20/11/07

Goldman Sachs downgraded Citigroup to sell from neutral and said the bank will likely have to take $15bn in writedowns over the next two quarters due to bets on risky debt. Citigroup fell 5.9 percent. Goldman also cut its price target on Merrill Lynch, Morgan Stanley and others in the sector. The comments sent the overall market lower, as investors were reminded that the breadth of the credit market fallout is not really known and could be a lot worse than had been expected.

Freddie Mac fell after Credit Suisse said the company could take up to $5bn in losses due to its bets on risky debt. Fannie Mae also slipped.

In merger news, Celgene said it will buy Pharmion for around $2.9bn in cash and stock.

US light crude for January delivery rose 80 cents to settle at $94.64 a barrel on NYMEX, after having been on both sides of unchanged through the morning.

Treasury prices rose, lowering the yield on the 10 year note to 4.07 percent from 4.16 percent late Friday.

In currency trading, the dollar fell against the euro and the yen COMEX gold for December delivery fell $9 to settle at $778 an ounce.

In Tokyo, the Nikkei closed 169 points higher at 15211.5 this morning, pulling out of slide to 16 month lows earlier in the day, buoyed by a $1.8bn bid led by a US firm to buy nearly one third of midsized lender Shinsei Bank Ltd. Aozora Bank also soared after unveiling plans for a business alliance with much larger lender Sumitomo Trust and Banking Corp, as talk of banking industry consolidation turned around a market that had been hit by another rough day on Wall Street. Shinsei Bank jumped 9.3 percent to Y398 after it said a group of investors led by J.C. Flowers would bid about $1.8bn to buy a stake of up to 32.6 percent. Aozora Bank soared 6.9 percent to Y340 on news of the alliance with Sumitomo Trust, which rose 2.2 percent to Y796. Shares of TDK Corp climbed 4.1 percent to Y7,710 after Credit Suisse upgraded it to outperform from neutral. Worse than expected conditions in the general component market made Credit Suisse lower its forecasts and target price to Y10,000 from Y11,000. East Japan Railway rose 3 percent to Y935,000 after Mizuho Securities raised its rating to 1 from 2, citing stability in its railway business.

The FTSE100 closed 170.4 points lower at 6120.8 on Monday, suffering its biggest one day fall since mid August, as investors financial stocks around the globe took fright after Citigroup was downgraded. The index had its biggest one day fall since August 16, when it fell more than 4 percent on credit fears in a world sell-off that was followed the next day by a surprise discount rate cut from the US Federal Reserve.

Northern Rock was the day's worst casualty, losing 21.4 percent and touching a new low after the bank said interest from potential suitors valued it at "materially" below Friday's share price. The treasury said it may offer financial help to potential rescuers of the bank, even though this would need to be approved by the EU, as it emerged proposals put forward so far were pitched low.

Across the Atlantic, Goldman Sachs cut Citigroup to sell and said the bank may have to write off $15bn over the next two quarter as mortgage losses reduce earnings.

Swiss Re became the latest financial institution to unveil a huge hit from the crisis in the subprime market, reporting a CHF1.2bn writedown.

Alliance and Leicester fell 4.2 percent after saying it continued to raise the funds it required successfully and saw no reason why its shares had fallen to a seven year low.

Bucking the trend Standard Chartered rose 0.9 percent after the FT said China's three leading banks have approached Singapore's state investment agency, Temasek to discuss the possible acquisition of its 17 percent stake in Standard Chartered.

Sliding metals prices and wider economic growth concerns exerted downward pressure on the mining sector. Lonmin and Antofagasta both tumbled 7.7 percent, while Anglo American and Xstrata both dropped 7.3 percent.

BHP Billiton lost 5.2 percent after its CE Marios Kloppers, told investors the firm will not add a cash sweetner to a proposed all share takeover bid for mining rival Rio Tinto, a South African BHP shareholder said.

Barratt Developments fell 4.9 percent after it kept its first half outlook and said the UK housing market had tightened as anticipated due to higher interest rates and financial market turmoil. The mood was further dampened after a survey by property Web site Rightmove showed house price inflation in England and Wales dropped to 7.9 percent year on year in the month to Nov 10 from 10.4 percent the previous month.

Kingfisher dropped 7.7 percent after JP Morgan cut its price target to 235 pence from 256 pence with an overweight rating.

Economics
UK Public finances (Oct) 09.30gmt

There is expected to be a tax take of roughly £2bn in September, which would take borrowing so far this year to £26bn, above the £18bn seen at this time last year. Following the PBR, the Chancellor estimates he will borrow £38bn this tax year. At this stage it looks as if he may miss even this upwardly revised target.

UK CBI industrial trends (Nov) 11.00 gmt

Manufacturing sentiment to decline further in November, as demand from our main trading partners, the US and Eurozone, is fading. This would suggest the mini boom in manufacturing seen through 2006 is now largely over.

US Housing starts (Oct) 13.30gmt

In the last few months, we have seen renewed declines for housing starts and building permits, with both sitting at cycle lows as of September. Housing starts are down 31 percent from a year ago, with the big declines coming from the Midwest, South and West. Housing starts are seen falling to 1170k and building permits are seen falling to 1200k.

US FOMC minutes (Oct) 19.00 gmt

The FOMC cut the Fed funds rate by 25bp in October. Hoenig was the lone dissenter in favour of no change, but these minutes might hint at other members showing some sympathy for this view. Bernanke and other recent Fed speakers have highlighted that rising oil prices and the weaker dollar could boost inflation in the short run. On the downside, the minutes are likely to highlight ongoing housing concerns, perhaps featuring some discussion of pending mortgage rate resets and rising foreclosures.

These minutes will be important as they will contain the FOMC's first expanded set of economic projections, now to be published on a quarterly basis. The central tendency estimates may reflect a slowdown in GDP and a rise in unemployment next year, before returning to trend in 2009-10. Charts will show the distribution of projections for each variable and how it has changed (this might mean we also get an older set of projections in this release). The text will also provide a narrative on the major influences shaping the outlook and the sources of risk to the view.

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