US & World Daily Markets Financial Briefing 14-05-2008

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Stocks open higher following inflation reading

NEW YORK  - Stocks are higher in early trading after the government's better-than-expected consumer price report eased some concerns about inflation.

The Labor Department's report that consumer prices advanced 0.2 percent in April after rising 0.3 percent in March appeared to alleviate Wall Street's worries of a big spike in prices due to the recent surge in energy costs. The decline in prices comes despite the largest jump in food prices in 18 years.

Wall Street has been concerned that higher food and energy costs are cutting into consumers' ability to spend. Any pullback is an unnerving prospect for investors because consumer spending accounts for about two-thirds of U.S. economic activity.

In the first hour of trading, the Dow Jones industrial average rose 72.95, or 0.57 percent, to 12,905.13. Broader stock indicators also rose. The Standard & Poor's 500 index rose 9.26, or 0.66 percent, to 1,412.30, and the Nasdaq composite index rose 14.93, or 0.60 percent, to 2,510.05.

Light, sweet crude oil fell $1.20 to $124.60 in premarket electronic trading on the New York Mercantile Exchange.

Household-durables stocks mostly rose Wednesday morning after data from the Labor Department showed consumer prices barely rose last month, news that eased inflation fears. How shares of some stocks of household-durables companies are trading:
   
Black & Decker Corp., down 31 cents to $66.11.
Whirlpool Corp., up 25 cents to $75.15.
Snap-on Inc., up 39 cents to $60.90.
 Stanley Works, up 57 cents to $50.33.

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Forex - Pound slips as BoE Inflation Report spells trouble for UK economy

LONDON - The pound fell as the Bank of England signalled worrying times for the UK economy lie ahead, with inflation set to soar while growth slows. The central bank effectively put markets on warning for a period of stagflation -- when growth slows but inflation remains high -- as it also lowered its GDP growth projections substantially today in its quarterly Inflation Report.

Under a more benign economic backdrop, a forecast for rising inflation would boost the pound, as markets scaled back their expectations for a rate cut next month. But given that the economy is expected to slow markedly, investors are selling the pound as they fear high inflation will prevent the Bank of England from making the monetary easing needed to stave off a recession.

"In the face of upside risks to inflation and downside risks to growth, the Monetary Policy Committee's preferred strategy seems to be to act tough on inflation and inflation expectations in the near term to bolster its credibility, even at the risk of generating a slowdown that is sharper than needed to prevent inflation dropping below target in the medium term," said Simon Hayes, UK economist at Barclays Capital.

In the report, the BoE said its base case scenario is that the annual CPI inflation rate will likely hit 3.6 percent this autumn because of higher energy and import costs -- subject to interest rates moving as the markets currently expect.

However, its fan chart, which shows the range of forecast probabilities, suggests that there's a real chance it could rise to 4 percent or even higher, a marked pick-up from its own previous projections.

The BoE also warned that the UK economy is in danger of grinding to a halt this year, and possibly sinking into recession, as a result of the crisis in credit markets. It said there is a high risk that GDP growth could fall to an annualised rate of 1 percent by the end of this year, the lowest levels since the early 1990s recession, even though the weaker pound should boost exports.

The news follows on the heels of a dismal labour market report, showing that wage inflation is accelerating despite a third consecutive rise in jobless claims.

"The news on the real economy just keeps getting worse, complicating the Monetary Policy Committees job further," said Vicky Redwood, UK economist at Capital Economics.

Elsewhere the euro recovered against the dollar, following slightly better than expected euro zone industrial production figures and a technical correction following strong gains for the dollar overnight after robust U.S. retail sales figures.

Production in the 15-nation single currency area fell 0.2 percent in March from February, better than the 0.3 percent fall markets had been expecting. "Industrial output came in better than expected for March which should offer the euro a glimmer of support," said Matthew Foster-Smith at Thomson IFR Markets.

The dollar has firmed against the euro in the past couple of weeks, but analysts said markets are likely to need further signs that the European Central Bank is set to cut borrowing costs or a much stronger set of U.S. economic data for it to break out of its current trading range.

"We expect the dollar to remain supported over the short-term but see little potential for it to break out of its current 1.53-1.56 range against the euro," said Mitul Kotecha, head of forex research at Calyon.

Later today focus will turn to U.S. April inflation figures. CPI is expected to have increased 0.3 percent on a monthly basis in April, the same rate as in the previous month. If inflation picks up sharply it could spark a dollar rally, on speculation the U.S. Federal Reserve may start to consider raising interest rates again.

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Euroshares open higher, EADS soars on Q1, miners rally on M&A hopes

At 09:06 a.m., the DJ STOXX 50 was up 20.70 points or 0.64 percent to 3,259.72, while the STOXX 600 rose 1.62 points or 0.50 percent to 327.19.

Gold prices fell sharply Tuesday after the dollar gained some muscle against the euro, weakening the appeal of precious metals as an inflation hedge. Gold for June delivery fell $15.30 to settle at $869.60 an ounce in light trading on the Nymex, after earlier falling as low as $861, its lowest level in a week.

Back in Europe, markets gained ground in early deals with the mining sector outperforming on the back of consolidation hopes. According to the DJ STOXX 600 for the industry, the sector added 1.5 percent in aggregate and led higher by BHP Billiton, which added 2.9 percent.

"One company that seems unwilling to move out of traders' focus appears to be BHP Billiton as after yesterday's speculation of a higher bid for Rio Tinto, there are now suggestions that the Chinese government is looking to acquire a stake in the stock too and this should lend further support across the mining sector as a whole in the near term," Matt Buckland, a trader at CMC markets said.

Meanwhile, EADS topped the STOXX 200 after a better than expected earnings reports. Analysts at Sal. Oppenheim said, in a first reaction to the results, first-quarter EBIT before goodwill and exceptional items came in much better than both consensus and its own estimates.

"I expect a clearly positive share price reaction today," the analyst noted. "On one hand, first-quarter results are a really positive surprise; on the other hand it could be somewhat disappointing that EADS has not increased its guidance based on these outstanding first-quarter numbers."

EADS was last up 4.96 percent at 16.49 euros, down from a high of 17.10. Turning to telecoms, Spain's Telefonica edged up 0.47 percent, but underperformed its market slightly after its first-quarter results were merely in line with expectations.

Peer Telekom Austria rallied 3.7 percent on the back of its first-quarter earnings. Among financials, BNP Paribas was a strong performer, up 2.1 percent after its first-quarter net profit beat consensus and as the French bank reassured on its capital levels and crisis exposure.

Natixis Securities stressed that the group's Tier 1 capital ratio remains stable at 7.6 percent, which should assuage fears of a possible capital increase, and provide welcome relief in the wake of Credit Agricole's announcement Tuesday.

In the Netherlands, ING climbed 1.8 percent as the Dutch bancassurer's released a mixed bag of first-quarter results but reassured investors with only 55 million euros in subprime-related write-downs.

Franco-Belgian financial services group Dexia in contrast, fell 2.7 percent after the group posted a sharper-than-expected decline in net profit due to both mark-to-market adjustments and an unexpected 128 million euros loss on US subsidiary FSA's portfolio of insured U.S. second-lien mortgage bonds.

In other news, Infineon was up 1.5 percent after the Financial Times Deutschland said the chip maker's supervisory board chairman Max Dietrich Kley is considering a merger with Kohlberg Kravis Roberts' NXP Semiconductors.

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Asian shares end higher; BHP, Rio set records

The Nikkei closed up 1.2 percent at 14,118.55 and the Topix rose 1 percent to 1,373.04, after reversing direction in late trade. Shanghai's gains and better-than-expected earnings from France's BNP Paribas boosted sentiment in afternoon trade, said Yumi    Nishimura, manager for equity marketing at Daiwa Securities SMBC.
 
The S&P/ASX 200 closed up 1 percent at 5,872.7 points, marking a four-month high. The broader All Ordinaries index closed up 1 percent at 5,940.3 points.

BHP and Rio Tinto hit records during the session as investors scrambled for the shares. BHP's rise was fuelled by talk that a Chinese group was about to swoop on the world's top miner, while Rio Tinto gained on speculation that BHP was preparing to sweeten its offer for the group, ranked the world's third-biggest miner.

BHP ended up 6.1 percent at A$48.56 after hitting a record high of A$48.90. The Shanghai Composite ended up 2.7 percent to 3,657.43, led by steel and cement companies that are expected to play an active role in repairing and reconstructing the area hit by the quake. Huaxin Cement, Ningxia Saima Industry and Jiangxi Wannianqing Cement all rose by the 10 percent daily limit.

Elsewhere, the South Korean Kospi closed up 0.1 percent at 1,843.75. The benchmark was lower for much of the session on oil price worries -- Korea imports all of its fuel. The benchmark Straits Times Index slipped 0.2 percent to close at 3,198.51. The Malaysian KLSE was up 0.1 percent at 1,287.74 and the Philippines Composite rose 0.5 percent to 2,562.53.

while the Jakarta composite index closed up 1.3 percent at 2,449.34. Hong Kong and Singapore face a more "measured" impact, mostly on inflation readings. China, Thailand and Malaysia will weather the storm -- Malaysia is a net exporter of oil, and Chinese and Thai growth will act as a buffer, said Guie.

Oil refiners fell on concerns the higher crude price will raise their costs. Petrochina eased 0.6 percent to HK$10.90 and Sinopec fell 2.2 percent to HK$7.49. NAB dropped 2.0 percent to A$33.70, ANZ retreated 1.8 percent to A$22.72 and Commonwealth Bank lost 0.9 percent to $A44.96.

In Tokyo, Big banks fell with Mizuho Financial Group shedding 1.2 percent to 517,000 yen, Mitsubishi UFJ Financial down 2 percent to 1,055 yen and Mitsui Sumitomo Financial Group down 1 percent at 830,000 yen.

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Oil falls as U.S. energy stocks rise

LONDON - Oil fell after U.S. distillate inventories, including heating oil, rose above expectations and crude stocks in the world's top consumer grew last week.

Oil on Tuesday hit a record of $126.98, partly on a rally in the distillate market. However, prices plunged Wednesday, immediately after the U.S. Energy Information Administration reported distillate stocks, which include heating oil, increased by 1.4 million barrels, against predictions for a 750,000 barrel gain.

"The larger than expected build in distillate stocks came on higher production and imports, versus somewhat weaker demand," said Tim Evans, energy analyst for Citi Futures Perspective.

Elsewhere in the report, crude oil inventories in the United States rose by 200,000 barrels in the week to May 9 and gasoline stocks fell by 1.7 million barrels.

At 3:54 p.m., New York-traded West Texas Intermediate crude for June delivery was down $1.12 cents at $124.68 a barrel.

In London, Brent crude for June delivery was down $1.60 at $122.50. Looking ahead, the market will keep a close eye on U.S. gasoline inventory as the driving season kicks off in late May.

On Tuesday, oil's record was reached on news that Iran, the world's fourth-biggest oil producer, is mulling a cut in production by up to 1 million barrels per day. Although those claims have been refuted by the country's oil minister, traders remain on edge.

"Whilst the Iranian oil minister was quick to refute suggestions of imminent cutbacks, the fragility of the market in respect of threats to supply coming on the foot of Middle East tensions and disruptions in Nigeria has resulted in an environment where the mere hint of geopolitical difficulties will inevitably result in a bullish surge," said Bank of Ireland analyst Paul Harris.

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