US & World Daily Markets Financial Briefing 17-12-2007

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Stocks dip ahead of Fed auction

The Dow Jones industrial average fell 72.02, or 0.54 percent, to 13,267.83. Broader stock indicators also declined. The Standard & Poor's 500 index dropped 9.19, or 0.63 percent, to 1,458.76, and the Nasdaq composite index fell 16.40, or 0.62 percent, to 2,619.34. Last week, the Dow dropped 2.10 percent, the S&P 500 index fell 2.44 percent and the Nasdaq lost 2.60 percent.

Government bond prices rose as stocks fell. The yield on the 10-year Treasury note, which moves opposite its price, slipped to 4.19 percent from 4.24 percent late Friday. The dollar rose against most other major currencies Monday, while gold prices fell.

Light, sweet crude futures fell $1.07 to $90.20 a barrel on the New York Mercantile Exchange. In economic data, the U.S. government said the current account deficit, the broadest measure of international trade, narrowed in the third quarter compared to the second quarter, as expected, to the lowest level in two years. Meanwhile, the New York Fed's Empire State Manufacturing Index fell much more sharply in December than economists anticipated.

Later on Monday the National Association of Home Builders is scheduled to release its housing market index, which is expected to hold steady. Wall Street, which started 2007 soaring due to strong merger-and-acquisition activity, found little consolation in deal-making Monday.

Ingersoll-Rand Co. -- the manufacturer that makes, among many things, Thermo King refrigerated trucks -- said it will buy Trane Inc. for $10.1 billion to access its building and transportation cooling systems. The deal will create one of the world's largest makers of air conditioners.

Ingersoll-Rand shares fell $3.36, or 6.8 percent, to $45.82, Trane surged $8.65, or 23 percent, to $45.85.

Meanwhile, Aon Corp. announced it will sell two insurance units for $2.75 billion in separate cash deals, and the conglomerate Loews Corp. said Monday its board approved a spinoff of Lorillard Inc., one of the nation's largest cigarette makers.

Loews rose $1.77, or 3.8 percent, to $48.57. Aon rose 52 cents to $49.46. Overseas, Japan's Nikkei stock average fell 1.71 percent, and Hong Kong's Hang Seng index fell 3.51 percent. Britain's FTSE 100 dropped 1.37 percent, Germany's DAX index lost 1.30 percent and France's CAC-40 declined 1.26 percent.

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Forex - Dollar remains firm after elevated US inflation data

The dollar remains on a firm footing across the board at the start of a busy week following last Friday's higher than anticipated US inflation data.

The US currency has been particularly strong against the euro, which has slipped below the 1.44 usd mark for the first time since the end of October. Meanwhile, the pound is heading down towards 2.00 usd for the first time in three months.

"As we enter the final period of trading in 2007 there are likely to be less predictable moves in the foreign exchange market as fundamentals give way to positioning," said Derek Halpenny, senior currency economist at The Bank of Tokyo-Mitsubishi UFJ.

The dollar's new momentum was triggered at the end of last week when higher than anticipated US retail sales and inflation data diminished market expectations of aggressive monetary easing from the US Federal Reserve, which last week cut its benchmark funds rate another quarter point to 4.25 pct.

"This is really has the potential to make it difficult for the Fed to be overly aggressive with regard to cutting interest rates in the New Year, but so long as the yields are going to remain attractive then investors will continue to lend support to the dollar," said James Hughes, market analyst at CMC Markets.

Despite the dollar's current march forward most currency watchers remain cautious about whether it can be sustained, especially if today's release of US capital flows data for October disappoint. "The US focus should be on the US Treasury TIC data of foreign capital flows into the US and the risk of another large outflow could hurt the dollar hard," said Steve Barrow, currency strategist at Bear Stearns.

The TICS data today kicks off a busy week in the US, with quite a few key pieces of market moving data likely to point to slower growth ahead. Attention this week will also be on how last week's joint announcement by the world's leading Western central banks to provide liquidity to money markets impacts on equity investors' risk appetite.

In the euro zone, the focus will be on the closely-watched Ifo survey on German business confidence on Wednesday and ECB president Jean Claude Trichet's address to the EU Parliament on the same day.
Today's purchasing managers' indices confirmed that euro zone growth is now slowing markedly at a time when inflationary measures remain elevated, making Trichet's commentary more difficult.

The PMI for the services sector fell to a provisional 53.2 in December from 54.1 in November, while the manufacturing sector PMI eased to 52.5 from 52.8. The composite PMI, which incorporates both the services and manufacturing surveys, fell to 53.3 from 54.1.

In the UK, sterling markets will be gripped by a raft of economic news, not least Wednesday's publication of the minutes to the last meeting of the Bank of England's Monetary Policy Committee, when the key Bank rate was cut a quarter point to 5.50 pct.

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Euroshares still weak midday as Dow seen lower; credit worries weigh again

At 11.46 am, the Dow Jones STOXX 50 Index was down 50.24 points or 1.35 pct at 3,671.56, while the DJ STOXX 600 Index fell 5.63 points or 1.53 pct to 361.61.

Spread bettors, IG Index, said the Dow looks set to fall another 61 points in opening deals after giving up 178.11 points on Friday as hopes of a Federal Reserve rate cut wane and after Citigroup cut its ratings on a number of US banks.

Back in Europe, banks and financials were among the weakest sectors. UBS shares were off 2.99 pct after Swiss Sunday paper Sonntag said the bank expects to log further writedowns of 4.5 bln sfr in the first quarter of 2008.

But the Swiss banking group refuted the report. Among other sector decliners, Societe Generale fell 2.49 pct, HBOS fell 3.24 pct and Deutsche Bank fell 1.72 pct. Broker downgrades for a number of European plays in the sector also hurt sentiment.

Fortis fell 2.92 pct after Keefe, Bruyette and Woods cut its rating to 'underperform' from 'market perform'.
Swiss Life was down 1.35 pct after JP Morgan cut its rating to 'neutral' from 'overweight'. Generali fell 2.4 pct as UBS cut its rating to 'neutral' from 'buy'. UK midcap Provident Financial was down 1.92 pct as its in-line update failed to offset wider concerns.

Cazenove, though, repeated its 'outperform' recommendation, saying the update showed no problems on all key elements -- lending, arrears, profits and funding. Alcatel-Lucent slumped 4.6 pct after a bearish note from UBS which said the fourth quarter will be a difficult quarter for the US business and the outlook looks challenging for next year. The broker cut its target to 6 eur from 7 eur and repeated its 'neutral' stance.

Swisscom outperformed -- down only 0.51 pct -- after the Swiss Federal Communications Commission said it is reducing Swisscom's interconnection prices for 2004-2006 by an average of 15-20 pct -- but lower than the company had been provisioning for.

Shares in Danisco -- the Danish supplier of food ingredients, sugar and industrial bioproducts -- were 3.93 pct higher after it reported far higher-than-expected second quarter pretax profit and improved margin gains.

This fed through to other consumer groups like L'Oreal -- up 0.19 pct, Nestle -- up 0.37 pct, and Unilever -- down 0.13 pct. Pernod Ricard rose 1.34 pct on a UK newspaper report suggesting the company is close to clinching a 1 bln stg purchase of the fast-growing Stolichnaya vodka brand in a move that could pave the way for the French giant to challenge Britain's Diageo as the world's number one alcoholic drinks manufacturer.

Separately, Lehman said Diageo -- up 1.29 pct -- and Pernod Ricard are better placed than Remy Cointreau and Campari to weather a downturn in the US economy. High Street retailers were left out in the cold as concern continues about the pace of pre-Christmas sales.

H&M fell back 1.94 pct after the clothing retailer's November Sales figures matched high analyst forecasts. Merrill Lynch said the numbers were slightly disappointing but said the group put in a good performance in a difficult trading environment.

Home Retail Group slumped 5.68 pct amid ongoing reports of weak pre-Christmas retail sales. Next and Debenhams fell as Seymour Pierce downgraded the pair to 'underperform' from 'buy' and to 'hold' from 'outperform' respectively. Shares fell 4.77 pct and 8.62 pct.

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Asian stocks fall with Wall Street on worry inflation may end Fed easing

The S&P/ASX 200 closed down 3.5 pct at 6,263.5, while the All Ordinaries lost 3.4 pct at 6,331.8.
The Nikkei ended down 1.7 pct at 15,249.79 and the broader Topix was down 1.9 pct at 1,472.70 as financials and metals-related stocks came under pressure. In Hong Kong, the Hang Seng lost 3.5 pct at 26,596.58, with property and financial stocks leading the decline.

The South Korean Kospi ended down 2.9 pct at 1,839.82 and the technology-loaded Kosdaq index closed down 3.2 pct at 702.49. Traders said caution ahead of the presidential elections on Wednesday also weighed. The frontrunner in opinion polls, Lee Myung-Bak, is expected to face an independent probe into his links to a case of financial fraud.

Among individual stocks, Centro closed down 76.1 pct at 1.36 aud after it slashed its earnings forecast for the year to June 2008 due to the higher-than-expected cost of extending and refinancing debt facilities caused by the tightened credit conditions.

Also weighing on the market were sharp falls in base metals and commodities prices amid concern the turmoil in credit and financial markets will erode demand. Copper, aluminium, lead, tin and zinc closed in negative territory on the London Metals Exchange while gold and crude oil prices ended the week lower.

BHP Billiton, which has made a three-for-one share offer for Rio Tinto, ended down 4 pct to 40.37 aud after the world's largest miner suspended a share buyback program. Rio retreated 3.9 pct to 131.85 aud after announcing plans to invest 991 mln usd to boost output at its Kestrel Mine in the Bowen Basin in central Queensland.

Base metals miner Zinifex slumped 6.8 pct to 13.09 aud after its subsidiary Zinifex Australia Ltd launched an unsolicited all-cash takeover bid for emerging nickel miner Allegiance Mining NL. Allegiance, which confirmed it is considering the offer, rose 38 pct to 98 Australian cents. Financial strain

In Tokyo, financials were lower, with Mizuho Financial down 5 pct at 533,000 yen, Mitsubishi UFJ Financial down 4.3 pct at 1,028 yen and Sumitomo Mitsui Financial off 3.7 pct at 825,000 yen.

Iron and mining stocks also fell. Nippon Steel fell 3.7 pct to 605 yen and JFE declined 4.6 pct to 5,180 yen. In Hong Kong, biggest developer in the region, Sun Hung Kai Properties, fell 6.5 pct to 148.90 hkd. The company is investing 2 bln yuan to develop a commercial and residential complex in the booming Chinese city of Suzhou, the South China Morning Post reported Monday.

China Shenhua Energy was down 2 pct at 44.75 hkd. The mainland's biggest coal producer said commercial coal output rose 15.8 pct to 13.2 mln tons in November from a year earlier.

Hong Kong Exchanges & Clearing Ltd fell 3.1 pct to 218.40 hkd. The stock market operator is studying a proposal to change the rules to make more shares in initial public offerings available to retail investors, the Wall Street Journal reported.

Some investors have complained that it is hard to buy IPO shares because the bulk are allotted to strategic investors who are required to hold the stock for a lock-up period of around two years, the newspaper said. Given the limited number of shares that are allowed to float freely, prices usually move up.

Separately, the South China Morning Post reported that Hong Kong Exchanges and Clearing plans to lure more foreign companies to list in Hong Kong. Government officials are set to visit the Middle East in the first quarter of 2008, after a trip to India this month, the newspaper said.

Elsewhere, the Singapore Straits Times fell 3.3 pct to a three-week low of 3,353.56, the Kuala Lumpur Composite Index was down 0.8 pct at 1,391.61 and the Shanghai Composite lost 2.6 pct at 4,876.76.

The Taiwanese Taiex lost 3.5 pct to 7,830.85, the Philippines Composite was down 1.5 pct at 3,486.82, and the Jakarta composite index closed down 2.7 pct at 2,664.92.

Indian shares crash tracking global meltdown

The Bombay Stock Exchange's (BSE) benchmark 30-stock Sensex fell 769.48 points, or 3.84 pct, to 19261.35, its second-biggest points fall in a single day, while the National Stock Exchange's S&P CNX Nifty, which registered its biggest points fall in a day, dipped 4.27 pct at 5,789.20 points.

Small-cap shares tumbled too. The BSE's midcap index was down 3.87 pct at 9,105.58 points, while the smallcap index fell 2.91 pct to 11,840.02 points.

Among the biggest losers today were, Housing Development Finance Corp (HDFC) which fell 5.93 pct to close at 2877.55 and state-owned Bharat Heavy Electricals Ltd which dipped 5.32 pct to 2425.25.

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Oil slips on stronger dollar, economic woes; overshadows US snow storm boost

At 12.40 pm, New York's WTI (West Texas Intermediate) crude for January delivery was down 62 cents at 90.65 usd per barrel. London's Brent crude for February delivery was down 45 cents at 91.24 usd per barrel.

Oil's recent rally towards 100 usd was spurred in large part by historic weakness in the dollar and interest rate cuts in the US. With the greenback on the rebound, and analysts lowering the odds of further cuts from the Fed as inflation spikes, prices have come off.

"All this brings back memories of a milder version of a 70's type 'stagflation' where we have low rates of growth coupled with high inflation readings," said Ed Meir at MF Global. "Commodities have a mixed record in such an environment -- although they usually spike early on due to elevated inflation readings, prices start to recede shortly thereafter, as slowing growth prospects become more entrenched and start to dent demand."

A weak dollar tends to boost commodities priced in greenbacks as they become cheaper for overseas investors. Funds also use oil as a hedge against weakness in the US currency, buying into the market on expectations prices will rise as greenbacks stumble.

Prices had pipped higher in early London trade, as investors absorbed news of an extreme cold front hitting the world's largest heating oil market. Parts of New York State are under about 30 cm of snow, while 25 cm has fallen across New England, boosting heating oil demand.

With the dollar strengthening and demand fears resurfacing in light of lingering credit crunch woes, prices soon turned south towards 90 usd. The driving factor for the market remains the confused economic outlook, analysts said, with investors trying to evaluate the extent of the damage created by the sub-prime fiasco.

The International Energy Agency (IEA) cut its demand growth outlook for the end of 2007 in its monthly report last week, as economic uncertainty and the recent oil price rises take their toll on consumers. The IEA raised its demand growth outlook for 2008, believing higher demand from developing nations will increase the call on supplies.

Losses have also been supported above 90 usd this morning by heightened geopolitical tensions in Africa and the Middle East. In Nigeria, militant groups which have targeted the oil industry in recent years have threatened to resume attacks if former Delta State governor James Ibori is not granted bail today following his arrest on corruption charges.

The oil rich Niger Delta region has been plagued by militant attacks, which have shut-in over 500,000 bpd of the country's full production capacity. "The peace process is stalling and we would increase some of the Nigerian risk premium," Petromatrix analyst Olivier Jakob said.

In northern Iraq, Turkish air strikes against Kurdish rebels it believes are sheltering in the region have heightened concerns over the stability of supplies from the Middle East.

While most analysts believe supplies through the key eastern Turkey energy corridor should be unaffected by the recent violence between the Turkish military and Kurdish separatist militants, fears tensions could spillover in the volatile region are supporting prices

Downside risks could come from a possible OPEC output hike at its February meeting, after Algerian Oil Minister Chakib Khelil said the cartel may look to increase quotas after holding them steady in December.

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