5/8/8

The Dow Jones fell 42.17 points to close at 11,284.15, the S&P 500 slipped 11. points to 1,249.01. The Nasdaq closed 25.4 points lower at 2,285.56.

WCI Communities, a large US home builder, tumbled 21.4% yesterday after filing for Chapter 11 bankruptcy after failing to obtain the financing that would keep $1.8 billion of debt out of default. The Dow Jones home construction index fell 1.7%.

The financial sector was lower after HSBC reported a 28% drop in first half profit, taking a $14 billion hit from bad debts. Wachovia, the fourth largest US bank, fell almost 10% after a Wall Street analyst suggested investors sell the stock.

US light crude oil for September delivery dropped $3.69 to settle at $121.41 a barrel. The commodity retreated in response to a tropical storm loosing steam in the Gulf of Mexico. As a result, Exxon Mobil lost 3.9% while Chevron fell 1.8%. Among miners to be lower after metal prices fell was Freeport McMoran, which closed 12% lower.

COMEX gold for December delivery declined $9.60 to $907.90 an ounce.

Treasury prices were mixed with the 10 year note holding steady at 3.94%.

The Nikkei closed 18.52 points lower at 12,914.66 this morning. Inpex Holdings led oil related companies lower following the commodity. Nippon Paper Group Inc led its peers to a seven month high as concerns eased that fuel costs will eat into profits.

The Hang Seng is currently 631.03 points lower at 21,883.89. Bank of East Asia leads declines after fell on losses related to subprime mortgage defaults in the US. Hong Kong Exchanges & Clearing Ltd declined to the weakest in more than two weeks after Goldman Sachs & Co cut its price estimate for the stock by 10%.

The FTSE 100 is 20.4 points higher this morning at 5,340.60. Legal & General tops the risers board after positive earnings news while oil and mining stocks top the fallers board in line with declining commodity prices.

Economics
UK Industrial production (Jun) 09.30 bst

The manufacturing PMI fell sharply in June, but given the sharp decline in production reported within the official data for May, we expect only a modest decline in June.

UK PMI services (Jul) 09.30 bst

This survey is extremely important to Bank of England policymakers. Financial market sentiment remains fragile, which may be impacting demand for more general business services. The real estate sector, another major component of this survey is also clearly struggling. This survey is expected to have deteriorated further in July.

US ISM non manufacturing (Jul) 15.00 bst

The June ISM non manufacturing survey fell to 48.2 from 51.7. The prices paid index soared to a record high 84.5 from 77, and respondent comments noted high energy costs as "disruptive to every part of our business" and "negatively impacting traffic counts and average check amounts". The July reading is expected to remain about unchanged at 48. Business activity could stay close to the breakeven level of 50, unchanged from last month. The employment index is expected to be around 45(43.8 in June), as job losses continue to hit a range of non manufacturing industries.

US FOMC rate decision (Aug) 19.15 bst

The FOMC is seen keeping Fed funds unchanged at 2 percent. Most likely we will again see a dissent from Dallas Fed President, Fisher (in favour of a rate hike), but there is chance that the decision is unanimous, given the latest spike in jobless claims and weak overall employment picture. The June statement noted the downside risks to growth had "diminished somewhat". This was not repeated by Chairman Ben Bernanke in his recent monetary policy testimony, where he simply noted "significant downside risks" to the growth outlook, including elevated energy prices, tight credit conditions and housing market weakness. The statement is likely to again highlight these downside risks (although the text may be adjusted to acknowledge the recent decline in oil prices), while continuing to note that upside risks to inflation have increased. Uncertainty regarding energy prices and inflation expectations are likely to be reiterated, even with lower oil prices and the latest University of Michigan survey 5 year median inflation expectations measure falling to 3.2 percent.

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