US & World Daily Markets Financial Briefing 11-02-2009

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US STOCKS-Wall St opens higher on bargain search

U.S. stocks opened higher on Wednesday, with investors scooping up beaten down shares following a sell-off sparked by concerns about a plan to shore up the financial system.

Bank shares were among stocks mounting a recovery, with Wells Fargo rising 1.2 percent to $16.60 and Bank of America up 4 percent to $5.78.

The Dow Jones industrial average was up 49.06 points, or 0.62 percent, at 7,937.94. The Standard & Poor's 500 Index  was up 4.83 points, or 0.58 percent, at 832.40. The Nasdaq Composite Index was up 8.63 points, or 0.57 percent, at 1,533.36.

Treasurys Down Ahead Of 10-year Note Auction

Long-term Treasurys gained Wednesday, pushing yields down further on the heels of the prior session's steep decline, as the U.S. Treasury prepared to sell the greatest amount of 10-year notes ever.

Ten-year note yields fell 2 basis points, or 0.02%, to 2.79%. Thirty-year bond yields also fell, off 4 basis points to 3.46%.  Two-year note yields increased 1 basis point to 0.90%, however.

Bond prices move inversely to their yields. Treasury yields fell by their most in at least two months on Tuesday.

Helping color the early trading, bids on the Treasury's record $21 billion auction of the benchmark 10-year securities are due at 1 p.m. Eastern time Wednesday.  It's the second of three note and bond auctions scheduled for this week, all part of the government's quarterly refunding. Tuesday's sales of $32 billion in three-year notes met with strong demand from investors.

The government plans to finish its refunding operations Thursday with the sale of a record $14 billion in long bonds.

Also Wednesday, bond traders will keep an eye on Treasury Secretary Tim Geithner, who was expected to testify before a Senate committee on his latest plan to recapitalize the nation's banks. Earlier, traders digested a government report showing the U.S. trade deficit shrank to $39.9 billion in December, the narrowest gap in six years.

Treasury yields fell and prices rose on Tuesday after Geithner announced his plan to use mostly private money to create a fund of at least $500 billion to recapitalize banks and another fund of $1 trillion to support consumer and business lending. U.S. and global stocks tumbled, suggesting investors wanted additional details and greater clarity on exactly how the plan will work.

"This lack of confidence is likely to keep investors defensive again and lure them back into the safe haven of Treasurys," said Roseanne Briggen, Treasury market analyst at Informa.  A pair of Federal Reserve policy makers, Elizabeth Duke and Charles Evans, also have speeches scheduled.

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FOREX-Dlr hands back gains as mkt digests US plan; Stg down

The dollar gave back gains from the previous session on Wednesday as dealers digested the latest U.S. financial rescue plan, while weak equity markets supported the yen and sterling fell due to more gloom over the UK economy.

The consensus was that the U.S. plan -- which could total over $2 trillion -- covered the key areas needed to stem the banking sector bleeding. But it lacked fresh details and failed to meet the high expectations built into financial markets.

The dollar rallied sharply after the plan was announced, as it boosted investors aversion to risk among investors, something that generally benefits the yen, Swiss franc and dollar.

But the dollar slipped back against most major currencies on Wednesday as dealers booked some profits, though the yen retained its broad gains as European equity markets followed Asia and Wall Street lower in early trade.

"An awful lot of bad news was taken on board yesterday... and as equity futures head off lows, that slight rebound in risk appetite (compared to late yesterday) is generally a negative for the dollar," said Adam Cole, global head of FX strategy at RBC Capital Markets.

Sterling was the biggest mover among the majors, extending losses against the dollar and euro after a Bank of England inflation report showed inflation at 0.5 percent in two years, boosting expectations the central bank will ease monetary conditions further.

The Swedish crown also fell sharply after the country's central bank surprised markets with a larger-than--expected interest rate cut of 100 basis points to 1.0 percent.

The main issue in currency markets on Wednesday, however, remained the bank plan unveiled by U.S. Treasury Secretary Timothy Geithner on Tuesday.

By 1045 GMT, the dollar had fallen 0.3 percent to 89.99 yen, and against the euro was down 0.27 percent at $1.2932. The Japanese currency posted larger gains against sterling and the Australian and New Zealand dollars.

The pound was down 0.88 percent against the dollar at $1.4383  and the euro was up 1.17 percent against the pound at 89.88 pence. Disappointment over the bank plan overshadowed passage of a $838 billion economic stimulus package by the Senate.

However, the Senate and the House of Representatives will now have to haggle over the shape and size of the final plan, leaving much uncertainty over the final size and scope of spending and tax cuts.  Should markets fail to warm to the plan, analysts at Credit Suisse expect the dollar to remain supported and so-called "riskier" currencies to suffer.

"The absence of a specific U.S. commitment to a bad bank structure is likely to put renewed pressure on sterling and, to a lesser extent, the euro relative to the dollar," they said in a note on Wednesday.

In terms of data releases, the global economic picture remained pretty bleak. Trade data from China released on Wednesday showed a 17.5 percent drop in January exports from a year earlier, and a 43.1 percent decline in imports.

However, UK data showed the number of people claiming jobless benefits rose less than expected, with the closely watched ILO measure of unemployment failing to breach the 2 million mark in the three months to December.

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London Shares Lower; Rio Tinto Advances

Rio Tinto shares advanced in a modestly lower London market Wednesday, as speculation intensified that the mining giant may be near a deal to cut its debt.

Rio Tinto (RTP) shares climbed 5.9%. "Ahead of tomorrow's 2008 results from Rio Tinto, there is plenty of speculation surrounding disposals and fund-raising as the group seeks to achieve its debt reduction target," noted analysts at Killik & Co. stockbrokers.

Analysts at Evolution Securities said that they're expecting the firm to post net earnings of $9.4 billion, within a consensus range of $9.1 billion to $10.4 billion. "Of more interest will be how the company chooses to raise the finance to cover debt repayments this year and next and at what cost," they said.

Rio Tinto is aiming to cut its debt by $10 billion this year. It recently said that it was holding talks with stakeholder Chinalco over the possible sale of mining operation stakes and an investment in convertible instruments.

The Wall Street Journal reported Wednesday that Chinalco may invest up to $20 billion in the Anglo-Australian miner. "The market has anticipated a deal with Chinalco for so long that the group almost has to announce something tomorrow," the Evolution analysts said.

Additionally, the Herald Sun newspaper in Australia reported Wednesday that Rio Tinto is talking to Japanese power companies about the possible sale of its 68% stake in uranium mining firm Energy Resources of Australia .

"We are encouraged to read that both BHP Billiton and Japan's Mitsui & Co have shown interest in acquiring assets from the company. At a time when Rio is perceived to be a distressed seller, a bit of competition is very helpful," said the Killik & Co. analysts.

Overall, the U.K. FTSE 100 index fell 0.4%, or 16.87 points, to 4,195.96. Other European shares were also lower.

Shares fell sharply on Tuesday, both in Europe and the U.S., as details about the U.S. government's plan to use mostly private money to create a fund of at least $500 billion to recapitalize banks and another fund of $1 trillion to support consumer and business lending remained thin on the ground.

"The market's negative reaction is widely attributed to the lack of detail -- both on how the new stress test will be applied but, more importantly, how those assets eligible for the 'bad bank' will be priced. The absence of any broader loan guarantees has also contributed to the negative reaction," noted analyst at Davy Stockbrokers.

Banks were lower in London, with Royal Bank of Scotland (RBS) down 2.5% and Lloyds Banking Group (LYG) down 3%.

The economic backdrop remains gloomy, with the Bank of England stating in its latest quarterly inflation report that the British economy is experiencing a near-term contraction "substantially deeper" than forecast in November.

The Bank will begin buying assets this week in an effort to boost corporate lending and is also prepared to take actions aimed at boosting the money supply in order to stimulate spending, Governor Mervyn King said in a news conference.

Further easing of monetary policy "may well be required" King said. Sterling traded down 1.2% at $1.4361. On the plus side, shares of household products firm Reckitt Benckiser rose 4.7%. The maker of Finish dishwasher detergent said that its fourth-quarter net income rose 36% to 393 million pounds. Net revenue climbed 33% to 1.8 billion pounds, reflecting broad-based performance across the group.

The group will pay a final dividend of 48 pence per share, up 60% from last year's payout. "Over-the-counter healthcare would appear to be the major positive. It is not going to get any easier in the coming quarters, but Reckitt's recent material share price outperformance seems wholly justified with these results in mind," noted analysts at Citigroup.

Shares of SABMiller fell 2.9% after Merrill Lynch downgraded the brewer to underperform from neutral and cut fiscal-year 2009 and 2010 earnings per share estimates by 3% and 5%.

"On our new estimates, SABMiller now trades at the high end of its peer group on a price-to-earnings and free cash flow yield basis," the broker said.

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Hong Kong shares end lower, snap 5-day rally

HONG KONG - Hong Kong shares broke its longest winning streak in more than two months to end 2.5 percent down on Wednesday, after the much-awaited U.S. bank bailout plan was not seen as sufficient remedy for the financial system.

But the main index pared losses after falling more than 500 points earlier on speculation that more concrete details on the execution of the plan to mop up toxic assets from the financial system would be revealed later on Wednesday.

"The U.S. government is expected to make some announcements today to support Tuesday's rescue plan. Without those details this just sounds like a follow up to (former U.S. President) Bush's plan," said Peter Lai, director with DBS Vickers.

Europe's biggest lender HSBC Holdings slid 4.8 percent to HK$59.95, tracking steep losses in its Wall Street peers after the $2 trillion plan rolled out by the U.S. Treasury Department on Tuesday did not offer details on how it would mop up bad debt that has weighed on the financial system.

Traders noted that a large number of short positions had been built up in HSBC stock in the last few days after it climbed nearly 15 percent from a multi-year closing low of HK$55 three weeks ago. The benchmark Hang Seng Index ended the session 341.43 points lower at 13,539.21.

Mainboard turnover edged down to HK$39.9 billion from HK$42.1 billion on Tuesday. "The Asian markets don't seem to have reacted as badly as Wall Street. They are not selling down sharply yet as they have a lot more to worry about with more corporate earnings from the post-Lehman quarter on their way," said Patrick Yiu, associate director with CASH Asset Management

The Dow Jones industrial average fell 4.6 percent on Tuesday but among the major Asian indexes, South Korea's KOSPI shed 0.7 percent while Australia's S&P/ASX 200 dropped 0.4 percent.

Hong Kong's main index had climbed nearly 8 percent in the last five trading sessions on optimism over the U.S. government's plan and signs of a faster-than-expected recovery in the Chinese economy.

A steep drop in crude oil prices pushed PetroChina, Asia's largest oil and gas producer, 3 percent lower to HK$6.40 while offshore oil specialist CNOOC shed 2.9 percent. Top refiner Sinopec Corp slid 4.8 percent.

Oil hovered around $37 per barrel in Asian trade on Wednesday after dropping 5 percent on a weaker demand forecast from the U.S. government on Tuesday.

China's exports and imports fell unexpectedly sharply in January, with both indicators clocking their worst drops since economists' records began in 1993.

The China Enterprises Index of top mainland firms fell 2.8 percent to 7,599.57. Zijin Mining jumped 7.5 percent even as the price of gold slipped after posting its biggest gain in nearly two weeks on safe-haven buying ignited by scepticism over the U.S. stimulus plan.

Another gold miner, Zhaojin Mining shot up 7.1 percent. Shares in Aluminum Corp of China Ltd, ended 0.7 percent higher after rising more than 3 percent as trade resumed on Wednesday.

The world's third-largest alumina producer said there had been no change in its senior management after its shares were suspended on Tuesday amid reports that its chairman, Xiao Yaqing, would step down as president of Chalco's parent company, Aluminum Corp of China.

Another bright spot was Tsingtao Brewery which gained 2.5 percent on hopes that the government may soon cut taxes on a number of consumer goods including alcohol, in a bid to boost demand.

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PRECIOUS-Gold rises as investors rush back to haven from risk

Gold rose in Europe on Wednesday, reversing earlier losses, as disappointment with the U.S. bank rescue plan prompted investors to seek out assets such as bullion-backed exchange-traded funds as a haven from risk.

The United States on Tuesday rolled out a revamped bank rescue plan that may cost more than $2 trillion. Stocks slid by the most in two months after the plan was unveiled, while oil and currency markets reacted with scepticism and gold climbed more than 2 percent as investors sought safety.

It extended those gains to a session high of $921.90 on Wednesday, after falling briefly overnight in Asia as investors took profits.

At 1016 GMT it was quoted at $920.70/922.70 an ounce, against $914.15 late on Tuesday. "There has been a lot of ETF demand," said Simon Weeks, director of precious metals at the Bank of Nova Scotia.

"That doesn't seem at all price sensitive or sensitive to where we are in technical terms. (Buyers) just want the safe-haven opportunity. As long as that carries on, the market is going to be very well supported," he added.

Holdings of the world's largest bullion-backed ETF, the SPDR Gold Trust, rose to a record 894.72 tonnes on Feb. 10, up 12.85 tonnes from the previous day.

Strong sales of gold for ETFs, plus coins and bars, are helping to make up for weak jewellery sales in traditionally key bullion markets like India, China and the Middle East.

Indian gold buying eased as prices rose after showing some signs of recovery as the metal slipped earlier this week. "Buying would only come if prices slide below $900 levels," a dealer with a state-run bank in Mumbai said.

Gold's main external driver, the dollar, weakened a touch against the euro, giving up some gains made in the previous session as dealers digested the implications of the U.S. recue plan.

A softer dollar typically benefits gold, which is often bought as a hedge against weakness in the U.S. currency. Among other assets, equities slipped in Europe, joining a global stock sell-off as investors feared the U.S. bank rescue plan would not be enough to prop up the troubled financial system.

Oil prices were at nearly $38 a barrel, recovering some of the previous session's 5 percent losses, after preliminary data showed U.S. crude stocks fell unexpectedly last week.

Markets will be eyeing further U.S. economic data due later in the session for clues as to the next direction of trade. The January Federal Budget is due for release at 1900 GMT, while December international trade numbers are expected at 1330 GMT.

Spot silver rose to $13.33/13.41 an ounce from $13.10. Silver has also benefited from ETF inflows. Holdings of the largest silver-backed ETF, the iShares Silver Trust, rose 1 percent or nearly 77 tonnes to a record 7,606.89 tonnes on Monday.

Among other precious metals, platinum extended Tuesday's gains to $1,055/1,060 an ounce from $1,032, while palladium was up at $210.50/215.50 an ounce from $210.

Platinum has risen 6 percent since early Tuesday on the back of hopes there may be light at the end of the tunnel for the global economy, and as platinum miners reported operational cutbacks. "Momentum signals are warning of downside potential today," Standard Bank analyst Manqoba Madinane said, however.

Chinese passenger car sales fell 7.76 percent in January year-on-year, official data showed on Tuesday. Platinum and palladium, which are used as components in catalytic converters, are highly sensitive to car demand.

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