Final World Summary: ALARM BELLS RING OVER US RATE FORECAST 08:41, Friday, 23 June 2006
Sydney - Friday - June 23: (RWE Australian Business News) - Concerns about US interest rates flared up overnight after Barclays Capital revised its forecast on the outcome of the FOMC meeting next week.
The global investment bank is now predicting that the Federal Reserve will raise the federal funds rate to 6 per cent this year, up from its previous estimate of 5.5 per cent.
It shocked US financial markets, sending Wall Street on the slide again, and knocked over Treasuries.
The Dow Jones settled 60 points lower, the S&P 500 lost 7, the Nasdaq composite 18 and the 100 index closed 19 behind.
In Treasuries the 10 year cash paper yield rose 4 points to 5.20 per cent, the 30 year bond yield also gained 4 points to 5.23 per cent and the 2 year note yield rose 3 points to 5.23 per cent.
The surprise was that US markets have accepted a 25 basis points rise next week and the Barclays forecast would seriously change market perception.
The bank believes that inflation excluding food and energy as measured by a figure favoured by the Fed - the core personal consumption expenditures index (PCE) - will reach 2.5 per cent.
This would lift the PCE from the current 2.1 per cent and well above the central bank's presumed comfort range between 1 per cent to 2 per cent, and trigger a more severe reaction from policy-makers.
Meanwhile, US markets had little else to go on, other than some economic data which produced little reaction.
The initial state jobless insurance benefits claims rose 11,000 last week, slightly less than expected.
The Labor Department reported first-time claims for state unemployment insurance benefits rose to a seasonally adjusted 308,000 for the week ended June 17 from an upwardly revised 297,000 claims the previous week.
Market economists had forecast initial claims would rise to 310,000 from an initially reported 295,000 the previous week with no special factors to account for last week's increase.
The four-week moving average of claims, which smoothes weekly fluctuations to provide a better picture of labour market trends, fell to 311,250 from an upwardly revised 316,250.
Meanwhile, the Conference Board reported the US economy fell by a larger-than-expected 0.6 per cent in May, indicating that growth may be slower during the summer months and more vulnerable to punishing hurricanes.
The sharp fall in the Composite Index of Leading Economic Indicators outpaced expectations for a 0.4% fall in May and was the biggest drop since a 0.8% slide in September 2005 after Hurricane Katrina smashed the US Gulf Coast.
Another economic influence that is emerging is energy costs, although corporate results have so far coped with this factor.
The August crude contract rose another 51c to $70.84 barrel on the New York Mercantile Exchange.
In currencies a stronger US dollar put the Aussie on the back foot, carving off more than half a cent to US73.38c in New York overnight trading.
The gold price also ran into more selling, reflected by the COMEX spot month down $5.30 to $582.20 oz.
In other news Chrysler plans to announce a major discounting program by the end of the month.
A GM spokesman said the company was monitoring the situation.
British Airways said it and other airlines faced a probe by the UK and the US for alleged cartel activities. And Federated announced a deal to sell its Lord & Taylor department store chain to Apollo and NRDC for about $1.2 billion.
WALL STREET ... The Dow Jones industrial average index settled 60.35 lower at 11,019.11. The Standard and Poor's 500 index ended 6.6 behind at 1245.60 while the Nasdaq Composite index lost 18.22 to 2122.98 and the Nasdaq 100 index fell 19.07 to 1554.49. Treasuries tumbled on rate speculation. The 10-year cash paper fell 10/32 ticks to 99 14/32, lifting the yield 4 points to 5.20 per cent. The 30-year bond yield was also up 4 points to 5.23 per cent and the 2-year note yield surprisingly gained 3 points to 5.23 per cent, the same as the 30-year.
US DOLLAR ... has strengthened against major currencies. It is trading at 116.13 yen from around 114.88 previously in New York. The Euro is $US1.2580 against 1.2662 while sterling is $US1.8285 compared with 1.8445. The US dollar has firmed on the Swiss franc, trading at 1.2426 against 1.2336 previously.
AUSTRALIAN DOLLAR ... has dropped sharply on the greenback. The dollar is at US73.38c in New York trading. This compared with yesterday's local close of US74.02c. Overnight, it has traded as high as US74.03c and as low as US73.21c. Crosses have been mixed with the Aussie worth 85.31 yen (pre 84.86), 0.5840 euros (pre 0.5838) and 40.17 pence on sterling (pre 40.10).
AUSTRALIAN SHAREMARKET ... is likely to come under pressure today. The market has rallied strongly in the past couple of days and the All Ordinaries yesterday put on 83.7 points to 4968.1 (making a two-day gain of 137) while the ASX 200 advanced 91.9 to 5010.8. But futures turned lower overnight, reflected by the September SPI 200 falling 20 to 4965 and December 32 to 4970. Angus & Coote will be trading ex a 22c dividend. And today's new listing is Panaegis Gold Mines (20c shares) at 11am.
EUROPEAN SHAREMARKETS ... finished firmer across the boards, led by Zurich with a rise of 56 points followed by Frankfurt up 30, Paris 29 and London 19. Markets lost some early gains after British Airways dampened enthusiasm as the carrier faced as probe of pricing and fuel surcharges. The Dow Jones Stoxx 600 Index rose 0.4% at 312.72 during the session as investors appeared more cautious after Wall St traded lower.
In London British Airways closed down 5.9% after disclosing the UK Office of Fair Trading and the US Justice Department were looking into the carrier and other airlines over pricing and fuel surcharges.
Building materials firm Lafarge posted strong gains in Paris, rising 2.3% as it disclosed plans to cut costs by 400 million euros a year starting in 2008. French food group Danone rose 2.2% as bid hopes were increased by speculation that Kraft Foods is looking to acquire milk, water and biscuits businesses in France. Rival Unilever advanced after it said that if markets grew at the upper end of their estimated range, Unilever sales could rise 4% to 5%. Meanwhile, pharmaceutical group Sanofi-Aventis rose after getting European marketing clearance for its Acomplia obesity drug.
In Frankfurt Allianz improved after it announced a job-cut plan, saying it expects to eliminate 5000 jobs at Allianz Germany and 2480 at its Dresdner Bank unit.
At the close, London's FTSE firmed 19.1 points to 5684.10, the Paris CAC-40 rose 28.56 to 4803.29, the Frankfurt DAX advanced 30.01 to 5533.42 and Zurich improved 56.18 to 7483.33. Other markets tracked the major indices. Amsterdam rose 3 points, Brussels 28, Madrid General 9, Milan 100 and Oslo finished 6 ahead.
METALS ... mixed. The COMEX June gold spot month contract fell $5.30 to $582.20 oz while the August contract lost $5.60 to $585.40. June silver shed 20.5c to $10.195. July platinum fell $17.80 to $1176.10 oz while spot copper (June) ended 9.5c lower at 321c lb in New York.
Three-month closing LME bid prices were copper $6690 tonne, tin $7850, lead $960, zinc $2930, aluminium $2470 and nickel $19,400 tonne. Earlier, on the three-month official bid prices, copper rose $190 to $6950, tin $90 to $7890 and lead $4.50 to $950 tonne. Zinc gained $155.50 to $3030, aluminium improved $56 to $2507 and nickel ended $500 better at $19,800 tonne.
OIL ... settled 51c higher at $70.84 barrel for the new spot August contract on the New York Mercantile Exchange with a high of $71.04 and low $70.05. The September contract gained 70c to $71.73 with a high of $71.90 and low $70.90. The Brent ICE June crude futures advanced 77c to $69.94 barrel with a high of $70.10 and low $69.08.
