Canadian Bonds Plunge as Federal Reserve Weighs Loans for AIG
By Daniel Kruger
"Sept. 16 (Bloomberg) -- Canada's two-year government note yield rose the most in more than three months as investors speculated the Federal Reserve was discussing a loan to American International Group Inc., the insurer facing a cash shortage."
"Yields on two-year securities, more sensitive to changes in monetary policy, climbed faster than 10-year notes, which are tied to expectations for inflation. The two-year yield fell the most in 11 years yesterday on concern AIG might be forced into bankruptcy after the U.S. Treasury and central bank didn't participate in a bailout for Lehman Brothers Holdings, Inc., the fourth-largest U.S. investment bank."
"``The fundamental backdrop is AIG's pervasiveness,'' said James Dutkiewicz, lead portfolio manager of C$5 billion ($4.67 billion) in fixed-income assets at CI Mutual Funds in Toronto. The plan helps Canada's financial markets because ``all the Canadian insurance companies and all the Canadian banks are going to have exposure to AIG.''"
"The yield on the two-year note rose 15 basis points, or 0.15 percentage point, to 2.63 percent at 4:11 p.m. in Toronto. It has fallen 45 basis points in the past two months. The price of the 2.75 percent security maturing in December 2010 fell 32 cents to C$100.28."
10-Year Yield
"The 10-year government note's yield climbed 9 basis points to 3.48 percent. The price of the 4.25 percent note maturing in June 2018 declined 78 cents to C$106.34. The yield earlier reached 3.34 percent, the lowest since at least 1989, when Bloomberg began collecting the data."
"Dutkiewicz said his firm had been buying government debt in the past week when prices had fallen. ``Bonds should be bought on weakness,'' he said."
"The 10-year bond yielded 85 basis points more than the two- year security, down from 91 basis points yesterday."
"The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 7 basis points, down from 39 basis points on June 16. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22."
"The two-year bond's yield will increase to 3.15 percent by year-end, while the 10-year bond's yield will gain to 3.83 percent, according to the median forecasts of economists surveyed by Bloomberg."
"Canadian government bonds have returned 5.3 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 6.1 percent this year."
"Canada's dollar, dubbed the loonie because of the aquatic bird on the one-dollar coin, rose 0.2 percent to C$1.0687 per U.S. dollar, from C$1.0706 yesterday. One Canadian dollar buys 93.58 U.S. cents."
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
"Last Updated: September 16, 2008 16:20 EDT"
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European Bonds Drop After U.S. Bails Out AIG to Limit Fallout
Sept. 17 (Bloomberg) -- European government notes fell for the first time in three days after the U.S. government provided an $85 billion loan to American International Group Inc. to avert a collapse in credit markets.
"The decline pushed the two-year yield up from a five-month low after Barclays Plc, the U.K.'s third-largest bank, agreed to buy Lehman Brothers Holdings Inc.'s North American investment- banking and capital-markets units. The Federal Reserve kept its benchmark interest rate at 2 percent yesterday, citing risks to economic growth and inflation."
"``It's a big relief that the U.S. government managed to avert a collapse of AIG,'' said Michael Markovic, a senior fixed- income strategist in Zurich at Credit Suisse Group. ``Bonds came down as risk seems to have eased for now. But we have to wait and see how things pan out.''"
"The yield on the two-year note rose 7 basis points to 3.74 percent by 10:54 a.m. in London. It declined 29 basis points in the previous two sessions, the sharpest two-day drop since March 17, the day after the Fed cut its discount rate."
"The yield on the 10-year German bund, Europe's benchmark government-debt security, climbed 4 basis points to 4.04 percent. Bond yields move inversely to prices."
"European stocks rose, reducing demand for the safest assets. The Dow Jones Euro Stoxx 600 Index, a benchmark for the euro region, advanced 1 percent."
"AIG, Lehman"
"AIG, the biggest U.S. insurer by assets, accepted a proposal to turn over majority control in exchange for an $85 billion Fed loan. The agreement will keep New York-based AIG in business, averting a failure that may have threatened more companies and added to declines in stock valuations. The Standard & Poor's 500 Index slumped 17 percent this year."
"Barclays will acquire the Lehman assets for $1.75 billion, two days after abandoning plans to buy the entire firm. Concern that financial turmoil will deteriorate put the money market into gridlock yesterday, with the cost borrowing in dollars overnight more than doubling to a record."
"The difference in yield between two- and 10-year German notes narrowed to 29 basis points, from 32 basis points yesterday, flattening the so-called European government bond yield curve."
"The rescue of AIG prompted Deutsche Bank AG, one of the world's top 10 bond traders, to drop its recommendation for so- called steepeners, or bets the yield spread will widen, on speculation economic growth will slow. Deutsche Bank, which made its recommendation on Sept. 5 to position for the yield gap between two- and 10-year notes to widen, said they should exit such trades on a ``tactical'' basis."
"``The euro front end doesn't fully price in the extent of the slowdown in Europe,'' Deutsche Bank's London-based strategists Ralf Preusser and Francis Yared wrote in a client note. ``Thus, beyond today's move in reaction to the AIG bailout we will seek to reinstigate these positions.''"
Crisis Lingers
Further declines in bonds may be limited on speculation the credit crisis that drove Lehman into bankruptcy and resulted in Bank of America Corp. buying Merrill Lynch & Co. will drag on.
"``I don't think we're near the bottom yet,'' said Gregor MacIntosh, portfolio manager in Edinburgh at Standard Life Investments Ltd., which has about $265 billion in assets. ``There's room for bond yields to fall further as it seems the market is convinced interest rates will come down at some point.''"
"The implied yield on the December Euribor contract rose as much as 11 basis points today, the most since July 18, as traders pared bets on interest-rate cuts by the European Central Bank. It was 8 basis points higher at 5.07 percent by 10 a.m. in London."
"The five-year euro swap spread, or the difference between the five-year swap rate and the equivalent maturity European bond yield, held near a record of 97 basis points reached yesterday. A wider spread suggests traders are betting corporate borrowing costs will increase."
"European bonds handed investors a 4.12 percent return in the third quarter, compared with 3.73 percent on Treasuries, according to Merrill Lynch & Co.'s German Federal Governments and U.S. Treasury Master indexes."
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
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"Brazilian Stocks Rise on Commodity Rebound, AIG Speculation "
By Paulo Winterstein and James Attwood
Sept. 16 (Bloomberg) -- Brazilian stocks rebounded from the biggest decline since 2001 after energy producers and miners rallied and speculation grew the Federal Reserve will step in to prevent insurer American International Group Inc. from collapse.
"Petroleo Brasileiro SA and Cia. Vale do Rio Doce SA, the commodity companies that make up more than a third of the index, rose more than 3 percent. Airlines Tam SA and Gol Linhas Aereas Inteligentes SA jumped as crude prices fell. Tobacco company Souza Cruz SA and utility Light SA, companies with the highest dividend payouts on the index, also gained."
"``Fundamentally, you're going to see very strong earnings growth in Latin America and you're looking at what are now very discounted prices,'' said Greg Lesko, who oversees $900 million at Deltec Asset Management Corp., a New York-based hedge fund. Raw-material producers such as Petrobras and Vale have been ``way oversold'' as part of global risk aversion, Lesko said."
"The Bovespa index rose 812.59, or 1.7 percent, to 49,228.92, after falling as much as 4.5 percent. The index is down 33 percent from a May 20 record. The BM&FBovespa MidLarge Cap index advanced 2 percent, while the BM&FBovespa Small Cap index retreated 2.2 percent."
"Brazilian stocks fell earlier in the day and extended declines after the Federal Reserve's unexpected decision to leave interest rates unchanged added to concerns about slowing economic growth. Yesterday, the Bovespa posted its steepest drop since the September 2001 terrorist attacks yesterday after Lehman Brothers Holdings Inc.'s bankruptcy spurred speculation that credit-market losses may push the U.S. into a recession."
"The index rallied in the last hour of trade on reports Fed officials are considering extending a ``loan package'' to AIG. The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are ``cautiously optimistic,'' said a person familiar with the negotiations."
Some Banks Gain
"Banco do Brasil SA, Latin America's biggest bank by assets, jumped 6.7 percent. It had earlier lost as much as 6 percent."
"Petrobras, as the state-controlled oil company is known, advanced 5 percent to 31.30 reais."
"Brazil's offshore oil fields in the area near the Tupi prospect, the largest find in the Americas since 1976, will be able to supply all of Brazil's natural-gas needs, Marco Tavares, partner at Rio de Janeiro-based consulting company Gas Energy, said. The fields include Jupiter, Guara, Bem-Te-Vi, and other ``pre-salt'' fields in the Santos Basin near Rio de Janeiro and Sao Paulo. They should be able to produce 120 million cubic meters of natural gas a day, double Brazil's current demand, Tavares told reporters in Rio de Janeiro."
"Vale, the world's biggest iron-ore producer, added 3.8 percent to 34.88 reais."
"Vale ``has been sold down almost half now and iron ore is still in very strong demand,'' Lesko said in a phone interview."
"Tam, Brazil's biggest airline, added 6.1 percent and smaller rival Gol surged 9.3 percent. Oil tumbled more than $4 a barrel in New York today."
Defensive Stocks
"Souza Cruz, Brazil's largest tobacco company, jumped 4.9 percent to 41.42 reais. Investors are seeking defensive stocks like Souza Cruz because of its high dividend yield, said Juliana Rozenbaum, analyst at Uniao de Bancos Brasileiros SA. Souza Cruz has the second-highest 12 month gross dividend yield in the index after Light. Rio de Janeiro-based Light, with a dividend yield of 15 percent, rose 4.9 percent to 23.62 reais."
"Cosan SA Industria & Comercio, the world's biggest sugar- cane processor, dropped the most on the index. Cosan fell 9.6 percent as sugar dropped in New York and on speculation tighter credit will slow global commodity demand, said analyst Paula Sa at Alpes Corretora in Sao Paulo."
"Elsewhere in Latin America, Argentina's Merval gained 0.6 percent, while Peru's Lima General dropped 3.4 percent, Chile's Ipsa fell 1.8 percent and Colombia's IGBC slid 3.8 percent. Mexican markets were shut for a holiday."
To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; James Attwood in Santiago at jattwood3@bloomberg.net.
"Last Updated: September 16, 2008 16:33 EDT"
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"Brazil Real Gains, Reversing Initial Tumble, on AIG Speculation "
By Adriana Brasileiro
"Sept. 16 (Bloomberg) -- Brazil's real gained, reversing an initial tumble of 2.2 percent, on speculation the Federal Reserve is preparing a bailout package for New York-based American International Group Inc."
The real gained 0.5 percent to 1.8060 per dollar at 4:27 p.m. New York time after a person familiar with negotiations said the Fed is considering extending a loan package to AIG.
"``This speculation about AIG reduced tension on the market a bit,'' said Gerson de Nobrega, head of Banco Alfa de Investimento's proprietary trading desk in Sao Paulo. ``It shows the Fed is being more flexible. Still, the market is nervous and volatile and anything can swing it one way or the other.''"
"Earlier today, the real sank to 1.8556, its weakest since November 2007, on concern AIG, the largest corporate insurer in the U.S., would fail a day after Lehman Brothers Holdings Inc. filed for bankruptcy."
"The Fed's decision to refrain from cutting the 2 percent benchmark lending rate at a policy meeting today further eroded demand for reais before the AIG bailout speculation mounted. The U.S. Treasury is considering taking over AIG under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions."
"The real is down 9.8 percent this month, the worst performer among the 16 most-traded currencies against the dollar. It has slumped 14 percent from a nine-year high reached Aug. 1 as the price of the country's commodity exports sank. The UBS Bloomberg CMCI index of 26 raw materials fell 2.9 percent today, leaving it down 25 percent from a record high reached July 2."
Central Bank Dollar Sales
"A commodity bear market is likely to continue ``for quite some time,'' weighing on commodity producers such as Brazil and other emerging-market countries, Win Thin, a New York-based currency strategist at Brown Brothers Harriman & Co., wrote in a note to clients today."
"Brazil's central bank refrained from buying U.S. dollars in the local currency market for a fourth session today, halting months of purchases aimed at slowing the real's five-year rally."
"The central bank may opt to start selling dollars to stem the real's tumble, bank president Henrique Meirelles said late yesterday in an interview with Globo TV. The bank last sold dollars in January 2003, a spokesman said."
"The yield on the overnight futures contract for January delivery was unchanged at 14.01 percent. The yield on Brazil's zero-coupon bonds due in January 2010 was unchanged at 14.72 percent, according to Banco Votorantim."
To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net
"Last Updated: September 16, 2008 17:02 EDT"
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"German Stocks Pare Gains; Continental, Metro Fall as Oil Climbs "
By Stefanie Haxel
"Sept. 17 (Bloomberg) -- German stocks pared earlier gains, led by Continental AG and Metro AG as crude oil rebounded. Deutsche Boerse AG paced rising shares."
"The benchmark DAX Index added 4.18, or 0.1 percent, to 5,969.35 as of 9:41 a.m. in Frankfurt after increasing as much as 1.2 percent. The HDAX Index of the country's 110 biggest companies advanced 0.2 percent, to 3,041.43."
"Continental, Europe's second-largest car-parts maker, sank 2.27 euros, or 3.2 percent, to 68.21. Metro, Germany's biggest retailer, dropped 1.01 euros, or 2.5 percent, to 39.77."
"Crude oil rebounded from its biggest two-day decline in almost four years, jumping as much as 4.2 percent to $95 a barrel in New York."
"Deutsche Boerse AG, operator of the Frankfurt exchange, added 1.10 euros, or 1.9 percent, to 60.16."
To contact the reporter on this story: Stefanie Haxel in Frankfurt at shaxel@bloomberg.net.
"Last Updated: September 17, 2008 03:51 EDT"
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"Italy Stocks Update: S&P/MIB Index Rises 445 to 27,034 "
By Daniel Hauck
"Sep. 17 (Bloomberg) -- Italy's benchmark stock index, the S&P/MIB Index, rose 1.67 percent at 9:10 a.m."
"The index of 40 companies traded on the Borsa Italiana rose 445 to 27,034. Among the stocks in the index, 38 rose and 2 fell."
"Gains in the S&P/MIB Index were led by Intesa Sanpaolo Spa, Unicredit Spa and Assicurazioni Generali Spa."
"Last Updated: September 17, 2008 03:10 EDT"
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U.K. Government Bonds Fall as BOE Says Prices May Keep Rising
"Sept. 17 (Bloomberg) -- U.K. bonds fell after the Bank of England said inflation may stay above target for longer than forecast, making interest-rate cuts to revive an economy ravaged by the worst housing slump in more than a decade unlikely."
"The decline pushed the yield on the 10-year gilt up from near the lowest level since March as minutes released today showed policy makers voted 8-1 to keep the benchmark rate on hold this month, with David Blanchflower the only member to back a reduction. U.K. unemployment rose at the fastest pace since 1992 in August, a government report showed today."
"``Gilts are down because we have not had a second dissenter and that means that the hopes of a rate cut in November are receding,'' said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA. ``Inflation remains a massive problem and that is rising exponentially.''"
"The 10-year yield rose 5 basis points to 4.46 percent as of 11:36 a.m. in London. The 5 percent security due March 2018 dropped 0.38, or 3.8 pounds per 1,000-pound ($1,784) face amount, to 104.10. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, advanced 6 basis points to 4.29 percent. Bond yields move inversely to prices."
"Rising import costs and the pound's depreciation ``could be symptomatic of a weakening confidence in the committee's determination to return inflation to target,'' according to the minutes. Bank of England Governor Mervyn King said yesterday inflation, which is running at the fastest pace since at least 1997, will stay ``markedly'' above target into next year."
Inflation Forecast
"The bank's latest forecast for inflation, published Aug. 13, showed the rate may rise above 5 percent before dropping just below the 2 percent target in two years if interest rates stay on hold."
"Policy makers kept their benchmark interest rate at 5 percent for a fifth month on Sept. 4, as inflation risks prevented them from cutting borrowing costs to spur growth."
"The pound also dropped as shares in HBOS Plc, the U.K.'s biggest mortgage bank, slumped as much as 52 percent amid investor concern it may not be able to fund itself. It pared losses after the BBC reported the company was in merger talks with Lloyd's TSB Group Plc."
"The U.K. currency dropped 0.5 percent to 79.69 pence per euro, from 79.26 pence yesterday. The pound little changed at $1.7836."
"``It's going to be a tough day for sterling because I think the knee-jerk reaction will be to sell,'' said Daragh Maher, London-based global deputy head of currency strategy at Calyon. ``Most people accept we are heading into a recession.''"
"Claims for jobless benefits increased 32,500 to 904,900, the Office for National Statistics said today. Economists predicted an increase of 23,000, according to the median of 25 forecasts in a Bloomberg News survey. The unemployment rate rose to 2.8 percent from 2.7 percent."
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net
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Yuan Forwards Predict Depreciation on Growth Concern (Update1)
By Judy Chen
Sept. 17 (Bloomberg) -- Offshore traders are betting the yuan will weaken against the dollar as the government reins in currency gains to protect exporters amid a global economic slump.
"The currency was at 6.8370 per dollar as of the 5:30 p.m. close in Shanghai and non-deliverable forwards contracts indicate it will decline to 6.8429 per dollar in three months. Six months ago, the contracts showed traders were expecting gains of more than 4 percent in that timeframe."
"China has halted the yuan's appreciation this quarter, after it gained 6.6 percent in the first half of the year, as policy makers stress the need to maintain ``stable and relatively fast growth.'' The nation's gross domestic product rose 10.1 percent in the second quarter, the smallest increase since 2005."
"``China is slowing the pace as the government realized fast yuan gains in the first half gave exporters a hard time,'' said Ken Peng, an economist with Citigroup Inc. in Shanghai. ``The recent weakness in yuan forwards reflects the policy adjustments.''"
Forwards are agreements in which assets are bought and sold at current prices for settlement at a later-specified time and date. Non-deliverable forwards are settled in dollars rather than the underlying asset.
Further Appreciation
"The People's Bank of China this week trimmed its benchmark one-year lending rate for the first time in six years and reduced the amount of money banks have to set aside, encouraging spending to help the economy. Property prices climbed in August at the slowest pace in 18 months and industrial output expanded by the least in six years, official figures show."
"Goldman Sachs Group Inc., the world's biggest securities firm by market value, said on Aug. 29 investors should buy three-month non-deliverable forwards as a widening trade surplus would support the trend of appreciation. Exports exceeded imports by a record $28.7 billion in August, official data shows."
"China has managed the yuan's exchange rate against a basket of currencies that includes the euro, the yen and the pound since a peg to the dollar ended in 2005."
"The Chinese currency has gained 11 percent against the euro, 0.5 percent against the yen and 12 percent against the pound in the third quarter. The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, has risen 8.8 percent."
"``The temporarily observed weakness against the dollar was merely a reflection of broader dollar strength in a managed basket context,'' Goldman's currency strategists led by London- based Thomas Stolper wrote in a research note."
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net.
"Last Updated: September 17, 2008 06:18 EDT"
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"Buy `Exceptionally Cheap' Japan Inflation-Linked Debt, RBS Says "
"Sept. 17 (Bloomberg) -- Japanese inflation-linked bonds are ``exceptionally cheap'' as yields exceed those on conventional debt by the most since the securities were introduced in March 2004, according to RBS Securities Japan Ltd."
"Investors cut losses and reduced holdings of inflation- linked debt in the wake of Lehman Brothers Holdings Inc.'s bankruptcy and Merrill Lynch & Co.'s sale to Bank of America Corp., said Tatsuo Ichikawa, a senior strategist at RBS in Tokyo. The difference between linked-debt and regular notes, or so-called breakeven rates, will return to levels seen more than a month ago, he said."
"``As soon as the market starts to stabilize, we will see higher breakevens,'' Ichikawa said. ``They are cheap now. It's a long-term carry-orientated alternative to buying 10-year nominal bonds.''"
"Ten-year inflation-linked notes yielded 14.5 basis points more than similar-dated conventional bonds yesterday, compared with 10 basis points more today and 27 basis points less on Aug. 1, according to data compiled by Bloomberg. A basis point is 0.01 percentage point."
"The last time the linked debt offered a higher yield than nominal notes for a second day was on Sept. 3, and the rate rose by almost 10 basis points during the following four days, Bloomberg data show."
Implying Deflation
"The yield on the benchmark 10-year debt rose 2.5 basis points to 1.49 percent as of 2:09 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. Yields on similar-dated inflation-indexed securities were little changed at 1.583 percent."
The so-called breakeven inflation rate reflects investors' expectations for average annual increases in consumer prices over the next decade.
"``People expected breakevens to stay positive, but it's negative, implying 10 years of deflation,'' Ichikawa said. We estimate consumer prices to hold at ``1 percent, so the breakeven, theoretically, will widen to 100 basis points.''"
"Core prices, which exclude fresh food, climbed 2.4 percent in July from a year earlier, the biggest increase in more than a decade, after rising 1.9 percent in June, the statistics bureau said on Aug. 29 in Tokyo."
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
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"Hedge Funds Fell for Third Month in August, Eurekahedge Says "
By Tomoko Yamazaki
"Sept. 17 (Bloomberg) -- Hedge funds worldwide declined for a third month in August, with all strategies posting negative returns, as global equities and commodity prices dropped amid heightened concerns about the global economy, Eurekahedge said."
"The Eurekahedge Hedge Fund Index, which tracks the performance of 2,408 funds that invest globally, declined 1.4 percent, based on preliminary figures from the Singapore-based hedge-fund research and publishing company. The index fell 2.1 percent in July and has dropped 3.4 percent this year."
"Hedge funds, an industry with about $1.9 trillion in assets globally, have suffered the effects of the financial contagion triggered by the collapse of the U.S. subprime market last year. The first half of 2008 saw the fewest new hedge funds in nine years and the highest number of liquidations, Eurekahedge said."
"``Going into September, we see most major markets trending in a similar fashion to that seen in August, with equities across the board being volatile and negative,'' Eurekahedge said in a statement."
"The MSCI World Index fell 1.6 percent in August amid signs of slowing growth in Europe and Japan, while bond prices rose and crude oil dropped from a record in July, according to the report."
"In terms of regional mandates, managers investing in emerging markets were among the worst performers, declining 3.3 percent, while the Eurekahedge Eastern Europe & Russia Hedge Fund Index slid 8.6 percent."
"Asia, Japan Funds Drop"
"The Eurekahedge Asian Hedge Fund Index also dropped 2.3 percent, and the index tracking Japan investments lost 2.3 percent. The Eurekahedge European Hedge Fund Index fell 1.4 percent and the Eurekahedge North American Hedge Fund Index slipped 0.1 percent, the report showed."
"By strategy, relative-value funds -- or those that attempt to profit from price discrepancies between markets -- and macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities, fared comparatively well during the month, according to the report."
"A separate report by Hedge Fund Research Inc. earlier this month showed hedge funds fell for a third consecutive month in August, pushing them closer to the first losing year since 2002, because of losses in emerging-market stocks and commodities."
"The HFRI Fund Weighted Composite Index fell 1.37 percent, extending its year-to-date loss to 4.83 percent, according to data compiled by Chicago-based Hedge Fund Research."
Hedge funds are mostly private pools of capital whose managers participate substantially in profits from their bets on whether the prices of assets will rise or fall.
To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net
"Last Updated: September 16, 2008 22:36 EDT"
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"Gold Climbs on Oil Advance From Seven-Month Low, Haven Appeal "
By Madelene Pearson
Sept. 17 (Bloomberg) -- Gold rose as crude oil's gain boosted its appeal as an inflation hedge and investors bought the metal as a store of value amid turmoil in global financial markets.
"Bullion advanced as oil climbed from a seven-month low after the U.S. government pledged up to $85 billion to rescue American International Group Inc. Precious metals fell yesterday as investors sold commodities to raise cash and cover losses in other markets after credit turmoil pushed Lehman Brothers Holdings Inc. to bankruptcy, sending equity indices tumbling."
"``What some investors may think is the higher oil prices add to inflation risks and they may view gold as providing a hedge against those inflation risks,'' David Moore, commodity strategist at Commonwealth Bank of Australia, said today by phone from Sydney. ``Gold may be a little firmer today.''"
Gold for immediate delivery rose 0.6 percent to $784.20 an ounce at 11:20 a.m. Sydney time. Silver for immediate delivery added 2 percent to $10.69 an ounce.
"The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to bail out AIG, the biggest U.S. insurer by assets. AIG needed the rescue to stave off a collapse after its credit ratings were cut and shares plunged 79 percent since Sept. 11."
"Crude oil for October delivery rose $3.20, or 3.5 percent, to $94.35 a barrel at 11:32 a.m. Sydney time on the Nymex after touching $92.98. Crude futures declined more than $10 a barrel in the past two days on concern that financial market disruptions may weaken the global economy and cut fuel demand."
"Bullion also gained as some investors bought the metal as a haven, said Toby Hassall, an analyst at Commodity Warrants Australia. Investors often consider gold a store of value during times of financial uncertainty."
"``In history it's always been a place to park your money when things are uncertain,'' Hassall said by phone from Sydney. ``We're probably seeing a bit of flight to safety.''"
Futures for December delivery rose 0.9 percent to $787.50 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange at 11:20 a.m. Sydney time.
To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net
"Last Updated: September 16, 2008 22:28 EDT"
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"Corn, Soybeans Rally as Crude Jumps, Boosting Demand Prospects "
By Jae Hur
"Sept. 17 (Bloomberg) -- Corn and soybeans advanced for the first day in three as crude oil rallied from a seven-month low on easing concern over the U.S. credit market, raising the appeal for the crops as alternative fuel sources."
"Oil rose from its biggest two-day drop in almost four years after the U.S. government agreed to rescue American International Group Inc., lowering concern a collapse will cause more credit-market losses. Investors had sold commodities to raise cash and cover losses in other markets after credit turmoil pushed Lehman Brothers Holdings Inc. to bankruptcy, sending equities tumbling."
"``The U.S. government's decision on AIG has put a break on worsening investment sentiment,'' Nicholas Chung, senior manager of the commodity derivatives team at state-run Korea Development Bank, said in Seoul. ``After being undermined by financial market factors, grains will now be driven by their own fundamentals.''"
"Corn for December delivery gained as much as 8.5 cents, or 1.6 percent, to $5.4075 a bushel in after-hours trading on the Chicago Board of Trade and was at $5.3725 by 3:00 p.m. Singapore time. The contract lost 5.3 percent yesterday, the biggest drop since Oct. 2."
"Soybeans for November delivery added as much as 17 cents, or 1.5 percent, to $11.41 a bushel and last traded at $11.3475. The contract lost 4.7 percent yesterday to close at $11.24, the lowest close for a most-active contract since Dec. 7."
"The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to bail out AIG, the biggest U.S. insurer by assets. AIG needed the rescue to stave off a collapse after its credit ratings were cut and shares plunged 79 percent since Sept. 11."
"Crude for October delivery rose as much as 4.1 percent to $94.84 a barrel after declining more than $10 a barrel, or 9.9 percent, in the past two days."
U.S. Soybeans
"U.S. farmers will harvest 1.8 percent less corn than forecast last month and 1.3 percent fewer soybeans, the U.S. Department of Agriculture said Sept. 12 in a report."
The USDA reduced the corn-crop forecast to 12.072 billion bushels from the 12.288 billion it estimated last month. The soybean crop estimate also declined to 2.934 billion bushels from the 2.973 billion projected in August.
"A rebound in the Baltic Dry Index, a measure of shipping costs for commodities, also provided support for corn and soybean prices, Chung said."
"The Baltic Dry Index rose to end a 19-session decline. The index tracking transport costs on international trade routes closed up 0.3 percent at 4,760 points, according to the Baltic Exchange in London."
"Wheat for December delivery rose as much as 20 cents, or 2.9 percent, to $7.10 a bushel and stood at $7.0175 by 3:04 p.m. Singapore time. The contract fell 5.1 percent yesterday, the biggest decline for a most-active contract since Aug. 8."
"Wheat production in Australia, the world's sixth-largest exporter of the grain, may be less than forecast by the government as dry weather limits yields."
"``I struggle to see a bigger than 20 million ton crop, the way it's going,'' Malcolm Bartholomaeus, a Clare, South Australia-based analyst at Callum Downs Commodity News, said today. The nation's government forecaster yesterday predicted production may be 22.5 million metric tons."
To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net
"Last Updated: September 17, 2008 03:40 EDT"
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Indian Rupee Rallies as Central Bank Prepares to Supply Dollars
By Anil Varma
Sept. 17 (Bloomberg) -- India's rupee rose from a two-year low after the central bank announced measures to boost the supply of dollars in the market and curb exchange-rate swings.
The currency snapped a six-day decline after the Reserve Bank of India said yesterday it will sell dollars and raise interest rates on locally-held foreign-currency deposits. The bank said it will sell dollars through its agent banks or directly to meet demand-supply gaps in the currency market after the rupee fell the most in a decade yesterday.
"``The rupee is likely to recover part of its losses today because it's a certainty now that the central bank will supply dollars in the spot market,'' said Krishnamurthy Harihar treasurer at Development Credit Bank Ltd. in Mumbai."
"The rupee rose 1.2 percent to 46.39 per dollar as of 9:04 a.m. in Mumbai, according to data compiled by Bloomberg. It fell 1.9 percent yesterday, the most since May 1998. The Indian currency is Asia's second-worst performer this year after South Korea's won, with a 15.1 percent loss."
The central bank increased the interest rate on some foreign-currency deposits by 0.5 percentage point with to attract dollar inflows. The rate ceiling on the so-called foreign currency non-resident (B) deposit is now pegged at 25 basis points below the London interbank offered rate.
"Dollar sales by the Reserve Bank in June exceeded purchases for the first time in 20 months, the bank reported last month. The monetary authority sold a net $5.23 billion during the month. The Reserve Bank's foreign-exchange reserves have declined by more than $27 billion from a record high of $316.2 billion reached in May, indicating it sold dollars."
To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.
"Last Updated: September 16, 2008 23:56 EDT"
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Goldman Sachs Slashes Oil Forecast on Credit Concern (Update2)
By Jane Lee
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"Sept. 17 (Bloomberg) -- Goldman Sachs Group Inc. slashed its forecast for crude oil prices in New York, saying the market has ``overshot to the downside'' because of concern the global credit crisis may lead to weaker demand."
"The most profitable U.S. securities firm cut its three-month benchmark West Texas Intermediate crude oil estimate to $115 a barrel from $149, and its six-month target to $125 from $142. Current prices present ``compelling buying opportunities,'' Goldman said."
"``We will stand by our bullish view on oil but just think it will now take longer to get to our previous price targets,'' Goldman analysts, led by Jeffrey Currie, said in a Sept. 16 report. ``The supply side of the market still remains severely constrained.''"
"Lehman Brothers Holdings Inc.'s bankruptcy and the U.S. government takeover of American International Group Inc. have roiled financial markets, raising concern global economic growth will slow. Crude oil futures have fallen 36 percent from the record $147.27 a barrel reached on July 11."
"Goldman lowered its 2009 average oil price forecast to $123 a barrel from $148. Until now, Goldman had the highest WTI forecasts for 2009 among 35 analysts' estimates compiled by Bloomberg."
Hurricane Disruption
"Oil could fall as low as $75 a barrel should a global recession takes place, and could jump a much as $15 above Goldman's targets because of shortages after plants restart from hurricane shutdowns, the securities firm said."
"Goldman said oil will rebound in the fourth quarter because of strong demand as U.S. refineries restart operations, speculators return to the market, OPEC cuts output and China purchases more crude after running down stockpiles."
"Hurricanes Gustav and Ike disrupted oil field operations and refinery production this month. The Organization of Petroleum Exporting Countries agreed at its Sept. 9 meeting in Vienna to stick to its limit for 11 members of 28.8 million barrels a day, about 500,000 barrels a day lower than the group's July output."
"Crude oil in New York rose today, snapping its worst two-day decline in almost four years. Oil for October delivery gained as much as $3.57 a barrel, or 3.9 percent, to $94.72 a barrel. Prices were at $94.12 at 2:31 p.m. Singapore time."
To contact the reporter on this story: Jane Lee in Kuala Lumpur at jalee@bloomberg.net
"Last Updated: September 17, 2008 03:10 EDT"
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"French Stocks Gain, Led by BNP, SocGen, Total, PPR, Eramet "
By Sarah Thompson
"Sept. 17 (Bloomberg) -- France's CAC 40 Index gained 61.66 points, or 1.5 percent, to 4,149.06 at 9:26 a.m. in Paris. The SBF 120 Index increased 1.5 percent."
The following were among the most active stocks in Paris. Symbols are in parentheses.
"Alstom SA (ALO FP) added 212 euros, or 3.4 percent, to 64.45 euros. The world's third-largest power plant maker won a contract valued at 500 million euros ($708 million) to supply equipment to the Santo Antonio hydropower plant in Brazil."
"ArcelorMittal (MTP FP) gained 1 euro, or 2.3 percent, to 44.1 euros. The world's biggest steelmaker posted a 48 percent gain in earnings for the first nine months on record prices and said demand will remain ``strong'' even as the global economy slows."
"Earnings before interest, tax, depreciation and amortization were more than $21.5 billion in the year through September. The company also said it plans to save $4 billion in costs over the next five years."
"Boizel Chanoine Champagne SA (BOZ FP) rose 1.76 euros, or 2.5 percent, to 71.76 euros. France's third-largest champagne producer said 2007 profit rose almost five-fold after it raised prices and more consumers purchased its pricier Lanson and Philipponnat brands."
"Carbone Lorraine SA (CRL FP) climbed 2.56 euros, or 7.4 percent, to 37. The French maker of electric motor parts lifted its 2011 sales target and said it plans to generate 30 percent of group sales from energy generation and distribution by 2012."
"Credit Agricole SA (ACA FP) rose 71 cents, or 5.9 percent, to 12.79 euros. France's third-largest bank said it has less than 20 million euros of exposure to Lehman Brothers, and holds no debt of the bankrupt U.S. investment bank. The bank had other Lehman-related risk amounting to 250 million euros."
"Dreamnex SA (DNX FP) increased 2 euros, or 5.3 percent, to 40. The French seller of adult products on the Internet said first-half profit more than doubled to 5.23 million euros."
"Electricite de France SA (EDF FP) gained 90 cents, or 1.9 percent, to 48.90 euros. The board of Europe's largest power company meets to discuss a possible renewed offer for U.K. nuclear firm British Energy Group Plc."
"Eramet SA (ERA FP), operator of the world's largest ferronickel plant, rose 10.90 euros, or 3.72 percent, to 304.09. Copper rebounded from a 10-month low in Shanghai as tight domestic supplies supported prices in China, the world's largest consumer of the industrial metal."
"PPR SA (PP FP) gained 1.22 euros, or 1.7 percent, to 72.80 euros. Gucci Group, the Italian luxury company owned by French retailer PPR, said Patrizio di Marco will take over as chief executive officer of its flagship Gucci brand, replacing Mark Lee."
"Societe Generale SA (GLE FP) climbed 2.89 euros, or 5.2 percent, to 58.86 euros. The bank said its exposure to Lehman Brothers Holdings Inc. arising from market activities in which Lehman acted as counterparty amounts to 400 million euros. The bank also has exposure of 76 million euros to senior Lehman debt. The counterparty exposure has been ``almost completely closed out,'' it said."
"Total SA (FP FP), Europe's biggest oil refiner, added 39.5 cents, or 0.9 percent, to 42.62 euros. Crude oil rebounded from its biggest two-day decline in almost four years after the Federal Reserve agreed to rescue American International Group Inc., lowering the risk of a further economic slowdown in the U.S."
"Zodiac SA (ZC FP) added 1.09 euros, or 3.2 percent, to 35.06 euros. The maker of airplane equipment said first half sales fell to 2.01 billion euros from 2.48 billion a year ago as it sold its marine unit and the weaker dollar cut revenue."
To contact the reporter on this story: Sarah Thompson in London at sthompson17@bloomberg.net.
"Last Updated: September 17, 2008 03:42 EDT"
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British Pound Falls Against Euro Before Bank of England Minutes
By Andrew MacAskill and Lukanyo Mnyanda
Sept. 17 (Bloomberg) -- The pound fell against the euro and was little changed versus the dollar before the Bank of England publishes minutes of its latest interest-rate meeting and a government report that may show jobless-benefit claims rose.
"The Monetary Policy Committee kept the benchmark rate at 5 percent on Sept. 4 as it weighed the risk of accelerating inflation against the threat of a recession. Bank of England Governor Mervyn King said yesterday inflation will peak ``soon'' around 5 percent. Unemployment claims probably were 23,000 in August, from 20,100 in July, the median estimate of 25 economists surveyed by Bloomberg showed."
"``The MPC minutes to be released today take on added importance in light of the mounting financial risks to the U.K.,'' a team headed by New York-based Gabriel de Kock, senior currency strategist at JPMorgan Chase & Co., wrote today in a report. ``Should the minutes show little sign of flexibility that would allow a rate cut soon, euro-pound could retrace some of the past fortnight's decline.''"
"The British currency dropped to 79.61 pence per euro as of 8:55 a.m. in London, its second day of declines, from 79.26 pence yesterday. Against the dollar, the pound traded at $1.7855, from $1.7835."
"The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, declined to 86.47, according to Deutsche Bank AG. The measure is down 8.7 percent this year."
Bank Minutes
The Bank of England will release the minutes of its last meeting at 9:30 a.m. in London. King voted with six other members of the MPC to keep interest rates on hold in August. One member backed an increase and another supported a reduction.
"``There is likely to be a dovish bias starting to come through,'' said Jeremy Stretch, senior strategist in London at Rabobank International, the third-largest Dutch bank. ``This may lead to a sell-off of sterling.''"
"The Federal Reserve kept its benchmark rate unchanged at 2 percent yesterday, with the bank citing risks to growth and inflation. The insurer American International Group Inc. averted the worst financial collapse in history by accepting an $85 billion federal loan and giving the government a majority stake."
"The Bank of England is among central banks that have pumped cash into money markets to help stabilize the financial system. The bank injected 20 billion pounds ($36 billion) yesterday, with the Fed, the European Central Bank and Bank of Japan also contributing liquidity."
The jobless-claims statistics are also scheduled to be announced at 9:30 a.m. in London.
"U.K. government bonds were little changed, with the 10-year yield down 1 basis point to 4.41 percent. The 5 percent security due March 2018 added 0.08, or 80 pence per 1,000-pound face amount, to 104.54."
The yield on the two-year note rose 1 basis point 4.26 percent. Bond yields move inversely to prices.
To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netLukanyo Mnyanda in London at lmnyanda@bloomberg.net
"Last Updated: September 17, 2008 04:13 EDT"
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Yen Falls for Second Day Against Dollar After Fed Rescue of AIG
By Ron Harui and Stanley White
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"Sept. 17 (Bloomberg) -- The yen fell for a second day against the dollar after the Federal Reserve said it will lend as much as $85 billion to American International Group Inc., helping prevent credit markets from seizing up."
"Japan's currency also dropped versus the Australian and New Zealand dollars on speculation an AIG rescue will encourage investors to resume taking out loans in Japan to buy higher- yielding assets elsewhere. The yen jumped the most in a decade against the greenback on Sept. 15 as mounting credit-market losses forced Lehman Brothers Holdings Inc. to file the biggest bankruptcy in history, sparking a global stocks rout."
"The Fed's loan is ``likely to support the U.S. financial system and avert a catastrophe,'' said Kenichiro Ikezawa, who helps oversee the equivalent of about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. ``Risk-taking appetite will probably recover a bit. Sentiment toward the dollar isn't bad, and the yen may be sold.''"
"Japan's currency fell 0.3 percent to 106.00 per dollar at 7:35 a.m. in London, after sliding 0.9 percent yesterday and surging 3.1 percent on Sept. 15. Against the euro, the yen slid 0.9 percent to 150.64. It touched 147.04 yesterday, the strongest since August 2006. The dollar fell 0.6 percent to $1.4212 per euro."
"Australia's dollar rose 3.1 percent to 84.90 yen from late in Asia yesterday, and New Zealand's dollar climbed 3.5 percent to 70.29 yen. The Nikkei 225 Stock Average advanced 1.2 percent, after a 5 percent drop yesterday."
Carry Trades
"``A disorderly failure of AIG could add to already significant levels of financial market fragility,'' the Fed said, explaining its decision to lend money to AIG in return for a 79.9 percent stake."
"Benchmark interest rates of 7 percent in Australia, 7.5 percent in New Zealand, 8.25 percent in Mexico and 13.75 percent in Brazil compare with 0.5 percent in Japan, making the nations' currencies favorites for so-called carry trades. The Bank of Japan today left its overnight rate unchanged for a 22nd straight policy meeting."
"In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The yen declined 0.3 percent to 58.6007 against the Brazilian real and weakened 0.5 percent to 9.910 versus the Mexican peso."
"``The news is lifting shares and calming investors,'' said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``They are selling the yen.''"
Lower Volatility
"Implied volatility on one-month dollar-yen options fell to 16.93 percent today from 17.65 percent yesterday when it touched 19.50 percent, the highest since March 17. Lower volatility may encourage carry trades as it indicates a smaller risk of exchange-rate fluctuations that can erode profits."
"Fed Chairman Ben S. Bernanke and his colleagues yesterday rebuffed calls by some investors for an interest-rate cut after Lehman filed for bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession. The benchmark rate was kept at 2 percent."
"Further losses in the yen may be limited by speculation Japanese investors will repatriate funds ahead of the Sept. 30 halfway point of Japan's fiscal year, according to Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo."
`Upside Risks'
"``The approach of the Japanese fiscal half-year end will keep domestic financial institutions sidelined in their foreign asset investment or may even foster repatriation,'' Fujii wrote in a research note yesterday. ``Upside risks to the yen will probably persist in coming weeks.''"
"Bank of America raised its yen forecasts, predicting the currency will trade at 104 per dollar at the end of September and 107 at the end of December. That compares with previous estimates of 108 and 110, respectively, Fujii said."
"The dollar may fall before government reports today that are expected to show the U.S. housing market is deteriorating, adding to evidence of a slump in the world's biggest economy."
"Housing starts fell 1.6 percent in August to an annual rate of 950,000, the lowest level since March 1991, according to the median forecast in a Bloomberg News survey of 74 economists. Building permits, a sign of future construction, probably fell 1 percent to a 928,000 pace. The Commerce Department will release the two reports at 8:30 a.m. in Washington."
"``The source of global financial sector concerns, that is, the U.S. housing market, has not shown signs of a recovery,'' Fujii said."
Rate Cuts
Any gains in the pound and the euro may be limited by speculation European central banks will lower interest rates in coming months as the U.S. slowdown spreads through other countries. The U.K. currency rose 0.3 percent to $1.7881.
The Bank of England will release minutes from its policy meeting ended Sept. 6 at 9:30 a.m. in London. The central bank kept its benchmark rate unchanged at 5 percent. BOE Governor Mervyn King said yesterday inflation will peak ``soon'' and then slow ``sharply'' in 2009.
Economists surveyed by Bloomberg forecast that the European Central Bank will keep its benchmark rate on hold at 4.25 percent this year before cutting it in the first quarter of 2009.
"Weaker Pound, Euro"
"``The pound and the euro will be hit more as more weakness spreads through Europe,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``The BOE will start cutting rates quite significantly from the fourth quarter. The ECB will have to follow.''"
"The pound may fall to $1.58 and the euro may decline to $1.30 by the middle of next year, Harr said."
"Luxembourg Finance Minister Jean-Claude Juncker, who heads a group of euro-area counterparts, said today the euro region and Germany, its biggest member, will escape recession even as economic growth weakens."
"``I don't see the danger of recession in the deeper sense of the word,'' Juncker told Germany's Deutschlandfunk radio. ``Economic growth will clearly weaken.''"
To contact the reporter on this story: Ron Harui in Tokyo at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
"Last Updated: September 17, 2008 02:41 EDT"
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Treasuries Fall on Speculation AIG Rescue May Boost Debt Sales
By Agnes Lovasz and Wes Goodman
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Sept. 17 (Bloomberg) -- Treasuries fell as the U.S. bailout of American International Group Inc. raised concern the government will have to issue more debt to shore up financial markets.
"U.S. notes dropped for a second day as European stocks rose and Barclays Plc, the U.K.'s third-biggest bank, agreed to buy the North American investment banking and capital-markets operations of bankrupt Lehman Brothers Holdings Inc., denting demand for the safest assets. The Federal Reserve left its target rate at 2 percent, rebuffing calls by some investors for a cut after Lehman's collapse shook markets worldwide."
"``With the rescue package for AIG the flight to safety into government bonds has reversed and sent U.S. yields higher again,'' said Allan von Mehren, a fixed-income strategist in Copenhagen at Danske Bank AS, the biggest lender in Denmark. ``Supply concern may also be adding to the sell-off and the Fed is sending a signal to the market that it's not going to cut rates every time there's financial turmoil.''"
"The yield on the two-year note climbed 11 basis points to 1.90 percent as of 6:43 a.m. in New York, according to BGCantor Market Data. The 2.375 percent security maturing August 2010 dropped 7/32, or $2.19 per $1,000 face amount, to 100 29/32."
Ten-year yields rose 7 basis points to 3.50 percent. A basis point is 0.01 percentage point.
"Two-year yields will fluctuate in a range between 1.50 percent and 2.20 percent in coming weeks, von Mehren predicts."
"Stocks, HBOS"
European stocks advanced for the first time in three days as the AIG bailout lifted insurers and higher commodity prices buoyed energy and mining companies.
"Treasuries earlier pared some of their declines as shares in HBOS Plc, the U.K.'s biggest mortgage lender, dropped as much as 52 percent amid concern it may not have access to funding from credit markets. Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, is in talks to buy HBOS, two people familiar with the situation, who declined to be identified."
"Central banks around the world pumped more than $210 billion into the financial system this week as they sought to ease a credit-market seizure. The Fed offered an $85 billion loan to AIG, the biggest U.S. insurer by assets, in exchange for control."
"The agreement will keep New York-based AIG in business, averting a failure that may have threatened more companies and added to stock declines that have sent the Standard & Poor's 500 Index down 17 percent this year."
"Barclays will acquire the Lehman assets for $1.75 billion, three days after abandoning plans to buy the entire firm."
`Under The Carpet'
"The AIG rescue ``smacks of sweeping the problem under the carpet rather than solving it in a structural sense,'' said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV, in a note to clients. ``At least the Lehman saga has gone some way towards a clean-up. We are still in the midst of the flight-to-quality environment.''"
"Three-month Treasury bills yielded 0.71 percent, near the lowest level since March."
"Banks drove up short-term lending rates in the money markets yesterday, with the cost of borrowing in dollars overnight more than doubling, on concern that AIG would follow Lehman into bankruptcy."
"The difference between what the U.S. government and banks pay to borrow in dollars for three months, the so-called TED spread, was at 2.12 percentage points, down from 2.19 percentage points yesterday, the most this year."
Borrowing Costs
"The London interbank offered rate, or Libor, that financial institutions charge each other for loans soared 3.33 percentage points to 6.44 percent yesterday, according to the British Bankers' Association. The increase was the biggest in its history. The rate was as low as 2.07 percent in June."
"Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman."
"``We could see massive withdrawals from the money-market fund industry with the money going to bank deposits and T- bills,'' Michael Cloherty, a New York-based analyst with Bank of America Corp., wrote in a research note yesterday."
Bond-default risk fell in Europe and by the most in five months in the Asia-Pacific region after the AIG bailout.
"Credit-default swaps contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high- yield credit ratings dropped 40 basis points to 575, according to JPMorgan Chase & Co. prices at 7:13 a.m. in London."
`Big Problems'
"``There's some risk aversion taken off the table and it's mildly negative for Treasuries,'' said David Keeble, London- based head of fixed-income strategy at Calyon, the investment- banking unit of Credit Agricole SA. ``There are still big problems in the market and the financial sector but the assumption is that the Treasury and the Federal Reserve are able to come in and save things.''"
"Two-year yields will rise to 2.10 percent and 10-year yields to about 3.70 percent in the next two weeks, Keeble said."
"Government securities returned 2 percent so far this month, the most since January, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Investors sought the relative safety of government debt as credit-market losses swelled to $515 billion, fueling forecasts for slowing economic growth."
"Housing starts fell 1.6 percent in August to an annual rate of 950,000, the fewest in 17 years, according to the median forecast in a Bloomberg News survey of 74 economists before the Commerce Department reports the figure today."
"Traders expectations of inflation over the next decade fell to near the lowest in five years, Treasury yields indicated. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional securities narrowed to 1.64 percentage points from 2.16 percentage points a month ago."
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
"Last Updated: September 17, 2008 06:48 EDT"
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Dollar Falls Against Euro After U.S. Government Bailout of AIG
By Bo Nielsen and Ron Harui
"Sept. 17 (Bloomberg) -- The dollar fell against the euro after the Federal Reserve lent as much as $85 billion to American International Group Inc., prompting investors to sell U.S. government debt."
"The U.S. currency also dropped against the Swiss franc and Canadian dollar after the U.S. reversed its opposition to a bailout of AIG by taking a majority stake in the insurer, sending U.S. Treasuries lower for a second day. The pound fell versus the euro on concern British home-loan provider HBOS Plc may not have access to funding."
"``The Fed is monetizing debt on an unprecedented scale and I can't see how that can be dollar positive,'' said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. ``Nothing is solved. I can't see risk aversion taking a lasting dive.''"
"The dollar fell to $1.4220 at 9:33 a.m. in London, from $1.4129 in New York yesterday. It was at 105.68 yen, from 105.65. Against the euro, the yen slid to 150.27, from 149.33. It touched 147.04 yesterday, the strongest since August 2006."
"``A disorderly failure of AIG could add to already significant levels of financial market fragility,'' the Fed said yesterday, explaining its decision to lend money to AIG in return for a 79.9 percent stake. The central bank yesterday kept its target rate for overnight bank loans at 2 percent."
"Treasuries Fall, Stocks Rise"
"U.S. Treasuries fell, with the yield on the two-year note climbing 4 basis points to 1.83 percent, according to BGCantor Market data. The Nikkei 225 Stock Average advanced 1.2 percent, after a 5 percent drop yesterday, and the Dow Jones Euro Stoxx 50 gained of 0.4 percent."
"The yen jumped the most in a decade against the dollar on Sept. 15 as mounting credit-market losses forced Lehman Brothers Holdings Inc. to file the biggest bankruptcy in history, sparking a global stocks rout and a surge in bank loan costs."
"The Fed yesterday injected $70 billion of temporary reserves into the banking system and $70 billion on Sept. 15, the most since the September 2001 terrorist attacks, to alleviate the seizure in credit markets. Central banks around the world pumped more than $210 billion into money markets."
"Fed Chairman Ben S. Bernanke and his colleagues yesterday rebuffed calls by some investors for an interest-rate cut after the Lehman bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession."
HBOS Hurts Pound
"The pound weakened versus the euro as HBOS, Britain's biggest mortgage bank, fell as much as 52 percent in London trading. Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, is in talks to buy the lender, according to two people familiar with the situation."
"The U.K. currency stayed lower after a government report showed jobless-benefit claims rose in August by the most since 1992 and minutes of the Bank of England's Sept. 4 meeting showed policy makers voted 8-1 to keep the nation's key lending rate at 5 percent. The pound was at 79.57 pence per euro, from 79.26."
"The yen fell against the euro as the AIG rescue stoked so- called carry trades, in which traders buy higher-yielding assets funded with low-interest-rate loans in countries such as Japan."
"Benchmark interest rates of 7 percent in Australia, 7.5 percent in New Zealand, 8.25 percent in Mexico and 13.75 percent in Brazil compare with 0.5 percent in Japan. The Bank of Japan today left its overnight rate unchanged for a 22nd straight policy meeting."
`Temporary Affair'
"``We regard any rebound of risk appetite at this stage as a temporary affair,'' BNP Paribas SA strategists led by Hans- Guenter Redeker, the London-based global head of currency strategy, wrote in a note today."
"The dollar also fell before government reports today that are expected to show the U.S. housing market is deteriorating, adding to evidence of a slump in the world's biggest economy."
"Housing starts fell 1.6 percent in August to an annual rate of 950,000, the lowest level since March 1991, according to the median forecast in a Bloomberg News survey of 74 economists. Building permits, a sign of future construction, probably dropped 1 percent to a 928,000 pace. The Commerce Department will release the two reports at 8:30 a.m. in Washington."
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net;
"Last Updated: September 17, 2008 05:41 EDT"
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ICBC Overtaken by HSBC as World's Most Valuable Bank (Update1)
By Luo Jun
Sept. 17 (Bloomberg) -- Industrial & Commercial Bank of China Ltd. ceded its title as the world's largest bank by market value to HSBC Holdings Plc after shrinking by $241 billion in less than a year as the nation's equity bubble burst.
"ICBC fell by the 10 percent daily limit in Shanghai and 8.1 percent in Hong Kong today, taking its market capitalization to $169 billion, $9 billion less than London-based HSBC. The Chinese bank overtook Citigroup Inc. by value in July last year and peaked at $410 billion in October."
"Investors, rattled by an 11-month slump in Chinese stocks, overlooked ICBC's success in avoiding most of the $516 billion of global credit market losses and focused instead on a slowing domestic economy. Chinese banks may have to contend with ``zero'' growth next year, according to Credit Suisse Group, after profits surged an average 118 percent in 2007."
"``ICBC has a lot of things to learn as it has never gone through any major tests,'' said Shao Zeyang, who helps oversee the equivalent of $994 million at Fortune SGAM Fund Management Co. in Shanghai, including ICBC shares. ``The Chinese economy is now at a turning point and investors want to stay away from the banking stocks.''"
"Chairman Jiang Jianqing has more than doubled ICBC's profit since it received a government bailout in 2005, riding economic growth of more than 10 percent a year. ICBC earned a record 64.5 billion yuan ($9.42 billion) in the first half to become the world's most profitable bank."
Analyst Downgrades
"That hasn't helped ICBC's shares, which slumped 58 percent in Shanghai this year -- a steeper drop than for Citigroup, the global leader in credit market losses with $55.1 billion. ICBC has written off $702 million. HSBC's tally is $27.4 billion."
"Analysts at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. have downgraded Chinese banks in the past week, citing less profitable lending and higher credit costs in a slowing economy. The 10.1 percent second-quarter increase in gross domestic product was the smallest since 2005."
"The central bank's surprise reduction in its benchmark one- year lending rate on Sept. 15 is a ``clear negative'' for Chinese lenders as it will make loans less profitable, Credit Suisse analysts said in a report yesterday. The People's Bank of China kept deposit rates unchanged, narrowing the spread between what banks charge for loans and pay depositors."
"``The prospects for further upside earnings surprise and sector re-rating hinge on more stable global and local macro conditions, and significant government policy easing, which we believe may not materialize near-term,'' Goldman analysts led by Ning Ma wrote in Sept. 9 report."
Price to Book
"China's benchmark CSI 300 Index fell 63 percent this year, the second-steepest decline among the world's 20 biggest equity markets. PetroChina Co., once the world's first company to surpass $1 trillion, has lost three-quarters of its value since November. The nation's largest oil producer was overtaken by Exxon Mobil Corp. as the world's most valuable company in March."
"Even after the market rout, China remains home to three of the world's 10 largest banks by market value: ICBC, China Construction Bank Corp. and Bank of China Ltd. At 2.18 times book value, ICBC's Hong Kong shares trade at a higher valuation than HSBC's 1.42 times and Citigroup's 0.79 times, according to data compiled by Bloomberg."
"The Chinese bank's return on equity is 22.8 percent, higher than HSBC's 13 percent and JPMorgan's 8.7 percent. The bank has $1.4 trillion of assets and held $1.21 billion of U.S. subprime- related securities at the end of June."
"ICBC also boasts 16,476 branches nationwide and 170 million personal customers, equivalent to the populations of Russia and Canada combined."
To contact the reporters on this story: Luo Jun in Shanghai at at jluo6@bloomberg.net
"Last Updated: September 17, 2008 05:06 EDT"
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UBI Banca Risk Related to Lehman Is `Very Contained' (Update1)
By Elisa Martinuzzi
"Sept. 17 (Bloomberg) -- Unione di Banche Italiane Scpa, Italy's fourth-largest bank by branches, said its risks related to Lehman Brothers Holdings Inc., which filed for bankruptcy on Sept. 15, are ``very contained.''"
"The Bergamo-based bank owns 11.3 million euros ($16.1 million) of Lehman bonds and is losing about 7 million euros on derivatives, it said in a stock-exchange statement today. UBI also has a cash deposit of 7.6 million euros with Lehman."
"Financial institutions around the world are being asked to disclose their holdings of assets related to Lehman, after the U.S. investment bank filed the biggest bankruptcy in history. Lehman bondholders may lose more than $111 billion following the collapse, Bank of America Corp. analysts said."
"UniCredit SpA and Assicurazioni Generali SpA, Italy's biggest bank and largest insurer, have also said their liabilities linked to Lehman are limited. Generali has a maximum of 110 million euros of ``net exposure'' to the U.S. firm's debt."
"Intesa Sanpaolo SpA, UniCredit's biggest rival, has on-balance sheet loans of about 51 million euros with Lehman and bonds with a nominal value in the region of 166 million euros. Banca Monte dei Paschi di Siena SpA, Italy's No. 3 bank, has about 50 million euros of ``exposure'' to Lehman, Il Sole 24 Ore reported today."
"Mediobanca SpA, the country's largest publicly traded investment bank, ``has no exposure either in shares or debt.''"
To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net
"Last Updated: September 17, 2008 04:37 EDT"
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Shirakawa Downplays Market Turmoil's Effect on Japan Economy
By Lily Nonomiya and Mayumi Otsuma
Sept. 17 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa downplayed concern that the U.S. banking crisis will hurt the world's second-largest economy and said Japan's financial system remains stable.
"``We don't think downside risks have intensified, but we will continue to monitor them closely,'' Shirakawa told reporters in Tokyo today after his policy board left the benchmark overnight lending rate at 0.5 percent."
"The Bank of Japan together with other central banks added more than $200 billion to their financial systems this week to make sure banks keep lending to each other following the collapse of Lehman Brothers Holdings Inc. and rescue of American International Group Inc. World market turmoil may crimp global growth, reducing demand for Japan's exports and weakening an economy that's on the brink of a recession."
"``The BOJ is sending a message that its best approach to the market turbulence is to provide as much liquidity as needed, not to change interest rates,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``The bank is trying to figure out how badly the external shocks will affect the economy at home.''"
"The U.S. government's decision to rescue AIG, the country's biggest insurer, was a ``significant step'' toward restoring investors' confidence in financial markets, Shirakawa said. The Federal Reserve made the ``best decision under the circumstances'' in lending $85 billion to the firm, he said."
Absorb Losses
Shirakawa said Japanese banks will be able to absorb any losses related to investments with Lehman.
"``Most lending to Lehman Brothers was made by major Japanese banks and their potential losses seem to be within the levels that can be covered by their profits,'' Shirakawa said. ``There's no concern that the latest events will threaten the stability of Japan's financial system.''"
"Japan's banks and insurers, including Mitsubishi UFJ Financial Group Inc., announced a combined 245 billion yen of potential losses tied to Lehman's bankruptcy."
"The Bank of Japan injected 3 trillion yen into the banking system today after the overnight rate surged to 0.65 percent, and yesterday added 2.5 trillion yen. ``Japan's money market has been functioning well,'' the central bank said."
"The central bank kept its assessment of the economy, describing growth as ``sluggish'' for a second month."
"``Economic growth has been sluggish against the backdrop of higher energy and material prices and weaker growth in exports,'' it said in a statement. ``Tensions in global financial markets have increased and there are downside risks to the world economy.''"
More Evidence
"The policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut borrowing costs, already the lowest in the industrialized world. The bank today reiterated that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term."
"``We think the Japanese economy is already in a recession and now the focus is on how much damage the latest external shock will cause,'' said Yoshimasa Maruyama, a senior economist at BNP Paribas Securities Japan Ltd. in Tokyo. Still, ``a rate cut isn't among the bank's options because BOJ policy makers have said monetary conditions are already very accommodative.''"
"Shirakawa warned that keeping rates low for too long could overstimulate the economy and make growth unsustainable in the long term. Protracting low rates may ``lead to swings in economic activity and prices,'' today's statement said."
"When asked whether the central bank was more concerned about growth than inflation, Shirakawa said his policy board will keep watching downside risks to the economy and upside risks to prices."
Sees Recovery
"Japan will recover as commodity costs ease and other economies improve, the central bank repeated today, adding that it will implement policy flexibly."
"Recent reports show resilience in Japan's economy even after it shrank an annualized 3 percent last quarter, the sharpest contraction since 2001. Exports, production and housing starts all rose in July, and crude oil has plunged 35 percent since exceeding $147 a barrel for the first time on July 11."
"``With commodity prices tumbling, the Japanese economy should be among the first to recover as the global inflation shock recedes,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies.''"
"Today's rate decision was unanimous, and predicted by all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut."
Consumer Prices
"Inflation will hover around a decade high in coming months before moderating, the central bank said. Consumer prices excluding fresh food rose 2.4 percent in July, the fastest rate since 1997, outpacing wage growth."
The bank said it's watching ``inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.''
"``Commodity markets are going through an adjustment, but core consumer prices will hover around 2 percent because companies continue to pass on food and energy costs,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``The BOJ won't cut rates to spur growth nor raise them to contain inflation for the time being.''"
To contact the reporters on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
"Last Updated: September 17, 2008 04:18 EDT"
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Crude Oil Rebounds From a Two-Day Decline on AIG Rescue Plan
By Grant Smith
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"Sept. 17 (Bloomberg) -- Crude oil rebounded from its biggest two-day decline in almost four years after the Federal Reserve agreed to rescue American International Group Inc., easing concerns of a further economic slowdown in the U.S."
"Oil also recovered before a U.S. government report forecast to show that Hurricanes Gustav and Ike caused crude stockpiles to fall a fourth week, while raids against oil facilities in Nigeria entered a fifth day. Goldman Sachs Group Inc. cut its three-month forecast for crude oil to $115 a barrel from $149, citing the global credit crisis and demand weakness."
"``Through the rescue of AIG liquidity went back into the market, so now we're seeing a counter-reaction'' to the price slide, said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich in Vienna. ``Fundamentals justify prices of $110, so we don't expect it to go down much further.''"
"Crude oil for October delivery rose as much as $3.85, or 4.2 percent, to $95 a barrel in electronic trading on the New York Mercantile Exchange. It was at $93.75 a barrel at 11:25 a.m. London time."
Crude futures declined more than $10 a barrel in the first two days of the week on concern financial market disruptions may weaken the global economy and cut fuel consumption.
Prices have dropped 2.2 percent this year and declined 36 percent from the record $147.27 a barrel reached on July 11.
Goldman Sachs said oil prices have ``overshot to the downside'' and the securities firm remains ``bullish'' that they will move higher.
Attacks in Nigeria
"The Movement for the Emancipation of the Niger Delta, the area's main militant group, said it destroyed the Orubiri oil- pumping station operated by a unit of Royal Dutch Shell Plc, and an oil pipeline operated by units of Shell and Eni SpA."
"Nigeria, which sits on Africa's largest hydrocarbon reserves, has lost about a fifth of its output since February 2006 as a result of sabotage attacks."
"The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to lend as much as $85 billion to AIG to save the insurance firm from collapse."
"U.S. crude-oil inventories probably fell by 3.5 million barrels last week as production platforms and refineries on the Gulf of Mexico shut because of Hurricanes Gustav and Ike, a Bloomberg News survey of analysts showed."
"``The rebound in the stock market probably encouraged some buying,'' said Tim Evans, an analyst at Citi Futures Perspective in New York. ``We're also setting up for the DOE report, which should show lower U.S. inventories in the major categories.''"
Refineries
"Supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, probably also dropped. The Energy Department is scheduled to release its weekly petroleum supply report at 10:35 a.m. Washington time today."
"Gasoline for October delivery rose as much as 7.92 cents, or 3.3 percent, to $2.48 a gallon in New York."
"A total of 14 Texas and Louisiana refineries, with combined crude-oil processing capacity of 3.57 million barrels a day, are shut because of Ike, the U.S. Energy Department said."
"U.S. energy producers have idled about 97 percent of oil production in the Gulf of Mexico after Ike and Hurricane Gustav moved through the region, the Minerals Management Service said yesterday in a statement on its Web site. Gulf fields produce 1.3 million barrels of oil a day, about a quarter of U.S. output."
"Brent crude oil for November settlement rose as much as $3.99, or 4.5 percent, to $93.21 a barrel on London's ICE Futures Europe exchange. It was at $91.53 a barrel at 11:26 a.m. London time. It was the first rise in 15 days."
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
"Last Updated: September 17, 2008 06:32 EDT"
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India's Bonds Decline as Central Bank Measures May Damp Demand
By Anil Varma
Sept. 17 (Bloomberg) -- India's 10-year bonds fell on speculation demand for the notes will decline after policy makers eased norms that require banks to pledge securities to borrow from the central bank.
"Benchmark yields rose from a three-month low after the Reserve Bank of India said yesterday banks can borrow funds equivalent to as much as 1 percent of their deposits without pledging bonds. The measure reduces lenders' need to buy debt in order to raise cash via the central bank's daily repurchase auctions, said Baljinder Singh, a trader at state-owned Andhra Bank in Mumbai."
"``The central bank's announcement effectively reduces banks' need to accumulate bonds for using them as collateral and borrowing money,'' Singh said. ``This is going to weaken demand for debt.''"
"The yield on the benchmark 8.24 percent note due April 2018 climbed 8 basis points to 8.17 percent as of 10:04 a.m. in Mumbai, according to the central bank's trading system. The price fell 0.52, or 52 paise per 100 rupee face amount, to 100.46. A basis point is 0.01 percentage point."
"Banks have borrowed from the central bank on every trading day of this month, indicating they are short of funds. Such borrowings rose to a record 575.65 billion rupees ($12.4 billion) yesterday, according to the Reserve Bank. The rate at which banks lend to each other overnight rose to a four-month high of 16 percent yesterday."
To contact the reporter on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.
"Last Updated: September 17, 2008 00:45 EDT"
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BOJ May Inject More Cash After Keeping Rate at 0.5% (Update1)
By Mayumi Otsuma
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Sept. 17 (Bloomberg) -- The Bank of Japan said it's ready to provide more cash after pumping 5.5 trillion yen ($51.8 billion) into money markets unsettled by the U.S. financial crisis.
"``The bank will continue to strive to ensure smooth settlement of funds and maintain market stability,'' it said in a statement after Governor Masaaki Shirakawa and his colleagues left the target for the overnight lending rate at 0.5 percent."
"Central banks from Frankfurt to Sydney added more than $200 billion this week to make sure banks keep lending to each other following the collapse of Lehman Brothers Holdings Inc. and rescue of American International Group Inc. World market turmoil may crimp global growth, reducing demand for Japan's exports and weakening an economy that's on the brink of a recession."
"``The BOJ is sending a message that its best approach to the market turbulence is to provide as much liquidity as needed, not to change interest rates,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``The bank is trying to figure out how badly the external shocks will affect the economy at home.''"
"Global stock markets have rebounded since reeling from Lehman's bankruptcy this week. The Nikkei 225 Stock Average advanced from a three-year low today after the U.S. government said it would take over New York-based AIG, the country's largest insurer, to save the firm from collapse."
Market `Tensions'
"``Economic growth has been sluggish against the backdrop of higher energy and material prices and weaker growth in exports,'' the Bank of Japan said, repeating language introduced last month. ``Tensions in global financial markets have increased and there are downside risks to the world economy.''"
The yen traded at 105.88 per dollar at 4:03 p.m. in Tokyo from 105.99 before the announcement. The Nikkei rose 1.2 percent.
"The Bank of Japan injected 3 trillion yen into the banking system today after the overnight rate surged to 0.65 percent, and yesterday added 2.5 trillion yen. ``Japan's money market has been functioning well,'' the central bank said."
"The policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut borrowing costs, already the lowest in the industrialized world. The bank today reiterated that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term."
Focus on Damage
"``We think the Japanese economy is already in a recession and now the focus is on how much damage the latest external shock will cause,'' said Yoshimasa Maruyama, a senior economist at BNP Paribas Securities Japan Ltd. in Tokyo. Still, ``a rate cut isn't among the bank's options because BOJ policy makers have said monetary conditions are already very accommodative.''"
"Protracting low rates may ``lead to swings in economic activity and prices,'' the bank said. Shirakawa made similar remarks in speeches in August and this month."
"Japan will recover as commodity prices ease and other economies improve, the central bank repeated today, adding that it will implement policy flexibly."
"Recent reports show resilience in Japan's economy even after it shrank an annualized 3 percent last quarter, the sharpest contraction since 2001. Exports, production and housing starts all rose in July, and crude oil has plunged 35 percent since exceeding $147 a barrel for the first time on July 11."
"``With commodity prices tumbling, the Japanese economy should be among the first to recover as the global inflation shock recedes,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies.''"
Unanimous Decision
"Today's rate decision was unanimous, and predicted by all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut."
"Inflation will hover around a decade high in coming months before moderating, the central bank said. Consumer prices excluding fresh food rose 2.4 percent in July, the fastest rate since 1997, outpacing wage growth."
The bank said it's watching ``inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.''
"``Commodity markets are going through an adjustment, but core consumer prices will hover around 2 percent because companies continue to pass on food and energy costs,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``The BOJ won't cut rates to spur growth nor raise them to contain inflation for the time being.''"
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
"Last Updated: September 17, 2008 03:05 EDT"
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"Buy Exotic, Not Vanilla, Rupee Options, Barclays Says (Update1) "
By Anil Varma
"Sept. 17 (Bloomberg) -- Overseas investors should buy so- called exotic rupee options that offer limited protection at a lower price to guard against the Indian currency's steepest slide in 17 years, according to Barclays Plc."
"Traders should avoid the costlier and more common ``vanilla'' options because the rupee's rising volatility is raising derivative prices, said Peter Redward, head of research for emerging Asia at the U.K.'s third-biggest bank. Money managers should buy partial defense against rupee weakness as India stems the currency's slide, he said. The currency plunged 1.9 percent yesterday, the most in a decade, and jumped as much as 1.4 percent today."
"``The balance of risks tilts toward more rupee losses,'' Singapore-based Redward said in an interview. ``It's much better to use structured options to hedge than simple vanilla contracts, which are too expensive.''"
"India's rupee is headed for its biggest slide since 1991, when a balance-of-payments crisis forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out a record $8.1 billion from local stocks this year."
"The rupee has slumped 15 percent this year, the second- worst among Asia's 10 most-active currencies outside Japan. It traded at 46.37 at 5 p.m. in Mumbai, after falling to a two-year low of 46.975 yesterday, according to data compiled by Bloomberg."
Reverse Knock-Out
"Implied volatility on one-month dollar-rupee options rose today to 16 percent, the most in at least nine years, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices."
Options are derivative contracts that give the holder the right to buy or sell an asset without the obligation to do so. Exotic options have features that allow investors to cut costs and brace for more probabilities than one. India doesn't allow local trading in exotic options. The strike price is the rate at which an option holder may buy or sell a currency.
"Investors should buy so-called reverse knock-out rupee put options due in a month, which grant the right to sell the currency against the dollar as long as its losses don't exceed a set limit, Redward said. The option ceases to exist, or gets ``knocked out,'' should the rupee fall past the limit, or trigger, within a month. An ordinary put option allows sales of the currency without setting any limits."
"Barclays recommends a strike price of 47.15, equal to the price of one-month rupee-dollar contracts in the overseas non- deliverable forward market, and a knock-out trigger of 49. The option would cost less than a tenth of a contract that doesn't limit rupee losses, Redward said, using prices before the market opened today."
Reducing Costs
"``Vanilla options are extremely costly due to strong demand and high volatility in the rupee,'' he said. ``Paying so much doesn't look viable, particularly because the central bank may curb currency losses. One can express a bearish rupee view more comfortably using structured options.''"
"Redward also recommends buying a rupee put option with a strike price of 47.15 and selling another one at 49 to partly offset the price of the first contract. The trade, called a rupee put spread, reduces the cost of protection against a rupee slide by a third, compared with an ordinary option, he said."
The Reserve Bank of India said yesterday it will sell dollars and increase interest rates on foreign-currency deposits held by local banks to bolster the rupee. The bank said it will sell dollars through its agent banks or directly to meet the demand-supply gap.
"India's foreign-exchange reserves have declined by more than $27 billion from a record high of $316.2 billion reached in May, indicating it sold dollars."
To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.
"Last Updated: September 17, 2008 07:39 EDT"
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"Asian Currencies: Korean Won, Rupee Gain as U.S. Rescues AIG "
By Lilian Karunungan and Kim Kyoungwha
"Sept. 17 (Bloomberg) -- South Korea's won led gains in Asian currencies as the U.S. government's rescue of American International Group Inc. eased concern that credit losses will spread, boosting demand for emerging-market assets."
The won rose the most since March 1998 as the Federal Reserve offered an $85 billion loan to cash-strapped AIG in return for an 80 percent stake in the company. The decision cooled speculation the biggest U.S. insurer would follow Lehman Brothers Holdings Inc. into bankruptcy. The MSCI Asia Pacific Index of regional stocks rose as much as 1.6 percent before paring gains.
"``The Fed had no choice but to rescue AIG because the repercussions will be too great,'' said Yeo Chin Tiong, head of treasury at OSK Investment Bank Bhd. in Kuala Lumpur. ``This should be positive for sentiment'' in Asian stocks and currencies, he said."
"Korea's currency climbed 3.9 percent to 1,116 against the dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. The advance reduced this year's loss to 16.4 percent. The rupee rose 1.1 percent to 46.3975 in Mumbai, according to data compiled by Bloomberg. It fell 1.9 percent yesterday, the most since May 1998."
Central banks in Japan and Australia injected $33 billion into their financial systems amid ongoing efforts to calm markets.
The Bank of Japan pumped 3 trillion yen ($29.3 billion) and the Reserve Bank of Australia added the equivalent of $3.45 billion. Global central banks have added more than $200 billion since the beginning of the week.
Asia's Worst
"The Korean currency, Asia's worst performer this year, rose as the nation's Kospi share index jumped 2.7 percent after a loss of 6.1 percent yesterday, the most in 13 months. Policy makers in Korea said the government may provide cash to help stabilize markets that slumped in the wake of Lehman Brothers bankruptcy filing and AIG's credit-ratings downgrade."
"``With the AIG rescue, risk appetite is reviving somewhat, lending support to the won,'' said Kim Yule, a currency dealer with BNP Paribas in Seoul."
The won fell the most since August 1998 yesterday as global investors accelerated sales of Asian equities.
India's rupee rose from a two-year low after the central bank announced measures to boost the supply of dollars in the market and curb exchange-rate swings.
Supplying Dollars
The currency snapped a six-day decline after the Reserve Bank of India said yesterday it will sell dollars and raise interest rates on locally held foreign-currency deposits. The bank said it will sell dollars through its agent banks or directly to meet the demand-supply gap.
"``The rupee is likely to recover part of its losses because it's a certainty now that the central bank will supply dollars in the spot market,'' said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai."
"The Indian currency is Asia's second-worst performer this year after South Korea's won, with a 15 percent loss."
"The Philippine peso rose, snapping two days of losses, as the Philippine Stock Exchange Index advanced for the first time in seven days."
"The currency rose 0.6 percent to 46.950 in Manila, from 47.24 late yesterday, according to Tullett Prebon Plc."
`Less Skittish'
"``The AIG development means there's a pullback in risk aversion,'' said Vishnu Varathan, a regional economist at Forecast Singapore Pte Ltd. ``Investors probably are less edgy and less skittish now. We see the bets against the peso reversing out.''"
Indonesia's rupiah rose by the most in almost a week.
"``There's less risk aversion to regional markets and we should see foreign funds holding off some of the selling,'' said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. ``The central bank has also been in the market defending the currency.''"
"The Indonesian rupiah gained 0.6 percent to 9,400 in Jakarta, according to data compiled by Bloomberg. The currency reached 9,550 yesterday, the lowest since August 2007."
"Bank Indonesia yesterday cut its overnight lending rate by 2 percentage points to 10.25 percent to ensure liquidity in the banking system, a move that ``should support the rupiah,'' Tanuwidjaja said."
"Elsewhere, the Singapore dollar declined 0.2 percent to S$1.4364 against the U.S. currency and the Thai baht dropped 0.1 percent to 34.32. Taiwan's dollar traded at NT$32.082 versus NT$32.070 yesterday, while Malaysia's ringgit weakened 0.2 percent to 3.4535. Vietnam's dong dropped 0.2 percent to 16,615."
To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net
"Last Updated: September 17, 2008 04:58 EDT"
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U.S. Government Debt Risk Jumps to Record After AIG Bailout
By Abigail Moses
Sept. 17 (Bloomberg) -- The cost to hedge against losses on U.S. government debt rose to a record after the Federal Reserve rescued American International Group Inc. to avert the worst financial collapse in history.
"Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30, according to BNP Paribas SA prices at 10:25 a.m. in London. That's more than double the cost of debt protection on government bonds sold by Austria, Finland or Sweden."
"The U.S. Treasury pledged an $85 billion loan for AIG just 10 days after committing as much as $200 billion to prevent a collapse of mortgage companies Fannie Mae and Freddie Mac. The U.S. budget deficit will grow next year to $438 billion, the Congressional Budget Office said Sept. 9, making it harder for President George W. Bush's successor to either cut taxes or increase spending."
"``The latest bailout comes at the expense of the U.S. taxpayer,'' Tim Brunne, a Munich-based credit strategist at UniCredit SpA, wrote in a research note today. ``It cannot be expected that AIG will survive in its present form.''"
"Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline, the opposite."
"Contracts on Treasuries are quoted in euros and a basis point on a credit-default swap contract protecting 10 million euros ($14.2 million) of debt from default for five years is equivalent to 1,000 euros a year."
"The cost of protecting bank bonds from default rose on concern more financial companies face collapse. The Markit iTraxx Financial Index of 25 European banks and insurers rose 5 basis points to 140, according to JPMorgan Chase & Co."
To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net
"Last Updated: September 17, 2008 05:30 EDT"
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Money-Market Rate May Stay at Seven-Year High as Credit Freezes
By Gavin Finch and Kim-Mai Cutler
Sept. 17 (Bloomberg) -- The cost of borrowing in dollars overnight may hold near the highest level since 2001 as banks hoard cash amid concern more financial institutions will fail.
"Overnight dollar loans were trading at about 7 percent as of 8:30 a.m. in London, according to Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. The London interbank offered rate, or Libor, soared 3.33 percentage points to 6.44 percent yesterday, the British Bankers' Association said. The increase was the biggest in its history."
"Credit markets seized up as the collapse of Lehman Brothers Holdings Inc. and the U.S. government's rescue of American International Group Inc. spurred concern more financial companies may collapse. HBOS Plc, the U.K.'s biggest mortgage lender, slid as much as 52 percent in London trading on speculation it may not have access to funding. The shares rebounded after two people familiar with the situation said Lloyds TSB Group Plc is in talks to buy the bank."
"``Everybody is worrying about which bank is going to go bankrupt next,'' said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's almost nothing being traded in the money markets, and absolutely no volume beyond one week. Nobody trusts anyone else.''"
"The cost of borrowing in euros for three months rose half a basis point to 4.97 percent today, the European Banking Federation said. That's the highest level since Dec. 5, 2000."
Averting Collapse
"AIG averted the worst financial collapse in history yesterday by accepting an $85 billion federal bailout and giving the government a majority stake. The Federal Reserve rescued AIG, while refusing aid to Lehman, which filed for bankruptcy two days ago, because financial markets were more prepared for a Lehman failure, a Fed staff official said."
"Since the start of last year, the world's biggest financial institutions posted almost $516 billion in subprime-related losses and writedowns. Eleven U.S. banks collapsed since January. Corporate bond sales in the U.S. and Europe have slumped 42 percent from a year ago, according to data compiled by Bloomberg."
"Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, ranging from home loans to credit derivatives."
TED Spread
"The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, was at 212 basis points, holding near its widest this year. It was about 50 basis points before the credit crisis began."
"The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, reached 117 basis points yesterday, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started."
Central banks around the world pumped cash into money markets yesterday. The Fed added $70 billion in temporary reserves. The European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation and the Bank of England injected 20 billion pounds ($36 billion). The Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion).
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net
"Last Updated: September 17, 2008 05:21 EDT"
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Bernanke Bets on Targeted Loans Over Rate Cut to Aid Wall St.
By Scott Lanman
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Sept. 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is betting he can use targeted emergency loans rather than another interest-rate cut to pull Wall Street through the credit crisis.
"The Fed kept the benchmark rate at 2 percent yesterday, citing risks to growth and inflation. Two days earlier, officials allowed securities firms to use equities as loan collateral to ease the impact of Lehman Brothers Holdings Inc.'s bankruptcy. Hours after the meeting, the Fed agreed to an $85 billion loan as part of a government takeover of American International Group Inc."
"By rebuffing calls by some investors for a rate cut, the central bank aims to meet its mandate to ensure stable prices while counting on auctions of cash and Treasuries and direct loans to address the credit crunch."
"Policy makers believe ``lowering the funds rate is a blunt instrument and not aimed at financial markets,'' said Stuart Hoffman, chief U.S. economist at PNC Financial Services Group in Pittsburgh and a former Fed economist. Instead, officials are relying on ``creative and innovative ways to get funds into the financial system.''"
"At the same time, the Fed edged closer yesterday to a rate reduction by saying in a statement after their meeting that financial-market strains have ``increased significantly.''"
"Employment is weakening, export growth is slowing and risks to growth and inflation are ``both of significant concern,'' the central bank said in its statement. After their Aug. 5 meeting, policy makers said such concerns applied only to inflation. The central bank yesterday dropped a reference last month to rising expectations that prices will increase."
`Push the Committee'
"``The outcome is going to be driven by the incoming data,'' former St. Louis Fed President William Poole said in an interview with Bloomberg Television. If retail sales, industrial production and employment are weak, ``that is going to push the committee probably to cut rates.''"
"Tumbling commodity prices, including a 37 percent decline in crude oil from a July 11 peak, ease pressure on the Fed to fight against inflation. The consumer price index fell 0.1 percent in August, the Labor Department said yesterday. So-called core prices, which exclude food and energy, rose 0.2 percent after a 0.3 percent gain in July."
The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $516 billion in writedowns and losses since the start of 2007. Firms have raised $362 billion of capital in response.
"Since the credit crisis began in August 2007, the Fed has lowered the rate on direct loans to commercial banks and created one loan program for banks and two for securities firms. It also secured the sale of Bear Stearns Cos. to JPMorgan Chase & Co. by taking on $29 billion of mortgage-backed debt and other assets."
AIG Takeover
"Late yesterday, the Fed agreed to an $85 billion loan for AIG, the insurer hit by billions of dollars of writedowns on investments in securities tied to mortgages. The government will get a 79.9 percent equity interest in the company as a result."
"Fed staff officials told reporters on a conference call that AIG's extensive operations across financial markets, including substantial business outside of insurance regulators' jurisdiction, meant the company needed rescuing."
"``The Fed is reasonably confident that the fundamental and liquidity problems in the financial markets can be adequately addressed with the various tools they have at their disposal,'' said David Resler, chief economist at Nomura Securities International Inc., in New York. ``It doesn't require a shotgun approach to macroeconomic policy.''"
Rate Cuts
New lending mechanisms and rate cuts totaling 3.25 percentage points in the past year have so far failed to revive lending among banks.
Central banks around the world pumped more than $210 billion into the financial system this week as they sought to alleviate the credit-market seizure.
"The New York Fed injected $70 billion of temporary reserves into the banking system yesterday and $70 billion Sept. 15, the most since the September 2001 terrorist attacks. The central bank has also provided billions of dollars through direct loans of cash and Treasuries."
"Still, banks are hoarding cash, driving up short-term lending rates."
"The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The overnight dollar rate soared 3.33 percentage points to 6.44 percent yesterday, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June."
"Economists anticipate the economy will slow to a 1.2 percent annual growth rate, or less than half the prior quarter's pace, as consumer spending, the biggest part of the economy, stalls this quarter, according to a Bloomberg survey this month."
"``The financial-market turmoil we have seen has tightened financial conditions,'' Brian Sack, who used to serve as head of monetary and financial market analysis at the Fed and is now a vice president at Macroeconomic Advisers in Washington, said in a Bloomberg Radio interview. ``That is really going to impart some restraint on the economy.''"
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
"Last Updated: September 17, 2008 00:00 EDT"
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Gold Gains in London After AIG Buyout; Platinum Also Rebounds
By Claudia Carpenter
Sept. 17 (Bloomberg) -- Gold gained in London as the American International Group Inc. bailout and a declining dollar increased demand for the precious metal. Platinum rose for the first time in three days.
AIG got an $85 billion loan and gave the U.S. government a 79.9 percent stake. The New York-based insurer couldn't raise money by selling shares after its stock plunged 94 percent this year. The dollar fell 0.8 percent against the euro and oil rose. Gold fell 6.1 percent this year as investors sold the metal to raise cash.
"``The AIG bailout is going to put extra pressure on the U.S. economy and that's going to be positive for gold in the long term,'' said Manqoba Madinane, a commodity analyst at Standard Bank Group Ltd. in Johannesburg. ``This will make stock markets more risky and that will be supportive of gold prices.''"
"Gold for immediate delivery rose $3.90, or 0.5 percent, to $783.65 an ounce as of 8:17 a.m. in London. Prices may rise to $820 by the end of the year, Madinane said."
"Platinum for immediate delivery jumped $35.25, or 3.3 percent, to $1,106 an ounce."
Banks have already tightened credit for consumers and companies this year after $517 billion of asset writedowns and credit losses since the start of 2007 amid the worst housing slump since the Great Depression.
Crude oil futures for October delivery rose 3.6 percent to $94.42 a barrel.
"Silver for immediate delivery rose 24.51 cents to $10.73 an ounce, and palladium increased $5 to $230."
To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net
"Last Updated: September 17, 2008 03:36 EDT"
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"Money-Market Rate Jumps, TED Spread Soars on Credit Squeeze "
By Gavin Finch and Kim-Mai Cutler
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Sept. 17 (Bloomberg) -- The cost of borrowing in dollars for three months jumped the most since 1999 as banks hoarded cash amid concern more financial institutions will fail.
"The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said today. The increase is the biggest since Sept. 29, 1999, during the run-up to the new millennium. The difference between what banks and the Treasury pay to borrow, the so-called TED spread, widened 64 basis points to 283 basis points. That's the biggest spread since Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday."
"``This is the second leg of the liquidity crisis,'' said Guillaume Baron, a fixed-income strategist who specializes in money markets for Societe Generale SA in Paris. ``We're having another round of problems plus higher bank risk. This is what happened in August 2007 when the crisis started.''"
The freeze in credit markets deepened this week as Lehman Brothers Holdings Inc.'s bankruptcy and the U.S. government's bailout of American International Group Inc. spurred concern more financial companies may collapse.
"The overnight dollar rate fell 1.41 percentage points to 5.03 percent today. It soared 3.33 percentage points yesterday, the largest increase in its history."
No Trust
"HBOS Plc, the U.K.'s biggest mortgage lender, slid as much as 52 percent today on speculation it may not have access to funding. The shares rebounded, surging as much as 18 percent, as HBOS said it's in ``advanced'' takeover talks with Lloyds TSB Group Plc."
"``Everybody is worrying about which bank is going to go bankrupt next,'' said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's almost nothing being traded in the money markets. Nobody trusts anyone else.''"
"The cost of borrowing in euros for three months rose more than half a basis point today, to 4.97 percent, the BBA said. That's the highest level since Dec. 5, 2000."
The surged in borrowing costs defied efforts by central banks from the U.S. to Japan to revive lending through emergency-cash offerings. Central banks refrained from pumping cash into money markets today after injecting more than $230 billion yesterday.
"AIG averted the worst financial collapse in history yesterday by accepting an $85 billion federal rescue and ceding control to the government. The Federal Reserve saved AIG, while refusing aid to Lehman, which filed for bankruptcy two days ago, because financial markets were more prepared for a Lehman failure, a Fed staff official said."
`Break the Buck'
"Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement."
"Since the start of last year, the world's biggest financial institutions posted almost $516 billion in subprime-related losses and writedowns. Eleven U.S. banks collapsed since January. Corporate bond sales in the U.S. and Europe have slumped 42 percent from a year ago, according to data compiled by Bloomberg."
Bear Stearns
"Banks began to hoard cash when rising defaults on subprime mortgages led two Bear Stearns Cos. hedge funds to seek bankruptcy protection on July 31, 2007. To avert further money- market dislocations the Fed in March backed JPMorgan Chase & Co.'s takeover of Bear Stearns, which was on the verge of collapse. On Sept. 7, the Treasury seized control of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage-finance companies."
"Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, ranging from home loans to credit derivatives."
"Nine years ago, the three-month dollar Libor climbed 57 basis points as banks stockpiled cash before year-end on concern the switchover to the year 2000 would disrupt computer systems."
"The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 131 basis points, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started."
"The Fed added $70 billion in temporary reserves yesterday, while the European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation. The Bank of England injected 20 billion pounds ($36 billion), the Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion)."
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net
"Last Updated: September 17, 2008 09:29 EDT"
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"Fed Keeps Rate at 2%, Rebuffing Call for Reduction (Update3) "
By Scott Lanman and Craig Torres
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"Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for an immediate cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide."
"The Fed did signal it will consider a reduction in the future by acknowledging in its statement that strains in financial markets are increasing. The central bank also said that employment is weakening and export growth is slowing, and dropped a reference to elevated inflation expectations."
"``Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters,'' the Federal Open Market Committee said after meeting in Washington."
"Chairman Ben S. Bernanke is trying to draw a line between interest rates, which will be set based on its assessment of the broader economy, and emergency operations designed to combat financial turmoil. Less than 48 hours before today's decision, the Fed expanded its lending to securities firms in the wake of Lehman's failure, including accepting equities as collateral for the first time."
"Stocks initially fell after today's decision, then rallied after a report that the central bank is considering a loan to American International Group Inc. That would be a shift from yesterday, when officials were inclined against providing funds."
Specific Tools
"``That continues the theme that the Fed is using targeted liquidity to be directed at the problems of Wall Street rather than the fed funds rate,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Ultimately, they may have to move as well on the funds rate.''"
"The decision was unanimous, the first such agreement in a year."
"New York Fed President Timothy Geithner didn't come to Washington today for the meeting, staying in New York, where talks continue at his bank on the crisis at AIG, which has slid 78 percent in the past week."
"The Fed is considering a ``loan package'' to AIG, a person familiar with the negotiations said. Two people familiar with the situation yesterday said the New York-based insurer was seeking $70 billion to $75 billion in loans arranged by private banks."
"Futures traders had put an 80 percent chance on at least a quarter-point rate cut today. Three months ago, they saw a 100 percent chance of an increase."
Stock Market
"The Fed held rates steady even after the Standard & Poor's 500 Index dropped 4.7 percent yesterday to the lowest level since October 2005. The index rose 1.75 percent today to 1,213.60."
Rate cuts totaling 3.25 percentage points in the past year and emergency Fed loan programs have failed to revive lending among banks.
"``We have a very concentrated problem in housing that's not really a rate problem, and we've got a financial crisis that's really not a rate problem,'' former Dallas Fed President Robert McTeer said in an interview with Bloomberg Radio before the decision. ``I don't think we have a generally weak economy that needs lower rates.''"
"Bernanke and Treasury Secretary Henry Paulson refused to offer federal aid to Lehman after its stock plunged last week, pushing the 158-year-old company into bankruptcy early yesterday."
"Merrill Lynch & Co. became engulfed by the turmoil, agreeing to a quick merger with Bank of America Corp. this week, while insurer AIG struggled to stave off collapse after its credit ratings were cut."
Global Losses
The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $515 billion in writedowns and losses since the start of 2007. Firms have raised $362 billion of capital in response.
"The New York Fed injected $70 billion of temporary reserves into the banking system today and $70 billion yesterday, the most since the September 2001 terrorist attacks. The central bank has also provided billions of dollars through direct loans of cash and Treasuries, and on Sept. 14 widened the collateral accepted for loans to securities firms to include equities."
Short-term Lending
"Still, banks are driving up short-term lending rates on concern AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure."
"The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June."
"Tumbling commodity prices, including a 38 percent decline in crude oil from a July 11 peak, ease pressure on the Fed to fight against inflation. The consumer price index fell 0.1 percent in August, the Labor Department said today. So-called core prices, which exclude food and energy, rose 0.2 percent after a 0.3 percent gain in July."
Lehman's bankruptcy filing came amid signs that losses at financial institutions are impeding U.S. economic growth.
"The economy will slow to a 1.2 percent annual growth rate, or less than half the prior quarter's pace, as consumer spending, the biggest part of the economy, stalls this quarter, according to a Bloomberg survey from Sept. 2 to Sept. 9."
Consumer Spending
"The decline in consumer spending prompted automakers last month to reduce car output by 12 percent, or the most in a decade, Fed figures showed yesterday. Industrial production in the U.S. fell by 1.1 percent, or the most in almost three years."
"Unemployment rose to a five-year high of 6.1 percent in August and foreclosure filings rose to a record as falling home prices frustrated homeowners' efforts to sell or refinance their homes, RealtyTrac Inc. said."
"``Downside risks to growth have risen significantly,'' Robert DiClemente, chief U.S. economist for Citigroup Global Markets said yesterday in a note to clients in which he predicted a half-point cut. ``Conditions remain hostile to a sustained restoration of economic growth.''"
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
"Last Updated: September 16, 2008 18:14 EDT"
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Platinum Gains After AIG Rescue Eases Concern Demand May Drop
By Dave McCombs
"Sept. 17 (Bloomberg) -- Platinum gained from an almost two- year low as the U.S. government took control of American International Group Inc., soothing concern that a widening credit crisis would sap economic growth and demand for metals."
"The metal, used in auto exhaust filters, rose for the first time in three days, trimming the decline this month to 24 percent. Some traders bet the metal will benefit should slumping U.S. and European car sales recover sooner than expected."
"``The market is taking the AIG news as good,'' Kazuhiko Saito, a commodity strategist at Interes Capital Management, said today in Tokyo by telephone. Many traders are buying out of ``shorts,'' or bets the metal would decline, he said."
"Platinum for immediate delivery climbed $22.75 to $1,093.50 an ounce at 5:50 p.m. Tokyo time, a 2.1 percent advance from New York yesterday."
"Metal for August delivery fell 0.6 percent to close at 3,682 yen a gram ($1,082 an ounce) on the Tokyo Commodity Exchange, the lowest since January 2006."
"The U.S. government agreed to lend as much as $85 billion to AIG in exchange for a 79.9 percent stake to save the country's biggest insurer from collapse. Losses industry-wide could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets. AIG needed the loan after its credit ratings were cut and shares plunged 79 percent since Sept. 11."
"General Motors Corp. Chief Executive Officer Rick Wagoner yesterday said that while credit-market losses and the bankruptcy of Lehman Brothers Holdings Inc. may erode consumer confidence, sales this month are ``OK.'' GM is the biggest U.S. automaker."
"Platinum consumption by automakers accounts for more than 60 percent of global platinum demand, according to Johnson Matthey Plc, which makes about a third of the world's auto catalysts."
To contact the reporter for this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net
"Last Updated: September 17, 2008 05:21 EDT"
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"European Stocks Fall on Growth Concern; Hochtief, Anglo Drop "
By Adria Cimino
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Sept. 17 (Bloomberg) -- European stocks fell for a third day after a report signaled the worst U.S. housing recession in a generation will continue and the takeover of American International Group Inc. failed to ease concern credit-related losses will subside.
"Hochtief AG, Germany's biggest builder, dropped 3.7 percent after the Commerce Department said builders in the U.S. broke ground on fewer houses than forecast in August. Anglo American Plc slid 7.3 percent and Xstrata Plc declined 4.6 percent on concern the economic slowdown will hurt demand for metals. Fortis and Royal Bank of Scotland Group Plc fell for a third day, leading financial shares lower."
"The Dow Jones Stoxx 600 Index lost 0.2 percent to 263.10 at 2:50 p.m. in London, erasing an earlier gain of as much as 1.9 percent."
"``The world economy didn't instantly recover last night,'' said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. ``''We remain cautious on financial stocks. There still will be damage.''"
"Fortis, the financial-services firm that announced plans in June to raise 8.3 billion euros, slid 5.5 percent to 7.02 euros. Royal Bank, the second-largest U.K. bank, retreated 3.4 percent to 182.7 pence."
"AIG, Fed"
"The U.S. reversed its opposition to a bailout of the nation's biggest insurer by assets after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement."
"The Fed kept the benchmark rate at 2 percent yesterday, citing risks to growth and inflation."
"The bankruptcy of Lehman Brothers Holdings Inc., the biggest in U.S. history, this week roiled credit markets and pushed the Stoxx 600 to the lowest in three years yesterday."
"The cost of borrowing in dollars for three months jumped the most since 1999 today as banks hoarded cash on concern more financial institutions will fail. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said today. The London interbank offered rate, or Libor, dropped 1.41 percentage points to 5.03 percent. It was at 2.14 percent a week ago."
"Hochtief lost 3.7 percent to 41.90 euros. Lafarge SA, the world's biggest cement producer, slid 2.6 percent to 79.33 euros."
Housing Starts
"Housing starts fell 6.2 percent in August to an annual rate of 895,000, the fewest since January 1991, the Commerce Department said in Washington."
"Morgan Stanley, seeking to reassure investors after its stock dropped 23 percent this week, rushed out a third-quarter earning report late yesterday saying profit fell a less-than- estimated 3 percent."
"Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman."
Bank of Ireland Plc sank 11 percent to 4.13 euros. The country's second-biggest bank said it will cut its dividend and post a drop in first-half profit as borrowers struggle to repay loans amid slowing economic growth.
"Anglo American, the world's fourth-largest diversified mining company, dropped 7.3 percent to 2,094 pence. Xstrata, the world's fourth-biggest producer of copper, sank 5.5 percent to 1,982 pence."
To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.
"Last Updated: September 17, 2008 09:54 EDT"
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U.S. Mortgage Rates May Wreak Havoc After Libor Gain (Update2)
By Kathleen M. Howley
Sept. 16 (Bloomberg) -- The biggest jump in the London interbank lending rate in at least seven years could wreak further havoc on the U.S. housing market and there's nothing the Federal Reserve can do about it.
"About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate, or Libor, according to First American CoreLogic in Santa Ana, California. Today's daily rate more than doubled, with smaller gains in the one-week and one-month rates, as lenders demanded higher compensation for risk after Lehman Brothers Holdings Inc. collapsed and the value of American International Group Inc. fell 84 percent in a week."
"Daily Libor rates are used to calculate monthly adjusting mortgage resets, including some so-called ``option ARMs'' that allow borrowers to defer payments by increasing mortgage balances, said Keith Gumbinger, vice president of Pompton Plains, New Jersey-based mortgage research firm HSH Associates Inc. More importantly, gains in the shorter-term Libor rates may signal increases to come in the three- to 12-month indexes used to calculate the majority of ARM resets, he said."
"``If this is more than a flare, if the rate remains high, there is no doubt it will have an effect on resetting mortgage contracts in the U.S.'' Gumbinger said. ``Even a small bump in the one-month rate will be additional stress on the marketplace.''"
"Home loan rates tied to Libor are beyond the reach of Federal Reserve Chairman Ben S. Bernanke and others on the Federal Open Market Committee, which today left its benchmark interest rate unchanged. Libor-indexed loans, including the subprime mortgages that helped spark the global credit crunch, have interest rates that are set by London bankers who report to the British Bankers' Association."
ARM Defaults
"Forty percent of subprime adjustable-rate mortgages were either in foreclosure or had late payments in the second quarter, according to the Mortgage Bankers Association in Washington. For prime adjustable-rate home loans the combined rate was 12 percent and for mortgages of all types it was 9.2 percent, the trade group said in a Sept. 5 report."
"U.S. home prices probably will tumble through 2010, Freddie Mac said in a forecast yesterday. The S&P/Case Shiller Home Price Index likely will drop 13 percent this year, 4.3 percent next year, and 2 percent in 2010, the MacLean, Virginia-based mortgage buyer said. That's on top of an 8.9 percent drop in 2007."
"Combined sales of new and existing homes probably will fall to 4.92 million this year, 34 percent below the all-time high of 7.46 million in 2005, Freddie Mac said in the forecast."
"The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent."
Mortgage Resets
"Many Libor-linked U.S. mortgages don't limit the size of a loan's first adjustment, with caps of 2 percent on subsequent changes. That means a monthly mortgage bill could double or even triple when it first resets."
"``If the Libor market seizes up and stays that way, it's going to complicate everything,'' said Bill Fleckenstein, president of Fleckenstein Capital in Seattle. ``What you are seeing is the unwinding of the financial system as we know it.''"
"Banks tightened lending as AIG was downgraded by Moody's Investors Service and Standard & Poor's, adding to evidence that the fallout from the collapse of the U.S. mortgage market is spreading. The surge in funding costs came less than a day after Lehman's bankruptcy, the biggest in history, and Merrill Lynch & Co.'s sale to Bank of America Corp."
"The Federal Reserve left its main interest rate at 2 percent today, its first unanimous decision in a year. The central bankers said they will continue to address market turmoil with emergency lending and use monetary controls with a long-term strategy aimed at promoting growth in the world's largest economy."
Fed Statement
"``Tight credit conditions, the ongoing housing contraction and some slowing in export growth are likely to weigh on economic growth over the next few quarters,'' the FOMC said in a statement. ``Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity should help to promote moderate economic growth.''"
"Policy makers have cut rates seven times from September 2007 to April 2008. They suspended the easing five months ago as oil prices surged, increasing inflation concerns."
"Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001."
"Premiums on investment-grade U.S. corporate bonds climbed. The extra yield investors demand to buy such bonds instead of Treasuries with a comparable maturity soared to 3.80 percentage points, the highest since Merrill Lynch began keeping the data in 1996, from 3.44 percentage points on Sept. 12."
To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.
"Last Updated: September 16, 2008 17:08 EDT"
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Corporate Bond Risk Declines as Fed Agrees to AIG Rescue Loan
By Laura Cochrane and Oliver Biggadike
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Sept. 17 (Bloomberg) -- Bond default risk fell by the most in five months in the Asia-Pacific region as the Federal Reserve agreed to lend American International Group Inc. up to $85 billion to save the biggest U.S. insurer from collapse.
"Australia's benchmark gauge of credit risk dropped from a record high and credit-default swap indexes in Japan declined the most since March, indicating improving perceptions of credit quality. Benchmarks in the rest of Asia also fell."
"The Fed's rescue of AIG avoids the worst financial collapse in history and allays concerns about a surge in credit-related losses if the insurer was to file for bankruptcy. Under the bailout plan, the Fed today said AIG would get a two-year loan to assist it ``in meeting its obligations as they come due'' while ceding a 79.9 percent equity stake to the U.S. government."
"Credit markets will ``benefit materially'' from a Fed bailout of AIG, Ken Hanton, senior fixed interest credit analyst at National Australia Bank Ltd. in Sydney, wrote today in a client note. ``Without the Fed's assistance, the market's perception is that AIG will be forced into filing for bankruptcy protection,'' the note said."
"Speculation of an AIG collapse sent the cost of default protection on Australian corporates and Wall St banks Morgan Stanley, Goldman Sachs Group Inc., Wachovia Corp. and Citigroup Inc. to record highs yesterday as investors sought to guard against potential losses on their holdings and to replace hedges they had with Lehman Brothers Holdings Inc., which filed for bankruptcy."
"The decline in Asian credit-default swap indexes is the first drop in three days, Bloomberg data show."
Default Swaps Drop
"The Markit iTraxx Australia Series 9 Index fell about 23 basis points to 185 at 2:40 p.m. in Sydney, ABN Amro Holding NV prices show. The index yesterday traded at a record 220 basis points and today's decline is the biggest since March 25, Bloomberg data show."
"The Markit iTraxx Japan index fell as much as 22 basis points and was 17 basis points lower at 163 as of 1:34 p.m. in Tokyo, according to prices from Morgan Stanley. The benchmark of 50 investment-grade Japanese companies includes All Nippon Airways Co. and Japan Tobacco Inc."
"The Markit iTraxx Asia was at 185 basis points, BNP Paribas prices show, compared with CMA Datavision prices of 220 basis points yesterday. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt."
"Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements."
To contact the reporter on this story: Laura Cochrane in Melbourne at lcochrane3@bloomberg.net; Oliver Biggadike in Melbourne at obiggadike@bloomberg.net
"Last Updated: September 17, 2008 01:09 EDT"
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U.K. August Unemployment Report: Summary (Table)
By Ainhoa Goyeneche
Sept. 17 (Bloomberg) -- Following is the summary for August of U.K. unemployment from the Office for National Statistics in London:
==============================================================================
Aug. July June May April March
2008 2008 2008 2008 2008 2008
==============================================================================
Claimant Count Rate 2.8% 2.7% 2.6% 2.6% 2.5% 2.5%
ILO Unemployment Rate n/a 5.5% n/a n/a 5.3% n/a
------------------------------------------------------------------------------
Claimant Count Level 904.9 872.4 844.6 824.6 810.3 799.1
Monthly Change 32.5 27.8 20.0 14.3 11.2 3.6
Inflows Level 247.8 240.6 229.3 217.4 217.0 204.5
Outflows Level 216.4 214.9 209.7 204.2 206.8 202.3
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Manufacturing Unit Wage Costs* n/a 1.9% 1.7% 1.9% 1.1% 1.0%
Average Earnings inc bonuses* n/a 3.5% 3.4% 3.8% 3.9% 4.0%
Average Earnings ex bonuses* n/a 3.7% 3.7% 3.8% 3.9% 3.8%
==============================================================================
Note: * = Headline Rate (3 month average compared with period one year ago).
The claimant total is the count of claimants of unemployment-related
benefits.
The level of the claimant count is measured in thousands.
Source: National Statistics
To contact the reporter on this story: Ainhoa Goyeneche in London at agoyenechecu@bloomberg.net
"Last Updated: September 17, 2008 04:30 EDT"
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"U.S. Stocks Climb, Led by Financial Shares, on AIG Speculation "
By Lynn Thomasson
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"Sept. 16 (Bloomberg) -- U.S. stocks rose, helping the Standard & Poor's 500 Index rebound from its steepest drop in seven years, as speculation American International Group Inc. would weather a funding shortage boosted financial shares in the last hour of trading."
"Benchmark indexes crossed between gains and losses more than 25 times, and AIG pared most of a 74 percent decline, as investors weighed the fate of the largest U.S. insurer after credit-market losses forced Lehman Brothers Holdings Inc. into bankruptcy. Merrill Lynch & Co. led a 6.2 percent rally in the S&P 500 Financial Index a day after the measure of banks, brokerages and insurers plunged the most since at least 1989."
"The Dow Jones Industrial Average added 141.51, or 1.3 percent, to 11,059.02 after twice erasing losses of more than 100 points. The S&P 500 increased 20.9 points, or 1.8 percent, to 1,213.6. More than two stocks rose for each that fell on the New York Stock Exchange."
"``This is a market that's not looking at fundamentals,'' said Quincy Krosby, who helps manage $380 billion as chief investment strategist at the Hartford in Hartford, Connecticut. ``It's going back and forth based on rumor and headlines and it has temporarily divorced itself from fundamental analysis.''"
"The U.S. overcame declines that pushed down equity prices around the world, led by a 17 percent plunge in Russia's Micex index, as overnight lending rates doubled and concern grew AIG would collapse. Each of the 10 main industry groups in the S&P 500 advanced except for telephone companies and utilities."
Last-Hour Rally
"The S&P 500 plunged as much as 2 percent in the morning. Stocks recovered as speculation grew that the Fed would cut interest rates, only to lose those gains after the central bank left borrowing costs unchanged."
"The last-hour rally came as federal regulators considered reversing a decision not to help AIG avoid collapse. People involved in the talks between AIG and the government said they are ``cautiously optimistic,'' said the person, who declined to be identified because negotiations are confidential."
"AIG slid $1.01, or 21 percent, to $3.75, recovering from a tumble of as much as $3.51 after the insurer's credit ratings were cut. After the close of U.S. exchanges, two people briefed on the situation said the U.S. Treasury is considering taking over AIG under a conservatorship. The stock lost 45 percent to $2.05 as of 6:07 p.m. in after-hours trading."
"About 1.2 billion shares of AIG changed hands, nearing WorldCom Inc.'s record single-day volume of 1.5 billion shares on July 1, 2002."
"``The market may be taking the point of view that the Fed is the only one with the financial wherewithal to backstop the perceived problems of AIG,'' said Keith Wirtz, chief investment officer at Fifth Third Asset Management Inc. in Cincinnati, which oversees $22 billion. ``Things feel like they're spiraling, and the Fed may be the only one in a position to stop this at the AIG level.''"
Wells Fargo Jumps
"Wells Fargo & Co., the biggest U.S. bank on the West Coast, rallied 13 percent to $34.93 after Credit Suisse Group AG said Lehman's bankruptcy will have a ``modest'' effect on the company."
"Banks, brokerages, insurers and real estate investment trusts made up the 20 biggest gains in the S&P 500. The S&P 500 Financials Index's 6.2 percent advance was its biggest since July."
"Washington Mutual Inc. advanced 16 percent to $2.32, erasing a tumble of as much as 25 percent, after the Daily Mail said JPMorgan Chase & Co. is in ``advanced talks'' to buy WaMu. The savings and loan also climbed after saying it doesn't expect a ``material'' effect from S&P's decision to cut its credit rating to junk."
AIG Competitors
Travelers Cos. and Chubb Corp. led a rally by competitors of AIG after analysts said insurers may benefit as the company struggles with liquidity.
"Citigroup Inc. analyst Josh Shanker recommended investors buy shares of Chubb, a competitor with AIG for commercial clients and coverage of high-end homes, and raised his price target on Travelers, the second-largest U.S. business insurer behind AIG."
"Travelers had the biggest advance since 2002, rising 12 percent to $48.86. Chubb increased 13 percent to $55.05."
"Monsanto Co. gained 7.6 percent to $112.97 for the biggest increase since March. The world's largest seed producer said its fiscal full-year profit rose more than previously forecast after weed-killer and seed sales climbed. Profit from ongoing operations was $3.58 to $3.60 a share in the year through August, compared with a previous forecast of $3.37, Monsanto said."
"Raw-material producers added 2.8 percent, the third-steepest advance among 10 S&P 500 industries."
Constellation Energy Tumbles
Constellation Energy Group Inc. tumbled 36 percent to $30.76. The biggest U.S. power marketer had the steepest drop in the S&P 500 on concern credit market turmoil will hurt the company's search for a partner to share the risk of its burgeoning energy-trading business.
The S&P 500 plunged 4.7 percent yesterday after Lehman filed for bankruptcy protection and Merrill was taken over by Bank of America Corp. The benchmark for U.S. equities has fallen 17 percent this year and is poised to post its first yearly retreat since 2002 after global banks racked up more than $514 billion in credit losses and asset writedowns stemming from the worst U.S. housing slump since the Great Depression.
"The S&P 500 Financials Index slumped as much as 3.7 percent in early trading today as the overnight dollar rate soared 3.33 percentage points to 6.44 percent today, a record jump, the British Bankers' Association said. The rate was 2.19 percent a month ago and 2.15 percent last week."
Oil Slides
Stocks also advanced as oil for October delivery lost $4.22 to $91.49 a barrel in New York on concern that turmoil on Wall Street may weaken the global economy and cut fuel demand.
"The S&P 500 Consumer Discretionary Index climbed 0.6 percent, helped in part by a Labor Department report showing the cost of living in the U.S. dropped in August for the first time in almost two years as falling fuel costs and a slowing economy cooled inflation. The government's consumer price index decreased 0.1 percent."
"Almost 2.2 billion shares changed hands on the NYSE, the most since June 27 and 60 percent more than the three-month daily average."
To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.
"Last Updated: September 16, 2008 18:13 EDT"
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"Australian, New Zealand Dollars Rally After U.S. Rescue of AIG "
By Candice Zachariahs and Tracy Withers
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Sept. 17 (Bloomberg) -- The Australian and New Zealand dollars rallied against the U.S. and Japanese currencies after the U.S. government agreed to take over American International Group Inc. to save it from collapse.
"The South Pacific currencies, favorites of so-called carry trades, rose as the government agreed to lend as much as $85 billion to the country's biggest insurer and Barclays Plc, the U.K.'s third-biggest bank, agreed to acquire the North American investment-banking unit of Lehman Brothers Holdings Inc."
"``With the AIG news this morning and the Barclays news, this is a better risk environment,'' said Tony Morriss, a senior currency strategist in Sydney at Australia & New Zealand Banking Group. ``The Aussie and kiwi are recovering a bit of ground,'' he said referring to the currencies by their nicknames."
The Australian dollar rose 1.2 percent to 80.04 U.S. cents at 5:05 p.m. in Sydney from 79.08 cents late in Asia yesterday. It climbed 2.8 percent to 84.70 yen from 82.38 yen yesterday.
The New Zealand dollar gained 1.9 percent to 66.43 U.S. cents from 65.21 cents late in Asia yesterday. It bought 70.29 yen from 67.91.
The currencies rose amid reports that the AIG agreement will avert a failure that could have threatened more financial companies and added to chaos in world markets.
The New Zealand dollar yesterday dropped to the weakest in more than four years against the yen and Australia's slid to a 2 1/2-year low as a global stocks rout curbed demand for the nations' higher-yielding assets.
Currencies Rebound
"``The New Zealand dollar rebounded off its lows in line with the recovery in U.S. equity markets amid hopes that government authorities will take action to prevent a systemic failure of the banking system,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington."
The Australian currency has fallen 19 percent against the dollar since reaching a 25-year high on July 16 and 17 percent versus the yen.
"``Global growth expectations are being revised down a bit and so are expectations for many commodity prices, and our currency is usually affected by changes in sentiment there,'' Reserve Bank of Australia Governor Glenn Stevens said in Sydney today."
"The Bank of Japan kept its overnight lending rate at 0.5 percent today and the Federal Reserve left its benchmark rate at 2 percent yesterday. Interest rates are 7 percent in Australia and 7.5 percent in New Zealand, making them favorites with investors seeking higher returns."
Bonds Fall
"In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits."
"Australian government bonds fell. The yield on the 10-year note rose 12 basis points, or 0.12 percentage point, to 5.57 percent. The price of the 5.25 percent security maturing in March 2019 fell 0.942, or A$9.42 per A$1,000 face amount, to 97.485. Bond yields move inversely to prices."
"New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.89 percent, from 6.8 percent yesterday."
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
"Last Updated: September 17, 2008 03:07 EDT"
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Japanese 10-Year Bonds Decline After Fed Agrees to AIG Funding
By Theresa Barraclough
"Sept. 17 (Bloomberg) -- Japan's 10-year bonds fell, pushing yields up from near a five-month low, after the Federal Reserve agreed to lend up to $85 billion to American International Group Inc. to avoid a deepening of credit-market turmoil."
"The U.S. government's loan to AIG, the biggest U.S. insurer by assets, comes after Lehman Brothers Holdings Inc. this week filed for the largest bankruptcy in history. The Bank of Japan left its key overnight lending rate at 0.5 percent today after pumping funds into the financial system for a second day, adding 3 trillion yen ($28.3 billion)."
"The markets are ``kind of relieved because the Fed is trying to intervene in the financial crisis,'' said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo. The 1.5 percent level is ``good for buying on dips,'' he said."
"The yield on the 1.5 percent bond due September 2018 rose 2.5 basis points to 1.49 percent as of 4:26 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.219 yen to 100.086 yen. The yield yesterday dropped to 1.375 percent, the lowest since April 18."
"Five-year yields gained 4 basis points, or 0.04 percentage point, to 1.075 percent."
Ten-year bond futures for December slid 0.72 to 138.73 as of the afternoon close at the Tokyo Stock Exchange and the Nikkei 225 Stock Average advanced 1.2 percent.
"The AIG rescue ``shows the U.S. government and financial authorities are working to prevent a negative spiral after Lehman Brother's failure,'' Japan Chief Cabinet Secretary Nobutaka Machimura said today."
BOJ Meeting
"AIG's fight to stay afloat is the latest tremor to shake the global financial industry, after Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection and Merrill Lynch & Co. sold itself to Bank of America Corp."
"``Japan's bonds will fall as an acceleration of the financial turmoil was avoided,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd."
"The downside risks to the world's second-largest economy haven't intensified even as the U.S. financial crisis roiled global markets, BOJ Governor Masaaki Shirakawa said after policy makers unanimously decided to keep rates at 0.5 percent, the lowest among industrialized nations. Shirakawa spoke at a press conference in Tokyo today."
"The BOJ ``won't cut interest rates'' this year, Shinsei's Katsu said. ``They can manage through increasing liquidity'' as opposed to interest rates, he said."
Central banks from Tokyo to New York pumped more than $200 billion into the financial system earlier this week.
Credit Risk Falls
"The central bank wants ``to calm the market,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government auctions. ``I don't think specific banks are having funding concerns in Japan.''"
"The cost of default protection on corporate bonds in Japan and Australia fell today, credit-default swaps show. The Markit iTraxx Australia Series 9 Index was about 23 basis points lower at 185 after earlier trading at 195 basis points, ABN Amro Holding NV prices show. The benchmark yesterday traded at 220 basis points, matching a record high of March 17. The Markit iTraxx Japan index fell 21 basis points to 159 basis points."
"``The market will unwind yesterday's move,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. ``Stocks will be bought and bonds will be sold.''"
"Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.88 with the Nikkei 225 so far this month, according to Bloomberg data. A value of 1 means the two moved in lockstep."
Technical Trading
"Losses in bonds were limited as technical indicators traders use to predict price changes, such as the moving average convergence-divergence chart, suggested that 10-year futures contracts were poised to rise."
"On the daily MACD chart, the line measuring the difference between 12- and 26-day moving averages was above the nine-day moving average, which is often a buy signal."
"MACD charts can indicate whether a price shift is a change in trend or a short-term deviation by comparing moving averages based on nine-, 12- and 26-day periods."
"Primary dealers, which are obliged to bid at government debt sales, may reduce holdings before the Ministry of Finance sells 800 billion yen in 20-year debt tomorrow."
"The prior sale of 20-year bonds on Aug. 26 drew bids worth 3.41 times the amount on offer, compared with a bid-to-cover ratio of 3.82 at the July sale."
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
"Last Updated: September 17, 2008 03:36 EDT"
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"Japan, Australia Inject $33 Billion to Soothe Markets (Update2) "
By Shamim Adam and Nate Hosoda
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Sept. 17 (Bloomberg) -- Central banks in Japan and Australia injected $33 billion into their financial systems amid ongoing efforts to calm markets roiled by the demise of Lehman Brothers Holdings Inc. and crisis at American International Group Inc.
"The Bank of Japan pumped 3 trillion yen ($29.3 billion) into the financial system today, for a total of 5.5 trillion this week. The Reserve Bank of Australia added A$4.285 billion ($3.45 billion). Global central banks from Tokyo to Frankfurt have added more than $200 billion since the beginning of the week."
"Policy makers are still trying to soothe concerns that the credit crisis will worsen as lenders push up borrowing costs amid reservations about the solvency of other banks. Financial institutions in Asia are charging each other more for loans, according to interest-rate swaps."
"``Banks are concerned about extending credit to each other,'' said Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. in Hong Kong. ``Central banks want to make sure that liquidity is sufficient.''"
Japan's overnight loan rate fell to 0.53 percent at 1 p.m. in Tokyo from 0.65 percent before two money-market operations today. The central bank kept is target overnight lending rate unchanged at 0.5 percent today. The Bank of Japan added 2.5 trillion yen to the banking system yesterday.
"The one-year swap rate, the fixed payment in exchange for interbank six-month borrowing, climbed 5 basis points, the biggest increase since June 10, according to data compiled by Bloomberg."
Market Turmoil
"The Bank of Japan's cash injection's ``was helpful because market players felt that the BOJ did something to deal with the current market turmoil,'' said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co. in Tokyo. The central bank's operations over the past two days ``is enough,'' she said."
"Japan's banks and insurers, including Mitsubishi UFJ Financial Group Inc., announced a combined 245 billion yen of potential losses tied to the collapse of Lehman."
"Australian one-year swap rates climbed 14 basis points, the largest gain since June 10, after the RBA's biggest injection of funds in almost two months failed to ease credit concerns."
"``The RBA is flushing the system with money to help financial institutions trying to shore up their balance sheets,'' said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd. ``Things could get worse from here.''"
"The Fed late yesterday agreed to an $85 billion loan for AIG, the insurer hit by billions of dollars of writedowns on investments in securities tied to mortgages. The government will get a 79.9 percent equity interest in the company as a result."
Avert Collapse
"The agreement, backed by U.S. Treasury, would keep New York- based AIG in business, averting a collapse that could have threatened more financial companies and caused $180 billion in losses, according to RBC Capital Markets. AIG needed the loan to stave off a collapse after its credit ratings were cut and shares plunged 79 percent since Sept. 11."
"The London interbank offered rate, or Libor, that financial institutions charge each other for loans soared 3.33 percentage points to 6.44 percent yesterday. The increase was the biggest in its history."
"The U.S. Federal Reserve yesterday added $50 billion in temporary reserves to the banking system, while the European Central Bank awarded 70 billion euros ($99.8 billion) in a one- day money-market auction. The Bank of England pumped in 20 billion pounds ($36 billion)."
"Central banks in South Korea and Singapore reiterated that they are ready to provide extra liquidity to their financial markets if necessary. The Bank of Korea will purchase government bonds if needed directly from the market, Governor Lee Seong Tae told parliament in Seoul today."
South Korea
"South Korean Deputy Finance Minister Noh Dae Lae said the country can weather the financial shocks emanating from the U.S. and policy makers will take measures to stabilize markets when needed. The nation's one-year swap rate increased 7.5 basis points, the biggest gain since July 14."
"In Taiwan, the central bank yesterday said it will cut its required reserve ratios for the first time in eight years in a bid to inject liquidity into the island's financial markets. The central bank added $3.59 billion into the foreign-currency interbank market yesterday."
"The Reserve Bank of India also took steps to boost cash in its banking system, reversing its policy to reduce liquidity as it sought to quell inflation. Lenders can get more funds through an additional repurchase auction everyday and a temporary increase in their eligibility to access funds through the repurchase auction, the central bank said."
"``The RBI's steps to ease liquidity are a significant change in policy,'' said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. ``The RBI has several weapons in its arsenal if it wishes to continue to loosen liquidity.''"
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net;
"Last Updated: September 17, 2008 00:20 EDT"
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"Canada Stocks Fall, Led by Manulife, Royal Bank; Potash Gains "
By John Kipphoff
"Sept. 16 (Bloomberg) -- Canadian stocks fell a second day as financial and energy companies tumbled on concern that more U.S. institutions may fail, leading to tighter credit and weaker economic growth and fuel demand."
"Manulife Financial Corp. and Royal Bank of Canada led finance shares to a three-week low. Suncor Energy Inc. paced a drop in oil and gas shares after the price of crude touched the lowest since February. BCE Inc. fell on speculation lenders will balk at financing a planned takeover of the company. Potash Corp. of Saskatchewan Inc. led raw-materials shares' rebound, on speculation that supply of the mineral will lag behind demand."
"The Standard & Poor's/TSX Composite Index slipped 0.2 percent to 12,226.99 in Toronto, after dropping as much as 2.9 percent earlier. The S&P/TSX pared its drop on speculation that the Federal Reserve will provide American International Group Inc. with a loan to avert the U.S. insurers' collapse."
"``Events south of the border are casting a long shadow in Canada,'' said David Cockfield, who helps oversee about $2 billion as a portfolio manager at Leon Frazer & Associates in Toronto. ``Investors are looking at the market and are saying `this could be a long haul.' There's more pain to come in the U.S. banking system.''"
"Canada's main equity benchmark derives more than three- quarters of its value from energy, materials and financial stocks. It lost about C$214 billion ($200 billion) in value this month through yesterday as it extended a slide from its June 18 record to 19 percent."
Holds Debt
"Manulife slipped 2.7 percent to C$36, after dropping as much as 6.3 percent earlier. Canada's biggest insurer may hold as much C$1.36 billion in debt sold by American International and three other ``troubled'' U.S. financial institutions, according to BMO Capital Markets analyst John Reucassel in Toronto. The other issuers include Lehman, Washington Mutual Inc. and Wachovia Corp., he wrote in a note."
"Royal Bank of Canada fell 3.3 percent to C$46.50, the steepest drop in four weeks. Earlier, the nation's largest lender by assets fell as much as 6.2 percent, the most in a decade."
"``As a large and growing credit trader in the U.S., it is hard to imagine that Royal Bank's business would be unaffected by the recent events,'' Genuity Capital Markets analyst Mario Mendonca wrote in a note today."
`Similar to Yesterday'
"``In terms of AIG, our position is very similar to yesterday, in that we manage and diversify our exposures in a variety of ways, including limiting our exposure to any single name and to any single sector,'' Royal Bank spokeswoman Beja Rodeck said in an e-mail today."
"Corporate borrowing costs soared to records in the U.S. and Europe, after yesterday's collapse of Lehman Brothers Holdings Inc. and credit downgrades of American International led banks to hoard cash, Merrill Lynch & Co."
"AIG pared most of a 74 percent decline in New York as federal regulators considered reversing a decision not to help AIG. People involved in the talks between AIG and the government are ``cautiously optimistic,'' said a person familiar with the matter, who declined to be identified because negotiations are confidential."
"A measure of financial shares, the biggest by value in the S&P/TSX, fell 1.9 percent, leading eight of the index's ten industries lower. Materials stocks gained 2.8 percent as group."
Commodities
"Crude oil tumbled more than $4 in New York to $91.49 a barrel, on concern that turmoil on Wall Street may weaken the global economy and cut fuel demand. Prices of other commodities including copper, gold and corn declined as investors sold commodities to raise cash and cover losses in other markets."
"Suncor, the second-largest oil-sands producer, fell 2.5 percent to C$45.10, the lowest since Jan 25. UTS Energy Corp., part owner of a C$14.1 billion oil-sands project, dropped the most in more than 5 ½ years, losing 19 percent to C$2.40."
"``Costs of the oil-sands projects are rising and profit margins are getting squeezed,'' said Cockfield."
"Not all energy producers dropped. Canadian Natural Resources Ltd., the country's second-biggest natural gas company, added 3.4 percent to C$79.61, after falling 7.5 percent yesterday."
"BCE slid 1.8 percent to C$37.18, falling for a second day. A group of investors led by Ontario Teachers' Pension Plan has agreed to buy Canada's biggest phone company for C$52 billion, or C$42.75 a share in cash, in the largest leveraged buyout."
"Toronto-Dominion Bank, Canada's second-largest bank, remains ``committed'' to financing the BCE buyout, spokeswoman Julia Koene said. Toronto-Dominion fell 1.5 percent to C$60.41."
Bank Financing
"Banks, led by Citigroup Inc. and Deutsche Bank AG, have agreed to help provide C$34 billion in debt needed to finance the transaction. Merrill Lynch & Co., which sold itself yesterday to Bank of America Corp. for $50 billion, pledged to join the deal."
"Fording Canadian Coal slid 1 percent to C$81.01, adding to a 10 percent drop yesterday. Teck Cominco Ltd., the nation's biggest diversified mining company, agreed in July to buy the world's second-largest exporter of coal used to make steel, for C$14.1 billion, or $82 in cash and 0.245 of a Teck share stock."
"The terms of a C$9.8-million syndicated loan co-arranged by Merrill may need restructuring because of the credit turmoil, said Kerry Smith, a Haywood Securities analyst in Toronto. Teck Cominco fell 3.4 percent to C$35.40."
"Potash Corp. advanced 6.7 percent to C$174.83. Potash inventories controlled by North America crop-nutrient producers fell 21 percent in August to their lowest in at least 19 years. A strike at three Canadian mines reduced output by 17 percent in August, according to figures published today by the Washington, D.C.-based Fertilizer Institute. Smaller rival Agrium Inc. added 4.3 percent to C$82."
"Barrick Gold Corp., the world's biggest bullion mining company, gained 4 percent to C$30.87, rallying from near the lowest level in three years."
"Research In Motion Ltd., the maker of the BlackBerry e-mail phone, gained for the first time in three days, advancing 2.9 percent to C$107.63."
To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.
"Last Updated: September 16, 2008 17:26 EDT"
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"JSW Steel Predicts Metal Prices, Demand Will Revive (Update2) "
By Paul Gordon and Debarati Roy
"Sept. 17 (Bloomberg) -- JSW Steel Ltd., India's third-largest producer, predicted prices and demand for the metal will revive after next month as steelmakers lower production globally."
"``Some European companies have already announced production cuts,'' Seshagiri Rao, finance director at the Mumbai-based company, said in an interview today. ``Also, the cost of production remains high as coal prices have not fallen.''"
"A global slowdown in economic growth has lowered steel demand from builders and makers of cars and appliances. JSW Steel cut prices by about 5 percent this month, joining ArcelorMittal, the world's largest mill, which said this month it will cut prices in South Africa by an average 5.6 percent."
"``There's some balance now between demand and supply and countries including China have lowered production to remain profitable,'' Rakesh Arora, an analyst at Macquarie Group Ltd., said today. He has an ``outperform'' rating on the stock."
"U.S. raw steel production fell 0.4 percent last week to 2.055 million tons from 2.062 million tons a week earlier, the American Iron and Steel Institute said on Sept. 15."
"The pace of growth in China's crude steel output slowed as production from January through July reached 308 million tons, 9 percent higher than a year earlier, ``marking single-digit growth for the first time in many years,'' Macquarie Group Ltd. said last month. Steel prices in China, the largest producer of the metal, fell for a second straight month in August as demand slowed."
"Coal, Ore"
"Coking coal prices have tripled, while iron-ore costs have almost doubled since April 1. Surging demand from China, the world's biggest consumer of the ore, has boosted prices this decade helping producers win a price increase of as much as 97 percent this year. Contract coking coal prices for the year that began April 1 have surged to as much as $308 a ton."
JSW Steel and other Indian steelmakers have been forced to hold prices since May to aid the government's efforts to cool inflation that rose to a 16-year high. JSW Steel said in July first-quarter profit slumped 52 percent because of the price cap and record raw-material costs.
"JSW Steel shares today reversed a three-day decline, gaining as much as 3 percent. They traded at 654 rupees, up 1.2 percent, at 12:14 p.m. in Mumbai. The Bombay Stock Exchange's benchmark Sensitive Index fell 1.4 percent."
To contact the reporters on this story: Debarati Roy in Mumbai at droy5@bloomberg.net; Paul Gordon in Hong Kong at pgordon6@bloomberg.net;
"Last Updated: September 17, 2008 02:46 EDT"
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BOE Voted 8-1 as Blanchflower Sought Half-Point Cut (Update1)
By Brian Swint
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Sept. 17 (Bloomberg) -- Bank of England policy makers voted 8- 1 to keep the benchmark interest rate unchanged in September as David Blanchflower argued for the biggest cut since 2001 to pull the economy out of a recession.
"The Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5 percent, minutes of the Sept. 4 decision showed today. Timothy Besley abandoned his previous call for an increase, while Blanchflower said that the deteriorating economy threatened to push inflation below the 2 percent target in due course, damaging the bank's credibility."
"``The signal is, they're turning more dovish,'' said Alan Clarke, an economist at BNP Paribas in London. ``There's a sporting chance of a cut in October but it's more likely to come in November.''"
"Inflation reached 4.7 percent in August, the fastest pace since at least 1997, and King said yesterday that the rate will stay ``markedly'' above target into next year. That threat prevented the bank from cutting rates before the demise of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc. exacerbated the global credit squeeze."
"``For most members, as there had been news this month for inflation prospects on the upside as well as on the downside, a reduction in bank rate now might suggest that the committee put undue weight on activity indicators,'' the minutes showed. That may signal ``some slackening in the MPC's commitment to meet the inflation target in the medium term.''"
Jobless Jump
"Unemployment rose at the fastest pace since 1992 in August, with 32,500 people joining the jobless benefit claims count, the Office for National Statistics said today in a separate report."
"King said last month the bank expects ``broadly flat'' economic output over the next few quarters. Growth stalled in the second quarter, ending the country's longest stretch of uninterrupted expansion in a century, and the Confederation of British Industry, the country's top business lobby, this week said the U.K. entered a recession in July."
The U.S Federal Reserve yesterday kept the main lending rate at 2 percent. The European Central Bank left its key rate at 4.25 percent two weeks ago.
"AIG averted the worst financial collapse in history yesterday by accepting an $85 billion federal loan and giving the government a majority stake. The U.S. reversed its opposition to a bailout after the Fed concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement late yesterday."
Rate Discussion
"A case could be made for a reduction in interest rates as well as an increase, minutes of the U.K. meeting showed today. Policy makers said the pound's drop and the risk that 11 months of above-target inflation will enable price increases to become embedded in the economy may justify raising borrowing costs."
"``High import price inflation and sterling's depreciation could be symptomatic of a weakening confidence in the committee's determination to return inflation to target,'' the minutes showed. ``However, the committee had concluded that there was little evidence that medium-term inflation expectations had been dislodged.''"
"Oil prices have dropped 36 percent since reaching a record above $147 a barrel on July 11. While Centrica Plc, E.ON AG, RWE AG and Scottish Power Plc have announced power-price increases in the past two months, King said yesterday that inflation should ``peak soon'' at around 5 percent."
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
"Last Updated: September 17, 2008 04:46 EDT"
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"Australia Industrials Safer Than Banks, Says JPMorgan (Update1) "
By Shani Raja
"Sept. 17 (Bloomberg) -- Australian industrials stocks are a ``safe haven'' amid a slowing global economy and are better value than either financial or resources companies, according to strategists at JPMorgan Chase & Co."
"Industrials are ``cheap'' relative to resources and bank stocks, Sydney-based strategist Paul Huxford said in a research note released today, citing possible slowing demand for the nation's resources from China and softer credit conditions affecting financial companies."
"JPMorgan's preferred industrials stocks include Brambles Ltd., the world's biggest pallet supplier, Coca-Cola Amatil Ltd., the nation's biggest soft drinks maker, and Aristocrat Leisure Ltd., the world's No. 2 slot machine maker."
"``We advocate investors seek refuge in this section of the market as a soft landing has already been priced in,'' Huxford wrote in the note. ``The macro outlook for resources stocks remains bleak as emerging market growth headwinds abound,'' while banks face higher borrowing costs and decreased lending volumes."
"Global economic growth has slowed since the U.S. housing recession triggered a worldwide credit crisis that has wiped out about $18 trillion in equity value. A measure of industrial stocks on Australia's benchmark S&P/ASX 200 Index has tumbled 29 percent this year, while materials and financial shares have fallen 21 percent and 34 percent, respectively."
Market Turbulence
"Banking stocks remain a risky bet given slowing credit growth, rising loan losses, high long-term debt funding costs, and escalating operational costs, according to Huxford."
"``The outlook for the Australian banks is deteriorating,'' he wrote. ``From a longer-term perspective, the sector is overvalued and earnings risk is rising.''"
"Those sentiments are echoed in a note released today by Morgan Stanley, which retained its ``underweight'' ratings on three major Australian banks -- Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., and National Australia Bank Ltd."
"The last two ``are the most vulnerable due to their weaker capital positions, risk of further writedowns and higher-risk business mixes,'' strategists led by Sydney-based Richard Wiles said in the note, citing the recent financial-market turbulence."
"Australia's four biggest banks are owed about A$290 million ($229 million) by Lehman Brothers Holdings Inc., the U.S. investment bank that filed for bankruptcy protection on Sept. 15."
Earnings Certainty
"Resources companies offer low earnings certainty due to the daily fluctuation of metals prices, Huxford said in the note. There is even less certainty now that some mining companies are shifting to spot pricing for bulk commodities, he said."
"Rio Tinto Group, the world's second-largest iron-ore producer, said last week it won't agree to any more contracts for the steelmaking raw material based on traditional benchmarks."
"Investors should steer clear of resources companies with high debt or gearing, and which are dependent on asset sales to reduce their financial leverage amid overall declining commodities prices, wrote Huxford."
"Paladin Energy Ltd., which is developing a uranium mine in Malawi, and Fortescue Metals Group Ltd., an iron ore producer controlled by Australia's richest man Andrew Forrest, are among the least safe stocks, JPMorgan said."
"Its top ``safe haven'' picks among resources companies include Newcrest Mining Ltd., the nation's largest gold producer, and Centennial Coal Co., Australia's fourth-largest coal producer."
To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.
"Last Updated: September 17, 2008 01:05 EDT"
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"Cemex, Cesp, Ecopetrol, Petroleo Brasileiro SA: Latin Preview "
By Paulo Winterstein and James Attwood
"Sept. 17 (Bloomberg) -- The following companies may have unusual price changes today in Latin America trading. Stock symbols are in parentheses, and share prices are from the previous close. Preferred shares are usually the most-traded class of stock in Brazil."
"The MSCI Latin America Index slipped 0.1 percent yesterday to 3,271.92. Markets in Mexico were closed yesterday for a holiday."
Brazil
"Cia. Energetica de Sao Paulo (CESP6 BS): The electric utility controlled by the state of Sao Paulo had its credit rating raised one level to Ba2 because of the company's ``continued focus'' on reducing debt and improving cash flow, Moody's Investors Service wrote in a note yesterday. Cesp, whose Ba2 rating is two levels below investment grade, fell 3.1 percent to 17.50 reais."
"Petroleo Brasileiro SA (PETR4 BS): Brazil's state-controlled oil company said average oil and natural-gas output increased 5.3 percent in August from a year earlier. Output in Brazil and abroad rose to 2.44 million barrels per day, Petrobras said yesterday in an e-mailed statement. In Brazil, average output climbed 4.3 percent to a record 1.89 million barrels, Petrobras said. Petrobras rose 5 percent to 31.30 reais."
Colombia
"Ecopetrol SA (ECOPETL CB): An American depositary receipt listing planned by Colombia's state-controlled oil producer tomorrow may boost the company's share price, Stanford Bolsa y Banca wrote. Ecopetrol's outlook remains positive on rising production prospects, analysts at the Bogota-based brokerage wrote in a note yesterday. The stock fell 3.6 percent to 2,530 pesos."
Mexico
"Cemex SA (CEMEXCP MM): American depositary receipts of the largest cement maker in the Americas jumped 5.6 percent yesterday, when Mexican markets were closed. Cemex fell 4.7 percent on Sept. 15 to 18.78 pesos."
To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; James Attwood in Santiago at jattwood3@bloomberg.net.
"Last Updated: September 17, 2008 00:01 EDT"
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Housing Starts in U.S. Probably Fell to 17-Year Low in August
By Bob Willis
Enlarge Image/Details
"Sept. 17 (Bloomberg) -- U.S. builders broke ground in August on the fewest new homes in 17 years, signaling the worst housing recession in a generation will continue to weigh on growth in coming months, economists said before a report today."
"Housing starts fell 1.6 percent in August to an annual rate of 950,000, according to the median forecast in a Bloomberg News survey of 74 economists. Building permits, a sign of future construction, probably fell 1 percent to a 928,000 pace."
Builders will probably keep scaling back as stricter lending and record foreclosures swell the number of properties on the market. The housing and credit meltdowns that led to the collapse of Lehman Brothers Holdings Inc. may continue to subtract from economic growth for the rest of the year and into next.
"``Starts need to drop further to work off that excess inventory,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``Credit will become tighter again.''"
"The Commerce Department's report on starts is due at 8:30 a.m. in Washington. Estimates in the Bloomberg survey ranged from 893,000 to 1.04 million units."
"Another report from the Commerce Department at the same time may show the current-account deficit in the second quarter widened to $180 billion from $176.4 billion in the previous three months, according to economists surveyed by Bloomberg."
"The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers this week to file for bankruptcy, just a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages."
Fed Policy
Federal Reserve policy makers yesterday left the benchmark interest rate unchanged at 2 percent for a third consecutive meeting. Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending.
"As banks tighten borrowing rules and confidence slumps, consumer spending is faltering. Retail sales in August dropped for a second month, Commerce reported last week."
Homebuilders remain gloomy. A report yesterday from the National Association of Home Builders/Wells Fargo showed confidence among U.S. homebuilders in September held near the lowest level since records began in 1985.
"As home prices continue to fall, more and more Americans are forced into foreclosure as they owe more than their homes are worth. Stricter lending rules also limit opportunities to refinance out of adjustable-rate mortgages before they reset higher."
"Foreclosure filings rose to a record in August, RealtyTrac Inc. said Sept. 12. One in 416 U.S. households got a default notice, was warned of a pending auction or was foreclosed upon."
"Toll Brothers Inc., the largest U.S. luxury homebuilder, on Sept. 4 reported a fourth straight quarterly loss."
"``Explosive energy price increases, rising unemployment and severe mortgage and credit'' conditions cut demand, Chief Executive Officer Robert Toll said on a conference call. ``Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers' market.''"
Bloomberg Survey
================================================================
Housing Building Current
Starts Permits Account
" ,000's ,000's $ Blns"
================================================================
Date of Release 09/17 09/17 09/17
Observation Period Aug. Aug. 2Q
----------------------------------------------------------------
Median 950 928 -180.0
Average 951 926 -180.8
High Forecast 1040 960 -169.0
Low Forecast 893 885 -188.1
Number of Participants 74 49 44
Previous 965 937 -176.4
----------------------------------------------------------------
4CAST Ltd. 950 920 -186.5
Action Economics 950 950 -179.0
Aletti Gestielle SGR 948 940 -178.0
Allianz Dresdner Economic 940 --- ---
Argus Research Corp. 970 --- ---
Banc of America Securitie 950 --- -179.0
Bank of Tokyo- Mitsubishi 955 916 -177.4
Bantleon Bank AG 960 937 ---
Barclays Capital 950 --- -183.0
BMO Capital Markets 940 910 -180.0
BNP Paribas 950 --- ---
Briefing.com 950 930 ---
Calyon 945 928 -188.1
CFC Group 955 930 -180.0
CIBC World Markets 920 900 -180.0
Citi 925 925 -179.0
ClearView Economics 950 --- ---
Commerzbank AG 950 900 ---
Credit Suisse 950 --- ---
Daiwa Securities America 900 --- -182.0
Danske Bank 946 937 ---
DekaBank 960 930 -179.3
Desjardins Group 940 930 -180.0
Deutsche Bank Securities 950 950 -180.0
Deutsche Postbank AG 960 --- ---
Dresdner Kleinwort 945 --- -178.0
DZ Bank 950 945 ---
First Trust Advisors 961 --- -182.2
Fortis 1000 --- ---
FTN Financial 950 930 ---
Global Insight Inc. 893 891 ---
"Goldman, Sachs & Co. 989 --- -182.5"
H&R Block Financial Advis 955 930 ---
Helaba 980 932 -180.0
High Frequency Economics 925 900 -183.0
HSBC Markets 970 950 -181.0
IDEAglobal 955 925 -180.0
Insight Economics 950 --- -178.0
Intesa-SanPaulo 1000 900 ---
J.P. Morgan Chase 930 910 -180.0
Janney Montgomery Scott L 945 921 ---
JPMorgan Private Client 930 920 ---
Landesbank Berlin 950 920 ---
Landesbank BW 940 915 ---
Lehman Brothers 920 900 -176.5
Lloyds TSB 960 930 -183.2
Maria Fiorini Ramirez Inc 925 --- ---
Merk Investments 985 920 -179.7
Merrill Lynch 900 885 -184.3
Moody's Economy.com 950 930 -181.6
Morgan Stanley & Co. 920 --- ---
National Bank Financial 960 935 ---
National City Corporation 1040 940 -186.2
Natixis 940 --- -185.0
Nomura Securities Intl. 985 925 ---
Okasan Securities 975 --- ---
PNC Bank 965 --- ---
RBS Greenwich Capital 930 --- ---
"Ried, Thunberg & Co. 935 925 -186.0"
Schneider Trading Associa 970 946 ---
Scotia Capital 960 --- ---
Societe Generale 980 --- -178.0
Standard Chartered 940 920 -180.0
Stone & McCarthy Research 950 --- -188.0
TD Securities 960 950 ---
Thomson Financial/IFR 958 942 -182.0
UBS Securities LLC 925 --- -179.4
Unicredit MIB 950 950 -169.0
University of Maryland 970 960 -179.5
Wachovia Corp. 960 --- -181.0
Wells Fargo & Co. 950 950 -183.0
WestLB AG 950 925 -178.0
Westpac Banking Co. 930 890 -175.0
Wrightson Associates 930 920 -182.0
================================================================
To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net.
"Last Updated: September 17, 2008 00:01 EDT"
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Shanghai Copper Rises From 10-Month Low on Tight Local Supply
By Li Xiaowei
"Sept. 17 (Bloomberg) -- Copper rebounded from a 10-month low in Shanghai as tight domestic supplies supported prices in China, the world's largest consumer of the industrial metal."
"Futures in London also gained after falling to the lowest price since January as turmoil in financial markets fueled speculation that economic growth will stagnate, eroding demand for raw materials. China imports of copper and alloys rose 9.5 percent to 101,317 metric tons, over the previous month, customs data showed yesterday."
"``Domestic supplies are very tight,'' Li Rong, an analyst at Great Wall Futures Co. said today by phone from Shanghai. ``This is going to act like a temporary brake on Shanghai copper which is prone to further declines amid global financial market turmoil.''"
"Copper for December delivery rose as much as 1.6 percent to $54,050 yuan ($7,899) a ton on the Shanghai Futures Exchange and traded at 53,710 yuan at 10:39 local time. The metal fell by the exchange-imposed daily limit yesterday to the lowest since November 2007."
"Copper for three-month delivery rose 0.2 percent to $6,885 a ton on the London Metal Exchange at the same time."
"Other commodities including gold and oil rebounded after the U.S. government pledged up to $85 billion to rescue American International Group Inc. Asian stocks also gained, helping the regional benchmark index rebound from the steepest plunge in eight months."
"Among LME-traded metals, aluminum was 0.7 percent higher at $2,548.5 a ton, zinc dropped 0.2 percent to $1,745, nickel rose 0.7 percent to $17,520, lead and tin were un-traded in Asia."
To contact the reporter for this story: Li Xiaowei in Shanghai at Xli12@bloomberg.net
"Last Updated: September 16, 2008 23:29 EDT"
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Europe Trade Deficit Widens to Record on Energy Costs (Update1)
By Fergal O'Brien
Sept. 17 (Bloomberg) -- Europe's trade gap widened to a record in July as a cooling global economy damped exports and crude oil's advance to a record boosted the energy deficit.
"The 15-nation euro region had a seasonally adjusted deficit of 6.4 billion euros ($9.1 billion), compared with a 3.5 billion-euro trade gap in June, the European Union's statistics office in Luxembourg said today. The July deficit is the largest since the euro was introduced in 1999."
"Euro-area exports to the U.S., the second-biggest buyer of the region's goods, have fallen the most since 2003 this year as economic expansion there has eased. At the same time, record oil prices pushed up spending on imported fuels such as gasoline and heating oil by 41 percent, further widening the trade gap."
"``On the one side, you're getting weakness in exports and that then is feeding through to weaker industrial production,'' said Marco Valli, an economist at Unicredit MIB in Milan. ``On the other side, there is the oil prices and in July we will see the maximum impact of that, as oil peaked in early July.''"
"Crude oil reached a record $147.27 a barrel on July 11 and the euro region's energy imports soared 41 percent to 151 billion euros in the first half, according to today's report. The detailed data are published with a one-month lag."
"The soaring energy costs boosted imports from Russia, which supplies 34 percent of Europe's imported oil and 40 percent of its imported gas. Overall imports from Russia, home of OAO Gazprom, the world's biggest gas producer, soared 22 percent in the first half and the euro area's trade gap with the nation soared 25 percent to 20.4 billion euros, today's report showed."
First-Half Decline
"The detailed data for the January-June period also showed exports to the U.S., the world's largest economy, fell 4 percent from a year earlier. That is the biggest first-half decline since a 9 percent drop in 2003. Shipments to the U.K., the euro area's biggest trading partner, rose 1 percent."
"The euro reached a record above $1.60 to the dollar in July, taking its gain over the previous 12 months to 15 percent. The euro's strength undermines the competitiveness of European goods sold abroad. The currency was at $1.4224 today, down 11 percent from its record."
"A slowdown in overseas sales has curbed production at Europe's factories and dragged the region's economy into its first contraction in almost a decade in the second quarter. Manufacturing activity has contracted for the last three months, according to a monthly survey of purchasing managers, while export orders have fallen for five months."
`Mightily Relieved'
"``Euro-zone exporters will be mightily relieved by the recent marked retreat in the euro from its July peak,'' said Howard Archer, chief European economist at Global Insight in London. ``However, this is being countered by slowing global growth and a very uncertain outlook.''"
Some companies have tried to offset falling U.S. orders by expanding in Asia and oil-exporting countries. Asian sales at French skin-creams maker Clarins SA rose 3 percent in the second quarter as North American sales fell by the same percentage.
"Volkswagen AG, Europe's biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia."
"Europe's trade deficit with China, which last year overtook the U.K. to become the euro area's biggest supplier, narrowed by 1.2 percent to 49.9 billion euros in the six months through June. Exports to Asia's second biggest economy rose 15 percent."
"Economists had expected the euro region to show a trade deficit of 3.5 million euros in July, compared with an initially reported 3 billion-euro deficit in June, according to the median of nine estimates in a Bloomberg News survey."
To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.
"Last Updated: September 17, 2008 06:46 EDT"
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<<2.638_20080917114634Brazilian Stocks Rise on Commodity Rebound AIG
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Initial Tumble on AIG Speculation .txt>> <<2.636_20080917112038German
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<<2.636_20080917111435Italy Stocks Update S&PMIB Index Rises 445 to
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after the Bank of England said inflation may stay .txt>>
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Japanese inflationlinked bonds are ``exceptionally cheap'' as yi.txt>>
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Bank Prepares to Supply Dollars .txt>> <<2.629_20080917151447Goldman
Sachs Slashes Oil Forecast on Credit Concern (Update2) .txt>>
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Before Bank of England Minutes .txt>> <<2.628_20080917151722Yen Falls
for Second Day Against Dollar After Fed Rescue of AIG .txt>>
<<2.627_20080917151044Treasuries Fall on Speculation AIG Rescue May
Boost Debt Sales .txt>> <<2.627_20080917115011Dollar Falls Against
Euro After US Government Bailout of AIG .txt>>
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TwoDay Decline on AIG Rescue Plan .txt>> <<2.624_20080917111805India's
Bonds Decline as Central Bank Measures May Damp Demand .txt>>
<<2.623_20080917151937BOJ May Inject More Cash After Keeping Rate at 05%
(Update1) .txt>> <<2.623_20080917151558Buy Exotic Not Vanilla Rupee
Options Barclays Says (Update1) .txt>> <<2.623_20080917111330Asian
Currencies Korean Won Rupee Gain as US Rescues AIG .txt>>
<<2.622_20080917110220US Government Debt Risk Jumps to Record After AIG
Bailout .txt>> <<2.622_20080917105225MoneyMarket Rate May Stay at
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Bets on Targeted Loans Over Rate Cut to Aid Wall St .txt>>
<<2.621_20080917114928Gold Gains in London After AIG Buyout Platinum
Also Rebounds .txt>> <<2.620_20080917150506MoneyMarket Rate Jumps TED
Spread Soars on Credit Squeeze .txt>> <<2.620_20080917150156Fed Keeps
Rate at 2% Rebuffing Call for Reduction (Update3) .txt>>
<<2.620_20080917110438Platinum Gains After AIG Rescue Eases Concern
Demand May Drop .txt>> <<2.619_20080917150757European Stocks Fall on
Growth Concern Hochtief Anglo Drop .txt>> <<2.618_20080917145738US
Mortgage Rates May Wreak Havoc After Libor Gain (Update2) .txt>>
<<2.618_20080917110039Corporate Bond Risk Declines as Fed Agrees to AIG
Rescue Loan .txt>> <<2.617_20080917150132UK August Unemployment Report
Summary (Table) .txt>> <<2.617_20080917115300US Stocks Climb Led by
Financial Shares on AIG Speculation .txt>>
<<2.617_20080917114234Australian New Zealand Dollars Rally After US
Rescue of AIG .txt>> <<2.617_20080917111142Japanese 10Year Bonds
Decline After Fed Agrees to AIG Funding .txt>>
<<2.616_20080917150013Japan Australia Inject $33 Billion to Soothe
Markets (Update2) .txt>> <<2.616_20080917113739Canada Stocks Fall Led
by Manulife Royal Bank Potash Gains .txt>> <<2.616_20080917111704JSW
Steel Predicts Metal Prices Demand Will Revive (Update2) .txt>>
<<2.615_20080917150712BOE Voted 81 as Blanchflower Sought HalfPoint Cut
(Update1) .txt>> <<2.615_20080917111957Australia Industrials Safer
Than Banks Says JPMorgan (Update1) .txt>> <<2.650_20080917115056Cemex
Cesp Ecopetrol Petroleo Brasileiro SA Latin Preview .txt>>
<<2.642_20080917105046Housing Starts in US Probably Fell to 17Year Low
in August .txt>> <<2.641_20080917114951Shanghai Copper Rises From
10Month Low on Tight Local Supply .txt>> <<2.639_20080917145953Europe
Trade Deficit Widens to Record on Energy Costs (Update1) .txt>>
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