Finance review: 06/02/08

February 6, 2008

Asian stocks sink after Dow's plunge

BANGKOK, Thailand - Asian markets plunged Wednesday after a steep drop on Wall Street overnight fanned investors' fears the U.S. economy was sliding into a recession that could sap demand for Asian exports.

In Hong Kong, the benchmark Hang Seng index plunged 1,339.24 points, or 5.4 percent, to close the half-day session at 23,469.46. Japan's Nikkei 225 index was down 3.8 percent in afternoon trading.

"It's unbridled pessimism," said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. "Everyone is concentrating on a U.S. recession, but Europe is also looking bad.... We are in for a bear market now."

Investors were unnerved by economic data Tuesday showing the U.S. service sector shrank last month for the first time since March 2003. That seemed to wipe out some nascent optimism about the American economy after the U.S. Federal Reserve's two big rate cuts late last month, which gave many markets a lift.

Pessimism returned when the Institute for Supply Management reported that its December index of activity in the U.S. service sector, which accounts for about two-thirds of the economy, dropped below 50, indicating contraction. That sent the Dow Jones industrial average plunging 2.93 percent, its largest one-day percentage drop since Feb. 27, 2007.

European markets also sank Tuesday in reaction to the news, with the U.K.'s FTSE 100 Index sliding 2.6 percent and France's CAC-40 Index falling 4 percent.

Global financial markets have turbulent since the start of the year, mostly tumbling amid worries about a U.S. — and worldwide — slowdown and massive losses racked up by banks that made bad bets on securities backed by risky mortgages.

Asian investors appeared increasingly anxious about a slump in Europe, another vital export market.

"There's a real probability that both the U.S. and Europe will go into recession at the same time," said Lun. "It's a financial mess on the two continents with the subprime crisis and the SocGen debacle."

The financial industry, already reeling from losses linked to the credit crisis, was dealt another blow last month when major French bank Societe Generale said it had lost about $7.1 billion in cleaning up unauthorized transactions by a rogue trader.

Elsewhere in the Asia-Pacific, Australia's key index fell 3.2 percent, while India's Sensex index was down 2.5 percent. Thailand's market slid 2.4 percent.

Some traders said Wednesday's decline in Hong Kong was overdone and largely driven by investors keen to avoid risky exposure during the long Lunar New Year holidays.

Markets in Hong Kong and Singapore were closed Wednesday afternoon and will remain shut Thursday and Friday. Markets in China, South Korea and Taiwan were closed Wednesday through Friday for the holidays.

U.S. stock index futures were down modestly, suggesting that Wall Street was poised for further declines. Dow futures were down 22 points, or 0.2 percent, to 12,298, while S&P 500 futures were down 1.2 points, or 0.1 percent, to 1,342.

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Stocks plunge on service sector weakness

NEW YORK - Wall Street plunged Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year.

The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003. The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.

"The report drives a nail into the coffin from investors' minds that we're in a recession," said Todd Salamone, director of trading at Schaeffer's Investment Research. "That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell."

The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. The market had expected another month of growth, and the disappointment contributed to Tuesday's $500 billion loss in the Dow Jones Wilshire 5000 Composite Index, an index that measures the movement in 5,000 U.S. stocks.

Alongside the Labor Department's report last week showing the first monthly U.S. jobs decline in more than four years, the data on the service sector — which includes businesses ranging from restaurants to retailers to banks — was particularly worrisome to investors.

Though Wall Street hopes the Federal Reserve will keep slashing interest rates to stoke the economy, some believe the central bank, which lowered rates 1.25 percent in just over a week last month, acted too late. Rate cuts take several months to take effect, and moreover, many analysts are skeptical that rate cuts are the correct remedy for an economy saddled with bad debt in the wake of a housing market implosion.

Fitch Ratings' plans to lower the rating on more than $100 billion wrapped up in bond funds called collateralized debt obligations added to the host of concerns plaguing Wall Street. Downgrades would mean the securities — many of which are backed by mortgages — are worth even less than many investors thought. That could cause more problems for strugging banks, brokerages, and bond insurers hurt by investments in mortgages that went sour.

The Dow fell 370.03, or 2.93 percent, to 12,265.13, after falling 108 points on Monday. Tuesday's slide was the blue chip index's largest one-day percentage drop since it lost 3.3 percent on Feb. 27, 2007, and its largest point drop since it fell 387 points last Aug. 9.

The broader Standard & Poor's 500 index lost 44.18, or 3.20 percent, closing at 1,336.64, while the Nasdaq composite index tumbled 73.28, or 3.08 percent, to 2,309.57.

In Monday and Tuesday's trading, the Dow gave up most of the gains it made last week, when it jumped 536 points, or 4.39 percent, in a burst of optimism about the economy. It's not surprising that the volatile market would pull back on any bad economic news — but some analysts claim stocks should be near their bottom given how low investors sentiment is right now.

According to JPMorgan equities analyst Thomas J. Lee, the three worst readings on record in the ISM's service sector index are associated with stocks rising in the ensuing three months — on average, by 6 percent.

Even if the stock market is near its low point, though, it has a lot of ground to recover. The Dow is down more than 13 percent since its Oct. 9 record settlement of 14,164.53. Meanwhile, the S&P 500 — the measure most watched by market professionals — is down 8.9 percent for the year, the worst year-to-date performance for the index ever. The S&P 500 has fallen 14.6 percent from its Oct. 9 high.

Bond prices jumped as investors sought the safety of government-backed debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.56 percent from 3.64 percent late Monday.

The ISM report is particularly alarming, said Bernard Baumohl, managing director of the Economic Outlook Group LLC. Because Americans will not pare back spending significantly on necessary services like health care and transportation, January's rapid decline in service sector activity suggests that investors may have underestimated how damaged the economy is, he wrote in a research note.

On Tuesday, the biggest losers in the stock market were banks, which have already suffered huge losses in their investment portfolios last year and are now socking billions of dollars away to prepare for debt-burdened consumers to stop making payments.

Dow component Citigroup Inc. fell $2.17, or 7.4 percent, to $27.05, while JPMorgan Chase & Co., another Dow component, fell $2.33, or 5 percent, to $44.28. Washington Mutual Inc. fell $1.08, or 5.6 percent, to $18.08; Bank of America Corp. fell $1.66, or 3.8 percent, to $42.37; and Wachovia Corp. fell $1.35, or 3.8 percent, to $34.18.

"When you have the financials in intensive care such as they are, for any economy like ours, they must heal," said Quincy Krosby, chief investment strategist at the Hartford. "They drew us into this; they must lead us out."

Light, sweet crude oil declined $1.61 to $88.41 a barrel on the New York Mercantile Exchange, as traders bet that a slower economy would dampen energy demand. An extended drop in energy prices could aid businesses that are finding their supply costs are rising, but that their customers are having trouble taking on price increases.

The dollar rose against other major currencies, while gold prices fell.

Declining issues outnumbers advancers by about 4 to 1 on the New York Stock Exchange. Consolidated volume came to 4.18 billion shares, down from 4.51 billion on Monday.

The Russell 2000 index of smaller companies fell 21.88, or 3.02 percent, to 701.58.

Stocks overseas also retreated. Japan's Nikkei stock average fell 0.82 percent; Hong Kong's Hang Seng index fell 0.89 percent; Britain's FTSE 100 fell 2.63 percent; Germany's DAX index fell 3.36 percent; and France's CAC-40 fell 3.96 percent.

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U.S. has not notified SocGen director about probe

WASHINGTON (Reuters) - U.S. regulators have not notified Societe Generale (SOGN.PA) director Robert Day that they are investigating the stock sales he made before the French bank announced billions of dollars in losses by a single trader, Day's spokesman said on Tuesday.

According to a report by the Wall Street Journal newspaper, the U.S. Securities and Exchange Commission is probing stock sales by Day and by two foundations associated with him.

The Department of Justice is also looking into Day's trading activity, a source close to the investigation told Reuters on Monday.

"We doubt this is coming from either the SEC or DOJ since both have prohibitions against such leaks," said Day's spokesman, Josh Pekarsky. "In any case, we have not been notified by the SEC or the DOJ of any investigation into Mr. Day."

Day and the foundations sold about $140 million of the bank's stock about two weeks before Societe Generale notified its board about the $7.3 billion in trading losses, the Journal said.

The bank publicly revealed on January 24 the losses it blamed on a single rogue trader, Jerome Kerviel.

Societe Generale has already said that Day's sales were during a window of time when such trades were permitted under the bank's trading policies for directors.

The bank has also said it was contacted by the U.S. Attorney's Office for the Eastern District of New York on January 25 about the trading losses announced the day before.

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Overview: Equities tumble as ISM fuels recession fears

US and European stock markets tumbled and government bonds surged on Tuesday as further evidence of economic slowdown emerged on both sides of the Atlantic.

The chief surprise of the day came from the US Institute for Supply Management's non-manufacturing business activity index, which fell to 41.9 per cent in January from 54.4 per cent, the biggest ever monthly decline and its lowest level since October 2001.

It was the first time the index has come in below the 50 level, signifying contraction, since March 2003. "The survey results were downright disastrous," said Stephen Stanley, chief US economist at RBS Greenwich Capital. "These are recessionary readings."

As Wall Street accelerated losses in afternoon trade, credit spreads widened sharply, maintaining support for government bonds. The dollar remained firmer as oil and gold lost ground.

"Stocks were crushed by the ISM weakness, and credit markets also performed poorly," said Ted Wieseman, economist at Morgan Stanley.

Lena Komileva, G7 economist at Tullett Prebon, said the report reinforced the notion that the Federal Reserve had been unable to forestall a recession in spite of aggressive, timely policy easing.

"Fed rate cuts are not the answer to this credit crunch and hence cannot prevent the loss of confidence in the real economy," she said.

Some analysts warned that the ISM report was well out of line with other January indicators. "The ISM indices have only deteriorated this rapidly following a massive shock, such as the 9/11 attacks," said Julian Jessop, at Capital Economics.

"But it may well be significant that after such sharp falls in the past they have typically rebounded in the following month."

US interest rate futures moved to fully price in another half-point cut in US interest rates when the Fed next meets, on March 18.

"We think that the Fed will ease by 50 basis points in March and in April and by another 25bp in June," reducing the Fed funds rate to 1.75 per cent by mid-year said Mr Stanley.

Disappointing services sector and retail sales data in the eurozone prompted similar slowdown fears and raised speculation that the European Central Bank would be forced to soften its hawkish stance on interest rates.

The purchasing managers' services index fell from 52.0 in December to 50.6 in January for the whole of the zone, and dipped below the break-even 50 level in Germany, Italy and Spain. Eurozone retail sales fell 0.1 per cent in December, and were down 2 per cent year on year.

"The sharp deceleration in eurozone services growth coupled with the lacklustre retail sales data suggest market expectations of ECB rate cuts later this year may be more than just wishful thinking," said Martin van Vliet, economist at ING.

The UK's service sector held up better last month, with the business activity index edging up to 52.5 from 52.4.

Analysts said the figures helped reinforce the view that the Bank of England would cut interest rates by 25 basis points to 5.25 per cent tomorrow, rather than by a more aggressive 50bp.

The equity market response to the day's economic news was unequivocal and stocks in New York closed at their lows of the day. Financials led the selling and late in the day Fitch Ratings placed some bond insurers on ratings watch negative.

The S&P 500 fell 3.2 per cent, its worst day in nearly a year and it is down 9 per cent in 2008, its poorest start to a year ever.

The pan-European FTSE Eurofirst 300 index tumbled 3.1 per cent and the FTSE 100 in London shed 2.6 per cent.

Asian markets had staged a broad retreat as investors took profits after the previous session's strong gains and closed positions ahead of the Lunar New Year holiday.

In Tokyo, the Nikkei 225 Average fell 0.8 per cent while Hong Kong lost 0.9 per cent. Australian stocks shed 1.3 per cent as retailers were hit by a 25bp rise in domestic interest rates.

European and US credit spreads widened sharply as stock markets declined. The Markit iTraxx Crossover index, a closely-watched barometer of risk appetite in Europe, widened to 504bp from 471bp late on Monday. The Markit CDX index which references US investment-grade bond risk widened to 117bp from 109bp.

The flight out of equities prompted strong safe-haven buying of government bonds. The yield on the 10-year US Treasury was down 8bp at 3.56 per cent while the two-year yield was 14bp lower at 1.92 per cent.

The Treasury yield curve steepened, with the difference between two-, and 10-year note yields moving to 1.64bp. The curve had steepened from just under 100bp since the start of the year as rate cuts and the prospect of more to come has pulled short-dated yields sharply lower.

"There were good further front-end led gains in late trading as stocks continued hitting new lows that steepened the curve significantly further," said Mr Wieseman.

In Europe, the two-year Schatz yield fell 13bp to 3.26 per cent.

On currency markets, the eurozone data weighed on the euro, sending the single currency down 1.2 per cent against the dollar and 1.1 per cent against the yen.

In commodities, March West Texas Intermediate fell $1.61 to $88.41 a barrel, as the day's economic figures sparked fresh concerns about the impact on demand of a global economic slowdown. Gold consolidated below $900 an ounce.

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US stocks tumble on service report

Wall Street stocks tumbled on Tuesday after an index of service sector activity slumped to its lowest level since the aftermath of the September 11 attacks, accentuating fears for the health of the US economy.

The extremely weak non-manufacturing data caused stocks to record their worst performance in almost a year as traders priced in a greater likelihood of a domestic recession.

All ten of the S&P's leading sectors closed in negative territory with financial, energy and telecoms companies leading the rout.

The S&P 500 closed down 3.2 per cent at 1,336.64, its worst day since February 27 last year when the index fell 3.5 per cent. A broad-based sell-off saw only 16 index members end in positive territory. The S&P has now declined 9 per cent in 2008, its worst start to a year ever.

The Nasdaq Composite fell 3.1 per cent to 2,309.57 while the Dow Jones Industrial Average shed 2.9 per cent - or 370 points - to 12,265.13.

The equities slump was accompanied by a spike in the CBOE Vix index - Wall Street's "fear gauge" - which jumped 9 per cent to 28.33.

The ISM non-manufacturing index recorded its biggest fall in its history, plunging to 41.9 last month from a reading of 54.4 in December. It was the first contraction in service sector business activity since the start of the Iraq war and the lowest reading since October 2001.

"This data release corroborates the notion that the US economy is in recession,"T.J. Marta, fixed income strategist at RBC Capital Markets, said.

Economists were expecting only a small pullback to 53.5, where a reading above 50 indicates expansion.

Some analysts were more sanguine, noting that such a dire reading could be a contrarian indicator and investors should therefore buy into market weakness.

"The three worst readings in non-manufacturing ISM occurred in 2001 [twice] and 2003. In two of three instances, equity markets rose three months later, with an average gain of 6 per cent," Thomas Lee, strategist at JPMorgan Research, said.

Bond prices rose sharply and the yield curve steepened as traders speculated that the Federal Reserve would keep slashing interest rates to head off a severe economic downturn.

Sheryl King, economist at Merrrill Lynch said the dismal data meant there was a strong chance of an inter-meeting rate move before the next Federal Open Market Committee meeting in March. The futures market priced in a 76 per cent likelihood of a 50 basis point cut in March and a 24 per cent chance of 75bp.

Financial stocks came under pressure after Fitch Ratings said it might downgrade some of the safest triple-A rated collateralised debt obligations by as much as five notches.

Meanwhile in a report on bond insurers Standard & Poors said there could be serious ripple effects if monolines lose their triple-A ratings, including possible credit downgrades for US banks. S&P said $125 billion of subprime-related CDOs hedged by bond insurers were concentrated at a small number of banks. "Few banks have disclosed how much that exposure is," the rating agency said.

Among the biggest fallers were Citigroup (NYSE:C), down 7.4 per cent at $27.05 and Merrill Lynch, 5.6 per cent weaker at $54.50. GMAC Financial Services, the finance company owned by Cerberus Capital Management and General Motors, reported a preliminary net loss of $724m for the fourth quarter.

Also retreating sharply was Goldman Sachs (NYSE:GS), down 5.5 per cent to $189.86, after Oppenheimer & Co analyst Meredith Whitney cut her rating from "outperform" to "perform", citing valuation concerns. Ms Whitney said Goldman would "suffer from its own success" as it faced tough earnings comparisons this year.

Homebuilder stocks initially rallied after Banc of America Securities raised its rating on four companies citing expectations that lower house prices would increase demand. That mood had dissipated by the close as the S&P homebuilder index fell 4.9 per cent.

In the technology sector, National Semiconductor (NYSE:NSM), down 7.5 per cent at $17.59, spurred a sell-off in chip stocks after it lowered its third quarter revenue outlook because of expected weakness in mobile electronics sales. The PHLX semiconductor sector index fell 3.7 per cent.

Earnings news was led by NYSE Euronext, whose shares fell 14.1 per cent to $71.03 as concerns about its ability to realise anticipated cost savings worried investors.The exchange operator more than tripled quarterly net income to $156m.

Whirlpool (NYSE:WHR) was a lone bright spot, soaring 10.3 per cent to $90 after the appliance maker increased quarterly earnings by 72 per cent. News Corp, up 0.6 per cent at $20.08, which increased fourth-quarter profit 1.2 per cent to $832m.

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Wall Street skids about 3 percent on recession sign

NEW YORK (Reuters) - Stocks suffered their biggest drop in nearly a year on Tuesday after data showed the worst monthly contraction in the services sector since the last U.S. recession and Standard & Poor's warned it could cut bank credit ratings.

The Dow and S&P 500 had their biggest drops since February 27, 2007. All 30 Dow stocks fell and only 17 of the 500 components on the S&P closed higher.

Recession fears slammed sectors across the board, ranging from telecommunications to energy. Banks and other financial services stocks fell particularly hard after S&P said any loss of a top credit rating by a major bond insurer could force banks to put hobbled bonds back on their balance sheets, curtailing funds available for basic lending.

"This could lead to a further prolonged period of generalized market disruption and a loss of confidence that would not be favorable for any financial institution," the rating agency said.

The tone for the day was set by the January reading of the Institute for Supply Management's non-manufacturing index. The gauge had its biggest drop since the indicator was created in 1997 and fell to the lowest level since October 2001, aggravating fears that a recession is at hand.

"The U.S is no longer a manufacturing economy, it's a service economy, so this number will carry a lot more weight" than last week's surprise rise in ISM's manufacturing index, said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. He added that the ISM report will make investors more nervous about other upcoming indicators.

The Dow Jones industrial average (.DJI) was down 370.03 points, or 2.93 percent, at 12,265.13. The Standard & Poor's 500 Index (.SPX) was down 44.18 points, or 3.20 percent, at 1,336.64. The Nasdaq Composite Index (.IXIC) was down 73.28 points, or 3.08 percent, at 2,309.57.

Year-to-date, the Dow is down 7.5 percent while the S&P is 9 percent lower. The Nasdaq has fared worse, dropping 12.9 percent so far in 2008.

Stocks took a last-minute leg lower after rating agency Fitch said it may cut the AAA-rating on MBIA Inc (MBI.N), the world's biggest bond insurer.

Insurer American International Group Inc (AIG.N) was one of the worst Dow performers, falling 4.5 percent to $52.93 on fears about credit exposure.

Investment bank Goldman Sachs & Co (GS.N) slid 5.5 percent to $189.86 after a broker downgrade. Citigroup Inc (C.N) shares dropped 7.4 percent to $27.05.

Oil companies such as Exxon Mobil Corp (XOM.N) were under pressure on expectations that an economic downturn will slow transportation and manufacturing, crimping demand for energy.

Exxon was down 3.9 percent at $82.11, making it the top-weighted drag on the S&P.

Technology shares, seen as particularly vulnerable to a downturn in both business and consumer spending, were under pressure.

Shares of business software maker Oracle Corp (ORCL.O) fell 4.7 percent to $19.25, while BlackBerry device maker Research In Motion Ltd's stock (RIM.TO)(RIMM.O) fell 5.2 percent to $88.30.

Verizon shares fell 4.6 percent to $36.83 while stock of rival AT&T Inc (T.N) dropped 3.8 percent to $36.73 on the NYSE.

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Walt Disney shares rise after results

NEW YORK (Reuters) - The Walt Disney Co's (DIS.N) shares rose 2.4 percent to $30.80 in after-hours trade on Tuesday after the company reported quarterly results that topped Wall Street estimates.

Shares had closed at $30.07 on the New York Stock Exchange.

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SEC forms office to pay back wronged investors

WASHINGTON (Reuters) - The Securities and Exchange Commission said on Tuesday it has created a new office in the agency to quickly distribute financial penalties to wronged investors.

The Office of Collections and Distributions will be used to dole out more than $5 billion the SEC has recovered from securities law violators, the agency said.

"The Commission's strong commitment to recovering money from wrongdoers and returning it to investors is amply demonstrated by the more than $2 billion we distributed last year," said Chairman Cox in a statement.

The SEC has the authority to collect and distribute the funds due to the post-Enron Sarbanes-Oxley corporate reform laws of 2002. Before the Fair Funds provision of that act, the SEC sent financial penalties collected from its enforcement actions to the U.S. Treasury.

The SEC said it has used this authority to distribute more than $3.5 billion to investors. It said the new office will help cut red tape and the cost of distributing the money.

Richard D'Anna, who was previously senior vice president at 1st Bridgehouse Securities, has joined the SEC as director of the new office. Lynn Powalski, who has been an assistant director for collections and distributions within the SEC's enforcement division, will serve as the new office's deputy director.

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Wall Street tumbles as recession fears grow

NEW YORK (AFP) - Wall Street shares slid at the open Tuesday after a surprisingly weak reading on US service sector activity intensified fears about a recession in the world's biggest economy.

In the first exchanges, the Dow Jones Industrial Average fell 165.67 points (1.31 percent) to 12,469.49 while the tech-heavy Nasdaq shed 35.54 points (1.49 percent) to 2,347.31.

The broad-market Standard & Poor's 500 index retreated 21.43 points (1.55 percent) to 1,359.3.

Market action came after a report from the Institute of Supply Management showed the vast services sector of the US economy contracted in January for the first time in nearly five years.

The Institute of Supply Management's index on nonmanufacturing activity slumped to 41.9 percent in January from 54.4 percent in December.

The report on services, which makes up the lion's share of US economic activity, is another sign of a sharp slowdown in the US economy that some analysts say means a recession is at hand.

Stephen Gallagher, economist at Societe Generale, said the ISM report "is in recession territory."

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Ping An feels the lash of intervention from Beijing

The Communist party has a long tradition of intervening in Chinese stock markets by publishing bullish or bearish statements in its mouthpiece, the People's Daily. So when an article attacking a giant share placement from Ping An Insurance appeared under the pen name Lily in Monday's edition, the markets paid attention.

Ping An's announcement two weeks earlier that it planned to raise more than $20bn in a domestic secondary share placement and bond sale helped send Chinese stocks into a tailspin just when markets in the rest of the world were collapsing. So an official comment from the government criticising what would be the largest yet share sale by far in mainland China was welcome news to investors and helped push the benchmark index up more than 8 per cent on Monday.

The commentary was scathing in its criticism of companies that act without concern for the investing masses and use the stock market as an automatic teller machine to collect money at will. It also suggested new rules forbidding secondary placements within three years of - or that exceed the amount raised in - an initial public offering. This is a direct attack on Ping An, which raised $5bn in its IPO a year ago.

But it ended on a more harmonious note: "Only when the interests of all sides are protected will the stock market continue to run like a fountain, bringing moisture and nutrition to listed companies and investors."

Artisan's shadow

Warren East, Arm Holdings' chief executive, has fielded investors' brickbats before. He oversaw the British technology group's first profit warning in 2002, then took a beating from shareholders who accused him of overpaying for Artisan of the US in 2004. By mid-afternoon on Tuesday, Arm's shares had fallen to their lowest level since shortly before the completion of that deal.

This ought not to happen. The largest part of Arm's business designs microprocessors for the kinds of small portable devices the digerati and their disciples cannot be without - everything from smartphones to the most sophisticated heating controls. That licensing revenues in this business slipped between the third and fourth quarters of last year is not so surprising - the macroeconomic clouds are gathering and industry conditions, as Arm says, are uncertain. But the group's revenues sit on a solid foundation of royalties. That income would probably continue to grow even if Mr East and his team were to pack up the rest of the company and go home.

Artisan is Mr East's problem child. Now recast as Arm's physical intellectual property division, its aim is to license technology to the world's largest semiconductor companies for packing ever-more information into ever-smaller chips. The plan to develop Artisan was always a slow burner. On Mr East's four- to seven-year timescale, he needn't start worrying until the end of this year. But he is already concerned. Last year, Arm poured more resources into PIPD, rejigging its structure and moving an experienced board member to run it last September. The group says it can now offer technology up to date enough to attract the attention of the likes of Texas Instruments or Qualcomm. But so far, no deal has been forthcoming.

For a division that (including royalties) accounts for only 17 per cent of total group revenue, Artisan is casting a long shadow.

Question of credibility

International investment funds have to rely on a carefully nurtured credibility to challenge successfully entrenched power brokers. Protecting that credibility depends on choosing targets equally carefully. If they get it wrong, the market these funds claim to represent will stop listening.

Take the case of Generali. The Italian insurer has come under attack by a London-based activist fund, Algebris, since October. This week, Algebris seemingly received a boost in its campaign with the publication of a letter from Franklin Mutual, one of the largest US fund managers, which criticised Generali's apparent interest in expanding in the US. It also echoed Algebris's complaints about Generali's governance structure, with its two chief executives and Antoine Bernheim, its 83-year-old chairman,

Franklin's suggestion that the US financial sector is a mature market and thus devoid of opportunity for a company such as Generali is somewhat surprising. In niche areas - such as third-age products - where Generali is looking to go, the US is probably one of the fastest-growing markets in the world.

Perhaps even more surprising is Franklin's decision to question the governance of the only big European insurer to have maintained its stock market value over the past six months.

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London sinks as financials weigh

Financial stocks dragged London's FTSE 100 back below the 6,000 level on Tuesday after US service sector data intensified fears of US recession.

The FTSE 100 closed 158.2 points, or 2.6 per cent at 5,868 while the mid-cap FTSE 250 fell 3 per cent to 9,955.3

Schroders was a leading faller, down 7.1 per cent to £10.25, as Morgan Stanley cut its stance on the fund manager from "equal-weight" to "under-weight".

After an analysis of some of the group's funds, the bank said Schroders was the "most exposed to equity mutual fund redemptions, a trend that we think is underestimated by the market". Morgan Stanley also downgraded Aberdeen Asset Management, which fell 6.8 per cent to 137¼p.

Leading banks were weaker, with Royal Bank of Scotland off 5.6 per cent to 383p and Barclays (NYSE:BCS) down 4.3 per cent to 460¾p.

Northern Rock, however, climbed 2.3 per cent to 90¾p as RAB Capital, the company's second-biggest shareholder, said it backed the management-led proposal to rescue the bank rather than a rival offer from a consortium led by Richard Branson's Virgin Group.

Olivant, another of the potential bidders for Northern Rock, pulled out of the running on Monday.

Housebuilders suffered the day's heaviest losses on fears of a sharp downturn in the UK housing market. Taylor Wimpey shed 8.1 per cent to 185p and Persimmon lost 7.3 per cent to 748.3p.

Hammerson led real estate groups lower after downgrades to the sector from HSBC.

The bank downgraded Hammerson and British Land from "neutral" to "underweight" and Land Securities and Brixton Estates from "overweight" to "underweight".

Hammerson fell 6.8 per cent to £10.67, British Land lost 4.8 per cent to 975.3p, Land Securities dropped 4.2 per cent to £15.92 and Brixton shed 4.4 per cent to 333p.

BP was one of only three risers on the FTSE 100 after its drop in quarterly net profit was offset by news that the group would increase its quarterly dividend by 31 per cent and continue to buy back shares.

The profit fall was due to weak refining margins and higher costs, with outweighed the impact of higher oil prices. BP shares rose 0.2 per cent to 542¾p.

"We believe that the sector bounce in the year to date has exacerbated significant downside opportunities," HSBC said.

In the mid-caps, chip designer ARM Holdings fell 20.1 per cent to 94¼p after missing forecasts with a 6 per cent rise in full-year revenues.

The company, which designs chips for Intel, said it was cautious on the short-term outlook for the industry, but said it had entered the year with its order backlog at its highest level ever.

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Financial Tech in talks on Singapore

Financial Technologies, the group that controls India's top commodities exchange, is considering opening a commodity bourse in Singapore as the country's biggest gold, silver and base metals trader diversifies.

Financial Tech, owner of India's Multi Commodity Exchange, was in talks with the Monetary Authority of Singapore about setting up the Singapore Mercantile Exchange, a person familiar with the plan said.

"Financial Technologies is the only company out of India to have set up exchanges in Dubai in the Middle-East and in Mauritius to serve Africa and to have plans for Europe and now Singapore," the person said.

Started by entrepreneur Jignesh Shah in 2003, MCX turns over $4bn a day, or about 75 per cent of the daily volume by value of India's 24 commodities markets.

While India's commodity business has boomed, analysts warn that the country remains a minefield for traders. India's leftist parties and security hawks have distrusted commodities futures trading amid concerns about abuses by unscrupulous traders or enemy agents.

Driven by political concerns over high inflation early last year, the government without warning banned the trading of futures for wheat and pulses, another important Indian crop.

"There are policy risks involved in the functioning of these exchanges, particularly regarding agricultural commodities," said Seema Desai, analyst at Eurasia Group in London.

Some analysts believe that diversifying this risk has been one reason for Financial Technologies' rapid overseas expansion.

The person familiar with Financial Technologies' proposed Singapore exchange said he expected the project to be ready for launch in "about a month".

MCX, whose shareholders include Fidelity, Merrill Lynch and Citigroup, also specializes in energy and some agriculture in addition to metals.

Singapore's two commodity exchanges - the Joint Asian Derivatives Exchange, run by the Singapore Exchange, and the Singapore Commodity Exchange - mainly trade futures in rubber and crude palm oil.

Financial Technologies declined to comment on the proposal. The Monetary Authority of Singapore also declined to comment.

The plan follows a series of recent regulatory changes in India including new rules allowing 49 per cent foreign ownership of domestic exchanges with no single investor permitted to own more than 5 per cent.

This means Fidelity might have to liquidate part of its 9 per cent stake in MCX and Goldman Sachs might have to sell a portion of its 7 per cent stake in a rival bourse, the National Commodity and Derivatives Exchange.

The government has also amended the law to make the regulator, the Forwards Market Commission, independent in a move the industry hopes will give it the teeth to make important reforms to the market.

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Wall Street slumps on service report

Wall Street stocks slumped on Tuesday after the US service sector contracted last month at the fastest rate since the aftermath of the 9/11 attacks, raising new fears for the health of the economy.

The disappointing non-manufacturing data caused stocks to tumble and pushed bond yields sharply higher as traders positioned themselves for a possible US recession.

Less than an hour after the opening bell, the S&P 500 was down 1.7 per cent at 1,357.09. The Nasdaq Composite fell 1.5 per cent to 2,347.03 while the Dow Jones Industrial Average also shed 1.5 per cent to 12,442.67.

The ISM non-manufacturing index plunged to 41.9 in January, from a reading of 54.4 in December, the largest drop in the history of the index.

It was the first contraction in the business activity index since March 2003 as the index fell to its lowest level since October 2001.

"This data release corroborates the notion that the US economy is in recession," said TJ Marta, fixed income strategist at RBC Capital Markets said.

Economists were expecting only a small pull back to 53.5 with a reading above 50 still indicating expansion.

The non-manufacturing employment index fell to 43.9 last month from 51.8 in December, following on from last week's disappointing jobs report, which also showed a slowdown in service sector employment. Meanwhile, new orders fell by 10.4 percentage points.

The ISM data were released ahead of schedule after a possible breach of information, ISM said. Bond prices had risen sharply ahead of the report's release.

The gloomy outlook for the US economy came as millions of Americans prepared to vote in electoral primaries on Super Tuesday.

"An absolutely stunning ISM non-manufacturing number leaves the chart of the index looking like it has fallen off the edge of a cliff, and is heartwarming only for those who think the economy is already in a recession," Alan Ruskin, strategist at RBS Global Banking & Markets, said.

Bond prices rose sharply as risk aversion increased after the ISM services data. The yield on the two-year Treasury note plunged below 2 per cent, falling 12 basis points to 1.94 per cent while the 10-year Treasury note was yielding 3.54 per cent, a decline of 11bp. A spread of 160bp marked the steepest yield curve since September 2004.

Yields on short-dated treasuries have fallen more rapidly amid expectations that the Federal Reserve will keep slashing interest rates to head off a severe economic downturn. After the ISM data the futures market fully priced in a 50bp cut when the Fed next meets in March, with at least two further cuts to a possible Fed funds rate of 2 per cent seen likely by June.

Financial stocks led Tuesday's sell-off with the S&P investment bank index falling 2.8 per cent, with energy and telecoms companies also coming under pressure.

Oppenheimer & Co analyst Meredith Whitney cut her rating on Goldman Sachs from "outperform" to "perform" on valuation concerns. Ms Whitney said Goldman would "suffer from its own success" as it faces tough earnings comparisons this year after successfully avoiding the worst of the subprime mortgage crisis in 2007. Goldman shares fell 3 per cent to $194.73 in pre-market trading and have fallen 6.6 per cent this year.

Homebuilder stocks were one of the few sectors to rally after Banc of America Securities raised its rating on four companies, citing expectations that lower house prices will increase demand.

Analyst Michael Wood told investors to buy shares in KB Home, Pulte Homes and MDC Holdings and set a neutral rating on Toll Brothers, predicting an average share price rise of 20 per cent over the coming year. ""While we do not expect a spike in demand immediately, we expect that it will gradually improve over 2008," Wood said in a research note," he said.

Homebuilders were one of the worst performing sectors last year as the subprime mortgage crisis caused house prices to fall and led builders to post massive losses.

But, together with fellow laggards like financial companies and retailers, homebuilders have enjoyed a rally in recent weeks. After hitting a low on January 9, the sector index has soared more than 50 per cent, though it remains more than 60 per cent below a high set in July 2005.

Earnings news was led by News Corp which said after the closing bell on Monday that fourth quarter profit increased 1.2 per cent from $822 to $832m as higher advertising sales offset weakness in its film business. The stock was unchanged at $19.98.

Also reporting after the close on Monday, Yum! Brands, owner of the KFC, Taco Bell and Pizza Hut chains, said fourth quarter profit dipped from $234m to $232m causing the shares to drop 4.3 per cent to $34.28.

NYSE Euronext, the exchange operator, more than tripled quarterly net income to $156m on record equity trading and new listings but the shares fell 5 per cent to $78.57. Also reporting quarterly results was CME Group, parent of the world's largest derivatives exchange, which said earnings almost doubled to $201m from $103m the previous year. The stock slipped 0.9 per cent to $613.35.

Boston Scientific, the medical device maker, swung to a $458m loss as costs from an acquisition weighed on its fourth quarter results causing its shares to give up 0.5 per cent to $12.78.

European stocks extended early losses as Wall Street opened. The FTSE Eurofirst 300 index was down 2.3 per cent, with the FTSE 100 down 2.1 per cent and the Ibex 35 down 4.1 per cent in Madrid.

The dollar pared earlier gains against the yen to trade up only 0.2 per cent at 106.8930 having earlier risen 0.6 per cent. Against the euro the US currency rose 1.2 per cent to $1.4650.

Meanwhile, gold retreated back below the $900 mark, falling $15.10 to $894.30 and crude oil prices slipped 1.6 per cent to $88.42 as the outlook for the US economy waned.

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Services data hits US stocks