Oil Sparks Global Sell-Off

123jump.com Staff
13 Jul, 2006
New York City

It was oil, Middle East tensions, Nigeria, Mexican election stand-off, Japan rate hike worries and Mumbai bomb blasts all came to bear on the market. Global markets sold-off with Russia losing 4% and Latin America down 3%. Despite a sharp rise in oil price, demand in the U.S. and China is still strong. Ford Motor cuts its dividend by half. Wal-Mart was downgraded. Apple Computer hits seven-month low.

[R]4:00 Rising oil price sparks a global sell-off.[/R]

-Nasdaq dropped 36.12 points, Dow lost 166.89 and S&P 500 16.32.
-Yield on 10-year bond closed at 5.09% and 30-year bond closed at 5.13%.
-Crude oil rose to $1.75 to close at $76.70 per barrel.
-Gold gained $3.20 to close at $654.40 per ounce.

-Asian Markets declined across the region, led by 2% decline in Thailand and 1% loss in Taiwan, Hong Kong and Singapore.
-Major European Markets closed lower, led by 2% decline in Germany, 1.8% loss in France and 1.6% in U.K. South Africa lost 3% and Russia declined 4.1%.
-Latin American Markets declined across the region. Argentina and Mexico lost more than 3% and Brazil declined 2.4%.

Oil climbed to a near record high of near $77 per barrel on attack on pipeline in Nigeria, Israel’s overly aggressive response to a single soldier kidnapping, continued stand-off between Iran and Western powers and steady demand for oil from the U.S. and China. Rising tensions in the Middle East fueled by soldier kidnapping and Israle’s aggressive military response and widening war with Lebanon, Syria and Palestine contributed to the oil price escalation. Restraint is lacking on Arab and Israel side in the region, destabilizing the world oil prices.

While oil price climbed, natural gas price declined as the latest government report suggested that the supply rose more than expected in the last week.

Technology, consumer staples, retails, financial services led the decliners. Ford Motor Co. ((F)) cut its dividend and board members fees by half. The move is expected to save the company $92 million per quarter. Ford shares declined 29 cents or 4% and traded at a new ten-year low.

European stocks declined across the region on sharp rise in crude oil price. SAP, German software maker ((SAP)) declined 6% in New York and Frankfurt trading on the news that license revenue for the quarter will be lower by 50 million euros. In other earnings news L’Oreal gained 0.8% on the earnings news and revenue rise of 8.7% but insurance sector declined after British insurer Aviva issued $1.7 billion shares to fund $2.9 billion purchase of AmerUs.

Mexican Presidential election uncertainties, global market sell-off and rising oil prices forced market lower. The IPC index lost 3.2% at close. Large cap stocks declined led by American Movil ((AMX)) down 2.5%, home builder Homex ((HXM)) down 2.6% and Cement maker Cemex ((CX)) down 2%. Brazilian stocks declined as oil price rose sharply in the international markets. Brazilian stocks declined for the second week in a row led by a decline in mining, telecom and banking stocks. CVRD ((RIO)), the iron ore mining giant, declined 4%, Banco Bradesco ((BBD)) and Banco Itau ((ITU)) lost 3% in New York trading.


[R]12:30PM European markets closed sharply down.[/R]
European markets ended sharply down Thursday on renewed concerns over the strength of Q2 earnings, following warning from SAP and surging oil prices to record highs. The German business software giant, dropped 6.2% after the company said that license revenue will grow 8% to 621 million euros, well below expectations of license revenue of 675 million euros. Crude oil futures climbed over $76 a barrel on supply worries, related to increasing violence in the Middle East and Nigeria. Technology, mining, and insurance stocks stood out among decliners. Britain''s largest insurance company Aviva dropped 3.2% after selling $1.7 billion in shares to finance its $2.9 billion acquisition of U.S. insurance company AmerUs. The German DAX 30 tumbled 2%, the French CAC 40 slipped 1.8%, and London FTSE 100 dropped 1.6%.


Oil prices climbed over $76 amid escalating violence in the Middle East, the standoff with Iran over its nuclear program and news of explosions on Nigerian pipelines. Light crude August delivery rose $1.30 to $76.25 a barrel. Gasoline futures gained 3 cents to $2.29 a gallon, while heating oil was up 3 cents to $2.0527. Natural gas futures climbed 10 cents to $5.880 per 1,000 cubic feet. London Brent surged $1.14 to $75.53. The dollar traded mixed versus major currencies. The euro traded at $1.2690, down from $1.2699. The dollar bought 115.24 yen, down from 115.52. The British pound stood at $1.8428, up from $1.8334. European gold prices declined. In London the precious metal traded at $645.50, down from $653.40 per ounce. In Zurich gold traded at $647.95, down from $653.95. Silver closed at $11.39, down from $11.71.


[R]11:30AM Stock markets traded down.[/R]
Stock markets continued to post weakness on bargain hunting and concerns about increasing geopolitical tensions. Escalating violence in the Middle East, the stand-off over Iran''s nuclear program, and North Korea’s unwillingness to agree to disarmament talks weighed on sentiment. The news contributed to a significant increase by the price of oil to the record $76.30 a barrel. As a result, airline stocks moved to the downside on worries about the impact of higher fuel costs. Gold stocks came under pressure on Thursday, with the Amex Gold Bugs Index down 2.4%. The brokerage sector moved notably to the downside, sending the Amex Securities Broker/Dealer Index down 1.6%.

At the same time, the utilities sector showed some strength, with Duke Energy ((DUK)), Exelon ((EXC)), and PSEG ((PEG)) turning in some of the sector''s best performances. In late morning trading, the Dow slumped 105.01, or 0.95%. The Standard & Poor''''s 500 index was down 9.34, or 0.74%; the Nasdaq composite index dropped 19.95, or 0.95%. Bonds continued gaining, with the yield on the 10-year Treasury note sliding to 5.09% from 5.1% late Wednesday.


[R]10:30AM Indian benchmark Sensex dips in weak trading.[/R]
The Sensex in India lost 71.59 points, or 0.65%, to close at 10,858.50. The turnover on BSE was $550 million or Rs 2,512 crore, down from Wednesday’s $600 million or Rs 3,130 crore. The market-breadth was positive as 1,294 shares advanced, 1,085 declined and 78 shares were unchanged. Advancers were led by Hidustan Lever which advanced 2.72% at Rs 243.95, Grasim rose 2.05% at Rs 2,038.00, ICICI Bank gained 1.73% at Rs 497.00, Cipla advanced 1.62% at Rs 226.00 and Hindalco climbed 1.25% at Rs 181.90.

The decliners were led by Infosys, Bharti Airtel, Wipro, HDFC Bank and Reliance. Reliance Industries lost 2.4%, to Rs 1,071 following reports that the petroleum ministry has rejected the company’s request for reimbursement of Rs 2,570 crore due to losses suffered in export sensitive petroleum products. Bharti Airtel was off 2% to Rs 375.

IT shares aslo declined in sympathy with declines ADR trading in New York. Wipro declined 2.6%, to Rs 503, TCS sank 1.2%, to Rs 1,870 and Satyam Computer down 0.8%, to Rs 744. Infosys closed at Rs 1,675 down from Wednesday’s closing price of Rs 3,386.45. The stock traded on a split adjusted basis..

High oil prices pulled auto shares down. Hero Honda lost 2.2%, to Rs 707, M&M declined 2.9% to Rs 593, Tata Motors sank 0.5% to Rs 766.85, and Bajaj Auto shed 2% to Rs 2,692. Car maker Maruti Udyog was down 1.4%, to Rs 802.

Oil and gas giant, ONGC lost 0.5%, to Rs 1,115 even as oil prices rose. The stock came off a session’s high of Rs 1,152. ONGC is reported to be considering bidding for more than $ 500 million for a stake in a block in Gabon. HDFC Bank shed 2.4% to Rs 746. UTI Bank also declined 1.8% to Rs 271 even as the company posted strong Q1 June 2006 results.

The gainers included ICICI Bank which rose 1.5% to Rs 496 and Tata Power gaining nearly 3% to Rs 492.30. Tata Coffee advanced 6% to Rs 381 after the company revised the terms of its earlier announced rights issue.

Second tier IT shares were actively traded. Polaris Software surged 10% to Rs 82.90, VisualSoft Tech gained 9% to Rs 88.50, Blue Star Infotech advanced 5.5% to Rs 79, Sonata Software climbed 3.3% to Rs 24.50, Geometric Software added 2.9% to Rs 91.45, Infotech Enterprises was up 2.3% to Rs 547, Cranes Software rose 1.9% to Rs 99.40, Tulip IT Services advanced 1.8% to Rs 257, Rolta India gained 1.6% to Rs 165, Ramco Systems climbed 1.5% to Rs 177.50, and KPIT Cummins Infosystems rose 1% to Rs 420.


[R]9:45AM Stocks opened in the negative, despite Pepsi’s earnings.[/R]
Stocks opened lower as surging oil prices and brokerage downgrade on Wal-Mart Stores raised fears that higher lending rates and gasoline prices would hurt consumer spending. Worries about inflation and economic growth overshadowed a slight rise in weekly unemployment claims and positive earnings news from PepsiCo Inc. ((PEP)). Transportation and airline stocks came under pressure due to the surging oil price to nearly $76. The Dow Jones Transportation Index fell about 2.2%, moving to a multi-week low. The broker/dealer sector also posted weakness in the early going, led by Jefferies ((JEF)), the worst performer in the group, falling by 3.4%. E*TRADE ((ET)), and TD Ameritrade ((AMTD)) were each down 2.4%. Retail and technology stocks also moved to the downside. In the first hour of trading, the Dow Jones industrial average slumped 47.54, or 0.43%. The Standard & Poor''s 500 index was down 4.51, or 0.36%, and the Nasdaq composite index dropped 18.97, or 0.91%. Bonds continued gaining, with the yield on the 10-year Treasury note sliding to 5.09% from 5.1% late Wednesday.

[R]Initial jobless claims increased more than expected.[/R]
The Department of Labor released its report on initial jobless claims in the week ended July 8 on Friday. The report showed that jobless claims increased by more than economists had been expecting. The Labor Department said that jobless claims rose to 332,000 from the previous week''s unrevised figure of 313,000. Economists had expected a more modest increase in jobless claims to about 320,000. The report also showed that the four-week moving average rose to 317,250 from the previous week''s unrevised average of 308,500. With the increase, the less volatile moving average rose to the second consecutive week. The Labor Department also said that continuing claims for the week ended July fell to 2.429 million from the preceding week''s revised level of 2.447 million.


[R]9:00AM Stock futures pointed to a lower opening on oil and Wal-Mart downgrade.[/R]
U.S. stock futures dropped Thursday, dragged by record-high oil prices and a brokerage downgrade of Wal-Mart Stores Inc.

Oil surged to a record high near $76 a barrel, increasing the risk of inflation. Energy prices rose amid worries over supply from major exporter Nigeria after suspected explosions at a pipeline. Shares of retailers moved to the downside in pre-market trading after Merrill Lynch lowered its rating on Wal-Mart Stores ((WMT)) to ‘neutral’ from ‘buy’ amid suspicion the rate of revenue growth could not be sustained. The Dow
component, slid 1.7% to $44.38 on the Inet.

A couple of higher-than-expected profit reports did little to help futures. PepsiCo Inc. ((PEP)) posted a rise in Q2 profit to $1.36 billion, or 80 cents a share, exceeding expectations of 77 cents a share. PepsiCo shares rose 1.4 percent to $61.94 on Inet. In other earnings news, Marriott International Inc. ((MAR)), hotel operator, reported a 35% rise in quarterly profit, exceeding analyst expectations, reflecting higher room rates and collected higher fees. Media company Tribune Co. ((TRB)) announced a Q2 decline in profit due to falling newspaper circulation and weaker advertising sales. In other news, Warner Music ((WMG)) dropped 23% after a European court annulled the European Union''s approval of a 2004 merger between Sony Music and BMG. Standard & Poor''s 500 futures were down 5 points, below fair value. Dow Jones industrial average futures were down 51 points, and Nasdaq 100 futures were down 10.25 points.

Tribune Co., ((TRB)), media and entertainment company, reported Q2 net income declined 62% to 28 cents a share, hurt by losses at Atlanta and Albany television stations it is planning to sell. Earnings from continuing operations also fell to 53 cents a share from 72 cents a share, including a penny a share gain from a tax adjustment and a 3 cents a share non-operating loss. Revenue sank 1.4% on a decline in circulation revenue and flat advertising revenue from its newspapers. The company missed analysts’ estimates for earnings of 55 cents a share.

Marriott International Inc., ((MAR)), hotels operator, reported Q2 net income of 43 cents a share, up from 29 cents in the same period last year. Quarterly revenue advanced 7%. On an adjusted basis, earnings were 42 cents a share for Q2, the company said. The company topped analysts’ views for earnings of 40 cents a share. Revenue per available room, the widely used benchmark for measuring performance in the hotel industry, advanced 10.7% for Marriott''s North American properties on a comparable systemwide basis from the 2005 second quarter, the company said.

PepsiCo Inc., ((PEP)), soda producer, reported Q2 earnings of 80 cents a share, up from a profit of 70 cents a share a year-ago on 12% revenue growth, beating analyst estimate for a profit of 77 cents a share. The company said it saw continued strong top-line growth across all of its businesses in Q2 with global servings volume up 9%. PepsiCo forecast earnings of at least $2.95 a share for 2006. The company anticipates share repurchases of about $3 billion in 2006.

Media General Inc, ((MEG)), media company, reported that Q2 net income dropped to 85 cents a share, from $1.61 a year ago. If not for a gain from the sale of a stake in the Denver Post newspaper last year, earnings would have increased from 80 cents in 2005. Revenue advanced 3.3%. The company topped analysts’ forecasts for earnings of 82 cents a share.

Polaris Industries Inc, ((PII)), maker of snowmobiles and all-terrain vehicles, reported Q2 earnings of 48 cents a share, down from a profit of 66 cents a share a year-ago. On a continuing operations basis, the company earned 53 cents a share, down from a year-ago equivalent profit of 66 cents a share. Sales dropped 13% compared with the same period last year. The company missed analysts’ estimate for earnings of 53 cents a share. Polaris cited the decline in sales and earnings to reduced dealer shipments in North America. The company also narrowed its fiscal 2006 outlook to earnings from continuing operations of $3.10 to $3.20 a share from $3.08 to $3.20 a share. It now expects a sales decline of between 3% and 5% for the year, compared to a prior estimate for a drop of 1% to 3%.


[R]8:00AM Britain’s Aviva PLC acquires AmerUs for $2.9.[/R]
Britain''s largest insurance company Aviva PLC agreed Thursday to acquire U.S. insurance company AmerUs Group Co for $2.9 billion. AmerUs is the largest provider by sales of indexed life insurance products in the United States, and one of the country''s top five providers of indexed annuities. Aviva will pay $69 in cash per AmerUs share, a 10% premium to the closing price of July 6, the day before Aviva confirmed they were in talks. The transaction is expected to be completed in the fourth quarter.

Aviva said it will raise 900 million pounds ($1.7 billion) in new shares at 700 pence ($12.90) each to finance the cash purchase, with the remainder to be paid with debt and money it has on hand. Aviva expects the acquisition will contribute $45 million in annual pre-tax cost savings.

Aviva said the purchase will ‘transform’ its U.S. business and will give it a leading position in the world''s largest savings market. It will combine AmerUs with its Aviva U.S. unit, and the business will use the Aviva name.

Aviva shares fell 0.8% to 707 pence ($13.02) on the LSE.


[R]7:30AM Asian markets fall spurred by U.S. losses and oil worries.[/R]
Asian markets closed lower on Thursday. The Nikkei 225 shed 0.99% to close at 15,097.95. Toyota Motor dropped 2.02% after the Asahi newspaper reported that the automaker intends to revise its domestic sales target downward. Honda Motor losses were restricted to 0.56% after announcing Thursday that its North American sales were better than expected and domestic sales were on target. Among electronics exporters, Canon Inc. fell1.92%, while Toshiba Corp shed 2.07%.

Hong Kong''s Hang Seng Index shed 1.31% to 16,305.48. The China Enterprises Index of Hong Kong-listed mainland companies fell 1.44%. HSBC Holdings, the largest stock in Hong Kong by market capitalization, declined 1.16%. South Korea''s Kospi index edged down 0.9%, while Australia''s benchmark S&P/ASX 200 sank 0.85%. China''s benchmark Shanghai Composite Index declined 4.8% to settle at a two-week low of 1,655.77. Concerns about impending policy tightening combined with selling pressure ahead of a flood of upcoming IPOs to trigger the losses.


[R]6:30AM Europe declines on higher oil prices and geopolitical concerns.[/R]
European markets were lower by mid-morning trading. The U.K. FTSE 100 index lost 0.7% at 5,818, the German DAX Xetra 30 index declined 1.3% at 5,563 and the French CAC-40 index declined 1.1% at 4,885. Britain insurance company Aviva attracted the attention. The company was partially responsible for the insurance sector decline. It traded 1% lower following its statement that it would place shares to partly finance its $2.9 billion purchase of U.S. insurance company AmerUs.

Emap fell 7.2% after the UK media group warned that underlying first half revenues were likely to drop and that trading conditions were likely to remain difficult. Swedish technology company Ericsson shed 0.9%, having announced that jointly owned mobile phone venture, Sony Ericsson, produced a 91% rise in second-quarter net income but average selling price dropped slightly sequentially in the quarter.

German subscription TV provider Premiere AGbucked the downtrend, soaring 23% in the wake of its announcement that it has agreed a deal to market Arena, a new TV channel for the German Bundesliga soccer league, to its cable TV customers.

Oil prices hit a record Thursday as an escalation of violence in the Middle East triggered concerns about stability in the region. Light, sweet crude for August delivery rose 93 cents to $75.88 a barrel. Gold bullion opened Thursday at a bid price of $650.10 a troy ounce, down from $653.40 late Wednesday.

The euro was higher nominally against the dollar Thursday, even though the prospect of higher European interest rates kept gains for the European currency at bay. The euro bought $1.2701 in afternoon European trading, up from $1.2699 in New York late Wednesday. The British pound dropped to $1.8335 from $1.8343 while the dollar fell to 115.43 Japanese yen from 115.52 yen as traders took the opportunity to buy the currency at a cheaper price before an expected interest rate increase from the Bank of Japan.