U.S. Market Update

Daily Forex Fundamentals | Written by Trade The News | Mar 27 09 15:26 GMT |

Dow -113 S&P -11 NASDAQ -26 Investors are stepping back from stocks this morning ahead of the end of the first quarter of 2009, with the leading US equity indices erasing much of yesterday's gains early on. The data has been mixed, with personal spending up a hair in February, as expected, and personal income down ever so slightly. The final March U of Michigan confidence survey was a bit ahead of expectations. Front-month crude has taken a big hit, losing more than $2 this morning after Petrologistics reported that OPEC members produced 1M bpd over quota in March. Treasury prices are benefiting from the weaker equity market pushing the long bond yield back towards 3.6%. The financials are down moderately in early trading, with Citi down 8% and headed lower. The US ADR of Barclays is one big exception, trading up more than 10% on reports circulating that the bank has successfully passed the FSA's stress test, although there is no official confirmation of this as of yet. Other reports are noting that Barclays will wrap up the sale of its iShares unit as early as next Monday. Goldman Sachs and Bain Capital are leading suitors for the unit, with reports earlier in the week stating Goldman may have bid around $6B. Note that both Goldman and Morgan Stanley were initiated at Friedman Billings overnight, ahead of their upcoming quarterly earnings reports. Shares of GM are up 12% in early trading after the FT reported the automaker will not ask for additional aid in its viability plan next week, according to people familiar with the plan. Note that this flatly contradicts statements by Presidential auto advisor Steve Rattner, who said last Friday that both GM and Chrysler will require need "considerably more" Federal aid. "Like all management teams, GM and Chrylser tend to take more optimistic view on their businesses," said Rattner last week. Labor negotiations between the Detroit three and the UAW are continuing. There have been reports for a while that bondholders are holding up the process by refusing the government's terms on their share of losses, while the UAW has said its retirees should not make any more sacrifices. Last night the WSJ wrote that GM is unlikely to get concessions from the UAW by the March 31st deadline. It cited people close to the process as saying GM had negotiated "another agreement" that would let it cut as many as 10,000 workers by October. In other equity news, there has been more sunny news out of the semi sector. The chairman of Taiwan Semi said the industry is in better shape than it was a month ago, noting chip industry revenues would fall less than 30% in 2009. In addition, a Samsung executive said the market will begin seeing spot shortages of memory chips as inventory is inadequate already. Shares of MGM are down around 15% after the company hired bankruptcy council for its troubled Las Vegas City Center project. The company will likely miss a debt payment later today, violating loan covenants and adding to its considerable debt problems. KB Homes is up 5% after reporting a smaller-than-expected Q1 loss. Selected metrics quoted by the homebuilder showed some improvement, with net orders up and cancellations down on both a q/q and y/y basis, while its margins have improved considerably. In currencies, the greenback surged against the European currencies during the early New York morning, aided by numerous factors. On the data front, the European Industrial Orders plunged 34%, the largest decline on record. In an address to the German parliament, German Finance Minister Peer Steinbrueck said the euro was at risk if the EU's Stability and Growth Pact, which governs the continent's rules on budget deficits, was not taken seriously. The Swedish finance minister commented that over 20 out of 27 EU states could break 3% limit under the pact in 2010. Finally negative German state inflation data triggered a huge batch of pre-placed euro sell orders as technical factors came into play below the 1.3480 and 1.3400 levels. Note that the 1.3000 one-month option out positions that were placed with size earlier in the week. The Swiss Franc was softer throughout the European morning on chatter the Swizerland's KOF leading indicators would be weaker than the consensus forecast. Dealers were eyeing the 1.5180 level in EUR/CH, a level that was not breached in the wake of the SNB currency intervention back on March 12th. The softer European currencies were also seen in yen related-pairs, with the EUR/JPY cross dropping below the 130 handle to test 129.30, the GBP/JPY dipping to 139 before consolidating session losses. The JPY was off its best level as dealer sought to place bets ahead of the Japanese fiscal year-end that a softer JPY would emerge after the required repatriation process expires. Trade The News Staff Trade The News, Inc. Legal disclaimer and risk disclosure All information provided by Trade The News (a product of Trade The News, Inc. "referred to as TTN hereafter") is for informational purposes only. Information provided is not meant as investment advice nor is it a recommendation to Buy or Sell securities. Although information is taken from sources deemed reliable, no guarantees or assurances can be made to the accuracy of any information provided. 1. Information can be inaccurate and/or incomplete 2. Information can be mistakenly re-released or be delayed, 3. Information may be incorrect, misread, misinterpreted or misunderstood 4. Human error is a business risk you are willing to assume 5. Technology can crash or be interrupted without notice 6. Trading decisions are the responsibility of traders, not those providing additional information. Trade The News is not liable (financial and/or non-financial) for any losses that may arise from any information provided by TTN. Trading securities involves a high degree of risk, and financial losses can and do occur on a regular basis and are part of the risk of trading and investing.

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Euro Bulls Toss in the Towel as Budget Tension Mounts

Daily Forex Fundamentals | Written by Interactive Brokers | Mar 27 09 15:28 GMT |

It would be all too easy to lay blame for the overnight decline in the euro to $1.3312 against the U.S. dollar at the door of a slide in new orders for industrial goods across the Eurozone. Sure, the 34.1% plunge treats the catastrophic December drop of 23.8%, but the reality is that this data occurred in January and so some two months ago. Spot forex markets are sharper than this surely! The reality is that the need for the onset of quantitative easing by the Fed recently is slowly being seen as the necessary evil and likely to be adopted across each G10 nation. We noted at the time of the immediate aftermath that there should have been further follow-through euro buying as the view became the new anti-dollar regime. But the fact was there was none. As more up to date comment and data is digested by the market, the euro is fast losing its luster. Confirmation this morning of a deeper recession in Britain (yes, deeper than yesterday even!) came in the shape of an upwardly revised contraction of fourth quarter GDP, which weighed in with a quarter-over-quarter decline of 1.6%. Meanwhile the Land Registry announced that regardless of whether the proverbial Englishman's home might be his castle, it's around 15% less expensive than one year ago. The pound lost some of its weekly gain as investors once again warmed to a dollar, which gained around 1% on a trade weighted basis this morning. The pound is lower at $1.4320 from $1.4434 Thursday. But there were more interesting developments in Euroland beyond the industrial data. While British economic output was decaying, the French economy contracted 1.1%. Meanwhile the debate on budget spending versus quantitative easing is starting to heat up. Casting the first stone was a WSJ interview with ECB vice president, Lucas Papademos, who said that in order to support the Eurozone economy, it might now be appropriate to buy corporate bonds. With a collective European budget deficit likely to reach 4.4% of GDP in 2009, that's not exactly the kind of news that German finance minister, Peter Steinbrueck wanted to hear. He says that Germany has a vested interest in maintaining appropriate budget spending controls, as has each of the member nations. Breaching the Stability Pact and financial straight-jacket that limits deficit spending to 3% of GDP would therefore be a bad thing for the solidity of the Eurozone. The problem is though, that this is possibly preferable to a deepening recession. Regardless, if there was ever a time to relax the Maastricht criteria, it's very likely right now when companies are going to the wall and unemployment is rising. This outcome was not on the menu when the chefs were cooking omelets back in the nineties. While quantitative easing might have got off the ground in the U.K. there is no disputing that the magnitude of U.S. easing makes it the king of the patch. What is surprising though is that the market's worst fears have so far not been played out. Failure to see an acceleration of the dollar's initial slide, failure for currency options implied volatility to remain against the dollar and now an increased likelihood of the same medicine across the Eurozone is playing out in outright disappointment with the euro. While equities might be taking a breather today we note that euro/yen fell back beneath ¥130 today. Perhaps this is fiscal year end repatriation of corporate yen back to Japan, but it might just be the start of all around repulsion of the euro as Eurozone tensions mount. Andrew Wilkinson Senior Market Analyst Interactive Brokers Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Afternoon Forex Overview

Daily Forex Fundamentals | Written by Dukascopy Swiss FX Group | Mar 27 09 15:30 GMT |

Previous session overview The dollar advanced against its major rivals early Friday in New York as the rally in riskier currencies broke down ahead of key policy meetings next week. The dollar completely recovered its losses against the euro since the Federal Reserve's vote last week to begin quantitative easing. Now, traders are preparing for similar, albeit less aggressive, plans of action from the European Central Bank when they decide on interest rates next Thursday. On the same day, the highly anticipated Group of 20 summit is also scheduled. Analysts point to comments Thursday by ECB Vice President Lucas Papademos, who said the ECB could intervene in bond markets to help ease companies' financing problems although they haven't yet decided to do so. Additional comments by German Finance Minister Peer Steinbrueck have mired the euro as well. He said the high debt levels being built up currently worldwide might cause another crisis, and that the effects of fiscal stimulus measures are "very limited". He also confirmed that the German government will cut its 2009 economic forecast April 29 from the 2.25% contraction predicted in January. The update in tax revenue estimates due in May will be so bad that "I will stay in bed for the next week," he said. Friday morning in New York, the euro was at USD1.3323 from USD1.3508 late Thursday, while the dollar was at JPY97.74 from JPY98.71. The euro was at JPY130.21 from JPY133.31. The U.K. pound was at USD1.4335 from USD1.4449, and the dollar was at CHF1.1415 from CHF1.1288. USDCAD has scrambled sharply higher in the last few minutes as the accumulated force of a number of negatives weighs on CAD and erodes its earlier outperformance. Equities markets are very weak today, so that is not helping the Canadian dollar, said technical analysts. Weaker crude oil futures and broad USD strength are also burdening CAD. Market expectation EURUSD easing to fresh lows for the day at USD1.3270, some demand interest said positioned around the earlier mentioned Fibo support at USD1.3250 but said to have tight stops attached. USDJPY sees a quick pop over JPY98.00 for trade to JPY98.13 and a quick reversal to JPY97.95. Not much flow or noise on the trade, dealers say. Pound little changed in the US session as the force of euro-sterling sales is felt through a weaker euro-dollar. Cable holding well above European lows at USD1.4270 and seen in the wake of downward revisions to UK Q4 GDP data. Light offers eyed at USD1.4360, more into USD1.4400, with bids coming in around USD1.4320 in small. EURGBP fresh lows hit in the cross as reported demand in the stg0.9280 area gives way, stops hit on the break, with slippage extending down to stg0.9252 at time of writing. Hedge fund supply cited for main sell pressure today, with a former US investment house said to have had the order. Light interest now eyed on the downside ahead of the stg0.9180 area. Dukascopy Swiss FX Group Legal disclaimer and risk disclosure This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.

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Income Drops as Job Losses Mount!

Daily Forex Fundamentals | Written by ecPulse.com | Mar 27 09 15:31 GMT |

Mounting job losses continued to weigh down on Americans' income and accordingly their spending remained subdued, meanwhile tightened credit conditions and falling home values are still leading the economy deeper into recession amid the worst financial crisis since the Great Depression. Personal income declined in February by 0.2 percent down from the prior revised rise of 0.2 percent and below median estimates of a 0.1 percent drop, meanwhile consumer spending rose 0.2 percent inline with median estimates and down from the prior revised rise of 1.0 percent. The drop in personal income came on the back of falling compensation which dropped 0.3%, while wages and salaries dropped 0.4 percent; disposable income accordingly dropped 0.1%. The saving rate rose in February by 4.2 percent down from the prior rise of 4.4 percent. Also the Federal Reserve Bank favorite indicator for inflation, core personal consumption expenditures rose in February by 0.2% inline with the prior revised estimate and the expected estimate as well, however core PCE rose an annualized 1.8 percent above the prior revised estimate of 1.7% and the expected 1.6% rise. While PCE deflator rose 1.0 percent from a year earlier up from the prior revised estimate of 0.8 percent. The U.S. economy remained weak over the course of the first three months of this year, following the 6.3 percent contraction reported back in the fourth quarter of 2008, as consumers continued to retrench their spending, however we might expect the economy to contract over a decreased pace over the course of this quarter, as the post holiday discount season boosted spending, which counts for nearly 2/3 of economic growth. Yet on the other hand we can't forget that the unemployment rate is continuing to rise, as the unemployment rate surged in February to a 25-year high at 8.1 percent, and the number is still expected to rise further over the upcoming months, as companies continue to feel the pressure from the worst financial crisis since the Great Depression. That should lead us to expect that consumer spending will remain subdued for a while before it starts to recover, and accordingly we should expect the world's largest economy to remain weak at least over the course of this year, while next year should start to show the effects of all the measures taken so far whether from the Fed or the Government. The Fed continued to support financial markets over the course of last year, especially after the failure of Lehman Brothers which indeed marked a catastrophe for global financial markets, as credit markets froze and economies fell in recession. The Fed indeed slashed their interest rates down to zero, while they continued to flood the financial system with liquidity, yet since that was deemed to be too little for a crisis of such magnitude, the Fed decided to undertake a $300 billion quantitative easing measure, in which they will purchase long term treasuries in a bid to reduce long term interest rates and accordingly help revive lending. Meanwhile the Treasury created several important measures aimed at stabilizing financial markets and economic activity, the last was the Public-Private Investment Program, which should be able to remove some of the pressures off banks' balance sheets in a bid to stabilize the financial system, as that would hopefully lead to recovery. Meanwhile speculations continue to mount that President Obama is preparing a program to help the auto industry, as the worst environment for the industry since the 1980s hampered automakers with losses, the auto industry is not the only one that needs help, but rather every other sector in the economy is in great need for help, even if little! Stocks dropped in today's early session as the income report continued to signal the ongoing weakness in economic activity, as the Dow Jones Industrial Average index dropped so far by 118.28 points or 1.49% as it was last trading at 7806.28, while the S&P 500 index was down 13.99 points or 1.68% and was last trading at 818.87, and the NASDAQ Composite index was also down by 29.99 points or 1.89% and was last trading at 1557.01, data as of 09:45 New York time. The University of Michigan released today its consumer confidence index for the month of March, the index rose to 57.3 from the prior estimate of 56.6, the economic conditions index rose to 63.3 from 62.3, while the economic outlook index rose to 53.5 from the prior estimate of 53.0. The 1-year inflation expectations declined to 2.0 percent from the prior estimate of 2.2 percent, while the 5-year inflation expectations index also declined to 2.6 percent from the prior estimate of 2.8 percent. Rising stock markets in March ignited by the optimism wave that dominated everyone must have had its share on confidence, however we shouldn't get too excited, as the economy is still very weak and the outlook is still full of uncertainty… Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk

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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | Mar 27 09 11:59 GMT |

USD-CHF @ 1.1404/08...Surges R: 1.1445 / 1.1479 S: 1.1273-68 / 1.1246 / 1.1067 Dollar-Swiss has surged during the day today and is likely to move up towards 1.1550-90 being the 61.8% retracement region of the fall from 1.2300 (11/21/08) to 1.0371 (12/29/08). The surge has taken us by surprise as Dollar strengthened across all the majors. A fallback could now be limited to 1.1268 for the US session. 1.1165 has now become an important possibly Long Term Support for the pair. The region below 1.1590 might see some good consolidation either today during the US session or possibly Monday as Swiss reversed its course. To see the chart which has defied the flag that we were looking at, click on: http://www.kshitij.com/graphgallery/chfcandle.shtml#candle Cable GBP-USD @ 1.4326/30...Bearish view holds R: 1.4338 / 1.4420 / 1.4476 S: 1.4272 / 1.4229-18 / 1.4191 Cable has fallen further towards 1.4268 and is likely to dip towards 1.4150 over the next couple of sessions after UK's 4Q Q-o-Q GDP contracted -1.6% as against an expectation of -1.5%. As mentioned earlier as well, a dip below 1.4218-1.4150 would require fresh look. To see the chart of Cable, click on: http://www.kshitij.com/graphgallery/gbpcandle.shtml#candle The upside continues to be capped at 1.4600 which is likely to hold over several weeks now. Aussie AUD-USD @ 0.6933/37...0.6881 is crucial R: 0.7004 / 0.7080-87 / 0.7200 S: 0.6881-74 / 0.6792 / 0.6668 Aussie has broken out of the narrow range of 0.6970-0.7080 mentioned in the morning and is now likely to dip towards 0.6881 as the broader range of 0.6881-0.7080 now has come into focus. The level of 0.6881 we have been mentioning as the Support is a crucial level which is likely to hold on. Till 0.6881 holds, 0.7500 could also be seen over the next few days/ weeks. 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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Daily Technical Strategist

Daily Forex Technicals | Written by FXTechstrategy | Mar 27 09 15:34 GMT |

Today's Focus: EURUSD & USDJPY EURUSD: Correcting With Eyes On The 1.3330 Level and Beyond. USDJPY: Still Maintaining Its Rally Off The 93.55 Level EURUSD EUR remains on the defensive reversing its one-day gain on Wednesday and cutting through its minor support at 1.3419 level, its Mar 25'09 low and another key support at the 1.3386 level, its Jan 19'09 high in early morning trading today. This price development now leaves the pair challenging its strong support at the 1.3330 level, its Jan 27'09 high/former range top where a cap is expected to turn off EUR thereby reversing higher again. This level preserves the pair's short term uptrend activated off the 1.2456 level, its Mar 04'09 low and in order for the said uptrend to remain valid, EUR must hold above the 1.3330.If however that level snaps, declines should shape towards the 1.3093 level, its Feb 09'09 high and subsequently the 1.2992/1.3000 area, its Feb 23'09 high/psycho level. Daily Stochastics and RSI remain bearish as well, pointing towards further weakness. Alternatively, the 1.3419 level, its Mar 25'09 low and the 1.3386 level, its Jan 19'09 high will come in as the immediate upside targets with the 1.3635 level followed by the 1.3736 level, its Mar 23'09 high seen the next two resistance levels. Beyond there if seen will open up further upside risk towards the 1.3857/88 levels, its.618 Ret (1.4719-1.2330 declines)/Sept 11'08 high. On the whole, EUR rise off the 1.2456 level to the 1.3738 level is now undergoing corrective pullbacks with deeper correction targeting the 1.3330 level and beyond. Support Comments 1.3330 Jan 27'09 high 1.3093 Feb 09'09 high 1.2992/1.3000 Feb 23'09 high/psycho level. Resistance Comments 1.3386 Jan 19'09 high 1.3419 Mar 25'09 low 1.3799 Jan 08'09 high USDJPY The recovery started at the 93.55 level, its Mar 19'09 low suffered a temporary set back after the pair was seen reversing its Thursday gains in early trading today suggesting that correction to consolidation of the said rise may be building up. While this occurs above its strong support at the 94.62 level ,its Jan'09 high, we envisage an eventual return to the 99.68 level with a break through there resuming its short term uptrend towards its psycho level/Nov 04'08 high at 100.00/55 or even higher. Its daily stochastics remains supportive of this view as it is trending higher. On the downside, objectives are located at the 96.58 level, its Mar 06'09 ahead of its Mar 12'09 low at 95.67. If that level is taken out, in any case, USDJPY would be set up for a dip towards the 94.62 level ,its Jan'09 high and next the 93.55 level, its Mar 19'09 low. All in all,USDJPY continues to retain s its upside bias triggered off the 93.55 level. Support Comments 96.58 Mar 06'09 95.67 Mar 12'09 low 94.62 Jan'09 high Resistance Comments 98.97 Mar 17'09 high 99.68 Mar 05'09 high 100.00/55 Psycho level/Nov 04'08 high Mohammed Isah Market Analyst www.fxtechstrategy.com This report is prepared solely for information and data purposes. Opinions, estimates and projections contained herein are the author's own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which the author incur any responsibility. The does not accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not construed as an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report

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King Becomes ‘Political Football’ in Spat With Brown

By Brian Swint and Svenja O’Donnell

March 27 (Bloomberg) -- Bank of England Governor Mervyn King began testimony to lawmakers this week with a joke about football. As the week ends, he may have scored a goal for the opposition.

Conservatives George Osborne and William Hague are seizing on King’s unprecedented warning that U.K. Prime Minister Gordon Brown doesn’t have the room to drive up spending, while investors are using the remark to explain why a British bond auction failed for the first time in more than seven years.

King’s rare commentary on fiscal policy is exposing him to the political spotlight he has sought to avoid since becoming central bank chief in 2003. It also adds to the tension monetary policy makers already find themselves under as the economic crisis forces them to risk their independence by working more closely with governments.

“These comments are now a political football,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London and a former Bank of England official. “I’m not sure King will have wanted to see the reaction.”

Hague, deputy leader of the opposition Conservatives, said in Parliament that King’s comments reveal an “open disagreement” between the central bank and the government. Osborne, who speaks for the opposition on financial matters, described the remark as a “defining moment.”

‘Quite Unprecedented’

“King’s comments are quite unprecedented, but so is the deterioration in public finances,” said Michael Taylor, an economist at Lombard Street Research Ltd. “They do deal Gordon Brown a blow. If we do have another big fiscal stimulus, he has to be very careful in justifying whether it’s necessary.”

Brown gave King a second five-year term last year, having kept the governor waiting before confirming his reappointment. With an election due within 15 months, Brown now faces the prospect that the independence flaunted by King’s central bank may turn against him.

The prime minister sought to play down talk of a rift with King, while noting the central banker may support some fiscal stimulus. “I am someone who is cautious by nature,” Brown told broadcasters during a visit to Sao Paulo, Brazil. “I think what Mervyn King was saying is what I have always said, that you have to be cautious about everything you do. Mervyn King has actually said that he would be prepared to support targeted actions.”

Bond Failure

The warning has already proved a distraction for the prime minister on a world tour to promote the need for governments to bolster economies before next week’s summit of Group of 20 leaders in London. The European Commission forecasts Britain’s budget deficit will touch 9.6 percent of gross domestic product in the year ending March 2010, triple the European Union limit.

“Given how big these deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,” King told lawmakers on March 24, adding that the Treasury could enact “targeted and selected measures.”

The next day the U.K. couldn’t find enough buyers for all of the 1.75 billion pounds ($2.55 billion) of bonds it was trying to sell. Robert Stheeman, head of the U.K.’s Debt Management Office, which runs the bond auctions, says it wasn’t able to attract enough bids partly because of the central bank’s efforts to lower yields by purchasing debt.

With the economy shrinking at the fastest pace since 1980, the Bank of England has cut the benchmark interest rate to 0.5 percent, the lowest in the bank’s three-century history. This month policy makers embarked on a program to spend as much as 150 billion pounds on U.K. government debt, corporate bonds and other assets with newly created money.

‘Worst Nightmare’

That need to work in lockstep with the government has led some economists to warn the central bank’s independence is at risk, especially if monetary policy makers come under pressure to keep injecting money into the economy once the recovery begins.

“The central banker’s worst nightmare is that he’s starting to print money to finance unsustainable government borrowing,” said Nick Kounis, an economist at Fortis Bank in Amsterdam and a former U.K. Treasury official. King’s comment is “a warning,” he said.

The government may now be heeding it. Chancellor of the Exchequer Alistair Darling, who presents the government’s budget on April 22, said yesterday he agrees with King that any new budget measures should be “targeted” at unemployment and struggling businesses.

The U.K. has “to have a sustainable position,” Darling told lawmakers, backing away from earlier indications he would ramp up stimulus spending.

King’s testimony also had its lighter moments. When lawmakers appeared confused about which of them should ask the next question, the governor joked, “I’m afraid it’s like Aston Villa passing: you’re not quite sure which man it’s going to.”

Birmingham, U.K.-based Aston Villa Football Club, King’s favorite soccer team, lost 5-0 to rivals Liverpool last weekend.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net.

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New Zealand Economy Shrinks 0.9% as Recession Deepens (Update2)

By Tracy Withers

March 27 (Bloomberg) -- New Zealand’s economy shrank last quarter by the most in more than 16 years as home building tumbled, exports fell and businesses cut spending.

Gross domestic product declined 0.9 percent from the third quarter, when it fell a revised 0.5 percent, Statistics New Zealand said in Wellington today. That was less than the median estimate of a 1.1 percent drop in a Bloomberg survey of nine economists.

New Zealand is mired in its worst recession in more than three decades as manufacturing contracts, export demand slows and the housing market slumps. Central bank Governor Alan Bollard said this month the economy won’t begin growing until the second half of 2009, a sign he will keep cutting interest rates to revive domestic demand.

“Interest rates haven’t troughed at 3 percent,” said Annette Beacher, a senior strategist at TD Securities Ltd. in Sydney. “Almost everything has fallen off a cliff. It’s too soon to be talking about a recovery.”

Bollard reduced the official cash rate to a record-low 3 percent on March 12. He will pare the rate by at least a quarter-point to 2.75 percent at his next review on April 30, according to 12 of 13 economists surveyed by Bloomberg.

New Zealand’s dollar rose to 57.69 U.S. cents at 11:30 a.m. in Wellington from 57.46 cents before the report was released as traders reduced bets that Bollard will lower borrowing costs next month.

Global Recession

The economy shrank 1.9 percent from a year earlier, today’s report showed. In 2008, gross domestic product rose 0.2 percent from 2007, the weakest annual-average growth since 1998.

The quarterly decline was the most since the third quarter of 1992.

New Zealand joined Japan, Europe and the U.S. in sinking into a recession last year as the global credit crisis buffeted consumer and business confidence and cooled global trade. The U.S. economy contracted 1.6 percent in the fourth quarter, Japan shrank 3.2 percent and Australia declined 0.5 percent.

The World Trade Organization forecasts international trade will shrink 9 percent in 2009, the most since World War II. Exports account for about 30 percent of New Zealand’s NZ$180 billion economy.

Slowing demand has caused companies to reduce hours and fire workers. Sealord Group Ltd., the nation’s largest fishing company, said this month it will fire 180 workers at a factory in Nelson. Fisher & Paykel Appliances Holdings Ltd. is adopting a 35-hour week at its refrigerator plant in Auckland, enabling it to protect 60 jobs, it said this week.

Household Spending

The International Monetary Fund said yesterday New Zealand’s economy will shrink 2 percent in 2009 because households are constrained by debt and workers are worried they may lose their jobs. About 57 percent of consumers expect the economy will worsen this year, according to a Westpac Banking Corp./McDermott Miller survey published March 25.

Household spending, which makes up 60 percent of the economy, was unchanged in the fourth quarter after falling for the first nine months of the year. Purchases of durable items such as furniture and home appliances declined 1.4 percent, today’s report showed. Sales of food and other so-called non- durable goods also fell. Spending on services increased, led by domestic air travel.

Warehouse Group Ltd., New Zealand’s biggest discount retailer, reported a 24 percent decline in profit in the six months ended Jan. 25 after sales dropped. Retail spending will likely stay weak as rising unemployment weighs on consumer confidence, Chief Executive Officer Ian Morrice said on a conference call this month.

Housing, Investment

Total investment dropped 5.3 percent, led by spending on new housing, which slumped 14 percent in the fourth quarter, the fifth straight decline.

Business investment fell 1.8 percent as companies purchased fewer vehicles, plant and machinery. Commercial construction rose.

Exports of goods and services declined 3.3 percent in the quarter amid lower shipments of meat, fish and logs plus reduced less spending by visiting tourists. Import volumes declined 0.6 percent, led by passenger cars.

Output from goods-producing industries slipped, led by a 3.8 percent drop in manufacturing and declining home building. Primary production rose, driven by output from dairy farms that offset a decline in mining. Service industries output increased, led by finance and insurance.

The GDP deflator, a measure of prices, rose 4.8 percent in the year ended Dec 31.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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French Economy Contracted a Revised 1.1% in the Fourth Quarter

By Sandrine Rastello

March 27 (Bloomberg) -- France’s economy contracted the most in more than three decades in the fourth quarter as companies slashed inventories and pared investment in the face of the worst recession since World War II.

Gross domestic product fell a revised 1.1 percent from the third quarter, when it rose 0.1 percent, Paris-based statistics office Insee said. The decline is the steepest since the final quarter of 1974. Insee initially estimated a fourth-quarter contraction at 1.2 percent in a preliminary report on Feb. 13.

Recent data suggest the economy has continued to deteriorate this year, damping manufacturers’ and consumers’ confidence as companies slash production and jobs to weather the global economic slump. Insee expects France’s GDP to shrink 1.5 percent this quarter and 0.6 percent over the following three months.

“Investment is going to drop further in the first quarter,” said Laurence Boone, chief French economist at Barclays Capital in Paris. “Spending had its last decent quarter as the marked deterioration of the labor market is starting to hurt.”

Companies’ profit margins declined and households boosted their savings, the report also showed.

From a year earlier, the French economy shrank 0.9 percent in the fourth quarter, less than the 1.0 percent drop initially forecast. Exports fell 3.5 percent from the third quarter, while imports were down 2.3 percent, Insee said. Corporate investment dropped 2 percent after it was flat the previous three-months. Companies’ paring of inventories shaved growth by 0.8 point, Insee said. Consumer spending rose 0.3 percent.

Job Cuts

Shoppers’ support may not last as the worsening labor market is offsetting the positive impact of slowing inflation. Job cuts in France by companies from Continental AG to American Express Co. have been multiplying across the country, prompting as many as 3 million people to take to the streets last week to protest the government’s response to the economic slump.

President Nicolas Sarkozy in December introduced 26 billion euros ($35.3 billion) in stimulus measures, most aimed at buoying investment. In February, he pledged an additional 2.6 billion euros in spending and tax cuts for jobseekers.

Companies’ profit margins narrowed to 36.4 percent from 37.5 percent in the third quarter, Insee’s report showed.

To contact the reporter on this story: Sandrine Rastello in Paris at srastello@bloomberg.net.

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Fed’s Lacker, Stern Voice Confidence Recession May Ease in 2009

By Steve Matthews and Vivien Lou Chen

March 27 (Bloomberg) -- The presidents of two regional Federal Reserve banks voiced confidence the U.S. economy will show signs of recovery by year-end, responding to unprecedented monetary stimulus and a $787 billion fiscal package.

“Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said yesterday in a speech, while Richmond Fed President Jeffrey Lacker cited several “favorable signs” for the economy, including stabilization in retail sales and continued improvements in wages and salaries.

Recent gains in home sales and residential construction also suggest that the rate of decline in gross domestic product may be easing after a 6.3 percent annual pace of contraction in the fourth quarter, the worst performance since 1982.

“Increasingly, the view is the worst quarter is behind us,” said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, and a former Fed economist. Fed policy makers “may be feeling a little better that they are not having to downgrade their forecasts.”

Both Lacker and Stern noted uncertainty over the precise timing of a recovery. The economy has yet to show a decisive reaction to a reduction of the Fed’s benchmark interest rate to as low as zero percent and emergency credit programs that have expanded the central bank’s balance sheet to $2.07 trillion.

“It bears emphasizing that uncertainty about the economy is particularly acute right now,” Lacker said in a speech in Charleston, South Carolina. “While there are indications consistent with the emergence of positive momentum by the end of the year, we are likely to see quite negative economic reports in the meantime.”

Jobless Benefits

The number of people collecting U.S. jobless benefits rose to a record 5.56 million as of March 14, indicating more Americans are spending longer periods out of work, the Labor Department said yesterday. Initial claims topped 600,000 for an eighth straight time.

“The economy is in the midst of a serious recession that seems likely to persist at least though mid-year,” Stern said in a speech to the Economic Club of Minnesota in Minneapolis. “Once under way, the pace of expansion is likely to be subdued for some time.”

An increase in consumer spending may indicate that the economy is likely to stabilize by the end of the year, Lacker said.

“Prominent forecasters expect the economy to bottom out at some point later this year and then gradually regain forward momentum, and I think that is a reasonable expectation,” he said. Increased retail spending through February “may be a sign that consumers are responding” to “less adverse longer- run income prospects.”

Stocks Rallied

U.S. stocks rallied yesterday, extending the market’s best monthly gain since 1974. The Standard & Poor’s 500 Index added 2.3 percent to 832.86, up 13 percent in March.

Treasury 10-year notes rose yesterday for the first time in six days as the Fed prepared to buy U.S. debt today for the second time this week and concern declined that record U.S. debt sales would overwhelm demand.

The Federal Open Market Committee on March 18 authorized the purchase of $300 billion of long-term Treasuries and announced a plan to more than double purchases of mortgage debt to $1.45 trillion in an attempt to reduce home-loan rates.

“The Fed has flooded the system with liquidity like we’ve never seen, so the comparisons with the Great Depression flop in my view,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said in an interview with Bloomberg Radio. “By the fourth quarter, maybe even the third quarter, we’ll be pleasantly surprised by the economic data,” he said.

Credit Contraction

Fed Chairman Ben S. Bernanke is trying to prevent the credit contraction from deepening what may be the worst recession in 70 years.

Policy makers “have responded aggressively and, in some instances, with unprecedented action,” Stern said.

While it’s unclear whether “further steps will be required to restore stability,” Stern said he’s “guardedly optimistic that many pieces are now in place to contribute to improvement in financial market conditions and in business activity.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.netVivien Lou Chen in San Francisco at vchen1@bloomberg.net

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Japan Heads for Deflation as Retail Sales Tumble 5.8%

By Jason Clenfield and Mayumi Otsuma

March 27 (Bloomberg) -- Japan’s consumer prices stalled in February and retail sales tumbled the most in seven years, signaling a return to deflation is likely to deepen the recession.

Prices excluding fresh food were unchanged from a year earlier, the statistics bureau said today in Tokyo. Retail sales declined 5.8 percent, the Trade Ministry said, more than the 3 percent economists predicted.

An unprecedented drop in exports is forcing companies to fire workers and cut wages, weakening household spending and pushing the economy closer to its worst slump in the postwar era. With the benchmark interest rate already at 0.1 percent, the Bank of Japan has little scope to stop prices from falling.

“Japan is back in deflation and the price level is set to decline for several years,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. Deflation “erodes the health of the corporate sector and means that the Bank of Japan cannot cut interest rates to appropriate levels.”

Central bank Governor Masaaki Shirakawa said this week that core prices are on the verge of falling and policy makers are committed to preventing the economy from sliding into a deflationary spiral.

During Japan’s last bout with sustained price declines that began a decade ago, bankruptcies surged and the jobless rate advanced to a postwar high. The central bank responded by cutting interest rates to zero percent and flooding the banking system with reserves for five years through 2006.

Reasons to Worry

“There are many reasons we have to worry about a return of deflation,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Companies may race to discount to get rid of inventories if they keep posting losses, and wage cuts and bankruptcies will spread in coming months.”

Investors shrugged off the reports. The Topix index rose 0.9 percent at the lunch break in Tokyo, heading for its best week in more than 16 years as better-than-expected earnings by U.S. companies fueled speculation the global recession is abating. The yen traded at 98.27 per dollar from 98.71.

Wages fell for a third month in January, leaving consumers with less money to spend and forcing retailers to lower prices.

Aeon Co., Japan’s largest supermarket operator, last week said it will offer discounts on 5,100 items this month. Rivals Ito-Yokado Co. and Seiyu Ltd. already cut prices of food, clothing and household products this month.

“Clearly the consumer has taken a shock,” Jerram said. “The pain in manufacturing has led to greater insecurity, and it seems to have damaged consumer spending.”

Store Discounts

Excluding food and energy, prices fell 0.1 percent in February, a second monthly decline. Finance Minister Kaoru Yosano said it was “too early” to conclude that the drop meant Japan has slid back to deflation.

Core prices in Tokyo rose 0.4 percent in March from a year earlier, slower than the 0.6 percent in February.

Sales at large retailers, which include supermarkets and department stores, plunged 8.2 percent, the biggest drop in 11 years. J. Front Retailing Co., the holding company that operates department stores Daimaru Inc. and Matsuzakaya Co., said sales slid 15 percent in February as shoppers cut back on clothing and luxury items.

Still, the retail slump may have been overstated because there were fewer shopping days in February compared with the same month in 2008, a leap year. About half the declines were owing to a drop in revenue at gasoline retailers, reflecting crude oil’s 59 percent slide last month from a year earlier.

Also, the retail report doesn’t account for the growing share of money spent through the internet or on services.

Consumer spending fell 0.4 percent last quarter from the previous three months, a fraction of the record 13.8 percent drop in exports that drove the worst quarterly contraction in gross domestic product since the 1974 oil crisis.

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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Siemens Says Profit From Main Units Rose 10%, Keeps 2009 Goals

By Sheenagh Matthews

March 27 (Bloomberg) -- Siemens AG, Europe’s largest engineering company said profit from at its main industry, energy and healthcare units rose at least 10 percent in the last three months.

Siemens advanced as much as 4.5 percent in Frankfurt trading to 46.15 euros. The company is sticking to its earnings forecast for the year after the energy business doubled its profit margin in the first quarter, Chief Financial Officer Joe Kaeser said yesterday at the company’s Munich headquarters.

Siemens is counting on its energy unit, which builds fossil-fuel power plants, wind turbines and power distribution equipment, to counter the effect of the economic slump on its industry and health-care divisions. The three main units account for 90 percent of group sales. The company is cutting purchasing and personnel costs and will “significantly” increase the number of employees working shortened hours from about 7,000 now, Kaeser said.

“We’re the only company in the capital-goods sector to stick to our forecasts since July,” Kaeser said. “We understand our forecast as a commitment. It’s clear that the times haven’t got any better.”

The company which expects to take in orders at a faster pace than sales for the quarter, has seen some order delays but no cancellations, he said. Siemens aims for sector profit, or earnings from the three main divisions, of 8 billion euros ($10.8 billion) to 8.5 billion euros this year.

Siemens was trading up 3.9 percent at 46.09 euros as of 9:16 a.m. in Frankfurt. The stock has lost 29 percent in the past six months in Frankfurt trading. The company, which has refocused its business on medical scanners, gear boxes and power equipment, has a market value of 40.6 billion euros.

Solar Boost

Siemens plans to expand in solar energy, with a focus on solar thermal power, which turns sunlight into heat, as opposed to photovoltaics, which converts solar energy directly into electricity, Kaeser said yesterday. The company earlier this week bought a 28 percent stake in Archimede Solar Energy SpA to add solar thermal technology and plans to take a majority holding in the Italian company.

The industry division is suffering as automotive and machine-building clients hold back investments, the CFO said. The biggest declines will come from the Osram light-bulb business and industry automation, where Siemens expects to sell “considerably” fewer motion control systems.

The U.S. healthcare market is “unsatisfactory” as the government spends less on hospital equipment, and the decline may spread to Europe, the CFO said. Siemens still plans to win market share and predicts an increase in earnings at the unit this year.

The manufacturer is seeing a “massive increase” in demand at its financial services business, which lends customers money to buy its products. Siemens is in a better position than banks to assess its customer’s value at risk, which measures the risk of loss on certain assets, Kaeser said.

Government stimulus packages won’t boost orders until 2010 and the company doesn’t expect a revival in the short term, he said.

To contact the reporter on this story: Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net.

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Petrobras Stock Rating Cut to ‘Hold’ at Deutsche Bank

By Chan Tien Hin

March 27 (Bloomberg) -- Petroleo Brasileiro SA, Brazil’s state-controlled oil company, had its stock rating cut to “hold” from “buy” at Deutsche Bank AG after the shares met their price target.

Petrobras, as the company is known, yesterday dropped 0.6 percent to $34.20 after rising as high as $35.30 in U.S. trading, past the bank’s $35 estimate. The “limited” increase in Deutsche Bank’s fourth-quarter 2009 oil price forecast, to $50 a barrel from $40, means Petrobras’s earnings estimates have increased “modestly,” the bank said in a report today.

Shares of the company have surged 39 percent this year, making the stock the best performer on Brazil’s Bovespa index, which has advanced 13.4 percent. The rally reflected a rebound for commodity producers, along with metal and oil prices.

“Now that the stock has reached our price target and with no certainty on the sustainability of the current oil price rally, we recommend investors to take a pause on adding positions,” Deutsche Bank’s analyst Marcus Sequeira wrote in the report.

Deutsche Bank’s downgrade comes less than two weeks after Credit Suisse Group said Petrobras’s valuation is “unwarranted” and earnings may decline, given the cloudy outlook for oil prices.

To contact the reporter on this story: Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net

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China Solar Power Shares Rise on Government Subsidy

By Winnie Zhu

March 27 (Bloomberg) -- Baoding Tianwei Baobian Electric Co. and Shandong Jinjing Science & Technology Stock Co. led gains by Chinese solar power companies in Shanghai trading after the government said it would pay a subsidy for solar projects.

Hebei province-based Tianwei Baobian rose by the 10 percent daily limit to 31.28 yuan as of the 11:30 a.m. break in Shanghai, headed for its highest close since July 29. Jinjing Science & Technology rose 9.9 percent to 14.27 yuan, while Wuhan Linuo Solar Energy Group Co. rose 8.4 percent to 10.20 yuan. The benchmark Shanghai Composite Index gained 0.5 percent.

China, which is closing older coal-fired power plants in favor of cleaner energy sources, said yesterday it will offer 20 yuan ($2.93) per watt-peak of power output for solar projects with at least 50 kilowatt-peak of capacity. The government subsidy will help boost domestic demand for solar power equipment, said Gu Jiahao, analyst with CSC Securities HK Ltd.

“The subsidy could offset half the installation cost for solar-power rooftop programs, which would cause a big boost for domestic demand,” Gu said by telephone from Shanghai today.

China, the world’s second-biggest consumer of energy, derives 80 percent of its electricity from burning coal.

The nation aims to boost renewable energy use to account for 10 percent of its total energy consumption by 2010 from 7.5 percent in 2005, the National Development and Reform Commission, China’s top economic planner, said last March. Solar power capacity will rise to 300,000 kilowatts from 70,000 kilowatts.

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

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Crude Oil Falls on Concern Economic Slowdown to Temper Demand

By Christian Schmollinger

March 27 (Bloomberg) -- Oil fell in New York, paring this week’s gains, on signs a deepening recession in Japan will cut demand for fuels in the world’s third-biggest crude user.

Retail sales in Japan fell a more-than-expected 5.8 percent in February, the Trade Ministry said today. Nippon Oil Corp., the country’s largest refiner, will cut processing runs in April by 23 percent. U.S. crude stockpiles rose to the highest since July 1993 last week.

“We’ve got storage at the highest level in 16 years and still weak demand,” said Jonathan Kornafel, a director for Asia at options traders Hudson Capital Energy in Singapore.

Crude oil for May delivery declined as much as 69 cents, or 1.3 percent, to $53.65 a barrel on the New York Mercantile Exchange. It was at $54.02 a barrel at 8:25 a.m. London time. Prices are up 6 percent this week.

“The rally is based on expectation and hope for the future so I do expect a drop in prices,” Kornafel said.

Oil futures have jumped 36 percent in five weeks through March 20. Crude is set for its sixth consecutive week of gains on signs of an economic recovery in the U.S., the world’s biggest oil consumer, where new home sales increased last month and durable goods orders rose.

“There is a shift in perception in the market that things are settling down and we’ll start to see a recovery,” Russell Norton, head of commodities sales at Barclays Capital, said in an interview in Singapore today. “To confirm the rally in prices, we have to see inventories fall.”

U.S. Inventories

U.S. oil supplies rose 3.3 million barrels to 356.6 million in the week ended March 20. It was the 22nd gain in 26 weeks and left stockpiles 13 percent higher than the five-year average for the period.

Crude oil stockpiles at Cushing, Oklahoma, where New York- traded West Texas Intermediate crude is delivered, fell 2.21 million barrels to 31.7 million last week.

Consumption of fuels rose 2.2 percent to 19.2 million barrels a day last week, the Energy Department report showed. Daily fuel demand averaged over the past four weeks was 19.1 million barrels, down 3.2 percent from a year earlier.

The Organization of Petroleum Exporting Countries will reduce crude-oil shipments by 3.3 percent in the month ending April 11, according to Oil Movements. Members will load 22.23 million barrels a day in the period, down from 23 million a day in the month ended March 14, the Halifax, England-based tanker tracker said in a report yesterday.

OPEC has agreed to production cuts of 4.2 million barrels a day since September after prices tumbled from record highs. The group decided against any further output constraints at a meeting in Vienna on March 15. OPEC will convene again there on May 28.

Brent crude oil for May settlement fell as much as 56 cents, or 1.1 percent, to $53.21 a barrel on London’s ICE Futures Europe exchange. It traded at $53.20 at 8:26 a.m. London time.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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Baltic Bust Sows Entrepreneur ‘Panic’ in EU’s Worst Economies

By James M. Gomez and Aaron Eglitis

March 27 (Bloomberg) -- Dalia Markeviciene created one of Lithuania’s largest kitchen designers after the country opened to capitalism in 1991. Now she is seeing the market’s down side.

With sales off by 25 percent, Markeviciene has slashed her 200-person workforce to 60, dropped high-end models and rented space in her Vilnius showroom to other retailers.

“Forget investment, everyone’s thinking only about surviving,” she said. “We’re witnessing panic.”

The Baltic economic crisis, the deepest in the European Union, is hitting entrepreneurship in Lithuania, Latvia and Estonia, former Soviet republics with few large companies to provide employment. The $350-million market value of Lithuania’s largest traded company, TEO LT AB, is smaller than all but one of the Standard & Poor’s 500 Index members. The $6.3 billion value of all Baltic companies is less than last year’s profit of Verizon Communications Inc., the biggest U.S. phone company.

Small business “is extremely important, because that’s where you have the future big companies” in the Baltics, said Anatoli Annenkov, a senior economist at the London-based European Bank for Reconstruction and Development. “That is where you talk about innovation.”

Estonian Economy Minister Juhan Parts, 42, said March 16 in Vilnius that the biggest challenge for all Baltic governments is to alleviate the credit squeeze “to encourage entrepreneurship, so that people will want to start up businesses again.”

Loan Guarantees

EU regulators approved Latvian plans to offer guarantees to companies on March 20, to ensure they can get financing. Latvia will be able to give as much as 500,000 euros ($675,950) per company in 2009 and 2010.

The Lithuanian government has set up a special fund to supply small- and medium-sized businesses with loans, and will use EU structural aid to boost it to 1 billion litai ($360 million) from 275 million litai.

To be sure, the global economic crisis and credit crunch are straining entrepreneurs around the world, said Ben Butters, director of European affairs at Brussels-based Eurochambres, a lobby group. More than 100 million Europeans work at small- and medium-sized enterprises, the European Commission says.

Small companies “collectively are the main employers, job providers and innovators,” said Butters. “They need to be protected.”

Doubling Prices

The global crisis has only exacerbated what was already a recession in Latvia and Estonia and the risk of a contraction in Lithuania. The home-grown credit crunch followed loan growth of about 50 percent a year in each country and a doubling of real- estate prices between 2004 and 2007.

Latvia’s average apartment price plunged 37 percent last year and Lithuanian prices fell 27 percent. They were the two worst markets globally, according to a review by the Manila- based Global Property Guide on its Web site.

The average cost of a one-bedroom apartment in Tallinn was down 25 percent by the end of 2008 from the market peak in the third quarter of 2007, according to the government statistics office.

Latvia’s gross domestic product may contract as much as 15 percent this year, Swedbank AB said on March 18. Estonia’s GDP is slated to fall as much as 8.9 percent and Lithuania’s 4.9 percent, according to their national central banks.

In downtown Riga, Aleksis Karlsons said he had never seen anything like it. Karlsons, whose family owns a sleek boutique hotel that is the centerpiece of their Berga Bazaar outdoor arcade shopping center, said tenants are asking for rent reductions of up to 50 percent.

No Newspapers

“I don’t even read the newspapers any more,” said Karlsons. Real estate prices in the Old Town “have completely collapsed.”

In the three Baltic states, whose combined population of 7 million is less than the population of London, small businesses are especially at risk because they have less cash to buy inventory, expand production or pay salaries, said Jekaterina Rojaka, a former World Bank economist and now a senior analyst at AB DnB NORD Bankas in Vilnius.

“What we are seeing is a plunging, crashing result everywhere, in every single industry,” said Rojaka as she sat at the only occupied table in a Vilnius tea house on March 9. “Small companies don’t have the financial strength.”

In the city center of Tallinn, the Estonian capital, a sign hung on the door of the Kolumbus Krisostomus pub saying the watering hole was closed. Kolumbus used to attract several hundred young Estonian professionals to karaoke nights twice weekly and in 2005 was the venue for a popular reality TV show.

Kairi-Kaia Truusa, the pub’s 42-year-old chef, said the institution was forced into bankruptcy proceedings after monthly revenue dropped by more than half at the end of last year from 1 million krooni ($87,000) in the previous year.

Truusa said as she was leaving the premises one recent blustery day that she hadn’t been paid for at least a month. She can’t start a new business because under Estonian law, company managers are prohibited from doing so until bankruptcy proceedings are complete, which may take months. For now she is cooking for a charity cooperative.

At Dalios Baldai, the Lithuanian kitchen maker, Markeviciene saw only one bright side:

“The attitude to work has changed,” she said. “People cherish their jobs and work harder for their salaries.”

To contact the reporters on this story: James M. Gomez in Prague at jagomez@bloomberg.netAaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net

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Korean Won Rises a Third Week as Global Stocks Jump; Bonds Fall

By Bob Chen

March 27 (Bloomberg) -- South Korea’s won strengthened for a third week as a rally in global stocks bolstered investors’ appetite for risk. Bonds slid.

The currency touched a two-month high against the dollar after a central bank report showed the economy shrank less than initially estimated in the fourth quarter and the government this week unveiled a 17.7 trillion won ($13.1 billion) extra spending package. Foreign investors bought more local stocks than they sold for a ninth day, helping drive the Kospi Index to a five-month high this week.

“The Korean won had been one of the harder-hit currencies in recent months, so it’s reasonable that it enjoys one of the nicer rebounds as investor sentiment has improved in the past few weeks,” said David Cohen, director of Asian forecasting at Action Economics in Singapore.

The won was at 1,349 per dollar as of the 3 p.m. local close, 4.7 percent stronger than last week, according to Seoul Money Brokerage Services Ltd. It earlier reached 1,307.50, the highest level since Jan. 8.

It declined 1.4 percent today, paring the week’s gains, after a technical indicator signaled the currency would change direction. The dollar-won’s 14-day relative strength index, which measures the momentum of a security, was at 29 yesterday, according to data compiled by Bloomberg. A level below 30 or above 70 indicates a reversal may occur.

“There was a large selling order, selling of the won onshore in Korea that pushed up dollar-won,” said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. “The market’s been caught a little bit short. I’m not sure whether this rally in the dollar will be sustained. Given it’s Friday, the market’s a little thinner.”

Economy Shrinks

The MSCI Asia-Pacific Index of shares was poised for a third weekly gain after the Standard & Poor’s 500 Index added 2.3 percent yesterday, headed for a monthly gain of 13 percent.

South Korea’s gross domestic product shrank a revised 5.1 percent in the fourth quarter, the central bank reported today. That’s less than the previously reported 5.6 percent decline and follows a 0.2 percent expansion in the three months to September. The quarterly contraction was the biggest since 1998.

“It’s hard to make a judgment on whether the economy hit the bottom or when it will bottom out,” Choi Chun Sin, director general at the central bank’s economic statistics department told reporters in Seoul.

Bonds Slide

Local-currency bonds fell this week on concern government debt auctions will overwhelm investor demand as the government steps up spending to help revive the economy, which contracted last quarter at the fastest pace in a decade.

The government will sell a record 81.6 trillion won of bonds in 2009, 57 percent more than last year, the Ministry of Strategy and Finance said March 25, as it drafts a 29 trillion won extra spending plan to support the economy. That’s 9.6 trillion won less than it originally planned to sell.

The yield on the benchmark bond due March 2014 rose 36 basis points this week, or 0.36 percentage point, to 4.57 percent, according to Korea Exchange. The three-year note yield climbed 21 basis points to 3.73 percent.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

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