Greenspan "shocked" at credit system breakdown

WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and that he expects the unemployment rate to jump.

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," he said.

Banks and other financial institutions need public support, such as the recently approved $700 billion bailout package, to avoid serious retrenchment, he said.

Greenspan was hailed as one of the most accomplished central bankers in U.S. history when he retired in January 2006. However, his decision to keep interest rates low during his final years at the Fed has been blamed in part for the housing bubble and crash that has led to the current deep financial crisis.

The former Fed chair said stabilization of U.S. housing markets -- a necessary precondition for the economy to heal -- is "many months in the future."

At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

"Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he said.

"The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he added.

(Reporting by Mark Felsenthal; Editing by Tom Hals)

Read more...

Japanese exports, weak U.S. earnings hit markets again

By Claudia Parsons

NEW YORK (Reuters) - Weak Japanese export data, bleak outlooks from carmakers and news of job cuts at Goldman Sachs and Chrysler deepened fears of an extended global recession and sent most markets lower again on Thursday.

Sweden and New Zealand responded to the worldwide financial crisis by cutting interest rates. Investor flight from emerging economies, a number of which looked set to seek help from the International Monetary Fund, compounded market anxiety.

U.S. stocks struggled to stay positive after major indexes hit a five-year lows on Wednesday. More bad company news on Thursday showed the breadth of the slowdown, which has hit profits from banks to chemical makers to hotels.

"The market is coming to grips, after being in denial for so long, with a global recession," said Barry Ritholtz, director of equity research at Fusion IQ in New York.

Japanese exports grew only 1.5 percent in September from a year earlier, well short of forecasts, prompting worries that the world's second-biggest economy is heading into recession and renewing speculation of a rate cut.

A dive in car shipments to the United States and slowing demand from emerging economies hurt Japanese exports. Sony Corp

slashed its operating profit forecast, citing reduced demand for flat TVs and digital cameras.

Italy's Fiat, Germany's Daimler and South Korea's Hyundai Motor Co added to the gloom among automakers with bleak 2009 forecasts.

U.S. carmaker Chrysler LLC said that it was closing one assembly plant early and eliminating a shift at another, resulting in 1,825 job cuts.

General Motors Corp said it was taking steps to preserve its cash, temporarily suspending its company match for its 401(k) retirement savings program and assessing staffing levels. The Wall Street Journal reported that the company was planning to begin involuntary layoffs of salaried workers.

New York-based bank Goldman Sachs Group Inc plans to cut nearly 3,300 jobs, or around 10 percent of staff, a source familiar with the matter said on Thursday.

RATE CUTS

The dollar and the yen continued to surge. The dollar rose to two-year highs against the euro and a basket of other currencies as falling shares highlighted recession fears and encouraged investors to further cut exposure to risk. The low-yielding yen reached a six-year high against the euro.

"It's a fast-moving market, and in general, risk aversion is high," said Tom Levinson, currency strategist at ING.

Sweden, which joined the U.S. Federal Reserve and others in coordinated cuts two weeks ago, lowered its key interest rate by 50 basis points and signaled more to come.

New Zealand cut rates by a record one percentage point and also hinted at more reductions.

Bank of England Governor Mervyn King said Britain too was ready to lower interest rates again after warning this week the country was probably entering its first recession in 16 years.

The central banks of Brazil and Norway acted to boost liquidity on Thursday, and Canada said the government would guarantee borrowing from the nation's banks.

Central banks worldwide are trying to limit the damage from the worst financial crisis since the Great Depression.

Economists say the effects of the financial crisis set off by a U.S. housing market collapse 15 months ago are only now starting to be felt by businesses, even as credit flows start to unfreeze as banks begin lending to each other again.

"Clearly, in spite of the fact that the global banking system was saved by government recapitalization and guarantees, crisis in the real economy is still deepening and will have to play out in several quarters of negative growth," said Dariusz Kowalczyk with CFC Seymour in Hong Kong.

Asian stocks fell to a four-year low and the FTSEurofirst 300 index of top European shares shed 2 percent.

U.S. stocks were mainly higher after two days of steep losses. The Dow and the S&P 500 rose about half a percent in early trade, while Nasdaq was lower.

Among companies posting lower profits were Dow Chemical Co

and Starwood Hotels, the operator of Sheraton, W and St. Regis brands.

Oil edged higher ahead of an emergency meeting of the Organization of the Petroleum Exporting Countries in Vienna on Friday when ministers will consider a supply cut.

The interbank cost of borrowing longer-dated dollars rose on Thursday for the first time since governments detailed a raft of bank bailout measures earlier this month as worries about the economic downturn deepened.

The cost to insure against sovereign debt default in countries such as South Korea, Indonesia, the Philippines, Russia and Kazakhstan has soared over the past two days -- a sign investors are increasingly reluctant to leave their money in once buoyant emerging markets.

Authorities around the world have committed nearly $4 trillion in a variety of plans including deposit and debt guarantees and taking stakes in struggling banks.

Seeking to ease the strain on the housing market, the U.S. administration is considering a roughly $40 billion plan to help stop foreclosures, the Wall Street Journal reported.

U.S. foreclosure activity in September rose 21 percent from a year earlier, research firm RealtyTrac said.

Chinese premier Wen Jiabao said the world's most populous nation could stimulate domestic demand to help overcome slowing growth -- a move which would benefit exporters to China.

A growing number of countries are turning to the IMF for help, including Iceland, Hungary, Belarus and Ukraine.

(Reporting by Reuters bureaus worldwide; Editing Steve Orlofsky)

Read more...

Can Falling Crude And Momentum Keep The Canadian Dollar Plunging?

Daily Forex Technicals | Written by DailyFX | Oct 23 08 14:30 GMT |

The Canadian dollar has been uniformly weak across the currency market with tempered interest rate and growth forecasts meeting the reality of a sharp drop in commodity prices (which share a frequent correlation with most Canadian dollar pairs). Still firmly steeped in its aggressive selloffs - but with some pairs meeting some form of support - our DailyFX Analysts look for setups that either hold with the trend or take advantage of a potential reversal. Chief Strategist - Antonio Sousa My picks: Remain Long USD/CAD Expertise: Fundamentals and Sentiment. Average Time Frame of Trades: 1 day to 3 months Despite the recent speculation that the OPEC will slash oil production by 2 million barrels a day in an effort to keep oil prices from falling any further, I expect lower energy prices going forward caused by a severe slowdown in the global economy. Having said that, I remain long USD/CAD since 1.10 and I expect the U.S. dollar to rise further against the Canadian dollar on speculation that a global recession will have a negative impact in the export sector of the Canadian economy. On the other hand, lower energy should help the U.S. economy by alleviating pressure in the U.S. consumer which makes nearly 70 percent of the U.S. economy. Moreover, a significant deterioration of interest rate differentials in favor of the U.S. dollar is likely to keep the Canadian dollar under pressure going forward. In fact, according to overnight index swaps, which measure interest rate expectations for the next twelve months, while the Bank of Canada is expected to cut rates by 100 bps, the Fed is expected to keep rates unchanged. Currency Strategist - John Kicklighter My picks: AUDCAD Breakout Expertise: Combining Money Management with Fundamental and Technical Analysis Average Time Frame of Trades: 3 days - 1 week The Canadian dollar has been extraodinarily weak over the past month. In fact, a look at a monthly chart reveals the incredible momentum that has driven the currency to new lows. However, the significant distance that the bears have covered in such a short time and the modest shift in fundamental speculations may also suggest this market is over-extended. This may be true, but I will let the market make the decision for me. My interest is in AUDCAD, which has marked a choppy rebound and is deeply set in very significant technicals - which is perfect for setting a breakout trade. The dominant technical formation I am looking at is a rising wedge that has developed from the October 8th swing low. The support component of this setup now stands at 0.83 which coincides with a building, temporary floor for the past few sessions. Resistance at 0.85 is noteworthy as a pivot level and a heavy 50% retracement of the July 15th to October 8th downswing. Fundamentally, the Canadian dollar has been driven lower by a steep drop in crude and other commodity prices; however we know that Australia is another major exporter of natural resources. What's more, the shift in rate expectations (the RBA surprised with a 100bp cut and the BoC joined in the coordinated 50bp easing with a follow up 25bp of its own) and growth forecasts (both have seen expectations for positive growth to hold out while the rest of the world failed curbed) has impacted the nation's evenly. Obviously there will be speculation over which economy will hold up best and recover first as well as which will turn their interest rate cycle quickest; and therein lies the fundamental tension that will lead to a breakout. I will place entry orders a modest distance outside 0.85 and 0.83 and let the market trigger the position depending on which direction it ultimately chooses. A conservative stop would be place outside the opposite side of the range - but that would be a very wide stop and targets would need to match. Since the levels are clear, I may approach this with a more aggressive clip. Currency Strategist - Terri Belkas My picks: Short USD/CAD Expertise: Fundamentals Combined With Technicals Average Time Frame of Trades: 1 - 3 Days USD/CAD is currently holding above long-term resistance, which may provide a decent short-term selling opportunity. Though this is clearly against the bullish trend, risk/reward potential shows that it may be worth it. The zone of resistance I'm looking at is between the 50% fib of 1.6190-0.9056 at 1.2618 and the May 2005 high of 1.2731, so stops should be placed above the high. A conservative target would be near 1.2350/58, but if the pullback is sharp enough, I think we could see a drop toward former resistance at 1.2120 where we also have the 61.8% fib of 1.1740-1.2740. Currency Analyst - John Rivera My picks: Long USDCAD Expertise: Fundamentals Combined With Technicals Average Time Frame of Trades: 1-2 Weeks The USDCAD has been on a tear, for that matter that "Loonie " has continued to lose ground to most currencies. However, as much as I think a retracement may be coming in the short term, I must maintain my bearish outlook for the Canadian Dollar. I have maintained this bias the past two weeks and it has served me well. I was burnt last month thinking the “loonie” would fight back. Lesson learned. Although, the other com-dollar currencies were looking like they might stabilize but their recent weakness underlines the grim outlook for the global economy and the demand for raw materials. My target is 1.3000. Currency Analyst - David Song My picks: Short CAD/CHF Expertise: Fundamentals and Technicals Average Time Frame of Trades: 2 - 10 Days The CADCHF has held within a broad range between 0.9370 and 1.0100 over the past two weeks, but has fallen below the stated level to hit a low of 0.9173 over the last 24 hours. In addition, the 50 day SMA has crossed below back the 100 day SMA, and may cross below the 200 day SMA over the next few days, which has favored a bearish outlook for the pair. From a fundamental standpoint, falling oil prices paired with the flight to safety has certainly fueled selling pressures for the Canadian dollar, but as OPEC is anticipated to cut production by one million barrels, the loonie may get a little bounce to the upside. However, I anticipate the downward momentum to lead the pair lower over the stated timeframe, and we may see the pair test the 6/15/04 low of 0.9076 over the following week. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Read more...

Mid-Day Report: Dollar and Yen Take a Breathe after Strong Rally

Market Overview | Written by ActionForex.com | Oct 23 08 14:12 GMT |

Markets stabilize a bit in early US session, digesting strong gains in dollar and yen. The greenbacks surged to 5 year high against Sterling and 4 year high against Canadian dollar. Yen, on the other hand, reached a 6 year high against Euro. Economic data released in the US session are disappointing, with jobless climbing to 478k. House price index dropped -0.6% mom in Aug. Crude oil breaches $65 level briefly while gold also breached 700 level briefly. US stocks are mixed, back and froth between positive and negative region in early trading. After all, there is no sign of a top in both the greenback and the yen yet. UK retail sales contracted -0.4% mom in Sep. More importantly, the annual growth rate slowed sharply from a 3.3% rise in Aug to 1.8%. Sterling is sent lower against dollar and in crosses as the data affirms the view that the outlook for the UK economy has deteriorated sharply in recent months and further contraction would likely be seen in second half of 2008. Having said that, the Q3 GDP data from UK will catch all attention tomorrow. Other data saw Eurozone industrial orders dropped sharply by -1.2% mom, -6.6% yoy in Aug. RBNZ cut overnight cash rate by 100bps to 6.5% as widely expected. In the accompanying statement, RBNZ said that the "ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision." The bank also expressed concern on "lower demand for exports" and "less readily available credit". On the other hand inflation concern eased with "weaker short-term growth" and "sharply lower oil prices". Markets generally expect further rate cut from RBNZ in Dec by another 50bps. EUR/USD Mid-Day Outlook Daily Pivots: (S1) 1.2701; (P) 1.2890; (R1) 1.3042; More EUR/USD stays in tight range above mentioned 100% projection of 1.6038 to 1.3381 from 1.4867 at 1.2710 . But intraday bias remains on the downside as long as 1.2984 minor resistance holds. Further decline is still expected. Sustained trading below 1.2710 will target 100% projection of 1.4867 to 1.3258 from 1.3768 at 1.2159 next. On the upside, above 1.2984 will turn intraday outlook neutral and bring recovery. But upside should be limited below 1.3285 resistance and bring fall resumption. In the bigger picture, EUR/USD is now trading well below 55 months EMA (now at 1.3331) and has taken out 38.2% retracement of 0.8223 (00 low) to 1.6038 at 1.3053 decisively. Further break of 100% projection of 1.6038 to 1.3381 from 1.4867 at 1.2710 will add more credence to the case that whole down trend from 1.6038 is developing into a five wave impulsive decline. In other words, EUR/USD is probably just in the middle of such fall which could extend beyond 1.1639 low before forming a medium term bottom. On the upside, while some rebound might be seen, break of 1.3768 resistance is needed to be the first signal that a medium term bottom is formed. Otherwise, medium term outlook remains bearish even in case of strong rebound.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
20:00	NZD	RBNZ rate decision	6.50%	6.50%	7.50%
23:50	JPY	Japan Trade balance (jpy) Sep	95.1B	600.0B	-324.0B	-327.6B
23:50	JPY	Japan Export Y/Y Sep	-10.90%	5.20%	0.30%
23:50	JPY	Japan mport Y/Y Sep	28.80%	24.00%	17.30%
08:00	EUR	Eurozone Current account (euro) Aug	-7.9B	N/A	-1.1B
08:30	GBP	U.K. Retail sales M/M Sep	-0.40%	-0.90%	1.20%	1.10%
08:30	GBP	U.K. Retail sales Y/Y Sep	1.80%	2.00%	3.30%
09:00	EUR	Eurozone Industrial orders M/M Aug	-1.20%	0.30%	1.00%	2.00%
09:00	EUR	Eurozone Industrial orders Y/Y Aug	-6.60%	-0.40%	1.60%	2.90%
12:30	USD	U.S. Jobless claims	478K	470.0K	461.0K	463K
14:00	USD	U.S. House price index M/M Aug	-0.60%	-0.40%	-0.60%
14:30	CAD	BOC Monetary Policy Report
14:35	USD	Natural Gas Storage		N/A	79B

Read more...

US Home Prices Fell For Sixth Consecutive Month In August

Daily Forex Fundamentals | Written by DailyFX | Oct 23 08 14:34 GMT |

US home prices fell for the sixth consecutive month in August as the FHFA's index slipped 0.6 percent. However, outside of a jump in the index in February, prices have actually slumped continuously since May 2007. Indeed, the collapse of the housing sector is far from over as tighter credit conditions limit the availability of mortgages, which is hurting already-weak demand for homes. Thus, the deterioration in housing is likely to continue weighing on economic growth going forward and should contribute to recession risks. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Read more...

EU Presses for Financial Overhaul, Cites Imbalances

By Jonathan Stearns and Jennifer Freedman

Oct. 23 (Bloomberg) -- The European Union stepped up calls for an overhaul of the global financial system, saying the world economy faces ``major imbalances'' that require a coordinated response with the U.S. and Asia starting at a summit next month.

``The current model of financial regulation and supervision needs to be revamped at international level,'' Jose Barroso, president of the European Commission, the 27-nation EU's regulatory arm, said today in Beijing. ``It is very simple: we swim together or we sink together.'' Barroso is due to attend a two-day meeting of European and Asian leaders in the Chinese capital beginning tomorrow.

The EU aims for a reordering of the financial system to prevent a repeat of the credit crunch that is causing a global economic slowdown. World leaders will meet Nov. 15 in Washington to assess the crisis at the urging of the EU, which has floated ideas including more bank supervision, stricter regulations on hedge funds and new rules for credit-rating companies.

The decision to hold the summit in Washington follows a yearlong credit squeeze that has toppled banks including Lehman Brothers Holdings Inc., forced coordinated interest-rate cuts by leading central banks and prompted U.S., European and Asian authorities to shore up banks with trillions of dollars and to consider economic-stimulus measures.

``The idea is to launch a process,'' Barroso said. ``The basic aim is to set some principles, to start a discussion on these principles.''

Global Differences

The EU campaign threatens to expose differences with the U.S. and other countries over global financial governance. That may provoke tensions and bog down talks while individual countries continue to act on their own to limit the fallout.

The credit crisis is choking off money to companies and people, undermining business and consumer sentiment. Economists at Deutsche Bank AG expect the Group of Seven economies to contract 1.1 percent next year, the worst since the Great Depression, and global growth to be the weakest since the 1980s.

``If someone thinks the effects of this crisis can be avoided, it's completely wrong,'' Barroso said. ``It started in the U.S., but it is becoming global. We're already seeing the ripple effects.''

Asian stocks slumped today, driving the region's benchmark index to the lowest level in four years, as Japanese exports missed estimates, commodities prices tumbled and South Korea's worst financial crisis in a decade deepened.

Seeking Chinese Support

Barroso said he would seek Chinese support for new financial rules in meetings with President Hu Jintao and Premier Wen Jiabao.

``I hope our Asian partners will contribute to this reform,'' he said. ``I really think China has a word to say.''

The Chinese government said it takes proposals on changing global financial rules ``seriously'' and stressed that emerging economies need extra help.

``Developing countries are especially vulnerable to the financial crisis and their concerns deserve special attention,'' said Chinese Foreign Ministry spokesman Qin Gang.

Barroso highlighted the strengths of China, the world's most populous country and fourth-biggest economy, and said changes could involve giving the Chinese greater weight in institutions such as the International Monetary Fund.

Meanwhile, the Brussels-based commission will come forward with proposals ``relatively soon'' to help support the EU economy, he said without elaborating.

Last week, French President Nicolas Sarkozy said European governments would look at offering loans to help carmakers switch to cleaner technologies and offset any competitive edge that U.S. government-backed loans may give to American automakers.

And earlier this week, Barroso said European support for businesses could embrace other ``key'' industries such as construction.

To contact the reporters on this story: Jonathan Stearns in Beijing at jstearns2@bloomberg.netJennifer Freedman in Beijing at jfreedman@bloomberg.net

Read more...

U.S. Initial Jobless Claims Rose to 478,000 Last Week

By Shobhana Chandra

Oct. 23 (Bloomberg) -- The number of Americans filing first- time claims for unemployment benefits rose last week, a sign the deepening credit crisis is hurting employment.

Initial jobless claims increased by 15,000 to a larger-than- forecast 478,000 in the week ended Oct. 18, from a revised 463,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls was little changed, holding near the highest level in five years.

The combination of tight credit and waning demand will cause more companies to retrench by trimming payrolls and investment. Mounting job losses may further restrict consumer spending, which accounts for more than two-thirds of the economy, and reinforce the risk of a protracted recession.

``The labor market remains weak,'' said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, who had forecast claims would rise. ``Consumer spending will drag down third- quarter growth, and we expect it to weaken further.''

Treasuries rose, pushing down yields. The benchmark 10-year note yielded 3.54 percent as of 8:44 a.m. in New York, down 5 basis points from yesterday. Stock futures were lower.

Initial claims were estimated to rise to 468,000 from 461,000 initially reported for the prior week, according to the median projection of 39 economists in a Bloomberg News survey. Estimates ranged from 431,000 to 490,000.

Hurricane Ike

Firings related to Hurricane Ike in Texas accounted for about 12,000 of last week's claims, a Labor spokesman said.

The four-week moving average of initial claims, a less volatile measure, fell to 480,250 from 484,750, today's report showed. So far this year, weekly claims have averaged 388,000, compared with an average 321,000 for all of 2007.

The number of people continuing to collect jobless benefits decreased to 3.72 million in the week ended Oct. 11, from 3.726 million the prior week that was the highest since mid 2003. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, was unchanged at 2.8 percent. These data are reported with a one-week lag.

Thirty-nine states and territories reported an increase in new claims, while 13 reported a decrease.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

Today's figures represent claims from the survey week for nonfarm payrolls, and will be closely watched by economists for signals on the job market in October. The number of applications were up by 20,000 compared with the September survey week. The total drop in payrolls this year reached 760,000 in September, according to the Labor Department.

The economy probably lost jobs for another month in October, according to some economists. The Labor Department will report the figures on Nov. 7.

More Firings

Yahoo! Inc. said it plans to cut at least 10 percent of its staff, or about 1,500 jobs, after online advertising spending slowed. The Sunnyvale, California-based Internet company will also trim the number of contractors and cut real-estate costs.

``The focus is to make sure we are better positioned to handle a long-term, protracted recession if that does occur,'' Chief Financial Officer Blake Jorgensen said in an interview on Oct. 21. ``We're also making sure those costs get out of the system for good.''

Also this week, National City Corp., Ohio's largest lender, announced plans to eliminate 4,000 jobs while Merck & Co., the third-largest U.S. drugmaker, said it will cut 7,200 jobs.

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

Read more...

Bernanke May Seek New Tactics as Fed Rate Nears 1%

By Craig Torres

Oct. 23 (Bloomberg) -- Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.

The Fed's Open Market Committee will probably reduce the benchmark federal funds rate by half a point next week to 1 percent, the lowest since May 2004, according to futures trading. The official rate has never been lower since the Fed made it an explicit target in the late 1980s.

Further cuts below 1 percent could turn Fed Chairman Ben S. Bernanke's focus away from the main rate and toward more use of alternative tools. Those might include increasing its holdings of mortgage bonds to lower costs for homebuyers and purchasing securities directly from the Treasury in order to pump more cash into the economy, Fed watchers said.

``If there is need for more stimulus, the Fed will buy up government debt'' to keep borrowing costs low, said Adam Posen, deputy director at the Peterson Institute for International Economics and a co-author with Bernanke. That's tantamount to ``turning government debt, as it is issued, into money.''

Bernanke, 54, has already thrown the central bank's balance sheet into action in unprecedented ways. Working with the New York Fed, the Board of Governors has rolled out 11 new programs aimed at absorbing risk or making dollars available when banks don't want to loan.

Assets Doubled

The result: The central bank's assets, which include a loan to insurer American International Group Inc. and a pool of investments once held by Bear Stearns Cos., more than doubled to $1.772 trillion last week from a year-earlier total of $873 billion that comprised mostly Treasuries. The latest weekly figures are scheduled for release at 4:30 p.m. in Washington.

There's more to come. The Fed announced this week a backstop for money-market mutual funds to which it will commit another $540 billion. A commercial-paper program approved Oct. 7 could buy up to $1.8 trillion of securities.

``The net effect of these facilities has been a truly staggering pace of growth in the Fed's balance sheet,'' said Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc.

When the Bank of Japan fought deflation and a banking collapse earlier this decade, its balance sheet ballooned to more than 30 percent of gross domestic product as it pumped money into the economy, Hatzius said. He predicted ``further rapid growth'' in the Fed's, which is now equal to 12 percent of U.S. GDP.

`Helicopter Ben'

As a Fed governor, Bernanke did research on alternative policy tools between 2002 and 2004, when U.S. central bankers last cut the benchmark rate to 1 percent. Traders nicknamed him ``Helicopter Ben'' after a 2002 speech that referenced Milton Friedman's comments comparing such unorthodox methods to dropping money from a helicopter.

Vincent Reinhart, the Fed's director of monetary affairs at that time, said Bernanke's policy activism, which contrasts with his predecessor Alan Greenspan's almost exclusive use of the federal funds rate, derives from the chairman's research on policy errors in the Great Depression and during Japan's rolling recessions of the 1990s.

``He saw what we viewed as an obvious policy failure and it was in the ability of human reason'' to fix it, said Reinhart, now a scholar at the American Enterprise Institute.

`Quantitative Easing'

The Bank of Japan, struggling against deflation, slow growth and consumers' reluctance to spend, brought its policy rate close to zero before turning in 2001 to a so-called quantitative easing strategy of increasing money in accounts held for commercial banks. The policy lasted for five years, before the central bank began to draw down reserves and raised its benchmark rate to 0.5 percent, where it has been since February 2007.

The Fed has flooded the economy with so much cash that excess reserve balances at banks, or cash surpluses beyond what banks are required to hold against deposits, soared to $136 billion for the two-week period ending Oct. 8 compared with an average of $1.4 billion in the same month last year.

``The Federal Reserve has already entered a regime of quantitative easing,'' said Brian Sack, vice president at Macroeconomic Advisers LLC who also worked with Bernanke as an economist in the Monetary Affairs Division.

As their liquidity programs dump excess funds into the banking system, it's become more difficult for the Fed to keep the rate at which banks lend overnight to each other in line with policy makers' 1.5 percent target.

Below Fed Target

In an effort to put a floor under the overnight rate, the central bank started paying interest on the reserves banks deposit with it. That hasn't stopped the so-called effective federal funds rate from falling below the target every day since officials lowered their benchmark by half a point in an emergency move on Oct. 8.

In the two weeks since then, evidence of a deteriorating economy has mounted and will likely push Fed officials toward a further rate cut when they meet Oct. 28-29, economists said.

Federal funds futures traders boosted their bets on a half- point rate cut to a 90 percent probability today from 46 percent a week ago. Traders see a 10 percent chance of a quarter-point reduction.

Industrial production in the U.S. fell in September by the most in almost 34 years, and retail sales dropped by the most in three years. Inflation pressures are easing as oil prices fall to a 16-month low, and nine months of job losses eliminates any pressure from wage increases.

Whether the target rate ends up below 1 percent depends on how fast consumers and businesses gain more access to low-cost credit. Economists at HSBC Holdings Inc. said the Fed would like to avoid cutting to zero. Still, if the economy doesn't improve, it ``could be at zero'' by the middle of next year, said HSBC economist Ian Morris.

``There is this understanding at the Fed that the worst thing you can do is save your ammunition,'' said Ethan Harris, economist at Barclays Capital Inc. ``You move fast -- that is the whole lesson of past crises in Japan and during the Great Depression.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Read more...

BOE's King Acted Too Slowly, Should be Replaced, Telegraph Says

By Svenja O'Donnell

Oct. 23 (Bloomberg) -- Bank of England Governor Mervyn King should be replaced for reacting too slowly to the banking crisis that's helped push the U.K. into recession, the Daily Telegraph newspaper said in an editorial today.

King has been an ``invisible man'' since the financial crisis started in August last year, said the paper, Britain's best-selling broadsheet. The bank's emergency interest-rate cut this month was ``too little, too late,'' the paper said.

The deterioration of markets over the past month has revived criticism of King's crisis-management skills after he escaped blame for the collapse of Northern Rock Plc last year. Former policy maker Charles Goodhart said last month that King should have been more generous in offering emergency funds to banks and some executives say King's been too focused on punishing risky lending rather than saving the financial system.

King gave a speech this week that analyzed the causes of the financial turmoil that led to Britain's worst banking crisis since World War I. He also acknowledged for the first time that the economy is likely to slip into a recession

``He gave the appearance of a thoughtful onlooker at a particularly nasty accident,'' said the Telegraph. ``The new financial order, with the government holding significant stakes in the banks, calls out for new leadership at the Bank of England.''

Flooding With Cash

A spokesman for the U.K. central bank didn't immediately return a phone call seeking comment. The governor was reappointed for a second five-year term by Prime Minister Gordon Brown in January.

King argued in the initial stages of the crisis that flooding the financial system with cash would bail out banks that took too many risks during the credit boom. He also defended the Bank of England's role in the failure of Northern Rock, saying that its fate was for the government to decide.

HSBC Holdings Plc Chairman Stephen Green or Standard Chartered Plc Chairman Mervyn Davies should be considered by Brown as potential replacements to King, the Telegraph said.

King will give testimony to a committee of lawmakers on Nov. 3 and will be joined by Financial Services Authority Chairman Adair Turner and Chancellor of the Exchequer Alistair Darling.

While Hector Sants, the FSA's chief executive has apologized for the regulator's failures in overseeing the banking system before the crisis broke, some economists say King hasn't been self-critical enough. In his speech on Oct. 21, did not ``really address the question'' of what the central bank could have done differently, said Citigroup Inc.'s Michael Saunders in an e-mailed note to investors yesterday.

``Given the economy's poor prospects now, such an honest assessment is clearly needed,'' said Saunders, chief Western European economist at Citigroup in London.

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

Read more...

Belgian October Business Confidence Drops to Lowest Since 2003

By Jurjen van de Pol

Oct. 23 (Bloomberg) -- Belgian business confidence dropped to the lowest in more than five years in October as the worsening global financial crisis undermined sentiment in the building industry.

The confidence index for Belgium, the sixth-largest economy in the 15-nation euro zone, fell to minus 14.8 from minus 14.4 in September, the Brussels-based National Bank of Belgium said today in an e-mailed statement. The October reading is the lowest since July 2003. In the manufacturing industry, ``forecasts for demand and employment are still on a downward path,'' the central bank said.

The deepening U.S.-led credit crisis, which has caused $660 billion of bank writedowns and losses worldwide, is pressuring economies across Europe and forcing governments to rescue embattled lenders. Growth in the euro region may have stagnated last quarter after the economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, as exports, investment and consumer spending fell.

``The recession scenarios have come out of the closet everywhere in the last month,'' said Bart Van Craeynest, an economist at KBC Bank NV in Brussels. ``Confidence is still above the levels of the 2001 recession and I expect they will drop below that in this cycle.''

DAF Trucks will cut 750 jobs in Belgium as the credit crisis forces the Paccar Inc. unit to lower production, the Belga newswire reported yesterday. Agfa-Gevaert NV, Europe's largest maker of health-care imaging systems, said Oct. 14 it plans to reduce its Belgian workforce by 300 positions.

Building Industry

A gauge of sentiment in Belgium's building industry fell to minus 5.9 from minus 3.6 in September as companies became more pessimistic about their order books and the labor-market outlook, according to today's report. Confidence in trade fell to minus 23 from minus 18.7.

Economists had expected the overall confidence index to decline to minus 16, according to the median of 18 forecasts in a Bloomberg News survey.

Business sentiment in Germany, which has declined for the past four months, is scheduled to be released on Oct. 27 by the Munich-based IFO Institute.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net

Read more...

Natural Gas Declines Before Government Report on Inventories

By Reg Curren

Oct. 23 (Bloomberg) -- Natural gas futures fell before a government report today that may show U.S. stockpiles gained more than average for this time of year, putting ample amounts of the fuel in storage to meet cold-weather demand.

Inventories probably increased 75 billion cubic feet in the week ended Oct. 17, according to the median of 20 analyst estimates compiled by Bloomberg. The average change over the past five years is an increase of 62 billion cubic feet, according to U.S. Energy Department data.

``Clearly, the market is well supplied,'' said George Ellis, a director in the energy derivatives group at BMO Capital Markets in New York. ``There is some talk the U.S. winter may not be that cold in the consuming east regions.''

Natural gas for November delivery fell 4.8 cents, or 0.7 percent, to $6.729 per million British thermal units at 9:11 a.m. on the New York Mercantile Exchange. Gas has dropped 10 percent this year.

A worsening economic outlook in the U.S. is also dragging gas lower, Ellis said.

The number of Americans filing first-time claims for unemployment benefits increased last week, a sign the credit crisis is hurting employment. Initial jobless claims increased by 15,000 to a larger-than-forecast 478,000 in the week ended Oct. 18, from a revised 463,000 the prior week, the Labor Department said today in Washington.

A slowing economy would cut 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.

Gas stockpiles were 85 billion cubic feet, or 2.7 percent, above the five-year average in last week's supply report.

Storage levels will probably reach 3.47 trillion cubic feet by the end of the month, George Hopley, an analyst at Barclays Capital Inc. in New York, said in a report this week. The five- year average for storage to start the cold-weather season in November is 3.327 trillion cubic feet.

The Energy Department is scheduled to release its supply report at 10:35 a.m. in Washington.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

Read more...

Natural Gas Pares Losses After Supplies Gain Less Than Forecast

By Bill Banker

Oct. 23 (Bloomberg) -- Natural gas futures in New York pared losses after an Energy Department report showed that U.S. supplies gained less than analysts estimated.

Natural gas for November delivery fell 17.7 cents, or 2.6 percent, to $6.60 per million British thermal units at 10:37 a.m. on the New York Mercantile Exchange. Gas was trading 3.3 percent lower at $6.555 before the report was released at 10:35 a.m.

To contact the reporter on this story: Bill Banker in New York at bbanker@bloomberg.net.

Read more...

Climate Change Poses Risks, Advantages to Insurers, Zurich Says

By Alex Morales

Oct. 23 (Bloomberg) -- Climate change poses risks to insurers as economic losses from weather-related disasters have risen 2 percent a year since 1970. Insurers, though, can turn global warming to their advantage, Zurich Financial Services AG said.

Warming weather raises flood dangers and the frequency and severity of catastrophes such as hurricanes, Zurich's Australian unit said today in a report. Rather than drop coverage of those at risk, insurance companies should help clients adapt, it said.

Insurers able to boost customer resilience to climate-change hazards may see ``reductions to property damage and insured losses while sustaining and even enhancing premium income,'' Zurich Australia Chief Executive Officer David Smith said in a statement.

The $4 trillion insurance industry is ``society's shock absorber for risk,'' the Zurich-based company said, with profitability a vital part of the health of the world's economy.

``2008 will be remembered as the year the global economy and markets had a roller-coaster ride,'' Smith said. ``But this does not make the issues of climate change redundant. If anything, it emphasizes that insurers need to factor the impact of climate change into their bottom line alongside the issues of the global economic meltdown.''

Insurers could benefit from entering new markets, such as providing coverage for projects that generate carbon credits, or permits to emit greenhouse gases, Zurich's report said.

Insurers should also reward clients who slash their greenhouse gas emissions and make buildings more resilient to storm damage, Switzerland's largest insurance company said. They can also sell climate risk-modeling services to generate more income, it said.

To contact the reporter on this story: Alex Morales in London at amorales2@bloomberg.net.

Read more...

Petro-Canada's Profit Rises 61% on Higher Oil Prices

By Dan Lonkevich

Oct. 23 (Bloomberg) -- Petro-Canada, the country's third- largest oil company, said third-quarter profit rose 61 percent from a year earlier on higher prices, beating analyst estimates.

Net income climbed to C$1.25 billion ($990 million), or C$2.56 per diluted share, from C$776 million, or C$1.58 diluted, the Calgary-based company said today in a statement. Petro- Canada was expected to earn C$2.29 per share, the average estimate of 15 analysts surveyed by Bloomberg. Revenue climbed 51 percent to C$8.29 billion.

Profit gained as oil advanced more than 57 percent in the quarter from a year earlier and gas rose 44 percent. About 72 percent of Petro-Canada's daily output comes from oil wells. The increase in prices helped counter project delays and higher costs, said Mark Gilman, an analyst at Benchmark Co. LLC in New York.

``It's project execution,'' according to Gilman, who has a ``sell'' rating on the shares and doesn't own any. ``The Fort Hills project is a prima facie case,'' he said, referring to the Alberta oil-sands venture that may cost 50 percent more than the company's previous forecast.

Fort Hills is a Canadian oil-sands project in which Petro- Canada has a 60 percent stake. The project targets production of 280,000 barrels of crude a day by 2015. The company expects total output of 420,000 barrels of oil equivalent a day this year. In September, Petro-Canada's partner UTS Energy Corp. raised the cost estimate to C$23.8 billion from C$14.1 billion.

Petro-Canada Chief Executive Officer Ronald Brenneman said today on a conference call that while the company may go ahead with the bitumen mine at Fort Hills, the decision whether to proceed with the upgrader may be delayed. A decision is expected in the fourth quarter, Brenneman said. The company may buy an upgrader, used to process the tar-like oilsands, rather than build one, he said.

Other Projects

Andrea Ranson, a spokeswoman for Petro-Canada, said yesterday in an interview that the company's Terra Nova and MacKay River projects have been operating near full capacity. She said, however, that the projects have had a history of delays.

No ``major turnarounds'' are planned for the rest of 2008 at North American natural-gas and oil-sands projects, or at the East Coast Canada and refining units, the company said today in the statement.

Oil prices averaged $118.22 a barrel in the third quarter. They have fallen more than 50 percent since touching an all-time high of $147.27 on July 11, because of concern that a global recession will slash demand for oil. The Organization of Petroleum Exporting Countries, which produces 40 percent of the world's oil, will ``most probably'' decide to trim output at its meeting in Vienna tomorrow, OPEC's president, Chakib Khelil, said.

Output Drops

Petro-Canada's output dropped 3 percent to 424,000 barrels of oil equivalent a day in the third quarter. The company's oil fetched C$114.11 a barrel, 54 percent more than a year ago, while its gas sold for C$8.68 per thousand cubic feet, up 64 percent.

Petro-Canada rose 93 cents to C$67.68 at 9:32 a.m. in Toronto trading. Before today, the stock had dropped 30 percent this year.

Imperial Oil Ltd., 70 percent-owned Exxon Mobil Corp., is Canada's largest oil company by 2007 sales, followed by EnCana Corp.

To contact the reporter on this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net.

Read more...

India's Rupee Declines to Record Low After Stocks Extend Slump

By Anoop Agrawal

Oct. 23 (Bloomberg) -- India's rupee weakened to a record low against the dollar as stocks slumped, heightening concern overseas funds will sell more local equities.

The currency fell for a seventh day on speculation the government's decision to raise the limit on loans Indian companies can get from abroad will fail to increase the supply of foreign exchange in the local market, said Sanjay Arya, a treasurer at state-owned Bank of Maharashtra. The central bank yesterday eased the overseas borrowing rules for domestic firms, lifting curbs imposed last year. The announcement was made after the financial markets closed.

``The global credit environment is still that of pessimism and the availability of funds is still difficult, which is why we should not expect easier overseas borrowing rules will result in dollar supply any time soon,'' Mumbai-based Arya said.

The rupee slid 1.1 percent to 49.825 per dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. It may drop to 50 in coming days, Arya said.

The Reserve Bank of India said local companies can borrow up to $500 million in a financial year without prior approval and can repatriate the funds as long as they don't invest the money in capital markets or real estate. It also raised the cap on borrowing costs. Last year, the government told companies they couldn't repatriate more than $20 million.

Share Sales

Sales of Indian shares by overseas investors this year exceeded purchases by a record $12.1 billion as the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, slid 52 percent. The measure fell 3.9 percent today.

``Nobody allows'' the rupee, ``to fall, nobody allows it to rise,'' Finance Minister Palaniappan Chidambaram told reporters today. ``The rupee rises, falls depending upon the demand for foreign exchange.''

Growth in Asia's third-largest economy may slow more than previously estimated, the central bank said in a report today, a day before Governor Duvvuri Subbarao meets fellow policy makers to review the monetary policy. He unexpectedly cut the key repurchase rate by 100 basis points to 8 percent on Oct. 20.

The economy may expand 7.7 percent in the year ending March 31, the central bank said, citing the median estimate given by 13 research groups in September. That's less than the 7.9 percent estimate in June.

The rupee pared losses on speculation the central bank will buy its currency to prevent imports from becoming more expensive.

Intervention

``The central bank will intervene to remove the speculative elements by supporting the rupee,'' said K.V. Mallik, treasurer at state-owned UCO Bank in Kolkata.

Reserve Bank of India spokeswoman Alpana Killawala said the central bank doesn't comment on daily rupee movements. Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.

A weaker currency increases costs for companies such as Indian Oil Corp Ltd., the nation's largest refiner. These companies face losses because under Indian rules they have to sell fuel products at prices below their costs. India meets almost 75 percent of its crude oil needs from imports.

The nation's foreign-exchange reserves fell to $274 billion on Oct. 10, from a record high of $316 billion in May, indicating the central bank has sold the U.S. currency. The reserves declined $9.9 billion in the week ended Oct. 10, the biggest drop since Bloomberg started compiling the data in 2000.

Many Parameters

Volatility in the rupee may decrease in the coming days, Ashok Chawla, economic affairs secretary said today.

``The movement of the rupee is something which is based on a large number of parameters,'' Chawla told reporters in New Delhi today. ``Once there is some easing of pressure, the expectation is it will be less volatile.''

Implied volatility on one-month dollar-rupee options rose to 24 percent from 14.5 percent a month ago, Bloomberg data show. Traders quote the gauge of expected swings in the rupee as part of pricing options.

There is no fixed target for the rupee, Chawla said.

``We are monitoring the situation and the Reserve Bank is doing its job,'' Chawla said. ``In any case, the interventions are not specifically to reach any specific target.''

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

Read more...

OPEC Faces Worsening Oil Price Drop as Growth Slips

By Margot Habiby and Grant Smith

Oct. 23 (Bloomberg) -- OPEC's first production cut in almost two years may fail to stanch a collapse in oil prices as roiling stock markets signal that the financial crisis has spread to emerging markets, the center of demand growth.

The Organization of Petroleum Exporting Countries will likely slice output by at least 1 million barrels tomorrow at a meeting in Vienna. It may not be enough. Morgan Stanley warned that global demand may fall this quarter, normally the peak period for oil consumption.

``The correlation between OPEC supply cuts and price increases is near zero,'' said Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York ``All a cut does is reaffirm we're oversupplied and demand is weakening. Developed economies are already negative and emerging markets are slowing.''

Crude oil for December delivery closed at a 16-month low of $66.75 a barrel in New York yesterday as Argentina's seizure of pension funds rattled markets around the world. It was up $1.19, or 1.8 percent, to $67.94 a barrel at 12 p.m. London time after Iranian Oil Minister Gholamhossein Nozari said OPEC should cut production by 2 million barrels a day.

An oil price between $60 and $90 a barrel won't worsen the global economic slowdown, said OPEC President Chekib Khelil, the Algerian oil minister.

Options trading shows crude prices are likely to extend their slide and may trade below $55 in December, Merrill Lynch & Co. said this week. Oil has fallen 54 percent from a July 11 record of $147.27.

Stocks Slump

Asian stocks slumped today, driving the region's benchmark index to the lowest level in four years, as Japanese exports missed estimates, commodities prices tumbled and South Korea's worst financial crisis in a decade deepened.

Argentina's main stock index had its biggest three-day loss in 18 years yesterday, on concern the government seizure of $29 billion of private pension funds will further undermine investor confidence in South America's second-biggest economy and cause its second default in a decade.

Earlier this week, China, the world's fastest growing energy consumer, said its economy grew at 9 percent in the third quarter, the slowest pace in five years. Demand from emerging markets, led by China, helped drive prices close to $150 a barrel this year. Chinese oil imports rose 11 percent last year and 13 percent in the first half of 2008, according to customs data.

Chinese Slowdown

The Centre for Global Energy Studies, founded by former Saudi Arabian Oil Minister Ahmad Yamani, doubled the likelihood of a slowdown in Asian economies to 20 percent in an Oct. 20 monthly report.

``Chinese demand has been setting up for a major decline,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc.

India's central bank unexpectedly lowered its key repurchase rate on Oct. 20 for the first time since 2004 in a signal that Governor Duvvuri Subbarao sees weaker growth as a bigger threat than inflation in Asia's third-largest economy.

South Korea, Asia's fourth biggest economy, reined in crude oil imports last month, to 69 million barrels last month from 70.3 million in August.

Demand Dip

World oil demand is expected to fall to as low as 83.5 million barrels a day in the second quarter of 2009, from 85.7 million barrels a day last quarter, a Morgan Stanley consultant said yesterday.

``We are going to see a significant dip in demand that will be most severe in the second quarter,'' Sadad Al-Husseini, a Morgan Stanley consultant and former head of exploration and production at Saudi Aramco, said on a conference call.

The price of Saudi Arabia's Arab Medium and Arab Heavy crude oils for shipment to the U.S. dropped below $60 a barrel for the first time yesterday, when priced against U.S. benchmark West Texas Intermediate oil, according to Bloomberg data. Arab Medium fell to $59.26 and Arab Heavy to $57.01.

Fuel demand in the U.S. averaged about 18.7 million barrels a day during the four weeks ended Oct. 17, down 8.5 percent from the same period a year earlier, according to the Energy Department.

Market `Flooded'

OPEC will ``most probably'' decide to cut production, Algerian Oil Minister and OPEC President Chakib Khelil said today in Vienna. Members are struggling to sell crude amid high global inventories, he said.

The oil market is ``flooded'' with crude and an output cut of 1 million barrels a day won't be sufficient, Shokri Ghanem, Libya's top oil official said yesterday.

The last time OPEC decided to slash quotas was at a December 2006 meeting in Abuja, Nigeria. The 500,000 barrel-a-day cut took effect in February 2007, expanding an earlier reduction agreed in October. The cuts were reversed later in 2007 as oil kept rallying.

``OPEC will be torn between wanting to lower output to shore up prices and, at a time when the global economy is getting into a recession, knowing that if they push up oil they will make the recession worse,'' Deutsche Bank AG's Chief Energy Economist Adam Sieminski said from New York. ``We predict the price could fall further, to $50 a barrel by 2010.''

Eleven years ago, OPEC members bickered about output quotas as oil slid 28 percent in 10 months amid the onset of the Asian financial crisis. At a meeting in Jakarta in November 1997, they raised quotas, ignoring the turmoil that slowed Asian economies and cut oil demand. Prices fell another 44 percent by December 1998 to below $11 a barrel. New York oil traded near $68 today.

IEA Forecast

To be sure, International Energy Agency Director Nobuo Tanaka said his organization has yet to see any decline in emerging markets oil demand and predicts 5.2 percent growth in Chinese oil demand next year.

``Our statistics clearly tell us there is not yet any indication of slowdown in China, India or the Middle East,'' Tanaka said in an interview yesterday. ``Their demand is still very robust.''

To contact the reporter on this story: Margot Habiby in Vienna at mhabiby@bloomberg.net; Grant Smith in Vienna at gsmith52@bloomberg.net.

Read more...

Polish Central Bank Sees Zloty Drop as `Temporary'

By Monika Rozlal and Ewa Krukowska

Oct. 23 (Bloomberg) -- The National Bank of Poland said the recent decline in the zloty is ``temporary'' and the ``good condition of the Polish economy should help the currency rebound.''

The weakening of the zloty ``is not justified by Poland's macroeconomic situation,'' the management board of Narodowy Bank Polski said in an e-mailed statement today.

The zloty fell 21 percent against the euro in the past two months to 3.853 at 3:15 p.m. in Warsaw, a two-year low on rising risk aversion and a revision of Polish economic growth outlook by Credit Suisse Group AG.

The zloty may ``weaken slightly further'' this year, Credit Suisse said in a note to clients.

Poland's economic situation is ``very good'' and the current zloty weakness ``is temporary and results from global factors,'' Deputy Finance Minister Katarzyna Zajdel-Kurowska added in an e- mailed statement today. She also forecast that this year's budget deficit will be lower than the planned 27 billion zloty ($9 million).

To contact the reporters on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.netEwa Krukowska in Warsaw at ekrukowska@bloomberg.net



Read more...

Pound Trades Near 5-Year Low Against Dollar as Sales Decline

By Kim-Mai Cutler

Oct. 23 (Bloomberg) -- The pound traded near its lowest level in more than five years against the dollar as reports showed declining retail sales and home-loan approvals, adding to evidence the U.K. is on the brink of a recession.

The pound slid after the Office for National Statistics said retail sales fell 0.4 percent in September from August and the British Bankers' Association reported a 57 percent slump in mortgage approvals last month compared with a year earlier.

``The line of least resistance is a weaker pound in a generally dollar-bullish environment,'' said Russell Jones, head of fixed-income and currency research in London at RBC Capital Markets. ``The pound came a long way. That's quite a rare occurrence.''

The British currency traded at $1.6227 as of 11:01 a.m. in London, from $1.6267 yesterday, when it had the steepest intraday decline against the dollar in 16 years. Against the euro, the pound was at 79.04 pence, from 79.06 yesterday.

The currency has declined 5.4 percent against the dollar this week on growing evidence the U.K., Europe's second-largest economy, is headed toward a slump. A report tomorrow may show the economy contracted 0.2 percent in the third quarter from the previous three-month period. Bank of England Governor Mervyn King said this week the U.K. may enter a recession.

``I don't see anything that can stop this,'' said David Woo, global head of currency strategy in London at Barclays Capital. ``It's shocking. I can't say we've anticipated this move.''

Gilts Fall

Two-year gilts fell, snapping a six-day gain. The yield rose 6 basis points to 3.22 percent. The 4.75 percent note maturing June 2010 slipped 0.10, or 1 pound per 1,000-pound ($1,629) face amount, to 102.40. The yield on the 10-year security fell 1 basis point to 4.47 percent. Bond yields move inversely to prices.

The spread, or difference, in yield between two- and 10- year notes was at 123 basis points, near the widest since October 1996, in a sign traders expect the Bank of England to lower interest rates again by year-end to buoy the economy.

Ten-year yields may fall to 4.37 percent by the end of the quarter, according to the median forecast of eight economists surveyed by Bloomberg.

Gilts have returned 0.5 percent this quarter, compared with a 1.8 percent return from German bunds and a 1.1 percent return from U.S. Treasuries, according to the U.S. Treasury Master, German Federal Governments and U.K. Gilts indexes compiled by Merrill Lynch & Co.

Inflation is likely to fall ``sharply'' in 2009, Bank of England policy maker Kate Barker said in an interview published with thebusinessdesk.com today, prompting traders to raise best on more cuts in borrowing costs. The implied yield on the December sterling interest-rate futures contract fell 5 basis points to 4.66 percent.

The U.K. Treasury sold 3 billion pounds of 10-year notes today yielding 4.47 percent today to help finance the government's rescue of the three of the country's biggest banks. Investors bid for more than twice as many notes were on offer.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Read more...

Canada's Dollar Falls to Four-Year Low on Outlook for Growth

By Chris Fournier

Oct. 23 (Bloomberg) -- Canada's currency dropped to the lowest in four years on speculation worldwide economic growth will slow as U.S. investors sell assets.

The loonie, as the currency is known because of the aquatic bird on the one-dollar coin, is poised for a fourth straight weekly decline, its longest losing streak in almost a year. The currency has lost 16 percent this month as commodities including crude oil have plummeted.

``The general bearishness on the global growth outlook is pressuring commodity currencies,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``We continue to see position covering and repatriation back to the U.S. driving the U.S. dollar higher across the board. The Canadian dollar is looking pretty soggy here.''

The Canadian dollar depreciated by as much as 1.6 percent to C$1.2743 per U.S. dollar, the lowest since Oct. 4, 2004. It weakened 3.2 percent yesterday to C$1.2539, its biggest one-day decline since at least 1971 when Bloomberg records begin. The currency has dropped 6.4 percent since Oct. 17. It fell six straight weeks to Dec. 14. It traded at C$1.2615 at 10:28 a.m. in Toronto. One Canadian dollar buys 79.27 U.S. cents.

The U.S. dollar rose against most of the 16 most-actively traded currencies.

`Somber Mood'

``The broader global growth concerns remain, and that's very much reflected in the continued sell-off in equity markets globally,'' said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``That somber mood is still weighing on the Canadian dollar. Calling a top now would be more of a gamble than a scientific forecast.''

The MSCI World Index, a gauge of 23 developed nations, lost 2.1 percent to 891.16. The index has plunged 44 percent in 2008 as credit-related losses and writedowns topped $650 billion in the worst financial crisis since the Great Depression.

``The credit crunch is the genesis of all this,'' Osborne said. ``It looks like it's going to continue. There are really quite exceptional moves that we're seeing in the currency market, but particularly in the Canadian currency.''

Osborne predicts a weekly close beyond C$1.2730 could indicate ``another big leg up in the U.S. dollar versus the Canadian dollar.''

`Mild Recession'

Canadian exporters will be hobbled by a U.S. recession, a world economy that ``appears to be heading into a mild recession,'' and lower prices for the country's exported commodities, the Bank of Canada said on Oct. 21.

The Canadian government will guarantee short-term borrowing by the country's commercial banks in an effort to revive lending and match support offered by other governments amid the global credit crisis, Finance Minister Jim Flaherty told reporters today in Ottawa.

So far this month, Canada's currency has outperformed those of Australia, Norway, Mexico, Brazil and South Africa. Against the loonie, the Aussie weakened 0.4 percent, the krone fell 2 percent, the peso was down 5.4 percent, the real depreciated 3.6 percent, and the rand slumped 13.3 percent.

The Reuters/Jefferies CRB Index of 19 commodities fell 1.3, or 0.5 percent, to 264.81 and is down 36 percent in the past three months.

Raw materials such as gold account for 60 percent of Australia's exports. Oil is Norway's biggest export, and it generates about 40 percent of government revenue in Mexico. Brazil is the world's biggest sugar producer and exporter. South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold.

Export Revenue

Crude and natural gas combined accounted for 17 percent of Canada's export revenue in 2007, according to Statistics Canada.

Moves in the loonie most closely track fluctuations in the price of base metals, according to George Davis, chief technical analyst at RBC Capital Markets. Davis, in a research note, cited movements of an index comprising aluminum, nickel, zinc and copper as providing the highest correlation to changes in the Canadian dollar, followed by shifts in the price of crude oil. The MSCI World Index provided the third-strongest correlation, Davis said.

Copper fell below $4,000 a metric ton for the first time since November 2005, nickel's the cheapest since August 2003 and zinc is the lowest since November 2004. Aluminum dropped to a three-year low.

The yield on the 10-year Government of Canada bond slipped 2 basis points, or 0.02 percentage point, to 3.58 percent, the seventh consecutive daily drop. The price of the 4.25 percent security maturing in June 2018 climbed 16 cents to C$105.39.

The yield on the two-year government bond was little changed at 2.10 percent. The price of the 2.75 percent security due in December 2010 fell 1 cent to C$101.33.

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

Read more...