31/10/07

FTSE 100	6659, -47	Dow	13792.5, -77.8
FTSE 250	11479.1, -73.7	Nasdaq	2816.71
FTSE All Share	3419.32, -23.31	S&P 500	1531, -10
Nikkei	16737.6, +86.6	Hang Seng	31434.3, -203.9
Oil (Brent)	$86.37	Gold	$787.80
Base Rate	5.75%	10 Yr Gilt	4.885%
£/$	2.073	Euro/Gbp	0.6968

Markets
US markets finished lower yesterday as investors soaked up some weak economic and corporate data. The Conference Board released its index of consumer sentiment which showed a drop to 95.6 in October, down from a revised reading of 99.5 in September. It was the lowest reading since Hurricane Katrina and considerably lower than expectations.

The Dow Jones fell 77.8 points to close at 13,792.5, the S&P 500 lost 10 points to end at 1,531. The Nasdaq edged 0.73 points lower to finish at 2,816.71.

Procter & Gamble led the Dow's decline following their quarterly results. Although earnings just topped expectations, the current quarter outlook disappointed some investors, sending shares 3.7% lower to $68.95. Merrill Lynch continued to fall after formally announcing that CEO Stan O'Neal is retiring following an $8 billion loss in the last quarter. A successor is yet to be named as shares fell a further 2.8% to $65.56, dragging on other financials as well.

Elsewhere, US Steel slumped 7% to $104.62 following a 35% drop in third quarter profits. The company also warned of a decline in earnings for the fourth quarter.

Technology stocks were again the bright spot for the day and the only S&P sector to finish higher. Apple rose after saying it sold more than two million copies of its latest operating system. Shares in the company added 1% to close at $187.00. Google jumped 2.3% to $694.77 following a report that the company is to announce Google-powered phones that may be on the market by mid-2008.

Capping broader market declines was a retreat in the price of oil. US light crude for December delivery lost $3.15 to $90.38 a barrel. Exxon Mobil fell 2.6% to $91.14 as a result.

COMEX gold for December delivery closed $4.80 lower to settle at $787.80 an ounce.

Treasury prices were almost unchanged, leaving the yield on the 10 year note at 4.38%.

The Nikkei added 86.6 points to close at 16,737.6 today. Ddenso Corp led the market and auto companies higher, after boosting its profit forecast on rising demand in overseas markets such as Europe. Mitsubishi UFJ Financial Group jumped after the Nikkei newspaper reported the company will spend 150 billion yen to conduct its first share buy back.

The Hang Seng is 203.9 points lower at 31,434.3 this morning. Angang Steel is one of the big losers following a drop in profit, as a result of higher costs. China's third largest steel maker by output is down by the most in four weeks. Cnnoc leads declines among oil producers as crude oil slumped the most in almost three months.

The FTSE 100 closed 47 points lower at 6659 as investors took profits ahead of today's US Federal Reserve meeting. The majority of pundits have pencilled in a quarter of a percentage point cut, but talk about a surprise no-change decision grew as the session wore on.

Mining stocks accounted for several of the Footsie's top fallers as investors banked gains made during an impressive session on Monday when fresh hopes of takeover activity buoyed the stocks. The rate hopes saw the dollar fall to a new 26-year low against the pound, as comments from Monetary Policy Committee member Kate Barker reinforced views that the Bank of England is not yet ready to lower borrowing costs at home in its policy meeting next week.

The weakness of the dollar has been lending support to oil price rises but the cost of crude slipped back, sending shares in BP down 11.5p to 622.5p. Royal Dutch Shell also declined, off 32p at 2102p. But Vedanta Resources was the leading Footsie faller, down 109p at 2121p - a fall of almost 5% - amid market speculation that the India-centred firm would not meet production targets in a trading update due next month. Meanwhile sector peer Antofagasta was down 27p at 833.5p, Anglo American fell 94p to 3258p and Xstrata drifted 109p lower to 3467p.

Sugars and ingredients group Tate & Lyle was also on the back foot, down 8.25p at 433p amid nerves over interim results due today after a profits warning in September.

Cigarette maker Imperial Tobacco spent much of the session in negative territory, reflecting profit-taking and concerns over possible delays and integration risks to the group's Altadis takeover. Traders eventually warmed to annual profit figures, leaving shares 4p higher at 2447p. The leading riser among blue chips was the investment company Schroders, after better-than-expected Q3 results lifted the stock 71p to 1547p, a gain of 5%. Property firms also bounced back from a mixed session Monday following a broker downgrade for the sector. Hammerson gained 26p to 1055p, while British Land cheered 24p to 1056p and Land Securities was up 29p at 1599p.

Economics
UK Nationwide house prices (Oct) 07.00gmt

The indicators of housing activity will become more important in the coming months as people focus on the impact the credit turmoil is having on home loans, activity and prices. According to the PICS survey, new buyer interest has been falling sharply, which is already constraining home price inflation. After some relatively decent gains in the past two months, some retreat is expected, pulling the annual rate down to 8.1 percent.

UK GfK consumer confidence (Oct) 10.30 gmt

There has been a lot of doom and gloom in the national press about house prices, which may depress household confidence in October. But its worth remembering that if house prices decline, first time buyers and those trading up benefit, so the overall decline in October is expected to be moderate.

US ADP employment change (Oct) 12.15gmt

An increase of 60000 for private payrolls in October is expected. HSBC's forecast of 80,000 for non farm payrolls assumes a 20,000 increase in government jobs.

US GDP (Q3, advance) 12.30 gmt

GDP is expected to grow 4 percent in Q3, a touch faster than the 3.8 percent rate in Q2. Consumption looks robust at 3.5 percent, despite residential construction investment plummeting by an expected 15 percent. Business inventories should grow about 5 percent, slower than last quarter's 11 percent. Government spending is expected to slow to 2 percent, after Q2's 4.1 percent. The change in inventories is seen to be USD20bn, which would add 0.5 ppts to growth. Net trade should add 0.9 ppts to growth, with exports up 13 percent (with some upside risk) and imports up about 5 percent. Private sector GDP (ex-housing) should grow 5.5 percent in Q3 after 4.7 percent in Q2. The GDP price deflator is likely to be low at 1.2 percent, as import prices surged 10 percent (imports subtract from GDP, so a rise in import prices lowers GDP prices ). Although the GDP price deflator looks low, the more relevant measure for the Fed is the GDP deflator, which is likely to be 2.1 percent. The headline PCE deflator will be about 1.5 percent, as the sharp rise in oil prices has so far not spilled over into higher gasoline prices, which the core PCE deflator should be 1.6 percent after Q2s 1.4 percent.

US Employment cost index (Q3) 12.30 GMT

Average hourly earnings rose 1.1 percent in Q3, the quickest pace since Q2 2006. This could translate into a 1 percent rise in wage and salaries in the ECI. Assuming a 1.1 percent increase in benefit costs, HSBC think the total ECI could rise by 1 percent, with the year on year rate increasing to 3.6 percent from 3.4 percent.

US Chicago PMI (Oct) 13.45gmt

The Chicago PMI could rise to 55. The last beige book reported that manufacturers continued to see strong demand from abroad for industries like machine tolls, heavy equipment and steel. Domestic demand was also good in some areas, such as agricultural and mining equipment, while sales of construction machinery continues to trend lower.

US FOMC rate announcement (Oct) 18.15gmt

There is not expected to be a change in the Fed funds rate, but a cut of 25bp in the discount rate is expected. This would reduce the penalty between the discount rate and Fed Funds from 50bp to 25bp. The should help further reduce the three months LIBOR spread over Fed funds to more than normal levels. Even if LIBOR trading remains relatively illiquid, the normalised fixings could inject confidence in financial markets generally. GDP in Q3 was 4 percent (released the morning of FOMC day), up from 3.8 percent in Q2. Therefore, based on the data, the Fed has little reason to cut rates at this meeting, given the larger than expected 50bp but in September.

Admittedly, if on FOMC day the Fed funds futures probability of a cut remains about 90 percent or higher, HSBC know that their call may well be wrong as the Fed typically will not disappoint markets. However, now could also be a chance for the Fed to make markets think twice about always relying on the "Bernanke-Put". It is notable that 2-3 percent swings in stock markets don't change policy expectations in the Eurozone, UK, Canada and Australia anywhere near as much as they do in the US, and not all the difference in market reactions can be explained by different growth/inflation outlooks, in HSBC's view. Some of its appears to be due to the "Bernanke Put", and it may be time to put the Put away (but still throw in the 25bp discount rate cut, the better way to address financial plumbing risks).

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