6/09/07

The Dow Jones sank 143.4 points to close at 13,305.5, the S&P 500 dropped 17.1 points to end at 1,472.3. The Nasdaq fell 24.29 points to finish at 2,605.95.

Homebuilders fell in response to the weak pending home sales data, but were affected further still by an analyst note from JP Morgan Securities which suggested an interest rate cut may not even help the sector. Centex lost 3.7% to $28.04, Toll Brothers slid 3% to $21.19 and Hovnanian tumbled 6.3% to $11.81.

CostCo Wholesale Corp raised concerns that the US consumer was starting to be affected by the troubled credit and mortgage markets. The largest US warehouse club finished 4.2% lower at $59 after reporting sales at stores open at least one year were well below expectations in August. Apple Inc also showed signs of weakness after announcing plans to cut the price of its new iPhone to spur sales. The company also unveiled its new iPod, as well as upgrades to its existing iPod line up, but this was not enough to lift the stock which has rallied 17% in the last two weeks. Shares closed 5.1% lower at $136.76.

Citigroup led the S&P 500 lower after the Wall Street Journal reported that large banks could be the latest in the sector at risk to lose billions due to their exposure to short term loans known as commercial paper. Citi fell 2.6% to $46.

US light crude oil for October delivery rose $0.65 to close at $75.73 a barrel. COMEX gold for December delivery edged $0.80 lower to $690.70 an ounce.

The Nikkei gained 98.5 points to close at 16,257 this morning ending a three-day losing streak as short covering and bargain hunting in oil stocks offset heavy opening falls in real estate sector. But analysts struck a cautious note on the rebound given thin volumes.

The Hang Seng is currently 30.5 points lower at 24,038.7, having closed above 24,000 for the first time yesterday. Increased concerns of a US housing slump sent stocks lower as investors worried that it will trigger a recession in the world's largest economy. Shares also dropped after the Organisation for Economic Cooperation and Development lowered its forecasts for growth in the US and Europe.

The London market plunged into the red yesterday after heavy early losses on Wall Street and fresh doubts over mortgage lenders sent blue chips tumbling. After a five-day winning run, the FTSE 100 Index lost 106.1 points to 6270.7 - a 1.7% fall wiping over £25bn off the value of the UK's leading companies.

Northern Rock and Alliance & Leicester were among the biggest sufferers after a downbeat broker note on the mortgage market's prospects amid soaring wholesale lending costs. Fresh nerves over the current credit crunch also filtered through to markets after the Bank of England said it would boost reserves available to banks to ease pressure on overnight lending rates, but added that it would not act to ease more expensive long-term interbank borrowing.

Mortgage bank Northern Rock was top of the fallers board down 39p to 693p, after Lehman Brothers downgraded the group, citing fears that the whole sector will be impacted by increases in interbank lending rates, which have hit near 10-year highs. Alliance & Leicester was also downgraded in Lehman's note, seeing shares fall 47p at 1011p, despite moves by A&L yesterday to reassure over US subprime mortgage exposure. The company also turned ex-dividend, meaning shareholders are not entitled to the latest dividend. Other financial stocks under pressure included investment manager Man Group, off 18.75p at 489.25p, and inter-dealer broker Icap, down 15p to 498p. Barclays fell 17p to 620.5p, with HSBC 16.5p lower at 881.5p.

Major retailers also fared badly after a Nationwide survey revealed consumer confidence and spending fell in August after recent interest rate hikes. Morrisons led the pack, off 10.75p at 280.5p, followed by Tesco down 8.75p at 428.25p and Sainsbury's, down 8.5p at 547p. Among other retailers shares in Argos owner Home Retail Group declined 8p to 421.5p and clothing chain Next fell 48p to 1925p.

Just three firms ended the session in positive territory. Vedanta Resources was the leading performer, up nearly 3%, or 55p, to 1847p, after an upgrade for the sector from Merrill Lynch and another favoured stock, Lonmin, moved ahead 12p to 3227p. Property group Land Securities lost earlier gains to finish unchanged at 1837p after revealing it was considering a break-up of the group. Foster's brewer Scottish & Newcastle meanwhile was 6.5p off at 626p after losing advances made in the previous session when the bid rumours surrounding the stock re-emerged.

Economics
UK Industrial production (Jul) 09.30 bst

The PMI manufacturing survey has pointed to relatively robust growth so manufacturing products are expected to have made a small monthly gain, although decent by historical standards. This could compound evidence that the level of sterling isn’t yet hurting exporters.

UK Bank of England rate announcement (Sept) 12.00 bst

As outlined in the recent HSBC report "Winds of Change", the current financial market turmoil could have significant implications for UK activity, not just because o the importance of the financial sector in the UK, but because credit standards are likely to tighten on their own accord, limiting the need for the BoE to act. Rates are expected to be put on hold until the fourth quarter of 2008.

EMU ECB rate announcement (12.45 bst)

Comments by ECB President Jean Claude Trichet on 27 August and ongoing strains in the money market, reflected in the ECB's latest 91 day tender on Wednesday, mean that the ECB is expected to keep rates unchanged at 4 percent. This is a change from our previous forecast of an increase of 25bp. Real economy data and surveys are holding up, hence the ECB is likely to say that it is monitoring the situation closely. No "strong vigilance" is expected. The ECB is likely not to commit to any action beyond September. Another possibility is that the ECB raises rates next week and signals at the same time that rates at 4.25 percent are appropriate. This means the ECB would revert clearly to a neutral stance. Although an interest rate hike would be a surprise, this would at least serve to quell some of the uncertainty.

US Non farm productivity (Q2, final) 13.30 bst

Non farm sector output was revised from 4.2 percent up to 5 percent in last weeks revision to Q2 GDP. Assuming hours worked is unchanged at 2.3 percent, non farm productivity should be revised from 1.8 percent up to 2.6 percent. This should also mean a downward revision to unit labor costs, from 2.1 percent to 1.3 percent. However, Q1 unit labor costs should be boosted after compensation growth was revised from 4.5 percent to 6.2 percent in the GDP report.

US Jobless claims (week 1 Sept) 13.30 bst

Initial jobless claims have increased for the past five weeks, rising from 303,000 in mid July to last weeks 334,000. Continuing claims have climbed from 2.534m up to 2.579m. Initial claims are seen at 330,000 this week.

US ISM non manufacturing 15.00 bst

ISM non manufacturing could show a direct impact from financial market conditions, as the industries covered by the survey include finance and insurance, real estate, and construction. New orders already declined 4.1 points to 52.8 in last months reading and could fall further in August. The headline index is expected to drop to 52.5 from 55.8.

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