Daily Forex Fundamentals | Written by Crown Forex | Feb 10 09 08:45 GMT |

Major Market Movers: Eye On Europe The Financial sector continues its jittery episodes but this time rumors diffused in markets that the Europeans will face some distresses especially after the ongoing Credit Crisis continued to anchor the levels of lending and borrowings between banks. The Financial sector continues its jittery episodes but this time rumors diffused in markets that the Europeans will face some distresses especially after the ongoing Credit Crisis continued to anchor the levels of lending and borrowings between banks. Bailout plans along with drastic interventions failed to spread back some tranquility in markets as banks will continue the gloomy chapter not really knowing when it will be over. To make the situation worse Obama and his Treasury Secretary decided to postpone the release of their plan, which would be the final rescue for the US economy where it might be heading towards a mini depression; leaving markets with some pessimism that the introduced plan will not be enough to stop the sweeping failures in the world leading economy. Based on that Dow Jones industrial average fell 0.12% or 9.72 points reaching to 8270.87 levels and NASDAQ fell 0.01% or 0.15 points reaching to 1591.56 levels, yet on the contrary, S&P 500 managed to close in green climbing 0.15% or 1.29 points reaching to 869.89 levels. Delays are taking place, but the new US President insist on the fact that a plan must be approved, so it would be released before the mid of the current month. Where yesterday the Senates voted in favor for the $838 billion measures, winning 61 votes with and 36 against, though still their might be some chance to see part of the plan by the end of today. With those turbulences in financial markets majors tumbled, the sixteen nation's currency fell reversing the gains that were seen two days earlier, now the pair is currently trading at 1.2893 levels retreating from a low of 1.2810. In addition, the US dollar weakened against the Japanese yen to currently trade at 91.27 levels. Even the governmental owned companies continue to struggle where they might be in need for more money just to keep them going; Freddie Mac and Fannie Mae also might need more cash to keep them surviving. According to projections, 200 billion dollars are needed if the housing sector continues to weaken leading to huge failures in their assets. The start of interventions took place with those two companies, last September Freddie Mac and Fannie Mae stood on the brink of filing for bankruptcy, where those two companies holds most of the housing mortgages in the United States and any further tumbling for those two companies will result to adding more disorders in the financial markets. Moving to our fundamentals, our calendar contains major data from the Royal Kingdom, according to expectations the Trade Balance deficit must narrow due to the weakening British pound, along with the vast decline in the domestic demand, which is a result from the fading confidence, and the endless failures in the United Kingdom. The Visible Trade balance deficit narrowed down to -8100 million pounds from the previous -8330 million, also the Non-EU trade balance had narrowed to -4800 million pounds from the previous -5304 million pounds; the total trade balance deficit narrowed to -4250 million pounds. So more destructions are coming on the surface and the Europeans are facing more failures in their financial sector with expectations that they might be in need for more interventions. 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.

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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | Feb 10 09 09:31 GMT |

Good morning from snowy and cold Hamburg. The FOREX markets will be obviously further impressed by political decisions around the world. It seems that news concerning the world's financial crisis have the market under control again. However, we wish you a prosperous trading day. Markets review The USD declined on Monday against a basket of major currencies as the economic stimulus package of the U.S. government was likely to be approved by the Senate. The EUR/USD rose on Monday about 1.38 % to 1.3093 at its high. In early Tokyo trading, the currency pair fell to 1.2810 after a Nikkei newspaper report showed that Russian bank and business may ask foreign lenders to reschedule loans worth about $400bln. Further incriminating for the EUR/USD was that European finance ministers signaled increasing apprehensiveness that some governments find it harder to borrow in financial markets. The JPY extended its gain versus USD for the second day on speculation that the financial crisis in Europe will broaden and thus higheryielding assets can profit. A report of the BoE this week may show that consumer-prices growth picked up and diffuse any interest rate cut rumors. The GBP/USD climbed therefore for a fifth day from its opening at 1.4798 to its day high at 1.4986. After Australia's business confidence index fell 12 points to -32 points, its lowest level ever. The AUD and NZD follow the index and decreased today the USD about 1.61 rather 1.54 percent Technical analysis USD/CHF Having the USD/CHF sustained a top loss of 15.12 % in December it recovered and has been trading in a bullish trend-channel. The Momentum indicator will maybe assist the upward trend and it seems that the currency pair tests its resistance at 1.1879. Should the bullish trend break, the next support is apparently at 1.1280. GBP/CAD The GBP/CAD has been trading in a bearish trend since the end of November 2008 and broke out of the trend-channel with the beginning of February. The Currency pair crossed the 1.7940 level which labelled now its support. On the upside the next resistance will be at 1.8745. Pivot Points - Daily FX Support and Resistance Levels Daily Calendar & Key FX Events Varengold Bank IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT This document is issued and approved by Varengold WPH Bank AG. The document is only intended for market counterparties and intermediate customers who are expected to make their own investment decisions without undue reliance on the information set out within the document. It may not be reproduced or further distributed, in whole or in part, for any purpose. Due to international laws/regulations not all financial instruments/services may be available to all clients. You should have informed yourself about and observe any such restrictions when considering a potential investment decision. This electronic communication and its contents are intended for the recipient only and may contain confidential, non public and/or privileged information. If you have received this electronic communication in error, please advise the sender immediately, and delete it from your system (if permitted by law). Varengold does not warrant the accuracy, completeness or correctness of any information herein or the appropriateness of any transaction. Nothing herein shall be construed as a recommendation or solicitation to purchase or sell any financial product. This communication is for informational urposes only. Any market or other views expressed herein are those of the sender only as of the date indicated and not of Varengold. Varengold reserves the right to consider any order sent electronically as not received unless it is confirmed verbally or through other means.

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Technical Analysis Daily: GBP/USD

Daily Forex Technicals | Written by iFOREX.bg | Feb 10 09 09:13 GMT |

GBP/USD 1.4817 GBP/USD Open 1.4853 High 1.4983 Low 1.4700 Close 1.4897 Pound/Dollar made a moderate increase yesterday. The Cable reached the long target 1.4910, made a top at 1.4983, and closed lower at 1.4897. On the 4 hour chart we have a hanged like formation, followed by 2 bearish candles, which is an indication for a potential descending reversal. At the same time, the CCI indicator is about to break down the 100 line, supporting the scenario of decreasing pressure. Immediate support is represented by the 1.4760 level. Break below this level may cause further bearish momentum towards the region of 1.4625. First resistance is seen at 1.4990. Technical resistance levels: 1.4990 1.5100 1.5225 Technical support levels: 1.4760 1.4625 1.4500 Trading range: 1.4850 - 1.4775 Trend: Downward Sell at 1.4838 SL 1.4868 TP 1.4788 iFOREX.bg Forecasts and Trading Signals http://www.zifx.com

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Daily Forex Technicals | Written by Finotec Group | Feb 10 09 09:10 GMT |

Forex Depth Analysis: GBP/JPY Investors use Sterling as alternative as Yen woes continue The pound gained for a fifth day against the U.S. dollar amid speculation this week's Bank of England quarterly inflation report will show consumer-price growth picked up, making an interest-rate cut less likely. The pound climbed to the highest level in three weeks after Barclays Plc said today earnings rose in the second half by more than analysts. The pound may extend gains against the euro should the Bank of England's Feb. 11 inflation report show the rate of consumer-price growth matching the central bank's target rather than undershooting it, Barclays Plc said. Trading Tactics Buy GBP/JPY on signs of a continuation pattern. The buying point is at 135.71; Pivot point is the take profit at 139.17; Fibonacci 38.2% is the stop loss at 133.55 The selling point is at 133.40; Pivot point is the take profit at 131.83; Fibonacci 23.6% is the stop loss at 135.02 Technical: Sterling breaks the previous resistance and continues its uptrend. A move back higher could set up a test of 1.39.17 The following analysis is for information only; Finotec is not responsible for any decisions or misinterpretations based on the given text. Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Australia’s Stevens Says World Mustn’t Retreat From Risk Taking

By Jacob Greber

Feb. 10 (Bloomberg) -- A worldwide retreat from the cycle of risk-taking could be even more damaging to future economic growth than the global financial crisis, according to Australia’s central bank Governor Glenn Stevens.

“The problem in the next couple of years will not be too many cross-border capital flows, but too few; not too much risk- taking, but too little,” Stevens said in the text of a speech to be given in Kuala Lumpur today. “A retreat into financial autarky and wholesale shunning of risk would be even more damaging than what we have seen to date.”

Stevens is among central bankers around the world that have cut interest rates as economies including the U.S., Europe and Japan sink into recessions because of fallout from the global credit freeze. Financial institutions worldwide have amassed $1.09 trillion of losses and shed almost 270,000 jobs since the U.S. subprime mortgage market collapsed, according to data compiled by Bloomberg.

A major complication for some countries is that “some of the transmission channels of monetary policy are not working normally,” Stevens said.

“The most damaging instances have been in the U.S. and U.K. where, despite quite aggressive reductions in the interest rates set by the central banks, rates paid by many borrowers have not fallen very much until quite recently,” he said.

Even where interest rates have declined, many commercial banks “display an individually understandable, but systemically damaging, reluctance to lend,” Stevens said.

Lending Concern

Australian Prime Minister Kevin Rudd said last month his government will take “whatever action is necessary” to aid the financial system should foreign banks fail to roll over up to A$75 billion ($50 billion) in loans to local businesses.

A shortfall in credit could push Australia into its first recession since 1991. The economy grew 0.1 percent in the third quarter, the weakest pace in eight years.

Global credit markets seized up following the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, prompting governments around the world to bail out financial institutions and boost spending to revive growth.

“In the short term, the situation requires flexibility and a degree of innovation on the part of central banks, and on occasion not a little boldness,” Stevens said.

The U.S. Federal Reserve and Japan’s central bank have pared their key rates close to zero, the European Central Bank to 2 percent, matching a record low, and the Bank of England to 1 percent, the lowest since the institution was founded in 1694.

Stevens cut his benchmark rate by 4 percentage points since early September to a 45-year low of 3.25 percent. Australia’s lenders have passed on most of those reductions to mortgage borrowers, around 90 percent of whom have variable-rate loans.

Australian Economy

The drop in borrowing costs is among reasons the Reserve Bank of Australia expects the nation’s economy will expand 0.5 percent this year. By contrast, the International Monetary Fund forecasts contractions in the U.S, Europe and U.K. of 1.6 percent, 2 percent and 2.8 percent respectively.

The U.S., Switzerland and “one or two other countries” are facing the prospect of dealing with the limits of monetary policy as benchmark lending rates approach zero, “a theoretical curiosum until Japan’s experiences over the past decade,” Stevens said.

“For this reason, so-called ‘unconventional’ policy instruments are starting to come into view in some countries,” he said. These include the purchase of assets by central banks.

In future, Stevens said central bankers and regulators will need to devise new ways of operating “effectively on the assumption that we will never have the full picture of the workings of the financial system and the real economy.”

Be Skeptical

Authorities need to be more skeptical about the latest financial innovations, and maintain a “much greater degree of distrust of leverage, in all its forms,” he said.

“Many investors, if they were honest, would have to admit that they knew that they did not fully understand the instruments, yet they were not deterred from investing,” Stevens said.

“The simple point, surely, was that there was too much optimism combined with too much leverage. That is neither new, nor particularly complicated,” he said, adding that it will probably “periodically recur.”

Central bankers can’t avoid revisiting the question of whether monetary policy should be used to control asset-price bubbles, the governor said.

Following the collapse of the dot-com bubble in 2001, those who supported the use of interest rates to temper rising asset prices, such as stocks and property, failed to get enough traction, “I suspect mainly because growth in the U.S. was fairly easily restarted after the shallow recession of 2001.”

Stevens’ speech didn’t address monetary policy in Australia or the nation’s economy.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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French Industrial Production Declines for Fifth Month

By Francois de Beaupuy and Simon Kennedy

Feb. 10 (Bloomberg) -- French industrial production tumbled for a fifth month in December as auto output plunged, pointing to a deepening recession and rising unemployment.

Output at factories and utilities fell 1.8 percent from the previous month when production declined a revised 2.8 percent, Insee, the Paris-based statistics office, said today. The drop matched the median forecast of 20 economists surveyed by Bloomberg News. Auto output fell 44.6 percent over the year, the biggest annual drop since the series began 18 years ago.

Manufacturing may weaken further in coming months, pushing the French economy into its first recession in 16 years this quarter, the Bank of France said yesterday. President Nicolas Sarkozy yesterday announced 6 billion euros ($7.8 billion) in loans for carmakers PSA Peugeot Citroen and Renault SA after a plunge in sales forced them to trim production.

“We’ll not see a meaningful recovery for several months,” said Gilles Moec, an economist at Bank of America Merrill Lynch in London. “We are very pessimistic for the French outlook.”

Renault SA said last month that it had cut inventories to 70,000 vehicles from more than 100,000 in September, after slashing production by 50 percent in the fourth quarter. Sarkozy said yesterday that Renault and Peugeot will get loans after they pledged not to shut plants or fire people in France.

Stimulus Plan

Sarkozy is also pushing a 26 billion-euro economic-stimulus package to spur construction, investment infrastructure, hiring at small companies and purchases of new cars. He last week announced 1.4 billion euros in “social measures” for impoverished workers and 8 billion euros of tax cuts for manufacturers next year.

The French economy, the second-largest among the nations using the euro, will shrink 0.6 percent in the three months through March, the Paris-based central bank estimated yesterday. The bank forecast in December that the economy contracted 1.1 percent in the final quarter of last year.

Industrial production fell 11.1 percent from a year ago in December, Insee said. French manufacturing production, which excludes energy and food output, dropped 2.8 percent in December from the previous month and 14 percent from a year earlier, Insee said. Auto production fell 7.7 percent in December from the previous month.

Insee is due to release French fourth-quarter GDP figures on Feb. 13. The statistics office had previously reported a 2.4 percent drop in industrial production in November.

To contact the reporter on this story: Francois de Beaupuy in Brussels at fdebeaupuy@bloomberg.net.

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Yoon Cuts South Korean GDP Forecast, Pledges Stimulus

By Seyoon Kim

Feb. 10 (Bloomberg) -- South Korea’s new Finance Minister Yoon Jeung Hyun pledged to increase stimulus spending after forecasting the economy will shrink about 2 percent this year and lose about 200,000 jobs.

Yoon’s estimate is a reversal of the government’s December prediction of 3 percent growth in 2009 and would be South Korea’s first contraction since the Asian financial crisis a decade ago. The government will submit a spending plan to parliament by the end of March, he told said in Gwacheon today, declining to add how much extra stimulus is sought.

The government already has allocated 51 trillion won ($36.8 billion) in tax cuts and infrastructure projects to shore up domestic demand as exports decline and unemployment climbs. South Korea will consider setting up a fund to buy stakes in troubled companies to stem defaults as the economy slows, the new top financial regulator Chin Dong Soo said separately today.

“South Korea faces substantial downside risks and policy makers ought to take active steps, even more than they feel comfortable with,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “The government can use the extra budget to help middle and low-income earners, while the central bank can cut rates further.”

Standard & Poor’s said today the government’s finances are “relatively healthy” and extra spending is unlikely to threaten the nation’s foreign-currency credit rating of A.

Yoon, 62, began in the top finance post today after President Lee Myung Bak fired most of his economic team following a slump in voter support as the local currency plunged and the economy faltered.

‘Regaining Trust’

Yoon’s prediction of 200,000 job losses is the worst since 1.3 million positions were lost in 1998.

“It isn’t pleasant for me to have to talk about an economic contraction, but I believe honesty is the first step toward regaining trust in the government from the market and the people,” Yoon said.

The Kospi stock index fell 0.3 percent to 1,198.87 at 3 p.m. in Seoul, narrowing this year’s gain to 6.6 percent. The won, Asia’s worst-performing currency in 2008, slipped 0.1 percent to 1,382.9 against the dollar.

Policy makers across Asia are stepping up spending to revive their export-dependent economies.

China is rolling out a 4 trillion yuan ($585 billion) stimulus package, equivalent to almost a fifth of gross domestic product, to support an economy that is growing at the weakest pace in seven years. Japan’s 10 trillion yen ($111 billion) relief measures are worth about 2 percent of its economy.

Yoon also said the government will inject capital into financial institutions “preemptively” if needed.

Credit Rating

South Korea is setting up a 20 trillion won fund to be used for buying banks’ preferred stock and subordinated debt as the weakening economy increases bad loans and erodes banks’ capital.

“It depends on the size, but I don’t think the extra budget or the capital injection to the banks will pose a threat to Korea’s sovereign rating,” Takahira Ogawa, Standard & Poor’s Singapore-based director of ratings, said in an interview.

S&P raised South Korea’s long-term foreign-currency credit rating in July 2005 to A, the sixth highest it awards.

The economy shrank 3.4 percent last quarter from a year earlier. Exports, which are equivalent to more than 50 percent of GDP, fell a record 32.8 percent in January.

“We’ll place utmost priority on creating jobs through activating domestic demand and will pursue a supplementary budget as early as possible,” Yoon said.. “I will do my best so the economy turns around next year,” he added, without providing a growth forecast for 2010.

Interest Rates

The central bank last month cut its benchmark interest rate to a record low of 2.5 percent and will reduce borrowing costs again this week, according to a Bloomberg survey of economists.

Asia’s fourth-largest economy will shrink 4 percent this year before rebounding to 4.2 percent growth in 2010, the International Monetary Fund forecast last week.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

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King’s BOE Should Print Money, Change Mindset, Fathom Says

By Svenja O’Donnell

Feb. 10 (Bloomberg) -- Bank of England Governor Mervyn King should print money now and abandon economic assumptions that have failed to save the U.K. from its worst recession since World War II, a group of former central bank economists said.

King and his colleagues are too reliant on an economic model that doesn’t pay enough attention to credit and housing bubbles, said Danny Gabay, director of Fathom Financial Consulting and a former author of the bank’s quarterly inflation report. Ignoring these key drivers of the downturn bears “some responsibility for the current malaise,” he said.

The Bank of England has so far stopped short of increasing the supply of money even after cutting its benchmark rate to a record low of 1 percent this month. Officials should now cast off the mindset of “the Threadneedle Street establishment” in favor of faster action and “bold, fresh thinking,” Fathom says, referring to the central bank’s address.

“The bank should be printing money by now, and should have started doing it some time ago,” said Gabay, who will present an alternative approach to the crisis in London today. “The framework at the Bank of England is based on an economic nirvana. If you assume, as we feel they did, that it represents reality, you end up in the kind of mess we’re in now.”

Buying homes on the verge of repossession to add money to the economy may prove an effective tool to fight the recession, Fathom says. U.K. economic prospects may be even “bleaker” than those released in the Bank of England’s quarterly inflation report tomorrow, it forecasts.

Cracks

The Bank of England’s inflation-targeting approach, which King helped draw up in the 1990s, is showing cracks after successfully helping policy makers keep consumer prices under control for most of the past decade. Inflation breached the Bank of England’s upper 3 percent limit last year after a surge in oil prices. The credit crisis has now sparked fears among policy makers that inflation will turn negative in coming months.

“The Bank of England’s analytical framework worked well in terms of anchoring inflation between 1997 and 2007 but its inability to respond to the housing bubble and the subsequent crisis of the last 18 months has exposed its shortcomings,” said Gabay.

U.K. gross domestic product will drop 2.8 percent this year, the most since 1946 and more than any other industrialized country, the International Monetary Fund said on Jan. 28. The Bank of England said last week there’s a “substantial risk” inflation will undershoot its central 2 percent target.

Home Purchases

Purchases of homes by the Bank of England would help put a bottom on the decline in the housing market and help fight deflation by pumping money into the financial system, Fathom says. Housing sales in Britain dropped to the lowest level since at least 1978 in the quarter through January, the Royal Institution of Chartered Surveyors said today.

“The underlying problem in the economy lies in falling asset prices, notably housing,” Fathom said in the report. “The government should buy houses directly and instruct the Bank of England to print the money to pay for them.”

The Bank of England on Feb. 5 cut the benchmark rate to 1 percent, the lowest level since the bank was founded in 1693. The Treasury last month granted it unprecedented powers to buy assets, as rates head towards zero, forcing the bank to adopt less conventional monetary policy tools.

“The framework at the Bank of England assumes markets clear, markets are efficient, consumers are rational and housing markets are not prone to bubbles,” Gabay said. “Over-reliance on this has contributed to the economic mess that the U.K. now finds itself in.”

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

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Economists Say House Stimulus Creates More Jobs Than Senate’s

By Matthew Benjamin

Feb. 10 (Bloomberg) -- Economists who support legislation to stimulate growth say the version passed in the House of Representatives would create at least half a million more jobs than the bill the Senate votes on today.

The key difference: The Senate version provides less money than the House measure for public works and aid to state and local governments. While the two measures have similar price tags, the Senate’s includes bigger tax cuts and adds tax breaks for auto and home buyers, part of a compromise to win some Republican votes.

“The House bill will create more jobs and a stronger economy than the Senate bill,” said Mark Zandi, chief economist at Moody’s Economy.com, who was a campaign adviser to Republican presidential candidate John McCain. Zandi estimates that the $838 billion Senate package would create about 625,000 fewer jobs than the $819 billion House version over the next two years.

The U.S. economy has lost 3.5 million jobs since the beginning of the recession in December 2007. President Barack Obama has pledged to save or create as many as 4 million jobs over two years through stimulus and other economic measures.

The Senate plan was hammered out last week between Democrats and moderate Republicans. While providing more generous tax breaks than the House version, the Senate agreement pared $40 billion targeted at helping state and city governments avoid layoffs, $19.5 billion for school construction, $7 billion for health care and about $1 billion for early education programs.

Stimulus Blunted

Excising or reducing funds to those programs significantly blunts the stimulative effects of the Senate package, economists say.

“The things that have been cut in the Senate compromise are some of the best job creating provisions in the House bill,” said Ross Eisenbrey, vice president of the Economic Policy Institute, a Washington-based research organization affiliated with organized labor. “It’s clear that the House bill is better.”

Not much of the spending trimmed from the Senate plan is likely to be restored in the final bill Congress sends to the president, said Pete Davis, president of Davis Capital Investment Ideas in Washington, which provides analysis of Congress to investors. He said moderate Republicans, including Senator Susan Collins of Maine, won’t vote for a final bill much larger than the one negotiated in the Senate.

“I don’t think Senator Collins can swallow another $5 or $10 billion, and they’re going to need her vote,” Davis said.

Tax Cuts

In addition, the Senate agreement adds or boosts several tax cuts, including a $15,000 tax break for homebuyers that’s expected to cost $35.5 billion and a credit for new car buyers, at a price of $11 billion.

“Those measures have some stimulative value, but nothing like the effect of a construction project or help for those most affected by the crisis,” said Will Straw, associate director for economic growth at the Center for American Progress.

The Senate also reserved $70 billion in its bill to prevent additional taxpayers from having to pay the Alternative Minimum Tax. Because the benefit will go mostly to upper income Americans who are less likely to spend it, the measure has very little value in boosting sagging consumer demand.

The Tax Policy Center in Washington gives it a D-minus grade for stimulative effect. It is “neither timely nor targeted,” and “makes no sense as economic stimulus,” according to a recent report from the TPC, a joint project of the Urban Institute and the Brookings Institution.

Apples-to-Apples

Not counting the AMT fix, which Congress probably would have passed this year anyway, the price tag of the Senate package is closer to $750 billion, Zandi said: “That’s the apples-to-apples comparison.”

Viewed that way, “the House bill is just bigger, and that matters,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Not every economist agrees. Harvard University economics professor Martin Feldstein, who was a top economic adviser to former President Ronald Reagan, said both bills simply “add a tremendous amount to the national debt and add less to GDP spending.”

“We’re just not getting the bang in terms of increased economic activity,” Feldstein, a member of Obama’s Economic Recovery Advisory Board, said yesterday in a Bloomberg Television interview. Feldstein didn’t discuss the job creation effect of the legislation in the interview.

While Feldstein says a stimulus package is still necessary, other economists reject the idea altogether.

“There’s basically no historical evidence since World War II that stimulus bills help,” said William Niskanen, chairman of the free-market Cato Institution in Washington. His organization ran an advertisement in national newspapers today, signed by 243 academic economists, registering their dissent.

Still, the focus of the Washington debate remains on the composition of a package that is almost certain to be enacted.

“Economies to some extent are self healing, but often need government assistance. This is the time for that,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York. “To do nothing is a big mistake.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

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ECB’s Mersch Opposed to Zero Interest-Rate Policy

By Angus Whitley

Feb. 10 (Bloomberg) -- European Central Bank council member Yves Mersch said he’s against following the example of the U.S. Federal Reserve and lowering interest rates to zero.

“I do not consider that we are in the same position as other countries,” Mersch told Bloomberg News today in Kuala Lumpur, where he is attending a meeting of central bankers. “We are an independent central bank.” He declined to comment further.

The ECB has reduced its key interest rate to 2 percent, matching a record low, to fight Europe’s worst recession since World War II. President Jean-Claude Trichet signaled last week the bank may cut rates by another 50 basis points in March. Still, it would be “inappropriate” to lower the benchmark to zero, Trichet said. Mersch, who heads Luxembourg’s central bank, said he agrees with Trichet.

One of the reasons policy makers oppose a zero-rate policy is the so-called stickiness of inflation in the 16-nation euro region. Inflexible labor markets and a lack of competition make inflation more persistent than in the U.S. That means “deflation is less likely,” ECB council member Erkki Liikanen said Jan. 30.

Inflation, which the ECB aims to keep just below 2 percent, slowed to 1.1 percent in January, the lowest rate since July 1999 and down from a 16-year high of 4 percent just seven months ago.

While the ECB expects inflation to drop to “very low levels” in the summer, it predicts it will accelerate in the second half of the year.

‘Dangerous’ Fallacy

The ECB’s wait-and-see approach is opening it to criticism that it’s not acting fast enough to protect the economy.

Spain’s industrial production fell 19.6 percent in December from a year earlier and in Germany, Europe’s largest economy, factory orders extended their worst slump on record.

Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook plunged to a record low. The European Commission expects the economy to shrink 1.9 percent this year.

Athanasios Orphanides is the only ECB council member so far to have advocated the idea of zero rates. The suggestion that monetary policy becomes ineffective when rates are close to zero is a “dangerous” fallacy, Orphanides said in a Jan. 28 speech.

To contact the reporter on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net

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Daily Forex Analysis

Daily Forex Fundamentals | Written by FOREXYARD | Feb 10 09 08:44 GMT |

Headlines EUR Tumbles on Russian Banks Restructuring European Loans The EUR fell sharply in late-day trading after it was reported that Russian banks may seek to restructure over $400 billion loans. This adds to the already fragile European banking system and highlights the considerable tension that still exists in the financial markets. Market Trend EUR/USD GBP/USD USD/JPY USD/CHF AUD/USD EUR/GBP Daily Trend Weekly Trend Resistance 1.2915 1.4917 91.90 1.1774 0.6762 0.8715 1.2890 1.4900 91.74 1.1755 0.6740 0.8693 1.2876 1.4885 91.53 1.1736 0.6728 0.8675 Support 1.2849 1.4847 91.30 1.1713 0.6700 0.8641 1.2821 1.4828 91.18 1.1689 0.6689 0.8628 1.2800 1.4811 91.02 1.1667 0.6670 0.8600 Economic News USD - USD Regroups after Negative News for Euro Banks The Dollar initially lost ground yesterday but recovered in late trading as forex markets shrugged off a delay to the much anticipated U.S. bank bailout announcement. Despite the postponement, riskier currencies gained favor and currencies such as the USD and JPY fell as traders' risk appetite increased. The U.S. bank bailout package is expected to provide added stability to the global economy, restore confidence to shaky financial markets, and has the potential to boost U.S. economic growth. This is providing traders with new reasons to take on riskier positions. This type of trading weighed on the Dollar yesterday but the currency later recovered as the EUR/USD finished the day down at 1.2821. The bank bailout announcement was delayed as officials in the Obama administration focused on details that could potentially hold up the approval of the $819 billion economic stimulus package in the U.S. Senate. Both bailout packages are being highly anticipated and it is yet unknown what impact they will have on the financial markets. Traders are advised to follow tomorrow's announcement by Treasury Secretary Geithner as he outlines the bank bailout plan. This key event may help decide the day's direction for the EUR/USD. EUR - EUR Plunges on Russian Loan Restructuring The EUR fell sharply in late day trading after it was reported that Russian banks may seek to restructure over $400 billion loans from foreign banks. The 16-nation currency also came under pressure after European finance ministers suggested it may be more difficult for European banks to borrow in the financial markets. These two events drove the EUR lower across the board. The EUR/GBP finished the day down sharply at 0.8646 from 0.8771, and the EUR/JPY was also sent lower to the level of 117.17. The EUR had built on its gains made since Friday and continued to rally through most of yesterday's trading as the new week began with more support for riskier currencies. Last week saw U.S. Non-Farm Payrolls post a higher than expected job loss numbers and this in turn helped to appreciate the EUR against the Dollar. However, these gains were quickly erased late last night amid the Russian banking news. JPY - Traders May Look for Further Weakening in the JPY The JPY gained against its currency pairs on news that Russian banks may seek to restructure loans to their European counterparts. This puts more pressure on the already struggling European banking sector. Japan is not without its own banking troubles considering Japan's largest investment bank and brokerage, Nomura, will seek new capital upwards of $3 billion. The investment firm is struggling to absorb its acquisition of Lehman Brother's Asian operations. Yesterday the USD/JPY finished down at 91.36 while the GBP was at 135.51 Yen from 135.09. Traders may be looking for further weakening in the JPY, specifically after U.S. Treasury Secretary Geithner's speech at 16:00 GMT. His outline of the U.S. banking system bailout may help reduce market risk. This could allow traders to dump their safe haven JPY positions for riskier currencies, depreciating the Japanese currency. Look for the USD/JPY to finish the day at the 92.00 mark. Oil - Oil Settles below $40 Ahead of Inventory Data The price of Crude Oil settled below the $40 mark yesterday as traders await Crude Oil inventory data due Wednesday. Many have predicated a rise in the price as the U.S. economic stimulus package inches closer to Congressional approval; however, the commodity has been range trading between $39-43 for the past 10 days, unable to find solid support. Yesterday's closing price of $39.83 was still within this range. This is more than $100 off Crude Oil's peak price seen last July. Wednesday's Crude Oil Inventories Report, combined with the passage of the U.S. economic bailout plan, has the potential to ignite a price rally. An unexpected drop in inventories could help to push Crude Oil above the $45 resistance level by week's end. Technical News EUR/USD The hourlies show quite a wide range-trading with no specific direction; however, the daily chart's Bollinger Bands are tightening, indicating upcoming increased volatility. A bearish cross on the 4-hour chart's Slow Stochastic indicates an upcoming test of the 1.2800 level once again. If that level is breached, swinging in the trend would be the best strategy. GBP/USD The pair's bullish price movement continues within the bullish channel, which still has yet to be breached. The bullish cross forming on the hourly chart's Slow Stochastic supports the upward notion as well. The RSI is floating above the 50 level pointing to the continuation of the upward movement. Next testing point might be around 1.4950. USD/JPY After touching a base at 90.89, the pair now consolidates a bit higher at around the 91.46 level. All oscillators show that the bullish momentum will probably continue. The Slow Stochastic of the 4-hour chart is showing no crosses in the horizon, and the bullish momentum there appears to be intact as well. On the daily chart, this pair is still trending upwards and there are no imminent indications of a reversal. Therefore, traders can maximize profits by entering steady long positions. USD/CHF The bullish momentum continues full steam ahead within the bullish channel which still has yet to be breached. The 4-hour chart is showing a strong bullish cross, and the RSI on the hourly chart also supports the continuation of the bullish movement. Next testing point should be around 1.1780. Going long appears to be preferable today. The Wild Card Gold There is a very distinct downwards channel forming on the hourly chart. A fresh bearish cross on the chart's Slow Stochastic implies that the bearish correction is quite imminent. The RSI on the 4-hour chart is floating below 40, supporting the notion that there is still more room for the downwards correction. Forex traders can maximize profits by taking advantage of a currently bearish trend. Indicators Date Time (GMT) Country Event Period Previous Forecast 02/10 07:45 EUR French Industrial Production m/m -2.8% -1.9% 08:15 CHF CPI m/m -0.5% -0.5% 08:45 AUD RBA Gov Stevens Speaks * * 09:00 EUR Italian Industrial Production m/m -2.3% -2.0% 09:30 GBP Trade Balance -8.3B -8.1B 10:00 GBP CB Leading Index m/m -1.0% - 14:00 USD FOMC Member Dudley Speaks * * 15:00 USD Treasury Sec Geithner Speaks * * 15:00 USD IBD/TIPP Economic Optimism 45.5 45.0 15:00 USD Wholesale Inventories m/m -0.6% -0.8% 18:00 USD Fed Chairman Bernanke Testifies * * 23:30 AUD Westpac Consumer Sentiment -2.2% - 02/11 00:30 AUD Home Loans m/m 1.3% 3.5% 07:00 EUR German Final CPI m/m -0.5% -0.5% FOREXYARD

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U.K. Home Sales Drop to Lowest Since at Least 1978, RICS Says

By Jennifer Ryan

Feb. 10 (Bloomberg) -- U.K. housing sales dropped to the lowest level since at least 1978 in the quarter through January as property prices fell further and Britain’s recession deepened, the Royal Institution of Chartered Surveyors said.

The average number of transactions in a survey of real- estate agents and surveyors dropped to 9.9 per respondent, the lowest since the data began three decades ago, the group said today in London. A separate report showed the slowest total retail sales annual increase since 1995 in January.

The Bank of England may start buying company debt this week in a bid to get credit flowing through the economy after policy makers cut the benchmark interest rate last week to 1 percent, the lowest ever. House prices may fall “significantly further,” the Financial Services Authority said yesterday.

“This will get worse before they get better,” said Dean Lomas, of real-estate agents John Earle & Son in Warwickshire, the West Midlands, the worst-performing region in the survey. “The current economic climate is affecting everything and will continue until we get some stability.”

The number of agents saying prices fell in January exceeded those reporting gains by 76.3 percentage points, compared with 73.9 percentage points in December, RICS said. The measure was minus 91 in the West Midlands, and minus 74 in London.

Enquiries to real-estate agents by new buyers still rose for a third month, led by Wales, the East and West Midlands and London, RICS said.

Overseas Buyers

“The majority of serious enquiries are coming from overseas cash buyers,” Kevin Ryan, an agent at Carter, Jonas LLP in London’s Westminster district, said in the report, adding that it was due to a drop in the value of the pound.

Wolseley Plc, the world’s biggest distributor of plumbing gear, said Jan. 26 pretax profit fell 66 percent in the first five months of its financial year after customers delayed refurbishments and British housing starts dropped to their lowest since 1945.

“People are extremely nervous about their jobs and the way prices are going,” said Jeremy Leaf, a spokesman for RICS. “It’s very fragile. There aren’t too many buyers around.”

The number of homeowners in so-called negative equity, meaning the size of their mortgage surpasses the value of their property, will exceed 2 million if prices drop 30 percent from 2007 levels, the FSA said in a report yesterday.

Prices “could fall significantly further,” the FSA said. “The actual path may be significantly influenced by the success of policy measures.”

Company Debt

The Treasury has given policy makers a 50 billion-pound ($74.8 billion) fund to spend on company debt to help ease monetary conditions now that interest rates are close to zero.

The government is also seeking to restore confidence in the 400 billion-euro ($523 billion) market for mortgage bonds by backing top-rated home-loan securities. Banks granted just 31,000 loans for house purchase in December, close to the lowest level since at least 1999.

The British Retail Consortium said same-store retail sales rose 1.1 percent last month from a year earlier, the best performance since May. It was still the lowest increase for January, a traditional month for discounts, since 2006. Overall sales rose an annual 2.6 percent, the least in 14 years.

William Morrison Supermarkets Plc, the smallest of the four main U.K. food retailers, reported faster holiday sales growth than its larger competitors on Jan. 22 as price cuts and Christmas advertising drew 2.2 million extra shoppers.

The economy contracted 1.5 percent in the fourth quarter, the most since 1980. Bank of England Governor Mervyn King will publish new growth and inflation forecasts tomorrow.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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ECB Says Mix of Bad Bank, Asset Guarantees Cuts Costs

By Meera Louis and Matthew Newman

Feb. 10 (Bloomberg) -- The European Central Bank said governments should consider combining a so-called bad bank with guarantees of securities to achieve the most cost-effective way of ridding lenders of toxic assets.

In draft guidelines being discussed at a meeting of European finance ministers in Brussels today, the ECB said the credit crisis shows no sign of ending and that the number of illiquid assets on banks’ books will probably rise.

Lawmakers from Washington to Berlin are studying how to clear the toxic assets clogging bank balance sheets and preventing them from lending. Economist Nouriel Roubini says global bank write-offs could triple to $3.6 trillion, and the ECB is seeking to provide a framework to deal with further woes.

“The credit crisis has not yet reached the bottom of the cycle,” the ECB said in a report obtained by Bloomberg News and dated Feb. 9. “The amount of impaired assets is likely to continue growing in the future.”

In the U.S., Treasury Secretary Timothy Geithner later today will announce a plan to help banks remove illiquid securities from balance sheets. Officials haven’t yet decided on the specific mechanics of a facility, though it would create a public-private investment fund to take on older assets in lieu of the bad bank of earlier proposals.

Luxembourg’s Jean-Claude Juncker, who led talks yesterday among euro-area finance chiefs, said there is a “vital” need to tackle toxic assets in Europe. He said ministers discussed the issue “at length” and hope to reach agreement among all 27 European Union finance chiefs today.

‘Upping the Tempo’

“The various instruments that might be deployed could be used in some countries for some banks in certain situations,” Juncker said at a press conference in Brussels last night. “We continue to coordinate the European approach to toxic assets, and in the next few weeks, we will be upping the tempo there.”

The guidelines aren’t “a one-size-fits-all proposal,” EU Monetary Affairs Commissioner Joaquin Almunia said after yesterday’s meeting, which he attended along with European Commission President Jose Barroso. “We need to guarantee a level playing field,” Almunia said. “This does not mean that all the formulas should be the same.”

While acknowledging that the best strategy varied depending on the bank and country, the ECB noted that Switzerland recently extended aid to UBS AG through a “hybrid scheme” involving elements of a bad bank and insurance. The Swiss National Bank and UBS set up a special fund to buy as much as $60 billion in toxic investments from UBS.

Commission Support

The strategy also found support in a separate draft report by the European Commission, which was prepared with ECB input. To control costs “one could consider combining a bad-bank approach and asset insurance whereby bad assets are transferred to a single entity which benefits in some way from a government guarantee,” the commission, the EU regulator in Brussels, said in the report dated Feb. 6.

European leaders may hold another informal meeting to discuss how to cope with the economic crisis before the end of the month, the EU said in a statement yesterday. In addition, finance ministers and central bankers from the Group of Seven countries are meeting in Rome on Feb 14.

The ECB said a bad bank would work best in an environment in which there was uncertainty regarding the future quality of bank assets or the impaired securities are concentrated in a few institutions. Insuring the assets may be the best approach if they are hard to value or governments have bloated public finances, it said.

Consistent Treatment

The commission also said governments should agree on the criteria for pooling impaired investments to ensure “the consistent treatment of assets” for banks with cross-border activities. An agreement is needed on the range and criteria for eligible assets and how they should be valued “to prevent that differences in approach result in opportunities for cross-border arbitrate and competition distortions,” it said.

The commission, which ensures that state aid doesn’t distort competition in the 27-member EU, said governments must avoid a subsidy war, which could hurt public finances. Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes, had no comment on the guidelines.

In setting out broad parameters for asset-support programs, the ECB said participation should be voluntary and priority given to those with large amounts of impaired assets. The definition of assets eligible for support should be kept broad and valuation of the assets is key to any plan’s success.

Banking System

Risk should be shared between the state and the banking system, while the program should be allowed to run possibly as long as it takes the assets to mature, according to the ECB report. The banks should be allowed to be run according to business principles and there should be yardsticks established to judge the success of the plan, it said.

“I think there will not be an agreement on a single methodology of how to deal with toxic assets today,” Czech Finance Minister Miroslav Kalousek told reporters before today’s meeting. “But I hope we will further advance discussions.”

To contact the reporters on this story: Meera Louis in Brussels in Brussels at mlouis1@bloomberg.net; Matthew Newman in Brussels at mnewman6@bloomberg.net.

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China’s Inflation Slows to 1%, Producer Prices Tumble

By Kevin Hamlin and Yidi Zhao

Feb. 10 (Bloomberg) -- China’s producer prices tumbled by the most in almost seven years and inflation cooled to the weakest pace since 2006 as the government struggled to revive growth in the world’s third-biggest economy.

Consumer prices rose 1 percent in January from a year earlier, the statistics bureau said today, after gaining 1.2 percent in December. Producer prices fell 3.3 percent after a 1.1 percent decline.

Lunar New Year celebrations last month may have prevented a bigger decline in the inflation rate as the economy slumped because of plummeting export demand. Central bank Governor Zhou Xiaochuan said today that China may use interest rates and foreign-exchange policy to cut the nation’s savings rate, boost consumption and sustain economic growth.

“Inflation could have been close to zero or worse if not for the Chinese New Year, because vegetable prices and grain prices went up,” said Wang Tao, China economist at UBS AG in Beijing.

Government bonds climbed, spurring speculation that the central bank may cut interest rates for the sixth time since September. The yuan rose to 6.8330 against the dollar as of 11:42 a.m. in Shanghai, from 6.8338 yesterday.

The global slowdown helped to trigger the drop in producer prices by prompting declines in costs of imports such as metals, the statistics bureau said in a statement.

McDonald’s Cuts Prices

McDonald’s Corp., the world’s biggest restaurant chain, said it cut prices in China last week to keep meals “affordable,” after the nation’s fourth-quarter economic growth was the slowest in seven years.

China’s slumping exports and economic slowdown have cost the jobs of 20 million migrant workers and led to the closure of 4,000 toy factories last year.

Slowing inflation leaves more room for interest-rate cuts to increase domestic demand, as Zhou urges the nation to boost consumption to sustain growth.

“We need a comprehensive package to do the task of lowering the savings rate, including exchange and interest rates,” Zhou told a conference of central bankers in Kuala Lumpur today. “We need to emphasize internal demand, that is domestic consumption, especially in rural areas. We need to change the consumption pattern.”

Inflation was faster than the 0.8 percent median estimate of 15 economists surveyed by Bloomberg News. The slump in producer prices was steeper than the survey’s forecast of a 2.6 percent decline.

Deflation Risk

The drop in producer prices “shows a rate cut is possible in the near term,” said Zhang Liling, a Shenzhen-based fixed income trader at China Merchants Bank Co., the country’s sixth largest lender.

The yield on the 3.68 percent note due in September 2018 fell 1.2 basis points to 3.3 percent, and the price of the security climbed 0.10 per 100 yuan face amount to 103.27, as of 11:32 a.m. in Shanghai.

China may report deflation in the first half of this year because of reduced commodity prices and because comparisons will be with inflation that reached an 11-year high of 8.7 percent in February 2008, said Jing Ulrich, head of China equities with JPMorgan Chase & Co. in Hong Kong.

Consumer prices “should stabilize towards mid-year” as the government’s 4 trillion yuan ($585 billion) stimulus package boosts consumption, Ulrich said.

The nation’s worst drought in 50 years may push up grain prices.

Pressure to Cut Rates

The inflation slowdown “puts more pressure on the central bank to cut interest rates further,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. “In the short term, the downward pressure is on prices.”

The key one-year lending rate stands at 5.31 percent after 2.16 percentage points of reductions in 2008 that followed the collapse of Lehman Brothers Holdings Inc. The central bank is yet to make a reduction this year.

Peng expects the rate to be cut a further 81 basis points this year after the economy grows as little as 5 percent this quarter.

China’s economy expanded 9 percent in 2008 after a 13 percent gain in 2007 that pushed it past Germany to become the world’s third-biggest. In the fourth quarter of last year, growth cooled to 6.8 percent, the weakest pace since 2001, on the export decline and a slump in property.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net;

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Geithner’s Bank Rescue May Determine Effectiveness of Stimulus

By Scott Lanman and Craig Torres

Feb. 10 (Bloomberg) -- The unprecedented stimulus package that President Barack Obama is trying to wrestle through Congress may end up being wasted unless the administration can find a way to restart stalled credit markets.

Investors are demanding a 5.20 percentage-point premium over U.S. Treasuries to buy bonds sold by companies with investment- grade ratings, more than five times the level of two years ago. The rate on jumbo mortgages is 6.91 percent, almost 1 percentage point higher at than the start of 2007.

The financial-rescue plan that Treasury Secretary Timothy Geithner will unveil today may determine how effective the stimulus will be. Without the ability to borrow to invest in new business projects, or credit for purchases of new cars, homes and appliances, companies and households won’t be able to follow through on Obama’s tax cuts and spending programs, analysts said.

“We really haven’t seen any breakthrough yet in the credit logjam,” said former Federal Reserve Governor Lyle Gramley, who is now a senior economic adviser at Stanford Group Co. in Washington. “We’re going to get limited benefit from the stimulus program unless people can finance their normal operations.”

After weeks of debate, the Treasury today will announce a fresh round of injections of taxpayer funds into banks, an expanded Fed-led effort to spur consumer and small-business loans and an initiative to address the toxic assets clogging banks’ balance sheets. Geithner speaks at 11 a.m. in Washington.

Private Capital

It’s unclear how successful Geithner’s plan will be in restarting markets. One of the ideas is to bring private investors into a so-called aggregator bank that would buy devalued securities, according to people familiar with the matter.

The illiquid securities, mainly tied to mortgages, have spooked investors away from putting new money into banks and made lenders loath to extend new credit. Rather than borrow at the Fed’s target rate for overnight funds -- now as low as zero percent -- to lend, banks have instead parked a surplus of $793 billion of cash at the central bank itself.

“We have got to fix the financial system -- if we do not deal with this, we will not get anything else done,” Christopher Whalen, managing director of Institutional Risk Analytics, a financial-services research company in Torrance, California, said in a Bloomberg Television interview. “If banks cannot move mortgages off their books, then we have a problem. We will see credit availability much lower” than in past generations.

Restart Market

Whalen said the challenge is for the government to craft its solution so that it becomes a “market maker,” enabling the banks to offload the illiquid securities and put them in the hands of other investors.

The aggregator bank may end up working like an auction house, with the government orchestrating sales, said Stuart Eizenstat, a partner at the law firm Covington & Burling and a former deputy Treasury secretary in the Clinton administration. Banks would bring distressed assets for investors to bid on, with federal protection for buyers against future losses.

“The government will in effect put a floor under those assets,” Eizenstat said. “If the value goes up, the investor gets the benefit. If the value goes down, the government picks up that, but it’s much less of an immediate expenditure than you would have if you purchased them.” Guarantees may also play a role for investments banks intend to hold to maturity, he said.

Investor Signals

Investors offered mixed signals about their appetite for participating in the effort.

“It will be a bad decision for a hedge fund to invest in these illiquid assets,” said Kenneth Windheim, chief investment officer of Strategic Fixed Income LLC in Arlington, Virginia, which manages $1.7 billion in assets and invests with hedge funds. “You’ll end up running into the same problems as the banks. The hedge fund industry is suffering as it is already.”

John Snow, a former Treasury secretary who is now chairman of Cerberus Capital Management LP, said that guarantees “might energize the private sector to begin putting in capital.”

Obama warned yesterday in a news conference that the economy faces a “full-blown crisis,” urging lawmakers to approve the stimulus package of more than $800 billion being considered in Congress. The credit crisis “is not over,” he said.

The financial rescue needs to create an “improving” credit market to ensure that the stimulus works, said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York and a former Fed researcher.

Bond Sales

There are signs of a thaw in some markets. Companies sold $146 billion of bonds in the U.S. last month, the most since May, and even high-yield, high-risk junk debt had the best start to a year since 2001.

Procter & Gamble Co., the world’s largest consumer-products company, sold six-year notes last week at a rate more than a percentage point lower than it issued in December.

Still, a measure of the appetite for banks to lend to each other remains elevated. The gap between the three-month London interbank offered rate and the overnight indexed swap rate is 0.95 percentage point, down from a high of 3.64 percentage points in October, while remaining distant from the 0.25 percentage point level some analysts regard as indicating a stable market.

Another option that officials and regulators considered was to set up a government-funded “bad bank” that would buy up the toxic debt. New York Senator Charles Schumer said that was “very expensive,” costing as much as $4 trillion, and risked setting values for the securities “so low that every other bank would go bankrupt.”

TALF Expansion

To help spark new credit, the Treasury plans to work with the Fed to expand the Term Asset-Backed Securities Lending Facility. The program, which has yet to start in its original form, offers loans to investors in top-rated debt backed by “newly and recently originated” loans.

The TALF has initially aimed at providing up to $200 billion of credit, with $20 billion from the Treasury’s $700 billion Troubled Asset Relief Program. It covers education, car and credit-card loans, and borrowing guaranteed by the Small Business Administration. The program may be expanded to include real- estate debt such as commercial mortgage-backed loans.

“They’re going to have to put a lot more TARP money into that,” Gramley said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

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Taiwan Energy Demand Falls for Sixth Month on Global Recession

By Yu-huay Sun

Feb. 10 (Bloomberg) -- Taiwan’s energy demand fell for a sixth month in December as manufacturers cut their consumption because of the global recession.

Use of coal, petroleum, gas, solar energy and electricity dropped 16 percent from a year earlier to the equivalent of 8.62 million kiloliters of oil, or about 1.75 million barrels a day, the Bureau of Energy said in an e-mailed statement. Demand dropped 2.6 percent in 2008.

Taiwan’s exports including computer chips, fuels and metal products fell by an unprecedented 44.1 percent last month, a finance ministry report showed yesterday. Industrial output plunged by a record 32 percent in December from a year earlier, the economic ministry said Jan. 23.

“The fall in energy demand reflected the economic downturn,” Alan Wang, a planning official at the bureau, said by telephone in Taipei today. “Industries across the board cut factory utilization, driving down energy consumption.”

AU Optronics Corp., the world’s third-largest maker of liquid-crystal displays, used 50 percent of its factory capacity in the fourth quarter, lower than the 80 percent in the previous three months, the Hsinchu-based company said last month.

CPC Corp., Taiwan’s state-owned oil refiner, extended the maintenance closure of a naphtha-processing plant in Kaohsiung to more than three months from about 45 days because of weak market demand for ethylene, used to make plastics and fabrics.

Industrial users led the decline in energy consumption in December with a 25 percent drop, according to the bureau.

Power Consumption

Consumption of petroleum products plunged 23 percent from a year earlier to the equivalent of 3.72 million kiloliters of oil in December, the bureau said.

Power consumption fell 11 percent to 16.4 billion kilowatt- hours, with demand from industrial companies 18 percent lower than a year earlier.

Formosa Petrochemical Corp. and CPC, Taiwan’s only refiners, utilized 62 percent of their crude distillation capacity in December compared with 71 percent in November, the bureau said. Crude-oil processing declined 22 percent from a year earlier to 3.84 million kiloliters.

Energy use fell 2.6 percent last year to the equivalent of 119.6 million kiloliters of oil, reversing the 4.4 percent gain in 2007.

To contact the reporter on this story: Yu-huay Sun in Taipei at ysun7@bloomberg.net.

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