgraded the company to buy from hold, citing an upbeat outlook for its Mercedes division.

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Dollar tumbles to new lows before FOMC decision

NEW YORK -- The dollar tumbled to a fresh one-year low against the euro and eight-month low against the yen Wednesday ahead of a Federal Reserve statement that may hint at a pause in the rate-hike cycle and a Treasury report that could name China as a manipulator in the currency market.
   
While another quarter-point rate hike to 5% is considered a given, the accompanying statement from the Federal Open Market Committee is considered key to the dollar's direction.
   
"Whether today's FOMC statement stems the slide in the dollar remains to be seen...as market expectations grow that the Fed will be increasingly hemmed in its ability to tighten further by the slowing housing market and lackluster labor conditions," said Boris Schlossberg, senior currency strategist at FXCM.
   
"The market appears to have lost faith in the ability of US policymakers to sustain economic growth and as a result the latest move in the currency market is less about demand for euros and yen and more of a wholesale repudiation of U.S. dollars," he said, in a note.

The euro and the Japanese yen rose to fresh multi-month highs against the U.S. dollar ahead of the Fed's rate decision. The euro was last up 0.2% at $1.2781. Against the yen, the greenback fell 0.4% to 110.57.
   
The British pound weakened to $1.8636 from $1.8655, while the dollar weakened to 1.2193 Swiss francs from 1.221 francs.
   
The dollar index, which tracks the U.S. currency against a handful of the world's major currencies, also dropped to its lowest level in a year at 84.52. It was last at 84.65.
   
Antje Paefcke, a currency analyst for German bank Commerzbank, noted that in the minutes from the last Fed meeting, some members were concerned the phrase "some further policy firming may be needed" was too hawkish.
   
The Fed has increased interest rates 15 times in a row since June 2004, which has given the U.S. currency a very attractive yield differential against the euro and yen. The federal funds rate currently stands at 4.75%.
   
Year to date, the dollar has shed about 8% against the euro and 6% against the yen respectively.
   
"The Fed must ensure in delaying further declines in the dollar, especially when the currency faces further selling next month when the FOMC does end up pausing and the Bank of Japan warms for its first rate hike in nearly a decade," said Ashraf Laidi, chief currency analyst at MG Financial Group.
   
Contrary to some market views, Laidi expects the Fed monetary policy statement to "sound off a relatively hawkish tone by not explicitly mentioning a conditional pause as the Fed opts for preventing an acceleration in the dollar's decline."
   
China a manipulator?
   
Also due out on Wednesday is a decision on whether the U.S. Treasury believes China is a currency manipulator. Most expect that notion to be rejected.
   
One surprise could be if the Treasury mentions Japan in its report.
   
"This would be consistent with the way U.S. rhetoric has been developing over the past month or so. This could add further pressure to the recent dollar/yen down move," said Ian Gunner, an analyst at Mellon Foreign Exchange.
   
One currency not rising against the dollar was the U.K. pound, pressured following the release of the Bank of England's quarterly inflation report.
   
While the BoE said its inflation forecast was higher than its last forecast, the market stance was fairly hawkish coming into the release.
   
The central bank noted risks to GDP growth in its release.

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The European Markets at 12.00 BST

London - Leading shares were lower at midday, with insurers weak following a disappointing trading update from Old Mutual and investors cautious ahead of the outcome of the FOMC meeting on US interest rates, dealers said.
   
At 12.08 pm, the FTSE 100 index was 2.3 points lower at 6,103.3, with the broader indices mixed.

Frankfurt - Shares were flat in midday trade after a mixed showing on Wall Street overnight and amid caution ahead of today's FOMC decision on US interest rates, though Deutsche Post sparkled on upbeat dividend news while DaimlerChrysler rose sharply on an upgrade, dealers said.
   
At 11.57 am, the DAX 30 index was 6.65 points or 0.11 pct higher at 6,147.37, having moved between 6,110.45 and 6,148.19 so far this session. The MDAX was at 9,112.03, down 43.32 points or 0.47 pct, while the TecDAX was at 760.22, up 5.69 points or 0.75 pct.

Paris - Shares were slightly down midday as investors were cautious ahead of the US interest rate decision today, while Vivendi shares surged on market rumour of a possible buyout of its SFR unit, dealers said.
   
At 1.09 pm, the CAC-40 index was 7.64 points or 0.15 pct lower at 5,304.42, on trading volume of 2.05 bln eur.
   
Amsterdam - Shares were lower at midday, led down by US futures that suggested a lower open of Wall Street trading, and by Unilever, which traded ex-dividend, dealers said.
   
At 12.10 pm, the AEX was down 1.14 points or 0.24 pct at 472.38, after opening at 470.96 and reaching an earlier high of 472.54.
   
Brussels - Shares were down in midday trading as the market reacted unfavourably to Bekaert's trading update.
   
At 11.36 am, the Bel 20 index was down 21.36 points or 0.54 pct to 3,965.98.

Milan - Share prices were slightly up midday, amid caution ahead of the US interest rate decision today, with Autogrill leading the way after its first-quarter results, while Mediaset was hit by a disappointing outlook, dealers said.
   
At 12.26 pm, the Mibtel index rose 0.20 pct to 30,132 points and the S&P/Mib was up 0.28 pct at 38,873, while volumes stood at 4.17 bln eur.

Madrid - Share prices were lower in light midday trade, weighed down by Repsol YPF while Altadis was higher after in-line results, dealers said.
   
At 12.15 am, the IBEX-35 index was down 11.5 points at 12,071.8, after trading in a range of 12,046-12,076, on turnover of 1.2 bln eur.

Stockholm - Shares remained in slightly positive territory in midday trade, marginally up from earlier levels, with metal firms Boliden and Lundin Mining outperforming in the wake of high metal prices, dealers said.
   
At 12.05 pm, the OMX Stockholm index was up 0.13 pct at 343.30, while the OMX Stockholm 30 index was up 0.09 pct at 1,055.02. Turnover was 8.22 bln skr.

Helsinki - Helsinki shares were slightly lower midday echoing other European bourses ahead of the FOMC's interest rate decision, with Nokian Tyres and KCI Konecranes providing relief after unveiling robust first-quarter results.
   
At 12.37 pm, the OMX Helsinki 25 was down 0.36 pct at 2,722.95. The OMX Helsinki was 0.32 pct lower at 9,598.82.

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Asian shares close mixed, Tokyo slides on firmer yen

HONG KONG - Share prices across the Asia-Pacific region ended mixed with Tokyo's benchmark index losing more than 230 points as market sentiment was dampened by a firmer yen, dealers said.
   
The benchmark Nikkei 225 Stock Average closed down 238.98 points or 1.4 pct at 16,951.93, after dipping as low as 16,883.39.
   
The TOPIX index of all first-section issues fell 22.44 points or 1.3 pct to 1,725.06, off a low of 1,719.71.
   
The US dollar rallied to the 111 yen level in early afternoon trading from 110.85 yen overnight in New York -- its lowest level since Sept 16 last year. But the dollar had fallen back 110.91 yen at the close of the stock market here.
   
A strong yen usually hurts Japanese exporters such as auto makers and makers of consumer electronics.
   
Investors  fear that the US Federal Open Market Committee  may indicate in its post-meeting statement later today the Federal Reserve will pause in its series of increases in interest rates, which could mean an even stronger yen, dealers said.
   
"The entire market tumbled in the afternoon as the dollar fell to 110 yen levels," said Ryuta Otsuka, a strategist at Toyo Securities.
   
The weaker dollar is risky for Japanese exporters as important manufacturing companies now assume a rate of 110.60 yen to the dollar for this year, he said, citing a Bank of Japan survey.
   
In Australia, share prices finished at fresh record highs as investor sentiment was boosted by yesterday's federal budget which led the key S&P/ASX 200 index to trade above 5,400 points for the first time, dealers said.
   
They said investors welcomed the federal budget's 45 bln aud spending package and forecasts of robust growth and higher surpluses ahead.
   
Dealers said investors bought resource and other sectors seen benefiting from the federal budget stimulus, while other individual stock gains capped off a stellar trading session.
   
The S&P/ASX 200 jumped 26.4 points or 0.50 pct to end at a record close of 5,352.2, surpassing the prior record close of 5,327.2 reached on April 26.
   
Share prices in Hong Kong were trading modestly lower in the afternoon led by Sun Hung Kai Properties after the company said it will place up to 111 mln shares to raise funds for China property development projects, dealers said.
   
At 3:37 pm, the Hang Seng Index was down 20.68 points or 0.12 pct at 17,113.31.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher for the fourth consecutive trading day on strong follow-through buying, with metals companies and automakers remaining in demand, dealers said.
   
The Shanghai A-share Index jumped 15.21 points to 1,622.58 on turnover of 35.61 bln yuan and the Shenzhen A-share Index was up 5.68 points at 395.30 on turnover of 23.24 bln yuan.
   
Share prices in Seoul ended little changed as investors took a wait-and-see attitude ahead of the expiry of options contracts and before central bank policy meetings both at home and in the US, dealers said.
   
Wall Street's mixed overnight performance brought on a weak start, with the market showing directionless trade for much of the session.
   
Sharp losses in major Asian markets pressured sentiment here in late trade but intensified program buying before the market close helped the market recover early losses to close flat.
   
The KOSPI index ended up 0.65 points or 0.04 pct at 1451.09.

Asian Bourse Round-Up

For a full list of closing prices, click here

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Gold futures fall under $700; copper sets new records

SAN FRANCISCO - June gold fell $2.70 to $698.80 an ounce after climbing as high as $701.50. The day's high matches the close from Tuesday, which was the highest closing futures price since October 1980.

Meanwhile, copper prices rose to a high of $3.67 per pound, a record price on the New York Mercantile Exchange. The July contract was last up 4.9 cents, or 1.4%, at $3.645.
   
On the bond market, long-term Treasury prices edged higher, sending yields lower as fixed-income traders positioned themselves ahead of the Fed. The benchmark 10-year note was up 5/32 at 95 11/32, with its yield at 5.11%.
   
Crude-oil futures were little changed ahead of the release of weekly supply data, with traders focused on the state of gasoline inventories as the summer driving season approaches. Crude for June delivery was last down 19 cents at $70.50 a barrel.

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