Asian Stocks Fall on U.S. Jobless Claims, Strengthening Yen

By Patrick Rial and Satoshi Kawano

May 22 (Bloomberg) -- Asian stocks fell, paring a weekly advance, as worse-than-expected U.S. jobless claims, a weaker dollar and lower commodity prices dimmed the prospects for earnings at exporters and mining companies.

Sony Corp., which gets 24 percent of its revenue from America, slumped 2.8 percent in Tokyo as the yen climbed to a two-month high against the dollar. BHP Billiton Ltd., the world’s biggest mining company, retreated 2.3 percent in Sydney after oil and copper prices sank yesterday.

“Given we’ve seen some improvements in U.S. economic statistics, the deterioration of the job market is disappointing,” said Juichi Wako, a senior strategist at Nomura Holdings Inc., Japan’s top securities brokerage. “Employment reports indicate the future trend of consumer spending.”

Two stocks declined for each one that advanced on the MSCI Asia Pacific Index, which retreated 0.1 percent to 99.62 as of 10:16 a.m. in Tokyo. The gauge’s losses were limited because the strengthening yen boosted the value of Japanese stocks on the dollar-denominated index.

Japan’s Nikkei 225 Stock Average lost 0.4 percent to 9,231.66. All equity benchmarks open for trading declined except South Korea. Rio Tinto Group led declines in Australia after the Financial Times said Aluminum Corp. of China won’t agree to a stake of less than 15 percent in the company.

The MSCI Asia Pacific Index gained 11 percent on the year through yesterday. In Japan, companies on the Nikkei 225 trade at 40.3 times their estimated net income for this fiscal year, compared with 15.6 times for the Standard & Poor’s 500 Index in the U.S., according to Bloomberg data.

Jobless Claims

Futures on the U.S. Standard & Poor’s 500 Index added 0.3 percent. The gauge declined 1.7 percent yesterday as a Labor Department report showed initial jobless claims fell by 12,000 to 631,000 in the week ended May 16, while economists had expected claims would drop to 625,000.

Bill Gross, co-chief investment officer of Pacific Investment Management Co. said in a televised interview the U.S. will “eventually” lose its top AAA credit rating. Standard & Poor’s yesterday slashed its outlook on the U.K.’s AAA rating to “negative” from “stable,” citing swelling debt.

Sony, maker of the PlayStation 3 game console, dropped 2.8 percent to 2,430. Mazda Motor Corp., which gets 75 percent of its sales from overseas markets, tumbled 4.6 percent to 230 yen.

The Japanese currency strengthened to as high as 93.87 per dollar, a level not seen since March 19, from 94.56 at the 3 p.m. close of stock trading in Tokyo yesterday. Japanese large manufacturers anticipate the yen will trade at an average of 97.18 versus the dollar this fiscal year, the Bank of Japan’s Tankan quarterly survey showed last month.

BHP dropped 2.6 percent to A$33.50. Woodside Petroleum Ltd., Australia’s second-largest oil producer, dropped 3 percent to A$43.07. Posco, South Korea’s top steelmaker, fell 2.9 percent to 399,500 won.

Crude oil for July delivery declined 1.6 percent to $61.05 a barrel in New York yesterday, the first drop this week. Copper slumped 2.6 percent. A gauge of six metals in London dropped 3.7 percent, the most since April 20.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net.

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Oil Rises as Dollar Drop Spurs Investor Demand for Commodities

By Christian Schmollinger

May 22 (Bloomberg) -- Crude oil rose in New York, poised for a 9 percent gain this week, as investors bought commodity futures as a hedge against inflation as the dollar fell to a four-month low against the euro.

The dollar declined on speculation the U.S. government’s creditworthiness is weakening, sapping demand for the currency. Oil also climbed after an index of leading U.S. economic indicators rose 1 percent April, raising expectations of improved fuel demand.

“The trend is still to the upside,” said Jonathan Kornafel, a director for Asia at options traders Hudson Capital Energy in Singapore. “With the weakness in the dollar you don’t have a lot of other places for money to go so I think prices will push higher.”

Crude oil for July delivery rose as much as 59 cents, or 1 percent, to $61.64 a barrel in electronic trading on the New York Mercantile Exchange. It was at $61.62 a barrel at 9:47 a.m. in Singapore.

Yesterday, the contract declined 99 cents, or 1.6 percent, to settle at $61.05 a barrel. The oil price dropped after equities declined, raising concerns about the Standard & Poor’s 500 Index slipped 1.7 percent yesterday and the Dow Jones Industrial Average fell 1.5 percent.

Demand for commodities as an alternative investment increases as the dollar drops as oil and gold hold their value against the falling currency. The dollar declined to $1.3926 per euro as of 9:25 a.m. in Tokyo, after reaching $1.3941, the lowest since Jan. 5.

‘Underweight Oil’

“I think this was just a short-term pullback,” said Hudson Capital’s Kornafel. “You’ve still got some funds that are underweight oil and as the price rallies, they start to panic and they buy in and push the price up even more”

OPEC is likely to keep output quotas unchanged for a second time this year as recovering oil prices forestall the need for new supply cuts, according to a Bloomberg survey. The group will maintain a production target of 24.845 million barrels a day when it meets May 28, according to 25 of 27 analysts surveyed.

Brent crude for July settlement rose as much as 63 cents, or 1 percent, to $60.56 a barrel on London’s ICE Futures Europe exchange. It was at $60.55 a barrel at 9:48 a.m. Singapore time. The contract fell 66 cents, or 1.1 percent, to end the session at $59.93 a barrel yesterday.

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

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Japan Stocks Drop on U.S. Credit Concern, Yen; Nissan Declines

By Masaki Kondo and Satoshi Kawano

May 22 (Bloomberg) -- Japanese stocks fell as speculation the U.S. will lose its top credit rating lifted the value of Japan’s currency against the dollar.

Nissan Motor Co., which gets 40 percent of its sales from North America, retreated 2.5 percent as the yen appreciated beyond 94 per dollar for the first time in two months. Panasonic Corp., the world’s largest maker of plasma televisions, declined 2.6 percent after initial jobless claims in the U.S. exceeded economist estimates. Mitsubishi Corp., a trading company that gets more than half its profit from resources, fell 2.1 percent as commodity prices slid.

“Given we’ve seen some improvements in U.S. economic statistics, the deterioration of the job market is disappointing,” said Juichi Wako, a senior strategist at Nomura Holdings Inc., Japan’s top securities brokerage. “Employment reports indicate the future trend of consumer spending.”

The Nikkei 225 Stock Average declined 111.18, or 1.2 percent, to 9,152.97 as of 9:30 a.m. in Tokyo. The broader Topix index fell 11.91, or 1.4 percent, to 869.53. For the week, the Nikkei is set to lose 1.2 percent, while the Topix is poised for a 1.4 percent drop.

The Nikkei was up 4.6 percent on the year through yesterday, compared with a 1.7 percent decline in the Standard & Poor’s 500 Index. Companies on the Nikkei trade at 40 times their estimated net income for this fiscal year, making Japanese equities the most expensive among the world’s five biggest markets, according to Bloomberg data.

Credit Ratings

In New York, the S&P 500 Index slid 1.7 percent as a Labor Department report showed initial jobless claims fell by 12,000 to 631,000 in the week ended May 16, while economists had expected claims would drop to 625,000.

Bill Gross, co-chief investment officer of Pacific Investment Management Co. said in a televised interview the U.S. will “eventually” lose its top AAA credit rating. Standard & Poor’s yesterday slashed its outlook on the U.K.’s AAA rating to “negative” from “stable,” citing swelling debt.

Nissan, Japan’s No. 3 automaker, slumped 2.5 percent to 545 yen, while Toyota Motor Corp., the world’s biggest automaker, dropped 2.5 percent to 3,560 yen. Panasonic retreated 2.6 percent to 1,298 yen. Makers of electronics and cars contributed the most to the Topix’s decline.

The Japanese currency strengthened to as low as 93.87 per dollar, a level not seen since March 19, from 94.56 at the close of Tokyo stock trading yesterday. Japanese large manufacturers anticipate the yen will trade at an average of 97.18 versus the dollar this fiscal year, the Bank of Japan’s Tankan quarterly survey showed last month.

No Intervention

The yen strengthened further after Finance Minister Kaoru Yosano told reporters today that Japan isn’t considering currency intervention.

Mitsubishi, the nation’s largest trading house by value, declined 2.1 percent to 1,704 yen. Mitsui & Co, No. 2, dropped 2.3 percent to 1,153 yen. Inpex Corp., Japan’s largest oil and gas explorer, lost 1.8 percent to 704,000 yen.

Crude oil for July delivery declined 1.6 percent to $61.05 a barrel in New York yesterday, the first drop this week. A gauge of six metals in London dropped 3.7 percent, the most since April 20.

Nikkei futures expiring in June retreated 1.4 percent to 9,150 in Osaka and slumped 1.5 percent to 9,155 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net.

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U.K. Budget Deficit Soars as S&P Warns on Debt Level

By Brian Swint

May 21 (Bloomberg) -- Britain had an 8.5 billion-pound ($13.4 billion) budget deficit in April, the most for the month since records began in 1993, and Standard & Poor’s Ratings Services signaled the country may lose its top credit rating.

The shortfall in the first month of the fiscal year compared with a 1.8 billion-pound deficit in April 2008, the Office for National Statistics said in London today. Tax revenue fell 9.5 percent and spending increased 5.4 percent.

The damage inflicted by the worst recession since World War II led Standard & Poor’s to revise the outlook for the U.K. to negative from stable, saying debt heading for 100 percent of gross domestic product is incompatible with a AAA rating. The pound fell the most in almost a month, stocks and bonds slid and the cost of insuring debt against default climbed.

“It’s looking more likely that we will get a ratings downgrade,” said Alan Clarke, an economist at BNP Paribas SA in London. “That will make it more expensive to service debt.”

Prime Minister Gordon Brown expects the budget deficit to double to 12.4 percent of economic output in the current fiscal year. The Treasury has been hit hard by losses at banks and the housing-market slump, the parts of the economy that helped Brown fund rapid investment in schools and hospitals during his decade as finance minister.

Debt Warning

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the next general government debt burden could approach 100 percent of gross domestic product and remain near that level in the medium term,” S&P analysts led by David Beers in London said in a report today.

The pound weakened to $1.5659 as of 10:22 a.m. in London, from $1.5755 yesterday, and to 88.46 pence per euro, from 87.47 pence.

The public finances typically receive a boost in April, when large companies pay quarterly installments of corporation tax, based on estimated profits for the current financial year.

Last month, cash receipts of corporation tax dropped 27 percent from a year earlier. Value-added tax, a levy on sales, fell 23 percent and income tax declined 14 percent. Net spending on social benefits rose 8.9 percent after unemployment rose at the fastest pace since 1981 in the first quarter of the year.

Cash Deficit

A measure of the cash entering and leaving the Treasury showed a deficit of 5.2 billion pounds, the first April shortfall since 1996 and the highest for the month since records began in 1984. The gap excluding capital investment was 7 billion pounds, the most for the month since at least 1998.

Concern over the U.K. fiscal position grew after the Treasury predicted the deficit will reach 175 billion pounds this fiscal year and said it plans to sell an unprecedented 220 billion pounds of debt to cover the shortfall and the cost of propping up banks.

Moody’s Investors Service, which assigns a Aaa rating to the U.K., last month said Britain is “taking risks” with the public finances and the Washington-based International Monetary Fund yesterday said the government needs to take tougher action to limit the buildup up debt once the economy emerges from recession.

Conservative leader David Cameron has warned of a period of “austerity” if his party wins the next election, due by June 2010 at the latest.

Tax Increases, Spending Cuts

Whichever party takes office will need to raise the equivalent of 3.2 percent of national income to balance the books, since planned tax increases and spending cuts worth 27 billion pounds a year by 2013-14 still leave the government borrowing to pay for non-investment spending, according to the Institute for Fiscal Studies.

Government debt is already at the highest level since the mid 1970s, and the Treasury says it may total 1.4 trillion pounds by 2013-14, of 79 percent of gross domestic product.

Net debt excluding the liabilities of Northern Rock Plc and Bradford & Bingley Plc, both seized by the government last year, rose to 42.9 percent of GDP in the first quarter, or 609 billion pounds.

Including the two banks, debt climbed to 53.2 percent of GDP in April, or 754 billion pounds, up from 618.7 billion pounds a year earlier. Debt may pass 2.2 trillion pounds when part-nationalized lenders Royal Bank of Scotland and Lloyds Banking Group Plc are taken onto the government books, the statistics office says.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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European Services, Manufacturing Shrank More Slowly in May

By Frances Robinson

May 21 (Bloomberg) -- Europe’s manufacturing and service industries contracted at the slowest pace in eight months in May, adding to evidence that the region’s worst recession since World War II is easing.

A composite index of both industries rose to 43.9 from 41.1 in April. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates a contraction. Economists forecast an increase to 42.0, according to the median of 13 estimates in a Bloomberg News survey.

Europe’s economy is showing signs it may recover later this year as stimulus packages and interest-rate cuts around the world prop up demand. German investor confidence rose to a three-year high in May and European exports climbed for a second month in March.

The report “fuels hopes that eurozone economic contraction is now slowing substantially,” said Howard Archer, chief European economist at IHS Global Insight in London. “Nevertheless, the economic and financial environment remains very difficult, activity is still clearly contracting, relapses remain highly possible.”

Policy makers are warning against excessive optimism. Bundesbank President Axel Weber said last week it is “not advisable” to assume that recovery is “safely on track.” Federal Reserve policy makers last month said that the global financial system still “vulnerable to further shocks,” minutes of their April 28-29 meeting published yesterday showed.

Markit’s manufacturing index rose to 40.5 this month from 36.7 in April, today’s report showed, while the services index increased to 44.7 from 43.8.

To contact the reporter on this story: Frances Robinson in Frankfurt at frobinson6@bloomberg.net

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Fed Unconvinced Economy’s ‘Stabilization’ to Persist

By Scott Lanman and Steve Matthews

May 21 (Bloomberg) -- Federal Reserve officials, who see possible signs of “stabilization” in the U.S. economy, signaled they’re not convinced those improvements will persist.

Policy makers, meeting April 28-29 in Washington, saw “significant downside risks” to the outlook for the economy, with the global financial system still “vulnerable to further shocks,” minutes of the session released yesterday said.

The report indicates that Fed officials may be ready to build on their plan in March to buy $300 billion of Treasuries should the economy or financial markets deteriorate further. Some policy makers said an increase “might well be warranted at some point to spur a more rapid pace of recovery” from the worst recession in five decades, the minutes showed.

“They are talking about keeping an option open in case things get worse for some reason,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress. “But if the economy improves, they don’t need to do any more.”

Government-bonds rallied after the report, indicating some investors expect the Fed to make additional purchases. Yields on benchmark 10-year notes dipped 5 basis points to 3.19 percent by the close; they were at 3.17 percent at 7:40 a.m. in New York. Futures on the Standard & Poor’s 500 Stock Index were down 0.6 percent at 894.80.

New Forecasts

Yesterday’s minutes also updated economic projections from the 17 Fed policy makers, who forecast a deeper U.S. contraction than they foresaw in January, with a 9 percent unemployment rate lasting through the end of 2010.

Central bankers made their biggest cut yet to next year’s growth forecast, indicating the economy won’t rebound as quickly as previously anticipated. The jobless rate may remain as high as 8.5 percent in late 2011. The weaker forecasts are in line with changes to projections by private economists over the past few months.

“Participants generally expected that strains in credit markets and in the banking system would ebb slowly, and hence the pace of recovery would continue to be damped in 2010,” the Fed said in the minutes. Economic growth will pick up in 2011 as financial conditions improve, the Fed said.

Rate Level

U.S. central bankers cited a slower pace of contraction in their April statement, leaving the benchmark interest rate trading in a range of zero to 0.25 percent. They cited improved financial conditions, stronger sentiment from businesses and households and expectations of an increase in industrial production to replace inventories.

“Improvement in business activity is not far off,” Minneapolis Fed President Gary Stern said May 19 in a speech. “Interest rates are low and financial conditions are improving,” he said. “The improvement is gradually becoming more broadly based.”

A firming in consumer confidence, industrial production and other areas of the economy indicate the recession may be easing. Output at factories, mines and utilities decreased 0.5 percent last month after dropping 1.7 percent in March, Fed figures showed last week.

That doesn’t necessarily mean policy makers are counting on continued improvement, yesterday’s report indicated.

“As a group, they are still nervous about where we are,” said William Ford, a former Atlanta Fed chief who’s now at Middle Tennessee State University in Murfreesboro. “There are a number who are still pessimistic about the outlook. Even though there is talk of green shoots, they want to see more evidence of a turnaround.”

Economic Contraction

The economy is contracting at a 1.1 percent annual pace in the second quarter, according to estimates from Macroeconomic Advisers LLC, compared with a 6.1 percent annual rate of decline in the first three months of the year.

The Fed has expanded assets on its balance sheet by $1.3 trillion over the past year to $2.2 trillion to replenish liquidity, narrow credit spreads and support borrowing and spending.

“Participants continued to see significant downside risks to the economic outlook,” the minutes said. “While financial strains and risk spreads had lessened somewhat over the intermeeting period, participants agreed that the global financial system remained vulnerable to further shocks.”

Commercial Property

The central bank said May 19 that in July it will begin accepting commercial mortgage-backed securities issued before Jan. 1 into the Term Asset-Backed Securities Loan Facility, which provides financing to investors in asset-backed securities backed by consumer and business loans.

The Fed’s securities purchase program hasn’t prevented yields on U.S. notes from rising. Ten-year Treasury yields are up from 2.53 percent March 18 when the central bank said it would buy $300 billion of government debt over six months.

Banks are still struggling with rising loan delinquencies in a variety of categories. Nearly 8 percent of residential real estate loans were delinquent in the first quarter, up from 6.3 percent in the fourth quarter, according to seasonally adjusted Fed data.

“Meeting participants noted that the volume of credit extended to households and businesses was still contracting as a result of shrinking demand, declining credit quality, capital constraints on financial institutions, and the limited availability of financing through securitization markets,” the minutes said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net.

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Global Economy Free-Fall May Be Ending, Krugman Says

By Jason Folkmanis

May 21 (Bloomberg) -- The global economy’s “free fall” may have ended, which could in turn hurt the U.S. dollar, Nobel Prize-winning economist Paul Krugman said.

The world economy is projected to shrink 1.3 percent this year, the International Monetary Fund said in April, reversing a previous forecast of 0.5 percent growth. Still, confidence in the global economy has jumped to the highest level in 19 months, based on a Bloomberg survey last week.

Interest-rate cuts by the U.S. Federal Reserve, moves by the Fed to buy assets such as mortgage-backed securities, and government stimulus spending have eased the crisis, Krugman told a seminar today in Ho Chi Minh City, Vietnam. The American economy may expand “slightly” in the second half, he said, citing a slowdown in the pace at which jobs are being lost.

“Just about all of the economic indicators out there are suggesting that the free-fall has come to an end, that we’ve stabilized,” said Krugman, an economics professor at Princeton University in New Jersey. “Probably the worst in terms of shocks to the system is over.”

Singapore’s economy shrank less than initially estimated in the first quarter, signaling the nation may be past the worst of its deepest recession since 1965. The Bank of Japan may tomorrow raise its assessment of the economy for the first time since July 2006, said economists including Yasunari Ueno from Mizuho Securities Co. in Tokyo.

Easing Stress

Measures of stress in financial markets have eased, Krugman told today’s seminar.

“The acute stress that we had last fall after the failure of Lehman has been reduced,” he said. “Interest-rate spreads on commercial paper are way down, interest-rate spreads on corporate debt are down a little bit. The spread on interbank lending is down.”

The London interbank offered rate, or Libor, for three- month dollar loans fell 3 basis points yesterday to 0.75 percent, the British Bankers’ Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.

Global purchasing managers’ indices have improved, as have industrial production figures in the U.S. and freight-loading figures at major ports, Krugman said.

“All of the indicators are telling the same story,” he said. “Things are getting worse, but they’re getting worse more slowly.”

Bounce or Stay?

While the first year of the current global economic crisis resembles the first year of the Great Depression, further declines along the lines of the 1930s-era financial collapse are unlikely, Krugman said.

“I don’t think we’ve hit bottom, but the bottom is not too much further below us,” he said. “My big concern is that we don’t hit the bottom and bounce, we hit the bottom and stay there. It’s not obvious where recovery comes from.”

A global economic stabilization may hurt the U.S. dollar, as will external American deficits, Krugman said.

“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”

China’s government in March suggested the creation of a new international reserve currency to replace the dollar.

“I view the Chinese agitation about a new currency as basically an attempt to have somebody rescue them from their own investment decision,” Krugman said. “China bought too many dollars. Now it’s looking at it and saying, ‘we’re going to lose a lot of money on this investment’.”

To contact the reporter on this story: Jason Folkmanis in Ho Chi Minh City at folkmanis@bloomberg.net

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Jobless Claims in U.S. Decreased 12,000 to 631,000

By Bob Willis and Shobhana Chandra

May 21 (Bloomberg) -- More Americans than forecast filed claims for unemployment insurance last week, and the total number of workers receiving benefits rose to a record, signs the job market continues to weaken even as the economic slump eases.

Initial jobless claims fell by 12,000 to 631,000 in the week ended May 16, from a revised 643,000 the prior week that was higher than initially estimated, the Labor Department said today in Washington. The total number of people collecting benefits rose to 6.66 million, a record reading for a 16th straight week, and a sign companies are still not hiring.

Job losses are likely to continue after Chrysler LLC filed for bankruptcy and General Motors Corp. may follow suit and terminate 1,100 U.S. dealers. The auto slump threatens to slow any recovery from the deepest recession in half a century and keep pushing unemployment higher.

“We expect upward pressure on claims stemming from auto- related layoffs,” said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, who acurately forecast the initial claims number. “The labor market will remain weak, with gradual improvement on the horizon.”

Stock index futures were lower and Treasuries were little changed after the report. The contract on the Standard & Poor’s 500 Index fell 0.7 percent to 893.2 as of 8:38 a.m. in New York. The benchmark 10-year note yielded 3.18 percent, down 1 basis point from yesterday.

Economists surveyed by Bloomberg had forecast claims would drop to 625,000 from the 637,000 initially reported for the prior week, according to median of 42 estimates. Projections ranged from 585,000 to 675,000.

The four-week moving average of initial claims, a less volatile measure, decreased to 628,500 from 632,000.

Joblessness Climbs

Today’s Labor report showed the unemployment rate among people eligible for benefits, which tends to track the jobless rate, climbed to 5 percent in the week ended May 9, the highest level since December 1982, from 4.9 percent. These data are reported with a one-week lag.

Thirty-four states and territories reported an increase in new claims for the week ended May 9, while 19 reported a decrease.

The ‘majority’ of last week’s decrease in claims was in states that reported a jump in auto-related filings the prior week, a spokesman for the Labor Department said.

In the week ended May 9, six of the 14 states that commented on the jump in claims mentioned the automobile industry as one source of the firings. Michigan led the advance with a jump of 16,817 claims.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

Unemployment Report

Today’s report, which encompasses the survey period for the government’s jobs report, may signal a moderation in job losses in May when the government releases its report on June 5, economists said. The four-week moving average during the April survey week was 648,000, almost 20,000 higher than this month.

Payroll job losses slowed to 539,000 in April from 699,000 in March and losses averaging 701,000 in the prior three months, according to Labor data. The jobless rate rose to 8.9 percent in April, the highest in a quarter century, and economists surveyed by Bloomberg forecast it will rise to 9.6 percent by 2010.

The auto industry is at the forefront of the latest wave of job losses.

General Motors, facing a probable bankruptcy filing by June 1, this week began advising 1,100 “underperforming” U.S. dealers they will be terminated as the automaker starts shrinking its retail network. GM also plans to idle as many as 23 stamping, engine and transmission plants during the period through July, in conjunction with its plan to idle 13 assembly plants for as long as 9 weeks in the same period.

Auto Slump

Chrysler, which filed for bankruptcy protection on April 30, idled 22 U.S. factories, with about 26,800 hourly workers, on May 1 and plans to cancel 789 dealership agreements by June.

Job losses are also mounting in the financial industry. American Express Co., the largest U.S. credit-card company by purchases, will cut about 6 percent of its workforce, or 4,000 employees, as cardholders squeezed by rising unemployment fail to pay debts.

“We continue to be very cautious about the economic outlook,” Chief Executive Officer Kenneth Chenault said in a statement on May 18.

MetLife Inc., the biggest U.S. life insurer, cut 1,000 jobs in its home market in the first three months of this year as the recession deepened, Chief Financial Officer William Wheeler said.

To contact the reporter responsible for this story: Bob Willis in Washington bwillis@bloomberg.net

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U.K. May Lose AAA Rating at S&P as Finances Weaken

By Lukanyo Mnyanda

May 21 (Bloomberg) -- Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II.

Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product. The pound fell the most in four weeks against the dollar, the FTSE 100 Index slid as much as 2.8 percent and the cost of insuring U.K. debt against default rose.

Britain needs to sell a record 220 billion pounds ($344 billion) of bonds in the fiscal year through March 2010 as the economy contracts and Chancellor of the Exchequer Alistair Darling predicts that the budget deficit will reach 175 billion pounds, or 12.4 percent of GDP. The U.K.’s worsening finances parallel the public perception of Prime Minister Gordon Brown, whose Labour government has trailed the Conservative opposition for more than a year in polls.

“The downgrade highlights the precarious fiscal outlook the U.K. economy faces,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets, a securities broker for banks and institutional investors. “The huge amount of issuance to face the gilt market in the coming months will push yields to the upside. We’re bearish.”

Gilts Drop

Gilts fell, pushing the yield on the 4.5 percent note due March 2019 up as much as 13 basis points to 3.71 percent, before rebounding to 3.62 percent at 12:14 p.m. in London. The budget deficit increased to 8.5 billion pounds last month, the most for April since records began in 1993, the Office for National Statistics said in London today.

Britain would become the fifth western European Union nation to lose its rating because of the economic slump, following Ireland, Greece, Portugal and Spain. The U.K.’s debt load next year will be 66.9 percent of GDP, exceeding Canada’s 29.1 percent and Germany’s 58.1 percent, according to April 22 forecasts by the International Monetary Fund. The U.S. will be at 70.4 percent, and the 16-nation euro area at 69 percent, according to the IMF.

“The key from a market perspective is whether this is a stand-alone U.K. problem or whether it is the start of a trend where the agencies start to review the ratings of various sovereigns across the developed world,” said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London. “If this is really just a case of the U.K. deteriorating as a credit then it could have a significant impact going forward.”

Unemployment Jumps

Brown’s efforts to patch up the nation’s finances are being hobbled by an economy mired in its first recession since 1991. Unemployment surged to 2.2 million in March, the highest since 1996, and tax income has dropped 10 percent in the past year. The IMF expects gross domestic product to contract 4.1 percent this year, the most since World War II.

British Land Co., the largest office developer in London, reported a record annual loss of 3.9 billion pounds today as property values slumped across the nation’s capital.

There are no U.K. companies with AAA ratings by S&P or Moody’s Investors Service. British Land is rated BBB by Fitch Ratings, its second-lowest investment-grade ranking.

The difference in yield, or spread, between U.K. 10-year bonds and equivalent German securities widened six basis points to 21 basis points following the S&P statement. As recently as March 19, gilts yielded less than bunds.

Stocks, Pound Slide

The FTSE index declined the most since March 30. The pound dropped 0.7 percent to $1.5639 and weakened 0.7 percent against the euro to 88.07 pence. Credit-default swaps on U.K. debt rose 5.5 basis points to 78, according to CMA DataVision prices.

European governments are increasing borrowing to bolster ailing economies and bail out banks reeling amid the fallout from the global credit crisis. Ireland had its AAA credit rating removed by S&P on March 30. S&P lowered the ratings of Spain, Portugal and Greece in January.

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of gross domestic product and remain near that level in the medium term,” S&P analysts led by David Beers in London, said in the report today.

The British economy, the second largest in Europe, shrank 1.9 percent in the first quarter, the biggest contraction since 1979, when Margaret Thatcher became Prime Minister, the Office for National Statistics said on April 24. Darling said in his budget the economy will slump about 3.5 percent this year, before expanding in 2010.

Government Support Slumps

Brown needs to increase borrowing to pay for rescuing banks that have reported $121 billion in credit-related losses and writedowns since the start of 2007. The government pledged 40 billion pounds to bail out lenders and hundreds of billions of pounds in loan guarantees.

Labour trailed the Conservatives by as much as 22 points this month, according to a BPIX Ltd. survey completed on May 16. Conservatives had the support of 42 percent of voters, compared with 20 percent for Labour, according to the poll, which didn’t provide a margin of error.

Support for Brown is tumbling in the run-up to European elections on June 4 as a scandal about lawmakers’ expenses engulfs British politicians. House of Commons Speaker Michael Martin resigned two days ago, the first time that has happened since 1695.

Bank of England

The government gave the Bank of England authority to purchase as much as 150 billion pounds of assets with newly printed money in an attempt to lower borrowing costs.

Britain’s “balance sheet is deteriorating rapidly,” Moody’s analysts led by Arnaud Mares in London wrote in a report on April 23. “The government is taking risks with public finances.”

Some reports indicated the economic decline is slowing. Nationwide Building Society said April 30 house prices fell less than forecast in the month, after posting a surprise increase in March. Consumer confidence climbed to the highest level in a year during April, GfK NOP said in a report the same day.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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Rand Declines as Lower U.K. Debt Outlook Curbs Risk Appetite

By Garth Theunissen

May 21 (Bloomberg) -- South Africa’s rand weakened against the dollar, reversing an earlier advance, after Standard & Poor’s cut the outlook on Britain’s credit rating to “negative,” curbing demand for higher-yielding assets.

The rand snapped a three-day advance after the outlook on the U.K.’s AAA credit rating was lowered from “stable” because of the increasing “debt burden” in Europe’s second-biggest economy, S&P said today. South African Reserve Bank Governor Tito Mboweni said yesterday the rand may weaken 4.25 percent this year.

“Sterling has taken a hit and that’s temporarily affecting risk appetite for emerging-market assets,” said Shahin Vallee, an developing-country currency strategist in London at BNP Paribas SA, France’s largest bank. “It’s not a lasting move and we should see emerging-market currencies stage a comeback once the market calms down.”

The rand declined 0.3 percent to 8.3910 per dollar as of 12:17 p.m. in Johannesburg. It also weakened versus 13 of the 16 most-actively traded currencies monitored by Bloomberg, losing 0.4 percent to 11.5766 per euro. Against the pound, it added 0.3 percent to 13.1384.

The rand strengthened earlier against the dollar after Moody’s Investors Service said yesterday a recession in Africa’s biggest economy would be “brief.” The ratings company said the $278 billion economy would return to growth in the third quarter amid increased government spending and lower interest rates.

Growth Forecast

South Africa’s economy probably shrank for a second quarter in the three months through March, after a 1.8 percent contraction in the final three months of 2008, Mboweni said May 19. The central bank has cut its main interest rate four times since December, to 8.5 percent, to boost growth as the country slides into its first recession in 17 years.

Government bonds fell, with the yield on South Africa’s benchmark 13.5 percent security due September 2015 adding five basis points to 8.15 percent. Its price, which moves inversely to the yield, fell 30 cents to 125.91 rand.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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ECB Said to Have Debated 125 Billion-Euro Asset Package in May

By Jana Randow and Simone Meier

May 21 (Bloomberg) -- The European Central Bank’s Governing Council discussed a package of asset purchases worth about 125 billion euros ($170 billion) this month, more than twice the amount finally agreed upon, people briefed on the talks said.

The package proposed at the May 7 council meeting included buying commercial paper and corporate bonds, said the people, who declined to be identified because the discussions were private. After the meeting, President Jean-Claude Trichet announced plans to acquire 60 billion euros of covered bonds, low-risk securities backed by mortgages and public-sector loans. An ECB spokeswoman declined to comment.

Germany’s Axel Weber opposed buying assets and argues the ECB should maintain its focus on getting banks to lend to each other again. Smaller countries in the 16-nation euro area pushed for the ECB to follow the Federal Reserve and the Bank of England in buying a broader range of assets to pump money into the economy and counter the possible risk of deflation.

“For an economy the size of the euro zone, 60 billion is chicken feed,” said Peter Dixon, an economist at Commerzbank AG in London. A sum of 125 billion euros is “more realistic, though it’s still half of what you’d like to see.”

The ECB’s plan is worth 0.6 percent of euro-region gross domestic product. Asset-purchase programs by the Federal Reserve and the Bank of England amount to about 12 percent of U.S. GDP and 10 percent of U.K. GDP.

Diversity

The diversity of views on the ECB’s 22-member council may make it harder for Trichet to restore consensus at the central bank and help an economy struggling to escape its worst recession since World War II. Before the May meeting, Trichet asked council members not to publicly debate the next policy steps, Austrian governor Ewald Nowotny said on April 30.

Slovenian central bank chief Marko Kranjec said in a May 13 interview that “we don’t exclude the purchase of first-class corporate bonds” and “short-term securities such as commercial paper.” He also said that an increase beyond 60 billion euros was “very likely.”

Six days later, he said that the comments were taken “out of context.”

Slovakia’s Ivan Sramko said May 14 he “can exclude nothing” on non-standard measures. Nowotny, in a speech on central banks in general, said they can buy government bonds when interest rates near zero. He later moved to “avoid some misunderstandings,” saying policy makers had a “clear common view.”

‘Powerful Comeback’

Bundesbank President Weber on May 13 insisted that 60 billion euros was the “maximum” the ECB will spend on assets and said inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected.

Athanasios Orphanides from Cyprus, the former Fed economist who has argued for an aggressive response to the financial crisis, warned the same day that deflationary expectations must not be allowed to develop.

“You have completely conflicting signals from different members, creating confusion,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “There may come a time when this cacophony becomes unbearable.”

“Intervention by Trichet to restore a certain order would help,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan.

‘Full Blown’

Asked on May 7 whether the ECB had considered buying other assets, Trichet said: “We have decided to engage in the purchase of covered bonds” and “have not taken any other decision on any other purchase.”

He said the ECB will give details of its covered bond purchases after its next council meeting on June 4. The securities have suffered a slump in demand during the crisis.

Weber “will block any further attempts to buy assets,” said Nick Kounis, chief euro-region economist at Fortis in Amsterdam. “As long as the Bundesbank is against it, we won’t get a full-blown” asset-purchase program.

The ECB this month cut its benchmark interest rate to a record-low 1 percent and Trichet said that’s not necessarily its lowest level. While Weber wants to make 1 percent the floor for the key rate, others say deeper cuts may yet be necessary.

Council members have also disagreed about the outlook for Europe’s recovery. Vice President Lucas Papademos said last week that “the recovery may start sooner than previously envisaged,” while Dutch official Nout Wellink warned against becoming “too optimistic when you see a few swallows flying around.”

Confidence Improves

German investor confidence rose more than economists forecast to a three-year high in May. At the same time, Europe’s largest economy shrank the most since 1970 in the first quarter and industrial output across the euro region plunged the most since at least 1986 in March.

The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

The Fed, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to revive growth.

To contact the reporters on this story: Simone Meier at smeier@bloomberg.netJana Randow at jrandow@bloomberg.net

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Chrysler Sales Top Industry’s Pace as Bargains Trump Bankruptcy

By Mike Ramsey

May 21 (Bloomberg) -- Chrysler LLC is selling cars at a higher rate than the U.S. industry this month, buoyed by incentives of as much as $6,000 and President Barack Obama’s assurances on the automaker’s survival.

Chrysler’s sales fell about 30 percent through May 18, less than the U.S. market’s drop of as much as 33 percent, said Gary Dilts, senior vice president of consumer-research firm J.D. Power & Associates, which collects data from 6,000 dealers.

The results show buyers aren’t turned off from dealing with a bankrupt automaker, a win for Chrysler in its bid to keep revenue flowing and cut inventory while in court protection. Chief Executive Officer Robert Nardelli told Congress in November that a Chapter 11 filing would shred demand.

“We had a pre-bankruptcy target to hit, and it looks we are seeing pretty close to the industry for the month,” Steve Landry, Chrysler’s U.S. sales chief, said yesterday in an interview. “It’s developing fairly well.”

Chrysler’s experience may be good news for General Motors Corp. as the biggest U.S. automaker faces a probable bankruptcy by Obama’s June 1 deadline to restructure outside of court. Then-CEO Rick Wagoner also said last year that sales would plummet in court protection.

Shrinking Market

With U.S. auto sales plunging in early 2009 to the worst annual rate in 27 years, outpacing the market now counts as a victory, even with declines of 30 percent or more from a year earlier. Auburn Hills, Michigan-based Chrysler’s sales tumbled 48 percent last month as its April 30 bankruptcy filing neared, eclipsing the U.S. industry’s 34 percent slump.

J.D. Power, based in Westlake Village, California, collects information from dealers as they make sales. Automakers typically don’t discuss their sales in detail in mid-month.

Chrysler’s goal is to drive down its supply of unsold cars, Landry said. The company’s factories will remain shut until mid- June or later, he said. By the end of June, its inventory may be 250,000 autos, 43 percent less than a year earlier.

Landry credited the company’s sales performance to the incentives and Obama’s assurance in a nationally televised address that Chrysler would survive.

Mickey Anderson, president of Performance Automotive Group in Omaha, Nebraska, said his Chrysler store there “is on pace” to outsell his Toyota Motor Corp. and Ford Motor Co. outlets.

“President Obama helped release a little bit of pent-up demand by clearly stating, ‘They are going to make it,’” Anderson said.

Sales have been higher than average at the 789 Chrysler, Dodge and Jeep dealerships that will have their contracts terminated by June 9, Landry said.

To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

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Canada’s Dollar Depreciates as U.S. Stock Futures, Oil Decline

By Chris Fournier

May 21 (Bloomberg) -- Canada’s dollar weakened for the first day in four, falling from a seven-month high, as U.S. stock-index futures declined and commodities such as copper and crude oil dropped.

“The Canadian dollar’s rally is built on shaky foundations,” Tom Levinson, a currency strategist in London at ING Bank NV, wrote today in a note to clients. Speculation that the global economy will recover quickly “is at best premature and at worst misguided.”

The Canadian currency depreciated 0.3 percent to C$1.1455 per U.S. dollar at 8:04 a.m. in Toronto, from C$1.1418 yesterday. One Canadian dollar buys 87.30 U.S. cents. The loonie, as Canada’s currency is known, strengthened earlier to C$1.1349, the highest in more than seven months.

Futures on the Standard & Poor’s 500 Index slipped 0.6 percent. Crude oil for July delivery dropped as much as 2.5 percent to $60.51 a barrel on the New York Mercantile Exchange, and copper fell in London for the first time in six days. Raw materials account for more than half of Canada’s export revenue.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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Dollar May Extend Slide to as Low as 90 Yen: Technical Analysis

By Hiroko Komiya

May 21 (Bloomberg) -- The dollar may weaken to 90 yen should it fall below a March low of 93.54 yen, said Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd., citing trading patterns.

Should the U.S. currency keep declining below its March 19 low, the next level of so-called support would be 92.60 yen, a 61.8 percent retracement of the rally from January to April, Tokyo-based Hashimoto said. The currency may then move toward a low of 90 yen, he said, based on a so-called “head-and- shoulders” formation that peaked at 101.44 yen on April 6.

“The dollar has fallen below its 90-day moving average, ending an upward trend which has been in place since January,” Hashimoto said. “The key now is whether the dollar’s decline will halt at the lower half of 94 yen where the lower end of downward channel line lies.”

The dollar fell as low as 94.29 yen today, the weakest level since March 20, before trading at 94.66 yen as of 10:15 a.m. in London from 94.88 yesterday in New York.

The dollar’s decline below its April 28 low of 95.63 has confirmed the formation of a head-and-shoulders pattern, Hashimoto said.

A head and shoulders is formed when a currency makes three consecutive peaks, with the middle being the highest. The neckline is drawn across the base of the three peaks. Support refers to an area where buy orders may be placed.

To contact the reporter on this story: Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net.

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Greenspan Says Banks Still Have a ‘Large’ Capital Requirement

By Alison Fitzgerald

May 21 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis has yet to end even as borrowing costs tumble, warning that U.S. banks must raise “large” amounts of money.

“There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded,” Greenspan said in an interview yesterday in Washington. He also said that “until the price of homes flattens out we still have a very serious potential mortgage crisis.”

Greenspan’s comments suggest he sees a bigger capital shortfall in the banking system than reflected in regulators’ stress tests on the 19 biggest U.S. lenders. Treasury Secretary Timothy Geithner told lawmakers yesterday that banks have issued more than $56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion.

A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief, who left the central bank in 2006, said that the continued slump in home prices is putting at risk millions of borrowers.

“We’re on the edge and if this thing doesn’t get resolved quickly I’m worried,” he said before a meeting with House of Representatives members on financial regulation that was organized by the Washington-based Bipartisan Policy Center.

Home prices will only start to stabilize once the “liquidation” rate of single-family homes has peaked, he said. “I don’t think we’re there yet.”

‘Remarkable’ Improvement

More broadly, “things have unquestionably improved” across the economy and financial markets, he said. “They’ve improved everywhere in the world. It’s remarkable.”

The London interbank offered rate, or Libor, for three- month dollar loans fell 3 basis points yesterday to 0.75 percent, the British Bankers’ Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.

That’s an “extraordinary improvement,” said Greenspan, who last year said that the credit crisis would be at an end once the Libor-OIS spread narrowed past 25 basis points. “Virtually all of the various credit spreads not only in the U.S. but globally have come down.”

Alan Blinder, a former Fed vice chairman, also said on Capitol Hill that “if there are no more reversals, history will judge that by May 2009 we will have passed the worst of the crisis.”

GDP Call

“My current guess would be in terms of GDP the second quarter will be a bottom and by the third quarter we’re eking out a positive,” Blinder said.

Greenspan agreed, estimating that U.S. gross domestic product will decline at an annual rate of 1 percent in the second quarter.

Members of the Fed’s Open Market Committee who met in Washington April 28-29 saw “some signs pointing toward economic stabilization,” and some officials detected prospects for “a trough” in the housing market’s downturn, according to minutes of the meeting released yesterday in Washington.

Fed governors and district-bank presidents project that the economy will shrink 1.3 percent to 2 percent this year and grow 2 percent to 3 percent in 2010, according to median estimates released yesterday.

Greenspan separately said he opposed the creation of a “systemic risk regulator,” a concept that has been backed by the Obama administration and Fed Chairman Ben S. Bernanke. The agency would be given an impossible task of trying to foresee crises, he said.

“If you put the power into the hands of people, very smart people, but if you ask them to do more than is possible I think they will create problems for the system,” said Greenspan, who said in congressional testimony in October that “a flaw” in his free-market ideology contributed to the “once-in-a- century” credit crisis.

The former Fed chairman also reiterated his view that the central bank’s emergency lending should be done instead through the Treasury.

To contact the reporter on this story: Alison Fitzgerald in Washington at afitzgerald@bloomberg.net

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Russia Convinces BlackRock Stocks Can Beat Recession

By Michael Patterson, Alex Nicholson and William Mauldin

May 21 (Bloomberg) -- Russia is sliding into its first recession since 1999, companies are struggling to repay $147 billion of foreign debt this year and corruption is the most widespread among the world’s biggest economies.

For BlackRock Inc., there isn’t a better place to buy emerging-market equities. The manager of $1.3 trillion has been purchasing banks and commodity producers, helping spur a 62 percent rally in the benchmark RTS Index this year.

BlackRock’s Plamen Monovski, Templeton Asset Management Ltd.’sMark Mobius and billionaire Kenneth Fisher are all looking past the economic crisis to buy shares trading at the lowest price-earnings ratios among the 50 major markets. They say shares will keep rising as expectations of a global recovery lift oil prices and lure overseas investors back to the largest energy exporter.

“A lot of things were priced for bankruptcy,” Monovski, an emerging-markets money manager at BlackRock, said in a phone interview from London. “All you need in Russia is a rally in commodity prices and the outlook for the economy changes pretty quickly.”

Russia is the main “overweight” holding in BlackRock’s emerging-market funds, Monovski said. He declined to say what companies the firm is buying.

Lukoil, Sberbank

The RTS Index tumbled 80 percent from an all-time high in May 2008 to its 2009 low in January, sending the gauge’s price- earnings ratio to 2.6, the lowest since Bloomberg began tracking weekly data in January 2002. Even after the rebound, the measure is valued at 5.7 times its companies’ profit from the past 12 months, about three-quarters of the monthly average since 2002.

“Russian stocks are still of good value,” Singapore-based Mobius, who as Templeton’s executive chairman oversees about $20 billion of emerging-market assets, said in an e-mail. “They have risen dramatically from their low point but they are still a long way from their previous high.”

OAO Lukoil, the country’s second-largest oil company, trades for 4.7 times profit, below the multiples of 8.1 for the MSCI Emerging Markets Energy Index and 8.9 for Petroleo Brasileiro SA of Rio de Janeiro, according to data compiled by Bloomberg. OAO Sberbank, the biggest lender, is valued at 6.8 times profit, less than half the 13.7 ratio for emerging-market financial shares as a group. Both Lukoil and Sberbank are based in Moscow.

Profit Drop

Russian earnings may tumble 60 percent in 2009 before rebounding by 16 percent next year, according to forecasts from Citigroup Inc. in New York. That compares with a 26 percent decline this year for developing nations as a whole, and an 18 percent increase in 2010.

Investors fled last year, taking capital outflows to a record $132.7 billion, as the country’s main export blend of oil declined as much as 77 percent from a July peak. A five-day war with Georgia in August increased speculation that overseas companies would reduce investments, after the conflict was condemned by the U.S.

Russian corporations slashed output and cut staff after the collapse of New York investment bank Lehman Brothers Holdings Inc. froze global credit markets.

In December, Moscow-based Finance Leasing Co. became the first state-run company to default on a foreign-currency coupon payment in more than a decade. The nation’s businesses have more than $30 billion of foreign-currency debt due this quarter, according to central bank data.

Ruble Rebounds

The ruble’s 14 percent rebound against the dollar since January is also eroding the competitiveness of non-energy businesses in Russia and risks pushing the country back to a “boom-bust cycle,” Roland Nash, chief strategist at Renaissance Capital, said in an interview from Moscow today.

The economy will contract by at least 4 percent this year and may shrink as much as 8 percent, Economy Minister Elvira Nabiullina said in a May 19 interview with Bloomberg Television. About 30 percent of gross domestic product comes from oil and natural gas, Energy Minister Sergei Shmatko said April 9.

“Russia is largely a call on whether you’re positive on energy or not,” said Hugh Hunter, who oversees about $2.2 billion as chief executive officer of Blackfriars Asset Management in London and holds an overweight position in Russian shares. “We will see the oil prices inching up in a reasonably steady way.”

Oil Recovery

Urals crude has climbed 42 percent this year on expectations government stimulus packages and interest-rate cuts from the U.S. to Brazil and China are easing the worst global recession since World War II.

A recovery in oil prices helped Russian stocks rebound from the nation’s 1998 default on $40 billion of domestic debt, a 71 percent devaluation of the ruble and a 6.5 percent contraction in GDP.

Urals crude jumped 138 percent the following year, helping the economy grow 6.4 percent. The RTS almost tripled.

“Investors that are still sidelined will gradually come back,” said Andreas Gummich, a senior strategist for emerging markets at DWS Investment GmbH in Frankfurt. “Despite all the definite risks in the economy, we find value in the Russian equity market.”

For Aberdeen Asset Management’s Mark Gordon-James, many corporate executives aren’t trustworthy enough for him to buy shares. The country makes up just 2.5 percent of Aberdeen’s emerging-market fund, compared with the nation’s 6.7 percent weighting in the benchmark MSCI Emerging Markets Index.

Corruption a Problem

Russia ranks 147th among 180 countries in Berlin-based Transparency International’s 2008 Corruption Perceptions Index, which collects data on bribes from surveys of local business leaders, international aid organizations and country risk experts. China ranks 72nd, Brazil is 80th and India is 85th.

“Reforms take a long time, and we don’t see any signs of positive momentum on this front,” Gordon-James said in an interview. State intervention into markets also makes Russia unattractive, according to the London-based money manager. Aberdeen oversees about $138 billion worldwide.

Prime Minister Vladimir Putin accused steel and coal producer OAO Mechel of price fixing on July 24, and four days later he said the company used offshore traders to minimize taxes. His criticisms wiped out about half of Mechel’s share price and more than $60 billion from the Russian stock market.

Gazprom’s Strategy

OAO Gazprom’s strategy of purchasing gas from central Asia and selling it to Europe is another reason investors should be cautious, according to Alexander Nazarov, an analyst at the Metropol brokerage in Moscow.

The transactions by Russia’s biggest publicly traded company are unprofitable, said Nazarov.

While corporate governance is lacking, Russian equities are still worth owning because global stocks are in the early stages of a bull market, according to Fisher.

The nation’s shares will outperform during the global rally because they fell disproportionately last year, Fisher said. The RTS Index dropped 72 percent in 2008 and was the worst performer among benchmarks for the biggest equity markets, Bloomberg data show.

“Russia in some ways today is just a levered play on the world,” said Fisher, who oversees about $24 billion as the CEO of Fisher Investments in Woodside, California. “Early in a bull market, Russia is going to run more.”

Cash Flows

Investors have poured less money into Russia this year than into Brazil, India and China. The four countries are grouped together under the BRIC acronym coined by Goldman Sachs Group Inc. in November 2001 to encompass four developing nations it predicted would join the U.S. and Japan as the world’s biggest economies by 2050.

Funds that invest in Russian equities attracted $338 million so far this year, according to Bank of America-Merrill Lynch Research. That compares with $3.2 billion of inflows into China funds, $2.3 billion into Brazil and $342 million into India.

The inflows helped push the price-earnings ratios for China’s benchmark Shanghai Composite Index and Brazil’s Bovespa index to 27 and 21, respectively, Bloomberg data show. India’s Bombay Stock Exchange Sensitive index is valued at 15 times profit.

Brazil’s economy may contract 1.3 percent this year, China’s may grow 6.5 percent and India’s may expand 4.5 percent, according to forecasts from the International Monetary Fund in Washington, which was formed after World War II to help stabilize the currencies and economies of member countries.

“People have been obsessed with that growth despite what they have to pay,” said BlackRock’s Monovski. “The potential for higher valuations in Russia is far from exhausted.”

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Alex Nicholson in Moscow at anicholson6@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net

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