Poland’s Political Storm Whirls Round Central Bank Independence

By Monika Rozlal

July 13 (Bloomberg) -- The row between Poland’s top two politicians over the central bank deepened yesterday when Piotr Kownacki, head of President Lech Kaczynski’s office, said a government plan to make the bank help the state budget violates the constitution.

Slawomir Nowak, chief political adviser to Prime Minister Donald Tusk, on July 10 warned the government may change the law to make the bank pay its profit to the budget instead of setting it aside to cover currency risks. Kownacki said yesterday such a change would “require the central bank to put Poland’s currency reserves and zloty stability at risk.”

Kaczynski and Tusk are at odds over monetary and fiscal policies before the 2010 presidential election, in which Tusk will challenge Kaczynski. Tusk wants early euro adoption, which the president opposes, and central bank Governor Slawomir Skrzypek, appointed by the previous Cabinet, has supported Kaczynski. Tusk’s proposal harms Poland’s image, analysts say.

“Such intervention by the government would be very controversial and could impair Poland’s image as it would be interpreted as an attack on the central bank’s independence,” said Stanislaw Gomulka, a former deputy finance minister and chief economist at Warsaw’s Business Center Club. “I can’t understand why the government has come up with such an idea.”

Tusk may use tomorrow’s press conference following the government’s weekly meeting to comment on Kownacki’s statement.

Tusk’s Plan

The premier discussed on July 9 with Kaczynski the plan to narrow the 2010 budget deficit by using an estimated central bank profit of more than 10 billion zloty ($3.19 billion). The premier argued this proposal would help avoid tax increases.

The bank responded with a forecast of zero profit this year. Still, Skrzypek later said if any profit is generated, the bank will pay 95 percent to the budget in line with the law.

“There is a risk that in a year or five quarters the zloty price will change and then the central bank must have reserves,” Kownacki said today. Without reserves, the bank “couldn’t fulfill its duties and be a European central bank.”

Jakub Borowski, chief economist at Invest Bank in Warsaw, agreed with that view.

“It would be a bad idea to change the law to keep the bank from boosting the reserves for currency risk just for the sake of helping the state budget, especially when the zloty is likely to strengthen and these reserves will be needed,” he said. “The government should in this case take seriously what the central bank projects about this year’s profit instead of threatening a change in the law.”

Avoiding Payments

The argument is unlikely to be smoothed over any time soon.

Zbigniew Chlebowski, head of Tusk’s party’s parliamentary group said yesterday the central bank is creating currency risk reserves solely to avoid making payments to the budget.

“If the central bank has at its disposal a $20 billion loan from the International Monetary Fund for stabilizing the zloty, why should it use its own capital for creating reserves on the balance sheet?” he said on Radio Zet. “It’s making it only for the sake of keeping this money from payment to the state budget.”

The government last week raised this year’s budget deficit target by 48 percent to 27.2 billion zloty, saying the economic slowdown is hurting revenue. At the same time, the government downgraded its forecast for 2009 economic growth to 0.2 percent from 1.7 percent. It estimates growth next year at 0.5 percent.

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net

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China’s Central Bank Pledges to Guide Loan Growth

By Bloomberg News

July 13 (Bloomberg) -- China’s central bank pledged to do more to guide loan growth as a record expansion in credit adds to the risks of asset bubbles and bad debts.

The People’s Bank of China will “strengthen monetary and credit management,” Li Dongrong, an assistant governor, said in a statement on the agency’s Web site. It will “guide the direction of money and loans” to ensure stability in the financial sector, Li said.

New loans rose almost fivefold in June as the credit boom revived growth in the world’s third-biggest economy, helping the Shanghai Composite Index to climb 80 percent from last year’s low. The central bank urged June 25 more lending to rural areas and small and medium-sized businesses and less to polluting industries and those with overcapacity.

“The central bank may work on more policies to better guide loans to boosting the real economy,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “The bank might have found that despite rapid loan growth, exporters still face difficulty in getting funds.”

Exports fell for an eighth month in June, the government said last week. Yuan forwards dropped by the most in more than a month today on speculation the central bank will keep the currency stable to help exports recover. The yuan was little changed, closing at 6.8327 against the dollar.

‘Gloomy’ Export Outlook

Complications and “new challenges” for policy makers include the difficulty of boosting domestic demand and the “gloomy” state of global demand, Li said. He reiterated government statements that the economy is showing “positive signs.” He didn’t explain what extra measures will be taken to guide loans and manage credit.

The People’s Bank of China dropped loan restrictions in November and pressed lenders to support a 4 trillion yuan ($585 billion) stimulus package. New loans rose to 1.53 trillion yuan in June.

Rapid loan growth may continue because the government is concerned that the recovery is fragile and some major projects have been only partially financed, the economist Xing said. The economy grew 6.1 percent in the first quarter, the slowest pace in almost a decade.

Pressure on the banking system may intensify as a result of a rapid increase in lending, Standard & Poor’s said today. The expansion of credit poses risks for lenders and excessive concentrations of credit can undermine financial stability, the China Banking Regulatory Commission said July 7.

‘Loose’ Monetary Policy

The central bank will stick with the policy direction set by the central government, Li said today. That stance includes a “moderately loose” monetary policy and a “proactive” fiscal policy. The People’s Bank of China will also “improve financial support for the economy,” he said.

Li was speaking at meetings during his field trip to east China’s Zhejiang province on July 8 and July 9, the statement said.

China’s central bank has asked the nation’s main lenders to report loan and deposit data daily in the last five days of each month, the 21st Century Business Herald reported today, citing a commercial bank official it didn’t name. Bank branches tend to cram loan books at the end of each month and each quarter to boost performance, the newspaper said.

To contact the Bloomberg News staff for this story: Li Yanping in Beijing at

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Obama’s Stimulus Money Starts to Flow as Jobless Await Results

By Matthew Benjamin and Alison Fitzgerald

July 13 (Bloomberg) -- David Oneglia was looking at the likelihood of layoffs at his construction company. Then he landed a contract funded by the federal stimulus program to repair roads and bridges on Connecticut’s Merritt Parkway.

The $67 million job and the 80 workers it employs has allowed Oneglia to maintain his current payroll. It doesn’t permit him to expand it.

“The work we’re getting is just keeping the people we have on our workforce day-to-day going,” said Oneglia, president of Torrington, Connecticut-based O&G Industries Inc. “It won’t add anything.”

Even as money begins flowing to projects across the U.S. from the stimulus President Barack Obama signed in February, some lawmakers are questioning its value.

Bigger-than-forecast job losses pushed the June unemployment rate to a 26-year high of 9.5 percent after Obama promised to create or save 3.5 million jobs over two years. Republicans say that is proof the $787 billion measure isn’t working, while Democrats debate whether a second shot of spending is needed to pull out of a recession.

The rising unemployment rate has triggered concerns of a slower-than-anticipated recovery and driven stock prices and bond yields lower.

The Standard & Poor’s 500 dropped 1.9 percent last week to 879.13, the lowest level since May 1. The measure has now retreated 7.1 percent since June 12.

Bond Yields Fall

Yields on 10-year Treasury notes touched the lowest level in seven weeks as concern about a slow recovery drove investors toward the safety of U.S. debt. The benchmark 10-year note yield fell 20 basis points on the week, or 0.20 percentage point, to 3.30 percent, according to BGCantor Market Data. It was at 3.261 on July 10, the lowest since May 21.

Economists say it isn’t realistic to expect stimulus spending and tax cuts to revive the labor market and restore economic good times in just five months.

“Everyone always expects fiscal stimulus to immediately help out, but it never does,” said Allen Sinai, chief economist at New York’s Decision Economics Inc. “The bulk of the effects will come in 2010.”

So far, about $60 billion in spending and $43 billion in tax relief has hit the streets, accounting for 13 percent of the plan’s total. An additional $175 billion has been committed to specific uses.

Every state met the administration’s June 29 target for obligating at least half its highway money, said Elizabeth Oxhorn, a spokeswoman for Vice President Joe Biden. A report last week by the Government Accountability Office, Congress’s investigative arm, said the government is ahead of schedule in distributing stimulus money to the states.

Other Benefits

While attention focuses on infrastructure jobs, other stimulus steps, such as increased unemployment benefits, are pumping money into the economy. Food-stamp use jumped by $725 million to a record $4.5 billion in April, fueled by a $20 billion, five-year funding increase.

By design, much stimulus spending won’t happen for six to nine months, with many road and bridge projects expected to begin late this year or next. The Congressional Budget Office said 70 percent of the money will be spent by September 2010.

“The stimulus was backloaded, so there are a number of features that won’t kick in until next year,” said Richard Berner, co-head of global economics at Morgan Stanley in New York.

‘Bit Too Small’

With unemployment rising, calls are starting for another spurt of stimulus spending. Obama, who says the jobless rate will exceed 10 percent before turning for the better, has neither endorsed nor ruled out additional action.

Laura Tyson, an outside economic adviser to the White House, said last week an additional stimulus should be considered because the first one was “a bit too small.” Billionaire investor Warren Buffett told ABC News in a July 9 interview that more stimulus “may well be called for.”

Biden defended the program on July 9 in Ohio, expressing frustration with criticism that progress has been too slow.

“Remember, we’re only 140 days into this deal -- it’s supposed to take 18 months,” Biden said. The stimulus is saving thousands of jobs each day, he said.

Still, Biden said on July 5 that the administration “misread the economy” in initial forecasts that underestimated the depth of the recession and overestimated the stimulus package’s impact.

It would be hard to move more quickly, said former House and Senate budget analyst Stan Collender.

‘Throwing $100 Bills’

“Short of standing on top of the Empire State Building throwing $100 bills out, I don’t know what they could do to get money out there faster than what they’re doing,” said Collender, managing director of Qorvis Communications in Washington.

The stimulus should be judged by how much money has been committed to projects because economic benefits start to appear as work begins, House Transportation Committee Chairman James Oberstar, a Minnesota Democrat, said on June 25.

In April, almost $61 million from the stimulus was designated to help pay for a $95 million laboratory building at the Energy Department’s Oak Ridge National Laboratory in Tennessee.

That let St. Louis-based McCarthy Building Cos. start work at least six months earlier than anticipated, Oak Ridge spokesman Michael Bradley said. While only $2.4 million has been paid through June, about 150 people are at work on the project, which is scheduled for completion in 2011, he said.

Savings Rate Rose

While stimulus tax cuts began showing up in paychecks across the country in April in the form of reduced withholding, the economic impact may be muted as consumers save more money. The personal savings rate in May rose to 6.9 percent, the highest since December 1993.

If spending eventually picks up, “reductions in withholding normally have a lag of two to four quarters before any of it begins to be spent in any clear way,” Sinai said.

Instead of focusing on unemployment to gauge the stimulus’s initial benefits, Moody’s Economy.com chief economist Mark Zandi said he will watch retail sales and initial unemployment claims, which he expects to improve in the next three months.

The unemployment rate isn’t the best measuring stick because “it significantly lags what’s going on in the economy,” said Zandi, who expects the jobless rate to peak at about 10.5 percent next spring.

Judging Effectiveness

Even some of the critics who say the stimulus was poorly designed, such as Douglas Holtz-Eakin, an adviser in Arizona Senator John McCain’s 2008 Republican presidential campaign, say unemployment isn’t the best way to judge its effectiveness now.

The stimulus’s biggest weakness is that it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” Holtz-Eakin said.

Statements by economists that job growth may be slow to arrive hasn’t lessened public concern -- or attacks by Republicans. The stimulus bill passed in February over unanimous opposition by House Republicans and got only three Republican votes in the Senate.

“People want their jobs,” House Republican Leader John Boehner of Ohio said on July 9. “They want to see the economy moving again, and they don’t see anything happening.”

Faster Recovery Sought

That’s the case for John da Silva, 33, an unemployed heavy- equipment operator in Litchfield, Connecticut.

Out of work since December, when he lost his $76,000-a-year job with Blue Bell, Pennsylvania-based Henkels and McCoy Inc., da Silva supports a stay-at-home wife and a daughter with respiratory ailments who requires frequent medical treatment.

“I felt that it would have funneled down a lot quicker than it has,” da Silva said of the recovery funds. “We need stimulus money for new big super-projects that are going to have guys working for a year or two. That’s not happening right now.”

The $150-a-week union check that supplemented da Silva’s unemployment benefits stopped coming on June 1. If not for union medical benefits, he said, “I would have been another statistic, with a foreclosure and a bankruptcy.”

Those benefits end in October. “Instead of getting better,” da Silva said, “it looks like things are getting worse.”

To contact the reporters on this story: Matthew Benjamin in Washington at Mbenjamin2@bloomberg.netAlison Fitzgerald in Washington at afitzgerald2@bloomberg.net

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New Zealand Retail Sales Gain 0.8%, Spurring Recovery

By Tracy Withers

July 13 (Bloomberg) -- New Zealand’s retail sales rose for the third time in four months in May, adding to signs that record-low interest rates and income-tax cuts may help the economy emerge from a recession later this year.

Sales gained 0.8 percent from April when they increased 0.5 percent, seasonally adjusted, Statistics New Zealand said in Wellington today. Core retail sales, which exclude car yards, fuel outlets and workshops, surged 1.6 percent, the biggest monthly gain since February 2007.

Higher retail and property sales add to evidence the economy may emerge from the worst recession in three decades by the end of this year. Reserve Bank Governor Alan Bollard kept the benchmark interest rate unchanged last month for the first time in a year, saying household spending may rebound.

“There were some tentative sign of housing-related spending picking up, although this is from a low base and the pickup in housing demand has been relatively modest to date,” said Jane Turner, an economist at ASB Bank Ltd. in Auckland. The report “suggests that underlying consumer demand remains reasonably subdued,” she said.

The increase in sales was four times the 0.2 percent median estimate in a Bloomberg News survey of 10 economists. New Zealand’s dollar bought 62.85 U.S. cents at 11:20 a.m. in Wellington from 62.74 cents just before the report was released.

Interest Rates

Bollard has cut the benchmark interest rate by 5.75 points to a record-low 2.5 percent since July last year. Finance Minister Bill English reduced income taxes on April 1 to help kick-start an economy that shrank for a fifth straight quarter in the three months ended March 31.

The economy may start growing in the fourth quarter of this year, Bollard said on June 11.

Buoying spending, annual immigration growth accelerated to the highest in more than two years in May. Consumers’ pessimism about their future wealth has fallen to the lowest level since February last year, according to a Roy Morgan Research poll taken in the two weeks ended July 5.

House prices were unchanged in June from a year earlier -- the first time in 15 months values hadn’t declined, the Real Estate Institute said last week. House sales rose 40 percent from a year earlier.

Retail sales increased in 14 of the 24 store categories measured in today’s report, led by a 2.2 percent gain in supermarket and grocery sales, which make up one-fifth of all retailing.

Monthly Sales

The monthly sales series isn’t adjusted to exclude price movements and sales. Grocery food prices rose 1 percent in May, according to government figures.

Clothing store sales surged 13 percent as plummeting temperatures and above-average rainfall boosted sales of winter clothes, the statistics bureau said. Appliance sales also gained.

“The cold snap sent shoppers indoors to the mall and boosted clothing sales,” said ASB’s Turner.

Pumpkin Patch Ltd., the nation’s second-largest retailer by market capitalization, last month said trading at its children’s clothing stores, was “reasonably robust.”

Vehicle dealer sales fell for the first time in three months, dropping 1.9 percent. Purchases from fuel outlets declined 2.7 percent.

The core retail trend series, which excludes irregular movements as well as seasonality, rose 0.2 percent from April.

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

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Bernanke May Explain Fed Exit Strategy in Testimony Next Week

By Craig Torres and Scott Lanman

July 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke probably will show how the central bank will exit the biggest monetary expansion in history when he reports to Congress next week, economists said.

The Fed pumped $1 trillion into the banking system over the past year through bond purchases and emergency loans, doubling assets on its balance sheet. Reassuring investors that inflation won’t exceed forecasts once the recession ends will give the Fed more credibility, said Dean Maki, chief U.S. economist at Barclays Capital Inc. While policy makers have spoken about specific tools they may use, they haven’t laid out a strategy.

“Now is the time to articulate the exit strategy,” said Vincent Reinhart, former monetary-affairs director at the Fed and now resident scholar at the American Enterprise Institute in Washington. “The Federal Reserve doesn’t speak with one voice and the testimony is an opportunity to present the consensus view.”

The Federal Open Market Committee will release updated economic forecasts on July 15. At their April meeting, officials anticipated inflation of between 1 percent and 1.6 percent in 2010, up from 0.6 percent to 0.9 percent this year. Their long- run forecast is for price increases of 1.7 percent to 2 percent.

Investor expectations for inflation have increased this year, as measured by the gap between yields on 10-year U.S. government notes and 10-year Treasury Inflation-Protected Securities. The spread widened to 1.52 percentage point at the end of last week from 0.09 percentage point in January.

Unemployment Projection

Unemployment is also surging: The jobless rate will exceed 10 percent early next year and average 9.8 percent for 2010, according to a Bloomberg News survey published last week. The rate was 7.6 percent in January.

Fed officials will begin to lift the benchmark interest rate in the third quarter of next year and take it to 1 percent in the final three months, the Bloomberg survey showed. The previous month’s survey estimated the Fed would hold the rate near zero until the fourth quarter of next year.

“The Fed does not want to trigger market concern about the beginning of policy tightening at this time, an objective I share,” said William Poole, former president of the St. Louis Fed. “That means that the Fed needs to be more explicit about how it will know, or what it will look for, to determine that the ‘‘appropriate’’ time has arrived. This explanation need not, and probably cannot, be very precise; however, there certainly can be some general guidance.”

Semiannual Testimony

Bernanke is scheduled to address the House Financial Services Committee on July 21. The chairman is required by law to testify twice a year on progress toward the Fed’s mandate to achieve stable prices and maximum employment.

“Chairman Bernanke’s semi-annual testimony would be a logical place to lay out these issues in a more detailed discussion,” said Maki at Barclays, who is based in New York. “The more credibility the Fed can cultivate with investors on the exit strategy, the freer it is to pursue stimulative policies in the near-term without leading to sharply higher inflation expectations.”

Bernanke will describe an economy that’s still reeling from the credit crisis that began in 2007 and intensified after Lehman Brothers Holdings Inc. filed for bankruptcy in September. The loss of 6.5 million jobs since the recession began has led the central bank keep pumping money after cutting the benchmark rate to zero.

Credit Expansion

The Fed has expanded credit through increased loans to banks to provide liquidity and rescues of financial companies such as American International Group Inc. It’s also begun market backstops such as the Commercial Paper Funding Facility, which holds $109.2 billion in short-term IOUs issued by corporations, and the Term Asset-Backed Securities Loan Facility, which has lent $24.9 billion to investors to buy securities tied to auto and other consumer and business loans.

The Fed has also pledged to buy $1.75 trillion in mortgage- backed securities, Treasury notes, and federal housing agency bonds. As of July 9, the Fed had bought $200.7 billion of Treasuries.

It may take years for the Fed to sell the securities back to investors, said Lou Crandall, chief U.S. economist at Wrightson ICAP LLC in Jersey City, New Jersey. In the medium term, the Fed would need to sterilize the purchases, or find a way to prevent the increased money supply from fueling inflation, he said.

‘Years’ Before Selling

“It will be years before they can start selling, if ever,” Crandall said. “Can they raise interest rates with an expanded balance sheet? The answer is yes. Can they do it in a tidy way? The answer is, we don’t know.”

U.S. central bankers have mentioned reverse repurchase agreements, interest on reserves, and possibly sales of short- term debt as ways to sterilize reserves in the banking system. There are problems with each tool. Under a reverse repurchase agreement, the Fed would sell bonds to Wall Street dealers with an agreement to buy them back at a later date.

Reverse repurchase agreements could require firms that deal directly with the Fed to hold billions of dollars in mortgage securities. “The dealer community and the investor community does not have the appetite to hold a trillion dollars more in mortgages than they are holding now,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut, one of 17 companies that deals directly with the Federal Reserve Bank of New York.

Additional Tool

Fed officials have also proposed selling their own bills to mop up cash. Congress hasn’t shown interest in the idea, which would require legislation. While the Treasury has a program of short-term bill sales to help sterilize excess reserves, it complicates the department’s regular borrowing to finance government spending.

“I am not worried at all that the Federal Reserve’s balance-sheet expansion will generate an inflation problem,” New York Fed President William Dudley said in a speech in Nashville on April 18. “The Federal Reserve has the ability to manage down the size of its balance sheet over time once financial conditions and the economy improve.”

That’s what RBS Securities’ Stanley calls the “trust us” approach. The lack of clarity may not ease inflation concerns, especially if the Fed has to increase its purchases of Treasury and mortgage-debt to provide further stimulus to the economy.

Job losses will continue even after the economy begins growing in the second half of this year, the monthly Bloomberg monthly showed.

Tellabs Inc., the Naperville, Illinois-based maker of networking equipment, said last week it’s scrapping about 150 jobs. Dow Chemical Co., the largest U.S. chemical maker, said July 1 it will permanently close three Louisiana factories and take a second-quarter charge of about $700 million. Midland, Michigan-based Dow’s charge includes the elimination of 2,500 jobs, following the acquisition of Rohm & Haas Co.

The Reuters/University of Michigan preliminary index of consumer sentiment fell by more than forecast in July to 64.6 from 70.8 in the previous month. Consumers in the survey said they are less likely to buy cars or appliances, suggesting the recovery may be weaker than anticipated.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net

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DPJ’s Nakagawa Says Japan Should Diversify Reserves

By Keiko Ujikane and Kyoko Shimodoi

July 13 (Bloomberg) -- Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”

Japanese investors are the biggest foreign holders of Treasuries after China with $685.9 billion of the securities in April, and Finance Minister Kaoru Yosano said last month his trust in the bonds is “unshakable.” The DPJ yesterday beat the ruling Liberal Democratic Party in elections for Tokyo’s city assembly, boosting its prospects ahead of national polls that Prime Minister Taro Aso today called for Aug. 30.

“The current reality of Japan’s foreign-currency reserves is that their heavy weighting toward dollar assets means any fall in the dollar’s value leads to valuation losses,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The DPJ is opposed to a foreign-currency reserve policy that is so wholly skewed to the dollar.”

The yen traded at 92.39 per dollar at 2:11 p.m. in Tokyo from 92.54 late July 10. It has gained 4.3 percent this month.

‘Unshakable’ Trust

Nakagawa said Japan should consider purchases of new bonds issued by the International Monetary Fund that will pay an interest rate pegged to the fund’s basket of currencies -- the dollar, euro, yen and pound -- and known as Special Drawing Rights. The dollar is the principal component of SDRs. The IMF said this month it would issue bonds to its 186 members for the first time.

“We should start considering that as an option,” Nakagawa said. “I am not saying we should do it right away. If everyone starts doing it all of sudden, it may sway the dollar.” He didn’t say Japan should sell any of its dollar holdings.

DPJ lawmaker Tsutomu Okubo, a director of the upper house’s financial committee, said there’s no consensus in the party on currency policy. Enhancing trust in the dollar and Treasuries is beneficial for Japan and the country shouldn’t change its currency reserve allocations for the time being, he said in an interview today.

China’s Reserves

China, India, Brazil, Mexico and South Africa last week challenged the U.S. dollar as the primary denomination of world reserves. In China, whose foreign-exchange reserves probably topped $2 trillion for the first time in the three months to June 30, Premier Wen Jiabao this year said he was concerned that his nation’s dollar assets may decline as the U.S. sells record amounts of debt to fund stimulus spending.

Japan holds $1.02 trillion in foreign reserves, also the world’s largest after China’s. Losses on the holdings stood at about 21 trillion yen ($227 billion) at the end of May, according to the Finance Ministry’s estimate.

Shifting reserves away from dollars “may be difficult for Japan” because it would weaken the U.S. currency and reduce the value of the country’s remaining dollar holdings, said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo.

“If Japan and China do that, the impact will be huge,” said Yamamoto, a former Bank of Japan currency trader.

Samurai Bonds

Nakagawa, 59, said Japan’s government should ask the U.S. to sell debt denominated in yen, so-called samurai bonds, as a way to diversify reserves and promote the globalization of the yen. Japan should also aim to strengthen the Chiang Mai Initiative, an Asia-wide foreign-reserve pool, and seek the creation of an Asian Monetary Fund, he said.

Nakagawa said intervening in the currency market to smooth abrupt and volatile moves is an option, though Japan shouldn’t try to push the yen up or down to achieve a prescribed level.

“If the yen were to appreciate or depreciate very steeply and the market becomes volatile, direct government intervention might be understandable,” Nakagawa said. “Intervention shouldn’t be used to strengthen or weaken it to a certain level.”

The yen gained against all 16 of the world’s major currencies in the past year. A stronger yen hurts Japanese exporters by making their products less competitive. It also lowers import costs for companies and consumers. Japan last stepped into the foreign-exchange market to sell yen in 2004.

Parliament will be dissolved July 21 to prepare for the lower-house election, Jun Matsumoto, deputy government spokesman, told reporters in Tokyo today.

A total of 23 percent of voters said they would choose the LDP, less than the 41 percent who favor the DPJ, according to a Yomiuri newspaper poll published July 10. The LDP has governed for all but 10 months since 1955. The DPJ already controls the upper house.

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

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Soybean, Corn Futures Drop in Chicago as Crude Oil Declines

By Luzi Ann Javier

July 13 (Bloomberg) -- Soybean and corn futures fell in Chicago as a drop in crude oil reduced the appeal of alternative fuels made from crops and favorable weather boosted supply prospects in the U.S.

Crude oil fell as much as 1.6 percent to $58.92 a barrel in New York on concern the global recession will sap demand for fuel and increase stockpiles. The Midwest, the largest corn and soybean growing region in the U.S., will have temperatures warming to above-normal levels, Meteorlogix LLC said in its 10- day weather outlook released July 11.

The decline in crude oil was having a “spill-over effect” on the grain and oilseed market, Toby Hassall, a research analyst at Commodity Warrants Australia Pty in Sydney said by phone today. “There’s nothing really too threatening in the longer-term forecast,” he said, referring to the weather outlook for the crop-growing areas.

Soybeans for November delivery, after the U.S. harvest, fell as much as 0.8 percent to $9.095 a bushel in after-hours electronic trading on the Chicago Board of Trade, and traded at $9.0975 a bushel at 2:21 p.m. Singapore time. The contract earlier gained as much as 1.3 percent. Soybean oil, crushed from the oilseed, can be processed into biodiesel.

Concerns that global soybean supplies may decline in the next marketing year have eased after the U.S. Department of Agriculture raised its harvest estimate for the world’s biggest grower and exporter of the oilseed, Hassall said.

Soybean Production

U.S. production was forecast at 3.26 billion bushels in the July 10 report, up 2 percent from the June estimate, as the planted area expanded.

Corn for December delivery fell as much as 1.9 percent to $3.315 a bushel in Chicago before trading at $3.3225. The most- active contract earlier rose as much as 0.5 percent. Corn can be processed into ethanol, used to stretch gasoline supplies.

Wheat for September delivery advanced as much as 1.6 percent to $5.27 a bushel in Chicago before trading at $5.2125 a bushel.

Wheat futures gained as investors bought contracts after prices plunged last week and the U.S. lowered its estimate for 2010 inventories held by the largest exporters.

Stockpiles held by shippers including the U.S. and Canada will total 26.97 million metric tons, the Department of Agriculture estimated, down 12 percent from its June estimate. Hedge-fund managers and other large speculators in the week ended July 7 increased bets prices will fall, boosting their net short positions by 148 percent from a week earlier, the U.S. Commodity Futures Trading Commission said July 10.

“We’re seeing some short covering because the speculators were holding quite a large short position,” Hassall said. Wheat prices may have touched a bottom in the past few weeks, he said.

Wheat rallied 5.1 percent since trading at $4.9575 a bushel on June 30, the lowest since Dec. 12.

To contact the reporter on this story: Luzi Ann Javier in Singapore at javier@bloomberg.net

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Palm Oil Falls on Concern Higher Output to Expand Stockpiles

By Claire Leow

July 13 (Bloomberg) -- Palm oil futures traded in Malaysia dropped, reversing earlier gains, on concern that higher second- half production will swell stockpiles and depress prices.

The price of the world’s most traded vegetable oil may remain below 2,000 ringgit ($558) a metric ton as output climbs faster than demand, according to Maybank Investment Bank Bhd. and OSK Research Sdn.

Palm oil for September delivery on the Malaysia Derivatives Exchange slid as much as 2.3 percent to 1,964 ringgit a ton and last traded at 1,990 ringgit a ton at 5:14 p.m. in Kuala Lumpur. The contract has slumped 19 percent in the past month. Stockpiles in Malaysia, the world’s second-largest producer, grew to 1.41 million tons in June, up 2.5 percent from May, the country’s Palm Oil Board said on July 10. Output climbed 3.6 percent.

“The market is presently worried about rising production and export prospects in the second half,” Ong Chee Ting, an analyst at Maybank, wrote in a report today. “We anticipate China’s and India’s pace of import growth to slow in the second half as these countries have stockpiled sufficiently in recent months.”

Prices may average around 1,800 ringgit a ton in the second half, said Ong. Palm oil averaged 2,192 ringgit in the first six months of this year.

The edible oil also tracked a broader decline in other commodities. Soybeans, crushed to make soybean oil, a direct substitute for palm oil, slid 0.9 percent to $9.09 a bushel on the Chicago Board of Trade. Crude oil for August delivery in New York dropped 0.9 percent to $59.35 a barrel at 4:38 p.m. Singapore time.

Palm oil and other vegetable oils can be used for alternative energy and often track crude oil prices.

To contact the reporters on this story: Claire Leow in Singapore at cleow@bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

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Singapore Probably Exited Recession on Output Gains

By Shamim Adam

July 13 (Bloomberg) -- Singapore’s economy probably expanded for the first time in five quarters as a rebound in manufacturing helped the Southeast Asian nation emerge from its worst recession since independence in 1965.

Gross domestic product rose an annualized 13.4 percent last quarter from the previous three months, after shrinking 14.6 percent between January and March, according to the median estimate of 12 economists surveyed by Bloomberg News. The trade ministry will release the data at 8 a.m. tomorrow.

Singapore and other economies in the region are forecast to report better second-quarter figures as about $2 trillion in stimulus worldwide helps stabilize overseas sales for companies including Japan’s Nissan Motor Co. and South Korea’s Samsung Electronics Co. The International Monetary Fund last week increased its forecast for emerging Asia’s growth in 2009.

“Much healthier manufacturing-sector numbers in the second quarter are the key drivers” of Singapore’s performance, said Chow Penn Nee, an economist at United Overseas Bank Ltd. in Singapore. We “will also likely see financial services boosting the services sector, with the rally in the stock markets in April, May and June.”

Singapore’s industrial output climbed in the first two months last quarter, while the decline in the island’s exports narrowed in May amid gains in drug shipments. Manufacturing, which slid 26.1 percent in the three months ended March, accounts for about a quarter of the economy.

India, South Korea

Other Asian nations have also reported an improvement in manufacturing. In May, India’s industrial production increased at the fastest pace in eight months, while Malaysia’s posted the smallest decline in six months. South Korea’s output rose more than estimated while China’s accelerated the same month.

Singapore’s $161 billion economy declined 5.4 percent in the three months ended June from a year earlier, compared with a 10.1 percent drop in the first quarter, according to the Bloomberg survey.

The Straits Times Index rose 37.2 percent last quarter, the biggest gain since at least 1999. The volume of stocks traded increased more than 50 percent in that period. The index was 0.3 percent lower as of 9:40 a.m. local time. The Singapore dollar was little changed at S$1.4615 against the U.S. currency.

The government forecasts the economy will shrink between 6 percent and 9 percent this year, the deepest contraction since its independence 44 years ago. Economists at Citigroup Inc., Goldman Sachs and DBS Group Holdings Ltd. are among those that have increased their Singapore economic estimates in recent weeks as manufacturing and export figures showed improvement.

Signs of recovery were also evident in other parts of the economy, Citigroup’s Kit Wei Zheng said.

“Re-stocking driven rebounds in technology, continued growth in construction spending, financial services and a revival in the private housing market contributed to the recovery in the broader economy,” he said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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Sugar Must Drop for Indian Imports to Become Viable

By Thomas Kutty Abraham

July 13 (Bloomberg) -- Global sugar prices must decline at least 13 percent for mills in India’s biggest producing state to make money on imports of the commodity, a producers’ group said.

Raw sugar traded in New York must drop to 15 cents a pound or domestic prices should rise 14 percent to 25,000 rupees ($506) a metric ton for imports to be viable, said Prakash Naiknavare, managing director of the Maharashtra State Cooperative Sugar Factories Federation Ltd.

A slowdown in purchases by India may cool a rally that’s made raw sugar the second best-performing commodity in the UBS Bloomberg CMCI Index in the past 12 months. Prices have gained 46 percent this year on forecasts for a global deficit, driven mainly by the drop in India’s production.

“There’s no point in importing at the current prices as it will be a loss-making proposition,” Naiknavare said in a phone interview in Mumbai. “I don’t see any reason for global prices to be where they are. Brazil and Thailand have bumper output.”

Raw-sugar for October delivery fell as much as 0.7 percent to 17.15 cents a pound in after-hours trading in New York, and white sugar for October delivery declined as much as 0.5 percent to $463.20 a ton in London.

India, the word’s biggest consumer, became a net buyer of sugar for the first time since the 2005-06 season as production is forecast to slump 44 percent to 14.7 million tons in the year ending Sept. 30. Output declined for two consecutive years from a peak in 2006-07 after growers moved to grains and oilseeds.

In comparison, Thailand, the world’s second-largest sugar supplier, expects to raise output as higher prices and adequate rain increase plantings. Production in Brazil’s Center South, the world’s biggest-producing region, has jumped 43 percent to 6.75 million tons this year through June 16.

Shortfall

Mills in Maharashtra require at least 1 million tons of raw sugar in the year starting Oct. 1 to fill a production gap, said Naiknavare, whose group of 190 mills account for a third of the country’s total output.

The government may extend a window for duty-free imports of raw sugar beyond Aug. 1, a government official said on July 10, asking not to be identified as the information is not public. The measure aimed at bolstering supplies will be considered by the Cabinet in 15 days, he said.

Domestic prices may climb starting next month with demand rising ahead of major Hindu festivals, Naiknavare said.

Prices at Vashi, India’s biggest wholesale market for the commodity, fell 0.4 percent to 2,400.20 rupees per 100 kilograms today. Before today’s decline, prices have gained 57 percent in the past year, reaching a three-year high in April.

India’s output may total 17-17.5 million tons next season and any deficit in the monsoon rains may pare harvests further, Naiknavare said.

Rains were 50 percent below normal in the northwest India from June 1 to July 8, the India Meteorological Department said last week. The region includes Uttar Pradesh, the second-biggest grower of sugar cane.

To contact the reporter on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net.

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Gold Falls in London as Lower Oil, Stronger Dollar Cut Demand

By Nicholas Larkin

July 13 (Bloomberg) -- Gold fell in London as lower oil prices and a stronger dollar reduced the metal’s appeal as a hedge against rising consumer prices and as an alternative investment. Other precious metals dropped.

Crude oil, used by some investors as an indicator of the outlook for inflation, declined for a second day after last week dropping the most since January. The U.S. Dollar Index, a six- currency measure of the greenback’s value, today added as much as 0.3 percent. Gold tends to move inversely to the currency.

The dollar’s “rise and weak oil prices have heightened concerns about an economic recovery and eroded bullion’s appeal as an inflation hedge,” Pradeep Unni, a Richcomm Global Services analyst in Dubai, wrote today in a report.

Bullion for immediate delivery fell $3.35, or 0.4 percent, to $909.70 an ounce by 10:49 a.m. in London. The metal slid 2.1 percent last week, the biggest drop in five weeks. August gold futures lost 0.4 percent to $909.30 an ounce on the New York Mercantile Exchange’s Comex division.

Spot prices have fallen in five of the past six weeks. Twenty-one of 32 traders, investors and analysts surveyed by Bloomberg News, or 66 percent, said bullion would decline this week as the dollar strengthens. Five people forecast higher prices and six were neutral.

Coin Demand

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was unchanged at 1,109.81 metric tons on July 10, the company’s Web site showed. Gold held in ETF Securities Ltd.’s exchange-traded commodities fell 0.6 percent to 7.598 million ounces on that date, its Web site showed.

There is “little interest from the jewelry industry, modest coin and investment-bar demand, and we have seen no substantial inflows into ETFs,” John Reade, UBS AG’s head metals strategist in London, said today in a note. “A test of $900 an ounce in gold is on the cards in the near future.”

Silver for immediate delivery in London fell for a sixth day, losing as much as 1.7 percent to $12.4738 an ounce, the lowest since May 4. It last traded at $12.525, the longest streak of declines since March. Platinum dropped 1.6 percent to $1,093.25 an ounce, and palladium declined 1 percent to $233 an ounce.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

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Asian Stocks Slump on Growth, Political Concerns; Samsung Falls

By Jonathan Burgos

July 13 (Bloomberg) -- Asian stocks fell, sending the MSCI Asia Pacific Index to an eight-week low, on speculation a U.S. economic recovery will be delayed and as Japan’s Prime Minister called national elections.

Samsung Electronics Co., Asia’s biggest maker of computer- memory chips and flat screens, lost 3.9 percent in Seoul as a U.S. consumer sentiment index fell more than economists estimated. Cathay Financial Holding Co. sank 6.7 percent in Taipei on concern a trade agreement with China will take longer than expected to negotiate. Japan’s Nikkei 225 Stock Average sank 2.6 percent as Prime Minister Taro Aso, whose party is trailing in polls, called an election for Aug. 30.

The MSCI Asia Pacific Index slumped 2.4 percent to 98.20 as of 7:37 p.m. in Tokyo, the lowest level since May 18. The gauge has lost 6.7 percent from an eight-month high on June 12 as optimism for a global economic recovery waned. The index had risen as much as 49 percent from a five-year low on March 9.

“The market did run ahead of itself,” said Diane Lin, a Sydney-based fund manager at Pengana Capital, which oversees about $1.9 billion. “The data we’ve been seeing in the U.S. have not been as strong as the market had been hoping for. We’re still very cautious.”

Taiwan’s Taiex Index tumbled 3.5 percent, the most since April 17. South Korea’s Kospi Index sank 3.5 percent. Hong Kong’s Hang Seng Index lost 2.6 percent. Australia’s S&P/ASX 200 Index declined 1.5 percent, led by Rio Tinto Group, the world’s third-largest mining company, which fell 3.6 percent as commodity prices dropped.

Merger Talks?

Among stocks that advanced today, Daiichi Sankyo Co. rose 2.4 percent after its anti-clotting drug was approved for sale in the U.S. Kirin Holdings Co., Japan’s biggest beverage maker, surged 7.8 percent after the Nikkei newspaper said the company may merge with Suntory Holdings Ltd.

Futures on the U.S. Standard & Poor’s 500 Index fell 0.4 percent, while Treasuries rose as demand for the relative safety of government debt increased. The S&P 500 dropped 0.4 percent on July 10 after the Reuters/University of Michigan preliminary index of consumer sentiment slid to 64.6 in July from the prior month. Economists had estimated the gauge would fall to 70.

“It’s going to be a while before we’re confident we’re going to have a strong, sustainable recovery in place,” U.S. Treasury Secretary Timothy Geithner said in an interview with “CNN’s Fareed Zakaria GPS” show.

Samsung Electronics dropped 3.9 percent to 620,000 won. Li & Fung Ltd., a Hong Kong trading company that sells goods to Wal-Mart Stores Inc., lost 2.2 percent to HK$19.66. Taiwan Semiconductor Manufacturing Corp., the world’s largest maker of customized chips, fell 2 percent to NT$55.

Economic Figures

Disappointing economic data, including worse-than-expected U.S. unemployment figures on July 2, has fanned investor concern that stock gains since March had outpaced prospects for an economic recovery. China’s exports slid 21.4 percent in June from a year earlier, the customs bureau said on July 10 after the market closed, following a record 26.4 percent drop in May.

Japan’s government said on July 8 that machinery orders declined 3 percent in May. Economists had estimated a 2 percent increase. Growth in Japanese bank lending slowed to 2.5 percent last month from a year earlier, compared with 3.3 percent growth in May, the Bank of Japan said on the same day.

“Investor sentiment is drifting because they can’t determine whether a recovery will be fast or slow,” said Yoshinori Nagano, a senior strategist at Tokyo-based Daiwa Asset Management Co., which oversees the equivalent of $90 billion.

Cathay Financial, Taiwan’s largest publicly traded financial services company, declined 6.7 percent to NT$47.70. Fubon Financial Holding Co., the island’s second-largest listed financial services company, slumped 7 percent to NT$30.70.

China, Taiwan Accord

The Taiex Index has gained 44 percent in the past six months on optimism closer ties with China will boost Taiwan’s economic growth.

Negotiations for an economic cooperation agreement with China should begin this year with the signing of a deal next year, Lai Shin-yuan, chairwoman of the Mainland Affairs Council, said in a statement on the council’s Web site yesterday.

“Investors are disappointed by the news; they were expecting the agreement to be signed this year,” Monika Yang, who helps oversee $10 billion at Hamon Asset Management Ltd. in Hong Kong, said by phone. “Now, any good news in the market is overshadowed by this.”

Rio Tinto declined 3.6 percent to A$46.63. Jiangxi Copper Co., China’s biggest producer of the metal, dipped 2 percent to HK$11.98. Cnooc Ltd., the nation’s largest offshore oil producer, lost 2.8 percent to HK$8.81 in Hong Kong.

Drug Approval

A gauge of six metals in London dropped 1.3 percent on July 10, posting a weekly loss of 3.9 percent, the most since the week ended April 24. Crude oil fell 0.9 percent in after-hours trading, extending July 10’s 0.9 percent drop.

Daiichi Sankyo gained 2.4 percent to 1,702 yen. Prasugrel, a drug developed by the company and its partner Eli Lilly & Co., was approved by the Food and Drug Administration on July 10 for sale in the U.S.

Kirin advanced 7.8 percent to 1,392 yen. The company and privately held Suntory are in merger talks, the Nikkei newspaper reported today. Spokespeople for both companies declined to confirm or deny whether the companies were in talks.

Japanese stocks were dragged lower after Prime Minister Aso called the election, with polls indicating his ruling Liberal Democratic Party may lose power for only the second time since 1955. The LDP has lost five successive local elections, including yesterday’s vote for the Tokyo assembly, in which the opposition Democratic Party of Japan won the most seats.

Forty-two percent of people prefer DPJ leader Yukio Hatoyama as prime minister compared with 22 percent for Aso, the Asahi newspaper said in a survey published July 6.

“Investors have no idea on what’s going to happen once the DPJ replaces the LDP and that’s negative for the stock market,” said Hideo Arimura, who oversees the equivalent of $2.2 billion at Mizuho Asset Management Co. “Nobody knows either if a DPJ- led government is better than the LDP for the economy.”

To contact the reporters for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

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Infineon, Porsche, Siemens, Volkswagen: German Equity Preview

By Claudia Rach and Daniela Silberstein

July 13 (Bloomberg) -- The following is a list of companies whose shares may have unusual price changes in Germany. Stock symbols are in parentheses, and share prices are from the previous close.

The DAX declined 1.2 percent to 4.576.31 on July 10.

BASF SE (BAS GY): The world’s biggest chemical company was added to Bank of America Corp.’s “Europe 1’ list. The shares retreated 0.3 percent to 27.66 euros.

Bayer AG (BAY GY): Germany’s largest drugmaker said its experimental florbetaben product showed promise in predicting Alzheimer’s disease in tests. The stock declined 2.1 percent to 35.66 euros.

Deutsche Telekom (DTE GY): Vodafone Group Plc has set Europe’s largest phone company a mid-July deadline to agree on cooperation on the high-speed VDSL network in Germany, Focus magazine said, citing no one. Telekom shares fell 1.2 percent to 7.98 euros.

Escada AG (ESC GY): The German maker of luxury clothing for women is in talks with bankruptcy experts, a step that prepares for a possible insolvency if investors don’t back a refinancing plan, Welt am Sonntag said, citing Chief Executive Officer Bruno Saelzer. The shares advanced 7 percent to 2.70 euros.

Infineon Technologies AG (IFX GY): Europe’s second-largest chipmaker may sell its wireless communication and smartcard units, Martin Kimmich, an IG Metall labor union member, told Euro am Sonntag. The shares rose 5.4 percent to 2.72 euros.

K+S AG (SDF GY): Europe’s largest producer of potash used in fertilizers was cut to “sell” from “neutral” at UBS AG. The stock dropped 4.9 percent to 37.89 euros.

Metro AG (MEO GY): Metro plans to add Permira Advisers LLP’s Olaf Koch to its management board to allow Chief Financial Officer Thomas Unger to concentrate on restructuring the German retailer, Handelsblatt reported. Metro plans to make “decisions on personnel” at its next supervisory board meeting, spokesman Martin Bommersheim told Bloomberg News in a telephone interview today. The shares fell 48 cents, or 1.4 percent, to 34.52 euros.

Porsche SE (PAH3 GY): Qatar offered about 7 billion euros ($9.8 billion) for a stake in the carmaker and stock options in Volkswagen AG, Spiegel said, without citing anyone. Separately, the Berliner Morgenpost said the Persian Gulf State would invest in a joint company of VW and Porsche only after all conflicts between the two carmakers were resolved. The shares gained 0.4 percent to 42.34 euros.

Q-Cells SE (QCE GY): Charles Anton Milner, chief executive officer of Germany’s largest solar company, expects market conditions to improve in the second half of the year after prices slumped in the solar energy industry, WirtschaftsWoche magazine reported. The shares fell 2.5 percent to 12.68 euros.

Siemens AG (SIE GY): Europe’s largest engineering company had unexpectedly weaker orders in its transmission unit in June and may extend shorter working hours, Euro am Sonntag said, citing works council leader Lothar Adler. Separately, Siemens aims to become the market leader for solar thermal energy, Spiegel said, citing Chief Executive Officer Peter Loescher. Siemens shares fell 1.7 percent to 46.43 euros.

ThyssenKrupp AG (TKA GY): Germany’s biggest steelmaker expects its pretax loss to exceed 1.5 billion euros for the year ending Sept. 30, Financial Times Deutschland said, citing internal documents. The stock slipped 1.1 percent to 16.66 euros.

Volkswagen AG (VOW GY): Europe’s biggest carmaker boosted first-half China sales 23 percent to 652,222 vehicles.

Separately, VW used loopholes in the German tax system to lower its tax payments. It used the money save to raise its offer for a 49.9 percent state in Porsche by about 1 billion euros, Focus said, without citing anyone. The Spiegel magazine reported VW raised its offer for the Porsche stake clearly to more than 4 billion euros. The shares fell 1.9 percent to 213.20 euros.

To contact the reporters on this story: Claudia Rach in Berlin at crach1@bloomberg.net; Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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U.K. Stocks Fluctuate; Rio Tinto Falls, Friends Provident Jumps

By Alexis Xydias

July 13 (Bloomberg) -- The U.K.’s benchmark FTSE 100 Index swung between gains and losses as a sell-off in mining companies was countered by a rally in Friends Provident Plc.

Rio Tinto Group and Vedanta Resources Plc retreated after Treasury Secretary Timothy Geithner said the U.S. economy still faces “enormous challenges.” Xstrata Plc declined following a report the mining company may offer as much as 5 billion pounds ($8.1 billion) more to convince Anglo American Plc investors of its merger bid. Friends Provident jumped 5.5 percent after rejecting a takeover bid from Resolution Ltd.

The FTSE 100 lost 4.09, or 0.1 percent, to 4,123.08 as of 11:00 a.m. in London, after gaining as much as 0.3 percent earlier. The FTSE All-Share Index slipped 0.1 percent and Ireland’s ISEQ Index decreased 0.3 percent.

The FTSE 100 has slumped 8.5 percent since June 1 amid speculation stock prices have outpaced the outlook for economic growth as a three-month, 28 percent rally pushed valuations to the highest in five years.

“The market is taking a breather since sentiment was running ahead of fundamentals,” said Boris Boehm, board member at Hamburg-based Aramea Asset Management, which oversees about 800 million euros ($1.23 billion). “This is now a normal recession and not the doom scenario of last year, so the market should get back on its recovery.”

Rio Tinto, the world’s second-largest iron-ore producer, lost 2.7 percent to 1,850.5 pence. Vedanta Resources, the biggest copper producer in India, dropped 2.5 percent to 1,300 pence.

Aluminum, nickel and zinc were among commodities that fell in the London Metals Exchange on concern the economy may take longer than expected to recover.

‘Going to be a While’

While the pace of decline in the U.S. economy has “slowed dramatically,” there are still “enormous challenges,” Geithner said. “It’s going to be a while before we’re confident we’re going to have a strong, sustainable recovery in place,” he said in an interview with CNN’s “Fareed Zakaria GPS” show.

Xstrata slipped 4.7 percent to 569 pence. The company may offer a cash payment to convince Anglo American shareholders to consider its merger proposal, the Observer said, citing unidentified people in the City of London. Xstrata spokeswoman Claire Divver declined to comment on the story. Anglo fell 1.7 percent to 1,627 pence.

Friends Provident soared 5.5 percent to 63.74 pence. The 177-year-old U.K. insurer rejected a 1.7 billion-pound takeover approach from Clive Cowdery’s Resolution, saying the bid was too low.

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

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