Afternoon Forex Overview

Daily Forex Fundamentals | Written by Dukascopy Swiss FX Group | May 29 09 15:02 GMT |

The dollar is broadly lower Friday after a flurry of economic data from around the world bolstering hopes that the grinding global recession may be easing. Relatively positive economic data have been the catalyst in most cases for the concerted global move against the dollar, as Japan reported that its industrial production rose by 5.2% last month, the largest monthly rise since March 1953. In the U.K., the latest report from Nationwide estimated that house prices rose by 1.2% in April, raising hopes that the worst of the recession is over. Germany added to the positive mood with a 0.5% increase in its retail sales last month, helping to offset concerns about falling export demand. Overnight, the dollar sank to new year-to-date lows against the euro, pound sterling, and pro-cyclical currencies like the Australian and Canadian dollars as risk appetites revived smartly. Friday, the euro was at USD1.4107 from USD1.3945 late Thursday, while the dollar was at JPY95.67 from JPY96.96. The euro was at JPY134.94 from JPY135.19. The pound was at USD1.6145 from USD1.5935, while the dollar was at CHF1.0724 from CHF1.0852. Market expectation EURUSD ebbs lower again with cable and traded back under USD1.4100 briefly as bounce stalls shy of earlier high at USD1.4135 and supply noted there. Trader's cautions that risk may be that short-term accounts are now overly long the pair with others suggesting that medium to long-term accounts has not actively participated in the day's dollar sell-off. Do those slower-to-move accounts step up to the plate, or do the short-term players lighten up ahead of month end? Traders say stops a risk under USD1.4050/55 area of old highs. Pound is back above USD1.6100 and meets resistance around USD1.6120 (50% USD1.6173/1.6066). Above here and further resistance is placed at USD1.6130/35 ahead of USD1.6150. EURGBP pushes above resistance at stg0.8750, as sterling pares earlier gains, but seen meeting sell interest around stg0.8760. Above here and stronger resistance noted between stg0.8770/80. USDJPY slipping further for trade near JPY95.40 area now as earlier reported demand interest around JPY95.50 gets taken out and as the yen starts to benefit more from broad dollar weakness. Minor support eyed at JPY95.24 area of Thursday lows. Dukascopy Swiss FX Group Legal disclaimer and risk disclosure This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.

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USD Plunges to New Lows With USD Index Dipping Below 80, USDCAD Below 1.1000, AUDUSD Nearly Touching 0.8000

Daily Forex Fundamentals | Written by Saxo Bank | May 29 09 15:07 GMT |

Geithner on the way to China to plead his case. Ugly Chicago PMI reading challenges green shoots theory. MAJOR HEADLINES – PREVIOUS SESSION Japan Apr. Housing Starts fell -32.4% YoY vs. -22.0% expected and -20.7% in Mar. Germany Apr. Retail Sales rose +0.5% MoM as expected and fell-0.8% YoY vs. -0.3% expected UK May Nationwide Housing Prices rose 1.2% MoM vs. -0.9% expected and fell -11.3% YoY vs. -13.7% expected Sweden Q1 GDP out at -0.9% QoQ vs. -2.7% expected, but Q4 revised down to -5.0% QoQ vs. -2.4% originally estimated Norway Mar. Retail Sales rose 1.4% MoM vs. +0.6% expected Switzerland May KOF Swiss Leading Indicator fell -1.86 vs. -1.78 expected Canada Q1 Current Account out at -9.1B vs. -10.3B expected US Q1 GDP revised up to -5.7% from original -6.1% estimate and -5.5% expected US May Chicago PMI out at 34.9 vs. 42.0 expected and 40.1 in Apr. THEMES TO WATCH – UPCOMING SESSION US May Final University of Michigan Confidence (1400) Market Comment: The USDJPY rally fizzled after yesterdays extension of the bond rout finally turned tail and buying came in, pushing USDJPY sharply back lower. Equities decided to take the stabilization of rates as good news and bulled higher ahead of the US session. The USD continues to act as the flipside of risk appetite and the theme that we are in the midst of a dollar devaluation. The dollar index lost further ground, pushing to new lows for the year just below 80 this morning. All other markets responded in unison with the classic, reflexive implications - particularly commodities, where oil is above 65 dollars a barrel and gold looks set to threaten the symbolic 1000 dollar mark. US Treasury Secretary Geithner is making his way to China this weekend. This is an interesting visit considering Geithner's controversial statements during his confirmation hearings that China is manipulating its currency. The obvious agenda for his trip is outlined by the standard business publications: namely to pressure China to allow its currency to appreciate and jump start Chinese domestic consumption to temper the gross current account surplus that is part of the entire global imbalance phenomenon of the last decade and more. As well, Geithner will no doubt also attempt to reassure China that the value of its enormous piles of US dollar reserves is not at risk with the Fed's and Treasury's money printing shenanigans (good luck, sir!). There is also some silliness about climate change in the mix, as this rates highly on the Obama agenda. Considering some of Geithner's previous appearances one might wonder if he has the diplomatic panache to pull off an effective appearance, his international background notwithstanding. The bigger question is this: if China finally allows its currency to appreciate versus the dollar as the Yuan NDF's are attempting to predict (12-month Yuan NDF's have risen sharply versus the USD this year even as the spot exchange rate has not budged), would this necessarily trigger a further weakening of the USD across the board or mostly versus the Yuan and other Asian currencies. It would seem the isolated movement would be sharper in Asian currencies, so something like a synthesized AUD/CNY or EUR/CNY short might be an idea for those looking for this kind of a revaluation, which seems necessarily inevitable and merely (!) a question of timing. If the reval doesnt transpire, then the trade goes wrong as long as the USD is weak, of course... The US growth figure was revised up to -5.7%, but the 2 quarter contraction of the US economy is still the worst since a brief episode in the late 1950's then growth rates were very volatile. With the Fed seemingly losing control over the long end of the yield curve and joblessness, we are having a bit of a hard time seeing a strong growth rebound in Q2, though the inventory rebuilding and stabilization in financial markets will prevent the rate of contraction we saw over the last two quarters. While on the subject of the much discussed inventory-rebuilding supposedly under way, it was more than interesting to note that the Chicago PMI today was very disappointing - an amazingly weak reading considering the comparative nature of the survey. Order backlogs registered their second lowest reading since the recession began, and employment was at index 25 - the lowest reading for the cycle. Challenges may mount going into Q3 and Q4 if final demand doesn't tick up - and again, when we look at a 9%+ national delinquency rate for outstanding mortgages in Q1 reported yesterday and the unemployment rate likely closing in on 10%, where is the final demand going to come from in the US economy? The Norwegian Krone looks like an interesting play at this point as it is tough to build an argument for a weaker krone regardless of whether the current trend of higher equity - and oil - prices continues or whether we move back into risk aversion mode, especially as relates to worries over the seemingly forgotten issues facing the single currency: namely the skeletons still in the closet at European banks and the potential for Recession, Round 2, to renew questions about the viability of the EuroZone framework. Is EURNOK of 9.00 an effective ceiling for the medium term? Chart: EURNOK EURNOK is showing signs of exhaustion in its weak rally attempt of the last two weeks. Is the 9.00 area an effective ceiling? Analysis Disclosure & Disclaimer Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Saxo Bank utilizes financial information providers and information from such providers may form the basis for an analysis. 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An analysis will be updated if and only if a market development or other issues relevant to the analysis render a new analysis on the same topic relevant. Saxo Bank's analysis does not cover any specific financial product over time but only products which Saxo Bank's strategy team finds it important to cover at any given point in time. In order to prevent conflicts of interest, Saxo Bank has established appropriate business procedures, incl. procedures applicable to research and analysis to ensure objective research reports. Saxo Bank's research reports have not been discussed with the parties, e.g. issuers of securities, mentioned in the analysis. Saxo Bank is under supervision by the Danish Financial Supervisory Authority. Saxo Bank does not engage in corporate finance activities and accordingly, Saxo Bank's employees, incl. the persons responsible for an analysis, do not receive remuneration associated with investment banking transactions.

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Dollar Weakens on Global Recovery Theme

Daily Forex Fundamentals | Written by Interactive Brokers | May 29 09 15:09 GMT |

The big theme to close the week and the month of May appears to be the rising tide of optimism for economies around the world. Strong production data out of Japan, growth figures from India along with rising retail sales in Germany conspired to send the dollar through $1.4100 on Friday allowing euro bulls to write that number on a trading ticket for the first time in 2009. The Japanese yen managed to rally despite recent evidence that its investors are growing increasingly confident and are investing overseas. However, following an awful Chicago-area PMI reading this morning it advanced against the dollar to ¥95.82 while against the euro it rallied to ¥134.91. Signs that a collective $13 trillion in government spending and stimulus is having an effect make for a good dollar-bashing story. Stronger than expected Indian GDP earlier today at 5.8% in the first quarter saw stronger demand for its rupee, and don't forget a new and less restricted government just received an overwhelming boost from voters. The dollar took fright overnight after a warning from an Asian agency harmed the prospects for plans to raise the issuance of U.S. government debt. South Korea's National Pension Service dropped the cymbals earlier with its notice that it had less room in its portfolio for U.S. bonds going forward. Fear of the unknown in terms of a possible loss of its AAA-national credit rating provides ongoing reservations for nations in fear of a loss of value in the dollar, which would undermine their holdings. At the end of 2008 the national pension fund listed $187 billion in assets. Industrial production in Japan grew at a faster than forecast clip of 5.2% and the rebound marked the largest monthly expansion in 56 years according to the Japanese Trade Ministry. While much of the Asian regional pick-up has perhaps been government inspired, especially in China, it leaves behind severe excess capacity in terms of labor and under-utilized factory space in Japan. Further, the rebound in activity might not last over the long haul when one considers that the region has become the home to manufactured exports, which ultimately end up in Western American ports. And while we know that the drop off in consumption in the U.S. has been tempered after the credit freeze begin to thaw in the first quarter, there are huge question marks overhanging the return to the kind of demand, which would keep Asian factories gainfully employed. But for now the rebound has increased demand for physical commodities and that plays right into the hands of commodity-exporting nations. The Australian dollar is off to the races today and has traded within an ace of 80 U.S. cents for the first time since the beginning of October 2008. Australian bank lending grew only marginally in April but marked the fourth straight monetary expansion in the nation. The drop in the value of the greenback has partially inspired investors to favor physical commodities, a traditional hedge against a weaker dollar. But it's also seen as a recovery play and with the evidence from China, India and other Asian nations it's easy to understand. Prices of many commodities are on fire. Copper prices are at a three-week high. Following another North Korean short-range nuclear test, the price of gold is at a three-month high and fast closing in on $1,000 per ounce once more. The price of silver used for industrial and jewelry-making had its largest single-monthly rise in 22 years throughout May. Meanwhile crude oil is blistering northwards and is likely undoing the unintended yet effective tax reduction that helped U.S. consumers whether the worst of the financial crisis earlier this year. OPEC's decision to maintain its production quota coupled with a depletion of U.S. inventories helped lift prices. Signs of recovery abroad, although welcomed by the Obama administration mask the hurdle it faces in dealing with the housing crisis. The administration earlier tried to persuade would-be first-time homebuyers that the combination of low mortgage rates and a tax incentive of $8,000 should be enough to help bring price declines to a halt and a return to confidence. However, the fastest rise on record in delinquencies last month and a record default rate hitched to ongoing price declines are threatening to derail the plan. In addition the rise in bond yields, as worries over the amount of debt issued grow, is taking money out of consumers pockets. The 19% decline in refinancing activity last week as told by the Mortgage Bankers Association is another sign that the bulk of mortgage applications from rate-sensitive homeowners is over. Meanwhile, the British pound rose on the unexpected news that the Nationwide Building Society's index of house prices grew 1.2% in May confounding expectations for a 0.9% decline. A measure of consumer confidence also clung to its least bad reading in two years and so added weight to the argument that Britain's recovery is on track. The pound is currently trading at $1.6068 and is stronger against the euro at 87.95. Andrew Wilkinson Senior Market Analyst Interactive Brokers Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Trade Idea: EUR/USD - Buy Again at 1.4035

Candlesticks Trades | Written by ActionForex.com | May 29 09 14:58 GMT |

EUR/USD - 1.4097 Most recent candlesticks pattern : N/A Trend : Up Tenkan-Sen level : 1.3964 Kijun-Sen level : 1.3964 Ichimoku cloud top : 1.3885 Ichimoku cloud bottom : 1.3737 Original trading strategy : Long position at 1.3920 met target at 1.4020 New strategy is : Buy at 1.4035, Target : 1.4140, Stop : 1.3980 The single currency found renewed buying interest at 1.3906 yesterday in New York session as expected (our long entry level was 1.3920 and got a fill there), then euro rallied today and met our target at 1.4020 (making another 100 points profit). Once resistance at 1.4051 was penetrated, the single currency gathered momentum and rallied to a fresh 2009 high of 1.4151 before easing. Looking at the 4-hour chart, the bullish cross-over of Tenkan-Sen above Kijun-Sen provided a strong buy signal, suggesting the upmove from 1.2457 remains in progress for gain to 1.4167 (100% projection of 1.2457 to 1.3739 measuring from 1.2885), however, upside should be limited to 1.4180 (61.8% projection of 1.3425 to 1.4051 measuring from 1.3793) and reckon 1.4216, being 1.618 projection of 1.3793 to 1.3984 measuring from 1.3906, would hold today. In view of this, whilst we are still looking to buy euro on pullback but one must not get overly bullish on next rise and should take profit when price approaches 1.4180. On the downside, expect renewed buying interest to emerge around 1.4028 (50% Fibonacci retracement of 1.3906 to 1.4151) and support at 1.3984 (previous resistance turned support) should continue to hold for eventual rally to abovementioned target. Loss of 1.3984 would suggest a temporary top is in place and retracement to 1.3950 and 1.3910 would follow but euro’s downside would be limited to 1.3850/60.

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Daily Report: Dollar at Fresh Low against AUD, CAD and CHF

Market Overview | Written by ActionForex.com | May 29 09 06:37 GMT |

Dollar is resuming recent down trend and makes new low against AUD, CAD and CHF on a couple of dollar negative news. Firstly, South Korea's state pension fund said it will reduce its exposure to US Treasuries and diversify to other overseas investments like "credit bonds". Secondly, "de-dollarization" may be included in the agenda in the first BRIC summit in Russia next month. Thirdly, Pimco's Bill Gross also warns again that dollar will lose its status as reserve currency status because of "too much debt". The dollar index is still holding above last week's low of 79.81 but it's very likely that consolidation from there has completed earlier at 81.13 after hitting 4 hours 55 EMA and 38.2 retracement of 83.22 to 79.81. A retest of 79.81 low is still anticipated and resumption of down trend is likely based on outlook in major dollar major pairs. While further decline could be seen towards 77.69 medium term support, we'd again look for reversal signals as dollar index re-enters into support zone of 77.69/80. Elsewhere, the Japanese yen remains the weaker currency along with dollar. So far, NZDJPY, AUDJPY has weakened and CADJPY are the biggest winners this week, rising 3.5%, 3.0% and 2.99% and have all resumed recent up trend. EUR/JPY, on the other hand, is still kept below recent high 137.38 but will likely take this resistance out sooner or later. Japan released a series of economic data suggesting the pace of economic contraction has moderated but general price level remained weak. National CPI dropped -0.1% yoy in April, compared with consensus and March's -0.3% while core CPI stayed flat at -0.1% yoy during the month. Tokyo CPI, leading indicator for national CPI, slid -0.7% yoy in May after coming in at 0% a month ago. Industrial production rose +5.2% mom in April, higher than market expectation of +3.3% and +1.6% in the previous month. The rise also brought the annual decline to -31.2%, compared with consensus of -32.5% and -34.2% in March. Unemployment rate climbed to 5% in April from 4.8% a month ago. Worsening job market dragged down household spending which plunged -1.3% yoy in April after a -0.4% decline a month ago. Eurozone's flash HICP estimate is expected to have eased to +0.2% yoy in May from +0.6% a month ago due to strong base effect in energy component. This might be the last month for HICP to stay in positive territory. Moreover, core inflation should also have eased gradually and unwinding of Easter effect in April should be seen. M3 money supply probably eased to +4.5% yoy in April from +5.1% in the previous month due to decline in demand for loans. 3-month moving average of M3 growth also have moderated to +4.5% from +5.1% in March. Unemployment rate is anticipated to have increased o 9.1% in April from 8.9% in March. As indicated in PMI, employment intentions remained weak, especially in manufacturing sector. Germany's retail sales probably rose +0.5% mom in April after dropping -1% a month ago. This would have slowed down the annual contraction to -0.3% from -1.5% in March. Switzerland's KOF Swiss leading indicator should have improved slightly to -1.78 in May from -1.86 a month ago. In the UK, Gfk consumer confidence was unchanged at -27 in May. Although the reading came in lower than market expectation of -25, it marked the 4th consecutive month without a drop and signaled the confidence level might have bit the bottom. In the US, annualized GDP should have been revised up to a contraction of -5.5% (preliminary: -6.1%)of 1Q09 as driven by revisions on inventory, net export and constructions. GDP price deflation could remain unchanged at 2.9%. Personal consumption was probably revised down to +2% from +2.2% while core PCE stayed at 1.5% in 1Q09. Chicago PMI is anticipated to have risen to 42 in May with employment index climbing further. Also, watch for new orders component as it surged more than 30 points last month to 42.1. Moreover, University of Michigan Confidence might have risen to 68 in May (preliminary: 67.9) from 65.1 a month ago. Canada's current account deficit probably widened to CAD 10.5B in 1Q09 from CAD 7.5B. USD/CAD Daily Outlook Daily Pivots: (S1) 1.1073; (P) 1.1165; (R1) 1.1224; More. USD/CAD's fall resumes after brief recovery and reaches as low as 1.1065 so far today. At this point, further decline is still expected as long as 1.1256 resistance holds, current fall from 1.1814 is expected to extend further to 100% projection of 1.2503 to 1.1475 from 1.1814 at 1.0786. Nevertheless, note mild bullish convergence condition in 4 hours MACD. Break of 1.1256 will argue that a short term bottom is in place and bring stronger rebound. In the bigger picture, with 1.1464 support taken out, whole medium term up trend from 0.9056 should have completed at 1.3063 already. Also, the impulsive structure of the fall from 1.3063 argues that some deep decline is underway towards 1.0297/1.0819 support zone, with 61.8% retracement of 0.9056 to 1.3063 at 1.05878, before completion. On the upside, above 1.1814 resistance is needed to indicate that such fall from 1.3063 has completed. Otherwise, outlook will remain bearish. Economic Indicators Update GMT Ccy Events Actual Consensus Previous Revised 23:01 GBP GfK Consumer Confidence Survey May -27 -25 -27 23:15 JPY Manufacturing PMI May 46.6 -- 41.4 23:30 JPY Unemployment Rate Apr 5.00% 5.00% 4.80% 23:30 JPY Household Spending Y/Y Apr -1.30% -0.70% -0.40% 23:30 JPY Tokyo CPI Core Y/Y May -0.70% -0.60% 0.00% 23:30 JPY National CPI Y/Y Apr -0.10% -0.30% -0.30% 23:30 JPY National CPI Core Y/Y Apr -0.10% -0.10% -0.10% 23:50 JPY Industrial Production M/M Apr Prelim 5.20% 3.30% 1.60% 23:50 JPY Industrial Production Y/Y Apr Prelim -31.20% -32.50% -34.20% 5:00 JPY Housing Starts Y/Y Apr -32.40% -22.00% -20.70% 6:00 EUR German Retail Sales M/M Apr 0.50% -1.00% 6:00 EUR German Retail Sales Y/Y Apr -0.30% -1.50% 8:00 EUR Eurozone M3 Y/Y Apr 4.50% 5.10% 9:00 EUR Eurozone CPI Estimate Y/Y May 0.20% 0.60% 9:00 EUR Eurozone Unemployment Rate Apr 9.10% 8.90% 9:30 CHF KOF Swiss Leading Indicator May -1.78 -1.86 12:30 CAD Current Account (CAD) Q1 -10.5B -7.5B 12:30 USD GDP (Annualized) Q1 P -5.50% -6.10% 12:30 USD GDP Price Index Q1 2.90% 2.90% 12:30 USD Core Personal Consumption Expenditure Q/Q Q1 1.50% 1.50% 13:45 USD Chicago PMI May 42 40.1 14:00 USD U. of Michigan Confidence May Final 68 67.9

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U.K. May House Prices Unexpectedly Jump in Sign of Improvement

By Svenja O’Donnell

May 29 (Bloomberg) -- U.K. house prices unexpectedly jumped by 1.2 percent in May in a sign the property market slump is easing, Nationwide Building Society said.

The average cost of a home rose to 154,016 pounds ($245,701) after declining 0.3 percent in April, the mortgage lender said in a statement today. Economists predicted a drop of 0.9 percent, according to the median of 14 forecasts in a Bloomberg News survey.

Consumer confidence matched the highest level in 11 months in May as people became more optimistic that they can weather the recession, GfK NOP said in a separate report today. Prime Minister Gordon Brown’s government still predicts that Britain faces its worst recession since World War II this year as the mortgage squeeze extends the housing market’s slump.

The report is “further evidence of some improvement in housing market conditions over the last few months,” Martin Gahbauer, Nationwide’s chief economist, said in the statement. “Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively.”

Home values fell 11.3 percent from a year earlier in May, compared with a 15 percent drop in April, Nationwide said. Mortgage approvals rose in April, the British Bankers Association said earlier this week.

GfK’s index of sentiment stayed at minus 27 in May, the same as in April, which had the strongest reading in 11 months, the market researcher said in a statement.

Dearth of Property

A lack of supply of properties for sale on the market may help explain this month’s gains as home sales still remain close to record lows, Nationwide said.

Rising unemployment may still curb the housing market’s recovery. U.K. house prices may keep falling for the rest of this year as more Britons lose their jobs, Nationwide’s finance director, Mark Rennison, said on May 27.

“If the supply of homes onto the market does increase, the recent moderation in the pace of house price falls may not be sustained,” Nationwide’s Gahbauer said. “In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

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India’s Economy Expands Faster-Than-Expected 5.8%

By Cherian Thomas

May 29 (Bloomberg) -- India’s economy grew more than expected last quarter, easing pressure on Prime Minister Manmohan Singh to revive consumer demand as he starts his second term in office. Stocks and the rupee gained.

Asia’s third-largest economy expanded 5.8 percent in the three months to March 31, matching the revised gain of the previous quarter, the statistics office said in New Delhi today. Economists were expecting a 5 percent increase.

Growth is still almost half the pace at which India expanded in the past five years and Finance Minister Pranab Mukherjee this week pledged to boost spending in July’s budget. The economy is already showing “some signs” of revival from interest-rate cuts and fiscal stimulus worth 7 percent of gross domestic product, Mukherjee said.

“A 5 percent growth rate isn’t enough to absorb the rise in working population, risking unemployment,” said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore. “It’s important to see how the issue is tackled in the budget -- too much in the way of giveaways may lead to further sell-off in the bond market.”

Stocks extended their gains after the better-than-expected growth figures, with the Bombay Stock Exchange’s Sensitive Index rising 1.6 percent to 14,519.75 at 11:05 a.m. in Mumbai. The rupee strengthened, advancing to 47.39 a dollar immediately after the report, from 47.46 earlier, according to data compiled by Bloomberg.

Asset Sales

The yield on benchmark bonds has climbed 28 basis points percent to 6.7 percent since Singh’s May 16 electoral triumph on concern the government will borrow more to fund its budget.

Still, India’s key Sensitive stock index has surged 18 percent during the period on optimism a coalition without communist parties will allow Singh to sell state assets and accept more foreign investments in insurance and banking.

The sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital for Mukherjee to find money to spend without widening a budget deficit that Moody’s Investors Service says has ‘deteriorated.”

India’s budget shortfall stood at 6 percent of GDP in the year ended March 31, more than double the target. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.

‘Key Reforms’

“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.

For now, Mukherjee said this week he plans to spend more to stimulate the economy, betting it will help boost tax revenues. He said the election results vindicate the strategy to pursue growth as a tool to improve people’s livelihood.

Almost 10 million people join India’s workforce each year and the International Labour Organization says India needs at least 10 percent economic growth each year for a one percent increase in employment.

Lower interest rates and increased government spending is starting to yield results in the economy.

Car sales and the production of cement, electricity and refined petroleum are showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.

Forecasts Raised

UBS AG raised its growth forecast for India to 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.

The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.

Singh, as finance minister between 1991 and 1996, abandoned the Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.

‘Game-Changing’

Singh’s election triumph has been a “game-changing” verdict, says Macquarie Group Ltd. economist Rajeev Malik, describing it as a “catalyst in enhancing the evolving global rise of the Indian economy.”

In Singh’s first term between 2004 and 2009, India’s economy grew close to 9 percent on average each year, the fastest pace since independence in 1947, helped by a six-fold surge in foreign direct investments to $38 billion.

General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday the Indian elections was the best development in the country that he’d seen in 20 years and he was “completely optimistic about India in the long term.”

At stake are economic changes blocked by Singh’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

“The future looks promising in India,” said Fumio Ito, president of Kuraray Co. Ltd., the Tokyo-based chemicals maker, which this week announced the opening of its marketing unit in India. “When our operations expand, we will consider building a production plant in India.”

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

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Korea Gas to Buy 10% Stake in Australia’s Blue Energy

By Ben Sharples

May 29 (Bloomberg) -- Korea Gas Corp., the world’s largest buyer of liquefied natural gas, agreed to acquire 10 percent of Australian coal-seam gas explorer Blue Energy Ltd., with the option of taking stakes in Queensland drilling permits.

Korea Gas agreed to buy shares at 20 Australian cents apiece, Blue Energy said in a statement to the Australian stock exchange today, 7 percent below the last closing price. Blue Energy jumped as much as 14 percent in Sydney trading, valuing it at about A$110 million ($87 million).

Chairman Peter Cockcroft said in November the Brisbane- based company would form alliances with partners as it seeks to confirm more than 1 trillion cubic feet of reserves within five years. BG Group Plc, Royal Dutch Shell Plc and ConocoPhillips are among companies that last year invested more than A$22 billion ($17.3 billion) in Queensland aiming to turn coal seam gas in Queensland into LNG.

“Blue Energy views Korea Gas as a key long-term strategic partner,” Cockcroft said in the statement. Under the heads of agreement the companies signed, Korea Gas has the option to share in Blue Energy’s permits in the Galilee Basin and the Northern Bowen Basin and can nominate one director to Blue Energy’s board.

Korea Gas has agreed to buy a stake of 10 percent based on Blue Energy’s expanded issued capital after a share sale to existing investors that closes June 3.

Blue Energy, which has more than doubled in the past six months, gained as much as 3 Australian cents to 24.5 cents and was at 23.5 cents at 12:19 p.m. in Sydney. The advance compared with an increase of as much as 1.2 percent in the exchange’s benchmark energy index. Korea Gas shares fell 2.5 percent to 45,550 won at 10:20 a.m. in Seoul.

Funds raised from Korea Gas and the share sale will be used to help certify the Australian company’s gas reserves in the second quarter of 2010, Blue Energy said.

To contact the reporter on this story: Ben Sharples in Melbourne bsharples@bloomberg.net

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Japan’s Industrial Production Surges Most in 56 Years

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By Jason Clenfield and Toru Fujioka

May 29 (Bloomberg) -- Japan’s industrial output surged the most in 56 years in April as a rebound in exports helps the economy emerge from its worst recession since World War II.

Production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

The yen gained on speculation funds will flow into Japan as the economy resumes growing after last quarter’s record contraction. Still, output is running at two-thirds last year’s levels, saddling manufacturers such as Nikon Corp. with workers they no longer need and driving the jobless rate to a five-year high of 5 percent.

“This is not so much a green shoot as it is a green tree,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “Optimism on Japan is certainly not misplaced as we look at a reasonably strong quarter of growth in April to June.”

The yen traded at 96.33 per dollar at 1:01 p.m. in Tokyo from 96.76 before the report was published. The Nikkei 225 Stock Average headed for its third monthly gain. The gauge has risen 34 percent from a 26-year low on March 10. The yield on Japan’s 10-year bond rose a basis point to 1.49 percent.

The increase in production was the biggest since March 1953, a year after the U.S. military occupation ended and as the Korean War was drawing to a close.

BOJ’s Shirakawa

Bank of Japan Governor Masaaki Shirakawa said this week the economy will resume growing this quarter after shrinking a record 15.2 percent in the three months ended March 31. Stimulus spending by governments around the world totaling $2.2 trillion has helped to prop up demand from abroad. Exports rose 1.9 percent in April from March, a second monthly gain.

Companies are making more cars and electronics to replenish stockpiles they managed to drain during the export slump. Inventories fell 2.7 percent in April, a fourth monthly drop. Businesses surveyed by the Trade Ministry said production will increase 8.8 percent in May and 2.7 percent in June.

Prospects for consumers were less reassuring.

The 5 percent jobless rate is the highest since November 2003, the statistics bureau said today. Job seekers found it harder to secure work as the ratio of positions available to each applicant slid to 0.46, matching the lowest ever in June 1999, a Labor Ministry report showed. Household spending slumped for a 14th month, a record losing streak.

Unemployment Toll

“Japan’s economy may return to growth in the second quarter, but looking beyond, there will be strong downside risks,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The deterioration in employment and income conditions will likely become clearer in the months ahead, taking a toll on consumers and the economy.”

Weakening domestic demand is increasing the risk that deflation will once again plague the world’s second-largest economy. Consumer prices excluding fresh food fell 0.1 percent in April from a year earlier, a second straight drop. In Tokyo, prices slid 0.7 percent in May, the most in six years, signaling nationwide declines may accelerate this month.

“Underlying deflation is worsening and set to persist for a prolonged period,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo.

Nikon Cuts Jobs

Nikon, a camera maker which is forecasting its biggest loss in 11 years, said this week it will eliminate 1,000 jobs and Nisshin Steel Co. said yesterday it plans to cut 9 percent of its workforce.

China’s $586 billion stimulus plan has been a boon to Japanese manufacturers struggling with depressed sales in the U.S. Goldman Sachs Group Inc. last week raised its ratings of equipment-makers Hitachi Construction Machinery Co. and Komatsu Ltd., citing the prospect of increased business from China, where government spending is driving building investment.

Government incentives in Europe are also helping sales at carmakers including Mazda Motor Corp. The automaker said last week it will cancel plans to suspend production at a plant in Hiroshima in order to meet demand from Germany and France, where governments are encouraging consumers to trade in their old cars for more fuel-efficient models.

Even as demand picks up, exports and production remain about a third lower than they were before the global financial crisis deepened in September. Output slid 31.2 percent in April from a year earlier and exports dropped 39.1 percent.

“It’s dangerous to be too pleased with the economy bottoming out,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Japan’s economy will fly low and experience more turbulence until the second half of next year.”

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

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India’s Reliance Power Plans Venture With BHP, Rio, Times Says

By M.C. Govardhana Rangan

May 29 (Bloomberg) -- Reliance Power Ltd. is negotiating with BHP Billiton Ltd. and Rio Tinto Ltd. to set up a joint venture for developing coal mines in India to supply its generation plants, the Economic Times reported, citing an unidentified person.

Reliance Power plans to spend 50 billion rupees ($1.05 billion) on the mines, according to the report. The generator is in talks with overseas companies, the Economic Times said, citing an unidentified company spokesman who didn’t provide their names.

To contact the reporter on this story: M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.

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Japex Shares Rise Most in 6 Months on Gains in Crude

By Megumi Yamanaka and Yuji Okada

May 29 (Bloomberg) -- Japan Petroleum Exploration Co., the nation’s second-biggest oil driller, gained the most in almost six months in Tokyo trading as analysts expected stronger earnings than the company projected on higher oil prices.

The shares climbed as much as 480 yen, or 11 percent, to 4,950 yen on the Tokyo Stock Exchange and traded at 4,910 yen as at 1:24 p.m. local time. The stock is the second-biggest gainer by index points after Inpex Corp. in the Topix Mining Index. Inpex, Japan’s biggest oil explorer, advanced 7.2 percent to 777,000.

“Both Japex and Inpex made their full-year forecasts based on conservative crude oil estimates and people are buying their shares on expectations of higher earnings projections,” Hirofumi Kawachi, a senior analyst at Mizuho Investors Securities Co., said by phone. “The recent increases in oil prices have caused their shares to jump.”

Oil delivered to Japan in April cost an average $47.39 a barrel, according to the latest data by the Finance Ministry. Japex forecast net income may decline to 4.7 billion yen ($49 million) in the year ending March 2010, from 12.6 billion yen in the previous period, based on oil at $40 a barrel, the Tokyo- based company said in a statement to the stock exchange on May 14. Oil in New York traded at $64.83 as of 12:33 p.m. Tokyo time today.

Japex’s profit may reach 9.4 billion yen for the year ending March 2010, Reiji Ogino, a senior analyst at Mitsubishi UFJ Securities Co., said in a report yesterday.

To contact the reporter on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net.

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Fonterra Says Emissions Study May Help Develop Global Standard

By Gavin Evans

May 29 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said a study may help develop an international standard for measuring emissions by milk producers.

Results released today from the 18-month project show each liter of milk produced by the company’s New Zealand farmers generates the equivalent of 940 grams (33 ounces) of carbon dioxide, Auckland-based Fonterra said in an e-mailed statement. About 85 percent of the emissions occur on-farm.

New Zealand, a signatory to the United Nations’ Kyoto protocol on climate change, is the world’s biggest exporter of milk products and lamb. About half its emissions come from farms and some of its exports have been targeted by U.K. environmentalists seeking special status for locally grown foods.

“We hope our work will speed efforts to agree a milk product carbon measurement standard that can be used by farmers and dairy companies everywhere,” Barry Harris, who runs Fonterra’s sustainability project, said in the statement. An agreed standard “means that if people want to make comparisons with other milk products or benchmark their performance, there is a fair and scientifically robust basis for doing so.”

The study, audited by PricewaterhouseCoopers, was carried out by the University of New South Wales in Australia and New Zealand research companies Scion and AgResearch Ltd.

The methods adopted will contribute to work the Belgium- based International Dairy Federation is doing on a global carbon standard, John Hutchings, Fonterra’s manager for sustainable production, said in a telephone interview. That work is expected to be completed within a year, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net.

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Chennai Petroleum Profit Falls on Refining Margins

By Rakteem Katakey

May 29 (Bloomberg) -- Chennai Petroleum Corp., a unit of India’s biggest refiner, said fourth-quarter profit fell 21 percent after earning less from turning crude into fuels.

Net income in the three months ended March 31 declined to 2.72 billion rupees ($57 million) from 3.43 billion rupees a year earlier, the refiner said in a statement to the Bombay Stock Exchange today. Net sales fell 43 percent to 48.1 billion rupees.

Chennai Petroleum earned $6.6 on every barrel of crude turned into fuels, compared with $9.59 a barrel a year earlier, according to the statement. Crude oil in New York rose 11 percent over the three months ending March 31 on optimism the global recession was receding.

India’s state-run refiners sell automobile and cooking fuels at prices fixed by the government to curb inflation.

Chennai Petroleum shares gained 1.6 percent to 182.60 rupees at 10:19 a.m. in Mumbai trading. The benchmark Sensitive Index climbed 1.1 percent.

Indian Oil Corp. held 52 percent of Chennai Petroleum as of Dec. 31, according to data compiled by Bloomberg.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

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Merrill Lynch’s Chief Americas Energy Trader Said to Leave Firm

By Margot Habiby and Matthew Leising

May 29 (Bloomberg) -- Jeremy Taylor, head of Bank of America Merrill Lynch’s energy trading in the Americas, has left the company, according to people familiar with its operations.

Also gone are Andrew Davis, who traded zonal electric power for the U.S. Northeast, and Matt Schicke, who traded coal, the people said. Taylor, managing director of Americas energy trading for Merrill Lynch Global Commodities, previously worked at Koch Carbon Inc., according to Bloomberg data.

Taylor, who was based in Houston with the other traders, couldn’t immediately be reached for comment. Danielle Robinson, a spokeswoman for Bank of America Merrill Lynch based in New York, said the company doesn’t comment on personnel.

The company named Pat Abercrombie as head of Americas Basis and Physical Gas trading; Michael Carson and Steve Wolf as co- heads of Americas Power; and Arden Majewski, head of Americas Financial Gas after the departures, one of the people said.

All of the new appointees are in Houston. They will report to Rob Jones in Houston and David Goodman in London, the company’s global co-heads for commodities.

Bank of America acquired Merrill Lynch & Co. in January after the brokerage lost billions of dollars tied to mortgages.

To contact the reporters on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net.

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AMP Capital Buys Natural Gas on ‘Imminent’ Price Gain

By Shani Raja

May 29 (Bloomberg) -- AMP Capital Investors, with $95 billion under management, is selling oil futures to buy natural gas contracts in anticipation of an “imminent” price spike.

The price of crude oil, which has almost doubled from last year’s December low, and natural gas, which has continued to tumble, has diverged so much that consumers will switch to the cheaper energy source, said Nader Naeimi, a Sydney-based strategist at AMP Capital, a unit of Australia’s biggest provider of pension plans.

“The price of natural gas is so low at the moment, and production’s been cut back so much, that a slight rise in demand is enough to trigger a huge price spike,” Naeimi said by phone today. “While other commodities have rallied, natural gas has been left substantially behind in the energy complex.”

Speculation of a global economic recovery has driven oil prices in New York up 93 percent since Dec. 19, when futures settled at their lowest since February 2004. The price of natural gas has slumped by more than a quarter over the same period.

The number of oil and natural gas rigs operating in the U.S. has more than halved from a two-decade high of 2,031 in September as the recession eroded demand, according to data published last week by Baker Hughes Inc.

“Spot is trading at much lower levels than long-dated natural gas contracts,” said Naeimi. “That means the market is expecting prices to rise. Everyone’s storing natural gas to sell at a higher price in the forward market. You also have a push for clean energy globally, which should benefit natural gas.”

Earlier this month, AMP Capital upgraded its holdings of commodities to an “overweight” allocation from “underweight,” taking money from its cash reserves on speculation demand will strengthen. AMP also holds heating oil and gasoline in its energy portfolio.

In August, Naeimi said surging commodity prices had hit a “choking point.” Crude oil, which reached a record $147.27 a barrel on July 11, fell to as low as $32.40 a barrel in December.

The global recession, caused by the collapse of the U.S. mortgage market and an ensuing credit crisis, eroded worldwide demand for commodities last year, driving prices of both copper and crude oil down more than 50 percent.

Natural gas is the most “undervalued” commodity, investor Marc Faber said in an interview with Bloomberg Television on May 27.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Oil Heads for Biggest Monthly Gain Since 1999 on OPEC Output

By Ben Sharples and Ann Koh

May 29 (Bloomberg) -- Crude oil headed for its biggest monthly gain in a decade after OPEC kept its output unchanged amid signs the global economy is recovering.

Oil has gained 27 percent in May as equities rose and the U.S. dollar weakened, spurring demand for commodities. Japan said today that its industrial output climbed the most in at least six years in April, improving the outlook for a rebound in fuel demand.

“Oil has followed equities primarily because investors have cash on hand on the sidelines,” Victor Shum, a senior principal at Purvin & Gertz Inc., said in Singapore. “They are counting on some of the positive economic indicators, and are placing bets.”

Crude oil for July delivery was at $65.20 a barrel, up 12 cents, on the New York Mercantile Exchange at 1:25 p.m. in Singapore. Yesterday, the contract rose $1.63, or 2.6 percent, to settle at $65.08 a barrel, the highest since Nov. 5.

Oil is poised for the largest increase since March 1999, when Asia was recovering from the 1997-1998 financial crisis and fuel demand started rising in China and India. Oil gained 37 percent, according to Bloomberg data.

Saudi Arabian Oil Minister Ali al-Naimi said that the Organization of Petroleum Exporting Countries opted not to alter its output targets because “prices are good, the market is in good shape.”

Dollar, Stocks

Crude should stay in a $60-to-$70 a barrel range for the rest of the year, OPEC Secretary General Abdalla el-Badri said. The Energy Department said yesterday that U.S. oil supplies fell the most since September.

“If we are able to keep this $60 to $70 price for the remainder of the year, it will be fine,” OPEC’s El-Badri said in a Bloomberg Television interview.

The dollar is set for the first decline in two months versus the euro, falling to $1.3987 per euro at 1:51 p.m. in Tokyo from $1.3941 in New York yesterday.

U.S. stocks rallied, led by banking and energy shares, as a rebound in 10-year Treasuries eased concern record government debt sales will trigger higher borrowing. The Standard & Poor’s 500 Index added 1.5 percent and the Dow Jones Industrial Average advanced 1.3 percent.

Japan’s factory production climbed 5.2 percent from March, when it gained 1.6 percent, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent expected by economists. Companies said they planned to increase output in May and June as well, the report showed.

U.S. Inventories

Oil jumped to a six-month high yesterday after the Energy Department weekly reported showed a drop in inventories.

U.S. crude inventories declined 5.41 million barrels to 363.1 million last week, according to the department. It was the biggest drop since September, when hurricanes hit the Gulf of Mexico coast. A 150,000-barrel reduction was forecast, according to the median of 12 analyst responses in a Bloomberg News survey.

The decline left inventories 27 percent higher than the five-year average, up from a 23 percent surplus a week earlier. Stockpiles were the highest since 1990 in the week ended May 1.

“The oil market fundamentals still remain relatively fragile, notwithstanding the gains in the oil price,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney.

Refineries operated at 85.1 percent of capacity, up 3.3 percentage points from the previous week, the biggest gain since October, the report showed.

Gasoline stockpiles dropped 537,000 barrels to 203.4 million, the lowest since the week ended Dec. 5, according to the report.

OPEC Limits

Gasoline for June delivery rose 0.2 cent, or 0.1 percent, to $1.9125 a gallon in New York at 12:51 p.m. in Singapore. It gained 1.88 cents, or 1 percent, to end yesterday’s session at $1.9105 in New York, the highest settlement since Oct. 13.

Saudi Arabia’s Al-Naimi forecast that oil may rise to $75 a barrel by this year’s third or fourth quarter. The group’s next meeting will be on Sept. 9, he said.

Other OPEC ministers said the group would work toward finishing previously announced reductions. OPEC has yet to complete output cuts totaling 4.2 million barrels a day agreed to last year.

“I don’t buy the story that we are going to go to $150 next week,” Jan Stuart, Macquarie Group Ltd.’s oil analyst in New York, said in an interview with Bloomberg Television. “What I do buy is that there is the beginning of a recovery.”

The production ceiling is 24.845 million barrels a day for 11 of its members. They pumped 25.812 million a day in April, a May 13 report from the group showed. Iraq has no quota.

Brent crude for July settlement was 11 cents higher at $64.50 a barrel on London’s ICE Futures Europe exchange at 1:31 p.m. Singapore time.

To contact the reporters on this story: Ben Sharples in Melbourne bsharples@bloomberg.net; Ann Koh in Singapore at akoh15@bloomberg.net

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Emerging-Market Bonds Post Best 3 Months Since 2002

By Lester Pimentel and Michael Patterson

May 29 (Bloomberg) -- Emerging-market bonds are headed for their biggest three-month rally in seven years, led by Argentina and Ukraine, as higher commodities prices and international bailouts improve the outlook for the nations to repay debts.

Bonds sold by developing countries returned 3.4 percent in May, extending their gain since March 1 to 12 percent, according to Merrill Lynch & Co. indexes. That marks the best performance since October to December 2002, when concern eased that Brazil would default after the election of President Luiz Inacio Lula da Silva. Argentine debt climbed 28 percent this month while Ukraine gained 17 percent, the indexes show.

“We’re seeing a lot of money come into the market,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Asset Management in New York.

Investors snapped up debt in May from raw-material exporting nations such as Brazil, Russia and Indonesia as signs the global recession may be easing helped lift the UBS Bloomberg Constant Maturity Commodity Index 13.1 percent, the most since February 2008. Any indication of a slower economic rebound may hurt emerging-market debt, Cisilino said. Data on durable-goods orders and unemployment yesterday offered no sign of an imminent rebound from the worst U.S. recession in half a century.

“We may have a pullback in the summer,” Cisilino said. “A lot depends on what happens to the global economy.”

Argentina reduced default concerns after extending maturities on 15.1 billion pesos ($4.3 billion) of debt this year. Emerging-market investors are “most bullish” on that country’s bonds, according to a survey by Barclays Plc published this week. 1

Ukraine’s IMF Accord

Ukraine’s financing improved after the country won approval for the second part of a $16.5 billion International Monetary Fund loan. JPMorgan Chase & Co. upgraded Ukraine’s bonds to “marketweight” from “underweight” on May 19, citing the IMF’s support.

The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries has shrunk 4.6 percentage points in May to 13.06 percentage points, the smallest gap since October, according to JPMorgan Chase & Co.

The rally in Ukraine’s dollar bonds pushed yields down by 5.2 percentage points this month to 11.50 percentage points, according to JPMorgan. That’s the smallest gap since October.

Emerging-market bonds’ three-month rally since February compares with a 13 percent rise in the three months ended in December 2002, just after Lula’s election to a first term, Merrill indexes show.

‘Come a Long Way’

The average yield spread on emerging-market dollar bonds has narrowed 84 basis points this month to 4.46 percentage points, according to JPMorgan’s EMBI+ Index. A basis point equals 0.01 percentage point. The so-called spread has tumbled from a six-year high of 8.65 percentage points in October.

Emerging-market bonds slumped yesterday after reports showed durable-goods orders in the U.S. hovered near a 13-year low in April and the number of Americans collecting unemployment insurance reached a record. The spread widened 13 basis points from 4.52 percentage points.

A retreat in global stock markets may also spark declines in emerging-market bonds, according to Prudential Financial Inc. The MSCI Emerging Markets Index rallied 53 percent since Feb. 27, the best three-month performance since its inception in December 1987. The 23-country measure now trades at 14.7 times reported earnings, the priciest since January 2008.

‘Overbought’

Emerging-market stocks are “technically overbought” after 12 straight weeks of fund inflows drove the benchmark index above its 200-day moving average, analysts led by Jonathan Garner at Morgan Stanley wrote in a report dated yesterday.

Bank of America-Merrill Lynch and Morgan Stanley are predicting a sell-off in developing-nation stocks after inflows into emerging-market funds climbed to levels that foreshadowed previous retreats.

“Stocks have come a long way awfully quick,” said David Bessey, who manages $8 billion of emerging-market debt for Prudential Financial in Newark, New Jersey. “Can’t rule out the potential for a pullback there. If that happens, spreads in emerging markets might sell off as well. The correlation between risk markets has been pretty high.”

To contact the reporters on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net

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