US & World Daily Markets Financial Briefing 18-05-2007

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Stocks up before consumer sentiment data

NEW YORK - Stocks surged higher in early trading Friday as investors grew optimistic that a reading on consumer sentiment would prove stronger than expected.
   
The preliminary Reuters/University of Michigan index of consumer sentiment for May was due shortly after the opening of trading. Wall Street expected the reading to be unchanged from April at 87.1.
   
Despite record gasoline prices -- which are averaging more than $3 per barrel nationwide -- some retailers have posted stronger-than-expected profits, suggesting perhaps consumers were feeling adequately confident to continue spending.
   
Strong stock markets in Europe and merger activity helped boost sentiment on Wall Street. The Wall Street Journal reported that General Electric Co. is near a deal to sell its plastics division to a Saudi industrial giant for $11 billion.
   
In the first hour of trading, the Dow Jones industrial average rose 42.61, or 0.31 percent, to 13,518.33. It set a new trading high of 13,539.54, having crossed 13,500 for the first time on Thursday.
   
Broader stock indicators also advanced. The Standard & Poor's 500 index rose 5.06, or 0.33 percent, to 1,517.81. The S&P rose to its highest level of the year in early trading and came within 10 points of its record close of 1,527.46, set in March 2000. The Nasdaq composite index rose 9.04, or 0.36 percent, to 2,548.42.
   
Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.78 percent from 4.76 percent late Thursday. The dollar fell against other major currencies, while gold prices rose.
   
Light, sweet crude rose 16 cents to $65.02 per barrel in premarket electronic trading on the New York Mercantile Exchange.
   
Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 231.5 million shares. The Russell 2000 index of smaller companies rose 1.41, or 0.17 percent, to 817.05.
   
In afternoon trading, Britain's FTSE 100 rose 0.90 percent, Germany's DAX index rose 1.08 percent, and France's CAC-40 rose 0.98 percent.

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Yen jumps as China hikes interest rates

LONDON - The yen was sharply higher after the Chinese central bank announced a package of currency measures including a hike in interest rates tomorrow.
   
The People's Bank of China will raise benchmark deposit rates by 0.27 percentage points, while lending rates will be increased by 0.18 points. It will also widen the daily fluctuation band for the yuan, allowing it to appreciate at a faster rate over time.
   
"The yen has taken support from this widened band as the market assumes it will feed into faster currency appreciation throughout the Asia region," said Ian Stannard, senior currency analyst at BNP Paribas.
   
A resulting reduction in risk appetite could provide longer-term support for the yen, which has been suppressed by the high-risk carry trade -- in which investors borrow money in low-yielding currencies such as the yen to invest in higher-yielding assets elsewhere.
   
The Japanese currency weakened yesterday following weak first-quarter GDP figures and the Bank of Japan's decision to keep rates on hold, although support came after central bank governor Toshihiko Fukui said rates might have to rise this year, even if consumer prices continue to fall.
   
Elsewhere, the pound strengthened against the euro and was level against the dollar after a sharp fall this morning, prompted by weaker-than-expected UK retail sales data.
   
Retail sales in April fell by 0.1 pct between on the month, official figures showed, missing expectations for a 0.4 pct rise. The year-on-year rise of 4.2 pct was also worse than the 4.5 pct predicted.
   
Most analysts noted the data are unlikely to deter the Bank of England from a rate-tightening path this year, given the volatility of the monthly figures and the fact that the implied deflator, a key indicator of prices, rose by an eight-year high of 1.0 pct.
      
Meanwhile, the dollar remained close to yesterday's highs against the euro after it was boosted by stronger-than-expected weekly jobless claims figures.
   
New claims for unemployment insurance fell by 5,000 to 293,000 in the week ended May 12, the lowest level of claims since the week ended January 13 and lower than analysts expected.
    
Elsewhere, the Swedish krona reversed most of its gains against the dollar, which had come after minutes to the Riksbank's monetary policy meeting on May 3 -- when rates were left on hold at 3.25 pct -- revealed two of the four members voted in favour of a quarter point hike.
   
The only data of any note for the euro, finally, were German producer price figures which posted a 0.1 pct rise in April from March, below analyst expectations for a 0.3 pct rise.

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Euroshares higher midday, oil stocks up on stronger crude, continuing M&A talk

LONDON - Europe's leading exchanges gained ground as the oil sector rallied on rising crude-oil prices and corporate takeover talk.  At 11.45 am, the STOXX 50 was up 26.42 points at 3,901.81 while the STOXX 600 added 2.2 points to 392.59.
   
Back in Europe, today's leading gainers were in the oil sector with BP up 2.19 pct, Total gaining 2.2 pct, while ENI rose 1.17 pct. Shell added 1.9 pct, supported by lingering M&A speculation.  Unconfirmed rumours circulated yesterday of a possible alliance between Shell and BP.
   
Theodoor Gilissen analyst Edward Loef said, in a note to clients, that share price hikes at both Shell and BP are "an indication that investors are positive about such a combination."
   
The analyst said that "it is too soon for a merger with BP," as "Shell is coming out of a difficult period after its reserves scandal and has work to do in order to keep some promises."
   
He added that, "BP is still in a difficult period due to the operational problems that have plagued the company for two years and they have just got a new CEO."
   
The high oil prices however weighed heavily on the stock of major European airlines.
   
Adding to sector weakness, British Airways said it was expecting revenue for the current year to be towards the lower end of its estimates. "The airline operating environment remains uncertain in the near term, which it expects to restrain the stock performance of BA and its peers," Collins Steward said.
   
In addition, Air France was lower as a report in Negocio suggested the flagship carrier could approach Spanish airline Iberia with a bid, dealers said.
   
British Airways lost 3.49 pct as Air France declined 1.49 pct and Lufthansa dropped 1.55 pct.
   
Over on the steel sector, JP Morgan this morning initiated coverage of Salzgitter with 'overweight' with the whole sector benefiting when it argued that the market was being too conservative on the outlook of the steel sector in 2008.
   
Shares in MDAX-listed Salzgitter gained 1.13 pct, while ThyssenKrupp added 1.34 pct.
   
Meanwhile, Exane and UBS became the latest brokers to make positive comments on Arcelor Mittal's prospects following its quarterly results on Wednesday.  UBS lifted its price target on the company to 48 eur from 44 eur and reiterated its 'buy' rating, saying it remained positive on the synergies Mittal and Arcelor will achieve once they are fully merged.
   
On Wednesday, the company said it sees total synergies from the merger of Arcelor and Mittal at 830 mln usd by the end of the second quarter, after first-quarter synergies reached 573 mln, above the targeted 500 mln.
       
Meanwhile, over in the banking sector, trading in Italy's Unicredito Italiano and Capitalia was suspended for the day, including after-hour trading, pending the release of a statement. The two banks are expected to hold board meetings on Sunday to clear a merger, according to media reports.
   
The swap ratio of the operation is expected to be 1.1 Unicredito share for every Capitalia share, and will lead to the creation of a bank with a market capitalisation of about 100 bln eur, according to Italy's Finanza & Mercati.
   
ABN Amro and Royal Bank of Scotland gained as the Wall Street Journal reported RBS and Bank of America may be close to brokering a deal regarding the ownership of ABN's US unit, LaSalle. The latter would be a sign that an RBS-led bid for ABN Amro is on the horizon, dealers added. ABN Amro shares gained 1.3 pct while RBS added 0.78 pct.
   
In the insurance market, shares in Royal & Sun Alliance Insurance Group PLC climbed 3.0 pct by midday amid ongoing bid talk with Finnish insurer Sampo OYJ. Credit Suisse raised its price target to 146 pence from 129 pence, although it reiterated an 'underperform' rating.
   
Shares in Renault SA rallied 2.4 pct after Merrill Lynch raised its price target on the car maker to 130 eur from 100 eur and reiterated its 'buy' rating. The broker said it has greater confidence in the recovery of the company's auto operations, prompting it to lift its 2008 and 2009 earnings estimates.
   
Other car makers were also higher in morning trading, with Peugeot up 1.18 pct, DaimlerChrysler gaining 0.44 pct while shares in BMW rose 0.96 pct.

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Asian shares close mostly lower on profit taking, China jitters

HONG KONG - Shares across the Asia-Pacific region closed mostly lower on profit-taking, with the Hong Kong market falling on fears about overheating in the China bourses and the likely impact on Hong Kong of a crash.
   
Tokyo shares finished lower as investors tracked the losses on the market for start-ups amid a dearth of fresh leads. Investors also refrained from active buying ahead of the release of banks' financial results for fiscal 2006 next week.
   
The Nikkei 225 Stock Average closed down 99.02 points or 0.57 pct at 17,399.58, after moving between 17,320.81 and 17,563.53 . The index lost 0.88 pct for the week. The TOPIX index of all first-section issues dropped 11.58 points or 0.68 pct to 1,695.69, after trading between 1,689.70 and 1,712.11. It fell 1.6 pct over the week.
    
The Tokyo Stock Exchange's Mothers market for start-up companies shed 1.9 pct to 813.18, while the Jasdaq index shed 0.6 pct to 2,002.36.
   
Australian shares ended lower as investors took profits following yesterday's strong rise into record territory. The S&P/ASX 200 closed down 53.4 points or 0.84 pct at 6,312.5, falling from yesterday's record finish of 6,365.9. The key index gained 15.1 points or 0.24 pct over the trading week.
   
Hong Kong shares were lower in afternoon trade after tycoon Li Ka-shing's comments about the risks of trading high-priced China stocks were echoed by an HSBC executive.
   
HSBC executive director Peter Wong said interest rate hikes in China are "inevitable" and warned local investors to be extra cautious as over 40 pct of the Hong Kong bourse is made up of Chinese stocks.
   
Wong said concerns that the mainland market is overheating are justified and warned the impact would be "quite serious" on the Hong Kong stock market if the Chinese bourse crashes. At 3.20 pm the Hang Seng Index was down 170.95 points or 0.81 pct at 20,823.66.
   
In mainland China, A-shares in Shanghai and Shenzhen closed mixed with concerns emerging about possible fresh interest rate hikes following recent central bank comments. The Shanghai A-share Index was down 19.50 points or 0.46 pct to 4,218.92 while the Shenzhen A-share Index rose 6.48 points or 0.54 pct to 1,206.52.
   
Seoul shares closed lower, with institutional and foreign investors selling following an overnight pullback on Wall Street and after the main index touched another fresh record yesterday. The market remained weak for most of the session, moving in tandem with weaker key regional markets, though it managed to find support at 1,600 points.
   
Chipmakers registered steep losses due to a sustained decline in DRAM chip prices. The KOSPI index closed down 3.33 points or 0.21 pct at 1,612.25, after moving between 1,600.24 and 1,617.77. It ended the week with a gain of 8.69 points or 0.54 pct.

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Copper turns lower on news of Chinese rate hike

LONDON - Copper prices turned lower as news the Chinese government has decided to raise interest rates added to already existing fears demand from the world's largest copper consumer is set to slow.
   
China's central bank said earlier it has decided to raise its interest rates and allow for greater flexibility for its currency, the yuan, to appreciate.
   
The news sparked fears the Chinese economy may slow down more than expected. Were this to happen, demand for copper from the world's biggest consumer of the metal would slow.
   
At 1.53 pm, in London, LME copper for three-month delivery was trading down at 7,186 usd per tonne against 7,251 usd at the close yesterday. Earlier, the metal touched a low of 7,090 usd, its lowest since April 3.
   
Yesterday, copper lost nearly 5 pct of its value as traders fretted the high level of copper imports into China have led to a stock oversupply in Shanghai, and that they are unsustainable and will slow going forward.
   
"Weakness in the copper market reflects concerns of an over-exuberant period of Chinese imports of copper from January to April that some fear could lead to a hangover in the form of reduced imports in following months," said JP Morgan analyst Michael Jansen.
   
This week, data out in China showed a 44 pct annual increase in Chinese imports in April to 205,053 tonnes. In addition, Chinese copper production reportedly rose 17 pct to 273,700 tonnes in April from the prior month.
   
Jansen said aside from worries imports will slow going forward, market participants also fear they the high import levels to date will result in a period of rising stocks in Shanghai.
   
Earlier today, weekly data out from China showed Shanghai stocks rose by 14,287 tonnes to 99,556 tonnes. Stocks are now at their highest since early 2004.
   
Elsewhere, zinc reversed earlier gains, falling to 3,635 usd from 3,671 usd, while lead bucked the trend, holding on to gains at 2,020 usd against 1,997 usd despite worries about Chinese demand.
   
In industry news, Australian lead and zinc producer Perilya said it had cut its lead production estimate for the year to June 30 by 60,000 tonnes to 10,000 tonnes, and trimmed its zinc output estimate by 90,000 tonnes to 40,000 tonnes.
   
In other metals, nickel was up at 49,300 usd a tonne from 48,800 usd, tin fell to 13,850 usd against 13,900 usd, while aluminium edged down to 2,827 usd against 2,835 usd.

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