Economic Calendar

Monday, March 16, 2009

London Session Recap

Daily Forex Fundamentals | Written by Forex.com | Mar 16 09 12:36 GMT |

The EUR and other major currencies continued to gain ground against the USD in London trading as global stock markets built on last week's rebound and news that the G20 would increase its funding to the IMF, which in turn would support beleaguered Eastern European economies. The USD continued to lose ground as its safe haven appeal softened against the better market backdrop. European stock markets were up around 2.5% and futures pointed to a 1% gain at the open for US shares. JPY-crosses surged higher as risk appetites improve, which also saw gold retreat about $5 to $925/oz. Oil prices also dropped sharply after OPEC declined to cut output in light of the global downturn.

EUR/USD popped over 1.2950 highs from last week and traded as high as 1.3060/65 by the NY opening. GBP/USD broke above 1.4050 and was trading just below intra-day highs near 1.4225/30, leading the way as a key UK banking group indicated it would seek to raise private capital to avoid falling under greater government control.

Upcoming data releases

  • 3/16/2009 12:30 CA Capacity Utilization Rate 4Q 77.40% - -
  • 3/16/2009 12:30 US Empire Manufacturing MAR -34.65 -33
  • 3/16/2009 13:00 US Net Long-term TIC Flows JAN $34.8B - -
  • 3/16/2009 13:00 US Total Net TIC Flows JAN $74.0B - -
  • 3/16/2009 13:15 US Industrial Production FEB -1.80% -1.30%
  • 3/16/2009 13:15 US Capacity Utilization FEB 72.00% 71.00%
  • 3/16/2009 EC ECB's Trichet Speaks on European Integration, in Frankfurt 16-Mar
  • 3/16/2009 17:00 US NAHB Housing Market Index MAR 9 9

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DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.


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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | Mar 16 09 12:37 GMT |

USD-CHF @ 1.1811/14...May dip towards 1.1763

R: 1.1870-75 / 1.1935 / 1.2005
S: 1.1771-63 / 1.1728 / 1.1687

Dollar-Swiss slipped during the day as Dollar lost strength across the majors. The Resistance of 200-day MA at 1.1935 continued to hold and it could now be expected to slide towards 1.1763 and rest Support there before it bounces back. A rise past 1.1935 would be very crucial beyond which the the pair might make some sizeable gains of 400 to 500 pips. With SNB's announcement to intervene in FX Market, we might see the Dollar rising further against Swiss Franc. To see the chart of Swiss, click on: http://www.kshitij.com/graphgallery/chfcandle.shtml#candle

Cable GBP-USD @ 1.4208/12...Sell on rise

R: 1.4250-72 / 1.4334-68 / 1.4421
S: 1.4154 / 1.4120 / 1.4020

Cable is facing Resistance from the trendline on the daily candle charts. Traders would be eyeing the Industrial Production numbers from the US. A break past this Resistance which though presently looks unlikely could next find Resistance near 1.4368 whereas the Support at 1.35 on the downside looks strong enough. Sell on rallies for Cable should be the mantra given the bleak outlook following the sharp dip in Cable over the last few days.

Over the longer term, the bearishness is likely to continue and the Support at 1.37 and next at 1.35 would be crucial ones for the pair.

Aussie AUD-USD @ 0.6629/32...Facing Resistance at 0.6600-40

R: 0.6641 / 0.6690 / 0.7005
S: 0.6569 / 0.6513 / 0.6475

Aussie has strengthened and is facing Resistance in the 0.6600-40 region as mentioned in the morning. We believe that this Resistance might hold. But if it were to break, as mentioned earlier in the morning that there are good chances of a rise towards 0.70 in the longer term over the next several days. On the 4-hour chart, the pair is on an uptrend and is likely to face some Resistance near 0.6660-90 which might give a good opportunity to go Short with intentions of squaring off at 0.6550 during the US session today. It is currently facing Resistance from the 55-day and 100-day MAs. To see the chart of Aussie, click on: http://www.kshitij.com/graphgallery/audcandle.shtml#candle

Kshitij Consultancy Service
http://www.fxthoughts.com

Legal disclaimer and risk disclosure

These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsibly for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.



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Currency Technical Report

Daily Forex Technicals | Written by FX Greece | Mar 16 09 12:06 GMT |

EUR/USD

Resistance: /1,2940-50/ 1,2975-80/ 1,3000-10/ 1,3070-80/ 1,3150/ 1,3190-00
Support : 1,2860-70/ 1,2800-10/ 1,2735-40/ 1,2590-00/ 1,2620-30.

Comment: Important resistance at 1,2950-00 limited euro's rise, but it still remains in high levels, folming a sideways move. Euro's outlook seems positive and the consolidation below 1,2950-3000 could be used as a base for a break.

In that case, retracements should remain above 1,2830-50 and the consolidation in the hourly chart should be resumed.

An upward break of 1,2950-60 would be the first important sign and a break of 1,3000 would confirm it. Our first targets would be at 1,3080-00, followed by 1,3350-80 area.

If 1,2950 cannot be breached and we see a downward break of 1,2830, it could lead us 100 pips lower, and 1,2730-50 area would be tested. This important support should not be easily breached and bulls are likely to gain momentum, leading euro back to 1,2850 area.

*STRATEGY :

A sideways consolidation is being formed in the short term and we will follow it trying buy orders at the retracements at 1,2860-70, with stops below 1,2810.

A clear break of 1,2810 may be followed with sell orders and target at 1,2730-50.

Sell positions could be tried at the first reach of 1,2950-70, with close stops and targets...

FX Greece

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  1. The details and information included in the above analysis, are part of research based exclusively on currency charts and are of purely instructional and educational nature. None of the information featuring in the analysis can be considered as an invitation for opening positions in FOREX market or in the market of forward contracts or any securities listed on an organized or unorganized market.
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China Eases Overseas Investment Rules for Companies

By Li Yanping

March 16 (Bloomberg) -- China said it will make it easier for its companies to invest overseas as cheaper commodity and share prices encourage bargain-hunting in industries from autos to energy.

The approval process will be simplified and mainly handled by local rather than central government, Ministry of Commerce spokesman Yao Jian said at a briefing in Beijing today. The procedures take effect May 1, a separate statement said.

China announced $22 billion of planned overseas spending last month, including a $19.5 billion investment in Rio Tinto Group, the world’s third-largest mining company. China’s outbound foreign direct investment may top inflows this year for the first time, Standard Chartered Plc says.

“The ‘Going Out’ policy to encourage more of China’s firms to invest overseas has been in place for a number of years,” said Stephen Green, head of China research at Standard Chartered in Shanghai. “We believe that 2009 will be the year when it really gains some scale.”

In 2008, China’s overseas investment doubled to $52.2 billion, including financial-sector investment, according to the commerce ministry. This year, in February alone, the total was $65 billion, according to a tally by Standard Chartered.

Eighty-five percent of applications for outbound investment that previously needed central government approval will be handled by local authorities in future, Yao said.

Energy, Minerals

The commerce ministry will scrutinize investment plans of more than $100 million and those which involve multiple countries, the ministry said in a separate statement. Provincial commerce authorities will vet smaller deals and those involving energy and minerals, it said.

China’s Minmetals Group is awaiting shareholder and government approvals for a A$2.6 billion ($1.7 billion) takeover of Melbourne-based OZ Minerals Ltd., the world’s second-largest zinc mining company.

Hunan Valin Iron & Steel Group agreed in February to buy a A$1.2 billion ($776 million) stake in Australia’s third-largest iron ore exporter Fortescue Metals Group Ltd. to secure supplies of the raw material.

China Shipping (Group) Co., the nation’s second-biggest sea-cargo company, said last week that it was looking for opportunities to buy assets overseas as shipping lines and port operators struggle with slumping world trade.

A strong currency, cheaper commodity prices and the need for many foreign companies to pay off debt are creating “the perfect opportunity” for China’s firms to ramp up investment abroad, Standard Chartered’s Green said.

‘Flurry of Deals’

“The beginning of 2009 has seen a flurry of deals in which Chinese investors have secured ownership or long-term supply contracts to such things,” he added.

Cnooc Ltd., China’s biggest offshore oil explorer, is seeking opportunities to acquire overseas assets made cheaper by the global financial crisis, Chairman Fu Chengyu said March 5. China, the world’s second-largest energy consumer, entered into oil-for-loans accords with Venezuela, Brazil and Russia last month.

Automakers are being to encouraged to make overseas acquisitions, according to Miao Wei, vice minister of the Ministry of Industry and Information Technology.

Today’s announcement came after China’s government said last week that it will simplify approvals for overseas capital entering the nation by giving local governments more authority to approve such spending.

More outbound investment “will help to improve China’s balance of payments while China is still running a relatively large trade surplus,” Yao said.

Foreign direct investment in China fell 15.8 percent in February, the fifth straight monthly decline, as companies cut spending to weather the global financial crisis, the commerce ministry said today.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net





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U.K. Mortgage Bond Market May Stay Shut, BOE Told

By Jennifer Ryan

March 16 (Bloomberg) -- U.K. residential mortgage-backed bond markets may stay shut throughout the rest of this year as banks nurse losses from the financial crisis, according to the Bank of England’s contacts.

“Overall liquidity conditions have yet to normalize to any significant degree,” the central bank said in its quarterly bulletin today. “Residential mortgage-backed securities (RMBS) markets remained effectively closed, at least for publicly issued securities. In general, contacts did not expect a sustained improvement in market conditions during 2009.”

Average asking prices for a home dropped 9 percent this month from a year earlier as buyers struggled to obtain home loans, Rightmove Plc said today. The British economy is in the throes of its worst contraction for three decades, threatening to exacerbate losses at banks stung by the financial crisis.

The central bank said in its report that credit costs rose last month as institutions became more reluctant to lend to each other. While the three-month London Interbank Offered Rate has fallen more than 4.4 percentage points since last year’s peak, the Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to a two-month high on March 11.

“Contacts cite ongoing balance sheet constraints on financial institutions as an important factor in continued pricing anomalies in various asset markets,” the bank said.

The outstanding balance of British residential mortgage- backed securities was the world’s second-biggest as of the third quarter of 2008, totaling 407 billion euros ($528 billion). That’s still a 10th of equivalent outstanding U.S. securities.

Toxic Assets

Prime Minister Gordon Brown has taken controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc and agreed to insure 585 billion pounds ($828 billion) of toxic assets, in return for pledges that they will lend more.

Barclays Plc, the U.K.’s third-biggest lender, said today it’s in talks with the Treasury about participating in its asset protection program, based on the “economic merits” to shareholders. It will only enter the program if it can do so without giving up a stake to the government, according to five analysts surveyed by Bloomberg News.

Rightmove, Britain’s biggest property Web site, said asking prices for homes fell 9 percent from a year earlier, close to the pace of February. On the month, prices rose 0.9 percent to an average of 218,081 pounds, the report showed.

Rate Cut

The Bank of England cut the benchmark interest rate to 0.5 percent on March 5, and started printing money to buy gilts and other assets to revive the economy and prevent deflation. The bank will spend 2 billion pounds on government bonds today and a total of 5 billion pounds this week.

The central bank’s forecasts show economic growth won’t resume until the second quarter of next year, while inflation will slow to 0.3 percent in early 2011, below the bank’s 2 percent goal.

Policy makers “will take the necessary steps to bring inflation back to target by making changes to monetary policy so that any deviation from target is short-lived and less costly,” according to a separate article in the bulletin by Charlotta Groth and Peter Westaway, both officials at the bank.

The central bank’s economic forecasts are consistent with the “configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock” in an environment of debt deflation, the article said. Uncertainty about how the strength of these effects form part of the bank’s uncertainty about how bad things will get, the bulletin said.

A situation of deflation where interest rates are at zero also poses a risk to the economy by eliminating one of the central bank’s tools for stoking growth, the economists said.

“If policy responds sufficiently promptly and decisively, employing the full range of conventional and unconventional monetary policy instruments, deflationary episodes should be short-lived,” Groth and Westaway wrote.

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





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Bernanke May Buy Treasuries After Gilt Yields Fall

By Rich Miller

March 16 (Bloomberg) -- Ben S. Bernanke may have something to learn from his former Massachusetts Institute of Technology colleague Mervyn King.

By buying government securities to increase the supply of money, Bank of England Governor King is taking a step that Federal Reserve Chairman Bernanke has only talked about. Early results have been encouraging: Yields on 10-year U.K. government bonds fell to 2.94 percent March 13, at least a 20-year low, from 3.64 percent before King announced the policy March 5.

“The BOE is providing an actual experiment in answering some of the concerns that the Fed has about the effectiveness” of using the strategy to effectively print more money, says former Fed Governor Laurence Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers LLC.

Bernanke and his colleagues on the Federal Open Market Committee start a two-day meeting tomorrow to discuss the deteriorating economic outlook and what they can do to turn it around. After their last meeting ended on Jan. 28, policy makers said they were “prepared to purchase longer-term Treasury securities” if it became clear the policy would be “particularly effective” in getting credit flowing again.

Since then, the stock market has fallen, with the Standard & Poor’s 500 index down 13 percent in a month and a half, even after last week’s 11 percent gain. Unemployment hit a 25-year high of 8.1 percent in February, and the number of Americans drawing jobless benefits reached a record 5.3 million.

Flooding the System

“The economy is in a free-fall,” says Tim Duy, an assistant professor at the University of Oregon in Eugene who writes on Fed policy. “They need to flood the financial system with money.”

Bernanke first raised the possibility of Treasury purchases in a speech on Dec. 1. The central bank subsequently put the idea on the back burner to focus on this month’s start of the Term Asset-Backed Securities Loan Facility, a $1 trillion credit program for consumers and small-business owners.

“At this point in time, the Fed has judged that buying long-term Treasuries is not the most efficient means of easing financial conditions,” Federal Reserve Bank of New York President William Dudley said after a March 6 speech in New York.

Treasuries have lost 2.85 percent this year, according to an index compiled by Merrill Lynch & Co., sending yields higher.

Dudley and other Fed policy makers argue that they get more punch for their purchases by concentrating on specific credit markets rather than buying Treasuries. The average interest charge on a 30-year fixed-rate mortgage has fallen to about 5 percent from more than 6 percent since the Fed announced plans to purchase $500 billion of mortgage-backed securities last November.

‘Credit Easing’

Bernanke, 55, has described the Fed’s approach as “credit easing” to distinguish it from the “quantitative easing” policy the Bank of Japan adopted from 2001 to 2006. The strategies differ in how they pump money into the economy. The BOJ’s focus was on increasing reserves in the banking system to encourage more lending. The Fed is trying to lower the cost of credit for specific types of borrowers, such as home buyers.

King -- whose office adjoined Bernanke’s when the two were visiting professors at MIT in Cambridge, Massachusetts, during the 1980s -- is pursuing both approaches.

Gilt Purchases

He is aiming to expand reserves in the financial system through purchases of U.K. government bonds, known as gilts -- a strategy he describes as “conventional unconventional” monetary policy. He will also buy private-sector assets as Bernanke is doing -- an approach the Bank of England chief calls “unconventional unconventional.”

The U.K. Treasury authorized the BOE to spend 150 billion pounds ($210 billion) for asset purchases, mostly of gilts. In the first stage, it will spend 75 billion pounds during the next three months.

King, 60, who has faced criticism for moving too slowly as the economic crisis gathered steam, was able to put his plan into action quickly because it involves the government-debt market, where the BOE already operates regularly. The central bank held its first auction to buy gilts on March 11, just six days after it unveiled the program.

In contrast, it has taken the Fed four months to launch the TALF, as it tweaked the terms of the program to make it more attractive for private lenders to participate.

Favorable Response

The U.K. bond market responded favorably to the moves by King. Corporate bonds in pounds rose, driving down borrowing costs. The Markit iBoxx sterling nonfinancial corporate bond index has gained 4.7 percent since March 4. The benchmark index includes 260 bonds issued by companies including confectionary maker Cadbury Plc, Vodafone Plc and supermarket chain Tesco Plc.

“Given that it was a groundbreaking operation, it went pretty well,” says John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London.

The Fed and the BOE, like other central banks, are struggling to find fresh ways to rescue their economies as they run out of room to cut interest rates further. King cut the BOE’s benchmark rate to 0.5 percent March 5, and the Fed’s overnight lending-rate target has been between zero and 0.25 percent since Dec. 16. Both are record lows.

The Bank of Japan is focusing on measures to improve corporate finance, rather than on boosting the money supply. Governor Masaaki Shirakawa, 59, argues that quantitative easing had only a limited effect on improving the economy when the BOJ tried it earlier this decade, although it did help stabilize the financial system.

Shirakawa’s Intentions

“Shirakawa doesn’t seem to have any intention of reviving quantitative easing by using a reserve target,” says Izuru Kato, chief market economist at Totan Research Co. in Tokyo.

The BOJ, which reduced its benchmark interest rate to 0.1 percent in December, is buying commercial paper and corporate bonds and has resumed purchases of shares from financial institutions. Shirakawa, though, is resisting pressure from politicians to increase the BOJ’s purchases of government bonds to help finance a stimulus package.

The Swiss National Bank is taking a different tack. After cutting its main lending rate to 0.25 percent March 12, the central bank started selling Swiss francs in the foreign- exchange market. The flood of new francs drove the Swiss currency down 3.4 percent against the euro March 12 and 13.

Exchange Rates

When central banks fail to align their nontraditional policies, “that can be hugely destructive” for exchange rates, says Richard Portes, professor of economics at the London Business School. After King unveiled his plans March 5, the pound fell 3.4 percent against the euro through March 13.

European Central Bank President Jean-Claude Trichet has been reluctant to emulate the policies of some of his fellow central bankers. The ECB’s key rate, at 1.5 percent, is the highest among major central banks in the industrial world. Trichet, 66, said March 5 that while the ECB is examining “nonstandard measures,” it hasn’t made any decisions on their use.

Bernanke and the Fed led the way last year in taking unconventional steps to aid the economy by supporting the commercial-paper market and moving to buy mortgage-related debt, says David Jones, president of Denver-based DMJ Advisors.

“Now he’s got to decide whether it goes all the way and buys Treasuries,” says Jones, author of four books on the Fed. “At some point,” he predicts, the central bank will.

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net





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European Payrolls Shrink by Record as Economic Slump Deepens

By Emma Ross-Thomas

March 16 (Bloomberg) -- European payrolls contracted by the most on record in the fourth quarter as the global financial crisis forced companies to scale back production and cut jobs.

Employment in the euro region shrank 0.3 percent from the previous three months, the second straight contraction and the biggest decline since the data series started in 1995, the European Union statistics office in Luxembourg said today. Compared with the year-earlier period, payrolls stagnated in the fourth quarter, and full-year growth slowed to 0.8 percent from 1.8 percent in 2007. A separate report showed inflation held near the lowest in 10 years in February.

Companies from auto-parts maker Continental AG to oil company Total SA are laying off workers to weather the deepening global recession. With euro-area unemployment at a two-year high and inflation at a decade low, growing concerns about deflation are putting pressure on the European Central Bank to announce new measures to stimulate lending.

“We’re definitely going to see employment fall a lot further,” said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. “It’s likely to bring inflation down further, or at least keep inflation limited,” he said, adding that employment may continue to decline “well into next year.”

With oil prices down by two-thirds since a July peak, consumer prices in the euro area rose 1.2 percent from a year earlier in February, holding near the lowest rate since 1999. Retail sales have declined for eight months and Carrefour SA, Europe’s largest retailer, said on March 12 that it would step up price cuts.

Global Economy

Goldman Sachs Group Inc. expects the euro-area economy to shrink by 3.6 percent this year and lowered its forecast for the global economy on March 13 to a 1 percent contraction. The World Bank has also said the world economy may contract this year for the first time since World War II.

Finance chiefs from the Group of 20 meeting in Britain over the weekend pledged a “sustained effort” to end the worldwide slump. As the credit freeze threatens to push the global economy deeper into its worst recession in six decades, the G-20 vowed to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses.

Hanover, Germany-based Continental, Europe’s second-biggest auto-parts manufacturer, said on March 11 that it plans to eliminate 1,900 jobs in the next 12 months. Paris-based Total, Europe’s third-largest oil company, plans to cut 555 positions at its refining and petrochemicals operations in France.

Rate Cut

The ECB has reduced its key interest rate by more than half since early October to a record low of 1.5 percent in its efforts to combat the worst global recession since World War II. The central bank expects inflation to average just 0.4 percent this year, and ECB President Jean-Claude Trichet said last week that deflationary risks were “negligible” even as he left the door open to another rate cut.

“Most analysts, including us, are thinking the ECB is underestimating the risk of deflation,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “There’s a risk that lower headline inflation, lower core inflation will start to impact on expectations of households and markets and that’s what the ECB is sort of in denial about.”

Data last week added to deflation concerns. European producer prices unexpectedly fell on an annual basis in January for the first time since 2004 as German wholesale prices declined the most in almost 22 years.

The statistics office estimates that the total number of people employed in the euro area was 145.4 million in the fourth quarter. The total in the 27-nation EU was 225.3 million.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net





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G-20 Turns Sight on Toxic Assets in Coordinated Move

By Simon Kennedy

March 16 (Bloomberg) -- Finance chiefs from the Group of 20 vowed to work together to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses.

Officials meeting near London this weekend outlined guidelines on how governments should rid banks of distressed securities that have devastated companies from Citigroup Inc. to Royal Bank of Scotland Group Plc. With the G-20 calling the fight its “key priority,” Treasury Secretary Timothy Geithner vowed in an interview to “move quickly.”

The commitment, made three weeks before G-20 leaders gather in London, comes as investors demand faster action in the face of turmoil that’s showing few signs of abating. The Standard & Poor’s 500 Financials Index has dropped 35 percent this year and a lack of lending is pushing the global economy deeper into its worst recession in six decades.

“Markets are looking to policy makers around the world to move from the recognition and design stages to implementation, and to do so in a coordinated, or at least correlated, fashion,” Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co. in Newport, California, said in an interview. “Tackling toxic assets is a necessary condition for sustainable progress.”

New Powers

Separately, the Obama administration may give the Federal Reserve new powers to impose tougher capital requirements for large banks, the Wall Street Journal said today, citing people familiar with the matter.

Governments have struggled to tackle toxic assets head on, allowing concern to seep through markets that banks still haven’t revealed all their exposure.

The Bush administration’s $700 billion Troubled Asset Relief Program was redirected away from buying the tainted securities and Geithner has disappointed investors by not giving details of a promised $1 trillion plan.

Germany has had several false starts and Barclays Plc is so hesitant about the terms of Prime Minister Gordon Brown’s asset guarantee program that it still hasn’t signed up.

“There have been too many promises already and investors now want to see concrete actions getting rapidly underway,” said Marco Annunziata, chief economist at UniCredit MIB in London. Citigroup, Commerzbank AG and Lloyds Banking Group have lost more than half their value this year

Substantial Recovery

Speaking after their talks, officials conceded that until banks are cleansed and can start lending again, attempts to revive growth by cutting interest rates and taxes would pack little punch.

“We aren’t going to have a substantial recovery in the real economy until we solve the bank issue,” Canadian Finance Minister Jim Flaherty said. Fed Chairman Ben S. Bernanke said in an interview with CBS Corp. that aired yesterday the biggest risk to an economic recovery is a shortage of “political will.”

Action may be imminent. Chancellor Angela Merkel is considering taking over Germany’s non-performing assets until they mature, according to three people familiar with the proposal. Geithner will this week roll out enough information on his public-private partnership plan for investors to gauge their interest in it.

“We have and expect to see a lot of support for this program” among potential buyers of the assets, he said in an interview after the Horsham talks.

Global Reach

To govern such programs, the G-20 proposed a dozen principles for authorities to follow with the hope that a united front would avoid distorting capital flows or sparking protectionism. The parameters are meant to guide a “cooperative and consistent approach by national authorities.”

“Financial institutions are global in their reach so it’s important governments adopt a common approach,” said Daniel Price, President George W. Bush’s G-20 negotiator and now senior partner for global issues at Sidley Austin LLP in Washington.

Among the guidelines: shareholders should be exposed by the “maximum possible” to losses or risks prior to a government intervening. There should also be flexibility when judging which assets can be aided and it should be clear how they are valued. Credit rating companies, hedge funds, and credit derivatives markets will be subjected to greater oversight.

Help

The parameters were drawn up to guide a “cooperative and consistent approach by national authorities,” the G-20 statement said.

Companies that receive help should be run according to business principles and agree to impose conditions on executive compensation. Governments should provide only temporary assistance and spell out exit strategies.

“The key question is whether this framework is detailed and concrete enough to reassure markets that the normalization of banking systems is at hand,” said Annunziata.

As Obama embarks on a revamp of U.S. financial rules, Geithner also wants the Fed to have authority to look broadly at markets to spot signs of systemic risk, such as huge bets made by investment banks on mortgage debt, the Wall Street Journal said.

The G-20 also pledged a “sustained effort” to end the worldwide recession, setting aside transatlantic differences over whether that should include more fiscal stimulus as the U.S. wants.

Data will this week show U.S. factories and home builders scaled back even more last month and European industrial production dropped the most on record in January, according to surveys of economists by Bloomberg News.

Necessary Action

“We are prepared to take whatever action is necessary to ensure growth is restored and we are committed to do that for however long it takes,” said U.K. Chancellor of the Exchequer Alistair Darling.

The International Monetary Fund will monitor budget policies and judge if more is needed to be done after euro- region finance ministers said they had spent enough and wanted to preserve fiscal discipline.

“I was worried we wouldn’t arrive at an agreement, but we all agreed that the re-launch has to go ahead on four wheels,” said France’s Christine Lagarde.

The IMF was told it will have its resources at least doubled to $500 billion after being inundated with loan requests from Pakistan to Hungary.

Influence at IMF

Smaller countries will be granted more say in how it is run within two years and its next boss will be selected by an “open” process and not automatically a European, the G-20 said.

In a bid to prevent future crises, the officials said they would strengthen ties between their individual banking supervisors. The financial system will also have more curbs introduced to ensure regulations “dampen rather than amplify economic cycles.” Options include buffers that limit leverage and encourage banks to save capital in good times.

“All in all, the Horsham statement should be regarded as a positive sign of progress,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. It “gives hope that the G-20 leaders will be able to present a common stance in responding to the extraordinary challenges.”

To contact the reporter on this story: Simon Kennedy in Horsham at Skennedy4@bloomberg.net





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HSBC Stock Slump Has Inspector Clouseau on Case: William Pesek

Commentary by William Pesek

March 16 (Bloomberg) -- HSBC Holdings Plc’s 24 percent tumble on March 9 had a certain karmic justice to it.

Few banks did more to bring us the subprime-loan debacle than Europe’s biggest. HSBC’s 2003 purchase of Illinois-based Household International added almost 50 million U.S. clients, many with spotty credit histories. The deal brought legitimacy to a business few considered respectable.

The boom in dodgy mortgages that followed set the global crisis in motion. The carnage united 355 of the world’s wealthiest people in a telling way: They are now ex-billionaires, according to Forbes magazine’s annual wealth ranking. It cost Hong Kong tycoon Li Ka-shing $10 billion in the last year alone.

HSBC’s precipitous plunge raised the stakes not just for wealthy Hong Kongers, but the territory’s entire economy.

It’s hard to exaggerate the 144-year-old bank’s importance in Asia’s ninth-biggest economy. Hongkong and Shanghai Banking Corp. moved its global headquarters to London in 1993 and adopted a bland abbreviation. It’s still an icon among icons in Asia. HSBC is one of Hong Kong’s three note-issuing banks and its stock was long seen as a sure bet -- a retirement stock.

Many in the territory refer to HSBC as “big elephant” or simply as “the bank.” Its futuristic building is both a tourist destination and a source of pride for Hong Kong’s 7 million people. The elephant reference relates to HSBC’s large weighting in the Hang Seng stock index.

Global Storm

More importantly, perhaps, is faith in HSBC’s uniqueness. Even as Citigroup Inc. and Lloyds Banking Group Plc stumbled, Hong Kongers believed HSBC would ride out the global storm.

The events of March 9 shattered the veneer of invulnerability. “HSBC is toppled -- the whole city is mourning,” said a March 10 editorial in Hong Kong’s Apple Daily. On that same day, Sandy Flockhart, chief executive of HSBC’s Asia-Pacific operations, held a hastily arranged press conference. He said HSBC shares were “headed for calmer waters.”

The damage had already been done, though. HSBC is clearly vulnerable to the whims of global markets that are growing darker by the day. It’s also worth noting that HSBC’s shares are now trading below the level they were in 1998, when Hong Kong spent $15 billion of public money to support stocks.

Back in Recession

It’s a measure of where Hong Kong finds itself as the world economy slides. The three pillars of Hong Kong’s economy -- exports, financial services and real estate --- all look shaky. By value, home sales fell 69 percent in February from a year earlier to HK$13.6 billion ($1.8 billion), after declining 72 percent in January.

It doesn’t much matter that shares stabilized or if the March 9 plunge was related to end-of-day trading processes that Hong Kong’s stock exchange is now scrapping. It doesn’t matter much that the response by institutional investors to a rights offering this month was, in Flockhart’s words, “very strong.”

Nor should investors be comforted by news that Hong Kong’s financial regulator is investigating whether stock manipulation was behind HSBC’s volatility.

It really does make you wonder if Inspector Clouseau, the bumbling detective of “Pink Panther” fame, is on the case. Investigate all you want. Just remember that in trying to solve cases, the accident-prone Clouseau frequently brings misfortune to himself and others. And he tends to miss the big clues.

Growth Prospects

The real problem in Hong Kong is denial at the highest levels of government about the economy’s growth prospects.

The city’s strong fiscal position means Financial Secretary John Tsang should do more to support an economy heading for its first full-year contraction since 1998. Tsang’s view that gross domestic product will shrink by as much as 3 percent in 2009 might prove optimistic as China slows further.

Hong Kong’s recent move to cut taxes temporarily and boost spending on infrastructure may help. Yet policy makers will need to do far more to keep unemployment from skyrocketing as global demand slides. The deepening U.S. recession will hit Asia hard.

Tsang forecast a HK$4.9 billion budget deficit for the year ending March 31. Steven Hess, a senior credit officer at Moody’s Investors Service in New York, said last month that deficits aren’t a threat to Hong Kong’s debt rating because of its large fiscal reserves and limited borrowings. Hong Kong has plenty of latitude to boost spending.

Recent HSBC headlines won’t help consumer or business sentiment. Seeing one of the bedrocks of the economy wilting amid global turmoil won’t get households spending more of their savings. Nor is it likely to bolster confidence among executives.

Here, breathless attempts to get to the bottom of HSBC’s stock drop are of little help. Officials risk, Clouseau-style, ignoring some basic facts about the troubles heading their way. Taking them more seriously and acting boldly will bolster the stock market. Detective work won’t make much difference.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net





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China’s Net Coal Imports Jump on Overseas Purchase

By Winnie Zhu

March 16 (Bloomberg) -- China, the world’s largest coal producer and user, increased net imports of the fuel to the highest in at least four years in February after power producers boosted overseas purchases on lower costs.

Net coal purchases rose to 3.44 million metric tons after imports climbed 73 percent to 4.88 million tons and exports fell to 1.44 million tons from a year earlier, according to data released by the Customs General Administration of China in Beijing today.

Chinese power companies are buying overseas coal as benchmark prices fell to $62.10 a metric ton in the week ended March 13 at Australia’s Newcastle port, compared with an average of $129 a ton in 2008. Imports have risen as talks on annual supplies from domestic coalminers have been deadlocked since December because of disagreements over price.

“Falling international coal prices have prompted Chinese utilities to increase overseas purchases,” Wang Shuai, chief coal analyst with Orient Securities Ltd., said by telephone in Shanghai today.

Three Chinese power producers bought 390,000 tons of coal from Russia and Indonesia, the Shanghai Securities News said Feb. 17.

Datang International Power Generation Co. is in talks to buy less than 1 million tons of coal from Australian suppliers, Chairman Zhai Ruoyu said Feb. 19.

The coal price at Qinhuangdao port, a benchmark for China, was unchanged at 557.5 yuan ($81.50) a ton as of March 16, compared with a week earlier, according to the China Coal Transportation and Distribution Association. The Qinhuangdao coal price has fallen from a July record of 995 yuan a ton.

“Given recent weak spot prices, we don’t think the 2009 contract price will rise from last year’s level,” Wang said.

Chinese coalminers aimed to charge power producers 10 percent more for the fuel under the 2009 annual contracts while power producers wanted a price cut of as much as 10 percent as electricity demand has fallen, Xie Juchen, a fuel purchasing director at China Electricity Council, said in December.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net;





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Swire Shipping Denies It Lied Over Queensland Oil Spill Volume

By Angela Macdonald-Smith

March 16 (Bloomberg) -- Swire Shipping, operator of a ship that last week leaked fuel oil, coating beaches in Australia’s Queensland, denied media reports it lied about the amount of fuel lost, which is about 10 times more than initially believed.

The container ship’s officers and the authorities were initially unaware that a second fuel tank had been punctured in the accident, Swire said in an e-mailed statement. The captain of the MV Pacific Adventurer yesterday surrendered his passport to the authorities, Queensland Deputy Premier Paul Lucas said.

The Queensland government yesterday said about 250 metric tons of heavy fuel oil may have been spilled by the ship in a storm, up from initial estimates of between 20 and 30 tons. More than half of the oil-affected areas on two islands and parts of the Sunshine Coast tourist area have been cleaned, Lucas said yesterday.

The accident occurred when 31 containers carrying ammonium nitrate washed overboard in rough seas whipped up by Tropical Cyclone Hamish, piercing the hull of the Pacific Adventurer on the port side. The ship’s officers only discovered a second hole, in the starboard fuel tank, once the vessel had docked in the Brisbane River, Swire, a unit of London-based John Swire & Sons Ltd., said in the March 15 statement.

Three separate investigations are underway into the accident, by the Australian Transport Safety Bureau, the Australian Marine Safety Authority and Marine Safety Queensland.

Maritime Safety Queensland officers served Queensland legal papers on the captain of the Pacific Adventurer yesterday under the Transport Operations (Marine Pollution) Act, Lucas said in a separate e-mailed statement.

Swire “accepts its responsibilities in connection with the incident and continues to cooperate fully with the authorities,” the company said. “The master and other members of the crew will stay on the vessel in Brisbane for as long as required by authorities and will be available to assist with their investigation.”

The Queensland government hadn’t initially been told of the full extent of the spill, Lucas was cited by the Brisbane Times as saying in a March 14 report.

“When someone has lied to you about the level of leakage of oil, it is a very difficult situation to be in,” he said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net





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Tata Power Has No Plan to Sell Stake in Indonesia Bumi Mines

By Archana Chaudhary

March 16 (Bloomberg) -- Tata Power Co., India’s biggest electricity generator outside state control, said it has “no intention” to sell its stake in two Indonesian coal mines owned by PT Bumi Resources, Asia’s third-biggest coal producer.

“We strongly deny the rumors regarding our stakes in Indonesian Coal mines - KPC and Arutmin,” Tata Power said in response to e-mailed questions from Bloomberg News today. “This acquisition is a key part of the company’s growth strategy and we have no intention to sell our stake in the coal mines to Bumi Resources or any other party.”

Tata Power agreed to pay $1.3 billion in March 2007 to buy a 30 percent stake in coal mining units PT Kaltim Prima Coal and PT Arutmin Indonesia owned by Bumi. The agreement entitled the company to purchase 10 million metric tons of coal, securing supplies of the fuel for its Indian power plants.

Tata Power said it expects to meet the loan repayment requirements on schedule.

To contact the reporter on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.





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Australian Uranium Could Boost GDP by A$17 Billion, Group Says

By Angela Macdonald-Smith

March 16 (Bloomberg) -- Australia could add A$17 billion ($11 billion) to Gross Domestic Product by 2030 by maximizing supplies of uranium to meet rising global demand for nuclear- based energy, an industry lobby group said.

Production and exports of uranium could rise to about 37,000 metric tons a year by 2030 from a forecast 14,000 tons in 2014, Michael Angwin, executive director of the Australian Uranium Association, said today in a statement released at a conference in Adelaide.

Australia’s production of uranium oxide is set to rise by 5 percent to 10,583 tons in the year ending June 30, mostly from an expansion at Energy Resources of Australia Ltd.’s Ranger mine in the Northern Territory, the government’s commodities forecaster said this month. Sixty-four nuclear power reactors are expected to be commissioned over the next six years, driven by increased energy security and environmental concerns, it said.

“On our modeling of action to address climate change, including carbon pricing assumptions, even the most conservative of those scenarios sees demand for nuclear energy doubling by 2030,” Angwin said in the statement. “For Australia, with 38 percent of the world’s low-cost uranium resources and 1 percent of current uranium supply, this presents a range of opportunities.”

Australia had GDP of A$1.09 trillion at the end of 2008.

Western Australia state in November scrapped a six-year ban on uranium mining after a new government was elected, while Queensland may end its ban depending on the results of a March 21 state poll. Australia’s three producing mines are in South Australia and the Northern Territory.

South Australia is set to increase uranium output with the start-up of Uranium One Inc.’s Honeymoon project next year, Paul Holloway, the state minister for mineral resources development, said in an address to the conference. At the same time, Sinosteel Corp. and partner PepinNini Minerals Ltd. are working to develop their Crocker Well project, he said in the address, a copy of which was e-mailed to Bloomberg.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net





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Exxon Mobil Restarts French Oil Refinery, Paris Normandie Says

By Alaric Nightingale

March 16 (Bloomberg) -- Exxon Mobil Corp. resumed operations at its Gravenchon refinery in France, Paris Normandie reported, citing the site’s managers.

About 1,000 people carried out the maintenance that began Feb. 11, the newspaper reported on its Web site March 14.

The Gravenchon site in northwest France can process 233,000 barrels of oil a day, according to data compiled by Bloomberg.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net





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Saudi Minister Says Happy With Result of OPEC Meeting

By Tara Patel

March 16 (Bloomberg) -- Saudi Arabian Oil Minister Ali al- Naimi, speaking in Geneva today, said he was “yes, very happy,” with the outcome of yesterday’s OPEC meeting in Vienna.

The Organization of Petroleum Exporting Countries agreed yesterday in Vienna to maintain current production quotas, concerned that a fourth cut since September risked increasing energy costs while the global economy deteriorates.

Brent crude oil futures for April settlement fell $2.32, or 5.2 percent, to $42.61 a barrel on the ICE Futures Europe exchange at 8:26 a.m. in London, after trading between about $41 and $46 last week.

Al-Naimi is in Geneva today to attend the Energy Pact Conference along with Iranian Oil Minister Gholamhossein Nozari and oil market experts. The ministers, representing the two largest producers in OPEC will return to Vienna later this week to attend the two-day OPEC Seminar conference, along with energy industry chief executives and other government officials.

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





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KNM’s Lee May Lead Buyout If Banks Can Raise Funds

By Angus Whitley

March 16 (Bloomberg) -- KNM Group Bhd. Managing Director Lee Swee Eng said he will consider leading a management buyout of the Malaysian oil and gas services provider as long as banks can raise the funds.

Investment bankers have approached Lee, who owns 25 percent of KNM, and suggested he buy the remaining shares, though none has made a proposal that includes financing, he said. KNM has lost 71 percent in the past six months in Kuala Lumpur trading, cutting its market value to 1.31 billion ringgit ($354 million).

“We are very undervalued,” Lee, who set up Selangor-based KNM in 1990, said in an interview on March 13. “The opportunity for privatization is a good opportunity, but it’s the source of funding. There’s no offer on the table.”

Lee, 53, has seen the value of his stake plummet as the global recession, tumbling oil prices and a selloff by foreign investors combined to make KNM the second-worst performer on Malaysia’s benchmark index in 2008. He said he probably needs between 1 billion and 2 billion ringgit to pay for any takeover.

Private investment funds, which would take a stake in KNM in return for cash for the buyout, may be more likely to finance the transaction than banks, said Kaladher Govindan, head of research at TA Securities Holdings Bhd. in Kuala Lumpur.

“The main issue is who’s going to give him the funding,” said Govindan, who has a “buy” rating on KNM. “A buyout is possible, but not at this price. They still have substantial foreign shareholders, and if there’s more selling in Europe, you may see more redemptions and KNM could be affected.”

Servicing Debt

KNM was unchanged at 33 sen at the 12:30 p.m. local time break. The shares reached a record 2.48 ringgit in January 2008. At the current price, Lee said he’ll continue to buy back shares.

Cashflow at KNM would be sufficient to service any borrowings after a buyout and associated cost cuts, Lee said. Annual profit at KNM has climbed every year since 2004.

“With our earnings, we should be able to handle that,” he said. “I don’t think that would be an issue.”

Banks worldwide have restricted lending during the financial crisis, and Malaysia’s government last week pledged 25 billion ringgit in guaranteed funds to help businesses obtain credit and raise money on the bond market in the Southeast Asian nation. Even so, Lee said it’s not clear whether banks, foreign or domestic, would be willing to lend funds for a management buyout.

KNM’s business prospects are tied to the price of crude oil because exploration projects, for which producers hire companies such as KNM, become less viable as prices fall. KNM has had to reduce its bids for most of the projects up for tender, Lee said.

Volatile Prices

The Malaysian company, with an order book of 3.9 billion ringgit, won about 300 million ringgit of work between December and January, Lee said. The revised value of all the contracts that KNM is seeking is 18 billion ringgit, he said.

“The business has been a bit slow because of the volatility of the price” of oil, Lee said. “We’re expecting the second quarter onwards to be better. Most of the rebidding has taken place. We will sail through this with flying colors.”

Crude oil for April delivery fell as much as 5.2 percent to $43.85 a barrel in after-hours electronic trading on the New York Mercantile Exchange after the Organization of Petroleum Exporting Countries decided against deeper output cuts. Crude, which has slumped 70 percent from its July record, was at $44.59 at 12:40 p.m. in Kuala Lumpur.

Lee said he expects oil and gas producers to proceed with more exploration projects if oil rises beyond $50 a barrel, or stabilizes at a level between $45 and $50.

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





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‘Green New Deal’ Fails to Get Funding in Britain, Lawmakers Say

By Alex Morales

March 16 (Bloomberg) -- Britain’s spending on public transportation and home insulation falls short of a “Green New Deal” needed to forge environmentally friendly growth, a committee of lawmakers said.

A 535-million-pound ($750 million) “green stimulus” announced by Chancellor of the Exchequer Alistair Darling in November includes only 100 million pounds of new funds, the Environmental Audit Committee said in a report today critical of the plan. Most of the funds are merely accelerated spending on railways and energy efficiency already pledged in future budgets.

“Taking money out of a budget two years down the road and bringing it forward to this year doesn’t really count as a ‘green new deal’ at all,” said committee Chairman Tim Yeo, in an interview. “That’s very disappointing.”

In the U.S., President Barack Obama has pledged to spend $150 billion over 10 years to combat climate change and create “green” jobs. Alluding to the New Deal spending program to bring that nation out of the Great Depression in the 1930s, Yeo said Britain risks lagging behind in developing clean technologies and promoting growth that cuts reliance on emitting greenhouse gases blamed for global warming.

“What Obama is doing is right, and it’s what other countries will be doing as well,” said Yeo, a member of the opposition Conservative Party. “That’s right not just for short- term economic reasons, it’s right for medium-term environmental reasons too, and Britain is going to look like it’s lagging.”

The committee recommended the government adopt a target for the proportion of the U.K.’s economic output that should be spent on a “green” stimulus, suggesting 0.8 percent -- or about 11 billion pounds a year -- as a starting point. That stimulus would include other investments, such as subsidies for wind energy.

Energy Efficiency

The 16-person panel, which includes nine members of the ruling Labour Party, said the government’s priority for a green stimulus should be to increase the scale and speed of programs to make existing buildings more energy-efficient.

The Treasury responded by saying that the money included in November’s report was “only a very small part” of the government’s spending on environmental measures.

“It would be wrong to mix up the 535 million pounds of green stimulus that was in the pre-budget report with the 50 billion pounds that we think is a conservative estimate of future investment we are putting into greening our economy,” the Treasury said in its reply, which is included in the committee’s report.

The committee also criticized Darling’s decision to retract a commitment to tax airlines on each flight rather than on each passenger and his withdrawal of another measure that would have increased taxes on higher-emitting vehicles that have already been purchased.

“The use of tax to encourage greener choices has not been fully grasped, and that goes back the last three or four years,” Yeo said. “It was even more important to do it this year, and they haven’t done it.”

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





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Schlumberger Bonds May Yield 180-190 Basis Points Over Midswaps

By Shelley Smith

March 16 (Bloomberg) -- Schlumberger Ltd.’s planned sale of five-year bonds in euros will be priced to yield about 180 to 190 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction.

The company hired bookrunners HSBC Holdings Plc and Societe Generale SA, as well as joint lead managers Citigroup Inc., Nordea Bank AB and Royal Bank of Scotland Group Plc for the planned benchmark issue, said the banker, who declined to be identified because the deal isn’t complete.

The bonds will be issued by Schlumberger Finance BV and guaranteed by Schlumberger Ltd., the banker said.

To contact the reporter on this story: Shelley Smith in London at ssmith118@bloomberg.net





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Saudi Arabia Warns Against Premature Shift to Renewable Energy

By Tara Patel

March 16 (Bloomberg) -- Saudi Arabia, the world’s largest oil exporter, cautioned against falling investment in fossil fuels and a “premature shift” to renewable energy, which may leave the world short of fuels when the economy recovers.

All energy sources have a role in meeting the energy demand though the fossil fuels of oil, natural gas and coal will remain the world’s energy “work horse” for many decades to come, Saudi Arabian Oil Minister Ali al-Naimi said in a speech at the Energy Pact Conference in Geneva today.

Saudi Arabia and other OPEC members agreed yesterday in Vienna to maintain current production quotas, concerned that a fourth cut since September risked increasing energy costs while the global economy deteriorates.

New technologies, such as carbon capture and storage, will help make fossil fuels more environmentally acceptable, he said.

The country’s state energy company, Saudi Aramco, hopes to become the world’s biggest solar energy producer in future years, taking advantage of the desert kingdom’s plentiful sunshine, the minister said.

Oil reserves in Saudi Arabia, the world’s largest, will last for 80 years at current production rates and the world will rely on fossil fuels for four-fifths of its energy needs for many decades to come, he said.

Earlier today, al-Naimi, said he was “very happy,” with the outcome of yesterday’s OPEC meeting in Vienna.

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





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Natural Gas Rigs Shutting Means Prices May Double

By Reg Curren

March 16 (Bloomberg) -- Natural gas drillers from Devon Energy Corp. to XTO Energy Inc. are idling rigs at the fastest pace since 2002, setting the stage for this year’s worst commodity to almost double as supplies drop faster than demand.

About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.

The last time drillers stopped rigs at this pace was seven years ago, when futures advanced 86 percent. The world’s biggest hedge funds have already started to close bets on a drop in prices, government data show. Natural gas tumbled 30 percent this year, the worst start since 2006, as sales weakened with the recession.

“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” said Larry Nichols, chief executive officer of Devon Energy Corp., the largest independent oil and gas producer.

Devon and Chesapeake Energy Corp., both based in Oklahoma City, slashed 2009 drilling budgets as gas prices tumbled more than 70 percent from a July high. The companies lost a combined $7.68 billion in the fourth quarter, mostly from writing down the value of gas and oil properties to reflect falling prices.

‘Steep’ Decline

“The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends,” said Nichols, who declined to give a price forecast.

Devon declined 62 percent in New York trading to $45.17 on March 13 since the fuel set a 2008 high of $13.694 on July 2. Chesapeake tumbled 78 percent to $15.46 and XTO lost 55 percent to $29.70.

The number of exploration rigs in the U.S. has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc., the third-largest oilfield-services provider, based on data through March 13.

XTO of Fort Worth plans to cut rigs to 60 by the end of this month, from 73 in the fourth quarter, and keep it at that level for the rest of 2009, the company said Feb. 19.

Companies are idling rigs just as President Barack Obama spends $787 billion to revive the economy by improving roads, bridges and related public works. The effort will kick in later this year and accelerate in 2010, Michael Moran, chief economist at Daiwa Securities America Inc. said March 12.

Declining Demand

Demand from industrial users, which accounted for 29 percent of U.S. consumption last year, declined 5 percent in the fourth quarter from a year earlier as the recession deepened, according to the Energy Department. The decline would be the largest since 2005 should it last through the year.

By the fourth quarter, analysts expect the economy to expand. Gross domestic product will grow 1.6 percent in the final three months of 2009 and 1.8 percent in 2010, according to the median estimate of 61 analysts surveyed by Bloomberg.

“The next big move for gas is obviously going to be up,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, an energy markets consultant. “If we are higher, I’d expect to see us at $7 by the start of next winter.”

Speculators’ Positions

Speculators, who anticipated lower prices more than two years ago by increasing short positions, are signaling the worst may be past. A speculative short is a bet that prices will decline. Large speculators trimmed their net short positions in gas by 11 percent to 114,064 futures in the week ended March 10, the smallest total since July, Commodity Futures Trading Commission data show.

Any recovery depends on a rebound in the U.S. economy, which may not happen until next year, said Tom Orr, research director at Weeden & Co., a brokerage in Greenwich, Connecticut.

“A lot of the stimulus spending is going to be on the construction side, but that’s going to take a while to feed back into the main economy,” said Orr. “The market is operating on a show-me first basis, and you need a ton of things to work to lift prices.”

Weeden forecast in January that natural gas would average $5 per million British thermal units in the fourth quarter and into 2010, with a supply glut weighing on the commodity. Total marketed U.S. production soared 7.2 percent to 21.5 trillion cubic feet in 2008, while consumption gained 0.8 percent, according to the Energy Department.

OPEC Cuts

The decisions to reduce gas production are similar to steps by the Organization of Petroleum Exporting Countries to end a flood of crude. OPEC reduced output three times, and crude oil gained 37 percent from a December low to $46.25 a barrel on March 13. Gasoline futures rallied 34 percent this year to $1.3529 a gallon, leading commodities tracked by the S&P GSCI Index.

OPEC agreed at a meeting yesterday in Vienna to keep production quotas unchanged, deciding against a further cut that risked damaging the ailing global economy. The group will aim to complete last year’s reductions and meet again on May 28 to review the policy. The decision led oil futures to plunge as much as 5.2 percent to $43.85 a barrel in New York and the April contract was trading at $44.52 at 10:12 a.m. in Singapore.

Natural gas futures for delivery in January 2010 are trading at a 48 percent premium to the April contract, indicating speculators, industrial consumers and utilities anticipate higher prices. A year ago, the January 2009 contract traded at a 12 percent premium to the April 2008 futures.

“We’re starting to see a downward production trend” for natural gas, said Martin King, an analyst at FirstEnergy Capital Corp., a Calgary-based brokerage.

Price Rebound

Lower supplies coupled with a rebound in demand will push natural gas to an average of $7.75 in 2010, he said. Gas fell to $3.759 per million British thermal units on March 12, the lowest in more than six years. Natural gas for April delivery was trading at $3.897 per million Btu, down 0.9 percent, at 9:51 a.m. in Singapore.

Should the number of rigs drop more and stay there, production by the end of 2009 may be as much as 4 billion cubic feet a day less than a year earlier, King said.

Spending on U.S. exploration and production will drop an estimated 40 percent to $22.5 billion this year, Theresa Gusman, the head of equity research for Deutsche Bank AG’s DB Advisors unit, said in New York.

“These dramatic cutbacks in capital expenditures are going to lead to shortages as we move through this recession and come out the other end,” she said.

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





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