US & World Daily Markets Financial Briefing 13-05-2008

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Stocks decline after retail sales report, Bernanke speech

NEW YORK - Wall Street pulled back Tuesday after a report on retail sales and comments from Federal Reserve Chairman Ben Bernanke gave investors little incentive to extend the previous session's big advance.

Investors remained concerned that higher energy and food prices will curb consumer spending, which makes up more than two-thirds of the U.S. economy. The latest report from the Commerce Department showed that retail sales fell in April, increasing worries about a recession.

The report, which was in line with economists' expectations, did show better-than-expected sales if automobiles are excluded. However, that indicates Americans are reluctant to make big-ticket purchases -- especially as soaring gasoline prices cut into demand.

Meanwhile, Bernanke said during a speech at the Atlanta Fed's Financial Markets Conference that turmoil in financial markets has eased somewhat, but the situation is still "far from normal." He noted some improvements in the markets for certain mortgage-backed securities, such as those backed by Fannie Mae and Freddie Mac, as well as some fixed-rate mortgages and corporate debt.

In midmorning trading, the Dow Jones industrial average fell 45.02, or 0.35 percent, to 12,831.29. The blue chip index soared 130 points on Monday as oil prices fell back and alleviated some concern about accelerating inflation.

Broader indexes were also lower. The Standard & Poor's 500 index fell 2.90, or 0.21 percent, to 1,400.68. And, the Nasdaq composite index declined 6.10, or 0.25 percent, to 2,482.39. Bonds fell in early trading. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.86 percent from 3.80 percent late Monday.

Oil prices edged up after falling briefly below $124 a barrel on profit-taking after it hit a record in the previous session. Light, sweet crude 11 cents to $124.34 a barrel on the New York Mercantile Exchange.

In corporate news, investors pored over a number of high-profile acquisitions, including Hewlett-Packard Co.'s offer to buy Electronic Data Systems Corp. for $12.6 billion. In addition, Staples Inc. raised its hostile bid to acquire Dutch rival Corporate Express NL.

The deal to combine Hewlett-Packard with EDS will create the second-largest technology services provider behind International Business Machines Corp. EDS shares rose 35 cents to $24.43, while Hewlett-Packard fell $2.44, or 5.2 percent, to $44.39.

Staples rose 39 cents to $22.35 after the office supply retailer sweetened its offer price by 10 percent. Corporate Express said it is willing to consider the deal.

Investors got another read on the consumer after Wal-Mart Stores Inc. reported first-quarter profit above Wall Street forecasts. However, the world's largest retailer, often a barometer of consumer spending in the U.S., forecast that the current quarter will come in below expectations. Wal-Mart fell $1.05 to $56.97.

Luxury home builder Toll Brothers Inc. said preliminary results show homebuilding revenue fell 30 percent in its fiscal second quarter amid a weak spring selling season. The company also expects to continue to face "challenging times" ahead, given soft conditions in most markets. Shares edged up 6 cents to $23.43.

Overseas, Japan's Nikkei stock average fell 1.53 percent. In morning trading, Britain's FTSE 100 was down 0.04 percent, Germany's DAX index fell 0.47 percent, and France's CAC-40 shed 0.64 percent.

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Forex - Dollar jumps higher on solid U.S retail sales, import prices data

The dollar jumped higher after U.S. data revealed a stronger-than-expected rise in retail sales excluding autos and a solid rise in import prices.

Retail sales excluding auto sales rose by 0.5 percent in April from March's 0.4 percent rise. This beat analysts' forecasts for a 0.3 percent increase and offset news that overall sales had fallen by 0.2 percent.

Elsewhere, import price inflation slowed to 1.8 percent in April, from 2.9 percent in March. However, this is slightly above forecasts for a 1.7 percent increase, and March's figure was revised upwards.

Rhonda Staskow, an analyst at Thomson IFR Markets, said the dollar soared in the wake of the retail sales data, which mirror "the recent positive retail sales data released last week that showed strong gains in same-store sales and in chain store sales for April".

"Inflation concerns are also supporting the expectations of a more hawkish Federal Reserve with import prices rising ... more than expected," said Staskow.

Following the data release, the dollar briefly strengthened to a day high of 1.5430 per euro, from 1.5472 prior to the releases. Against the pound, the dollar rose to a day high of $1.9444 from $1.9497.

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Euroshares open up on Wall St gains, Credit Agricole down on capital hike

At 9:00 a.m., the DJ STOXX 50 was up 5 points, or 0.15 percent, at 3244.33 and the DJ STOXX 600 was up 0.56 points, or 0.17 percent, at 3260.51.

Oil prices briefly spiked to a new record above $126 a barrel Monday but later retreated as investors cashed in profits and a massive earthquake in China raised the possibility of a drop in demand.

Credit Agricole shed 4.25 percent, after the group confirmed a massive 5.9 billion euro capital increase to preserve its Tier 1 solvency ratio following heavy subprime-related losses at its Calyon unit.

Meanwhile, Belgo-Dutch bancassurer Fortis lost 1 percent after posting first-quarter results which showed a drop in net profit due to a 380 million euro impact from the credit market turmoil.

In the U.K., mortgage lender Alliance & Leicester lost 4.95 percent after unveiling a further 192 million pound hit from the credit crunch. Shares in Societe Generale also underperformed, down 0.16 percent, after after the group reported first quarter numbers, which were of poor quality according to analysts.

Turning to the telecoms sector, Deutsche Telekom dove to the bottom of the DAX, down 1.42 percent, after state-owned KfW Bankengruppe said it is issuing an exchangeable note on shares of the group with a basis volume of 3.0 billion euros. The bank added that the issue reflects the ongoing successful privatisation strategy of Deutsche Telekom carried out by the Federal Government and KfW.

Peer Telekom Austria rose 2.66 percent, with investors hoping for confirmation of a split-up of the group at today's supervisory board meeting. In other news, EADS was under pressure, down 0.6 percent, after the aerospace and defence group confirmed a delay in its A380 programme.

In a note to clients, Landsbanki Kepler reiterated its 'reduce' rating and said the announcement was expected but stresses that the visibility on the story remains limited. Italian rival Finmeccanica lost 2.43 percent after the group, last night, announced the takeover of DRS Technologies for $81 a share.

In a note to clients, Cheuvreux remarked that the deal is accretive, but that it requires a capital hike and the initial public offering of Ansaldo Energia.

Staying with corporate takeover talk Corporate Express NV rallied 6.04 percent following news that Staples Inc will raise its indicative unsolicited offer on the company to 8 euros per share from 7.25 euros. Rabo Securities said that while this is lower than its own expectation of 8.25 to 8.50 euros, it does signal the clear intent of Staples to pursue the acquisition.

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Asian shares higher as oil retreats, Shanghai slips after earthquake

Hong Kong's Hang Seng rose 1.95 percent at 25,552.77, with HSBC's upbeat first-quarter earnings soothing worries about the global credit turmoil. HSBC shares rose 1.96 percent at H$135.5.

The Nikkei closed 1.5 percent higher at 13,953.73, and the broader Topix gained 1.3 percent to 1,360.05. The Shanghai Composite closed closed down 66.74 points or 1.84 percent at 3,560.24 on concerns about the damage wrought by China's strongest earthquake in decades which ripped through Sichuan province on Monday.

The death toll from the 7.8-magnitude quake has risen to nearly 10,000, according to state media. "These are all difficult news for the market and will likely drag down Chinese stocks, particularly the banks. But I still think local shares will rise because the latest figures from China indicate that the economy remains strong," said Francis Lun, general manager at Fulbright Securities.

News of the quake dragged down insurance companies listed in Hong Kong as investors worry the rising death toll and destruction of properties in China may impact on their revenue.

Australian banks in focus In Sydney, the benchmark S&P ASX 200 closed down 0.3 percent at 5,812.7, with investors taking a defensive stance ahead of the release later Tuesday of the newly elected federal government's first fiscal budget. But volumes were healthy, fueled by takeover activity.

The broader All Ordinaries index dropped 0.2 percent to 5,883.2. The financial services sector remained in focus after Australia's third-largest bank in terms of market capitalization, Westpac, announced the terms of a friendly A$18.6 billion ($17.6 billion) offer for fifth-ranked St. George. Westpact is offering 1.31 of its shares for each St. George share in a deal backed by St. George's board, subject to conditions.

Westpac ended down 3.3 percent at A$25.11, valuing its offer for St. George at A$32.64 per share. St. George jumped 25.2 percent to A$33.37. Both stocks were suspended from trading on Monday ahead of Westpac's announcement that it was in merger discussions with St. George.

In Tokyo, exporters rallied as investors took comfort in a stable yen. Japan's largest computer maker Fujitsu soared 13.2 percent to 773 yen. Digital camera maker Nikon surged 12.5 percent to 3,190 yen. Construction machinery maker Komatsu rose 3.8 percent to 3,220 yen. Consumer electronics giant Sony gained 3 percent at 4,790 yen. Nissan Motor climbed 3.2 percent to 960 yen.

South Korea's KOSPI closed up 1.1 percent at the day's high of 1,842.80. Samsung Electronics rose 3.7 percent to 735,000 won snapping a three-day decline on expectations that a weaker won combined with strong demand for its flat-screen panels and handsets will boost earnings.

The Malaysian KLSE closed 0.5 percent lower at 1,286.54 as investors locked in profits from recent gains in plantation and energy stocks. Singapore's STI rose 0.7 percent to 3,203.42. The Taiwanese Taiex was up 1.81 percent at 8,989.53.

The Philippine Composite rose for the fifth straight session, gaining 1.6 percent to 2,849.29 on upbeat quarterly earnings. The Jakarta Composite advanced 1.7 percent to 2,418.90.The Bombay Stock Exchange's 30-share benchmark Sensex closed 108.04 points or 0.64 percent lower at 16,752.86 and the National Stock Exchange's 50-share S&P CNX Nifty shed 54.85 points or 1.09 percent to 4,957.80.

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Metals - Copper steady as firm dollar offsets supply concerns

LONDON - Copper was steady in London trade on Tuesday morning after the dollar's firmer footing offset potential supply disruptions. With the dollar edging higher recently, commodities priced in the greenback have become relatively more expensive for holders of other currencies, diminishing the appeal of metals like copper.

However, tight global markets have left the red metal vulnerable to fears of supply disruptions, which saw prices jump to record a high of $8,800 per tonne last month.

At 10:48 a.m., London Metal Exchange copper for three-month delivery was trading at $8,280 per tonne against $8,260 per tonne at the close on Monday.

Potential supply disruptions in China following Monday's huge earthquake in Sichuan province -- which has killed at least 10,000 people and severely damaged local infrastructure -- is providing some support for the market, analysts said. "Although not a major metal producing region, the damage to power and transport systems may cause disruption to supply," said William Adams at BaseMetals.com.

While a potential nationwide miners' strike in Peru has been delayed by 15 days to allow further negotiations, the market is still eyeing developments closely in the key metal producer. "The country is the world's largest silver producer, and produces significant amounts of zinc and copper, consequently strike action could lead to higher prices for these metals," said Fairfax analyst John Meyer.

In Chile, fears recent strikes at Codelco plants could be resumed have also lent support to the market. Union leaders have threatened that further strikes cannot be ruled out after the Supreme Court ruled the state mining giant does not have to offer thousands of subcontractors full-time positions.

Subcontractors had agreed to end their 20-day strike on May 5 after a pledge from Codelco to make many of them full-time, and to pay a bonus of over $1,000 agreed in 2007.

While supply disruptions are never far from traders' minds in the current climate, many will also be keeping an eye on U.S. Federal Reserve chairman Ben Bernanke's speech today, as they try to judge the future direction of the dollar. "Anything pointing to a U.S. economic recovery and an end to the run of rate cuts we've seen from the Fed should lend some notable support to the dollar," said James Hughes at CMC Markets.

Bernanke is due to speak at a financial markets conference organised by the Federal Reserve Bank of Atlanta at 1:20 p.m. BST. Copper inventories monitored by the LME rose by 125 tonnes to 121,775 tonnes in today's report from the exchange.

Elsewhere, tin was trading flat at $24,950 per tonne, having yesterday touched a fresh all-time high of $25,000 a tonne. Fears lower supplies from major producers China and Indonesia will lead to market tightness later this year has propelled tin prices higher in recent months.

In other metals traded on the LME, lead was trading at $2,265 per tonne against $2,245 per tonne at the close on Monday, while zinc for delivery in three months was up at $2,231 per tonne against $2,178. Aluminium was higher at $2,931.25 per tonne against $2,928, while nickel edged up to $26,629 from $26,550.

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