Modest Gains on Rates Concerns

Elena
06 Jun, 2006
New York City

U.S. stocks opened in the positive, but lingering concerns about interest rates and a lack of major corporate news limited gains. The airline sector advanced on retreating oil prices. Insurance and HMO stocks also posted strength. The housing sector moved lower, dragged by DR Horton, down 3.5% on downgrade from Wachovia. Gold stocks moved notably lower.

[R] 9:45AM Stocks gained some ground at opening.[/R]
Stocks slightly advanced Tuesday as bargain hunting helped market regain some ground after Monday''s heavy sell-off, sparked by comments by Fed Reserve Chairman Ben Bernanke. His warning suggested that the central bank will remain vigilant in fighting inflation and will probably further increase the key interest rate, presently standing at 5%. Monday's drop was felt around the globe: Stocks in most Asian markets fell sharply, with Tokyo''s Nikkei 225 index down 1.81%, while India's benchmark index fell 2.5%. The major European indexes were all lower in afternoon trading, with Ireland''s benchmark index down 3.41%.

The airline sector moved slightly upward, benefiting from a notable decrease by the price of oil. The HMO sector ticked modestly higher. Also, insurance stocks posted some mild gains. The housing sector pushed down 1.2% in the early going, extending its 52-week low. DR Horton ((DHI)) was one of the worst performers in the group, sliding by 3.5% on a downgrade from Wachovia. Standard Pacific ((SPF)), Toll Brothers ((TOL)) and Pulte Homes ((PHM)) also showed significant weakness, with each falling by more than 2.5%. The gold sector was another standout to the downside in the early going, falling by 2.3%. The computer hardware sector also posted weakness. In the first hour of trading, the Dow Jones industrial average rose 36.26, or 0.33%. The Standard & Poor''s 500 index added 3.55, or 0.28%, and the Nasdaq composite index rose 3.43, or 0.16%. Bonds fell, with the yield on the 10-year Treasury note rising to 4.05% from 5.02% late Monday.


[R]9:00AM Stock futures indicated a positive start.[/R]
U.S. stock futures pointed to a slightly positive start, recovering from yesterday’s steep declines when the Dow fell to its lowest close in almost three months and the Nasdaq had its biggest one-day percentage decline since January 20 as warnings from Federal Reserve Chairman Ben Bernanke and another top Fed official about inflation suggested the Fed was not finished raising interest rates.

On Tuesday, IBM ((IBM)) is expected to be in focus as the computer services company announced plans to invest nearly $6 billion in India over three years. General Motors Corp. ((GM)) will also attract attention before the company''s annual shareholders'' meeting later. Shares of Human Genome Sciences jumped 11.5% before the opening bell as Swiss drug maker Novartis AG unveiled a $507 million deal with the company. Shares of Bob Evans Farms Inc. rose 7.2% in pre-market trading after the restaurant operator reported Q4 adjusted earnings that came in well above analyst estimates. Standard & Poor''s 500 futures were up 1 point, above fair value. Dow Jones industrial average futures were up 9 points, and Nasdaq 100 futures were up 0.75 points.


[R]8:00AM BAA PLC accepted a 10 billion pound takeover bid.[/R]
Operator of seven airports in Britain BAA PLC agreed to be acquired by a consortium led by Spanish airport operator and engineering company Ferrovial SA. for 10 billion pound ($19 billion) or 950.25 pence ($17.79) per share. The Ferrovial consortium also includes Canadian investment fund Caisse de Depot et Placement du Quebec and Singapore government fund GIC. Last week BAA rejected a 900 pence ($16.81) per share offer from Ferrovial as too low. The announcement came a day after BAA, which operates London''s Heathrow, Gatwick and Stansted airports, confirmed that it was in talks with Ferrovial and with another consortium. The Goldman Sachs-led group made a preliminary offer of 870 pence a share in May, which BAA rejected. On Tuesday, Goldman Sachs confirmed that the rival consortium had made a bid of 955.25 pence ($17.98) per share for BAA, including a declared final dividend of 15.25 pence.

Ferrovial said that BAA shareholders could opt to exchange their shares for a combination of cash and shares in a new company. In a filing with the Spanish stock market supervisor, the CNMV, Ferrovial said the shares in the new company would be listed on the AIM market of the LSE. BAA shares gained 2.1% to 947.5 pence ($17.84) in trading on the LSE.


[R]7:30AM Asian stocks track U.S. decline.[/R]
Asian markets closed lower. In Japan, the Nikkei 225 Index fell 1.81% to 15384.86, its lowest close since January 23. Trading exporters led declines. Electronics maker NEC was down 2.27%, Kyocera lost 2.43% and Konica Minolta shed 4.64%. Auto stocks also fell, as Nissan Motor declined 1.93% and Mitsubishi Motor dived 2.9%. In Hong Kong, the Hang Seng Index shed 0.27% to close at 15973.11. Property stocks, constituting a large component of the Hang Seng, declined on interest-rate concerns. The Hong Kong dollar is tied to the U.S. currency, and local interest rates follow those set by the Fed. Property stocks will keep underperforming until the U.S. interest rate cycle kicks in reverse. IPOs kept looming large in Hong Kong, with Shanghai-based developer Shui On Land launching a nearly $1 billion offering to help finance six projects in the mainland. Benchmarks in Australia, Malaysia, Indonesia and Singapore also declined. Taiwan regained some lost ground after being off 3.51% on Monday, while stocks in Shanghai remained flat. Markets in South Korea were closed for a holiday.


[R]6:30AM European shares fell broadly across the region.[/R]
European markets fell by mid morning. The FTSE Eurofirst had shed 12.9 points or 1% to 1,305.91, while the German Dax declined 40.8 points or 1% to 5,580.83 and the French CAC 40 dropped 66.4 points or 1.4% to 4,849.68. The takeover struggle for BAA saw another turn as Goldman Sachs announced it was prepared to offer 955.25p after market talk prompted the UK airport operator had been up to a revised 950.25p takeover offer from Grupo Ferrovial of Spain. Both bids include the BAA dividend of 15.25p. Ryanair shed 1.9% after the budget airline announced it anticipated profits growth of 5 to 10% this year if oil prices stayed close to $70 a barrel. Axa, the French insurance company, said it had reached an agreement to sell its Axa Re business to Stone Point Capital, the US private equity group. Axa dropped 1.2%. Novartis reported that it would pay up to $507m in milestone payments to the US biopharmaceuticals company Human Genome Sciences to acquire rights to Albuferon, a treatment being developed for chronic hepatitis C infections. Novartis declined 0.5%.

Light, sweet crude oil for July delivery dropped 20 cents to $72.40 a barrel and July Brent crude on London''s ICE Futures exchange declined 29 cents to $71.08 per barrel. Gold traded at $633.50 an ounce on Tuesday, down $10 an ounce from Monday''s close of $643.50. The dollar gained against the other major currencies. The euro dropped to $1.2906 from $1.2909, after it rose on Monday to its highest level since May 15. The greenback advanced to buy 112.39 Japanese yen from 112.16 the day before, while the British pound fell to $1.8720 from 1.8724 in New York.