US & World Daily Markets Financial Briefing 20-02-2009

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Wall St cuts losses on tech; banks weigh

Chipmakers helped the Nasdaq briefly turn positive on Friday while the Dow and S&P 500 pared losses a day after the Dow tumbled to levels last seen more than six years ago.

"We are seeing a short-covering rally that should test yesterday's settlement of the S&P 500 futures of 779.40. Failure to make inroads above 779.40 could result in another round of selling," said Harry Michas, technical analyst at MFGlobal marketmonitor.com.

Still, shares of Bank of America and Citigroup tumbled as worries persisted that a financial sector rescue might involve nationalization of major banks, wiping out shareholders.

The Dow Jones industrial average was down 90.00 points, or 1.21 percent, at 7,375.95. The Standard & Poor's 500 Index was down 8.56 points, or 1.10 percent, at 770.38. The Nasdaq Composite Index was down 4.99 points, or 0.35 percent, at 1,437.83.

Treasurys Gain As Banking Sector Fears Intensify, Stks Fall

U.S. Treasury prices shot higher Friday in a flight to safety bid as investor concerns about the well-being of the banking sector gained traction.

The gains came amid a drop in global equities as speculation grew that the U.S. government could move to nationalize two major U.S. banks, Citibank and Bank of America Corp., as both struggle to stay afloat given hefty losses. Both banks' stock have reflected that sentiment in recent days, falling sharply, and shares of Bank of America were down nearly 10% ahead of the open on Friday.

In recent trade, the five-year yield was down by 12 basis points to 1.76%, the 10-year yield was down by about 11 basis points to 2.74%, and the 30-year yield was down 15 basis points to 3.54%. The two-year yield was down by 8 basis points to 0.91%.

"The focus is on the banking system and continued talk about the potential nationalization of two of our largest banks," said Mike Materasso, senior vice president of the fixed income group at Franklin Templeton. "It's the fear of the unknown, what form (nationalization) could take on," he said. "That has investors kind of nervous right now."

The hope is that if nationalization were to occur, the form it would take would be for the government to provide a large amount of equity to the banks and to protect senior and subordinated, and even deeply subordinated bond holders, Materasso said. That is "a wish though, not a given," he said, "and therein lies the problem. It's the unknown."

Bank nationalization in the U.S. is a topic that's been discussed with more gusto by market participants of late as banks continue to suffer from the effects of the credit crisis. This week, former Federal Reserve Chairman Alan Greenspan said it might be necessary for the U.S. government to temporarily nationalize some banks in the U.S. to help the financial system heal and to get credit flowing again.

Treasurys' higher prices break with two consecutive days of losses as market participants fret over the hefty amount of new supply to come next week. Treasury will auction a total of $97 billion in two-, five- and seven-year notes in the coming week. And while strategists expect some market weakness as dealers set up for supply, the poor fundamentals and banking fears should keep an underlying bid alive.

Meantime Friday, the day's only key economic report revealed that annual consumer prices are at a 53-year low. Still though, consumer prices rose on monthly basis in January for the first time in six months, by 0.3% versus expectations for a 0.2% rise. CPI fell by 0.8% in December, revised up from a 0.7% drop earlier. Core CPI, which excludes food and energy, was up 0.2% in January, also higher than expected.

With data out of the way, Treasurys are left to eye equities for the rest of the session, and will likely also be jostled around by corporate deal flow, said RBS strategists, a factor that has marked trade the last several days.

Ahead of deal pricings, companies tend to sell Treasurys as a way to hedge the risks of rising interest rates when they sell new debt. They will then unwind the hedge by buying back Treasurys after the deals are priced, sending Treasury prices higher again.

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Euro Hit Even Lower By PMI's; Yen Rises Again

The dollar and the euro are down against the yen in Europe Friday, driven by the latest rise in risk aversion as well as fresh repatriation flows.

The euro was hit by continued fears over Eastern Europe as well as by a disappointing set of purchasing managers' reports. Instead of stabilizing as hoped, the indexes plunged once again - indicating that the slowdown in Europe is far from over.

The latest rise in risk aversion came as speculation over European Union help for Eastern European countries faded and talk that stronger euro-zone economies might help weaker ones appeared to be just that - talk.

With U.S. economic data remaining weak and concern over the global recession remaining high, stock markets came under renewed selling pressure.

A 1.2% fall in the Dow Jones Industrial Average on Thursday was followed by a 1.9% decline in the Nikkei early Friday. As European bourses opened, they were posting losses of nearly 3% in places.

Once again, the yen benefited from the lack of risk appetite, with flows into the Japanese currency helped by repatriation by Japanese investors before the fiscal year-end next month.

Some analysts doubt that yen support will last for long given the underlying concerns about the Japanese economy and the fact that the U.S. Treasury will be auctioning about $94 billion of Treasury notes next week. Both are likely to encourage new outflows from Japan.

In the meantime, though, the euro is the main loser as the risks to the euro-zone economy and banks are once again top of the agenda.

Earlier in the day, the composite euro-zone purchasing managers' index, covering both manufacturing and service industries, fell to 36.2 this month from 38.3 in January instead of rising to 38.7 as forecast.

Martin van Vliet, senior euro-zone economist with ING Financial Markets in Amsterdam, said that the data dealt "a severe blow" to the hope that there might be light at the end of the economic tunnel.

By contrast, the latest U.K. retail sales figures were higher than expected - showing a 0.7% rise last month instead of just a 0.2% increase as had been forecast.

The news lifted the pound from lows earlier in the day but economists said the improvement in sales was unlikely to last.

By 1036 GMT, the dollar had fallen to Y94.08 from Y94.39 late Thursday, according to EBS. The euro fell to Y118.62 from Y119.51.

The single currency was also down at $1.2606 from $1.2663. The dollar was up sharply at CHF1.1875 from CHF1.1741, while the pound was at $1.4277, little changed from $1.4278 late in New York Thursday, after rebounding from a plunge earlier in the session to $1.4151.

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European Shares Fall Sharply As Banks Slide

European shares fell sharply on Friday, with banks the worst performers, as investors continue to fret about the health of the financial system as the economy contracts.

The pan-European Dow Jones Stoxx 600 index fell 2.8% to 178.31, back near January lows. The index dropped to 178.04 on Jan 23 after nationalization fears sparked another wave of selling in the financial sector.

Banks were also at the forefront of selling on Friday, with BNP Paribas down 6.3%, Societe Generale down 6.6% and UBS (UBS) shares down 15.6%. UBS separately is fighting the Internal Revenue Service's request to hand over the names of 52,000 accounts for U.S. taxpayers.

"It's the same story. Everyone was hoping for a plan to take toxic debt off the balance sheet but that has not happened. There needs to be a solution and people also need to be convinced that equity won't be wiped out," said Philippe Gijsels, strategist at Fortis.

In another blow for the sector, closely-watched surveys of purchasing managers signaled that activity in the manufacturing and services sectors contracted at a record pace in February.  "This will mean more second-round effects as banks that were already hit by the subprime will be hit by bad debts on credit cards, etc," noted Gijsels. "This isn't helping the market."

Regional indexes were sharply lower. The U.K. FTSE 100 index fell below the key 4,000 level, down 2.4% to 3,921.66. The German DAX 30 index dropped 3.2% at 4,080.75 and the French CAC-40 index fell 2.9% to 2,788.53.

U.S. stock futures were pointing to another day of losses across the Atlantic. The Dow Jones Industrial Average fell to a low not seen since 2002 on Thursday, with financials also fronting declines. Banks also knocked Asian share markets were on Friday.

Anglo American shares fall  Other sectors were also under pressure, with Anglo American (AAUKD) shares down 12.8% in the basic resources sector. The firm's annual profit dropped 29%, the company suspended dividend payments and share buybacks and said it was cutting 19,000 jobs.

"As we begin 2009, the economic outlook remains weak, with limited visibility and we are continuing to experience volatility and downward pressure on commodity prices," said CEO Cynthia Carroll.

Elsewhere, shares in French building materials group Compagnie de Sant-Gobain fell 16.2%. The group intends to raise 1.5 billion euros ($1.9 billion) by issuing shares in a move to strengthen its finances amid a slowing construction market. It also announced a 7.3% drop in net profit for 2008 to 1.38 billion euros and said that it will cut 8,000 jobs in 2008.

Also in Paris, shares of Axa fell 13.8%. Ratings agency Standard & Poor's cut its outlook for the firm to negative and said it expects a material decline in profits at the insurer. Axa shares fell on Thursday when it reported earnings.

On the plus side of the insurance sector Prudential (PUK) shares climbed 9.6%. It will transfer the assets and liabilities of its agency distribution business and its agency force in Taiwan to China Life Insurance Company, a move it said will boost its capital surplus by 800 million pounds.

Prudential's capital surplus was approximately 1.7 billion pounds at the end of 2008. Total insurance sales rose 5% to 3.0 billion pounds in the year.

Swiss Life Holding shares jumped 6.5%. The insurer said that its solvency ratio rose to 160% by the end of 2008, up from 135% at the end of September. It also reported that its net profit is expected to fall to 340 million Swiss francs, from 1.35 billion francs a year ago.

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Japan's Topix hits lowest close in quarter century

Japan's broad-based Topix index booked its lowest close in 25 years on Friday, falling 1.6 percent as bank shares slipped on worries about their European peers, while exporters largely failed to benefit from a weaker yen.

Bridgestone Corp sank more than 7 percent after forecasting a bigger-than-expected slide this year as it grapples with weak demand and a stronger yen, while Seven & I Holdings dropped on news that its Seven-Eleven convenience store chain was being investigated by regulators.

"The biggest problem is that there are very few buyers in the market. Risk tolerance of global investors is falling," said Takashi Kamiya, chief economist at T & D Asset Management.

"Even though countries like Japan and the United States are expanding their government spending, consumer demand hasn't followed due to heavy consumer debt, and that will prevent the economy from a full-fledged recovery."

Nervous investors pushed the benchmark Nikkei average down by 1.9 percent to 7,416.38, its lowest close since Oct. 27. The Topix shed 12.06 points to 739.53, the lowest close since January 1984.

On the week, the Topix lost 3.3 percent, while the Nikkei gave up 4.7 percent. Although the dollar stayed within striking distance of a six-week high of 94.47 yen hit on trading platform EBS the previous day, exporters failed to receive much help.

Investors usually welcome a weaker yen as it boosts exporters' profits when repatriated, but some market players warned the weaker yen this time was a symptom of broader problems amid growing worry about Japan's economy.

Data on Monday showed the economy suffered its worst quarterly decline since the 1974 oil crisis. "This time, the weaker yen isn't a good thing. It's part of a broader 'sell Japan' trend," said Masayoshi Yano, senior market analyst at Meiwa Securities.

After the market close, Kirin Holdings, Japan's second-largest brewer, said it has agreed to buy a 43.3 percent stake in the beer unit of Philippine conglomerate San Miguel Corp for about 58.9 billion pesos ($1.2 billion).

The stock ended the day down 0.8 percent at 930 yen before the announcement. Banks fell, with top lender Mitsubishi UFJ Financial Group shedding 2.3 percent to 429 yen and No.2 Mizuho Financial Group retreating 4.1 percent to 188 yen. Sumitomo Mitsui Financial Group slid 2.2 percent to 2,965 yen.

"The market is now worried about the economic situation in Eastern European countries such as Poland and the health of their banks, and then the implication for other European banks that had made loans to those banks," said Kamiya at T & D Asset Management.

Exporters also slid. Electronic parts maker Kyocera Corp lost 3.5 percent to 5,790 yen and industrial robot maker Fanuc Ltd declined 4.6 percent to 6,090 yen.

Shares of Bridgestone tumbled 7.4 percent to 1,251 yen after the world's top tyremaker posted an 86 percent fall in quarterly operating profit and forecast a bigger-than-expected slide this year.

Seven & I shares gave up 5.5 percent to 2,135 yen after the Asahi newspaper said the Fair Trade Commission is investigating whether Seven-Eleven, in violation of antimonopoly regulations, pressured franchise stores not to mark down daily food items such as boxed meals that were near their expiration dates.

In a statement, the company said the FTC was investigating and that the retailer was cooperating fully. But T&D Holdings bucked the trend, soaring 11.9 percent to 2,200 yen after the insurer said it would raise 69.8 billion yen ($741 million) through a new share issue to boost the capital of its life-insurance units.

Trade was moderate on the Tokyo exchange's first section, with 1.89 billion shares changing hands, compared with last week's daily average of 1.92 billion. Declining stocks outnumbered advancing ones by nearly 4 to 1.

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PRECIOUS-Gold up on risk aversion, profit-taking caps gains

Gold climbed in Europe on Friday as risk aversion fuelled buying, but profit-taking capped the precious metal below the last session's seven-month high.

Spot gold rose to $980.15/981.75 an ounce at 1033 GMT from $973.75 late in New York on Thursday. Earlier that session it struck a high of $985.95, its firmest level since July 15, but failed to maintain its upward momentum.

"In the short-term there may be an attempt to lock in some profits," said Saxo Bank senior manager Ole Hansen. "It is not every week you have a commodity rising 6 percent."

He said the deteriorating macroeconomic picture and inflows into exchange-traded funds were currently the main influences on the gold price, now that the metal's traditionally close relationship with the dollar had broken down. More investment flowed into precious metals-backed ETFs on Thursday, with figures released earlier showing both the largest gold ETF and the biggest silver-backed fund climbing to record levels.

New York's SPDR Gold Trust GLD said its holdings rose nearly 5 tonnes to a record 1,028.98 tonnes on Thursday, while the iShares Silver Trust's silver holdings climbed 18.4 tonnes to an all-time high of 7,892 tonnes.

Investors fear the U.S. stimulus package signed off this week may not be enough to stimulate the economy and shore up the ailing financial system, analysts said. "Gold investors hear 'trillions and trillions' and 'bailout after bailout' and look at gold as the only asset good for capital preservation," said MF Global analyst Tom Pawlicki in a note. "This should keep gold buoyant in the near-term as investors flock to both futures and ETFs."

Equity markets tumbled on Friday, with world stocks dropping to their weakest since November and eyeing six-year lows. The U.S. Dow index hit a six-year low on Thursday. Falling stocks boost the appeal of safe-haven assets like gold.

The precious metal's usual external drivers, oil and dollar, exerted little influence. Gold traditionally moves in the opposite direction to the U.S. currency, as it can be used as a hedge against dollar weakness, and in line with oil.

The dollar climbed on Friday, along with the yen, as global economic woes, falling equity markets and worries about the prospect of a deepening recession in eastern Europe sparked buying of safer assets.

Meanwhile oil prices, which often pull gold in their wake, weakened as fears over the weakening global economy depressed the demand outlook.

Among other precious metals, spot silver climbed to $14.18/14.24 an ounce from $13.01. Spot platinum edged up to $1,082.50/1,087.50 an ounce from $1,066.50, while spot palladium  was little changed at $214/222 an ounce from $213.50.

Anglo American, whose Anglo Platinum unit is the world's largest platinum producer, saw its shares tumble more than 10 percent after it scrapped its final dividend and said it will cut 19,000 jobs.

The company has sliced its 2009 platinum output forecast by 300,000 ounces, chief executive Cynthia Carroll said. Elsewhere, Standard Bank analyst Walter de Wet noted Swiss import/export data shows a jump in platinum exports in January. "After being a net importer of close to 3,150 kilograms of platinum in December, 8,764 kilograms of the metal left Switzerland in January," he said. "The main destination was Asia."

Switzerland is the hub of physical platinum trade and its trade flows are indicative of demand for the metal, he said.

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