US & World Daily Markets Financial Briefing 14-01-2009

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US STOCKS-Wall St tumbles on bank woes, consumer gloom

NEW YORK - U.S. stocks tumbled on Wednesday as investors feared more credit losses in the banking sector, while bleak December retail sales compounded worries about the toll on consumers from the deepening recession.

Citigroup, down more than 15 percent to $4.98, was a standout drag on the financial sector, while shares of JPMorgan and Bank of America fell 5 percent and 3.5 percent respectively.

The fall in Citigroup, a Dow component, followed a deal by the embattled bank to sell a controlling stake in its crown jewel unit, the Smith Barney retail brokerage, to Morgan Stanley for $2.7 billion.  Analysts reckon the Smith Barney sale was a precursor to a break-up of Citigroup and that the bank must be urgently seeking to replenish capital due to mounting losses.

"You'd think the news on banks is baked in, but there's still a lot of headwinds," said Rich Parker, head of trading, Stanford Group, in New York. "The write-downs are starting to really scare people outside of the banking area as well. Is there a balance sheet out there that you can really trust? By all indications, it seems the recession is going to be a historically long one."

The Dow Jones industrial average slid 277.01 points, or 3.28 percent, to 8,171.55. The Standard & Poor's 500 Index tumbled 29.99 points, or 3.44 percent, to 841.80. The Nasdaq Composite Index dropped 48.07 points, or 3.11 percent, to 1,498.39.

The sell-off marked another hindrance to the market's push to recover from its November bear market low. The benchmark S&P 500 began 2009 up more than 20 percent from that low but is now up about 11.5 percent. The S&P financial index .GSPF fell nearly 6 percent.

Sales at U.S. retailers fell 2.7 percent in December, government data showed on Wednesday, as a deteriorating economic climate forced consumers to cut back on spending during the key holiday period.

Consumer spending accounts for about two-thirds of U.S. economic activity and as such is a key pillar of corporate profits. The S&P retail index declined 3.7 percent.

Investors also sold off shares of economic bellwethers including big manufacturer Caterpillar Inc, down 6 percent. On Nasdaq, shares of iPhone maker Apple Inc led the slide, falling 2.4 percent to $85.64. Even more unnerving to investors was a forecast by Morgan Stanley analysts that HSBC, Europe's biggest bank, is likely to halve its dividend and may need to raise up to $30 billion of capital.

Additionally, Germany's Deutsche Bank posted a loss of about $6.4 billion for the last three months of 2008, hitting markets in Europe. JPMorgan is due to post quarterly results on Thursday after it moved up its reporting date, followed by Citigroup on Friday after it also moved up its results date.

Thomson Reuters data show expectations for JPMorgan have crumbled: A month ago it was expected to earn 27 cents per share in the fourth quarter. Two days ago that view was down to 5 cents. Before the bell, the view was a penny before special items. On Tuesday, Federal Reserve Chairman Ben Bernanke said more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from banks' books.

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FOREX-Euro cuts gains, gnawed by economy, financial worries

LONDON - The euro cut broad early gains on Wednesday as concerns over the single currency bloc's economy and public finances mounted ahead of Thursday's verdict on interest rates from the European Central Bank. The euro had earlier hit session highs on a tentative easing in extreme risk aversion but reports, later denied, that Ireland might need IMF help if its economy worsened took it down more than a cent from those levels.

Data showed Germany's economy grew at its slowest pace in three years in 2008. More pointedly, the euro zone's biggest economy had contracted by between 1.5 percent and 2.0 percent in the final three months of the year, the largest fall since German reunification in 1990.

"The weakness in the data brings home concern around the lack of policy stimulus. We'll see what the ECB brings tomorrow, but the concern is that the data is looking worse for wear," said Phyllis Papadavid, currency strategist at SG in London.

The euro stumbled after reports Irish Prime Minister Brian Cowen said IMF help may be needed if its economic downturn worsens, although the comments were later denied. But Cowen told Irish broadcaster RTE in an interview he endorsed the view of the country's unions that public finances are unsustainable.

"Even with the denial, I think the markets are likely to conclude that there's no smoke without fire," said Derek Halpenny, European head of global currency research at BTM UFJ in London. Indeed, the cost of protecting Irish government bonds against default rose sharply with the five-year credit default swap hitting 207.5 basis points from 193.1 basis points, according to data from CMA DataVision.

By 1219 GMT, the euro was up 0.1 percent at $1.3218, more than a cent off a session high of $1.3335. That was still above a one-month low of $1.3140 on trading platform EBS the previous day.

The euro also cut gains versus the yen to trade at 118.24 yen. Markets were already jittery after Spain and Portugal became the third and fourth euro zone countries since last week to be warned by ratings agency Standard & Poor's that their credit rating is under threat from the global financial crisis.

"The euro zone is going to face its sternest test in 10 years," said Chris Turner, chief currency strategist  "We are seeing some independent euro weakness, given the severity of the slowdown and concerns about finances given recent news on credit ratings."

The ECB is widely expected to cut rates by 50 basis points from the current 2.5 percent to help fight a broad economic downturn. Meanwhile, sterling got a boost, hitting a session high of $1.4708, after the British government launched a scheme to help cash-strapped small firms.

The Australian dollar also rebounded from one-month lows hit on Tuesday, rising 1.5 percent to $0.6735. The dollar was up 0.1 percent against the yen at 89.29 yen.

Investors are watching U.S. December retail sales, which will reflect the critical Christmas shopping season. Retail sales, due out at 1330 GMT, are expected to fall 1.2 percent to mark a sixth straight monthly drop after a 1.8 percent decline in the previous month.

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Europe stocks sag as Deutsche Bank, HSBC sink

PARIS - European shares dropped on Wednesday, falling for the sixth consecutive session and turning negative on the year on renewed fears surrounding banks' balance sheets.

Deutsche Bank tumbled 9 percent after saying it has racked up a loss of about 4.8 billion euros ($6.4 billion) in the final three months of 2008 alone, blaming troubled markets.

HSBC tumbled 8.5 percent after Morgan Stanley analysts said the bank is likely to halve its dividend and may need to raise up to $30 billion in a rights issue.

"Our detailed study of HSBC's capital and asset quality position reinforces our belief that it will have to halve the dividend and raise major capital in 2009," Morgan Stanley analysts Anil Agarwal and Michael Helsby said in a note.

Other leading European banks also took a beating, with Societe Generale down 7.2 percent and Credit Suisse down 6.5 percent. "In the first week of the year, people forgot about banks' woes for a moment. But now they are back in the spotlight," said Natixis analyst Pascal Decque.

At 1119 GMT, the FTSEurofirst 300 index of top European shares was down 1.2 percent at 829.88 points. Britain's Barclays said it is cutting more UK-based jobs in its retail and commercial banking business, which a person familiar with the matter said is likely to mean a further 2,100 jobs will go. Its shares were down 13.2 percent.

The DJ Stoxx banking index, which plummeted 65 percent in 2008, has lost 3 percent so far in 2009, underperforming the FTSEurofirst 300, which is down 0.3 percent.

Investors were also digesting news that Citigroup moved towards dismantling itself as it agreed to merge its Smith Barney brokerage with Morgan Stanley's wealth management unit and is expected to make further asset sales to raise capital.

Global bellwether General Electric fell more than 5 percent on Tuesday after an analyst said the conglomerate's profit could rely heavily on tax benefits when it reports results next Friday.

"The first quarter is a minefield, as a lot of adjustments on corporate result forecasts still have to be made. The consensus still points to flat 2009 profits compared to 2008, but they will probably be halved compared to 2007," said Romain Boscher, head of equity management at Groupama Asset Management in Paris.

"Earnings will plunge, but that's not all. We will also see a raft of negative exceptional items, such as impairments, underfunded pension funds, rising charges and the need to recapitalise," he said.

"I don't see how the market could rise with such a dismal newsflow. At best, stocks will move sideways, but I think that the most likely scenario is that the market will continue to correct, and will revisit the lows before a rebound during second half of the year."

Miners also featured among Europe's biggest losers, falling along with metal prices, hammered by renewed worries over the outlook for the global economy.

BHP Billiton dropped 3.4 percent and Xstrata fell 4.2 percent. Cement maker HeidelbergCement plunged 10 percent as traders pointed to market talk it may carry out a capital increase to beef up its balance sheet. The company declined to comment.

Around Europe, the UK's FTSE 100 index was down 1.9 percent, Germany's DAX index fell 1.5 percent and France's CAC 40 lost 1 percent.

Drug makers gained as investors turned to the safety of defensive stocks. AstraZeneca and Sanofi-Aventis were up between 0.6 percent and 1.3 percent. Later in the session, investors will eye U.S. retail sales for December at 1330 GMT.

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HK shares snap 6-day slump but HSBC weighs down index

HONG KONG - Hong Kong shares pared early gains to finish 0.3 percent higher after a sharply lowered target and earnings estimates on HSBC Holdings sent shares in Europe's top bank to their lowest in more than seven years.

Index heavyweight HSBC tanked 4.1 percent to HK$70, even slipping below that level at one point earlier Wednesday, after Morgan Stanley cut its target by 31 percent to HK$52.

The U.S. investment bank cut its profit estimate for the British-based lender by 17 percent for 2008 and 39 percent for 2009 and expects the bank to halve its dividend. Morgan Stanley also predicts a $20 billion to $30 billion capital need at HCBC.

"If HSBC cut its dividend by half, its dividend yield will fall to 5 percent from 10 percent and given the bank's huge exposure to UK and U.S. market, 5 percent yield is not attractive any more," said Steven Leung, director with UOB Kay Hian.

"If the stock can't recover to HK$72 or HK$73 by tomorrow the situation can get pretty ugly."Slumping HSBC shares offset gains in Chinese banking counters after the third equity selldown in a major lender this year eliminated some of the overhang on the sector.

The benchmark Hang Seng Index closed 36.56 points higher at 13,704.61, snapping a six-day slide, its longest since September 2008. But the index finished well off its early highs as HSBC extended losses in the afternoon session, dragging down with it shares in local arm Hang Seng Bank which fell 4 percent.

Mainboard turnover rose to HK$66.2 billion ($8.5 billion) from HK$47.3 billion on Tuesday. The China Enterprises Index .HSCE of top mainland firms outperformed, climbing 2 percent to 7,219.04.

Beijing-controlled Bank of China rose 2.7 percent after Royal Bank of Scotland sold $2.4 billion worth of shares, its entire holding in China's No.2 lender. The deal was sealed at the top end of a price range at HK$1.71 per share, a discount of 7.6 percent to the Chinese lender's Tuesday closing price.

Other Chinese lenders also rose, bouncing back from a sharp correction last week triggered by worries over equity selldowns by strategic stakeholders, as U.S. and European investors hit hard by the global credit crises look to shore up their books.

China Construction Bank, which plunged more than 20 percent in the last six days, gained 3 percent while Bank of Communications added 3.1 percent. ICBC, which has yet to see a major stakeholder reduce its holdings so far this year, gave up 1.2 percent. Last week, Bank of America reduced its holding in CCB while Asian tycoon Li Ka-shing sold some shares in Bank of China.

Other Chinese financial counters also rose, tracking a 3.5 percent gain on the Shanghai bourse, after data raised hopes that economic downturn might bottom more quickly than many expected. The government announced late on Tuesday that growth in Chinese bank lending and money supply surged in December, responding to government efforts to boost an economy that is being hit by the global financial crisis.

Top insurer China Life rose 2.5 percent while smaller rival Ping An Insurance gained 4.3 percent. Chinese real estate stocks gained amid talk that Beijing was set to announce further steps to rescue the country's ailing property sector.

China may announce measures including cash support for developers who build small apartments, the housing minister was cited as saying in a newspaper report on Tuesday. China Overseas Land gained 5.7 percent while Country Garden climbed 2.5 percent.

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PRECIOUS-Gold firms on weak dollar, rising oil; ECB eyed

LONDON - Gold firmed in Europe on Wednesday, supported by a weaker dollar and rising oil prices, though it pared gains as the euro slipped from highs against the U.S. currency and equities and base metals turned negative.

Trading is expected to be muted ahead of the interest rate announcement of the European Central Bank on Thursday. The ECB is widely expected to cut rates by 50 basis points.

Spot gold was at $824.20/825.60 an ounce at 1026 GMT, down from $821.05 late in New York on Tuesday. It touched a high of $828.65 earlier in the session, but slipped as the euro retreated and European equities and base metals turned negative.

"Everyone is in wait-and-see mode for the ECB," said Simon Weeks, director of precious metals at the Bank of Nova Scotia.

In the short-term, gold risks being caught up in falling equity and industrial metals prices, he said. However, with interest in investment products such as exchange-traded funds remaining high, "there is certainly an element that views gold as a safe haven," he said. "As long as that interest continues, it is a very good signal for gold in the long term," he added.

In the shorter run, gold is taking support from dollar weakness. Bullion is often bought as an alternative investment to the dollar and tends to move in the opposite direction to it.

All eyes are now on the interest rates decision of the ECB on Thursday, which will have a significant impact on the foreign exchange markets, and consequently on gold.

Data released on Wednesday showed euro zone industrial production plunged for the seventh month running in November, suggesting the recession is worsening and strengthening views the ECB will cut rates deeply on Thursday.

Elsewhere firmer oil prices are supporting gold. Crude bounced up more than 3 percent to above $39 a barrel as talk of OPEC output cuts continued and a cold snap in the United States boosted heating oil demand.

However, analysts are still eyeing developments in the wider commodity and equity markets. "Equity markets continue to fall on jitters over company earnings," said Standard Bank analyst Walter de Wet. "Stock markets' ongoing decline and the lack of major economic data is dictating precious metals' direction."

European shares fell on Wednesday, erasing earlier gains, as falling banking and mining stocks led the market lower. Industrial metals prices also swung back into the red. "Metals have been heading south, which we expect to continue," noted de Wet.

In Asia, jewellers are buying up gold bars ahead of the Lunar New Year on January 26, dealers said. Premiums for gold bars were steady at between 10 and 20 U.S. cents to spot London prices in Hong Kong.

"With Chinese New Year approaching it will be very interesting to hear how sales have gone and whether the strong purchases continue after the New Year holidays," said UBS strategist John Reade in a note.

Jewellery demand in the world's largest bullion market, India, has however been lacklustre in recent weeks, as buyers await lower prices.

Interest in investment products backed by physical gold, such as ETFs, is also healthy. Bullion holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD, remain near record levels.

Among other precious metals, spot platinum edged up to $955.50/960.50 an ounce from $941, while palladium was quoted at $182.50/187.50 an ounce against $182. Spot silver was at $10.75/10.83 against $10.72.

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