US & World Daily Markets Financial Briefing 17-12-2008

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U.S. Stocks Down As Weak Earnings Trump Fed Cuts

Stocks opened lower on Wednesday after its best day so far this month as exhilaration faded over record low interest rates and investors mulled disappointing results from securities firm Morgan Stanley

The Dow Jones Industrial Average (DJI) fell 69.05 points to 8,855.09, with 25 of its 30 components sinking in early trade.

Alcoa Inc. (AA) was among the blue-chip index's gainers, its shares up 0.8%. After hitting a five-week high Tuesday, the S&P 500 Index (SPX) fell 9.53 points to 903.65, with financial stocks fronting the declines.

The Nasdaq Composite (RIXF) shed 17.38 points to 1,572.51, with Apple Inc. (AAPL) among those weighing on the tech-laden index.

Apple shares were lately off 6.3% after its downgrade by Oppenheimer to market perform following word that Apple CEO Steve Jobs would not make his traditional keynote at Macworld next month.

Crude-oil futures declined in early action on the New York Mercantile Exchange, with the contract for January delivery off 34 cents at $43.26 a barrel ahead of an official announcement on a production cut from the Organization of Petroleum Exporting Countries. .

Early volume on the New York Stock Exchange topped 109 million, and declining stocks passed those advancing roughly 4 to 3. On the Nasdaq, nearly 73 million shares exchanged hands, and advancers beat decliners almost 6 to 5.

Shares of Morgan Stanley (MS) fell 4.5% after the former investment bank reported a wider-than-expected fourth-quarter loss.

ConAgra Inc. (CAG) climbed 6.1% after it said profits in the second quarter fell 31%, but the food producer's earnings proved nearly in line with forecasts.

General Mills (GIS) Inc. shares dropped 0.8% after the cereal maker reported a decline in second-quarter profits.

Newell Rubbermaid Inc. (NWL) fell 6.7% after it cut its fourth-quarter forecast, citing ongoing economic weakness and reduced consumer spending.

Stocks rallied Tuesday after the Federal Reserve slashed its target rate for overnight loans between banks to between zero and 0.25%, and said it would buy more debt and mortgage-backed securities.

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FOREX-Dollar hits 2 1/2-mth low vs euro on big US rate cut

LONDON - The dollar fell broadly on Wednesday, hitting a 2 1/2-month low against the euro and heading towards a 13-year low versus the yen after the Federal Reserve slashed interest rates to between zero and 0.25 percent.

The euro climbed as high as $1.4192 according to electronic trading platform EBS in Asian trade, after the Fed said it would use "all available tools" to support the economy from a recession after cutting the Fed funds rate from 1 percent to a record low.

It added that it was mulling possible purchases of longer-term U.S. Treasury debt and would consider other ways to tap its burgeoning balance sheet to support the economy.

The announcement triggered broad selling in the dollar, as the market had expected a smaller rate cut of 50 basis points. Analysts said the outlook for the greenback looked bleak going into the year-end, with repatriation flows seen drying up.

"The main trend going into Christmas and year-end will be one of dollar weakness," UBS currency analyst Geoff Kendrick said.

At 0855 GMT, the dollar had fallen 0.7 percent on the day to 88.21 yen, hovering close to a 13-year low of 88.10 yen hit on trading platform EBS last week.

The euro gained 0.2 percent against the dollar to $1.4126, not far off an earlier two-and-a-half month high of $1.4192 hit on EBS during Asian trade. Yen gains versus the U.S. currency helped to push the euro down 0.5 percent to 124.82 yen.

The yen has risen sharply in recent months as investors unwound carry trades and fled out of riskier and higher-yielding assets. The gains gathered pace, however, as the Fed's move brought the U.S. interest rates below the Bank of Japan's 0.30 percent target for the overnight call rate for the first time in well over a decade.

This has increased speculation that the BoJ will cut interest rates to almost zero following its two-day meeting which ends on Friday. Analysts say Japan's central bank may also follow the Fed into buying commercial paper outright or purchasing asset-backed securities.

"With rates in Japan now higher than Fed rates, this puts further downward pressure on dollar/yen," Bank of America G10 currency strategist David Powell said. "It also increases the possibility that the BoJ will cut rates by 20 basis points on Friday," he added.

Two-thirds of analysts polled by Reuters now expect the BoJ to cut rates this week, and most of them see rates falling to 0.1 percent. The yen's gains prompted Naoyuki Shinohara, Japan's top financial diplomat, to declare on Wednesday that rapid movements in currency markets are undesirable.

Market players say they remain wary about the risk of Japan intervening to rein in the yen's climb, which is hurting the nation's exporters.

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Bank worries push Europe shares lower by midday

LONDON - European shares fell by midday, hurt by worries over more losses at major banks, but a rise in the price of crude on expectations of a production cut lifted energy stocks, limiting broader market losses.

At 1144 GMT, the FTSEurofirst 300 index of top European shares was down 0.7 percent at 829.01 points, not enthused by a Federal Reserve rate cut and a pledge of more unconventional steps to fight a deep recession.

Banks took most points off the index, with BNP sliding 16 percent after its investment banking unit suffered a 11-month loss, hit by rocky capital markets and its exposure to an alleged $50 billion fraud by U.S. financier Bernard Madoff.

Deutsche Bank fell 6.4 percent amid market talk of a possible fourth-quarter loss on investment writedowns. The bank declined to comment. HSBC and Societe Generale were off more than 5 percent, and the DJ Stoxx European banking sector index , the worst performing sectoral index this year amid a credit crisis, lost nearly 3 percent.

"Generally there's a sense of nervousness going on with Madoff's alleged fraud and BNP's losses," said Fox-Pitt, Kelton analyst David Williams.

"What the markets continue to be afraid of is all the uncertainty surrounding so many aspects of banking right now, whether it's the trading revenues, whether it's the credit revenues, whether it's the funding or the capital."

Across Europe, Britain's FTSE 100 was up 0.1 percent, while Germany's DAX was down 0.6 percent and and France's CAC-40 down 0.7 percent.

But futures for the Dow Jones, S&P and Nasdaq were 1.2-1.6 percent lower. The day's main diaried event is results from U.S. bank Morgan Stanley.

The Federal Reserve move on Tuesday to cut rates to a range of zero to 0.25 percent, pushed the dollar down to a 2-1/2 month low versus the euro, and analysts said that this was hitting banks stocks as well.

But they said that this was just one in a long list of policy responses and unlikely to make much difference on its own. "It's symbolic that we have gone to zero, that's it. Am I as a company going to act any differently? No is the answer," said John Haynes, strategist at Rensburg Sheppard Investment Management. "There are too many big things going on for any individual big thing to make much of a difference."

Data on Wednesday showed that a plunge in energy and food prices slowed euro zone inflation in November to just above the European Central Bank's target, official data showed, adding to expectations that the ECB will continue to cut rates.

Oil rose $1.40 to around $45 a barrel as OPEC ministers met to remove a record 2 million barrels per day from oil markets in a race to balance supply with the world's rapidly crumbling demand for fuel. BP was the top weighted gainer in Europe, rising 2.2 percent. StatoilHydro and BG Group added 2 percent.

The FTSEurofirst 300 has fallen more than 45 percent in 2008, hurt a by a credit crisis that has contributed to several major economies going into recession.

UK unemployment data provided further evidence of economic weakness. The number of Britons out of work and claiming benefit rose for a tenth consecutive month in November and by the largest amount since March 1991, data showed.

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HK shares gain 2 pct on rate cuts; Esprit plunges

HONG KONG - Hong Kong shares rose 2.2 percent on Wednesday as Chinese counters soared on continued talk of fresh support from Beijing, while property stocks climbed following interest rate cuts led by the U.S. Federal Reserve.

Shares of fashion brand Esprit, meanwhile, fell 8.2 percent, leading losses on the main index, after Goldman Sachs cut its earnings estimates for the company, factoring in slower growth, lower margins and current forex rates.

The benchmark Hang Seng Index ended 330.31 points higher at 15,460.52 as investors ignored weak housing and inflation data from the United States on Tuesday. But analysts expect the market to retreat in the near term, as investors cash in on the recent rally.

"The Fed rate cut was too aggressive and some smart fund managers are taking it to mean that the Fed knows something we don't, and also there is nothing more the Fed can do from here on," said Peter Lai, director with DBS Vickers.

Market turnover was strong at HK$56.4 billion compared with just HK$40.3 billion on Tuesday. On Wednesday, Hong Kong's central bank followed the Fed's lead by lowering its base rate by 100 basis points to 0.50 percent. The HK dollar is pegged to the U.S. dollar.

Property counters gained strength even as local lenders including HSBC Holdings decided to maintain their prime rates at current levels on Wednesday, citing no room for adjustment. "HSBC seems to be playing hardball but sooner or later they will have to cut rates," said Francis Lun, general manager with Fulbright Securities.

Top developer Sun Hung Kai Properties rose 4 percent while Henderson Land added 7.8 percent. Hongkong Electric dropped 3.3 percent following a larger-than-expected 5.9 percent tariff cut, effective Jan.1, 2009. Citigroup had forecast an average 5 percent reduction in the power utility's tariffs.

The China Enterprises Index of top locally listed mainland Chinese firms.HSCE rose 3.8 percent to 8,372.26 on continued speculation over another round of interest rate reductions on the mainland. Cement maker China National Building Materials climbed 14 percent, as the highly leveraged company was seen benefiting greatly from lower loan interest payments.

Other commodity stocks also joined the rally, with Aluminum Corp of China vaulting 13.5 percent and offshore oil producer CNOOC jumping 7.4 percent

But non-life insurer PICC P&C dropped 5.3 percent after rallying 17.5 percent on Tuesday. "We continue to prefer the China life insurance sector over the property and casualty sector owing to better market discipline, less price competition and better valuation appeal. PICC is our least preferred exposure to the China insurance sector," said Nomura analyst Ben Lin, calling Tuesday's rally "unjustified".

China Unicom, the nation's second-largest mobile operator, climbed 4.2 percent after agreeing to pay $940 million to acquire all the fixed line assets of its parent group and China Netcom.

The deal is part of the government-led restructuring in the sector, kicked off in June to usher in high-speed third-generation services. Unicom's bigger rival, China Mobile gained 3.3 percent on hopes that China will grant 3G licenses by the end of the year.

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PRECIOUS-Gold eases on profit taking after Fed rate cut

LONDON - Gold edged down in Europe on Wednesday as traders took profits after the previous session's 2 percent gains on the back of a larger-than-expected interest rate cut from the U.S. Federal Reserve.

The market is awaiting fresh direction from the crude oil market, which rose ahead of an expected production cut from the Organization of the Petroleum Exporting Countries (OPEC). Spot gold was quoted at $855.60/857.60 an ounce at 1024 GMT, little changed from $857.35 an ounce late in New York on Tuesday. U.S. gold futures for February delivery GCG9 were up $14.70 at $857.40.

Gold is likely to consolidate after recent sharp moves, analysts said. "We have jumped so much in a relatively short period of time without any major changes on the fundamental side," said Wolfgang Wrzesniok-Rossbach, the head of sales at Heraeus.

While gold was benefiting from dollar weakness and safe-haven buying as a result of the financial crisis, physical demand for bullion was tailing off as prices rose, Wrzesniok-Rossbach said. "Fundamentally the situation might not be 100 percent positive, but everything related to the financial crisis is positive for gold."

Gold climbed in late New York trade on Tuesday after the Fed said it was cutting rates to between zero and 0.25 percent, knocking the dollar lower and prompting further rate cuts from Hong Kong and Kuwait.
The dollar hit a 2-1/2 month low against the euro on Wednesday after the cut.

However, "technical momentum signals are warning of an upside correction for the greenback today," said Standard Bank analyst Walter de Wet. "This could restrain precious metals." The other main external driver of gold, crude oil prices, were broadly supportive, ticking up $1 a barrel ahead of an OPEC decision on production quotas.

The cartel is expected to cut output by some 2 million barrels to shore up the falling oil price, which has dropped around $100 a barrel from the highs it hit earlier this year. Physical demand for gold was mixed, with traders reporting falling interest in gold coins and bars in Europe and Indian buyers said to be staying away until prices fall.

However, investment demand for gold-backed exchange-traded funds was firm. The world's largest bullion-backed ETF, the SPDR Gold Trust GLD, said its gold holdings rose 3.98 tonnes on Dec. 16 and are up 1 percent or 7 tonnes since Friday.

Among other precious metals, platinum and palladium were little changed. The two metals, which are primarily used to make catalytic converters, have fallen sharply in recent months on fears demand would suffer from a slowdown in car sales.

Platinum is now trading close to parity with gold, a situation last seen in 1996. However, the metal is likely to recover next year, analysts said. "Current levels for platinum group metals are not sustainable for many South African producers unless there is a sharp weakening of the rand," said Fairfax analyst Marc Elliott.

"Consequently the eventual recovery of the automotive market appears likely to prompt a shortage that should lift PGM prices perhaps to levels seen earlier this year." "However, for the next few months we see little reason for a substantial improvement, unless some major production cuts (or) disruptions take place," he added.

Spot platinum was quoted at $856/866 an ounce against $860.50 late in New York on Tuesday, while palladium was at $176.50/181.50 an ounce against $178. Silver fell to $10.98/11.06 an ounce from $11.21.

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