US & World Daily Markets Financial Briefing 31-01-2007

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Boeing Dow rises, Nasdaq falls in early trading

Stocks were narrowly mixed in early trading Wednesday as the economy gave off fresh signs it could sidestep a sharp slowdown and quarterly results from Boeing Co. blew past projections. The robust data offset skittishness about the Federal Reserve's decision on interest rates due later in the day.

While Wall Street expects the Fed will leave short-term interest rates unchanged for the fifth straight time, investors are wrestling with their hopes that the economy will continue to grow but somehow still allow the inflation-wary central bank to lower rates. The market will again be paying close attention not only to the Fed's decision on rates, but also its statement assessing the economy.

In recent months Wall Street has worried less that the economy will slow sharply and more recently that it will heat up again and prompt the Fed to raise rates. The gross domestic product report out Wednesday could underscore that notion. The Commerce Department found the economy grew at 3.5 percent in the fourth quarter as consumers increased spending despite a pullback in the housing market. Wall Street had been expecting an increase of 3 percent.

In other economic news, the cost of hiring and retaining workers moderated in the fourth quarter, possibly easing some concern about wage inflation. Wages and benefits rose 0.8 percent in the fourth quarter, down from a 1 percent increase in the third quarter, the Labor Department reported.

In the first hour of trading, the Dow Jones industrial average was up 14.34, or 0.11 percent, at 12,537.65.

Broader stock indicators were lower. The Standard & Poor's 500 index was down 1.84, or 0.13 percent, at 1,426.98 and the Nasdaq composite index was down 10.54, or 0.43 percent, at 2,438.10.

Bonds were little changed ahead of the Fed's comments on the economy and interest rates. The yield on the benchmark 10-year Treasury note was flat at 4.88 percent from late Tuesday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell 46 cents to $56.51 per barrel in premarket electronic trading on the New York Mercantile Exchange.

In corporate news, Boeing, a component of the Dow industrials, rose $3.87, or 4.5 percent, to $89.87 after the aerospace company's fourth-quarter profit more than doubled amid broad strength in its commercial airplane and defense system businesses. Revenue climbed 26 percent to $17.5 billion, coming in well ahead of Wall Street's forecast.

The Russell 2000 index of smaller companies was down 3.45, or 0.43 percent, at 794.52.

Overseas, Japan's Nikkei stock average closed down 0.61 percent. In afternoon trading, Britain's FTSE 100 was down 0.25 percent, Germany's DAX index was down 0.07 percent, and France's CAC-40 was down 0.49 percent.

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Forex - Dollar retains firm tone after US Q4 GDP beats forecasts

Stronger than anticipated fourth-quarter US growth helped the dollar retain a firm tone ahead of this evening's latest interest-rate decision from the US Federal Reserve, and its accompanying statement in particular.

The Commerce Department reported that the US economy grew at an annualised 3.5 pct pace in the final quarter of last year, up on the 2.0 pct recorded in the third quarter and higher than expectations for a more modest rise to 3.0 pct. The fresh snapshot underscored the resilience of the US economy in the face of a faltering housing market.

As a result, he said any remaining near-term Fed rate cut expectations are likely to evaporate, helping to underpin the dollar's recent consolidation. The US currency has enjoyed one of its best months in a year as the market has reined in any remaining expectations that the Fed will cut rates soon.

The Fed has kept its benchmark rate unchanged at 5.25 pct for four consecutive meetings after raising it 17 times in a row previously.  

A further key test for the dollar will be this Friday's closely-watched jobs report for January and signs are that this will be better than expected.

According to the ADP payrolls firm, total January private-sector non-farm employment rose by a seasonally-adjusted 152,000.

Daragh Maher, senior FX strategist at Calyon, said he is tempted to revise up his forecast for January's non-farm payrolls by around 10,000 to 145,000.

The dollar's gains this last month have been most pronounced against the yen, which has suffered after the Bank of Japan's failure to raise interest rates earlier this month.

The yen's slide has fuelled talk that weakness in the Japanese currency will be a key focus at the upcoming G7 meeting of finance ministers in Germany.

However, the market remains sceptical about any near-term change in Japanese monetary policy or any consensus comment at the G7 meeting.

Elsewhere, data out of Germany further cemented market expectations that the European Central Bank will continue raising borrowing costs in the months ahead but relatively subdued inflation data from the single currency zone is making any further tightening more and more unlikely.

The flash estimate of euro zone inflation in January was only 1.9 pct, below expectations for a rise to 2.1 pct and below the ECB's target of 2.0 pct.

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LONDON - Leading shares slipped to their session lows at midday, with weakness across the insurance sector and indications of cautious start on Wall Street outweighing strong gains by Corus, dealers said.

By 12.10 pm, the FTSE 100 index was 27.70 points lower at 6,214.3, falling back from its early high of 6,257.3, while broader-based indices were slightly lower.

Volume was hefty, with 756.8 mln shares changing hands in 73,324 deals, swelled by sizeable trade in Corus after its board endorsed Tata Steel's 608 pence per share bid.

FRANKFURT - German shares were slightly lower in mid-morning trade, as investors awaited the Fed decision and its outlook for the US economy later today, dealers said.

At 11.27 am, the DAX was down 24.59 points or 0.36 pct at 6,763.64 after trading between 6,711.05 and 6,781.00 throughout the day.

PARIS - Share prices moved lower at midday as investors consolidated positions ahead of sales data due out this week and held tight ahead of the FOMC's announcement on interest rates today.

At 12.38 pm the CAC-40 index was down 27.59 points or 0.49 pct at 5,618.80, on  volume of 2.1 bln eur.

AMSTERDAM - Shares in Amsterdam were lower around midday, mirroring lower  Dow futures, while Corus soared following last night's bidding auction, dealers said.

At 1.04 pm, the AEX was 2.49 points or 0.50 pct lower at 500.34 after opening at 502 and reaching an earlier low of 499.46.

MILAN - Share prices were flat at midday, ahead of the FOMC meeting on US interest rates, with gains in Terna after its business plan announcement offsetting falls in Bulgari on disappointing sales data, brokers said.

At 12.35 pm, the Mibtel index was up 0.05 pct at 32,520 points, and the S&P/Mib gained 0.05 pct to 42,311.

MADRID - Share prices were lower midsession as the main blue chips saw sellers ahead of the Fed's rate decision and outlook, while Ferrovial and Acerinox bucked the weak trend, dealers said.

At 1.01 pm, the IBEX-35 index fell 76.9 points to 14,476.2, after trading in a range of 14,450-14,554, on turnover of 1.9 bln eur.

STOCKHOLM - Shares were slightly lower in late morning trade on profit-taking, with specialty steel maker SSAB however sharply outperforming in the wake of Tata Steel's high winning bid for Corus, dealers said.

At 11.05 am, the OMX Stockholm index was down 0.35 pct at 386.26, with the OMX Stockholm 30 down 0.49 pct at 1,184.47.

HELSINKI - Shares were lower in midday trade, led down by Nokia and Fortum after the latter posted a consensus-missing fourth-quarter report this morning, brokers said.

At 11.55 am, the OMX Helsinki 25 was 0.45 pct lower at 2,994.74 points and the OMX Helsinki was down 0.42 pct at 10,067.63 points.

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Asian shares close lower, Tokyo down on disappointing company earnings

Shares across the Asia-Pacific region closed lower, with the Japanese market depressed by disappointing company earnings and other markets sidelined ahead of the US Federal Reserve's interest rate decision, dealers said.

Tokyo shares closed lower after Sony's third quarter to December earnings announcement disappointed investors, muting the impact of favorable reports from other companies such as Kyocera, dealers said.

They said sentiment was further undermined by fears that Nikko Cordial may be delisted, after the broking house said its former president and other senior executives may have been involved in manipulating year to March 2005 earnings to inflate group profits.

The blue-chip Nikkei 225 Stock Average closed down 106.77 points or 0.61 pct at 17,383.42, off a low of 17,275.84.

The TOPIX index of all issues listed on the Tokyo Stock Exchange's first section finished down 9.64 points or 0.56 pct at 1,721.96, off a low of 1,713.24.

Gloomy prospects for technology stocks cast shadows over prospects for the broader stock market, he added.

Australian shares closed lower as investors took profits following an earlier rise into fresh record territory before selling gained momentum, dealers said.

They said negative sentiment flowed from an overnight fall on Wall Street, where US investors remained cautious ahead of tonight's Federal Reserve interest rate decision and outlook statement.

The S&P/ASX 200 fell 39.1 points or 0.67 pct to close at the day's low of 5,773.4, retreating from yesterday's record close of 5,812.5. The key index closed off a fresh intra-day record high of 5,829.3.

Over the trading month for January, the benchmark index advanced 103.5 points or 1.8 pct from the record high of 5,669.9 reached on Dec 29 and after rising 19 pct in 2006.

Hong Kong shares were lower in afternoon trade on profit-taking in blue chips and China stocks, dealers said.

At 3.20 pm the Hang Seng Index was down 282.30 points or 1.38 pct at 20,178.16.

In mainland China, A-shares in Shanghai and Shenzhen closed sharply lower on institutional selling with airlines, property developers and banks under pressure, dealers said.

The Shanghai A-share Index ended down 151.42 points or 4.92 pct to 2,927.83 and the Shenzhen A-share Index finished down 41.98 points or 5.80 pct at 681.56.

Seoul shares closed lower as foreign investors and institutions cut their positions in IT stocks amid an uncertain industry outlook, dealers said.

Weak current account data for December following disappointing industrial output data also weighed on sentiment, with many investors sidelined awaiting the outcome of tonight's US FOMC meeting, they added.

The KOSPI index closed down 10.49 points or 0.77 pct at 1,360.23, off a low of 1,357.87 and a high of 1,374.76.

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Oil inches lower after surging on cold weather, planned OPEC cuts

Oil edged lower as market players retraced yesterday's sharp gains on cold weather and speculation that OPEC countries would honour pledges to cut output from tomorrow.

At 10.59 am, front-month Brent North Sea crude contracts for March delivery were down 21 cents at 56.18 usd a barrel, after gaining 2.71 usd to settle at 56.39 usd yesterday.

Meanwhile, front-month New York light sweet crude contracts for March delivery shed 16 cents to 56.83 usd a barrel, after surging 2.96 usd to close at 56.97 usd yesterday.

Oil was supported by the return of colder weather to the US Northeast which is expected to finally bite into weekly US inventory data, due to be released at 3.30 pm today.

The cold snap is expected to reduce distillate inventories by 2.2 mln barrels last week, which include heating oil, according to analysts. But crude stocks were expected to rise by 1.1 mln barrels.

Also propping up prices is the imminent OPEC Feb 1 deadline to cut output by 500,000 barrels per day.

"OPEC action has been successful (in cutting production) for 70 to 80 pct of the time since 1993," said Deutsche Bank analyst Michael Lewis. "The times when they didn't succeed is when world growth was slow. Our sense is that as long as world growth stays strong this year then OPEC would succeed."

This will be in addition to the 1.2 mln barrels per day cut in production the cartel agreed in November 2006.

Speculation that key OPEC member Saudi would reduce its oil production by another 158,000 barrels per day from today, and that more cuts were on the way, is lending support to prices.

Prices have been volatile of late because "market sentiment is still quite fragile," added Lewis. "There are a lot of conflicting views that people are looking at, but our view is that the bull story will eventually win through."

Despite the recent arrival of freezing temperatures in the US Northeast and Europe, a mostly mild winter dampened demand while stockpiles increased. As a result, most analysts agree higher-than-normal stocks at this time of the year are capping gains.

"The real test on prices will be as we enter the lower demand second quarter if the winter as a whole, on average, remains milder than expected," said Sucden analyst, Michael Davies. "We think it is still too early to say whether we have seen the market bottom out."

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