US & World Daily Markets Financial Briefing 30-01-2008

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Stocks dip ahead of Fed decision

NEW YORK  - Wall Street fell modestly Wednesday ahead of a widely expected interest rate cut by the Federal Reserve as investors cashed in some profits from the stock market's two-day rally.

The market has been banking on another rate reduction Wednesday afternoon, following the central bank's drastic three-quarter-point cut in the target fed funds rate a week ago. The only uncertainty in investors' minds is whether the Fed will lower the rate by a sizable half point or a more cautious quarter point.

A larger cut would show central bankers remain concerned about stimulating a flagging economy. A smaller move would point to continuing nervousness about inflation.

An hour after market open, the Dow Jones industrial average fell 34.22, or 0.27 percent, to 12,446.08 after rising 273 over Monday and Tuesday.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 2.60 percent, or 0.19 percent, to 1,359.70, while the Nasdaq composite index fell 0.98, or 0.04 percent, to 2,357.08.

Government bond prices slipped, sending yields higher. The yield on the 10-year benchmark note inched up to 3.69 percent from 3.68 percent late Tuesday.

The economy slowed more than expected in late 2007, according to the Commerce Department's preliminary fourth-quarter gross domestic product report. The economy grew at a 0.6 percent annual clip, below the 0.8 percent pace projected by analysts polled by Thomson/IFR and well below the 4.9 percent growth seen in the third quarter.

For all of 2007, gross domestic product grew 2.2 percent, the weakest growth since 2002. The tepid late-year growth should help advance the case that the Fed needs to be aggressive in reducing rates, given that many economists believe growth has slowed further in the current quarter.

Concerns that global banks have not seen the last of the fallout from the subprime mortgage crisis were reinforced by news Wednesday that two major European banks revealed further impact from the crisis.

Swiss bank UBS said it will have a $11.4 billion fourth-quarter loss, largely due to subprime problems. Analysts had expected a much smaller shortfall. French bank BNP Paris Wednesday said its quarterly profit will decline by 40 percent from year-earlier levels.

Meanwhile, Yahoo Inc. took a thumping Wednesday after the Internet search company said its quarterly profit declined, its 2008 sales outlook was below analysts' forecasts, and that it was slashing 1,000 jobs.

Yahoo Inc. fell $1.84, or 8.8 percent, to $18.97. The biggest loser among the Dow components Wednesday was Merck & Co., which late Tuesday reported a $1.63 billion fourth-quarter loss in the fourth quarter due mostly to charges for its Vioxx litigation settlement.

Merck fell $1.61, or nearly 3.4 percent, to $46.40. Overseas markets fell ahead of the U.S. rate decision. In Tokyo, the Nikkei fell 0.99 percent. In Europe, London's FTSE 100 dropped 0.60 percent, France's CAC 40 lost 1.07 percent and Frankfurt's DAX rose 0.07 percent.

Crude oil rose 55 cents to $92.19 a barrel on the New York Mercantile Exchange. The dollar was mixed against rival currencies, while gold prices dipped.

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Forex - Dollar remains weak ahead of Fed rate decision tonight

LONDON - The dollar remained weak ahead of tonight's interest rate decision from the Federal Reserve, with speculation mounting that the US central bank will cut interest rates by at least a quarter point.

Financial markets have priced in a large probability of the Fed delivering a half point reduction to take the Fed fund rate down to 3.00 pct from the current 3.50 pct, although this prospect has been slightly dented since equity markets' rally this week, and after some better-than-expected data in the world's largest economy yesterday.

"As is usual, ahead of the Fed meeting, some doubts have started to creep in about exactly what the Fed will deliver," said Paul Mortimer-Lee, head of market economics at BNP Paribas.

"While markets judge 50 basis points remains the most likely case, a number of commentators have noticed the rally in stocks ... this has led them to conclude that maybe 25 basis points is all the Fed need deliver," said Mortimer-Lee.

The advance Q4 GDP is due first though, and is expected to have grown at an annual rate of 1.2 pct following a healthy 4.9 pct growth rate in the previous month. "Recession talks could resurface with the Q4 GDP data," said Audrey Childe-Freeman at CIBC World Markets.

The ADP employment report is also due this afternoon, which may affect forecasts for Friday's key non-farm payroll data if it comes in weak.

Elsewhere, the pound weakened against the euro after Bank of England data revealed UK housing market activity remains weak, which will add to the pressure on the central bank to cut interest rates next week.

The BoE said mortgage approvals -- a good indicator of future housing demand -- fell to 73,000 in December, their lowest level since records began, down on November's 81,000 and well below expectations for 80,000.

"Today's data adds on to the series of weak UK economic releases of the past few weeks, reinforcing the case for a BoE rate cut next week," said CIBC World Markets' Childe-Freeman.

Elsewhere in the release, the central bank found that net consumer credit during December was only 0.6 bln stg, down on November's 1.2 bln and the rolling 6-month average, also 1.2 bln.

The pound strengthened against the dollar though, supported not only by expectations that US interest rates will fall further and quicker than in the UK, but by the reappointment of Mervyn King as Bank of England governor, and Andrew Sentance as a Monetary Policy Committee member. Both are considered to be hawkish members of the rate setting MPC.

"Mervyn King's reappointment as Governor of the Bank of England for another five years is possibly a slightly hawkish development for the outlook for interest rates," said Jonathon Loynes, chief European economist at Capital Economics.

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Euroshares still lower midday as Dow seen lower; BNP, UBS updates weigh on banks

At 12.13 am, the Dow Jones STOXX 50 Index was down 22.444 points, or 0.7 pct at 3,234.25 while the DJ STOXX 600 Index fell 1.99 points, or 0.6 pct to 322.32. Although earnings provided an early focus, investors both sides of the Atlantic are looking ahead to the Federal Reserve's decision on interest rates due later today.

The Federal Open Market Committee, the central bank's monetary policy body, will announce its decision on interest rates at around 7.15 pm GMT. The Fed's key fed funds rate currently stands at 3.5 pct.

Back in Europe, Societe Generale grabbed the early spotlight as the bank's shares rose 0.74 pct ahead of a board meeting that could see the departure of Chairman and Chief Executive Daniel Bouton.

Bouton already tendered his resignation to the board after the activities of Jerome Kerviel, a junior trader, led to the French bank posting a 4.9 bln eur trading loss in the fourth quarter. The board, at the time, declined to accept his resignation.

Yesterday, Societe Generale's shares surged over 10 pct with traders attributing the move to vague takeover talk or hopes Bouton will be forced out.

While BNP Paribas and Unicredit have been seen as possible bidders, many question the timing and point out both have denied any interest in acquiring the French group. The French government, meanwhile, has been quick to declare it will fight a hostile, non-French approach.

UBS, meanwhile, fell 0.5 pct after the Swiss banking giant reported a larger-than-expected fourth-quarter loss.

Among other earnings reports of note in the financial sector, Munich Re was up 3.87 pct after the insurance company said its full year net profit rose to 3.9 bln eur from 3.5 bln a year earlier, exceeding its guidance for net profit in the range of 3.5-3.8 bln.

There was better earnings news out of the technology sector as shares in SAP rose 1.11 pct after the software group offered an upbeat outlook as fourth-quarter profit and revenue came in largely in line with expectations.

The company is forecasting software & software related service revenues to increase 24-27 pct at constant currencies in the current full year. It added that the operating margin for 2008 should be in the range of 27.5-28 pct.

And shares in Roche Holding AG added 1.6 pct as investors warmed to the group's update. Early on, some analysts said the Swiss healthcare group's outlook is too conservative but later investors turned their attention to today's strong update.

And BMW shares added 1.63 pct after the luxury car group reported stronger than expected full year numbers.

Goldman Sachs cut its ratings on both Renault and Volkswagen and WestLB cut its stance on Peugeot to 'hold' from 'add'. Renault shares fell 4.84 pct, Volkswagen shares fell 2.54 pct and Peugeot shares were down 2.22 pct.

In other news, Iberdrola shot up 6.5 pct after tacit confirmation from core shareholder ACS that it is in talks with EDF over a joint bid for the Spanish utility.

ACS shares were up 3.3 pct, EDF shares were off 1.32 pct while shares in Union Fenosa, which could stand to benefit from a potential move on Iberdrola, gained 5.01 pct.

In a related development, shares in Galp Energia SGPS fell 3.61 pct after it said Iberdrola will sell its entire 4 pct stake in the Portuguese oil and gas group.

French oil services group Technip fell 6.9 pct after a full-year profit warning. Wile other oil exploration groups fell in sympathy, ABN Amro said the French group's woes are company specific.

Indeed, SBM Offshore moved up 3.2 pct as analyst's cheered the group's full year update, saying the group's target for net profit of 280 mln usd for 2008 seems conservative.

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Asian markets turn lower as uncertainty builds ahead of Fed decision

The Nikkei closed down 1 pct at 13,345.03. The Topix was down 0.7 pct at 1,320.11. The Hang Seng closed down 2.6 pct at 23,653.69 and the Shanghai Composite closed down 0.9 pct at 4,417.8.

The Straits Times Index fell 1.6 pct at 3,000.03, while the Kuala Lumpur Composite Index finished down 0.3 pct at 1,384.08. The Jakarta composite index closed up 0.1 pct at 2,610.36.

Manila's composite index finished up 1 pct at 3,256.53, as investors chased bargains like Philippine Long Distance Telephone Co (PLTD), encouraged by an upbeat Wall Street looking forward to another cut in US interest rates this week.

PLDT, the country's biggest company by market value, advanced 3.6 pct. Investors consider the stock under-valued, given forecasts of strong earnings for the past year.

Taiwan's weighted index closed down 0.4 pct at 7,743.50, as investors were eager to cut positions in the last few sessions before the holiday closure of the market Feb 4-11.

The Australian market fell for a second consecutive day as selling concentrated on the financial sector, where a number of highly leveraged companies were struggling to maintain market credibility.

The S&P/ASX 200 closed down 1.7 pct at 5,618.7, and the All Ordinaries index ended down 1.6 pct at 5,665.3. "What's troubling the market is Tricom and its failure to settle trades," said Stuart Smith, a private client advisor at Bell Potter Securities.

National Australia Bank ended down 4.9 pct at 33.69 aud, Commonwealth Bank dropped 5.2 pct to 49.00 aud, ANZ was off 1.7 pct at 25.99 aud while Westpac fell 2.5 pct to 25.60 aud.

Financial services group Allco was belted again, dropping 10.5 pct to 3.24 aud. Babcock & Brown Infrastructure dropped 3.5 pct to 1.245 aud, though the parent company Babcock & Brown rose 1.5 pct to 18.87.

Smith said miners escaped the sell-off, helped by firmer commodity prices. BHP Billiton gained 1.2 pct to 36.11 aud while Rio Tinto added 0.7 pct to 114.34 aud, helped by talk that BHP was preparing to sweeten its merger proposal. Subprime blues

Elsewhere, Japan's Mizuho Financial Group closed down 1.6 pct at 495,000 yen. The company's Mizuho Securities unit will likely book about 250 bln yen in subprime mortgage-related losses in the current year to March, nearly double what it projected in November, the Nikkei business daily reported in its evening edition Wednesday.

In Hong Kong, insurance stocks fell on disappointment at China Life's earnings growth in 2007 and worry about the damages being wrought by the current severe snowstorms. China Life was down 7.4 pct to 29 hkd and Ping An was 6.5 pct at 57.40 hkd. Retailer Esprit lost 4.9 pct to 93.55 hkd ahead of its earnings announcement.

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Metals - Copper dips as nervousness set in ahead of Fed rate decision  

At 10.39 am, LME copper for three-month delivery was down at 7,255 usd a tonne against 7,291 usd at the close yesterday, when it touched a two-week high in intraday trades.

Analysts said the weaker tone in equities was reinforcing traders' jitters about the Fed rate decision. Asian stocks closed lower today while European stocks are currently in the black.

Falls in global equities have been taken in recent weeks as signs the US economic problems are spreading, weakening economies the world over and boding ill for metals demand going forward.

On the other hand, however, analysts say falls in copper should be tempered by strong demand from top consumer China, and by ongoing declines in stockpiles both on the LME and in Shanghai.

"We feel copper has just suffered some nervous profit taking (today), but we would expect the dips to be well bought as the underlying fundamentals remain tight," said Adams.

Elsewhere, aluminium was up at 2,693 usd a tonne against 2,645 usd, having earlier surged to a 5 month high of 2,715 usd a tonne amid ongoing supply disruptions in China, linked to severe whether and power outages.

China is currently suffering its worst snow storms in 50 years. In addition, power shortages in the country have sharply cut output at energy intensive aluminium smelters.

The market estimates around 300,000 tonnes of aluminium production has been lost. "The power issues in China ... strongly reinforce that the medium to long term outlook for aluminium remains bullish," said JP Morgan analyst Michael Jansen.

Zinc was down at 2,362 usd a tonne against 2,380 usd, while lead fell to 2,745 usd against 2,780 usd. In industry news, China's Zhuye said it shut down all its lead and zinc production on Tuesday after an electricity blackout.

However, with zinc and lead stocks remaining high overall and with sentiment in the broader markets turning nervous ahead of the Fed decision, the metals have struggled to clock up gains.

Tin was down at 16,950 usd, reversing gains made yesterday on the back of news police had shut down PT Koba Tin's smelter in Bangka island as part of investigations into alleged illegal tin mining.

Nickel was up at 27,950 usd a tonne against 27,745 usd, amid speculation the power outages in South Africa, which have cut ferrochrome output, could spark increased demand for nickel from the stainless steel industry.

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