US & World Daily Markets Financial Briefing 16-06-2008

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Stocks trade mixed as oil climbs

NEW YORK - Stocks traded mixed Monday after another spike in oil prices and a decline in regional manufacturing activity touched off fresh concerns about the well-being of the economy.

A declining dollar helped push up the price of oil to nearly $140 per barrel. Light, sweet crude jumped $3.05 to $137.91 on the New York Mercantile Exchange.

Treasury prices were little changed in the early going Monday. Short-term Treasurys declined sharply last week amid inflation fears.

Economic news stirred some concern among investors. The New York Federal Reserve Bank's Empire State index indicated that manufacturing activity in New York State continued to weaken in June. The index fell to a negative 8.7 from a negative 3.7 a month earlier.

The report is the earliest of several monthly regional snapshots that investors look to for insights on economic activity.

Wall Street is worried that rising prices in an already uncertain economy will cause consumers to tamp down spending. A pullback could deal a blow to the economy, as consumer spending accounts for more than two-thirds of U.S. economic activity.

In midmorning trading, the Dow Jones industrial average fell 48.20, or 0.39 percent, to 12,259.15. Broader stock indicators were mixed after trading lower shortly after the opening bell. The Standard & Poor's 500 index fell 3.31, or 0.24 percent, to 1,356.72, while the Nasdaq composite index rose 0.79, or 0.03 percent, to 2,255.29.

The moves follow a strong session Friday that left the Dow with a weekly advance and pared the declines seen by the S&P 500 and Nasdaq composite index for the week.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, was flat at 4.26 percent from late Friday. The dollar was mixed against other major currencies, while gold prices rose.

Federal Reserve Chairman Ben Bernanke, who was to appear at the Senate Finance Committee's Health Reform Summit to discuss challenges in health care, didn't make comments about interest rates or Fed policy in his prepared remarks. The central bank's rate-setting arm is scheduled to meet next week.

In corporate news, Lehman Brothers Holdings Inc. reported a second-quarter loss of $2.87 billion, or $5.14 per share. The figures were unchanged from what the nation's No. 4 investment bank projected last week. The loss, the first for Lehman since it went public in 1994, follows misplaced hedges and trading positions. Lehman rose $1.97, or 7.6 percent, to $27.78.

Investors were reviewing a decision by insurer American International Group Inc. to name former Citigroup Inc. executive Robert Willumstad as chief executive. Willumstad replaces Martin Sullivan after AIG logged billions in losses on bad bets in the mortgage market. AIG, one of the 30 stocks that comprise the Dow industrials, rose 31 cents to $34.49.

Declining issues narrowly outnumbered advancers on the New York Stock Exchange, where volume came to 212.8 million shares.

The Russell 2000 index of smaller companies fell 0.02, or less than 0.01 percent, to 733.59. Overseas, Japan's Nikkei stock average rose 2.72 percent. In morning trading, Britain's FTSE 100 declined 0.40 percent, Germany's DAX index fell 0.98 percent, and France's CAC-40 fell 0.82 percent.

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Forex - Euro climbs as inflation figures cement rate hike expectations

LONDON - The euro rose after the final reading of May inflation in the 15-nation single currency area was revised higher, cementing expectations that interest rates will be raised next month.

The euro zone's harmonised index of consumer prices rose a final 3.7 percent year-on-year in May, revised up from a provisional estimate of a rise of 3.6 percent. Inflation is now 1.7 percentage points above the European Central Bank's 2.0 percent target, and investors are increasingly convinced there will be an interest rate hike next month.

"High oil and food prices are already clearly denting any hopes for a pick-up of private consumption but only a severe  deterioration of economic confidence indicators might prevent the ECB from pulling the rate trigger at the next rate-setting meeting," said ING analyst Carsten Brzeski.

This gave the euro some momentum after a lacklustre start to trading on the currency markets following the lack of comments on foreign exchange issues at the G8 summit.

The communique from the ministers' meeting in Japan focused on slowing economic growth and rising oil prices, disappointing some investors who had been looking for some specific comments on the weak dollar and a hint that intervention in the foreign exchange markets was a possibility.

In the run-up to the meeting U.S. Treasury Secretary Henry Paulson had stated he believed the dollar needed to appreciate, but Japanese Finance minister Fukushiro Nukaga said no discussion of currency policy took place.

"The G8 June Communique was a major disappointment for dollar bulls who were looking for further confirmation of recent U.S. official comments on the currency," said Callum Henderson, head of forex strategy at Standard Chartered.

However, the dollar did gain some support following the announcement by Saudi Arabia that it would raise production in July by 200,000 barrels of oil a day.

"The decision by Saudi Arabia to raise production in July has provided a supportive tone for the dollar," said analysts at BNP Parbias, noting that the fact the move was made without a discussion among OPEC members shows the strength of U.S. influence on the Middle East Kingdom.

Later this afternoon, focus will be on the U.S. Empire State manufacturing index and figures on foreign net transaction.

Elsewhere, the pound remained well supported despite a gloomy economic outlook from business lobby the CBI. The CBI forecast that UK economic growth in 2009 will slow to its lowest level since 1992. But while growth is set to slow, inflation figures out tomorrow are set to confirm market expectations the Bank of England won't cut interest rates for several months to come.

The annual UK CPI rate is anticipated to have risen above 3.0 percent during May, triggering an open-letter of explanation from BoE governor Mervyn King to Chancellor of the Exchequer Alistair Darling. Analysts are doubtful though as to whether the letter will provide any clear signal on what the next move will be for UK interest rates.

"It might be a short letter, however, for there is very little any central bank can do in the current environment," said Commerzbank analyst Peter Dixon.

Forex

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Euroshares flat at open; oils, food group losses offset Dow, Asia gains

At 8:59 a.m., the DJ STOXX 50 was down 5.52 points, or 0.18 percent, at 3016.66 and the DJ STOXX 600 was down 0.67 points, or 0.22 percent, at 305.03.

Oil prices eased in Asian morning trade after top OPEC crude producer Saudi Arabia agreed to increase production, saying it did not want to be blamed for the impact of soaring prices.

New York's main oil futures contract, light sweet crude for July delivery, was 86 cents lower at $134.00 a barrel, having lost $1.88 on the New York Mercantile Exchange on Friday.

This weighed on heavyweight oil stocks with Eni down 0.53 percent and Royal Dutch Shell down 0.63 percent. Soco International dropped 6.2 percent as testing from the first drill stem test (DST) on TGD-1X-ST1 proved inconclusive. While analysts said they remain optimistic that the next tests will bring good news, some investors took profits amid the current uncertainty.

UBS cut its ratings on Danone, Cadbury and Unilever to 'sell' from 'neutral' and the trio fell 2.92 percent, 2.15 percent and 2.37 percent respectively.

But there were some strong upward moves, too, with shares in ASMI surging 11.4 percent in early trading on Monday on speculation of a takeover offer or a break-up of its operations, after it said on Friday that it is open to talks with Applied Materials but rejects the indicative offer made by the U.S. group.

ASMI rejected Applied Materials' indicative offer for its ALD and PECVD product lines, which are part of its loss-making Front-end business, but added it is open for talks about an alternative arrangement.

Applied Materials then issued a statement on Sunday indicating it has "strong interest" in meeting ASMI early this week to discuss possible transactions, including its proposed offer. "This could be the starting point for a bid on all of ASMI, or at least on all of the Front-end activities," brokerage Petercam said in a note.

Shares in ProSiebenSat.1 Media AG. were 3.11 percent higher after the pay-TV company said it is selling Scandinavian C More Group AB to Swedish TV4 for about 320 million euros, around 20 million euros more that the group said it was targeting for the unit.

The respective share purchase agreement was signed on Monday, the company said in a statement. Deutsche Postbank, up 0.93 percent, gained after reports that UK bank Lloyds TSB Plc. is in the early stages of examining the launch of a takeover bid for Germany's largest retail bank.

According to a report in the Sunday Telegraph, people close to Lloyds TSB say Sir Victor Blank, Lloyds' chairman, and Eric Daniels, its chief executive, are keen to look at a series of merger and takeover opportunities in continental Europe.

Commerzbank which had also reportedly been examining a merger as a step towards a three way tie-up with the group, added 2.27 percent.

Barclays, up 11.79, soared as analysts cheered confirmation from the UK banking group that it is considering a share placement. The Sunday Times had reported the banking group plans to raise 4 billion pounds within two weeks through a share sale to sovereign wealth funds.

Cazenove said it expects shareholders will welcome this structure as it avoids the drawn out timetable of a rights issue and ends the corrosive speculation about an equity issue that, the broker believes, has caused the share price to underperform its peers in recent months.

Anglo American, up 2.38 percent, was boosted by ongoing talk that it might be targeted by Vale. The Observer newspaper suggested major shareholders in the UK-listed mining group would accept a high enough offer, but Vale may have to offer at least a 25 percent premium.

Rio Tinto was up 3.96 percent on hopes it may receive a higher offer from BHP Billiton, while ENRC added 4.47 percent after ABN Amro upgraded the shares to 'buy' to reflect rising ferrochrome prices.

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Asian stocks rise as inflation worries ease; Australia dips, led by banks

Tokyo's benchmark Nikkei index closed up 2.7 percent at 14,354.37, while the broader Topix rose 2.2 percent to 1,401.69. A weaker yen boosted exporters like Toyota Motor, which gained 2.9 percent to 5,650 yen, and Nissan Motor, which climbed 2.2 percent to 978 yen.

South Korea's KOSPI was up 0.8 percent at 1,760.82 as Wall Street's rally on Friday encouraged investors to seek out bargains in the financial sector following last week's sell-off.

But the Australian benchmarks faltered and Hong Kong pared early gains on caution ahead of earnings reports by U.S. investment banks. Investors also awaited the U.S. housing market data to determine how the world's top economy is coping with the housing slump.

The Hang Seng Index finished 1.9 percent higher at 23,029.69 points, off a high of 23,232.99. Investors in Hong Kong turned cautious after Shanghai shares turned mixed as worries about the impact of rising inflation on the economy outweighed enthusiasm for bargain stocks.

The Shanghai composite index closed up 0.2 percent at 2,874.10.

In Sydney, the S&P/ASX 200 was down 0.1 percent at 5,371.7 and the All Ordinaries lost 0.1 percent at 5,476.3, led by financial services. "It is a fairly mixed sort of day, with sentiment towards the financial sector still a bit shaky -- that has outweighed gains by the likes of BHP and Rio Tinto," said Michael Heffernan, an equities advisor at Austock Securities.

Heffernan said investors were still reluctant to back financial services stocks as concerns remained about the credit markets and funding costs, which have risen in the wake of the global credit crunch.

Embattled investment firm Babcock & Brown closed steady at A$5.25, ending a market rout that last week saw its share price more than halved.

Babcock & Brown managed to stop the fall by saying it hadn't broken any lending covenants even though it was talking to its banks, which may review a A$2.8 billion debt facility. The firm is likely to sell assets to reduce debt, having seen its business model come unstuck.

Concerns about the state of credit markets crimping growth saw the nation's top investment bank, Macquarie Group, end down 1.1 percent at A$48.65.

Among the big banks, Commonwealth Bank was the only one that advanced, ending up 0.2 percent at A$41.84. National Australia Bank led the falls, dropping 2.6 percent to A$27.55, while ANZ fell 1.3 percent to A$21.70, Westpac lost 0.9 percent to settle at A$21.70 while its takeover target St. George fell 1.4 percent to A$29.05.

BHP Billiton and Rio Tinto rose following comments from Rio Tinto chief executive Tom Albanese, who expressed confidence in the long-term outlook for commodity prices due to continuing strong demand from China, driven by rapid urbanisation and industrialisation.

Albanese also again rejected BHP's $180 billion plus all-share bid for his group, saying that Rio Tinto's growth prospects meant the offer under-valued the group.

BHP gained 1.3 percent to A$43.61 while Rio Tinto also rose 1.3 percent to A$136.20. In Japan, Mitsubishi Motors gained 2 percent to 205 yen following a Nikkei newspaper report that Japan's fourth-largest automaker will tie up with PSA Peugeot Citroen Group in the area of electric cars.

Oil refiners buoyed the Shanghai market amid hopes for a price hike. The National Development and Reform Commission, the central government's economic planning agency, said China will ease price controls on oil and gas products "at an appropriate time."

PetroChina, the biggest index component, rose 2.60 pct to 15.38 yuan, while China Petroleum & Chemical Corp. (Sinopec) jumped 6.64 pct to 11.89 yuan.

Elsewhere, the Singapore Straits Times Index rose 1.9 percent to 3,036.92, while Malaysia's KLCI closed 0.7 percent higher at 1,238.06.

Earlier at midday the Philippine composite index closed up 2.6 percent at 2,620.76. The Taiwanese weighted index rose 0.8 percent to 8,169.77 and the Jakarta composite index was up 0.2 percent at 2,402.14.

The Indonesian composite index closed down 0.38 points at 2,398.04,

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Metals - Gold steady at lower levels; inflation concerns underpin

LONDON - Gold was steady at lower levels as the dollar held on to recent gains and as oil prices ticked lower.

The precious metal, now some 16 percent lower than a record $1,032.50 hit in March, has fallen from its peak as some expect the dollar could have seen its lowest levels this year.

Gold trades counter to the dollar as it is seen as an alternative asset and in line with oil prices as investors hedge against inflation.

While oil is lower than a record $139.12 struck on June 6, crude prices remain high and well supported by fund interest and a tight supply/demand balance.

"Given the increased global concerns towards inflation investors are likely to continue to view dips in gold favourably. Further psychological support is anticipated back towards $850, although in the short-term the market will remain vulnerable to further dollar related pressure," said TheBullionDesk.Com analyst James Moore.

Inflation concerns were also being stoked as markets digested the G8 communique, released on Saturday, which said: "Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable, and may increase global inflationary pressure."

At 9:32 a.m., spot gold was trading at $869.20 per oz against $869.50 in late New York trade on Friday.

Among other precious metals, platinum was trading down at $2,023 per oz against $2,033.50 in late New York trades on Friday. Sister metal palladium slipped to $442 per oz from $447, while silver was lower at $16.48 per oz from $16.52.

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