US & World Daily Markets Financial Briefing 26-06-2007

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The Commerce Department reported that sales of new homes fell 1.6 percent in May to a seasonally adjusted annual rate of 915,000. It was the fourth decline in the past five months, in April, new home sales had jumped by 12.5 percent, but a milder decrease than many investors anticipated.

Investors were a bit unnerved by a larger-than-expected drop in the Conference Board's index on consumer confidence, and still jittery about ongoing subprime lending troubles.

The stock and bond markets are also trading erratically ahead of Thursday's Federal Reserve rate decision. Central bankers are widely expected to keep the benchmark rate steady at 5.25 percent, but Wall Street will be watching to see if they alter their stance on inflation, which could suggest a rate cut or rate hike later in the year.

In mid-morning trading, the Dow Jones industrial average rose 17.72, or 0.13 percent, to 13,369.77.

Broader stock indicators also rose. The Standard & Poor's 500 index rose 1.10, or 0.07 percent, to 1,498.84, and the Nasdaq composite index gained 1.52, or 0.06 percent, to 2,578.60.

Bonds were little changed after the new home sales data, with the yield on the benchmark 10-year Treasury note at 5.08 percent, the same as late Monday.

Earlier Tuesday, the Standard & Poor's home price index for April showed which declined for the 17th consecutive month, and showed its steepest annual decline since 1991.

Investors got yet another update on the status of the housing industry after homebuilder Lennar Corp. posted a loss for the second quarter as the housing downturn continues, and warned that a third-quarter loss is likely. Lennar fell 65 cents to $38.10, and other homebuilders followed.

Lennar Chief Executive Stuart Miller warned that "the housing market has continued to deteriorate throughout the second quarter. The supply of new and existing homes has continued to increase resulting in declining home prices across our markets."

Target Corp. said June same-store sales will be at the low end of its planned 3 percent to 5 percent range. Target fell 47 cents to $63.68.

Investment management company BlackRock Inc. said is buying the fund of funds division of Quellos Group LLC for up to $1.7 billion. The deal, set to close around Oct. 1, will create a fund of funds operation with more than $25.4 billion in managed assets. BlackRock rose $2.37 to $156.90.

The dollar was mixed against other major currencies, while gold prices fell.

Crude-oil futures for August dropped 87 cents to $68.31 a barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies was up 0.21, or 0.03 percent, at 827.67.

Overseas, Japan's Nikkei stock average fell 0.12 percent. In afternoon trading, Britain's FTSE 100 was down 0.18 percent, Germany's DAX index was down
0.80 percent, and France's CAC-40 was down 0.73 percent.

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Japanese stance on weak yen shows signs of changing

Japan's policy over how to handle the persistent weakness of its currency is showing signs of changing as politicians stepped up their rhetoric on foreign exchange imbalances.   

Earlier today Finance Minister Koji Omi told reporters at a press conference that "we are watching (foreign exchange) very closely," a more aggressive line than the usual remark that "foreign exchange ought to reflect economic fundamentals." It is also in line with the language employed by the central bank and other G7 officials in warning markets about currency imbalances.    

Because financial markets often rely on catchphrases to interpret the intentions of policy-makers, the change in wording may boost views that politicians are considering ways to prop up the yen.    

The currency has been steadily pushed lower over the past few years by carry trades -- where investors seek to borrow in low-yielding economies like Japan to invest in higher-yielding ones.   

The change in rhetoric comes just two days after a report from the Bank for International Settlements said the yen's decline is "anomalous" and warned investors that the currency could rise sharply once market sentiment shifts.   

"Tighter monetary policies would help to redress this situation, but the underlying problem seems to be a too-firm conviction on the part of investors that the yen will not be allowed to strengthen in any significant way," the BIS
stated in its annual report.    

The BIS also said that interest rates would have to rise globally in order to avoid a 'boom-bust cycle' and, because carry trades have been an important source of liquidity and asset market strength, such forex imbalances need to be addressed.   

The Japanese comments echo more aggressive rhetoric on currencies by central banks around the world. The Swiss National Bank last week warned markets not to push the franc any lower while the Reserve Bank of New Zealand actually intervened in the market, selling its strong domestic currency over the past two weeks.   

"Japan officials had become increasingly conspicuous in their lack of concern with yen weakness and the yen's role as a funding currency," noted Daniel Katzive at UBS.   

However, he noted that the change in rhetoric was incremental, and that a true appreciation of the yen would need a more explicit indication of a Japanese monetary policy response. The wider economic environment, with falling stock markets and a fear of higher global rates, has also made investors very sensitive to news on carry trades.

"On any other day, the MoF's comments wouldn't have been given as much weight," said Gavin Friend at Commerzbank.   

He noted Omi was pressed by the media to respond to the BIS report, and said that the market is currently undergoing a bounce in risk aversion.   

"Carry trades will be affected far more if equities continue to fall," said Friend, adding that this would spook investors into unwinding their one-way bets.   

While the BoJ is expected to hike its key interest rate twice to reach 1.00 pct by the end of the year -- still far below other industrialised economies -- the "economic background doesn't suggest a need to hike aggressively," Friend said.   

But beyond Finance Minister Omi's rhetoric, some reshuffling among senior MoF officials has also supported views that Japan intends to get more aggressive in currency policy.    

Media reports have in fact emerged suggesting that vice finance minister and senior forex officer Hiroshi Watanabe, who has often expressed little concern about carry trades or the weak yen, will step down from his position.   

While it is not clear that Watanabe's departure is a direct consequence of a shift in foreign exchange policy, the change may mean a more yen-friendly ministry going forward.

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Euroshares down in cautious trade on interest rate concerns 

LONDON (Thomson Financial) - Europe's leading exchanges continued to inch lower midday in a cautious market environment ahead of Thursday's US interest rate setting and with investors still concerned over the state of the two distressed hedge funds at Bear Stearns.

Looking ahead, Wall Street is looking at a higher open ahead of housing and consumer confidence reports, with falling bond yields and dropping oil prices helping expected to add some support.

Back in Europe, rate-sensitive stocks were on the decline with banks in particular losing ground as investors are engaged in cautious trade ahead of Thursday's rate decision by the FOMC. Traders noted that, while no interest rate hike is expected this time around, investors will be on the look out for signals to future rate movements in the accompanying statement.

Heavyweight banks were on the defensive, with Deutsche Bank dropping 1.38 pct, as Unicredito fell 1.50 pct, and Fortis down 1.12 pct.

Peer Abn Amro, meanwhile, was subject to some good news this morning after the Dutch Supreme Court was advised that there is no need to consult shareholders over the sale of its US unit LaSalle to Bank of America Corp.

Elsewhere, French construction group Eiffage was suspended from trade at the request of the financial regulator AMF ahead of its verdict on the company's contested AGM.

Shares surged more than 9 pct earlier today on speculative buying from investors, dealers said, on the back of expected legal developments in its conflict with Spanish shareholders, plus an interview from CEO Benoit Heitz, served to further speculation.

Roche grabbed the spotlight after it announced a hostile takeover bid for Ventana Medical Systems Inc for 75 usd per share in cash, or an aggregate of approximately 3 bln usd.

Shares were flat in a weakening market and a Paris-based dealer said the deal would be strategically sound for Roche, noting that the company has a history of "smart acquisitions".

Commenting on the price tag, he noted that the premium Roche is willing to pay indicates that it is serious about the purchase.

Meanwhile, shares in defence company BAE Systems were 10.24 pct lower following news the US Department of Justice had started a formal investigation relating to the company's compliance with anti-corruption laws, including its business concerning Saudi Arabia, although brokers considered the reaction overplayed.

Over in Italy, Alitalia dropped 2.30 pct after reports that AP Holding, which controls Air One, will not present a bid in cash for the troubled airline but will offer 99.99 pct of Air One. Air One has a book value of 876 mln eur, 20 pct less than yesterday's market capitalization of Alitalia.

Shares in defence manufacturer Chemring Group PLC gained 2.07 pct after the company reported underlying pretax profits from continuing operations of 20.3 mln stg for the six month period to April 30, 2007 -- 68 pct up on the 12.1 mln it reported during the same period last year. Sales increased by 29 pct year-on-year to 106.8 mln from 82.6 mln.

Shares in Porsche AG dropped 2.47 pct as investors locked in profits after the company presented 10-months sales figures which failed to impress.

Vehicle sales are down slightly and with Porsche shares having gained 85 pct in the last 12 months and economic concerns starting to gain momentum on both sides of the pond, investors are deciding to consolidate profits, Yates said.

In neighbouring Vienna, a Kapsch TrafficCom AG was the latest newcomer to the ATX Prime index. The IPO of the toll collection services provider was 14 times oversubscribed and shares surged some 15 pct above the IPO price.

Over in Italy, Morgan Stanley placed 10.35 mln Banca Popolare Italiana shares at 11.24 eur each, according to dealers, and the stock declined 1.38 pct.

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SINGAPORE - Oil prices were lower in Asian trading hours in a market underpinned by below-normal gasoline inventories in the US.
   
At 10.53 am here (0253 GMT), the New York Mercantile Exchange's main oil futures contract, light sweet crude for delivery in August, was down 0.04 usd at 69.14 usd a barrel from 69.18 usd in late trading US overnight. Brent North Sea crude for August was down 0.18 usd at 71.18 usd.
   
Shum said US crude oil inventories were at a nine-year high, but that persistent refinery outages continued to stir concern about the ability to meet demand during the peak season for demand in North America, which has already begun.
   
Analysts with Societe Generale said US gasoline demand kept growing and seemed on track to challenge a record set in July 2005.

MUMBAI - Indian shares are likely to open lower as trading is expected to be lacklustre ahead of futures and options contract expiry Thursday and subdued trends in Asian and US stock markets, dealers said.
   
Yesterday, the Bombay Stock Exchange's sensitive index Sensex gained 20.36 points, or 0.14 pct, to close at 14,487.72 while the National Stock Market's broader S&P CNX Nifty moved up by 7.35 points, 0.17 pct, to close at 4,259.40.
   
Asian markets were largely weak today. Japanese share prices turned lower after overnight fall on the Wall Street. Investors remained cautious as they keenly watch developments in sub-prime lending issues in the US ahead of key
economic events.

Information technology stocks like Infosys Technologies, Satyam Computer Services, Tata Consultancy Services and Wipro may get some relief from the news, dealers said.
   
State Bank of India may be watched on reports that it will go ahead with plans to float a holding company for its insurance and asset management business.
   
Canara Bank may also be in the limelight on reports that the bank is eyeing a merger with Oriental Bank of Commerce.
   
State-run Bharat Heavy Electricals Ltd is likely to gain on news that it received a 1.06-blnrupee order for a turbo blower package from Rashtriya Ispat Nigam Ltd.

BEIJING - Wahaha Group, China's largest beverage maker, plans to sue its French venture partner Groupe Danone for up to 5 bln eur for "illegal activities," the South China Morning Post reported, citing a spokesperson from the Chinese firm.
   
Danone has already filed cases against Wahaha in the US and Sweden for alleged illegal sales of products outside their joint venture, and Wahaha said it would respond to them.
   
The companies are sparring over the use of the Wahaha brand within their decade-old beverage venture, of which Danone owns 51 pct.
   
Wahaha, which has produced a steady stream of public statements against Danone since the disagreement became public this month, did not specify when and where its countersuit would be filed.

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Gold hits lowest level since mid June on weaker energy prices 

Gold hit its lowest level since June 13 as the inflation risk posed by higher energy costs weakened further.

A slightly stronger dollar, meanwhile, reduced gold's appeal as an alternative asset.

At 3.38 pm in London, spot gold was trading at 644.50 usd per ounce against 651.10 usd in late New York trade yesterday. Earlier in the session, gold slumped to as low as 634.18 usd. 

Jon Nadler, a Kitco analyst, said gold was undermined by declining inflation fears on the back of weaker crude oil values.

Gold moves in line with oil prices as investors hedge against inflation. Brent crude prices were down by around 1 usd today near 70 usd, or 3 pct lower than 72.25 usd -- the year-high that was struck last week.

Meanwhile, a slightly stronger dollar prompted a sell off as the yellow metal, priced in US dollars, became stronger for those trading in other currencies.

"Longer-term high energy costs, inflation and extreme volatility in the equity markets are all likely to prove favourable for gold as investors add some safe-haven protection to their portfolios," TheBullionDesk.Com analyst, James Moore, said.

In other precious metals, palladium slipped to 361.55 usd against 371.50 usd, while silver eased to 12.38 usd from 12.85 usd. Platinum was lower at 1,259 usd from 1,280 usd.

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