US & World Daily Markets Financial Briefing 20-06-2008

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Airline shares fall in premarket as crude futures rally

In the U.S., the DJIA was off 170.30 points at 11892.80, while the NasdaqComposite index was down 43.19 points at 2,418.87, and the S&P 500 index was14.58 points lower at 1,328.25.

NEW YORK - Airlines shares fell in premarket trading Friday, with a rally in crude oil futures and Continental Airlines' pricing of a share offering casting a pall on the sector.

July crude futures rallied $3.12 to $135.05 a barrel, and the more-active August contract climbed $3.13 to $135.73 a barrel, amid concerns over increasing tensions in the Middle East.

Continental shares shed 6% to $14.65. The air carrier said late Thursday that it priced a public offering of 11 million shares of its Class B common stock at $14.80 a share.

Elsewhere, AMR Corp. dropped 5.4% to $5.97 ahead of the open, although the stock was upgraded to buy from sell by Soleil Securities, which cited more-favorable-than-expected revenue and cash flow generation and better apparent liquidity. Analyst James Higgins also raised his stock price target to $12 from $3.

Among some of the other more-active air carrier shares in the pre-open, Delta Air Lines lost 4.5% to $6.09, Northwest Airlines gave up 6.3% to $7.05, UAL Corp. slid 8.4% to $7.43 and US Airways shed 7.9% to $3.26.

Lehman Bros. analyst Garrett Chase said he believes the airline industry is undertaking a "sweeping restructuring process" that will create significant opportunity for certain companies. "We see large upside potential for Delta Air Lines and Northwest Airlines as likely survivors and beneficiaries of what will almost surely prove a profound industry restructuring," Chase said in a research note.

Shares of Medis Technologies Ltd. fell to their lowest point in more than five years after the New York-based fuel cell technology company said it agreed to sell securities to selected institutional investors for aggregate gross proceeds of $29 million.
   
The stock was last down 26.5% at $3.74 on volume of 430,515 shares, after hitting a five-year low of $3.52 earlier in the session. Medis Technologies said the the securities in the offering include up to 6.82 million shares of its common stock and five-year warrants to purchase up to 2.94 million shares of its common stock at an exercise price of $5.50 per share.
   
The company intends to use the net proceeds from the offering for working capital and general corporate purposes.

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Forex - Dollar weakens on downgrade of U.S. bond insurers, geopolitical tensions

LONDON - The dollar remained weak, particularly against the euro, after credit ratings agency Moody's downgraded the bond insurers Ambac and MBIA, and after the emergence of fresh geopolitical tensions in the Middle East.

Moody's downgrade, made overnight, pushed the market to sell off the dollar as investors scaled back on their risk appetite on fears that the financial system might suffer another credit squeeze.

Geopolitical questions also weighed on the greenback, with news that Israel has held military exercises intended as a practice for a possible attack on Iran. "The situation was worsened by a bellicose response from Iran stating it would answer an Israeli attack with a 'strong blow', driving oil prices back above $134 per barrel," noted Ashraf Laidi at CMC Markets.

The dollar has been further sold off as investors square off their positions going into the weekend as they look to next week's Federal Reserve policy decision. The consensus is that the Fed will not back up its hawkish rhetoric with a rate increase. "Next week's (Fed) decision is expected to keep rates unchanged at 2.0 percent, with a statement that would express deteriorating inflationary conditions and an alertness towards weakening economic data," said Laidi.

The euro, on the contrary, has received a boost on views that the European Central Bank will go ahead and raise interest rates by a quarter point to 4.25 percent. Inflation is once again the main source of concern, a view that received more support by the limited amount of economic news today.

Producer prices in Germany rose by 1.0 percent in May from April, and were 6.0 percent higher than a year ago. This was higher than the market's consensus for a 0.8 percent increase month-on-month and an annual rise of 5.7 percent.

In the UK, the pound was somewhat stronger, riding on the positive momentum from strong retail sales figures released on Thursday. These showed sales rose 3.5 percent in May from April, the fastest rate of growth since records began in 1986, despite the economic slowdown in the UK.

Along with high inflation data, the figures have buoyed speculation that the Bank of England may raise interest rates in the short term, although many analysts say the most likely scenario is the central bank will remain in a wait-and-see mode as long as most economic data points to a sharp slowdown ahead.

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Euroshares fall midday as Dow set for sharp falls; banking stocks bear the brunt

At 12:08 p.m. the DJ STOXX 50 was down 41.19 points, or 1.47 percent, at 2,932.5 and the DJ STOXX 600 was down 3.82 points, or 1.32 percent, at 296.29.

The gloomy outlook for the financials sector weighed on European plays too, with Fortis down 4.73 percent, Deutsche Boerse down 4.46 percent and Intesa SanPaolo down 2.39 percent.

In the technology sector Nokia slumped 4.22 percent, Ericsson 1.11 percent and Alcatel-Lucent was down 3.06 percent, tracking the U.S. sector lower after cautious comments from Foxconn.

Fiat's CEO Sergio Marchionne made bearish comments yesterday, saying that car sales in the Italian market will be "the same kind of disaster we have seen in May". Shares in the car group fell 4.53 percent.

In other news, Veolia fell back another 0.57 percent, after it confirmed reports yesterday that it is turning more cautious on its prospects.

It said high oil prices and currency impact means its net income growth objective of 10 percent "could be difficult to achieve in 2008." The warning does not impact its medium-term growth and performance outlook, Veolia said.

Wavin fell back 4.74 percent after its profit warning. Petercam downgraded the Dutch building materials group to 'sell' from 'reduce' on the back of the news. Saint-Gobain fell 4.08 percent.

But Tenaris added another 5.97 percent on talk of possible antidumping measures in the United States against Chinese producers. The U.S. International Trade Commission is scheduled to vote on pipe imports from China on Friday.

Dealers also said the sector is in the spotlight after U.S. President George Bush lined up with Republican presidential candidate John McCain to push for oil drilling off the U.S. coast.

Shares in Atos Origin surged 7.72 percent in morning trade after European private equity investor PAI Partners announced it had bought a 17.9 percent stake in the company, becoming its primary individual shareholder.

Investors have welcomed the news because AI Partners, along with other existing major shareholders, is likely to want to influence strategy by putting pressure on the management, said a local dealer.

Valeo climbed 3.97 percent on hopes that interest from its activist shareholders will prompt changes at the car parts group. Valeo had been expecting a calm AGM after reaching an agreement last month following a long-running dispute with shareholder Pardus, that it would offer a board seat to a partner at the U.S. investment fund in return for a pledge that the fund would not raise its 19.7 percent stake above 20 percent. But Wyser-Pratte bought a new 1.6 percent stake in the group and is contesting CEO Thierry Morin's strategy.

In other news, shares in Kloeckner & Co AG. stormed 3.82 percent higher after the steel-and-metals distributor issued strong 2008 targets and said it expects solid profit and revenue gains, due to "massive price increases".

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Asian markets mixed as financial,energy stocks fall; Chinese shares rise

But China's move sparked a rally in Shanghai and Hong Kong. After initially moving in and out of positive territory, the Shanghai Composite closed up 3.01 percent at 2,831.74.

The Hang Seng index pared gains and closed up 0.2 percent at 22,835.94. Oil refiners and power firms rose after mainland authorities announced the hikes in fuel and electricity prices. China has also announced an increase in electricity prices of 0.025 yuan per kilowatthour, which will take effect on July 1.

"The near-term impact of the announcement should be positive, although I expect the news in the long run to weigh on the shares as higher refined oil product prices could dampen demand and drag down oil prices with it," said Ben Kwong, associate director at KGI Asia Ltd.

Oil refiner and producer PetroChina was up 0.16 hkd or 1.55 pct to 10.46, off a high of 10.9, while Sinopec was up 0.09 hkd or 1.13 pct at 8.08, off a high of 8.46. CNOOC was down 0.4 hkd or 3.07 pct at 12.62 following a 4.75 usd drop in crude oil prices overnight.

Goldman Sachs upgraded Sinopec to "buy" from neutral" and PetroChina to "neutral" from "sell" on hopes the increases would help the companies recover losses from soaring crude oil prices. "We believe this price hike has significantly boosted their 2008 to 2009 earnings outlook and made valuations attractive," Goldman Sachs said. "The price hike is sooner and bigger than we had assumed."

In Sydney, the S&P/ASX 200 finished down 1.5 percent at 5,288.3 while the All Ordinaries index was off 1.3 percent to 5,411.8. "The losses are bigger than what we were expecting, considering we had such a good lead from Wall Street overnight. We're seeing the energy stocks really weigh on the market," said CommSec's Saly.

Woodside Petroleum ended down 3.9 percent at A$62.93, Santos dropped 6.2 percent, Oil Search fell 2.7 percent and Australia's only listed oil refiner Caltex lost 4.4 percent to A$13.93. Major banks also fell, with the exception of ANZ, which ended up 0.5 percent at A$18.78, still well below its high for the year of A$27.49 on January 25.

Commonwealth Bank retreated 1.4 percent to $39.36, National Australia Bank was down 2.9 percent at A$25.75, Westpac lost 2.1 percent to $20.63 and its takeover target St. George declined 2.2 percent to A$27.97.

Japan's Nikkei average closed 1.3 percent lower at 13,942.08 while the broader Topix slipped 1.4 percent to 1,356.74. "Investors were hesitant to open fresh positions after the slow, (moderate) rebound in U.S. stocks last night, in addition to the week-end factor," said Mitsushige Akino, chief fund manager at Ichiyoshi Management.

Mitsubishi UFJ Financial Group dropped 3.2 percent to 1,005 yen. Mizuho Financial Group lost 0.7 percent to 545,000 yen and Sumitomo Mitsui Financial Group Inc. turned lower, losing 1.5 percent to 883,000 yen after gaining by as much as 1.3 percent to 908,000 yen.

Crude oil futures fell $4.75 to settle at $131.93 per barrel on the New York Mercantile Exchange on Thursday after China said it would raise the prices of petrol and diesel fuel by 16 percent and 18 percent, effective Friday.

Saudi Arabia's announcement that it plans to increase daily oil output by 200,000 barrels per day also helped pull oil prices down. Crude prices were easier in Asia trade on Friday, with New York light sweet crude for July delivery around 56 cents lower at $131.37 per barrel.

But a warning from Citigroup Inc. that a "substantial" amount of writedowns on bad debt are still to come sent the stock lower, capping the Dow's gains.

South Korea's Kospi closed 0.6 percent lower at 1,731.00. Elsewhere, Singapore's Straits Times index closed up 0.3 percent at 3,001.81  while Malaysia's KLCI added 0.9 percent to 1,206.67. The Jakarta Composite edged down 0.1 percent to 2,371.78 and the Philippine Composite finished down 0.5 percent at 2,578.57.

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Metals - Copper jumps to month high on lower inventories, dollar weakness

LONDON - Copper rose to a month high in London on Friday after inventories fell and the dollar weakened, encouraging fund buying of the red metal.

At 11:58 a.m., London Metal Exchange (LME) copper for three-month delivery was at $8,415 a tonne, up from $8,330 at the close on Thursday. Earlier, the metal touched an intraday peak of $8,430 a tonne, its highest level since May 19.

Concerns over supply tightness have boosted the red metal, with inventories at relatively low levels and Chinese demand proving resilient despite the global knocks from the credit crunch.

Stocks monitored by the Shanghai Futures Exchange fell by 575 tonnes to 33,417 tonnes in the week ended Thursday, while inventories monitored by the LME were down 225 tonnes to 124,000 in the daily report from the exchange.

Weakness in the U.S dollar has also boosted commodities priced in the greenback, as they become relatively cheaper for holders of other currencies and more attractive as a financial hedge against the dollar's decline.

Copper's strength today comes despite the end of strike action at Southern Copper's Cuajone mine in Moquegua province, Peru, which had stoked supply fears earlier in the week.

Some analysts doubt whether copper's move higher is currently justified by the fundamentals. UBS metals analyst John Reade said: "While stocks are low in copper, demand is weak according to our sales desks."

In other metals traded on the LME, tin was up at $22,840 a tonne against $22,400. Lead traded up at $1,860 from $1,811, while aluminium was higher at $3,139 from $3,073. Nickel rose to $22,625 from $22,200, while zinc climbed to $1,950 from $1,934.

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