30/4/08

The Dow Jones lost 39.8 points to close at 12,831.9, the S&P 500 fell 5.4 points to end at 1,390.95. The Nasdaq edged 1.7 points higher to finish at 2,426.1.

Pharmaceuticals were lower following poor news concerning two new drugs. Merck & Co said late Monday that the Food and Drug Administration have rejected its new cholesterol drug Cordaptive. Shares fell over 10% as brokerages cut their price targets on the stock. Genentech Inc and Biogen Idec also went lower on news that a study of one of its cancer treatments failed to show that it was also effective for treating lupus. Genentech tumbled 7.15% while Biogen Idec slid 5.2%.

In the financial sector, Deutsche Bank AG said it would write down $4.2 billion in its first quarter. The company's CEO said financial market conditions during the quarter were "the most difficult in recent memory". Shares in Germany's largest bank fell 1.1%. After the bell, Citigroup declined 3.1% after the bank said it plans to sell $3 billion of common stock to boost capital levels.

The tech sector took strength from Corning, the world's largest maker of liquid crystal display glass. The company said first quarter profit was three times higher than last year, citing strong demand for flat screen TVs and computers. Shares rose almost 3%.

US light crude for June delivery dropped $3.12 to $115.63 a barrel as workers resumed operations at a Scottish refinery following a dispute. As a result airline shares soared higher, Northwest rallied 22.8% while Delta surged 14.6%. However, oil stocks also improved after Goldman Sachs upgraded the integrated oil sector to "attractive" from "neutral". Chevron finished 2.4% higher, while Conoco Philips gained 1.2%.

COMEX gold for June delivery ended $18.70 lower at $876.70 an ounce.

Treasury prices were almost unchanged, leaving the yield on the 10 year note at 3.82%.

The Nikkei fell 10.88 points to finish at 13,883.49 this morning. Car makers fell after factory output dropped more than expected and the consumer confidence report from the US fell to a five year low. Matsushita soared the most in eight years after forecasting profit that beat analysts estimates.

The Hang Seng is currently 106.24 points lower at 25,807.91. Cnooc Ltd, China's biggest offshore oil producer, dropped for the first time in three days after the price of crude retreated. On the upside, Ping An Insurance (Group) Co was set for its biggest close in more than three months after it reported higher first quarter profit.

Bumper profits from BP and Shell gave the energy sector a boost yesterday, but failed to provide direction for the wider London market.  The blue-chip oil giants dominated the risers board on the FTSE 100 Index as they announced combined profits of more than £7bn in the first three months of the year alone. A downbeat opening on Wall Street offset much of the cheer in London, leaving the Footsie down one point to close at 6089.4.

Losses for other big-hitting sectors such as mining and banking also pared back gains seen earlier in the session on London's leading share index. Oil and gas companies saw their share prices soar regardless, with BP setting the pace, adding 6% to 613p after it unveiled a 48% hike in profits for the period. Rival Shell, which posted a 12% rise in profits to $7.7bn (£3.92bn), followed also with a 6% gain, ahead 112p to 2035p. Gas exploration firm BG Group was also high up the leaders' board, gaining 10p to 1308p, while Cairn Energy added 1p to 3000p.

Shares in Britain's biggest mortgage lender Halifax Bank of Scotland dropped nearly 2% as investors digested the news of a £4bn rights issue from the group. Broker Collins Stewart told clients to sell the stock, and the shares dropped 9p to 486.75p. Barclays, another said to be in line for a capital raising move, was also on the back foot, off 10.5p to 460p. HSBC stayed in the black as the City noted good results from Spanish-owned Abbey, strengthening through the session to gain 6p to 871p. Another mover was Friends Provident after the insurer said first quarter sales lifted 11% and it said it had faith in its new strategy. The fading of takeover interest has put shares under pressure recently, but the stock rose 1p to 118.2p.

Falling metals prices saw shares in the big mining companies dominate the fallers' board. Kazakhmys lost 77p to 1648p, with Rio Tinto down 216p at 6010p and Anglo American 92p worse off at 3249p.

Economics
Bank of Japan rate announcement (April)

The Bank of Japan are expected to maintain the current guidelines for money market operations by a unanimous vote. The April Outlook Report will be released after the meeting, detailing the real GDP year on year growth outlook for FY 2009 (around 1.8 percent). But at the same time, the BoJ  is likely to stress the uncertainty of this scenario amid strong downside risks stemming from a stagnant US economy and high oil and commodity prices. And its new monetary policy stance will be neutral, thereby allowing it (in a forward looking manner) to assess the likelihood of the projected future paths of the economy and prices, as well as both upside and downside risks, and make policy decisions based on this assessment.

EMU HICP (Apr, flash) 10.00 bst

The ECB's price mandate is medium term inflation, but given that we are currently at a 15 year high with inflation, short term movements have an impact on ECB council members rhetoric. So this release is important. For April, headline HICP should ease to 3.4 percent as the early Easter effect and German tuition fees fall out of the equation.

EMU Unemployment (Mar) 10.00 bst

The labour market is now in a more mature phase than a few quarters ago. For March, the unemployment rate is expected to stay at 7.1 percent. In HSBC's view, the number is just borderline, and a 7 percent figure is a big risk. The German unemployment rate (national measure) fell to 7.8 percent in March from 9 percent the previous month.

EMU Confidence indicators (Apr) 10.00 bst

HSBC are generally speaking not especially optimistic regarding consumers morale in the Eurozone, but believe after 8 consecutive falls, the index should rise slightly in April. On a pan Eurozone level, labour markets are still relatively healthy. The news flow hasn't necessarily deteriorated in April, although high energy prices continue to be a drag on disposable income. In the current inflationary environment, a lot of focus goes to householder price expectations, which are released alongside the confidence indicator. Expectations of future price gains moderated a tough in March, but are still elevated. So the ECB is sensitive to this.

UK GfK Consumer confidence (Apr) 1.30 bst

Consumer confidence has deteriorated sharply in recent months and this trend is expected to continue as credit availability is harder and more expensive to come by. People may fell less optimistic about employment prospects and the cost of living is rising sharply with rapid increases in food and energy bills.

US ADP employment change (Apr)

A 65,000 drop for private payrolls is expected. HSBC's non farm payroll estimate of -50k assumes a 15k increase in government employment.

US GDP (Q1, advance) 13.30 bst

Q1 GDP is expected to rise 1 percent. HSBC suspect some upside surprise potential may come from inventories, which they think might rise a bit (+3 USD6bn), which would add 0.7ppts to growth. Final sales (GDP ex inventories) will therefore be weaker at 0.3 percent. Consumption appears to be on track to rise a fairly weak 0.8 percent, while residential construction should collapse again, dropping 24 percent. Business inventories are seen rising to 1.4 percent, but there is some downside risk here if IT capex declines outright (a modest 5 percent IT rise is expected). Government spending may be on the weak side (+1.4 percent) as state/local public investment looks to have fallen. Exports are expected to have boomed by 10 percent while imports rose about 6 percent, allowing a small net export contribution of 0.3ppts. This means domestic final sales (GDP less inventories and net expects) was probably flat in Q1. The GDP price deflator is seen rising 2.2 percent with a 3.7 percent rise in the deadline PCE deflator and 4 percent rise in the government spending deflator offset by residential construction prices (-1 percent), and equipment. software prices (flat). Import prices probably surged 16 percent on higher energy prices, which arithmetically reduced GDP inflation, while exports prices probably surged 13 percent (the quickest in 28 years), which adds to GDP inflation.

US Employment cost index (Q1) 13.30 BST

The Q1 employment cost index is seen rising 09 percent. Wage and salaries could rise 0.9 percent (payroll average hourly earnings rose 1 percent), a touch higher than the past few quarter but not particularly inflationary. Benefits costs have also been continued in recent quarters, and a 0.9 percent increase is expected.

US Chicago PMI (April) 14.45 bst

A small decline in the Chicago PMI to 47 is expected, consistent with a similar reading for ISM manufacturing. So far this month, the Philadelphia Fed was very weak at -24.9, while the Empire index improved, rising from -122.2 to 0.6.

US FOMC rate announcement (Apr) 19.15bst

HSBC think a 25bp cut is the most likely scenario, although there is a serious change (30-40 percent) that the Fed keeps rates unchanged. A larger 50bp cut is now virtually out of the question. In dissenting at the March meeting ( in favour of a smaller cut), Fisher felt that unconventional measures targeting liquidity strains would be more effective than further reductions in Fed Funds, and given some subsequent success in these measures, this may well be a view that is now more widely shared across the Committee.

If it cuts 25bp, the FOMC is likely to hint that this is the last rate cut for a while, on the grounds that inflation risks have risen and that the tax rebated due to be mailed out from early May might soon boost growth. "Elevated" inflation risks are likely to be linked directly to higher food and energy costs, while Fed speakers have been increasingly vocal about the need to keep inflation expectations contained.

The statement may highlight lower consumer spending, softer labour markets, on-going financial market stresses (despite recent improvements), and falling housing activity and prices. However, this is now likely to be partially offset with the risk of higher inflation (despite the central scenario remaining benign), so that the Fed may state that at a 2 percent Fed funds rate (assuming it cuts 25bp), the risks between weak growth and higher inflation have tilted a little more towards balance, although not quite at balance yet. Therefore, the downside risk to growth will remain the predominant concern, and if the risks become reality, the Fed will say that they are prepared to cut rates again, although a breather is the more likely scenario for the next few months.