US & World Daily Markets Financial Briefing 05-03-2009

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US Stocks Decline On Concerns Over Auto Makers, Financials 

U.S. stocks declined Thursday morning, failing to build on the previous session's bounce, as anxiety about auto makers and the financial sector returned to center stage.

The Dow Jones Industrial Average declined about 107 points shortly after the opening bell. The Standard & Poor's 500 dropped about 1.7%, hovering around 700, and the Nasdaq Composite Index fell about 1.1%.

Markets had snapped a five-day losing skid on Wednesday amid hopes that an economic stimulus plan from China would help jolt the global economy back to life. "Every time we get going, we fall off again," said Todd Leone, head of listed trading at Cowen & Co.

Shares of General Motors were down more than 11% after it said in a securities filing that its auditors raised substantial doubt about the auto maker's ability to continue operating. GM shares have shriveled to less than $2. Ford Motor, also trading at less than $2, was down about 4%.

General Electric rose about 3.6% after its chief financial officer said on CNBC, a television network the conglomerate owns, that a cut in its credit rating seems possible but would have no operational impact on the company. Worry that GE may lose its AAA-rating has driven the shares to 16-year lows in recent weeks.

Wal-Mart Stores posted a 51% jump in February same-store sales, more than double analysts' expectations, and said that it would increase its dividend 15%. Its shares up nearly 5%. Other chains also reported generally better-than-expected sales for last month, though many relied on deep discounting that may pressure profit margins.

Wells Fargo shares were down 8.8% after Moody's warned that it is considering downgrading the bank's credit rating. Moody's also changed its outlook on J.P. Morgan Chase to negative. The ratings firm expects the lenders to face higher credit costs and deteriorating returns. J.P. Morgan shares were down about 3.3%.

New data Thursday showed a slight dip in jobless claims, but Omair Sharif, an economist at RBS Greenwich Capital, said that it is "far too early" to conclude that the trend in claims is stabilizing, and traders remained focused on the U.S. nonfarm payrolls, due Friday. That is expected to show that the economy shed roughly 600,000 jobs in February.

Stocks rallied world-wide Wednesday on speculation that a stepped-up Chinese stimulus plan would help revive the global economy. But Chinese Premier Wen Jiabao on Thursday deflated such hopes as he largely reiterated a previous $585 billion plan. Though the Shanghai Composite built on Wednesday's gains, the Hang Seng slipped 1%.

In Europe, the European Central Bank cut its primary lending rate to a record low of 1.5%, from 2%. The Bank of England became the first European central bank to implement quantitative easing policy, saying that it would purchase up to $106.28 billion in mostly medium and long-term U.K. government debt. The central bank also cut its key interest rate by a half point to 0.5%. The FTSE 100 was down more than 2% and European markets more broadly were weaker.

The dollar advanced against the yen and the euro. Treasury prices were higher after falling on Wednesday amid concern about incoming supplies of new debt. Crude-oil prices backed off the previous session's highs as worry about demand reasserted itself in the market. Gold prices were modestly higher.

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Dollar Mostly Higher On Lack Of China Stimulus

The dollar is higher against most widely-traded currencies early Thursday, with safe haven considerations coming to the fore again as markets register disappointment over the absence of new details on anticipated stimulus measures in China.

After risk appetites worldwide received a boost on Wednesday from expectations that Thursday's opening of China's National People's Congress would result in some augmentation of China's $585 billion stimulus plan announced in November, those hopes were set back when Chinese Premier Wen Jiabao didn't detail any new measures.

That served to dampen risk appetites somewhat and set off some profit-taking on the gains many currencies saw Wednesday against the dollar, reversing the greenback's earlier losses against the euro.

Otherwise, currency market activity has been driven by the market reactions to interest rate cuts by the European Central Bank and the Bank of England earlier Thursday.

Both central banks conformed with expectations and cut their respective policy rates by 50 basis points, taking the ECB's key rate to 1.5% and the Bank of England's rate to a record low 0.50%.

The Bank of England also signaled it will begin a program of quantitative easing by purchasing up to GBP75 billion of government bonds and other assets, a development that had been expected, but nevertheless initially weighed on the pound sterling.

The pound dipped as low as $1.4036 against the dollar before recovering modestly as the dollar more generally pulled back from initial strength against a range of currencies.

The euro meanwhile, had little overt response to the ECB's rate cut, but fell back to new intraday lows following post-meeting remarks from ECB President Jean-Claude Trichet.

Trichet indicated that euro-zone inflation is likely to remain below the ECB's 2.0% target rate for the balance of this year and in 2010.

That implied to many that the ECB will have no choice but to cut rates further and likely adopt other non-conventional measures to support the euro-zone economy.

Early Thursday, the euro was at $1.2509 from $1.2650 late Wednesday, and the dollar was at Y99.20 from Y99.14, according to EBS. The euro was at Y124.10 from Y125.40 late Wednesday. The U.K. pound has fallen to $1.4069 from $1.4190. The dollar is higher against the Swiss franc at CHF1.1795 from CHF1.1704 Wednesday.

Canada Morning
 
The Canadian dollar is lower early Thursday in line with the stronger global tone for the U.S. dollar, and also in response to pullbacks in commodity prices.

The Canadian currency's retracement Thursday again put it within striking distance of 4-year lows in the C$1.3000 area, tested without success several times in late 2008, though currency strategists at Scotia Capital in Toronto said it likely "will take continued equity liquidations to break resistance there."

The U.S. dollar was at C$1.2862 from C$1.2731 late Wednesday.

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European Stocks Stable On BOE QE Details
 
European stocks were stable in negative territory Thursday as the Bank of England cut interest rates, as expected, and provided details of the extent of its quantitative monetary easing program.

The 50 basis point cut in Bank Rate, to 0.5%, was anticipated by sterling markets beforehand, so the lack of reaction was unsurprising. The central bank also said it will begin a program of purchasing U.K. government securities, or gilts, and other assets which could take up to three months to complete.

It said it will purchase up to GBP75 billion's worth of gilts and other assets in total. Governor Mervyn King said the bank's rate-setting Monetary Policy Committee will vote monthly on how much to buy.

"Otherwise known as printing money, quantitative easing will allow banks to borrow more funds from the central bank and so inject funds into the economy and restore the flow of credit," said Manoj Ladwa, a senior trader at ETX Capital. "But it will only work if banks loosen their lending criteria and a measure of business confidence returns," he said, voicing a pretty general view.

At 1230 GMT, the pan-European Dow Jones Stoxx 600 index was down 2.4% at 163.55. In London, the FTSE 100 was down 2.6% at 3552.79; Paris' CAC 40 was off 2.2% at 2615.74 and Frankfurt's DAX 30 was down 2.7% at 3786.75.

U.S. stocks were still expected to open lower Thursday, as investors fret over the state of the U.S. economy ahead of Friday's key employment report.

Private sector jobs fell 697,000 in February, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. This sets the scene for initial jobless claims figure at 1330 GMT, and then Friday's nonfarm payrolls release.

"It is the eve of nonfarm payrolls and jobs are firmly in focus," said Martin Slaney, head of derivatives at GFT. He expected the Dow Jones Industrial Average to open 94 points lower at 6782, and the broad Standard & Poor's 500 index down 10.4 points at 702.5.

Coupled with concern about the growing number of jobless in the U.S., many investors were disappointed by a lack of an additional economic stimulus from China. China's legislature, the National People's Congress, began its annual session Thursday with Premier Wen Jiabao promising to bolster the economy.

However, he stopped short of promising a major new stimulus package. Many in China had speculated he would announce an expansion of the plan announced last year for CNY4 trillion in investment.

Turning to the corporate sector, the lack of fresh news out of China had a negative impact on the basic resources sector in Europe. "The China stimulus story was essentially disappointing; we were looking for a big increase in the size of the package; we didn't get it," said Ioan Smith, a sales trader at Knight Equity Markets International in London.

"On top of that, there's plenty to suggest that the stimulus package in its current form wasn't really doing much to change things anyway."

Earlier in Asia, expectations for increased Chinese government spending to support its economy had propped up the region's equity markets.

However, the edge was taken off this positive tone when China's finance ministry didn't signal additional spending.

Asian share markets were off their early highs, with Hong Kong's Hang Seng index down 0.7%, although Japan's Nikkei 225 closed nearly 2% higher and China's Shanghai Composite added 1.9%.

Markets will now await the European Central Bank's interest rate decision, at 1245 GMT, where a 50 basis point rate cut is also expected. The issue of quantitative easing may also be addressed during its post-decision press conference and any further evidence that such action is seriously considered could weigh on the euro.

In the currency markets, the single currency slipped against the dollar Thursday because players expect the ECB to cut its key interest rates by half a percentage point later in the day.

"Many players are saying that the ECB has room to cut its rates by at least one percentage point from the current 2.0%," said Jun Kato, a senior dealer at Shinkin Central Bank. "So, the market thinks that the bank will cut its rates by 50 basis points this time and President Jean-Claude Trichet will also signal further cuts ahead."

At 1210 GMT, the euro stood at $1.2536, down from $1.2661 in late New York trading Wednesday. Sovereign debt got a lift from the BOE announcement, as the combination of low inflation, low interest rates and, now, quantitative easing all raised investors' mood.

At 1235 GMT, the March bund contract stood 0.81 higher at 124.07, with the June gilt contract was up 2.26 at 121.31.

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Crude Lower, Market Continues To Fret On Demand

Crude oil futures fell more than $1 Thursday as hopes for a new Chinese stimulus package were dashed and as the market braced itself for a flurry of macroeconomic data.

After prices advanced strongly on China hopes and U.S. government oil inventory data Wednesday, traders Thursday booked profits ahead of macroeconomic data due over the remainder of the week, mindful that further indications of economic weakness could trigger fresh concerns for crude demand.

"Even though sizable commodity rallies will occur from time to time, banking on continued upside momentum is not a sure thing, given the backdrop of a global recession that shows few signs of easing," said Edward Meir, analyst at MF Global in New York.

At 1231 GMT, the front-month April Brent contract on London's ICE futures exchange was down $1.69 at $44.43 a barrel.

The front-month April light, sweet, crude contract on the New York Mercantile Exchange was trading $1.43 lower at $43.95 a barrel.

The ICE's gasoil contract for March delivery was down $16.50 at $365.75 a metric ton, while Nymex gasoline for April delivery was down 523 points at 132.93 cents a gallon.

Despite recent signals that Organization of Petroleum Exporting Countries members are making good on their recently announced 4.2 million barrels a day of output cuts, demand concerns continue to block any crude price move up out of a three-month, $35-50 a barrel range.

Optimism that a big new stimulus package from China would offer a glimmer of hope for global demand was dashed Thursday.

In a speech to the National People's Congress, Chinese Premier Wen Jiabao promised to bolster the economy - the world's second largest consumer of crude - but stopped short of promising a major new stimulus package.

Many had hoped for an expansion of the CNY4 trillion investment plan announced last year.

In an attempt to help E.U. economies weather the economic downturn, the European Central Bank cut its refinancing rate by 50 basis points to 1.5% Thursday. The Bank Of England earlier met expectations by cutting its bank rate by 50 basis points to a record low of 0.5%.

Markets are meanwhile braced for U.S weekly unemployment and factory output data later Thursday, while U.S. monthly unemployment numbers due Friday are expected to be particularly closely watched.

"We expect the rest of the week to be influenced by the broader markets, with important macro releases at the end of the week, including U.S. Nonfarm payrolls for February," said Andrey Kryuchenkov, vice-president of commodities research at VTB Capital in London.

Ahead of OPEC's March 15 meeting, indications continue to emerge that the organization's output reductions are starting to have an impact, the latest clues emanating from Wednesday's U.S. Department of Energy inventory data.

"When you look at crude imports into the U.S. over the past two or three weeks, it has been down, roughly 1 million barrels a day, which means OPEC cuts are really starting to work," said Christophe Barret, global oil analyst at Calyon in London. "In the second quarter of the year we should see a drawdown on U.S. onshore stocks."

Disruptions to energy supplies were being closely observed Thursday. In addition to news of a Nigerian pipeline blast this week, traders were also eyeing the impact of a pipeline fire that is set to block several days' worth of Russian crude flows to export terminals.

"There could be much more volatility and the market is still very vulnerable to price spikes on the back of unexpected supply disruptions," said VTB Capital's Kryuchenkov.

Market participants were also eyeing gas developments between Ukraine and Russia Thursday. Russian Prime Minister Vladimir Putin warned that Moscow would cut off gas supplies to Ukraine if Kiev doesn't pay its bills to energy giant OAO Gazprom by Saturday.

A gas spat between the two countries earlier this year provided a psychological boost to crude prices.

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Treasurys Up Amid Weak Data, No News From China

Treasury prices advanced Thursday, with yields down for the first time in three sessions, amid evidence of persistently weak employment in the U.S. and disappointment over stimulus plans in China.

Ten-year note yields fell 11 basis points, or 0.011%, to 2.87%. Bond yields move inversely to prices.

Two-year note yields declined 4 basis points to 0.92%. Bonds were in favor before the jobless-claims data as European equities declined and U.S. stock futures pointed lower in the aftermath of China not announcing bigger stimulus plans, as had been speculated on Wednesday.

The Labor Department said initial claims for jobless benefits sank by 31,000 to 639,000 last week, possibly because of adjustments involving the Presidents Day holiday.

Four-week averages tracking initial claims as well as continuing claims moved higher into record territory, indicating continued weakness in labor markets, analyst said.

"Yields have continued to push lower in the wake of the release, [with] lower stocks and poor data the obvious motivators," said Ian Lyngen, interest-rate strategist at RBS Greenwich Capital.

The report comes a day before the government's closely watched report on nonfarm payrolls for February. Economists surveyed by MarketWatch expect the Labor Department to say that the economy lost 640,000 jobs last month.

Expectations that Europe's economy will shrink and plans by the Bank of England to support its economy and financial markets sent overseas bond markets higher, also supporting U.S. debt.

The Bank of England cut its key lending rate nearly to zero and launched an unprecedented program to buy commercial paper and government bonds over the next three months.

Separately, the European Central Bank dropped its benchmark lending rate to the lowest level in its decade-long history. President Jean-Claude Trichet said he expects the euro-zone economy to shrink as much as 3.2% this year.

Still to come, the Treasury Department will announce at 11 a.m. Eastern time how much in 3-year, 10-year and 30-year debt is will auction next week.

The government will auction $33 billion in 3-year notes on Tuesday, says Wrightson ICAP, a research firm specializing in government debt. That will be followed the next day by $17 billion in 10-year debt and $10 billion in 30-year bonds on Thursday, according to this forecast.

Both the latter long-term debt sales will be reopenings, meaning the debt sold will carry the same coupon and mature on the same date as the most recently issued securities. For the longer-dated bonds, it will be the first reopening a month after the original issue.

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