US & World Daily Markets Financial Briefing 12-02-2009

U.S. Stocks Knocked By Worry Over Value Of Bank Assets

With Washington moving on a stimulus package to jump start the economy, the measure does little to address the persistent weight dragging the stock market down: placing a value on the toxic assets held by financial institutions.

"We need to know where they are going to price the mortgage assets in order to stabilize the financial institutions," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

On Thursday, the battered financial sector once again led the market's sharp decline, with issues including Zions Bancorp (ZION) Fifth third Bancorp (FITB) and Wells Fargo & Co. (WFC) all down about 9%.

After sliding more than 200 points early on, the Dow Jones Industrial Average (DJI) was more recently down 146.39 points at 7,793.14. The S&P 500 (SPX) shed 14.07 points to 819.67, and the Nasdaq Composite (RIXF) fell 9.95 points to 1,520.55.

While a $789 billion stimulus deal is expected to clear the House and Senate as soon as Thursday, the proposed legislation fails to adjust the mark to market rule, putting "even more pressure on the Treasury to nail down some kind of a valuation model," said Pado.

"We're heading into a long weekend, and (Treasury Secretary Timothy) Geithner is off to Europe, and still nobody knows how much these assets are worth," said Marc Groz, founder and chief investment officer of Topos LLC.

US Jobless Claims -8K To 623K In Feb 7 Week; Survey -8K

The number of U.S. workers filing new claims for jobless benefits remained near quarter-century highs above 600,000 last week, a government report showed, suggesting the hemorrhaging of jobs since late 2008 continued into February.

Meanwhile, total jobless claims lasting more than one week hit a fresh record, inching closer to the five-million mark in a sign of just how hard it is getting for the unemployed to find new work.

Initial claims for jobless benefits fell 8,000 to 623,000 after seasonal adjustments in the week ended Feb. 7, the Labor Department said in a weekly report Thursday. The previous week's level, the highest since the 1982 recession, was revised slightly higher.

Last week's decline was expected by Wall Street economists surveyed by Dow Jones Newswires. New jobless claims have nearly doubled from one year ago.

The four-week average, which aims to smooth volatility in the data, jumped 24,000 to 607,500, the highest since November 1982.

The U.S. has lost 3.6 million jobs since the recession started in December 2007, with about half of those losses coming in the last three months alone, including the largest monthly drop in over 30 years last month. The latest jobless claims figures point to another dramatic decline in February.

Meanwhile, according to Thursday's report the tally of continuing claims - those drawn by workers collecting benefits for more than one week in the week ended Jan. 31 - rose 11,000 to 4,810,000. That's the highest level since the government started keeping track in 1967. Continuing claims are up more than two million in the past year.

The unemployment rate for workers with unemployment insurance remained at a 25-year high of 3.6%. Not adjusted to reflect seasonal fluctuations, California reported the largest increase in new claims during the Jan. 31 week, 20,001, due to layoffs in construction and services. Virginia reported the largest decrease, 1,937, due to fewer layoffs in manufacturing.

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FOREX-Dollar, yen rise as shares fall

The dollar and yen rose on Thursday as investors drew comfort in the perceived safety of those units as stocks fell, fueled on concerns about the potency of government policies to combat recession and ailing banks.

European shares were lower in early trade after Asian stock markets fell, as disappointment lingered after the U.S. bank rescue plan on Tuesday fell short on detail. Investors remained wary despite U.S. Congress reaching a compromise deal on the economic stimulus package.

"The market is vaguely risk adverse," said Christian Lawrence, currency strategist at RBC Capital Markets, but added it lacked clear direction.

The dollar index against a basket of currencies was up 0.2 percent at 86.087.

By 0845 GMT, the dollar was down 0.5 percent at 89.99 yen while the euro was also down 1.1 percent at 115.27 yen. The euro was down 0.4 percent at $1.2841.

Traders will look to economic data including euro zone industrial production and U.S. retail sales data later on Thursday. Industrial production in the euro zone is seen falling 2.1 pct in December from the previous month, or a fall of 8.9 year-on-year.

Traders will also keep an eye as European Central Bank President Jean-Claude Trichet speaks, as well as a slew of other ECB officials. ECB officials that commented on Wednesday confirmed market expectations the central bank will cut interest rates next month, but nothing to further such views, analysts said.

Markets hope to get a cue from U.S. retail sales, which probably fell again in January. Total sales are forecast to fall 0.8 percent after tumbling 2.7 percent in December, while sales excluding autos are seen falling by 0.5 percent after a record 3.1 percent plunge in December.

"The weak tone of the data will provide an offset to what little enthusiasm prospective passage of the U.S. fiscal package may foster," Daragh Maher, deputy head of currency strategy at Calyon, said in a note.

"The weakness in Asian equities overnight suggests that disappointing data and the lack of detail so far from (U.S. Treasury Secretary Timothy) Geithner will win out over fiscal optimism, pointing to modest gains for the dollar and yen."

U.S. congressional negotiators reached a deal on Wednesday on $789 billion in emergency spending and tax cuts aimed at pulling the economy out of a deepening recession, and voting on it could take place as early as on Thursday.

Sterling hit one-week lows against the dollar and euro, keeping its downward trend after the Bank of England said it may need to ease policy further, including steps such as buying gilts to boost the money supply. The pound was down 1.3 percent at $1.4186. The euro was up 0.9 percent at 90.45 pence.

The Australian dollar was down 1.0 percent to $0.6482, after parliament rejected the government's A$42 billion ($28 billion) economic stimulus plan.

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European shares hit 1-week low; banks, oils slide

European shares hit a one-week trough on Thursday, led lower by banks, as poor corporate results and fresh signs of deteriorating global economic outlook overshadowed a compromise deal on a massive U.S. stimulus plan.

By 0949 GMT, the FTSEurofirst 300 index of top European shares was down 1.5 percent to 791.78 points after falling as low as 787.14. The index is down 4.8 percent this year after plunging 45 percent in 2008.

Banks were among the top fallers on the index, with Commerzbank falling 5.4 percent, Credit Agricole down 3.5 percent and Societe Generale declining 3.4 percent.

Energy shares were also under pressure as crude prices eased to trade below $36 a barrel -- down 75 percent from a record high near $150 just seven months ago. BP, Royal Dutch Shell, Repsol and Tullow Oil shed between 0.3 and 1.3 percent.

Governments are using "historically strong medicines to try to revive a patient that is looking very weak at the moment and so far almost everything that has been used has failed to work," said Henk Potts, strategist at Barclays Stockbrokers.

Investors hoped the measures would support in the long term, but there was a lot of nervousness before they saw the results of the U.S. government's efforts on the economy, he added.

The pessimism over a compromise deal on a $789 billion U.S. package, which helped Wall Street shares to gain overnight, evaporated after investors scrutinised a raft of disappointing corporate results and macroeconomic data.

Figures showed Japanese wholesale prices dropped in the year to January, the first drop in five years, bringing the world's second-largest economy closer to its second bout of deflation in a decade as the economy slipped deeper into recession.

Swiss engineering group ABB posted an 88 percent fall in fourth-quarter net profit, oil major Total reported an 8 percent drop in profits due to lower oil prices and output, while banking group KBC booked a $3.4 billion loss due to writedowns.

"Asides from the stimulus package, the big news has been the large stake in Rio Tinto being sold to Chinalco," said Andrew Turnbull, senior sales manager at ODL Securities.

"The deal is said to be the largest overseas deal by the Chinese and really does show how desperate for cash Rio Tinto has become," he said.

Rio Tinto will sell $12.3 billion in asset stakes to Chinalco and raise a further $7.2 billion by issuing China's top aluminium maker convertible notes to cut debt, the global miner said. Rio shares were up 1.2 percent. The negative market sentiment spread to other sectors such as mining, electricity, telecommunications and retail.

Miners, struggling due to falling prices and slowing demand of metals, fell again. BHP Billiton, Anglo American, Xstrata and Antofagasta fell between 0.8 percent and 3.3 percent. Among electricity companies, Enel dropped 2 percent and Renewable Energy slipped 1.4 percent.

France's EDF fell 7 percent after it posted a dip in 2008 core earnings, hit by a larger-than-expected 1.2 billion euro ($1.55 billion) charge related to French regulated tariffs.

Britain's BT Group dropped more than 5 percent after its core earnings slumped 9 percent in the third quarter and pre-tax profits slumped 81 percent. Among gainers, French carmaker Renault rose 5.9 percent after it dropped its once sacrosanct 2009 profit targets and said it would focus on cutting inventories this year.

Across Europe, the FTSE 100 index, Germany's DAX and France's CAC 40 were down 1.1-1.9 percent.

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Nikkei hits 2-wk closing low on yen, U.S. bank plan

The Nikkei stock average slid 3 percent on Thursday to post its lowest close in over two weeks, as disappointment over a U.S. bank rescue plan hurt financial shares and a firmer yen dragged down exporters.

One bright spot was gold and copper producer Sumitomo Metal Mining, which gained 5.3 percent after gold prices jumped to a 6-½ month high on Wednesday as risk aversion prompted investors to buy gold and bullion-backed exchange-traded funds as a safe haven.

After staying out of the market on Wednesday due to a national holiday, Japanese investors on Thursday played catch-up with Wall Street's falls.

U.S. Treasury chief Timothy Geithner on Tuesday unveiled a new bank rescue plan that would put $2 trillion to work mopping up bad assets and restoring credit, but stock markets plunged on fears it wouldn't work. U.S. stocks recovered some ground on Wednesday.

"Investors were disappointed as the U.S. bank rescue plan turned out to be rather small and it gave the impression the establishment of a 'bad bank' might not proceed smoothly," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

"Additionally, even though both the House and the Senate agreed on the stimulus package, there's a concern that the U.S. market may not gain on the news as it could merely see it as a sign that another event had passed."

The benchmark Nikkei shed 240.58 points to 7,705.36, its lowest finish since Jan. 26. The broader Topix lost 2.3 percent to 760.29. Handing a big victory to President Barack Obama in his effort to pull the economy out of a tailspin, U.S. congressional negotiators on Wednesday reached a deal on $789 billion in emergency spending and tax cuts.

A majority of negotiators approved the deal, setting up votes in the House potentially on Thursday and possibly later that evening in the Senate.

"It (the agreement) had been largely expected," said Kazuhiro Takahashi, general manager at Daiwa Securities SMBC. "Investors can't actively move until they see its impact, including how and when the tax cuts will effectively help out consumers."

After the market close, Japanese electronics maker Pioneer Corp said it would exit the flat TV business and consider moving its optical disk operations into a joint venture as part of a package of restructuring steps.

The stock ended the day up 0.6 percent at 178 yen. Banking shares fell after the U.S. bank rescue plan failed to buoy investor confidence. Japan's top lender Mitsubishi UFJ Financial Group shed 3.5 percent to 468 yen, while No.2 Mizuho Financial Group lost 4.6 percent to 209 yen.

Nomura Holdings, the country's biggest brokerage, tumbled 5.9 percent to 479 yen. Exporters also came under pressure as the Japanese currency gained against the dollar, which dipped roughly 0.2 percent to 90.15 yen. Investors dislike a stronger yen as it eats into Japanese exporter profits when repatriated.

Canon dropped 6.6 percent to 2,405 yen and Kyocera Corp lost 5 percent to 5,760 yen. Toyota Motor Corp fell 2.9 percent to 3,050 yen.

Asahi Breweries declined 3.9 percent to 1,246 yen after Deutsche Bank downgraded its rating on Japan's top brewer to "Hold" from "Buy," citing risks of shortfall in Asahi's earnings guidance this year. But Sumitomo Metal Mining rose to 994 yen to become the top positive contributor to the Nikkei 225.

Toshiba Corp climbed 2.3 percent to 262 yen after saying on Tuesday that it, Tokyo Electric Power Co and the Japan Bank for International Cooperation will together buy C$270 million ($221.1 million) worth of shares in Canada's Uranium One Inc.

Trade was light on the Tokyo exchange's first section, with 1.9 billion shares changing hands, compared with last week's daily average of 2.1 billion. Declining stocks outpaced advancing ones by more than 3 to 1.

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PRECIOUS-Gold rises on haven buying, hits sterling high

Gold climbed in Europe on Thursday, building on gains that took it to a 6-1/2 month high in the previous session, as risk aversion fuelled investor demand for bullion and gold-backed exchange traded funds.

Gold priced in sterling and gold futures in India hit an all-time high, adding to record peaks recorded for bullion on Wednesday in euro, Canadian dollar and Swiss franc terms.

Spot gold was quoted at $942.60/944.60 an ounce at 1249 GMT, up from $938.35 an ounce late in New York on Wednesday. The metal hit a peak of $953.30 that day, its highest since July 2008.

"Gold is still in a very bullish trend," said Alexander Zumpfe, precious metals trader at Heraeus. "There is very strong investor demand, which you see when you look at the data coming from the ETFs, which are at record levels."

The world's largest gold-backed ETF, New York's SPDR Gold Trust, said its holdings rose nearly 5 percent on Wednesday. Gold prices rallied soon after the opening of the New York market, suggesting heavy buying.

ETFs and physical gold products such as coins and bars have proved popular with investors as the global slowdown shows little sign of abating.

The U.S. Congress is poised to pass as early as Thursday a $789 billion package of measures to stimulate the economy, which is reeling from a slump in asset prices, scarce credit and millions of layoffs. "The final passage of the stimulus, if it were to alleviate some investor uncertainty, could provide a headwind to the gold rally," said HSBC analyst James Steel.

Elsewhere the first fall in Japan's wholesale prices in five years showed the country may be entering a period of deflation, while Australia said its unemployment rate rose to a two-year high and South Korea's central bank slashed interest rates.

European shares slipped 1.5 percent on Thursday as fresh signs of deepening economic misery overshadowed the potential U.S. deal, weighed down by banks. Rising risk aversion benefited the dollar, however, as investors bought into the perceived safety of the currency as stocks fell.

Usually a stronger dollar weighs on gold, which is often bought as a currency hedge. However, the two assets have broken their historic relationship as both become attractive as a haven from risk. "Gold is still decoupled from movements in the currency markets, which means at the moment it has a life of its own," said Heraeus' Zumpfe.

Oil prices meanwhile were little changed just below $36 a barrel as fears over demand weighed.  In supply news, South Africa said its gold output fell 17.6 percent year-on-year in December. The republic is the world's second largest producer of gold after China.

The IMF also told Reuters it had no intention of changing plans to sell 403 tonnes of gold once it has received Congressional approval to do so.

Among other precious metals, spot silver was quoted at $13.39/13.47 an ounce, against $13.49. Holdings of the largest silver-backed ETF, the iShares Silver Trust are currently at an all-time high of nearly 7,607 tonnes.

Spot platinum was at $1,076/1,084 an ounce against $1,067, while spot palladium was at $213.50/217.50 an ounce against $212.

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