US & World Daily Markets Financial Briefing 12-06-2007

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Stocks fall as bond yields rise

NEW YORK - Stocks retreated Tuesday as investors kept a close eye on rising bond yields that cemented the belief on Wall Street that the Federal Reserve won't lower interest rates anytime soon.
   
The benchmark 10-year Treasury note's yield, whose advance has been unnerving stock market investors since last week, was at 5.21 percent in mid-morning trading Tuesday -- up from 5.16 percent late Monday, but down a bit from earlier levels and still below 5.25 percent, a level the 10-year yield has not traded above consistently since 2002.
   
The bond market's weakness has accelerated particularly as mortgage originators, who use Treasuries to hedge exposure to interest rate moves before selling the loans, sell their holdings. But later Tuesday, the government's sale of $8 bln in new 10-year notes will test bond investors' willingness to re-enter the market and take advantage of low prices.
   
Last week, investors regarded inflation levels that remain above the Federal Reserve's comfort level as a sign that the central bank wouldn't cut short-term interest rates. As yields move in the opposite direction from bond prices, market interest rates soared. Higher rates make mortgages more expensive for home buyers, and tend to slow down corporate deal-making.
   
In mid-morning trading, the Dow Jones industrial average fell 36.65, or 0.27 percent, to 13,388.31.
   
The broader stock indexes also declined. The Standard & Poor's 500 index fell 5.25, or 0.35 percent, to 1,503.87, and the Nasdaq composite index dropped 10.05, or 0.39 percent, to 2,562.10.
   
Wall Street weakened in the absence of new economic reports Tuesday, with investors awaiting retail sales on Wednesday, the Producer Price Index on Thursday, and the Consumer Price Index on Friday.

Light, sweet crude futures fell 45 cents to $65.52 a barrel on the New York Mercantile Exchange.
   
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 103.5 million shares. The Russell 2000 index of smaller companies was down 4.56, or 0.55 percent, at 828.62.
   
In afternoon trading, Britain's FTSE 100 was down 0.33 percent, Germany's DAX index was down 0.57 percent, and France's CAC-40 was down 0.40 percent.

Stocks in focus
   
Lehman Brothers Holdings Inc., the first of the big Wall Street investment firms to release its quarterly results, reported a stronger-than-expected profit for its second-quarter. Bear Stearns Cos. and Goldman Sachs Group Inc. are expected to report later in the week. Lehman rose $1.96, or 2.6 percent, to $77.64.
   
Video game publisher Take-Two Interactive Software Inc. reported second-quarter results after the closing bell Monday and announced plans to cut costs. The stock rose 76 cents, or 4 percent, to $19.70.
   
Not all corporate news was positive, though. Dean Foods Co., the largest dairy in the United States, warned that its full-year profit before certain items will miss Wall Street's forecast because of rising raw milk prices and an oversupply of organic milk. Dean Foods fell $1.52, or 4.7 percent, to $30.94.
   
And Texas Instruments Inc., which makes semiconductors used in mobile phones, late Monday narrowed its second-quarter forecast. Texas Instruments fell 72 cents, or 2 percent, to $35.07.

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Dollar remains firm ahead of US data, Treasury report on yuan

LONDON - The dollar remained firm ahead of key US data this week and speculation that China will be labelled a currency manipulator by the US Treasury.
   
The US currency has enjoyed one of its best weeks in a while as stronger than anticipated US economic news has helped shift the US Treasuries yield curve higher.
   
"The dollar has benefited from the hawkish shift in US interest rate markets, especially against the euro," said Mitul Kotecha, head of global foreign exchange research at Calyon. "The rhetoric from Fed speakers this week is likely to maintain the pressure on US interest rate markets despite the soft data, implying that the dollar should remain supported," he added.
   
The US Federal Reserve, which has kept interest rates unchanged for a year at 5.25 pct, continues to voice concern about inflation, making players all the more nervous ahead of the Fed's Beige Book economic report on Wednesday and US consumer price figures on Friday.
   
Elsewhere, US lawmakers are to unveil a proposed law this week that could address concerns China is keeping its currency allegedly under-valued.
   
Details of a bipartisan bill "to address under-valued currencies that harm US trade and economic interests" would be unveiled tomorrow, a statement from the powerful Senate committee on finance said. They would be released by four senior Senators who crafted the bill, and on the same day when the US Treasury makes its semiannual report about currencies to Congress.
   
The administration of US President George Bush is under pressure from lawmakers in the Democratic-controlled Congress to label China a "manipulator" of its yuan currency.
   
Lawmakers say China grossly under-values the yuan, making US-bound exports cheaper and fuelling a ballooning US-China trade deficit, at 232.5 bln usd last year.
      
Elsewhere, the pound was firm in the wake of yesterday's hawkish speech by Bank of England governor Mervyn King.
   
He said the rate-setting Monetary Policy Committee will be "watching closely" indicators of capacity pressures, pricing intentions and inflation expectations. "If these indicators remain elevated, the MPC may need to take further action," King added.
   
King's comments last night also diminished the market's response to the confirmation of a further improvement in UK inflation in May.
   
The office for National Statistics said the annual CPI inflation rate eased to 2.5 pct in May from 2.8 pct in April. The fall was in line with expectations.

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Euroshares steady as investors eye bond markets for direction

LONDON - European's leading exchanges were little changed in midday trade with the market resuming a wait-and-see stance as investors showed concern over potential future interest rates hikes around the globe and looked towards the bond markets for direction.
   
At 12.16 pm, the Dow Jones STOXX 50 fell 6.12 points or 0.15 pct to 3,881.10, as the STOXX 600 retreated 0.63 points or 0.16 pct to 388.25. 
     
The banking sector was once again in focus today after a trading update by HBOS, the UK's fourth largest bank, failed to impress investors, and prompted Panmure Gordon to cut its price target and lower full-year estimates. The shares lost 4.49 pct.
   
Meanwhile, US banking peer Lehman Brothers will take over the spotlight later today with its second-quarter report.
   
HBOS' trading statement also affected rival UK mortgage lenders, with Alliance & Leicester slipping 1.86 pct, Northern Rock off 3.22 pct while shares in Bradford & Bingley were down 1.78 pct.
  
Shares in Commerzbank were off 1.40 pct after analysts at equinet said the German bank was unlikely to emerge as the winner in the takeover battle for Landesbank Berlin.     
   
Staying in the German market, Siemens outshone its blue chips peers, adding 1.41 pct, while the DAX dropped 0.28 pct. The stock was buoyed by positive broker notes from Morgan Stanley and Credit Suisse and rumours that General Electric Co might be interested in bidding for the German electronics firm. Morgan Stanley raised its price target on Siemens to 130 eur per share from 110 and reiterated its 'overweight' rating.
       
General Electric was also the subject of news in the aviation industry after Merrill Lynch, in a note to clients, pointed towards recent reports in trade press, which suggested that negotiations between EADS Airbus to supply a competitor of the Rolls-Royce Trent engine on the A350 XWB have stalled.
   
Shares in Rolls-Royce climbed 3.00 pct at last check, while EADS retreated 0.53 pct.
   
Further in connection to EADS, Lagardere gained 3.02 pct at midday, following an upgrade by Exane BNP Paribas to 'outperform' from 'neutral' on the grounds of an impending disposal of its EADS stake.
   
According to Exane analysts, a disposal would generate cash returns of up to 1.8 bln eur, and transform the group into a pure media player, prompting them to reduce the 10 pct conglomerate discount they currently apply to the stock. Lagardere has already reduced its stake in EADS from 15 pct to 7.5 pct, but has stressed in the past that it has no intention of selling its remaining holding.
   
Meanwhile, shares in French utility EDF soared 2.74 pct higher amid reports that the EU is opening a formal inquiry into French capped electricity tariffs for businesses prompted speculation that prices may be fully deregulate earlier than planned, boosting EDF's profit margins.
   
Staying with the energy sector, oil service sectors led the way after the International Energy Agency raised its 2007 global oil product demand forecast by 2 pct to 86.1 mln barrels per day and said tighter OPEC supply is adding to US gasoline shortages to push up the price of crude.
   
Among the main gainers, Seadrill was up 4.34 pct, Statoil gained 0.91 pct, Cairn Energy rose 1.25 pct while Acergy added 1.19 pct. In the coatings sector, ICI shares were up 2.9 pct as Merrill resumed coverage on the company and on its peer Akzo Nobel, with a 'buy' rating. Akzo gained 1.58 pct.
   
Over in Scandinavia, Sweden's CPI fell 0.1 pct in May from April, and was up 1.7 pct year-on-year, the Central Statistical Bureau reported.

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Asian shares close mixed; Tokyo down on rate fears

HONG KONG - Shares across the Asia-Pacific region closed mixed, with Tokyo shares falling on rate fears but the China markets shrugging off high inflation data and continuing to rise.
   
Tokyo shares finished lower, with investors stepping back from active buying amid caution about the outlook for interest rates worldwide.
   
The blue-chip Nikkei 225 Stock Average closed 73.57 points or 0.41 pct lower at 17,760.91, off a low of 17,735.56. The TOPIX index of all first-section issues slipped 9.53 points or 0.54 pct to 1,751.62, off a low of 1,748.99.
   
Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Securities, said: "The Tokyo market falls were due to concerns over the upward trend of interest rates globally." Fujito said foreign investors had started to lock-in profits on Tokyo stocks while the yields on longer-dated Japanese government yields remained high.
   
Investors are cautious while they await the outcome Friday of the two-day meeting of the Bank of Japan's policy board and the post-meeting news conference with its governor, Toshihiko Fukui.
   
Australian shares ended slightly higher, losing most of their earlier gains, with support provided by resource stocks due to higher metals and oil prices. The market was far from its early highs as caution set in on fears of further profit-taking following last week's heavy losses. The S&P/ASX 200 closed up 8.4 points or 0.13 pct at 6,240.1, still well off last Monday's record close of 6,392.9. The intraday high was 6,294.9.
   
Hong Kong shares were flat in afternoon trade after China's inflation data renewed worries that mainland authorities may take further measures to cool the economy. Most property stocks were lower in the afternoon after a site in West Kowloon fetched a lower-than-expected bid from major developers in a government land auction today. At 3.30 pm the Hang Seng Index was up 11.23 points or 0.05 pct at 20,626.72.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher on optimism for profit growth, shrugging off an early fall due to interest rate fears after China announced high inflation data.
   
The Statistics Bureau announced that the consumer price index for May rose 3.4 pct year-on-year, the highest gain this year. The number was at the top end of market expectations, and raises fears that the central bank may soon be prompted to hike interest rates again.
   
The Shanghai A-share Index was up 80.06 points or 1.91 pct to 4,271.16 and the Shenzhen A-share Index was up 32.67 points or 2.66 pct at 1,260.58 on turnover of 112.18 bln yuan.
   
Seoul shares closed higher, rebounding from a weaker start to end a sharp two-day correction, with institutions seeking brokerage shares on hopes for a consolidation in the industry. The KOSPI index closed up 13.32 points or 0.78 pct at 1,729.88, off a low of 1,712.13 and a high of 1,730.63.

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Gold dips in line with other commodities as sentiment remains weak

LONDON - Gold dipped in line with other commodities and the wider markets with sentiment remaining flat following Friday's sell-off in the precious metals. At 1.43 pm, spot gold was trading at 650.30 usd per ounce against 654.80 usd in late New York trade yesterday.
   
"Precious metals are broadly stable but remain vulnerable due to further pullbacks in outside markets," said JP Morgan analyst Michael Jansen. "The euro is trading somewhat softer this morning and with the US equity markets pointing towards a softer opening this is equally a moderate negative for the flat gold price."
   
Softer oil prices and continued weakness in the base metals this morning is also weighing on sentiment towards the commodities, analysts said, as is expected weakness on Wall Street this morning.
   
"The gold-to-stock markets correlation that has developed into a tandem-trade pattern since February 27 appears to now play a larger-than-expected role in the gold price equation," said Jon Nadler, an analyst at Kitco Bullion Dealers. "More investors are taking parallel cues from historically counter-cyclical assets to make their bullion investment decisions," he added.
   
Gold added almost 10 usd per ounce yesterday from Friday's close, and is seen continuing to trade within a relatively narrow range, supported by physical buying and taking direction from the dollar.
   
The metal fell to a three-month low of 643 usd at the end of last week as concern mounted over rising inflation, with investors becoming increasingly risk averse as global equity markets turned lower and US bond yields pushed above 5.21 pct.
       
Among other metals, platinum was trading at 1,288 usd against 1,292 usd in late New York trades yesterday. Palladium dipped to 363 usd from 367 usd yesterday. Silver was trading down at 13.08 usd against 13.24 usd yesterday.

At 3.33 pm, LME nickel for three-month delivery had slumped to 39,925 usd a tonne against 42,600 usd at the close yesterday, having dropped to as low as 39,800 usd earlier in the session. Zinc slipped to 3,664 usd against 3,750 usd, while aluminium dropped to 2,692 usd from 2,725 usd. Lead eased to 2,310 usd from 2,345 usd, while tin dipped to 13,975 usd against 14,000 usd yesterday.

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