US & World Daily Markets Financial Briefing 14-06-2006

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Stocks bounce higher despite CPI data

NEW YORK - Stocks bounced higher in early trading Wednesday despite a key inflation reading that came in above expectations and raised the prospect of another interest rate hike by the Federal Reserve.
   
U.S. stocks have fallen for seven of the last eight sessions on renewed inflation worries, wiping out the year's gain for every major index.
   
In early trading, investors looked past the Labor Department's Consumer Price Index, which posted a 0.4 percent increase in May. Core inflation, which excludes energy and food prices, rose by a larger-than-expected 0.3 percent. That brings the Consumer Price Index inflation rate for the year to 2.4 percent.
   
Fed Chairman Ben Bernanke and a parade of regional Fed governors have said in recent weeks that a rate of inflation above 2 percent is outside their comfort zone.
   
"A rate increase to 5 1/4 percent on June 29th ... seems assured," John Ryding, Bear Stearns chief U.S. economist wrote to clients.
   
While Japanese markets rebounded, European stocks fell in afternoon trading and were shaky elsewhere. Russia's benchmark index dropped 9.4 percent Wednesday after falling 10 percent in Tuesday's trading. Pakistan's benchmark index lost 5.86 percent and Thai stocks fell 3.54 percent, Chile's benchmark index dropped 4.37 percent.
   
In the first hour of trading, the Dow Jones industrial average rose 50.99, up 0.48, to 10,757.13.
   
Broader stock indicators also moved higher. The Standard & Poor's 500 index rose 4.59, or 0.38 percent, to 1,228.28, and the Nasdaq composite index rose 9.90, or 0.48 percent, to 2,082.37.

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Dollar firms as US CPI cements Fed rate increase expectations

LONDON - The dollar headed back towards the 6-week highs it struck against the euro yesterday after US inflation data for May reinforced market expectations that the US Federal Reserve will again raise the cost of borrowing at the end of this month.

The U.S. dollar edged lower Wednesday ahead of those figures. The euro rose to $1.2587 from $1.2549, while the dollar fell to 114.87 yen from 115.22 yen.
   
The core CPI rate has been at the forefront of the market's attention since last week, when Ben Bernanke, the new Fed chairman, noted the "unwelcome" rise in core inflation measures. As a result of his comments, financial markets moved to price in another quarter-point increase on June 29, which would take the key funds rate up to 5.25 pct.
   
"The Fed remains concerned that rising resource utilisation rates in labour and product markets combined with elevated prices for energy and other commodities have the potential to increase inflationary pressures," said Calyon senior forex strategist Mike Carey.
   
Though Carey thinks the publication this evening from the Fed of its Beige Book on economic activity will highlight worries about the growth outlook in the US, he said inflation concerns will dominate Fed policy for now.
   
The upward shift in US interest rate expectations has helped the dollar independently because it has occurred at a time when short-term yield considerations are moving in favour of the euro and the yen, with both the European Central Bank (ECB) and Bank of Japan (BoJ) expected to tighten policy over the coming months.
   
It has also indirectly helped the dollar through the general volatility it has caused. What has been bad for equities and commodities has benefited bonds and the dollar because they are considered to be less risky assets.
   
"Its strength over the last week is being driven by renewed concerns that the Fed will be more hawkish than the ECB, the BoJ and other central banks around the world, a reduction in concerns over Iran now that the US has agreed to consider talks with Tehran, and further position unwinding in commodities and emerging markets," said Mansoor Mohi-uddin, currency strategist at UBS.
   
Most currency watchers reckon the dollar will come under pressure again once the Fed halts its monetary tightening, possibly after the June meeting. Since mid-2004, the Fed has raised its key funds rate on 16 consecutive occasions to 5.00 pct.
   
The US currency has been on the backfoot for much of this year, partly because of interest rate factors and structural considerations surrounding the US current account deficit, which accounts for about 6 pct of the country's GDP.
   
"With our US economists arguing that this months expected quarter-point rate hike by the FOMC (Federal Open Market Committee) will be the last in this present cycle, we think the dollar will trade back over one month to 1.27 against the euro and 113 against the yen," said the UBS's Mohi-uddin.
   
The market's attention is also on the yuan after the Chinese currency rose above the key psychological level of 8.00 to the dollar. It was the second time the yuan breached that level since China's forex system was overhauled last year.
   
Beijing's management of its forex regime is a constant source of friction with its trading partners, especially the US, which blames its huge deficit with China on an under-valued yuan.

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The European Markets at 12.00 BST

London - UK blue chips slipped into the red at midday, giving up earlier gains, as BAE Systems extended its fall following news of further Airbus delays and with investors cautiously awaiting key CPI data in the US, dealers said.
   
At 11.57 am, the FTSE 100 index was 7.5 points lower at 5,512.1, while the broader FTSE 250 was up 6.4 at 8,728.1.

Frankfurt - Shares were slightly lower in midday trade, having gained at the opening following yesterday's solid losses, amid caution ahead of key US CPI data and losses by heavyweights such as DaimlerChrysler, which slid on a profit-warning from EADS, in which it has a stake, dealers said.
   
At 12.13 pm, the DAX 30 index was 11.68 points or 0.22 pct lower at 5,280.46, having moved between 5,277.12 and 5,330.04 so far this session.

Paris - Shares were slightly lower at midsession, as the severe losses by EADS stock after a profit-warning offset gains elsewhere from bargain-hunting investors returning to the market in the wake of yesterday's broad sell-off, dealers said.
   
At 12.53 pm, the main CAC-40 index was 3.90 points or 0.08 pct lower at 4,613.69, on volume of 2.79 bln eur. Of the CAC-40 shares, 26 were higher and 14 were lower.

Milan - Share prices were lower at midday in cautious trade ahead of the release of US May CPI figures, dealers said.
   
At 12.36 pm, the Mibtel was down 0.26 pct at 26,517 points and the S&P/Mib also lost 0.26 pct to 34,836.

Madrid - Share prices were slightly higher in cautious early afternoon trade ahead of key US CPI data and the Fed Beige Book, with NH Hoteles surging on bid news, and Inditex firm after solid first quarter results, dealers said.
   
At 12.53 pm, the IBEX-35 index was up 19.0 points at 10,816.5, after trading in a range of 10,799-10,843 on moderate volume of 1.648 bln eur.

Helsinki - Helsinki shares eased back in late morning and early afternoon trade after initial highs as caution resurfaced ahead of US CPI data to be released this afternoon, dealers said.
   
At 1.34 pm, the OMX Helsinki 25 was 0.24 pct higher at 2,248.62 and the OMX Helsinki was up 0.11 pct at 8,040.59. Turnover was a lighter-than-usual 282 mln eur.

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Asian shares close mostly higher on bargain hunting

HONG KONG - Shares across the Asia-Pacific region mostly closed higher as bargain hunters emerged to buy oversold stocks, overriding the fall on Wall St, dealers said.
   
Tokyo share prices rebounded as investors stepped back into the market to pick up bargains after the Nikkei 225 index yesterday posted its biggest single-day points loss in more than four years, Japanese dealers said.
   
Despite today's bounce back, they noted that investors were unwilling to push the market's upside strongly amidst ongoing fears over rising interest rates and signs of a slowdown in US economic growth.
   
The Nikkei 225 Stock Average closed up 90.96 points or 0.6 pct at 14,309.56 after moving between 14,045.53-14,458.82. Yesterday, the blue-chip marker fell 614.41 points, its biggest one-day fall since Sept 12, 2001.
   
The broader TOPIX index of all first-section issues rose a more modest 7.84 points or 0.5 pct to 1,466.14, after moving between 1,439.00 and 1,475.82.
   
"The market rebounded today as bargain hunting set in. This is no surprise since the Nikkei lost more than 600 points yesterday," said Fumiyuki Nakanishi, chief strategist at SMBC Friend Securities.
   
Australian shares also ended higher as bargain hunters reversed earlier selling prompted by a continuing sell-off on Wall Street overnight, dealers said.
   
They said the key S&P/ASX 200 index was down 80.6 points or 1.67 pct from the open as investor sentiment remained cautious following the 2.56 pct plunge on Tuesday, which was the largest fall since September 2001.
   
But, dealers said, caution gave way to investors scooping up bargains in stocks such as index-leading resource companies BHP Billiton and Rio Tinto, which drove the broader market into positive territory.
   
The S&P/ASX 200 gained 11.9 points or 0.25 pct to close at 4,850.8.
   
Hong Kong share prices were higher in afternoon trade with bargain hunting in China Mobile and selected property stocks that investors considered oversold, dealers said.
   
At 3:27 pm the Hang Seng Index was at 15,297.84, up 63.42 points or 0.42 pct.
  
A-Shares in mainland China bucked the regional trend to close lower on  increasing liquidity worries following Air China's IPO plan, with metal and energy issues hit by a slump in commodity prices, dealers said.
   
The Shanghai A-share Index tumbled 18.22 points or 1.12 pct to 1,609.63 on turnover of 17.35 bln yuan and the Shenzhen A-share Index was down 3.93 points or 0.94 pct at 412.56 on turnover of 10.93 bln yuan.
   
Seoul shares finished higher in volatile trade after a nearly three pct decline in the previous session, as bargain hunters picked up oversold stocks, dealers said.
  
Wall Street's overnight retreat brought on a weak start, sending the index near 1,190 points, with continued selling by foreign investors adding to the pressure.
   
But the market soon moved into positive territory as institutional investors stepped up buying and as program buying picked up, triggered by foreign investor activity in futures.
   
The release of positive jobs data also helped sentiment, with solid gains in major Asian markets providing momentum.
   
The May jobless rate eased to 3.2 pct from 3.5 pct a year earlier, the National Statistical Office said.
   
The KOSPI index closed up 17.87 points or 1.48 pct at 1,221.73, after moving between 1,230.02 and 1,192.09.

Asian Bourse Round-Up

For a full list of closing figures, click here 

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Gold claws back some ground after 'carnage'

LONDON - Gold prices had clawed back some ground by early afternoon London trading after what analysts described as yesterday's "carnage", when prices tumbled across the precious spectrum.
   
At 2.30 pm in London, spot gold was quoted at 568.90-569.60 usd, with silver at 9.77-9.87 usd; platinum at 1,122-1,127 usd and palladium at 290.00-295.00 usd.
   
"Carnage would be an accurate description for the movements of the precious complex yesterday," said analyst James Moore of TheBullionDesk.com. "Selling from all corners of the market sent metal prices spiralling lower," he said.
   
Yesterday saw gold closing 7 pct lower, with silver down 13 pct and Palladium down 12 pct "as investors in all metal markets headed for the door".

The dollar's strength on increasing hopes of a US rate hike sucked investment out of the precious metals markets, analysts said. The market sold into any signs of recovery, and the metal was quoted at 562.50 in late New York trading.
   
Gold took another tumble overnight, as follow through selling from Asia emerged. In the over the counter market gold fell as low as 543 usd.
   
Analysts said that the scale of selling seen over the past few days suggests some short covering may emerge, providing support around the psychological 550 usd level.
   
Silver also saw further selling overnight, with prices falling to 9.47 before rising on short covering.
   
Base metals were mixed, with LME copper for three month delivery down 2.65 pct to 6,600 usd a tonne while three-month zinc fell 1.93 pct at 3,000 usd.

LME three month lead fell 2.91 pct to 967 usd a tonne, tin was down 1.35 pct at 7,700 usd and nickel rose 1.25 pct to 18,200 usd.

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