Sri Lanka Cuts Rates as Economy Grew at Slowest Pace Since 2003

By Cherian Thomas

March 18 (Bloomberg) -- Sri Lanka’s central bank lowered interest rates for the third time in three months after the island’s economy expanded last quarter at the slowest pace since at least 2003.

The Central Bank of Sri Lanka cut the penal interest rate to 14.75 percent from 16.5 percent, according to a statement posted on the bank’s Web site today. The economy expanded 4.3 percent in the three months to Dec. 31 from a year earlier, the statistics agency said in a separate report in Colombo.

The 175 basis point cut in rates today came before the International Monetary Fund imposes conditions on Sri Lanka in return for an emergency loan sought by the country to make payments for imports and debt. Pakistan, for example, was directed last year by the Washington-based lender to raise rates if its foreign-exchange reserves fall below a monthly floor.

“Sri Lanka has been following a tight monetary policy since 2007 to control inflation and it has to slacken now,” said Bimanee Meepagala, an investment analyst at Eagle NDB Fund Management Co. Ltd. in Colombo. “Lowering rates will be of paramount importance to boost economic growth.”

Sri Lanka’s central bank said that steps taken so far will help “promote demand and support economic activity.” The growth figure released today was the smallest since quarterly data was first compiled in 2003.

The central bank said March 4 it is in talks with the IMF for a $1.9 billion loan to repay debt and rebuild the country as a 26-year civil war draws to a close. It said negotiations may be completed by the end of this month.

Dwindling Reserves

Since August, the South Asian nation has spent half its foreign reserves, now $1.7 billion, on supporting its currency, paying debt and imports. It needs another $900 million for loan repayments in 2009. The reserves aren’t getting replenished as the ailing world economy pummels exports and overseas investors flee emerging markets.

Sri Lanka raised $184.25 million selling two-year dollar- denominated bonds, less than the $200 million it had planned, the central bank said yesterday.

President Mahinda Rajapaksa’s government turned to the IMF for a bailout, avoiding devaluation of the nation’s currency, to conserve reserves. Securing financing from other countries was challenging for the nation, which has a credit rating from Standard & Poor’s that is only higher than Bolivia, Pakistan, Grenada, Argentina and Lebanon. Fitch Ratings downgraded its outlook on Sri Lanka last month.

Governor Nivard Cabraal began easing borrowing costs from November, taking advantage of dropping commodity prices, to stimulate local consumer demand as exports waned.

Weaker Exports

Consumer prices in the capital Colombo rose 7.6 percent in February from a year earlier, the lowest in three years.

Exports from Sri Lanka fell 19.1 percent in December, the most in six years, as demand for the nation’s tea and textiles declined from the U.S. and Europe.

Sri Lanka’s government expects agriculture to be a vital support to growth in the coming quarters as areas controlled by the rebel Liberation Tigers of Tamil Eelam are liberated.

The government says it is on the verge of defeating the Tamil Tigers, who are fighting for a separate Tamil homeland. The army says it has driven the LTTE into an area of less than 55 square kilometers (21.2 square miles) in the northeast after capturing its main bases since January.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

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China’s Economy May Be Stabilizing, World Bank Says

By Kevin Hamlin

March 18 (Bloomberg) -- China’s economy is showing “early signs” of stabilizing as government-backed investment counters a slump in exports, the World Bank says.

The lender cut its forecast for the nation’s economic growth this year to 6.5 percent in a quarterly report released in Beijing today. Its estimate was 7.5 percent in November.

China is weathering the global slowdown better than many nations because its banks were largely unscathed by the financial crisis and the government quickly implemented a 4 trillion yuan ($585 billion) stimulus plan, the lender said. Government-influenced investment will surge 26 percent this year and contribute three-quarters of the economic expansion, it said.

“The government’s stimulus is working,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “China’s fundamentals are strong enough to ride out this storm.”

Premier Wen Jiabao said last week that the nation’s 8 percent growth target was “difficult but possible,” adding that the government could add stimulus measures at any time. The spending plan through 2010 includes roads, power grids, pipelines and low-cost housing.

A “substantial part” of China’s surging lending in the first two months of this year was money for infrastructure projects, the World Bank said. Private-sector investment will retreat in 2009 after contributing the bulk of fixed-asset spending in the past two years, leaving the government the key role, it said.

Investment, Consumption

Still, the government should focus less on short-term targets for GDP and more on boosting consumption to rebalance the economy away from capital-intensive industrial investment, the lender said.

The new and former World Bank forecasts both predict the weakest growth since 1990, after a slowdown deepened in the fourth quarter of last year.

“There have at least been early signs of stabilization, although, given the international weakness, it is too early to expect a sustained rebound,” the lender said. “China’s growth can only rebound significantly and sustainably if the world economy recovers, and this does not seem likely to happen soon.”

The central bank has “further scope for expansionary monetary policy,” the report said, without making forecasts for interest rates or bank reserve requirements. JPMorgan Chase & Co. predicts reductions in both within a month.

Deflation Risk

The government can counter the risk of deflation by removing price controls to let costs rise for “some industrial inputs -- energy, water, utilities, natural resources and the environment,” the report said.

Depreciation of the yuan would be unlikely to stimulate export demand and unhelpful for boosting consumption, the World Bank said. The exchange rate will be supported “in the medium term” by the nation’s current-account surplus, it said.

Exports will shrink this year, the report said.

The global slowdown has underscored the need for the world’s third-biggest economy to rely more on domestic consumption and less on investment and trade, the bank said.

The government has “room to do more” to improve health, education and social security and to boost incomes, it said.

This year’s planned fiscal deficit, which may be equivalent to 3.2 percent of gross domestic product, is “sizable but manageable,” the report said.

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

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Hedge Funds Can’t Save Themselves With Lower Fees: Matthew Lynn

Commentary by Matthew Lynn

March 18 (Bloomberg) -- It works for street traders. It can work for airlines, retailers and carmakers. But hedge funds?

As the financial community staggers from disaster to disaster, some alternative-investment managers have decided that slashing their fees is the only way to salvage their business.

Firms such as Centaurus Capital Ltd. and Harbinger Capital Partners are cutting the charges they levy on investors. As sales fall and redemptions increase, don’t be surprised if many others do the same thing.

It won’t work. The hedge-fund industry was never about price and never will be. These money managers are now showing that their ability to manipulate figures on a screen doesn’t necessarily translate into knowledge about how business works.

Throughout its explosive growth, the hedge-fund industry has been dominated by two simple numbers: 2 and 20. Typically, the funds charged 2 percent of assets under management and collected 20 percent of any gain made. Some of the biggest fortunes of recent times have been built on those two figures.

Now, with returns plummeting and investors heading for the exit, hedge funds are searching for a new strategy.

This week, London-based Centaurus Capital said it was starting a new fund that would charge a more modest 1.5 percent plus 15 percent of profits. Earlier this month, Harbinger Capital Partners, run by Philip Falcone, proposed lower management and incentive fees if investors agreed to have their money tied up for two years rather than one. New York-based Prentice Capital Management LP is offering similar incentives for tie-up periods.

‘Cost-Conscious Clients’

Expect to see more price-cutting by hedge funds in the months to come. The consulting firm Mercer released a survey in February that indicated a greater willingness to cut fees among 3,400 alternative-investment managers.

“Anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients,” Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business said.

It isn’t hard to understand why. Hedge funds are expensive products. In a world where investment returns are looking miserable, costs will be scrutinized more than ever before. A lot of people have been paying top-of-the-range prices for bottom-of- the-range performance. Not surprisingly, they aren’t happy about it. If customers are saying they want lower charges, it is difficult for the managers to say no.

Wrong Responses

The first response of many hedge funds to the crisis has been to bring down the gates to stop their investors from leaving. When they realized that imprisoning the customer wasn’t much of a long-term strategy, they decided to opt for price- cutting instead. Both responses were wrong.

Any manufacturer setting out to make and sell a product has to make a simple choice before starting: Be a low-cost, high- volume producer to sell “value” to the consumer, or be a high- cost niche producer to sell “brilliance” and “exclusivity.”

Both can be good choices. In fashion, you can be Giorgio Armani SpA or you can be Hennes & Mauritz AB. In airlines, you can be British Airways Plc, pushing its business-class seats, or Ryanair Holdings Plc, promising dirt-cheap, minimal-service flights. There is money to be made with either strategy.

Sometimes you can even straddle both within the same parent company. Volkswagen AG, for example, owns the Skoda and the Audi brands. Both of them do pretty well.

But you have to make a decision about what strategy you are pushing. And the one thing you can’t do is switch from one to the other -- at least not overnight, and not without some planning.

Choice of Strategy

There is no point in Armani suddenly flooding the market with jeans selling at 10 euros ($13) a pair, just as there isn’t much point in Hennes offering a shirt for 500 euros. Audi can’t suddenly introduce a cheap-and-cheerful city car, nor Skoda a luxury sports car. Consumers would stagger away in confusion.

Likewise, there isn’t much point in discount hedge funds.

In fund management, investors have a clear choice: They can place their money with one of the low-cost index-tracking funds, which can be run by just about anyone with a medium-powered personal computer. Or else they can put it with a hedge-fund manager who promises to consistently beat the market.

In making that decision, price isn’t really relevant.

If the asset manager can come up with a technique to outperform the market, then paying 20 percent of the profits isn’t a problem for most investors. They don’t care what the manager makes as long as they deliver an extraordinary profit.

Yet, if they can’t beat the market, a 10 percent performance fee won’t make that more palatable. You might as well put your money into an index fund charging half a percent and not pay any other fees.

One point has become clear in the past year. Many people in the hedge-fund industry didn’t know as much about investment as they thought they did. And now it turns out, they don’t know much about business either.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

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Seinfeld Stock Rally Is Built on Empty Chatter: David Reilly

Commentary by David Reilly

March 18 (Bloomberg) -- This may end up being the Seinfeld rally. After all, the stock market’s recent rise seems to be based on nothing, aside from empty chatter.

Over the past week or so, the president and his minions, members of Congress, and a host of bank chief executives have made a concerted effort to spin the market. The message has been clear: It’s time to get on board with Team America where the glasses and bank balance sheets are officially half full.

That is working some temporary magic. The Standard & Poor’s 500 Index is up almost 14 percent from early last week. The KBW Bank Index, meanwhile, leapt about 40 percent.

For all that, investors should be on guard. While hot air got markets off the ground, it isn’t enough to sustain them. Nor is it likely that any rally, even if recent lows were a bottom, will lead to the kind of V-shaped recovery some investors still dream is possible.

The reason? The economy still looks lousy. Banks haven’t worked their way out from underneath toxic assets and souring loans. Debt markets remain fragile. Even Federal Reserve Chairman Ben Bernanke’s measured comments over the weekend about the prospect for a better 2009 second-half are tempered by expectations the Fed will have to increase efforts to drive down long-term interest rates.

One sign the six-day surge stands on such shaky ground comes from the way it started -- the disclosure early last week of an internal memo from Citigroup Inc. Chief Executive Vikram Pandit.

Looking Up

In it, he said the bank was profitable in January and February and is enjoying its best quarter since the financial crisis started in 2007. The missive also said revenue, excluding certain writedowns, in those two months came to $19 billion.

Later in the week, Bank of America Corp. Chief Executive Officer Ken Lewis dropped into a speech that the bank expects “more than $100 billion in revenue this year, and close to $50 billion in pretax, pre-provision earnings.”

At first blush, this all seems to be a sign of a turnaround. If that’s the case, the banks choose a pretty strange way to convey such important and material news.

Strange, unless they didn’t want to provide detailed information for which they might be held accountable. No surprise that neither Citigroup nor Bank of America filed their market- moving information with the Securities and Exchange Commission. Had they done so, investors could put more faith in the numbers.

True, Citigroup included its memo in a regulatory submission to the SEC. The bank noted, though, that the information was “being furnished, not filed.” That’s legalese for, “If these unofficial projections don’t pan out, don’t blame us.”

‘I Know O.J.’

As “Daily Show” host Jon Stewart noted while mocking cable business news networks, investors shouldn’t blindly accept the word of a CEO talking up his or her own business. “For instance, I know O.J. Simpson,” Stewart said. “He told me that he didn’t kill anybody, and he should know. He was there.”

Citigroup also emphasized pre-provision, pretax earnings. Pandit’s memo, for example, estimated the bank had generated $8.3 billion in such profit.

Provisions are charges banks take against profit to build reserves to absorb loan losses. Some investors say pre-provision profit reflects a bank’s true earnings power.

Maybe this is true in normal times. Today, investors are concerned that the need for more provisions will overwhelm banks. That worry was underscored Monday when American Express Co. reported higher delinquency rates for credit cards in February.

So ignoring provisions in today’s markets is like a bad golfer totaling up his score while excluding mulligans.

Banks weren’t the only ones jawboning markets. Congress pitched in with talk of changes to rules governing short-sales and mark-to-market accounting.

Underlying Cause

Neither goes to the underlying cause of the crisis -- banks making bad loans using too much borrowed money to people buying overvalued homes.

Consider the uptick rule, which Congress last week called on the SEC to reinstate. Until the SEC abolished it in 2007, this rule required investors to wait for a stock’s price to rise before shorting it. A short sale entails an investor selling borrowed stock and hoping to buy it back later for less.

Many investors have clamored for the rule’s revival, saying it prevented shorts from piling onto already falling stocks.

Bringing the uptick rule back may indeed help slow the momentum in a declining market. Yet it won’t change the underlying rationale for going short -- that investors think banks still face hefty losses and don’t believe their books.

It’s also worth remembering that the uptick rule was around when markets nosedived after the tech bubble burst. The Nasdaq Composite Index fell almost 80 percent with the rule in place.

Shameful Give-Away

Likewise, calls to scrap mark-to-market accounting may ultimately undermine, not lift, markets. True, accounting rule makers on Monday proposed a rule change that may give banks a way to avoid recognizing some mark-to-market losses.

Yet even that shameful give-away won’t eliminate mark-to- market accounting or mask balance-sheet weakness.

President Barack Obama kicked this all off with comments two weeks ago that stocks were a buy based on their attractive price- to-earnings ratios.

When presidents start talking about P/E ratios, there’s a good chance we’re seeing a bear-market rally. For something more lasting, investors need real signs the housing market is improving and the increase in unemployment is slowing.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Australian Dollar Near One-Month High; New Zealand Dollar Slips

By Candice Zachariahs

March 18 (Bloomberg) -- The Australian dollar traded near a one-month high as equities rallied, prompting investors to buy higher-yielding assets. New Zealand’s currency slipped.

Australia’s dollar touched the strongest in two months versus the yen as stronger-than-forecast home starts in the U.S. and increased spending by the Bank of Japan fueled optimism the global economy may be stabilizing.

“The Australian dollar looks pretty solid with equities performing well,” said Paul Milton, chief foreign-exchange dealer at Societe Generale Australia Ltd. in Sydney. “There seems to be firm selling interest around the 66.30 U.S. cents area, which might cap the Aussie in the short-term,” he said, using the currency’s nickname.

Australia’s dollar was at 66.20 U.S. cents as of 4:37 p.m. in Sydney from 66.19 cents late in New York yesterday. It earlier touched 66.30 cents, near the one-month high of 66.38 reached March 16. The currency was unchanged at 65.26 yen and earlier bought 65.50 yen, the most since Jan. 8.

New Zealand’s dollar declined 0.2 percent to 52.93 U.S. cents from 53.06 cents in New York. It bought 52.19 yen.

The Standard & Poor’s 500 index has rebounded 15 percent from a 12-year low on March 9, triggered by optimism that the worst of the financial crisis was over after Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. said they were profitable in the first two months of the year.

The Bank of Japan will increase government bond purchases from banks to 1.8 trillion yen ($18.3 billion) each month, up from 1.4 trillion yen, it said in Tokyo today.

Australia’s dollar will likely trade between 65.50 U.S. cents and 66.50 cents today, said Nick Jonas, a currency trader at Suncorp-Metway Ltd. in Brisbane.

Kiwi Buffer, Rates

New Zealand’s dollar fell as Prime Minister John Key said the nation’s exchange rate “is acting as a buffer,” for the economy, which entered its fifth quarter of contraction. The so- called kiwi is the worst performer against the greenback among the 16 most traded-currencies in the past year, falling 34 percent. It dropped 35 percent versus the yen.

“Firms in some industries, including for example, sheep meat, venison, and even niche manufacturing, are getting better incomes as a result of the lower currency,” Key said.

Interest rates are 3.25 percent in Australia and 3 percent in New Zealand compared with 0.1 percent in Japan and as low as zero in the U.S., prompting investors to purchase the two nations’ assets with money borrowed in Japan or the U.S. The risk in such so-called carry trades is that exchange-rate moves can erase profits.

The Australian dollar is trading close to its 100-day moving average of 66.25 U.S. cents and could retest February highs on a sustained break above that level, Westpac Banking Corp. wrote in a research note yesterday.

Moving Average

“The Australian dollar has failed to make a sustained break above the 100-day moving average since the onset of the downtrend in the middle of last year,” wrote a team led by Sydney-based Robert Rennie, chief currency strategist at Westpac.

A move above that level “would pave the way for a test of the early February highs around the 68 U.S. cent level and potentially beyond to early January highs around the mid 72 cent level,” they wrote.

Australian government bonds were little changed with the yield on 10-year notes at 4.36 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.14, or A$1.40 per A$1,000 face amount, to 107.11.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 3.45 percent from 3.48 percent yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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India’s Rupee May Strengthen on Signs Risk Aversion Is Easing

By Anil Varma

March 18 (Bloomberg) -- India’s rupee may strengthen as gains in global stocks and commodities prices damp risk aversion, spurring demand for emerging-market assets.

The currency has rebounded 1.4 percent from an all-time low reached on March 3 as stock exchange data showed purchases of Indian equities by foreign funds exceeded sales last week for the first time in a month. The MSCI Asia-Pacific Index of regional shares rose for a fourth day, while the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials climbed 2.6 percent this week.

“Money is coming back into markets worldwide as investors are turning slightly more optimistic about a global economic recovery,” said Sanjay Arya, Mumbai-based treasurer at state- owned Bank of Maharashtra. “The rupee could benefit as we see signs of an improvement in capital inflows.”

The rupee traded at 51.445 per dollar as of 10:21 a.m. in Mumbai, little changed from yesterday, according to data compiled by Bloomberg. It rose as high as 51.32 earlier. The currency may reach 51.20 in the coming days, Arya said.

The Bombay Stock Exchange’s Sensitive Index, or Sensex, has gained almost 3.3 percent this week, adding to a 5.2 percent advance in the five days through March 13.

Net Buyers

Funds based abroad bought a net $26 million of Indian stocks last week, compared with net sales of $543 million in the previous five-day period, according to data released by the Securities and Exchange Board of India, the nation’s capital markets regulator.

Offshore contracts indicate traders bet the rupee will trade at 51.76 to the dollar in a month, compared with expectations for a rate of 51.75 yesterday. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

Implied volatility on one-month dollar-rupee options measured 11.75 percent, the lowest in a month, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

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Malaysia’s Ringgit Rises to 3-Week High on Stimulus; Bonds Gain

By David Yong

March 18 (Bloomberg) -- Malaysia’s ringgit rose to a three- week high against the dollar on optimism economic stimulus packages at home and abroad will help break a global recession.

The currency strengthened after the Bank of Japan increased government bond purchases from banks to spur lending and the U.S. reported a pickup in homebuilding. Asian stocks rose for a fourth day as the World Bank said China’s economy shows “early signs” of stabilizing with support from state-led investment.

“The stock rally shows there’s been some easing on the risk-aversion front,” said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “There’s been too much cynicism and people are now more willing to give stimulus efforts a chance to work. It’s positive for the ringgit.”

The currency rose 0.2 percent to 3.6660 per dollar as of 12:34 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency earlier climbed as much as 0.6 percent to 3.6532, the strongest since Feb. 25.

Malaysia can afford the 60 billion ringgit ($16 billion) of additional spending announced on March 10 and the risk is “that we don’t do enough,” Deputy Prime Minister Najib Razak said in an editorial opinion in the Wall Street Journal Asia today.

The MSCI Asia Pacific Index rose for a fourth day, its longest winning streak since Jan. 5, after the Bank of Japan today said it will buy 1.8 trillion yen ($18.3 billion) of government debt each month, up from 1.4 trillion yen. The BOJ yesterday said it may provide as much as 1 trillion yen of subordinated loans to shore up banks capital. U.S. housing starts rose 22 percent in February from the previous month, the Commerce Department said yesterday.

Bonds Gain

Five-year notes gained, snapping two days of losses, on speculation yields near the highest in five months made the debt cheap. Three- and 10-year benchmark securities haven’t traded.

“We like the five-year because the yield and spread should compensate for the supply risk” to fund the stimulus program, said Soo Wang Wei, a bond analyst at OSK Investment Bank Bhd. in Kuala Lumpur. “They are oversold.”

The yield on the 5.094 percent note due in April 2014 fell three basis points to 3.87 percent, according to Bursa Malaysia Bhd. The price rose 0.11, or 1.1 ringgit per 1,000 ringgit face amount, to 105.61. A basis point is 0.01 percentage point.

Five-year bonds yielded 115 basis points more than three- year securities, according to data compiled by Bloomberg, compared with an average spread of 27 basis points in the past six months.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.

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China Won’t Devalue Yuan to Stem Slide in Exports, Goldman Says

By Patricia Lui

March 18 (Bloomberg) -- Political concerns will deter China from pursuing a weaker yuan as exports slump and the trade surplus shrinks, according to Goldman Sachs Group Inc.

China’s trade surplus plunged to $4.8 billion in February, or about an eighth of January’s balance, as overseas sales fell by a record 25.7 percent from a year earlier. The deterioration has spurred speculation that the government will weaken its currency, which some U.S. lawmakers say is kept artificially weak to help Chinese exporters compete.

“Such fears are overdone,” Mark Tan, a New York-based analyst at Goldman, wrote in a report yesterday. “There is the political barrier and the sensitivities associated with competitive devaluations, something which China cannot avoid given the intense focus on this issue.”

Moreover, China’s trade balance is unlikely to slip into a deficit this year although the surpluses will continue to narrow, Tan wrote in the report. U.S. Treasury Secretary Timothy Geithner in January said China was “manipulating” its currency, which has gained 21 percent since a dollar peg was scrapped in July 2005.

The yuan was little changed at 6.8351 a dollar as of 12:30 p.m. in Shanghai, compared with 6.8372 late yesterday. It was 6.8318 at the end of July, the month the government started favoring a stable currency to help exporters weather a global recession. Non-deliverable forwards contract indicate the yuan will ease 0.6 percent to 6.8744 in six months.

Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net

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Korea Won Falls From 1-Month High on Importer Bills; Bonds Gain

By Kim Kyoungwha

March 18 (Bloomberg) -- South Korea’s won, the world’s best performer this month, weakened for the first time in four days on speculation importers are taking advantage of its recent gains to settle bills. Bonds rose.

The currency dropped from a one-month high against the dollar as the benchmark Kospi index of local shares halted a rally after climbing 3.4 percent yesterday, the biggest gain in almost seven weeks. The won has strengthened about 8 percent since the end of February as signs of an improvement in the U.S. financial industry drove a rebound in global shares.

“The won’s recent strength is spurring a bout of importers’ settlements,” said Lee Young Chul, a currency dealer with Korea Exchange Bank in Seoul. “With local stocks showing signs of faltering, demand for the currency also weakened.”

The won fell 0.8 percent to 1,420.05 per dollar as of 11:07 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. It earlier reached 1,389.90, the highest since Feb. 12.

Demand for the won rose earlier after Finance Minister Yoon Jeung Hyun said the government will continue to discuss an extra budget with the ruling party for a “satisfactory” package to help create jobs.

The government is pumping 51 trillion won ($36 billion) into the economy, including tax cuts and infrastructure spending. Yoon said today the government will submit the extra spending package to the parliament by the end of this month.

The government plans to cut issuance of currency- stabilization bonds and will use 5 trillion won from the stabilization fund to pay for the extra budget, Seoul Economic Daily reported, citing officials it didn’t identify.

The government and ruling party are working on an extra budget of between 27 trillion won and 29 trillion won, Lim Tae Hee, the policy chief of the Grand National Party told reporters yesterday, the report said.

Bonds Advance

Government bonds rose on speculation debt sales to finance economic stimulus plans will be smaller than the market expected. The government may issue 17 trillion won to 19 trillion won of bonds to fund additional spending, Yonhap news agency reported, citing GNP’s Lim. Traders had estimated 24 trillion won in issuances.

“Concerns about an oversupply of debt are easing as the size of new debt sales may not be overwhelming,” said Kong Dong Rak, a fixed-income analyst with Hana Daetoo Securities Co. in Seoul.

The yield on the benchmark bond due March 2014 fell two basis points, or 0.02 percentage point, to 4.34 percent, according to Korea Exchange.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Patricia Lui at plui4@bloomberg.net

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Yen Trades Near 2009 Low Versus Euro as BOJ Raises Debt Buying

By Theresa Barraclough and Ron Harui

March 18 (Bloomberg) -- The yen traded near the weakest level against the euro this year after the Bank of Japan said it will step up purchases of government debt, encouraging investors to seek higher-yielding assets overseas.

The dollar was near a one-month low against the euro as Asian stocks extended a rally in global equities, damping demand for the U.S. currency as a refuge from the financial turmoil. South Korea’s won weakened versus the dollar, snapping a three- day advance, on speculation domestic companies took advantage of its recent gains to pay import bills.

“Governments and central banks are taking various measures which are supporting sentiment that the worst of the financial crisis may be over,” said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third- largest bank. “People who had shunned risk are returning to the markets. This is causing selling of the dollar and the yen.”

Japan’s currency traded at 128.48 against the euro as of 3 p.m. in Tokyo, from 128.35 yesterday in New York, when it slid 0.8 percent. It earlier dropped to 128.83, the weakest since Dec. 29. The yen was at 98.51 per dollar from 98.60.

The dollar was at $1.3039 per euro from $1.3017 yesterday, when it declined 0.4 percent. The U.S. currency touched $1.3072 on March 16, the lowest level since Feb. 10. The won fell 0.6 percent to 1,417.65 per dollar, according to Seoul Money Brokerage Services Ltd. It earlier reached 1,389.90 the highest since Feb. 12.

Risk Appetite

The MSCI Asia Pacific Index of regional stocks climbed 0.9 percent after the Standard & Poor’s 500 Index rose 3.2 percent yesterday. The S&P 500 surged 11 percent last week in its biggest rally since November.

“Basically, we’ve seen a bear market rally in risk appetite and in riskier assets such as equities,” Callum Henderson, Singapore-based head of foreign-exchange at Standard Chartered Bank said in a Bloomberg Television interview. “That has taken the upside pressure off the dollar.”

The Bank of Japan said after its policy meeting ended today that it will increase the amount of government debt it will buy to 1.8 trillion yen ($18.3 billion) from 1.4 trillion yen. The BOJ has purchased the bonds since 1989 and last increased the amount in December.

“The direction is clearly up for” the euro, said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. It may be that a “recovery in risk appetite, given expectations of quantitative easing from central banks, is supporting equity markets.”

The yen is heading for an 8.7 percent loss versus the dollar in the three months to March 31, the end of the nation’s fiscal year, as demand waned for the currency as a shelter from the financial crisis.

Under Pressure

“Going into the Japanese fiscal year-end, we expect the yen to remain under pressure,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a note yesterday. “It is worth noting that we are now entering the most positive period of the year for the dollar-yen as far as seasonal factors are concerned.”

The Dollar Index declined for a seventh day, the longest losing streak in a year, on speculation the Federal Reserve will say at the end of a two-day policy meeting today that it is shifting toward more aggressive monetary expansion. The index, which the ICE uses to track the U.S. currency’s performance against the euro, yen, British pound, Canadian dollar, Swiss franc and Swedish krona, declined to 86.726 from 86.933.

Fed Chairman Ben S. Bernanke and his colleagues may signal today they will accelerate so-called quantitative easing measures, such as increasing the pace and size of purchases of mortgage securities. The board will keep its benchmark interest rate in a range of zero to 0.25 percent, according to a Bloomberg News survey.

‘Aggressive Efforts’

The yen strengthened against the dollar for the first time in five days after U.S. Treasury Secretary Timothy Geithner signaled that the “wind down” of American International Group Inc. may accelerate.

“We will continue our aggressive efforts to resolve the future status of AIG in a manner that will reduce systemic risks to our financial system,” Geithner wrote in a letter yesterday to House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid and other lawmakers. “We will explore any and all ways to accelerate this wind-down process.”

Geithner has been criticized by Congress for presiding over AIG’s payment of about $165 million in bonuses and retention pay. The company received a government bailout package in September that has since grown to about $170 billion.

‘Remain Intact’

“The market has been paying attention to the recovery in the U.S., but now with AIG, uncertainty has increased,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “There are risks associated with the U.S. financial industry, so the risk aversion type of strategy will remain intact,” supporting the yen, he said.

The South Korean won dropped from a one-month high against the dollar as the benchmark Kospi index of local shares tempered a rally after climbing 3.4 percent yesterday, the biggest gain in almost seven weeks. The won has strengthened about 8.2 percent since the end of February as signs of an improvement in the U.S. financial industry drove a rebound in global shares.

“The won’s recent strength is spurring a bout of importers’ settlements,” said Lee Young Chul, a currency dealer with Korea Exchange Bank in Seoul. “With local stocks showing signs of faltering, demand for the currency also weakened.”

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Rubber Reaches Two-Week High on Supply Cut, Chinese Purchases

By Aya Takada

March 18 (Bloomberg) -- Natural rubber futures climbed to the highest in more than two weeks after producers restated proposed supply cuts and on speculation China, the world’s largest consumer, is adding the commodity to state stockpiles.

Prices in Tokyo rose as much as 3.1 percent to the highest since Feb. 27. Thailand, Indonesia and Malaysia, the world’s three biggest exporters, may cut output by 10 percent this year, a Thai official said today. China’s State Reserve Bureau may buy as much as 80,000 tons in the domestic market, the head of the nation’s industry association said yesterday.

“The 10 percent reduction in supply will be large enough to support prices,” Takaki Shigemoto, an analyst at Tokyo- based commodity broker Okachi & Co., said today by phone. “Chinese buying is another support as the volume of planned purchases is larger than expected.”

Rubber for August delivery, the most-active contract, rose 1.4 percent to 140.9 yen a kilogram ($1,432 a metric ton) on the Tokyo Commodity Exchange at the 11 a.m. local time break.

Thailand, Indonesia and Malaysia agreed in December to reduce combined exports by about 700,000 tons this year.

Farmers in the three nations will cut down rubber trees and reduce output by 900,000 tons to take the global total to 8.12 to 8.15 million tons, Somchai Charnnarongkul, director- general of the Department of Agriculture of Thailand farm ministry, said today. Global output of natural rubber was around 9 million tons last year, he said.

Recent purchases by China’s State Reserve Bureau may reach 50,000 to 80,000 tons, Fan Rende, chairman of the China Rubber Industry Association, said in an interview in Guangzhou yesterday. That would be equivalent to 14 percent of the nation’s output last year.

“I heard previously that China had a plan to buy a total of 30,000 tons natural rubber for stockpiles in the three months to June 30,” Okachi’s Shigemoto said. “If China buys as much as 80,000 tons, that could be positive for prices.”

July-delivery rubber on the Shanghai Futures Exchange, the most-active contract, added 0.6 percent to 12,475 yuan ($1,825) a ton at 11:30 a.m. local time.

To contact the reporters on this story: Aya Takada in Tokyo atakada2@bloomberg.net;

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Hyundai Steel Cuts Hot-Rolled Price on Weak Demand

By Sungwoo Park

March 18 (Bloomberg) -- Hyundai Steel Co., South Korea’s second-largest steelmaker, cut the price of hot-rolled coil by 14 percent on weak demand, the first reduction the company has made this year on its products.

The price was reduced to 880,000 won ($618) per metric ton from 1.02 million won, Chang Young Sik, a spokesman at the Incheon-based company, said today by the phone. The cut took effect earlier in the month, he said, without giving details.

Steel prices in China, the world’s largest consumer, have fallen nearly 10 percent this year on oversupply, spurring calls by Beijing’s Shougang Corp. for mills to cut output by 20 percent. Hyundai Steel in January said sales and output will drop because of the global recession.

Hyundai Steel sells hot-rolled coil to oil pipeline makers, builders and automakers including Hyundai Motor Group.

Separately, the company signed a contract with Welspun Gujarat Stahl Rohren Ltd. in India to supply 100,000 tons of steel sheets for oil pipeline manufacturing this year, it said in an e-mailed statement.

Hyundai Steel gained 0.9 percent to 39,250 won at 12:35 p.m. in Seoul trading, compared with a 0.2 percent gain in the benchmark Kospi stock index.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net.

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Goldman Deepens Iron Ore Price Forecast to 40% Drop on Slowdown

By Jesse Riseborough

March 18 (Bloomberg) -- Goldman Sachs JBWere Pty deepened its contract iron ore price forecast to a record 40 percent decline because of slumping global steel production.

Prices for benchmark Australian iron ore may drop to $55 a metric ton in the year starting April 1, down from a record $91 this year, Goldman Sachs analysts led by Malcolm Southwood said in a report yesterday. It had forecast a 30 percent decline.

Goldman joins Macquarie Group Ltd. in cutting price forecasts for iron ore this week. The worst recession since World War II has slashed demand for steel, sending stockpiles soaring at ports in China, the biggest maker of the alloy.

“The major contract suppliers of iron ore will eventually be forced to concede bigger than previously expected price cuts,” the report said. “Negotiations could be protracted and acrimonious.”

Goldman cuts its earnings per share forecast for Rio Tinto Group by 21 percent in 2009 and 30 percent in 2010. BHP Billiton Ltd.’s EPS forecasts were also reduced 3 percent this year and 15 percent in 2010, the report said.

A 40 percent decline would be the biggest drop in Australian iron ore prices on record and comes after six consecutive years of gains, Goldman said.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net

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China May Ship 80% Less Steel Products as Orders Drop

By Helen Yuan

March 18 (Bloomberg) -- China may export 80 percent less steel products this year because of the global recession, leading to rising inventories in the world’s largest producer of the material, the China Iron and Steel Association said today.

“The export situation is very severe,” Shan Shanghua, general secretary of the association, said in a statement posted today on its Web site. The group had previously forecast a 50 percent drop in shipments.

The prediction indicates Chinese exports will deteriorate further after shipments had plunged by 52 percent in the first two months of the year. Chinese steelmakers are also hurting from a 14 percent decline in domestic benchmark prices since February, with many suffering losses.

“A short-lived prosperity in the steel market, driven by traders restocking, no longer exists,” Shan said. “Steelmakers should take rational measures” to slow production, he said.

Steel inventories gained 38 percent to 6.7 million metric tons by the end of February in China’s 20 biggest cities from January, Shan said.

“We currently forecast no growth in Chinese crude steel production this year,” Goldman Sachs JBWere Pty analysts led by Melbourne-based Malcolm Southwood said in a report dated yesterday. Goldman now predicts contract prices for iron ore, a steelmaking material, will drop 40 percent, worse than an earlier forecast of a 30 percent cut.

Tax Help

Beijing-based Shougang Corp. last week called for steelmakers to cut output by 20 percent after production had jumped on expectation of demand coming from the government’s 4 trillion yuan ($585 billion) stimulus package. Prices are now below output costs, the steelmaker had said.

China, which could become a net importer of steel products in March, should adjust export taxes and raise rebates to help the shipment of higher-grade products, the association said. It should also step up anti-dumping investigations, Shan said.

Dumping is the practice of selling products overseas at below the price in the domestic market.

Chinese steel prices have fallen back to last year’s November low, also the worst since 1994, Shan said.

China’s 71 biggest mills posted an aggregate loss of more than 1.06 billion yuan in January, he said. They may extend losses in February and March on lower prices, Shan said.

The statement is from a speech Shan made to the nation’s key steel producers on March 9.

To contact the reporter for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

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FSA Report Promises a ‘Very British Revolution’ in Regulation

By Caroline Binham

March 18 (Bloomberg) -- Financial Services Authority Chairman Adair Turner has promised to start a “revolution” in financial regulation with new rules for banks and hedge funds to address the worst economic crisis in 80 years.

The U.K. regulator said last month that a report to be issued today will discuss liquidity and capital rules, compensation, accounting, and how the FSA and the Bank of England can monitor risks to the financial system.

“This will be a very polite revolution,” said Simon Gleeson, a regulatory lawyer at London-based Clifford Chance LLP. “It’ll be a very British revolution, where not much is going to happen and everyone will be nice to each other.”

The FSA has come under fire for not doing enough to spot warning signs of the global financial crisis, which has led to the nationalization of Northern Rock Plc and Bradford & Bingley Plc, the takeover of a third bank, and the government holding majority stakes in two others.

The FSA report is one of several from regulatory agencies before the Group of 20 Nations’ summit in April in London, when lawmakers from around the world will try to redesign financial regulation. U.K. Prime Minister Gordon Brown asked Turner to lead the U.K.’s position on the global response to the crisis. The report’s themes, apart from the oversight of system-wide risk, are ones all regulators must discuss ahead of the summit.

No Coincidence

“There’s no coincidence at all in the timing,” said Bob Penn, a regulatory lawyer at Allen & Overy LLP. “This is a clear play to demonstrate thought-leadership, and is a plea for international consensus.”

The FSA said as early as June that it would press ahead with reforming liquidity rules even if other countries lag behind, and has published proposals for banks to hold more Treasury bonds. Similarly, it has published a draft code on compensation; and told banks that they should plan to move to conserve capital in the good times to draw on during the bad.

Different regulators moving at different speeds is the main hurdle to Turner’s proposals: financial regulation is dictated by directives from the European Union, and rules on capital are overseen by an international committee in Basel, Switzerland.

“What is needed is a revolution in Europe and a revolution in the United States,” said Jonathan McMahon, a former FSA supervisor now advising companies on regulation at Promontory Financial Group.

Catch Up With U.K.

There is an international consensus that hedge funds need greater supervision. The FSA already regulates hedge-fund managers and Hector Sants, the FSA’s chief executive officer, told the select committee last month that it would be a good idea for the rest of the world “to catch up” with the U.K.

The FSA said last month if hedge funds posed a risk to the economy if they failed, it would introduce capital and liquidity rules. An obstacle is that the funds are often based overseas, beyond the jurisdiction of the FSA, said McMahon.

At a parliamentary committee hearing last month, Turner also said there would be proposals to increase by “several times” the amount of capital banks hold against risks on their proprietary trading books. Proprietary trading is when a financial company trades securities and other financial instruments with its own money rather than for its customers.

Banks have “been able to trade in pretty much whatever market they choose in whatever instrument they like,” said McMahon. “It is certainly putting the brakes on some of the changes that have occurred over the last 20 years.”

Perhaps the biggest change will be in the way the FSA regulates. Turner told lawmakers that political pressure to use a “light touch” stopped the FSA from asking too many questions.

Scary Sants

The opposition Conservatives suggested last week that should they win the next general election, they may hand supervision of capital back to the Bank of England. The FSA was created by Gordon Brown in 1997 as one of his first acts as then-Chancellor of the Exchequer.

Sants said last week that “people should be frightened” of the FSA. He signaled a move away from principles-based regulation, where companies abide by 11 over-arching themes such as treating customers fairly.

He said the FSA will question the business models of financial companies, become involved in appointing senior executives -- and hold them to account when things go wrong.

“That will be heightening the risk for the FSA,” said Arnondo Chakrabarti, a regulatory lawyer at Allen & Overy. “People can say: ‘You were involved in those business decisions’ if things go wrong.”

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

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Arcandor, BMW, HeidelbergCement, Lanxess: German Equity Preview

By Nadja Brandt

March 18 (Bloomberg) -- The following is a list of companies whose shares may have unusual price changes in Germany. Stock symbols are in parentheses, and share prices are from the previous close.

The X-DAX Index rose 0.5 percent to 4.057.20. The measure, derived from trading in DAX Index futures, provides an estimate of Germany’s benchmark index. The DAX fell 1.4 percent to 3,987.77.

Arcandor AG (ARO GY): The parent of travel company Thomas Cook Group Plc plans to hold its annual shareholders meeting. The shares added 5 percent to 1.47 euros.

Bayerische Motoren Werke AG (BMW GY): The biggest luxury- auto maker plans to publish its annual report and hold its annual press conference. The shares increased 1.7 percent to 22.85 euros.

Douglas Holding AG (DOU GY): Germany’s largest makeup and perfume retailer plans to hold its annual shareholders meeting. The company in February said its first-quarter net income fell 7.1 percent to 87.6 million euros ($114 million). The shares advanced 1 percent to 31.20 euros.

HeidelbergCement AG (HEI GY): The cement maker owned by the German billionaire Merckle family plans to slash its 2008 dividend by 91 percent after net profit last year dropped and the financial market crisis ate into reserves. The shares dropped 1.2 percent to 20.75 euros.

Lanxess AG (LXS GY): Germany’s largest publicly traded specialty chemicals maker is scheduled to release fourth-quarter results. The company in January confirmed its 2008 guidance after a “very weak” fourth quarter. The shares declined 5 percent to 13.04 euros.

Phoenix Solar AG (PS4 GY): The maker of sunlight-powered electricity plants is scheduled to report full-year results. The shares climbed 4.4 percent to 31.18 euros.

SGL Carbon SE (SGL GY): The world’s largest maker of carbon and graphite products plans to report fourth-quarter results. The shares decreased 7.6 percent to 18.60 euros.

Wacker Chemie AG (WCH GY): The maker of chemicals and silicon wafers used in microchips plans to post final fourth- quarter results. The company in January said quarterly profit fell 42 percent on slowing demand in the construction and automobile industries and a one-time charge. The shares fell 6.3 percent to 51.93 euros.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

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French Connection, RBS, Shell: U.K., Irish Equity Preview

By Andrew MacAskill

March 18 (Bloomberg) -- The following is a list of companies whose shares may have unusual price changes in U.K. and Irish markets today. Stock symbols are in parentheses and prices are from the last market close.

The benchmark FTSE 100 Index fell 6.89 points, or 0.2 percent, to 3,857.10. The FTSE All-Share Index declined 0.3 percent, and Ireland’s ISEQ Index dropped 0.5 percent.

French Connection Group Plc (FCCN LN): The U.K. fashion retailer with stores in London, New York and Tokyo is scheduled to report earnings. The shares gained 2.3 percent to 56.25 pence.

Prostrakan Group Plc (PSK LN): The U.K. maker of the Tostran testosterone gel is due to publish earnings. The stock fell 2.8 percent to 61 pence.

Royal Bank of Scotland Group (RBS LN): Britain’s biggest government-controlled bank’s corporate banking activity has been “buoyant” since the start of the year, Chairman Philip Hampton told the Financial Times in an interview. The shares fell 2.6 percent to 22.2 pence.

Royal Dutch Shell Plc (RDSA LN): Europe’s biggest oil company by market value needs to pay as much as 4.6 billion euros ($6 billion) into its pension funds after the value of the plans’ assets declined, NRC Handelsblad reported without saying where it got the information. The shares fell 1.3 percent to 1619 pence.

SIG Plc (SHI LN): Britain’s biggest supplier of insulation and roofing materials will announce a 320 million pound ($450 million) capital-raising plan today the Financial Times reported, without saying where it got the information. The stock dropped 10 percent to 105 pence.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net.

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Arcandor, Campari, Swatch, UniCredit: Europe Equity Preview

By Nadja Brandt

March 18 (Bloomberg) -- The following companies may have unusual price changes in European trading. Stock symbols are in parentheses, and share prices are from the previous close.

The Dow Jones Stoxx 600 fell 0.7 percent to 172.05. The Dow Jones Stoxx 50 Index declined 0.7 percent to 1,771.97. The Euro Stoxx 50 Index, a benchmark for the nations using the euro, decreased 1.1 percent to 2,012.25.

Arcandor AG (ARO GY): The parent of travel company Thomas Cook Group Plc plans to hold its annual shareholders meeting. The shares added 5 percent to 1.47 euros.

Baloise Holding AG (BALN VX): Switzerland’s third-biggest insurer may say its 2008 profit dropped 55 percent to 362 million Swiss francs ($306 million) because of lower investment income, according to analysts surveyed by Bloomberg. The shares rose 3.8 percent to 64.25 francs.

Bayerische Motoren Werke AG (BMW GY): The biggest luxury- auto maker plans to publish its annual report and hold its annual press conference. The shares increased 1.7 percent to 22.85 euros.

Benetton Group SpA (BEN IM): Italy’s largest clothing maker plans to report final 2008 earnings. The stock rose 0.9 percent to 5.26 euros.

Cie. de Saint-Gobain SA (SGO FP): Europe’s biggest supplier of building materials, raised 1.45 billion euros in a rights offer. The company will issue 103.3 million new shares and the transaction will be completed with a private placement of 4.7 million new shares. The stock lost 55 cents, or 2.6 percent, to 20.79 euros.

Davide Campari-Milano SpA (CPR IM): The beverage maker known for its bittersweet red aperitif plans to report 2008 results. The stock lost 4.6 percent to 4.04 euros.

Douglas Holding AG (DOU GY): Germany’s largest makeup and perfume retailer plans to hold its annual shareholders meeting. The company in February said its first-quarter net income fell 7.1 percent to 87.6 million euros ($114 million). The shares advanced 1 percent to 31.20 euros.

HeidelbergCement AG (HEI GY): The cement maker owned by the German billionaire Merckle family plans to slash its 2008 dividend by 91 percent after net profit last year dropped and the financial market crisis ate into reserves. The shares dropped 1.2 percent to 20.75 euros.

Julius Baer Holding AG (BAER VX): Switzerland’s biggest independent wealth manager doesn’t see reasons for “drastic” cost-cutting measures, Chairman Raymond Baer told Finanz und Wirtschaft in an interview. When its Artio Global U.S. fund unit is sold in an initial public offering, Julius Baer would probably use the proceeds to buy back shares or acquire a private bank, he said. The shares rose 2 centimes, or 0.1 percent, to 29.02 francs.

Lanxess AG (LXS GY): Germany’s largest publicly traded specialty chemicals maker is scheduled to release fourth-quarter results. The company in January confirmed its 2008 guidance after a “very weak” fourth quarter. The shares declined 5 percent to 13.04 euros.

SGL Carbon SE (SGL GY): The world’s largest maker of carbon and graphite products plans to report fourth-quarter results. The shares decreased 7.6 percent to 18.60 euros.

Swatch Group AG (UHR VX): The world’s largest watchmaker holds analyst and media conferences. The shares rose 10 centimes, or 0.1 percent, to 135.1 francs.

Telefonica SA (TEF SM): Spain’s largest telephone company sold 1 billion euros ($1.3 billion) of seven-year bonds, according to a banker involved in the sale. The shares gained 8 cents, or 0.5 percent, to 15.16 euros.

UniCredit SpA (UCG IM): Italy’s biggest bank by assets plans to report fourth-quarter and full-year results before the market opens. The bank plans to hold a conference call at 10:30 a.m. local time.

UniCredit may report a 72 percent drop in fourth-quarter profit to 351 million euros, the consensus estimate of 22 analysts posted on the bank’s Web site showed. Earnings for 2008 were probably below the company’s goal of 4 billion euros, according to the survey. The stock climbed 0.3 percent to 96.85 euro cents.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

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Taiwan Stocks to Extend World’s Third-Best Rally, JPMorgan Says

By Chen Shiyin

March 18 (Bloomberg) -- Taiwan’s Taiex stock index, the world’s third-best performer this year, may gain as much as 18 percent by end-2009 on the prospect of increasing trade with China, JPMorgan Chase & Co. said.

The index may rise to 6,000 by Dec. 31, after fluctuating between 4,200 and 5,000 in the first half as the global recession continues to weigh on earnings, JPMorgan analyst Nick Lai wrote in a report today. Investors should be “overweight” on technology companies, Lai said. The Taiex rose 0.5 percent to 5,064.48 as of 10:02 a.m. local time.

The index has jumped 10 percent this year, lagging behind only China and Venezuela among the 89 global stock gauges tracked by Bloomberg. Taiwan’s market has rebounded as relations warmed with China, its biggest trading partner, after Taiwanese President Ma Ying-jeou took office last year. The mainland claims the island as its territory.

Trade talks between Taiwan and China “will become an important source of growth for the Taiwan economy in the medium to long term,” Lai said. The “results season in April could be poor, which however provides a buying opportunity,” Lai added.

JPMorgan’s top stock picks include MediaTek Inc., Taiwan’s largest chip designer, which has rallied 40 percent this year and Silitech Technology Corp., a handset keyboard maker, which has jumped 50 percent. Taiwan Cement Corp., the island’s largest supplier of the material, has gained 5.6 percent.

Exports, Economy

Taiwan’s exports fell for a sixth straight month in February, the longest losing streak in seven years. The economy contracted 8.36 percent last quarter, pushing the island into its first recession since the dotcom bubble burst in 2001.

Chinese Premier Wen Jiabao said this month the nation wants to accelerate normalization of trade relations with the island and create conditions for ending the state of hostility. Direct daily flights, shipping and postal links between China and Taiwan started in December.

The island has been ruled separately since Chiang Kai- shek’s Nationalist army retreated there in 1949 after being defeated by Mao Zedong’s Communist forces.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net

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