US & World Daily Markets Financial Briefing 13-12-2007

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Stocks fall on jump in wholesale prices

Stocks fell moderately Thursday after a spike in wholesale prices and uncertainty about a plan to ease tightness in the credit markets stirred concerns about whether the Federal Reserve will be able to help prop up the economy. Prices at the wholesale level jumped 3.2 percent in November, their biggest increase in 34 years. The jump came from a record rise in wholesale gasoline prices.

The economic news wasn't all unwelcome, however. The Commerce Department said retail sales rose in November by the largest amount in six months and a Labor Department report showed new claims filed by those seeking jobless benefits dropped last week.

The decline on Wall Street comes a day after stocks gained but finished well off their highs as investors took a closer look at the Fed's agreement with the European Central Bank and the central banks of England, Canada and Switzerland to combat what it labeled elevated pressures in the credit markets.

In the first hour of trading, the Dow Jones industrial average fell 23.49, or 0.17 percent, to 13,450.41. Broader stock indicators also fell. The Standard & Poor's 500 index fell 5.91, or 0.40 percent, to 1,480.68, and the Nasdaq composite index declined 12.14, or 0.45 percent, to 2,659.00.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its yields, jumped to 4.14 percent from 4.06 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude fell $1.07 to $93.32 per barrel in premarket electronic trading on the New York Mercantile Exchange.

Investors had a mix of economic readings to consider. The producer price index, which measures inflation at the wholesale level, rose 3.2 percent in November, according to the Labor Department. But excluding the often volatile food and energy sectors, inflation rose by 0.4 percent.

And retail sales jumped by 1.2 percent in November, which was double the increase economists had expected. In October, the increase had been a much weaker 0.2 percent.

Beyond the day's economic news, concerns about the effectiveness of central banks' plans to loosen the world's credit markets weighed on stock markets abroad. In afternoon trading, Britain's FTSE 100 fell 2.11 percent, Germany's DAX index lost 1.16 percent, and France's CAC-40 fell 1.78 percent. In Asia, Japan's Nikkei stock average closed down 2.48 percent, while Hong Kong's Heng Sang index lost 2.72 percent on the day.

In corporate news, Lehman Brothers Holdings Inc., the nation's No. 4 investment bank, on Thursday said equity trading and investment banking fees drove its fiscal fourth-quarter profit above Wall Street expectations. Lehman rose 41 cents to $62.23.

Costco Wholesale Corp.'s fiscal first-quarter profit rose 11 percent amid membership fee growth. Some investors were disappointed by the results at the wholesale warehouse. The stock fell $3.87, or 5.5 percent, to $66.32.

Dow Chemical Co. jumped $3.46, or 8.3 percent, to $45.21 after agreeing to sell a 50 percent stake in five of its global businesses to a Kuwaiti company for about $9.5 billion to form a joint petrochemicals venture.

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Forex - Dollar drifts higher against euro in choppy trade

The dollar drifted higher, mostly against the euro, reversing earlier losses as currency trading remains choppy in the aftermath of yesterday's liquidity measures announced by several leading central banks.

When central banks in the US, euro zone, UK, Canada and Switzerland together said they would act to shore up cash availability in the financial sector during the crucial New Year rollover period, the dollar and yen initially dropped lower on improved global risk appetite.

But that momentum has now dropped out of foreign exchange markets, as investors realise that uncertainty will continue to dominate regardless of the central banks' actions. "Uncertainty is too high to justify large positions, particularly going into year-end," said Ray Ferris at Credit Suisse.

He said the increased coordination among countries to tackle liquidity problems is a clear positive, and that this will continue to put pressure on the yen and the Swiss franc, particularly after the Swiss National Bank today decided against raising interest rates.

The dollar should also be hurt by improved US money market rates, as US companies will no longer be forced to sell non-US assets to build up dollar reserves. Furthermore, said Ferris, "the longer the Federal Reserve eases monetary policy only gradually, the greater the risk US growth slows more than expected."

Meanwhile, the pound remained somewhat softer after weak housing and manufacturing data. The Royal Institute of Chartered Surveyors said a balance of -40.6 pct of its members reported lower house prices during the month. This is the fourth successive month a majority of surveyors have reported lower house price increases and is the biggest negative since May 2005's -49 pct.

Also, the Confederation of British Industry reported that manufacturers are expecting output, orders and prices charged to grow more slowly in the future, which will further bolster views of rate cuts in the UK early next year.

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Euroshares fall as credit fears persist after central bank intervention

At 9.38 am, the Dow Jones STOXX 50 Index was down 59.12 points, or 1.6 pct at 3,742.42 while the DJ STOXX 600 Index fell 5.55 points, or 1.5 pct to 369.20. In Europe, banks led the decline as concerted central bank action failed to restore confidence in the sector.

In an unprecedented move, the central banks of the US, the euro zone, the UK, Canada and Switzerland announced they will all inject extra liquidity into the financial system in order to ease pressures in short-term funding markets.

Some investors only viewed the move as supplying temporary relief to the global liquidity crisis brought on by bank sector exposure to the ailing US subprime mortgage market.

Northern Rock, perhaps the most high profile victim of the subprime crisis, was down 2.7 pct, after the UK mortgage lender said it is taking a 281 mln stg charge to reflect a decline in the value of debt-related investments, including collateralised debt obligations and holdings in structured investment vehicles, as a result of the global credit squeeze.

A Financial Times report that private equity group Olivant Ltd is threatening to abandon its takeover bid for the company also weighed on the stock.

Elsewhere in the sector, HBOS was down 4.1 pct as the UK's mortgage lender said it would offer no further share buybacks until market conditions were more certain.

It added that the credit crunch had forced it to write down the value of asset-backed securities held in its trading book by 180 mln stg, but stressed these are not linked to sub-prime mortgages.

Munich Re was down 0.6 pct as its 'Investor Day' got underway. The company last month said it doesn't expect additional losses related to the collapse of the US subprime mortgage market.

Among drug stocks, Novartis gained 1.4 pct as investors welcomed restructuring measures aimed at simplifying its organizational structure over the next two years, with a view to achieving annual pretax savings of 1.6 bln usd beginning in 2010.

And Merck KGaA rose 1.2 pct after the German pharmaceutical company said it had initiated a Phase II/III clinical trial of Atacicept to combat lupus nephritis, a severe form of systemic lupus erythematosus (LSE). LSE is the most prevalent form of lupus and affects about 1.5 mln people worldwide.

In the airline sector, Alitalia was up 0.5 pct as the Financial Times reported that Prime Minister Romano Prodi's government remains divided over whether to support an Air France-KLM Group bid or an offer from discount carrier Air One for the government's 49.9 pct stake in the airline carrier.

And in a late development, Singapore Airlines and investment funds Quantum Funds and Evergreen Fund have made a joint offer for Alitalia SpA, Radiocor news agency reported, without citing sources. Iberia Airlines was up 1.6 pct as it prepares to release November traffic figures, with its profile as a takeover candidate further underpinning gains.

Lufthansa Chief Executive Wolfgang Mayrhuber said his company was still interested in a potential takeover of the Spanish airline, although the indicative price range for the company is still on the high side. On the earnings front, Club Mediterranee fell 1.4 pct as the market voiced disappointment over the resort operator's full-year earnings figures.

Analysts at Kepler Equities said the group's net loss of 8 mln eur was well below their own estimate for a profit of 10 mln eur, and missed the consensus forecast for profit of 6 mln eur. In broker action, Thales was up 0.3 pct, outperforming a weak industrials sector, after UBS upgraded the French defence group to 'buy' from 'neutral' with a price target of 49 eur from 47 eur. 

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Asian stocks fall after Fed plan fails to ease worry over credit crisis 

The Nikkei 225 Stock Average was 2.5 pct lower at 15,536.52, and the broader Topix index lost 2.6 pct at 1,516.10. Hong Kong's Hang Seng slipped 2.7 pct to 27,744.45 and the Shanghai composite was down 2.7 pct at 4,958.04.

The Australian benchmarks were little changed, with investors weighing the volatile trading in New York against profit forecast upgrades by Australian companies. The S&P/ASX 200 fell 0.3 pct to 6,597.6 and the All Ordinaries declined 0.2 pct to 6,661.1.

Profit forecast upgrades by national flag carrier Qantas Airways and travel agency Flight Centre limited the market fall. Qantas Airways jumped 2.6 pct to 5.90 aud after upgrading its earnings guidance for the year to June 2008 on strong passenger numbers in the first four months of the current financial year.

Flight Centre rose 3.6 pct to 31.00 aud after the travel agency hiked its earnings guidance for the current financial year following strong trading in the five months to November. Oil stocks retreat Oil stocks fell in Asia after international oil prices softened Thursday as traders reacted to new measures aimed at easing tight credit conditions. PetroChina slipped 4.36 pct to 14.48 dollars.

In Hong Kong, China Eastern Airlines tumbled 12.7 pct to 6.53 hkd after Singapore Airlines ruled out raising its offer price for a stake in the carrier. In Japan, worry about the credit crisis accelerated the selling of financial stocks.

Mitsubishi UFJ Financial Group was down 7.9 pct at 1,128, Sumitomo Mitsui Financial Group declined 7.3 pct to 884,000 and Mizuho Financial Group dropped 5.3 pct at 59,000 while Nomura Holdings was down 4.3 pct at 1,919.

Elsewhere, the Philippine Composite closed up 0.6 pct at 3,626.21. In South Korea, the KOSPI was down 0.6 pct to 1,915.90 while Malaysia's KLCI lost 0.9 pct to 1,410.56. The Jakarta index ended down 1.4 pct at 2,755.73 while Taiwan's weighted index closed down 3.57 pct at 8,187.95. The Singapore Straits Times finished down 2 pct at 3,479.31.

Indian shares close lower as investors lock in recent gains

The Bombay Stock Exchange's benchmark Sensex closed 271.48 points or 1.33 pct lower at 20104.39, while the National Stock Exchange's S&P CNX Nifty lost 1.64 pct to close at 6058.10 points.

However, stocks of companies with lower market capitalisation continued to advance. The BSE's midcap index closed 36.45 points or 0.39 pct higher at 9375.94, while the smallcap index surged 122.34 points or 1.03 pct to close at 12007.33.

Diversified conglomerate ITC Ltd led the Sensex gainers. The stock, called an "underperformer for long" by a dealer, closed 4.12 pct up at 196.90 rupees on value buying.

Tata Steel extended its gains to close almost 3 pct higher at 889.40 rupees, a day after reports said it will invest up to 2 bln usd to build an iron ore mine in Ivory Coast.

GSM player Bharti Airtel was the biggest blue-chip loser, down 6.24 pct at 987.80 rupees as investors took profits from the scrip's recent good runs.

ICICI Bank also declined on profit taking, closing 3.7 pct lower at 1242.50 rupees. Media reports quoted its chief KV Kamath saying it is too early to comment whether ICICI Bank will review its rates after the recent Fed rate cut.

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Metals - Gold eases on profit taking after hitting 2-week high yesterday

The precious metal hit 816.85 usd per ounce yesterday -- its highest price since Nov 28 -- after the US Federal Reserve said it will add liquidity to the banking system in cooperation with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

At 9.54 am, spot gold was trading at 810.15 usd per ounce, down from 813.40 usd in late New York trade yesterday.

A stronger dollar, which made gold more expensive for those trading in currencies other than the greenback, also shaved the metal's value. Weaker oil prices, meanwhile, reduced gold's appeal as an inflation hedge.

"Both oil and the dollar look set to provide price direction in the coming sessions but for the moment gold appears comfortable trading around the 795-815 usd area, with further rallies likely to be used as profit taking opportunities ahead of year-end," said TheBullionDesk.Com analyst James Moore. "Investment demand is still strong though, reflecting the unease in the financial markets."

Gold acts as a safe-haven asset in times of financial and political stress. Some players interpret the major banks' pledge to improve liquidity as a sign the global economy is in need of serious help, which could lift gold as investors buy the metal as a safe asset.

Gold has risen some 30 pct so far this year, helped by global economic weakness that has fuelled investor demand and as physical demand from growing economies has increased.

Chinese gold use in jewellery jumped 24 pct to 221 metric tonnes in the first nine months from a year earlier. That compares with 515 tonnes in India, the biggest consumer, and 165 tonnes in the US, said analysts at Juno Mother Earth Asset Management.

"More economic development in China and a relatively higher savings ratio than that of India should in the long-term continue to drive gold demand in China," said the hedge fund group. "China is poised to become the world's second-largest jewellery market for gold this year, overtaking the US and coming in No 2 behind India."

Among other precious metals, platinum was slightly lower at 1,474 usd from 1,475 usd while sister metal palladium dipped to 343 usd from 346 usd. Silver, meanwhile, was trading at 14.61 usd per ounce against 14.65 usd.

"(Silver) has been little changed overnight and has seen a steady improvement in sentiment in recent sessions due to the return of investment demand," said Moore at TheBullionDesk.Com. "Further resistance is expected around the 14.75 usd chart level although successful clearance should open the way to challenge above 15 usd."

US economic data is plentiful today with the line-up including jobless claims for the week of Dec 8, October Inventories and PPI & Retail Sales for November. Should the data move the dollar, gold and other precious metals might also shift.

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