US Dollar: Further Weakness Ahead?

Daily Forex Fundamentals | Written by GFT | Dec 13 08 05:31 GMT |

EXPECTATIONS FOR UPCOMING FED MEETINGS ** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE US DOLLAR: FURTHER WEAKNESS AHEAD? The automaker bailout drama has exerted its toll on the financial markets. Last night, news that the bailout deal fell apart in the Senate drove the US dollar to a 13 year low against the Japanese Yen. Almost immediately, the dollar rebounded and its recovery accelerated after reports that the White House may provide assistance to the automakers by tapping the TARP funds. Stocks have rebounded from negative territory, but the unconvincing rally in both the currency and equity markets suggest that traders do not know what to make of the automaker bailout saga, which is sure to drag out into the New Year. With the Federal Reserve expected to cut interest rates on Tuesday, the US dollar could remain weak going into the rate decision. Retail Sales and Producer Prices = Recession and Deflation Even though US retail sales and producer prices were basically in line with expectations, the data was very weak and confirms that the Federal Reserve will need to cut interest rates again on Tuesday. Consumer spending fell for the fifth month in a row while producer prices dropped for the second straight month pointing to recessionary and deflationary conditions in US. The two biggest inputs into GDP are retail sales and trade. Consumers cut back spending more aggressively in October and November which suggests that GDP growth could take a big dive in the fourth quarter, especially with the widening trade deficit. The biggest drop in consumer spending came from gasoline station receipts. Prices at the pump have fallen more than 50 percent since the summer and gas stations have suffered as a result. The only silver lining in the retail sales report is the fact that not every sector saw slower sales. Electronics and sporting goods were in demand but the rebound after 4 consecutive months of softer spending is likely related to Black Friday sales. Consumer confidence for the month of December improved, which was a bit surprising but it is important to remember that the index remains near 1980 levels. Federal Reserve: 50bp vs. 75bp Although we are putting our confidence in the Federal Reserve and hope that they will be proactive in cutting rates by 75bp on Tuesday, a smaller 50bp rate cut is still on the table. The majority of economists are still calling only a half point rate cut, but as of Friday afternoon, Fed fund futures are pricing in a 70 percent chance of a 75bp rate cut. Taking interest rates to zero is all but inevitable but it is not clear how quickly the Federal Reserve wants to make that move. If the Fed cuts by 75bp on Tuesday, then zero interest rates will probably be reached at the March meeting but if they cut by 50bp instead, then we may not see rates at zero until late April. The Federal Reserve has extended their meeting to 2 days to explore all options but the bottom line is that they have to decide whether to deliver more stimulus now or postpone it for later. Both economists and Fed fund futures have incorrectly forecasted the Fed's move in the past and this time around one of them will be wrong. Implications of the Fed's Rate Decision on Currencies The weakness of the US dollar against the Japanese Yen reflects the market's expectation that after Tuesday, the US dollar will yield less than the Japanese Yen. If that comes to reality, we could see further weakness in the US dollar against all of the major currency pairs but if it doesn't and the Fed only cuts by 50bp, there could be a violent recovery in the US dollar. Either way, currency traders need to know that there could be a lot of volatility following the interest rate decision. The FOMC statement will also be heavily scrutinized for any indication of what the Federal Reserve will do next and because of that, traders need to be particularly careful with their positions going into the rate decision. The outcome could set the tone for trading until the end of the year. In addition to the FOMC meeting, consumer prices, the current account balance, housing and manufacturing data are due for release in the coming week. EUR/USD: JANUARY RATE CUT NOT A DONE DEAL Of all the high yielding currencies, the Euro was the only one to appreciate against the US dollar today. The move was certainly not spurred by economic data, which continued to disappoint, but instead by the market's realization that the Euro will remain the third highest yielding currency for some time. Industrial production dropped 1.2 percent in October while French business confidence plunged. Labor costs rose 4 percent, which may be a bit worrisome for the ECB, who is obsessed with inflation pressures. Higher labor markets could be yet another reason why they may want to refrain from cutting interest rates as aggressively as their peers. Yesterday, ECB member Weber said that a January rate cut is not a done deal. Comments today from Mersch and Constancio confirm that the central bank have not made up their minds yet. Both ECB members said there is still room for maneuver but everything is data dependent and they may not have much new information before February or March. Although there are a lot of important economic data due for release next week, the ECB may be alluding to the fact they want to see how the 75bp rate cut impacts the financial markets and the economy. Eurozone purchasing manager indices are due for release on Tuesday, consumer prices on Wednesday, German IFO index on Thursday and German producer prices on Friday. EUR/GBP: NEAR TERM TOP? It has been a tough week for the British pound, which fell to a record low against the Euro. In the past, the big action in the pound was against the US dollar and the Japanese Yen, while EUR/GBP would range trade away. However over the past few months, there has been a huge divergence between growth and monetary policy in the UK and growth in the Eurozone. The Eurozone economy has held up better than the UK but more importantly, the BoE has cut interest rates aggressively while the ECB has not. This has led to a dramatic run in EUR/GBP. Not only has the currency pair appreciated more than 16 percent in the past 2 months, but it rallied every single day this week. The strength of the Euro and the weakness of the British pound should be the factors that engineer a reversal in the currency pair next year. The weakness of the British pound and the aggressive interest rate cuts by the BoE will help to turn economy around in the second half of the year. The comparably restrictive monetary policy in the Eurozone and the strength of the Euro could crimp growth and delay a recovery. The price action in the EUR/GBP today suggests that some investors may already be realizing this notion. It will be a very busy week in the UK with consumer prices, the BoE minutes, employment data and retail sales due for release. AUD/USD: RISK AVERSION HITS THE COMMODITY CURRENCIES Commodity currencies are largely under pressure as new apprehensions have erupted in the face of the failure of the US auto bailout. Once again, risk aversion takes hold of the market. Concerns about the recession-prone Canadian economy have reignited today as Capacity Utilization falls to a record low. The figure, established in 1987, will prove to be a certain hindrance on growth as any level of corporate investment spending has been relinquished. New Motor Vehicle Sales fell -0.9%, after posting a gain of 2.4% last month. The signs that consumer and business spending will face renewed pressure should present an intensifying headache for the Bank of Canada. Thursday's Retail Sales and Friday's Consumer Price report will give more color on the state of the Canadian economy. The Reserve Bank of New Zealand has boosted its efforts in restoring liquidity for lending institutions by broadening its acceptance of investment vehicles to corporate bonds. The bank will now purchase investment grade dollar denominated corporate bonds in their open market operations. Next week's most important Australian economic figures will be the RBA minutes and Westpac Leading Index on Tuesday, New Home Sales on Wednesday, and Quarterly Wage Agreements on Friday. For New Zealand, we expect Business Confidence on Thursday. USD/JPY: WILL THE BOJ INTERVENE? The Japanese Yen surged to a 13 year high against the US dollar after news that the bailout plan for automakers has failed to pass the Senate. Although USD/JPY rebounded almost instantly after hitting a low of 88.22, the weakness of the currency leads many traders to wonder if and when the Bank of Japan will intervene. In our opinion, BoJ intervention will not happen anytime soon. As an export dependent nation, a strong currency is not in Japan's best interest. However unlike the past where the BoJ has intervened when USD/JPY fell below 105 and 100, we may not see any action by the Japanese government this time around. Since the problems are inherent in the US and the Eurozone, intervening at this time may be counterproductive for the Japanese. The only type of intervention that has ever worked is coordinated intervention. The BoJ will have a very tough time convincing Americans to take any steps that would lead to further strength in the US dollar. The Japanese government needs to stand aside and allow the US and Eurozone governments to take their own steps to spur growth. The Bank of Japan has an interest rate decision scheduled next week - no moves are expected from the central bank. USD/JPY: Currency in Play for Next 24 Hours The currency in play on Monday will be USD/JPY. Japan is set to release Tankan Surveys on Sunday at 6:50PM EST or 23:50GMT. The U.S. is set to release its Empire Manufacturing survey along with TIC flow at 8:30AM EST or 13:30GMT and 9:00AM EST or 14:00GMT on Monday, respectively. After hitting a 13 year low, USD/JPY retraced on the day forming a textbook example of candlestick hammer. The pair remains in the Sell-Zone that was derived using the Bollinger Bands. Although today's drastic recovery may signal a reversal for the currency pair, a close above 92.50 would be needed for the downtrend to be negated. Nevertheless, it is important to be cautious as volatility expanded drastically. Short term support is at the 2nd Standard Deviation of the Bollinger Bands at 90.60. Below that is today's 13-year low of 88.30. Resistance is placed at 92.50 which is the 1st Standard Deviation of the Bollinger Bands as well as 10-day SMA. The Tankan survey will contribute to the increase in volatility, for which, support and resistance may be tested. Kathy Lien http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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US Dollar Outlook Hinges Upon Federal Reserve Rate Decision Next Week - What Will They Do?

Daily Forex Fundamentals | Written by DailyFX | Dec 13 08 05:02 GMT |

British Pound Hits Fresh Record Low Versus Euro, BOE Meeting Minutes May Make or Break Cable Next Week Japanese Yen Reaches 13 Year High Versus Dollar, Treasury to Announce TARP-Funded Auto Bailout on Sunday? US Dollar Outlook Hinges Upon Federal Reserve Rate Decision Next Week - What Will They Do? The US dollar was mixed across the majors on Friday, slipping against the euro and Japanese yen while gaining versus the British pound and commodity dollars. The US Senate's failure to pass an auto bailout plan has left considerable uncertainty in the financial markets, especially as General Motors (GM) has already hired bankruptcy counsel. The White House subsequently stepped in on Friday morning to express disappointment about the bailout's failure, and to say that they were considering other options, including using TARP funding in order to salvage the plan. Until the Treasury makes this official, though, the markets will likely bet on the bankruptcy of automakers like GM and Chrysler. There was additional dollar-bearish news lingering in the markets as well, as US consumption contracted for the fifth straight month in November, highlighting the extent of the recession in the US. Indeed, the Commerce Department reported that advance retail sales fell 1.8 percent during the month, and while spending is anticipated to remain lackluster through year-end and 2009, there is a notable factor we must take into account that is skewing this report: prices. This particular index is not adjusted for inflation, and because gas costs have fallen precipitously in recent months, the Commerce Department's reading shows a 14.7 percent plunge in gasoline station sales. However, looking at the rest of the report, electronics, furniture, clothing, sporting goods, and general merchandise sales all rose slightly during November. That said, this is likely a result of heavy discounting and promotions by retailers during the holiday shopping season, which should extend through December. Once we get into the New Year, though, traders should watch these components as they will provide a good gauge as to the status of the consumer and how long the recession will last. Overall, the news still leaves the odds in favor of an aggressive rate cut by the Federal Reserve next week. In fact, on December 16 at 14:15 ET, the Fed is widely anticipated to announce a 50bp cut to the fed funds rate, which would bring the rate to 0.50 percent. However, this is actually on the lower end of what the markets are expecting, as fed fund futures are pricing in a 72 percent chance of a 75bp cut to 0.25 percent. This upcoming monetary policy decision will be extremely important not only because of the prospect of such historically low rates, but also because the FOMC's policy statement may signal that they are done cutting rates, or may suggest that they are prepared to pursue unconventional options like quantitative easing. The news could have major consequences for the US dollar and risk trends in general, meaning that the Japanese yen crosses may experience significant volatility as well. British Pound Hits Fresh Record Low Versus Euro, BOE Meeting Minutes May Make or Break Cable Next Week The British pound slumped against the US dollar and plunged to fresh record lows against the euro on Friday, as the outlook for the UK economy remains bleak. As we mentioned yesterday, conditions in the Euro-zone are by no means strong, but they are comparatively better than in the UK as the credit crunch has choked off the finance sector that has previously allowed the country to thrive for so long. Going forward, the Bank of England is anticipated to continue cutting rates aggressively, as BOE Governor Mervyn King has declined to rule out cutting rates to zero in the past. This leaves the release of the minutes from the BOE's December meeting on December 17 all the more important. During the December meeting, the BOE's Monetary Policy Committee slashed the Bank Rate by 100bps to 2.00 percent, as expected. The key will be to gauge the vote count, as indications that the decision to cut rates was unanimous and clear discussion of additional rate cuts in the future could lead the British pound to pull back sharply. Japanese Yen Hits 13 Year High Versus Dollar, Treasury to Announce TARP-Funded Auto Bailout on Sunday? The Japanese yen held its own on Friday as lingering risk aversion sent the currency to 13 year highs against the US dollar overnight, as Japan announced an emergency economic package. Indeed, the country pledged 4,000 billion yen in spending and tax cuts and 3,000 billion yen in credit for companies, along with an increase in limits for public fund injections for financial institutions to 12,000 billion yen. However, risk aversion was a bigger driver of the move, as Japanese fundamentals rarely play a role in Japanese yen price action, with the biggest issue on the minds of traders being the failure of the US Senate to pass an auto bailout plan overnight. While the White House has suggested that they may step in and use TARP funds in order to salvage the plan, a confirmation by the Treasury will be necessary to revive investor confidence. As we've seen in the past, the US government has a long history of making these sorts of announcements on Sunday, so it may be worthwhile to check out the news before forex trading resumes on Sunday afternoon. Other risk-related news includes Ecuador's default on “illegal” foreign debt and Japan's announcement of an emergency economic package, as the country pledged 4,000 billion yen in spending and tax cuts and 3,000 billion yen in credit for companies, along with an increase in limits for public fund injections for financial institutions to 12,000 billion yen. Other news to watch includes the release of the Bank of Japan's Tankan survey on Sunday evening, which is expected to show that confidence amongst Japan's large manufacturers fell by the most since 1975 during Q4, as the index is forecasted to fall to -23 from -3. The outlook amongst manufacturers and non-manufacturers alike is expected to be similarly gloomy, as the combination of waning foreign and domestic demand proves to be toxic for Japanese businesses. Exporters have faced particularly difficult circumstances given the 16% jump in the Japanese yen against the US dollar over the past six months. The appreciation of the Japanese yen has been even more extreme against other currencies over the same time period, as it has rallied 27% versus the euro, 35% against the British pound, 38% versus the New Zealand dollar, and 40% against the Australian dollar. In light of this situation, speculation is mounting that the Bank of Japan will move to intervene in the currency markets in order to stem the Japanese yen's gains. If the results of the Tankan survey prove to be disappointing, the chances of intervention will likely rise. 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.

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British Pound Shows Signs of an Important Bottom

aily Forex Technicals | Written by DailyFX | Dec 13 08 05:05 GMT |

A drop below 1.3680 is still very much a possibility for the GBPUSD in mid 2009 but there are signs that at least a multi-month low is in place. An in-depth look at the technical considerations suggests that the mid 1.60's could be reached in the first quarter of 2009. If the GBPUSD closes down this month (December 2008), then it would be six months in a row that the currency pair would have done so. This is worth noting because the previous two times that the GBPUSD closed down 6 months in a row, a major bottom formed. Of course, there are 2 other instances where the GBPUSD closed down more than 6 months in a row. Even then, the drop was only at its midpoint. This is an observation, not a forecast. Still, the observation warrants a deeper look into where the GBPUSD may be headed. There are a number of patterns that could unfold longer term from the current juncture. The one shown above (which is the one that I have shown on numerous occasions for over a month) suggests a drop below 1.3680 before a major low is in place (close below long term support line favors this count). There is another pattern though that gives scope to a significant low forming prior to 1.3680. That pattern would be a triangle. Under the triangle scenario, the GBPUSD would likely have already bottomed in wave (C) of the triangle and be headed higher now in wave (D) for many months. A close examination of price action since the 1992 bottom reveals a potential inverse head and shoulder as well, with the 1992 low as the left shoulder and the right shoulder forming now. Monthly RSI is at 10, which is a level reached just twice, in 1976 and 1985; on both occasions the GBPUSD soared in the months and years that followed. Take the RSI reading with a grain of salt though. The month is not over yet and a substantial rally the rest of the month could lead to a higher RSI reading and render this observation worthless. From 2.1160, the GBPUSD has completed 3 waves down in what is probably a 5 wave drop that will end below 1.3680. Regardless, a large 4th wave rally is due and could reach the 38.2% of 2.0162-1.4465 at 1.6641, which intersects potential channel resistance in early March. Zooming in, the GPBUSD is supported by a short term trendline. A spike below the line today constitutes a false break of the line, which is bullish in my opinion. There were likely many sellers on that spike and their short covering will eventually propel price higher. Near term, price should remain above 1.4675 if a larger advance is underway. 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.

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GM, Chrysler Bankruptcies Would Cause Turmoil for U.S. Economy

By Michael McKee

Dec. 13 (Bloomberg) -- A bankruptcy filing by General Motors Corp. or Chrysler LLC might send the U.S. economy into chaos within weeks if it led to a shutdown at the companies.

Industry experts and economists say the automakers would close plants, fire tens of thousands of workers and cut production. That would cause many of their suppliers to collapse, triggering more job losses, straining the cities and states where the car and parts companies operate, as well as federal safety-net programs.

It would also deliver another psychological blow to consumers and a major shock to Main Street following the crises on Wall Street.

“The auto industry is a key element in the economy,” said Bob Schnorbus, chief economist at J.D. Power & Associates in Troy, Michigan. “Anything that disrupts it is going to slow the economy down more than we have already seen.”

Economists say it’s difficult to estimate the full impact, given the large number of possible scenarios. The outcome hinges on which companies filed for bankruptcy and when, and whether they would be able to continue building cars and trucks while in reorganization -- assuming they don’t go into liquidation.

“It would be unprecedented,” says Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. “So it’s hard to say exactly what would happen.”

‘Cascade of Failures’

Still, a GM or Chrysler bankruptcy “would be the start of a cascade of failures,” says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. “The economy will be in chaos within weeks.”

The Bush administration said yesterday it will consider using money from the $700 billion bank-bailout fund to prevent GM and Chrysler from “collapsing.” On Dec. 11, the Senate rejected a short-term aid package for the two automakers.

The effect of a bankruptcy on growth would be significant, although economists say it won’t be as great as in decades past. Gross domestic product fell at a 4.2 percent annual pace in the fourth quarter of 1970 -- when, like today, the U.S. was in a recession -- following a 67-day nationwide strike against GM. Now, auto production accounts for only about 3 percent of GDP, Stanley says.

“It would obviously be a sizeable jolt to the economy,” he says. “But the sector is not as important as it was.”

Even so, statistics from the Center for Automotive Research in Ann Arbor show 239,000 people work in the U.S. for GM, Chrysler and Ford Motor Co. The center, which does research for the auto companies, estimates total job losses would reach 2.5 million if GM failed and 3.5 million if all three auto companies went out of business in 2009.

Retail, Manufacturing

That includes 1.4 million people in industries such as retailing that aren’t directly tied to manufacturing. Economists say each manufacturing job is responsible for an additional six outside the industry.

While many analysts say the Center for Automotive Research totals are exaggerated, the number of jobs eliminated would still be staggering.

“I don’t know that we’d lose all of those folks,” said Mark Zandi, chief economist at Moody’s Corp.’s Economy.com. “But over a million in the first quarter of ‘09, I think, would be reasonable to expect.”

The total would depend on whether Americans keep buying cars and trucks. While a Chapter 11 bankruptcy would allow the automakers to continue making vehicles while they restructure, GM, Ford and Chrysler have argued that deliveries would drop precipitously. Customers would baulk at buying anything from a company that might not be around to fix it, they say.

Plunging Sales

U.S. auto sales plunged 37 percent in November to a seasonally adjusted annual rate of 10.2 million -- the lowest level in 26 years, according to Autodata Corp. in Woodcliff Lake, New Jersey -- compared with 16.1 million a year earlier and 10.6 million in October.

Dealerships are already feeling the pinch. The National Automobile Dealers Association, a trade group based in McLean, Virginia, estimates that even without an automaker bankruptcy, 900 dealers will close this year and 1,100 next year, most of them GM, Ford and Chrysler franchises. The association says the three companies have more than 13,000 dealers nationwide, employing more than 700,000 workers.

The ripples of failure would also spread quickly to auto- parts makers. “There’s a fairly large number of suppliers out there very squeezed on cash right now,” says Jim Gillette, director of supplier analysis for CSM Worldwide, an automotive consulting firm in Northville, Michigan. “Vehicle volumes are so low, regardless of a bailout, that suppliers are still in trouble.”

Widespread Closures

Because many of these business work for all three companies, widespread closures would lead to production problems at Ford, even if it didn’t file for bankruptcy protection, officials at the No. 2 U.S. car company have said.

Parts makers including American Axle & Manufacturing Holdings Inc. and brake and powertrain-system makers ArvinMeritor Inc. and Hayes Lemmerz International Inc. employ 526,000 workers, according to U.S. Labor Department statistics, down more than 300,000 since 2000. Gillette predicts another fifth of them will lose their jobs in the coming year even if the automakers get bridge loans.

That will mean higher unemployment costs for states, which pay an average of $279 a week for benefits for 26 weeks, according to Jennifer Kaplan, a Labor Department economist. The payments can last as long as 39 weeks in some states, including Ohio, where GM has more than 11,000 employees, according to the company’s Web site. The jobless rate there was 7.2 percent in September.

Retiree Pensions

Hundreds of thousands of auto retirees who depend on the companies for pensions and health insurance would also be affected. Bankruptcy could throw them into federal government programs -- including the Pension Benefit Guaranty Corporation and Medicare -- just when rescue packages and government market actions are ballooning the federal budget.

The effect would be multiplied by an estimated decline in tax revenue for federal, state and local governments of $108.1 billion over three years if U.S. automakers’ operations were cut by 50 percent, the Center for Automotive Research says.

A collapse would quickly spread to financial markets, said Eric Selle, an automotive-credit analyst at JPMorgan Chase & Co. in a research report last month.

GM, Ford, Chrysler and their credit operations comprise 10 percent of the high-yield bond market, he said, and any failure would have major implications for credit-default swaps, asset- backed securities and commercial paper. It would be “the credit crisis, part II,” he said.

Less Concern

Federal Reserve Chairman Ben S. Bernanke signaled less concern about the potential impact for the bond market in a Dec. 5 letter to Senate Banking Committee Chairman Christopher Dodd. The automakers’ bonds “already trade at 20 to 40 percent of par value, suggesting that many of the losses that would be associated with a default have probably already been recognized,” he said.

Even if the automakers get loans to continue operations, the economy is going to take a hit. All three companies have promised to cut workers and close plants as a condition of receiving aid. And yesterday, General Motors said it will close 30 plants for at least part of the first quarter, cutting production by 250,000 vehicles. Honda Motor Co. said it will eliminate 119,000 vehicles from its North American production plan.

That means “suppliers are going to go under in the next few months, even if a bridge loan comes in,” Gillette says. “The only solution is to sell more cars.”

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net

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GM Moves Closer to Bailout as Wagoner Holds Talks With Bolten

By Jeff Green and John Brinsley

Dec. 13 (Bloomberg) -- General Motors Corp. moved closer to a possible government rescue yesterday as the Bush administration said it may tap a bank bailout fund for financing and GM's top executive discussed terms with administration officials.

GM Chief Executive Officer Rick Wagoner spoke by telephone with White House Chief of Staff Joshua Bolten and Treasury Secretary Henry Paulson about a short-term plan to keep the automaker solvent, a person familiar with the talks said.

The talks followed a statement by the White House that it would consider using the Troubled Asset Relief Program to help GM and Chrysler LLC following the Senate's rejection of an aid package the night before.

``Congress has really punted the ball over to the White House,'' John Bogle, founder of the $80.6 billion Vanguard 500 Index Fund, said in a Bloomberg Television interview. ``That will give them temporary stopgap aid. I do not think General Motors is going to go out of business.''

GM Chief Operating Officer Fritz Henderson also participated in yesterday's talks. GM Chief Financial Officer Ray Young and other executives probably will work on the details with administration staffers this weekend, although any agreement isn't likely until next week at the earliest, the person with knowledge of the matter said.

The administration is trying to keep GM and Chrysler from running out of money before the next Congress takes office Jan. 6, the person said.

Cerberus Too

Stephen Feinberg, founder of Chrysler owner Cerberus Capital Management LP, was also in talks with administration officials yesterday, people familiar with the discussions said.

Treasury spokeswoman Michele Davis didn't immediately respond to a call seeking comment. GM spokesman Tony Cervone and White House spokesman Tony Fratto wouldn't confirm the discussions. Chrysler spokeswoman Lori McTavish said the automaker isn't informed of Feinberg's schedule.

GM is reeling from almost $73 billion in losses since 2004 and a 22 percent slump in U.S. sales this year. The automaker last month said it lost $4.2 billion in the third quarter.

Chrysler has been battered by a 28 percent plunge in U.S. sales through November, the most among major automakers.

Senate Banking Committee Chairman Christopher Dodd said the Treasury Department has enough money left in its financial-rescue fund, or TARP, for an auto rescue. In addition, nine of the largest U.S. banks that received $125 billion in TARP money may also be able to help the car manufacturers, he said.

`Lot of Pockets'

``There are a lot of pockets you can go to, it seems to me, to meet this need,'' Dodd said at a press conference yesterday in Washington.

Dodd said he disagreed with Fed Chairman Ben S. Bernanke, who wrote in a Dec. 5 letter to Dodd that it's ``unclear'' whether carmakers have sufficient collateral to qualify for Fed loans.

House Speaker Nancy Pelosi, in a letter to President George W. Bush, said providing funds to the automakers ``is the right decision'' and urged him to require the same ``tough accountability and shared sacrifice'' from all sides in the industry as were set in a bill passed by her chamber this week.

Senator Bob Corker, a Tennessee Republican involved in failed efforts to forge a compromise with Dodd the night of Dec. 11, said providing TARP money without union commitments for restructuring and wage concessions would make the car companies ``less likely'' to become more competitive. Such a move would put ``good money after bad,'' Corker said in a Bloomberg Television interview.

Ensuring `Viability'

Neither the Treasury nor White House statements yesterday said whether any TARP funds provided would be accompanied by conditions. Paulson has insisted that any funds must include a plan ensuring ``viability'' for the automakers.

``Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,'' White House spokeswoman Dana Perino said yesterday. ``However, given the current weakened state of the U.S. economy, we will consider other options if necessary -- including use of the TARP program -- to prevent a collapse of troubled automakers.''

The Treasury Department ``will stand ready to prevent an imminent failure,'' spokeswoman Brookly McLaughlin said in a statement. Paulson had resisted Congress's bid to finance an industry rescue with TARP, saying the funds were intended only to bolster ailing banks.

Asked whether Bush will decide to provide the funds, Julian Zelizer, professor of history and public affairs at Princeton University in Princeton, New Jersey, cautioned that the president is willing to ``defy what seems politically or strategically inevitable.''

``That said, ending his presidency with the collapse of one of the most important U.S. industries would be disastrous to his legacy and, he is well aware, potentially disastrous to the health of the economy,'' Zelizer said. ``While it is impossible to say he will do this, all the arrows point in this direction.''

GM dropped 18 cents, or 4.4 percent, to close at $3.94 yesterday in New York Stock Exchange composite trading, and Ford Motor Co. rose 14 cents, or 4.8 percent, to $3.04. GM plummeted as much as 37 percent earlier. Ford tumbled 27 percent.

GM shares have plunged 84 percent this year and Ford's have dropped 55 percent. While Ford also is losing money, the automaker has said it's not seeking short-term aid from the government.

United Auto Workers

United Auto Workers President Ron Gettelfinger endorsed emergency aid from the TARP program or the Fed, saying the automakers would be liquidated without U.S. assistance.

Job losses from an automaker failure in 2009 would total 2.5 million to 3.5 million in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 report from the Ann Arbor, Michigan-based Center for Automotive Research, which does studies for government agencies and companies.

Even with a possible new source of funds, GM and Chrysler's default risk in the coming months ``remains very high,'' Standard & Poor's credit analyst Robert Schulz said in a statement yesterday. ``In addition, we remain concerned about the spillover effects of an automaker failure'' on parts suppliers, he said.

GM's 8.375 percent bonds due in July 2033 lost 2 cents to 15 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The yield was 57.6 percent.

Ford's 7.45 percent bonds due in July 2031 dropped 2.9 cents to 21.5 cents on the dollar, yielding 34.7 percent, Trace data showed.

To contact the reporters on this story: Jeff Green in Washington at jgreen16@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net.

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Iraqi Economy Faces ‘Difficult’ 2010 on Oil’s Drop, Saleh Says

By Camilla Hall

Dec. 13 (Bloomberg) -- Iraq’s economy has been hit by plummeting oil prices and 2010 will be a “difficult” year for balancing the budget, Deputy Prime Minister Barham Saleh said.

“The decline in oil prices has serious implications on the Iraqi economy,” Saleh said during a security conference in Bahrain today. “This has impacted our budget.”

Crude has slumped 69 percent to about $46 from an all-time high of $147.27 in the summer. Iraq’s economy is inherently linked to the oil price as the commodity represents 95 percent of the country’s exports and the nation’s southern oil terminals alone account for more than 80 percent of government revenue.

“Last year and the year before we had added revenues because of the higher oil prices,” Saleh said at the Manama Dialogue conference, organized by the London-based International Institute of Strategic Studies. “We are somewhat safe for 2009 because we have a surplus.”

The global financial crisis and a low crude price should add “urgency” to reforming the Iraqi oil sector, Saleh said. The government also needs to use 2009 to diversify its economy away from oil, he added.

To contact the reporter on this story: Camilla Hall in Bahrain at chall24@bloomberg.net.

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Georgia, Texas Banks Shut as Foreclosures Rise; Toll Reaches 25

By Margaret Chadbourn and Alison Vekshin

Dec. 13 (Bloomberg) -- Georgia and Texas banks with $544 million in deposits were shut by state regulators, raising the failure toll to 25 for this year, as mortgage delinquencies and home foreclosures climb in a deepening U.S. recession.

Haven Trust Bank of Duluth, Georgia, was seized yesterday and sold by the Federal Deposit Insurance Corp. to BB&T Corp. of Winston-Salem, North Carolina, which will reopen four offices northeast of Atlanta as branches on Dec. 15, the FDIC said. Sanderson State Bank was shut by Texas regulators and its assets were sold to Pecos County State Bank of Fort Stockton, which will open a single southwest Texas office Dec. 15 as a branch.

The acquisitions by BB&T, the fifth-best performing stock in the KBW Bank Index this year, and Pecos County Bank were “the ‘least costly’ resolution for the FDIC’s deposit insurance fund,” the Washington-based FDIC said in a statement.

Regulators have closed the most banks in 15 years, and the annual total now exceeds the combined toll for the previous six years, with the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. among the biggest in history. The U.S. entered a recession a year ago and President-elect Barack Obama on Dec. 7 said the slump will worsen before a recovery begins.

BB&T will buy about $55 million of Haven’s $572 million in assets and pay $112,000 for the failed bank’s $515 million in deposits, the FDIC said. The agency will retain the remaining assets “for later disposition.” The deposit insurance fund, supported by fees on insured banks, will pay an estimated $200 million, the agency said.

Pecos will buy $3.8 million of about $37 million in Sanderson’s assets and pay a premium of 0.55 percent to assume the failed bank’s $27.9 million in deposits, the FDIC said. The deposit insurance fund will pay $12.5 million, the agency said.

Failures

The U.S. is seeking to avert failures by using $250 billion from a bank-rescue fund to boost lender capital after tighter credit contributed to a freeze in markets. The FDIC and Office of the Comptroller of the Currency in November allowed private- equity firms and other investors to buy assets and deposits of failing lenders, expanding the pool of bidders.

The FDIC on Nov. 25 classified 171 banks as “problem” in the third quarter, a 46 percent jump from the second quarter, and said industry earnings fell 94 percent to $1.73 billion from a the prevision year. The agency doesn’t name “problem” banks.

“We’ve had profound problems in our financial markets that are taking a rising toll on the real economy,” FDIC Chairman Sheila Bair said at a Washington news conference after releasing the report.

U.S. foreclosure filings climbed 28 percent in November from a year earlier and a looming “storm” of new defaults and job losses may force 1 million homeowners from their properties next year, RealtyTrac Inc. said yesterday.

Insurance Premiums

The FDIC oversees 8,384 institutions with $13.6 trillion in assets, and insures deposits of as much as $250,000 per depositor per bank and the same amount for retirement accounts. The agency has proposed doubling premiums charged to banks for coverage to replenish its reserves amid agency forecasts that bank failures through 2013 will cost almost $40 billion.

Washington Mutual, the biggest savings and loan, sold its assets to JPMorgan Chase & Co. Sept. 25 after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp., the sixth-biggest bank, was pushed by regulators to sell itself to Wells Fargo & Co. for $11.7 billion or face collapse.

The Treasury as part of its bank-rescue effort has bought preferred shares in nine banks: Wells Fargo & Co., JPMorgan, Citigroup Inc., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.

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Saudi Arabian Stocks Resume Gains After Holiday, Led by Sabic

By Anthony DiPaola

Dec. 13 (Bloomberg) -- Saudi Arabian stocks rose as the bourse reopened following the Eid al-Adha religious holiday, led higher by Saudi Basic Industries Corp. on speculation the company’s shares are cheap relative to earnings.

The benchmark Tadawul All Share Index advanced 190.37, or 4.1 percent, to close at 4,845.25 in Riyadh, as 115 stocks increased, three declined and eight were unchanged on the first day of trading since Dec. 3. The index has gained in three of the four sessions this month, adding 2.3 percent.

Saudi Basic Industries, the world’s biggest chemicals maker by market value also known as Sabic, rallied 9.9 percent to 58.5 riyals today. Saudi Arabian Fertilizer Co., a Sabic unit known as Safco, rose 7 percent to 91.25 riyals.

“Investors are optimistic about the forthcoming quarterly earnings,” Abdulla al-Aqil, a trader at Samba Financial Group, said in a telephone interview from Riyadh. “With the pause in trading people missed much of the bad news in markets. Investors believe Sabic will have a good set of results and that there’s room for the stock to rise.”

Companies in Saudi Arabia will start releasing results at the beginning of January.

Sabic shares currently trade at 6.14 times earnings, compared with the average ratio of 20.65 since January 2002, according to Bloomberg data. The Tadawul All Share Index is valued at 11.01 times its members’ profits.

Sabic’s plastics unit plans to cut about 9.5 percent of its workforce in a sales and marketing reorganization to adapt to rising material costs and falling demand for products. The cuts in Europe, Asia and North America don’t involve the Riyadh-based parent company.

Al-Rajhi Bank, the largest bank in Saudi Arabia by market value, added 5.3 percent to 60 riyals. Alinma Bank, a Shariah law-compliant lender, climbed 5.8 percent to 11.8 riyals.

Al-Qassim Agricultural Development Co., a producer of wheat, dates and dairy products, was the benchmark index’s biggest gainer in percentage terms, adding 9.9 percent to 7.2 riyals.

To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net.

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Toyota May Report 2nd-Half Operating Loss, Asahi Says

By Stanley White

Dec. 13 (Bloomberg) -- Toyota Motor Corp., Japan's largest automaker, may report an operating loss of at least 100 billion ($1.1 billion) in the fiscal second half as a global recession and a strengthening yen crimp sales, the Asahi newspaper said.

Losses in the October-March period may reduce the automaker's full-year profit by 80 percent or more, forcing the company to lower its earnings forecasts, the Asahi reported, without citing anyone. Calls to the company's offices in Tokyo and Toyota City, Japan weren't answered.

The maker of Corolla cars last month forecast the biggest drop in profit in at least 18 years as a global slump cripples auto demand and gains in the yen erode the value of overseas sales. President Katsuaki Watanabe predicted the smallest profit in nine years as higher fuel costs and the credit crunch hurt vehicle sales in the U.S., the world's largest auto market.

Toyota said on Nov. 6 it expects operating profit to plunge 74 percent this fiscal year to 600 billion yen, which is also down 63 percent from its previous forecast.

Car sales last month may have fallen more than expected, the newspaper said. The yen's 23 percent gain against the dollar and 34 percent rise against the euro this year will also erode overseas earnings, according to the newspaper.

The dollar traded at 91.07 yen at 4:27 p.m. in New York, compared with 91.45 yesterday, after dropping as much as 3.2 percent to 88.53, the lowest level since August 1995. The euro

Output Cuts

Sales in the U.S., traditionally the company's most profitable market, plunged the most in 28 years last month as the recession forced consumers to cut spending. Auto sales in the U.S., the world's largest auto market, fell to the lowest annual rate in 26 years last month. Toyota's sales slipped 34 percent.

Domestic sales plunged 28 percent in November, as industrywide sales dropped to the lowest tally in 39 years for the month. Toyota sold 83,000 vehicles in Europe in October, down 14 percent from a year ago. In the first 10 months of this year, European sales dropped 6.4 percent.

In response, the company is also cutting output. Toyota, which opened its seventh North American auto assembly plant last week, said it plans to further reduce production at factories in the U.S. and Canada. It halted production of Tundra pickups at its San Antonio plant for more than three months.

The company is eliminating nine days of output by extending an annual holiday shutdown at its Georgetown, Kentucky, facility and closing the location for two additional days in January, the company said Dec. 5.

Holiday shutdowns are also extended at a plant in Fremont, California, that Toyota shares with GM and at plants in Cambridge and Woodstock, Ontario, the company said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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Thailand, Indonesia, Malaysia to Cut Rubber Exports

By Yoga Rusmana and Naila Firdausi

Dec. 13 (Bloomberg) -- Thailand, Indonesia and Malaysia, the world's three biggest natural rubber producers, plan to reduce rubber shipments next year to help revive prices.

The three countries agreed to cut rubber exports by a combined 700,000 metric tons next year, or a tenth of their annual harvest, said Nurmala Abdul Rahim, Malaysia's deputy secretary general at the Ministry of Plantation Industries and Commodities in Bogor, Indonesia.

The producers are discussing steps after rubber prices in Tokyo tumbled 70 percent since reaching a 28-year high in June on slowing demand. Thailand, Indonesia and Malaysia in October agreed to jointly reduce output by 215,000 tons next year by felling trees.

``With immediate implementations, we hope price of natural rubber will improve,'' Abdul Rahim said. The export limitation and output cut may reduce the global market supply by as much as 915,000 tons next year, she said.

Futures for May delivery in Tokyo slipped 3.8 percent to 105.8 yen ($1.16) a kilogram yesterday after the U.S. Senate rejected a bailout plan for U.S. automakers, heightening concern demand for car tires will decline. Prices reached a six-year low of 99.8 yen on Dec. 5 after touching a 28-year high of 356.9 yen on June 30.

The three countries last year harvested about 7 million tons of rubber and exported a combined 5.5 million tons, according to the tripartite rubber council.

Defaults

Rubber associations of Thailand and Malaysia also agreed to tell its members not to ship natural rubber at below $1.35 a kilogram, following Indonesia's plan, Abdul Rahim said.

The tripartite rubber council also called for the three governments to talk with counterparts at importing countries to help prevent buyers from defaulting on orders, Abdul Rahim said. Out of disputes for 300,000 metric tons of rubber between overseas buyers and exporters from Indonesia, Thailand and Malaysia, 200,000 tons have now been settled, she said.

``The recent drastic decline of natural rubber prices was aggravated by non-fulfillment of contracts,'' Abdul Rahim said.

The three rubber-producing nations plan to hold a ministerial meeting on rubber in Kuala Lumpur in January to adopt measures including on reference price and assistance to small- scale plantation owners.

To contact the reporters on this story: Naila Firdausi in Jakarta at nfirdausi@bloomberg.net; Yoga Rusmana in Jakarta at yrusmana@bloomberg.net.

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South Korea, Japan to Work Together on N. Korea Talks

By Seyoon Kim

Dec. 13 (Bloomberg) -- South Korean President Lee Myung Bak and Japan's Prime Minister Taro Aso agreed to cooperate in dismantling North Korea's nuclear program, South Korea's presidential office said.

The leaders ``reaffirmed they will continue close cooperation'' between the two countries and with the U.S. to resolve the North Korean nuclear arms issue, the office said in a statement. Lee and Aso met in the Japanese city of Fukuoka ahead of a summit of South Korea, Japan and China later today.

The latest round of negotiations with North Korea and involving South Korea, China, Japan, Russia and the U.S., ended earlier this week after a fourth day of discussions in Beijing. The North Korean government rejected a document drafted by China's delegation that would allow international inspectors to remove soil and waste samples from North Korea's Yongbyon reactor.

In a separate meeting, Lee and Chinese Premier Wen Jiabao agreed to maintain ``close cooperation'' between the two countries to help resolve the North Korean nuclear issue, the presidential office said. Lee and Wen also agreed to work together to try to ``counter the global financial turmoil efficiently'' through policy cooperation, it said.

Aso and Lee expressed their regret about ``the uncooperative attitude which North Korea showed'' toward the joint effort to establish a structure to verify the extent of its atomic work, the statement said.

Currency Arrangement

The two leaders ``welcomed'' an increased bilateral currency swap arrangement announced yesterday and agreed to work together to follow up action plans agreed by heads of state from G-20 countries last month.

Leaders of the world's biggest developed and emerging nations in November put banks and investors on notice they will need to keep more capital and reveal more about their holdings, signaling the industry may emerge from the current crisis with less potential for profit.

South Korea and Japan yesterday agreed to increase an existing won-yen arrangement to $20 billion while China and South Korea agreed on an accord worth 38 trillion won ($28 billion).

To contact the reporter on this story: Seyoon Kim in Fukuoka, Japan or Skim7@bloomberg.net

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Chubu Electric Plans to Restart Hamaoka Reactors in April 2011

By Stanley White

Dec. 13 (Bloomberg) -- Chubu Electric Power Co., Japan’s third-largest power utility, said it plans to restart its No. 1 and No. 2 Hamaoka nuclear reactors in April 2011.

“The No. 1 and No. 2 reactors are closed for maintenance,” the Nagoya-based utility’s spokesman, Hiroaki Ohashi, said in a telephone interview today. “We hope to improve efficiency and restart operations from April 2011.”

Ohashi declined to comment on whether the company will construct a new reactor to replace the two.

Chubu Electric plans to build a 1,400-megawatt No. 6 reactor for operations from 2018 and decommission the No. 1 and No. 2 reactors by 2035 because of rising maintenance costs, Kyodo News reported earlier today without citing anyone.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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German Government Forecasts Economy to Shrink 2%, Spiegel Says

By Aaron Kirchfeld

Dec. 13 (Bloomberg) -- The German government expects a “deep” recession next year, predicting a 2 percent contraction, Der Spiegel said, citing a draft report by economists.

The budget deficit will climb to 3 percent of gross domestic product because of declining tax revenue and costs from rising unemployment, the magazine said in a pre-released article. The forecast increases the chances of a further stimulus package, Der Spiegel reported.

The government will “vigilantly” watch economic developments, the magazine said, citing a draft of an annual report due to be published at the beginning of next year. The government may implement further measures to relieve and stabilize the economy if the international crisis worsens, the magazine quoted the report as saying.

German Chancellor Angela Merkel’s government in October slashed its growth forecast for Europe’s biggest economy, saying that gross domestic product will expand 0.2 percent in 2009 as global markets for exports dry up.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

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Schaeffler Says Didn’t Intend to Interfere With Continental AG

By Aaron Kirchfeld

Dec. 13 (Bloomberg) -- Schaeffler Group said it wasn’t trying to interfere in Continental AG’s business when it sent a letter to banks renegotiating loans with the German car supplier it’s acquiring.

“The intention of the letter was not to influence Continental AG’s business management,” Schaeffler spokesman Detlef Sieverdingbeck wrote in an e-mailed statement today. Continental Chief Executive Officer Karl-Thomas Neumann said yesterday he was “irritated” at the “massive interference” in the bank talks after Schaeffler CEO Juergen Geissinger sent the letter to the lenders.

Continental, Europe’s second-largest car-parts maker, anticipates higher financing costs as it renegotiates 10.8 billion euros ($14.4 billion) in loans taken out last year to purchase Siemens AG’s former VDO component division.

The talks between Hannover-based Continental and banks on the VDO loans included conditions that could “significantly hurt” the company and its shareholders, Sieverdingbeck said. This would have a direct impact on Schaeffler, the largest shareholder, he added.

Schaeffler’s letter was strictly intended to avoid the risk that such agreements would be made between Continental and the banks, he said. “It can’t be considered a violation against the spirit of the investor agreement,” Sieverdingbeck said. The ball-bearing maker is based in Herzogenaurach, Germany.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

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European Stocks Post Weekly Gain; Lafarge, Holcim, Rio Advance

By Adria Cimino

Dec. 13 (Bloomberg) -- European stocks rose this week, led by construction companies and commodity producers, on speculation a U.S. stimulus plan will prevent a prolonged recession in the world’s largest economy.

Lafarge SA, the biggest cement maker, and Holcim Ltd. climbed at least 11 percent as President-elect Barack Obama said he is planning the most extensive public-works spending package since the 1950s. Rio Tinto Group, the third-largest mining company, surged 42 percent after saying it will reduce debt. Gains in the Dow Jones Stoxx 600 Index were limited after the Senate rejected a $14 billion plan to rescue U.S. carmakers.

The Stoxx 600 added 4.4 percent to 198.22, bringing the rebound from this year’s low in November to 8.8 percent as governments from the U.S. to India announced packages to buoy the global economy and prevent earnings from tumbling.

Stimulus “plans offer oxygen as we face an accumulation of bad news,” said Pierre Nebout, a fund manager at Edmond de Rothschild Asset Management in Paris, which oversees $3.9 billion in stocks. “The market welcomes them,” he said in a Bloomberg Television interview.

The Stoxx 600 has tumbled 46 percent in 2008 as almost $1 trillion in bank losses and writedowns froze credit markets and pushed the U.S., Europe and Japan into the first simultaneous recessions since World War II.

National benchmark indexes rose in all 18 western European markets this week except Iceland. Germany’s DAX Index added 6.4 percent. France’s CAC 40 climbed 7.6 percent and the U.K.’s FTSE 100 increased 5.7 percent.

Obama Plan

Lafarge gained 11 percent. Holcim, the world’s second- biggest cement maker, advanced 19 percent. Lafarge gets 24 percent of its sales in North America, while Holcim generates almost 20 percent of revenue there.

Obama said Dec. 6 he will boost investment in roads, bridges and public buildings to create and preserve 2.5 million jobs. That’s the largest public works program since President Dwight D. Eisenhower created the interstate highway system.

Mining stocks climbed 17 percent as a group this week, the best-performing industry in the Stoxx 600. Rio Tinto surged 42 percent after the company said it will cut 14,000 jobs and slash spending next year to reduce debt as the global financial crisis curbs demand for metals.

Lonmin Plc, the third-largest platinum producer, and Vedanta Resources Inc., the mining company controlled by billionaire Anil Agarwal, each soared 29 percent.

Metal Prices

Copper added 4.1 percent on the London Metal Exchange this week, while gold increased 8.7 percent. Platinum also advanced.

Energy shares posted the third-best weekly performance as a group in the Stoxx 600 as crude oil rebounded on the New York Mercantile Exchange.

The gain in crude prices “is good for oil companies and it’s a positive signal for the stock market,” Yves Bonzon, who helps manage about $348 billion as chief investment officer at Pictet & Cie in Geneva, said in a Bloomberg Television interview. “It rekindles hope that demand is stabilizing and the economic news will perhaps improve.”

BP Plc, Europe’s second-biggest oil company by market value, increased 8 percent. Total SA, the region’s largest refiner, rallied 12 percent.

Tullow Oil Plc, the U.K. explorer with the most licenses in Africa, jumped 30 percent after saying it will increase the size of its resource estimates following “successful” drilling at wells in Ghana and Uganda.

Failed Rescue

The Stoxx 600 pared its weekly gain, losing 2.7 percent Dec. 12, after the Senate’s rejection of a rescue for carmakers in the U.S. The bailout plan was thwarted when a bid to cut off debate on the bill the House passed on Dec. 11 fell short of the required 60 votes.

The Bush administration will “evaluate our options in light of the breakdown in Congress,” spokesman Tony Fratto said.

“It’s a spiral and touches other industries,” said Guillaume Chaloin, a fund manager at Meeschaert Asset Management in Paris, which oversees about $2.7 billion. The failure of the plan “means no boost for consumer spending and no stabilization of the economy,” he added.

Nokian Renkaat Oyj fell 7.3 percent this week after the Nordic region’s biggest tiremaker cut its full-year sales and earnings outlook.

Analysts expect profits at companies in the Stoxx 600 to fall 15 percent this year, compared with 11 percent growth forecast at the beginning of 2008.

Deepening Recession

Infineon Technologies AG, Europe’s second-largest chipmaker, slid 31 percent after competitors United Microelectronics Corp. and National Semiconductor Corp. cut quarterly sales forecasts.

Q-Cells SE tumbled 29 percent. Germany’s biggest solar company cut its 2008 and 2009 earnings forecasts as customers delayed orders on slowing economic growth and tighter financing.

Germany’s economy will shrink 2.2 percent next year and the contraction will continue into 2010, the Ifo institute said, while the U.K. economy may contract at the fastest pace since 1990 in the current quarter, according to the National Institute for Economic and Social Research.

Switzerland’s central bank reduced its interest rate to a four-year low of 0.5 percent this week and said further measures are possible as the economy faces a recession that may be the worst since 1982.

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

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European Bonds Post Biggest Weekly Loss Since 2001 on U.S. Plan

By Anchalee Worrachate

Dec. 13 (Bloomberg) -- European government bonds posted the biggest weekly decline in seven years on speculation the U.S. government will produce a public-spending package and bailout for automakers, preventing the country from sinking deeper into a recession.

Bonds dropped yesterday as the Treasury said it’s ready to provide financing to car producers after the Senate failed to approve a rescue plan a day earlier. President-elect Barack Obama said Dec. 8 his government will invest the most in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system 50 years ago.

“These pledges appear to reduce some of the downside risks to the economy, and are therefore bond negative,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “But their impact on bonds could be short-lived. You have economic data and an inflation outlook that are increasingly bond bullish. It’s inevitable yields will come crashing in at some point in the first quarter.”

The yield on the 10-year bund rose 26 basis points from last week to 3.29 percent, the most since the week ended Dec. 7, 2001. The 3.75 percent note due January 2019 fell 0.71, or 7.1 euros per 1,000-euro ($1,334) face amount, to 103.84.

The yield on the two-year note advanced 20 basis points from last week, the most since the five days ending June 6. Yields move inversely to prices.

Bond Returns

German bonds returned 10.4 percent this year, compared with 8.3 percent for gilts and 12.2 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Government, U.K. Gilts and U.S. Treasury Master indexes. By comparison, the Dow Jones Stoxx 600 Index slid 46 percent and Germany’s DAX Index lost 42 percent. Crude oil fell 51 percent and gold 1.8 percent.

“Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” Treasury spokeswoman Brookly McLaughlin said in a statement yesterday.

The Treasury committed all but about $15 billion of the first half of the Troubled Asset Relief Program’s funds since the plan was enacted Oct. 3. Treasury Secretary Henry Paulson has resisted calls to use the program to aid the automakers.

Bonds also slipped as European Central Bank council member Axel Weber cautioned against cutting the region’s key interest rate below 2 percent.

A week after reducing the rate by 75 basis points, the biggest cut in the ECB’s history, officials are displaying little appetite to follow the Federal Reserve and other central banks in continuing to ease monetary policy. The ECB pared its key rate by 175 basis points since early October to 2.5 percent.

“We should be cautious when our rates approach territory we haven’t expected before,” Weber said in an interview with Germany’s Boersen-Zeitung. “Our lowest level so far was 2 percent.”

The difference in yield, or spread, between two- and 10-year notes was at 102 basis points yesterday, from 98 basis points a week earlier. The so-called steepening of the yield curve suggested investors are convinced the economy will deteriorate and the central bank will need to cut borrowing costs.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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