U.S.: Commodities Push CPI Lower in August

• U.S. headline CPI declined for the first time in almost two years.
• Core CPI rose by a moderate 0.2% M/M.
• The decline in the headline rate of inflation was due mostly to the drop in energy prices.

U.S. consumer prices declined for the first time since October 2006, falling by 0.14% M/M in August, following the 0.8% M/M increase in July. With the monthly decline in the headline index in August, the annual rate of consumer inflation declined to 5.4% Y/Y, following the 5.6% Y/Y print in July. Market consensus was for a reading of 5.5% Y/Y. Core consumer prices rose by a fairly modest 0.194% M/M, leaving the annual rate of core inflation unchanged at 2.5% Y/Y. The 3-month annualised rate of core inflation moderated to 3.4% (from 3.5% in July), while the 6-month annualised rate accelerated to 2.6% from 2.3% in July.

The details of the report were fairly mixed. As expected, energy prices declined for the first time since February, falling by 3.1% M/M (down from +4.0% M/M in July), though prices are still 27.2% higher than they were in August last year. Overall, commodity prices declined by 0.5% M/M, following the 1.2% M/M surge in July. There were also declines in vehicle prices (down 0.4% M/M) and housing (-0.1% M/M). On the other hand, the cost of food (up 0.6% M/M, though down from +0.9% M/M in July), apparel (+0.5% M/M) and recreation (+0.5% M/M) edged higher on the month. The price of services increased by a modest 0.1% M/M, following the +0.5% M/M in July.

With the FOMC meeting today, the decline in the headline index and evidence that core consumer prices may also be moderating will come as some relief. Additionally, with commodity prices continuing to head lower (particularly energy prices), we expect to see further moderation in consumer inflation in the coming months, which will provide some breathing room for the Fed to cut rates in the coming months (if this is deemed necessary, though much will depend on financial and economic conditions).

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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Pride Jack-Up Rig Is Missing in U.S. Gulf After Ike

By Jim Polson

Sept. 16 (Bloomberg) -- Pride International Inc., the U.S. oil and gas driller with operations from Mexico to India, said one of its jack-up rigs is missing in the Gulf of Mexico after Hurricane Ike and is expected to be a total loss.

All personnel were safely evacuated from the Pride Wyoming rig before the storm, Houston-based Pride said today in a statement. Its last location was about 90 miles (145 kilometers) south of Houma, Louisiana.

Aerial surveys found no visible damage to other Gulf of Mexico rigs, which crews have begun boarding for more thorough inspection and startup, Pride said.



The insured value of the Pride Wyoming is $45 million with a $20 million loss retention, Pride said.

Pride fell $1.16, or 3.6 percent, to $31.44 at 10:09 a.m. in New York Stock Exchange composite trading, extending its decline for the week to 12 percent.

The company, with operations extending from Mexico to India, has 47 offshore rigs, including 28 jack-ups with legs that extend to the seafloor. The Pride Wyoming was capable of drilling in water 250 feet deep, according to the company's Web site.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

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EDF Won't Pay `Any Price' for British Energy Deal

By Paul Dobson and Mathew Carr

Sept. 16 (Bloomberg) -- Electricite de France SA, Europe's biggest power producer, won't pay an inflated amount for British Energy Group Plc, the French utility's chief executive officer said.

EDF isn't going to do a deal ``at any price,'' Pierre Gadonneix told reporters today at a conference in London.

British Energy, the U.K.'s largest electricity generator, with eight nuclear power plants and one coal-fed station, rejected a 12 billion-pound ($23.8 billion) takeover offer from EDF on Aug. 1, although both parties pledged further talks. The U.K. company wouldn't support the offer because its largest private shareholders said the price was too low, two people with knowledge of the bid said at that time.

Electricite de France is ``clearly committed to play a major role in nuclear development in Great Britain,'' Gadonneix said. ``We are interested in developing our generation capacity for EDF Energy,'' its U.K. subsidiary.

The U.K. government wants to boost the share of electricity from nuclear power stations to reduce future dependence on imported gas and cut emissions. Paris-based Electricite de France is the dominant utility in France, where 77 percent of electricity is generated by nuclear power.

The Times reported that British Energy's board, led by Chairman Adrian Montague, will meet today to discuss a new, provisional bid from Electricite de France higher than the original offer.

Future Profits

The improved proposal may include a slightly increased cash offer of about 775 pence a share and a boost in the possible payout from contingent value rights, which are financial instruments designed to give shareholders a slice of future profits, the newspaper said.

Andrew Dowler, a spokesman for British Energy, which is based in East Kilbride, Scotland, declined to comment when reached by Bloomberg News.

British Energy shares fell 12.5 pence, or 1.7 percent, to 718.5 pence at 12:49 p.m. in London trading. Electricite de France shares fell 49 cents, or 1 percent, to 47.75 euros in Paris.

EDF has a scheduled board meeting tomorrow, spokesman Francois Molho said, declining to give details of the agenda.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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Iran Guards Corps Is Put in Charge of Gulf Defense

By Ladane Nasseri

Sept. 16 (Bloomberg) -- Ayatollah Ali Khamenei put Iran's elite Revolutionary Guards Corps in charge of defending the Persian Gulf from possible attacks by the U.S. or Israel, a key aide to the country's supreme leader said.

``The Guards' missiles have the range to cover all the Persian Gulf,'' the official Islamic Republic News Agency cited Major General Yahya Rahim-Safavi as telling reporters today. ``No ship can cross it without being within reach.''

The Guards Corps, which sparked a crisis last year when members seized and held for two weeks 15 British sailors and marines, has a chain of command separate from the country's regular armed forces and responsibilities that include safeguarding the ideals of the 1979 revolution. It answers directly to Khamenei.

The move came a day after the United Nations' International Atomic Energy Agency said Iran refused to answer questions about possible nuclear-weapons activity and expanded its production of atomic fuel in its latest defiance of demands by the UN to halt uranium enrichment.

The U.S. and several major partners have accused Iran of seeking to develop nuclear weapons, while the government in Tehran has insisted that its program is peaceful, intended to generate electricity, and legal under the nuclear Non- Proliferation Treaty, to which the country is a signatory.

The Bush administration says it favors a diplomatic solution to the dispute, though it hasn't ruled out military attacks.

Nuclear Sites

On June 2, Israeli warplanes carried out an exercise in the eastern Mediterranean Sea that was interpreted by military analysts as a rehearsal for a strike on Iranian nuclear sites. In July, the U.S. Fifth Fleet conducted maneuvers to practice protecting Gulf oil rigs. Days later Iran said its military test- fired a missile with a 2,000-kilometer (1,243-mile) range.

``In case of venturing into hostility with Iran, the U.S.'s 200,000 troops in the region would be in serious danger,'' IRNA cited Safavi, who is Khamenei's armed forces adviser, as saying.

The government in Tehran has indicated several times that it may respond to any attack by closing the Strait of Hormuz, a chokepoint between Iran and Oman at the mouth of the Persian Gulf through which about a fifth of the world's daily oil supply is shipped.

``The Revolutionary Guards' naval forces are more active in the Persian Gulf than the navy and their equipment is very advanced,'' said Akbar Montajabi, a political analyst and deputy editor-in-chief of the privately owned weekly Shahrvand Emrouz. ``They are playing the main role in the Gulf. They have their fingers on the pulse of the Hormuz Strait.''

`Promotional Dimension'

The announcement today gave their role an official stamp, and also had a ``promotional dimension,'' he said.

The decision was a means of responding to ``threats that are every now and again expressed about possible military attacks against Iran,'' Montajabi said.

Iran's defiance over its nuclear program may increase pressure from the U.S. and its allies. Tension between Russia and the West over the Georgia conflict has sharpened Russian opposition to pressuring Iran at the UN, U.S. and British envoys said last week. That may limit the prospects for a fourth round of UN Security Council sanctions against the Persian Gulf country.

China indicated today that it may not be prepared to back further sanctions. China and Russia are both veto-wielding, permanent members of the UN Security Council.

``China has always believed that negotiation is the only way to resolve the Iran nuclear issue,'' Foreign Ministry spokeswoman Jiang Yu said at a regular media briefing today in Beijing. ``I don't think sanctions are the way out.''

France will back U.S. moves for a fourth round of sanctions, the French Foreign Ministry said.

``We have no choice but to work, in the coming days and weeks, on a new sanctions resolution at the Security Council,'' ministry spokesman Eric Chevallier said.

To contact the reporter on this story: Ladane Nasseri in Tehran at lnasseri@bloomberg.net.



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Traders Divert 20 Gasoline Tankers to U.S. Gulf Coast

By Alaric Nightingale and Nidaa Bakhsh

Sept. 16 (Bloomberg) -- Gasoline traders diverted about 20 tanker loads of the fuel headed for New York to the Gulf of Mexico after hurricanes Gustav and Ike reduced southern U.S. refinery output, said Fearnleys A/S, an Oslo-based shipbroker.

Gustav and Ike forced a total of 6.3 million barrels a day of refining capacity to shut in Louisiana and Texas. Each of the diverted vessels is transporting about 37,000 metric tons of cargo and the decisions to change course were taken last week, Truls Dahl, a shipbroker at Fearnleys, said by phone today.

``A lot of vessels will end up'' in the Gulf of Mexico, Dahl said, adding that so far, he's seen no extra demand from traders to ship European gasoline across the Atlantic to take advantage of higher U.S. fuel prices after the storms.



Refiners and traders can earn as much as $1.44 a gallon sending product from northwestern Europe to the U.S. Gulf Coast, according to data compiled by Bloomberg. That's three times as much as at the start of the month.

Fearnleys arranged for four vessels to be diverted south out of a total of about 20 that have been switched so far, Dahl said. That would equate to about 6.3 million barrels of gasoline, or 3.3 percent of U.S. gasoline inventories of 188 million barrels, based on Department of Energy Data.

Exxon Mobil Corp., the world's biggest oil company, said yesterday it was importing gasoline from refineries in Europe, the Middle East and Asia to meet a shortfall in U.S. supplies.

More than 27 million barrels of fuel products haven't been produced because of the hurricanes, the U.S. Energy Department said in a statement yesterday. Of that, nearly 13 million barrels is gasoline and about 9 million barrels are distillates such as diesel and heating oil.

Gasoline stockpiles in the U.S. are at the lowest since the end of 2000, according to Energy Department data.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.netNidaa Bakhsh in London at o nbakhsh@bloomberg.net

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Nigerian Rebels Attack Shell, Chevron Oil Facilities

By Dulue Mbachu and Karl Maier

Sept. 16 (Bloomberg) -- Nigerian militants attacked a pipeline operated by a unit of Royal Dutch Shell Plc and clashed with soldiers near a Chevron Corp. oil field as raids against the oil industry in the Niger River delta entered a fourth day.

The Movement for the Emancipation of the Niger Delta, or MEND, used explosives to destroy the pipeline at Bakana in Rivers state at 10:10 p.m. local time yesterday, spokesman Jomo Gbomo said in an e-mailed statement. Shell spokesman Rainer Winzenried today confirmed the attack, saying the link is part of the Bonny Light crude system. He didn't provide details of the damage.

MEND said it was also involved in a ``minor skirmish'' with soldiers near Chevron's Idama oil field. Lieutenant Colonel Sagir Musa, a spokesman for the region's joint military task force, said gunmen traveling in six speed boats attacked the field. Chevron spokesman Scott Walker said a shooting incident near the field at 1 a.m. today had no impact on production which was already shut-in for pipeline repairs.


The latest attacks began on Sept. 13 when Nigerian soldiers and militants clashed in the Elem-Tombia district, south of Port Harcourt. The militants said troops had launched an air and marine offensive against its positions and declared an ``oil war'' targeting installations in the region, which produces almost all of Nigeria's oil.

Musa also said a British citizen was kidnapped overnight by unidentified gunmen near Port Harcourt.

``We're aware of reports of the kidnapping and we're investigating,'' James McLaughlin, a spokesman for the British High Commission to Nigeria, said in a telephone interview.

Chevron Attack

Nigerian soldiers beat back an attack on Chevron's oil field and sank two of the gunmen's boats, Musa said. ``One soldier was wounded during the raid and is in a stable condition,'' he said. MEND said five of its scouts were involved in a ``minor skirmish'' with soldiers while patrolling near the Idmam flow station.

The Idama field, which exports crude via a Shell pipeline, was already closed for repairs to the pipe and the company's Nigerian production is unaffected by the incident, Chevron's Walker said in an e-mailed statement today. There is no indication that Chevron is being targeted by the militants, he said.

MEND said yesterday its fighters destroyed a Shell flow station and a major pipeline feeding the Bonny export terminal.

Nigeria has Africa's biggest hydrocarbon reserves, with more than 30 billion barrels of crude and 187 trillion cubic feet of gas. The West African country, which has dropped behind Angola as the continent's top oil exporter because of the violence, is the fifth-biggest source of U.S. oil imports.

MEND says it's fighting on behalf of the inhabitants of the Niger Delta, who have yet to share in the oil wealth of the region. Attacks by armed groups in the region have cut more than 20 percent of Nigeria's oil exports since 2006.

To contact the reporters on this story: Dulue Mbachu via the Johannesburg bureau at abolleurs@bloomberg.net; Karl Maier in Rome at kmaier2@bloomberg.net


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OPEC Emergency Meet Would Be Premature, Officials Say

By Ayesha Daya and Maher Chmaytelli

Sept. 16 (Bloomberg) -- OPEC needs to study the effects of its production cuts before considering an emergency meeting, oil officials from Iran and Libya said as prices fell to a seven-month low near $90 a barrel.

``Ministers need at least September and October data to see the impact of OPEC's decision on the market,'' Mohammad Ali Khatibi, Iran's OPEC governor, told Bloomberg in a phone interview from Tehran today. ``We cannot be in a hurry -- an emergency meeting would be a judgment in a rush.''

The Organization of Petroleum Exporting Countries urged members to adhere more strictly to production quotas at its meeting in Vienna last week. Oil has plunged 38 percent from its July record on concern the deepening credit crisis will weaken global economic growth, cutting demand. Iran is traditionally among the most active OPEC members in urging action to defend prices.

``The main reason for the price decline is the poor performance of the world economy, particularly in industrialized countries,'' Khatibi said. ``That is affecting oil demand. The International Energy Agency, the Energy Information Administration, all have revised oil demand downward.''

Crude oil for October delivery declined as much as $5.16, or 5.4 percent, to $90.55 a barrel, the lowest intraday price since Feb. 8. It was at $91.98 at 1:38 p.m. London time on the New York Mercantile Exchange.



`Very Concerned'

``We are very concerned. It's a huge drop,'' Libya's top oil official Shokri Ghanem said today in a phone interview from Tripoli, commenting on the falling oil prices.

OPEC agreed at its meeting in Vienna to a total limit for 11 members of 28.8 million barrels a day. That's 465,000 barrels a day lower than production from those 11 in August, according to secondary estimates published in an OPEC monthly report today.

``It will take more than a month for the impact of the cut to be felt, so let's wait and see,'' Libya's Ghanem said, when asked if further action by OPEC was needed.

Most of OPEC's extra pumping in the past few months has come from Saudi Arabia, the world's largest oil producer, which pledged to raise output by about 500,000 barrels a day in June and July, to calm markets.

The group ``will take action if they see continue pressure for prices to fall below $80,'' John Sfakianakis, chief economist at Saudi British Bank, said today in an interview in London. ``I think they are more than fine if prices stay around $80-$90 in the next few months.''

Lower Demand

OPEC, which supplies more than 40 percent of the world's oil, lowered its forecast for demand this year by 120,000 barrels a day as the global economic slowdown cuts fuel consumption, according to the oil market report.

The 13-member group reduced its forecast for average oil consumption next year to 87.66 million barrels a day, compared with an estimate last month of 87.80 million barrels.

``The economic slowdown is now spreading beyond the U.S. to Europe and Japan with contagion risks to other regions,'' the report said. ``The weakening economic situation has been reflected in a slowdown in world oil demand growth.''

Last week, the International Energy Agency, an adviser to 27 nations, cut its forecast for global oil demand in 2008 and 2009.

Iran Production

Iran doesn't need to cut any production because it is producing at its quota level, Khatibi said. ``As far as I know, Iran was producing around its commitment,'' he said.

The country, OPEC's second-largest member, produced 4.08 million barrels a day of crude oil last month, according to Bloomberg estimates. Its quota is 3.8 million barrels a day.

Libya, whose output target is 1.7 million barrels a day, produced 1.63 million barrels a day last month, according Bloomberg estimates.

OPEC is scheduled to meet on Dec. 17 in Oran, Algeria.

To contact the reporters on this story: Ayesha Daya in Dubai adaya1@bloomberg.netMaher Chmaytelli in Nicosia at mchmaytelli@bloomberg.net


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Crude Oil Tumbles as Wall Street Turmoil Adds to Demand Concern

By Mark Shenk

Sept. 16 (Bloomberg) -- Crude oil tumbled below $91 a barrel, taking its two-day decline to more than $10, on concern that turmoil on Wall Street may weaken the global economy and cut fuel demand.

Oil fell more than 5 percent today after American International Group Inc. had its credit rating cut, threatening efforts to raise funds to keep the insurer afloat, and Lehman Brothers Holdings Inc. yesterday sought bankruptcy protection.

``Asset prices are taking a hit, be it futures or stocks, because people need to raise cash,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. ``The market fundamentals don't justify prices here, but that doesn't matter in this environment.''


Crude oil for October delivery fell $3.84, or 4 percent, to $91.87 a barrel at 9:53 a.m. on the New York Mercantile Exchange. Futures dropped as much as $5.16, or 5.4 percent, to $90.55 a barrel, the lowest since Feb. 8.

Oil in New York has declined 4.3 percent this year and dropped 38 percent from the record $147.27 a barrel reached on July 11.

Gasoline for October delivery tumbled 9.89 cents, or 3.9 percent, to $2.4625 a gallon in New York. The contract dropped as low as $2.4480 a gallon, the lowest since Feb. 14.

The Organization of Petroleum Exporting Countries, supplier of more than 40 percent of the world's oil, lowered its forecast for 2009 oil demand to 87.66 million barrels a day because of the global economic slowdown.

OPEC Decision

OPEC needs to study the effects of its production cuts before considering an emergency meeting, Iran's OPEC governor said today.

``Ministers need at least September and October data to see the impact of OPEC's decision on the market,'' Mohammad Ali Khatibi said in a phone interview from Tehran today. ``We cannot be in a hurry; an emergency meeting would be a judgment in a rush.''

OPEC agreed at its meeting in Vienna to a limit for 11 members of 28.8 million barrels a day, about 500,000 barrels a day lower than the group's July output. The group is scheduled to meet on Dec. 17 in Oran, Algeria.

Texas oil refiners may need weeks to restore normal operations as utilities struggle to restore power after Hurricane Ike swept through the region.

U.S. crude-oil and fuel inventories probably fell last week because of Ike, a Bloomberg News survey of analysts showed. The Energy Department is scheduled to release its weekly petroleum supply report tomorrow.

Intertwined Markets

``There's been a hurricane, attacks in Nigeria and the inventory data will be very bullish due to shipping disruptions and refinery closures, and yet we're testing $90,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``This shows that energy became intertwined with financial markets. Now that's coming undone.''

Brent crude oil for November settlement declined $4.77, or 5.1 percent, to $89.47 a barrel on London's ICE Futures Europe exchange. Futures fell to $88.99 today, the lowest since Feb 8. Prices have dropped 14 straight days, the longest stretch since the contract was introduced in 1988.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.


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U.K. Pound Slips Against Dollar, Euro on Outlook for Inflation

By Andrew MacAskill

Sept. 16 (Bloomberg) -- The U.K. pound fell by the most in two weeks against the dollar after Bank of England Governor Mervyn King said inflation will peak 'soon' and then slow 'sharply' in 2009, boosting speculation of an interest-rate cut.

The pound also snapped an eight-day gain versus the euro as King said in a letter today to Chancellor of the Exchequer Alistair Darling that price-growth in Europe's second-largest economy will peak at about 5 percent. The governor was required to explain why inflation exceeded the government's target after the statistics office today said consumer prices jumped an annual 4.7 percent in August, the most since records began in 1997.

``The market is reading that inflation is going to come down and this will allow the Bank of England to cut interest rates,'' said Chris Turner, head of currency research in London at ING Groep NV. ``This is being perceived as sterling negative and we are going to see it start coming off.''

The British currency fell as much as 1.2 percent to $1.7796, and was at $1.7803 by noon in London, from $1.8007 yesterday. Against the euro, the pound slipped to 79.66 pence, from 79.16 pence, after gaining 3 percent in the previous eight days.

King said the balance between the risks of slower growth and inflation remained 'finely balanced'. The bank will ``assess how the balance of risks is evolving at its next and subsequent meetings,'' he said in his letter.

Under the terms of the Bank of England's mandate, King is obliged to write a letter of explanation to Darling if inflation breaches its 2 percent target by more than one percentage point and stays there after three months.

U.K. policy makers have kept the main rate at 5 percent since April on concern inflation will become embedded in the economy. They are scheduled to release the minutes of their last meeting tomorrow.

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partner, fell to 86.68, according to Deutsche Bank AG. The measure is down 8.4 percent this year.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net



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Canadian Dollar Falls as Investors Abandon Risk, Commodities

By Daniel Kruger

Sept. 16 (Bloomberg) -- The Canadian dollar fell for a second day as investors sold commodities including crude oil and aluminum as part of a move toward less risky assets.

Concerns that global economic growth is slowing, reducing demand for natural resources, also weighed on the Canadian currency. Canada's dollar has fallen 5.9 percent against the U.S. currency since the price of crude oil peaked at $147.27 a barrel on July 11.

``The commodity cycle is still an important driver,'' said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto.

Canada's dollar, dubbed the loonie because of the aquatic bird on the one-dollar coin, fell 0.1 percent to C$1.0712 per U.S. dollar at 8:18 a.m. in Toronto, from C$1.0706 yesterday. One Canadian dollar buys 93.35 U.S. cents.

Crude oil for October delivery dropped 4.2 percent to $91.69 a barrel on the New York Mercantile Exchange. Earlier it reached $90.83, the lowest since Feb. 8.

The Canadian currency will slip to C$1.12 against the U.S. dollar by the end of 2009, according to the median forecast of 33 economists surveyed by Bloomberg News.

The U.S. dollar weakened versus the yen and euro as the debt-rating downgrade of American International Group Inc. fueled concern credit markets are seizing up after the collapse of Lehman Brothers Holdings Inc.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net



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Yen Rises to Two-Year High Against Euro on Downgrade of AIG

By Ye Xie and Bo Nielsen

Sept. 16 (Bloomberg) -- The yen rose to a two-year high against the euro and gained versus the dollar as the debt-rating downgrade of American International Group Inc. fueled concern credit markets are seizing up after the collapse of Lehman Brothers Holdings Inc.

Japan's currency jumped to the highest level in almost five years against the New Zealand dollar as a drop in stocks encouraged investors to reduce holdings of higher-yielding assets and pay back loans in the yen. The dollar rose versus the euro as traders forecast the Federal Reserve will cut interest rates at its meeting today and investors sought a haven.

``The markets are turning upside down,'' said Samarjit Shankar, director of global strategy for the market group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets. ``Nobody knows what's coming next. Money-market institutions are getting out of risky positions and parking their money in short-term bills denominated in the yen.''

The yen increased 1.2 percent to 147.39 per euro at 10:03 a.m. in New York, from 149.11 yesterday. It touched 147.04, the strongest since August 2006. The Japanese currency climbed 0.9 percent to 103.77 per dollar, from 104.66, after touching 103.54, the strongest since May 27. The dollar increased 0.3 percent to $1.42 per euro, from $1.4243 yesterday, when it reached $1.4481, the weakest level since Sept. 4.

Money-market rates surged today as lending between banks all but seized up. The London interbank offered rate, or Libor, for overnight dollars more than doubled to the highest level in seven years, the British Bankers' Association said.

AIG Downgrade

AIG's credit was downgraded by Standard & Poor's and Moody's Investors Service, threatening efforts to raise emergency funds to keep the company afloat. The largest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar with the situation.

Lehman filed for the biggest bankruptcy in history yesterday after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based firm.

``It's the end of the world as we know it, at least that is how it feels,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``The main beneficiary has been the yen, which is not a surprise, it being the typical risk-aversion play and given the prospect that Japanese outflow to foreign markets dries up.''

Stronger Yen

The yen gained as much as 2.5 percent to 67.25 against the New Zealand dollar, the strongest level since November 2003, and 3.5 percent to 81.43 versus the Aussie as investors reduced carry trades, in which they borrow where interest rates are low and buy higher-yielding assets elsewhere. Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand.

The Fed added $50 billion in temporary reserves to the banking system with overnight repurchase agreements, or repos, today. It injected $70 billion in reserves yesterday, the most since the Sept. 11, 2001, terrorist attacks.

The Standard & Poor's 500 Index fell 0.9 percent after posting the steepest drop since September 2001 yesterday.

The European Central Bank offered 70 billion euros ($99.8 billion) in a one-day money-market auction today. The Bank of Japan and the Bank of England also injected liquidity to their banking systems. The Libor OIS spread, which measures the availability of funds in the market, increased 15 basis points, or 0.15 percentage point, to 120 basis points today, the widest since at least December 2001.

Money Markets

``All eyes of the currency markets are on the money markets,'' said Steve Barrow, a currency strategist at Standard Bank Plc in London. ``The key issue is whether there is a systemic meltdown in the interbank market. That could cause further dislocations.''

Traders are certain U.S. policy makers will lower the 2 percent target rate for overnight lending between banks when they meet today. Futures on the Chicago Board of Trade showed a 74 percent chance the Fed would reduce the rate by a quarter- percentage point and a 26 percent chance that it would cut by a half-percentage point. Traders saw a 2 percent chance of a rate cut a week ago.

``The market is expecting the Fed to calm things down,'' said Henry Wilkes, head of foreign-exchange trading at Brown Brothers Harriman & Co. in London. ``Whether they actually will is another matter. We're heading into unprecedented waters with the concerns about AIG and the contagion into the insurance market. A lot of people are a bit shell-shocked.''

Implied volatility on one-month euro-dollar options reached 14.71 percent today, the highest level since the aftermath of the Sept. 11 attacks, indicating traders see more price fluctuation in the next month. Volatility on one-month dollar- yen options touched 18.79 percent, the highest since March 17, the day before the Fed cut borrowing costs.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net



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Russia's Micex Index Falls Most Ever; Exchanges Suspend Trading

By Bradley Cook and Will Mauldin
Enlarge Image/Details

Sept. 16 (Bloomberg) -- Russia's Micex Index plunged a record 17 percent, prompting the exchange to halt trading, after the cost of borrowing in dollars overnight more than doubled and oil prices tumbled.

OAO Sberbank and OAO VTB Group, Russia's two biggest banks, led the decline in Moscow, falling 19 percent and 33 percent respectively. Financial stocks worldwide slid after American International Group Inc., the biggest U.S. insurer, had its credit ratings downgraded. OAO Rosneft, the government-controlled oil producer, lost 20 percent.

The ruble-denominated Micex plunged 17 percent to 890.29 at 4:42 p.m. in Moscow, before trading was suspended, the lowest level in almost three years. That is the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS Index lost 12 percent to 1,131.12, giving a 54 percent retreat from its highest close of 2,487.92, on May 19.


The RTS Exchange halted equities trading for the rest of the day. The Micex is due to resume trading at 5:42 p.m. local time.

``It's panic,'' said Oleg Vorotnitsky, head of equity trading at Uralsib Financial Corp. in Moscow. ``There are problems with liquidity on the market. People are having problems with refinancing their positions so they started selling. Concern about AIG in the U.S. is adding to the panic.''

The overnight dollar rate soared 333 basis points to 6.44 percent today, its biggest jump, according to the British Bankers' Association. Rates climbed yesterday after Lehman Brothers Holdings Inc. succumbed to mounting credit-market losses and filed for bankruptcy.

Sberbank sank 19 percent to 36.39 rubles. VTB plunged 33 percent to 3.09 kopeks.

Rosneft Drops

Rosneft, Russia's biggest oil producer, fell 34.01 rubles, or 20 percent, to 135 rubles, the lowest since its IPO in 2006. OAO Novatek, Russia's second-biggest natural-gas producer, sank 17.96 rubles, or 14 percent, to 112.05 rubles.

OAO Gazprom, Russia's biggest corporate borrower, declined 14 percent to 166.99 rubles, less than half its all-time high of 367.54 rubles on May 19.

Crude oil tumbled, dipping below $91 a barrel and taking its two-day decline to more than $10 on concern that turmoil on Wall Street may weaken the global economy and reduce demand.

``For now, we expect the oil price and global financials to dictate moves on the Russian market,'' JPMorgan Chase & Co. strategist Peter Westin in Moscow wrote in a note to investors. ``The outlook for Russian equities today is anything but cheerful.''

To contact the reporter on this story: Bradley Cook in Moscow at bcook7@bloomberg.net.


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U.K. Pound Slips Against Dollar, Euro on Outlook for Inflation

By Andrew MacAskill

Sept. 16 (Bloomberg) -- The U.K. pound fell by the most in two weeks against the dollar after Bank of England Governor Mervyn King said inflation will peak 'soon' and then slow 'sharply' in 2009, boosting speculation of an interest-rate cut.

The pound also snapped an eight-day gain versus the euro as King said in a letter today to Chancellor of the Exchequer Alistair Darling that price-growth in Europe's second-largest economy will peak at about 5 percent. The governor was required to explain why inflation exceeded the government's target after the statistics office today said consumer prices jumped an annual 4.7 percent in August, the most since records began in 1997.

``The market is reading that inflation is going to come down and this will allow the Bank of England to cut interest rates,'' said Chris Turner, head of currency research in London at ING Groep NV. ``This is being perceived as sterling negative and we are going to see it start coming off.''

The British currency fell as much as 1.2 percent to $1.7796, and was at $1.7803 by noon in London, from $1.8007 yesterday. Against the euro, the pound slipped to 79.66 pence, from 79.16 pence, after gaining 3 percent in the previous eight days.

King said the balance between the risks of slower growth and inflation remained 'finely balanced'. The bank will ``assess how the balance of risks is evolving at its next and subsequent meetings,'' he said in his letter.

Under the terms of the Bank of England's mandate, King is obliged to write a letter of explanation to Darling if inflation breaches its 2 percent target by more than one percentage point and stays there after three months.

U.K. policy makers have kept the main rate at 5 percent since April on concern inflation will become embedded in the economy. They are scheduled to release the minutes of their last meeting tomorrow.

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partner, fell to 86.68, according to Deutsche Bank AG. The measure is down 8.4 percent this year.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net



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Sugar Sinks for Second Day as Oil Drop Leads Commodities Lower

By Ron Day

Sept. 16 (Bloomberg) -- Sugar fell for a second day in New York as crude oil slid, leading commodities lower on speculation that Wall Street turmoil may slow global demand.

Crude fell to as low as $90.83 a barrel in New York, trimming demand for alternative fuel made from sugar cane, after insurer American International Group Inc. had its credit ratings cut and world stock indexes plunged. The Reuters/Jefferies CRB Index of 19 commodities declined as much as 0.6 percent, led by falling energy and metal prices.

``More long liquidation could come into play as AIG, who operates a large index fund, may redeem investors' money,'' Peter Hoyt, a Sucden (U.K.) Ltd. analyst in London, said today in a report. ``Other index funds may be subjected to the same process should shareholders opt to hold money in cash instead of keeping it in falling commodities.''

Raw-sugar futures for March delivery dropped 0.32 cent, or 2.3 percent, to 13.56 cents a pound at 8:46 a.m. on ICE Futures U.S., the former New York Board of Trade. Earlier, the contract sank as much as 3 percent.

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



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FTSE 100 Drops Below 5,000 for First Time Since 2005; RBS Falls

By Adam Haigh

Sept. 16 (Bloomberg) -- U.K. stocks slumped, sending the benchmark FTSE 100 Index below 5,000 for the first time since June 2005, as concern grew there may be further capital raisings at financial companies and commodity stocks fell with metals prices.

Royal Bank of Scotland Group Plc dropped 16 percent and HBOS Plc tumbled 40 percent after American International Group Inc.'s credit ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening efforts to raise emergency funds to keep the company afloat. BHP Billiton Ltd. slid 6.4 percent and Rio Tinto Group lost 8 percent as copper retreated in London.

``A sustained run below this point would open up the scope for bigger losses to be exposed on the downside,'' London-based James Hughes, a market analyst at CMC Markets wrote in an email.

The benchmark FTSE 100 Index fell 220.6, or 4.2 percent, to 4,983.6 at 2:25 p.m. in London, extending its loss this year to 23 percent. The FTSE All-Share Index dropped 4.2 percent and Ireland's ISEQ Index retreated 5.3 percent, the lowest since 2003.

Stocks extended the slide after the British Bankers' Association said the cost of borrowing in dollars overnight more than doubled to 6.44 percent, a record jump.

About $1.1 trillion has been wiped off the value of U.K. shares this year as banks including Barclays Plc and Royal Bank have been forced to raise capital as losses at financial companies topped $229.5 billion across Europe, eroding profits.

`Risk is Just too High'

``There is a lot of uncertainty out there as to how this will unwind and how it will affect the financial system,'' said Jane Coffey, head of equities at Royal London Asset Management, which oversees about $63 billion in a Bloomberg Television interview. ``It seems that nobody is prepared to do any transactions with anyone else again because the counterparty risk is just too high.''

Royal Bank of Scotland, the U.K.'s second largest bank, slid 16 percent to 177.6 pence. HBOS, Britain's biggest mortgage lender, plummeted 40 percent to 139.4 pence.

AIG had its ratings cut after two people familiar with the situation said the biggest U.S. insurer by assets is seeking $70 billion to $75 billion in loans to replenish capital.

``The financial sector is again under the spotlight and AIG is the cumulus nimbus cloud,'' said David Buik, a London-based market analyst at BGC Partners.

Barclays slid 11 percent to 282.75. The U.K.'s third largest bank is close to a deal to buy assets of Lehman Brothers Holdings Inc. for $2 billion, according to the Wall Street Journal. The bank said today it's in talks to buy assets from bankrupt Lehman Brothers Holdings Inc. two days after abandoning plans to acquire the entire securities firm.

BHP, the world's largest mining company, slipped 6.4 percent to 1,348 pence. Rio Tinto, the third biggest, dropped 8 percent to 3,859 pence.

Copper for delivery in three months slumped 2.3 percent in London. Platinum, gold, nickel, lead, zinc and aluminum prices also fell.

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



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European Stocks Tumble on AIG Debt Rating Cuts; UBS, HBOS Drop

By Adria Cimino

Sept. 16 (Bloomberg) -- European stocks fell for a second day after the downgrade of American International Group Inc.'s credit rating increased turmoil in global debt markets.

UBS AG, which reported more than $43 billion of subprime- related losses and writedowns, fell 20 percent after the cost of borrowing in dollars overnight more than doubled as banks hoarded cash. HBOS Plc, Britain's biggest mortgage lender, lost 34 percent. Xstrata Plc, the world's fourth-largest copper producer, dropped 9.9 percent as commodity prices retreated on speculation that the seizure in financial markets will hurt the global economy.

``We're at the heart of the storm right now,'' said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. ``The downgrade of credit ratings is bad news.''

The Stoxx 600 sank 3.1 to 262.3 at 2:40 p.m. in London, bringing its 2008 decline to 28 percent. More than $16 trillion has been erased from global equities this year as the biggest surge in mortgage defaults in at least three decades sparked $514 billion in credit losses and writedowns.

The cost of borrowing in dollars overnight soared 3.33 percentage points to 6.44 percent, its biggest jump, the British Bankers' Association said.

Risk Appetite

``Banks have adjusted their risk premiums,'' said Peter Jarvis, a London-based director of European equities at F&C Asset Management, which has about $200 billion. ``Until we see clarity in the financial systems and trust between banks, investors' risk appetite for asset classes such as equities is not going to improve.''

Traders increased bets the Federal Reserve will cut borrowing costs today, putting the odds of a quarter point reduction in rates at 76 percent, up from 68 percent yesterday.

National benchmark indexes fell in all of the 18 western European markets. The U.K.'s FTSE 100 sank 4.5 percent, dropping below 5,000 for the first time since June 2005. Germany's DAX lost 2.9 percent as did France's CAC 40.

Banks were the worst performers after mining shares today in the Stoxx 600 as concern about defaults rose, according to traders of credit-default swaps. In Europe, the Markit iTraxx Financial index of 25 banks and insurers rose 30 basis points to 150, the highest in six months, according to JPMorgan prices.

AIG

AIG, which sold Wall Street's largest firms and other investors protection on $441 billion of fixed-income assets, had its credit ratings downgraded by S&P and Moody's, threatening efforts to raise emergency funds to keep the company afloat. The biggest U.S. insurer fell 61 percent yesterday after failing to present a plan to raise capital and stave off credit downgrades, helping push the Standard & Poor's 500 Index to the steepest drop since the September 2001 terrorist attacks.

Washington Mutual Inc., the biggest U.S. savings and loan, had its credit rating cut to junk by S&P. Lehman Brothers Holdings Inc.'s bankruptcy yesterday fueled speculation credit- related losses will worsen.

UBS, the largest Swiss bank, plunged 20 percent to 16.03 francs. Natixis SA, France's fourth-biggest bank, slumped 18 percent to 2.44 euros.

HBOS, the U.K.'s biggest mortgage lender, tumbled 34 percent to 152.9 pence.

Barclays, Xstrata

Barclays Plc retreated 9.5 percent to 286 pence. The U.K.'s third-largest bank said today it's in talks to buy assets from bankrupt Lehman two days after abandoning plans to acquire the entire securities firm.

Xstrata slid 9.9 percent to 2,049 pence. Anglo American Plc, the world's fourth-biggest diversified mining company, fell 8.3 percent to 2,210 pence.

BG Group Plc, the U.K.'s third-biggest oil and natural-gas producer, slumped 7 percent to 1,019 pence. Total SA, Europe's largest oil refiner, lost 3.2 percent to 42 euros.

Copper dropped to a seven-month low in London. Lead, nickel, tin and zinc also fell.

Crude oil tumbled, dipping below $91 a barrel and taking its two-day decline to more than $10 on concern that turmoil on Wall Street may weaken the global economy and reduce demand. The contract for October delivery fell as much as 5.4 percent to $90.55 on the New York Mercantile Exchange.

Technology stocks dropped after Dell Inc., the second- biggest personal-computer maker, predicted ``further softening'' in demand this quarter.

STMicroelectronics NV, Europe's largest chipmaker, lost 3.2 percent to 8.43 euros. Infineon Technologies AG, the industry's second biggest, retreated 6.9 percent to 5.52 euros.

Customers showed ``continued conservatism'' in technology spending in the U.S. last quarter, which has spread to Western Europe and some Asian countries, Dell said, reiterating comments made last month.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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Suncor Energy, Toronto-Dominion May Fall on Oil, Market Turmoil

By John Kipphoff

Sept. 16 (Bloomberg) -- Suncor Energy Inc. may decline, based on bids on the Toronto Stock Exchange, after crude oil tumbled a second day on concern that turmoil in financial markets may weaken the global economy and reduce demand.

Toronto-Dominion Bank may retreat, joining a global rout of financial companies, as American International Group Inc. tumbles in New York after its credit ratings were cut, threatening efforts to raise funds to keep the insurer afloat.

The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as yesterday's collapse of Lehman Brothers Holdings Inc. and the credit downgrades of American International Group led banks to hoard cash.

The Standard & Poor's/TSX Composite Index declined 4 percent to 12,254.03 yesterday in Toronto, the most since Jan. 21. Canada's main equity benchmark, which derives more than three-quarters of its value from energy, materials and financial stocks, has lost about C$214 billion ($200 billion) in value in September. The S&P/TSX has fallen 19 percent from its June 18 record, approaching a so-called bear market.

Crude oil for October delivery fell as much as 5.1 percent, to $90.83 a barrel, the lowest intraday price since Feb. 8.

AIG shares tumbled 61 percent in early New York trading.

Suncor, the second-largest oil-sands producer, may fall C$1.25 to C$45, bids already submitted in Toronto showed. Canadian Natural Resources Ltd. may drop C$1.01 to C$76. Talisman Energy Inc. may retreat 36 cents to C$16.05, bids showed.

Toronto-Dominion, Canada's second-biggest bank, may decline C$1.23 to C$60.07, bids suggested. Royal Bank of Canada, the largest, may drop C$1 to C$47.10.

Manulife Financial Corp. may slip 90 cents to C$36.10, bids indicated. Canada's biggest insurer is a likely candidate to buy the AIG's variable annuity business if it is put up for sale, RBC Capital Markets analyst Andre-Philippe Hardy said in a note to clients yesterday.

Potash Corp. of Saskatchewan Inc., the biggest maker of crop nutrients by market value, may decline C$4.11 to C$159.72, according to bids. 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.

U.S. stock-index futures declined after the jump in overnight lending rates and the credit downgrades of American International showed strains on the financial system are intensifying.

To contact the reporter on this story: John Kipphoff in Montreal at jkipphoff@bloomberg.net.



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China Urges Vale to Stop Demand for Higher Ore Prices

By Helen Yuan

Sept. 16 (Bloomberg) -- Cia. Vale do Rio Doce, the world's biggest iron ore producer, should stop trying to raise contract iron ore prices for the second time this year, the China Iron and Steel Association said.

The Brazilian mining company's request is ``unreasonable, going against international negotiation rules,'' the association said in a statement carried on the Custeel.com Web Site.

Vale is seeking to raise prices for Asian mills to match what ArcelorMittal and European steelmakers are paying the company. Steelmakers are rejecting the push as prices for their products fall because of a slowdown in demand.

Asian customers pay 11 percent to 11.5 percent less than European clients, Rio de Janeiro-based Vale said Sept. 9 in a statement. There is no guarantee the talks will be successful, the company said then.

Vale is trying to match higher prices charged by rivals Rio Tinto Group and BHP Billiton Ltd., the second and third-biggest producers. Rio and BHP won a price increase of as much as 97 percent this year, compared with the 71 percent gain of Vale.

Qi Xiangdong, vice chairman of the association, confirmed the authenticity of the statement.

To contact the reporter for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net



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Gold, Precious Metals Fall as Investors Sell to Cover Losses

By Pham-Duy Nguyen

Sept. 16 (Bloomberg) -- Gold, silver and other precious metals fell as investors sold commodities to raise cash and cover losses in other markets.

Equities in Asia, Europe and the U.S. retreated on speculation American International Group Inc. would be the next victim of the credit crisis. The cost of borrowing dollars doubled overnight in London as banks hoarded cash after Lehman Brothers Holdings Inc. filed for bankruptcy protection and AIG's debt ratings were downgraded. Gold rose 5.6 percent in the previous two sessions as investors sought a haven from market turmoil.

``It's all related to money flow at this point,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``Some of this is the need to acquire capital related to margin calls. Gold has a very special quality to it as a monetary asset that silver and platinum lack and that's why it's holding up much better than other commodities.''

Gold futures for December delivery fell $9.20, or 1.2 percent, to $777.80 an ounce at 9:24 a.m. on the Comex division of the New York Mercantile Exchange. The metal reached a record $1,033.90 on March 17.

Silver futures for December delivery dropped 55 cents, or 4.9 percent, to $10.585 an ounce on the Comex. Platinum futures for October delivery plummeted $99.20, or 8.4 percent, to $1,077 an ounce. Palladium futures for December delivery lost $14.05, or 5.9 percent, to $223.95 an ounce in New York.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.



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Crude Oil Tumbles as Wall Street Turmoil Adds to Demand Concern

By Mark Shenk

Sept. 16 (Bloomberg) -- Crude oil tumbled below $91 a barrel, taking its two-day decline to more than $10, on concern that turmoil on Wall Street may weaken the global economy and cut fuel demand.

Oil fell more than 5 percent today after American International Group Inc. had its credit rating cut, threatening efforts to raise funds to keep the insurer afloat, and Lehman Brothers Holdings Inc. yesterday sought bankruptcy protection.

``Asset prices are taking a hit, be it futures or stocks, because people need to raise cash,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. ``The market fundamentals don't justify prices here, but that doesn't matter in this environment.''

Crude oil for October delivery fell $3.84, or 4 percent, to $91.87 a barrel at 9:53 a.m. on the New York Mercantile Exchange. Futures dropped as much as $5.16, or 5.4 percent, to $90.55 a barrel, the lowest since Feb. 8.

Oil in New York has declined 4.3 percent this year and dropped 38 percent from the record $147.27 a barrel reached on July 11.

Gasoline for October delivery tumbled 9.89 cents, or 3.9 percent, to $2.4625 a gallon in New York. The contract dropped as low as $2.4480 a gallon, the lowest since Feb. 14.

The Organization of Petroleum Exporting Countries, supplier of more than 40 percent of the world's oil, lowered its forecast for 2009 oil demand to 87.66 million barrels a day because of the global economic slowdown.

OPEC Decision

OPEC needs to study the effects of its production cuts before considering an emergency meeting, Iran's OPEC governor said today.

``Ministers need at least September and October data to see the impact of OPEC's decision on the market,'' Mohammad Ali Khatibi said in a phone interview from Tehran today. ``We cannot be in a hurry; an emergency meeting would be a judgment in a rush.''

OPEC agreed at its meeting in Vienna to a limit for 11 members of 28.8 million barrels a day, about 500,000 barrels a day lower than the group's July output. The group is scheduled to meet on Dec. 17 in Oran, Algeria.

Texas oil refiners may need weeks to restore normal operations as utilities struggle to restore power after Hurricane Ike swept through the region.

U.S. crude-oil and fuel inventories probably fell last week because of Ike, a Bloomberg News survey of analysts showed. The Energy Department is scheduled to release its weekly petroleum supply report tomorrow.

Intertwined Markets

``There's been a hurricane, attacks in Nigeria and the inventory data will be very bullish due to shipping disruptions and refinery closures, and yet we're testing $90,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``This shows that energy became intertwined with financial markets. Now that's coming undone.''

Brent crude oil for November settlement declined $4.77, or 5.1 percent, to $89.47 a barrel on London's ICE Futures Europe exchange. Futures fell to $88.99 today, the lowest since Feb 8. Prices have dropped 14 straight days, the longest stretch since the contract was introduced in 1988.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.



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German Stocks Fall for Second Day, Led by Commerzbank, Postbank

By Stefanie Haxel

Sept. 16 (Bloomberg) -- German stocks fell for a second day after Standard & Poor's and Moody's Investors Service cut their debt ratings for American International Group Inc., threatening efforts to keep the biggest U.S. insurer by assets afloat.

Commerzbank AG, Germany's second-largest bank, slumped 8.6 percent to the lowest in almost four years, and Deutsche Postbank AG slid 8 percent. Deutsche Bank AG dropped to a two-month low. Germany's biggest bank is among European bank stocks that investors should avoid, according to JPMorgan Chase & Co.

The DAX Index plunged 103.82, or 1.7 percent, to 5,960.34 as of 1:12 p.m. in Frankfurt. DAX futures expiring in September lost 1.5 percent to 5,961. The HDAX Index of the country's 110 biggest companies declined 1.6 percent.

``We are in a downside spiral and the end isn't in sight yet,'' said Matthias Jasper, head of equities at WGZ Bank in Dusseldorf, in a telephone interview. ``Investors fear a domino effect or financial market tsunami.''

The DAX has fallen 26 percent this year as credit losses and writedowns at financial firms worldwide topped $500 billion and slowing economic growth damped the outlook for earnings.

AIG had its long-term counterparty rating lowered three grades to A- from AA- by S&P, which cited a reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses. AIG's senior unsecured debt rating was downgraded by Moody's to A2 from Aa3.

Commerzbank

Commerzbank declined 1.375 euros to 14.535, the lowest since November 2004. Postbank, Germany's biggest consumer bank by clients, fell 3.18 euros to 36.58, the biggest drop since 2004.

Deutsche Bank lost 1.525 euros, or 2.8 percent, to 52.685, the lowest since July 16. The company may be counterparty to bankrupt Lehman Brothers Holdings Inc., JPMorgan analysts including Kian Abouhossein wrote in a note to clients. Investors should ``avoid banks with large trading operations,'' he said. Deutsche Bank spokesman Christian Streckert declined to comment.

Crude oil for October delivery extended its slide, dipping below $92 a barrel, on concern that turmoil on Wall Street may weaken the global economy and reduce demand.

Deutsche Lufthansa AG added 21.5 cents, or 1.5 percent, to 15.05 euros. Europe's second-largest airline, which yesterday agreed to purchase 45 percent of Brussels Airlines, may be a preferred buyer for Alitalia SpA, Italian Prime Minister Silivo Berlusconi said during the taping of the ``Porta a Porta'' talk show in Rome.

Henkel AG & Co. KGaA, the maker of Loctite glue and Persil detergent, climbed for a fourth day, adding 41 cents, or 1.5 percent, to 27.95 euros.

The following stocks also rose or fell in German markets. Symbols are in parentheses.

Abromedia AG (RBX GY) rallied 79 cents, or 9 percent, to 9.54 euros, the highest in more than seven years. Goldbach Media AG, Switzerland's biggest seller of online advertising, took control of the marketer of advertising space and offered to pay 9.80 euros per share for the 27 percent is doesn't own.

BASF SE (BAS GY) dropped for a second day, losing 86 cents, or 2.4 percent, to 35.38 euros. Moody's Investors Service said it is reviewing its long-term credit ratings on the world's largest chemical maker for downgrade after the company agreed to buy Switzerland's Ciba Holding AG.

Separately, CA Cheuvreux lowered its share-price estimate 9 percent to 39 euros.

Bayer AG (BAY GY) rose 1.14 euros, or 2 percent, to 57.08, the highest in seven months. Germany's largest drugmaker climbed on renewed speculation Pfizer Inc. will bid for the company.

Premiere AG (PRE GY), the pay-television company partly owned by News Corp., gained 15 cents, or 1.3 percent, to 11.50 euros. Germany's DFL soccer league will end a broadcast-rights marketing contract with Sirius Sportmedia GmbH, Handelsblatt reported.

``This would put Premiere in the best position to get the broadcast rights for Germany's top soccer league,'' said Sonia Rabussier, an analyst at Sal. Oppenheim jr. & Cie. in Frankfurt. Sal. Oppenheim has a ``neutral'' recommendation on the stock.

SAP AG (SAP GY) increased 45 cents, or 1.2 percent, to 38.60. Credit Suisse Group AG raised its recommendation for the world's largest maker of business-management software to ``outperform'' from ``neutral,'' citing potential for higher profitability.

To contact the reporter on this story: Stefanie Haxel in Frankfurt at shaxel@bloomberg.net.



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Emerging-Market Stocks Fall Most in 8 Months; Gazprom Declines

By Fabio Alves

Sept. 16 (Bloomberg) -- Emerging-market stocks tumbled for a second day, sending the benchmark index to its biggest decline in almost eight months, as mounting credit losses and a surge in banks' borrowing costs prompted investors to sell riskier assets.

Every European and Asian emerging market in MSCI indexes except Indonesia retreated. Russia's Micex Index fell the most since Bloomberg began tracking the measure in May 2001, led by financial companies OAO Sberbank and OAO VTB Group, before trading was suspended. South Korea's Kospi index dropped the most in 13 months, while Czech's stocks had the biggest decline since July 2001.

The MSCI Emerging Markets Index fell 6 percent to 776.02 at 9:12 a.m. New York time, the biggest tumble since Jan. 21. Before today, the measure lost 34 percent in 2008, compared with a 19 percent decline for the Standard & Poor's 500 Index. A gauge of energy stocks in the emerging markets index slipped 7.4 percent to 668.36, the lowest since March 2007.

Russia's Micex index plummeted 17 percent to 890.29, dragged down by a 19 percent plunge in Sberbank and a 14 percent decrease in OAO Gazprom. Korea's Kospi index fell 6.1 percent, while Czech's PX index slumped 6.5 percent.

The cost of insuring bonds in emerging markets surged. Argentina's five-year credit-default swaps rose above 1,000 basis points as concern New York-based American International Group Inc. may collapse eroded demand for all but the safest investments.

To contact the reporters for this story: Fabio Alves in New York at Falves3@bloomberg.net.



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AIG, Apple, Best Buy, Dell, Goldman Sachs: U.S. Equity Preview

By Elizabeth Stanton and Elizabeth Campbell

Sept. 16 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading today. Stock symbols are in parentheses, and share prices are as of 8:30 a.m. in New York, unless otherwise specified.

American International Group Inc. (AIG US) slumped 36 percent to $3.04. The biggest U.S. insurer by assets had its credit ratings cut by Standard & Poor's and Moody's Investors Service. New York Governor David Paterson told CNBC that AIG probably has one day to reach an agreement to raise $75 billion to $80 billion to keep the company afloat.

Apple Inc. (AAPL US) fell 3.1 percent to $136. Goldman Sachs Group Inc. removed the maker of Macintosh computers and iPod music players from its ``conviction buy'' list, while maintaining a ``buy'' recommendation on the shares.

Best Buy Co. (BBY US) slid 8 percent to $40.20. The largest U.S. electronics retailer said second-quarter earnings fell short of analyst estimates after it spent more to enhance U.S. stores. Profit dropped 19 percent to $202 million, or 48 cents a share, missing the average estimate by 9 cents.

Dell Inc. (DELL US) fell 7.1 percent to $16.71. The world's second-biggest personal-computer maker said it sees ``further softening'' in global demand this quarter. The company expects to incur costs to cut jobs and realign the business, according to a statement.

Goldman Sachs Group Inc. (GS US) fell 8.8 percent to $16.40. The largest of the two remaining independent U.S. securities firms reported third-quarter profit fell 70 percent, the sharpest decline in its nine years as a public company, and said it remains ``well positioned.''

Harris Corp. (HRS US) rose $1.40, or 3.1 percent, to $47. The maker of military radios will replace Lehman Brothers Holdings Inc. (LEH US) in the Standard & Poor's 500 Index, S&P said.

Hewlett-Packard Co. (HPQ US) fell 8 cents to $45.25. The world's largest maker of personal computers said it plans to cut about 24,600 jobs over three years as part of its integration of Electronic Data Systems Corp. and expects to incur $1.7 billion in expenses this quarter for the cuts.

Hexcel Corp. (HXL US): The maker of reinforced plastics for aircraft withdrew its full-year earnings forecast, saying it cut production volumes because of the machinists strike at Boeing Co. (BA US) The stock fell 4.3 percent to $18.02 in regular trading yesterday.

Lawson Software Inc. (LWSN US) fell 6.7 percent to $6.40. The maker of business-management programs for Safeway Inc. said in a statement that first-quarter profit excluding some items was 4 cents to 5 cents a share. That's short of the 7-cent average estimate from analysts in a Bloomberg survey.

Washington Mutual Inc. (WM US) fell 21 cents, or 11 percent, to $1.79. The biggest U.S. savings and loan had its debt rating cut to junk by Standard & Poor's because of the deteriorating housing market.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net



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U.S. Stocks Drop as AIG, Goldman, Morgan Stanley Shares Retreat

By Lynn Thomasson and Michael Patterson

Sept. 16 (Bloomberg) -- U.S. stocks declined, sending the Standard & Poor's 500 Index to its worst two-day slump since July 2002, after a record jump in overnight lending rates and the credit downgrades of American International Group Inc. showed strains on the financial system are intensifying.

AIG sank 70 percent, Goldman Sachs Group Inc. lost 11 percent and Morgan Stanley tumbled 24 percent after the cost of borrowing in dollars more than doubled as banks horded cash. Oil's dip below $91 a barrel exacerbated concern the economy is headed for a recession as General Electric Co. and General Motors Corp. dropped more than 5 percent. The global sell-off erased more than $1.5 trillion in value from equity markets worldwide and sent Russia's Micex Index down a record 17 percent.

``Clearly, we're not out of the woods,'' John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion, told Bloomberg Television. ``I wouldn't be looking for near-term gains at all.''

The S&P 500 declined 21.47 points, or 1.8 percent, to 1,171.23 at 9:37 a.m. in New York. The Dow Jones Industrial Average fell 155.43, or 1.4 percent, to 10,762.08. Six stocks declined for each that rose on the New York Stock Exchange.

The S&P 500 posted the steepest drop since the September 2001 terrorist attacks and stocks erased more than $600 billion of value yesterday after Lehman Brothers Holdings Inc.'s bankruptcy spurred speculation that credit-market losses may push the U.S. into a recession.

Consumer Prices Drop

Stocks continued their decline even after the Labor Department said 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.

The Federal Reserve announces its interest-rate decision at about 2:15 p.m. in Washington. Futures traders give 76 percent odds that the central bank will shift to 1.75 percent today from 2 percent. The Fed lowered its target for the overnight lending rate between banks seven times from September 2007 through April.

AIG declined $3.35 to $1.41. Its credit ratings were downgraded by S&P and Moody's Investors Service, threatening efforts to raise emergency funds to keep the company afloat.

The ratings reductions occurred after two people familiar with the situation said that the biggest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs and JPMorgan Chase & Co. to replenish capital. AIG probably has one day to raise the money, New York Governor David Paterson said during an interview with CNBC.

Biggest Profit Decline

Goldman Sachs retreated $15.50 to $120. The largest of the two remaining independent U.S. securities firms posted a 70 percent decline in quarterly profit, the sharpest drop in its nine years as a public company. Goldman Sachs said it remains ``well positioned'' despite turmoil in credit markets.

Morgan Stanley, the only other independent securities firm, lost $7.62 to $24.57.

Financials fell after the cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings Inc. and credit downgrades of AIG led banks to hoard cash.

The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump, the British Bankers' Association said. The rate was 2.19 percent a month ago and 2.15 percent last week. Lehman filed for bankruptcy yesterday after succumbing to mounting credit-market losses.

`Uncharted Territory'

``We're in uncharted territory,'' Laszlo Birinyi, who oversees more than $350 million as president of Birinyi Associates Inc. in Westport, Connecticut, said in a Bloomberg Television interview. ``There's no real historic precedent for what we're going through.''

Washington Mutual Inc. dropped 24 percent to $1.52. The biggest U.S. savings and loan had its credit rating cut to junk by S&P because of the deteriorating housing market. WaMu has reported $6.3 billion of losses in the last three quarters due to soured mortgages.

Crude for October delivery lost as much as 5.4 percent to $90.55 a barrel. Exxon Mobil Corp. fell 1.2 percent to $72.40. Chevron Corp. retreated 2.1 percent to $78.40.

``There's a recession still ahead of us and it exacerbates the credit crunch and puts a further damper on investor and consumer psychology,'' said David Joy, who helps oversee about $149 billion as chief market strategist at RiverSource Investments in Boston.

Dell Inc. dropped 9.2 percent to $16.33 after the second- biggest personal-computer maker predicted ``further softening'' in demand this quarter and said it will record expenses to trim payrolls.

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

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Home prices to fall on liquidity concerns: analyst

Sept 16 (Reuters) - The collapse of Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) and takeover of Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) will cause liquidity in the credit market to shrink, resulting in lower home prices, prominent U.S. banking analyst Meredith Whitney said.

The Oppenheimer & Co analyst also expects fewer mortgages to be available for prospective homeowners, as she sees no hope for the return of the mortgage securitization business.

"All this creates a recipe for meaningfully lower U.S. house prices," Whitney said.

The magnitude of houseprice declines in the next few years could likely exceed expectations of both the markets and the companies, she wrote in a note issued late Monday.

"The fact that all banks under our coverage have unrealistic HPA (housing price appreciation) assumptions will in our opinion lead to a material and protracted writedown and capital pressure scenario for banks well into 2009," Whitney said.

Since the onsetof the credit crisis over 14 months ago, less than $100 billion worth of mortgages have beensecuritized and, accordingly, homeownership stands at 68 percent, Whitney said. (Reporting by Neha Singh in Bangalore; Editing by Anil D'Silva)

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Bangkok Bank says has $101 mln exposure to Lehman

By Arada Therdthammakun

BANGKOK, Sept 16 (Reuters) - Bangkok Bank BBL.BK, Thailand's top lender, said on Tuesday it held 3.5 billion baht ($101 million) in senior, unsecured bonds issued by Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), which has filed for bankruptcy protection.

Other leading Thai banks, including second-ranked Krung Thai Bank KTB.BK and number five Bank of Ayudhya BAY.BK, said they had limited, indirect investments in Lehman Brothers through collateralised debt obligations (CDOs).

Bangkok Bank's executive vice president, Kulathida Sivayathorn, told Reuters: "The exposure might affect our profits in a quarter, but not enough for us to show a loss as we still have profits from operations."

"We expect to receive some repayment, but don't know how much," Kulathida said, adding this was its total exposure to Lehman.

The stock market's banking subindex .SETB slumped to its lowest level since November 2004 in early trade on Tuesday, led by a 7.3 percent fall in Bangkok Bank to 102 baht.

"Lehman's downfall is bad for local banks, though the total amount (of exposure) is relatively small," Kim Eng Securities said in a research note. "Losses on debentures are unclear while the loss on forex should be limited to 100 million baht."

The central bank has said the overall impact would be limited as Thailand's 14 commercial banks had only 4.3 billion baht of direct exposure to Lehman and another 5.3 billion of foreign exchange contracts.

State-run Krung Thai Bank KTB.BK, Thailand's second-largest lender, said only 1 percent of its $160 million invested in CDOs related to Lehman Brothers.

"Nothing to worry about on our CDO portfolio. There is only 1 percent of our CDOs linked to Lehman's securities and we already have provisions to cover an impairment loss for them," President Apisak Tantivorawong told Reuters.

Bank of Ayudhya, Thailand's fifth-biggest bank, said it had indirect investments in Lehman Brothers through investments in $85 million of CDOs, but that an insignificant portion was linked with Lehman.

"The bank has no direct transactions with Lehman but has indirect investment through CDOs," Yaowalak Poolthong, head of corporate communications and investor relations, told Reuters.

President Kannikar Chalitaporn, president of number three lender Siam Commercial Bank SCB.BK, said it had sold some securities linked to Lehman and would book a small loss on the investment in the third quarter. She gave no figures.

Siam Commercial shares dropped 4.14 percent to 69.50 baht, having hit their lowest level in 15 months at 68 baht in early trade.

At 0841 GMT, shares in Krung Thai Bank had dropped 2.8 percent, Bank of Ayudhya was down 5.26 percent, while Kasikornbank KBAN.BK, the country's fourth largest, was down 2.3 percent although it said it had no exposure to Lehman. ($1=34.56 Baht) (Additional reporting by Manunphattr Dhanananphorn; Editing by Alan Raybould)

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Global equity selloff wreaks havoc on money mkts

* MSCI world equity index down 1.2 percent at 304.88

* Woes at AIG deepen; Goldman Sachs results, Fed in focus

* O/n dollar rates surge; 25bps rate cut being priced in

By Natsuko Waki

LONDON, Sept 16 (Reuters) - Investors dumped equities and oil as the financial meltdown spread on Tuesday, a day after Lehman Brothers collapsed, driving the yen and government bonds higher and unleashing a panic rush to secure short-term cash.

A day after Lehman filed for bankruptcy protection and Bank of America agreed to buy Merrill Lynch , concerns about the global financial system deepened as fears grew American International Group could be the next financial giant to tumble.

Third-quarter earnings results from Goldman Sachs and an interest rate decision from the Federal Reserve ECON top the day's agenda with a panic scramble in the interbank money market threatening to trigger a fresh liquidity crunch.

The cost of borrowing dollars overnight rose to 10 percent , five times the benchmark Fed rate of 2 percent. Interest rate futures FEDWATCH were pricing in a more than 90 percent chance the Fed would cut rates to 1.75 percent later.

Asian and European central banks flooded money markets with cash as they sought to prevent the upheaval on Wall Street from clogging the pipes of the global financial system.

"There's a smell of cordite in the air. It's like the day after the explosion. People are still extremely nervous. They're wondering what happens next," said Justin Urquhart Stewart, investment director at Seven Investment Management.

"Investors are looking at what other companies have weak balance sheets. Now we need a bit of leadership from the central banks and the regulators."

The MSCI main world equity index .MIWD00000PUS fell 1.2 percent, its lowest since June 2006, on top of a 3.6 percent tumble on Monday.

The FTSEurofirst 300 index fell 1.7 percent while Asian stocks .MIAPJ0000PUS fell more than 4 percent.

AIG, thrown a $20 billion lifeline by New York state, came under renewed pressure as ratings agencies downgraded the insurer's debt.

PANIC SCRAMBLE IN MONEY MARKET

There were signs that the deepening financial crisis is freezing up activity in the interbank money market. Overnight dollar deposit rates rose to 10 percent, according to Reuters data, five times the benchmark Fed interest rates.

"The interbank market is dead because people are not willing to take up positions or not willing to provide liquidity for other banks," said a fixed income trader in London.

"Banks do have liquidity but they don't want to share with other banks because they don't know what is going to happen overnight. They don't want to come into the office and see who is looking for Chapter 11."

The low-yielding yen extended its steep rise, with the currency hitting a four-month high of 103.70 per dollar . On Monday, the dollar suffered its biggest one-day drop against the yen in nine years.

The dollar .DXY also fell against a basket of major currencies.

Safe-haven government bonds surged around the world, with the December bund future FGBLc1 rising 76 ticks.

The broad sell-off in risky emerging assets, already under pressure from slowing global growth, gained new momentum. Emerging sovereign spreads 11EMJ blew out to 395 basis points over U.S. Treasuries, their widest level since May 2005.

Emerging stocks .MSCIEF fell 3.4 percent, their lowest since October 2006.

U.S. light crude CLc1 extended losses, falling 3.6 percent to $92.32 a barrel as investors extended across-the-board deleveraging, taking oil more than $50 off its record high set in July.

Gold fell to $775.80 an ounce.

(Additional reporting by Brian Gorman and Ian Chua; Editing by Ruth Pitchford)



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Venezuela's Chavez to visit oil-hungry China

BEIJING, Sept 16 (Reuters) - Leftist Venezuelan President Hugo Chavez will visit China next week, sealing agreements that may include expanded energy cooperation and prompt wariness from the United States.

Chavez's state visit from Sept. 23-24 will include meetings with President Hu Jintao and agreements for cooperation in sports, judicial affairs and other areas, Chinese Foreign Ministry spokeswoman Jiang Yu told a news conference on Tuesday.

Asked whether his visit would also bring the energy-hungry Asian power expanded access to Venezuela's plentiful oil, Jiang was circumspect but did not rule out deals.

"Energy cooperation is a constitutive part of mutually beneficial cooperation between China and Venezuela," she said, adding that Venezuela supplied only 4 percent of China's oil imports.

"As to whether both sides will sign other agreements, they are continuing consultations."

Chavez has repeatedly said he wants to sell more oil to China and Jiang said Chavez had been eager to visit "as early as possible".

A self-styled revolutionary and florid critic of Washington, Chavez wants to reduce his nation's traditional reliance on energy markets in the United States. China's big energy appetite and Communist Party government make it an attractive alternative.

Chavez has said he wants his country to ship China 1 million barrels per day of oil by around 2011, about 13 percent of its current oil demand.

Venezuela supplied China with 5.17 million tonnes of crude -- just 177,000 bpd -- in the first seven months of 2008, though this was a 94 percent increase on the same period last year.

In May, the Venezuelan state oil company PDVSA and the largest Chinese oil and gas company PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz) agreed to build a refinery in China's far southern Guangdong province.

China this year lent $4 billion to Venezuela, which the South American country will repay in fuel, to create an investment fund for development projects.

Washington has long been critical of Chavez's leftwing politics at home and his jousting with U.S. policy abroad.

But Jiang stressed that China did not want to be drawn into diplomatic rivalry.

She said Beijing's ties with Caracas were "not directed at any third party". Of energy ties, she said, "Chinese and Venezuelan cooperation in this sphere will not affect Venezuela's oil supplies to other countries." (Reporting by Chris Buckley; Editing by Nick Macfie) (chris.buckley@reuters.com; +96-13501014479)

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ECB pumps 70 bln euros into money markets

FRANKFURT, Sept 16 (Reuters) - The European Central Bank pumped 70 billion euros into money markets on Tuesday as demand from banks topped the 100 billion mark amid signs interbank lending had frozen.

It was more than double the amount it allotted on Monday and effectively adds 40 billion to the funds it has now shovelled into money markets since they were shaken by the collapse of Lehman Brothers and the sale of Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) to Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz).

Demand for the overnight variable rate funding rose to 102.48 billion euros. The ECB said that the money was lent at an average interest rate of 4.40 percent with 56 banks taking part in the auction.

The ECB said on Monday it stood "ready to contribute to orderly conditions in the euro money market", shortly before pumping 30 billion euros into the system, although funding hungry banks would have sucked up more than three times that amount.

For more details please double click ECB23 (Reporting by Marc Jones, editing by Patrick Graham)

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