US & World Daily Markets Financial Briefing 10-12-2007

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Stocks rise amid rate cut hopes

Wall Street rose in early trading Monday as expectations for an interest rate cut from the Federal Reserve helped offset concerns about another round of subprime mortgage-related losses. Investors remained upbeat ahead of the Fed's rate-setting meeting on Tuesday. Policymakers are broadly expected to lower rates, though economists are still split over whether there will be a quarter-point cut or a half-point cut.

Swiss bank UBS said it will write down some $10 billion of subprime mortgage holdings, which could lead to full-year losses. However, shares rallied in European trading as the bank unveiled plans for an $11.5 billion cash infusion from the government of Singapore and an unidentified Middle Eastern investor.

The announcement from UBS comes just before the top U.S. investment banks are slated to report earnings. Lehman Brothers Holdings Inc. will report results on Wednesday, while Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. are scheduled for next week.

There was little in the way of economic data due to be released, though Wall Street will be monitoring a report on pending home sales in October. The Dow Jones industrial average rose 28.94, or 0.21 percent, to 13,654.52.

Broader stock indicators also rose. The Standard & Poor's 500 index rose 2.03, or 0.13 percent, to 1,506.69. The Nasdaq composite index added 3.43, or 0.13 percent, to 2,709.59. Bond prices rose as well. The 10-year Treasury note's yield, which moves opposite the price, fell to 4.10 percent from 4.12 percent late Friday. The dollar was mixed against other major currencies, and gold prices rose.

Wall Street has posted robust gains recently as investors grew more confident in the Fed's openness to loosening its policy again. The Dow has risen more than 640 points over the last two weeks, a rally that has brought the blue-chip index to less than 4 percent below the record close it reached Oct. 9.

Last week, the Dow ended 1.90 percent higher, the S&P 500 index finished up 1.59 percent, and the Nasdaq ended up 1.70 percent. In corporate news, Blackstone Group LP might be planning a bid to acquire steel company Rio Tinto Ltd., according to Britain's Daily Telegraph. Blackstone would lead a consortium that would include China's sovereign wealth fund, according to the report.

McDonald's Corp., the world's largest fast-food company, said global same-store sales rose 8.2 percent in November. Much of the strength came from overseas, including Europe and Asia.

Japanese drug maker Eisai Co. said Monday it will buy U.S. biopharmaceutical company MGI Pharma Inc. for $3.9 billion in a move aimed at boosting its cancer drug business and sustaining sales growth.

Oil prices edged higher amid end-of-year position taking and anticipation of Tuesday's Federal Reserve meeting. Light, sweet crude rose $1.41 to $89.69 a barrel on the New York Mercantile Exchange.

Overseas, Japan's Nikkei stock average closed down 0.20 percent, while Hong Kong's Hang Seng index fell 1.18 percent. Britain's FTSE 100 fell 0.20 percent, Germany's DAX index rose 0.16 percent, and France's CAC-40 increased 0.03 percent.

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Forex - Dollar drops on jitters ahead of Fed meeting; Pound up on strong PPI

The dollar dropped as jitters set in ahead of tomorrow's key interest rate decision by the US Federal Open Market Committee, while this afternoon's pending home sales data will also be closely watched.

Interest rates are fully expected to be cut again tomorrow, but there remains the question of whether they will opt for the standard 25 basis point cut or a bigger 50 point cut. The latter is generally seen as unlikely given Friday's solid US jobs data, but the outcome remains uncertain.

"Some people may be thinking the Fed will cut by half a point," said Mic Mills at TradIndex.com. He added, however, that moves have been small and the euro has continued to trade within recent ranges against the dollar.

Meanwhile, the pound was firmer, hitting a five-day high against the dollar, after stronger-than-expected UK producer prices sparked talk that rising pipeline inflationary pressures may prevent the Bank of England from following up last week's rate cut any time soon.

The figures showed annual UK output price inflation unexpectedly surged to its highest level in over sixteen years last month, at 4.5 pct. Input prices meanwhile rose an above-forecast 1.7 pct on the month and by 10.2 pct on the year, the biggest annual gain since July 2006.

"The PPI data were a lot higher than expected, which might mean the Bank of England won't be cutting rates again any time soon," Mills said.

Focus for this afternoon will centre on the release of US pending home sales later this afternoon, where analysts are expecting to see a fall of around 1 pct in October after September's small 0.2 pct rise.

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Euroshares turn up midday; Dow seen up; cement sector M&A, shareholder activism

At 12.03 am, the Dow Jones STOXX 50 Index was up 16.62 points, or 0.4 pct, at 3,802.63 while the DJ STOXX 600 Index added 1.67 points, or 0.45 pct, to 374.53. Intra-morning the STOXX 50 had been as low as 3771.46 as disappointment in the banking sector weighed.

Back in Europe, Lafarge shares shot up 7.5 pct to their best level in nearly two months as the market welcomed the group's announcement of an 8.8 bln eur deal to acquire Egypt's Orascom Cement. The group said the deal would permit it to exceed its current earnings targets.

"At first glance, this is a good strategic move, at an okay price," said a local dealer. "The company they're buying is number one in its market, and Lafarge is increasing its exposure to emerging markets to 55 pct of EBITDA, from 45 pct previously."

Shares rose across the sector were bolstered by the news. Italcementi stormed 6.39 pct. Saint Gobain added 2.5 pct. Holcim was up 2.39 pct. M&A hopes boosted other stocks with Premiere up 6.79 pct amid rumours Vivendi is preparing to pay 1.8 bln eur for the German media group.

A dealer in Paris, though, rubbished the talk. "We would say [such a move is] unlikely, given Vivendi's recent deal with Activision, and having ruled themselves out of interest in Premiere earlier in year," he said.

Shares in Agfa-Gevaert NV jumped 5.45 pct on speculation of a potential bid for a part of all of the company following comments made by its new chief executive last Friday. And Xstrata added 0.57 pct but was off its earlier high as ongoing hopes of a bid from Brazil's Cia Vale do Rio Doce or from UK listed peer Anglo American came to nothing.

In other news, Philips was up 4.14 pct, topping the gainers on the DJ Euro STOXX Index after news that two hedge funds holding around 1.6 pct of the consumer electronics and medical systems group are joining forces to give the company feedback concerning its business model and cash reserves.

And Cadbury Schweppes rose 1.5 pct after Nelson Peltz's Trian business said it has increased its stake in the company to about 4.5 pct, prompting hopes Peltz will put the group under more pressure to accelerate its restructuring plans.

In the banking sector, UBS rallied from opening lows to add 2.62 pct as investors cheered the group's attempt to kitchen sink its subprime exposure.

The Swiss banking group said it will initiate a further write down in the value of its US subprime-related holdings, this time by 10 bln usd, and warned it sees a loss at group level for the fourth quarter and possibly a net loss for the full year.

Ahead of the update, there had been fears the group would eke out news about its sub-prime exposure over the next few quarters.

Meanwhile, UK banking group Lloyds TSB Group turned 3.38 pct higher after its trading update. Deutsche Bank repeated its 'buy' stance saying the update shows the strength of the group's brand. But Spanish utilities were under pressure, with Union Fenosa down 3.66 pct after shock plans for new legislation to claw back free CO2 allocations.

In its morning note, UBS said the CO2 claw back could reduce valuations for the utilities by about 2 pct, or up to 5 pct in a worst case scenario.

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Asian stocks mostly lower ahead of Fed's decision; China outperforms 

Stock markets across Asia were mostly down Monday, with benchmarks in Australia, Japan, Hong Kong, Singapore, South Korea and Malaysia lower as investors marked time ahead of the Federal Reserve decision on interest rates tomorrow.

In Tokyo, the blue-chip Nikkei 225 Stock Average closed down 0.2 pct at 15,924.39 and the broader Topix index was down 0.2 pct to 1,558.51. Australia's S&P/ASX 200 was down 0.4 pct at 6,625.1 and the All Ordinaries was down 0.4 pct at 6,686.1.

"It has been very quiet, with volumes fairly soft. There's not much happening ahead of the Federal Reserve meeting," said Michael Heffernan of Reynolds & Co in Sydney.

The focus was on BHP Billiton's proposal to merge with Rio Tinto and on a possible counter-bid by China's Sinosteel for iron ore miner Midwest Corp, which is facing a hostile bid from rival Murchison Metals. BHP Billiton was up 0.2 pct at 43.59 dollars and Rio Tinto reversed early losses to rise 0.8 pct to 146.70 dollars.

The South Korean KOSPI closed down 1.4 pct at 1,906.42 as caution before the Fed meeting was compounded by concerns ahead of the triple-witching on Thursday or the simultaneous expiry of options and futures for the main index and options contracts for individual shares.

Samsung Heavy was among the worst performers, slipping 6.4 pct to 39,300 won after a Samsung Heavy barge collided with an oil tanker, causing South Korea's worst-ever oil spill. The spill cut investor appetite for the insurance segment, with Samsung Fire & Marine Insurance down 2.9 pct at 232,500 won.

The Kuala Lumpur Composite Index was down 0.6 pct at 1,425.13. Taipei's weighted index closed down 1.4 pct at 8,598.03. The Philippine Composite Index ended down 1.9 pct at 3,675.52, while Singapore's Straits Times Index fell 0.1 pct to finish at 3,553.08.

Stocks in China gained, defying the expectation of most analysts that markets would give up last week's gains after China ordered mainland banks to increase the amount of deposits set aside as reserves by 1 percentage point to 14.5 pct, cutting liquidity by about 400 bln yuan.

The measure is Beijing's first move to curb lending after announcing last week that it is adopting a tight monetary policy. The increase will take effect on December 25. The Shanghai Composite closed up 1.4 pct at 5,161.92.

The Hang Seng shed early gains and turned lower in the afternoon session following weakness in other Asian markets. The index closed down 1.2 pct at 28,501.10. Shares of Chinese banks were lower in Hong Kong after the reserve requirement was raised.

China Merchants Bank tumbled 4.2 pct to 35.60 dollars. Industrial & Commercial Bank of China, the mainland's largest bank, slipped 1.4 pct to 6.14 dollars and Bank of China, the second-largest, was down 1.2 pct at 4.07 dollars.

Indian shares close little changed in choppy trade

The Bombay Stock Exchange's benchmark Sensex ended the day 35.32 points, or 0.18 pct, lower at 19930.68, while the National Stock Exchange's S&P CNX Nifty ended 0.23 pct lower at 5960.60.

Stocks of companies with lower capitalisation, however, scored gains on heavy buying. The BSE's midcap index rose 95.48 points, or 1.06 pct, to close at 9117.44, while the smallcap index gained 188.65 points or 1.66 pct to end the day at 11530.92.

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Metals - Copper eases as market eyes tomorrow's Fed announcement on rates

Following a solid US jobs report on Friday, the Fed is expected to deliver a 25 basis point cut in rates, rather than the more aggressive 50 point-cut mooted earlier, but uncertainty remains.

At 10.19 am, LME copper for three-month delivery was trading at 6,844 usd against 6,910 usd at the close Friday.

"Base metals largely drifted back during Monday pre-market LME trading, although price moves were confined to relatively narrow bands, as the industrial metals complex marked time ahead of this week's interest rate-setting FOMC meeting," noted analyst Martin Hayes at BaseMetals.com.

"The Fed meeting this week is the last key economic event before business starts to wind down ahead of the year-end, and metals trading may be rangebound ahead of its outcome," he added.

A cut in rates is expected to stimulate the US economy, boosting demand for industrial metals. A healthier US may also help allay fears over easing demand in other large consumers of the metal, particularly China.

An aggressive tightening of monetary policy announced by China's central bank last week has spooked investors, who fear any move to cool the country's burgeoning economy could hit metals demand. China's central bank, the People's Bank of China, said Wednesday it is shifting to a 'tight' from a 'prudent' stance after measures taken this year failed to curb inflation and rein in an overheating economy.

It later increased the bank reserve requirement ratio to 14.5 pct, effective from 25 December, a further policy measure probably aimed at tempering China's pace of growth, according to analysts.

"This reflects the Chinese authorities' continued determination to drain excess system liquidity, slow down credit and investment growth and prevent an overheating economy," said Deutsche Bank analyst Krista Yue in a note.

Elsewhere LME lead for three-month delivery was trading at 2,635 usd per tonne against 2,671 usd on Friday. The heavy metal has been pressured by expectations Canadian miner Ivernia Inc will soon be resuming lead shipments from its Magellan mine in Australia.

According to a statement released yesterday by Ivernia, the Environmental Protection Authority of the Western Australia government has said it does not see a problem with the miner exporting lead concentrate from the mine through the Port of Fremantle.

Shipments from Magellan, which were previously transported through the Esperance port, were suspended earlier this year amid fears over lead pollution. The other metals also moved lower. Nickel slipped to 26,700 usd per tonne from 27,400 usd, while aluminium eased to 2,467 usd per tonne from 2,481 usd, basis three months.

Zinc edged down to 2,424 usd per tonne from 2,430 usd and three-month tin dipped to 16,600 usd from 16,700 usd per tonne.

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