US & World Daily Markets Financial Briefing 29-06-2006

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Stocks climb ahead of Fed rate decision

NEW YORK  - Stocks extended their advance in early trading Thursday as positive economic news lifted investors' spirits while they awaited the Federal Reserve's decision on interest rates later in the session.    

Wall Street has endured several sessions of erratic trading amid confusion about the prospect of higher interest rates. Investors, however, appeared to come to terms with the fact that the Fed will likely boost rates Thursday afternoon and were looking for bargains after the market's recent selloff.
   
Upbeat economic news helped distract investors ahead of the Fed's announcement. The Commerce Department raised first-quarter gross domestic product growth to a 5.6 percent annual rate but cut the GDP's inflation component to 3.1 percent, feeding optimism that price increases may be under control.
   
Meanwhile, energy traders bought futures on a report showing shrinking U.S. gasoline reserves amid the start of the busy summer driving season. A barrel of light crude gained 38 cents to $72.57 on the New York Mercantile Exchange.
   
In the first hour of trading, the Dow Jones industrial average climbed 66.68, or 0.61 percent, to 11,040.24.
   
Broader stock indicators also gained ground. The Standard & Poor's 500 index was up 9.58, or 0.77 percent, at 1,255.58, and the Nasdaq composite index jumped 19.58, or 0.93 percent, to 2,131.42.

Bonds recovered ground after sliding to historic lows, with the yield on the 10-year Treasury note tapering to 5.23 percent from 5.25 percent late Wednesday. Crude-oil futures held above $72 a barrel. 

Meanwhile, the Labor Department said that new applications filed for unemployment insurance increased by a seasonally adjusted 4,000 to 313,000 for the week ending June 24.

Britain's FTSE 100 climbed 1.21 percent, Germany's DAX index added 1.64 percent and France's CAC-40 was higher by 1.46 percent.
  
The Russell 2000 index of smaller companies rose 9.30, or 1.35 percent, to 697.34.

Stocks in focus
   
On the company end, Walt Disney Co. will be in focus after naming John Pepper Jr., former chief executive and chairman of Procter & Gamble Co., to be non-executive chairman of the entertainment company, effective Jan. 1.
   
McDonald's was upgraded to buy at Merrill Lynch on hopes for higher sales and margins, particularly in Europe.
   
Ford Motor Co. Chairman and CEO Bill Ford told The Wall Street Journal in an interview published Thursday that the company is running into a stronger headwind than it foresaw a few months ago. Sales of sport-utility vehicles have fallen off faster than planned because of the recent run-up in gasoline prices, he told the paper.
   
Alcoholic beverages giant Diageo said comparable sales rose 6% and operating profit 7 percent in the year ending June 30, though shares fell as the operating profit forecast met expectations. Diageo rival Constellation Brands is due to release earnings after the close of trade on Thursday.
   
Cereal maker General Mills reported an in-line 52 percent decline in profit, while Research In Motion and Monsanto also are due to report results.
   
Red Hat may see pressure after its quarterly results didn't meet consensus estimates, though the company insisted that was due to confusion over whether options expenses were included in the analyst guidance.
   
Tenet Healthcare Corp. has agreed to pay the U.S. Department of Justice $725 million to settle allegations related to gaming of the Medicare program. It will also sell 11 hospitals.

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Dollar steady ahead of crucial Fed rate decision

LONDON - The dollar remained steady against the euro as investors remained reluctant to stake out positions ahead of tonight's crucial US interest rate decision despite an upward revision to US economic growth.
   
Most, if not all, the market's attention rests on tonight's rate decision and the statement accompanying the expected quarter point hike in the Fed funds rate to 5.25 pct.
   
Since the hike is already priced in, attention will therefore focus on the accompanying statement for hints as to whether any further rate rises can be expected, but in the meantime the uncertainty over the US interest rate outlook is causing rangebound trade in the major currencies, analysts said.
   
"Everyone's waiting on the Fed's statement," said Neil Mackinnon, chief economist at ECU Group.
   
"The decision is a foregone conclusion, but the wording of the statement is crucial and currencies have been drifting in fairly light flows," he added.
   
There has also been some speculation that the Fed may be tempted to hike by a half point and, more or less, call it a day on its tightening cycle.
   
"If the Fed were to hike by 50 basis points, the dollar would likely see strong knee-jerk gains, though these could be tempered if the accompanying statement were to pre-empt markets pricing additional hiking," said Daniel Katzive, currency strategist at UBS.    

"Conversely, a more dovish than expected statement could put the dollar back
on the defensive given markets are currently pricing more than 80 pct odds of an
August rate hike," he added.
   
This focus on the Fed over recent days has masked a further ratcheting up in European interest rate forecasts following strong euro zone economic news, particularly in Germany, and hawkish commentary from ECB officials, most notably from Yves Mersch, Luxembourg's central bank governor.
   
The data and the commentary have combined this week to reinforce expectations that the central bank will itself raise its main cost of borrowing in August by a quarter point to 3.00 pct.

The ECB has raised interest rates a quarter point every three months since December. If that profile were sustained, another hike would not be due until September.

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The spike up in US rate expectations has helped support the dollar in recent weeks because it occurred at a time when short-term yield considerations were moving in favour of the euro and the yen, with both the ECB and the Bank of Japan expected to tighten policy over the coming months.
   
The dollar, as well as bonds, have recently garnered support from the market's reduced appetite for risk in the light of expectations of higher borrowing costs, most evident in the slide in stock markets and commodity prices. Fixed-income issues and the US currency have gained because they are seen as less risky assets than equities and commodities.
   
Elsewhere, the pound slipped after Bank of England rate-setters failed to provide any support to expectations of an imminent rate hike.
   
During testimony to MPs on the Treasury Select Committee, the BoE's governor Mervyn King highlighted the recent drop in equities and the rise in sterling and the "surprisingly" limited second-round effects of sky-high energy costs.
   
"Pretty well all the comments and news go the other way, in favour of a greater willingness to wait and see how events unfold," said Michael Saunders, economist at Citigroup.
   
"All this is quite a contrast to market pricing which, with 2-year rates roughly 20 basis points higher than the level used for the May Inflation Report forecast, project that the policy rate is likely to rise earlier and further than the profile endorsed by the MPC in early May," he added.

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Asian shares close higher on Wall St rebound, bargain hunting

HONG KONG - Shares across the Asia-Pacific region closed higher on Wall Street's rebound overnight, with bargain hunters returning to the market, dealers said.
   
Tokyo shares finished sharply higher, inspired by the rebound in US markets, as investors bought oversold stocks after yesterday 1.9 pct fall in the benchmark Nikkei index, dealers said.
   
They said the market was also cheered by foreign investors having turned net buyers in their pre-opening orders today.
   
Even so, trading was generally thin as market players awaited the US FOMC's decision on interest rates, dealers said.
   
The blue-chip Nikkei 225 Stock Average ended 235.04 points or 1.6 pct higher at 15,121.15, off a high of 15,137.58.
   
The broader TOPIX index of all first-section issues gained 20.24 points or 1.3 pct at 1,547.75, after touching a high of 1,550.13.
   
"Stock prices climbed sharply as investors targeted bargains after the sharp falls yesterday, while gains overnight on Wall Street also lent support to investor sentiment," said Juichi Wako, senior strategist at Nomura Securities Financial Institute.
   
Australian shares ended higher as investors bought banking and resource stocks ahead of the Australian financial year end, dealers said.
   
They said the overnight rise on Wall Street also provided impetus to reverse the majority of Wednesday's sell-off.
   
But, dealers said, investors remain wary ahead of tonight's Federal Reserve meeting, and the implications for global markets of its outlook statement.
   
The S&P/ASX 200 rose 50.4 points or 1.02 pct to close at 4,997.2.
   
The benchmark indicator closed at the day's high and above the low of 4, 951.8.
   
Hong Kong shares were higher in afternoon trade on the Wall Street and Tokyo gains, dealers said.
   
They added that China stocks outperformed after news that the Chinese Government plans to allow an expanded yuan business in Hong Kong.
   
At 3.29 pm the Hang Seng Index was up 127.00 points, or 0.81 pct, at 15,869.66.
   
In mainland China, A-shares in Shanghai and Shenzhen closed sharply higher on fresh inflows after strong gains over the past 10 trading days, with machinery manufacturers and property developers in favor, dealers said.
   
The Shanghai A-share Index added 34.10 points or 1.98 pct to 1,757.36 and the Shenzhen A-share Index was up 9.79 points or 2.21 pct at 451.94.
   
Seoul share prices closed sharply higher on program buying sparked by foreign investors buying into futures, dealers said.
   
Upbeat production data released one and a half hours before the market closed propelled follow-through buying, pushing the KOSPI index to a three-weak high, they added.
   
South Korea's industrial output expanded 11.6 pct year-on-year in May, the strongest since a 20.6 pct rise in February, boosted by robust sales of chips, cars and handsets, according to official data.
   
The KOSPI index closed up 24.31 points or 1.96 pct at 1,263.02, off a high of 1,267.90 and a low of 1,247.80.

Asian Bourse Round-Up

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Gold edges higher, traders nervous ahead of US rate verdict

LONDON - Gold prices edged higher, in line with gains in oil, but trading remained subdued ahead of tonight's crucial interest rate decision by the US Federal Open Markets Committee (FOMC).
   
At 11.56 pm, spot gold was quoted up at 581.25 usd an ounce against 578.10 usd at the time of the COMEX market close yesterday. Other precious metals also edged up.
   
Spot silver rose at 10.33 usd against 10.20 usd, platinum was up at 1,184.50 usd from 1,180.00 usd and palladium was up at 307.50 usd against 306.00 usd.
   
Gold closed lower yesterday amid late US dollar strength, as "a general air of cautiousness ahead of today's FOMC meeting kept many on the sidelines," said TheBullionDesk analyst James Moore.
   
Moore said "narrow sideways trade has continued" today in gold and that prices "look set to hold for the remainder of the day ahead of today's rate announcement".
   
The market has fully priced in a 25 basis point hike in interest rates, although investors are waiting for the statement accompanying the Fed verdict for hints about further hikes ahead.
   
Higher interest rates support the dollar and help address concerns about price pressures. This usually diminishes the allure of gold as an alternative investment or hedge against inflation.
   
"With the exception of palladium, we see no need to hurry back into metals at the moment; there is considerable risk from US inflation/growth/interest rate expectations."
   
"Implied volatility is high for all metals indicating that the market is not swamped with ... sellers; this should keep trading ranges wide and perhaps biased to the downside," said UBS Investment Bank analyst John Reade.
   
Gold has lost some 26 pct of its value since hitting a 26-year-high of 730 usd in mid-May, on the back of record high oil prices, geopolitical tensions and uncertain prospects for the dollar.

Copper edges up but trade remains thin ahead of US rate verdict

LONDON - Copper prices edged up but trade remained extremely thin as investors kept to the sidelines ahead of tonight's crucial interest rate decision by the US Federal Open Markets Committee (FOMC).
   
At 2.31 pm, LME copper for 3-month delivery was up at 7,002.50 usd a tonne against 6,990.00 usd at the close yesterday, while nickel rose to 21,175.00 usd from 20,400.00 usd and zinc grew to 3,065.00 usd against 2,945.00.
   
Copper closed up yesterday, along with most base metals except aluminium and tin, and has extended those gains today, although trade has remained thin and range-bound ahead of the US rate verdict.
   
The market has fully priced in a 25 basis point hike in interest rates, although investors are waiting for the statement accompanying the Fed verdict for hints about further hikes ahead.
   
Higher interest rates support the dollar and make commodities, which are traded in dollars, more expensive. This in turn helps slow down economic growth and dampens demand for industrial metals.

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