US & World Daily Markets Financial Briefing 16-09-2008

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NEW YORK - U.S. stocks fell sharply on Tuesday as investors worried about insurer American International Group's ability to secure desperately needed capital to avert more credit agency downgrades.

The losses added to the somber mood on Wall Street, which on Monday suffered its worst day since markets reopened after the Sept. 11, 2001 attacks on the United States.

AIG fell 63 percent to $1.72.

Dell Inc shares fell after the computer maker said it was seeing more softening in demand for technology, while Goldman Sachs shares tumbled after the investment bank posted a 70 percent slide in third quarter profits.

The Dow Jones industrial average was down 153.39 points, or 1.40 percent, at 10,764.12. The Standard & Poor's 500 Index was down 18.86 points, or 1.58 percent, at 1,173.84. The Nasdaq Composite Index was down 26.19 points, or 1.20 percent, at 2,153.72. The S&P was at its lowest level since October 2005

TREASURIES-Bonds jump on credit angst, rate-cut bets

NEW YORK - U.S. Treasuries jumped on Tuesday as investors unnerved by upheaval in the global financial system sought refuge in U.S. government debt, and market players increasingly bet the Federal Reserve will cut interest rates this afternoon.
   
Tame September readings on the U.S. consumer price index, together with tumbling oil prices, assuaged inflation worries, also contributed to the rise in bonds. They also reinforced the view Fed policy-makers will turn their focus to battle the market turmoil that could deepen the world's economic slowdown, rather than maintaining its stand to curb price pressures.
   
"The Fed has the blanket to ease because of this CPI number. Bonds are flying. Customers and their mothers are running scared," said Michael Franzese, head of government trading with Standard Chartered in New York.
  
The worsening credit crisis has hammered stock markets worldwide, leading to a halt in trading at exchanges in Moscow and Prague. The dramatic sell-off in global equities since Monday has spurred investors to scramble for cash and Treasuries with 30-year U.S. yields sinking to their lowest since the 1960s.
   
Benchmark 10-year notes were up 1-10/32 in price at 106-9/32. Their yield which moves inversely to price fell to 3.25 percent, the lowest since June 2003. Two-year U.S. government debt was up 10/32 in price for a yield of 1.58 percent, down 16 basis points from late Monday.
   
Thirty-year bonds were up 1-29/32 in price to yield 3.94 percent, a level not seen since the early 1960s and down 11 basis points from Monday.

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Sterling falls against dollar as o/night Libor soars

LONDON - The pound fell more than one percent against the dollar on Tuesday on evidence UK banks were reining in lending and as investors continued to curb risk exposure following the collapse of Lehman Brothers.
      
The overnight sterling Libor rate surged to 6.79375 percent on Tuesday from 5.49375 percent on Monday, the highest since April 2001 and well above the Bank of England's base rate of 5 percent, highlighting major concerns about the health of the financial sector.
      
UK bank shares extended their losses on the money market fixings. "Market conditions are very volatile and we are seeing the impact of the Lehman news continue to ripple through the market," Robert Minikin, senior currency strategist at Standard Chartered said.
      
Sterling continued to suffer from profit-taking after hitting a two-week high of $1.8128 early on Monday, he said. At 1125 GMT, the pound was down 1.10 percent against the dollar at $1.7795, while ongoing risk aversion trades dragged it to a four-and-a-half year low against the yen at 184.66 yen.
      
The euro was also higher against the pound, up 0.7 percent on the day at 79.78 pence, but still below Monday's high of just above 80.00 pence. The BoE on Tuesday injected 20 billion pounds as part of an exceptional fine-tuning operation in response to tight conditions in short-term money markets. It received nearly three times that amount in bids.
      
Market attention was focused on the possibility of a U.S. interest rate cut on Tuesday evening, while earnings results from Goldman Sachs and any fresh developments with troubled U.S. insurer AIG will also be closely watched.
      
Earlier, higher-than-expected inflation data had little impact on the pound as worries about the turmoil in the financial sector were seen increasing the chances of a Bank of England interest rate cut.

Markets have now fully priced in the prospect of a quarter point interest rate cut in November, with a sizeable chance of a cut as early as next month.

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European shares slip on AIG woes; Fed, Goldman eyed

LONDON -  European shares fell on Tuesday as global equities continued their slide amid turmoil in the financial sector, which led losers after a debt downgrade for American International Group.
   
The FTSEurofirst index of leading European shares was down 1.2 percent at 1,106.09 points, following a 3.6 percent slide on Monday after Lehman Brothers filed for bankruptcy protection. The index has fallen about 27 percent this year.
   
The DJ Stoxx European insurer index fell 2.7 percent, led by a 9.7 percent tumble in Swiss Re. Allianz, AXA Prudential and Aviva fell between 3.1 and 3.8 percent.
   
Underlining the unease among investors in financial stocks, the DJ Stoxx European banks index slid 3.5 percent. HBOS slid 11.3 percent, UBS fell 9.6 percent and Natixis lost 8.1 percent. "There's a smell of cordite in the air. It's like the day after the explosion. People are still extremely nervous. They're wondering what happens next," said Justin Urquhart Stewart, investment director at Seven Investment Management.
   
"Investors are looking at what other companies have weak balance sheets. Now we need a bit of leadership from the central banks and the regulators," he said. Oil shares fell after another drop in the price of crude up 2.4 percent.
   
Recruiter Adecco was 1.5 percent higher after saying it would not go ahead with a bid for UK rival Michael Page, which was down 28.8 percent. Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC 40 were down between 1.5 and 2.2 percent.
   
Shares pared losses after Germany's ZEW economic sentiment index indicator came in stronger than expected. The U.S. Federal Reserve announces its rate decision at 1815 GMT. Fed fund futures point to an 86 percent chance of a 25-basis point rate cut.
  
"Expectations of a rate cut have increased dramatically in the last few days, with most people now expecting a cut, though we still think rates will be held," said Henk Potts, strategist at Barclays Stockbrokers. "If rates are cut, you could argue both ways. The optimists will say it shows the Fed will use every weapon in their armoury to help the markets. The pessimists will say it shows desperation, and it's a sign of how weak the economy is." 
     
   
UK shares remained lower after the Office for National Statistics said inflation rose to 4.7 percent in August, from 4.4 percent in July. This reduces the chances of a cut in interest rates. Lafarge and Holcim were 1.4 and 2.9 percent higher respectively on rumours they would merge. Both companies declined to comment. 

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Asian stock market summary

JAPAN
The Nikkei 225 Stock Average shed 605.04 points to end at 11,609.72, its lowest close since July 2005, with investors dumping shares across the board after Lehman Brothers Inc.'s collapse fuelled fears about the U.S. financial system and hit stock markets worldwide.
  
Japan's top three lenders plunged, with No. 2 Mizuho Financial Group and No. 3 Sumitomo Mitsui Financial Group losing about 10 percent.

SOUTH KOREA
The Korea Composite Stock Price Index closed down 6.10 percent at 1,387.75, as fear over a U.S. financial system meltdown escalated after Lehman Brothers filed for bankruptcy and insurer American International Group Inc. (AIG) scrambled for survival.

CHINA
The benchmark Shanghai Composite Index closed down 4.47 percent at 1,986.64, led by banks after a rout on Wall Street.
   
The Shanghai A-share Index was down 4.46 percent at 2,085.67, and the Shenzhen A-share Index fell 1.30 percent to 598.74.
  
The Shanghai B-share Index fell 7.80 percent to 124.65, and the Shenzhen B-share Index was down 5.50 percent at 308.59.

AUSTRALIA
The benchmark S&P/ASX 200 index fell 1.4 percent to a two and half year closing low at 4,750.8, but recovered from an early trough as some investors bet that global central banks could join hands to stabilise fragile markets.
   
Sentiment remained downbeat, however, and nervous investors focused on the fight for survival of U.S. insurance giant AIG.

TAIWAN
The weighted index closed down 4.89 percent at 5,756.59, as the collapse of Lehman Brothers and troubles at AIG heightened worries about the U.S. financial sector.
   
Taiwan authorities said Tuesday that local financial institutions and individuals had exposure of about T$80 to Lehman.
   
Financials took a beating, with the sectoral index tumbling almost 7 percent, on fresh concerns over their exposure to mortgage-backed and other securities linked to U.S. institutions.

HONG KONG
The benchmark Hang Seng Index ended down 1,052.29 points at 18,300.61, dragged down by steep losses in finance, energy, and telecom plays. It was the largest single-day percentage drop since January.

 
INDIA
The benchmark 30-share Sensitive Index of the Bombay Stock Exchange closed 12.47 points or 0.1 percent lower at 13,518.80 points, recovering more than 450 points from the day's low of 13,051.73. The broader 50-share S&P CNX Nifty of the National Stock Exchange rose 0.05 percent to close at 4,074.90 points, off the day's low of 3,919.35 points.

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Gold down on oil, firm dlr; Fed meeting in focus

LONDON - Gold fell nearly 2 percent on Tuesday alongside a sharp drop in oil as the dollar firmed ahead of a decision on interest rates by the U.S. Federal Reserve.

Platinum slipped more than 5 percent to its lowest level since the end of 2006 as the escalating credit crisis reinforced fears that global economic slowdown could further hit demand from auto makers.

Although gold normally gains on safe-haven buying during financial crises, portfolio managers have been selling assets across the board after U.S. investment bank Lehman Brothers filed for bankruptcy.

As of 0920 GMT, spot gold fell 1.2 percent to $776.90 an ounce from a session low of $771.55 from Monday's close of $786.20. Earlier it touched a one-week high of $786.95.

Robin Bhar, analyst at Calyon, said oil and the dollar were weighing on gold. "Although gold might be struggling in the short-term, the longer this goes on, it should be positive," he said. "You might see more people coming into the market on the long side looking to buy gold if financial conditions continue to deteriorate."

Precious metals were undermined on selling led by Asian investors returning from a three-day weekend. Markets will closely watch the outcome of the Federal Reserve's meeting later in the day. Speculation of a rate cut is growing to help ease tensions in financial markets.

Investors and analysts will also scrutinise the Fed's statement on the outlook for growth in the United States. "Prices will be driven by this whole commodities panic -- the economic outlook will be the key driver today," said Standard Chartered analyst Daniel Smith.

OIL DOWN

The dollar slid to a two-month low versus a broadly rallying yen as a wave of risk aversion sparked by the collapse of Lehman Brothers rippled across markets. Crude oil prices slipped nearly $3 to a seven-month low as the escalating credit crisis reinforced fears that global economic weakness could further depress energy demand.

The most active December contract on COMEX was trading down $8.0 or 1 percent at $779.0 from the New York settlement. The benchmark August 2009 gold contract on the Tokyo Commodity Exchange was down 9 yen or 0.3 percent at 2,609 yen per gram from Friday's close.

"Investors are cutting their risk positions as uncertainties are increasing with share prices falling and also crude prices quickly plunging to near $90," said Shuji Sugata, a manager at Mitsubishi Corp Futures and Securities in Tokyo.

"Some bargain-hunting could emerge as gold is still slightly more supported than other commodities, but you simply cannot build new buy positions aggressively from here," Sugata said.

Spot platinum dropped to $1,099 an ounce, the lowest since December 2006, and was last quoted at $1,099/1,129 an ounce from Monday's $1,164.50.

Platinum, mainly used in autocatalysts, has been hit by heavy selling due to a slowing U.S. economy and poor car sales in the United States, Japan and China. It struck a record high of $2,290 an ounce in March.

Spot palladium tumbled more than 5 percent, falling in line with platinum to trade 4.3 percent lower at $221.50 an ounce. Spot silver was trading 1.8 percent lower at $10.88 an ounce, from Monday's close of $11.08.

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