US & World Daily Markets Financial Briefing 15-12-2008

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U.S. Stocks Mixed As Madoff Losses Hit Home

U.S. stocks sputtered in mixed trade at Monday's start, with energy shares climbing along with the price of crude and the financial sector weighed as firms detailed their exposure to the alleged $50 billion fraud by Bernard Madoff.

The Dow Jones Industrial Average (DJI) gained 9.8 points to 8,639.48. The S&P 500 (SPX) gained 1.04 points to 880.77, while the Nasdaq Composite (RIXF) shed 3.83 points to 1,536.89.

The economic calendar for Monday included the December Empire State Index, with the gauge of manufacturing activity in the New York region contracting at a record pace in November.

In a separate report, the Federal Reserve said output of the nation's factories, mines and utilities declined 0.6% in November on broad-based weakness across manufacturing industries. .

Investors will also be looking ahead to Tuesday's Federal Reserve interest-rate decision, where rates are expected to come down half a point to 0.5%. .

"The FOMC meeting should be overshadowed this week by earnings from Goldman Sachs (GS) on Tuesday and Morgan Stanley (MS) on Thursday," said Marc Pado, U.S. strategist at Cantor Fitzgerald.

Crude-oil futures rose before a meeting of the Organization of Petroleum Exporting Countries later in the week, where production is expected to be cut again. Light crude for January delivery climbed $2.29 to $48.57 a barrel in early trade on the New York Mercantile Exchange. .

The dollar fell sharply against other major currencies, with the dollar index (DXY) down 0.8% to 82.44. "The uncertainty surrounding the fate of the U.S. auto industry, coupled with the market's expectation of an imminent Fed rate cut on Tuesday, pressured the dollar to start the week in a distresses state," said Rebecca Lia, a currencies analyst with Wachovia Corp.

The Wall Street Journal reported Monday that the Bush administration is sizing up what terms to seek from the auto industry in return for a bailout, including whether to push the companies to file for liquidation.

The administration is discussing a rescue totaling $10 billion to $40 billion or more, the Journal reported.  Shares in General Motors Corp. (GM) and Ford Motor Co. (F) both rose in early trade.

As more details of the alleged fraud by former Nasdaq Chairman Bernard Madoff emerged, Banco Santander (STD) said its customers had an exposure of around $3.1 billion though its Optimal asset-management business, while Japan's Nomura (NMR) has an exposure of around $302 million.

Former Dow component Honeywell International Inc. (HON) shares 9.3% after the industrial company reaffirmed its full-year guidance. Late Sunday Huntsman Corp. (HUN) ended its agreement to be acquired by Hexion Specialty Chemicals Inc. and reached a settlement over litigation. Huntsman said it is due payments totaling $1 billion.

In international markets, Japan's Nikkei 225 rose 5.3% and the French CAC 40 index added 0.3%.

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FOREX-Dollar hits 2-mth low vs euro; US bailout, Fed eyed

LONDON - The dollar hit a two-month low against the euro and a basket of currencies on Monday, as investors shunned the U.S. unit on uncertainty surrounding the fate of its ailing automakers and the possible economic impact.

The dollar was starting to respond negatively to concerns about further weakness in the U.S. economy, after an ongoing run of weak data had boosted the currency due to an exodus from risky positions. "The tide seems to have turned around in recent sessions, with bad U.S. economic news now hurting the dollar rather than helping it," said UBS analysts in a research note.

By 1223 GMT, the euro was up 1.0 percent at an eight-week high of $1.3508, according to electronic platform EBS. The dollar also hit a two-month low against a basket of currencies at 82.897. Analysts said the dollar was also suffering as investor demand to dump risky positions and repatriate those funds back into the U.S. currency have started to dry up. Deleveraging trades have also started to calm as currency markets show some sign of stabilising, they added.

The yen fell slightly against the dollar to 90.65 yen, after hitting 13-year highs of 88.10 yen on Friday. Yen gains were capped on speculation that Japanese authorities could intervene to curb further rapid appreciation. Sterling was supported against the broadly weak dollar, although ongoing concerns about the rapid deterioration of the UK economy helped to push the pound to a record low of 90.22 pence against the euro, according to Reuters data.

Investors also awaited the outcome of a policy meeting by the Federal Reserve on Tuesday to see how close to zero the U.S. central bank will cut interest rates and indicate whether it will aggressively deploy quantitative easing measures to shelter the economy from a downturn.

The Fed is widely expected to cut rates by 50 basis points or more from 1 percent. With interest rates rapidly approaching zero, the Fed may also indicate more steps to provide liquidity into the market to help support the economy through a recession.

Investors fear a failure of any of the automakers would exacerbate a year-long recession and drag other companies under. A 0.3 percent rise in European shares and rallying Asian shares eased extreme risk aversion, prompting demand for higher-yielding currencies. The Australian dollar rose 0.3 percent and New Zealand dollar was up 1.2 percent.

Market reaction was limited to the Bank of Japan's quarterly tankan survey showing corporate sentiment deteriorated sharply. The headline index for big manufacturers' sentiment fell to a nearly seven-year low of minus 24, down from minus 3 in the previous survey in September.

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Oils lead Europe shares up at midday; banks fall

LONDON - European shares rose at midday on Monday, with oils gaining as crude rose on expectations of an OPEC production cut, more than offsetting banks that fell on worries about the sector's exposure to an alleged fraud.

At 1142 GMT, the FTSEurofirst 300 index of top European shares was up 0.8 percent at 836.05 points after rising as high as 843.89. The benchmark has lost more than 44 percent in 2008.

Oil prices rose more than 5 percent to $48.60 a barrel with OPEC Secretary General Abdullah al-Badri saying he expected a "very sizeable reduction" at this week's meeting in Algeria and that the market was oversupplied by about 100 million barrels.

BP, Royal Dutch Shell, Total, StatoilHydro and gas producer BG Group rose between 1.5 and 5.1 percent. Across Europe, the FTSE 100 index  was up 1 percent; Germany's DAX rose 1.9 percent and France's CAC 40 was 0.9 percent higher.

Markets also took heart from hopes that President Bush would rescue U.S. auto firms and prevent another major corporate collapse that could reverberate around the globe.

Further, Fed fund futures pointed to a 76 percent probability of a 75-basis point U.S. Federal Reserve rate cut on Tuesday following a two-day meeting.

Miners rose in line with higher metals prices. BHP Billiton, Anglo American, Vedanta Resources, Xstrata, and Rio Tinto rose between 1.7 and 5.6 percent.

But banks fell after news Santander, BNP Paribas, and Swiss private bank Reichmuth & Co became the latest parties to detail possible losses over exposure to an investment fund run by U.S. investor Bernard Madoff.

BNP Paribas shares fell 7.5 percent, Santander was down 0.6 percent and HSBC slipped 2 percent. Trade in Fortis shares were suspended, pending a statement on the financial impact of a court ruling suspending a state-led deal to dismantle Fortis and sell Belgian assets to BNP Paribas.

However, Irish banks were some of the biggest gainers in the index, as a pledge from the country's government to bolster their capital with an injection of up to 10 billion euros ($13.47 billion) was welcomed by investors.

Anglo Irish Bank and Bank of Ireland rose 19.4 and 15.9 percent respectively, while Allied Irish Banks rose 4 percent. Electrolux, the world's second-biggest home appliances maker, slipped 5 percent after it warned that 2008 results would fall short of expectations and said it would cut more than 3,000 jobs globally.

Automakers were mostly higher. BMW, Daimler AG, Peugeot, Fiat and Volkswagen were up 0.8-3.1 percent.

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Tokyo Sizzles, Ignoring Bad News; Karachi Drops

Most Asian markets ended higher Monday, spurred by hopes for a steep U.S. interest rate cut and after the Bush administration said it would step in to prevent a failure of U.S. automakers.

Japanese stocks led the charge, recovering most of the ground that they lost Friday, as investors brushed aside bad news, including a survey that showed a plunge in business confidence, Nomura Holdings' $302 million exposure to an investment firm run by Bernard Madoff and a report Toyota Motor Corp. could cut its earnings forecast.

"I think this is only a seasonal rally. The fundamentals can change overnight," said Dale Tsang, managing director at Imperial Dragon Asset Management Co. "One may not see the kind of panic-selling we saw earlier, but there will be continued selling over a long period of time," he added.

Going the other direction, Pakistani shares tumbled after the country's stock market regulator lifted a floor on stock prices that they had imposed in August, with analysts expecting further steep declines in coming days.

The Nikkei 225 Average finished 5.2% higher at 8,664.66, after dropping 5.6% Friday, while the broader Topix index gained 4.1% to 846.93.

The advance ignored Bank of Japan's tankan survey, which showed business sentiment dropped sharply, with the headline diffusion index for large manufacturers deteriorating at its fastest pace since August 1974, falling 21 points to minus 24. The reading was the worst in nearly seven years.

Thailand's SET Index rose 2.8% to 436.56 after opposition leader Abhisit Vejjajiva, an Oxford-educated economist and leader of the Democrat Party, won a parliamentary vote to become the country's prime minister. The vote came two weeks after a court sacked Somchai Wongsawat as prime minister, after finding his People Power Party guilty of fraud in a December 2007 election that brought it to power.

Hong Kong's Hang Seng Index rose 2% to 15,046.95, also rebounding after losing 5.5% Friday, and shrugging off a report in the Financial Times that HSBC Holdings has a potential exposure of $1.5 billion to an investment firm run by Bernard Madoff, a former chairman of Nasdaq, who was arrested last week and charged with securities fraud. An HSBC spokesman in Hong Kong declined to comment on the report.

China's Shanghai Composite rose 0.4% to 1,962.60. Peter Pak, vice president at BOCI Research, said expectations that the U.S. government will find "an alternative plan to save the Big Three" automakers and that the Federal Reserve may cut interest rates by at least a half-point later this week contributed to the buoyancy in the markets.

"Investors are anticipating stimulus measures from China before the Chinese New Year [in January]. The expectation is that the government may revise taxes to increase disposable incomes and also raise infrastructure spending," said Pak.

Taiwan's Taiex ended 3% up at 4,613.72 and Singapore's Straits Times Index gained 2% to 1,774.76, while India's Sensitive Index, or Sensex, added 1.3% to 9,815.23 by late afternoon.

Australia's S&P/ASX 200 rose 2.3% to 3,591.40 and South Korea's Kospi jumped 4.9% to 1,158.19, while New Zealand's NZX 50 index ended little changed at 2,676.43.

Pakistan's KSE 100 index ended 2.8% lower at 8,927.39 after the Securities and Exchange Commission of Pakistan lifted a floor imposed on stock prices in late August.

However, trading volumes were weak because of a 5% limit imposed on stock movements, analysts said. "Because shares can't move more than 5%, there are only sellers and no buyers," said Shuja Rizvi, Capital One Equities in Karachi.

Rizvi said that during the past three months, the floor on stock prices had resulted in off-market transactions at prices that were often nearly 35% lower than the prices quoted on the stock exchanges.

"Had the daily limit not been there, the market could have fallen 30% to 35% today itself," said Rizvi. "What we need right now is investor confidence. Once confidence returns, liquidity will follow."

Shares of HSBC Holdings (HBC) rose 2.4% in Hong Kong trading during the session, ignoring the report about its exposure to Madoff.

Nomura Holdings Inc. (NMR) stock likewise was up in Tokyo trading, rising 0.6%, after the brokerage firm said it has an exposure of 27.5 billion yen ($302 million) in investments made with Madoff. Nomura said it considers the exposure "as non-material considering our capital base."

Shares of BOC Hong Kong (Holdings) (BHKLY) dropped 4.7%, after the Hong Kong lender said its full-year profit was expected to "decrease considerably" from last year. BOC added that its parent Bank of China will extend a $2.5 billion subordinated credit facility to the bank to strengthen its capital base, provide "greater operating flexibility to meet its business development needs and to weather the economic uncertainties arising from the global financial turmoil."

Shares of Toyota (TM) surged 9.8%% and Honda Motor Co. (HMC) spiked 8.5% in Tokyo, while Hyundai (HYMLF) added 7.1% in Seoul.

The advance came after the U.S. Treasury Department said it stands ready to make funds available to automakers until lawmakers have time to consider a long-term rescue package next year. Auto stocks tumbled in Asian markets Friday, with some including Toyota and Honda plunging more than 10% in Tokyo trading, after a $14 billion loan package proposal to the Big Three automakers fell apart in U.S. Senate.

Toyota's gains Monday came even as the Nikkei business daily reported Sunday that the auto giant plans to cut capital expenditure because of falling sales and a weak global economic condition. Furthermore, the company was also expected to further revise downward its group earnings projections for the second-half of the current financial year, Kyodo News reported Saturday.

Resource stocks jumped as January crude-oil prices rose as much as $1.08 to $47.36 a barrel in electronic trading, after gaining $1.70 Friday to end at $46.28 a barrel on the New York Mercantile Exchange.

Shares of BHP Billiton (BHP) jumped 7.2% and Woodside Petroleum (WOPEY) rose 7.4% in Sydney. Commodities trader Marubeni Corp. (MARUY) gained 5.5% in Tokyo and Cnooc (CEO) rose 1.8% in Hong Kong. In Asian currency trading, the U.S. dollar bought 90.65 yen, compared with 91.35 yen late Friday.

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PRECIOUS-Gold rises on weaker dollar, equity rally

LONDON - Gold climbed in Europe on Monday as the dollar weakened against the euro and the yen, boosting interest in the metal as a currency hedge, and gains in equities and other commodities fuelled buying appetite.

Spot gold was quoted at $826.90/828.90 an ounce at 0950 GMT, against $819.90 an ounce in New York late on Friday. Traders are looking ahead to a decision on U.S. interest rates on Tuesday, after the Federal Open Market Committee's two-day policy meeting.

A cut in rates is likely to have a significant impact on the foreign exchange market, and consequently on gold. "We have the Fed interest rate decision this week... which should be the last big event of the year," said Afshin Nabavi, head of trading at MKS Finance in Geneva.

"Everyone is banking on a lower interest rate in the U.S. If the dollar continues to lose value, of course it will benefit gold."

Gold was reacting to a move higher in the euro versus the dollar, with selling of physical gold stocks in the Far East and technical resistance keeping a lid on gains, he said.

Gold tends to track the euro/dollar exchange rate closely, as it is often bought as an alternative investment to the U.S. currency and tends to move in the opposite direction to it. The dollar slipped against both the yen and the euro, striking a two-month low against the single currency as traders weighed comments from European Central Bank officials suggesting rate cuts may not be imminent.

Interest rate differentials between the United States and the euro zone are likely to widen, dealers said. The Federal Reserve is widely seen cutting rates by at least 50 basis points on Tuesday.

Equity markets are also rallying, demonstrating a sharper appetite for risk that is also buoying commodities. Asian stocks climbed nearly 4 percent on hopes the U.S. car industry will be bailed out. European shares rose at the open.

Firm buying interest also trickled into other markets, with commodities such as oil and industrial metals posting strong gains in Asian trade. Oil rose more than $1 a barrel on expectations of a deep OPEC supply cut.

Among other precious metals, spot silver tracked gold higher to $10.36/10.44 an ounce, against $10.23 in New York late on Friday.

The platinum group metals benefited from hopes for a bail-out of the U.S. automotive industry. Carmakers are major buyers of PGMs and weakness in the sector has pushed prices sharply lower in recent months.

"The Senate's rejection of the U.S. automakers' bailout deal put the PGMs in a weaker mood Friday," The BullionDesk.com analyst James Moore said.

"The metal has jumped over 3 percent this morning from Friday's close of $818 amidst renewed hope of a rescue deal for the beleaguered U.S. automakers."

News that major platinum producer Aquarius Platinum will keep its Everest mine in South Africa closed for at least six months is also likely to support prices.

Spot platinum  climbed to $831.50/851.50 an ounce from $805.50 an ounce, while palladium surged to a high of $178, before easing back to $172.50/180.50 an ounce, up from $168 late on Friday.

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