US & World Daily Markets Financial Briefing 12-12-2006

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Stocks are down ahead of Fed decision

NEW YORK - U.S. stocks edged lower Tuesday, with Texas Instruments' lowered revenue forecast and a shake-up at Citigroup giving some direction to a market otherwise fixated on the Federal Reserve's interest rate decision due out later in the session.
   
Earnings from electronics retailer Best Buy and investment bank Goldman Sachs also may help shape sentiment.
   
In the opening minutes, the Dow Jones industrials fell 6.97 points to 12,321.51, the S&P 500 slipped 1.29 points to 1,411.75, and the Nasdaq lost 1.04 points to 2,441.82.
   
On Monday, U.S. stocks closed higher, with the Dow industrials up nearly 21 points, the Nasdaq Composite adding 5.5 points and the S&P 500 rising 3.2 points. Deal news, oil price weakness and an upgrade for J.P. Morgan Chase contributed to the modest uptick.
   
Attention turns to the Fed on Tuesday, with its decision due out at 2:15 p.m. EST. A change in interest rates from 5.25 percent would be a shock, and even the accompanying statement is likely to be similar to last month's.
   
In a speech last month, Fed Chairman Ben Bernanke suggested that the central bank hadn't been surprised by any of the economic developments since the summer.
   
Stocks in focus
   
Texas Instruments is due to be in focus after the world's top maker of cell phone microchips cut its fourth-quarter sales and earnings forecast. TI Vice President Ron Slaymaker said in a conference call that the company's wireless business saw weaker demand than expected but that it wasn't the only reason for the forecast cut.
   
Still, J.P. Morgan saw some silver lining in the announcement, upgrading shares to overweight from neutral, on hopes that its gross margins are bottoming out.
   
Citigroup shares slipped 1.5 percent in Frankfurt after the bank named Robert Druskin, now president and chief executive of Citigroup's corporate and investment-banking arm, to be chief operating officer. He'll report directly to Charles Prince, chairman and chief executive. CFO Sallie Krawcheck, rumored to be on the way out, remains in her position.
   
Goldman Sachs is expected to post its best quarterly profit of the year, helped by its gains in investing in Industrial and Commercial Bank of China and Japan's Accordia Golf.
   
Lehman Brothers and Bear Stearns release their results on Thursday.
   
Best Buy results meanwhile will be scrutinized for the impact of falling high-end television set prices.

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Dollar rises as US trade gap narrows sharply; Pound remains firm

LONDON - The dollar rose after data showed a massive improvement in the US trade deficit, though gains were limited as many in the market preferred to remain sidelined ahead of this evening's interest rate decision in the US.
   
Data released this afternoon showed the US trade deficit narrowed to 58.9 bln stg in October. This was the largest drop in the deficit in five years and was well above analysts' expectations for a much smaller improvement to 63.0. The data caused the euro to dip just below the 1.3220 usd mark.
   
The Fed is fully expected to leave interest rates unchanged at 5.25 pct when it announces its decision today and all attention will therefore centre on the accompanying statement for clues on the rate outlook for next year.
   
Many expect, however, that recent firmer US data, and strong core CPI inflation numbers in particular, will prompt the Fed to leave intact its current bias towards tightening interest rates.
   
"While the Fed believes that core inflation is likely to moderate, it will still likely be characterised as elevated and result in the FOMC maintaining the current tightening bias," said Mike Carey at Calyon.
   
Elsewhere, the pound remained firm, trading at 6-day lows against the euro after better-than-expected UK inflation data this morning increased expectations that the Bank of England will raise interest rates further in 2007, most likely in February.
   
The UK CPI inflation rate came in at an annual 2.7 pct in November, above analysts' expectations for 2.6 pct and the highest annual rate since the series began in 1997.
   
"The fog surrounding the outlook for UK interest rates may now be clearing," said Stuart Bennett at Calyon, who expects a rate hike in February.

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FTSE 100 risers

ICI 433-1/2 up 10 - Break-up bid hopes

Tesco 391-1/4 up 5-1/2 - Raises stake in Chinese joint venture to 90 pct, Cazenove positive

Cadbury Schweppes 543 up 8 - Trading in line; Evolution reiterates 'buy' with 630 pence target

Lloyds TSB 559-1/2 up 1 - Rallies after Goldman Sachs Q4 update beats expectations

Prudential 695 up 1-1/2 - SG Securities 'buy' with 760 pence fair value

Cairn Energy 2,083 up 6 - Speculative support

Shire 1,070-1/2 up 5-1/2 - Ongoing bid hopes

Standard Chartered 1,501 up 7 - Pulls back opening losses as investors warm to trading update

Next 1,773 up 13 - Retailers rally after recent sell-off
   
FTSE 100 fallers

Reuters 449-1/2 down 11-3/4 - UBS issues cautious note, 'neutral'

Drax Group 814 down 277 - Merrill cut forecasts & Morgan Stanley cuts its tgt to 720p yesterday

British Land 1,568 down 12 - Profit-taking

Royal Dutch Shell 1,799 down 25 - Co yields to Kremlin pressure on Sakhalin project

Pearson 1,463 down 41 - Deutsche Bank cuts target to 710 pence from 750; Goldman cuts estimates

Centrica 337 down 5-1/4 - Morgan Stanley reiterates 'underweight'

Frankfurt

At 3.45 pm, the DAX 30 index was down 7.12 points at 6,462.30, after moving between a low of 6,457.37 and a high of 6,484.10 this session. The MDAX was 1.22 points or 0.01 pct lower at 9,072.87, while the TecDAX dropped 1.94 points or 0.27 pct to 711.57.
   
The DAX futures contract was at 6,470.5, down 3.0 points, while bund futures were 118.11, up 0.01.
   
ThyssenKrupp led blue chips lower, down 0.88 eur or 2.74 pct at 31.25. Deutsche Boerse followed, down 2.29 eur or 1.67 pct to 134.81, after WestLB AG cut their recommendation for the stock to 'hold' from 'add', dealers said. Continental fell 1.22 eur or 1.36 pct to 88.47.

On the MDAX, Vossloh gained 4.32 eur to 57.57, while Premiere fell 0.40 eur or 3.36 pct to 11.88. Aareal gained 1.50 eur or 4.81 pct to 32.70 after the bank forecast income in the upper double-digit million euros range due to Interhotel Group, 33-pct owned by Aareal, selling properties.

Pfeiffer gained 1.32 eur or 2.13 pct to 63.40 to lead the Tec-DAX higher, while Morphosys fell 1.70 eur or 3.39 pct to 48.50 as the index's fastest decliner.

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Asian shares close mostly higher, Tokyo rises as yen falls

HONG KONG - Shares across the Asia-Pacific region closed mostly higher, with Tokyo rising on a weaker yen.
   
Tokyo shares ended higher, helped by foreign buying and a weaker yen, which lifted interest in exporters. Investors were also encouraged by a media report that the governing coalition may extend tax breaks on capital gains for one more year, although there was some caution as investors awaited the outcome of the Federal Reserve's policy meeting later today.
   
The blue-chip Nikkei 225 Stock Average closed 109.79 points or 0.66 pct higher at 16,637.78, off its best level for the day of 16,682.65. The broader TOPIX index of all first-section issues advanced 8.75 points or 0.54 pct to 1,636.72, off a high of 1,641.86.
   
Hiroichi Nishi, equity chief at Nikko Cordial Securities, said shares in exporters had been bought because the yen's further decline against the US dollar had raised expectations that the companies might raise their forecasts for the fiscal year ending next March.
   
Australian shares finished higher after investor sentiment, buoyed by the overnight rise in US shares, drove the Australian share market into fresh record territory.
   
Banking stocks led the market higher in early trading and buying was also fuelled by merger and takeover activity. Butlower base metal and energy prices overnight weighed on resource and energy stocks, together with profit taking later in the trading session, which saw stocks drift lower.
   
The S&P/ASX 200 gained 3.9 points or just 0.07 pct to close at 5,473.6, still short of the previous record closing high of 5,491.6 set on Nov 7.
   
The key index closed off a fresh record intra-day high of 5,502.3, beating the previous record intra-day high of 5,496.3 also set on Nov 7, and ended above the low of 5,468.4.
   
Hong Kong shares were weaker in afternoon trade on profit-taking and caution ahead of the US Federal Reserve's policy meeting tonight. At 3.23 pm the Hang Seng Index had fallen 13.29 points or 0.07 pct at 18,911.37.
   
In mainland China, A-shares in Shanghai and Shenzhen closed higher on follow-through buying with banks and auto makers gaining ground. The Shanghai A share Index gained 40.70 points or 1.78 pct to 2,332.73 and the Shenzhen A-share Index was up 1.21 points or 0.23 pct at 526.52.
   
Seoul shares closed lower, with sentiment undermined by heavy institutional sell offs and caution ahead of triple witching this Thursday. Following a brief upturn in initial trade prompted by a firmer close on Wall Street, the market soon lost momentum to close near its low for the day, with the won's rally also pressuring sentiment.
   
The KOSPI index closed down 13.75 points or 0.99 pct at 1,376.98, after moving between 1,373.03 and 1,392.90. The won finished at 922.70 against the dollar, compared with 926 in the previous session.

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Copper edges lower as market consolidates after yesterday's gains; oil edges up

LONDON - Copper edged lower as the market consolidated after posting gains yesterday and as traders reacted to news a potential strike at Xstrata's Altonorte smelter will be held off for 5 days amid requests for government mediation.
   
At 1.06 pm, LME copper for three-month delivery had edged down to 6,855.00 usd a tonne from 6,930.00 usd at the close yesterday.
   
Copper edged up yesterday amid concern over a potential strike at Chile's Altonorte smelter and on news Chinese copper imports rose 6 pct in November, bringing an end to the declining import trend seen since the start of the year.
   
The metal has come under slight pressure today, however, amid news Xstrata has requested Chilean government mediation in contract talks with unions at its Altonorte smelter, holding off a potential strike for 5 working days.
   
Elsewhere, LME tin for three month delivery edged down to 10,850.00 usd a tonne after touching a new contract high of 11,250.00 usd yesterday as traders eyed a crackdown by the Indonesian government on illegal tin mining.
   
LME lead for three month delivery was also lower, trading at 1,760.00 usd after it also touched a new contract high yesterday, of 1,775.00 usd, amid a continuing fall in LME stocks and a rise in cancelled warrants.
   
In other metals, three month LME zinc bucked the trend to edge up to 4,395.00 usd against 4,350.00 usd yesterday, while nickel fell to 33,700.00 usd against 34,000.00 usd and aluminium dipped to 2,795.00 usd against 2,800.00 usd.

Oil prices edged up after closing lower yesterday, as some players remained nervous Opec will announce further output cuts at its meeting on Thursday despite somewhat mixed signals from the cartel.
   
Gains were limited, however, by further forecasts for above average temperatures in the US and expectations tomorrow's US inventory data will show a counter-seasonal build in distillates, which include the key heating oil fuel.
   
At 10.27 am in London, front-month Brent North Sea crude contracts for January delivery were up 17 cents at 62.00 usd a barrel, after settling down 36 cents at 61.84 usd yesterday.
   
Meanwhile, front-month New York light sweet crude contracts for January delivery were up 15 cents at 61.37 usd a barrel, after closing down 81 cents at 61.22 usd yesterday.
   
At its October meeting, Opec agreed to cut output by 1.2 mln bpd, effective Nov 1, in an attempt to shore up falling oil prices, which have lost more than 20 pct of their value since peaking above 78 usd in July and August.
   
The market has been sceptical, however, about the extent to which individual cartel members complied with the cut and is looking to tomorrow's report from the International Energy Agency for evidence of compliance.
   
Elsewhere, traders are looking to tomorrow's US inventory data, which is expected to show an increase of about 700,000 barrels in already ample crude stocks, and a slight dip in distillate stocks amid above average temperatures.

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