US & World Daily Markets Financial Briefing 03-04-2008

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Stocks drop after rise in jobless claims

NEW YORK - Wall Street slipped modestly Thursday after the Labor Department reported a spike in jobless claims, sapping some of the market's confidence ahead of testimony from Federal Reserve Chairman Ben Bernanke and Friday's anxiously anticipated March employment report.

Wall Street was disappointed to hear the government say the number of people applying for unemployment benefits rose by a full 38,000 last week to 407,000 -- the highest level since September 2005. The less volatile four-week average of claims also increased, by 15,750 to 374,500.

However, the stock market's losses were mild, particularly given the huge advance Wall Street logged Tuesday and has mostly maintained. Investors got a bit of relief from the Institute for Supply Management which said Thursday the services sector contracted only slightly in March -- a stronger performance than in February, and a better reading than many economists predicted.

Meanwhile, Wall Street was cautiously listening for new information about the economy and financial system from Federal Reserve Chairman Ben Bernanke, who was appearing before Congress for a second straight day. On Wednesday, the Fed chairman said a recession is possible in the first half of this year.

With a broad swath of corporate earnings reports set to arrive in the coming weeks, the market is eager for signs that the economy, while undeniably weak, is not crumbling, and that the credit markets are improving.

In mid-morning trading, the Dow Jones industrial average fell 43.96, or 0.35 percent, to 12,561.87. Broader stock indicators also declined. The Standard & Poor's 500 index fell 4.44, or 0.32 percent, to 1,363.09, and the Nasdaq composite index fell 12.70, or 0.54 percent, to 2,348.70.

Government bonds edged higher as investors grew more uncertain about the economy and turned to safer assets. The yield on the 10-year Treasury note, which moves opposite its price, fell to 3.58 percent from 3.60 percent late Wednesday.

Crude oil fell 81 cents to $104.02 a barrel on the New York Mercantile Exchange, after surging a day earlier on the prospect of climbing demand for gasoline. The dollar was mixed against other major currencies, while gold declined further below $900 an ounce.

The Russell 2000 index of smaller companies fell 0.78, or 0.11 percent, to 711.49. Declining issues outnumbered advancers by about 5 to 4 on the New York Stock Exchange, where volume came to 212.2 million shares.

Tokyo's Nikkei index closed 1.52 percent higher. There were light losses in the European stock markets -- London's FTSE fell 0.70 percent, Frankfurt's DAX lost 0.99 percent and Paris' CAC 40 slid 0.91 percent.

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Forex - Euro soft on retail sales downturn

LONDON - The euro fell against the dollar after disappointing retail sales data from the 15-nation single currency zone. Retail sales unexpectedly fell in February, largely because of weak consumer spending in Germany, the euro zone's biggest single economy.

Eurostat said  euro zone fell O.5 percent in February from January while slipping 0.2 percent over 12 months. Economists had forecast retail sales would rise 0.3 percent over the month and remain flat over one year. "Overall the latest newsflow confirms our view of deteriorating growth conditions in the euro zone, and the latest acceleration of inflation expectations will likely lose steam," said Manuel Oliveri, currency strategist at UBS, who is targeting a drop in the euro down to 1.52 usd.

Analysts said today's data shows consumer spending is unlikely to offset slowing exports and industrial growth this year and may in due course prompt the European Central Bank to cut borrowing costs earlier than thought. "We expect growing signs of economic moderation in Q2 will lead to a softening in ECB rhetoric in coming months," said Matthew Sharratt, analyst at Bank of America. "As things stand, it would appear the earliest month for a 25 basis point rate cut (from the current 4.00 pct) from the ECB would likely be June,"  he added.

The dollar has been drifting higher since yesterday on comments by U.S. Federal Reserve chairman Ben Bernanke, who suggested growth may pick up later this year. Bernanke said the U.S. economy could fall into a recession in the near-term, but also said growth would rebound in the second half of the year. With a lot of the bad news already priced into the market by investors, this glimmer of hope pushed the dollar higher.

The next big piece of U.S. data is tomorrow's March non-farm payrolls data. "We are compelled to point out yesterday's ADP employment report, which suggested that all may not be as bad as it seems," said Neil Mellor, currency strategist at Bank of New York Mellon.

Elsewhere, the pound was on the backfoot immediately after data this morning indicated that the United Kingdom economy is slowing fast and beginning to feel the effects of the credit crunch more fully.

In particular, the services PMI dropped to 52.1 in March from February's 54.0. The drop was bigger than expected. Meanwhile, the Bank of England's (BoE) credit conditions survey revealed a further reduction in credit availability to households and a rise in default rates on household secured lending.

"As such, we are now more confident in our call that the Bank of England will lower the Bank rate next week by 25 basis points and we have raised the probability of a cut from 60 percent to 75 percent," said Michael Hume, analyst at Lehman Brothers.

However, the pound recovered many of its earlier losses through the morning session as inflationary concerns are likely to mean that the BoE will not be cutting interest rates aggressively over the months ahead. Last night's speech from Paul Tucker, one of the nine rate-setters on the Monetary Policy Committee, indicated that he is in no hurry to replicate the U.S. Federal Reserve's aggressive rate cutting.

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Euroshares lower midday, profit taking in lacklustre trade, Syngenta rallies

At 11:55 a.m., the DJ STOXX 50 was 11.98 points or 0.38 percent lower at 3,164.73, while the DJ STOXX 600 fell 1.19 points or 0.37 percent to 318.47.

Back in Europe, markets were modestly lower. "Financials can't rise everyday and I think investors aren't too certain right now where we will go from here," a trader in Frankfurt said. The banking sector shed an aggregate 1.59 percent according to the DJ STOXX 600 for the sector, with Credit Suisse down 2.4 percent, Commerzbank 4.2 percent lower and Credit Agricole trading 3.69 percent lower.

The weakness among financials was partly offset by strength in the oil and gas sector, following a nearly $4 jump in oil prices overnight. On Wednesday, the U.S government's Energy Information Administration said in its weekly report that gasoline stocks fell by 4.5 million barrels last week - a much bigger decline than the market expectations of just 2.5 million barrels.

European oils stocks were mostly higher, with Total up 1.42 percent, ENI up 1.31 percent and BG Group up 3.38 percent. Norway's DNO International ASA added 2.39 percent after chief executive Helge Eide said he was very positive that the company would be awarded a major Iraq oil export licence in 2008.

The chemicals sector also outperformed today, up 1.19 percent overall, with Swiss agribusiness group Syngenta storming 7 percent higher after it raised its outlook for the year. Merrill Lynch repeated its 'buy' rating, saying the market had been looking for 15 percent growth.

A strong performance had been widely expected after US competitor Monsanto Co raised its outlook. However, analysts said they are likely to hike their profit forecasts on the back of the 20 percent sales rise. Also in earnings news, Oce shed 7 percent after the Dutch printer manufacturer released a disappointing set of first-quarter results.

In M&A-related news, Air France-KLM added 3.4 percent following news that the takeover of ailing Italian airline Alitalia is off the table for now as negotiations between the group's union and the Franco-Dutch flag carrier have failed.

According to union sources, Air France chairman Jean-Cyril Spinetta has refused to accept the unions' proposal, but said he would present it to the board of his group nonetheless. Reports said the union was concerned about the planned 2,100 job cuts of the airline's 11,000 employees.

Over in Milan, Tiscali added 5.9 percent on the back of a report in The Times which said Carphone Warehouse may be casting an acquisitive eye on its Italian peer.

The group named JP Morgan Chase and Banca IMI as financial advisors for its sale and media reports last weekend said a number of companies are interested and that the group would like to identify a buyer by the time of its shareholder meeting at the end of April.

Elsewhere, shares in PPR tumbled 4.96 percent amid market talk that the French retail group is facing difficulties at its luxury goods division that could affect its output. A London-based trader said he was hearing talk of problems at Gucci and Yves Saint Laurent, with a fire at one of the factories and logistics issues in Italy with suppliers.

And German construction group Hochtief added 4.45 percent following news that its Australian Leighton unit has been awarded a A$1 billion contract. Turning to economic data due out later today, the services sector is in focus over in the U.S., and economists expect the non-manufacturing ISM to show a decline in March to 49.0 from 49.3 in February.

"The ISM index of services, resources and construction in March is expected to retrace part of February's gain, which was merely a partial payback of the steepest decline in the series' 10-year history in January," Kubarych said. In addition, the Labor Department will release its weekly initial jobless claims numbers, which are forecasted to total 366,000 claims, the same level as in the previous week.

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Asian stocks flat after modest pullback in U.S.; Australia bucks trend

The Nikkei was barely changed at 13,200.71, while the Topix rose 0.1 percent to 1,282.78. Oil firm Inpex added 2.7 percent  after crude futures closed at almost $105 a barrel on the New York Mercantile Exchange.

The Hang Seng rose 0.6 percent to 24,006.68 with retailer Esprit leading with an almost 2 percent gain. The Shanghai Composite was flat at 3,351.58 and the Taiwanese Taiex was up 0.1 percent at 8,612.72. The Singapore Straits Times was 0.6 percent higher at 3,142.86 and the Kuala Lumpur Composite rose 0.1 percent to 648.78.

Australia bucked the trend with the S&P/ASX 200 up 1.7 percent at 5,595.0 and the All Ordinaries up 1.5 percent at 5,630.1 as investors embraced resources stocks and also waded into the financial sector hoping that the worst of the financial crisis was over.

Two of Australia's most influential economists, Reserve Bank board member Warwick McKibbon and Treasury chief economist David Gruen, have forecast strong terms of trade will see Australia's Gross Domestic Product (GDP) with expand 3.0 percent in the year to June 2009.

Such an outcome will  be lower than growth of 4.25 percent for the year to June 2008, forecast in November by the Treasury but still healthy compared to forecast slowing global economic growth.

Meanwhile, resource  stocks rallied following a 2.5 percent gain in copper prices in London. "Inventories on the London Metal Exchange are quite tight. Copper inventories have fallen about 45 percent since January and now there's only a two days of global supply in those (LME) warehouses," said Sebastion.

BHP Billiton was up 3.4 percent at A$37.99 ($34.74) while Rio Tinto had gained 3.5 percent to A$129.80. The turmoil in financial markets is dampening growth, Bernanke said, leading the central bank to cut its near-term forecast to a range of 1.3% to 2.0% over the four quarters of the year. However, "the uncertainty of this new gloomier forecast is quite high and risks remain to the downside," Bernanke said.

The revised forecast comes a day after the Asian Development Bank trimmed its forecasts for Asian growth in 2008. The ADB said it now expects growth in Asian economies excluding Japan of 7.6 percent, down from a prior forecast of 8.2 percent. In 2007, the region managed growth of 8.7 percent.

The Bombay Stock Exchange's (BSE) benchmark index, the Sensex, edged up 82.15 points or 0.52 percent to end the day at 15,832.55 and the National Stock Exchange's (NSE) S&P CNX Nifty ended 0.37 percent higher at 4,771.60 points.

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Metals - Copper slips back below $8,500 on rising Shanghai inventories

LONDON  - Copper slipped back below $8,500 following a day of strong gains yesterday, as a rise in weekly Shanghai inventory data weighed on sentiment. Stocks of the red metal in warehouses monitored by the Shanghai Futures Exchange (SHFE) rose by 2,588 tonnes to 58,195 tonnes.

At 10:21 am, London Metals Exchange copper for three-month delivery was quoted at $8,435 per tonne against $8,549 at the close yesterday.

Copper prices have risen strongly since the start of the year to get within touching distance of all time highs, on a combination of falling stockpiles and investment flows from funds looking to buy into commodities. Copper had risen strongly yesterday due to supply concerns in key producer Chile, emanating from possible strike action by contract workers at Codelco, the world's largest producer of copper.

But with SHFE stocks rising, and reports the Chilean government expects production to rise by 5 percent to 6 million tonnes by 2009, the red metal has given up some of its recent gains. "We feel increasingly nervous about markets and the prospect for metals, as copper approaches all time highs," said Fairfax analyst John Meyer, citing concerns the construction industry could be badly hit by the ongoing economic turmoil.

Stockpiles of copper also rose at LME monitored warehouses for the second day running, reversing the recent downward trend. Stockpiles increased by 500 tonnes to 112,575 tonnes, though the level of forward cover remains low, helping to support prices.

Base metals across the complex are also underpinned by improved hopes for the United States economy, after Federal Reserve Chairman Ben Bernanke said economic conditions should get better by the second half of 2008. On the flip-side, the rebound in the dollar this has engendered could be weighing on prices, as commodities denominated in the U.S. currency become more expensive for overseas investors.

In other metals traded on the LME, lead for delivery in three months was down at $2,850 per tonne against $2,870, aluminium fell to $2,913 per tonne from $2,935 and zinc was down to $2,320 per tonne from $2,355 at the close yesterday.

Three-month tin edged slightly lower to $19,975 per tonne from $21,000, while nickel bucked the trend to trade up slightly at $28,400 a tonne against

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