US & World Daily Markets Financial Briefing 11-05-2006

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U.S. stocks fall; rising commodity prices stoke inflation fears

NEW YORK - U.S. stocks lost ground in early trading Thursday as a rise in oil and other commodity prices stoked inflation fears and added to uncertainty about the outlook for interest rates.
   
American International Group was a notable decliner after its earnings fell short of Wall Street expectations.
   
The Dow Jones Industrial Average was down 20 points at 11,623.
   
The Nasdaq Composite Index fell 5 points to 2,316, while the S&P 500 Index fell 1 point to 1,321.94.
   
"The market's a bit nervous here," said Michael Metz, chief investment strategist at Oppenheimer & Co. "With the continuing rise in metals prices, fear of inflation is going to be one of the dominant themes. I think the market is ready to sell off a bit."
   
Metz said the weakness of the dollar is another major concern.
   
On Wednesday, stocks closed mixed, after the Federal Reserve lifted key short-term rates and issued a statement that left investors unsure about the outlook for interest rates.
   
The Fed made clear Wednesday, in the statement accompanying its 16th consecutive rate hike, that fighting inflation remains a key priority, saying "some further policy firming may yet be needed" to address inflation risks but also emphasizing that the extent and timing of any such firming will depend on data.
   
Some investors had been hoping the central bank would signal a pause in rate increases, especially after Fed chief Ben Bernanke, in congressional testimony in April, said a temporary halt may be needed to assess the impact of previous rate hikes as they feed through into the economy. After the statement, a number of economists forecast short-term interest rates could now hit 5.5% by year-end before the Fed's finished.
   
With the Fed focusing on data, investors will be combing through economic reports in order to garner any information that could help them plot the future course of interest rates.
   
April retail sales were the first set of data to hit the market after Wednesday's Fed decision.
   
Sales increased 0.5%, due in large part to increased spending at the gas pump. Excluding gasoline sales, seasonally adjusted sales rose just 0.1%. Excluding autos, sales increased 0.7%. Economists had been expecting a larger increase of about 0.7% for overall sales and 0.8% excluding autos, according to a survey conducted by MarketWatch.
   
Also, the number of initial claims in the week ended May 6 fell to 324,000, but this was down only 1,000. 

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On the currency market, the U.S. dollar was flat against the euro, and slightly lower against the Japanese yen.

The euro rose to $1.276 from $1.2752 late Wednesday, while the dollar fell to 110.77 yen from 111.19 yen.

The British pound was the biggest mover against the greenback, climbing against the dollar after figures showed that March industrial production in the U.K. rose an unexpectedly strong 0.7%.    

The pound rose to $1.8694 from $1.8578 shortly after the U.S. data releases.

Stocks in the spotlight
   
American International Group was the biggest percentage decliner on the Dow industrials, down 2.3% at $65.03 after the insurance giant posted lower-than-expected first-quarter earnings late Wednesday, as a strong performance by its property and casualty division was offset by weakness in its foreign life insurance business.
   
Fellow blue chip Johnson & Johnson was up 0.9% after being upgraded to buy from neutral at Banc of America, which cited valuation, the company's relatively minimal exposure to generics over the next two years and an improving pharmaceuticals pipeline.
   
Also, Pfizer Inc. shares rose 1.2% to $25.33 after getting U.S. Food and Drug Administration approval for Chantix, a drug aimed at helping people give up smoking.
   
Outside the Dow, News Corp. advanced after the media conglomerate's profit more than doubled, led by its cable-network operations. BSkyB , the U.K. satellite operator run by Rupert Murdoch's son James and partly owned by News Corp., should also see gains, buoyed by an upgrade from Morgan Stanley.
   
News Corp. shares rose 1.7% to $19.44 in early trading. BSkyB shares were up 3%.
   
Elsewhere, Research In Motion Ltd. rose 1.5% to $74.75 after it said it will launch its BlackBerry wireless handheld service in China.
   
Also grabbling investors' attention, Movie Gallery Inc. shares surged more than 60% to $5.16 after the company said it planned to restructure leases at more than 1,100 stores, to close stores as conditions warrant, to considering selling assets and to cut capital spending. The company's earnings doubled as well.
   
Shares of rival DVD rental chain Blockbuster Inc. also got a boost, rallying 6.8% to $5.

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The European Markets at 12.00 BST

London - Share prices were off session highs at midday with Wall Street seen opening higher, albeit ahead of the latest US retail sales numbers, and as continued strength in commodity prices supported heavyweight mining issues, dealers said.
   
At 12.13 pm, the FTSE 100 index was 17.4 points higher at 6,100.8, having reversed from a late morning peak of 6,114.5.
   
Frankfurt - Shares were higher at midday as US stock futures pointed to a higher opening on Wall Street, though Deutsche Telekom fell sharply as its first-quarter results disappointed the market.
   
At 11.57 am, the DAX 30 index was 35.13 points or 0.57 pct higher at 6,153.51, having moved between 6,121.23 and 6,162.37 so far this session.
   
The MDAX was at 9,110.21, up 10.04 points or 0.11 pct, while the TecDAX was at 760.58, up 1.15 points or 0.15 pct.

Paris - Shares were higher as positive euro zone data boosted banks and other index heavyweights, which pulled the CAC-40 index up to a fresh 5-year intraday high, dealers said.
   
At 1.15 pm, the CAC-40 index was up 41.84 points or 0.79 pct at 5,320.11, on volume of 2.03 bln eur.
   
Of the CAC-40 stocks, 24 were higher and 16 were lower. On the Matif, May CAC-40 futures were trading 37.5 points higher at 5,290.5.

Madrid - Share prices were slightly higher midsession on a rebound, tracking the firmer US futures, with Bankinter surging on renewed bid speculation, while Repsol YPF and Telefonica were lower, and Sogecable underperformed, dealers said.
   
At 12.47 pm, the IBEX-35 index was up 12.4 points at 12,077.3, after trading in a range of 12,048-12,106, on thin turnover of 1.148 bln eur.

Milan - Share prices were higher at midday led by gains in Fiat, which reached a 12-month high, and with investors also focusing on a raft of domestic earnings reports, dealers said.
   
At 12.14 pm, the Mibtel index rose 0.52 pct to 30,143 points and the S&P/Mib advanced 0.56 pct to 38,858, while volumes stood at 3.05 bln eur.

Helsinki - Share prices were lower in mixed midday trade as Nokia and Nokian Tyres led the index lower, with Neste Oil providing relief on a broker upgrade and firmer crude prices, dealers said.
   
At 12.42 pm, the OMX Helsinki 25 was down 0.10 pct at 2,709.54. The OMX Helsinki was 0.29 pct lower at 9,510.18.

Stockholm - Shares were slightly higher in late morning trade, with Ericsson rebounding after yesterday's late losses sparked by comments about continued pressure on margins in the second quarter, dealers said.
   
At 11.10 am, the OMX Stockholm index was up 0.36 pct at 342.64 and the OMX Stockholm 30 was up 0.26 pct at 1,049.97. Turnover was 7.56 bln skr.

Zurich - Share prices were higher towards midday, tracking gains on other European markets on well-received corporate results, as investors awaited fresh direction from Wall Street after the Fed left investors unsure on the outlook for interest rates.
   
At 11.53 am, the SMI was up 38.28 points at 8,151.15 and the SPI was up 28.98 at 6,361.05.

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Asian shares close mixed, Tokyo sinks on stronger yen

HONG KONG - Share prices across the Asia-Pacific region ended mixed with Tokyo lower amid concerns about the yen's continuing strength against the US dollar, dealers said.
   
The benchmark Nikkei 225 Stock Average closed 89.79 points or 0.5 pct lower at 16,862.14, after touching a low of 16,840.85.
   
The TOPIX index of all first-section issues fell 13.75 points or 0.8 pct to 1,711.31, off a low of 1,708.99.
   
"The market was pushed down by the yen's strength," said Hideo Mizutani, chief strategist at Sieg Securities.
   
"When the dollar rallied in the morning to the 111 yen level, there was some buying back in high-tech shares, but that only offset yesterday's sell-off [in that sector]."
   
Investors are increasingly worried about the strong yen, even though the US Federal Reserve, in the statement issued after the meeting overnight of the Federal Open Market Committee (FOMC), gave little away about the possibility of a pause in its series of increases in interest rates.
   
The FOMC statement said "some further policy firming may yet be needed" to address inflation risks, but emphasized that the extent and timing of any increases in rates will depend on future economic data.
   
"The Fed will stop raising interest rates soon anyway, so its neutral stance this time only suggested a slight delay in the pause," Mizutani said.
   
"Currency rates have a strong impact on Japanese companies. Unless investors are convinced that the dollar won't drop below 105 yen, they cannot buy aggressively," he said.
   
Share prices in Australia finished at fresh record highs as investors bought resource stocks which offset profit taking in the banking sector, dealers said.
   
They said traders' exuberance eased after Wednesday's strong gains resulting from the federal budget's 45 bln aud stimulus including tax cuts, benefits and other programs.
   
Dealers said Australia's biggest lender National Australia Bank defied selling in the banking sector after reporting a 11.4 pct jump in cash net profit of 1.84 bln aud for the six months to March.
   
The S&P/ASX 200 rose 12.3 points or 0.23 pct to a record close of 5,364.5, beating yesterday's record close of 5,352.2.
   
In Hong Kong, share prices were trading higher as optimism about upcoming initial public offerings of Bank of China and Tianjin Port helped investors put aside concerns over interest rates, dealers said.
   
They said interest rate concerns are expected to come to the fore again in the coming days after thr FOMC was unclear on its future course on monetary policy.
   
At 3:28 pm, the Hang Seng Index was up 78.15 points or 0.46 pct at 17,158.74.
   
In mainland China, A-shares in Shanghai and Shenzhen closed lower on profit-taking after sharp gains recorded over the past four trading days, with real estate developers and banks losing ground, dealers said.
   
The Shanghai A-share Index slid 8.97 points to 1,613.60 on turnover of 42.47 bln yuan and the Shenzhen A-share Index was down 3.17 points at 392.13 on turnover of 25.93 bln yuan.
   
Share prices in Seoul ended at a record high after flat closes over the past two sessions, and as large cap IT, steelmakers and telecom stocks posted solid gains, dealers said.
   
Many analysts had expected a turbulent trade today due to the expiry of options contracts and rate policy meetings both at home and in the US.
   
But the market moved sideways for much of the session as investors decided that rate leads have already been largely priced in, before setting a new record on massive program buying before the market close.
   
The KOSPI index closed up 13.61 points or 0.94 pct at a record 1,464.70.

Asian Bourse Round-Up

For a full list of closing prices, click here

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NEW YORK - On the bond market, long-term Treasury prices briefly turned higher, sending yields lower on hopes the Fed would view the weaker-than-expected retails sales data as a sign that the economic growth's slowing and that the need for further rate hikes is limited.
   
The yield on the 10-year Treasury note fell to 5.122% from 5.127% late Wednesday. However, the benchmark's yield quickly rebounded, and was last back up at 5.159%.
   
Gold futures rose to another multi-decade high and copper and platinum set new records early Thursday as the metals sector continued its bull run. The benchmark June contract was up $18.30 at $724 an ounce.
   
Crude-oil futures climbed above $73 a barrel after reports of the closure of a Texas refinery run by Valero Energy revived concerns about potential gasoline shortages heading into the summer driving season. Continued also concern over the West's standoff with Iran also supported prices.

Crude for June delivery was last up $1.62 at $73.76 a barrel.
   
Silver and gold hit peaks last seen in 1980

LONDON - The price of silver and gold reached the highest levels since 1980 today, while platinum smashed another record owing to geopolitical and economic concerns.
   
On the London Bullion Market, the price of gold reached 724.7 usd per ounce,
which was last reached in January 1980, or more than 26 years ago.
   
The precious metal has rocketed by almost 40 pct since the start of 2006.
   
Silver prices broke through 15 usd per ounce for the first time since December 1980, reaching as high as 15.06 usd per ounce.
  
Meanwhile platinum climbed to a record high 1,287.50 usd per ounce on the London Platinum and Palladium Market.
   
All three precious metals are supported by a weakening US dollar, tensions over Iran and inflation fears prompted by high oil prices.
   
A weaker dollar makes commodities priced in the US unit on world markets more attractive to buyers using other currencies.
   
Investors seek refuge in precious metals -- particularly gold -- that are seen as a safe store of value in times of higher inflation and geopolitical uncertainty -- such as the current Iranian nuclear energy crisis.
   
Metal have also forged higher this week as low global inventories and supply disruptions have prompted frenzied speculative buying.

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