US & World Daily Markets Financial Briefing 16-11-2007

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NEW YORK - Stocks rose in early trading Friday as investors searched for bargains following a three-week losing streak.
   
Concerns about consumer spending and the still unfolding global credit crisis has driven some well-known stocks - especially in the financial services sector -- to lows for the year. Bargain hunters were seen rushing into the market ahead of the weekend to take advantage of lower prices.
  
 Investor sentiment got a boost from Morgan Stanley's decision to raise its rating on Hewlett-Packard Co. to an "overweight" from "equal weight." The upgrade on the largest maker of printers appeared to help offset some concerns about consumer spending and further turmoil in the credit markets.
   
However, investors received bad news from Starbucks Corp., which slashed its earnings forecast for the fourth quarter after it reported traffic at stores open at least 13 months dropped by 1 percent -- the first time a decline has ever been reported by the coffee retailer. The company said late Thursday it also plans to slow the pace of U.S. store openings.
   
In addition, FedEx Corp. lowered its earnings expectations for the fiscal second quarter and full year, citing rising fuel costs and a troubled U.S. freight market.
   
In early trading, the Dow Jones industrial average rose 69.91, or 0.53 percent, to 13,179.96.
   
Broader stock indicators also rose. The Standard & Poor's 500 index advanced 6.97, or 0.48 percent, to 1,458.12, and the Nasdaq composite index rose 7.49, or 0.29 percent, to 2,626.00.
   
Bonds fell as stocks gained. The yield on the benchmark 10-year Treasury note rose to 4.16 percent from 4.14 percent late Thursday.
  
Investors appeared to look past a drop in industrial production in October the sharpest decrease in nine months. The Federal Reserve said output at the nation's factories, mines and utilities fell by 0.5 percent last month, a much worse outcome than had been expected. The report found a big drop in utility output and continued troubles in autos and housing-related industries.

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The dollar had earlier benefited from the heightened risk aversion on global markets, and this afternoon's Treasury International Capital data may determine whether the dollar can regain its strengthening bias.
   
The last set of TIC figures showed a record net level of capital flowed out of the US during August -- 69 bln usd -- as investors withdrew money when financial market volatility hit fever pitch. Today's figures are expected to show a bounce back with forecasts for a September net inflow of 7 5 bln usd.
  
 "A turn in the US basic balance is, we think, a necessary condition for calling a bottom in the US dollar," said Stephen Pearson, chief currency strategist at the Bank of Scotland Treasury.
  
 Fears that the fallout from the US subprime crisis could hit the world economy harder than expected earlier led to renewed demand for the US currency as players retreated from the riskier high yielding carry trade currencies.
   
There were also concerns there will be a repeat of this summer's liquidity crisis, with spreads in the money markets climbing sharply. This led the Federal Reserve to inject over 47 bln usd into money markets yesterday, the largest injection since Sept 19, 2001.
  
 Elsewhere, the pound remained under pressure against the euro, briefly easing to a fresh four and a half year low as UK growth expectations continued to be scaled back following yesterday's weak retail sales figures and Wednesday's dovish Bank of England Inflation Report.
   
An increasing number of analysts now think the BoE could cut interest rates as early as next month, pushing the pound sharply lower.
   
The UK's largest building society Nationwide added to the deteriorating outlook this morning, forecasting that house price inflation will drop to zero next year.
   
"There has already been growing speculation that the Bank of England would look to adopt a strongly dovish stance in 2008, but (the weak retail data) yesterday combined with suggestions from Nationwide that UK house price inflation will fall to zero in the New Year is certainly emphasising that the MPC is now in a position to act without undue fears of stoking inflation," said James Hughes, analyst at CMC Markets.

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Euroshares off lows midday; US futures, utilities support, banks fall

In Europe, utilities were in high demand throughout a relatively volatile session. ""In a shaky session such as today, traders turn to utilities as a safe-heaven. It's a flight towards quality with utilities usually sporting rather low-risk business models," one Frankfurt-based trader said.
   
The sector gained 0.66 pct in aggregate, with Gas Natural adding 1.35 pct and RWE climbing 1.45 pct higher.
  
However, the financial sector took yet another hit today, with the banking industry falling 1.36 pct, led lower by Dexia, down 6.74 pct, after it posted third-quarter results showing a sharp decline in net profit.
   
Axel Pierron at Celent research said "Dexia results are not very encouraging for the industry," noting that the bank has been hit by the side-effects of the sub-prime crisis, despite its "very efficient" risk management.
   
In addition, the deadline for indicative proposals regarding the future of ailing UK mortgage bank Northern Rock comes to a close today. According to the Financial Times, 6-8 proposals can be expected. Shares in Northern Rock were very volatile in anticipation and were 1.26 pct lower at last check.
   
Meanwhile, in the German market IKB is in focus, down 5.72 pct, after state-owned KfW Bankengruppe said turbulence in the financial markets affected the 3.5 bln credit line provided to troubled IKB Deutsche Industrie Bank AG this summer. In August, several German banks led by KfW launched a rescue plan for IKB after the bank was hit by the crisis in the US market for mortgage-backed securities.
  
In earnings news, Richemont outperformed its Swiss peers after the luxury goods maker presented first-half results that beat expectations and said its full-year results will be "comfortably ahead" of last year's figures.
   
The stock fell 0.07 pct, as the SMI was 1.27 pct down.
  
In M&A chatter, Vallourec surged 4.71 pct as speculation over a potential bid continues, as traders note that someone had taken a large, out-of-the-money call position with a strike price of 240 eur a share, well above the 203 eur the stock is trading at currently.
   
Staying in France, EADS took centre stage this morning as reports that Russian bank VTB is planning to sell its remaining 5 pct stake in the group resurfaced in a report in Frankfurter Allgemeine Zeitung.
   
The bank had previously stated that it would dispose of its stake by the end of the year. But, the defence and aerospace group is also in focus this morning after one of its Airbus A340-600 hit a wall during ground tests in Toulouse. According to AP, 10 people were injured during the accident and it is yet unclear what caused it. The shares fell 1.30 pct.
   
Meanwhile, Iberia came off highs to trade up 0.27 pct, remaining of interest after Gala Capital said last night that it expects to make a formal bid 'very shortly' after completing the due diligence period. Gala and its partners have approached Iberia with a 3.6-3.9 eur per share indicative offer.
   
Also in the airline sector, British Airways declined 3.36 pct after the Times reported that it faces a multi-million-pound compensation bill after failing to keep secret a deal in which it agreed to pay passengers 430 stg each for cancelling their flights.
   
Among miners, Rio Tinto rose 1.72 pct amid talk that BHP Billiton - whose three-for-one share bid was rejected last week -- is about to announce a sweetened offer for its smaller peer.
   
In other news, Belgian pharmaceuticals group UCB SA fell 9.34 pct after the European Medicines Agency (EMEA) rejected its application to sell Crohns disease drug Cimzia in the EU.
   
In terms of broker action, Infineon plunged 7.04 pct following several bearish broker notes. Exane cut its target for the chipmaker to 7.70 eur from 10.20, as difficulties in the DRAM business are likely to continue. Goldman Sachs also cut its target to 12 eur from 13 eur.

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Asian stocks tumble as subprime fears persist; Hang Seng off 4 pct

The Hang Seng closed down 1,136.78 points or 4 pct to 27,614.43 with banks and property companies leading the decline.
   
"The market will remain in a consolidation mode today as overseas markets drag down sentiment," said Francis Lun, general manager at Fulbright Securities. "Trading is likely [to be] rangebound as investors remain cautious while they await statements regarding the outlook [for] interest rates."    

Reports that the authorities in Shenzhen, just across the border in mainland China, are moving to limit cash withdrawals from bank accounts in the city to prevent the alleged illegal flow of mainland funds into Hong Kong added to the downdraft.
   
The proximity of Shenzhen to Hong Kong encourages residents there to open accounts on the island to trade in the local stock market. The practise has been a major source of funds for the Hong Kong bourse in recent months, media reported.
   
The South Korean KOSPI closed down 1.1 pct at 1,926.20.
       
In the UK, Barclays said it took a 2.7 bln usd charge in the third quarter on subprime-related securities and warned it expects more writedowns.
       
In Tokyo, the Nikkei closed down 1.6 pct at 15,154.61 and the Topix was down 1.8 pct at 1,471.67, with exporters under fresh pressure from a strengthening yen. The dollar was last quoted at 110.22 yen, down 0.2 pct from late Thursday, after trading below the key 110 level for much of the morning.  

Toyota Motor Corp finished down 1.7 pct at 6,110 yen as the market found little comfort in a Nikkei report that the carmaker plans to reduce the weight of its midsize passenger cars by 10 pct to improve fuel efficiency.
   
Sony Corp and Canon Inc both lost ground, with Sony down 1.1 pct at 5,350 yen, and Canon down 1.3 pct at 5,500 yen.
   
Mizuho Financial Group closed down after Moody's Investors Service revised the outlook on the ratings of its units to negative after the bank reported a 16 pct fall in first-half net profit and issued a profit warning for the full year.
   
Resource stocks were the main decliners in Australia after pullbacks in gold and oil prices overnight. Australia's largest pure gold miner, Newcrest Mining, fell 4.4 pct to 32.25 aud after the December Comex gold contract plunged 3.4 pct overnight. Lihir Gold was 5 pct weaker at 3.81 aud. The S&P/ASX 200 closed down 1 pct at 6,461.9 and the All Ordinaries fell 1 pct to 6,526.1.
  
Emerging iron ore miner Fortescue Metals Group fell 4.4 pct, giving back some of yesterday's gains, after applying to the National Competition Council for third-party access to rail lines owned by BHP Billiton Ltd and Rio Tinto Ltd in Western Australia.
   
Fortescue wants open access to Rio Tinto's Hamersley Iron rail line and BHP Billiton's Goldsworthy rail line to allow the development of its iron ore deposits in the Pilbara region.
   
Rio Tinto fell 2.5 pct to 131.21 aud and BHP Billiton was unchanged at 41.15 aud, amid speculation Rio Tinto is planning to make a counterbid for BHP Billiton. Rio Tinto has rejected a three-for-one share offer from BHP Billiton on the grounds it is too low.
   
In Hong Kong, oil stocks extended their falls following an OPEC forecast of lower demand. PetroChina, lost 4.5 pct at 14.60 hkd, while the mainland's largest offshore oil producer, CNOOC, fell 6.9 pct to 12.40 hkd.
   
The Singapore Straits Times closed 1.1 pct down at 3,440.96, the Kuala Lumpur Composite closed down 0.2 pct at 1,386.64 and the Philippines Composite was down 2 percent at 3,598.
   
The Shanghai Composite fell 0.9 pct to 5,316.27 and the Taiwanese Taiex was down 1.6 pct at 8,764.82. The Jakarta index closed down 1.4 pct at 2,668.70.

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Oil recovers more of yesterday's losses, aided by weaker dollar

LONDON - Oil prices continued to recover yesterday's losses, helped by a falling dollar and little hope OPEC will increase output at this weekend's heads of state summit in Riyadh.

In addition, players were still reviewing a surprise rise in US crude stocks reported in yesterday's inventory data, which initially sent oil prices sharply lower but has failed to keep them depressed.
   
"We are inclined to agree with the market's assessment that yesterday's crude stock build was only worth about a 60 cent decline in crude prices at the end of the day," said Jim Ritterbusch, president of Ritterbusch & Associates.
   
"The stock build was no big deal since it developed largely on the west coast. It also appears that the pop in imports that drove the increase was largely related delayed arrivals out of Mexico."
   
All the same, however, the data, which showed total product demand slipped by 0.7 pct over the past four weeks, did renew worries over US demand and led many to predict weaker prices going forward.
  
This is despite a price recovery today on bargain hunting after yesterday's falls and on a weaker dollar, which makes dollar priced oil cheaper for holders of other currencies.
   
At 2.03 pm, London's Brent crude for January delivery, the new front month contract, was trading up 1.28 cents at 91.53 usd per barrel. Yesterday, the expiring December contract closed down 42 cents at 90.94 usd.
   
Meanwhile, New York WTI crude contracts for December delivery, which expire later today, were up 1.62 usd at 95.05 usd per barrel, having slipped 66 cents to close at 93.43 usd yesterday.
   
Algerian Energy Minister Chakib Khelil said on the sidelines of this weekend's OPEC Summit that oil prices would remain at elevated levels until the end of the first quarter of next year, but would not breach 100 usd.
   
"I doubt prices will go beyond 100 dollars because there is plenty of supplies and fears of recession," Khelil told reporters in Riyadh. He added, however, that a colder than normal winter could change all this.
   
OPEC, whose heads of state are gathering for a summit in Riyadh this weekend, has come under increasing pressure to increase output in a bid to lower prices.

However, the cartel has to date resisted these calls. "OPEC members are due to meet for a summit in Riyadh over the weekend, but the group will not discuss output hikes and will focus on longer term strategies and production," said Sucden analyst Michael Davies.
  
 "However, this does not mean that the cartel will not consider hiking production during its official policy meeting in December, as high oil prices remain a concern."
   
Oil prices have gained more than 35 pct since mid-August on rising geopolitical tensions, a weak US dollar and worries that the counter-seasonal third quarter decline in OECD stocks will worsen this winter.
   
However, prices have been see-sawing for over a week now after failing to breach the elusive 100 usd mark last week, leading some analysts to call the top of the current rally.

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