Business News: 12/08/08

Monday, December 8, 2008

Markets Trading in Narrow Ranges

Daily Forex Fundamentals | Written by Crown Forex | Dec 08 08 15:07 GMT |

A light week but optimism is still fulfilling markets, the European and the Asian indices inclined in the early morning retrieving back some of the losses that was seen last week, where Obama the new elected president is preparing a fiscal plan which could bolster the US economy and mitigate the ongoing turmoil.

Today markets lacked any major fundamentals and news that could affect the its movements, as the movement seen is considered to be a pure technical one; the Euro inclined in the European session to record a high of 1.2915 as its currently trading at 1.2904 levels, a resistance will seen at 1.2944 levels.

The British pound managed to incline against the US dollar, where it recorded a high of 1.5046 but retrieved back again to currently trade at 1.4864 levels, an upside potential is seen for the pound according to the technical indicators.

The US dollar is trading in narrow ranges but it managed to incline slightly against the Japanese Yen where the optimism in markets increased slightly the risk appetite. The pair recorded a high of 93.90 but retreated back to trade currently at 93.18 levels.

Crown Forex

disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

Dollar Down as Risk Revives - Sayonara USD/JPY?

Daily Forex Fundamentals | Written by GFT | Dec 08 08 13:51 GMT |

Trichet Economy Hits Friedman’s Bump, Avoids Breakup

By Simon Kennedy

Dec. 8 (Bloomberg) -- The euro area has so far defied Milton Friedman’s forecast that it would splinter as soon as the “global economy hits a real bump.” As the euro marks its 10th birthday, the monetary union is hitting the biggest bump yet.

While the 15-nation region remains in one piece amid its deepest financial crisis, the turmoil is placing new demands on the European Central Bank. Among the most urgent: shifting focus as the recession quashes the inflation threat that dominated the ECB’s agenda for the last decade.

With deflation looming as the greater danger to the world economy, President Jean-Claude Trichet is signaling the ECB may continue to lag behind other central banks in cutting interest rates, risking a delayed recovery that undermines the euro’s initial success. A further threat to the currency’s stability comes from abroad, as weaker neighbors seek shelter from the financial crisis through early entry into the euro bloc.

“Serious new challenges are taking shape that could still jeopardize the very survival of economic and monetary union,” says Thomas Mayer, chief European economist at Deutsche Bank AG in London. Still, he says, “there will be a lot to celebrate at the 10th anniversary.”

The euro region will start its second decade Jan. 1 in better shape than some economists once imagined possible. Even in the current recession, it has avoided the bank and currency runs that have plagued neighbors such as Iceland and Hungary. Foreign retailers and central banks increasingly use the euro, which reached a record $1.6038 in July and an unprecedented 87.26 pence against the pound last week.

Difficult Birth

That’s a far cry from the bloc’s difficult birth, when the bank’s first president, Wim Duisenberg, was criticized for sending confusing policy signals. Global governments intervened to rescue the euro after it plunged in its first 21 months.

Those early days gave some credence to the view of Friedman, the late Nobel-Prize-winning economist, that “internal contradictions” would destroy the currency. Harvard University Professor Martin Feldstein warned in a 1997 article that monetary union would spark greater political conflict within the region. While it’s impossible to predict whether such conflict would lead to war, Feldstein wrote, “it is too real a possibility to ignore in weighing the potential effects” of monetary and political union.

While early critics may have been wrong, the credit crunch amounts to what ECB Executive Board member Juergen Stark describes as the region’s true “litmus test.”

“The current global financial distresses pose challenges of a significant and unprecedented nature to the ECB,” he said in a Nov. 14 speech.

Battling Inflation

After battling inflation above its 2 percent limit for much of its lifetime -- even raising its benchmark rate a quarter point to 4.25 percent in July -- the Frankfurt-based bank changed tack only in October. That was more than a year after its U.S. counterpart, the Federal Reserve, started lowering borrowing costs.

Trichet and colleagues suggested last week that the ECB’s response to recession will remain less aggressive than that of other central banks.

Avoiding Trap

While its 0.75 percentage-point rate cut on Dec. 4 was its deepest ever, the shift was dwarfed by reductions in the U.K. and Sweden. The ECB’s benchmark rate, at 2.5 percent, is still the highest among major economies, and Trichet indicated reluctance to lower it much more, saying the bank must avoid being “trapped” with “much too low” rates.

In a signal that rates may not be cut next month, Governing Council member Ewald Nowotny said in a Dec. 5 interview that the “situation is open.”

“This tells of an ECB not yet fully aware of how serious and bad is the recession hitting the euro area,” says Aurelio Maccario, chief euro-zone economist at Unicredit Group in Milan.

Already since July, the euro has dropped 20 percent against the dollar and is poised for its first yearly decline against the U.S. currency since 2005.

The bank also may be behind its counterparts in addressing the risk of deflation and how it will operate as interest rates get closer to zero. While Trichet dismisses the likelihood of a prolonged decline in prices, economists say he must assure investors he has a strategy for such an eventuality, as Fed Chairman Ben S. Bernanke did last week.

Plan B Needed

“The ECB should lay out as soon as possible a Plan B in order to dispel the notion that it might be running out of ammunition,” says Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London. Options include purchasing financial assets, buying commercial paper or easing collateral rules when making loans.

After cutting rates at an historic pace and releasing unlimited cash into the banking system, Trichet argues the bank always does what’s necessary to aid the euro economy. Investors are betting it will deliver more interest-rate cuts next year.

“If new decisions are needed, we will take new decisions,” Trichet told reporters last week. “We continue to look very carefully at the situation.”

As it guides its own economy through the turbulence, the ECB has also been forced to act beyond its borders by providing liquidity assistance to central banks in Poland and Hungary. Their economies have been hammered as investors dumped riskier assets, sending their currencies sliding.

Flight of Capital

The flight of capital has Eastern Europe’s emerging markets envying the protection that other countries with heavy debt burdens, such as Italy and Spain, enjoy with membership in the euro bloc. “There is stability and security in numbers,” says Barry Eichengreen, a professor at the University of California at Berkeley.

Economists at Morgan Stanley predict Poland and the Baltic states may seek admission in 2012 and Hungary in 2013, a year earlier than they foresaw in the middle of this year.

The dilemma for the ECB is that, while the desire to join the euro region is greater, qualifying is becoming harder: Membership requires countries to meet targets for inflation, budgets, currencies and interest rates -- a tall order in the middle of a recession.

Allowances have been made before. Greece assumed membership in 2001 on data that proved to be fudged. Inflation rebounded in Slovenia after it joined last year.

Compromises

The consequences of similar compromises would be greater now, says Paul Donovan, an economist at UBS AG in London. Enlargement would expose the euro area to more bank failures and make it harder to manage a one-size-fits-all monetary policy.

“While smaller countries outside the euro are more willing to join as a result of the crisis, the rest of the euro zone may be less willing to contemplate their admittance,” he says.

A widening gap between the region’s weakest and strongest economies would add to concern about a breakup. Harvard’s Feldstein says individual nations could still leave the euro bloc if they find monetary policy too tight or fiscal rules too onerous.

“The global economic crisis provides a severe test of the euro’s ability to survive in more troubled times,” he wrote in a column last month. He said the growing gap between interest rates on German bonds and on those of more heavily indebted Italy suggests investors “regard a breakup as a real possibility.” The gap, or spread, has more than quadrupled in a year to 1.4 percentage points.

Still, Elga Bartsch, chief European economist at Morgan Stanley in London, bets the crisis will fortify the currency union by broadening membership rather than shrinking it and boosting the reputation of its central bank.

“It’s in testing times that the euro area’s mettle is likely to be shown,” she says. “Economic and monetary union will likely pass this first real test of its policy framework.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

Dollar Correction Time? Finally?

Daily Forex Fundamentals | Written by Black Swan Capital | Dec 08 08 15:12 GMT |

Currency Currents
Key News

The euro area has so far defied Milton Friedman's forecast that it would splinter as soon as the “global economy hits a real bump.” (Bloomberg)
In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude. (Bloomberg)
Canada's housing sector is entering what RBC Economics calls a “cyclical downtown,” but says the risk of a U.S.-style meltdown is remote. (G&M)
Record numbers of companies will go bankrupt next year with 200,000 insolvencies in Europe alone and “an explosion” of failed businesses in the US, according to the world's largest credit insurer. (FT)

Quotable

“A product of the untalented, sold by the unprincipled to the utterly bewildered.

Al Capp (of abstract art)...think derivatives!

FX Trading - Dollar Correction Time? Finally?

If we could only forecast the stock market, then we'd be able to forecast the dollar - it seems. But we can forecast either of them - we can only make probability bets on both. And those probabilities are all in our head - guesswork at best there too.

But, based on Friday afternoon's huge reversal in fortunes in both the stock market and dollar, and adding in the carry-though today (stocks higher globally and buck bashing) on seeming euphoria over President-elect Obama's self-expressed gargantuan stimulus package that will surely get the US job market moving again, it looks like stocks could stage a decent bounce - here and elsewhere. That would mean a decent correction in the dollar.

US$ Index Daily: First Fib from the July dollar blast-off point comes in at 8194.

Dow Jones Industrial Average Daily: 28-day moving average has been strong resistance.

Trying to play a dollar correction has been a dangerous and unprofitable game however. We know that firsthand, as we have called about five of the last zero dollar corrections...that is a disclaimer.

Stay tuned.

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

Black Swan Capital's Currency Snapshot is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

U.K. Drops, China Rises in Economic ‘League Table,’ Says CEBR

By Simon Kennedy

Dec. 8 (Bloomberg) -- The financial crisis is recasting the league table of economies, with the U.K. sliding behind its European neighbors and China gaining on its richer rivals, according to the Centre for Economics and Business Research Ltd.

A recession and a decline in the sterling’s value pushed the U.K.’s gross domestic product below France’s this year and it will be passed by Italy in 2009, the CEBR said in a report published today. China has overtaken Germany and will top Japan in 2010 to become the world’s second-largest economy behind the U.S., it said.

“The recession associated with the credit crunch will change the position of many countries in the world’s GDP league table,” the London-based CEBR said in the report.

The study shows how countries that ran up debts during expansion such as the U.K. will now suffer, while emerging- market economies will wield increasingly more power in the global economy as they develop. Governments from the Group of Seven nations are under pressure to broaden their membership to reflect the changing shape of the world economy.

Brazil will rise to eighth-biggest economy from 10th by 2010 and India to 10th from 12th, the CEBR said. Canada will drop to 13th from ninth in the same period as its currency falls, it said.

The CEBR also said the U.K. and Italian economies will suffer the deepest downturns with 18 quarters of GDP below its previous peaks. Spain’s slump will last 16 quarters and Japan’s 11 quarters. The U.S. will rebound after nine quarters. China won’t suffer a single quarter of contracting growth, the report said.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

German Industrial Output Drops on Machinery Orders

By Gabi Thesing

Dec. 8 (Bloomberg) -- Industrial production in Germany, the world’s biggest exporter, fell more than economists forecast in October after demand for plant and machinery faltered.

Output dropped a seasonally adjusted 2.1 percent from September, the Economy Ministry in Berlin said today. Economists expected a decline of 1.9 percent, the median of 39 forecasts in a Bloomberg News survey showed. From a year earlier, production adjusted for working days fell 3.8 percent.

Companies are reining in manufacturing and shedding jobs as the global financial crisis that originated in the U.S. and pushed Europe into recession damped global demand. U.S. President elect Barack Obama pledged the biggest public works program in about 50 years to stimulate growth and preserve jobs in the world’s largest economy. German factory orders dropped more than expected in October after posting a record decline the previous month.

“The outlook for German industry is catastrophic,” said Juergen Michels, an economist at Citigroup Inc. in London. “While the sector was the locomotive for the boom it will now drag the economy into its worst recession since the end of World War II.” Michels predicts the economy will contract 1.5 percent next year.

The ministry revised last month’s production figure to a 3.3 percent decline from an initially reported 3.6 percent, according to today’s statement. This month’s drop was led by a 3.1 percent slump in investment goods such as plant and machinery.

Global Recession

The euro-area economy fell into its first recession in 15 years in the third quarter. The International Monetary Fund predicts it will shrink by 0.5 percent next year as the world’s advanced economies suffer their first simultaneous recession in more than 60 years. Global growth will slow to 2.2 percent, meeting the organization’s definition of a recession.

Germany exported goods for 969 billion euros ($1.25 trillion) last year, 65 percent of which went to European Union countries. The VDMA machine makers association said last week that orders for plant and machinery dropped 16 percent in October from a year earlier, led by a decline in export demand.

Governments worldwide have introduced packages to buttress their economies from the worst financial crisis since the Great Depression as more than $31 trillion has been erased from the value of global equities so far. German lawmakers last week backed a stimulus plan that aims to unlock 50 billion euros ($64 billion) of investment.

Severe Adversity

Even so, “the continuing adverse factors going into next year are to be rated as severe,” Germany’s Bundesbank said Dec.5. “Against the backdrop of slower orders for the past few months we expect industrial output to weaken in the coming months,” the Economy Ministry said.

Rheinmetall AG, the Dusseldorf-based auto-parts and weapons supplier, will eliminate 750 jobs, reduce fixed costs by 50 million euros and extend Christmas production breaks because of slowing demand from car makers.

The credit crunch and recessions in the U.S. and Europe have plunged the auto industry into what General Motors Corp. has called the worst crisis since 1945. The sales slump has prompted German automakers, including GM’s Opel unit, Daimler AG’s Mercedes-Benz and Bayerische Motoren Werke AG, to cut production by more than 200,000 vehicles this year, putting pressure on suppliers.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net

Nowotny Says ECB ‘Cautious,’ January Cut Not Certain

By Christian Vits

Dec. 8 (Bloomberg) -- European Central Bank council member Ewald Nowotny said the bank is in a wait-and-see mode, signaling it won’t necessarily cut interest rates again next month.

“The situation is open,” Nowotny said in an interview in Wuerzburg, Germany, late on Dec. 5. “We’ll observe how things are working, what’s happening, and then we’ll see. The ECB certainly doesn’t want to be pressured by expectations.”

Investors are betting the deepening economic downturn will prompt the ECB to cut its benchmark rate by a further 50 basis points at its next meeting on Jan. 15, Eonia forward contracts show. The ECB lowered the rate by 75 points to 2.5 percent last week, the biggest reduction in its ten-year history. Still, President Jean-Claude Trichet refused to be drawn on whether it would lower borrowing costs again.

“We’ve taken this step, which was a relatively big one for the ECB, and we’ll monitor further developments,” said Nowotny, who heads Austria’s central bank. “I favor a steady-hand policy. Having said that, one should always retain the flexibility to react to new developments. There’s certainly room for maneuver if the future economic development is significantly weaker” than expected.

“The remarks point to a pause in January,” said Juergen Michels, an economist at Citigroup Inc. in London. “However, the ECB will cut rates again in February as the bank’s view on economic growth next year will turn out to be too optimistic.”

Downside Risks

The ECB last week predicted the economy will shrink about 0.5 percent next year, which would be its first full-year contraction since 1993. The 15-nation euro region is already in recession after the global financial crisis pushed up lending costs and damped demand for European exports.

“To my mind, the downside risks are probably bigger than the upside risks,” said Nowotny, 64. Still, “the ECB is rather cautious with interest-rate cuts and doesn’t want to commit hastily to anything.” Asked if the bank is in a wait-and-see mode, Nowotny said “yes.”

While the ECB expects inflation to drop below its 2 percent limit next year and stay there through 2010, it hasn’t achieved its price-stability goal since 1999. The ECB raised rates as recently has July, citing the threat of a wage-price spiral.

Trichet said last week he wants to avoid “being trapped” at interest-rate levels that are “too low.”

Global Rate Cuts

The U.S. Federal Reserve has reduced its key rate by 325 points this year to 1 percent, and the Bank of England has lopped 2.5 percentage points off borrowing costs since Nov. 6, taking its main rate to 2 percent.

The ECB has lowered rates by 175 basis points since early October and flooded the banking system with additional liquidity. Nowotny suggested policy makers want to take stock before committing to further steps.

“There’s uncertainty regarding the extent to which the measures taken this quarter are starting to have an impact,” he said. “We’re in uncharted waters but we see several indications that the situation is normalizing. Money-market rates are declining, they’re moving to the right direction, even though only slowly.”

Nowotny said the ECB may look at ways to make the use of the bank’s deposit facility “less attractive” to commercial banks. Overnight deposits with the central bank have boomed as financial institutions choose to park money with the ECB rather than risk lending to others at a better rate.

Banks deposited 250.5 billion euros ($322 billion) on Dec. 5, the ECB said today. In the year to Sept. 15, deposits with the ECB averaged just 534 million euros a day.

‘More Clarity’

“If this development continues and the deposit facility continues to be used exceptionally, we’ll have to look at it,” Nowotny said. The interest-rate corridor “mustn’t necessarily be symmetrical. But first of all, we have to see how things evolve after the interest-rate cut.”

Lending between banks ran dry after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, shattering confidence and sending borrowing costs to records. The ECB has provided banks with unlimited cash in its weekly refinancing operations to rebuild confidence in the market and revive lending.

“After the closing of the balance sheets this year we’ll hopefully have more clarity and therefore more certainty,” Nowotny said. “The ECB has acted in a very expansionary way and against this background it’s wrong to assess the ECB’s policy as restrictive.”

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

Dutch Economy to Slip Into First Recession Since 1982, CPB Says

By Jurjen van de Pol

Dec. 8 (Bloomberg) -- The Dutch economy will enter its first recession since 1982 next year as the credit crisis curbs exports and the government budget shows a deficit, according to a forecast by the government planning agency CPB.

The economy in the Netherlands, the fifth-largest in the euro region, will contract 0.75 percent next year after growth of 2.25 percent this year, only to recover in 2010 when the economy expands 1 percent, the agency said in statement released in The Hague today. Inflation is forecast to slow to 1.5 percent next year and 1 percent in 2010 from 2.5 percent this year.

“The credit crisis is causing a decline in economic activity that hasn’t occurred since the beginning of the 1980s,” the agency said. “The economic decline will increase unemployment markedly.” Uncertainties about the timing of the recovery are considerable, the agency added.

Europe’s economy slipped into a recession in the third quarter and the International Monetary Fund predicts the worst global slump in almost three decades. The Dutch economy came to a standstill in the second and third quarters, the national statistics bureau said last month.

This year’s budget surplus of 1.3 percent of gross domestic product will turn into a deficit of 1.2 percent next year and a deficit of 2.4 percent in 2010 as tax revenue and natural gas proceeds decline while spending on unemployment benefits rises, the agency said.

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

EDF Extends Offer for British Energy, Holds 92.7%

By Tara Patel

Dec. 8 (Bloomberg) -- Electricite de France SA, Europe’s biggest power producer, extended the cash portion of its 12.5 billion-pound ($18.7 billion) takeover offer for British Energy Group Plc to Jan. 5 after acquiring 92.7 percent of the company.

British Energy stockholders representing about 1.49 billion shares accepted the bid, including those with 207.6 million shares opting for the so-called Contingent Value Rights, EDF said today in a statement. The CVRs give holders a slice of profits from existing U.K. nuclear power plants run by the East Kilbride, Scotland-based company.

The French utility, whose holding in British Energy includes stakes from Invesco Ltd. and the U.K. government, said last week it expects the purchase to be cleared by the European Commission by Dec. 22 and become unconditional early next month. In the meantime, EDF will submit concessions for the deal to competitors and customers in the U.K. for market testing.

The Paris-based utility, the world’s biggest operator of nuclear plants, agreed in September to buy British Energy to become the U.K.’s largest power producer and gain control of eight sites to build reactors. The purchase will add commercial clients to the 5 million households supplied by EDF’s U.K. unit.

The bid for British Energy is part of EDF’s strategy to expand its nuclear operations outside France, where it operates 58 reactors.

Last week, EDF offered to buy half the atomic business of Baltimore-based Constellation Energy Group Inc. for $4.5 billion. The acquisition would give the French company generation capacity in North America and scupper a competing bid from billionaire Warren Buffett’s MidAmerican Energy Holdings Co.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

Obama to Spur Economy With Infrastructure Investment

By Edwin Chen and Julianna Goldman

Dec. 8 (Bloomberg) -- President-elect Barack Obama is focusing his economic recovery strategy on making the biggest investment in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system a half- century ago.

Speaking yesterday at a Chicago news conference and on NBC’s “Meet the Press,” Obama said state governors have many such projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs.

He declined to specify a price tag for the stimulus, saying his advisers are “busy working, crunching the numbers, looking at the macroeconomic data to make a determination as to what the size and the scope of the economic recovery plan needs to be. But it is going to be substantial.”

The remarks sparked a stock market rally, with oil and mining shares leading indexes higher in Europe and Asia. The MSCI World Index added 2.7 percent to 871.09 at 10:01 a.m. in London. Futures on the Standard & Poor’s 500 Index expiring in December surged 2.4 percent to 893.1.

Dealing with the loss of jobs, frozen credit markets, falling home prices and other signs of economic turmoil is “my number one priority,” Obama told NBC. Later at the Chicago news conference, he said “more aggressive steps” are needed to cope with the housing crisis.

Even with the prospect of a federal budget shortfall approaching $1 trillion, “we can’t worry, short term, about the deficit,” he said on NBC. “We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”

Housing Crisis

Obama also said in Chicago that his economic team is working on plans to address the housing crisis, noting that he hasn’t seen the “kind of aggressive steps in the housing market to stem foreclosures” that he wants to see from President George W. Bush. Obama’s transition team has spoken with the outgoing administration about the situation, he said.

“If it is not done during the transition, it will be done by me,” Obama said.

“We will emerge stronger than we are right now,” Obama said at the Chicago news conference, called to announce that former Army Chief of Staff Eric Shinseki is his choice to head the U.S. Department of Veterans Affairs.

He also indicated that proposals -- which could include updating health care administration and public schools -- would be reviewed as part of his broader plan.

Worsening Economy

Earlier, on NBC, Obama said the U.S. recession will worsen before a recovery takes hold and that he will offer a plan to boost the economy “equal to the task.”

The economy has shown signs of worsening since the Nov. 4 election. The Labor Department reported Dec. 5 that employers cut 533,000 workers last month, bringing job losses this year to 1.91 million. U.S. stocks fell for the fourth time in five weeks as the worsening job market added to concern the recession is deepening.

“Things are going to get worse before they get better,” Obama, 47, who takes office on Jan. 20, said on NBC. In Chicago, Obama said the recession is still “rippling” through the economy.

Tax Rates

Lawmakers in Congress suggested last month that the size of such a program may be between $500 billion and $700 billion. Jared Bernstein, named as economic policy director for Vice President-elect Joe Biden, said after the job numbers were released Dec. 5 that “it’s fair to assume the upper bound on a stimulus package is going up, not down.”

Obama sidestepped questions about whether he would delay making good on his campaign promise to repeal Bush administration tax cuts for those making $250,000 or more annually. He said his economic team is studying whether to raise those rates right away or wait until the tax cuts to expire on schedule in 2011.

During the hour-long NBC interview, Obama also said that while it’s not an option to let U.S. automakers “collapse” amid a recession and throw more workers out of jobs, any government loans or aid they get must be conditioned on the companies revamping their business and their products.

Auto Industry

That also may mean management changes at General Motors Corp., Ford Motor Co. or Chrysler LLC, he said. The executives must abandon their “head-in-the-sand” approach and develop a “sustainable business model” that begins by building fuel efficient vehicles.

“They can’t keep on putting off the changes that they frankly should have made 20 or 30 years ago,” Obama said.

He called for “a new ethic of responsibility” for corporate leaders when it comes to executive compensation, saying they should be willing to give up some pay and bonuses to allow more workers to keep their jobs, retain medical insurance and stay in their homes.

“That kind of notion of shared benefits and burdens is something that I think has been lost for too long and is something that I’d like to see restored,” he said.

The circumstances aren’t unique to the auto industry, he added. “We have seen that across the board. Certainly we saw it on Wall Street.”

To contact the reporter on this story: Edwin Chen in Washington at echen32@bloomberg.net; To contact the reporter on this story: Julianna Goldman in Chicago at jgoldman6@bloomberg.net

Chesapeake Gains 24% in Pre-Market Trading After Cutting Budget

By Dan Lonkevich

Dec. 8 (Bloomberg) -- Chesapeake Energy Corp., the second- biggest independent U.S. natural-gas producer, gained 24 percent in pre-market trading after saying it will cut spending and plans to build cash resources because of a plunge in prices.

Chesapeake, based in Oklahoma City, rose to $14.05 as of 8:47 a.m. Before today, the shares had fallen 71 percent this year. Gas futures have dropped 59 percent from a high of $13.694 per million British thermal units this year on the New York Mercantile Exchange. Gas fell 1.5 percent to $5.655 today.

Chesapeake said yesterday it will cut its 2009 and 2010 capital spending by a combined $2.9 billion, or 31 percent. It also reduced its leasehold and producing-property acquisition budget for the two years by a combined $2.2 billion, or 78 percent. Since July 31, the company said it has reduced spending by $9.8 billion.

“The plan is to live within their means, which is what investors were looking for,” Jason Gammel, an analyst at Macquarie Bank Ltd. in New York, said in an interview. Gammel rates Chesapeake shares “outperform” and doesn’t own any.

Devon Energy Corp. is the largest U.S. independent oil and gas producer. Independent producers are those without refining assets.

(Chesapeake’s conference call to discuss its plans started at 9 a.m. New York time. To listen, dial +1-913-312-1236 or +1- 888-211-7383 and enter passcode 1193464.)

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

Eni Advances After Libya Says It May Purchase Stake

By Gianluca Baratti and Maher Chmaytelli

Dec. 8 (Bloomberg) -- Eni SpA surged in Milan trading after the Italian government said the Libyan Energy Fund is interested in buying a stake in Italy’s biggest oil company.

Eni climbed as much as 11 percent to 17.07 euros, its biggest gain since Nov. 24, and was trading up 1.59 euros at 16.98 euros, as of 2:57 p.m. local time, valuing the company at 68 billion euros.

Oil-rich nations have been showing greater interest in European companies since the financial crisis sent market values plummeting. European leaders such as French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi have suggested oil-producing countries might try to exploit falling share prices to bid for domestic companies.

“They will have to buy any stake in the open market, because the Italian government will not go below its 30 percent stake,” said Irene Himona, a London-based oil and gas analyst at Exane BNP Paribas, who has an “outperform” rating on the stock. “There is not much incentive to sell because the stock is at such a low price that Eni’s dividend yield, using last Friday’s closing price, is 9.1 percent per year.”

Libya could buy as much as 10 percent of Eni for as much as 9 billion euros ($11.5 billion), Il Sole 24 Ore said yesterday, citing Hafed Gaddur, Libya’s Ambassador to Italy. Eni said “it will provide the market with information on its shareholdings in line with regulations.”

‘Expressed Our Interest’

The Libyan government said on its Web site Dec. 6 it had “indicated to the Italian government an interest in acquiring a share in the capital of Eni” and that it would not “interfere in the company’s management in any way.”

The Italian Finance Ministry controls about 30 percent of Eni, which employs about 76,000 workers worldwide. Libya will buy shares of Eni “when the market is right,” the North African nation’s top oil official said today in an interview.

“Eni is one of the opportunities we’re looking at,” said Shokri Ghanem, the head of Libya’s National Oil Corp., in a telephone interview from Tripoli. “We expressed our interest to the Italian government and we will buy shares when we feel the market is right,” he said, without specifying a price at which Libya would buy Eni stock.

In Italy, Libyan sovereign funds are discussing a possible investment in Telecom Italia SpA, said Saif al-Islam Qaddafi, son of the country’s leader, Muammar Qaddafi, at a conference on Oct. 30. Libyan investors in October increased their stake in UniCredit SpA to at least 4.9 percent to become the Italian bank’s second-biggest shareholder.

Italy is the biggest trading partner of Libya, its former North African colony.

Italy’s benchmark S&P/MIB Index has fallen 53 percent this year and hit an all-time low on Dec. 5.

To contact the reporter on this story: Gianluca Baratti in Madrid at gbaratti@bloomberg.net

Contango Pays Most in Decade as Shell Stores Crude

By Robert Tuttle and Alexander Kwiatkowski

Dec. 8 (Bloomberg) -- In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.

Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.

Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 72 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 40 percent this year and two-year government notes yield 0.9 percent.

“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”

Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.

Oil Storage

The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts. U.S. crude inventories rose 11 percent this year to 320.4 million barrels, according to the Energy Department.

“All the market operators keep placing oil in storage,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “Even though the contango is steep, it could get steeper.”

Crude oil for January delivery rose as much as $2.66, or 6.5 percent, to $43.47 a barrel in electronic trading on the New York Mercantile Exchange today. It was at $42.86 at 11:53 a.m. London time.

Blanch said last week that oil may fall to $25 a barrel should the Chinese economy slip into recession and the Organization of Petroleum Exporting Countries fail to take enough crude off the market.

Shell, Koch

The Hague-based Shell, Europe’s largest oil company, last month chartered the supertanker Leander with an option to store North Sea Forties crude, according to Paris shipbroker Barry Rogliano Salles. The vessel arrived at Scotland’s Hound Point, the loading port for Forties, on Nov. 20, according to tracking data compiled by Bloomberg. Sally Hepton, a London-based spokeswoman at Shell, declined to comment.

Shell and Koch Industries Inc. of Wichita, Kansas, also hired four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead. They took Very Large Crude Carriers, or VLCCs, to move oil from the Middle East, said Bruce Kahler, a broker at Lone Star, R.S. Platou in Houston.

Koch Supply & Trading LP spokeswoman Katie Stavinoha declined to comment.

Tanker Shares

Demand for tankers to store crude oil may help revive the share prices of shipowners including Knightsbridge Tankers Ltd., down 43 percent this year, economist Dennis Gartman said in today’s edition of his Gartman Letter.

“If contango has gone so far in crude oil where Shell and Koch and others are chartering ships to store oil on the water, then demand for tankers is rising,” he said. “Shares of the tanker companies must be ‘cheap.’”

The cost to store crude at Cushing averages about 35 cents a barrel a month, Lipow said in an interview. The cost of financing the crude would also be about 35 cents a month. A trader would have to take ownership of the oil in January 2009 and deliver it during December, according to Nymex rules.

A supertanker would cost about 90 cents a barrel per month for storage, according to data from shipbroker Galbraith’s Ltd. The amount varies, depending on the duration of the storage.

“The economics make sense if you can find somewhere to store the oil,” said Tony Quinn, managing director of Lincolnshire, U.K.-based Global Storage Agency Ltd., a bulk liquid storage terminal consultant. With depots in Europe almost full, “companies don’t have anything else they can do, so are chartering commercial tankers for floating storage.”

Reduced Credit

The reduced availability of credit may make it harder for traders and companies to purchase and store oil, said Merrill’s Blanch and Societe Generale’s Wittner.

“With this sort of contango, we would probably have seen a larger stock build were it not for the credit crunch,” said Olivier Jakob, managing director of consultant PetroMatrix in Zug, Switzerland.

The opportunity to benefit from the storage trade may disappear in weeks should OPEC cut output after its Dec. 17 meeting in Algeria. The group postponed a decision on production at its Nov. 29 gathering in Cairo.

“It’s still quite profitable as long as inventories are ample and OPEC does not remove the barrels from the market,” said Johannes Benigni, chief executive officer at Vienna-based consultants JBC Energy GmbH.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net; Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

Rand Snaps Two-Day Loss as Stocks Rally on U.S. Stimulus Plan

By Garth Theunissen

Dec. 8 (Bloomberg) -- South Africa’s rand rose against the dollar as the nation’s stocks rallied with those around the world after the U.S. and India unveiled economic stimulus packages to ease the effects of a global recession.

The rand snapped a two-day decline after U.S. President- elect Barack Obama pledged the biggest public works program since the 1950’s and India cut interest rates and increased government spending. South Africa’s currency also rallied on speculation interest-rate cuts will bolster Africa’s biggest economy.

“The fiscal stimulus being poured into the global economic system is very significant for growth prospects,” said George Glynos, managing director in Johannesburg at Econometrix Treasury Management, which advises clients on bond and foreign- exchange transactions. “It’s resulted in positive equity sentiment which has dragged down risk aversion, and that’s been good for riskier assets like the rand.”

The rand advanced as much as 1.4 percent to 10.1610 per dollar and was at 10.2040 by 1:54 p.m. in Johannesburg, from 10.3050 on Dec. 5. It weakened 0.3 percent to 13.1442 per euro.

It will trade in a range of 10.05 to 10.35 per dollar today and will “strengthen gradually towards year-end, potentially reaching a level of 9.50 by the start of 2009,” Glynos said.

“The rand is undervalued at the moment so exporters should take advantage of current levels to cash in foreign earnings,” he said. “We recommend traders sell dollars into any rand rally at the moment.”

Stock Gains

Stock markets climbed from Tokyo to Johannesburg after Obama said on Dec. 6 he’s planning the biggest public investment program since President Dwight D. Eisenhower created the interstate highway system to create and preserve 2.5 million jobs in the world’s biggest economy. Governments around the world introduced measures this year to buttress their economies against the worst financial crisis since the Great Depression.

South Africa’s FTSE/JSE Africa All Share Index of equities climbed as much as 5.3 percent, the biggest intraday gain since Nov. 25. Europe’s Dow Jones Stoxx 600 Index added 5 percent and the MSCI Asia Pacific Index rose 4.3 percent. U.S. stock-index futures advanced.

Indian Prime Minister Manmohan Singh said his government plans to allocate an extra 200 billion rupees ($4 billion) as part of a 3-trillion-rupee spending plan for the rest of the financial year ending March 31. The Reserve Bank of India reduced borrowing costs on Dec. 6 for the third time since October.

Rates Outlook

The rand also strengthened on bets the South African Reserve Bank will lower the repurchase rate by a half point to 11.5 percent this week, according to 12 of 17 economists surveyed by Bloomberg. Ten interest-rate increases since June 2006 sapped consumer spending, helping push the retail industry into recession and restricting economic growth to a decade low.

Central banks in the euro region, the U.K., Sweden, New Zealand, Denmark and Indonesia last week reduced their key rates to spur economic growth.

Government bonds fell, with the yield on the benchmark 13.5 percent security due September 2015 rising two basis points to 8.11 percent. The yield on the 13 percent note maturing in August 2010 climbed three basis points to 7.97 percent. Yields move inversely to bond prices.

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

Euro Dreams Fade for Zloty, Forint, Koruna on Slump

By Ewa Krukowska

Dec. 8 (Bloomberg) -- The slowing global economy is halting the spread of monetary union into eastern Europe and may lead to another year of losses for the Polish zloty, Hungarian forint and Czech koruna.

The zloty fell 21 percent against the euro from a record high in July as Poland headed for its biggest economic slowdown in almost a decade, while Hungary turned to the International Monetary Fund, World Bank and European Union for a bailout as the forint weakened 15 percent. Koruna volatility almost tripled as it depreciated 12 percent. The two-year mandatory trial period before adopting the euro allows swings of no more than 15 percent.

Poland, Hungary and the Czech Republic joined the European Union in 2004, committing to enter the 10 trillion-euro ($12.7 trillion) economy of countries sharing a single currency. The dream faded since July as the worst global financial crisis since the Great Depression drove investors from emerging markets. Now, New York-based Morgan Stanley and UBS AG in Zurich predict more foreign exchange losses in eastern Europe.

Hungary’s plans to enter the pre-euro stability test by 2010 are a “mirage,” said Istvan Hamecz, chief executive officer of OTP Fund Management, Hungary’s largest fund management company, with $6.4 billion of assets. “Nobody needs us in that club.”

Less than three months after announcing a target of 2012, Polish Finance Minister Jacek Rostowski said the date isn’t “dogma.” The main opposition party says rushing into the currency will hurt growth and trigger inflation.

Unacceptable Volatility

The zloty rose 0.4 percent to 3.8640 against the euro at 10:07 a.m. in Warsaw and the koruna advanced 1.1 percent to 25.590. The forint strengthened 1.2 percent to 263.43 per euro, compared with a record high of 227.61 on July 21 and a record low of 286.55 on Oct. 23.

Only Iceland’s krona has performed worse against the euro and dollar since June among currencies in Europe, the Middle East and Africa.

Converting to the euro -- which began in 1999 and now has 15 members ranging from Portugal to Slovenia and Italy to Germany --requires candidates prove the stability of their currencies and economies.

Three-month volatility in the forint rose to a record 25.8 percent, up from 5 percent at the start of the year. Swings in the zloty jumped to 26 percent from 5.7 percent in January, and to 17.7 percent for the koruna from 6.37.

Inflation Challenge

Polish growth may slow to 0.4 percent next year from 4.8 percent this year, making it impossible for the government to keep its fiscal deficit below the limit of 3 percent of gross domestic product needed to qualify for euro adoption, said Michal Dybula, central European economist at BNP Paribas in Warsaw. The deficit, based on EU methodology, may rise to 3.7 percent of GDP next year from 2.5 percent this year, he forecast.

Inflation will also be a challenge. The average 12-month increase in consumer prices must be within 1.5 percentage points of the average in the three EU nations with the slowest growth. The rate was 6.6 percent in Hungary in October, compared with an EU ceiling of 4.2 percent for that month.

Hungary’s central bank unexpectedly cut its main interest rate by half-point to 10.5 percent today. Polish and Czech policy makers lowered rates in November and signaled more monetary easing was possible.

Target Dates

While European Union Monetary Affairs Commissioner Joaquin Almunia endorsed Poland’s euro-adoption plan on Nov. 26, he also said the target date could change. Poland may need to delay until 2015 or 2016 because the government is unlikely to win support to pass laws needed to adopt the euro, said Citigroup Inc. senior economist Piotr Kalisz in Warsaw.

“Given the currency volatility and the deepening slowdown, the euro adoption target is not realistic,” Kalisz said. “The risk aversion and volatility on the market will last for another two or three quarters.”

The Czech central bank recommended the government avoid setting a date for euro adoption this year amid the financial crisis. Opposition leader Jiri Paroubek last week offered his lawmakers’ support for the government during its European Union presidency, starting on Jan. 1, in return for an agreement to start talks on setting a euro-adoption date.

Reserves

Hungarian Finance Minister Janos Veres said this month the country could join the pre-euro exchange-rate mechanism, known as ERM-2, in 2010 even though the government’s 10-year bond yields are 5.4 percentage points higher Germany’s. Euro criteria say they must converge to a gap of no more than 2 percentage points.

The 2010 date is already later than the 2009 target cited last month by Peter Kiss, the minister in charge of the Prime Minister’s office. Even the new deadline may not be realistic after the country was forced to turn to international lenders for a 20-billion euro loan.

Once Poland, Hungary or the Czech Republic join ERM-2, the zloty, forint and koruna will be pegged to the euro and allowed to trade in a 15-percent band. Their central banks will need to use reserves when their currencies are in jeopardy of breaching the limits.

Poland’s foreign-currency reserves shrank to $55.9 billion in November, from $62.1 billion in June. In euro terms, they rose to 3.4 billion euros, from 39.3 billion euros, as the single currency declined against the dollar.

Frozen Credit

Hungary’s bailout helped boost foreign reserves to 22.6 billion euros in November from 17 billion euros in October. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings cut their foreign-debt ratings for the country.

“The euro won’t solve anything,” OTP’s Hamecz said. “The country has severe structural problems. Those structural problems are easier to solve outside the euro than inside the euro.”

Introduced in 1999 with 11 members, the euro is now the world’s second most-traded currency after the dollar. Greece, Malta, Cyprus and Slovenia have since switched their currencies to the euro and Slovakia will become the 16th in January.

Slovakia’s central bank forecast that membership will boost its trade within the monetary union by as much as 90 percent over the next two decades and lift GDP as much as 20 percent.

The global economic slowdown prompted by frozen credit markets and $978 billion of losses and writedowns among the world’s biggest financial institutions has driven investors away from emerging markets, including Poland, Hungary and the Czech Republic, where benchmark stock indexes have fallen at least 50 percent this year.

Risk-Reversal Rate

“People have been growing increasingly convinced that the crisis will delay euro adoption, but I believe we’ll see some positive news, which will provide a boost for the zloty and the forint,” said David Hauner, a strategist in London for Bank of America Corp. “In Poland and Hungary the crisis has increased the public support for euro adoption and I’m keeping my bet that both countries will enter ERM-2 in the second half of 2009. The more euro-skeptic Czechs may do it a year later.”

Currency traders have never been more bearish, based on the cost of options to hedge against foreign-exchange losses.

The difference in the costs between three-month puts, which grant the right to sell the zloty, and calls, which allow for purchases, has risen to a record 7.5 percentage points.

The so-called risk-reversal rate, used as an indicator of sentiment in the foreign-exchange market, shows traders are more bearish on the zloty and forint than any other of the east European currencies except the Romanian leu.

‘Severe Crisis’

“I would remain cautious on central European currencies in three to six months,” said Benoit Anne, emerging-market strategist at Merrill Lynch in London. “We’re going through a severe crisis, with repercussions for all emerging markets. This will probably delay the adoption of the euro in the region.”

Anne predicts the zloty will fall 9 percent to 4.25 against the euro by June. The forint will depreciate 14 percent to a record low 305 per euro and the koruna will drop 2.5 percent to 26.5 versus the euro, he said.

The Polish and Czech governments both cut their growth forecasts to 3.7 percent next year from 4.8 percent amid the seizure in global credit markets. Hungary’s cabinet expects the economy to shrink next year by 1 percent, the biggest contraction since 1993.

Further reductions may add to pressure on the zloty and put into question the feasibility of Poland’s euro-adoption “within the current time-frame,” said Roderick Ngotho, currency strategist for Europe, the Middle East and Africa at UBS AG in London.

“We are negative on all currencies in the EMEA region,” said Ngotho, who expects the forint will drop 3 percent to 275 per euro in the next three months. “They should remain relatively weak in 2009.”

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net

Canada’s Dollar Gains as U.S. Currency Loses Haven Appeal

By Chris Fournier

Dec. 8 (Bloomberg) -- Canada’s currency rose as President- elect Barack Obama’s pledge to spend the most on infrastructure since the 1950s reduced the U.S. currency’s haven appeal.

“It’s a risk appetite move,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “Across the currency board, we’re seeing the U.S. dollar weaker.”

The Canadian dollar appreciated as much as 2 percent to C$1.2457 per U.S. dollar, from C$1.2702 on Dec. 5, the biggest intraday gain since Nov. 24. The currency traded at C$1.2525 at 7:57 a.m. in Toronto. One Canadian dollar buys 79.91 U.S. cents.

The U.S. dollar weakened against all of the 16 most actively traded currencies except Japan’s yen and Brazil’s real.

In remarks on NBC’s “Meet the Press” program yesterday, Obama reiterated a commitment to the biggest investments in U.S. infrastructure since President Dwight D. Eisenhower created the interstate highway system a half-century ago.

“The market is heavily focused on this news from Barack Obama,” said Gallo, who predicts the Canadian dollar may strengthen to C$1.20 by year-end.

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

Copper Gains in London, Ending Worst Losing Streak in a Decade

By Chanyaporn Chanjaroen

Dec. 8 (Bloomberg) -- Copper rallied from its worst losing streak in a decade in London, buoyed by a weaker dollar and U.S. President-elect Barack Obama’s pledge to begin the biggest public works program in about 50 years. Aluminum and zinc also advanced.

The relationship between copper and the euro-dollar exchange rate has strengthened, with a correlation of 0.6 this quarter, compared with 0.44 in the first three quarters of the year. A reading of one would suggest the two move in tandem.

“All metals have been oversold,” said Michael Khosrowpour, an analyst at Triland Metals Ltd. in London. “They rose today in conjunction with the dollar’s decline.”

Copper for delivery in three months advanced $198, or 6.5 percent, to $3,248 a ton as of 10:47 a.m. local time, paring this year’s loss to 51 percent. The metal had fallen for seven consecutive sessions, the longest stretch since December 1998.

Commodities rebounded from last week’s losses on speculation spending on roads, bridges and repairing school buildings will boost raw material demand and engineer a recovery in the world’s largest economy. Obama said his economic plan would create or preserve more than 2.5 million jobs.

LME-monitored copper stockpiles added 3,425 tons, or 1.2 percent, to 300,725 tons, the exchange said, the highest since Feb. 20, 2004. Combined with those tracked by exchanges in New York and Shanghai, they totaled 335,947 tons, or 6.5 days of global consumption, according to Bloomberg calculation. Last year’s average was 4.9 days.

Short Positions

Hedge-fund managers and other large speculators increased their net-short position in New York copper futures in the week ended Dec. 2 by 10 percent, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 17,722 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report on Dec. 5.

Young Poong Corp., South Korea’s second-largest zinc producer, started reducing output by 10 percent today because of weakening demand and falling prices, the company said. The company has a capacity to produce 303,000 tons of zinc a year, according to its Web site.

Among other LME-traded metals, aluminum increased $46, or 3.1 percent, to $1,537 a ton, lead rose $34 to $1,004 a ton and zinc advanced $52 to $1,124 a ton. Tin gained $650, or 5.7 percent, to $12,050 a ton.

-- With reporting by Shinhye Kang in Seoul. Editors: Stuart Wallace, James Ludden.

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

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