US & World Daily Markets Financial Briefing 14-12-2007

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Stocks fall amid inflation concerns

Stocks fell Friday after a jump in consumer inflation raised concerns about how much freedom the Federal Reserve has to continue cutting interest rates. The Labor Department said the consumer price index rose 0.8 percent in November amid a spike in gasoline prices. The report also found large increases in the cost of clothing, airline tickets and prescription drugs.

The report raises questions about the Fed's plans for priming the economy. The Fed this week lowered interest rates and announced a plan to align with other key central banks and offer liquidity to pressed lenders around the world. But while it wants to stimulate the U.S. economy and make lending easier among banks wary of faltering debt, the Fed also has to keep a watchful eye on inflation.

In the first hour of trading, the Dow Jones industrial average fell 112.83, or 0.83 percent, to 13,405.13.
Broader stock indicators also fell. The Standard & Poor's 500 index dropped 11.77, or 0.79 percent, to 1,476.64, and the Nasdaq composite index fell 20.58, or 0.77 percent, to 2,647.91.

The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude dropped $1.29 to $90.96 per barrel in electronic trading on the New York Mercantile Exchange. Friday's report on inflation follows a reading Thursday that showed the biggest jump in inflation at the wholesale level in 34 years.

The 0.8 percent increase in consumer prices topped the 0.6 percent rise economists had been expecting.
The report also showed core inflation, which excludes often-volatile food and energy prices, rose 0.3 percent, the biggest increase in 10 months.

But beyond economic reports, corporate news added to investors' concerns. Citigroup Inc. said late Thursday it plans to move assets from seven "structured investment vehicles" onto its books and put up $49 billion to help the SIVs repay their debts. The bank had said earlier it had no plans to bring the SIVs onto its books.

SIVs are complex investments set up by banks and sold to investors. They have loomed large on Wall Street in recent months as investors developed a distaste for mortgage investments and other now-risky debt. The resulting drop in demand hurt the value of the SIVs.

Moody's Investors Service lowered its rating on Citi's long-term debt. In other corporate news, Black & Decker Corp. lowered its fourth-quarter target for adjusted earnings, citing a product recall and slowing sales. Shares of the power tools maker fell 21 cents to $82.92.

United Technologies Corp. fell 59 cents to $77 despite an announcement that it expects to generate revenue of $59 billion in 2008, beating Wall Street estimates, and sees per-share earnings of $4.65 to $4.85.

Overseas, Japan's Nikkei stock average slipped 0.14 percent. In afternoon trading, Britain's FTSE 100 slipped 0.07 percent, Germany's DAX index fell 0.58 percent and France's CAC-40 lost 0.23 percent.

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Forex - Dollar consolidates strong gains as US inflation surprises on upside

The dollar extended a strong morning rally after CPI inflation figures for the US came in above expectations, confirming Federal Reserve hesitations to cut rates too aggressively because of price pressures.

US CPI rose a monthly 0.8 pct in November, above analysts' expectations for a more modest 0.7 pct rate. Core CPI also surprised to the upside, with a 0.3 pct gain against forecasts for it to book another 0.2 pct increase.

The data reinforces the views that the US, like many developed economies, is entering a state of stagflation -- slowing growth accompanied by stubborn inflation pressures. "The sharp rise in inflation globally is a serious threat to asset markets given that we are in an environment of slowing growth," said Hans Redeker at BNP Paribas. "In fact, it signals that central banks will not be able to cut rates as freely as they might like," he added.

He also noted that the Chinese yuan has been steadily appreciating, which helps the dollar appreciate against other currencies like the euro, while lower base metal prices will also keep a dollar-positive environment.

Mitul Kotecha at Calyon believes financial markets are expecting too many rate cuts from the Fed next year, himself forecasting about 50 basis points in rate cuts in the first quarter.

As markets readjust their expectations, the dollar will benefit, he said. "The dollar looks set to maintain its gains into year-end and we continue to look for the dollar to extend its recovery in 2008 as the extreme bearishness towards the US economy fades," said Kotecha.

Beyond interest rate speculation, analysts have noted that the dollar may also be boosted from US companies repatriating foreign capital in order to make up for tight liquidity conditions. Elsewhere, the pound was weaker after comments from the Bank of England's rate-setter Kate Barker, who said the UK economy is not moving back to a high inflation environment.

Barker also said manufacturing companies were doing well since the pound has weakened recently, boosting exports, particularly with the euro zone. The BoE is expected to cut interest rates again next year, which will weaken the pound further, particularly against the euro as the European Central Bank remains quite hawkish.

That was confirmed once again today after the preliminary estimate for euro zone CPI was revised up to an annual 3.1 pct from 3.0 pct previously. "The data should keep ECB rhetoric on the hawkish side and support our view that even given growth risks, rates are on hold at 4 pct throughout 2008," said Stuart Bennett at Calyon.

Inflation picked up in September in Europe as both areas show fragile economic growth. Just as in the U.S., rising energy prices are to blame. Read free, daily market reports available only at CMS Forex and open your free demo trading account today. Click here

Euroshares rebound in opening trade, but credit market fears persist

At 9.38 am, the Dow Jones STOXX 50 Index was up 13.02 points, or 0.3 pct at 3,717.76 while the DJ STOXX 600 Index ticked up 1.55 points, or 0.4 pct to 367.14. "We had a significant fall on the FTSE yesterday and bearing in mind that Dow ended higher overnight, it was almost inevitable we would see gains today," said Howard Wheeldon, strategist at BGC Partners.

"But I don't see us go anywhere from here until an element of trust creeps back into the system," Wheeldon added, referring to the crisis of confidence in the banking sector over its exposure to the US subprime mortgage market. The auto sector was in focus, with Renault gaining 1 pct after it said late yesterday its worldwide group sales for passenger cars and light utility vehicles rose 15.5 pct in November compared to a year earlier to reach 214,028 units.

"The group is very likely to meet its target of a slight volume increase this year with, in our view, around a 2 pct volume rise globally after a 6 pct decline in the first half," said broker Cheuvreux, commenting on the car maker performance in a note to clients.

Separately, Renault saw a 10.3 pct rise in November new car registrations. French rival Peugeot SA fared less well, with the car maker slipping 0.5 pct, after new car registrations in November fell 2.3 pct.

Volkswagen was up 0.3 pct even as it saw a 7.7 pct drop in new car registrations last month, but one analyst said the fall was in line with the decline in its home market. Fiat, meanwhile rose 1.1 pct on a 2.6 pct rise in registrations against a 1.1 pct overall drop in European new car registrations.

Staying in the sector, shares in Continental fell 1.5 pct as Morgan Stanley resumed coverage on the German tyre maker with an 'underweight' rating, citing concern over its debt levels following its 11.4 bln eur acquisition of VDO, Siemens' car parts business. The broker said Michelin, among other car parts makers, offers a better risk to reward ratio for investors. Michelin shares were up 1.6 pct.

Elsewehere, shares in Premiere rose 3.2 pct amid ongoing takeover speculation, and an announcement by the German Federal Cartel Office that it had yet to approve DFL's transfer of Bundesliga broadcasting rights to German media mogul Leo Kirch.

Sirius has made clear that it wants to offer ready-to-air football matches that can be broadcast by any pay-TV provider. Up to now, Premiere has been largely responsible for producing Bundesliga broadcasts for pay-TV. Shares in Swiss tour operator Kuoni Reisen Holding AG rose 2 pct as the market welcomed news that chief executive Armin Meier will leave the company by year-end.

Merrill Lynch said the departure of the CEO was not expected but understandable given the group's recent spate of earnings target revisions and amid lingering strategic concern. The chemicals sector put in a strong performance, helped by an upbeat outlook for 2008 from Deutsche Bank.

Later in the session, investors will be looking to see how Wall Street reacts to the latest consumer price report after wholesale inflation yesterday came in stronger-than-expected. Investors will be hoping producer price inflation has not fed through to the consumer, a factor that would raise alarm bells at the Federal Reserve and perhaps derail further interest-rate cuts.

The consumer price index is expected to have risen 0.7 pct in November after a 0.3 pct rise in the previous month, according to the median estimate of economists polled by Thomson's IFR Markets. Core CPI, which excludes volatile food and energy prices, is seen rising 0.2 pct, matching the rise in October.

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Asian stock markets mostly lower as subprime worries persist

The Nikkei finished 0.1 pct lower at 15,514.51 and the broader Topix index fell 1 pct to 1,501.25, giving up early gains sparked by the sharp fall on Thursday. The Hang Seng index closed down 0.7 pct at 27,563.64 as confidence took a fresh beating on talk of further interest rate hikes in China this weekend.

China's inflation rate accelerated to the highest level in 11 years in November. The central bank is expected to raise its benchmark one-year lending rate by at least 27 basis points before the year ends, after increasing it five times this year to 7.29 pct.

The Singapore Straits Times index was closed down 0.4 pct at 3,466.38 and South Korea's KOSPI ended at a two-week low of 1,895.05, down 1.1 pct. Australia's S&P/ASX 200 was down 1.6 pct at 6,491.7 and the All Ordinaries lost 1.6 pct to 6,556.1.

In Japan, Mizuho Financial Group fell 4.9 pct to 561,000. Mitsubishi UFJ Financial Group was down 4.8 pct at 1,074, Sumitomo Mitsui Financial Group declined 27,000 yen or 3.1 pct to 857,000 and Nomura Holdings was down 2.3 pct at 1,874. Sumitomo Trust & Banking Co slipped 3.4 pct to 789.

Investors also found few reasons to buy after the central bank's latest survey showed business confidence fell in the fourth quarter on worry about rising costs, their impact on profits, and further fallout from the subprime crisis.

The Bank of Japan's quarterly Tankan survey showed business confidence among large manufacturers fell to plus 19 in December from plus 23 in September, the first fall in three quarters. The figure was also below the consensus forecast for a reading of 21.

The weaker-than-expected Tankan sent the yen briefly down in morning trade to 112.64 to the US dollar, from 112.21 in early Asian trade, before it bounced back to 112.39 in midafternoon in Tokyo.

In Hong Kong, financial stocks were also hit by a warning from Joseph Yam, the chief executive of the city's de facto central bank, the Hong Kong Monetary Authority, that some local banks may incur losses or post lower profits due to their exposure to subprime mortgage-related investments in the US.

Despite the ongoing global credit crisis which has impacted the biggest names in international banking, Hong Kong lenders have yet to report any significant losses from the subprime mortgage debacle.

Investors focused on banks with reported exposure to the problem including the unlisted unit of Citic International Financial Holdings (CIFH), Citic Ka Wah Bank and Fubon Bank (Hong Kong) Ltd.

Shares of CIFH fell 6.6 pct to 4.83 hkd, and Fubon was down 8 pct to 4.46 hkd. Dah Sing Bank 7.4 pct at 17.86 hkd. China's second-largest bank, Bank of China, which has the biggest exposure to subprime mortgage investments, was down 1.8 pct at 3.90 hkd.

The Shanghai A-share Index rose 1 pct to 5,254.71 as investors sought out bargains after recent losses. Malaysia's KLCI closed down 0.5 pct to 1,403.41. The Jakarta index lost 0.6 pct to 2,740.06 and the Philippine Composite was down 2.4 pct at 3,538.69, its lowest level for the day. Taipei's weighted index closed down 0.85 pct at 8,118.08.

Indian shares close lower in volatile trade; cement, pharma stocks gain

The Bombay Stock Exchange's benchmark Sensex closed 73.56 points or 0.37 pct lower at 20030.83 while the National Stock Exchange's S&P CNX Nifty closed 0.17 pct lower at 6047.70 points.

However, stocks of companies with lower market capitalisation continued to advance. The BSE's midcap index gained 96 points or 1.02 pct to close at 9471.94, while the smallcap index rose 188.17 points 1.57 pct to 12195.50. For the week, the Sensex has risen 64.83 points and the Nifty has gained 73.40 points.

ACC Ltd, India's biggest cement producer, gained the most on the blue-chip index today, rising 3.58 pct to 1102.60 rupees and Ambuja Cement advanced 1.56 pct to close at 147.45 rupees.

India's second-largest bank ICICI Bank also extended losses, declining 2.87 pct to 1206.85 rupees on profit taking. HDFC, which hit a new 52-week high of 3,195 rupees yesterday, fell 2.51 pct to close at 3,058 rupees.

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Metals - Copper steadies as gains in other markets offset demand woes

Copper steadied as gains in other commodities like oil, as well as a rebound in European equity markets, offset lingering worries that demand will slump if problems in the wider financial markets persist.

At 10.45 am, LME copper for three-month delivery edged down to 6,500 usd a tonne against 6,510 usd at the close yesterday, when the metal lost nearly 3 pct of its value.

Oil prices turned higher today, while European equity markets were also stronger on the day, benefiting from yesterday's firmer close on Wall Street.

The steadier tone has helped underpin base metals like copper, even though the market remains in the grip of worries over the global credit crunch and its impact on economic growth and metals demand.

"Fears of further contagion fallout from the banking crisis continue to dominate, keeping sentiment negative," said analysts at RBC Capital Markets.

Turning to copper, they added: "Speculation continues to be that the slowdown in the US will further curb demand for copper's use in pipes and wires."

The US is the second-largest copper consumer after China. As a result, a slowdown in growth there would seriously impact copper demand, especially as the slowdown is led by the ailing housing sector, which consumes lots of copper.

Elsewhere, copper remains under pressure from ongoing increases in LME stockpiles. Data out earlier showed stocks rose by 3,675 tonnes to a total 193,900 tonnes. Copper stocks are up some 90 pct since mid-July.

Over in Shanghai, however, data showed copper stocks fell by 1,242 tonnes to total 26,390 tonnes, continuing the downtrend that began early November.

Analysts said the decline in Shanghai stocks was not supporting copper partly because there are expectations of large deliveries into Shanghai warehouses next week.

Elsewhere, lead edged down to 2,445 usd against 2,460 usd despite a 625 tonne fall in LME inventories. The metal is still under pressure from expectations shut in supplies from Australia will be back on the market next year.

In other metals, nickel climbed to 25,800 usd a tonne against 25,650 usd, tin edged up to 16,060 usd against 16,055 usd, zinc dipped to 2,370 usd from 2,375 usd while aluminium was flat at 2,416 usd.

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