21/11/07

Early on, a rally in commodity stocks and positive earnings from Hewlett Packard sent the market higher, but the momentum faded as the release of the Federal Reserve minutes approached. The selling reached its peak after investors had a chance to digest the central bank's commentary on the economy and get a view of its thinking at its two day October meeting. However, a late surge back to the upside erased the losses and sent the indices into positive territory.

The expanded minutes showed that Fed members regarded the interest rate cut as a "close call", but the reduction was appropriate to help offset the effects of tighter financial conditions on the economic outlook. They read "Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity. Many members were concerned about the still sensitive state of financial markets and thought that an easing of policy would help to support improvements in market functioning, thereby mitigating some of the downside risks to the economic growth". The minutes also showed that Fed members found "scant evidence" of spillovers due to the ongoing housing correction to other sectors of the economy.

Oil closed at a record high, with January crude surging $3.21 to close at $98.03 a barrel on NYMEX, passing the previous closing record of $96.70 set Nov 6.

Bond prices fell slightly, with the 10 year note down 4/32 to yield 4.09 percent.

Freddie Mac fell over 25 percent as it reported steep third quarter losses and a dividend cut for the fourth quarter. The company said it had set aside $1.2bn in the quarter to account for credit losses.

Fannie Mae slumped 24 percent. The company has been under pressure over the past few weeks after it revealed its mortgage losses, with investors questioning whether the losses are bigger than the company has so far acknowledged.

Hewlett Packard reported quarterly sales and revenues that topped expectations late Monday.

Exxon Mobil rose after a UBS upgrade.

In economic news, October housing starts rose more than expected, while permits, a measure of builder confidence, fell more than expected.

The dollar gained versus the yen and fell against the euro.

COMEX gold for December delivery rose $16.50 to close at $794.50 an ounce.

In Japan, the Nikkei ended at a 16 month closing low, as a stronger yen and a weaker outlook for the US economy depressed exporters such as Honda Motor Co Ltd. The market extended losses in the afternoon after the dollar's sharp fall against the yen and losses in other Asian markets further dampened investor sentiment. The dollar extended its fall in the afternoon, slipping as low as 108.84 yen at one point. The Nikkei closed 373.86 points lower at 14837.66, its lowest close since July 24 2006.

Extended losses in tandem with the dollar's fall, with Honda down 4.5 percent at Y3,620 and TDK Corp losing 3.4 percent to Y7,450. Canon Inc shed 1.8 percent to Y5,390. Toyota Motor Corp slid to a 16 month low, down 2.8 percent at Y5,940.

One bright spot was Nippon Sheet Glass Co Ltd. Its shares rose 4.2 percent to Y593 after it said first half operating profit grew more than threefold thanks to the addition of Pilkington, which it bought in June 2006.

Oil and gas developer INPEX Holdings rose 3.6 percent to Y1.15m after oil prices matched an all time high on Tuesday on the weak dollar and supply concerns heading into winter.

Mitsubishi Paper Mills gained 4.8 percent to Y218 after a ratings upgrade by Nikko Citi to "buy" and an announcement on Tuesday that it had agreed with Oji Paper to a business and capital tie up in which Mitsubishi will raise Y1.77bn.

Shares of Katakochi rose 17.4 percent to Y594, adding to a 19 percent gain in the previous session after the Nikkei business daily reported on Tuesday that Japan Tobacco Inc and Nissin Food Products planned to team up to acquire the frozen food company.

The FTSE100 rallied on Tuesday after the previous day's steep fall, as beaten down banks gained on hopes of interest rates cuts, and firmer metal and crude prices lifted commodity stocks. The index closed 105.7 points higher at 6226.5, the biggest one day percentage gain since Sept 19, the day after the US Federal Reserve cut its key interest rates.

Bank stocks, which tumbled on Monday, rebounded on vague market talk of a cut in the Bank of England's emergency rate. The Bank of England declined to comment on market rumours. Barclays rose 5.1 percent, RBS added 2.1 percent and Standard Chartered and Alliance and Leicester both added 2.2 percent. Bradford and Bingley climbed 3.1 percent after the bank said it had sold £4.2bn of commercial property and social housing debt to improve group liquidity.

To add to the credit crunch woes, Ireland's AIB Mortgage Bank postponed plans for a three year euro benchmark covered bond due to "unfavourable market conditions".

Rate cut talk also lifted shares in housebuilders and property stocks. The FTSE350 real estate index ended up 5.8 percent, its biggest one day rise since March 2006.

Northern Rock fell by as much as 42 percent, triggering brief suspensions, on concerns that any offers would be low. The stock recovered most of the losses but still ended down 6.9 percent at 97 pence.

Paragon plunged nearly 39 percent after its Chief Executive said it may need to raise £280m from shareholders because of difficulty in raising funds in the crisis hit credit markets.

Miners rose following heavy losses on Monday. Rio Tinto, BHP Billiton, Xstrata, Anglo American and Kazakhmys all rose.

BP and Royal Dutch Shell were also strong as crude prices rose above $96 a barrel.

ICAP topped the FTSE100 leaderboard, rising nearly 13 percent after it posted a 34 percent rise in first half underlying profit, boosted by volatility on global markets, and said its prospects remained good.

The November Inflation Report, released last week suggested the Committee is willing to lower the base rate in the future, based on the likely spill over from the events of the summer. The question is, how many of the Committee members wished to lower the base rate immediately, rather than wait until next year. Some Committee members, who didn’t necessarily feel rates needed to go this high in the first instance, are probably prepared to lower the base rate, so it is though the vote will be 7-2 in favour of rates unchanged, with Lomax joining last month's dissenter, Blanchflower.

US Initial jobless claims (week 17 Nov) 13.30gmt

Initial claims have trended a bit higher, with last week's reading again rising to 339,000. The 4 week average is at 330,000, up from 310,000 at the beginning of October. Jobless claims for this week are expected to be 335,000 for this week.

US University of Michigan confidence (Nov, final) 15.00gmt

The preliminary estimate surprised to the downside at 75, down from 80.9. Both the current conditions (91 from 97.6) and expectations (64.7 from 70.1) indexes declined, reflecting the combined hit from falling hone prices, higher gasoline and the latest drop in equities. The November IBD/TIPP economic optimism index showed a similar decline, falling to 42.2 from 49.4. The final Michigan reading is expected stay at 75.

US Leading indicators (Oct) 15.00 gmt

A 0.3 percent decline in October is expected for leading indicators. Negative contributions will come from higher jobless claims, as well as declines in consumer expectations, ISM supplier deliveries, and average manufacturing hours.