Australia Faces the ‘Full Brunt’ of Global Recession

By Victoria Batchelor

July 3 (Bloomberg) -- Australia’s economy, which has so far skirted the global recession, may stall after reports showed exports dropped to a 14-month low, bank lending fell and home- building approvals declined by the most since 2002.

Australia was one of few major economies including China and India to grow in the first quarter as government cash handouts and record interest-rate cuts stoked consumer spending. Gross domestic product expanded 0.4 percent from the previous three months, in contrast to a 3.8 percent decline in Japan and a 1.4 percent contraction in the U.S.

This week’s reports suggest the global recession is biting as stimulus efforts fade, which may prompt the central bank to cut interest rates. Reserve Bank Governor Glenn Stevens said last month that slower growth and inflation give him scope to reduce borrowing costs if it helps secure “a durable upswing.”

“The full brunt of the deepest and most synchronized post- war global recession has yet to fully bear down on Australia,” said Su-Lin Ong, Sydney-based senior economist at RBC Capital Markets. “Export income, the terms of trade and business investment are all set to move substantially lower in 2009.”

The benchmark S&P/ASX 200 stock index dropped 1.8 percent to 3,806.5 at 10:11 a.m. in Sydney. Australia’s dollar slipped 0.2 percent to 79.26 U.S. cents, headed for its biggest weekly decline against its U.S. counterpart in seven weeks.

Economy Flatlines

The local currency fell 1.8 percent yesterday after a government report showed exports slumped 5 percent in May from April, widening the trade deficit to A$556 million ($448 million). Economists surveyed by Bloomberg expected a A$125 million shortfall.

Imports of capital goods, which include trucks and machinery, tumbled 14 percent, a sign businesses are cutting capital spending, yesterday’s report showed.

“As Australia’s GDP flatlines and unemployment climbs, the central bank may have to cut interest rates,” said Annette Beacher, senior strategist at TD Securities Ltd. in Singapore.

All 20 economists surveyed by Bloomberg News prior to this week’s economic reports forecast Stevens would leave the overnight cash rate target unchanged at 3 percent on July 7. The central bank reduced the benchmark by 4.25 percentage points between September and April to a 49-year low.

Lower prices for coal and iron ore have damped a mining boom that has driven Australia’s 17 years of economic expansion. BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group have cut output, fired workers and reduced capital expenditure in response to the slowdown in world demand.

‘Reality Check’

“The numbers this week provide a reality check for markets that continue to price in interest-rate hikes in early 2010,” RBC Capital Market’s Ong said.

Traders expect Australia’s overnight cash rate target will be 42 basis points higher in 12 months, a Credit Suisse Group AG index based on interest-rate swaps showed at 10:15 p.m. in Sydney. Earlier this week, the index was pricing in 63 basis points in rate increases in a year.

Further signs of weakness in the economy include a July 1 report that showed approvals to build or renovate houses and apartments fell 12.5 percent in May from April, the biggest drop since November 2002. The decline was led by apartments, which tumbled 43.6 percent.

Lending by Australian financial institutions slipped 0.1 percent in May, led by a 0.7 percent decline in borrowing by companies, the central bank said this week. Sales of newly built homes slumped 5.7 percent from April, the first drop this year, the Housing Industry Association reported on June 30.

Spending Rises

Still, there was evidence this week of strength in a key area of the Australian economy. Retail sales increased 1 percent in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June, according to an index today from Commonwealth Bank of Australia and the Australian Industry Group.

Consumer spending rose 0.6 percent in the first quarter, accounting for three-quarters of the Australian economy’s growth in the period.

The S&P/ASX 200 stock index climbed 10 percent in the three months ended June 30, the first increase in seven quarters, on optimism of a recovery. Retailers David Jones Ltd. and JB Hi-Fi Ltd. have both raised their profit forecasts in recent weeks because of a pickup in sales.

The government has distributed A$12 billion in cash handouts to households this year. Adding to stimulus measures, Treasurer Wayne Swan allocated A$22 billion in his May budget to upgrade roads, railways, ports and hospitals over four years.

“Arguably there is still some pain ahead, but clearly Australia has been faring much better than other developed economies,” Rod Pearse, chief executive officer of Sydney-based Boral Ltd., Australia’s largest seller of building materials, said in a speech last week. The government’s “significant” stimulus will provide support to the building industry, he added.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.

Read more...

Australia Faces the ‘Full Brunt’ of Global Recession

By Victoria Batchelor

July 3 (Bloomberg) -- Australia’s economy, which has so far skirted the global recession, may stall after reports showed exports dropped to a 14-month low, bank lending fell and home- building approvals declined by the most since 2002.

Australia was one of few major economies including China and India to grow in the first quarter as government cash handouts and record interest-rate cuts stoked consumer spending. Gross domestic product expanded 0.4 percent from the previous three months, in contrast to a 3.8 percent decline in Japan and a 1.4 percent contraction in the U.S.

This week’s reports suggest the global recession is biting as stimulus efforts fade, which may prompt the central bank to cut interest rates. Reserve Bank Governor Glenn Stevens said last month that slower growth and inflation give him scope to reduce borrowing costs if it helps secure “a durable upswing.”

“The full brunt of the deepest and most synchronized post- war global recession has yet to fully bear down on Australia,” said Su-Lin Ong, Sydney-based senior economist at RBC Capital Markets. “Export income, the terms of trade and business investment are all set to move substantially lower in 2009.”

The benchmark S&P/ASX 200 stock index dropped 1.8 percent to 3,806.5 at 10:11 a.m. in Sydney. Australia’s dollar slipped 0.2 percent to 79.26 U.S. cents, headed for its biggest weekly decline against its U.S. counterpart in seven weeks.

Economy Flatlines

The local currency fell 1.8 percent yesterday after a government report showed exports slumped 5 percent in May from April, widening the trade deficit to A$556 million ($448 million). Economists surveyed by Bloomberg expected a A$125 million shortfall.

Imports of capital goods, which include trucks and machinery, tumbled 14 percent, a sign businesses are cutting capital spending, yesterday’s report showed.

“As Australia’s GDP flatlines and unemployment climbs, the central bank may have to cut interest rates,” said Annette Beacher, senior strategist at TD Securities Ltd. in Singapore.

All 20 economists surveyed by Bloomberg News prior to this week’s economic reports forecast Stevens would leave the overnight cash rate target unchanged at 3 percent on July 7. The central bank reduced the benchmark by 4.25 percentage points between September and April to a 49-year low.

Lower prices for coal and iron ore have damped a mining boom that has driven Australia’s 17 years of economic expansion. BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group have cut output, fired workers and reduced capital expenditure in response to the slowdown in world demand.

‘Reality Check’

“The numbers this week provide a reality check for markets that continue to price in interest-rate hikes in early 2010,” RBC Capital Market’s Ong said.

Traders expect Australia’s overnight cash rate target will be 42 basis points higher in 12 months, a Credit Suisse Group AG index based on interest-rate swaps showed at 10:15 p.m. in Sydney. Earlier this week, the index was pricing in 63 basis points in rate increases in a year.

Further signs of weakness in the economy include a July 1 report that showed approvals to build or renovate houses and apartments fell 12.5 percent in May from April, the biggest drop since November 2002. The decline was led by apartments, which tumbled 43.6 percent.

Lending by Australian financial institutions slipped 0.1 percent in May, led by a 0.7 percent decline in borrowing by companies, the central bank said this week. Sales of newly built homes slumped 5.7 percent from April, the first drop this year, the Housing Industry Association reported on June 30.

Spending Rises

Still, there was evidence this week of strength in a key area of the Australian economy. Retail sales increased 1 percent in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June, according to an index today from Commonwealth Bank of Australia and the Australian Industry Group.

Consumer spending rose 0.6 percent in the first quarter, accounting for three-quarters of the Australian economy’s growth in the period.

The S&P/ASX 200 stock index climbed 10 percent in the three months ended June 30, the first increase in seven quarters, on optimism of a recovery. Retailers David Jones Ltd. and JB Hi-Fi Ltd. have both raised their profit forecasts in recent weeks because of a pickup in sales.

The government has distributed A$12 billion in cash handouts to households this year. Adding to stimulus measures, Treasurer Wayne Swan allocated A$22 billion in his May budget to upgrade roads, railways, ports and hospitals over four years.

“Arguably there is still some pain ahead, but clearly Australia has been faring much better than other developed economies,” Rod Pearse, chief executive officer of Sydney-based Boral Ltd., Australia’s largest seller of building materials, said in a speech last week. The government’s “significant” stimulus will provide support to the building industry, he added.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.

Read more...

Indonesia Has Limited Room on Rates After Eighth Cut

By Aloysius Unditu and Yoga Rusmana

July 3 (Bloomberg) -- Indonesia’s central bank said room for reducing borrowing costs further is “limited” after cutting its benchmark interest rate for an eighth straight month.

Bank Indonesia lowered its reference rate by a quarter of a percentage point to 6.75 percent, acting Governor Miranda Goeltom said at a briefing in Jakarta today. The reduction was predicted by 18 of 23 economists in a Bloomberg News survey. The other five expected borrowing costs to be kept unchanged.

The central bank may be near the end of its cycle of rate cuts as inflation is set to accelerate in the coming months, economists including Destry Damayanti say. Asian policy makers, who have slashed borrowing costs and pledged more than $950 billion of stimulus plans, have started saying their economies could be past the worst of the global slump.

“We don’t expect many rate cuts ahead as inflation tends to increase in the second half,” said Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “The current inflation level is nearing its bottom and is likely to increase by the end of the year due to religious festivities.”

The rupiah rose 0.2 percent to 10,205 against the dollar at 2:14 p.m. in Jakarta. The benchmark stock index fell 0.1 percent.

Southeast Asia’s largest economy may stop cutting interest rates as a credit crunch in the nation’s banking system has been resolved, the Paris-based Organization for Economic Cooperation and Development said June 24.

‘Getting Limited’

Indonesia’s improving economic outlook has pushed it out of the world’s 10 riskiest issuers of sovereign bonds, according to credit-default swap prices from Credit Market Analysis.

Monetary policy will be directed toward “maintaining macroeconomic and financial system stability,” Bank Indonesia said in a statement. “With this consideration, monetary policy will be done more carefully considering that the room for monetary easing is getting limited.”

Consumer prices rose 3.65 percent in June from a year earlier, the statistics office said on July 1. That was the smallest increase since June 2000 and less than the 3.85 percent median forecast in a Bloomberg News survey of 20 economists.

Bank Indonesia is “confident” inflation will be below 5 percent this year, Goeltom said today. The central bank is monitoring inflationary pressures that may appear as commodity prices increase next year, she added.

Faster Growth

Bank Indonesia cut the policy rate “using the lower inflation print and relative stability in the currency as an opportunity to take out further insurance on growth,” said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. The central bank will likely cut rates by another quarter point “with 6.5 percent marking the bottom in rates,” she added.

Indonesia’s economy is forecast to expand 4.6 percent in the second half of this year from an estimated 4.1 percent in the first six months, Finance Minister Sri Mulyani Indrawati said June 30. The economy may expand 4.3 percent this year, helped by domestic consumption, Sri Mulyani said.

Bank lending has expanded 15 percent this year and will be able to support economic growth, Goeltom said.

Indonesia has been less affected than its neighbors by the worst worldwide recession since the Great Depression as it isn’t as reliant on exports. The $433 billion economy expanded 4.4 percent in the three months to March 31 from a year earlier, the fastest pace in Southeast Asia.

The OECD predicts Indonesia’s economy will expand by 3.5 percent this year. Bank Indonesia’s forecast is between 3 percent and 4 percent. The economy expanded 6.1 percent in 2008.

Bank Indonesia has cut its policy rate by 2.75 percentage points from 9.5 percent in December amid slowing inflation.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net; To contact the reporter on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net

Read more...

China’s Zeng Urges More Oversight of Reserve-Currency Nations

By Bloomberg News

July 3 (Bloomberg) -- Former Chinese Vice Premier Zeng Peiyan highlighted the nation’s concern at the risks posed by a global financial system dominated by the dollar, urging more oversight of countries issuing reserve currencies.

“There should be a system to maintain the stability of the major reserve currencies,” said Zeng, the head of a research center under the government’s top economic planning agency. Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” he said in a speech in Beijing today.

Premier Wen Jiabao said in March that he was “worried” about his nation’s $763.5 billion of Treasuries as spiraling U.S. debt threatens the value of the dollar. China, the owner of the world’s biggest foreign-exchange reserves, called yesterday for a stable dollar and damped speculation that it is seeking talks on a new international reserve currency at next week’s Group of Eight meeting.

“They are reiterating the message that they are very concerned about the U.S. fiscal position,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “China’s got a greater interest than anybody in making sure that the dollar doesn’t collapse.”

The dollar headed for a weekly gain versus the euro on speculation the global recession will be prolonged, increasing demand for the relative safety of the U.S. currency.

‘Inherent Deficiencies’

The dollar traded at $1.4014 per euro as of 7:08 a.m. in London from $1.4003 yesterday in New York, heading for a 0.3 percent gain this week. It earlier rose to $1.3929, the highest level since June 25. The U.S. currency bought 96.13 yen from 95.94 yen.

The yuan may join the dollar and euro in becoming one of the main currencies in the international monetary system after more than 10 years, Dai Xianglong, chairman of China’s national pension fund, said in Beijing today.

“The dollar’s dominant position won’t weaken soon as the international monetary system is a reflection of economic power,” Dai, formerly central bank governor, said.

The People’s Bank of China renewed on June 26 its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the central bank said in a report. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.

‘Loose’ Monetary Policies

Zeng’s comments were in an online transcript. He heads the China Center for International Economic Exchanges, which was established in March and includes researchers, former government ministers and company executives. The Beijing-based agency, which is supervised by the National Development and Reform Commission, is holding a summit on the global financial crisis.

Zeng also cautioned against the possible ill effects of “loose” monetary policies, such as those of the U.S., echoing a statement by the central bank in May.

“A policy mistake made by some major central bank may bring inflation risks to the whole world,” the People’s Bank of China said then in a monetary-policy report.

China has $1.95 trillion of foreign-exchange reserves and is the biggest foreign holder of Treasuries. U.S. President Barack Obama is relying on the Asian nation to keep making purchases as his administration sells record amounts of debt to fund a $787 billion stimulus package.

The U.S. fiscal deficit is estimated to rise to 12.2 percent of GDP this year, according to the median estimate of 78 economists surveyed by Bloomberg News, up from 5.9 percent last year and 1.3 percent in 2007.

At the end of 2008, the dollar accounted for 64 percent of global central bank reserves, down from 73 percent in 2001, according to the IMF.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net

Read more...

U.K. Services Expanded for a Second Month in June

By Brian Swint and Jennifer Ryan

July 3 (Bloomberg) -- U.K. service industries from law firms to consultancies grew in June for a second month, suggesting Britain may be starting to emerge from recession.

An index based on a survey of about 700 service companies by the Chartered Institute of Purchasing and Supply was little changed at 51.6 in June from 51.7 in May, Markit said today in London. Readings above 50 indicate expansion. Economists predicted 51.5, the median of 29 forecasts in a Bloomberg News survey shows.

Today’s report adds to signs that the U.K. economy is no longer shrinking as quickly as in the first quarter, when it contracted the most in 50 years. Bank of England policy maker David Miles said yesterday that while a “rapid” return to growth is unlikely, record-low interest rates the central bank’s money-printing program is gaining traction.

“This is encouraging,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “We should still see these numbers rise further. But if they stabilize at this level it will mean the recovery will be anemic.”

The index of services rose above 50 in May for the first time since April last year.

Freshfields Bruckhaus Deringer LLP, one of the five highest-grossing U.K. law firms, said yesterday that revenue increased 9 percent in the fiscal year ending April 9. The depreciation of the pound bolstered earnings overseas, the company said. Linklaters LLP, another of the highest-earning law firms, also said today that revenue increased.

Technology Consultants

Morse Plc, the U.K. technology consultancy, rose the most since February today after saying that earnings and revenue will be “towards the upper end” of analysts’ forecasts.

“The services sector is showing signs of life, but it is still too early to tell if this is the start of a full-blown recovery,” David Noble, chief executive officer at CIPS, said in a statement. “Consumer spending remains fragile, and firms are being forced to slash prices in order to attract customers.”

British households are paying back loans to reduce the record 1.5 trillion pounds ($2.5 trillion) of consumer debt. Homeowners reduced net mortgage debt, paying down more than they borrowed, by the most since at least 1970 the first quarter, the Bank of England said in a separate report today.

The U.K. central bank last month kept the benchmark interest rate at 0.5 percent and maintained the plan to buy 125 billion pounds of bonds with newly created money. The next interest-rate decision is July 9.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

Read more...

ECB Sets Cruise Control, Pushes Banks to Drive Growth

By Simon Kennedy and Simone Meier

July 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet is urging the region’s banks to play their part in generating an economic recovery.

Trichet yesterday said financial institutions should pass onto the “real economy” the 442 billion euros ($619 billion) it granted them June 24 and said the ECB has no immediate plans to ramp up its response to the crisis. He spoke to reporters after keeping the ECB’s main rate at a record low of 1 percent.

“The ball was played back to the banking system,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “The ECB has now released the accelerator and switched to cruise control.”

The ECB has been pumping unlimited funds into the financial system since October and banks will get even more cash next week when it starts buying 60 billion euros of covered bonds. Banks are nevertheless still restricting lending and the risk for the Frankfurt-based ECB is that they either hoard the cash to repair damaged balance sheets or direct it to other assets.

The ECB is focusing its efforts on banks because they account for about 75 percent of company financing in the 16- nation euro region, more than in the U.S. where they provide about a third of funding.

Last week’s auction, the first that gave banks unlimited funds for a full 12 months, “justified our call to commercial banks to be up to their responsibility to ship to the real economy,” Trichet said yesterday at a press conference in Luxembourg.

More Losses

Even with the cash, banks are concerned they face more writedowns from the credit crisis, said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. The ECB last month said commercial banks may lose a further $283 billion by the end of next year and Deutsche Bank AG Chief Executive Officer Josef Ackermann said July 1 that the financial industry is “not out of the woods yet.”

Loans to households and companies grew at the slowest pace since at least 1991 in May, rising 1.8 percent on the year, the ECB said this week.

“There is a serious concern that banks are in no position to kick-start lending,” Peruzzo said. “Banks are seriously under stress.”

Marco Annunziata at UniCredit Group says financial institutions may also keep putting money in safer assets or just leave it at the ECB. The central bank said today banks deposited 288 billion euros with it overnight, the most since Jan. 14. The ECB currently pays 0.25 percent on deposits.

No Certainty

“There is clearly no certainty that the liquidity will be promptly passed on to the real economy,” said Annunziata, chief economist at UniCredit.

If banks don’t act, the ECB may be forced back into action as the worst recession since World War II drives unemployment higher and prices fall. Trichet yesterday declined to say it had stopped cutting rates. Bundesbank President Axel Weber said June 23 that “direct intervention in the capital markets” would be necessary should banks fail to provide credit.

“The ECB has scope to take additional action if it appears that banks are still not markedly stepping up their lending,” said Howard Archer, chief European economist at IHS Global Insight in London. “The ECB could bypass the commercial banks and take more direct measures.”

Cash

There are signs that banks are moving the cash around, although not necessarily into the economy. The Euro Overnight Index Average, the rate at which banks lend to each other overnight, tumbled to 0.36 percent on July 2 from 1.38 percent on June 24, the day the ECB allotted the one-year loans.

“If the banks start to feel that the business climate is improving, then they’ll have better confidence to lend,” said Julian Callow, chief European economist at Barclays Capital in London. “The overall economic climate is really the key.”

Reports this week showed that the economy is still mired in a slump even though the recession may be moderating. Unemployment reached its highest in a decade in May and consumer prices recorded their first annual decline on record in June.

ING Groep, the largest Dutch financial-services company, said July 1 it would eliminate a further 800 jobs and Air France-KLM Group said on June 19 that it expects to extend job cuts at the company.

For now, Trichet is reluctant to step up his policy response amid concerns that stimulus measures are already storing up inflation risks for the future. The ECB has cut its benchmark rate by 325 basis points since early October.

Economists at Goldman Sachs Group Inc. and Lloyds TSB Group Plc say the ECB is unlikely to signal any change before September, when its staff publishes new economic forecasts.

The ECB probably wants “clear evidence” that banks are not lending before it implements more measures, said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “The risk is that it waits too long, raising the prospect of a prolonged period of deflation and extremely weak growth.”

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Simone Meier in Frankfurt at smeier@bloomberg.net;

Read more...

Treasury’s Distressed Debt Plan Said to Begin With $20 Billion

By Christopher Condon

July 3 (Bloomberg) -- The U.S. Treasury Department may begin its program to spur purchases of mortgage-backed securities from banks with about $20 billion in public and private money, down from as much as $100 billion when it was announced in March, two people familiar with the matter said.

The Treasury plans provide about $1.1 billion in capital to eight to 10 money managers it will pick for the Public-Private Investment Program, according to the people, who asked not to be identified before the details are announced. The firms will raise about $1.1 billion each for funds to buy distressed mortgage securities, less than they had expected the government to support. The plan also will include about $10 billion in government-backed loans.

The government unveiled the program when losses tied to home loans hobbled banks such as Citigroup Inc. and Bank of America Corp. and threatened to choke off lending needed to revive the economy. Since then, the 19 largest U.S. banks raised more than $100 billion by selling equity and assets, swapping preferred shares for common and offering debt, easing concern that the lenders couldn’t handle a deeper, longer recession.

“It wouldn’t shock me if the program never gets any bigger than this,” said Douglas Elliott, a fellow at the Brookings Institution in Washington and a former investment banker. “It would be nice see these assets moved off the balance sheets of banks, but I don’t think it’s critical anymore.”

A separate portion of PPIP, run by the Federal Deposit Insurance Corp. and designed to aid the sale of whole loans from banks to investors, was postponed indefinitely last month. Treasury Secretary Timothy Geithner said then that interest in such U.S. programs may be waning as market confidence improves.

Expansion Possible

Geithner said in March that the government might commit as much as $50 billion in public capital to match PPIP funds raised by private firms. Treasury officials have said the program could be rolled out in stages and expanded over time.

Andrew Williams, a Treasury spokesman, declined to comment. The department may announce the program’s start as soon as next week.

Invesco Ltd., based in Atlanta, and BlackRock Inc. in New York were among companies that said in April they would each seek to start PPIP funds. BlackRock had planned to raise as much as $7 billion, while Wilbur Ross, who runs Invesco’s WL Ross & Co. unit, expected to gather “several billion” dollars. Officials from both companies declined to comment.

Pacific Investment Management Co. in Newport Beach, California, and the Standish bond unit of Bank of New York Mellon Corp. also said they would seek to participate in PPIP.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

Read more...

European Service Industry Contracts at Faster Pace

By Mark Deen and Jana Randow

July 3 (Bloomberg) -- Europe’s service industry contracted at a faster pace in June as rising unemployment damped consumer spending.

A gauge of services activity in the 16-nation euro region fell to 44.7 from a seven-month high of 44.8 in May, London- based Markit Economics said today. The June reading was revised up from an initial estimate of 44.5. The index is based on a survey of purchasing managers by Markit and a reading below 50 indicates contraction.

Companies across Europe have been forced to cut output and eliminate jobs to weather the global slump, prompting consumers to trim spending. Unemployment in the euro region increased to 9.5 percent in May from a revised 9.3 percent in April, the European Union statistics office said yesterday.

“Manufacturers were hit hard by de-stocking, which is now being corrected,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in Paris. “With consumers cutting back, services will be slower to revive.”

Manufacturing shrank at the slowest pace in nine months in June, a separate report showed on July 1, adding to signs that Europe’s economy is starting to recover from the worst recession in six decades. A composite index of manufacturing and services rose to 44.6, marking the fourth month of slowing contraction.

The European Central Bank has cut interest rates to a record low of 1 percent and governments have pumped billions of euros into their economies to revive growth. Still, the ECB expects the euro-area economy to contract 4.6 percent this year and 0.3 percent in 2010.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Jana Randow in Frankfurt jrandow@bloomberg.net.

Read more...

Oil Is Set for a Third Weekly Loss on Rising U.S. Unemployment

By Christian Schmollinger and Ben Sharples

July 3 (Bloomberg) -- Crude oil was poised to decline for a third week on concern a rise in unemployment in the U.S. to the highest in almost 26 years will reduce fuel demand in the world’s largest energy user.

Oil fell more than $2 a barrel yesterday after the Labor Department said employers cut 467,000 jobs in June. Crude also declined as equities dropped and the dollar climbed against the euro, limiting futures purchases as an alternative investment.

“People are worried about the employment number because it shows the expectation of a demand recovery has faded,” said Tetsu Emori, a commodity fund manager with Astmax Ltd. in Tokyo. “The rising dollar has been adding to the bearish sentiment in the market.”

Crude oil for August delivery dropped as much as 63 cents, or 0.9 percent, to $66.10 a barrel on the New York Mercantile Exchange, and was at $66.64 at 1:52 p.m. in Singapore. Oil fell 3.7 percent to $66.73 yesterday. Futures are down 3.9 percent this week.

June’s employment decline was more than forecast and followed a 322,000 decrease in May. Payrolls were estimated to fall 365,000 after a 345,000 drop initially reported for May, based on the median of 79 economists surveyed by Bloomberg News.

The jobless rate jumped to 9.5 percent, the highest since 1983, from 9.4 percent. U.S. fuel supplies increased last week by more than forecast.

“The negative jobs report was not taken well by the equities or oil market,” said Mike Sander, an investment adviser with Sander Capital in Seattle. “Helping to push oil lower was a fall in the Dow Jones by over 200 points and a drop in the euro.”

Stocks Drop

The MSCI Asia Pacific Index lost 0.9 percent to 102.09 as of 1:31 p.m. in Tokyo. The gauge has slipped 1.5 percent this week, the second time in three weeks it has retreated. The Standard & Poor’s 500 Index tumbled 2.9 percent to 896.42, extending its slump since June 12 to 5.3 percent and erasing its 2009 gain.

Declining crude oil and gasoline prices helped send the Reuters/Jefferies CRB Index of 19 raw materials lower. The index dropped 1.8 percent to 246.60.

A rising dollar makes raw materials such as oil and gold less attractive to investors. The dollar climbed to $1.3952 per euro as of 8:25 a.m. in Tokyo from $1.4003 in New York yesterday, after earlier rising to $1.3929, the highest level since June 25.

There will be no floor trading in New York today because of the Independence Day holiday. All electronic trading will be counted as part of the session on July 6.

Oil Supply

Kuwaiti Oil Minister Sheikh Ahmed al-Sabah said oil prices above $100 a barrel would weaken the global economy. There is an oversupply of oil in the market and if the situation continues, OPEC will “definitely” not increase output in the group’s next meeting on Sept. 9, he told reporters in Kuwait City yesterday.

“Hopefully in the third and fourth quarter it won’t surpass the $100 mark because this will fuel recession again,” Sheikh Ahmed said.

The Organization of Petroleum Exporting Countries, in a meeting May 28 in Vienna, decided against cutting production targets because of concern higher prices might harm an ailing global economy. The group increased output for a third month in June, a Bloomberg News survey showed. Members pumped an average 28.23 million barrels a day last month, up 55,000 from May.

Brent crude oil for August settlement fell as much as 79 cents, or 1.2 percent, to $65.86 a barrel on London’s ICE Futures Europe exchange. It was at $66.51 a barrel at 1:49 p.m. Singapore time. Yesterday, the contract declined 3.1 percent to settle at $66.65 a barrel.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Ben Sharples in Melbourne at bsharples@bloomberg.net.

Read more...

South Korean Groups Buy 110,000 Tons U.S. Corn in Private Trade

By Jae Hur and Shinhye Kang

July 3 (Bloomberg) -- Two South Korean groups bought 110,000 metric tons of corn through private negotiations yesterday, according to two industry executives familiar with the trade.

The purchase was split into two lots of 55,000 tons each, said the executives, asking not to be identified as the trade was confidential. The Major Feedmill Group bought the first cargo at $216.90 a ton on a cost and freight basis for arrival by Dec. 30 at Gunsan and Ulsan, with an extra cost of $1.50 a ton for delivery to the second port, they said.

The Korea Feed Association’s members in Busan purchased the second lot at $214.70 a ton for arrival by Jan. 10 at Busan and Ulsan, with an extra cost of $1.50 a ton for delivery to the second port, they said.

The trade was in addition to the Korea Feed Association’s purchase of 55,000 tons in a tender held yesterday.

To contact the reporters on this story: Jae Hur in Singapore at jhur1@bloomberg.net; Shinhye Kang in Seoul at skang24@bloomberg.net

Read more...

Free-Range Goats Promise 12% Private-Equity Gains in Australia

By Rudy Ruitenberg

July 3 (Bloomberg) -- Free-range goat farming in rural Australia is a low-cost investment that may offer annual returns of as much as 12 percent, said Peter Hannen, chairman of private-equity firm MG Capital Plc.

MG Capital has invested about $12 million to buy 600,000 acres of land in Australia’s outback populated with 50,000 feral goats, Hannen said yesterday in an interview at the World Agri Invest Congress in London.

“Is it an industry or is it a hobby?” said Hannen, a former sugar trader and ex-chairman of Celtic Resources Holdings Ltd., the gold producer acquired by OAO Severstal in January 2008. “We’re not losing money. That’s a good start.”

Australia exported 27,000 metric tons of goat meat last year, and the U.S. is the world’s largest buyer, according to Hannen. London-based MG Capital expects to produce about 50,000 goats a year from its herd, the executive said.

The goats are harvested by fencing off watering holes that are accessible via “tiger traps” which can be shut to trap the animals, Hannen said. Land can be bought for A$10 ($7.96) an acre, and the project’s biggest investments are in fencing and water supply, he said.

“Goats being goats, basically you have a low-cost enterprise in an arid land, and the world is becoming more arid,” Hannen told the conference. “You have to keep probing at the frontiers.”

‘Startup Market’

MG Capital expects cash returns “over time” of 8 percent to 12 percent from goat farming in the outback, “in line with general farming,” Hannen said in the interview. The firm first invested in Australian goat farming three years ago, he said.

“This is a startup market,” he said. “It’ll be five years before we know if there’ll be a goat industry.”

The firm also has invested between $5 million and $6 million in farming of merino sheep in Uruguay for wool, which generated annual post-tax returns of 14 percent in the five years through May 2008, according to Hannen.

“My most profitable operations in South America have been my sheep operations, and my most profitable land there has been that with the lowest productivity index,” he said. “There is life in livestock. Sheep do offer a very good investment.”

To contact the reporter on this story: Rudy Ruitenberg in London at rruitenberg@bloomberg.net.

Read more...

Gold Gains in Asia on Haven Demand After U.S. Job Losses Mount

By Glenys Sim and Jason Scott

July 3 (Bloomberg) -- Gold advanced in Asia after mounting unemployment in the U.S., the world’s largest economy, raised concerns about a protracted recession, prompting investors to seek the precious metal to preserve their wealth.

Employers in the U.S. cut more jobs than forecast in June and the unemployment rate rose to the highest in almost 26 years, triggering the biggest drop since April 20 in the Dow Jones Industrial Average yesterday. Asian stocks fell for a third day, with the MSCI Asia Pacific Index down 0.3 percent today.

“The jobs data out of the U.S. is going to reignite fears among investors that the global economic recovery will be slower than expected,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. “When investors become risk-averse they retreat out of equity markets and into gold.”

Bullion for immediate delivery rose as much as 0.4 percent to $933.90 an ounce, before trading at $933.55 at 2:44 p.m. in Singapore. Gold for August delivery increased 0.3 percent to $933.60 on the New York Mercantile Exchange’s Comex unit.

“Recently investors have started to credit gold also with the monetary role again,” Ronald Peter Stoeferle, an analyst at Erste Group Bank AG, said in a report. The metal “locks in the purchase power and thus the value over long periods of time.”

Still, bullion is down 0.6 percent this week as the dollar headed for a weekly gain against the euro after the rise in unemployment in the U.S., and also in Europe, added to speculation the global recession will be prolonged. The precious metal tends to move inversely to the U.S. currency.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was unchanged for a second day at 1,120.55 metric tons yesterday, the company’s Web site showed.

Among other precious metals for immediate delivery, silver gained 0.2 percent to $13.45 an ounce, platinum was up 0.2 percent at $1,188.50 an ounce and palladium lost 0.6 percent to $250.50 an ounce at 2:30 p.m. in Singapore.

To contact the reporters on this story: Glenys Sim in Singapore at gsim4@bloomberg.net; Jason Scott in Perth at Jscott14@bloomberg.net;

Read more...

Copper May Extend Drop as Equities Slide on U.S. Jobless Data

By Bloomberg News

July 3 (Bloomberg) -- Copper, little changed in Asian trading, may drop for a second day after U.S. employers cut more jobs than forecast in June, triggering a global equity slump and raising concern demand for industrial metals will slow.

U.S. payrolls declined by 467,000 in June and the country’s jobless rate climbed to 9.5 percent, the highest since August 1983. The MSCI Asia-Pacific Index of equities declined 0.8 percent as of 10:18 a.m. Singapore time, extending yesterday’s 0.2 percent drop. Copper has tended to track moves in equity markets in recent months.

“Sentiment soured on the unemployment data,” He Qing, an analyst at Jinrui Futures Co., said in an e-mailed report today. “Copper will fall easily and find it difficult to rally in the near term.”

Three-month copper on the London Metal Exchange dropped as much as 1.1 percent to $4,980 a ton and last traded at $5,042. Copper for September delivery in New York dropped 0.3 percent to $2.2985 a pound.

October-delivery copper on the Shanghai Futures Exchange fell as much as 1.5 percent to 39,550 yuan ($5,788) a ton, the lowest intraday level in a week. The contract last traded 0.3 percent lower at 40,050 yuan a ton.

Among other LME-traded metals, aluminum gained 0.3 percent to $1,645, zinc was up 0.3 percent at $1,577 a ton and nickel fell 0.3 percent to $16,400 a ton. Lead added 0.3 percent to $1,705 a ton and tin was unchanged at $14,300 a ton as of 10:12 a.m. in Singapore.

--Li Xiaowei. Editors: Matthew Oakley, Wendy Pugh.

To contact the Bloomberg News staff on this story: Li Xiaowei in Shanghai at Xli12@bloomberg.net

Read more...

Rio Completes $15.2 Billion Share Sale to Cut Debt

By Rebecca Keenan

July 3 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, completed this year’s second biggest share sale, reducing the high level of debt that forced it to consider selling stakes in its most valuable assets.

London-based Rio today finished a $15.2 billion share sale to existing holders, selling 95 percent of the Australian-traded shares on offer, Rio said today in a statement. Yesterday, 97 percent of its London-traded shares were sold in the offer.

Rio scrapped a $19.5 billion investment proposal from its biggest shareholder Aluminum Corp. of China last month in favor of raising $21 billion from a share sale and an iron ore joint venture with BHP Billiton Ltd. The deals allowed Rio to reduce $38.9 billion of debt without selling bonds and stakes in its largest mines, defusing a backlash from politicians and shareholders.

“Rio has ended up with the best deal they could have done,” said Don Williams, who helps manage A$1.1 billion ($876 million) as chief investment officer at Platypus Asset Management Ltd, including BHP and Rio stock. “They got there in a very convoluted manner unfortunately. It is definitely investment grade again.”

Rio shares declined 4.2 percent to A$49.60 at the 4:10 p.m. Sydney time close after the balance of shares not bought by existing Australian holders were sold at A$48.50. The 15.9 million U.K. shares not taken up were priced at 2,100 pence, Nick Cobban, a Rio spokesman in London, said yesterday by phone. That compared with the rights price of 1,400 pence for the London shares and A$28.29 for its Sydney shares.

Debt Cut

Rio will cut its debt to $23.2 billion once it receives the $5.8 billion payment from BHP to create the 50-50 venture. BHP abandoned its $66 billion hostile takeover bid for Rio in November, partly because of Rio’s high-level of debt.

Rio is cutting jobs and trying to sell assets to help repay $10 billion of debt this year. Most of its borrowings were incurred mainly through the 2007 purchase of Alcan Inc.

The deal Chief Executive Officer Tom Albanese, 51, brokered with Chinalco, as the Chinese company is known, was criticized by Legal & General Group Plc, the third-largest investor, and the Association of British Insurers, for not giving them the option to participate in the fund-raising. It also spurred a Senate inquiry in Australia.

Not Neutered

Rio last month dropped the deal with Chinalco, which was agreed in February, after the improvement in financial markets and Jan du Plessis took over as chairman in April. Rio turned to du Plessis after prior chairman nominee Jim Leng resigned less than a month following his appointment because of a disagreement about how to cut debt.

“Leng walking actually made the board sit up and take notice,” Williams said. “ The Chinalco deal would have achieved similar balance sheet results but it neutered them strategically to some extent. I don’t think any shareholders felt comfortable having a major customer sitting on the board.”

At $15.2 billion, the rights offering is the second-biggest this year after HSBC Holdings Plc, which sold $18.3 billion of stock in April. Chinalco confirmed yesterday that it took up its rights in the share sale.

Credit Suisse Group AG, JPMorgan Cazenove Ltd., Deutsche Bank AG, Morgan Stanley and Macquarie Capital Ltd. are the joint global managers of the rights offer. Credit Suisse and JPMorgan, as underwriters of the share sale, will seek buyers for the balance of London-listed Rio shares not bought by shareholders.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

Read more...

Japan Stocks Retreat on Slowing Retail Sales, U.S., Europe Jobs

By Masaki Kondo

July 3 (Bloomberg) -- Japanese stocks dropped on retailers’ slowing sales and after worsening U.S. and European job data fueled concern the global economic slump will be prolonged.

Seven & I Holdings Co., the nation’s largest retailer, plunged 5 percent after reporting a record quarterly slump in profit. Mitsui O.S.K. Lines Ltd. dropped 3 percent after commodity cargo fees fell to the lowest level in three weeks. Orix Corp., Japan’s largest non-bank financial company, surged 7.1 percent even after saying it will sell new shares, which will dilute shareholder value by as much as a fifth.

“Household spending won’t recover anytime soon,” said Hiroshi Morikawa, a senior strategist at Tokyo-based MU Investments Co., which manages about $13 billion. “Consumers are flocking to discounted products and that may damage the economy through deflation.”

The Nikkei 225 Stock Average slid 60.08, or 0.6 percent, to close at 9,816.07 in Tokyo. The broader Topix index lost 3.40, or 0.4 percent, to 920.62. The volume of shares traded in Tokyo declined to a level not seen since March 10.

For the week, the Nikkei lost 0.6 percent and the Topix decreased 0.7 percent.

The Nikkei soared 22.8 percent in the three months to June 30, the second-biggest gain on record, on optimism the global economy was stabilizing. Companies on the gauge are expected to pay dividends equivalent to 1.7 percent of their share prices, lower than U.S. and European counterparts.

Save Money

Seven & I dropped 5 percent to 2,190 yen, making it the biggest drag on the Topix. Net income tumbled 28 percent in the three months ended May 31, the steepest slide in quarterly net income since the company was formed in 2005. Worsening household income and job markets prompted consumers to save money, the company said in a filing with the Tokyo Stock Exchange.

Fast Retailing Co., the nation’s largest clothing retailer, dived 2.9 percent. The company said yesterday its average June customer spending fell the most this year. Isetan Mitsukoshi Holdings Ltd., a department store operator, sank 4.9 percent.

In New York, the Standard & Poor’s 500 Index slumped 2.9 percent after a government report showed employers cut more jobs than economists had estimated in June. Europe’s unemployment rate jumped in May to the highest level since 1999.

“It took years for us to get into this mess, and it’s going to take us more than a few months to turn it around,” U.S. President Barack Obama said.

Shipping Fees

Mitsui O.S.K. dived 3 percent to 593 yen. Iino Kaiun Kaisha Ltd., which operates oil, chemical and gas tankers, sank 3.3 percent. The Baltic Dry Index, a measure of shipping costs for commodities, fell 1.9 percent yesterday to the lowest level since June 12.

“The worsening of U.S. job figures is causing concerns the recession may be drawn out,” said Satoshi Yuzaki, a section manager at Takagi Securities Co. “That’s hurting shipping shares.”

Bridgestone Corp., the world’s largest tiremaker, jumped 1.8 percent, while Sumitomo Rubber Industries Inc. climbed 2 percent. Daiwa Securities Group Inc. lifted its ratings on the two companies to “outperform,” from “neutral.”

Orix leapt 7.1 percent, making it the second-biggest winner on the MSCI World Index. The company will raise as much as 100 billion yen ($1.04 billion) through share sales for loan repayments and investment, the company said yesterday.

“Orix’s financial position is very healthy,” said Shiro Yoshioka, an analyst at Japaninvest KK in Tokyo. “Orix is probably preparing to expand its business, which could boost profit.”

Nikkei futures expiring in September fell 0.5 percent to 9,840 in Osaka and slipped 0.8 percent to 9,820 in Singapore.

To contact the reporters for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

Read more...

Asian Stocks Fall on U.S., Europe Jobs Data, Seven & I Results

By Patrick Rial

July 3 (Bloomberg) -- Asian stocks fell for a third day as a drop in profit at Seven & I Holdings Co., Japan’s largest retailer, and worsening job markets in the U.S. and Europe fanned doubts the global economy will recover soon.

Seven & I tumbled 5 percent after saying profit dropped 28 percent last quarter. Mitsui O.S.K. Lines Ltd., Japan’s No. 2 bulk shipper, lost 3 percent amid speculation global trade will suffer after unemployment reached 9.5 percent in both the U.S. and Europe. BHP Billiton Ltd., the world’s biggest mining company, declined 2.5 percent as oil and metals dropped.

The MSCI Asia Pacific Index lost 0.4 percent to 102.61 as of 3:28 p.m. in Tokyo. The gauge, which has leapt 45 percent from a more than five-year low in March, lost 1 percent in the past five days, the second weekly decline in three.

“We are running out of data points that can boost sentiment, so there’s not much hope for further gains,” said Tomomi Yamashita, a fund manager at Shinkin Asset Management Co. in Tokyo, which oversees about $5.5 billion. “Stocks are not at reasonable levels when you consider the facts.”

Japan’s Nikkei 225 Stock Average fell 0.4 percent to 9,746.06. Most markets in the region declined. China’s Shanghai Composite index led advancing markets, adding 0.7 percent as signs power demand is recovering drove gains in power companies.

The MSCI Asia soared a record 28 percent in the three months ended June 30 on optimism the global economy is stabilizing. The surge has driven the price of stocks on the measure to 23.4 times estimated earnings, compared with 15 times at the market trough in March and 15.2 for the U.S.’s Standard & Poor’s 500 Index.

Job Cuts

Sundance Resources Ltd. plunged in Sydney after the ore- exploration company said its chairman was stepping down. Orix Corp., Japan’s largest non-bank lender, surged 7.1 percent even after saying it would sell 100 billion yen ($1 billion) in new shares.

In New York, the S&P 500 slumped 2.9 percent after the Labor Department said U.S. employers cut 467,000 jobs in June, over 100,000 more than economists had forecast. That pushed the nation’s unemployment rate to 9.5 percent, a level not seen since August 1983. Futures on the S&P 500 rose 0.4 percent today.

“The U.S. unemployment data confirms that the economy remains very fragile at the moment,” said Jason Teh, who helps manage more than $2.5 billion at Investors Mutual Ltd. in Sydney. “The sustainability of the share market recovery has to be confirmed by further improving economic fundamentals.”

Europe’s unemployment rate also increased to 9.5 percent in May, the highest level since 1999. Jean-Claude Trichet, the European Central Bank governor, said the bank will maintain interest rates at 1 percent.

‘State of Crisis’

Seven & I plunged 5 percent to 2,190 yen. The retailer said yesterday profit dropped 28 percent in the three months ended May 31. Worsening household income and job markets prompted consumers to save money, the company said.

Rival retailer Aeon Co. declined 4.4 percent to 895 yen. Isetan Mitsukoshi Holdings Ltd., Japan’s largest department- store operator, slumped 4.9 percent to 950 yen. The company said on July 1 sales fell 10.3 percent in June.

Yoshimasa Hayashi, who was appointed as Japan’s Economy and Fiscal Policy Minister on July 1, said yesterday the nation may slip back into deflation and that the economy is “in a state of crisis.”

Today marks the first three-day slump in MSCI’s Asian gauge since April 28, as economic reports this week pointed to a stalled recovery in the region. The Bank of Japan’s Tankan survey of manufacturer sentiment rebounded less than estimated, while government data showed Japan’s unemployment rate reached a five-year high in May. Australia’s exports dropped to a 14-month low, while building approvals declined by the most since 2002.

Oil, Metals, Shipping

The job reports raised concern demand for materials will wane. Crude oil tumbled 3.7 percent to $66.73 a barrel in New York, the lowest settlement since June 3, and extended its decline today. A gauge of six metals in London dropped 1.2 percent. The Baltic Dry Index, a measure of shipping costs for commodities, lost 1.8 percent to a three-week low.

Mitsui O.S.K. slumped 3 percent to 593 yen. BHP lost 2.5 percent to A$33.43. Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, dropped 4.1 percent to A$3.52.

Chinatrust Financial Holding Co., Taiwan’s biggest credit- card issuer, surged 4.6 percent to NT$21.60. The China Times reported China may open its credit card market to Taiwanese banks, citing Liu Mingkang, Chairman of the China Banking Regulatory Commission.

Electricity Output

Huaneng Power International Inc., the listed unit of China’s largest power group, rose 1.3 percent to 7.91 yuan. The nation’s electricity output gained 3.6 percent in June, the first monthly increase since October, the China Securities Journal reported today, citing China State Grid Corp.

Sundance Resources, which is seeking to build a $3.3 billion iron ore project in Camaroon, slumped 6.3 percent to 15 Australian cents. Chairman George Jones will retire on Aug. 31 and be replaced by non-executive director Geoff Wedlock, the company said.

Orix jumped 7.1 percent to 5,880 yen in Tokyo. The company will sell 18 million new shares in two sales, using the proceeds to repay debt and the rest for investment and loans, the company said yesterday.

“Orix’s financial position is very healthy,” said Shiro Yoshioka, an analyst at Japaninvest KK in Tokyo. “Orix is probably preparing to expand its business, which could boost profit.”

To contact the reporters for this story: Patrick Rial in Tokyo at prial@bloomberg.net.

Read more...

Fortis Recommends Emerging-Market Stocks Over European Equities

By Adam Haigh

July 3 (Bloomberg) -- Investors should buy emerging-market equities rather than European stocks to benefit from government stimulus measures in China and a rally in commodities, according to Fortis Investments.

Fortis strategist Joost van Leenders cut his recommendation on European stocks to “neutral” from “overweight” in favor of adding to an already “overweight” position in emerging markets, he wrote in a weekly report to clients dated yesterday.

The MSCI Emerging Markets Index of 22 developing economies has jumped 61 percent from this year’s low on March 2, as inflows from investors surged and stimulus plans from China to Brazil bolstered confidence. That compares with a 29 percent rally in Europe’s Dow Jones Stoxx 600 Index from a 12-year low reached on March 9.

“This is mostly related to the economic cycle as emerging markets are actually doing quite well and Europe is definitely lagging,” Amsterdam-based Leenders said in a phone interview yesterday. “We have been a bit disappointed with the European economy and leading indicators are the lowest among the major regions.”

The European Commission Economic Sentiment Indicator which Fortis says is “one of the best” leading indicators for the countries using the euro “continued its sluggish advance in June, though it still firmly points at a shrinking economy,” Leenders wrote in the report. That compares with the Purchasing Manager’s Index for Chinese manufacturing, which signals “the government spending and bank lending stimuli and having a positive impact on the economy,” he wrote.

Chinese Stimulus

China, the world’s second-largest exporter, is using a 4 trillion-yuan ($585 billion) stimulus plan to revive the economy. The European Central Bank will start buying 60 billion euros ($84 billion) of covered bonds on July 6 to free credit and encourage lending, though ECB President Jean-Claude Trichet said yesterday the bank will make sure that the measures don’t boost inflation.

Fortis, which manages about $240 billion, maintained its “underweight” stance on U.S. and Japanese equities and made no other changes to its asset allocation, Leenders said.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

Read more...