Short Squeeze Triggers Sharp Volatility in Stocks, FX Traders Look for Buying Opportunity

Daily Forex Fundamentals | Written by GFT | Oct 10 08 15:14 GMT |

For the first time since March 2003, the Dow Jones Industrial Average broke 8000 at the open of the US markets. However just as quickly as stocks dropped 600 points, it recovered more than half of its losses in the first 15 minutes of trading and actually moved into positive territory 35 minutes into the trading session. The capitulation followed by the major short squeeze suggests that we may have seen a near term bottom. This type of volatility drove the VIX index to a record high of 70. Currency Traders Waiting for the Buying Opportunity Interestingly enough, we have not seen much of a reaction in the currency market. This suggests that the capitulation is only in stocks and traders are waiting for the bounce to get in. The day is early so many things can change and equities could sell off again, but for the time being, it appears that the buyers of EUR/USD, GBP/USD and USD/JPY are sitting on the sidelines waiting to get in. If stocks start bottoming out, carry trades could actually bounce today. No one will want to be short carry ahead of the G7 and G20 meeting this weekend - we expect a bounce. Pessimism in Uncharted Territories Pessimism in the market has hit uncharted territories with the TED spread reaching another record high. This indicates that liquidity remains a problem and unfortunately confidence in the markets is tied to liquidity. Lehman has a CDS auction today and the rumor in the markets is that governments could resort to temporarily shutting down equity trading. This seems nearly impossible by theory, but it is certainly becoming a growing possibility. There is nothing more coveted than cash right now and the continued hemorrhaging will force the G7 and G20 into action. It will be another long weekend for US Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke. There is even talk that the US is considering a guarantee of bank debt. G7 Meeting - Most Significant Since 1985 Plaza Accord Finance Ministers have arrived in Washington for the G7 meeting while the G20 meeting is scheduled for the weekend. This will be the most significant G7 / G20 meeting since the 1985 Plaza Accord which marked a major turning point for the US dollar. The consequences of inaction are severe, so we expect a big announcement this weekend if not sooner. In 1985, the 5 nations attending the event agreed to intervene in the currency markets and to sell US dollars to reduce the US current account deficit and to pull the US economy out of a serious recession. FX intervention is still on the table, but it remains to be seen whether even that step will enough to surprise the markets. How Low Can Stocks Go? The Dow Jones Industrial Average has fallen to the lowest level in 5 years. Since its peak in October 2007, the Dow has fallen close to 40 percent. The worst financial crisis prior to the current one was the Wall Street Crash of 1929, which led to the Great Depression. Stocks started selling off in October 1929 with the big crash happening on October 29th of that year. Equities did not bottom out until July 1932, after the Dow lost 89 percent of its value. These are scary figures but it provides a perspective on how bad things have gotten in the past. We sincerely hope that this doesn't happen, but the lower equities fall, the greater the decline in USD/JPY and carry trades. Kathy Lien http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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FX Performance Since the Storm

Daily Forex Fundamentals | Written by Ashraf Laidi | Oct 10 08 15:16 GMT |

The charts below show the performance of major currencies as measured against gold and each other, since September 2-- two weeks before the makets' plunge. The relationship between slumping world equities, record high TED spreads (LIBOR minus T-bill) and multi-year highs in low-yielding currencies is bolstered by a break in confidence across the equity, credit and foreign exchange markets. Our Thursday morning piece sent to clients titled "Sterling Still the Major Loser" preceded further losses in the currency as GBPUSD broke to 5-year lows at $1.6784. Sterling also slumped against the Swiss franc, hitting 12-year lows at 1.900 as the Swiss franc also flexed its low yielding safe haven muscle alongside the Japanese yen. But the yen fared exceedingly better than the Franc, hitting 3-year highs against the franc at 86.53 yen, a 7% rise for the yen this week and an 18% increase from its June record low. Aside from favoring JPY and CHF against GBP, AUD and NZD, using USD as a low yielding play against GBP and AUD remains the preferred short-term play especially as a hedging short USDJPY positions. Dissecting Currency Performance Since September 2nd The charts show the Japanese yen as the best performing currency since September 2, which is about 2 weeks before the surge in volatility. The left chart shows currencies performance as measured against gold, with the yen showing the least decline at -4% and the Aussie the greatest decline at an astounding 44% loss against the metal. The yen is followed by the dollar and Swiss franc, while the worst performing Aussie is followed by the New Zealand dollar and the Canadian dollar, all of which are typical commodity currencies. The chart on the right shows the returns of each currency against an aggregate of 7 other currencies, also showing similar performance. The reason the dollar has outpaced the lower yielding Swiss franc in overall performance partly reflects the unwinding of dollar-selling positions accumulated over since mid September, as well as funds disposal of positions in emerging market assets. The complete break in the once positive correlation between gold and the Aussie owes to the escalation in the unwinding of carry trades at the expense of high yielding currencies, which coincided with a refuge to the safe haven metal. Thus, unlike in past conditions of strengthening economic fundamentals when rising gold moved in tandem with the metal-dependent Aussie, todays conditions are characterized by reduced risk appetite, money flowing out of high yielding currencies to the benefit of safe haven yen, Swiss franc and gold. Equity markets are increasingly being dominated by liquidators as fund managers accelerate selling to meet or avoid margin calls and hedge funds clients pile on their redemption requests. In an environment where 5%-8% daily losses in major indices are a back-to-back occurrence, the modus operandi mainly is characterized by players seeking an exit, or speculators buying volatility, rather than traders seeking value. Ashraf Laidi http://www.ashraflaidi.com

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U.S. August Trade Balance: Statistical Summary (Table)

By Kristy Scheuble

Oct. 10 (Bloomberg) -- Following is a summary of the U.S. trade balance report from the Commerce Department.

=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
                     -----------------Billions of Dollars-----------------
Total trade balance  -$59.138 -$61.305 -$58.835 -$60.208  -$61.508  -$55.333
   3-mo. average    -$59.759 -$60.116 -$60.184 -$59.560  -$59.969  -$59.037
   MoM % change        -3.5%     4.2%    -2.3%    -2.1%      8.0%      n/a
Ex-petroleum        -$23.530 -$18.355 -$21.499 -$27.371  -$26.734  -$30.920
 Exports            $164.715 $168.089 $162.788 $156.935  $155.094  $142.113
 Imports            $223.853 $229.393 $221.624 $217.143  $216.602  $197.446
-----------------------------------------------------------------------------
Goods               -$70.901 -$74.116 -$71.267 -$72.111  -$72.950  -$66.672
 Exports            $117.642 $120.834 $116.255 $110.998  $110.059   $98.524
 Imports            $188.543 $194.949 $187.523 $183.109  $183.009  $165.196
-----------------------------------------------------------------------------
=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
Services             $11.763  $12.811  $12.432  $11.903   $11.442   $11.339
 Exports             $47.073  $47.255  $46.533  $45.937   $45.035   $43.589
 Imports             $35.310  $34.444  $34.101  $34.034   $33.593   $32.250
-----------------------------------------------------------------------------
Real $ goods balance -$38.992 -$40.926 -$40.149 -$43.529  -$46.925  -$51.972
Ex-petroleum        -$35.592 -$32.678 -$34.566 -$39.439  -$38.708  -$44.130
                      -------------------MOM%-------------------    -YOY%-
Total exports           -2.0%     3.3%     3.7%     1.2%      3.6%     15.9%
Goods                  -2.6%     3.9%     4.7%     0.9%      4.8%     19.4%
 Capital goods          2.0%     2.2%     2.9%    -1.7%      6.0%     11.1%
  Semiconductors        0.5%    -0.2%     6.2%     0.0%     -1.7%     14.5%
  Computer access.     -7.6%     6.9%    -0.6%    -1.2%      8.7%      4.1%
  Telecom equipment    -5.8%     0.5%    -1.9%     0.2%     -5.7%     -8.4%
  Civilian aircraft    31.9%     5.7%    -8.2%     7.8%     23.5%     22.6%
 Indust. supplies      -3.2%     4.2%     7.4%     4.4%      3.7%     35.4%
 Consumer goods        -5.9%     5.3%     5.3%     0.0%      6.7%     12.5%
 Automotive           -13.8%    12.6%     5.7%     1.9%      6.2%      1.9%
=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
 Food & beverage       -2.1%    -0.4%     7.6%    -2.0%      2.8%     35.1%
Real $ goods           -0.2%     2.0%     3.6%     0.9%      4.9%     10.9%
Services               -0.4%     1.6%     1.3%     2.0%      0.8%      8.0%
                     ---------------------Level Change--------------------
Total exports         -$3.374   $5.301   $5.853   $1.841    $5.388   $22.602
Goods                -$3.192   $4.579   $5.257   $0.939    $5.030   $19.118
 Capital goods        $0.827   $0.903   $1.158  -$0.672    $2.280    $4.219
  Semiconductors      $0.020  -$0.008   $0.259   $0.001   -$0.073    $0.564
  Computer access.   -$0.211   $0.179  -$0.015  -$0.031    $0.212    $0.101
  Telecom equipment  -$0.160   $0.013  -$0.054   $0.006   -$0.169   -$0.238
  Civilian aircraft   $1.334   $0.227  -$0.352   $0.313    $0.760    $1.014
 Indust. supplies    -$1.230   $1.556   $2.535   $1.454    $1.175    $9.674
 Consumer goods      -$0.883   $0.750   $0.712  -$0.004    $0.840    $1.561
 Automotive          -$1.683   $1.364   $0.578   $0.186    $0.590    $0.195
 Food & beverage     -$0.222  -$0.039   $0.739  -$0.201    $0.265    $2.636
Real $ goods         -$0.150   $1.821   $3.220   $0.793    $4.201    $9.353
Services             -$0.182   $0.722   $0.596   $0.902    $0.358    $3.484
=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
Total imports MoM%      -2.4%     3.5%     2.1%     0.2%      4.8%     13.4%
Goods                  -3.3%     4.0%     2.4%     0.1%      5.5%     14.1%
 Ex-petroleum           0.9%     1.0%    -1.3%     1.2%      3.7%      5.7%
 Capital goods         -2.0%     1.5%    -3.4%     1.7%      3.2%      2.6%
  Semiconductors       -7.0%     5.1%    -6.2%    -0.2%      4.2%     -9.2%
  Computer access.     -3.9%    -3.8%    -2.0%     3.3%     -2.1%     -0.9%
  Telecom equipment     1.0%     0.2%    -0.9%     1.5%      4.8%      6.6%
  Civilian aircraft   -16.5%   -15.5%    19.4%   -23.8%     -6.5%    -26.2%
 Indust. supplies      -7.8%     8.9%     9.4%    -0.6%      9.7%     37.7%
  Crude oil           -15.5%    17.8%    13.2%    -0.4%     13.9%     74.7%
 Consumer goods         5.6%    -0.6%    -1.2%     4.1%      1.7%     10.5%
  Pharmaceuticals      23.4%   -16.8%    26.6%    -1.8%    -13.3%     40.3%
  Apparel              10.2%    -1.3%    -7.8%     7.5%     -2.2%     -2.0%
 Automotive            -6.0%    -0.4%     0.3%    -4.7%      5.8%    -12.4%
 Food & beverage        3.2%     0.6%    -1.8%     3.5%      4.1%     11.8%
Real $ goods           -1.5%     1.9%    -0.1%    -1.9%      3.0%     -2.6%
Services                2.5%     1.0%     0.2%     1.3%      1.1%      9.5%
=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
                     ---------------------Level Change--------------------
Total imports         -$5.540   $7.769   $4.481   $0.541    $9.932   $26.407
Goods                -$6.406   $7.426   $4.414   $0.100    $9.577   $23.347
 Ex-petroleum         $1.314   $1.347  -$1.927   $1.639    $5.052    $7.737
 Capital goods       -$0.768   $0.571  -$1.341   $0.670    $1.230    $0.961
  Semiconductors     -$0.157   $0.110  -$0.141  -$0.004    $0.093   -$0.211
  Computer access.   -$0.207  -$0.209  -$0.111   $0.178   -$0.119   -$0.048
  Telecom equipment   $0.039   $0.006  -$0.034   $0.058    $0.176    $0.241
  Civilian aircraft  -$0.153  -$0.170   $0.178  -$0.287   -$0.084   -$0.274
 Indust. supplies    -$6.205   $6.494   $6.296  -$0.435    $5.981   $20.169
  Crude oil          -$6.137   $5.973   $3.930  -$0.134    $3.634   $14.302
 Consumer goods       $2.293  -$0.258  -$0.509   $1.646    $0.663    $4.135
  Pharmaceuticals     $1.479  -$1.275   $1.592  -$0.112   -$0.939    $2.239
  Apparel             $0.399  -$0.053  -$0.336   $0.302   -$0.091   -$0.088
 Automotive          -$1.232  -$0.087   $0.058  -$1.002    $1.175   -$2.717
 Food & beverage      $0.242   $0.044  -$0.140   $0.261    $0.291    $0.823
Real $ goods         -$2.084   $2.599  -$0.161  -$2.603    $3.910   -$3.628
=============================================================================
                      Aug.     July     June     May      April     Year
                      2008     2008     2008     2008     2008       Ago
=============================================================================
Services              $0.866   $0.343   $0.067   $0.441    $0.355    $3.060
                     ---------Imports of energy related petroleum--------
Total petro products
Barrels (millions)   388.679  424.467  382.675  373.287   388.145   414.665
Value (billions)     $46.013  $52.814  $45.207  $40.360   $38.186   $28.898
Crude petroleum
Barrels (millions)    308.38  342.024  297.532  293.995    303.05   317.585
Barrels per day(mln)   9.948   11.033    9.918    9.484    10.102    10.245
Value (billions)     $37.001  $42.638  $34.850  $31.245   $29.340   $21.648
Price per barrel     $119.99  $124.66  $117.13  $106.28    $96.81    $68.16
                     ------------Advanced Technology Products------------
Balance               -$3.212  -$7.084  -$3.876  -$3.546   -$5.311   -$4.650
Exports              $25.122  $23.311  $25.037  $24.078   $23.423   $23.247
Imports              $28.334  $30.395  $28.912  $27.624   $28.734   $27.897
                     -----Balance by Country---Year ago YTD 2008  YTD 2007
Canada               -$7.417  -$8.243  -$7.233  -$5.524  -$54.395  -$46.309
Mexico               -$5.880  -$5.456  -$5.689  -$6.812  -$47.037  -$46.799
=============================================================================
                      Aug.     July     June     Year      YTD       YTD
                      2008     2008     2008     Ago      2008      2007
=============================================================================
Europe                -$8.993 -$12.817 -$10.716 -$10.759  -$71.902  -$78.984
France               -$0.988  -$1.714  -$1.537  -$1.388   -$9.725   -$9.044
Germany              -$3.188  -$4.601  -$3.899  -$4.155  -$30.480  -$29.976
Ireland              -$1.706  -$1.991  -$1.722  -$1.973  -$14.325  -$15.253
Italy                -$1.925  -$2.462  -$1.536  -$2.114  -$14.569  -$14.061
Netherlands           $1.871   $1.690   $0.967   $1.025   $13.136   $10.540
United Kingdom       -$1.301  -$0.809  -$0.042  -$0.898   -$2.089   -$3.188
Pacific Rim          -$30.825 -$32.572 -$26.596 -$31.634 -$223.841 -$238.862
China               -$25.334 -$24.877 -$21.430 -$22.542 -$167.673 -$163.799
Japan                -$4.766  -$6.328  -$6.127  -$6.899  -$50.788  -$54.947
Malaysia             -$1.336  -$1.614  -$1.366  -$1.926  -$12.481  -$13.805
NICS                  $0.650   $0.198   $2.213   $0.048    $6.181   -$4.247
 Korea               -$0.749  -$1.335  -$0.482  -$0.808   -$8.045   -$9.574
 Taiwan              -$1.076  -$0.489  -$0.625  -$0.841   -$5.578   -$7.736
South/Central America -$1.646  -$4.504  -$2.753  -$2.596  -$19.338  -$18.925
OPEC countries       -$19.199 -$24.184 -$18.098 -$11.366 -$137.932  -$78.050
Africa                -$8.470 -$10.243  -$9.309  -$6.349  -$65.152  -$44.408
=============================================================================
NOTE: All dollar figures are in billions. All figures are seasonally
adjusted except for country balances and energy related petroleum
imports.

SOURCE: U.S. Commerce Department.

To contact the reporter on this story: Kristy Scheuble in Washington kmckeaney@bloomberg.net

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King Must Stop Morality `Lessons' on U.K. Banking, Minford Says

By Svenja O'Donnell

Oct. 10 (Bloomberg) -- Bank of England Governor Mervyn King should stop giving banks ``lessons in morality'' and focus on preventing financial collapse, said Patrick Minford, a former adviser to Margaret Thatcher.

``The bank has been detached and not got the point that we have serious disarray in financial markets,'' Minford, who is now an economics professor at Cardiff University, said today in an interview. ``Its role is to get in there and sort it out, not make quasi-regulatory moralistic noises at this stage of the game.''

King will next week unveil a planned revamp of money-market operations to help the banking system weather the crisis. The Bank of England, which joined a global round of surprise rate cuts this week, has yet to reduce the penalty on emergency loans and the mortgage securities it accepts as collateral must have the highest credit rating.

``I think the bank has performed so badly it's asking a lot for people to trust them,'' said Minford. ``The banks themselves must feel really let down. For the Bank of England to offer extra help in giving banks a good spanking is really offensive.''

The U.K. central bank has so far refrained from lowering the margin at which they set the so-called penalty rate. The European Central Bank halved the margin it charges banks hours after the coordinated rate cuts. The Bank of England's penalty rate is set at one percentage above the benchmark rate, currently 4.5 percent, double the margin set by the ECB.

`Lessons in Morality'

``It is really not King's job to read us lessons in morality at this stage,'' Minford said. ``It's to get behind the banking system and avoid the consequences of collapse. That involves a scheme, very broadly drawn in terms of acceptable assets, the broadest range of assets to be accepted by the bank.''

The bank's emergency lending program accepts as collateral residential mortgage-backed securities issued in the U.K. or European Economic Area rated AAA, the highest level. On such securities with a maturity date more than a decade away, it will lend only 78 pounds ($134) for every 100 pounds in loan value, a ``haircut'' of 22 percent, its strictest terms. The comparable discount for government debt of similar maturity is 5.5 percent, while government agency debt is discounted by 14 percent.

``The special liquidity scheme has one major flaw: they charge a huge fee to provide liquidity,'' Minford said. ``They have been feeding the problem. They need liquidity at base rate, plus a small penalty rate.''

The U.S. Federal Reserve and other central banks on Oct. 8 delivered a coordinated round of interest-rate reductions to protect economies from the worst financial market crisis since the Great Depression. The Bank of England cut its rate by half a point after keeping it unchanged at 5 percent since April.

`Kicking and Screaming'

``The Bank of England's behavior has been a major contributor to the crisis,'' Minford said. ``They've been dragged kicking and screaming into the role they've been forced to undertake.''

Former Bank of England policy makers have said more rate cuts will be needed. Christopher Allsopp, a member of the monetary policy committee from 2000 to 2003, said that the bank will probably need to follow the rate cut with ``another big one.''

``The Bank of England is now faced with possible meltdown and deflation,'' said Minford. ``The central bank needs to get behind the banking system and avoid the consequences of collapse.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.



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G-7 `Against the Wall,' Weighs Loan-Guarantee Plan

By Simon Kennedy

Oct. 10 (Bloomberg) -- Finance ministers and central bankers from the Group of Seven nations meet today facing a breakdown in investor confidence in their ability to end the credit freeze endangering the global economy.

Threatened by the worst economic outlook in a quarter century, officials arrived in Washington still without the broad-based strategy that investors were seeking, raising the risk of further turmoil if their remedies disappoint. Among the options: a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that U.S. Treasury Secretary Henry Paulson hasn't ruled out.

Unprecedented interest-rate cuts and bank bailouts failed to quell panic in markets, putting the officials under pressure to pull even more policy levers. The MSCI World Index of stocks is recording its worst week in more than three decades and credit markets remained frozen.

``Global policy makers have their backs against the wall -- they have nowhere to run, nowhere to hide,'' said Marco Annunziata, chief economist at Unicredit MIB in London. ``Do not underestimate how hard they are going to fight back now.''

The officials from the U.S., Japan, Germany, U.K., France, Canada and Italy are gathering for the first time since the financial crisis intensified last month and spread more virulently beyond U.S. borders.

Emergency Meeting

The International Monetary Fund, which activated an emergency-financing mechanism to aid countries that run into trouble, and the Financial Stability Forum held emergency talks yesterday with officials from 27 nations to discuss responses to the turbulence. Paulson helped lead the meeting.

G-7 officials are scheduled to release a joint statement at about 6 p.m. in Washington.

``This is an opportunity to make sure that they're all on the same track,'' said former Federal Reserve Chairman Paul Volcker. He urged that ``all of them now admit or all of them own up to the fact their own banks are going to need support,'' in an interview with PBS Television's Charlie Rose show.

Reflecting the seriousness of the crisis, President George W. Bush will meet with the G-7 in an echo of predecessor Bill Clinton's gathering with the group during a 1998 financial crisis. Officials from the broader Group of 20 will convene for a special meeting tomorrow.

Borrowing Costs

The G-7's dilemma is that even after a battery of policy actions, money markets remain gridlocked as banks shun lending to each other for fear they will lose the money or because they need it themselves. The cost of borrowing dollars for three months in London today rose to its highest this year and the rate in Tokyo jumped to the most since 1998.

``Mistrust is set to persist,'' said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. ``While measures are moving in the right direction, reaction has been lukewarm at best.''

Policy makers are lining up more initiatives, yet run the risk that their new proposals appear piecemeal or lacking in ambition rather than providing the comprehensive and coordinated solution that investors want. Even as he sought an international approach in a news conference two days ago, Paulson said it might ``not make sense to have identical policies'' because each nation's circumstances differ.

``Governments must act now and decisively to restore confidence otherwise we are in for serious trouble and a long- run recession,'' said Moorad Choudhry, head of treasury at Europe Arab Bank Plc in London.

U.K. Plan

Darling wants countries to guarantee lending between banks, either by turning central banks into clearing houses for the loans or having governments back them. That would ``be an effective way of easing the crisis,'' said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York.

U.S. officials have played down the idea without dismissing it outright, expressing concern that the step would be biased against financial institutions outside the banking sector. ``We received the U.K. proposal and we're reviewing it,'' White House spokesman Tony Fratto said.

For its part, France questions the need to adopt Darling's plan, according to a French official.

Bank Stakes

The U.S. already plans to follow Darling in another way by purchasing stakes in a wide range of banks within weeks, tapping authority included in the $700 billion rescue package passed by Congress last week.

Paulson and advisers were yesterday considering options on how the purchases would work, including having the government acquire preferred stock, two officials informed of the matter said.

Separately, the Federal Deposit Insurance Corp. said today it has ``significant latitude'' to take further steps to support banks and their depositors using emergency powers. The U.S. is weighing a proposal to insure all U.S. bank deposits, the Wall Street Journal reported today.

While the Treasury still aims to buy troubled mortgage- backed securities from financial institutions, a direct capital injection would offer more immediate relief by giving banks quick access to funds they could then lend out.

The U.K. is already engineering a 50 billion pound ($87 billion) strategy to partly nationalize at least eight British banks. Japanese lawmakers are also considering reviving a law that expired in March that would allow them to inject public money into regional financial companies.

Capital Needs

``The financial system doesn't need more liquidity it needs more capital,'' said Jim Bianco, president of Bianco Research LLC in Chicago.

Other G-7 nations are wary of taking either step, with German Finance Minister Peer Steinbrueck arguing Germany's banks are sound. He has proposed the G-7 focus on overhauling regulations on executive pay, liquidity buffers at banks and complex financial instruments.

Japan's Finance Minister Shoichi Nakagawa said he will tell his counterparts that his country is ready to help the IMF enhance its lending program during the crisis.

Still, central banks may have more work to do having already executed emergency rate cuts this week. New York University professor Nouriel Roubini recommended they pare interest rates by at least 1.5 percentage points to avert a depression. Jacques Cailloux, an economist at Royal Bank of Scotland Group Plc in London, said today the European Central Bank will cut again before its governing council is next scheduled to meet Nov. 6.

``While a coordinated government response in the coming days through the G-7 is possible, it might not be sufficient to boost confidence in the system sufficiently quickly,'' said Cailloux.

In a report published yesterday, University of California Berkeley economist Barry Eichengreen warned against a disjointed approach. ``The policy response needs to be decisive,'' he said. ``It needs to be global. The stakes could not be higher.''

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net;

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IMF Speeds Access to Funds as Emerging Markets Buckle

By Christopher Swann

Oct. 10 (Bloomberg) -- The International Monetary Fund will use a ``rapid-fire'' emergency-loan program to lend hundreds of billions of dollars to emerging markets as the credit squeeze threatens to hobble nations that until this year were weaning themselves off the fund's aid.

Dominique Strauss-Kahn, the IMF's managing director, said yesterday he has activated the program, which could distribute a record amount of cash. The move comes as the cost of protecting bonds issued by a number of developing countries has climbed sharply, and nations such as Brazil, Mexico and Peru have sold dollars to shore up their currencies.

The financial turmoil may restore the Washington-based lender to a central role in the global economy. Demand for IMF assistance has collapsed in the past few years as buoyant capital markets and rising commodity prices allowed many developing nations to raise funds on their own and build up currency reserves. Now central banks around the world are drawing on those reserves as the credit crisis spreads.

``The IMF had been written off as increasingly irrelevant,'' said Claudio Loser, a scholar at Inter-American Dialogue, a policy-analysis center in Washington, and former director of the IMF's Western Hemisphere department. ``Now we could see a renaissance at the fund. Countries that had hoped never to need the fund again may be forced to ask for help as the normal sources of finance dry up.''

Less Burdensome

Strauss-Kahn, 59, announced the plan on the eve of the fund's annual meeting this weekend in Washington. The program will allow the fund's 184 member nations to get loans in 10 days or less, rather than the usual several weeks it takes to process requests. Conditions the fund typically requires, such as cutting government spending, will also be less burdensome.

The IMF had $110.2 billion in outstanding loans at its peak as of Dec. 31, 2003. That had fallen to $17 billion as of September 30.

``The fund did not lend a lot during the last five or six years,'' Strauss-Kahn said. ``We have hundreds of billions of dollars which are likely to be used in one year, and even more if we go over this period.''

Stocks tumbled today, driving the MSCI World Index to its worst week in more than three decades. The index lost 3.7 percent to 922.27 at 12:23 p.m. in London.

Russian stock exchanges delayed the opening of trading today and Indonesia extended a two-day halt. Iceland yesterday suspended equity trading today until Oct. 13 after the government seized Kaupthing hf, the country's biggest bank.

Iceland `Option'

Iceland's Prime Minister Geir Haarde said Oct. 8 an IMF loan is ``definitely an option,'' and a mission from the fund was on the island yesterday. The government has taken control of the country's three biggest banks after they collapsed under the weight of debt.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, said in an Oct. 7 report that Eastern European nations are among the most at risk, because of large current-account deficits and high levels of external debt.

Estonia's current-account deficit -- the broadest measure of trade because it includes transfer payments and investment income -- is equal to 16 percent of the country's $28.6 billion gross domestic product. Its short-term debt is $10 billion, more than twice its $4 billion in foreign-exchange reserves, according to data compiled by Brown Brothers Harriman.

Bulgarian Debt

The data show Bulgaria's $14 billion in short-term debt equals three-quarters of foreign-exchange reserves, and its $12 billion current-account deficit is 25 percent of GDP.

Brazil sold dollars this week for the first time in five years, and Mexico sold $2.5 billion in the spot market Oct. 8 and 9, helping their currencies pare losses. Last month, Peru's central bank was forced to pour record sums into the foreign- exchange market to support its ailing currency.

The cost of default protection suggests other developing countries that may need help. Credit-default swaps for Kazakhstan imply a 52 percent chance the country won't meet its debt obligations in the next five years, according to Bloomberg data. Swaps for Pakistan indicate an 86 percent chance of default.

The IMF has been at the center of some of the biggest financial bailouts of the past three decades, helping broker solutions to the Latin American debt crisis in the 1980s and rescues for Mexico, Russia, Brazil and Asia in the 1990s.

Mexican Peso

The fund established its rapid loan program in the wake of the so-called Mexican peso crisis of December 1994, when the country was forced to abandon its currency peg to avoid depleting its reserves. During the next six weeks the Mexican peso plunged 45 percent, prompting a $17.8 billion loan from the IMF -- at the time, the fund's largest.

In 1997 and 1998, the IMF extended credit lines of more than $80 billion to Indonesia, Thailand and South Korea to help them avoid default after a decline in their currencies pushed up the cost of foreign-debt payments.

Even a modest pickup in loans would help stem financial losses at the IMF that totaled $165 million in 2007. The fund's first shortfall since 1985 led Strauss-Kahn to announce an 11 percent, or $100 million, cut in operating costs that included eliminating at least 380 of the IMF's 2,900 jobs. Even with the cuts, the fund is expected to lose $135 million in 2008.

``If there are no fires, then the fire department does not have much to do, and after a while people start to wonder whether they need a fire department at all,'' said Michael Mussa, the IMF's chief economist from 1991 to 2001. ``This has been the position for the fund in recent years, but things have changed in just a few weeks.''

To contact the reporter responsible for this story: Christopher Swann in Washington at cswann1@bloomberg.net

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U.S. Trade Deficit Narrows on Drop in Fuel Imports

By Shobhana Chandra

Oct. 10 (Bloomberg) -- The U.S. trade deficit narrowed in August as the retreat in oil prices cut the import bill.

The gap shrank 3.5 percent to $59.1 billion, close to economists' forecasts, a Commerce Department report today in Washington showed. Exports fell to the second-highest level on record. Sliding energy costs also sent the cost of imported goods down the most since 2003 last month, the Labor Department said.

In addition to crude oil, imports of automobiles, computers and televisions also dropped as the deepening financial crisis caused American consumers and businesses to retrench. Federal Reserve policy makers anticipate that with turmoil spreading through the global economy U.S. exports may also wane.

``I expect trade to continue being a positive for the U.S. economy, just a much smaller positive in coming months,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

Exports have climbed to record levels this year in part because of a slump in the dollar since 2002 that has made American products more competitive in world markets. The currency has advanced against the euro in recent weeks as Europe's economic outlook deteriorated, while the dollar's decline against the yen has accelerated.

The U.S. currency rose 0.3 percent today to $1.3560 per euro at 8:43 a.m. in New York and was down 0.8 percent versus the yen at 99.02 yen per dollar.

Economists' Forecasts

The trade gap was projected to narrow to $59 billion in August, according to the median forecast in a Bloomberg News survey of 71 economists. The deficit for July was revised to $61.3 billion from an initially reported $62.2 billion.

Imports decreased 2.4 percent to $223.9 billion, mainly reflecting the decrease in oil. The average price of a barrel of crude fell to $119.99 in August from a record $124.66 the prior month. The number of barrels imported in August also fell.

The oil deficit is likely to keep shrinking. A barrel of crude oil on the New York Mercantile Exchange dropped to a one- year low yesterday and continued to fall today.

Exports declined 2 percent, the biggest drop in four years, to $164.7 billion. Record demand for American goods from Central and South America and from the Organization of Petroleum Exporting Countries helped offset declining sales to Europe.

GDP Impact

After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit shrank to $39 billion, the lowest level since December 2001. The decrease may prompt some economists to boost third- quarter growth estimates. The median forecast of economists surveyed this month projected the economy contracted at a 0.2 percent annual pace from July through September.

The politically-sensitive trade gap with China increased to $25.3 billion, the highest in almost a year as imports rose more than exports.

Trade has been one of the few bright spots in the U.S. economy over the past year. A narrower gap in the second quarter, reflecting record exports and falling imports, contributed the most to growth in almost three decades. Without the help, the economy would have contracted.

The pillars supporting export gains -- growing economies overseas and a drop in the value of the dollar -- are starting to crumble. The euro-zone economy contracted in the second quarter for the first time since the introduction of the currency, and Japan also shrank.

IMF Forecasts

Advanced economies next year will grow 0.5 percent, the slowest pace since 1982, the International Monetary Fund forecast this week. Its global growth estimate for 2009 was scaled back to 3 percent, a level the fund has called the dividing line between a global recession and expansion.

Since reaching a 12-year low in April, the dollar has rallied 12 percent against a basket of currencies from the U.S.'s biggest trading partners. A lower dollar made American-made goods more competitive in global markets. Still, it may take several years for the recent appreciation to affect exports.

The financial crisis, by choking off access to cash, is having a more immediate influence. Textron Inc.'s Cessna business-jet unit saw a slowdown in airplane orders in recent weeks, its President Jack Pelton said.

``It's really hit us in the last two to three weeks,'' Pelton said at a trade show in Orlando on Oct. 5. At the same time, the world's biggest business-jet maker has seen strong demand from markets including Brazil, Russia and the Middle East, he said.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net



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Cost of U.S. Crisis Action Grows, Along With Debt

By Matthew Benjamin

Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.

``I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. ``At the moment, there's nothing happening here that's positive for the budget. Nothing.''

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

Yields to Rise

That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. ``The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. ``The supply will trigger some elevation in yields.''

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. Benchmark 10-year note yields rose to 3.82 percent at 7:49 a.m. in New York, from a close of 3.45 percent Oct. 6.


Payments the government allocated to keep vital companies solvent are beginning to look insufficient.

AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy.

``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG.

The financial health and earnings prospects of Fannie Mae and Freddie Mac -- seized by the government on Sept. 7 to prevent them from failing -- worsened in the second and third quarters, the companies' government regulator said this week.

Price Declines

The companies and regulators are recalculating the value of all of their assets to factor in price erosion. That may mean the government will have to spend more to keep the firms solvent.

Earlier this week the Fed announced it will create a special fund to buy commercial paper, the credit that businesses use to finance payrolls and other ongoing expenses. The Treasury will deposit money into the Fed's New York district bank to help set up the new unit. A Fed official said Treasury funding for the program could be ``substantial.''

California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.

California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions.

Plan for Banks

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.

``We have to recapitalize the banks,'' Phelps told Bloomberg Television this week. ``I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.''

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

Debt Limit

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion.

On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.

Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.

The rescue legislation ``creates a mask for all sorts of fiscal irresponsibility,'' said Bixby. ``It covers up a multitude of sins.''

To contact the reporters on this story: Matthew Benjamin at mbenjamin2@bloomberg.net


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Natural Gas Futures Decline on Credit Freeze, Economic Concerns

By Mario Parker

Oct. 10 (Bloomberg) -- Natural gas in New York dropped as investors fled commodities amid concern the global financial crisis will slash energy usage.

A declining economy would reduce demand from commercial and industrial users of gas, which accounted for 9.64 trillion cubic feet, or 42 percent, of consumption in the U.S. in 2007. Oil in New York headed for its biggest weekly decline since 2004.

``The credit market has been such that there is massive liquidation from commodities,'' said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. ``There's panic and widespread pandemonium.''

Natural gas for November delivery fell 13.1 cents, or 1.9 percent, to $6.694 per million British thermal units at 10:29 a.m. on the New York Mercantile Exchange. Prices have tumbled 51 percent from a 30-month intraday high of $13.694 on July 3. Futures are the lowest since Sept. 26, 2007.

``I've been in this business for 25 years, seen 1987 and 2002 and this is worse,'' Rose said. ``I've never seen so much money being shredded in my life.''

More than $4 trillion has been erased from global equities this week even as central banks across the world were forced to cut interest rates on concern banks will run out of money.

The Dow Jones Industrial Average fell below 9,000 for the first time since 2003 yesterday as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis.

Commodities Rout

Commodities, as measured by the Reuters/Jeffries CRB Index of 19 raw materials, have tumbled as much as 10.41 to 300.12, the lowest since Aug. 22, 2007.

``Right now it's impossible to separate ourselves from what's happening economically across the world,'' said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. ``People are worried that demand is just not going to be there.''

Natural gas inventories also are adequate heading into winter, Florer said.

Inventories gained 88 billion cubic feet in the week ended Oct. 3 to 3.198 trillion cubic feet, the U.S. Energy Department said yesterday. Analysts forecast an 87 billion-cubic-foot advance. The average increase this time of year is 69 billion.

The increase kept supplies on a pace to be above the five- year average of 3.327 trillion cubic feet at next month's start of the peak-demand heating season. The surplus to the average widened to 69 billion, or 2.2 percent, from 50 billion, or 1.6 percent a week earlier.

``All momentum and all signs point lower,'' Florer said. ``It was definitely a bearish number.''

Crude oil for November delivery plunged $4.61, or 5.3 percent, to $81.98 a barrel at 10:32 a.m. in New York. Futures touched $78.61, the lowest since Oct. 9, 2007.

``One of the largest open interest segments was hedge funds,'' said Ed Kennedy, a trader with Commercial Brokerage Corp. in Miami. ``Now redemptions are huge in both mutual and hedge funds. They have to get out of positions because they need the money.''

To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net.



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Rand Headed for Biggest Weekly Drop in 5 Years as Stocks Plunge

By Garth Theunissen

Oct. 10 (Bloomberg) -- South Africa's rand headed for its biggest weekly drop in almost five years against the dollar as a global stock-market rout prompted investors to shun higher- yielding, emerging-market assets.

The rand also slumped to its weakest level since November 2002 on bets the financial turmoil and banks' reluctance to lend to each other will push the global economy into a recession, slowing capital flows to emerging markets. Group of Seven finance ministers and central bankers meet today and tomorrow in Washington to discuss the credit crisis that has wiped more than $4 trillion off the value of equities around the world this week.

``All emerging-market currencies are falling because there simply isn't enough confidence in the global financial system,'' said Jon Harrison, an emerging-markets currency strategist at Dresdner Kleinwort in London. ``There are simply too many sellers and too few buyers for assets in emerging markets, which are seen as too risky in the current environment.''

The rand slid as much as 1.3 percent to a six-year low of 9.4901 per dollar and was at 9.2846 by 4:20 p.m. in Johannesburg, from 8.4891 on Sept. 3. It fell 9.2 percent this week, the steepest five-day loss since December 2003.

Harrison recommends clients ``stay out of all emerging- market currencies'' until the global financial crisis abates.

``The market is so illiquid it's difficult to trade because offers are so wide and volumes so small that even small trades can move the market,'' Harrison said, adding it would be ``meaningless'' to forecast a trading range for the rand.

Stocks Fall, Gold Gains

Stocks fell around the world on concern the deepening credit crisis will spur the failure of more financial companies, while gold climbed to the highest level in almost 11 weeks as investors sought the metal as a haven.

The MSCI World Index lost 3.9 percent, driving it to its worst week in more than three decades. The MSCI Asia Pacific Index lost 17 percent in the week, the biggest slump since the measure was created in December 1987. The FTSE/JSE Africa All Share Index dropped 10.4 percent this week, the biggest five-day retreat since August 1998.

``The local stock market is collapsing because foreign investors are repatriating money to cover losses,'' said Grant Barrow, head of foreign-exchange trading at Investec Capital Markets in Johannesburg. ``Speculators have sniffed blood and are trying to make money by shorting the rand, which just adds to the mayhem.''

Global equities slumped even as central banks from London and Frankfurt to Washington and Hong Kong were forced to cut interest rates after the yearlong credit-market seizure stoked concern banks will run short of money.

U.S. Treasury Secretary Henry Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan while the U.K. is engineering a 50 billion pound ($87 billion) strategy to partly nationalize at least eight British banks.

South African government bonds rose in the week, with the yield on the benchmark 13.5 percent security due September 2015 losing 2 basis points to 8.90 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net



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EU Strikes Deal Over Foreign Gas, Power Takeovers

By Jonathan Stearns

Oct. 10 (Bloomberg) -- A Dutch-led group of European countries bolstered its defenses against energy takeovers by foreign natural-gas and power companies after letting Germany and France opt out of a plan to break up national champions.

The governments said producers such as E.ON AG and Electricite de France SA must be barred from controlling transmission networks in European Union nations that require the two businesses to be split and could face hurdles acquiring rival producers in those countries. Non-EU energy companies including Russia's OAO Gazprom, the world's biggest gas producer, are also affected.

The provision puts the finishing touches on a compromise market-opening accord among the EU's energy ministers after they struck a preliminary deal in June. A final EU agreement on the new rules requires the ministers to bridge differences with the European Parliament, which is holding out for more deregulation.

``We need a clause that will allow member states to protect their own structures,'' Dutch Economy Minister Maria van der Hoeven, who is also responsible for energy matters, told a meeting with her EU counterparts today in Luxembourg. ``We need independent management of the grids. We don't want monopolies.''

Unbundling

The EU is fighting its way toward new gas and electricity rules that aim to facilitate network access for companies such as Centrica Plc without their own grids. After 2003 laws gave customers the right to choose suppliers, the EU's 340 billion- euro ($463 billion) power and gas market remains fragmented by national barriers, says the European Commission, the bloc's regulatory arm that proposed the new rules in September 2007.

The commission said gas and electricity producers should sell or spin off their transmission business -- steps known as ownership unbundling -- or hand over operation of the network to an independent entity. The Brussels-based regulator said such structural separation was necessary to remove a conflict of interest that leads incumbents to discriminate against new entrants when it comes to network access.

On June 6, EU governments as a whole caved in to German and French demands for a third, looser option under which power and gas producers would be able to make their grid business more independent through internal actions. That led to a disagreement over how to ensure a level playing field for EU nations that opt for ownership unbundling.

`Difficult Process'

The compromise accord on this marks a balancing act between political sensitivities and legal realities in the 27-nation EU. The new text being added to the draft legislation says any measures taken by a government to ensure a level playing field must be reported to the commission and comply with the EU treaty, which guarantees the free movement of capital.

``It was a difficult process,'' said German Deputy Economy Minister Peter Hintze. He said Germany succeeded in ensuring the primacy of EU treaty rules in the new text, which also says any restrictions in an EU nation on foreign producers acquiring its own producers must be ``proportionate, non-discriminatory and transparent'' and must be approved by the commission.

While EU governments were working toward today's accord, the EU Parliament voted in June to require the breakup of electricity companies and in July to allow the gas industry to opt out with the looser option of greater internal separation.

Differences

The 785-seat assembly said ownership unbundling should be the only way forward in the power industry and the looser option for gas should be a substitute for, rather than an addition to, the possibility of an independent system operator.

These differences must be resolved for the EU to reach a final accord on the new rules. The process will probably extend into next year.

As lawmakers have debated new EU legislation, the commission has used its antitrust powers to open a second front in the battle for more energy-market competition. This has led to probes of companies including E.ON, Gaz de France SA -- now GDF Suez SA -- RWE AG, Electricite de France, Eni SpA and Electrabel SA for possible illegal business practices that could lead to fines totaling as much as 10 percent of the companies' annual sales.

In February, Germany's E.ON agreed to sell its electricity grid to resolve two commission probes into the company's business practices. And in May, Germany's RWE agreed to sell its gas-transmission network to settle a commission inquiry.

The German unit of Sweden's Vattenfall AB said in July it would seek to sell its power transmission grid. Neither the company nor the commission has said whether this step was linked to an antitrust case.

To contact the reporter on this story: Jonathan Stearns in Luxembourg at jstearns2@bloomberg.net



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E.ON, GDF Suez Pace Losses Among European Utilities

By Nicholas Comfort and Tara Patel

Oct. 10 (Bloomberg) -- E.ON AG and GDF Suez SA paced losses among European utility stocks for a third day as crude futures fell to a one-year low on concern energy demand will slow.

The Dow Jones Europe Stoxx Utilities Index slid as much as 11 percent to 296.36, the steepest one-day decline since the end of 1986. The industry subgroup was down 8.2 percent at 305.54 as of 12:50 p.m. in London. E.ON, Germany's biggest power company, fell as much as 16 percent while GDF Suez, the world's second- biggest utility, lost 16 percent.

``It seems that the utility sector has picked up a habit of always being in the wrong place at the wrong time this year,'' Dresdner Kleinwort analyst Lueder Schumacher wrote in a note. ``When commodity prices were still rising, premature recovery hopes caused defensive earnings to underperform, and now that the argument has switched to recession versus depression, the defensive nature of utility earnings is being questioned.''

Crude oil prices in New York have dropped 45 percent from a record $147.27 a barrel reached on July 11. The lower cost of oil implies cheaper natural gas, used for heating, because of the relationship between the fuels in European supply contracts, Dresdner analysts wrote yesterday.

Hard coal, used to generate more than a fifth of electricity in Germany, fell to its lowest since April, helping trigger a slump in power prices in the continent's largest market. Higher electricity prices had been a boon for utilities in the country, as they could pass on the costs to consumers.

`Tired'

``Investors may be tired of the power price story,'' Credit Suisse Group analysts including Raimundo Fernandez-Cuesta wrote in a report today. ``We do not know when the process of capitulation on utilities will come to an end but we think many stocks are trading close to harsh ``black sky'' fundamentals.''


Credit Suisse cut its recommendation for Scottish & Southern Energy Plc, the U.K.'s second biggest energy supplier, to ``neutral'' from ``outperform'' and lowered its price target for the stock to 1,600 pence a share from 1,775 pence.

Scottish & Southern lost 9.1 percent to 1,098 pence in London. The company may miss earnings forecasts because of extended production halts at some power plants, Credit Suisse analyst Colin Pollock wrote in an investor note today.

Utilities also fell on concern they will suffer from tighter regulation and slower growth in Russia.

Cap Prices

A move by the Belgian government to cap power prices for three years may be included in an Oct. 14 policy statement by Prime Minister Yves Leterme, Le Soir reported yesterday, citing Energy Minister Paul Magnette. The proposal isn't opposed by the European Commission, Magnette told the newspaper.

The minister noted that the system would affect margins at GDF Suez's Electrabel SA unit, Belgium's biggest power company and the owner of the seven atomic generators at two nuclear plants.

``A wind of panic has swept through the utilities sector,'' Natixis Securities analyst Philippe Ourpatian wrote in a research report.

Matthias Heck, an analyst at Oppenheim Research in Frankfurt, said while the policy may take effect in Belgium, he doesn't think Germany will follow suit. The bigger problem for E.ON is that investors are cutting holdings in companies involved in Russia, he said.

E.ON is having ``serious problems'' integrating its Russian unit OAO OGK-4, Handelsblatt reported yesterday. That's spreading fear the company won't make growth targets in the market it promised would contribute to profit, analysts said.

Stake Purchase

The Dusseldorf-based utility has spent 4.6 billion euros buying a 76 percent stake in OGK-4, a power generator in central Russia, the Ural region and western Siberia, since September last year.

That stake would be worth about 2.7 billion euros if the Russian government cancels plans to open the country's power market to price increases, Landesbank Baden-Wuerttemberg analyst Bernhard Jeggle wrote in a note to investors yesterday.

E.ON spokesman Jens Schreiber said the utility expects its Russian unit to post earnings before interest, tax, depreciation and amortization of 1 billion euros in 2011.

RWE dropped as much as 14 percent, while Enel SpA, Italy's biggest utility, sank as much as 12 percent and Spanish power generator Iberdrola SA slumped 15 percent.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.netTara Patel in Paris at Tpatel2@bloomberg.net


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Brazilian Real Falls as Global Crisis Sparks Capital Outflows

By Adriana Brasileiro

Oct. 10 (Bloomberg) -- Brazil's real fell as the global financial crisis deepened, prompting investors to pull money out of higher-yielding, emerging-market securities.

The real fell 1.2 percent to 2.3110 per dollar at 8:54 a.m. New York time, compared with 2.2826 per dollar yesterday. The real has lost 11.6 percent this week, prompting the central bank to sell dollars for the first time in five years, as financial institutions in Europe started to falter under the weight of the global credit crisis. It has sunk 33 percent from a nine-year high reached on Aug. 1.

The yield on Brazil's overnight futures contract for January 2009 delivery fell 1 basis point, or 0.01 percentage point, to 13.96 percent. The yield on Brazil's zero-coupon bond due in January 2010 rose 16 basis points to 15.06 percent, according to Banco Votorantim.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net



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Libor for Three-Month Dollars Rises as Credit Remains Frozen

By Gavin Finch and Nate Hosoda

Oct. 10 (Bloomberg) -- The cost of borrowing in dollars in London for three months rose as cash injections and interest-rate cuts by 10 major central banks failed to thaw a credit freeze that put stocks on course for their worst week in 30 years.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 7 basis points to 4.82 percent today, the British Bankers' Association said. The rate in Tokyo jumped to the highest since 1998 even as the Bank of Japan added more than $30 billion to the banking system. The overnight dollar rate tumbled 262 basis points to 2.47 percent.

``Central banks are trying to supply liquidity, and in many cases it just comes back to them,'' said Robin Marshall, director of international fixed income in London at NCL Smith & Williamson, which oversees about $20 billion in assets. ``There's a real problem in getting people to put their money to work. The fear of counterparty risk is so intense that the only bank prepared to lend at the moment is the central bank.''

Stock exchanges in countries including Russia and Austria delayed the opening of trading today and Indonesia extended a two-day halt as valuations plunged on concern more financial institutions will fail. Iceland yesterday suspended trading until Oct. 13 after the government seized Kaupthing Bank hf, the nation's biggest lender. Banks in South Korea stopped giving credit to importers.

Seized Up

Lending between financial institutions has seized up since the collapse of Lehman Brothers Holdings Inc. on Sept. 15, stymieing attempts by governments and central banks to stave off a global recession. The Bank of Japan added 3 trillion yen ($30.3 billion) to the banking system and the Reserve Bank of Australia pumped in A$2.63 billion ($1.8 billion). The European Central Bank today loaned banks $94 billion for four days.

The MSCI World Index lost 5.3 percent today, extending this week's drop to 20 percent, the most since at least 1970. Gold was headed for the biggest weekly gain as investors sought a haven for their cash. The Libor-OIS spread, a gauge of cash scarcity, climbed to a record 366 basis points.

``You just don't know whether the person you're lending to is going to be the guy that has the weak balance sheet and is going to fall over,'' said Sally Auld, an interest-rate strategist at JPMorgan Securities Australia Ltd. in Sydney. ``What markets are telling you is that it doesn't matter what central banks and governments do.''

Libor Settings

Libor, set by 16 banks in a survey conducted by the BBA each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for terms between one day and a year.

While the estimates that go into Libor used to be based on actual transactions between banks, they have become little more than guesswork since credit markets froze, according to three people with knowledge of how interbank rates are set.

Hong Kong's three-month interbank offered rate, or Hibor, climbed 1 basis point to 4.41 percent today, the highest level since Oct. 31. Singapore's three-month dollar loan rate increased for a fourth day, rising 23 basis points to 4.74 percent, the highest this year.

The ECB yesterday offered banks as much cash as they required for six days at its benchmark interest rate of 3.75 percent, bringing forward new measures to soothe money markets. It also loaned banks a record $100 billion in overnight-dollar funds, allotting most of the cash at 5 percent, 350 basis points above the Federal Reserve's benchmark rate. Today, it allotted four-day cash at 0.5 percent.

Rate Cuts

The BOJ has pumped more than 25 trillion yen into the system in the past three weeks, the most in at least six years, after lending growth at Japanese banks slowed in September for the first time in nine months as companies cut earnings forecasts. Loans, excluding those by credit associations, rose 1.8 percent in September from a year earlier, after increasing 2 percent in August, the Bank of Japan said today.

South Korea, Taiwan and Hong Kong cut interest rates yesterday, a day after reductions by central banks including the Fed and ECB. The U.K. government pledged Oct. 8 to spend 50 billion pounds ($87 billion) to bolster British banks.

Japan's overnight call rate climbed as much as 18 basis points, or 0.18 percentage point, to 0.72 percent today, before falling back to 0.5 percent following a second injection of cash, according to brokerage Tokyo Tanshi Co.

The Reserve Bank of Australia added cash through so-called repurchase agreements after estimating money markets would have a deficit of A$1.84 billion in funds today. Australian banks reduced deposits held at the central bank by A$1.37 billion to A$8.36 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site.

TED Spread

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 457 basis points, the most since Bloomberg began tracking the data in 1984.

``While the authorities across the globe have taken a host of unprecedented measures to shore up confidence, nothing seems to be working,'' Rajiv Setia and Piyush Goyal, strategists at Barclays Capital Inc. in New York, wrote in a report. ``Participants are increasingly unwilling to bear counterparty risk with any entity, other than the government, at any price.''

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net

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Canada's Dollar Poised for Biggest Weekly Decline Since 1971

By Chris Fournier

Oct. 10 (Bloomberg) -- Canada's dollar headed for the biggest weekly slump since at least 1971 as the deepening credit crisis drove investors to take refuge in the U.S. dollar.

The Canadian currency has declined 8.4 percent this week against its U.S. counterpart, touching the lowest since February 2007 today, as prices for commodities including crude oil plummeted and global stock markets plunged.

``The Canadian dollar has become the whipping boy,'' said Jonathan Gencher, director of foreign-exchange sales at Bank of Montreal in Toronto. ``This is still part of the bigger picture of demand for U.S. dollars.''

The Canadian dollar dropped as much as 2.9 percent today to C$1.1834 per U.S. dollar, from C$1.1501 yesterday, the weakest since Feb. 9, 2007. The currency fell for a seventh day, its longest losing streak since the period ended Aug. 11. It last traded at C$1.1763 at 10:22 a.m. in Toronto. One Canadian dollar buys 85 U.S. cents.

Gencher ``wouldn't be surprised'' to see the Canadian currency depreciate to C$1.20 by the end of the year.

Canada's currency will slip to C$1.13 against the U.S. dollar by the end of 2009, according to the median forecast in a Bloomberg News survey of economists.

Crude oil for November delivery fell as much as $7.98, or 9.2 percent, today to $78.61 a barrel on the New York Mercantile Exchange. It closed at $93.88 a week ago and reached a record $147.27 on July 11.

The Canadian currency briefly pared its loss today after a government report showed the nation recorded its biggest one- month employment gain in at least 30 years during September.

`Ignoring the Data'

``People are ignoring the underlying data and dwelling on the uncertainty for the global economy,'' said Millan Mulraine, an economics strategist at TD Securities in Toronto. ``We should expect that to continue.''

Canada added 106,900 jobs last month after a gain of 15,200 positions in August, Statistics Canada said today in Ottawa. The median forecast of 20 economists surveyed by Bloomberg News was for an increase of 10,000 in September. Canada's unemployment rate held at 6.1 percent.

``Data isn't driving the currency these days,'' said Shane Enright, currency strategist at CIBC World Markets Inc. in Toronto. ``Oil is lower because credit spreads continue to widen and equity markets continue to plunge. Oil and the Canadian dollar moves are the secondary effects of these factors.''

The Bank of Canada joined the Federal Reserve, the European Central Bank and other global counterparts on Oct. 8 in reducing interest rates to ease the financial crisis. The Canadian target lending rate was cut to 2.5 percent from 3 percent. The Bank of Canada next meets Oct. 21.

Another Weekly Decline

Canada's dollar has weakened 12 percent since Sept. 26 as turmoil in global financial markets prompted investors to seek the relative safety of U.S. government debt. The Canadian currency, dubbed the loonie because of the aquatic bird on the one-dollar coin, slumped 4.5 percent last week.

``We are still heading into a very challenging macro- economic environment for the Canadian dollar,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets. ``The outlook has not changed. The Canadian dollar can't escape the macro background, but it can avoid the worst of the fear and panic-driven mania.''

Other commodity-based currencies, including those in Brazil, Australia and New Zealand, have declined versus the Canadian dollar so far this week.

The yield on the two-year government bond slipped 28 basis points, or 0.28 percentage point, to 2.25 percent this week. The price of the 2.75 percent security due in December 2010 climbed 56 cents during the period to C$101.04.

The 10-year note's yield increased 21 basis points to 3.80 percent during the week. The price of the 4.25 percent security maturing in June 2018 fell C$1.77 to C$103.61.

The 10-year bond yielded 155 basis points more than the two- year security, up from 106 basis points a week ago. The so-called yield curve is the steepest since September 2004.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net



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Yen Set for Biggest Gain in 10 Years as Carry Trade Evaporates

By Daniel Kruger and Kim-Mai Cutler

Oct. 10 (Bloomberg) -- The yen headed for its biggest weekly gain in a decade against the dollar as the global stock- market rout prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan.

Japan's currency was poised to rise the most versus the euro in any week since the 15-nation euro's debut in 1999 as a plunge in global stocks discouraged carry trades. President George W. Bush said the U.S. is working with global partners to solve the financial crisis as Group of Seven finance ministers and central bankers met today in Washington.

``Investors are concerned it could get worse,'' said JensNordvig, a currency strategist at Goldman Sachs Group Inc. in New York. ``Clearly a lot of investors have only one goal, to preserve capital.''

The yen traded at 99.96 per dollar at 10:48 a.m. in New York, compared with 99.82 yesterday, after reaching 97.92, the strongest level since March 19. Japan's currency advanced 0.4 percent to 135.35 per euro, from 135.83. It touched 132.83, the strongest level since July 2005. The euro fell 0.5 percent to $1.3531, from $1.3604.

The U.S. currency has dropped 5.2 percent against the yen this week, the most since Oct. 9, 1998, when it plunged 14 percent as investors shed risk and abandoned yen carry trades in the wake of the collapse of hedge fund Long-Term Capital Management LP.

Coordinated interest-rate reductions by central banks in the U.S., Europe and Asia in the past two days failed to revive lending among banks, putting stocks on course for their worst week in 30 years. The cost of borrowing in dollars in London for three months rose to 4.82 percent today, the highest since December, the British Bankers' Association said.

G-7 Alternatives

Threatened by the worst economic outlook in a quarter- century, G-7 officials arrived in Washington without a broad- based strategy that investors were seeking. Among options is a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that U.S. Treasury Secretary Henry Paulson hasn't ruled out.

``I don't think this particular G-7 meeting will rewrite history,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``I'm not optimistic anything material will come out.''

Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with counterparts from the G-7, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan. Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan, including having the government acquire preferred stock, two officials informed of the matter said.

Euro vs. Dollar

Europe's currency is on course for its second straight weekly decline versus the dollar on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates further. The bank lowered its main refinancing rate two days ago for the first time in five years. The pound fell as much as 1.8 percent to $1.6792, breaching $1.70 for the first time since November 2003.

The South Korean won surged as much as 11 percent to 1,224.95 per dollar after a meeting among financial regulators fueled speculation the government will intervene to support the currency, which reached a decade-low of 1,485.32 yesterday. The nation's foreign-exchange reserves dropped in each of the past six months, sliding $24.6 billion to $239.7 billion as the Bank of Korea used the funds to stem the won's slide.

Stronger Yen

The yen gained 20 percent this week to 65.55 versus the Australian dollar, 15.4 percent to 58.97 against New Zealand's currency, known as the kiwi, and 7.6 percent against the euro on speculation investors will reverse trades in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia, 7.5 percent in New Zealand and 3.75 percent in Europe.

``It has been most volatile against the Aussie and kiwi, and the big move is to the downside,'' said Derek Halpenny, the European head of global currency research at Bank of Tokyo- Mitsubishi Ltd. in London. ``If you stand back from this, the moves we have seen are extreme. We should continue to see the yen as the star performer.''

Implied volatility on one-month dollar-yen options, a measure of expectations for future currency moves, rose to 32.18 percent, the highest since Bloomberg began compiling the data in 1996. Higher volatility can wipe out carry trade profits.

``People in the options market are saying this is some of the most frantic activity they have seen,'' said Geoffrey Yu, a foreign-exchange strategist in London at UBS AG, the second- biggest currency trader. ``You don't want outright cash exposure to the yen because it's so volatile. That's why people are going into options.''

Currency volatility mirrored turbulence in global stock markets as the VIX, the Chicago Board Options Exchange Volatility Index surpassed 60 for the first time yesterday. The VIX jumped 11 percent to 63.92. The Standard & Poor's 500 Index dropped for an eighth day today, falling 3 percent, in its longest losing streak since 1996.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

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