US & World Daily Markets Financial Briefing 15-09-2008

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US STOCKS-Wall St extends losses, AIG falls 50 pct

NEW YORK - U.S. stocks extended losses in early trade on Monday, with the Dow industrials and S&P both down nearly 3 percent as investors worried about the stability of the financial system after Lehman Brothers filed for bankruptcy.

The losses accelerated after shares of American International Group fell more than 50 percent to $5.99 on fears over the major insurance company's ability to raise capital in the face of mortgage-related losses.

The Dow Jones industrial average  was down 265.59 points, or 2.33 percent, at 11,156.40. The Standard & Poor's 500 Index  was down 28.81 points, or 2.30 percent, at 1,222.89. The Nasdaq Composite Index was down 38.30 points, or 1.69 percent, at 2,222.97.

U.S. industrial output drop biggest in 3 years

NEW YORK WASHINGTON - U.S. industrial production tumbled a bigger-than-expected 1.1 percent in August due to a big drop in auto production and a slide in utilities output that was tied to mild temperatures, a Federal Reserve report showed on Monday.
      
It was the biggest decline in industrial production, which includes factories, mines and utilities, since September 2005. Analysts were expecting a 0.3 percent slide. Manufacturing output fell 1 percent, also the largest decrease in three years, as auto production plummeted by 11.9 percent.
      
Output at utilities slid 3.2 percent because of a milder-than-usual August, the Fed said. It was the sharpest drop in utilities output since March. Production at mines slipped 0.4 percent.    
      
Capacity utilization, a measure of how close to flat out factories are running, slipped to a smaller-than-expected 78.7 percent, the lowest since October 2004. Analysts had forecast a 79.6 capacity use rate.
      
Industrial production in June and July were revised down to show smaller gains of 0.2 percent and 0.1 percent, the Fed said. Precautionary shutdowns in the Gulf of Mexico in advance of Hurricane Gustav curtailed refinery activity and oil and gas extraction, but the effect on total industrial production was less than 0.1 percent, the government said.
      
Capacity utilization is 2.3 percentage points below its 25-year average, the Fed said.

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FOREX-Yen rallies on financial fears, dlr rebounds

LONDON - The yen appeared set on Monday for its biggest daily percentage gain versus the dollar in nearly two years as risk aversion mounted after Lehman Brothers filed for bankruptcy protection.

But the dollar rebounded from early losses against other major currencies such as the euro and rose sharply versus higher yielding units as oil slid to seven-month lows and on fears the U.S. banking problems will spread to other parts of the world.

"There is a high likelihood that the distress in financial markets and wider evidence of slowing global growth are prompting investors, particularly U.S. investors, to repatriate those flows back into the United States and clearly that's been boosting demand for the dollar," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi-UFJ.

"That seems to be the strongest influence in the market at the moment and outweighing the negative sentiment towards the U.S. financial sector, which in the past would help fuel dollar weakness."

Higher-yielding currencies such as the Australian dollar fell, European stocks fell more than 4 percent and European credit spreads jumped wider. U.S. stock index futures indicated a steep fall on Wall Street.

"In general, with equity markets today lower, it's the yen and the lower-yielding currencies which are strong," said Marcus Hettinger, global FX strategist at Credit Suisse.

The market was also digesting news Bank of America has agreed to buy Merrill Lynch and the Federal Reserve will accept stocks in exchange for cash loans for the first time ever.

Adding to worries about the extent of the global slowdown, China cut interest rates for the first time since February 2002 to prop up its slowing economy, which had been seen as a major driver of world growth to counter the downturn elsewhere.

At 1204 GMT, the dollar was down 2.1 percent against the Japanese currency at 105.66 yen -- the biggest one-day fall since early 2007 -- while the euro dropped 2.7 percent to 149.16 yen. Seen also as a safe haven, the Swiss franc rose against the dollar, which fell 0.5 percent to 1.1245 francs.

The euro slipped 0.7 percent to $1.4120, erasing early gains, while the Australian dollar fell 2.6 percent to $0.8018.

"The initial jump (in euro/dollar) was a reaction to expectations for a U.S. rate cut. But it hasn't really changed the macro scenario. Europe is just as exposed to the financial mess as much as anyone," said Geoffrey Yu, FX strategist at UBS.

The uncertainty was so high that major central banks around the world including the European Central Bank, Bank of England and Bank of Japan said they stood ready to help soothe markets.

There is also speculation that the Fed, which holds its regular policy meeting on Tuesday, may cut interest rates again. Rate sensitive Fed funds futures are pricing in an 82 percent chance of rates falling to 1.75 percent from 2.0 percent at the September meeting.

Lehman Brothers Holdings filed for bankruptcy protection on Monday after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crisis.

Underscoring the dire situation in the U.S. financial sector, 10 of the world's biggest banks have pledged to establish a $70 billion borrowing facility to bolster worldwide liquidity and reduce volatility in what they called an "extraordinary market environment."

Wall Street even arranged a rare emergency trading session on Sunday to allow dealers in the $455 trillion derivatives market to reduce their exposure to Lehman, though turnover was said to have been light. There are no major U.S. economic data releases due later on Monday and all eyes will be on further developments in the U.S. financial system and Wall Street's reaction to Lehman's news.

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Europe shares sink on Lehman bankruptcy, AIG report

LONDON -  European shares slumped on Monday as nervousness gripped the market after Lehman Brothers filed for Liquidation protection and a newspaper reported that AIG sought $40 billion from the Federal Reserve.

By 0843 GMT, the FTSEurofirst 300 index of top European shares was down 3.8 percent at 1,118.10 points, its lowest in nearly two months. It is down 26 percent this year.

Out of 314 shares traded on the index, 311 were down.

Lehman filed for Liquidation protection, after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crisis. Its shares plummeted 80 percent in Frankfurt.

Financial market woes continued with American International Group, working to stave off rating downgrades and shore up the capital of its holding company, made an unprecedented approach to the U.S. Federal Reserve seeking $40 billion in short-term financing, the New York Times said. AIG officials did not immediately respond to requests for comment.

Banks topped the weighted losers list, with BNP Paribas and Societe Generale down between 6 and 9 percent.

The DJ Stoxx European banking index and European insurance index were down 5.4 percent and 5.9 percent respectively.

"This is a perfect storm in a perfect storm. There are two ways of looking at it: one, as financial Armageddon, the other as a dose of realisation of the level of complexity of the problem people are dealing with," said Justin Urquhart Stewart, investment director at 7 Investment Management. "It's a return to pure capitalism, the survival of the fittest -- the government can't, and won't, bail everybody out."

Britain's FTSE fell 3.7 percent, Germany's DAX lost 3.6 percent and France's CAC fell 4.5 percent.

Bank of America Corp agreed to buy Merrill Lynch in an all-stock transaction that Bank of America said is worth $50 billion.

A newspaper reported on Sunday that Swiss bank UBS would have to write down another $5 billion on its risky investments in the second half of the year. Its shares were down 8.4 percent.

"It can be the final clean up, but you have a risk within the financial system to see a lot of downgrading and losses. Beyond this point, my concern is the real economy," said Valerie Plagnol, chief strategist at CM-CIC Securities, in Paris.

"We are faced with quite a dramatic credit crunch ... the fact that the central bank is widening its collateral to include stocks may prove to bring some support to the market, but I don't know. The Fed is really doing its best to avoid any major crash."

The Federal Reserve took new steps on Sunday to ease trading disruptions. The Fed said it would begin accepting equities as collateral for emergency loans for the first time ever, and said it would increase the amount of Treasury securities it auctions regularly under one of its lending programs.

Commodity stocks also fell, hit by a broader sell off in the market and falling prices of metals and crude. Key base metals fell between 0.3 and 2.7 percent, while crude tumbled below $100 a barrel to a six-month low.

BP, Royal Dutch Shell, gas producer BG Group and Tullow Oil shed between 2.3 and 5 percent.

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Asian Market Summary

AUSTRALIA

Australian shares fell 1.8 percent on Monday on concerns about global financial health after investment bank Lehman Brothers filed for bankruptcy protection and Merrill Lynch agreed to be bought.
   
Macquarie Group ended down 10 percent at A$39.46, though miners lent some support after metal prices rose.
   
The benchmark S&P/ASX 200 index ended 86.1 points lower at 4,817.7, according to the latest available data, after earlier falling to a five-week low of 4,770.9.
  
New Zealand's NZX50 index fell 1.2 percent to 3,319.9.

INDIA

Indian shares closed nearly four percent lower, rattled by news of Wall Street investment bank Lehman Brothers filing for bankruptcy and Merrill Lynch being acquired by Bank of America.
   
Elsewhere in Asia Taiwan shares fell 4.09 percent. Tokyo, Hong Kong, Seoul and China markets were closed for a holiday.
   
The 30-share benchmark Sensitive Index of the Bombay Stock Exchange tumbled 469.54 points or 3.35 percent to 13,531.27 while the broader 50-share S&P CNX Nifty of the National Stock Exchange fell 3.96 percent to 4,061.00.
   
All indices of the Bombay Stock Exchange closed in the red on broad-based selling as investors anticipated foreign fund outflows. The real estate index, which fell 7.65 percent, and the IT index that dipped 5.5 percent were among the hardest hit.
   
Technology shares fell as the news of Lehman Brothers and Merrill Lynch renewed fears that IT spending in the world's largest economy will drastically fall, impacting the revenues of Indian software exporters.
   
Satyam Computer fell the most, sliding 9.45 percent to 368.15, followed by India's largest software exporter Tata Consultancy Services dipping 5.74 percent to 761.80 points. Infosys fell 4.24 percent to 1,574.40 rupees and Wipro fell 4.16 percent.
   
Among banks ICICI Bank Ltd. closed 3.82 percent lower at 627.90, after sliding as much as seven percent intra-day while India's biggest lender State Bank of India recovered earlier losses to close 1.55 percent lower at 1,488.90, after dipping to a low of five percent during the day.
   
Among the biggest decliners was India's largest real-estate developer DLF Ltd., which fell 7.54 percent to 432.60 percent. A gloomy market took little notice of a fall in crude prices -- which fell $4.44 down at $96.74 a barrel in New York trade.

The fall saw shares of Indian oil marketing companies Hindustan Petroleum Corp. Ltd. and Indian Oil Corp. rise. HPCL rose 2.96 percent to 240.25 and IOC grew 1.67 percent.

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Oil shares fall on lower crude price, Lehman woes

LONDON - Shares in European oil producers and oil services companies dropped on Monday as oil prices fell and stock markets globally felt the fallout of the Lehman Brothers bankruptcy filing.
   
The DJ Stoxx European oil and gas sector index traded down 5.7 percent at 1154 GMT, underperforming a 4.8 percent fall in the DJ Eurostox 50. 

 In the past year, rising oil prices meant oil majors such as Royal Dutch Shell Plc and BP Plc were seen as defensive plays amid weakness in global stock markets.
  
However, with oil down from a peak above $147/barrel in July to under $95/bbl on Monday, the oil majors are now suffering even more than many other sectors.
   
The companies that build and operate the oil companies' facilities saw their shares hit even more than their clients.
  
Shares in Saipem, Europe's largest oil services company by market value, fell over 6 percent and industry number 2, France's Technip, fell 7.4 percent.
   
"We have lowered our price targets across the board on average by 8.5% to reflect price-earnings contraction," analysts at Morgan Stanley said in a research note on Monday, citing "more pronounced perceived risks of a continued global economic slowdown".
   
BP and Shell were down around 4 percent.

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