February 1, 2008

Jobless claims worry Wall Street

Wall Street stocks were set for a lower start on Thursday after a sharp spike in jobless claims added to worries about the labour market and as wary traders reflected on a 50 basis point rate cut and the possibility of downgrades of key bond insurers.

Less than an hour before the opening bell, S&P 500 futures were down 13.5 points at 1337.10, Nasdaq futures were down 16.75 points at 1794.75 while futures for the Dow Jones Industrial Average were down 100 points at 12294.

Traders were unsettled by a sharp spike in weekly claims for unemployment benefit, which jumped 69,000 to 375,000 - the biggest increase in more than two years - versus expectations of a 320,000 reading.

Although these numbers may have been affected by the timing of a public holiday the uptick will renew concerns that Friday's employment report may not be as strong as hoped. ADP on Wednesday painted a contrasting picture after showing the private sector added 130,000 jobs in January.

Treasury prices rallied after the jobless numbers while the dollar slipped against the yen and stock futures extended losses.

A brief rate-cut rebound fizzled out almost immediately on Wednesday as rumours about possible downgrades of bond insurers unsettled investors.

"People don't know what to think, they're mostly reactive, not proactive," Ryan Larson, senior equity trader at Voyageur asset management, said. "It's a sell first, ask questions later, mentality."

One of these bond insurers, MBIA (NYSE:MBI), said on Thursday it made a $2.3bn fourth-quarter loss after writing down $3.5bn of credit derivatives and is considering new ways to raise capital in order to maintain its triple-A rating.

The shares fell 6.9 per cent to $13 in pre-market trade. FGIC, a rival, was downgraded by Fitch Ratings on Wednesday.

Investors fear downgrades could trigger losses for financial companies many of which are forced to hold only securities guaranteed by triple-A ratings.

Oppenheimer said on Wednesday that additional writedowns could reach $70bn but that losses would be concentrated at three banks - UBS, Merrill Lynch and Citigroup. Many analysts think other beaten-down financial stocks could soon become an attractive investment.

"From a longer term perspective the actions that the Fed is taking allows you to become a bargain hunter in the financial stocks - you can start to take positions in them," equity manager Hugh Whelan at Hartford Investment Management, said.

Some investors have also tried to call a bottom in the consumer sector but a slew of mixed earnings and economic data revealed the danger of this strategy.

Procter & Gamble increased fiscal second quarter earnings 14 per cent while sales leapt 9 per cent to $21.58bn and the company raised its full-year outlook.

Burger King also beat estimates as second quarter profit jumped 29 per cent.

In contrast, although Amazon.co (NASDAQ:AMZN)m reported quarterly results in line with expectations after the closing bell on Wednesday, a decline in profit margins caused the stock to slide 8.3 per cent after hours.

Starbucks (NASDAQ:SBUX)' cautious outlook for 2008 also unnerved investors as it said it plans to open 425 fewer US stores and close 100 existing outlets. Earnings increased less-than 2 per cent to $208.1m. The shares fell 1.9 per cent after-hours.

Personal spending rose a modest 0.2 per cent in December and although this was more than expected for all of 2007 spending was the weakest since 2003.

Personal income rose 0.5 per cent last month against expectations of a 0.4 per cent increase. The personal consumption expenditure price index, a closely watched measure of inflation rose 0.2 per cent.

The yield on the 2-year Treasury note fell 3 basis points to 2.15 per cent while the 10-year yield shed 5bp to 3.62 per cent.

The dollar fell 0.4 per cent against the yen to Y105.84 and was 0.1 per cent weaker against the euro at $1.4875.

The price of crude oil slipped 0.8 per cent to $91.76 early in New York while gold rose 0.6 per cent to $932 as safe-haven buying continued.

European stocks fell sharply ahead the open on Wall Street. The FTSE Eurofirst 300 index was down 1.7 per cent while the FTSE 100 lost 1.5 per cent and the Cac-40 gave up 1.6 per cent. Asian equity markets were mixed with the Nikkei closing up 1.9 per cent but the Hang Seng was down 0.8 per cent.

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