US & World Daily Markets Financial Briefing 18-01-2008

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Stocks rebound after huge drop

NEW YORK - Wall Street rose sharply Friday as a strong outlook from IBM encouraged investors to buy back into stocks after their huge drop this week. The Dow Jones industrial average rose more than 120 points.

The market remains extremely skittish, however. The Dow, having suffered its worst three-day plunge in over five years, has fallen to levels not seen since last March.

Some companies are weathering the economic slowdown well -- like International Business Machines Corp., which told Wall Street late Thursday to raise its 2008 profit estimates for the tech company, and General Electric Co., which posted a fourth-quarter profit rise Friday.

But others are struggling. Washington Mutual Inc. reported a steep loss late Thursday for the fourth quarter, just as Citigroup Inc. and Merrill Lynch did earlier in the week. With the banking industry trying to fix its shrinking portfolios and preparing for more distress in consumer debt, the economy may only have the government to fall back on.

Federal Reserve monetary policymakers meet Jan. 29-30, and the market widely expects them to lower the key interest rate, perhaps by a half-point. Federal Reserve Bank of Richmond President Jeffrey Lacker said Friday that more rate cuts are "quite possible."

And at 11:50 a.m. EST, President Bush is expected to speak on the economy and discuss a plan to stimulate the economy through tax rebates and other strategies. Treasury Secretary Henry Paulson said Friday on NBC's "Today" show he was confident a temporary stimulus package can be agreed upon quickly.

In the first hour of trading, the Dow shot up 122.34, or 1.01 percent, to 12,281.55. Broader stock indicators also rose. The Standard & Poor's 500 index gained 10.44, or 0.78 percent, to 1,343.69, and the Nasdaq composite index advanced 19.65, or 0.84 percent, to 2,366.55.

Government bonds fell as stocks rallied. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.66 percent from 4.63 percent late Thursday.

Investors also awaited consumer sentiment data from the University of Michigan, which is expected to indicate a decline as worries escalate about a possible recession. Though not a perfect predictor of consumer spending, the report is closely watched; consumer spending accounts for about two-thirds of the nation's economy.

In other corporate news, chip maker Advanced Micro Devices Inc. on Thursday said its fourth-quarter net loss widened, but the loss was smaller than Wall Street predicted. AMD surged 69 cents, or 10.9 percent, to $7.03.

IBM rose $4.39, or 4.3 percent, to $105.49 on its strong outlook. Washington Mutual rose 42 cents, or 3 percent, to $12.88, as many investors ahead of the Thursday report anticipated an even bigger fourth-quarter loss.

On Thursday, a dismal reading on the Philadelphia Fed's manufacturing index and ratings agency downgrades of bond insurers sent the Dow tumbling 306 points. Friday, a Bank of America Corp. analyst cut its ratings on three bond insurers -- MBIA Inc., Ambac Financial Group and Security Capital Assurance Ltd. -- to "Neutral" from "Buy."

MBIA fell 57 cents, or 6.2 percent, to $8.65, after a sharp drop Thursday. Ambac rebounded from Thursday's drop, though, rising 77 cents, or 12.3 percent, to $7.01. The dollar was mixed against most major currencies, while gold rose.

Crude oil futures rose 28 cents to $90.41 a barrel in pre-market trading on the New York Mercantile Exchange. The Russell 2000 index of smaller companies rose 1.17, or 0.17 percent, to 681.74.

In overseas trade, Japan's Nikkei stock index rose 0.56 percent and Hong Kong's Hang Seng index advanced 0.35 percent. In Europe, London's FTSE 100 rose 1.31 percent, Frankfurt's DAX rose 0.63 percent and Paris' CAC gained 0.55 percent.

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Forex - Pound remains weak after soft UK retail sales

LONDON - The pound remained in the doldrums against the euro, although has steadied off earlier lows, as markets became convinced UK interest rates will fall in February following a weak set of retail sales figures.

UK retail sales decreased 0.4 pct on the month in December, worse than analyst forecasts for no change, and an ominous sign for retailers, who depend on the Christmas month for a large part of their yearly trade.

Markets have been expecting a 25 basis point rate cut in February ever since the Bank of England left rates unchanged last week at 5.50 pct, but comments on inflation yesterday by deputy BoE governor John Gieve unsettled expectations as to the extent of future cuts.

But today's data reinforced expectations for a February cut, with some analysts raising the possibility that rates could fall by up to 50 basis points.

"The pound looks increasingly weighed down by a growing assuredness underpinned by a poor December retail sales report and ongoing concern for the banking sector  that the Bank of England will be obligated to meet the growing malaise with a cut in interest rates in February," said Neil Mellor, currency analyst at Bank of New York.

Elsewhere the dollar was fairly steady against the euro as markets await details from US President George Bush of fiscal plans to stimulate the US economy.

Federal Reserve President Ben Bernanke yesterday said a fiscal stimulus would help shore up economic growth but stressed that the design and implementation, as well as the temporary nature of such the plan, are critical. Analysts agreed, saying investors will want to be convinced the plan will help prop up US consumption, if markets are to pick up anytime soon.

"The drop in consumption in the US is a key worry for US and global growth.... if the proposal fails to achieve any material improvement in the real economy in the short run, the current structural market bias towards risk aversion and non-cyclical assets will hold," said Geoffrey Yu, currency analyst at UBS.

Also out this afternoon is the University of Michigan consumer confidence indicator, which is expected to show to a drop in the index to 74.7 in January from 75.5 in December.

Elsewhere, the yen continued to weaken as investors took some profits on its strong rally this week and as risk appetite improved somewhat on the news of a fiscal stimulus by the US government. The Japanese currency, a marker of investors' perceptions of risk in the global economy, had been rising all week on views that the US economic slowdown will spread to the global economy.

A rise in European and Asian share markets sent the Japanese currency lower today, but analysts said the losses are unlikely to extend very far, with risk sentiment set to remain fragile over the coming months. "The prospects for a sustained sell-off of the yen in the current financial market climate of uncertainty remain very slim," said Derek Halpenny currency strategist at Bank of Tokyo-Mitsubishi UFG.

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Euroshares fall in early trade on US pessimism; ThyssenKrupp outperforms

At 9.11 am, the Dow Jones STOXX 50 Index was down 25.53 points, or 0.7 pct at 3,376.85 while the DJ STOXX 600 Index fell 2.75 points, or 0.9 pct to 328.24.

Among metals & mining stocks, ThyssenKrupp was up 1.6 pct on better-than-expected first quarter results. The German company's solid performance lifted other steel makers, with ArcelorMittal up 1.6 pct while Acerinox rose 1.1 pct and Salzgitter gained 0.8 pct.

Elsewhere, Swatch Group was up 2 pct after the Swiss watch group said it expects an above-average increase in operating result and net income for 2007 after posting record full-year gross sales. The company was also upbeat about its prospects in 2008, saying it anticipates further growth in all areas, after seeing double-digit sales growth in January while orders on hand are also strong.

Rio Tinto climbed 2.4 pct on market speculation BHP Billiton may raise its bid for the miner. The banking sector was an early focus Unicredit moved quickly to deny a report in Italy's l Sole 24 Ore that it was considering a takeover bid for Merrill Lynch. Unicredit shares were off 1.2 pct.

Northern Rock shares climbed 3.2 pct after the UK's Financial Times said a consortium led by Sir Richard Branson's Virgin Group has strengthened its bid for stricken mortgage lender. Dexia fell 3.4 pct on news overnight that US bond insurer Ambac has been placed on review for a possible rating downgrade reignited concerns about Dexia's own bond insurance unit FSA.

The Moody's warning on Ambac weighed heavily on the European insurance sector. Among the leading fallers, Ing Groep was off 3.9 pct, Allianz was down 3.4 pct while Axa fell 2.9 pct. And Aegon was down 5.1 pct on a report that its Scottish Equitable unit has frozen withdrawals from its property fund.

Infineon Technologies was up 1.2 pct and STMicroelectronics rose 1 pct as Europe's two biggest semiconductor companies benefited from better-than-expected results from US competitor Advanced Micro Devices overnight.

The car sector struggled after General Motors' Chairman and Chief Executive Rick Wagoner and Chief Financial Officer Fritz Henderson predicted a U.S. economic slowdown in 2008, although stopped short of calling a recession.

The executives cautioned that high fuel prices, tightening consumer credit, shaky consumer confidence and high raw materials costs could be headwinds to GM's recovery plan they said was well under way.

Among the biggest auto fallers, Renault was down 3.1 pt, Porsche fell 3 pct, Fiat was off 2.7 pct while Daimler dropped 1.2 pct. In other news, Metro AG shares gained 2.8 pct as investors welcomed the sale of its Extra supermarkets chain to the Rewe Group. An upgrade to 'buy' from 'hold' from broker ABN Amro also underpinned gains.

A leading indicator report, which forecasts economy activity three to six months down the line, is also expected to drop 0.1 pct in December., marking the third straight monthly decline, according to Thomsons's IFR Markets.

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Asian stocks end mixed ahead of Bush economic package

The Tokyo market turned around with the Nikkei 225 index closing up 0.6 pct at 13,861.29 and the broader Topix up 0.8 pct  to 1,341.50. In Seoul, the Kospi was up 0.7 pct at 1,734.72, turning around from an early low of 1,684.39. The Shanghai market recovered, finishing up 0.6 pct at 5,180.51, and the Taiwan weighted index gained 1 pct to 8,184.65.

Hong Kong's Hang Seng closed up 0.4 pct at 25,201.87. But sentiment across most Asian markets remained fragile after another day of red screens on Wall Street following the latest bearish news on manufacturing activity and the housing sector.

Australia and some other Asian markets failed to find their way back into the black. The S&P/ASX 200 closed down 0.8 pct at 5,747.30 and the All Ordinaries was down 1 pct at 5,799.4.

Singapore's Straits Times Index slipped 1.1 pct at 3,104.25, while the Kuala Lumpur Composite Index fell 1.5 pct to 1,439.49. The Philippines Composite index closed down 2.5 pct at 3,168.30, and the Jakarta index closed down 1.4 pct at 2,611.13.

In Japan, real estate stocks led gainers in a continuation of the trend seen on Thursday. Developer Mitsui Fudosan rose 5.9 pct to 2,255 yen and Mitsubishi Estate climbed 3.9 pct to 2,545 yen.

Shares of steel makers and shipping companies were also higher on expectations of robust demand for steel and transportation of industrial materials from China and other emerging economies. Nippon Steel jumped 5.2 pct to 663 yen while JFE Holdings gained 3.7 pct to 5,320 yen.

Nippon Yusen edged up 1 pct to 798 yen, while Mitsui OSK Lines climbed 2.4 pct to 1,216 yen. In Korea, chip stocks continued their rally on hopes among bigger companies that some of the weaker competitors may be forced to cut production to reduce their losses, with Samsung Electronics up 1.3 pct at 567,000 won.

Banks were mostly firmer as investors decided their share prices were approaching bottom. Kookmin Bank added 2.2 pct to 64,900 won and Shinhan Financial climbed 1.7 pct to 49,400 won.

In Hong Kong, most Chinese banks were higher after the mainland's biggest lenders -- Industrial and Commercial Bank of China (ICBC) and China Construction Bank -- posted improved preliminary earnings in 2007 on higher service fees, commissions and interest income.

China Construction bank was up 1.5 pct at 6.13 hkd, ICBC surged 5.4 pct to 5.27 hkd, Bank of China was up 4.7 pct at 3.6 hkd and Bank of Communications was up 0.9 pct at 9.76 hkd.

Yue Yuen Industrial Holdings, maker of shoes for Nike Inc and Adidas, underperformed and was down 6.8 pct at 24.6 hkd. Yue Yuen said yesterday its net profit for the year to September 2007 rose 1.6 pct to 359.4 mln usd. Yue Yuen's net profit was 5 pct below its expectations, said brokerage Morgan Stanley.

Indian shares close lower fourth day in a row; Reliance Industries, ICICI tumble

The Bombay Stock Exchange's 30-share Sensitive Index plummeted 687.12 points or 3.49 pct to close at 19,013.70 while the National Stock Exchange's 50-share S&P CNX Nifty fell 207.90 points or 3.52 pct to 5,705.30.

India's Wholesale Price Index (WPI) rose to 3.79 pct for the week ended January 5 compared with 3.5 pct in the previous week, according to the figures released by the government today.

India's largest private-sector bank ICICI Bank Ltd dipped 5.78 pct to 1,245.45 rupees, sliding more than 13 pct for the week. Reliance Industries Ltd, India's most valuable company, also dipped 6.57 pct to 2,799.50 rupees. Reliance has fallen more than 10 pct since last Friday.

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Oil up on bargain hunting, but recession fears still weigh on sentiment

LONDON - Oil rose on bargain hunting, having lost almost 10 pct since hitting a record at the start of this month, but concerns that economic weakness will hurt crude-demand were still weighing on sentiment.

Yesterday, oil fell in line with lower equity markets. Wall Street extended its 2008 plunge last night, tumbling after a regional Federal Reserve report showed a sharp decline in manufacturing activity and as investors feared that downgrades of key bond insurers could trigger further trouble with souring debt. The FTSE 100 also opened lower this morning.

Oil market players are concerned that, should such falls continue and a recession follow, demand for crude would suffer as investment dries up. "A lot (of oil's price movement) will depend on the financial markets and other commodity markets," said Base Commodities trader Tony Machacek, who noted that because gold had also fallen around 4.5 pct since hitting a record earlier this week sentiment was still shaky.

At 10.13 am, New York's WTI crude for February delivery, which expires Tuesday, was up 18 cents at 90.31 usd per barrel. The WTI March contract, which has seen the most volume so far today, was up 33 cents at 89.90 usd per barrel.

WTI oil hit the 100 usd milestone on January 2 and then set a record at 100.09 usd the following day. Meanwhile, London's Brent crude for March delivery was up 54 cents at 89.29 usd per barrel. The Nymex, where WT is traded, will be closed Monday for Martin Luther King Day.

Looking ahead, the price of oil is most likely to be determined by wider financial markets. However, temperatures across the Northern Hemisphere in the last few months of winter, US crude stock levels, OPEC's decision whether or not to release more oil to the market and geopolitical news from producing countries are likely to be assessed by players attempting to trade on the fundamental supply/demand picture.

"Longer-term weather forecasts indicate mild/warm weather for much of the US, which is, and will stunt demand in short-term. In addition refinery maintenance may well slow down the thirst for crude barrels (in the US)," said MF Global senior energy broker Rob Laughlin.

Players are unsure, meanwhile, as to whether oil producing cartel OPEC will decide to raise output at its Feb 1 meeting in Vienna. At its last gathering on Dec 5 the group left production unchanged, saying that stocks were at comfortable levels.

Yesterday, Algerian oil minister and OPEC president said the cartel has no intention to add extra barrels to the marketplace in February if prices stay at these levels.

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