US & World Daily Markets Financial Briefing 25-01-2008

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Stocks backtrack amid hedge fund rumors

NEW YORK - Stocks gave up some of their early gains Friday as investors grappled with rumors that another hedge fund may have run into financial trouble.
   
Word of possible trouble unnerved a market that had moved higher on upbeat profit reports from big names like Microsoft Corp. and amid word of a possible buyout of a troubled bond insurer. The notion that a hedge fund could face trouble rekindled concerns that the recent stumbles in the finanical sector may not be entirely on the mend; reports of fund problems have contributed to the market's declines over the past few months.
   
"There are a number of names of hedge funds being bandied about as possibly being in trouble," said Tom di Galoma, head of Treasurys trading at Jefferies & Co. It is impossible to discern whether the stories have any basis in fact, he said.
   
In midmorning trading, the Dow Jones industrial average rose 16.10, or 0.13 percent, to 12,394.71. The Dow had been up more than 100 points in early trading.
   
Broader stock indicators also gave up their biggest gains. The Standard & Poor's 500 index rose 0.67, or 0.05 percent, to 1,352.74. The technology-heavy Nasdaq composite index, benefiting from the Microsoft report, rose 8.48, or 0.36 percent, to 2,369.40.

Investors looking for reasons to buy were pleased by reports from U.K. newspapers that billionaire Wilbur Ross was in talks to acquire bond insurer Ambac Financial Group Inc. Financial woes at many U.S. bond insurers have in recent weeks caused headaches for investors worldwide who have worried that the credit crisis could worsen should one of the companies buckle under an inability to draw new business.
   
Word of Ross' interest follows comments this week by New York State regulators saying they would consider lending support to shore up the struggling bond insurance industry. While uncertainty surrounds what role regulators might play, the comments helped reassure Wall Street and made room for stocks to rally in recent days.
   
Microsoft rose 76 cents, or 2.3 percent, to $34.01 after topping Wall Street's expectations. The company raised its forecast for the rest of its fiscal year, which ends in June, and said its quarterly earnings jumped 79 percent to $4.71 billion, or 50 cents per share.

Among other financial sector heavyweights, Goldman Sachs lost 1.8% to $195.20, Merrill Lynch slipped 1.3% to $56.70 and Bank of America edged up 0.3% to $40.
   
The Russell 2000 index of smaller companies rose 8.22, or 1.19 percent, to 700.94. In afternoon trading Britain's FTSE 100 rose 1.17 percent, Germany's DAX index rose 2.20 percent, and France's CAC-40 rose 1.34 percent.

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Forex - Dollar woes renewed as risk appetites recover

LONDON - The dollar's woes were renewed as a tumultous week drew to a close with the shifting sands of risk appetites going against the US currency.

Once again share price movements were at the heart of the poceedings. The rout at the start of the week led to a quick reduction in risk taking and funds flowed into the dollar. But as the week progressed share prices came back from the brink, helping restore confidence and restoring risk appetites.

The euro was back above 1.47 usd, having dropped to as low as 1.4409 usd this week. The single currency found support from the recovery in share prices and fading expectations of a euro zone interest rate cut.

At the other end of the spectrum, the yen was lower as risk appetites recovered as risky carry trades resumed in earnest. "Yen weakness and euro strength dominated throughout the European and Asian sessions as risk appetite further picked up," said Ashraf Laidi at CMC Markets.

He put the currency movements down to a positive market response to US President George W Bush's economic stimulus package and reports that billionaire investor Wilbur Ross was in talks to buy out troubled US bond insurer Ambac.

The company is among a few of the US struggling mortgage bond insurers estimated to require as much as 200 bln usd in capital injections in order to maintain its AAA credit ratings.

Meanwhile, the euro's broadening strength remains manifested by the currency's positive correlation with rising risk appetites as European Central Bank officials maintain an increasingly united hawkish tone, added Laidi.

Additionally, it is worth noting that the euro has been largely unaffected by Societe Generale's 7.1 bln usd trading loss.

"The euro remains unfazed by the biggest trading loss in banking history, as the ECB is considered among the last central banks to allow its independence to be swayed by a fraudulent operation or pressure from politicians," added Laidi.

Carsten Fritsch, currency strategist at Commerzbank, said any movements in equity markets are likely to determine how the euro moves against the dollar, although the underlying rate in the medium term is unlikely to change significantly.

"The euro-dollar is trading sideways but with large swings in both directions, depending on changes in risk aversion," he said.

Meanwhile ECB rate setter Axel Weber dashed market hopes for a rate cut, saying current expectations for a drop in borrowing costs were "wishful thinking".

"These were the most significant comments we have heard so far from an ECB official during the current market turmoil, and the unexpected rise of the Ifo index added further weight to Weber's view," said Fritsch.

The Ifo, a key survey of German business sentiment, unexpectedly rose in January to 103.4 from 103.0 in December.

With little major data out today, attention is now turning to next week's US interest rate decision. Markets are pricing in a strong probability of a 50 basis point cut, although Tuesday's surprise 75 point cut along with the pick-up in markets has unsettled these somewhat, with upcoming data on new home sales, durable goods and consumer confidence likely to be key.

Elsewhere, the pound was firmer, hitting 1.9846 usd at one point -- its highest level this year, on news of a major stock market acquisition and as markets scaled back their interest rate cut expectations. Scottish & Newcastle, the UK's largest brewer, announced it has agreed to be bought by Carlsberg and Heineken, for around 7.6 bln stg.

"Sterling appears to have caught something of a general bid this morning on confirmation that the Carlsberg purchase of Scottish and Newcastle will be completed," said Steve Pearson, currency strategist at HBOS.

Markets are also starting to scale back their expectations for the number of UK interest rate cuts, as Bank of England rate setters continue to sound hawkish on inflation. Yesterday Monetary Policy Committee member Andrew Sentance said markets are ignoring the upside risk to inflation.

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Euroshares open higher on overseas gains; L'Oreal, Ahold rise on earnings

At 9.08 am, the DJ STOXX 50 was up 42.34 points, or 1.30 pct, at 3,302.33 and the DJ STOXX 600 was up 4.42 points, or 1.37 pct, at 326.50 points. And L'Oreal shares climbed 5.14 pct after the hair care and cosmetics group reported full year sales that analysts said were ahead of the consensus forecast.

And in the automotive sector, Porsche, up 5.44 pct, impressed investors by stating that it expects record revenues and unit sales for the first six months of its fiscal year 2007/2008. The luxury car maker said this morning that revenues for the first-half covering August to January are expected to show a 14.2 pct growth to 3.5 bln eur, with unit sales up 18.7 pct at around 46,600.

The group was also optimistic with regards to its outlook and as a result Commerzbank and Unicredit reiterated their 'buy' ratings this morning. Turning to M&A news, Carlsberg rose 1.08 pct and Heineken gained 2.912 pct after the two groups announced a joined recommended offer for Scottish & Newcastle of 800 pence a share. S&N added 2.09 pct.

Elsewhere Northern Rock was up 6.73 pct, boosted by a report in the Daily Mail, which said that US private equity firm Cerberus is interested in bidding for the stricken mortgage lender and had requested information from Goldman Sachs.

Staying with the banking sector, IKB Deutsche Industriebank AG rose 26.01 pct at last check amid rumours about a potential tie-up between Deutsche Postbank and the ailing German bank. Traders dismissed the rumours:  "There was a report about a tie up of Deutsche Postbank with another institute and I think someone just made the connection with IKB, but its rather improbable," a Frankfurt-based trader said.

Deutsche Post itself was also in focus, up 4.06 pct, buoyed by a report in Financial Times Deutschland which suggested the group may dispose its loss-making US parcel and express business and sell it to its rival Fedex Corp.

In an interview with Handelsblatt, chief financial officer John Allan said however his company is aiming to retain a significant market share in its US express business and has ruled out an option of withdrawing from its operations there.

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Asian stocks extend gains to third day; Hang Seng leads

The Hang Seng index closed up 6.7 pct at 25,122.37, recouping Thursday's losses which came after Societe Generale announced a 4.9 bln eur fraud by a rogue trader and unveiled another 2 bln eur in subprime-related writedowns.
   
The S&P/ASX 200 closed up 5 pct at 5,860.3 and the All Ordinaries tacked on 5 pct to 5,886.3. The indexes are still down about 8 pct each for 2008 so far. The Australian market declined for 12 days to Tuesday, when the key indexes had their biggest one-day fall in more than 18 years, dropping more than 7 pct.
  
The Kuala Lumpur Composite Index (KLCI) closed up 1.6 pct at 1,405.4,tracking the strong performance of regional markets, with energy, construction and palm oil stocks leading the advance.
   
The Nikkei was firm too, closing up 4.1 pct at 13,629.16. A weaker yen buoyed exporters, including tyre-maker Bridgestone, truck-maker Hino Motors, Honda and Toyota. The broader Topix closed 4.7 pct up at 1,344.77
   
The Singapore Straits Times was up 3.6 pct at 3,159.48. The Jakarta composite index closed up 4.1 pct at 2,620.49. The Philippines Composite rose 2.9 pct to 3,237.41.
   
The Shanghai Composite reversed early losses and closed up 0.9 pct at 4,761.69. The index fell to as low as 4,65.71 early in the day, as retail subscriptions for China Coal Energy's initial public offering in Shanghai
diverted funds from the secondary market.
   
China Coal Energy Co, the mainland's second-biggest coal producer, said it may raise up to 25.7 bln yuan via the issue of up to 1.525 bln A-shares. Taiwan's weighted index closed up 3 pct at 7,739.59.

The Kospi index closed up 1.8 pct at 1,692.41, as after the government announced stronger-than-expected GDP data. The central bank said GDP grew 1.5 pct in the fourth quarter from the previous quarter on a seasonally adjusted basis, ahead of a market consensus estimate of 1.2-1.3 pct. GDP grew 1.3 pct in
the third quarter.  
   
Korean heavy industry and steel stocks led the advance in Seoul after data showed the economy grew at a faster-than-expected pace in the fourth quarter.
   
Hyundai Heavy rallied 4.8 pct to 358,000 won. POSCO rose 2.9 pct to 502,000 won and Hyundai Steel advanced 4.1 pct to 70,700 won, on hopes for future hikes in steel prices.
  
Hyundai Motor continued to rally, up 2.8 pct at 72,800 won, on its fourth-quarter earnings released Thursday. Investors are hoping that the nation's largest car maker will post even better earnings this year on strong sales of new models.
   
LG Electronics was up 2 pct at 94,900 won. On Thursday, the consumer electronics maker also reported record sales for the fourth quarter on the strong performance of its handset business in the global markets.
   
In Tokyo, Honda closed up 6.5 pct to 3,266 yen and Toyota was up 6.3 pct at 5,509 yen. Financials were also stronger, with Mitsubishi UFJ Financial adding 7.9 pct to 1,027 yen and Mizuho Financial up 10.9 pct at 500,852 yen.
   
National Australia Bank rose 8.1 pct to 36.49 aud, Commonwealth Bank gained 5.8 pct to 53.71 aud, ANZ gained 5.7 pct to 27.49 aud and Westpac added 3.9 pct to 26.59 aud.Miners were stronger, with BHP Billiton up 5.7 pct at 36.80 aud and Rio Tinto up 9.3 pct at 118.50 aud. Oil and gas sector leader Woodside put on 6 pct at 47.19 aud after crude oil prices rose.

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Metals - Platinum, gold at record on South African mine stoppages

LONDON - Platinum raced to a series of record highs as mine stoppages in South Africa sparked a fresh wave of investment.

Mining companies in South Africa, the world's biggest platinum producer, including Harmony Gold Mining Company Ltd, AngloGold Ashanti Ltd, Impala Platinum Holdings Ltd and Gold Fields Ltd, have all halted operations after the country's national power utility, Eskom, said that it could not guarantee today's power supply.

In separate statements, all four companies said they have suspended South African mining operations due to this crisis. It is reported that Eskom requested last night that 138 major industrial customers, including platinum and gold mines, cut electricity use for the next 2 to 4 weeks.

"Platinum and gold mines consume almost one-fifth of electricity in South Africa. With South Africa producing on around 20,000 ounces of platinum a day, this could have a major impact on global supply," said Standard Bank precious metals analyst Walter De Wet. "At this stage, we don't foresee a total two-week shut-down but there is no doubt that these power cuts will impact on platinum supply," he added.

By 12.53 pm, platinum was up at 1,688 usd per ounce against 1,551 usd, having earlier hit a record 1,697 usd an ounce. The price of gold also continued to break record highs on the news, as South Africa is the world's second-biggest gold producer after China.

Gold was already well supported as the dollar weakened, oil prices rose, financial jitters lingered. Higher stock markets in Asia and London after Wall Street made gains yesterday also boosted sentiment, even though in the longer term major worries over the global economy remain.

Bullion trades in the opposite direction to the US dollar as it is seen as an alternative asset and in line with oil prices because gold acts as an inflation hedge. Wider financial concerns and worries the US is headed for recession, meanwhile, boosted gold's appeal as a safe store of value.

"Gold looks set to extend higher in the coming sessions as investors seek further safe-haven protection. In addition following the recent period of consolidation/correction the metal is well placed technically to move higher with RSI at 67 suggesting a target around 955 to 960," said TheBullionDesk.Com analyst James Moore.

Investors are also rushing to buy gold, which last year rose by around 30 pct, ahead of the US Federal Reserve's Jan 30 meeting. The central bank is expected to cut interest rates again after it made an emergency 75 basis-point intra-meeting cut earlier this week.

Such a move would likely weaken the dollar further and therefore boost gold buying. Also, some market players might see another rate cut as the Fed's recognition that such drastic measures are needed to calm the ailing US economy, which would also spark investment into gold as a safe store of value.

"We continue to see further upside for the yellow metal today, with equities on the rebound," said Standard Bank analyst Walter De Wet. But, he warned that

"the risk could lie in the belief that the Fed would not cut rates as aggressively as initially thought at the end of the month." Some players, who had tipped the Fed to cut by 75 basis points next week have scaled back those expectations and now reckon 50 basis points is more likely.

By 12.43 pm, spot gold was trading up at 921.00 usd per ounce, against 907.35 usd in late New York trade yesterday. Earlier it touched a historic high of 923.45 usd. Meanwhile, palladium rose to its highest price since May 2006 of 389 usd, while silver hit 16.58 usd an ounce, its highest value since April 2006.

The metals tend to follow in gold's footsteps, especially if bullion trades at record levels, as players invest in precious metal portfolios. Palladium was up at 389 usd per ounce from 367 usd while silver was higher at 16.47 usd per ounce against 16.04 usd.

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