US & World Daily Markets Financial Briefing 21-11-2007

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Wall Street plunged in early trading Tuesday, finding little to placate its worries about the wilting mortgage market ahead of Thanksgiving. The Dow Jones industrial average fell more than 100 points .
   
The yield on the Treasury's 10-year note fell below 4 percent for the first time since 2005 as investors sought the safety of government securities.
   
The stock market has been thrashing around recently as investors attempt to gauge how companies around the world will fare amid a further slowdown in the U.S. housing market, deterioration of credit and record oil prices that crested overnight above $99 a barrel.
   
With the housing market worsening -- the Mortgage Bankers Association said mortgage application volume fell 3.6 percent last week -- financial institutions continue to suffer.
   
Government-sponsored lender Freddie Mac, which reported a $2 billion quarter loss Tuesday and saw shares plummet nearly 29 percent, declined another 9 percent early Wednesday after an analyst downgrade. Freddie's counterpart Fannie Mae also dropped for a second straight day, as did Countrywide Financial Corp., the nation's largest mortgage lender.
   
The Commerce Department said jobless claims fell by 11,000 last week, a positive sign for U.S. employment, but the report did not alleviate anxiety about the potential for weaker consumer spending.
   
At 10 a.m. EST, the University of Michigan offers its reading on consumer sentiment and the Conference Board reports on leading indicators. The Dow fell 109.00, or 0.84 percent, to 12,901.14
   
Broader stock indicators also fell. The Standard & Poor's 500 index dropped 12.07, or 0.84 percent, to 1,427.63, and the Nasdaq composite index slumped 23.42, or 0.90 percent, to 2,573.39.
   
Stocks managed to finish with a gain Tuesday after a somewhat baffling pair of reports from the Federal Reserve. The Fed's minutes from its last meeting called its last rate reduction a "close call," but the central bank's economic forecast seemed to imply it is willing to keep lowering rates.
   
Wall Street is fairly confident the Fed will lower rates at its Dec. 11 meeting to keep the tight credit markets liquid, but it is uncertain if the economy is safe -- particularly given big losses at Freddie Mac and its counterpart Fannie Mae, and possible liquidity problems at Countrywide.
   
In an interview with The Wall Street Journal, U.S. Treasury Secretary Henry Paulson said the number of potential home-loan defaults "will be significantly bigger" in 2008 than this year.
   
Amid worries that both the private and government lending industries are struggling with the mortgage market implosion, Freddie shares fell 75 cents, or 2.8 percent, to $25.99; Fannie fell 75 cents, or 2.7 percent, to $27.50; and Countrywide fell 94 cents, or 9.1 percent, to $9.34.
   
And with oil prices briefly reaching a high of $99.29 a barrel in overnight electronic trading, the question among investors is no longer if oil will reach $100 a barrel, but when -- and how long it will stay there.
   
By Wednesday morning, crude futures were up on New York Mercantile by 45 cents at $98.48 a barrel. Whether they settle at a new record will depend much on the Energy Department's inventory report, scheduled to be released at 10:30 a.m.
   
The dollar rose against most other major currencies, but fell precipitously versus the yen. Gold advanced.

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Yen rallies strongly on falls in equity markets, pound slumps vs euro

The yen continued to climb, reaching its highest level against the dollar for more than two years as sub-prime worries weighed on equity markets, causing investors to pull out of the risky carry trade.
   
Equity markets in Asia fell sharply overnight, and European bourses followed them down prompted by fears of slowing US economic growth, and record oil prices. This gave the yen a huge boost as it dented the carry trade - a risky strategy where they sell the low-yielding yen to invest in high-yielding ones elsewhere.
   
By mid-morning this mean the dollar fell to 108.23 yen, its lowest level since June, 2005. "The yen has continued to make strong gains across the board as investors flee the carry on weak equity sessions in Asia and Europe," UBS currency strategist Alina Anishchanka said, adding there is scope for a further unwind in the carry trade if the global growth outlook deteriorates. 
   
This rise in risk aversion however meant the dollar was able to regain some ground against the euro and the pound, as it is still seen as a safe haven currency.
   
A gloomy set of economic forecasts from the Federal Reserve had pushed the dollar lower overnight, as markets continued to price in another US rate cut next month -- even though the Fed signalled it was unwilling to ease again.
   
"Although the Fed may have characterised the last policy easing as a 'close call', its downbeat forecasts for growth for next year coupled with the resolutely downbeat news-stream over the past few days did little to dissuade the markets from believing that it will have to cut rates again," Bank of New York currency strategist Neil Mellor said.
   
Attention is likely to return back to US economic fundamentals this afternoon with the release of the weekly jobless claim figures and the University of Michigan confidence indicator.
   
The number of people making their registering for unemployment insurance last week is expected to remain elevated, with analysts expecting about 330,000 new claims. Meanwhile, the confidence indicator is expected to remain fairly steady with a reading of about 75.
   
Elsewhere the pound slumped against the euro, falling at one point to its lowest level since June 2003 on the news Bank of England deputy governor John Gieve voted for a rate cut earlier this month, along with David Blanchflower. The euro rose to 0.7203 stg on this news before falling back slightly.
  
Gieve is traditionally seen as a fairly hawkish member of the Monetary Policy Committee so markets have taken the news as a signal interest rates could fall next month, even though seven rate-setters opted to keep rates on hold.
   
"If PMIs continue to fall, credit conditions worsen, accompanied by a fall in housing and equity markets, it will not take long for three other members of the board to swing to the side of those voting for a cut," UBS' Anishchanka said.

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At 12 pm, the Dow Jones STOXX 50 Index was down 59.80 points, or 1.7 pct at 3,568.18 while the DJ STOXX 600 Index fell 7.01 points, or 2 pct to 351.66. Both indices are now flirting with lows touched in August when the crisis in the credit markets erupted sending stocks tumbling.
   
By sector, mining and metal companies fell amid a fall in base metal prices on concern a global economic slowdown would dampen demand. Banks, financial services and auto makers were other sectors seeing a significant pullback.
  
Back in Europe, Northern Rock continues to be the undoing of the banking sector as shares in the ailing UK mortgage lender tumbled 8.7 pct after it said it had received another expression of interest for the company that was "materially below" yesterday's closing price of 97 pence.
   
On Monday, the bank said all the offers it had received at that point valued it "materially below" its market capitalisation at the end of last week.

Deutsche Postbank though proved a bright spot in the sector as its shares gained 2 pct after Deutsche Bank AG chief executive Josef Ackerman said the bank did not rule out interest in buying Germany's largest retail bank.
   
Telecom equipment maker Alcatel-Lucent fell 4.9 pct in a knock-on effect from rival Ericsson's announcement late yesterday that its fourth quarter sales would be at the low end of its forecast range of 53 bln to 60 bln skr.
   
A dealer also pointed to news this morning from a research company, which said Alcatel-Lucent's market share for mobile phone networks declined 8.6 pct in the third quarter.
   
Ericsson shares, meanwhile, fell another 4.8 pct to hit their worst level in nearly four years as brokers Goldman Sachs and Societe Generale downgraded the company.
   
Goldman Sachs removed Ericsson from its Conviction Buy List and downgraded it to 'neutral' from 'buy,' citing its deteriorating revenue outlook and "the growing probability that the wireless infrastructure market will decline again in 2008."
   
Societe Generale cut the company to 'hold' from 'buy,' saying lower sales will have a significant impact on margins.

In the utilities sector, EDP Energias de Portugal SA rose in 1.3 pct after UBS analysts said the indicative price range released yesterday by Spain's Iberdrola SA for its renewables unit could add about 0.4-0.8 eur per share to the Portuguese energy group's valuation.
   
UBS analysts said the range announced by Iberdrola implies an enterprise value per kilowatt of 2,595-2,909 eur, based on average 2008 installed capacity. They said if those multiples are applied to EDP's average 2008 wind capacity, then EDP's enterprise value is 10.1-11.3 bln eur, which is well above consensus.
   
EDF also outperformed the sector, up 0.5 pct as investors welcomed a report the group is poised to enter the Chinese nuclear energy market. Shares in fertiliser group Yara International climbed 1.4 pct as analysts re-rated the stock upwards on upbeat comments by the company on synergies from Finnish acquisition Kemira GrowHow that would translate into higher bottom line earnings and on a strong outlook for its markets.
   
Elsewhere, Roche climbed 1.5 pct after it confirmed that it has submitted a biologics license application with the US Food and Drug Administration (FDA) for approval of Actemra for the treatment of rheumatoid arthritis.

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Stock markets across Asia faltered Wednesday with Hong Kong leading the decline with a more than 4 pct pullback, as Wall Street's choppy performance overnight and oil close to 100 usd a barrel set a nervous tone.
   
The major US indexes seesawed through the session before closing higher after investors, still jittery about mortgage-related problems at the nation's major lenders, interpreted comments from the US Federal Reserve as hinting at another interest rate cut.
   
"The market is still [being] hounded by a lot of negative news, including a slowing US economy and the overheating Chinese economy," said Alex Tang, research head at Core Pacific Yamaichi in Hong Kong.
   
The Nikkei 225 closed down 2.5 pct at 14,837.66 and the broader Topix lost 2.1 pct to 1,438.72 as exporters, including Canon and Toyota Motor, were hit by a stronger yen. The dollar fell through 109 yen to trade at 108.93, down 0.8 pct from late Tuesday.
   
The Hang Seng index was down 4.2 pct at 26,618.19 and the Singapore Straits Times was down 2.6 pct at 3,347.20.
   
The Australian benchmarks fell just 0.6 pct, with the national election fuelling uncertainty and keeping investors on the sidelines. The S&P/ASX 200 fell to 6,384.3, while the declined to 6,450.2.
   
Australians go to polls on Saturday after a closely fought election campaign, without any clear indication of the outcome. Prime Minister John Howard's conservative government hopes to hold on to power after 11 years in government but the Australian Labor Party, led by Kevin Rudd, has consistently been leading in voter opinion polls.
       
But Australia's Woodside Petroleum tacked on 0.7 pct to 48.12 aud and Santos added 2.7 pct to 13.56 aud.

 Airline stocks fell as higher oil prices will lift their fuel costs. Air China, China's biggest international carrier, fell 4.2 pct to 8.16 hkd. China Southern Airlines, the biggest carrier, was down 4.7 pct at 8.04 hkd.
   
In Japan, exporters were the main casualties thanks to the stronger yen. Canon finished down 1.8 pct at 5,370 yen, Honda Motor Co lost 4.5 pct to 3,660 yen and Toyota fell 2.8 pct to 5,940 yen.
   
In Malaysia, the Kuala Lumpur Composite Index fell 0.9 pct to 1,359.85. Shares of carmaker Proton tumbled after talks with Germany's Volkswagen and General Motors on an alliance were called off.
   
Elsewhere, the Philippines Composite closed down 0.9 pct at 3,510.49 and the Kospi was down 3.5 pct at 1,806.99. The Shanghai Composite Index closed down 1.5 pct at 5,214.23.
   
The Jakarta index closed down 2.3 pct at 2,563.62. The Taiwan weighted index closed down 2.3 pct at 8,484.11.

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Crude oil prices rose above a record $99 per barrel Wednesday as worries about inadequate winter supplies in the Northern Hemisphere and news of refinery problems stoked bullish sentiment.
   
The declining U.S. dollar and speculation that the U.S. Federal Reserve will again cut interest rates also boosted prices. Some investors put their money into oil contracts, betting that gains in their price will offset dollar weakness.
   
"The market is now really looking at $100 a barrel as the next target to hit," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The fact that we are having this surge in pricing in this short trading week underscores the strength of this bull run for oil."

Light, sweet crude for January delivery rose as high as $99.29 a barrel in electronic trading after the New York Mercantile Exchange closed, breaking the previous intraday record of $98.62 set last week. The contract was trading at $98.04 a barrel -- up 1 cent on Tuesday's close -- at midday in Europe. Brent crude for January delivery was little changed at $95.88.

The contract surged $3.39 during the floor session Tuesday in New York to a record close of $98.03 a barrel. The Nymex will be closed on Thursday for Thanks giving and close early on Friday.
   
"There were strong gains in almost all commodities (Tuesday), hence we will view the rise of the oil markets in that global context," said Olivier Jakob at Petromatrix in Switzerland. "The mythical $100 per barrel is of course within reach for today with or without the help of the weekly statistics."
   
Energy futures got a boost on news of problems at two oil facilities Tuesday. A Valero Energy Corp. refinery in Memphis, Tennessee, that processes 180,000 barrels of crude a day has shut down for 10 days of unplanned maintenance. Also, a Royal Dutch Shell PLC plant that converts bitumen from Alberta's oil sands region into 155,000 barrels a day of synthetic crude oil was temporarily shut down due to a fire.
   
Beyond these temporary concerns, investors are anxious that as global demand for energy grows, fueled by China and India's rapid development, oil supplies won't be able to keep up.
   
Currently, oil producers are turning out about 85 million barrels a day, while the U.S. Department of Energy says consumption is between 85 million and 86 million barrels a day.
   
"The long-term underlying trend is that demand is powering forward and the supply situation looks tight," said Jeff Brown, managing director and chief economist at FACTS Global Energy in Singapore.
  
Oil prices also got support after the Fed said it thinks U.S. economic growth will slow next year to between 1.8 percent and 2.5 percent, less than the Fed's previous projections. It also projected that U.S. inflation should fall next year to between a 1.8 percent and 2.1 percent increase.
   
That could mean the Fed will cut interest rates further, and that could weigh on the dollar. On Tuesday, the euro hit an all-time high against the dollar, breaking through the $1.48 mark.
   
"When the U.S. dollar hit a record low, oil also surged ahead. It's been an inverse relationship," Shum said. "Also, the Fed indicating worries about the U.S. economy has caused worry that the Fed will cut interest rates."
   
Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today. Oil product prices also fell back from higher level earlier Wednesday.

December heating oil futures were down 0.01 cent at $2.6900 a gallon after closing in New York at $2.6901 a gallon, a record settlement. Gasoline prices were unchanged at $2.4715 a gallon. Natural gas futures gained 0.1 cents to $7.478 per 1,000 cubic feet. Traders were also closely watching for the release of Wednesday's petroleum inventory report from the U.S. Energy Department's Energy Information
Administration.
   
Analysts surveyed by Dow Jones Newswires, on average, predict that crude oil inventories rose by 800,000 barrels last week, while refinery use grew by 0.4 percentage point to 88.1 percent of capacity.
Gasoline likely grew by 700,000 barrels, the analysts predicted, while inventories of distillates, which include heating oil and diesel fuel, fell by 400,000 barrels.

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