US & World Daily Markets Financial Briefing 17-09-2008

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US STOCKS-Wall St slides on credit woe, AIG fallout

NEW YORK - U.S. stocks slid on Wednesday as a spike in inter-bank lending rates added to fears of credit constraints in the global financial system.

Additionally, investors worried the U.S. government rescue of embattled insurer American International Group wouldn't be enough to stem turmoil that has rocked markets.

With AIG now in government hands, investors started worrying again about who might be the next in the financial sector to come under strain, sending the S&P financial index down 3.4 percent.

Shares of Morgan Stanley slumped more than 14 percent to $24.49 on the New York Stock Exchange after CNBC television reported that the U.S. investment bank is weighing whether it should remain independent or merge with a bank.

Shares of Goldman Sachs dropped 9.4 percent to $120 after several brokerages cut their profit outlooks for the investment bank. Credit constraints could hamper business and consumer lending.

"The credit crunch and credit contraction is intensifying," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "The action in Morgan Stanley in light of what was better than expected numbers last night is disconcerting."

The Dow Jones industrial average .DJI fell 139.72 points, or 1.26 percent, to 10,919.30. The Standard & Poor's 500 Index .SPX dropped 16.44 points, or 1.35 percent, to 1,197.15. The Nasdaq Composite Index .IXIC declined 26.25 points, or 1.19 percent, to 2,181.65.

The bank-to-bank cost of borrowing overnight dollars fell more than a percentage point on Wednesday, but the premium paid for the greenback and sterling over three months swelled, showing persistent money market strain.

The drop in Morgan Stanley shares came despite the bank's posting quarterly results after the bell on Tuesday that beat Wall Street estimates.

Shares of General Electric were down 7.3 percent at $23.22 and were a top drag on the S&P 500. Boeing weighed on the Dow, with a drop of 4 percent to $59.34 after UBS cut its price target on the plane maker's stock.

Shares of iPhone and iPod maker Apple Inc dropped 2.6 percent to $136.30, making the stock a top drag on the Nasdaq.

The government agreed on Tuesday to rescue AIG via an emergency $85 billion loan. AIG shares were off 41 percent at $2.26 on the NYSE.

Banks frantically seeking dollar funds have been stonewalled by others increasingly reluctant to lend amid uncertainty and nervousness following the collapse of Lehman.

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Pound falls amid bank woes and jobless data

LONDON - The pound fell against the euro and erased early gains against the dollar on Wednesday, undermined by continued banking sector jitters and data showing the biggest jump in jobless numbers since 1992.

Traders also focused on minutes from the Bank of England's September 3-4 policy meeting, which showed an 8-1 vote in favour of keeping UK interest rates on hold at 5 percent, with dove David Blanchflower calling for a half point cut, although a rate hike was also discussed.

Sterling initially rose against the dollar after news of rescue plan for insurer AIG but it gave up those gains as shares in UK lender HBOS dropped, with investors remaining nervous over financial sector health.

HBOS shares later turned higher after a source said Lloyds and HBOS were in advanced merger talks nLH437309.

"Market sentiment remains very tense with more volatility ahead. We still have a long way to go and things remain very nervous and uncertain. Everyone is just looking over their shoulder," said Geraldine Concagh, economist at AIG Group Treasury in Dublin

At 10:25 a.m., the euro had gained 0.6 percent to 79.63 pence, whole the pound was flat at $1.7871, well off the day's highs at $1.7979.

The pound was also undermined after figures from the Office for National Statistics showed the UK claimant count leapt by 32,500 in August, its biggest rise since December 1992.

The data highlighting the weakness of the economy was released on the same day as minutes from this month's Bank meeting which showed policymakers considered both raising and cutting rates before deciding to leave rates unchanged.

Still, details of the vote boosted expectations the MPC was moving closer to easing monetary policy as policymaker Tim Besley did not repeat his call for a rate rise this month.

"This suggests that the MPC are creeping towards cutting interest rates. Nevertheless, the tone of the minutes remain relatively balanced overall, with discussion of the case for a rate hike as well as a cut," Global Insight economist Howard Archer said in a note to clients.

The minutes have nevertheless been overtaken by recent events, with the collapse of Lehman Brothers and ongoing worries over financial sector health leaving the market increasingly of the view that UK interest rates will be cut by November.

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FRANKFURT - European shares traded higher at midday on Wednesday, with financials lifted by the U.S. government's bail-out of insurer AIG and Lloyds TSB leaping on talk of a merger with HBOS

At 12:25 p.m., the FTSEurofirst 300 index of top European shares was up 0.8 percent at 1,100.52 points, having lost 2.6 percent on Tuesday and 3.6 percent on Monday.

"We are seeing a moderate recovery. The main stories remain the bailout of AIG and its effect on financials, and rumours surrounding a takeover of HBOS," said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Germany.

"But it might take a while until investors have the confidence to return to the market in greater numbers," he said.

Lloyds shares were up 14.5 percent after a person familiar with the matter said the bank was in merger talks with British mortgage lender HBOS, whose shares were up 1.1 percent, having fluctuated wildly during the morning session.

Lloyds and HBOS declined to comment. Barclays rose 11.5 percent after it agreed to buy several parts of U.S. investment bank Lehman Brothers LEH.H, which has filed for bankruptcy protection.

The DJ Stoxx European bank index was up 1.9 percent.

Underlining, however, that banks relying on the interbank market for funding may not be out of the woods, one-week Euribor rates rose to a nine-month high, three-month rates hit a near eight-year high and six-month rates hit an all-time record of 5.202 percent.

The interbank cost of borrowing overnight dollar funds was indicated as high as 8 percent, suggesting, said analysts, that dollar lending between banks remains sporadic at best, in part because the foreign exchange swaps market is frozen.

"The risk of bulky losses and more rights issues is very real and we still think it is too early to buy investment banks," Dresdner Kleinwort said in a note on European banks.

Insurance shares were the top gainers, up 2.6 percent on the sector index .French AXA gained 5.8 percent and Swiss Re climbed 3.4 percent. Both companies provided details of their exposure to Lehman Brothers and AIG.

"The capital position of the sector is not an immediate concern, with the risk of ratings downgrades relatively remote," Morgan Stanley said in a European insurance industry note.

"Liquidity, a key problem for AIG, is not an issue for the sector, which has limited debt refinancing issues in the near-term," Morgan Stanley said.

American International Group (AIG) got an $85 billion emergency rescue package from the U.S Federal Reserve for two years in exchange for a 79.9 percent equity stake. "The rescue package for AIG could mean that systemic concerns are going to moderate from very elevated levels," Goldman Sachs said in a note.

But International Monetary Fund Director General Dominique Strauss-Kahn said the worst of the financial crisis may still lie ahead and more major financial institutions may face trouble.

German Chancellor Angela Merkel said Europe's largest economy will not escape unscathed even though the impact of the global market turmoil has been moderate so far.

Across Europe the FTSE 100 .FTSE index was up 1.3 percent, the German DAX was 0.7 percent higher and the French CAC 40 rose 0.3 percent.

Energy stocks gained as the crude oil price rose more than 3.5 percent, closing in on $95 a barrel. Shares in Repsol were up 2.9 percent, BP added 1.5 percent and Royal Dutch Shell rose 1.4 percent.

French carmaker Renault  lost 4.1 percent although the group said it was sticking to profitability targets of 4.5 percent in 2008 and 6 percent in 2009.

"The company has experienced a material volume decline during the first two months of H2, 2008," Sal. Oppenheim said in a note.

"This further raises the risk for Renault to miss even its already revised volume growth target for this year and confirms our view that the company will fail to achieve its 2008/09 operating margin targets by an even wider margin."

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Asian stock market summary

JAPAN
The Nikkei average rose 1.2 percent on Wednesday from a three-year low the previous day, after the Federal Reserve's bailout of American International Group worked to calm some of the turmoil ravaging Wall Street.
   
The Nikkei average added 140.07 points to 11,749.79, after rising as high as 2.3 percent earlier. The broader Topix inched up 0.4 percent to 1,121.43.

SOUTH KOREA
The KOSPI ended 2.7 percent higher at 1,425.26 points, recouping part of the previous session's 6 percent losses. Persistent U.S. financial market worries limited gains, while Samsung Electronics underperformed after its offer for SanDisk Corp.
   
Buying appetite also waned after a report from broadcaster CNBC that U.S. investment bank Morgan Stanley was weighing whether it should stay independent or merge with a bank.

AUSTRALIA
Australian shares fell 0.6 percent on Wednesday as worries about further implosions in the U.S. banking system overwhelmed relief on the U.S. government's rescue of troubled insurer American International Group.
   
The benchmark S&P/ASX 200 index ended down 28.6 points at 4,722.2.

CHINA
The benchmark Shanghai Composite Index fell 2.90 percent to a 22-month low of 1,929.05, after China Merchants Bank announced a large exposure to Lehman Brothers, raising concerns about how much of Lehman's securities are held by other financial institutions.
   
The Shanghai A-share Index fell 2.88 percent to 2,025.60, while the Shenzhen A-share Index fell 1.84 percent to 587.70.
   
The Shanghai B-share Index fell 7.51 percent to 115.29, while the Shenzhen B-share Index was down 4.30 percent at 295.33.

TAIWAN
Taiwan's weighted index closed up 0.77 percent at 5,800.87 after a cut in bank reserve ratio requirements as the central bank moved to shore up liquidity in the financial system.
   
The index came off the day's highs as financials gave up early gains, with investors not convinced that the US government's bailout of insurer AIG will end financial sector troubles there.

HONG KONG
The Hang Seng index closed down 663.42 points or 3.63 pct at the day's low of 17,637.19, after hitting a high of 18,699.18.
 
INDIA
The 30-share Sensitive Index of the Bombay Stock Exchange closed 288.65 points lower at 13,230.15 while the 50-share S&P CNX Nifty of the National Stock Exchange shed 1.92 percent to close at 3,996.75 points.

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US crude oil, products supplies slide on storms - EIA

NEW YORK - Inventories of crude oil and refined oil products in the United States fell last week as storms disrupted energy and port operations, according to government data released Wednesday.
     
The Energy Information Administration said domestic commercial supplies of crude oil fell 6.3 million barrels to 291.7 million barrels in the week to Sept 12 -- a reading which handily beat analysts' forecasts for a 3.8 million barrel fall.
      
Analysts expected the data to reflect both the impact of the recent Hurricane Gustav and industry preparations before Hurricane Ike which hit the Texas coast early Saturday.
     
Stockpiles of gasoline -- which logged their eighth weekly decline and hit a record low -- fell 3.3 million barrels to 184.6 million barrels last week, according to the report. The decline lagged forecasts that stocks would fall 3.8 million barrels.
      
Distillates, which include heating oil and diesel, declined 900,000 barrels to 129.6 million barrels, by far missing analysts' projections for a fall of 1.9 million barrels.
      
U.S. crude oil runs were down 246,000 barrels per day at 13.24 million bpd last week while refinery utilization fell 0.9 percentage point to 77.4 percent of capacity -- its lowest since October 2005 after Hurricanes Katrina and Rita. The latest utilization reading missed a forecast drop of 3.4 percentage points.
      
U.S. production of gasoline and distillates fell during the week, with gasoline off 72,000 bpd at 8.33 million bpd and distillates output down 121,000 bpd at 3.8 million.
      
Crude oil imports declined by 71,000 bpd last week while imports of refined products were up slightly.

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