US & World Daily Markets Financial Briefing 14-07-2008

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Stocks trade mixed on plan to aid Fannie, Freddie

NEW YORK - Stocks turned mixed in early trading Monday as investors lost some of their initial enthusiasm over the government's plans to shore up confidence in mortgage financiers Fannie Mae and Freddie Mac.

Shares of the government-chartered companies advanced in volatile trading after tumbling last week amid concerns they would succumb to losses in their mortgage portfolios. Statements Sunday from the Treasury and the Federal Reserve that they would aid the companies if needed has eased some worries of further turmoil in the credit markets.

The Fed said it would lend to the two companies "should such lending prove necessary." Treasury Secretary Henry Paulson said his department is asking Congress for quick approval of a plan to expand its line of credit to the two companies and to make an equity investment in them if necessary.

Wall Street has been on edge about the well-being of the companies because Fannie Mae and Freddie Mac hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States. Worries over their future led to a volatile session Friday in which the Dow Jones industrial average dipped below the 11,000 mark for the first time in about two years before paring its losses.

While the companies say they have adequate access to capital, the government's effort to help the companies is designed to reassure investors who have grown nervous about further fallout from the nearly year-old credit crisis. A weak housing market has eroded the value of many securities backed by now faltering mortgages.

In the first hour of trading, the Dow rose 27.60, or 0.25 percent, to 11,128.14 after spiking nearly 140 points in the opening minutes of trading.

Broader stock indicators were mixed. The Standard & Poor's 500 index rose 1.74, or 0.14 percent, to 1,241.23, and the Nasdaq composite index fell 6.68, or 0.30 percent, to 2,232.40.

Declining issues outnumbered advancers by about 4 to 3 on the New York Stock Exchange, where volume came to 191.1 million shares.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, fell to 3.93 percent from 3.96 percent late Friday. The dollar was mixed against other major currencies, while gold prices rose. Light, sweet crude fell 53 cents to $144.55 on the New York Mercantile Exchange.

Fannie Mae shares rose 24 cents, or 2.3 percent, to $10.49, while Freddie Mac jumped 29 cents, or 3.7 percent, to $8.04 after announcement of the government's plans.

Sen. Charles Schumer on Sunday defended himself against claims by regulators that he was in part to blame for a run on IndyMac Bancorp Inc. that led to the bank's takeover by the government Friday. IndyMac is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said after taking control of the bank.

Anheuser-Busch Cos. agreed to a sweetened $52 billion takeover bid from Belgian brewer InBev SA. The deal involving a marquee name in American business combines the maker of Budweiser and Bud Light with the producer of Stella Artois and Beck's. Anheuser-Busch rose 87 cents to $67.37.

Yahoo Inc. revealed Saturday it had rejected Microsoft Corp.'s latest attempt to acquire its online search engine in a joint proposal made with activist investor Carl Icahn, who is leading an effort to remove Yahoo's current board. Yahoo fell 78 cents, or 3.3 percent, to $22.79, while Microsoft rose 42 cents to $25.67.

The renewed concerns about the financial sector come in what is expected to be a busy week for corporate news, with a flurry of quarterly results due from names like Intel Corp., Cola-Cola Corp., Microsoft Corp. and Citigroup Inc.

The Russell 2000 index of smaller companies fell 1.62, or 0.24 percent, to 673.33. Overseas, Britain's FTSE 100 rose 1.95 percent, Germany's DAX index rose 1.55 percent, and France's CAC-40 advanced 1.93 percent.

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U.S. dollar remains firm after bailout of Fannie Mae/Freddie Mac

The dollar remained firm after the U.S. government effectively bailed out U.S. mortgage giants Fannie Mae and Freddie Mac.

U.S. Treasury Secretary Hank Paulson said yesterday the monetary authorities will provide additional liquidity to the troubled mortgage groups and pledged to buy stakes in the pair should market conditions worsen.

"The dollar gained ground overnight in the wake of the US Treasury's dramatic announcement to inject equity and/or debt into major US lenders, Fannie Mae and Freddie Mac," said Neil Mellor, currency strategist at Bank of New York Mellon.

The dollar's gains though have been limited, partly because of a New York Times article last Friday, which broadly heralded the effective bailout, and amid ongoing worries about the health of the US economy and a slew of earnings results from major U.S. banks due this week.

"We are still in a trend which is quite dollar negative so it may be a temporary relief," said Johan Javeus, FX strategist at SEB Merchant Banking. "The U.S. problems are still of course there even if measures are being taken to alleviate the effects," he added.

U.S. Federal Reserve chairman Ben Bernanke takes centre stage Tuesday when he presents his half-yearly update on monetary policy and the economy to Congress. In particular, markets will be seeing if he tones down his anti-inflationary rhetoric amid the ongoing financial stresses in the U.S.

Money markets have scaled back their expectations for monetary tightening from the Fed and now don't expect it to start hiking until the autumn.

"Whilst the Fed continues to fight an inflation threat armed with rhetoric and hopes for a stronger currency, the European Central Bank has shown that it is willing to act, and do so despite growing concerns over the health of the euro zone economy," said Bank of New York's Mellor.

"Accordingly, an assault on $1.60 for the euro still looks a realistic proposition from here  with the ECB's ostensibly neutral policy statement more a reflection upon currency policy sensitivity than the Bank's contentment in its fight with price instability," he added.

The ECB lifted its key refi rate a quarter point earlier this month and has indicated that that will be the only such increase.

Euro zone inflation figures on Wednesday will be closely monitored to see if there may be another increase this autumn.

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Euroshares gain as DJIA seen up, Alliance & Leicester climbs on Santander bid

LONDON - Europe's largest exchanges added to gains midday as a flurry of M&A news and reports and stronger than hoped for earnings from Philips added to investor enthusiasm. The DJIA is seen opening sharply higher.

At 11.54 a.m., the DJ STOXX 50 was up 39.95 points, or 1.45 percent, at 2795.94 and the DJ STOXX 600 was up 4.22 points, or 1.56 percent, at 274.58.

In Europe, Alliance & Leicester shares soared 46.75 perecent after the UK mortgage bank said it agreed to be taken over by Banco Santander, in a deal valuing the UK's seventh largest bank at 1.259 billion pounds.

The acquisition will enable Santander to combine its UK business, Abbey, with A&L, which should "benefit from increased efficiency and should, over time, enable A&L's cost of funding to be reduced from the current high levels."

Alliance & Leicester said that the deterioration in economic conditions and turbulent financial markets have contributed to its decision to recommend the deal.

TNT shares soared 30.15 percent after a newspaper report suggested FedEx was in preliminary talks to buy its Dutch rival.

"While Fedex has a highly developed intercontinental service, it is relatively absent in the European domestic (ex UK) and cross-border market. As such, FDX/TNT combination always has (and continues) to make sense to us," said Christopher Combe, senior equity analyst at Jefferies.

Continental AG climbed 25 percent after the company confirmed it had "one brief conversation about a possible engagement" by Schaeffler in Continental.

A number of media reports said Schaeffler plans to make a 10-billion-euro bid for Continental, and said Schaeffler is prepared to take its bid hostile should Continental reject it and traders noted talk that Bosch GmbH might be willing to make a counter-offer.

Imperial Energy soared 20.27 percent as it confirmed it has received an approach, with traders suggesting the most likely bidder is India's ONGC. Merrill Lynch said any offer -- for all or part of the group -- is likely to be at a significant premium.

Norsk Hydro fell 12.54 percent after warning its second-quarter earnings will be negatively hit by cost increases at its aluminium metals business.

And SBM Offshore slumped 20.57 percent after it said the costs of its major projects have exceeded previous budgets and will lead to a decline of 20 percent in its full-year profit target of $280 million after Friday's market close. Cheuvreux cut its recommendation to 'underperform' from 'selected list'.

News was better at Philips. The Dutch consumer electronics group a resilient set of second quarter numbers. Petercam said the results should take away further worries about Philips running into major problems and upgraded the stock to 'add' from 'hold'.  Shares added 7.16 percent.

Elsewehere, Fortis added 2.54 percent after the group said Friday that CEO Jean-Paul Votron would leave the company "by mutual agreement".

Analyst Ivan Lathouders at Bank Degroof said the price is expected to react "positively," but added that Votron leaving "doesn't really change the situation at Fortis". "The significant part of the solvency plan still has to be put into action," he added.

Other banks also took heart from the recovery on global markets and M&A in the sector, with Credit Agricole up 4.06 percent, Societe Generale up 3.63 percent and Bradford & Bingley up 13.16 percent.

Telecom Italia shares fell 2.25 percent amid increasing concern that its second quarter update at the beginning of August will disappoint.

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Asian stocks lower ahead of results of U.S. banks

HONG KONG - Stock markets across Asia closed lower Monday, with benchmarks in Japan, Australia and Hong Kong sliding into negative territory as nervousness built ahead of the release of quarterly results of top U.S. investment banks.

Worries about rising oil prices and doubts over the effectiveness of U.S. government measures to shore up mortgage giants Fannie Mae and Freddie Mac added to the downdraft.

Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. on Thursday are expected to report profit declines. Citigroup Inc. -- the nation's largest bank by assets -- is expected to post its third straight quarterly loss.

"We are seeing weakness following concerns in the U.S. about the financial sector," said Elvina Simpson, an equities analyst at CommSec in Sydney.

Australia's S&P/ASX 200 slipped 1.2 percent to 4,921 and the All Ordinaries was down 1.2 percent at 5,5007.9.

In Tokyo, the Nikkei 225 index lost 0.2 percent to 13,010.16 and the Topix was down 0.4 percent at 1,280.72. The Kospi was up 0.6 percent at 1,558.62.

The U.S. Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary" at the same rate given to commercial banks. Treasury is also seeking expedited authority from Congress to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies -- if needed.

"The fractious market mirrored a mixed assessment by investors about the steps as they appeared to find it difficult to judge whether they will be efficient in rescuing troubled U.S. financiers," said Soichiro Monji, chief strategist at Daiwa SB Investments.

The plight of Fannie Mae and Freddie Mac is the market's focus because they are holding or guaranteeing about $5 trillion worth of mortgages, or about half the outstanding mortgages in the United States.

"The market will likely be trading softer until the release of quarterly earnings from U.S. banks this week," Monji said. "With most of the bad news expected to come out this week, the market may soon see a near-term bottom."

The Hang Seng index gave back early gains, to close 0.8 percent lower at 22,014.46 as investor anxiety set in ahead of the key economic data from the mainland and earnings announcements by U.S. investment banks.

China is scheduled to announce June CPI and other economic data Thursday. Analysts are expecting China's inflation to have slowed to a five-month low of 7.1 percent in June.

"Huge losses from U.S. investment banks will of course impact on sentiment and will make trading volatile this week. Worries about monetary tightening in China will resurface as its CPI is released," said Matthew Kwok, research head at Tanrich Securities.

"China is unlikely to relax monetary tightening until maybe the end of the year," said Kwok. The Shanghai composite index was up 0.8 percent at 2,878.26.

Elsewhere in Asia, the Philippine Composite index was up 0.8 percent at 2,457.27. The Singapore Straits index was down 0.8 percent at 2,904.12. The Jakarta composite index slipped 0.8 percent at 2,259.54.

Malaysia's Kuala Lumpur Composite Index (KLCI) lost 0.6 percent to 1,144.0 and Taiwan's weighted index closed down 1.21 percent at 7,156.96.

India's main stock index, the Sensex of the Bombay Stock Exchange, closed down 139.34 points, or 1.03 percent, at 13,330.51 points while the S&P CNX Nifty of the National Stock Exchange closed down 0.23 percent at 4,039.70 points.

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Base metals supported by supply jitters, safe haven buying

LONDON  - News some Chinese smelters will trim output lifted lead and zinc prices Monday after strong gains last week. The reports added to supply fears after similar measures recently announced by the country's aluminium smelters.

Other metals held onto most gains made last week as wider economic turmoil prompted investors to buy commodities as safe haven assets.

The U.S government plan to shore up mortgage finance firms Fannie Mae and Freddie Mac helped calm markets Monday but did little to allay fears about the health of the U.S. financial system.

"The base metals, like other commodities, have gained on asset-switching from troubled equity markets, as well as curbs on supply, either from disruption or power-related issues, as is now the case in China," said William Adams, an analyst at Basemetals.Com.

China's smaller zinc and lead smelters will cut output by 10 percent for three months to bolster prices and ease a power shortage in the world's largest producer of the metals ahead of next month's Beijing Olympics.

However, Zhuzhou Smelter Group Co. and Huludao Zinc Industry Co., China's two biggest smelters, are among producers that aren't part of the accord, said Adams.

The latest cuts are in addition to the reductions of as much as 10 percent by China's top 20 aluminium producers that helped send prices to a series of records last week, the most recent at $3,380 per tonne.

By 10:46 a.m copper was up at $8,300 from $8,270 at the close Friday. Nickel was trading at $21,400 from $21,600, aluminium was steady at $3,310 from $3,317. Zinc rose to $2,037 from $2,025, while tin eased to $22,950 from $23,000. Lead, meanwhile, was up at $1,985 from $1,965.

India spot gold edges lower on global cues, lack of physical buying support

MUMBAI - India spot gold prices closed marginally lower on Monday, tracking international bullion markets, amid a lack of physical buying support in the domestic market.

At 2.00 p.m. in London, gold was trading at $961, close to a four-month high on Friday, as near record oil prices stoked inflation woes but some strength in the dollar capped gains. In intraday trades Friday, gold hit $967.70, its highest price since mid-March.

"Domestic demand was very dull as buyers were waiting for prices to go down to $950 levels," said a treasury official at Union Bank of India. Dealers expect prices to come down in the next two days, as tensions over oil producer Iran have eased and crude prices have also slipped from record highs hit Friday.

In Mumbai, gold of 0.995 purity closed 15 rupees lower at 13,310 rupees per 10 grams and gold of 0.999 purity closed 15 rupees lower at 13,375 rupees per 10 grams. Silver of 0.999 purity closed 30 rupees lower at 25,595 rupees per kilogram.

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