US & World Daily Markets Financial Briefing 11-07-2006

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Stocks slide on Alcoa, Lucent

NEW YORK - Wall Street slumped in early trading Tuesday after disappointing earnings from Alcoa Inc. and a revenue warning at Lucent Technologies Inc. cast doubt on the strength of second-quarter profits.

In the first hour of trading, the Dow dropped 25.69, or 0.23 percent, to 11,077.86.
   
Broader stock indicators were also lower. The Standard & Poor's 500 index was down 1.85, or 0.15 percent, at 1,265.49, and the Nasdaq composite index lost 8.38, or 0.4 percent, to 2,108.55.
   
Bonds edged higher, with the yield on the 10 year Treasury note slipping to 5.12 percent from 5.13 percent late Monday. However, the 2 year yield stood at 5.17 percent; inverted bond returns signal expectations for slowing economic growth.
   
With no new data to feed investors' curiosity about the economy's health, the market was focused on earnings and whether higher lending rates and energy costs have affected companies' results. Many had hoped for double-digit profit growth from companies in the Standard & Poor's 500 index to help stocks rally.
   
But early disappointments from Dow Jones industrial Alcoa and Lucent Technologies unnerved the market. While Alcoa on Monday posted a steep jump in second-quarter profit, its revenue fell short of Wall Street estimates. Lucent warned Tuesday that its sales would miss targets by $300 million.
   
Stocks in focus

LG.Philips LCD continued the trend of negative news in the flat-screen television market after swinging to a $341 million quarterly loss. It also lowered its capital expenditure guidance on a decision to postpone investment in existing facilities.
   
PepsiCo heads up companies releasing results on Tuesday.
   
Outside of earnings, a poll of June consumer confidence is due to be released, as well as an interest-rate decision from the Bank of Canada. The Canadian central bank decision - analysts are divided as to whether it will hike its key rate beyond 4.25 percent - is due at 9 a.m. EDT.

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Budget deficit drops $296B under estimate

WASHINGTON - President Bush touted new deficit figures Tuesday showing considerable improvement upon earlier administration predictions, trumpeting it as validation of his tax cuts.
   
Bush himself announced the deficit -- a task that has in the past been left to lower-ranking administration officials. The figures show that the deficit for the budget year ending Sept. 30 will be $296 billion -- much better than the $423 billion that Bush predicted in February and a slight improvement over 2005.
   
Bush said the improvement is due to tax cuts he pushed in 2001 and 2003 and his clampdown on domestic agencies funded by Congress.
   
"These tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners. And they used this money to help fuel an economic resurgence that's now in its 18th quarter," Bush said. "Economic growth fueled by tax relief has sent our tax revenues soaring."
   
Impressive profits and big income gains by the wealthy are largely responsible for the surge in revenues and, in turn, the deficit drop.
   
However, the results are less impressive when compared to the $318 billion deficit posted last fall for fiscal 2005. Despite strong revenues, the high costs of the Iraq war and Gulf Coast hurricane relief have weighed on the deficit -- as have higher interest payments paid on the national debt.
   
"The 2006 deficit may be a bit lower, but it represents a $600 billion swing from the surplus projected in 2001. And a deficit of $296 billion is still a large deficit. In nominal terms, its one of the four largest in history," said Rep. John Spratt Jr. of South Carolina, top Democrat on the Budget Committee.
   
Revenues are running $115 billion greater than expected earlier this year, the White House said, reflecting particularly strong growth in taxes paid on corporate profits and income taxes paid by wealthier people and small businessmen who pay taxes quarterly instead of having them withheld by employers.
   
Taxes paid by individuals are growing at an 11 percent rate, the White House says, while corporate taxes are rising at a 19 percent rate.
   
The economy is estimated to grow at a 3.5 percent rate in real terms, a slight slowdown from the 5.6 percent rate of the first quarter of the year.
   
"We've had extraordinarily good profit growth, and when you have better profit growth than wage growth you tend to have windfall tax revenues because taxes on profits are higher than taxes on wages," said Diane Swonk, chief economist for Mesirow Financial, a Chicago-based financial services firm.
   
Swonk predicted that the unexpected revenue surge would ease around the end of the year as profits peak.

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The European Markets 12.00 BST

London - UK blue chips remained weak but off session lows at midday, with Wall Street seen easier in opening deals as the US corporate earnings season swings in, while market heavyweight Vodafone remained a drag after a broker downgrade, dealers said.
   
At 12.00 pm, the FTSE 100 index was 16.0 points lower at 5,880.9, holding off an earlier low of 5,871.9 having only reached a high of 5,891.4. All the broader FTSE indices were also lower, with the FTSE 250 index down 20.9 points at 9,369.2.

Frankfurt - Shares remained down in midday trade after Wall Street's lacklustre overnight performance and Tokyo's lower close, dealers said.
    
At 2.00 pm, the DAX 30 index was 38.10 points or 0.67 pct lower at 5,668.22, having moved between 5,650.62 and 5,684.40 so far this session. The MDAX was at 7,854.28 down 26,02 points or 0.33 pct, while the TecDAX was at 643.13, down 3.38 points or 0.52 pct.

Paris - Shares were lower in midsession trade as investor attention shifted from macroeconomic issues of interest rates and oil prices to the microeconomic newsflow of corporate quarterly results, which was particularly gloomy in the technology sector, dealers said.
   
At 12.45 pm, the main CAC 40 index was 36.02 points or 0.72 pct lower at 4,946.45, on trading volume of 1.93 bln eur.

Amsterdam - Shares were lower at midday, with Philips leading blue-chip decliners following disappointing second-quarter results from its joint venture LG Philips LCD, dealers said.
   
At 11.45 am, the AEX was down 2.13 points or 0.48 pct at 440.45, after reaching an earlier low of 439.72.

Brussels - Shares were lower in early afternoon trading, in line with other European markets following a mixed overnight session on Wall Street, with utility Suez leading the stocks down, traders said.
   
At 12.29 pm, the Bel 20 was down 19.46 points or 0.52 pct at 3,724.10.

Milan - Share prices were lower at midday trade, with STMicro leading the decline after profit warnings from US technology companies, while Fiat clearly outperformed on a "buy" recommendation issued at Goldman Sachs, dealers said.
   
At 12.49 pm, the Mibtel index fell 0.37 pct to 27,913 points and the S&P/Mib was down 0.42 pct at 36,436, while volumes were 1.20 bln eur.

Madrid - Share prices were lower midday in quiet trade, tracking losses in US futures, with second liners like Zeltia buoyed by bid rumours, dealers said.
   
At 12.55 pm, the IBEX 35 index was down 50.2 points at 11,599.3, after trading in a range of 11,574-11,616, on turnover of 719 mln eur.

Stockholm - Shares remained in negative territory in midday trade, below earlier levels on continuing profit-taking, as Ericsson went deeper into the red in the wake of Lucent's profit warning, dealers said.
   
At 12.35 pm, the OMX Stockholm index was down 0.94 pct at 305.06, while the OMX Stockholm 30 index was down 1.09 pct at 943.71. Turnover was 6.47 bln skr.

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Asian shares close mixed, Tokyo falls on profit taking

HONG KONG - Asian shares closed mixed as companies in the US and Asia began reporting their earnings, with the Tokyo market falling on profit taking, dealers said.
   
Tokyo share prices closed lower as investors opted to pocket profits from yesterday's gains, dealers said.
   
They added that the inconclusive performance of US stocks overnight gave market participants a reason to lock in profits. There was also wariness about driving up stock prices too far before the Bank of Japan's policy meeting this week, at which the central bank is widely expected to scrap its zero interest policy with a rate rise of 0.25 pct.
   
The Nikkei 225 Stock Average ended 78.99 points or 0.5 pct lower at 15,473.82, off a low of 15,333.59.
   
The broader TOPIX index of all first-section issues lost 8.22 points or 0.5 pct at 1,585.85, off a low of 1,572.37.
   
"Share prices declined as many investors chose to cash-in profits after the Nikkei climbed sharply yesterday," said Yutaka Miura, senior strategist at Shinko Securities. "Market players were also wary following the mixed performance on Wall Street."
   
He said recent profit warnings by US firms Advanced Micro Devices Inc, 3M Co and EMC Inc kept investors at bay.
   
Australian shares finished lower as investors sold banking stocks following a strong rise in housing finance data for May, which increases the risk of an interest rate hike in coming months, dealers said.
   
They said resource stocks were also out of favor after oil prices slipped and metal prices were mixed overnight.
   
The S&P/ASX 200 shed 35.6 points or 0.69 pct to close at 5,107.2. The benchmark indicator closed off the day's low of 5,093.8 and below a high of 5,139.1.
   
Hong Kong shares were lower in afternoon trade after a mixed performance on Wall Street overnight as US companies started to report second-quarter earnings, dealers said.
   
PCCW fell sharply after news that chairman Richard Li has agreed to sell nearly a 23 pct stake in the company to local financier Francis Leung, ceding control.
   
At 3.28 pm, the Hang Seng Index was down 106.41 points or 0.64 pct at 16,497.40.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher on continued bargain-hunting interest, with banks and machinery companies in demand.
   
The Shanghai A-share Index rose 11.93 points or 0.65 pct to 1,835.76 and the Shenzhen A-share Index was up 2.80 points or 0.60 pct at 465.69.
   
Seoul shares closed slightly higher and above 1,300 points, with expectations of weak second quarter results having been priced in. Several major South Korean companies will report their results this week.
   
The KOSPI index closed up 1.15 points or 0.09 pct at 1,300.44, off a high of 1,301.95 and a low of 1,289.35.

Asian Bourse Round-Up

For a full list of closing prices, click here

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Gold recovers as Asian bargain hunting sparks buying in Europe

LONDON - Gold prices recovered from yesterday's sharp falls, with Japanese and Far East bargain hunting and buying interest sparking follow through buying in the European session.
   
At 12.16 pm, spot gold was quoted at 631.75 usd against 623.90 at the time of the COMEX market close yesterday. Other precious metals were also higher.
   
Spot silver was at 11.32 usd against 11.09, platinum was at 1,230.00 usd from 1,218.00 and palladium was at 322.00 usd against 316.00.
   
Gold declined yesterday as the dollar edged higher, showing resilience despite some weak US data last week, and as oil weakened on a perceived easing of tensions in the Iranian nuclear dispute.
   
It recovered today, however, having found good support yesterday after testing a low of 620.15 usd in New York trade. Standard Bank said the metal will likely consolidate in the 620's before mounting a serious attempt higher.
   
"The immediate perceived easing of tensions in Iran and North Korea could potentially hurt demand for the safe haven asset in the near term, but the bullish longer-term outlook for gold remains intact," said the bank.
   
The dollar firmed slightly against the euro, but dealers said the release of US trade data tomorrow could weaken the dollar. A weaker dollar increases the appeal of gold as a hedge against inflation.
   
Gold hit a 26-year-high of 730 usd in mid-May on increased geopolitical tensions, high oil prices and an uncertain outlook for the dollar, but a brutal sell-off soon ensued, sending the precious metal down to 543 usd in mid-June.
   
John Meyer, analyst at Numis Securities, said gold has been firming since the June falls and that this uptrend should continue, led by "rising demand, some interruptions to mine supply and central bank activity".

Base metals rally as nickel touches new all-time record high
     
At 3.05 pm, LME nickel for three month delivery was at a record 25,650 usd a tonne, up from 24,650 at the close yesterday. Nickel prices have risen by more than 85 pct this year.
   
Other metals were also higher. LME copper was at 7,950.00 usd a tonne against 7,755.00 usd, zinc was at 3,560.00 usd against 3,505 usd, tin was at 8,750.00 usd against 8,725.00 and aluminium was at 2,610.00 usd against 2,565.00.
   
Nickel stocks stored in LME warehouses fell by another 486 tonnes today to total 8,400 tonnes. "The steady downtrend in LME nickel stock has been pivotal to the current rally in prices," said Barclays Capital in a note.
   
Meanwhile, the threat of a strike at the Escondida mine in Chile boosted copper, as tin looked to re-challenge the 9,000 usd level on news of an 8 pct production cut this year at PT Timah.
   
In industry news, Alcoa, the world's biggest aluminium maker, said it will continue to import large amounts of alumina and aluminium in the near term, even as it increases production to support rising demand.
   
"Overall, the outlook for metals has improved in recent weeks following the mid-May to mid-June corrections, which seem to have unwound a lot of the hot money," said BaseMetals.com analyst William Adams.
   
He said the metals will likely head higher "until either supply shows definite signs of picking up or until the economic outlook deteriorates to such an extent that the demand outlook is revised sharply lower".
   
Base metals reached all-time records in May, supported by historically low inventory levels and strong demand, but a sell-off soon ensued, prompted by fears continued interest rate rises by the US Federal Reserve would crimp growth and demand.

Oil prices recovered as energy traders monitored developments in talks with Iran over its nuclear arms program, as well as a weekly update on domestic reserves on Wednesday. A barrel of light crude added 34 cents to $73.95 on the New York Mercantile Exchange.

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