US & World Daily Markets Financial Briefing 22-01-2009

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US STOCKS-Wall Street hit by Microsoft, economic woes

NEW YORK - U.S. stocks fell on Thursday with the major indexes down more than 2 percent after a surprisingly grim earnings report from Microsoft Corp and economic data that showed further deterioration in the labor and housing markets.

Microsoft, raising worries over how it would fare in the economic slowdown, said it would cut up to 5,000 jobs over the next 18 months and that it could no longer offer profit forecasts for the rest of the fiscal year. For more details, The stock was among the Dow's biggest drags, falling 8 percent.

"It is a negative surprise for the market, certainly from a bellwether technology company. For Microsoft to miss its guidance, it brings home the pervasive fallout from the credit crisis," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

"On Wednesday, we had been able to bounce from the 8,000 level on the Dow. This (Microsoft news) makes it inevitable to retest the November lows for the market."

The results, which had been expected to be released later in the day, added to the already negative tone after data showing the number of workers filing new claims for jobless benefits rose by more than expected last week, while housing starts and permits fell to a record low in December, data showed.

The Dow Jones industrial average fell 195.30 points, or 2.37 percent, to 8,032.80. The Standard & Poor's 500 Index was down 21.20 points, or 2.52 percent, at 819.04. The Nasdaq Composite Index gave up 48.55 points, or 3.22 percent, to 1,458.52.

Investors were watching for a vote by the U.S. Senate Finance Committee on the nomination of Timothy Geithner to be Treasury secretary.

Geithner faced tough questioning at his confirmation hearing before the committee on Wednesday. Wall Street had originally cheered Geithner's nomination but the choice has since come under controversy over Geithner's failure to pay some taxes

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Key US Dollar Libor Rises As Liquidity Dries Up

LONDON - The cost of borrowing longer-term U.S. dollars in the interbank market rose Thursday as funding conditions in the money market continued to deteriorate amid concerns over the financial sector.

Analysts at Royal Bank of Scotland said the realization of tight short dated cash and minimal term liquidity has sunk in, adding term liquidity for most names was "almost non-existent at any level."

Market sentiment remained poor, said RBS, but should the upturn in global equity markets prove durable, it could stop the tone from worsening further.

Data from the British Bankers' Association showed three-month U.S. dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, rose to 1.15938% from Wednesday's fixing of 1.125%.

The rate has fallen significantly, aided by aggressive monetary easing by the Federal Reserve, since peaking at 4.81875% on Oct. 10.

The one-month Libor rate rose to 0.38938% from Wednesday's 0.35625%. Meanwhile, the overnight rate climbed to 0.21% from 0.1875%.  The Fed funds target range now stands at zero-to-0.25%.

The three-month BOR/OIS spread, a gauge of stress in the money markets, widened to 94.9 basis points from around 93 bps Wednesday.

The spread has tightened significantly from its widest point of 366 bps, seen on Oct. 10 when interbank market tensions peaked.

Lending rates in other currencies were lower across the board Thursday.  Three-month sterling Libor fixed at 2.20125%, down from Wednesday's 2.2125%, while the one-month rate fell to 1.61875% from 1.63813%.

The three-month rate has fallen steadily since peaking at 6.3075% on Oct. 1.

Meanwhile, overnight sterling Libor slipped to 1.575% from Wednesday's 1.605%, remaining above the Bank of England's Bank Rate, currently 1.50%.

Market expectations of further monetary easing by the BOE remained intact. Barclays Capital revised its U.K. interest rate call Wednesday, and now expects the BOE to cut its Bank Rate to zero by May.

According to Sonia rates, the Bank Rate is expected to fall to 1.0% in February, and to base around 0.75% by mid-year.

Euro Libor fixings were lower across all tenors Thursday.  The key three-month rate fell to 2.25313% from Wednesday's fixing of 2.3075%, while the one-month dropped to 1.89875% from 1.95%.

Meanwhile, the overnight rate tumbled to 1.15375% from 1.40625%, below the ECB's refinancing rate of 2.0%, and approaching the ECB's new deposit rate facility at 1.0%.

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European Shares Advance; Banks Lead

Banks led an advance for European shares on Thursday, as the beaten-down sector regained some poise after this week's sharp sell-off, although worse-than-expected results from Nokia took the shine off early gains.

The pan-European Dow Jones Stoxx 600 index advanced 0.4% to 185.26, rising after three straight sessions of losses.

Banks weighed on the market in the early part of the week as investors fretted that deteriorating trading conditions will force lenders to write down more assets.

"What has bought us under stress in the last couple of trading days is the fear that the financials' equity position will suffer as there will be further attempts to nationalize banks or further capital injections," noted Gerhard Schwarz, strategist at UniCredit.

However, the sector took back some of those losses on Wednesday afternoon and again on Thursday, with Societe Generale shares up 5%, Credit Suisse (CS) shares up 9.3% and Santander (STD) shares up 3.2%.

"After the sell-off, prices might bounce back from severe losses, and there is also the hope that there will be some new help provided which might not be as negative for existing shareholders as capital injections," said Schwarz.

KBC Group shares stood out on Thursday, up 37.9% in Brussels, after the lender said that it has arranged to receive 2 billion euros of capital from Flemish government but that the deal won't dilute existing shareholders.

On a national level, the French CAC-40 index rose 0.8% to 2,928.89, the German DAX 30 index climbed 1.2% to 4,312.52 and the U.K. FTSE 100 index rose 1.2%, to 4,108.50. 

Oil producers were strong as well in Europe, with BP (BP) shares up 1.7% and Total (TOT) shares up 2.3% as light sweet crude oil futures traded over $44 a barrel in electronic trading.

However, shares were off early highs in Europe as Nokia Corp. (NOK) shares dropped 6.6% after reporting a 69% drop in fourth-quarter earnings. Nokia also shaved its estimates for margins and industry-wide mobile sales in 2009. "We must expect that the economic weakness will bite on corporate profitability," noted Schwarz at UniCredit.

"Now the hope is probably that the worst momentum of the downturn is where we are right now. The critical thing is to bridge the time until we see the trough in leading indicators. There might be some rocky times over the next couple of weeks," he added.

BT Group details charge

Fiat shares also fell sharply on weak numbers, down 10.3%. It now only expects a group net profit of over 300 million euros in 2009, after dramatically slashing its target for trading profit - or operating earnings before asset disposals, restructuring costs or other one-time items - to 1 billion euros from a previous target range of 3.4 billion euros to 3.6 billion euros. The firm also cut its 2008 dividend and halted its share buyback program.

BT Group shares dropped 10.9% as it's going to take a 340 million pound ($471.7 million) charge in its global services unit as a result of financial and contract reviews.

Shares of low-cost airline easyJet climbed 11%. First-quarter revenue rose 32% to 550 million pounds after a strong performance across its network. First-half revenue is expected to exceed guidance, the firm added.

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Asian Shares End Higher; Banks, Japan Real Estate Cos Up

Asian stocks ended higher Thursday, with financials trading on a firmer note, while real-estate developers were standouts in Tokyo after the Bank of Japan released details of its plan to inject liquidity into the economy.

Analysts said stocks were rebounding from oversold conditions, with direction provided by U.S. gains overnight, although volume was limited ahead of the Lunar New Year holiday. "I think it's just a trading market, concerns over the economy will remain for some time," said Marco Mak, head of research at Tai Fook Securities in Hong Kong.

Citigroup cautioned in a research note Thursday that corporate earnings globally are in the early stages of a recession that could last four to six quarters before recovering. "We are in the midst of what will probably be the deepest global earnings recession in over 40 years," wrote Citi strategists.

Mitsubishi Estate was part of a broad rally in the Japanese real-estate sector after the Bank of Japan said it will accept bonds issued by real estate investment trusts, or REITs, as collateral for loans. The announcement came as the BoJ's policy board vote unanimously to keep interest rates unchanged at 0.1%. Mitsubishi Estate shares ended 5.4% higher.

South Korea's Kospi Composite ended up 1.1%, while Australia's S&P/ASX 200 added 1.3% and New Zealand's NZX-50 gained 1.1%. Hong Kong's Hang Seng Index finished 0.6% higher. Markets in Taiwan were closed for a public holiday.

Japan's Nikkei 225 ended up 1.9% after a choppy session which saw the index fall nearly 1% at one point. "(Foreign exchange) concerns will continue to limit the Nikkei's upside" with the yen solidly higher for January, said Yumi Nishimura, a market analyst at Daiwa Securities SMBC. A stronger yen makes Japanese goods less competitive on global markets.

Among Japanese exporters, Toyota Motor fell 4.2%, Nissan Motor 3.6% and Canon 1.7%, with data showing exports in the country sank 35% in December from a year earlier, the third-straight month of declines.

The BoJ's announcement that it would buy up to 3 trillion yen ($33.5 billion) of commercial paper and asset-backed commercial paper through the end of fiscal year in March helped spark late-afternoon support for the Nikkei.

Overall volume for Asia was low. "The overnight gain in the U.S. markets seemed to be a technical rebound, and is likely to have a limited positive impact on local stocks," said Lee Jin-woo at Mirae Asset Securities in Korea.

EBay however dropped 5.8% in late trade as its fourth-quarter net income fell 31%. The online auctioneer issued a first-quarter view below analyst estimates. "We remain bearish on risky assets in the near term. We think weak economic data globally and poor profit reports will continue to weigh" on sentiment, said analysts at Calyon.

Banking stocks were a bright spot in Asia. In Australia, National Australia Bank gained 2.8% and Westpac Banking 3.3%. Japan's Nomura Holdings added 4.3% while South Korea's KB Financial rose 4.2%.

In India, ICICI Bank was up 2.8%. In Hong Kong, HSBC added 3.6%, after falling 26% over the eight previous sessions.

Sony fell 2.6% in Tokyo as the company said it would close one of two domestic TV manufacturing plants. After trading closed, the company said it now expects a group net and operating loss for this fiscal year, and it cut its planned capital spending, citing a strong yen.

Gains in South Korean shares were limited by data showing the economy put in its worst performance in almost 11 years in the fourth quarter. Gross domestic product fell a seasonally adjusted 5.6% from the previous three months.

Kia Motors fell 2.5% even as fourth quarter net profit jumped 97% from a year earlier, helped by a weaker won. Hyundai Motor lost 2.9% with its fourth quarter net profit falling 28% from a year earlier to 243.6 billion won ($170 million), lower than 569.8 billion won forecast in a Dow Jones Newswires poll.

LG Electronics shed 3.7% after it swung to a fourth-quarter net loss, weighed down by hefty declines in its flat-screen panel unit. The 671.3 billion won loss at Korea's second-largest electronics maker was worse than the market expected.

In Hong Kong, markets were higher but trade was winding down before the Chinese New Year holiday next week. "Trading interest is unlikely to be strong and investors may sell into strength if stocks shoot up after their recent sharp declines," said Conita Hung at Delta Asia Securities.

The Shanghai Composite Index added 1%, with gains in healthcare stocks after Beijing said it would spend more than $120 billion over three years on the sector. Shinva Medical Instrument added 7.7%.

Markets in China shrugged off news that the economy grew 6.8% in the fourth quarter of 2008, the lowest quarterly growth rate in seven years.

India's Sensex was up 0.3% in late trade as Reliance Industries traded basically flat before its third quarter results later Thursday.

Singapore's Straits Times Index was 0.3% higher with Malaysian shares up 0.6%, stocks in the Philippines 1.3% higher and Indonesia easing 0.2%. Thai shares were up 2%.

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Gold Steady, Temporary Break From Dollar

LONDON -- Spot gold prices decoupled from the dollar this week and traded mostly unchanged in European hours Thursday, but market participants said the metal should eventually realign with currency moves.

At 0920 GMT spot gold was trading at $854.55 a troy ounce, nearly unchanged from Wednesday's close. Spot silver was at $11.34/oz, up 0.3%. Spot platinum was at $927/oz, up 0.4%. Spot palladium was at $182/oz, down 0.8%.

In the wider markets, the dollar was mildly weaker against the euro, European stocks were higher and crude oil was up. The VIX index, which measures equity volatility, is back at levels last seen in mid-December.

Traders said two banks were heavy buyers of gold in European trading this week, which contributed to pushing gold up and caused it to break its trading correlation with the dollar.

While Gold prices decoupled from their high correlation with the dollar, it may be temporary, said Standard Bank analyst Walter de Wet. If the dollar continues to appreciate against the euro, gold will eventually move down, he said.

"Longer term, the dollar will still give the most direction to the gold market in the coming weeks and months," said Mitsubishi analyst Tom Kendall.

Kendall said when the dollar breaks its upward momentum and weakens, then gold will "do well," but that isn't expected imminently.

In the meantime, Kendall said he expects gold to trade in its current range between $800/oz and $885/oz.

Ongoing financial sector instability will keep investors interested in buying gold, traders and analysts said. Gold exchange traded fund buying continues to rise, with the largest fund SPDR in New York up another three tons to 805.90 tons, as of Wednesday.

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