European Market Update

Daily Forex Fundamentals | Written by Trade The News | May 18 09 10:02 GMT |

Currency intervention talk heats up; Indian shares halted for the first time ever after breaching an upper limit following election results ECONOMIC DATA (JP) Japan April Tokyo Dept Store Sales Y/Y: -11.9% v -12.9% prior, Nationwide Dept Sore Sales Y/Y: -11.3 v -13.1% prior (TU) Turkish Apr Consumer Confidence: 80.8 v 74.8 prior (SP) Spain March Bad loans ratio 4.27% v 1.2% y/y (RU) Reportedly Russian April Industrial output -16.9% v -14%e y/y (EU) Euro-zone Mar Trade Balance: €400M v -€300Me; Trade Balance sa: -€2.1B v -€3.8Be SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM In equities: European equity markets opened to the downside continuing a profit taking theme seen rolling over from the Asian trading session. Pre-market trading was downside biased as well, with notable underperformance from the DAX30. Comments out of VW [VOW.GE]regarding the cancellation of planned merger talks with Porsche [PAH3.GE] that had been scheduled for Monday, along with further statements that VW saw no constructive reasoning to immediately re-schedule negotiations sent those names lower. The European automotive sector as a whole traded lower with French names, such as Renault [RNO.FR] and Peugeot [UG.FR] leading lagers on the CAC40. Banking names showed mixed results, a FT article noting that US small and mid-cap banks could need an additional $24B in capital swirling further concern in the strength of banking balance sheets. On the open, equity markets traded lower, pushing off to losses greater than -1% by 3:15EST. Shares of Lloyds [LLOY.UK] staged a recovery following 3:15EST. In the pre-market Lloyds had priced its £4B right placement as it attempted to buy back some UK Treasury held preference shares. News that the groups Chairman was to step down in 2010 out of the UK press also provided positive momentum in the name. By 3:30EST the FTSE100 turned positive moving to then session highs +0.25% while the CAC and DAX paired some of their opening losses. Markets traded in a tight range through the 4:00-5:00EST hrs with the FTSE holding to positive territory and the CAC and DAX with losses around the -0.75% mark. Leading up to 5:00EST, markets exhibited some strength, rallying in currencies against the Yen following statements out of the Japanese vice Fin Min and a strong Euro Zone March trade balance provided lightness. Past 5:00EST, the CAC and DAX paired nearly all their opening losses, down less than -0.25% Lloyds [LLOY.UK] Launches £4B Placing and Open Offer set for May 20. Proceeds from the Placing and Open Offer will be used to redeem the £4 billion of preference shares held by UK Treasury. Offer price set at 38.43p/share (57% discount from Fridays close). Chairman Blank to step down in 2010 (had been instrumental in HBOS merger). Lloyds named Alexander Leitch, who becomes the group's senior non-executive director at the next annual general meeting, as deputy chairman. Volksagen [VOW.GE] Spokesman Bestenbostel: Co. cancels merger talks with Porsche scheduled for Monday. Co shares the view of Mr Osterloh that there is currently no atmosphere for constructive talks. Co remains open to constructive talks with Porsche, but said it remains uncertain if and when talks could resume. Porsche spokesman Albrecht Bamler: The company will stick to the agreed confidentiality of the talks and declined to elaborate further. Speakers: ECB's Weber noted in a report that simulative measures set out by ECB were adequate unless conditions deteriorate significantly. The report reiterated that negative Euro-zone inflation could occur for several months in the summer, before rising to 1% or more toward year-end. He noted that Monetary policy needs time to produce impact but one should not exaggerate hopeful signs seen in financial markets. Weber reiterated that current interest rates were 'appropriate' given the current environment and warned against excessive optimism from positive economic data . he did note that perhaps the worst of economic crisis might be behind in Germany but does not see sustained positive growth before mid-2010 and that setbacks could still occur ||| ECB's Tumpel-Gugerell reiterated the ECB view that inflation could be negative in the coming months. She noted that the monetary policy must act appropriately and leave no stone unturned in combating issues at hand. She reiterated that keeping inflation near 2.0% target was priority of the central bank. Lastly, an economic recovery can only take place once confidence has been restored ||| Japanese Vice Fin Min Sugimoto commented that the Ministry continues to monitor currency markets, do not want currency markets to have negative effect on economy. He noted that the finances in Japan remain severe and that discipline remained important ||| Moody's unified the government of Japan's local and foreign currency bond ratings at Aa2, increasing its domestic currency bond rating (the JGB rating) from Aa3 and lowering its foreign currency bond rating from Aaa. Moody's outlook for the Japanese government's ratings was stable. Japan's foreign and domestic currency long-term bond ceilings and deposit ceilings remain unchanged at Aaa, and its short-term ceilings remain at Prime-1. ||| Japan Fin Min Yosano commented that action by Moody's reflected the ability of Japanese market to absorb further JGBs ||| China reiterated it would take additional measures if its economic recovery stumbled - NDRC ||| China FX Regulator SAFE announced rules to promote outbound investment. The agency noted that Chinese firms could purchase foreign currencies to invest aboard. Chinese firms could reinvest overseas profits abroad and borrow in foreign currencies to invest abroad In Currencies: The surge in Indian shares helped to stem any risk aversion flows that characterized the early Far East trading session. The USD and JPY came off their best levels ahead of the European mornings after Indian equity markets were halted for the first time ever after breaching an upper limit. USD/JPY was at 95.40 after testing 94.55 in Asia. EURJPY and GBP/JPY crosses were also well off their Asian session lows of 127.00 and 143.10 respectively. The JPY weakness was also aided by comments from Japanese top finance official Sugimoto that the Government was carefully watching the currency markets carefully. The EUR/USD bounces off its 200-day moving average of 1.3410 in Asia to hover around the 1.3450 area for most of the European morning. || Reportedly Singaporean Central bank to intervene if pair moves below $1.46 fro its current level of $1.4715 || The BOJ might upgrade its economic assessment for the first time in 2 years according to Japanese press reports. This has been echoed in the media lately. Numerous times last week there was chatter that the Japanese Government would likely upgrade its economic assessment for the first time in three years citing the fact that exports and production were showing signs of bottoming out. -In Fixed Income: Government bonds have performed reasonably well in thin volumes in Europe this morning, with Gilts outperforming Bunds ahead of the BoE's 20th reverse auction. Some selling has moved into T-Note futures at the time of writing with session lows at 121-13. Three month Euribor fixed at a new low of 1.44%, with 2y EUR swap spreads at the unchanged mark. In Energy: Reportedly Iran to raise oil production to over 5M bpd from current level of 3.6M bdp ||Brazil's President Lula da Silva to meet with China's President Hu Jintao to finalize terms of funding partnership for Brazil's oil industry by China in exchange for guaranteed oil shipments || Nigeria MEND militants attack two oil and gas pipelines near to Escravos which supply the 110K bpd Kaduna refinery in northern Nigeria || NOTES Indian equities surge following election results; markets were halted for the first time ever after breaching an upper limit Moody's unifies Japanese debt ratings. Japan's local and foreign-currency debt ratings were brought to the same level, Aa2, to reflect that the repayment risk for each is equal. Moody's cut the foreign-currency debt rating from Aaa and raised the local-currency assessment from Aa3 to unify the ratings The cycle of life. Dealers noting that the underlying theme has evolved over the last few weeks from the initial global financial collapse risk; to the duration of crisis risk and now morphing into the durability of recovery risk. SNB managed to keep the EUR/CHF cross above the 1.5000 level following the London close on Friday. Japan follows with verbal intervention during the European session today. Chatter that Singapore will intervene in USD/SGD below the 1.46 handle White House NEC Director Summers: US economy is no longer in freefall; Economic data "suggests more mixed picture than two months ago" IMF: Global expansion to start next year; ECB's Webers say not before mid 2010 Dealers noting that the US NAHB Housing Market Index will be used to for further sign of stabilization Looking Ahead: 11:30 (US) Treasury's Geithner speaks in Washington 13:00 (US) NAHB Housing Market Index: 16 expected versus 14 prior 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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FX Markets Lack Direction

Daily Forex Fundamentals | Written by AC-Markets | May 18 09 09:58 GMT |

Market Brief The Usd was mixed in the Asian session, as markets look uncertain of a direction. The EurUsd traded between 1.3440 and 1.3498, while the UsdJpy weakened to 94.60 in early trading before trading up to 94.45, as Europe opened. Economic data last week was mixed at best, with data probably confirming that economic contraction has bottomed out, yet meaningful recovery should not be expected in the near term. German GDP, which signaled a -3.8% decline in activity for the first three months of 2009, took the wind out of the Eur sails. Currently, the economic forecasts reflected in market pricing have overshot true conditions and a correction is highly likely. Following Europe, the US equity futures are pointing toward a negative open. In Japan, Moody’s unified Japan's ratings to Aa2, downgrading foreign currency JGB ratings from AAA but upgrading local currency ratings from Aa3. While in economic data Japanese consumer confidence came in slightly better than expectations at 33.2 vs. 31.2 exp and household consumer confidence also surprised to the upside 32.4 vs. 32.0 exp. The SNB has still not commented on Friday's spectacular EURCHF rally. In addition, official rhetoric recently showed the SNB moved beyond the usual threats of currency intervention and chose to provide more specifics on its recent operations, such as the foray into covered bonds. With a light calendar today in Europe and the US, markets will be debating the aspects of the global recovery and watching equity markets for direction. ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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Currency Pair Daily Forecasts

Daily Forex Technicals | Written by Finotec Group | May 18 09 09:28 GMT |

EUR/USD Daily Technical Reports EUR/USD-market strategy can be a sell from the level 1.3450$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/JPY Daily Technical Reports USD/JPY-market strategy can be a buy from the level 95.80 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. GBP/USD Daily Technical Reports GBP/USD-market strategy can be a sell from the level 1.5200$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/CHF Daily Technical Reports USD/CHF-market strategy can be a buy from the level 1.1230 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | May 18 09 09:10 GMT |

Good morning from Hamburg and welcome to our Daily FX Report. We hope you have enjoyed the weekend and start rested into the new trading week. Also this week comes up with important economic data's and decision, for e.g. the BoJ rate decision on Friday. We wish you a successful trading day Markets review In the first Tokyo trading hours the EUR declined to a two-week low versus the JPY and fell against the USD as Asian stocks slumped and reduced the demand for higher-yielding assets. The EUR was additionally bonded by speculation the European Central Bank will cut its key interest rate again. Notwithstanding yesterday, Axel Weber, ECB council member and the head of Germany's Bundesbank, said in a Financial Times interview, 'If the situation doesn't get significantly worse, then in my view the package of measures is sufficient.' He also said that the ECB doesn't see the risk of a broad credit crunch or deflation in the 16-nation euro-zone and predicted that the inflation rate will have a '1 before the comma' by the end of the year. The JPY rose to the strongest level in eight weeks against the USD on concern the recession in the world's biggest economy will be prolonged. On Friday the CHF decreased already versus the EUR amid speculation the Swiss National Bank will intervened again and sell the CHF to curb its advance. New Zealand's service industry contracted for the 13th month as sales slowed, a report showed today. Technical analysis EUR/JPY The currency pair has been trading close to a bearish trend-line since the beginning of the last week. During the May 13th and 15th the EUR/JPY showed a flag-tradingformation, which may suggest an impending trend reversal. Though for now it remains to be seen if the support at 127.31 may sustainable cross. The RSI adumbrate an oversold market and may support the bulls EUR/GBP The EUR/GBP went in the last three weeks up and down, it seems like an absolutely trendless market. At the moment the currency pair is arranged in a downward trend and fell below its support level at 0.8883. This approved terrain is down to its next support at 0.8850 rather 0.8827. Only the RSI Indicator may be strong enough to struggle against the downward trend Pivot Points - Daily FX Support and Resistance Levels Daily Calendar & Key FX Events Varengold Bank IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT This document is issued and approved by Varengold WPH Bank AG. The document is only intended for market counterparties and intermediate customers who are expected to make their own investment decisions without undue reliance on the information set out within the document. It may not be reproduced or further distributed, in whole or in part, for any purpose. Due to international laws/regulations not all financial instruments/services may be available to all clients. You should have informed yourself about and observe any such restrictions when considering a potential investment decision. This electronic communication and its contents are intended for the recipient only and may contain confidential, non public and/or privileged information. If you have received this electronic communication in error, please advise the sender immediately, and delete it from your system (if permitted by law). Varengold does not warrant the accuracy, completeness or correctness of any information herein or the appropriateness of any transaction. Nothing herein shall be construed as a recommendation or solicitation to purchase or sell any financial product. This communication is for informational urposes only. Any market or other views expressed herein are those of the sender only as of the date indicated and not of Varengold. Varengold reserves the right to consider any order sent electronically as not received unless it is confirmed verbally or through other means.

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Argentine Data May Signal First GDP Drop Since 2002: Week Ahead

By Eliana Raszewski

May 18 (Bloomberg) -- Argentine data due this week may cement forecasts that gross domestic product is heading for its first contraction since 2002 as a global financial crisis and June mid-term elections cause companies to delay investment.

South America’s second-biggest economy will shrink 2.5 percent in the second quarter from a year earlier, said Juan Pablo Fuentes, an economist at Moody’s Economy.com in West Chester, Pennsylvania. It would be the first drop since a 3.4 percent GDP decline in the final quarter of 2002.

“Argentina’s economy has been slowing since the second half of 2008,” Fuentes said in a telephone interview. “A drop in domestic demand, consumption and investment will be reflected in a contraction starting in April.”

The National Statistics Institute will release industrial output for April on May 22, giving economists and analysts an indication of how the economy fared in the first month of the second quarter. The agency will release economic activity for March on May 21.

Argentina’s economy has already shown signs of weakness stemming from the global financial crisis. Economic activity expanded at the slowest pace since 2002 in January and February.

April’s new-vehicle sales fell 33 percent from a year earlier, and industrial production declined 0.9 percent in March after shrinking 1.5 percent in February and 4.4 percent in January.

Farm Output

A drop in agricultural output is also hurting growth.

The worst drought in 70 years will cause the soybean crop, which is now being harvested, to drop to 32.8 million metric tons from a record 48 million tons a year ago, according to the Buenos Aires Cereal Exchange.

Output from the current corn harvest will decline to 12.7 million tons from 21 million tons in 2008, the exchange said in a May 13 report.

Dry weather will also lead farmers to cut wheat planting to 3.7 million hectares (9.1 million acres), the smallest area since the exchange began collecting such data in 1910, the report said.

The approach of the June 28 elections is dragging on the economy by discouraging both investment and consumer spending, said Mariano Lamothe, an economist at Abeceb.com, a research company in Buenos Aires. President Cristina Fernandez de Kirchner is seeking to keep her majority in Congress.

“Everybody is waiting to see how the government will react to the election results,” Lamothe said in an interview. “They want to see if the government will create more uncertainty.”

Shrinking Economy

The economy, which has expanded at least 7 percent a year since 2003, may contract 3 percent in the second quarter and 0.5 percent to 2 percent over the whole year, Lamothe said.

Fernandez used her dominance of Congress to nationalize about $24 billion in private pension funds last year and to take over the country’s biggest airline, Aerolineas Argentinas SA.

She described the measures as an effort to extend the policies of her husband and predecessor Nestor Kirchner, which she said helped spur the six years of growth.

Kirchner, who is running for a seat in the lower house, said on April 28 that if Fernandez loses her majority the country may slip back into a financial crisis. In 2001, the government limited bank withdrawals and defaulted on $95 billion in debt, before abandoning its one-to-one peg with the U.S. dollar in early 2002.

Such talk prompted Mario Nollmann, owner of Nollmann SA, a 73-year-old factory that makes electrical components and circuit boards, to put off plans to move to a bigger plant.

“I’m worried,” Nollmann, 72, said in a telephone interview from his factory in Buenos Aires. “I heard a speech that says that after the elections we could fall again into chaos, so I prefer to wait and see.”

In April, he suspended overtime for his 110 employees as sales fell 30 percent from a year earlier.

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 rose 170 basis points, or 1.7 percentage points, to 22.15 percent, according to Bloomberg data. The bond’s price slid 3.25 cents to 52 cents on the dollar.

The Buenos Aires benchmark Merval stock index fell 4.1 percent to 1,438.64. Grupo Financiero Galicia SA (GGAL AR), which controls the nation’s third-biggest private lender, rose 12.8 percent. Pampa Energia SA (PAMP AR), Argentina’s biggest energy holding company, declined 2.8 percent.

The following is a list of events in Argentina this week:

Event                         Date
Budget Balance                May 18 - 22
Inflationary Expectations     May 18
Economic Activity             May 21
Industrial Production         May 22
Unemployment Rate             May 22

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net

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Japan’s Debt Ratings Unified at Aa2 by Moody’s

By Steven McPherson and Keiko Ujikane

May 18 (Bloomberg) -- Japan’s local and foreign-currency debt ratings were brought to the same level, Aa2, by Moody’s Investors Service to reflect that the repayment risk for each is equal.

Moody’s cut the foreign-currency debt rating from Aaa and raised the local-currency assessment from Aa3, saying it can no longer assume that Japan would be more likely to repay debt borrowed in currencies other than the yen. The outlook remains stable, Moody’s said in a statement today.

Moody’s said Japan’s “considerable strengths” in terms of foreign reserves and household savings need to be balanced against its burgeoning debt. Prime Minister Taro Aso has pledged to spend 25 trillion yen ($263 billion) to counter Japan’s worst postwar recession, adding to debt that the Organisation for Economic Cooperation and Development says will swell to almost twice the size of the economy next year.

“The upgrade of the local-currency debt rating is psychologically positive” for local bond investors, said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co. Investors shrugged off the downgrade to the foreign- currency rating because Japan has “almost no exposure” to debt denominated in other currencies, Bandou said.

The yield on Japan’s benchmark 10-year bond fell two basis points to 1.405 percent at the close in Tokyo. The yen was initially little changed before weakening to 95.79 per dollar at 10:05 a.m. in London from 95.01 before the announcement.

Hong Kong, Italy

The rating is the third-highest investment grade, equivalent to Standard & Poor’s AA and one notch higher than Fitch Ratings’ AA-. It puts Japan on a par with Hong Kong and Italy. Within the Group of Seven industrialized nations, only Italy and Japan have assessments below Aaa.

Moody’s said Japan is cushioned by its large household savings and foreign reserves as well as a “strong home bias” of investors in government bonds. Japan had $1 trillion in foreign reserves as of April 30, the most after China, and households have financial assets totaling 1,400 trillion yen.

Meanwhile the debt, the world’s largest, “leaves the country’s fiscal position vulnerable to shocks or imbalances that would cause a sharp rise in interest rates,” it said.

New bond sales will climb to an unprecedented 44.1 trillion yen for the year ending March. Total bond sales will surge to 130.2 trillion yen, also the highest ever.

Absorbing Bond Sales

Moody’s said domestic investors “will absorb the record level of bond issuance this year to fund the government’s economic stimulus program.”

So far there’s no indication that investors will become hesitant about buying the debt, though “perhaps that could happen if the government doesn’t resume its course of fiscal consolidation, and that would have negative rating implications,” Thomas Byrne, senior vice president at Moody’s, said at a press conference in Tokyo.

The OECD said in March that Japan’s public debt, already the world’s largest, will balloon to 197 percent of gross domestic product in 2010.

“The Ministry of Finance has to be satisfied with this, given the additional borrowing that’s planned -- plus the economy is hardly booming,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “The bottom line is that they’re still way ahead of where they were a couple years ago.”

Moody’s assigned Japan the top Aaa rating in 1993, and since 1998 made four cuts as the nation’s borrowings swelled. It began raising the assessment in 2007. In Asia-Pacific, only Australia, New Zealand and Singapore retain the top rating.

Fiscal Discipline

Finance Minister Kaoru Yosano said last month that while fiscal spending is necessary to prop up the economy and employment during the current crisis, the government needs to keep a grip on its finances over the longer term.

Analysts expect a Cabinet Office report on May 20 to show the world’s second-largest economy contracted the most since World War II last quarter as exports collapsed. GDP shrank an annualized 16.1 percent in the three months ended March 31, according to the median estimate of economists surveyed.

Still, recent reports suggest that represented the low point for Japan. Overseas demand is beginning to stabilize and Aso’s stimulus plans are providing at least temporary relief to consumers facing job losses and wage cuts.

Household confidence climbed to a 10-month high in April, the Cabinet Office said today. Industrial production rose in March for the first time in six months as manufacturers replenished inventories. Exports had their first month-on-month gain since May 2008.

The government will raise its assessment of the economy for the first time in more than three years later this month, the Asahi newspaper reported last week.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Russia, Indonesia Upgrade at JPMorgan; China Cut

By Chen Shiyin

May 18 (Bloomberg) -- Russian and Indonesian stocks were upgraded at JPMorgan Chase & Co. as a recovery in the global economy and investors’ risk appetite drives further gains in emerging market equities. The brokerage downgraded China.

Russia was raised to “neutral” while Indonesia was upgraded to “overweight” within JPMorgan’s global emerging- market portfolio, said analysts led by Adrian Mowat. They cut China to “neutral” after a 20 percent gain this year and lowered South Africa and Malaysia to “underweight.”

JPMorgan last month said the MSCI Emerging Markets Index will rise to 900, the highest level since September, when Lehman Brothers Holdings Inc.’s bankruptcy sparked an exodus from emerging-market assets. The measure has rallied 25 percent this year to 709.38 and developing markets make up all 10 of the best performers in 2009, with Peru, Russia and China leading gains.

“The world has turned on its head and the emerging markets are looking decidedly more sound than the developed markets,” Arjuna Mahendran, Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets, said in a Bloomberg Television interview today. “I would buy all emerging markets going forward.”

Russian stocks, previously rated “underweight” at JPMorgan, are benefiting from the government’s growth policies, a contracting risk premium and the increasing likelihood of earnings upgrades by analysts, the brokerage said in the note.

Russia, Indonesia

The RTS Index has jumped 48 percent this year, the second- best performer among the 92 global stock indexes tracked by Bloomberg. The ruble-denominated Micex Index has surged 62 percent in 2009.

Indonesia’s Jakarta Composite Index has climbed 28 percent during the same period. The market was upgraded from “neutral” because of the improving commodities and currency outlook, JPMorgan wrote.

Gross domestic product expanded 4.4 percent in the three months to March 31 from a year earlier as local spending accelerated, Indonesia’s statistics bureau said May 15. That’s the fastest pace in Southeast Asia.

Still, JPMorgan has turned less optimistic about China, lowering its rating on the market from “overweight.” The MSCI China Index has gained 20 percent this year and this month touched the highest level since September, just before Lehman’s bankruptcy. The Shanghai Composite Index, which tracks mainland- listed shares, has added 43 percent, the world’s third-largest advance.

Reallocating Capital

“As China discounts its economic recovery, we are reallocating capital to other North Asian economies that are later in the recovery phase,” the JPMorgan analysts wrote.

The brokerage is also downgrading stocks in South Africa and Malaysia from a previous recommendation of “neutral,” citing the “low beta” in the two countries, which may indicate that they fluctuate less when global markets rise and fall.

Templeton Asset Management Ltd.’s Mark Mobius has also predicted a rebound in emerging market shares.

Stocks in developing countries may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Mobius, who helps oversee $20 billion in emerging-market assets, said in a May 4 interview.

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

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Pension Gap at $334 Billion Forces U.K. Dividend Cuts

By Alexis Xydias

May 18 (Bloomberg) -- The 220 billion pound ($334 billion) hole in U.K. corporate pensions may push companies to cut dividends, damping the recovery in Europe’s largest stock market.

The 1.17 percentage point drop in corporate bond yields since October is forcing companies from BT Group Plc to BAE Systems Plc to set aside more cash for future obligations. London-based BT slashed its dividend by 89 percent last week to support a plan for more than 340,000 current and retired employees.

More will follow, adding to the biggest dividend reductions in Europe since at least 1997, according to data compiled by Paris-based Societe Generale SA and UBS AG in Zurich. U.K. companies are the most susceptible because English corporations typically run pension funds, unlike the rest of Europe, where the state is responsible for retirees.

“Pension managers are caught in the perfect storm,” said Chetan Ghosh at Investment Solutions Ltd. in London, which oversees more than $13.8 billion. “Bond yields are falling and stocks have not recovered from last year’s sell-off. This will increasingly be a problem through 2011.”

Dividend reductions would add pressure to share prices already battered by the global recession and the region’s first annual net gain in equity sales since 2005.

‘Under-Funded’

BT, the U.K.’s largest phone company, and BAE Systems, Europe’s biggest arms maker, rank with British Airways Plc and Dusseldorf, Germany-based ThyssenKrupp AG, Germany’s largest steelmaker, as having a “high risk” of using cash to shore up pensions, Societe Generale said in a report last month.

BAE Systems plans to contribute an additional 200 million pounds to help cover its U.K. pension deficit and $250 million for its U.S. plan. London-based British Airways, Europe’s third- largest airline, may have to set aside more money for its growing pension deficit, analysts at Paris-based brokerage Oddo Securities wrote in a March 6 report.

“Markets underestimate the extra funding needs for companies’ pension obligations,” said Claudia Panseri, a strategist at Societe Generale in Paris. “Unless the equity markets rebound significantly during 2009, pension funds will remain significantly underfunded, which will result in high contribution requirements in 2010 and 2011.”

Discount Rate

International accounting rules require pension plans to calculate the amount of money they need today to meet future payments. The total is increased or reduced by an amount proportional to yields on corporate bonds, reflecting what a company will earn in interest before benefits are due. The lower the yield, the more money must be pledged now.

The deficits are in part an unintended consequence of the Bank of England’s efforts to pull the country out of the steepest economic contraction in at least three decades. The central bank cut its benchmark interest rate to a record 0.5 percent and said it would spend as much as 125 billion pounds to buy debt securities in an attempt to push down borrowing costs. The U.K. economy shrank at a 1.9 percent rate in the first quarter, the biggest contraction since Margaret Thatcher came to power in 1979.

Yields on 15-year corporate bonds in pounds rated AA have dropped to 6.55 percent from 7.72 percent in October, according to Markit Group Ltd. The decline may continue, according to Mark Bon, a London-based fund manager who helps oversee about $750 million at Canada Life Ltd.

Worst Case

“Yields are still falling and it will become increasingly difficult to fund pensions,” Bon said. “The worst-case scenario is depressed equity markets and deflation which keeps interest rates very, very low for a long time.”

A Bank of England spokesman said the central bank hasn’t commented on the effect of lower yields on benefit plans.

Deficits for companies in the FTSE 350 Index almost doubled to 61 billion pounds in the first three months of 2009, according to Mercer Ltd., a consulting firm. The “technical” funding needs as reported by pension trustees, a more accurate indication of shortfalls, climbed to 220 billion pounds at the end of March, said Matt Collinson, a Birmingham, England-based consultant at Mercer.

European equity benchmarks have recouped their 2009 losses since early March on speculation the worst financial crisis in seven decades is easing. Britain’s FTSE 100 is down 2 percent for the year after rallying 24 percent since March 3. The measure, which has retreated 35 percent from a seven-year high in June 2007, advanced 0.3 percent to 4,360.44 as of 8:43 a.m. in London.

Median Allocations

FTSE 350 pension managers had a median of 46 percent of their assets invested in stocks as of March 31, Mercer estimates. The allocation to bonds, whose value has increased as rates declined, was 40 percent.

BT slumped 9.4 percent last week as it cut its final dividend to 1.1 pence a share from 10.4 pence and said its pension deficit as of March 31 was 4 billion pounds before taxes compared with a 2.8 billion-pound surplus the year before. British Airways may scrap its payout after distributing its first dividend since 2001 last fiscal year, according to Bloomberg data that compiles analyst estimates and trading in options markets.

Laura Goodes, a spokeswoman for British Airways, said the company is working on a three-year review of the pension and estimates the deficit has grown. Goodes said the company can’t comment on the dividend before its May 22 earnings statement.

About 30 percent of European companies may reduce their dividend in the next 12 months, according to UBS, the most since the Swiss bank’s data started in 1997. Companies in the region may raise 300 billion euros ($405 billion) selling shares this year, excluding financial institutions, New York-based Goldman Sachs Group Inc. estimated in February. The gain would end three years in which buybacks and mergers outpaced equity sales.

‘Severe Peril’

The total deficit for all British companies narrowed to 189 billion pounds last month from a record 242 billion pounds in March, when the FTSE 100 fell to a six-year low, the Pension Protection Fund, an insurance plan financed by members’ levies, said on May 12. A year earlier, retirement plans had a 27 billion-pound surplus.

Companies struggling with obligations to retired workers have flexibility to revise funding arrangements, according to the Pensions Regulator, the Brighton, England-based agency that oversees retirement plans for the government.

“Though pension deficits are a long-term issue, it does concern us,” said Richard Champion, London-based head of U.K. equities at Principal Investment Management Ltd., who helps oversee about $1.2 billion. “Some of these schemes look in severe peril.”

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

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U.K. Home Sellers Raised Asking Prices in May, Rightmove Says

By Jennifer Ryan

May 18 (Bloomberg) -- U.K. home sellers raised asking prices in May by the most in more than a year as buyers’ access to mortgages improved and the number of properties for sale dwindled, Rightmove Plc said.

The average cost of a home climbed 2.4 percent from April to 227,441 pounds ($347,000), the operator of the biggest U.K. residential property Web site said today. That was the largest increase since February 2008. The 61,000 total of new listings this month is the lowest May reading since 2003.

“A drastic lack of supply is putting upward pressure on prices,” Miles Shipside, commercial director of Rightmove, said in an interview with Bloomberg Television. “There is increased demand among buyers and slightly more mortgage money becoming available.”

The Bank of England said last week that there have been signs of a “modest improvement” in housing activity after the number of mortgages approved by banks rose to a 10-month high in March. The property market has slumped as the economy succumbed to the worst contraction since 1979.

The increase in asking prices was led by East Anglia, where values increased 5.1 percent. Prices in London rose 2.7 percent, led by Hackney and Islington, and the only district to show a decline was Kensington and Chelsea, which dropped 3.1 percent.

The number of new properties for sale in London dropped by a third from a year earlier to 11,478, Rightmove said.

Housing Slump

Signs of a property market recovery have been mixed. Prices fell an annual 17.6 percent in March, according to Lloyds Banking Group Plc’s Halifax division. The slump will leave a total of 1.8 million households, or 15 percent of those with mortgages, in negative equity by the end of 2010, Sanford C. Bernstein & Co. analysts led by Bruno Paulson said last month.

More Britons are browsing property available for sale as home finance becomes easier to obtain. The Royal Institution of Chartered Surveyors said last week that enquiries from new buyers rose to the highest since 1999.

Banks are loosening the availability of credit after the central bank cut the key rate to 0.5 percent and started a program to buy bonds with newly created money. Loans for home purchase climbed to 39,230 in March compared with 37,716 in February, Bank of England data show.

A separate report by Incomes Data Services showed labor unions won smaller pay increases than a year ago. The median salary increase clinched by wage negotiators was 3 percent in the three months through March, down from 3.5 percent in the same period in 2008, the London-based pay researcher said in an e-mailed statement.

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

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IMF’s Lipsky Says Global Recovery to Start in 2010

By Jason Clenfield

May 18 (Bloomberg) -- The global economy will start growing next year, said John Lipsky, the International Monetary Fund’s first deputy managing director.

“Our world economic outlook anticipates a return to global expansion by next year,” Lipsky said in Tokyo today. “However, the recovery is likely to be more gradual than in past recessions.”

Confidence in the global economy jumped to the highest level in 19 months, a Bloomberg survey showed as central bank policy makers from Federal Reserve Chairman Ben S. Bernanke to European Central Bank President Jean-Claude Trichet indicate that the recession may be easing. Lipsky also said that the current downturn is far from over and that a rebound in Asia will hinge on how strong the global turnaround is.

“It is clear that the current crisis -- that is coming to be known as the Great Recession -- is far from over,” he said. “The prospects for a broad recovery in Asia will depend on the speed of the global economic turnaround.”

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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Yen Declines as Sugimoto Says Currency Gains May Hurt Economy

By Anna Rascouet

May 18 (Bloomberg) -- The yen fell against the dollar and the euro after Japanese Vice Finance Minister Kazuyuki Sugimoto said “excessive moves” in currencies may hurt the economy.

The yen dropped the most against the Australian and New Zealand dollars as Sugimoto told reporters in Tokyo today that bolstering the economy is now the government’s “top priority.” The euro dropped versus the dollar after European Central Bank council member Axel Weber warned against “exaggerating” recent signals the economy is stabilizing. India’s rupee climbed the most in two decades on optimism Prime Minister Manmohan Singh’s election victory will help his party implement reforms.

“Sugimoto said that volatility in the exchange was undesirable, which indicates that the yen is probably at too high a level at the moment,” said Emeric Challier, who manages about $92 million in currencies and fixed-income assets at Avenir Finance Investment Managers in Paris.

The yen weakened to 95.85 per dollar as of 10:32 a.m. in London, from 95.21 last week, paring its gain this month to 2.9 percent. It depreciated to 129.11 per euro, from 128.43. The euro slid to $1.3467, from $1.3495.

Japan’s local and foreign-currency debt ratings were brought to the same level, Aa2, by Moody’s Investors Service today, to reflect that the repayment risk for each is equal.

The yen gained 11 percent versus the dollar since the collapse of Lehman Brothers Holdings Inc. last September as investors sought refuge in the currency.

To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net

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Brazil to Sell 10-, 30-Year Bonds to Set Benchmarks, Valle Says

By Renato Andrade

May 18 (Bloomberg) -- Brazil may offer more 10- and 30-year bonds in international markets this year, tapping into demand for the country’s most-traded securities, Deputy Treasury Secretary Paulo Valle said.

“Our strategy is to keep offering 10- and 30-year bonds,” Valle, 45, said in a phone interview from Brasilia. “That helps improve the liquidity in these important benchmark points.”

The government sold $1.78 billion of 10-year notes in January and May, part of a wave of new issues by developing nations as the global financial crisis eased. Developing-nation governments and companies sold more than $57 billion of debt this year through the first week of May, up from $34.8 billion during the same period in 2008, according to data compiled by Bloomberg.

Brazilian bonds have outperformed other emerging-market debt in the past year as President Luiz Inacio Lula da Silva’s buildup of record foreign reserves of more than $200 billion helped maintain investor confidence in Latin America’s biggest economy amid the global crisis. Brazil’s foreign bonds returned 3.1 percent in the past 12 months while emerging-market bonds on average declined 2.2 percent, according to JPMorgan Chase & Co.

Brazil sold $1.03 billion of the 5.875 percent bonds due in 2019 in January to yield 6.13 percent, or 3.7 percentage points above U.S. Treasuries, and $750 million at 2.52 percentage points above Treasuries on May 7.

Buyback Program

The Lula administration also plans to keep buying back less-traded bonds with high interest rates such as the securities due in 2020 and 2030 to focus trading in the newly created benchmarks, Valle said.

The government is repurchasing an average of about $100 million of bonds each month, he said. Buybacks in the program, which began in 2006, slowed as credit markets seized up late last year before picking up again in recent weeks, he said.

The older securities trade at a higher yield spread than the newer notes, creating pricing distortions that Brazil wants to eliminate, Valle said. The 2020 bonds, for example, yield 3.14 percentage points above Treasuries, according to JPMorgan. By comparison, the new 2019 bonds yield 2.73 percentage points more than Treasuries -- or 0.41 percentage point less than the 2020 securities.

“These old bonds have distorted our yield curve,” Valle said.

Brazil’s foreign bonds have returned 1.4 percent this year after gaining 5.9 percent in 2008, according to JPMorgan.

‘No Complaints’

The price on the 5.875 percent bonds have climbed to 100.25 cents on the dollar, pushing the yield down to 5.84 percent, from 98.1 cents in the January offering.

The bonds underperformed securities issued by Colombia, Turkey and the Philippines in the first several days after the sale, prompting David Spegel, head of emerging-market strategy at ING Financial Bank NV, to say Brazil sought to price the notes at lower yields than investors were willing to accept.

Valle played down those concerns, saying pricing the notes was difficult because the bond market remained volatile in January amid the global crisis.

“We were the first emerging-market country to offer a new bond in January when volatility was high,” Valle said. He said it was easier to sell the notes in May as demand was more than double that in January. “Things were clearer” in the market, he said. “And we had no complaints.”

To contact the reporter on this story: Renato Andrade in Sao Paulo at randrade11@bloomberg.net

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Corn Declines on Speculation Dry Weather to Boost U.S. Planting

By Jae Hur

May 18 (Bloomberg) -- Corn prices in Chicago declined for a second day on speculation that dry, warm weather will firm soils in the U.S. Midwest, enabling farmers to accelerate planting. Soybeans and wheat also dropped.

A high-pressure area has moved over the central U.S. states, bringing warm temperatures and reducing the likelihood of rainfall this week, according to AccuWeather.com.

“Corn has been under pressure as dry weather will help U.S. farmers to speed up planting in the Midwest,” Hiroyuki Kikukawa, general manager of research at IDO Securities Co. in Tokyo. A slump in global equity markets and weaker oil prices also dragged down the grains and oilseed complex, he said.

Corn for July declined as much as 2.6 percent to $4.0625 a bushel, the lowest since May 7, and was at $4.10 by 3:23 p.m. Tokyo time on the Chicago Board of Trade. The price dropped 0.9 percent last week. Corn reached a seven-month high of $4.34 on May 13 after the U.S. Department of Agriculture forecast reserves on Aug. 31, 2010, will fall to a six-year low.

“The acceleration of U.S. corn planting would be a bullish factor for soybeans” as it may reduce acreages for the oilseed, while recent jumps in prices may curb demand from China, the world’s biggest soybean importer, Kikukawa said.

Soybeans for July delivery fell as much as 1.5 percent to $11.135 a bushel and last traded at $11.205. The most-active contract rose 1.7 percent last week, the third weekly gain. The price touched $11.5625 on May 15, the highest since Sept. 29.

U.S. sales to China rose 42 percent since Sept. 1 and made up 56 percent of all exports, USDA data show.

July-delivery wheat fell as much as 2.5 percent to $5.6325 a bushel and last traded at $5.705. The price fell 2.3 percent last week, snapping a four-week rally.

Australian Wheat

Australia, the world’s fourth-largest wheat exporter, may produce more of the grain than previously forecast after rainfall in the nation’s east, National Australia Bank Ltd. said.

Output from the crop being planted may total 22.2 million tons, 1 million ton more than forecast last month and about 4 percent higher than last year’s crop, Frank Drum, the bank’s agribusiness economist, said today.

World stockpiles will climb 8.9 percent to 181.9 million tons in the year ending May 31, 2010, the U.S. Department of Agriculture said May 12. Global production in the year that ends on May 31 may rise to a record 682.7 million tons, the USDA said. The following year’s production will total 657.6 million tons, the agency predicts.

To contact the reporter for this story: Jae Hur in Tokyo at jhur1@bloomberg.net

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Palm Oil to Rise Above 3,000 Ringgit, Mistry Predicts

By Claire Leow

May 18 (Bloomberg) -- Palm oil futures traded on the Malaysia Derivatives Exchange could exceed 3,000 ringgit ($841) a metric ton “very quickly” because of a “strong” increase in consumption and production problems, an industry analyst said.

There was “a powerful bull market which has yet to realize its full potential,” Dorab Mistry, director of Godrej International Ltd., said today in remarks prepared for an industry conference in Tokyo. Palm oil traded today in Malaysia at about 14 percent less than Mistry’s target threshold.

India, the largest consumer of palm oil after China, may boost consumption of all vegetable oils to 12.8 kilograms per head per year in the 12 months to October, about 12 percent more than the year before, Mistry said in the remarks. Godrej is one of the largest importers of edible oils into the Asian country.

“Price-conscious markets like India will chase palm,” he wrote in the address, saying there had been a “phenomenal” rise in the nation’s usage of vegetable oils. “India’s imports of vegetable oil will continue to exceed the previous year.”

Palm oil for July delivery dropped 3.2 percent to 2,580 ringgit a ton at the 12:30 p.m. trading break. Still, the world’s most consumed cooking oil has advanced 52 percent this year. In 2008, the contract plunged 44 percent amid the global recession.

‘Create Inflation’

“It is not wise for me to speculate on how high prices will go,” Mistry wrote, without giving a precise palm forecast. “However, the powerful injection of liquidity in all our economies must create inflation at some point down the road.”

Central banks worldwide have been printing money to combat the global recession, triggering concern that inflation may accelerate. Some investors buy commodities, including palm oil, to hedge against increasing consumer prices.

Palm oil exports from Malaysia to India in the first four months of the year more than tripled to 608,440 tons, according to independent cargo surveyor Societe Generale de Surveillance. The surge made up for the 12 percent drop in exports to China to 1.14 million tons from the same period a year ago, SGS said.

Global demand for five major edible oils including palm oil and soybean oil will probably rise by 4.5 million tons in 2008- 2009, matching the increase the previous year, Mistry said. Still, global supply growth will slow to 2.85 million tons compared with 5.65 million tons in the last crop year, he said.

Mistry didn’t give a forecast for soybean oil, while highlighting a reduced soybean harvest in Argentina, and lower- than-expected planting in the U.S. Soybean oil traded in Chicago has gained 12 percent this year to 37.66 cents a pound at 12:45 p.m. Singapore time. The oil trades at a 14.9 percent premium to palm oil, according to Bloomberg data.

To contact the reporter on this story: Claire Leow in Singapore at cleow@bloomberg.net

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Rio Says China’s Aluminum Smelters Utilization Gains

By Kyunghee Park

May 18 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, said the utilization rates of aluminum smelters in China “improved” to almost 66 percent in April.

Demand continues to remain weak, so prices are “under pressure” because of concerns about overcapacity, Anthony Loo, head of the company’s China unit, said in Hong Kong at a conference. He didn’t give a comparison for utilization rates.

China, the world’s largest aluminum producer, may have restarted as much as 1.4 million metric tons of idled capacity in April, an analyst at Aluminum Corp. of China Ltd. said May 13. Alcoa Inc., the largest U.S. aluminum producer, last week said there is still “significant oversupply” in the global market and restarts by Chinese smelters aren’t needed.

The Chinese “authorities have said they would buy the metal if prizes fall below a certain price,” Loo said. “From what we have heard, no stockpiling has taken place as prices haven’t fallen below that certain price.” He didn’t give details.

Aluminum futures in Shanghai dropped 0.7 percent to 12,690 Yuan ($1,859) a ton at 11:01 a.m. local time. Prices have rallied 11 percent this year after the government bought excess metal to support domestic producers.

Aluminum Purchases

China’s State Reserve Bureau should hold back from more purchases of aluminum unless prices drop below 11,000 yuan a ton, Wen Xianjun, deputy head of the China Nonferrous Metals Industry Association said May 12. More purchases would only encourage higher production, which would depress prices, he said.

The Chinese automobile and home appliances industries haven’t significantly raised copper consumption, though their increased purchases of steel suggests that copper demand will also improve, Loo said.

Copper demand in the real estate industry remains “weak” at the moment, he said.

Chinese copper imports jumped in the first quarter because of the shortage of scrap and reduced smelter production, he said. Imports by China, the world’s largest consumer, rose to a record for a third month in April, according to customs data last week.

To contact the reporter on this story: Kyunghee Park in Hong Kong at kpark3@bloomberg.net

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China’s Stockpiles Are New Sovereign Wealth Strategy, RBC Says

By Kevin Hamlin

May 18 (Bloomberg) -- China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline, according to the Royal Bank of Canada.

“It’s part of an overall desire to decrease its exposure to dollar assets,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong, in an interview today. China fears the hundreds of billions of dollars the U.S. is spending on bank bailouts and stimulus will cause “higher inflation and a weaker dollar,” he said.

Premier Wen Jiabao has said he is “worried” about the safety of the nation’s $767.9 billion in holdings of U.S. Treasuries and called on the U.S. “to guarantee the safety of China’s assets.” Central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.

“Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note.

China, the world’s biggest consumer of iron ore, boosted imports of the material to a record 57 million metric tons in April. China’s purchases of copper and copper products reached a record 399,833 metric tons last month, compared with 374,957 tons in March.

Crude Oil Imports

Oil rose to a six-month high on May 12 after China, the world’s second-biggest energy-consuming country, increased crude imports by 14 percent in April.

China will expand purchases of important resources while prices are at their lowest in seven years, Wen said in March. The country will increase emergency stockpiles, the National Development and Reform Commission, the country’s top planner, said at the same time.

Domestic oil stockpiles should meet 90 to 100 days of demand, Zhang Guobao, the head of the National Energy Administration, said in April.

“We don’t have exact numbers on the oil stockpile but most estimates put it around 30 days now so they’re talking about a pretty significant increase,” said Jackson.

Increasing volumes of imports of iron ore, copper and refined petroleum by the government and state enterprises are a “deliberate reallocation of China’s sovereign wealth,” said Jackson.

Without this stockpiling of strategic commodities, China’s trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion, he said.

“Every dollar spent on increasing these reserves of physical resources is obviously a dollar that cannot be spent on accumulating financial assets,” Jackson said.

China’s foreign reserves total almost $2 trillion.

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

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Asian Stocks Drop as Panasonic, Aozora Fuel Earnings Concern

By Jonathan Burgos and Patrick Rial

May 18 (Bloomberg) -- Asian stocks fell, while Treasuries and the yen rose, as losses at Panasonic Corp. fueled concern a two-month equity rally had outpaced earnings prospects. Indian stocks surged following the ruling party’s election victory.

Panasonic, the world’s biggest maker of plasma televisions, tumbled 7.6 percent in Tokyo. Mizuho Financial Group Inc., Japan’s No. 2 listed bank, fell 3.8 percent on share-sale plans. Reliance Industries Ltd., India’s biggest company by market value, soared 23 percent before the market’s surge triggered a halt in stock trading.

The MSCI Asia Pacific Index slipped 0.5 percent to 96.84 at 5:32 p.m. in Tokyo. Through the end of last week, the gauge had climbed 38 percent from a more than five-year low on March 9. The rally lifted the average valuation of stocks in the measure to 1.4 times the book value of assets as of May 15, 17 percent higher from the end of 2008.

“Until we see the economic outlook improve and earnings show signs of rising above current levels, we won’t see stocks push to higher levels,” said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co., which oversees about $3.3 billion.

Japan’s Nikkei 225 Stock Average declined 2.4 percent. Hong Kong’s Hang Seng Index climbed 1.4 percent and China’s Shanghai Composite Index rose 0.3 percent, led by coal producers after China Shenhua Energy Co. said consumption of the fuel may increase. Sri Lanka’s Colombo All Share Index surged 7.1 percent as the government claimed victory against Tamil rebels.

Treasuries, Yen

Yokogawa Electric Corp., which makes measuring equipment, slumped 15 percent on a full-year loss. Unitika Ltd. rose 18 percent, pacing gains among Japanese makers of materials used in medical masks, as the country confirmed 125 swine flu cases. Gloucester Coal Ltd. surged 18 percent in Sydney trading after agreeing to a higher takeover bid from Noble Group Ltd.

Futures on the U.S. Standard & Poor’s 500 Index declined 0.3 percent. The measure dropped 1.1 percent on May 15 as Federal Deposit Insurance Corp. Chairman Sheila Bair predicted the heads of some banks may be replaced.

Treasuries and the yen rose as the drop in stocks prompted investors to seek haven assets. The yield on the 10-year Treasury note fell three basis points to 3.11 percent, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. The yen advanced to 94.55 per dollar, the strongest since March 20, from 95.21 last week.

“We are seeing risk aversion across the board,” 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. “The market is becoming more vulnerable to negative news.”

‘Too Hard, Too Quickly’

Economic figures in the past week have fueled concerns that the stock rally since March was overdone. Japan’s wholesale prices fell at the fastest pace in 22 years in April, according to central bank figures on May 15. Hong Kong’s gross domestic product shrank 4.3 percent in the first quarter from the previous three months, which was worse than the 2.6 percent median decline expected by economists in a Bloomberg survey.

“There’s the perception that maybe things have gone too hard, too quickly,” said Tim Schroeders in Melbourne, who helps manage $1 billion at Pengana Capital Ltd. “People are looking a bit more circumspectly about how things are progressing.”

Panasonic tumbled 7.6 percent to 1,344 yen. The company said on May 15 it will probably post a net loss of 195 billion yen in the 12 months ending March 31, compared with a 379 billion yen deficit a year earlier.

Stable Government

Mizuho Financial sank 3.8 percent to 228 yen in Tokyo after posting a 588.8 billion yen ($6.2 billion) loss for the 12 months ended March 31. The bank plans to raise as much as 800 billion yen selling stock and preferred securities after posting its first loss in six years.

Aozora Bank Ltd., the Japanese lender controlled by Cerberus Capital Management LP, declined 5 percent to 134 yen after posting a wider-than-expected full-year loss.

India’s Sensitive Index, or Sensex, surged 17 percent to 14,284.21 before trading was suspended. Reliance Industries climbed 23 percent to 2,393.9 rupees. ICICI Bank Ltd., the nations second-largest, jumped 25 percent to 719.8 rupees.

Prime Minister Manmohan Singh’s Congress party and its allies won 260 of the 543 seats in the lower house of India’s parliament, the Election Commission said on its Web site on May 16. The victory margin exceeded the most optimistic prediction for 216 in exit polls released by NDTV television.

“The election result is extremely positive and very, very bullish,” said Madhusudan Kela, head of equities at Reliance Capital Asset Management, the nation’s largest money manager. “This will provide a government which is stable and has powers to take decisions.”

Swine Flu

Shenhua Energy, China’s biggest coal producer, gained 3.2 percent to HK$23.95 in Hong Kong and rose 3.2 percent to 28.05 Yuan in Shanghai. The company said power stations may have to pay higher prices for the fuel because demand may rise.

Datong Coal Industry Co. surged 9.8 percent to 37.73 Yuan.

Yokogawa slumped 15 percent to 446 yen after reporting a net loss of 38.4 billion yen for the year ended March 31, compared with an 11.7 billion yen profit a year earlier, it said in a release on May 15.

Unitika soared 18 percent to 109 yen on speculation the spread of swine flu in Japan will boost demand for its products. Kurabo Industries Ltd., which makes woven fabrics, surged 20 percent to 177 yen. Japan has so far confirmed 125 cases of swine flu, formally known as H1N1, Chief Cabinet Secretary Takeo Kawamura said today at a briefing in Tokyo.

Gloucester Coal jumped 18 percent to A$6.95. Noble raised its offer to A$7 a share in cash, from A$6, to win unanimous endorsement from Gloucester directors, the Hong Kong-based commodity supplier said. Noble, which owns a 21.7 percent stake in Gloucester, fell 2.7 percent to S$1.43 in Singapore.

For Related News and Information: World equity valuations: WPE World equity index monitor: WEI Most-read stock market stories: MNI STK Biggest movers this year: MXAP MRR 10 Market map of today’s trading: MXAP IMAP For more on India’s election, see TNI INDIA ELECT .

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