US & World Daily Markets Financial Briefing 23-01-2008

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U.S. stocks open lower in rocky trading

NEW YORK  - Stocks fell in another rocky opening Wednesday, with investors uneasy about the health of the economy and corporate earnings after disappointing reports from big names like Apple Inc. and Motorola Inc. Bond prices rose sharply as investors sought the safety of government-backed debt.

Wall Street also fell in tandem with markets in Europe, which pulled back after European Central Bank President Jean-Claude Trichet indicated that the ECB would not follow the Federal Reserve's lead and cut interest rates, according to Dow Jones Newswires. The Fed's decision Tuesday to cut its federal funds rate by 0.75 basis points to 3.5 percent eventually helped calm U.S. markets, but it was already clear that investors had doubts about the potency of the Fed action. Rate cuts typically take months to work their way into the economy.

Meanwhile, a disappointing forecast from Apple showed how fragile investor sentiment is. The maker of the iPod issued a forecast for its fiscal second quarter that said sales would likely grow by 29 percent. The figure would represent faster growth than in earlier years but fell short of what Wall Street had expected.

Apple's expectations appeared to confirm worries about consumer spending. As consumers account for more than two-thirds of the economy, investors are keen on learning whether retailers and other companies will have a harder time prying open wallets.

Shares of Apple fell $17.26, or 11 percent, to $138.38. In the first hour of trading, the Dow Jones industrial average fell 206.47, or 1.72 percent, to 11,764.72. Broader stock indicators also declined. The Standard & Poor's 500 index fell 28.12, or 2.15 percent, to 1,282.38, and the Nasdaq composite index slid 53.87, or 2.35 percent, to 2,238.40.

Bond prices rose sharply, the beneficiary of investors' search for safer places for their money. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.32 percent from 3.41 percent late Tuesday. The dollar was mixed against other major currencies.

In afternoon trading in Europe, stocks dropped sharply. Britain's FTSE 100 fell 3.44 percent, Germany's DAX index fell 4.76 percent, and France's CAC-40 fell 4.02 percent. Light, sweet crude oil fell $1.05 to $88.14 per barrel in premarket electronic trading on the New York Mercantile Exchange.

In other corporate news, Motorola fell $1.98, or 16.1 percent, to $10.34 after reporting its earnings fell sharply in the fourth quarter and the maker of mobile phones warned that the recovery in its struggling handset unit will take longer than expected.

United Technologies Corp., one of the 30 stocks that comprise the Dow industrials, said its fourth-quarter earnings rose 23 percent as sales increased across each of its businesses. The results from the parent of names like Sikorsky and Otis topped Wall Street's forecast, according to Thomson Financial. The stock fell 70 cents to $66.50.

Delta Air Lines Inc., the nation's No. 3 carrier, reported it was hampered by high fuel prices in the fourth quarter but was able to post a narrower loss on a solid increase in sales. Delta slid 44 cents, or 3 percent, to $14.41.

While investors worldwide remain concerned about the health of the U.S. economy, the Fed's rate cut and Wall Street's ability to come off its lows Tuesday helped drive a rebound in Asian trading Wednesday. Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 148.2 million shares.

The Russell 2000 index of smaller companies fell 13.33, or 1.98 percent, to 658.24. Japan's Nikkei stock average closed up 2.04 percent after falling 5.7 percent Tuesday. Similarly, Hong Kong's Hang Seng index surged 10.72 percent, showing its biggest gain in 10 years after falling 13.7 percent in the previous two sessions.

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Forex - Risk aversion supports dollar, yen; euro pressured by ECB rate-cut talk

LONDON - Ongoing aversion to risk kept the dollar and the yen well-supported, while speculation that the European Central Bank could follow the Federal Reserve and cut interest rates weighed on the euro.

The dollar's falls in the wake of yesterday's emergency 75 point rate cut by the Federal Reserve proved to be limited as the market continued to worry about contagion of the credit crisis into the global economy, with the dollar benefiting from moves into safe-haven assets.

The low-yielding yen and the Swiss franc were also firmer, benefiting from safe-haven flows and the general flight to quality. "Even in light of yesterday's emergency rate cut by the Fed... risk aversion remains a key driver of all markets," said Manuel Oliveri at UBS.

Key for the dollar now will be whether other central banks follow the Fed's aggressive easing lead, as they did in 2001, he said. Matthew Foster-Smith at Thomson IFR Markets said the euro has come under pressure as "rumours of an ECB emergency rate cut resurfaced".

Speaking today, ECB president Jean-Claude Trichet failed to give too many clues in this respect, but he did stress the downside risks to the euro zone economy. He also said the "very significant" market correction we are seeing at the moment is a reminder of how financial problems can spread from one economy to another.

The risks to the euro zone economy were highlighted by the provisional euro zone PMI figures this morning, which showed service sector activity unexpectedly slumping to its lowest level in more than four years in January. Manufacturing activity remained unchanged, however, better than forecasts for a modest fall.

Elsewhere, the pound turned lower, quickly reversing earlier gains as market players concluded that today's stronger-than-expected fourth-quarter UK GDP data and hawkish Monetary Policy Committee minutes are unlikely to mean the Bank of England will not cut interest rates next month.

Nevertheless, the news, combined with a hawkish speech by BoE governor Mervyn King last night -- in which he put great emphasis on the risks of higher inflation as well as the risks of lower growth -- prompted talk that rates will not fall as much as previously thought.

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Euroshares climb in opening trade, helped by insurance sector strength

At 8.52 am, the Dow Jones STOXX 50 Index was up 2.16 points or 0.1 pct at 3,203.19 while the DJ STOXX 600 Index climbed 0.87 points or 0.3 pct to 316.42.

"We're just seeing an ongoing reaction to yesterday's Fed rate cut," said Andrea Williams, European fund manager at Royal Asset Management. "We're seeing a little bit of rotation out of defensives." In early trading, sectors such as health care, food and utilities, which are traditionally viewed as safe havens in times of slowing growth, were all moving lower.

Williams said the markets may have trouble holding onto these gains if they do not see further rate cuts out of the European Central Bank and the Bank of England.

"(The central banks) will struggle to do anything with their inflation mandate," said Wiliams. In a surprise move yesterday, the US Federal Reserve cut its key interest rate by three quarters of a percentage point to 3.5 pct in a bid to stabilise equity markets and stimulate economic growth.

Back in Europe, the insurance sector outperformed, helped by a 10.1 pct jump for Swiss Re after Warren Buffet's investment vehicle, Berkshire Hathaway, took a 3 pct stake in the reinsurer. Investors viewed the move as a vote of confidence in the company following recent rumours it faces further subprime-related losses.

In a further boost to the Swiss insurer's share price, the company said it would use the proceeds of a reinsurance deal with Berkshire Hathaway to buy back more of its own shares up to a value of 1.75 bln sfr.

Merger and acquisition action also fuelled gains at UK insurer Prudential. A news report said Ping An Insurance (Group) Co of China Ltd, the country's second-largest life insurer, may take a stake worth 100 bln yuan in the group. Prudential shares were last up 5.3 pct.

In other corporate takeover talk, Scottish & Newcastle was down 2.6 pct. It was a mixed bag of earnings in the the technology sector. Infineon Technologies AG was down 2 pct after Qimonda, its US chip memory subsidiary, swung to a first-quarter loss as sales tumbled 56 pct to 513 mln eur. Qimonda also cut a key production forecast.

But STMicroelectronics rose 1 pct after the chip maker's latest quarterly results topped analyst estimates. In other earnings news, Richemont shares fell 3.2 pct after the Swiss luxury goods maker posted third-quarter sales below consensus forecasts.

Lonza Group was up 2.5 pct after the maker of fine chemicals reported a consensus-beating full-year net profit of 301 mln sfr, up from 199 mln last year, driven by solid developments across its business, with a lower tax rate and improved financial operations contributing to the improvement.

Later in the session, investors will be looking to see if Wall Street can make a decisive move into positive territory as the market continues to assess the implications of the Fed's surprise rate cut. Early indications from US stock futures suggest a mixed open.

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Asian stocks end higher on Fed's surprise rate cut; HK up almost 10 pct

The Hang Seng closed up 10.7 pct at 24,090.17 points. The index had lost about 14 pct of its value in two days of heavy selling and suffered its worst-ever performance on Tuesday.

The Hong Kong Monetary Authority followed the Fed move with a 75 basis-point cut of its own. Hong Kong tracks US rate moves closely as its currency is pegged to the dollar. "The rate cuts will abate panic for now, but there is still a lot of negative news out there, such as weak earnings reports from US companies," said Benjamin Collett, head of hedge fund sales trading at Daiwa Securities SMBC Co.

India's Sensex provisionally closed up 5.6 pct at 17,661.55. The Shanghai Composite also bounced off its lows to close up 3.1 pct at 4,703.05. The Kospi ended up 1.2 pct at 1,628.42, below its intraday peak at 1,659.

The Taiwanese Taiex was the worst performer in the region, ending down 2.3 pct at 7,408.40. The US is a key market for Taiwan's high-tech exporters. The Australian benchmarks gained for the first time in 13 sessions with the S&P/ASX 200 closing up 4.4 pct at 5,412.3. The All Ordinaries was up 4.3 pct at 5,445.6.

The Nikkei closed up 2 pct at 12,829.06 and the broader Topix added 2.5 pct to 1,249.93, with both benchmarks pulling back from early highs. The Singapore Straits Times closed up 4.1 pct at 2,983.62, after briefly trading in the red. The Philippines Composite ended up 2.7 pct at 3,058.26, but had also retreated from a high of 3,094. The Jakarta composite index closed up 7.9 pct at 2,476.28, after losing 7.7 pct yesterday.

Stocks rose across the board. In Hong Kong, Cheung Kong rose 10.4 pct at 130 hkd, Sun Hung Kai Properties was up 9.3 pct at 154.90 hkd, Henderson Land rose 7.52 pct at 69.35 hkd, Sino Land rose 9.3 pct at 25.40 hkd and Wharf was up 15.9 pct at 41.60 hkd.

Among China financials, Industrial and Commercial Bank of China (ICBC) was up 11.1 pct at 4.92 hkd and China Construction Bank rose 16.1 pct to 5.78 hkd. Bank of China was up 8.1 pct at 3.33 hkd after saying it expects higher profit for 2007 despite provisions for subprime-related investments.

Major Japanese exporters gained as the pause in the yen's rise against the US dollar boosted sentiment. Printer manufacturer Canon rose 2.8 pct to 4,340 yen, Toyota Motor climbed 4.5 pct to 5,100 yen and construction machinery maker Komatsu gained 5 pct to 2,305 yen.

In Australia, index leader BHP Billiton added 9.3 pct to 33.89 aud after reporting strong production across key commodities in the first half, raising expectations the miner will report a record first half net profit of about 6.6 bln usd, up from the previous first half's record of 6.168 bln usd.

There were also reports the miner's board is planning to meet in Melbourne on January 30 ahead of a February 6 deadline to make a formal offer for Rio Tinto. Rio rose 5 pct to 106.01 aud. In Seoul, POSCO jumped 4.3 pct to 491,000 won thanks to a hike in steel product prices. Technology issues rallied on foreign investor interest, with LG Philips LCD up 2.8 pct at 41,100 won. Hynix gained 1.2 pct to 25,300 won.

LG Electronics climbed 5.9 pct to 90,500 won ahead of its earnings release on Thursday. Fourth-quarter operating profit earned by its headquarters and overseas operations was estimated at 379.4 bln won, up from 363 bln won a year earlier.

Samsung SDI, a plasma display panel maker, surged 5.4 pct to 66,300 won as investors shrugged off its disappointing fourth-quarter performance and instead focused on hopes for a turnaround this year. The company reported an operating loss of 206.8 bln won for the fourth quarter, reversing a profit of 23.6 bln won a year earlier and worse than market forecast of 135.1 bln won loss.

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Oil falls after overnight Fed cut

Oil futures were lower Wednesday, extending overnight declines despite the U.S. Federal Reserve's surprise cut in its key interest rates. Many investors doubt the Fed's emergency move will stave off a seriousslowdown that would dampen demand.
   
Light, sweet crude for March delivery lost 84 cents to $88.37 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. It fell 71 cents to settle at $89.21 a barrel in the floor session overnight.
   
The contract for February delivery fell 72 cents in the floor session to settle at $89.85 a barrel. It expired at the close of trade. The Fed slashed its federal funds rate -- the interest that banks charge each other on overnight loans -- by three-quarters of a percentage point Tuesday to 3.5 percent.
   
The U.S. central bank was responding to concerns about a possible recession that have sent global equities markets sharply lower in recent days. Asian stock markets rebounded Wednesday, although the Dow Jones industrials still lost 1.1 percent after the cut.
   
In Europe, however, the indices started in positive territory but turned negative as the day went on. By the early afternoon, London's FTSE 100 Index was down 2 percent, the CAC-40 in Paris was 2.6 percent lower and Frankfurt's DAX was 3.2 percent below Tuesday's close.
   
The Dow industrials might have fallen further Tuesday had the Fed not acted. Oil futures recovered from earlier losses during the day because the Fed move appeared to stabilize stocks, analysts said. The volatility of the equity markets has been a "confidence breaker" for oil investments, said Olivier Jakob of Petromatrix in Switzerland.
       
In London, March Brent crude futures fell $1.34 cents to $87.11 a barrel on the ICE Futures exchange. Nymex heating oil futures fell 2.62 cents to $2.4464 a gallon (3.8 liters) while gasoline prices dropped 2.82 cent to $2.2524 a gallon. November natural gas futures fell 0.6 cent to $7.676 per 1,000 cubic feet.

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