Business News: 07/23/08

Wednesday, July 23, 2008

Canada June Consumer Price Index: Summary (Table)

By Andy Burt

July 23 (Bloomberg) -- Following is a summary of the June consumer price index report from Statistics Canada.

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                      June   May  April March Feb.  Jan.  Dec.  June  3-mo.
                      2008  2008  2008  2008  2008  2008  2007  YOY%  Annual
==============================================================================
[bn:WBTKR=CACPICHG:IND] All items []               0.7%  1.0%  0.8%  0.4%  0.4% -0.2%  0.1%  3.1%  10.3%
 Ex-food & energy      0.0%  0.4%  0.3%  0.2%  0.4% -0.4% -0.2%  1.2%   2.6%
[bn:WBTKR=CACPX8M:IND]   Core []                  0.1%  0.3%  0.3%  0.2%  0.5%  0.1% -0.3%  1.5%   2.5%
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Food                    1.0%  1.0%  0.8% -0.2%  0.4%  0.6%  0.4%  2.8%  11.9%
Shelter                 0.6%  0.3%  0.9%  0.4%  0.3%  0.0%  0.3%  4.7%   7.5%
Household operations    0.0% -0.1%  0.3%  0.0%  0.8% -0.2%  0.2%  1.3%   0.8%
Clothing, shoes        -0.5% -1.4% -1.8%  2.0%  2.1% -1.6% -2.8% -0.6% -13.8%
Transportation          1.8%  2.9%  2.0%  0.7% -0.5%  0.1%  0.7%  5.5%  30.1%
Health, personal care   0.1%  0.3%  0.4%  0.2%  0.2% -0.2% -0.3%  0.7%   3.0%
Recreation, education   0.0%  1.3%  0.3%  0.5%  1.2% -1.6% -0.8%  0.4%   6.5%
Alcohol, tobacco        0.2%  0.6%  0.1% -0.2%  0.3%  0.2% -0.2%  1.6%   3.5%
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                      June   May  April March Feb.  Jan.  Dec.  June  3-mo.
                      2008  2008  2008  2008  2008  2008  2007  YOY%  Annual
==============================================================================
Goods                   1.1%  1.1%  1.0%  0.7%  0.1% -0.1% -0.2%  2.5%  13.6%
Services                0.3%  0.8%  0.5%  0.2%  0.6% -0.3%  0.3%  3.7%   7.0%
Energy                  4.4%  5.5%  4.9%  2.7%  0.3%  0.6%  1.2% 18.0%  77.5%
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NOTE: All figures are not seasonally adjusted and month-over-month,
unless otherwise stated.

The following eight volatile components, as defined by the Bank of Canada, comprise the core CPI ex-8: fruit; fruit preparation and nuts; vegetables and vegetable preparations; mortgage interest costs; natural gas; fuel oil and other fuels; gasoline; inter-city transportation and tobacco products and smokers' supplies. Figures prior to May are based on previous release and may be subject to revision.

To contact the reporter on this story: Andy Burt in Washington at aburt1@bloomberg.net

House Lawmakers to Vote on Fannie-Freddie Rescue Plan

By Brian Faler

July 23 (Bloomberg) -- The House of Representatives is set to vote today on a rescue plan for Fannie Mae and Freddie Mac after U.S. lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.

Legislators crafted the agreement nine days after Treasury Secretary Henry Paulson asked for powers to inject capital into Fannie Mae and Freddie Mac. White House spokeswoman Dana Perino today said President George W. Bush will sign the measure, removing a veto threat over a provision to include $3.9 billion in aid to communities hit by the housing market collapse.

The agreement increases the likelihood Paulson will get the authority this week, after he lobbied lawmakers to overcome concerns about taxpayer liability. The Treasury chief argued that the backstop for the beleaguered mortgage companies was critical to help safeguard U.S. financial market stability.

``It's important to get this legislation in place, and Congress and Paulson have done well to put together a workmanlike bill,'' said Peter Wallison, a former Treasury general counsel who is now a fellow at the American Enterprise Institute in Washington.

Lawmakers added the provisions to legislation that would create a stronger regulator for Fannie Mae and Freddie Mac and expand federal efforts to stem mortgage defaults.

Fannie Mae gained $1.39, or 10 percent, to $14.80 at 8:02 a.m. in early New York Stock Exchange composite trading. Freddie Mac added $1.06, or 11 percent, to $10.76.

Vote Today

Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said the House will vote today, with the Senate expected to take it up tomorrow. He introduced the bill to reduce foreclosures in April.

``Nobody is for everything that's in it or got everything in it he wanted, but we negotiated a lot,'' Frank told reporters late yesterday.

Lawmakers, intent on limiting potential losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. Still, they also raised that ceiling to $10.6 trillion from the current $9.815 trillion.

Paulson, in an emergency move after Fannie Mae and Freddie Mac stock dropped to the lowest levels in more than 17 years, asked July 13 for power to make unlimited equity purchases in the firms. He also asked for ``unspecified'' increases in their lines of credit, from $2.25 billion each. Both proposed measures would last until the end of next year.

Challenged Bush

Democratic lawmakers challenged Bush with yesterday's deal by including a measure he has repeatedly threatened to veto. Perino maintained that although the White House thought it would have the votes to uphold a presidential veto of the measure, time was running out for action before legislators begin their summer recess in August.

``We believe this is not the time for a prolonged veto fight,'' she said in a conference call with reporters.

The provision would channel $3.9 billion to communities for the purchase of foreclosed properties. Officials have said it would aid lenders who now owned the vacated properties rather than struggling homeowners.

Frank's counterpart in the Senate issued a statement indicating he backs the bill.

``We remain optimistic about the prospects for this legislation,'' Democratic Senator Christopher Dodd said in a joint statement with Republican Senator Richard Shelby.

Dodd, of Connecticut, chairs the Senate Banking Committee and Shelby, of Alabama, is the panel's top Republican. After the Senate, the bill would go to Bush for signing into law.

$12 Trillion

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about half of the $12 trillion of U.S. home loans outstanding. The companies face mounting losses stemming from the collapse of the subprime market.

Fannie Mae has dropped about 45 percent in the past month, and Freddie Mac has tumbled about 60 percent, on concern they have insufficient capital to cover writedowns and losses.

``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television yesterday. ``We must, in the short term, take steps to boost confidence'' in the firms.

In addition to a new regulator, the bill provides for the Federal Reserve to consult on Fannie Mae and Freddie Mac finances. Paulson said this week that the Fed has already begun participating in assessments of the companies.

The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government.

Higher Cap

Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase. The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

States would be able to offer an additional $11 billion of mortgage-revenue bonds to refinance subprime loans.

Chances for the legislation's passage also got a boost yesterday when the Congressional Budget Office released a cost estimate for Paulson's plan that was lower than some had feared. While a range of outcomes was possible, the non-partisan group put a price tag of $25 billion on the proposals.

``It's pretty good news -- a lot of people thought it would be much higher,'' Shelby said yesterday.

The CBO also warned of the consequences of Congress failing to approve the backstop.

``Failing to provide such authority at this point could trigger turmoil in the nation's financial and housing markets, with potentially serious adverse consequences,'' the CBO said, noting that markets are anticipating the measure's passage.

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

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BOE Panel Splits Three Ways as Besley Favors Increase (Update3)

By Brian Swint

July 23 (Bloomberg) -- Bank of England policy makers split three ways in the decision to keep interest rates unchanged this month, as Timothy Besley cast the first vote for an increase in a year and David Blanchflower favored a reduction.

Governor Mervyn King and six other members of the Monetary Policy Committee kept the benchmark rate at 5 percent, minutes of the July 10 decision showed today. Besley argued that the fastest inflation in a decade put the bank's credibility at risk, while Blanchflower said the economy was likely to ``contract sharply in the near term, possibly for several quarters.''

The split highlights the dilemma facing Bank of England officials as they weigh the risk of a recession against the danger that inflation will get out of control. Reports today showed that mortgage approvals plunged by two thirds in June as the U.K.'s housing slump worsened, while a gauge of factory prices jumped to the highest in more than 18 years this month.

``For all members of the committee, the decision was a difficult one,'' the Bank of England said in the minutes. ``But all members agreed that, relative to the'' forecasts published in May, ``the path of inflation in the near term would be higher and the slowdown in activity more pronounced.''

The pound rose 0.3 percent against the dollar after the release of the minutes, and traded at $1.9973 as of 11:41 a.m. in London. Against the euro, it climbed 0.4 percent to 78.78 pence.

Rate `Threat'

``This has reminded the market that the MPC has not gone soft on inflation,'' Alan Clarke, an economist at BNP Paribas SA in London, said in an interview on Bloomberg Television. ``The threat of a hike will remain for months to come.''

The divide among policy makers was the first such split on the direction of rates since May 2006. While the panel also split three ways in April this year, the debate focused more on the size of the rate cut than the direction of the move. Blanchflower favored a half-point reduction and six members argued for a quarter-point move. Andrew Sentance and Besley wanted no change.

The last vote for an increase was in July 2007, when a majority of the committee raised the rate to 5.75 percent. The bank has cut the rate three times since December.

This was Chief Economist Spencer Dale's first vote on the committee since he took up his post this month. Rachel Lomax left the panel at the end of June after she finished her term as deputy governor.

Inflation Jump

Inflation accelerated to 3.8 percent in June, the fastest pace in 11 years. The rate has exceeded the bank's target for nine months. A U.K. index of factory price expectations rose to 34 in July from 28 in June, the highest since January 1990, the Confederation of British Industry said today.

U.K. unemployment jumped the most in June since the aftermath of the last recession in 1992 as the economic slowdown forced homebuilders and banks to cut jobs. Banks are curbing lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $467 billion in losses and writedowns.

``Keeping bank rate at 5 percent when the economy was slowing was arguably already signaling a strong signal of the MPC's commitment to reducing inflation,'' the minutes showed. ``A rate change this month would be a surprise at a time when credit and other financial markets remained fragile.''

Those in favor of no change in interest rates this month said that an increase now may ``impart at downward momentum on the economy that risked significant undershoot of inflation in the medium term,'' the minutes showed.

Policy makers suggested that, if needed, a change in interest rates would be more appropriate next month when they update their quarterly forecasts.

``Any change in rates would be better communicated alongside the bank's August inflation report,'' the minutes showed.

Policy Argument

Besley argued that the bank should raise its rate by a quarter-point ``to keep medium-term inflation expectations anchored and ensure the committee's credibility,'' the minutes showed. Blanchflower wanted a cut by the same amount ``to avoid inflation undershooting the target in the medium term.''

Economic growth will slow to a 1 percent annual pace in the first quarter of 2009, the weakest since 1992, the Bank of England predicted on May 14. King said then that there may be ``an odd quarter or two of negative growth.''

U.K. mortgage approvals dropped 67 percent in June from a year earlier to the lowest since at least 1997 after the housing market worsened and deterred potential buyers, a report by the British Bankers' Association showed today. HBOS Plc, the U.K.'s biggest mortgage lender, said this month that house prices, which tripled in the past decade, dropped in June from a year earlier by the most since 1992.

``The housing market downturn had gathered momentum,'' the minutes showed today. ``House prices had already fallen by around 8 percent since their peak.''

The next interest rate decision is on Aug. 7 and the bank will publish new economic forecasts on Aug. 13.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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European Industrial Orders Fall More Than Forecast

By Fergal O'Brien

July 23 (Bloomberg) -- European industrial orders dropped more than twice as much as forecast in May as cooling global growth and the euro's advance damped demand.

Industrial orders in the euro area fell 3.5 percent from April, when they increased less than initially estimated, the European Union statistics office in Luxembourg said today. Economists had forecast a decline of 1.3 percent, according to the median of 22 estimates in a Bloomberg survey.

Europe's manufacturing activity is contracting as global economic growth eases, reducing demand for the region's exports. European Central Bank President Jean-Claude Trichet said last week there will be a ``trough'' in growth through the third quarter before the economy gathers strength toward the end of the year.

``Industrial orders are notoriously volatile, so not too much should be read into one month's data,'' said Howard Archer, chief European economist at Global Insight in London. ``Nevertheless, May's sharp decline adds to a recent stream of worrying news on the manufacturing sector and, indeed, the euro-zone economy overall.''

A monthly index of European manufacturing probably fell to 48.7 this month from 49.2 in June, according to economists surveyed by Bloomberg. The purchasing managers' index is scheduled to be published tomorrow and a reading below 50 indicates contraction.

Soaring Prices

The euro has gained 14 percent against the dollar in the last 12 months. It fell 0.3 percent to $1.5738 as of 10:48 a.m. in London.

Europe's economy may be further undermined as soaring food and energy prices and higher borrowing costs erode household confidence. Consumer spending in France fell 0.4 percent in June, the country's statistics office said today.

The data is ``further evidence that households are cutting down on spending across the euro-area,'' said Lavinia Santovetti, an economist at Lehman Brothers in London. ``The inflation shock, the deterioration of labor market conditions, smaller wealth effects and tightening credit conditions are weighing on consumers' spending decisions.''

The increase in industrial orders in April was revised to 2 percent from 2.5 percent, the statistics office said. From a year earlier, orders fell 4.4 percent in May. Excluding transport equipment, orders declined 2.5 percent from the previous month and were down 4 percent from the year-earlier month.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

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Dollar Rises to Four-Week High as Financial Loss Concern Eases

By Ye Xie and Kim-Mai Cutler

July 23 (Bloomberg) -- The dollar rose to a four-week high against the yen and advanced versus the euro as concern eased that losses at financial firms may prolong the U.S. economic slowdown and oil prices fell.

The currency also gained as signs of stability in the financial sector fueled bets that the Federal Reserve will raise interest rates in September. The yen fell to a record low against the euro as stocks climbed, encouraging investors to add to holdings of higher-yielding assets funded in Japan.

``The view that the worst of the uncertainty and bad news may be behind us has reinvigorated risk appetite,'' said Derek Halpenny, head of currency research in London at Bank of Tokyo- Mitsubishi. ``We're on the last leg of the dollar bear market.''

The dollar rose 0.5 percent to 107.82 yen at 8:47 a.m. in New York, from 107.33 yesterday. It touched 107.92, the highest since June 26. The U.S. currency appreciated 0.2 percent to $1.5746 per euro, from $1.5783. The euro may peak at about $1.62 before falling to $1.48 in a year, Halpenny said. The yen dropped 0.2 percent to 169.80 per euro, from 169.43 yesterday. It touched 169.96, the weakest since the euro's 1999 debut.

Futures traded on the Chicago Board of Trade showed a 55 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 49 percent odds yesterday. Policy makers next meet Aug. 5.

The Chinese yuan fell 0.1 percent to 6.8298 versus the dollar. China will slow the local currency's gains to about 3 percent in the second half of the year to help exporters weather a decline in global demand and rising costs, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences in Beijing.

Weaker Yen

The yen dropped 0.9 percent against the pound and 0.4 percent versus the Brazilian real as an advance in global stocks encouraged carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 5 percent in the U.K. and 12.25 percent in Brazil.

``With the markets calming down, shown by the rally in stocks, the yen is becoming particularly weak among major currencies,'' said Shigetake Nakayama, a manager on the proprietary-trading desk in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second-largest financial group. ``With rates still low, there is no reason to buy the yen.''

The euro extended its decline versus the dollar as a report showed industrial orders in the euro region fell in May more than twice as much as forecast. Orders dropped 3.5 percent from April, the European Union statistics office in Luxembourg said today, compared with a 1.3 percent decline predicted by economists in a Bloomberg survey.

Treasury Note

The yield on the U.S. two-year Treasury note increased 7 basis points, or 0.07 percentage point, to 2.78 percent. The yield advantage of the comparable-maturity German bund decreased to 181 basis points, the narrowest since July 11, making the U.S. securities more attractive.

The dollar rose the most against the euro in more than two weeks yesterday after Treasury Secretary Henry Paulson said a strong dollar is ``really very important'' and Congress will likely pass a plan to support Fannie Mae and Freddie Mac. Philadelphia Fed President Charles Plosser said interest rates should be raised.

The U.S. currency touched a record low of $1.6038 per euro on July 15 as traders speculated the two companies, which own or guarantee almost half of the $12 trillion in outstanding U.S. home loans, would be forced to seek a bailout.

Overseas Purchases

Overseas investors' net purchases of Fannie Mae, Freddie Mac and other so-called agency debt were $24.2 billion in May the Treasury Department said on July 16. That compares with the $67 billion foreign investors spent on U.S. stocks, notes and bonds that month, Treasury data show.

``Paulson is trying to prevent further declines in dollar assets given that foreign investors' purchases of agency bonds are one source of funding for the U.S. current-account deficit,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote today in a research note.

The current account is the broadest measure of trade. An economy with a deficit relies on overseas investment to make up for its own savings shortfall.

The Fed will issue its Beige Book report, a survey of regional economic performance, at 2 p.m. today in Washington. Economic growth was ``generally weak'' in April and May as consumer spending slowed, the Fed said in its June 11 report.

``The Beige Book will hold a bearish tone on the economy while mentioning rising inflationary pressure,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd. ``We don't expect any rate hike by the Fed this year. With the markets still pricing in a rate hike, this will push down the dollar,'' to 103 yen by year-end, he said.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.

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Wachovia CEO Steel's Plan Boosts Stock $7.7 Billion

By David Mildenberg

July 23 (Bloomberg) -- Wachovia Corp. Chief Executive Officer Robert Steel, in the job only two weeks, drove up the bank's market value $7.7 billion in a single day after reporting the biggest quarterly loss in its history.

Wachovia rallied 27 percent in New York trading yesterday, the most in almost 25 years, after Steel said he will cut jobs, reduce the dividend and consider the sale of ``non-core'' assets. The former Treasury undersecretary told shareholders the bank had an $8.9 billion second-quarter loss, and he still faces the legacy of the previous CEO's $24 billion bet on home loans that could undermine earnings for years to come.

``Before they were in denial; they've started to come to grips,'' said Bart Narter, a senior analyst at Celent, the Boston-based financial research and consulting firm. Steel ``is anticipating future losses. The problem is, you don't know what future losses are going to be,'' Narter said.

Former CEO Kennedy Thompson bought Golden West Financial Corp. in 2006, at the height of the housing boom. Concern about bad loans helped drive Wachovia to a 17-year low last week, and now Steel, 56, must decide what to do about $122 billion of remaining Golden West mortgages. Two-thirds are in California and Florida -- two states hit hardest by the U.S. housing slump.

The Charlotte, North Carolina-based bank said yesterday that home prices will probably tumble another 14 percent in California and 19 percent in Florida. The lender didn't include the Golden West purchase in the $6.1 billion writedown announced yesterday.

Wachovia was little changed at $16.79 in early New York trading today, giving the company a market value of about $36 billion, according to Bloomberg data.

Core Value

Steel urged investors to look away from Golden West and focus on the $4 billion in quarterly profit produced elsewhere in the company.

``It's become even more clear to me that Wachovia is very strong and has excellent opportunities going forward,'' said Steel, who joined the bank on July 9. Wachovia's gains yesterday lifted the stock price to the highest since June 26. The shares are still down 56 percent this year.

The bank resembles a golfer who pars the first 16 holes, then scores a 12 on the last two, said Deutsche Bank AG analyst Mike Mayo, who upgraded his opinion on big U.S. banks yesterday.

Wachovia set aside $4 billion in reserves for future losses and showed it can earn $16 billion on an annualized basis, excluding its mortgage problem, Mayo wrote in a report.

`A Bit Evasive'

Steel deferred questions on what he considers to be ``non- core assets,'' saying on a conference call with analysts, ``I admit to being a bit evasive.'' He said he'd be prepared to answer in several months.

Wachovia hasn't tried to raise capital by selling shares to boost its 8 percent Tier 1 ratio, Steel said, relying instead on savings from dividend cuts and cost reductions. When Wachovia last raised money, in April, shares sold at $24 -- about 43 percent more than where the stock closed yesterday.

Wachovia's operating earnings should enable the company to ``absorb up to $16 billion in annual provisions without having to raise additional capital via a stock offering,'' Merrill Lynch & Co. analyst Edward Najarian wrote in a report yesterday. He rates Wachovia at ``neutral.''

Steel pointed to Wachovia Securities as a particularly strong business that complements the bank's retail banking division. The investment banking unit, which earned $209 million after two straight quarterly losses, received limited mention from the new CEO.

Option-ARMs

Wachovia isn't getting interest payments on almost 6 percent of its $122 billion in option adjustable-rate mortgages, which let borrowers skip payments and add interest to their principal balances. Again, most of the loans were in California and Florida.

So far the company has charged off $454 million of the loans as uncollectible. That number is expected to soar to $6.6 billion by the end of 2009, the bank said yesterday, citing a more negative outlook on both economic and housing markets than it had previously disclosed.

``This possibly is a turning point,'' said John Moore, a Charlotte insurance agency owner who owns 200,000 Wachovia shares. ``The market is also telling you that after more than 20 years of leadership by Ed Crutchfield and Ken Thompson, the shareholders are worse off,'' he said.

Crutchfield was CEO of predecessor First Union Corp. from 1984 until 2000, when Thompson took over.

To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina, at dmildenberg@bloomberg.net.

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U.K. Gilts Slide on Global Stock Gains, Bank of England Minutes

By Agnes Lovasz

July 23 (Bloomberg) -- U.K. bonds fell as stocks worldwide rose and central bank minutes showed a policy maker voted for the first time in a year to increase interest rates to curb accelerating inflation. The pound jumped.

The yield on the 10-year gilt climbed to the highest level since July 3 as the Dow Jones Stoxx 600 Index, a European equity benchmark, rose as much as 2.1 percent. Asian stocks and U.S. index futures also gained. Bank of England policy maker Timothy Besley, who voted to lift rates at this month's meeting, said the fastest inflation in a decade put the bank's credibility at risk.

``Equities are having a reasonable bounce, which erodes the risk premium in the market,'' said Jason Simpson, a fixed-income strategist in London at Royal Bank of Scotland Group Plc. ``The negative risk hanging out there is that some policy makers may say, given where inflation is going, we need to hike rates.''

The yield on the 10-year gilt climbed 6 basis points to 5.06 percent at 1:12 p.m. in London. The price of the 5 percent security due March 2018 declined 0.45, or 4.5 pounds per 1,000 pound ($2,000) face amount, to 99.56. The two-year note yield advanced 8 basis points to 5.12 percent, after sliding 7 basis points yesterday. Yields move inversely to bond prices.

The pound climbed against all 16 of its major counterparts. Against the euro, the currency rose to 78.70 pence, from 79.24 pence yesterday. It was at $2.0005, from $1.9917. The pound has dropped 6.6 percent versus the euro this year and gained 0.8 percent against the dollar.

Rates Unchanged

Bank of England policy makers left rates unchanged at 5 percent on July 10 after lowering them three times since November in a bid to stave off a recession.

The implied yield on the December short-sterling futures contract advanced 10 basis points to 5.97 percent, showing traders increased wagers borrowing costs will increase.

Central bank policy maker Andrew Sentance said July 17 he was ``particularly struck'' by the jump in inflation and considered voting for higher rates last month. David Blanchflower, who favored a reduction at the last meeting, said the economy was likely to ``contract sharply in the near term, possibly for several quarters.''

``The minutes are tilting the expectations on the hawkish side,'' said Peter Schaffrik, a fixed-income strategist in London at Dresdner Kleinwort. ``The bank is deemed to be `laissez faire' when it comes to inflation, hoping the problem will go away by itself if the economy is sluggish enough and now that's brought into question. It does change the near term picture.''

Two- and 10-year gilt yields will rise to about 5.25 percent in the next three to six months, Schaffrik said.

Opposing Viewpoint

The MSCI Asia Pacific Index gained 1.5 percent and futures on the Standard & Poor's 500 Index increased 0.6 percent. The MSCI World Index, a global measure, advanced for the sixth day, climbing 0.4 percent.

Some analysts disagree.

The difference in yield, or spread, between four- and 10-year U.K. gilts will widen as the threat of a recession prompts the central bank into ``aggressive easing'' of rates, Royal Bank of Canada said.

The spread between the March 2012 and March 2018 yields will widen to as much as 22 basis points, said Richard McGuire, a senior fixed-income strategist in London at RBC. It was less than half a basis point as of 9 a.m. today. McGuire said the forecast has no specific timeframe, though he typically suggests strategies on a three-month horizon.

U.K. mortgage approvals slumped in June, the British Bankers' Association reported today. Banks granted 21,118 loans for house purchase, down 67 percent from a year earlier and the lowest since the data begin in 1997, the BBA said.

Slowing growth and the prospect of rate cuts will weaken the pound to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. Gains in gilts will lower the yield on the 10-year note to 4.84 percent in the period, a separate survey showed.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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Morgan Stanley Is `Modestly Bullish' on Peso, Rupiah

By Lilian Karunungan

July 23 (Bloomberg) -- Morgan Stanley said it has turned ``modestly bullish'' on the Philippine peso and the Indonesia rupiah after their central banks raised interest rates in the past months to damp inflation.

The Philippine peso is headed for its first monthly gain since February after the Bangko Sentral ng Pilipinas raised its overnight rate after inflation accelerated to the fastest in 14 years. Indonesia's rupiah has risen 1.3 percent in the past month, the second-best performer of the 10 Asian currencies outside Japan, after Bank Indonesia increased borrowing costs to slow the quickest inflation in 21 months.

``With monetary policy `normalizing', the balance of fundamentals is tilting back to a more supportive position for the Philippine peso and the Indonesian rupiah,'' Stewart Newnham, a research analyst in Hong Kong at Morgan Stanley, wrote in a research note sent to clients today. He confirmed the contents of the report by telephone.

The Philippine central bank on July 17 raised its overnight rate to 5.75 percent from 5 percent in June after inflation quickened to 11.4 percent last month.

Bank Indonesia on July 3 increased its benchmark rate to 8.75 percent from 8 percent starting May to slow inflation. Bank Indonesia's Governor Boediono said today fighting inflation will be the central bank's priority for the next 1 1/2 years.

`Weak' Response

The peso rose 1.3 percent to 44.02 against the U.S. currency as of the 4 p.m. close in Manila, the most in almost seven years, according to the Bankers Association of the Philippines. The rupiah gained 0.1 percent to 9,145 per dollar.

``We believe the weak monetary policy response to inflation has been the Achilles' heel that has undermined the overall fundamentals of their currencies,'' Newnham said in the report.

Morgan Stanley, the second-biggest U.S. securities firm by market value, didn't give a new forecast for the peso. The company on July 7 had predicted the Philippine currency will decline to 45.80 by Dec. 31.

The rupiah's gains will be capped at 9,000, the strongest since June 2007, the Morgan Stanley report said, without giving a time frame. It had previously forecast the currency to decline to 9,367 by the end of December.

Morgan Stanley said its ``bullishness'' on both currencies is tempered by the prospects of a slowdown in the global economy.

The peso's depreciation will slow after the central bank's rate increase of 50 basis points last week, according to a report by HSBC Holdings Plc.

`Moderate Pace'

``Peso weakness will likely occur at a more moderate pace going forward,'' Perry Kojodjojo, HSBC's Hong Kong-based currency strategist, said in a report sent to clients today. ``Hawkish subsequent talk suggests the most linear part of the U.S. dollar rally is done.''

Kojodjojo, who confirmed the contents of his report, said he did not have a new forecast. In a June 23 report he said the peso may weaken to 49 per dollar by December and to 52 by the second quarter next year,

The Philippines' rate advantage over the U.S. is 3.75 percentage points, the most since 2005. Indonesia's rate premium to the U.S. is 6.75 percentage points, the biggest since 2006.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net

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Copper, Aluminum Drop in London as Stronger Dollar Curbs Appeal

By Chanyaporn Chanjaroen

July 23 (Bloomberg) -- Copper and aluminum fell in London as a strengthening dollar dulled the metals' appeal as an alternative investment. Zinc rose the most in more than a week.

The London Metal Exchange index tracking six industrial metals has a correlation of 0.534 with the euro/dollar so far this month, compared with 0.462 in June. A reading of 1 indicates they move in lockstep. Oil and gold also declined as the U.S. currency gained to a four-week high against the yen and a two- week high against the euro.

``If you are investing in copper, you should not keep your eye only on supply and demand, and the labor unrest in South America, but also on the strength of the dollar,'' Donald Selkin, chief market strategist at National Securities Corp. in New York, said yesterday in a Bloomberg Television interview.

Copper for delivery in three months fell $30, or 0.4 percent, to $8,100 a metric ton as of 1:31 p.m. London time. Aluminum dropped $21, or 0.7 percent, to $3,014 a ton.

A stronger U.S. currency discourages holders of other monies to buy dollar-denominated commodities, which become more expensive to them.

Output from Chile's Escondida, the world's biggest copper mine, may fall between 10 and 15 percent in the fiscal year to June 30, 2009, because of lower-quality ores, said BHP Billiton Ltd.

BHP owns 57.5 percent of the mine and its share of output in fiscal 2008 was 679,500 tons, the company said today. Production rose to 178,200 tons for the three months ended June 30, from 170,500 tons a year earlier, it said. Rio Tinto Group owns 30 percent of the mine.

Zinc Rallies

Zinc rose as much as $70, or 3.8 percent, to $1,915 a ton, the biggest intraday gain since July 11.

China, the world's largest producer and consumer of the metal, remained a net importer of the metal for a fifth consecutive month, according to customs data published yesterday.

Still, ``demand is weak, suggesting a build in unreported stocks,'' Barclays Capital said in an e-mailed report.

Among other LME-traded metals, nickel fell $50 to $20,450 a ton, lead slipped $15 to $2,125, after earlier rising as much as 2.6 percent to $2,195 a ton, the highest intraday price since May 20. Tin fell 0.2 percent to $23,350.

To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net

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Sugar Falls for Sixth Session as Crude Oil Slumps, Dollar Gains

By Ron Day

July 23 (Bloomberg) -- Sugar fell for a sixth straight session, its longest decline in more than two months, as crude oil slipped and the dollar strengthened.

Crude oil dropped as much as $2.60 a barrel, the sixth decline in seven sessions, renewing speculation that demand for fuel made from cane will weaken. Sugar cane is refined into ethanol in Brazil, the world's biggest producer of the sweetener and cane-based fuel. The dollar rose to a four-week high against the yen on supportive statements yesterday by U.S. officials.

Sugar futures for October delivery fell 0.15 cent, or 1.2 percent, to 11.86 cents a pound at 8:58 a.m. on ICE Futures U.S., the former New York Board of Trade. The price earlier touched 11.73 cents, the lowest for a most-active contract since June 13. The slide is the longest since a seven-session slump that ended on May 1.

Speaking in New York yesterday, Treasury Secretary Henry Paulson voiced support for the dollar, which also rose against the euro. Federal Reserve Bank of Philadelphia President Charles Plosser, in remarks in Pennsylvania yesterday, said that interest rates should be raised.

The dollar jumped as much as 0.6 percent against the yen and 0.4 percent against the euro in early New York trading.

To contact the reporter on this story: Ron Day in New York at rday1@bloomberg.net.

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Oil, Gold, Crops Drop as Stronger Dollar Cuts Commodity Demand

By Grant Smith

July 23 (Bloomberg) -- Crude oil, precious metals and crops fell as a stronger U.S. dollar limited the appeal of commodities as a hedge against inflation.

Oil dropped for a second day, capping a 15 percent slide from a record $147.27 a barrel on July 11, as the dollar strengthened and gasoline demand fell. Gold traded close to its lowest in a week and corn neared a two-month low as expectations of higher interest rates supported the U.S. currency.

``Oil and some other commodities are down on the back of the dollar,'' said Mike Wittner, head of oil research at Societe Generale in London. ``Also, general pessimism about the economy has caused the market to refocus on the demand outlook.''

Crude oil for September delivery fell as much as $2.25, or 1.8 percent, to $125.70 a barrel, and traded at $126.10 at 1:25 p.m. London time on the New York Mercantile Exchange. The August contract expired yesterday after declining 2.4 percent to $127.95 a barrel, the lowest settlement since June 5.

The dollar rose to a four-week high against the yen after Treasury Secretary Henry Paulson voiced support for the currency and the president of the Federal Reserve Bank of Philadelphia said interest rates should be raised.

The dollar rose to 107.77 yen as of 6:37 a.m. in New York, from 107.33 in New York yesterday. It appreciated to $1.5745 per euro, from $1.5783 yesterday.

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, gained 29 percent in the first half of the year as the U.S. currency retreated 7.4 percent. The index has fallen 7.1 percent this month as the dollar has stabilized.

Hurricane Dolly

Oil also declined on forecasts that Dolly, a hurricane in the Gulf of Mexico, will miss rigs in the region, which accounts for 25 percent of U.S. crude production. Dolly approached to within 100 miles (160 kilometers) of the coasts of northern Mexico and southern Texas with winds of 80 miles per hour, according to the National Hurricane Center.

``The downside for oil is somewhat limited as we are at the beginning of the hurricane season, and it's predicted to be an above-average season,'' said Andy Sommer, an analyst with HSH Nordbank in Hamburg. ``We are telling our customers to live with $130 until the end of October.''

Gold for immediate delivery dropped to $932.45 an ounce in London, the lowest since July 10, and corn for December delivery slid to $5.8125 a bushel, the lowest since May 30. Platinum fell $28.50, or 1.6 percent, to $1,780 an ounce, an eighth consecutive decline.

Agricultural commodities also declined. Wheat for September delivery dropped 1.6 percent to $7.84 a bushel at 1:13 p.m. London time, down 42 percent from a record $13.495 on Feb. 27.

Gasoline Stockpiles

Soybeans for November delivery tumbled as much as 36 cents, or 2.5 percent, to $13.81 a bushel and traded at $13.825 as of 1:14 p.m. London time.

The U.S. Energy Department is scheduled to release its weekly report on crude and fuel stockpiles today at 10:35 a.m. in Washington.

U.S. gasoline demand fell 3.3 percent last week from a year ago, the 13th consecutive weekly decline, as Americans react to record pump prices by driving less, a MasterCard Inc. report yesterday showed.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net.

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South Africa Strike Shuts Carmakers, Hits Miners

By Mike Cohen and Nicky Smith

July 23 (Bloomberg) -- A strike in four of South Africa's provinces to protest increased power prices shut car manufacturing plants and hindered people from getting to work in the several cities.

The strike, called by the Congress of South African Trade Unions, also drew support from some workers at mines owned by Anglo Platinum Ltd., Impala Platinum Holdings Ltd., Harmony Gold Mining Co. and Gold Fields Ltd.

Cosatu, South Africa's biggest labor federation, called the strike after the country's energy regulator last month allowed state-owned Eskom Holdings Ltd. to raise electricity prices by 27.5 percent, almost triple the 10.9 percent inflation rate, to help fund a $44 billion expansion. The utility provides 95 percent of South Africa's power.

``They are making a very valid point,'' Colen Garrow, chief economist at Brait SA in Johannesburg, said in an interview. ``There is a voice to be heard. South Africans are hurting.''

The labor federation staged rallies and marches in 11 towns today. About 3,000 people joined a peaceful protest in Johannesburg, the country's biggest city, while about 7,000 attended a march in the southern city of Port Elizabeth, police said.

The strike is the last of a series of protests held in the country's nine provinces this month. A nationwide strike has been called for Aug. 6. Today Cosatu called on its members in Gauteng, South Africa's richest province, to boycott work along with those in the Eastern Cape, North West and Limpopo provinces.

Car Plants

The labor action shut a car plant owned by Daimler AG in the southern town of East London while Ford Motor Co. closed its plants in Port Elizabeth and at Silverton, near the capital, Pretoria. Volkswagen AG's main plant in the southern town of Uitenhage, which usually produces 450 vehicles a day, was also shut.

In Johannesburg many privately owned minibus taxis, the main form of transport in the country, didn't run, stranding commuters.

``We have three mines and one plant that are affected,'' said Amelia Soares, a spokeswoman for Harmony, South Africa's third-biggest gold producer. ``The loss for the day will be about 32 kilograms of gold.''

Contractors, who represent about 15 percent of the company's workforce, continued to work, Soares added.

Gold Fields

Gold Fields, South Africa's second-biggest gold producer, said its Kloof mine and non-mining operations at its South Deep facility were hit by the strike, while its Driefontein mine was operating as normal, according to company spokesman Daniel Thole.

Joanne Jones, a spokeswoman for AngloGold Ashanti Ltd., the country's biggest gold producer, said the strike is having a ``limited effect'' at its West Wits mines and is expected to have a ``more significant impact'' at its Vaal Reefs operations.

DRDGold Ltd., South Africa's fourth-biggest gold producer, ``is not badly affected at all,'' spokesman James Duncan said. ``The ERPM and Blyvoor operations will be normal. At Crown surface retreatment operations one of the three plants has been affected. One plant's attendance is down to 35 percent.''

Anglo Platinum, the world's biggest platinum producer, said 73 percent of workers stayed away at its Twickenham mine. Eight percent of workers at the company's Rustenburg operations joined the strike, as did 21 percent of workers as its Waterval smelter and 36 percent at its Polokwane smelter, said company spokesman Simon Tebele.

Impala

Impala Platinum, the world's second-largest producer of the metal, said almost all employees at its Rustenburg operations attended work.

``At our Marula mine in the Eastern Bushveld, near Burgersfort, there is a 60 percent attendance,'' said Impala's investor relations officer Alice Lourens. ``That will have no material impact on Impala's production.''

Northam Platinum, which operates the world's deepest platinum mine, was unaffected by the strike, said spokeswoman Marion Brower.

Sasol Ltd., the world's largest producer of motor fuel from coal, also wasn't affected, said spokesman Johan van Rheede.

Strikes in five other provinces earlier this month forced the closure of many textile factories and crimped production at some platinum mines.

Cosatu, whose affiliate unions have about 1.8 million members, has a formal alliance with the ruling African National Congress and supports the party in parliamentary elections. The federation says the increased power prices will exacerbate poverty and unemployment.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Nicky Smith in Johannesburg nsmith38@bloomberg.net

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Stocks in Europe and Asia Advance; U.S. Index Futures Increase

By Sarah Jones

July 23 (Bloomberg) -- Stocks rose in Europe and Asia and U.S. index futures climbed as oil retreated, concerns eased that bank losses will expand and better-than-estimated earnings from Volkswagen AG and PSA Peugeot Citroen lifted automakers.

Air France-KLM Group and DSG International Plc led airlines and retailers higher after oil traded below $126 a barrel. UBS AG and HSBC Holdings Plc rose after Deutsche Bank AG said yesterday that financial companies are overcoming credit losses. Macquarie Group Ltd., Australia's biggest securities firm, advanced after saying it made a ``solid'' start to the year. Yahoo! Inc. jumped in German trading.

The MSCI World Index added 0.5 percent to 1,384.42 at 1:58 p.m. in London as four of 10 industry groups increased. Futures on the Standard & Poor's 500 Index rose 0.5 percent. India's Sensitive Index jumped 5.9 percent after Prime Minister Manmohan Singh's government retained the support of parliament.

``There are still some reassuring elements'' in the market, said Amandine Gerard, a Paris-based fund manager at Richelieu Finance which oversees $6.2 billion. ``Oil declining is the first. The market was also very worried about earnings at banks. All have reassured about solvency.''

The MSCI World has tumbled 13 percent this year as record oil prices, accelerating inflation and more than $467 billion in credit-related losses threatened to push the U.S. into recession.

Europe's Dow Jones Stoxx 600 Index advanced 1.8 percent today, as British Airways Plc, Debenhams Plc and STMicroelectronics NV climbed. The MSCI Asia Pacific Index increased 1.5 percent.

Investor Confidence

Crude fell for a second day as forecasters said Hurricane Dolly will miss fields in the Gulf of Mexico and the dollar rebounded, curbing investments in commodities.

The contract for September delivery fell as much as 2.4 percent to $125.35 a barrel on the New York Mercantile Exchange. The oil price yesterday tumbled 2.6 percent.

``The more the oil price falls the more confident you can become that inflation will be reduced and interest rates will come down,'' said Jane Coffey, head of equities at Royal London Asset Management, which oversees about $63 billion.

Air France, Europe's biggest airline, climbed 5.3 percent to 16.79 euros. British Airways Plc, the region's third-largest airline, jumped 4.4 percent to 257 pence.

DSG, the U.K.'s biggest consumer-electronics retailer, climbed 7.2 percent to 48.5 pence. Debenhams, the second-largest U.K. department-store company, jumped 12 percent to 45.5 pence.

UBS, the European bank hardest hit by the subprime contagion, climbed 4.4 percent to 22.94 francs. HSBC, Europe's biggest bank by assets, rose 2.6 percent to 834.75 pence.

Quelling Fears

Deutsche Bank analyst Mike Mayo said yesterday bank losses haven't spread as ``much as feared'' and that he's less ``negative'' on bank earnings.

Financial firms have led a rout that has erased about $13 trillion in value from global equities since October as credit losses and asset writedowns by the subprime-mortgage market's collapse spread, curbing the outlook for profit growth.

Better-than-expected earnings from Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. have sparked a rally in global financial stocks in the past week.

The MSCI World Financials Index has climbed 16 percent in six days after closing at the lowest since 2003 on July 15.

Macquarie gained 12 percent to A$52 in Sydney. Chief Executive Officer Nicholas Moore said ``Macquarie's businesses are performing relatively well despite market conditions deteriorating since this time last year,'' according to a statement before an annual shareholder meeting in Melbourne.

Banks worldwide have raised $345 billion to offset losses stemming from the financial-market turmoil and slowdown in lending.

Fannie, Freddie

Fannie Mae gained $1.58 to $14.99 in Germany, and Freddie Mac added 93 cents to $10.63. The House of Representatives is set to vote today on a rescue plan for the biggest U.S. mortgage-finance companies, said Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee.

State Bank of India, the nation's largest lender, gained 7.4 percent to 1,506.9 rupees. Prime Minister Singh yesterday won the country's first confidence motion in a decade, giving him the support needed to revive stalled policies.

Volkswagen advanced 4.9 percent to 205.60 euros. Europe's largest carmaker said second-quarter profit rose 35 percent to 1.64 billion euros ($2.58 billion) on sales of the Tiguan compact sport-utility vehicle and new car models. Seven analysts surveyed by Bloomberg News had estimated profit of 1.29 billion euros. Sales rose 4.5 percent to 29.5 billion euros.

Peugeot

Peugeot jumped 7.9 percent to 34.46 euros after Europe's second-biggest carmaker reiterated its 5 percent sales growth target and 3.5 percent operating-margin goal for the full year.

The company posted a 49 percent increase in first-half profit to 733 million euros, aided by cuts in production costs and buoyant demand for its new 308 compact and 207 small car. Analysts had expected net income of 674 million euros.

Fiat SpA gained 9.9 percent to 11.46 euros. Italy's largest manufacturer said second-quarter profit rose 1.9 percent to 604 million euros as higher sales in Brazil offset a slump in its home market. That beat the median forecast of 594 million euros in a Bloomberg survey.

Analysts estimate earnings for companies in the Stoxx 600 will drop 2.4 percent in 2008, Bloomberg data show. That's down from 11 percent growth predicted at the start of the year.

Profit at S&P 500 companies fell 16 percent in the second quarter, the fourth straight decline, according to analysts' estimates. That would be the longest streak in six years, Bloomberg data show.

Yahoo

Yahoo advanced 52 cents to $21.92 after reporting sales that met the company's forecasts from April. The Internet company that added activist investor Carl Icahn to its board yesterday said sales, excluding fees passed on to partner sites, rose 8.2 percent to $1.35 billion, compared with the $1.38 billion average of estimates compiled by Bloomberg.

STMicroelectronics advanced 4.2 percent to 7.05 euros. Europe's largest chipmaker forecast third-quarter revenue that met analysts' estimates, bolstered by sales of chips used in mobile devices.

Sales will climb between 7 percent and 14 percent from a year earlier. The midpoint of that range equates to $2.45 billion, the average of analysts' estimates in a Bloomberg survey.

Vodafone Group Plc gained 1.1 percent to 130.35 pence after the world's largest mobile-phone company said it will start a 1 billion-pound ($2 billion) stock buyback because the shares are ``significantly'' undervalued after a 14 percent drop yesterday.

Friends Provident Plc and Standard Life Plc led insurance companies higher after Goldman Sachs Group Inc. rated the insurers ``buy'' in new coverage.

The brokerage also added Friends Provident, a 176-year-old British insurer, to its ``conviction buy'' list. The shares jumped 9.9 percent to 88 pence. Standard Life increased 4.6 percent to 227 pence.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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U.K. Stocks Rise, Led by Banks, Insurers; Barclays Leads Gains

By Adam Haigh

July 23 (Bloomberg) -- U.K. stocks rose, led by banks and insurers, after Deutsche Bank AG said financial companies are overcoming credit losses and Goldman Sachs Group Inc. added Standard Life Plc and Friends Provident Plc to its ``conviction buy'' list. Barclays Plc paced the advance.

HBOS Plc rallied on takeover speculation. Losses from banks have not spread as ``much as feared,'' Deutsche Bank analyst Mike Mayo wrote in a note to clients. Vodafone Group Plc gained after saying it will buy back 1 billion pounds ($2 billion) of shares. Carnival Plc and Thomas Cook Group Plc rose as oil traded below $125 a barrel.

``The summary of the U.S. banks' earnings has been `so far, so good' and this can be seen as some light at the end of the tunnel,'' said Richard Hunter, London-based head of U.K. equities at Hargreaves Lansdown Stockbrokers, a unit of Hargreaves Lansdown Plc, which oversees $21.5 billion. ``The general market consensus is positive towards Vodafone.''

The benchmark FTSE 100 Index gained 65.7, or 1.2 percent, to 5,429.8 at 12:23 p.m. in London. The FTSE All-Share Index advanced 1.3 percent. Ireland's ISEQ Index climbed 4 percent.

Barclays, Britain's fourth-largest bank, added 4.9 percent to 330 pence. HSBC Holdings Plc rose 1.3 percent to 824 pence.

Deutsche Bank's Mayo said he is less ``negative'' on earnings for U.S. banks after Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. reported better-than-expected earnings.

HBOS, the U.K.'s largest mortgage lender, soared 12 percent to 291.25 pence.

``The sector has been lifted by HBOS, which is up on talk of bid interest from Spanish bank BBVA,'' said Nick Mitchell, a trader at CMC Markets in London.

A spokesperson for BBVA and HBOS spokesman Shane O'Riordain declined to comment on speculation Banco Bilbao Vizcaya Argentaria SA may consider making an offer.

Standard Life, which gets more than three-quarters of its revenue from the U.K., added 3.7 percent to 225 pence. Friends Provident, the 176-year-old British insurer, advanced 10 percent to 88.1 pence.

Standard Life will benefit from ``strong new business'' from self-invested personal pensions and ``very little risky asset exposure,'' London-based Goldman analyst Colin Simpson wrote in a note to clients initiating coverage on the stock.

Friends Provident, the worst-performing stock on the Bloomberg Europe 500 Insurance Index this year, offers the potential for growth following asset sales and ``superior value,'' Goldman said.

Separately, HSBC said the European insurance industry is ``adequately capitalized'' and dividends are ``increasingly attractive.''

Vodafone advanced 1.2 percent to 130.6 pence after saying its shares are ``significantly'' undervalued after yesterday's 14 percent drop.

Separately, Morgan Stanley upgraded the stock to ``equal- weight'' from ``underweight,'' saying the share price now discounts an ``extreme decline'' in free cash flow. The brokerage has a price estimate of 170 pence on the shares.

Carnival, world's largest cruise-line company, added 5.2 percent to 1,902 pence, while Thomas Cook, Europe's second- biggest travel company, gained 3.8 percent to 213.25 pence.

Crude oil dropped as much as 1.7 percent in New York as a stronger U.S. dollar limited its appeal as a hedge against inflation.

The following stocks also rose or fell in the U.K. market. Stock symbols are in parentheses.

U.K. Companies:

Daily Mail and General Trust Plc (DMGT LN) advanced 17.75 pence, or 5.7 percent, to 330. The publisher of Britain's Daily Mail newspaper said third-quarter revenue grew 5 percent on expansion of the tradeshow management and Internet businesses.

GlaxoSmithKline Plc (GSK LN), Europe's largest drugmaker, slid 7.25 pence, or 4.7 percent, to 145.75 after saying second- quarter profit fell 3.5 percent following job cuts and asset sales which failed to overcome a decline in revenue from the Avandia diabetes pill.

Halfords Group Plc (HFD LN), the largest retailer of car parts and bicycles, added 13.25 pence, or 4.8 percent, to 289.75 after saying first-quarter profit was ahead of expectations.

International Personal Finance Plc (IPF LN) climbed 12 pence, or 4.3 percent, to 294. The U.K provider of unsecured cash loans reported an increase in first-half net income to 15.5 million pounds from 8.1 million pounds a year earlier.

Paragon Group Cos. (PAG LN) advanced 1.75 pence, or 1.6 percent, to 111.75 after the Financial Times reported TPG Capital is considering a bid, citing people close to the U.S. buyout firm.

Raymarine Plc (RAY LN) slid 7 pence, or 4.6 percent, to 146. Panmure Gordon & Co. cut its recommendation on the stock to ``hold'' from ``buy'' following the recent share price rally and expectations the company is ``vulnerable to further earnings disappointments.''

The share had gained 39 percent from July 16 before today's trading.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

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Russia's RTS Index Target Cut at UralSib on Global Stock Rout

By William Mauldin

July 23 (Bloomberg) -- UralSib Financial Corp. lowered its projection for the RTS Index, Russia's dollar-denominated stock benchmark, because of the impact of the credit crunch and the global equities rout.

The Moscow-based bank cut its year-end estimate for the 50- stock benchmark to 2,600 from 3,000. Investors should avoid consumer-related stocks and focus instead on OAO Gazprom, Russia's biggest company, fertilizer companies and the electricity industry.

``The net effect of six months of sustained battering with credit-market losses, record high oil prices, inflation worries and missed earnings targets is that global investor sentiment is shot to pieces,'' Chris Weafer, chief strategist at UralSib, wrote in a report released today.

Overseas fund flows will be limited ``until investors are convinced that the worst of the financial crisis is over,'' the note said. Meanwhile, higher interest rates may limit investment by Russians who borrow money to place bets on the stock market, Weafer added.

About $13 trillion has been wiped off the value of global equities since October as financial companies notched up more than $467 billion in credit-related losses. Banks worldwide have raised $345 billion to offset losses stemming from the financial-market turmoil and slowdown in lending.

`Fairly Ambitious'

In Russia, higher energy costs pushed the inflation rate to 15.1 percent in June and led the central bank to raise its benchmark interest rate by a quarter of a percentage point for the fourth time this year on July 11 to 7 percent.

In the ``best-case scenario,'' Russian stocks will recover with global equities starting in the last three months of the year, while the RTS may reach 3,000 in the first quarter of 2009, Weafer said.

The RTS has dropped 7.3 percent this year to 2,123.66 as of the close July 22, compared with a 17 percent decline for the MSCI Emerging Markets Index.

Weafer and Roland Nash, chief strategist at Moscow-based Renaissance Capital, both said on Dec. 18 that the RTS would rise to 3,000 by the end of 2008. In an interview on July 16, Nash said he is keeping his year-end target for now.

``We still have 3,000, but that's looking fairly ambitious at the moment,'' he said.

In December, Nash favored potash producer OAO Silvinit and Weafer recommended its rival, OAO Uralkali. Since then both stocks have more than doubled in trading on the RTS, as of the close of trade yesterday.

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net.

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Citigroup Advises Selling ArcelorMittal Puts on Steel Outlook

By Gareth Gore

July 23 (Bloomberg) -- Citigroup Inc. advised clients to sell put options in ArcelorMittal on speculation steel prices will stay high, bolstering earnings at the world's biggest steelmaker and supporting its stock price.

The brokerage advised selling put options expiring in December at a strike price of 48 euros after the price paid for the contracts soared to a four-month high. Investors will profit as long as the shares remain above 44 euros each, assuming the contract is sold at 4 euros, it said.

ArcelorMittal shares have lost 22 percent in the past month, trading at 51.39 euros as of 12:24 p.m. today in Paris. ArcelorMittal is among the stocks that top Citigroup's list of equities expected to reverse declines.

``Bears could find a bit more negative newsflow over the summer period, as seasonal demand slows and price growth moderates, but earnings momentum continues to grow,'' analysts including Stuart MacDonnell wrote in a note dated July 21.

Steel prices aren't likely to experience ``a major correction'' over the coming months and will likely remain at around current levels, the note added.

ArcelorMittal has lower costs that most of its rivals and sells more than 80 percent of its products on a ``shorter-term'' basis, helping increase profit margins, the note said.

The benchmark north-European hot-rolled coil steel price index has rallied 48 percent in the last five months.

Put options give the buyer the right -- but not the obligation -- to sell shares at a pre-agreed price on a specific date. By selling a put, an investor is taking the bet the contracts won't be exercised, allowing him to keep as profit the price paid for the option.

For related news: Most-read derivatives news: {MNI DRV } Options news: {NI OPTIONS }

To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net

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U.S. Stock-Index Futures Rise as Oil Drops; GM, Yahoo Advance

By Michael Patterson and Lynn Thomasson

July 23 (Bloomberg) -- U.S. stock-index futures climbed as oil extended its weeklong retreat and reports from AT&T Inc. to PepsiCo Inc. to Yahoo! Inc. bolstered expectations that earnings will weather an economic slowdown.

General Motors Corp. rose after crude fell for the sixth time in seven days. Yahoo advanced as second-quarter results met its own targets and the Internet company said profit will increase through 2010. Growth in its wireless business boosted AT&T, the biggest U.S. phone carrier, while higher prices for potato chips helped PepsiCo. Fannie Mae and Freddie Mac climbed before Congress votes today on a rescue plan for the biggest mortgage-finance companies. Shares in Europe and Asia climbed.

``In this weak economy, where people are expecting companies to miss, the fact that companies are doing OK even versus these lowered expectations is really good news,'' Robert Doll, who helps oversee $1.3 trillion as chief investment officer of New York-based BlackRock Inc., told Bloomberg Television. ``You want to be an accumulator of common stocks.''

Futures on the Standard & Poor's 500 Index expiring in September added 6.6 to 1,280.8 as of 8:41 a.m. in New York. Dow Jones Industrial Average futures rose 49 to 11,613. Nasdaq-100 Index futures advanced 11.75 to 1,835.75.

The S&P 500 may extend a 1.4 percent gain yesterday that was sparked by a slump in oil and a late rally in financial stocks. The benchmark for U.S. equities has rebounded 5.1 percent from a 32-month low on July 15 as profits at companies outside the financial industry topped analysts' estimates by 3.5 percent, according to data compiled by Bloomberg.

GM, the biggest U.S. automaker, added 20 cents to $14.52. AT&T climbed 68 cents to $32.50, while PepsiCo rose 81 cents to $67.

Yahoo, Norfolk Southern

Crude oil for September delivery fell 1.8 percent to $125.70, extending its retreat from a July 11 record to 15 percent. Futures declined after forecasters said Hurricane Dolly may miss fields in the Gulf of Mexico and the dollar's rebound curbed investments in commodities.

Yahoo rose 41 cents to $21.81. Chief Financial Officer Blake Jorgensen said partnerships with clients such as Wal-Mart Stores Inc. helped the company meet its targets in the second quarter even as an economic slowdown hurt some customers' advertising budgets.

Norfolk Southern Corp. may advance after saying second- quarter profit rose 15 percent and sales gained 16 percent. Per- share earnings beat the average estimate of 12 analysts compiled by Bloomberg as demand increased for moving coal and agricultural products. The stock didn't trade in Europe.

Fannie Mae gained $1.54 to $14.95 and Freddie Mac added 99 cents to $10.69. The House of Representatives is set to vote today on a rescue plan for government-sponsored enterprises, said Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee.

Lehman, Costco

Lehman Brothers Holdings Inc. added 40 cents to $20.60. The securities firm shaken by speculation it's losing clients may sell its Neuberger Berman money-management unit or consider ``sizeable'' asset sales, UBS AG analyst Glenn Schorr wrote in a note to clients.

Costco Wholesale Corp., the nation's largest warehouse-club chain, dropped $7.15 to $64.85. Fourth-quarter earnings per share are expected to miss the $1 consensus estimate of analysts surveyed by First Call after surging energy prices increased the retailer's costs and made selling gasoline less profitable, Costco said. The company also said it plans to buy back an extra $1 billion of shares.

Broadcom Corp. lost 84 cents to $26.80. The maker of chips for Nintendo Co.'s Wii video-game console said inventory is rising and that expenses may increase this quarter.

E*Trade Financial Corp. declined 60 cents to $3.55. The fourth-largest online brokerage by client assets posted a wider- than-estimated second-quarter loss after its provision for bad loans surged more than 10-fold and trading commissions fell.

WaMu Earnings

Washington Mutual Inc. slipped 12 cents to $5.70. The biggest U.S. savings and loan reported a $3.3 billion second- quarter loss on uncollectible loans as a record number of borrowers were unable to keep up with mortgage payments. The company said mortgage-related losses through 2011 will be at the high end of its previous forecast of $12 billion to $19 billion.

John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is starting a hedge fund to provide capital to financial firms hurt by mortgage writedowns. Paulson aims to open the fund by December, according to two people with knowledge of the matter. Paulson, whose firm oversees $33 billion, declined to comment.

VMware Forecast

VMware Inc. dropped $5.37 to $32.60. The biggest maker of software that lets computers run multiple operating systems cut its annual sales forecast amid competition from Microsoft Corp. and slowing technology spending.

EMC Corp., the world's largest storage-computer maker, said second-quarter profit rose 13 percent on increasing sales of software and services. The shares added 34 cents to $12.80.

Pfizer Inc. climbed 58 cents to $18.93. The biggest drugmaker reported second-quarter profit excluding some items that beat analysts' estimates as the company cut costs and boosted sales outside the U.S., where it benefited from favorable exchange rates.

The Federal Reserve releases its regional economic survey, known as the Beige Book, at about 2 p.m. New York time. The report's anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states.

The S&P 500 is still 18 percent below its October record, having pared a decline of as much as 22 percent from that peak.

Except for Canada, all of the 23 developed markets in the MSCI World Index experienced bear market plunges of at least 20 percent this year as global credit losses exceed $452 billion and oil trades near a record.

``We have passed the market bottom,'' Max King, an investment strategist at Investec Asset Management, said in an interview on Bloomberg Radio. ``I would expect 20 percent returns plus over the next 12 months.''

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Lynn Thomasson in New York at lthomasson@bloomberg.net.

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ARIUS Research, Suncor Energy, Zarlink: Canadian Equity Preview

By Katherine Greene

July 23 (Bloomberg) -- The following companies may have unusual price changes in Canadian trading. Stock symbols are in parentheses, and share prices are as of the last close.

The Standard & Poor's/TSX Composite Index fell 0.3 percent to 13,643.19.

ARIUS Research Inc. (ARI CN): Roche Holding AG, the world's biggest maker of cancer drugs, agreed to pay C$191 million ($189 million) in cash for the company to gain technology used to develop tumor and inflammatory disease treatments. ARIUS investors will get C$2.44 a share, 15 percent more than the Toronto-based company's closing price yesterday. The shares gained 7.6 percent to C$2.13.

Cargojet Income Fund (CJT-U CN): The overnight cargo service said second-quarter results were worse than forecast because of a delay in a plane's release and a slower economy. The shares were unchanged at C$9.75.

Lockerbie & Hole, Inc. (LH CN): The construction company said it won a C$53 million contract to build eight oil stations in Saskatchewan and Manitoba. The shares retreated 1.3 percent to C$12.90.

Liquor Stores Income Fund (LIQ-U CN): The operator of liquor stores in Alberta and British Columbia said it would enter the U.S. market by buying 19 stores from Brown Jug Inc., the largest independent chain of liquor stores in Anchorage, Alaska. Liquor Stores shares increased 83 cents to C$15.73.

Niko Resources Ltd. (NKO CN): The oil and natural gas exploration and development company will fund a project with EnerMad Corp. to explore in the Mozambique Channel. Niko shares fell 66 cents to C$81.52.

Suncor Energy Inc. (SU CN): The world's second-largest oil- sands producer received government approval to remove restrictions that curtailed output at one of its projects.

Suncor was also raised to ``sector perform'' at Canadian Imperial Bank of Commerce. The shares fell 2.2 percent to C$54.80.

TMX Group Inc. (X CN): Dundee Securities Corp. analyst John Aiken lowered his second-quarter profit estimates for the owner of the Toronto Stock Exchange to 74 cents on an adjusted basis from 77 cents, citing lower trading volumes. He maintained his ``buy'' rating on the company. TMX gained 3.3 percent to C$37.20.

Zarlink Semiconductor Inc. (ZL CN): The wireless- communications chipmaker reported first-quarter revenue of $60.5 million, more than the $59.5 million average analyst estimate, according to Bloomberg data. The shares fell 4.4 percent to 86 cents.

To contact the reporter on this story: Katherine Greene in New York at kgreene8@bloomberg.net.

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ADC, Costco, First Horizon, McDonald's: U.S. Equity Preview

By Elizabeth Stanton

July 23 (Bloomberg) -- The following companies may have unusual price changes in U.S. markets today. Stock symbols are in parentheses after company names, and prices are as of 9 a.m. in New York, unless otherwise stated.

ADC Telecommunications Inc. (ADCT US) fell 23 percent to $10.35. The maker of telephone equipment for AT&T Inc. said fiscal 2008 profit was likely to be 18 cents to 26 cents a share, down from a previous range of 31 cents to 39 cents.

Amerigroup Corp. (AGP US) rose 6.5 percent to $27 after the close of U.S. exchanges yesterday. The manager of government health plans agreed to pay $225 million to the U.S. and Illinois to settle a lawsuit alleging the company wrongfully denied coverage to pregnant women eligible for Medicaid.

Anadigics Inc. (ANAD US) slumped 22 percent to $6.90. The maker of chips for mobile phones predicted third-quarter profit in the 10-to-14 cents a share range, less than the average analyst estimate of 18 cents.

CEC Entertainment Inc. (CEC US) added 12 percent to $33 in extended trading yesterday. The owner of Chuck E. Cheese's restaurants said it expects third-quarter profit of as much as 60 cents a share, higher than the 55 cents average analyst estimate from a Bloomberg survey.

Costco Wholesale Corp. (COST US) fell 12 percent to $63.39. The largest U.S. warehouse-club chain said earnings will be ``well below'' analysts' estimates after surging energy prices increased the retailer's costs and made selling gasoline less profitable.

BJ's Wholesale Club Inc. (BJS US), the third-biggest, fell 10 percent to $36.50.

E*Trade Financial Corp. (ETFC US) fell 11 percent to $3.60. The fourth-largest online brokerage by client assets posted a second-quarter loss of $94.6 million after its provision for bad loans surged more than 10-fold and trading commissions fell.

Fannie Mae (FNM US) rose 11 percent to $14.88 and Freddie Mac (FRE US) climbed 7.7 percent to $10.45. The House of Representatives is set to vote today on a rescue plan for government-sponsored mortgage-finance companies, said Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee.

First Horizon National Corp. (FHN US) rose 11 percent to $10.25. Tennessee's biggest bank was upgraded to ``buy'' from ``neutral'' at Goldman Sachs Group Inc., which predicted the price will reach $12.50 within 12 months. The shares are ``too cheap, even in a deteriorating environment,'' analysts led by Richard Ramsden in New York wrote in a report.

Intuitive Surgical Inc. (ISRG US) climbed 13 percent to $315.74. The maker of a robot to aid in surgery said in a statement on Prime Newswire that second-quarter profit increased 67 percent, more than analysts expected, on higher sales of the machine and its related equipment.

Infinera Corp. (INFN US) added 13 percent to $10.20. The maker of high-speed computer-networking equipment for Deutsche Telekom AG rose after it reported its second consecutive quarterly profit on a jump in sales.

McDonald's Corp. (MCD US) rose 1.5 percent to $61.01. The world's largest restaurant company posted a $1.19 billion profit in the second quarter, spurred by European sales of hamburgers and chicken sandwiches. The earnings beat the average analyst estimate.

Philadelphia Consolidated Holding Corp. (PHLY US) rose 63 percent to $57.85. Tokio Marine Holdings Inc., Japan's largest insurer, agreed to buy the commercial property and casualty insurer for $4.7 billion, or $61.50 a share, in cash. That's 73 percent more than the Bala Cynwyd, Pennsylvania-based company's closing price of $35.55 yesterday.

VMWare Inc. (VMW US) fell 15 percent to $32.45. The biggest maker of software that lets computers run multiple operating systems, cut its annual sales forecast amid competition from Microsoft Corp. and slowing technology spending.

Washington Mutual Inc. (WM US) slid 3.8 percent to $5.60. The biggest U.S. savings and loan reported a $3.3 billion second- quarter loss as tumbling home prices left a record number of borrowers unable to keep up with mortgage payments.

Yahoo! Inc. (YHOO US) advanced 2.3 percent to $21.90. The Internet company that added activist investor Carl Icahn to its board yesterday said sales, excluding fees passed on to partner sites, rose 8.2 percent to $1.35 billion, compared with the $1.38 billion average of estimates compiled by Bloomberg.

Zimmer Holdings Inc. (ZMH US) fell 9.8 percent to $63.94. The artificial-joint maker suspended marketing of a product used in hip replacement surgery and lowered its earnings forecast for the year. Some U.S. surgeons have reported that Zimmer's Durom cup, a hip socket introduced in 2006, loosened after being implanted.

To contact the reporter on this story: Katherine Greene in New York at kgreene8@bloomberg.net.

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ADC, Costco, First Horizon, McDonald's: U.S. Equity Preview

Cap, Cemex, Ecopetrol, Sonda, Suzano, Weg: Latin Equity Preview

By James Attwood and Alexander Ragir

July 23 (Bloomberg) -- The following stocks may have significant gains or losses in Latin American markets. Symbols are in parentheses after company names, and stock prices are from the last session.

The MSCI index of Latin American shares fell 1.7 percent to 4,311.27 yesterday. In Brazil, preferred shares are the most commonly traded class of stock.

Brazil

TPI - Triunfo Participacoes & Investimentos SA (TPIS3 BS): The Brazilian operator of highways and harbors will pay 70.2 million reais ($44.5 million) for a plot of land on the coast of Sao Paulo state. Triunfo plans to pay 40.2 million reais in cash, with the remaining 30 million reais paid in shares of a new company that Triunfo will establish. Triunfo added 0.2 percent to 5 reais.

Suzano Papel e Celulose SA (SUZB5 BS): Latin America's second-biggest pulp exporter, said second-quarter profit rose to 185.6 million reais ($117.6 million), or 61 centavos a share. Suzano Papel fell 3.1 percent to 24.80 reais.

Brasil Telecom Participacoes SA (BRTP4 BS): Telemar Participacoes SA (TLMP3 BS), owner of Brazil's largest phone carrier, spent 947 million reais ($600 million) in a voluntary offer for shares of Brasil Telecom and a unit as part of a takeover. Brasil Telecom fell 2.7 percent to 24.10 reais.

Weg SA (WEGE3 BS): The Jaragua do Sul, Brazil-based electrical equipment maker reported ``good'' second-quarter earnings, Fator Corretora analyst Jacqueline Lison wrote, citing revenue growth of 19 percent, reduction of costs and the maintenance of operating margins ``at high levels.'' In a note sent yesterday, the analyst reiterated her ``buy'' rating on Weg, which fell 1 percent to 18.25 reais.

Chile

Cap SA (CAP CC): Chile's biggest steel and iron-ore producer hasn't entered into any talks to be acquired, Chairman Roberto de Andraca said. Cap shares have gained by a third this year on speculation that higher prices and expanding output will boost earnings growth and increase its appeal as a takeover target. ``There isn't any negotiation; if there was it would be a subject for public information,'' de Andraca said in an interview. ``Anyone who wants to buy a stake has to buy it on the stock market.'' Cap fell 2.4 percent to 18,049 pesos yesterday.

Compania de Telecomunicaciones de Chile SA (CTCA CC): The country's biggest fixed-line phone company, known as Telefonica Chile, may report a drop in second-quarter earnings today on higher costs. Net income probably declined to 3.56 billion pesos ($7.22 million), the average estimate of three analysts surveyed by Bloomberg. Telefonica Chile fell 1.7 percent to 800 pesos.

Multiexport Foods SA (MULTIFOO CC): Chile, the world's second-largest producer of salmon, said a virus that causes anemia in the fish will affect 3 percent of its production this year. Commercial output of salmon will total about 700,000 metric tons in 2008, little changed from last year, as contaminated fish are destroyed, Felix Inostroza, the head of the Chilean fishing regulator, said at a news conference yesterday in Santiago. Multiexport Foods, the world's sixth largest salmon producer, was little changed at 150.01 pesos.

Sonda SA (SONDA CC): Chile's biggest independent software company reported a 14 percent increase in first-half profit as sales jumped 62 percent. Net income for the first six months rose to 13.3 billion pesos ($25 million) from 11.7 billion pesos a year earlier, according to data posted yesterday on the regulator's Web site. Santiago-based Sonda, which didn't give separate second-quarter results, rose 1.6 percent to 680 pesos.

Colombia

Ecopetrol SA (ECOPETL CB): Colombia's state energy company will start trading shares in New York in September, Portafolio reported, citing mining and energy minister Hernan Martinez. The company, which sold a 10 percent stake on Colombia's stock market last year, probably will double profit this year on higher oil prices, the newspaper reported yesterday. Ecopetrol fell 1.2 percent to 2,480 pesos.

Mexico

Cemex SAB (CEMEXCP MM): North America's largest cement maker said second-quarter profit fell 27 percent to $444 million as construction slowed in its largest markets. Sales rose 29 percent to $6.35 billion because of the acquisition last year of Australian building materials company Rinker Group Ltd. Cemex shares rose 2.2 percent to 23.31 pesos.

Telefonos de Mexico SAB (TELMEXL MM): Mexico's biggest fixed-line phone company said net income from continuing operations dropped 13 percent to 6.19 billion pesos ($616.7 million) in the second quarter. Revenue declined 6.3 percent to 30.9 billion pesos as it lost subscribers. Telmex, as the company is known, fell 1.2 percent to 12.49 pesos.

To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.net; Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net;

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Amazon May Say Profit Increased on Overseas Sales, Electronics

By Heather Burke

July 23 (Bloomberg) -- Amazon.com, the world's largest Internet retailer, may say profit rose as online shoppers bought more flat-screen televisions and video-game players and a weaker dollar boosted overseas sales.

Second-quarter net income may have risen 43 percent to $111.6 million, or 26 cents a share, the average estimate of 15 analysts in a Bloomberg survey. A year earlier, Seattle-based Amazon had net income of $78 million, or 19 cents.

Sales of electronics, jewelry and baby clothes have outpaced those of books and CDs, Amazon's original wares, as Chief Executive Office Jeff Bezos adds new categories, and international revenue has grown faster than U.S. sales.

``Amazon.com has historically been known for media, but they're not tied to media,'' Scott Tilghman, an analyst at Soleil Securities Corp., said yesterday in an interview. ``You want to have what the customer is looking for in a one-stop shop.''

The dollar's decline boosted the value of Amazon.com's overseas sales when translated into the U.S. currency. The dollar dropped 12 percent against a basket of six foreign currencies during the quarter. International sales accounted for 45 percent of Amazon.com's revenue last year.

The company reports second-quarter results today after the close of U.S. markets.

Bezos, 44, wasn't available for an interview, Amazon.com spokeswoman Patty Smith said in an e-mail yesterday.

In April the company forecast second-quarter sales of $3.88 billion to $4.08 billion and operating income of as much as $160 million. The average revenue estimate of 18 analysts is $3.96 billion.

Power Tools, Fabric

Amazon is benefiting from more rapid growth of Internet sales compared with total sales. Sales by online merchants increased 14 percent in the first quarter from a year earlier, compared with a 2.8 percent gain overall, according to the Commerce Department. Second-quarter data will be released next month.

Amazon fell 51 cents to $67.97 yesterday in Nasdaq Stock Market trading. The stock has dropped 27 percent this year after more than doubling in 2007.

The company now sells products in more than three dozen categories ranging from power tools to musical instruments. Last month Amazon opened an office supplies Web store and bought Fabric.com, which sells cloth and sewing tools.

Amazon's Kindle electronic reading device might have accounted for as much as 2 percent of revenue in the quarter, estimates Baltimore-based Tilghman. He recommends buying Amazon shares and doesn't own any. Amazon has declined to release sales figures for the Kindle.

The company also has expanded sales of digital movies and music, where it ranks second behind Apple Inc.'s iTunes, according to market researcher NPD Group in Port Washington, New York.

Digital downloads are ``a large untapped market with a lot of upside potential,'' Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York, said yesterday in an interview. He recommends buying Amazon shares and doesn't own any.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net.

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U.S. Stock-Index Futures Rise as Oil Drops; GM, Yahoo Advance

ARIUS Research, Suncor Energy, Zarlink: Canadian Equity Preview

ADC, Costco, First Horizon, McDonald's: U.S. Equity Preview

ADC, Costco, First Horizon, McDonald's: U.S. Equity Preview

Cap, Cemex, Ecopetrol, Sonda, Suzano, Weg: Latin Equity Preview

Amazon May Say Profit Increased on Overseas Sales, Electronics

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