25/6/08

FTSE 100 5634.7, -32.5 Dow 11807.4, -34.9

FTSE 250 9192.33, -128.24 Nasdaq 2368.28, -17.46

FTSE All Share 2861.84, -20.48 S&P 500 1314.3, -3.7

Nikkei 13829.9, -19.6 Hang Seng 22665.8, +209.8

Oil (Brent) $137 Gold $891.60

Base Rate 5% 10 Yr Gilt 5.176%

£/$ 1.968 Euro/Gbp 0.7911

Markets
US markets fell yesterday as investors struggled with poor economic data and a profit warning from United Parcel Service. The Conference Board's Consumer Confidence index showed a reading of 50.4 in June, its fifth lowest ever level, down from 58.1 in May. Analysts had forecast a much smaller decline to 56. Investors were also cautious as the Federal Reserve began its two day policy meeting, which is expected to result in interest rates being held at 2%.

The Dow Jones slipped 34.9 points to close at 11,807.4, the S&P 500 fell 3.7 points to end at 1,314.3. The Nasdaq dropped 17.46 points to finish at 2,368.28.

Package delivery company, United Parcel Service, tumbled 6% after cutting its second quarter outlook late Monday. The company cited slower economic growth and higher fuel costs. These factors affected stocks across the board including Alcoa, down 2.2%, Caterpillar, which lost 4.2% while DuPont ended 3.3% lower.

Financials proved to be a bright spot for investors as they looked for bargains in the recently beaten down sector. The S&P financial index rebounded 1.5% yesterday, having fallen almost 12% this month alone. Bank of America gained 2.9%, Citigroup added 1.6%, JPMorgan rose 2.3% and Wells Fargo climbed 1.5%. Although it was regional banks that made the strongest gains such as SunTrust Banks which finished 4.1% higher.

Yahoo Inc enjoyed an active session which saw shares rally 11.5% higher at one point before falling back to close with a gain of just 2.8%. It was technology blog TechCrunch which caused the excitement after saying that Yahoo's talks with Microsoft were back on, however, CNBC said there was no deal "whatsoever" on the table - both cited unnamed sources.

US light crude oil for August gained $0.26 to settle at $137 a barrel. COMEX gold for August delivery climbed $4.40 to finish at $891.60 an ounce.

Treasury prices were slightly higher, lowering the yield on the 10 year note to 4.1% from 4.16%.

The Nikkei slipped 19.6 points to close at 13,829.9, its fifth loss in a row and the longest losing streak this year. Real estate companies, including Mitsui Fudosan Co, fell after a smaller rival filed for bankruptcy. Exporters such as Mazda Motor Corp slumped on further signs the US economy is slowing.

The Hang Seng is currently 209.8 points higher at 22,665.8. Trading only began at 2:30 pm local time after the morning session was abandoned due to the city raising its storm warning to No. 8 late yesterday as Severe Tropical Storm Fengshen approached. China Life Insurance went higher after a report in China Securities Journal said the company has been buying up "large quantities" in mutual funds.

The London market closed in the red yesterday after a volatile session amid concerns over the housing market and political tension between Israel and Iran. The FTSE 100 closed 32.5 points down at 5634.7, although a late bounce-back from the banking sector helped the Footsie claw back a 1.3% drop in mid-session trading on rumours of a strike on Iran's nuclear sites. The speculation was later denied, but compounded a poor day for London's leading share index, with worrying lending figures from the British Bankers' Association starting the market on the back foot.

Sentiment was hit by figures showing the number of new mortgage approvals dived to a new record low, hitting house builders and retailers. Lending data showed that the number of new mortgages approved for people buying a house plunged by 20% during May to 27,968 - less than half this time last year. The data accelerated losses in the retailing sector after FTSE 250 member Kesa Electricals issued a gloomy trading outlook. The group was off 16.75p to 157.75p. A downgrade for Domino's Pizza also saw the company's shares lose 14%, or 30p to 186p. Back in the top flight, Next was off 35.5p at 959.5p, with Tesco and Sainsbury's down 12.9p at 365.1p and 10.5p to 314.75p respectively after figures revealed recent market share losses for the duo.

The lending figures failed to halt the rally by embattled lender Bradford & Bingley, which saw shares jump more than 17% on news that major investors are planning to sidestep the company's current rights issue plan. The alternative proposal, revealed last night, would see B&B drop the planned sale of a 23% stake to TPG Capital, in favour of a £400m cash injection led by investment group Resolution. The move was welcomed by shareholders, with B&B shares up 11.25p to 77.25p.

Among blue-chip banks, Royal Bank of Scotland benefited the most from the afternoon rally, rising 4.75p at 219.25p, with Lloyds TSB ahead 7p at 325.75p. But HBOS lost early trading gains to fall back below its 275p rights issue price - down 4.5p at 274.75p.

One of the biggest gains in the top flight came from Thomas Cook after the tour operator said trading for the summer remained strong in "all major markets". The stock rose 7.25p to 241.5p, with rival Tui Travel lifting 2.5p to 208.25p.

Economics
UK CBI Distributive trades (Jun) 11.00 bst

Following on from the staggering strong official May retail sales data, this survey will attract more attention than usual as the market attempts to gauge the extent of any decline in spending during June, or indeed the scope for a further upward surprise. The magnitude of the jump in the official sales data appeared to defy logic, particularly in the light of some fairly meaty price increases, and the MPC have expressed continued surprise over the strength of consumer spending over the course of 2008. In fairness, however, the May CBO distributive trades survey did hint at some improvement in the retail landscape, with the expected retail sales component picking up sharply (albeit for June rather than May), and reported sales measure being very strong on the distribution side of the survey during the month. The CBO survey has been volatile in recent months and its track record of predicting the official series far from compelling, but, given the uncertainty surrounding the outlook for consumer spending, analysts will likely be grateful for guidance from any direction and the finding of this survey will therefore be worth keeping any eye on.

US Durable goods orders (May) 13.30 bst

A softer report is expected for May, with total orders up 0.1 percent and extransportation orders falling 0.5 percent. Boeing aircraft orders rose from 58 to 67 in May and transportation orders could rise 2 percent. But both machinery and electrical equipment orders have surged above the underlying rate of shipments in recent months and may drop back sharply in May.

US New home sales (May) 15.00 bst

Both new and pending home sales increased in April, up 3.3 percent and 6.3 percent respectively. In the West, there has also been improvement in existing home sales and new construction activity. There is expected to be an extension to this, with new home sales rising to 570k in May.

US FOMC rate announcement (Jun) 19.15 bst

The Fed is likely to keep rates unchanged at this meeting. After suspending its balance of risks assessment in the April 30 statement, the Fed will probably re-institute it in this one. If so, then an upside risk to inflation is likely to be implemented. The question is whether the downside risk to growth will also make a re-appearance. HSBC think so, although the Fed might choose to say that the upside risk to inflation may now be somewhat greater than the downside risk to growth, at least in the short term since the fiscal stimulus seems to working for the moment.

The text might be a bit more upbeat on the recent growth data, especially since retail sales have been strong. Something along the lines of GDP picking up in the current quarter may replace "spending has been subdued". But acknowledging "tight credit conditions" is likely to remain. Once again, the FOMC can say that "Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen". It's too early for the Fed to be seen celebrating the recent 25 percent decline in wheat prices from its April high (-17 percent for rough rice).

Given there will be no change in rates, the two dissenters last time (Fisher and Plosser) may go with the rest of the pack in an unanimous decision, as a rate hike in the meeting might even be a bit too early for them. One dissent cannot be ruled out however, but two dissents in favour of a hike would suggest the difference in opinions between the Presidents (relatively hawkish) and Governors (relatively dovish) is turning into a chasm.

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