US & World Daily Markets Financial Briefing 11-07-2008

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Stock decline as Fannie, Freddie fall sharply

NEW YORK - Stocks tumbled Friday as investors focused on troubles at mortgage companies Fannie Mae and Freddie Mac and watched oil prices climb further into record territory. The Dow Jones industrials fell more than 170 points and neared the 11,000 mark for the first time in two years.

Investors seemed unimpressed by a statement from Treasury Secretary Henry Paulson, who said the government's focus is ensuring that Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission.

The government-chartered companies at times each lost more than 40 percent on growing speculation that a government bailout is needed. A collapse of the two financiers would cause further shock to the financial system, and trigger more losses to banks and brokerages with significant holdings of mortgage-backed securities.

Global banks and brokerages have scrambled to sell assets and raise capital in an effort to offset nearly $300 billion of write-downs linked to the credit crisis. Citigroup Inc. announced Friday it will sell its German retail banking operation to France's Credit Mutuel for $7.7 billion.

Meanwhile, oil continued its ascent on supply concerns. A barrel of oil vaulted to a record above $147. The confluence of negative news offset a mostly positive quarterly report from General Electric Co. The conglomerate that owns everything from television network NBC to jet engine plants reported second-quarter profits that met analysts' expectations. However, the outlook across its business lines was mixed.

In midmorning trading, the Dow fell 173.83, or 1.55 percent, to 11,055.19. It last traded below 11,000 on July 25, 2006.Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 19.58, or 1.56 percent, to 1,233.81, and the Nasdaq composite index fell 33.03, or 1.46 percent, to 2,224.82.

Light, sweet crude rose $5.08 to $146.73 per barrel on the New York Mercantile Exchange. Behind the rise are concerns about a disruption to tight global supplies amid tensions over Iran's launch of test missiles and the possible renewal of oil-related violence in Nigeria.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83 percent from 3.80 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

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Forex - Dollar weighed by trouble for Fannie Mae, Freddie Mac

LONDON - The dollar was weighed by news that the U.S. government may have to step in to salvage troubled mortgage lenders Fannie Mae and Freddie Mac with state ownership.

After doubts emerged this week about the capitalisation needs of the two government-sponsored bodies, the news that the government may intervene to return the two companies to public ownership made markets nervous. "Traders may look to further limit any exposure to the dollar as we move into the weekend break," particularly ahead of economic data later today, said James Hughes at CMC Markets.

The University of Michigan consumer optimism indicator is expected to erode slightly to 56.0 in July from the previous reading of 56.4, remaining near a record low.

The trade deficit is also expected to worsen, to $62.1 billion in May from $60.9 billion in the prior month, driven by higher crude oil costs. Additionally, the dollar is being hurt by oil prices inching higher once again as well as geopolitical tensions resurfacing in the Middle East.

The euro and pound, meanwhile, are not expected to show much momentum today, as few fundamental drivers are scheduled and after recent economic data has highlighted the extent to which growth is slowing across Europe.

The possibility of a recession in the euro zone will keep the European Central Bank from raising rates any more this year, with most analysts expecting the next move to be a cut after several months of staying on hold. In the UK, too, data has shown the economy may already be entering a recession -- a view which has forced the Bank of England to keep interest rates unchanged on Thursday despite a flare-up in inflation.

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Euroshares open up after Wall St recovery; oils track crude higher

At 8:48 a.m., the DJ STOXX 50 was up 8.61 points, or 0.3 percent, higher at 2842.33 and the DJ STOXX 600 was up 1.09 points, or 0.39 percent, at 279.04.

Oil's resurgence back above $141 a barrel and the continued sell-off in banks which pushed Lehman Brothers to an all-time low and Wachovia to a 17 year low intra-day had pulled the Dow into negative territory in afternoon trading.

And oil continued to rise in Asian trade with New York's main oil futures contract, light sweet crude for August delivery, up 13 cents to 141.78 dollars a barrel after a jump of $5.60 to close at $141.65 Thursday at the New York Mercantile Exchange.

This lifted oil shares with Total up 1.71 percent, ENI up 1.16 percent and Repsol YPF added 0.65 percent. Schneider Electric added 1.86 percent after Citigroup lifted its rating on the shares to 'buy' from 'hold' and Philips fell 1.4 percent after the broker downgraded the Dutch group to 'hold' from 'buy'.

Food groups rallied after sharp falls yesterday, boosted by news Morgan Stanley has lifted its sector stance to 'in-line' from 'cautious'. The broker said some stocks such as Unilever, up 0.25 percent, are oversold.

Its favourite pick remains Nestle, up 0.5 percent. Carrefour added 0.6 percent, having fallen 8.56 percent after the supermarket group's disappointing update yesterday. Casino was up 1.91 percent after its trading update this morning.

Pharming Group N.V. shares soared 15 percent in early morning trade on Friday with investors pleased with the positive results seen for lead product Rhucin during ongoing open-label studies.

Telecoms and utilities stocks though slipped lower as investors spurned stocks traditionally seen as safe-havens. Telecom Italia fell 1.79 percent and France Telecom fell 0.63 percent. RWE, up 0.62 percent was upgraded to 'buy' from 'hold' at SG Secs.

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Asian stocks turn mixed as oil price concerns offset early gains

South Korea's Kospi gained almost 2 percent to 1,567.51, while the Hang Seng index in Hong Kong advanced 1.6 percent to 22,184.55. Tokyo's Nikkei 225 index slipped 0.2 percent to 13,039.69, and the Topix index lost 0.4 percent at 1,285.91.

In Sydney, the S&P/ASX 200 rose 0.9 percent to 4,979.9 and the All Ordinaries added 0.9 percent to 5,067.8.

"There's some buying in the resources sector though investors remain reluctant to push prices too much higher -- they're still wondering whether the bottom has been reached though there is a bit of life," said Michael Heffernan, an equities analyst with Austock Securities.

Index leader BHP Billiton was up nearly 4 percent at A$40.35 while its takeover target, Rio Tinto, added 3.6 percent to A$126.00. National Australia Bank Ltd, which fell as much as 4 percent earlier in the session, closed down 0.6 percent at A$27.45.

In Japan, banks clawed their way into positive territory on the New York Times report about Fannie Mae and Freddie Mac. Mizuho Financial Group gained 1.7 percent to 535,000 yen, Sumitomo Mitsui Financial rose 0.6 percent to 836,000 yen and Mitsubishi UFJ Financial was up 0.4 percent at 992 yen.

Banks also advanced in Korea with Kookmin Bank ending 2.1 percent higher at 59,000 won and Shinhan Financial rising 3.4 percent to 45,500 won.

Elsewhere in Asia, the Philippine composite index was down 0.5 percent at 2,437.99 while the Jakarta composite index had barely moved at 2,276.85. Singapore's Straits Times Index closed up 0.9 percent at 2,926.84 while Malaysia's Kuala Lumpur Composite Index (KLCI) was up 1.3 percent at 1,150.39.

The Taiwan weighted index gained 2.4 percent to 7,244.76 while the Shanghai composite index lost 0.7 percent to 2,856.63.

India's main stock index, the 30-share Sensex of the Bombay Stock Exchange closed down 456.39 points, or 3.28 percent, at 13,469.85 points though it rose 0.12 percent on the week and the 50-share S&P CNX Nifty of the National Stock Exchange closed down 113.2 points, or 2.72 percent, at 4,049.00.

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Metals - Base metals well supported by vulnerable dollar, supply problems

LONDON - Most base metals held onto gains as the dollar remained vulnerable, resurgent credit fears spurred investment into commodities and as a bout of supply fears darkened the output outlook.

Elsewhere, gold hovered hit a three-month high and oil rose to within striking distance of its recent record near $146.

Basemetals.Com analyst William Adams said: "For the moment supply disruptions and a feeling that consumers are generally running with low stocks and therefore are vulnerable to higher prices and may end up chasing the market higher seems to be driving sentiment."

On Thursday, London Metal Exchange aluminium futures rose to a record high of $3,350 per tonne on Thursday as Chinese aluminium smelters agreed to cut output by 5-10 percent.

However, some analysts reckoned the extent of the output lost will not reach expectations. "Estimates of 1 million metric tonnes of lost production are plainly ridiculous as this assumes that this capacity reduction is semi permanent," said JP Morgan analyst Michael Jansen. "We would be surprised if cuts, if they happen, last more than two months as one major reason for the cuts is to reduce electricity production from polluting coal fired power stations. After the Olympics this rationale will not be convincing."

Elsewhere, copper was still well supported by tight supplies. Global inventories, as tracked by the LME, of the red metal currently stand at around 124,125 tonnes -- less than three days worth of global consumption.

By 10:26 a.m. on Friday, three month aluminium rose over 1 percent to $3,334 from $3,290 at the close Thursday. Copper was up at $8,312 against $8,230, nickel rose to $22,100 from $22,000, zinc jumped to $2,023 from $1,990. Tin, meanwhile, surged to $23,145 from $22,700 and lead climbed to $2,060 from $1,984 at the close on Thursday.

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