European Market Update

Daily Forex Fundamentals | Written by Trade The News | Aug 19 09 09:59 GMT |

China Shanghai Composite approaching bear market territory; BOE split vote on Asset Purchase Facility (APF )sends GBP lower and Gilt futures higher ECONOMIC DATA (GE) German Jul Producer Prices M/M: -1.5% v -0.2%e; Y/Y: -7.8% v -6.5%e; weakest annual reading since 1949 (JP) Japan Jul Final Machine Tool Orders Y/Y: -72.3 v -72.2% prior (HU) Hungarian Jun Avg Gross Wages Y/Y: 1.1% v 2.0%e (EU) Euro-Zone Current Account: -€0.3B v -€13.0B prior; Current Account Seasonal Adj: -€5.3B v -€1.2B prior (UK) Bank of England Minutes: MPC voted 6 to 3 to raise the Asset Purchase facility (APF) by £50B with the dissenters seeking a £75B increase (EU) Jun Construction Output SA M/M: -1.1% v -2.0% prior, Y/Y: -8.8% v -7.6% prior (SP) Spain Jun Trade Balance: -€3.2B v -€3.3B prior (UK) U.K. CBI August Industrial Trends Total Orders: v -59 prior SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM In equities news overnight: European markets again took their equity direction from volatile Asian markets. Losses in Asian bourses, specifically, later session declines in Mainland China drove further risk aversion tendencies that carried into the European morning. With the Shanghai exchange closing over 4% on the session, and nearly 20% from its early August peak of 3,477(and 2009 highs), European equities opened to the downside and quickly fell below the -1% mark. In another light earnings morning, figures seen out of Eurasian Natural Resources [ENRC.UK], Venture Petroleum [VPC.UK] and SBM Offshore [SBMO.NV] equities took their general trend from the technical and boarder risk aversion market tendencies. Comments from the BoE minutes at 4:30EST showed that the MPC was in unison on expanding its APF, the only dis-union being in the size expansion, further concerns that while the worst of the recession 'may' have passed, its effects are still being felt. Economic data releases have been light through the European morning and in this environment overall trading patterns and volumes have been thin. Turnover on the FTSE, CAC and DAX is seen down between 20-40% from its averages. In individual equities: Eurasian Natural Resources [ENRC.UK] Reports H1 Net $562M v $449Me, Rev $1.7B v $1.6Be. || Venture Production [VPC.UK] Reports H1 Pretax £105M v £103Me, Rev £275M v £262Me. H1 Production volumes up 16% to 52,988 boepd (2008 - 45,534 boepd). || National Grid [NG.UK] Announces results of scrip dividend issuance of new shares (approx 9% of shares outstanding). Confirms the issue and allotment of 24,691,249 ordinary shares on 19 August 2009 in relation to the operation of the Scrip Dividend Scheme for the 2008/09 final dividend, payable on 19 August 2009. || SBM Offshore [SBMO.NV] Reports H1 Net $95.5M v $98Me, Rev $1.4B v $1.4Be. Order Backlog $8.2B v $9.5By/y. Outlook: Management re-iterates that it expects net profit to be in the range of the 2008 level. Turnover is expected to be around US$ 2.9 billion. || Sanofi Aventis [SAN.FR] Reportedly US Patent Office has ordered re-examination of Plavix patent. Plavix is an anti-clotting drug from BMY and SNY. Multiple generic makers are working on their own versions of the drug. || Continental [CON.GE] Shaeffler states that a consortium of banks has granted it €12B in mid-term financing. Plan to change format of group structure to more capital market oriented group. Facility to have two tranches of 4.5 and 6 year maturities. Finance plan allows for potential merger of group with Continental. Fitch lowers long term issuer default rating; senior rating cut to B+ from BB. || Finmeccanica [FNC.IT] Has agreed to buy 88% stake in Pzl-Swidnik for $112M. Purchase to support Augusta helicopter unit. || Speakers: BOE minutes showed that the MPC voted 6 to 3 to raise the Asset Purchase facility (APF) by £50B with the dissenters (Gov King, Besley and Miles) seeking a £75B. The minority view was that not enough stimulus spending could have the CPI remain below 2% target. The minority also viewed that acting too cautiously towards monetary stimulus posed a larger danger than providing too much stimulus. The minority felt that if QE policy was too expansive, it could be reversed via asset sales and interest rate hikes. The majority view noted that a moderate QE increase of £50B was only needed as the immediate danger to downside GDP risk had diminished and that concerns that too cash might cause unwarranted increase in some asset prices. Overall, the MPC noted the promising signs that QE program was having but underlying M4 growth was surprisingly weak || ECB's Weber issued some cautious comments as he was not convinced that recovery was sustainable as the German economy was not yet able to stand on its own feet. Weber noted that the German economy would not reach 2008 GDP levels again until 2013. The current economic recovery was due to monetary policy and other government measures. Weber noted that the job market remained a negative factor and was too early to withdraw stimulus measures. Lastly the German would struggle for years to come as a result of the financial crisis ||Lativan Central Bank Head: Will continue to defend currency peg In Currencies: Ahead of the European morning the focus remained on the Shanghai index. The Chinese equity market approached 'bear market territory as its has decline by almost 20% decline since its Aug 4th high of 3,477, thus raising the risk aversion theme. The Shanghai Composite fell 4.3% in the session to close at 2,785. The USD and JPY again benefited from the rise in risk aversion. EUR/USD probing back below the 1.41 level but holding above the key hourly pivot point of 1.4050. USD/JPY approached the lower end of the 94 handle. The GBP was softer against its major pairs. Initially weakness was attributed to a Telegraph article that noted comments from UK opposition leader that the British Gov't could default on it debts (see 'in the paper section' below). GBP/USD declined from its opening levels in Asia of 1.6586 to test 1.6440 prior to the release of the BOE minutes from its August 6th policy meeting. The GBP exhibited another spat of weakness as the BoE Minutes revealed that three MPC members sought to raise the asset purchase target by £75B. The split vote on APF weakened GBP further (and supported Gilts futures). The GBP/USD dipped below the 1.6400 handle to test 1.6373 before consolidating its losses, while EUR/GBP firmed above the 0.86 level. The CAD and AUD currencies were softer as both energy and metals followed the Chinese markets. Oct NYMEX crude was off around 40 cents at $70.70/barrel. Natural Gas futures was hovering near $3/contract, which it has not traded below in the rolling front month contract since Feb 2002. USD/CAD continues to test the 1.11 neigborhood while AUD/USD dipped back below the 0.82 handle in the session. In Fixed Income: A confluence of factors has lead to a strong performance for Government Bond this morning in Europe. Gilt markets are particularly well bid following minutes from the BoE's August meeting, which somewhat surprisingly revealed that the MPC was split on its £50B expansion of quantitative easing. Markets had not excluded the possibility of a consensus vote however July's unexpected decision to stay put and the cautious tone of various BoE members in the lead up to August had led many to expect that any dissenters would be on the cautious side of the argument, But the BoE continues to confound and Gilt markets are better for it, with the short end in particular subject to good buying. The 2-year Gilt has moved back below 0.90%,the 10-year Gilt has moved below 3.60%, and UK 2s10s spread has pushed though +270bps . Bunds and Treasuries are benefiting from risk aversion stemming ultimately from continued weakness in Shanghai equities. The yield on the 2-year Note has fallen back below 1%, whilst the yield on the 10y note has plunged into its lowest levels after its initial offering last week at the 3.43% area. The yield on the 10y Bund is off by 3bps at 3.268% In Energy: Kuwait Oil Min stated that OPEC should hold current production levels at next energy meeting. Current crude prices were 'not bad' with a good margin in the $70-80/bbl rang. The official was optimistic regarding demand increase by the end of 2009 || According to the China Petroleum and Chemical Industry, China's domestic oil-product sales dropped "significantly" in July on weak demand . Also, in July commercial fuel stockpiles rose by a big margin. || Japan Aug 15 crude stocks at 15.5M kiloliters versus 15.1M prior. Gasoline at 1.9M kiloliters compared to 2.1M prior In the papers: Telegraph: UK Opposition leader David Cameron warned that spending could lead to Britain defaulting on its debt as current debt levels now posed unjustified economic risks. Cameron stated that the UK could "get to a level of government debt where, not that it becomes certain that people will cease to lend you the money, but you start running risks of them demanding higher premium, higher interest rates or run the risk of not being able to meet its obligations." The article noted that UK borrowing was predicted to be far higher in 2009 and 2010 than it was when Britain was forced to apply to the International Monetary Fund for a loan in 1976 NOTES China's Shanghai Composite has decline almost 20% from its Aug 4th high of 3,477 Pimco believes that USD to fall as it loses reserve status Telegraph: British Gov't could default on it debts - Opposition leader BOE splits on the Asset Purchase Facility (APF) between £50B and £75B increase ECB's Weber: Not convinced that economic recovery is sustainable Current sentiment seems concerned that global consumer demand not strong enough to replace government stimulus programs Looking Ahead Canada Inflation, US, DOE weekly energy inventories. 7:00 (US) MBA Mortgage Applications: No expectations v -3.5% prior 7:00 (CA) Canadian Jul Consumer Price Index M/M: -0.2%e v 0.3% prior, Y/Y: -0.8%e v -0.3% prior 7:00 (CA) Canadian Bank Canada CPI Core M/M 0.1%e v 0.0% prior, Y/Y: 1.9%e v 1.9% prior 8:00 (PD) Poland Jul Producer Prices M/M: -0.2%e v 0.6% prior, Y/Y: 3.8%e v 4.0% prior 8:00 (PD) Poland Jul Sold Industrial Output M/M: -1.40% e v 6.20% prior, Y/Y: -2.9%e v -4.3% prior 8:30 (CA) Canadian Leading Indicators M/M: 0.2%e v -0.1% prior Trade The News Staff Trade The News, Inc. Legal disclaimer and risk disclosure All information provided by Trade The News (a product of Trade The News, Inc. "referred to as TTN hereafter") is for informational purposes only. Information provided is not meant as investment advice nor is it a recommendation to Buy or Sell securities. Although information is taken from sources deemed reliable, no guarantees or assurances can be made to the accuracy of any information provided. 1. Information can be inaccurate and/or incomplete 2. Information can be mistakenly re-released or be delayed, 3. Information may be incorrect, misread, misinterpreted or misunderstood 4. Human error is a business risk you are willing to assume 5. Technology can crash or be interrupted without notice 6. Trading decisions are the responsibility of traders, not those providing additional information. Trade The News is not liable (financial and/or non-financial) for any losses that may arise from any information provided by TTN. Trading securities involves a high degree of risk, and financial losses can and do occur on a regular basis and are part of the risk of trading and investing.

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FX Markets Directionless

Daily Forex Fundamentals | Written by AC-Markets | Aug 19 09 09:40 GMT |

Market Brief Dollar weakened as risk appetite made its return to the markets after positive data from the UK and the European Union boosted the majors against the US Dollar. UK released its inflation report which showed that it remained flat for the month of July whereas a negative CPI data was expected while the yearly CPI data showed a reading of 1.8% but still below the Bank of England's inflation target of 2%. The Retail Price Index too showed a better than expected figures which shows that consumers are spending in the markets thereby boosting the economy and adding to recovery measures. The ZEW Survey which shows the economic confidence among consumers in the Euro Zone and Germany posted higher than expected reading of 54.9 and 56.1 respectively, the highest confidence data in 3 years. The pound moved up to a high of 1.6587 while the Euro moved up to 1.4154 after these economic releases on sentiments that recovery is returning in the European markets and consumers have started to start spending and shown confidence in the economy. Economic releases from the US showed that the Housing starts dropped in the month of July to 581,000 lower than the 599,000 expected figure while the construction permits for new houses too fell to 560,000 down 1.8%. also released were the Producer Price Index which showed that the wholesale prices dropped 0.9% while the PPI except for food and energy component dropped unexpectedly by 0.1% due to lower energy costs and high inventory of goods in warehouses and that inflation levels would not be a cause of concern for the FOMC. US stocks rose as better than expected earnings data were released for Home Depot and Target which also led to increase in oil prices. The Dow Jones Index rose 83 points to close at 9218 while the S&P 500 Index rose 10 points to close at 989 points. European stocks too rose for the day on the ZEW Confidence figures ending the day in the green. Today the important data to be seen would be the Producer Prices from Germany while UK would be releasing the Bank of England Minutes which could describe the additional 50 Billion Pound of stimulus added in the last rate decision meeting while giving further ideas on the economy and the rate decision in upcoming meetings. Also released would be the Leading indicators from the US. ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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Currency Pair Daily Forecasts

Daily Forex Technicals | Written by Finotec Group | Aug 19 09 09:16 GMT |

EUR/USD Daily Technical Reports EUR/USD-market strategy can be a sell from the level 1.4180$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. Also, MA oscillators indicate a bearish cross on the short MA line. USD/JPY Daily Technical Reports USD/JPY-market strategy can be a buy from the level 94.13 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. Also, MA oscillators indicate a bullish cross on the short MA line. GBP/USD Daily Technical Reports GBP/USD-market strategy can be a sell from the level 1.6525$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. Also, MA oscillators indicate a bearish cross on the short MA line. USD/CHF Daily Technical Reports USD/CHF-market strategy can be a buy from the level 1.0718 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. Also, MA oscillators indicate a bullish cross on the short MA line. Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | Aug 19 09 09:33 GMT |

Good morning from sunny Hamburg und welcome to our newest Daily FX Report. The Forex market keeps on moving very volatile und driven by some important economic data's. However, we wish you a successful trading day. Markets review Yesterday the National Statistic Office in London reported that U.K.'s inflation rate unexpectedly held at 1.8 percent this month, which giving the Bank of England less reason to keep the interest rates at a record low. In order of this, the U.K. gilts declined and the GBP/USD rose from 1.6348 at its opening to 1.6587 at its highest level. In the early Tokyo trading hours the JPY strengthened versus the USD and EUR as Japanese equities fell, prompting investors to reduce holdings of higher-yielding assets. The EUR/JPY weakened from 133.84 at its opening to 133.50. The German investor confidence jumped to its highest level in more than three years after a national government stimulus packages and rising exports pulled Europe's largest economy out of the recession. The index climbed to 56.1bps in August after 39.5bps in July. Yesterday the USD/CHF declined from 1.0780 at its opening to 1.0757 at its closing. The U.S. wholesale prices fell 0.9 percent, more than forecasted. The AUD/USD gained after the national Minister for Resources and Energy Martin Fergusen said that an accord between Exxon Mobil Corp. and PetroChina Co. to supplying China with Natural Gas from Australia was endowed with a record of 42bln USD Technical analysis GBP/CAD The currency pair traded since the beginning of July close to a bearish trendline until the bulls helped to cross the trendline this week. Now it seems that the GBP/CAD build above its new support at 1.8209 a basement. If this support will be strong enough it could boost the GBP/CAD near to its next resistance at 1.8340. The MA Oscillator may also support the bulls if the support will hold. EUR/AUD Having the EUR/AUD touched its highest level in July the bears entered the market and led the currency pair down near the 1.6800 level. From this multi-month low a short recovery phase crossed the lower Fibonacci fan and is now close the weekly pivot point. It remains to be seen, if the EUR/AUD could rose sustainable above the lower Fibonacci fan, supported by an increasing MA Oscillator. Pivot Points - Daily FX Support and Resistance Levels Daily Calendar & Key FX Events Varengold Bank IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT This document is issued and approved by Varengold WPH Bank AG. The document is only intended for market counterparties and intermediate customers who are expected to make their own investment decisions without undue reliance on the information set out within the document. It may not be reproduced or further distributed, in whole or in part, for any purpose. Due to international laws/regulations not all financial instruments/services may be available to all clients. You should have informed yourself about and observe any such restrictions when considering a potential investment decision. This electronic communication and its contents are intended for the recipient only and may contain confidential, non public and/or privileged information. If you have received this electronic communication in error, please advise the sender immediately, and delete it from your system (if permitted by law). Varengold does not warrant the accuracy, completeness or correctness of any information herein or the appropriateness of any transaction. Nothing herein shall be construed as a recommendation or solicitation to purchase or sell any financial product. This communication is for informational urposes only. Any market or other views expressed herein are those of the sender only as of the date indicated and not of Varengold. Varengold reserves the right to consider any order sent electronically as not received unless it is confirmed verbally or through other means.

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King Push for 200 Billion-Pound Purchases Defeated

By Brian Swint

Aug. 19 (Bloomberg) -- Bank of England Governor Mervyn King and two other policy makers were overruled in a push to expand the bank’s bond-purchase program to 200 billion pounds ($329 billion) as the majority favored a smaller amount.

The pound fell after the nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds, according to minutes of the Aug. 6 decision released today. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

“All members agreed that substantial further asset purchases were needed over the next three months,” the minutes said.

King, who has now been defeated three times as governor, said last week it’s “likely” that inflation will slow below 1 percent this year and won’t return to the goal until at least the end of 2012. Investors scaled back expectations for interest-rate increases next year after the comments.

“I’m stunned,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former Bank of England official. “This sends a clear message that the bank is willing to do whatever it takes, and that’s encouraging. It’s more likely they’ll make extra purchases than start tightening over the next year.”

Pound Decline

The pound dropped 0.4 percent to $1.64 after the Bank of England minutes. The yield on the 10-year benchmark U.K. government bond slid 5 basis point to 3.602 percent.

An argument for a larger expansion of the bond purchases was that “insufficient stimulatory monetary policy” would harm confidence in the recovery. The risks of “another large stimulus might be less than the possible costs of acting too cautiously,” and the policy could be reversed if found to be “overly expansive,” the minutes said.

The argument for a smaller extension included that “the most immediate downside risks to the economy seemed to have receded.” The effects of the purchases were “uncertain,” risked “unwarranted increases in some asset prices,” and an early unwinding of the program might “prompt a sharp rise in market interest rates that was unwarranted by the economic outlook,” the minutes said.

Policy makers also agreed to keep the benchmark rate at a record low of 0.5 percent.

Outvoted

King has repeatedly said he’s comfortable being outvoted on the Monetary Policy Committee. He was defeated at the June 2007 meeting in a bid to raise interest rates to counter “upside” inflation risks. He was also outvoted in August 2005, when the committee cut the rate by a quarter point to 4.5 percent, a move criticized by some economists as spurring a housing boom that collapsed two years ago.

“The committee is a group of nine people who form their own independent view,” King said a week ago. “I’m sure there will come a time when we will start to see split votes again, just as, in the past, when we’ve been accused of always having split votes, there was sometimes unanimity.”

Policy maker Andrew Sentance wrote in an article for the Sunday Times on Aug. 16 that he expects a return to economic growth in the second half. U.K. services expanded the most in 1 1/2 years and manufacturing grew for the first time in more than a year in July, surveys show.

“The more timely indicators of economic activity, including business surveys, indicated that output in the United Kingdom had probably stabilized in the middle of the year,” the minutes said. While that “indicated that the likelihood of the very worst near-term downside risks to activity had lessened, they shed little light on the key question of how durable the recovery would prove to be in the medium term.”

Inflation unexpectedly held at 1.8 percent in July, instead of slowing as all economists in a Bloomberg News survey had predicted. Policy makers said that without more purchases, “nominal demand would likely be insufficient to prevent inflation remaining below the 2 percent target, perhaps substantially, throughout the forecast period.”

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

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German July Producer Prices Drop Most in 60 Years

By Gabi Thesing and Christian Vits

Aug. 19 (Bloomberg) -- German producer prices fell at the fastest pace in 60 years last month as energy costs declined.

Prices dropped 7.8 percent from a year earlier after falling 4.6 percent in June, the Federal Statistics Office in Wiesbaden said today. That’s the biggest decline since the office started to calculate the series in 1949 and exceeded economists’ forecast for a 6.5 percent drop, according to the median of 21 estimates in a Bloomberg News survey.

The price of crude oil has dropped more than 50 percent from a record in July 2008, while weaker demand is also weighing on inflation. The European Central Bank, which has cut its benchmark interest rate to a record low of 1 percent, has downplayed the threat of deflation in the euro-region economy.

“Producers’ pricing power is declining and one could see the data as a first sign of deflation,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “However, deflation is only dangerous if it lasts and I expect producer prices to return to positive territory by year-end.”

The euro extended its decline against the dollar after the report and was down 0.3 percent at $1.4094 as of 7:42 a.m. in London.

Energy Prices

The price of oil was at $68.91 a barrel today, having reached a record $147.27 in July 2008. Energy prices dropped 16.5 percent in July from a year earlier, according to today’s report. Petroleum prices fell 28.8 percent and heating oil was 49.8 percent cheaper. Prices for electricity declined 10.8 percent.

From the previous month, overall producer prices decreased 1.5 percent in July. Excluding energy costs, prices fell 0.2 percent in the month and were down 3.6 percent from a year ago.

ThyssenKrupp AG, Germany’s largest steelmaker, has curbed output this year and delayed output at a U.S. steel mill after metal prices tumbled.

German consumer prices posted their first annual decline in more than 22 years in July, dropping 0.7 percent. Euro-area consumer prices also fell 0.7 percent last month. ECB President Jean-Claude Trichet has said the drop is due to energy prices and that inflation will “turn positive again later this year.”

Trichet also expects price developments “to remain subdued,” even as the euro-area economy emerges from the recession, he said in Frankfurt on Aug. 6.

Germany’s economy expanded 0.3 percent in the second quarter, a report showed last week, bringing an end to the worst slump since World War II sooner than forecasters had expected.

While rising exports and government programs may keep growth on track, higher unemployment threatens to restrain the recovery, Bundesbank President Axel Weber said in an interview with Sueddeutsche Zeitung published on Aug. 17.

Even so, the German economy “has reached the trough,” Weber said. “The third quarter should also be better than thought.”

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net

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European Construction Output Declined for Second Month in June

By Simone Meier

Aug. 19 (Bloomberg) -- European construction output declined for a second month in June even as the region’s recession eased.

Construction in the 16-member euro region dropped 1.1 percent from May, when it fell 2 percent, the European Union’s statistics office in Luxembourg said in a statement today. From a year earlier, output declined 8.8 percent.

European builders have been forced to reduce spending and jobs after the global recession eroded demand for new housing and infrastructure. Hochtief AG, Germany’s largest construction company, on Aug. 14 forecast a drop in full-year orders. The euro-area economy barely contracted in the second quarter after governments pledged billions of euros to fight the crisis and Germany and France unexpectedly returned to growth.

“European builders were severely hit by the global downturn,” said Stefan Bielmeier, chief German economist at Deutsche Bank AG in Frankfurt. “We’ll only see a very gradual recovery in construction output in the year’s second half, mainly driven by fiscal spending.”

In Spain, construction declined 0.2 percent in June from the previous month and 12.6 percent from a year earlier, today’s report showed. Output in France, the euro region’s second- largest economy, fell 0.2 percent in the month and 4.6 percent on the year. Germany, Europe’s biggest economy, saw a drop of 1.4 percent from May and a 1.2 percent gain from a year earlier.

The euro was lower against the dollar following a report earlier today that showed German producer prices declined at the fastest pace in 60 years in July. The European currency traded at $1.4104 at 9:50 a.m. in London, down 0.2 percent. The Dow Jones Stoxx 600 Index of European shares dropped 1.2 percent.

Investor Confidence

The euro-area economy shrank 0.1 percent in the second quarter from the previous three months, when it contracted a record 2.5 percent. Germany and France showed growth of 0.3 percent, while the economies of Spain, the Netherlands and Italy continued to shrink.

Adding to signs of recovery, German investor confidence jumped to the highest in more than three years in August after government stimulus measures and rising exports pulled the economy out of recession. The ZEW Center for European Economic Research said yesterday that its index of investor and analyst expectations rose to 56.1 from 39.5 in July.

European investor sentiment rose to a one-year high in August and economic confidence increased more than economists forecast in July. Manufacturing and service industries probably contracted at the slowest pace in 12 months in August, according to the median estimate of 11 economists in a Bloomberg News survey. Markit Economics will release that report on Aug. 21.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

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Swiss Franc to Hold at 1.52 Per Euro on SNB ‘Caution,’ UBS Says

By Justin Carrigan

Aug. 19 (Bloomberg) -- The Swiss franc is likely to be little changed over the next three months as the central bank seeks to stem its gains, according to UBS AG.

The Swiss National Bank will keep interest rates near zero and continue franc sales to prevent a strengthening of the currency, Handelszeitung cited central bank board member Thomas Jordan as saying in an interview yesterday.

“The deflation risks mean it is still too early for a normalization of monetary policy” from Jordan’s perspective, Brian Kim, a currency strategist at UBS in Stamford, Connecticut, wrote in a report yesterday. The “comments echo the themes and undertone from the SNB’s mid-June assessment and so far the SNB continues to sound comparably cautious.”

The franc was little changed at 1.5202 per euro as of 7:33 a.m. in Zurich. UBS has a one-month and three-month target for the franc of 1.52 per euro.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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New World Resources Reports First-Half Loss; Plans Energy Sale

By Douglas Lytle

Aug. 19 (Bloomberg) -- New World Resources NV, the Czech Republic’s biggest supplier of coking coal, reported a first- half loss as it cut production on weaker demand, and said its board agreed to sell the company’s energy business.

NWR posted a net loss of 41.4 million euros ($58 million), following net income of 189 million euros a year earlier, the Amsterdam-based company said in a statement today. Sales from continuing operations fell 48 percent to 484.4 million euros.

The company, which sold shares in a 2008 initial public offering in Prague, London and Warsaw, in May cut its 2009 output target to 10.5 million metric tons from 12.1 million tons because of “considerably lower” demand and higher inventories.

“I would hope we would be profitable and cash generative in the second half,” Chairman Mike Salamon said today in a phone interview from London.

Coal production fell 17 percent from a year earlier in the first half and coke production declined 40 percent, NWR said.

The company reported a net loss of 39.3 million euros in the second quarter, compared with net profit of 71.3 million euros a year earlier. The result beat the median estimate of a 20 million-euro loss in a Bloomberg survey of six analysts. Revenue from continuing operations was 243.9 million euros in the period, down from 463 million euros.

“Market conditions were difficult for NWR throughout the first half,” Salamon said in the statement. “NWR’s core customer markets are beginning to show some signs of recovery. Sales volumes have been rising since June and our inventory levels have therefore started to fall.”

The board agreed to sell the company’s energy business and said the development “is in line with our strategy to focus on our core business of coal mining and coke production, and also in order to strengthen our balance sheet,” the statement said.

NWR supplies hard coal and coke to customers such as the Czech unit of ArcelorMittal, the world’s largest steelmaker, and U.S. Steel Corp.’s division in Slovakia. It also produces coal used by power plants.

To contact the reporters on this story: Douglas Lytle in Prague dlytle@bloomberg.net

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China’s Probe of Rio Employees May Last Two Months

By Bloomberg News

Aug. 19 (Bloomberg) -- China’s investigation of four Rio Tinto Group employees, including Australian Stern Hu, for alleged bribery and theft of commercial secrets may last two months, according to a law firm representing two executives.

A probe would be followed by one-and-a-half months of review by prosecutors before court hearings, according to procedures outlined in Chinese law, Shanghai-based lawyer Zhai Jian said. Zhai’s firm represent Ge Minqiang and Wang Yong.

Hu, head of Rio’s iron ore business in China, and three Chinese colleagues, were formally arrested this month for allegedly stealing secrets related to the steel industry, a publication run by the prosecutors’ office said Aug. 12. The detention since July 5 and arrest have strained relations between Australia and China.

“The duration of the two procedures can be extended depending on specific conditions,” Zhai said over the phone today. The “court hearing may be open to the public for cases that don’t relate to state secrets or personal privacy.”

Hu, Ge, Wang and Liu Caikui, the fourth Rio Tinto employee, were originally accused of the theft of state secrets, a charge that wasn’t included in the arrest statement this month.

“Given the complexity of the Rio case, the investigations may take longer than two months,” said Xiong Dingzhong, a Beijing-based lawyer at Hantong Law Firm, which isn’t representing any of the employees. “Stern Hu has been detained for six weeks before the official arrest. It is hard to determine whether that should be included in the two months.”

Initial Investigations

The charges come as London-based Rio Tinto, the world’s second-largest iron ore supplier, refused to budge in contract price talks with Chinese steelmakers this year. The company rejected in June a $19.5 billion investment by state-owned Aluminum Corp. of China in favor of a share sale and an iron ore joint venture with rival BHP Billiton Ltd.

Initial investigations showed that the Rio Tinto workers obtained commercial secrets about the steel industry through improper means as well as evidence of bribery, the publication of the prosecutors’ office had said.

The downgrade in charges from the theft of state secrets was a “conciliatory” gesture to calm investors, said Richard Cassin, author of “Bribery Everywhere, Chronicles From the Foreign Corrupt Practices Act.”

Seven Years

“While infringing trade secrets and commercial bribery are still serious, at least the threat of life in prison or even execution is removed,” said Cassin, partner at Singapore-based law firm Cassin Law LLC. Hu and his colleagues face a potential penalty of seven years in prison and a fine, he said.

Lawyers aren’t able to see details about the prosecution’s evidence before a case is put on trial, according to Chinese law, Hantong’s Xiong said. They can visit defendants and can see summaries on the progress of the investigations, he said.

Lawyer Duan Qihua will represent Stern Hu, while Tao Wuping will represent Liu, the Wall Street Journal reported Aug. 14. Duan and Tao couldn’t be reached immediately for comments.

Chinese companies have continued to invest in Australia. Exxon Mobil Corp. yesterday agreed to sell 2.25 million metric tons a year of liquefied natural gas to China from Australia’s Gorgon project for 20 years.

Australia’s Resources and Energy Minister Martin Ferguson said the agreement, worth A$50 billion ($41 billion) was a “landmark in our relationship with China.” Foreign Minister Stephen Smith yesterday had said difficulties in ties with China following the detention and a visit by Uighur leader Rebiya Kadeer must be managed carefully.

--Helen Yuan, Andrea Tan. Editors: Tan Hwee Ann, Douglas Wong.

To contact the reporter on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

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Pimco Says Dollar to Weaken as Reserve Status Erodes

By Garfield Reynolds and Wes Goodman

Aug. 19 (Bloomberg) -- Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

The Dollar Index, which tracks the greenback against a basket of currencies, touched 78.823 today, the lowest this week. It has fallen 12 percent from this year’s high in March as U.S. authorities pledged $12.8 trillion to combat the recession. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote.

The U.S. government boosted spending and the Federal Reserve bought bonds to revive credit markets that seized up after financial companies posted $1.6 trillion in writedowns and losses, raising concern there is an oversupply of greenbacks.

Asian Rally

The currency was little changed today at $1.4140 per euro as of 10:27 a.m. in Tokyo. The Dollar Index is down about 3 percent this year, after a 6 percent gain in 2008.

Asian currencies stand to benefit as the region’s economy grows and the dollar’s allure fades, said Rajeev de Mello, Singapore-based head of Asian investments at Western Asset Management Co., which oversees $473.4 billion.

“We are positive on the Asian currencies against the dollar and think they will continue to rally,” de Mello said in an interview. “I do think the diversification of reserves is something that’s important and I think we’ll see some from China into other currencies and this will benefit as well Asian currencies and other emerging currencies.”

Sample Coin

China’s central bank renewed its call for a new global currency in June and said the International Monetary Fund should manage more of members’ foreign-exchange reserves. Russian President Dmitry Medvedev last month illustrated his call for a supranational currency by producing a sample coin after a summit of the Group of Eight nations.

Mewbourne joins investor Jim Rogers, who said last year that he was shifting all his assets out of dollars and buying Chinese yuan because the Fed eroded the value of the U.S. currency. The dollar is losing its status as the world’s reserve currency, said Rogers, who is the author of books on investing including “Hot Commodities.”

Sovereign Funds

Bill Gross, who runs the $169 billion Pimco Total Return Fund, is also warning the U.S. currency will fall.

Holders of dollars should diversify before central banks and sovereign wealth funds do the same because of concern government budget deficits will deepen, Gross said in June.

Gross’ fund has returned 12 percent in the past year, outperforming 95 percent of its peers, according to data compiled by Bloomberg.

The U.S. budget deficit reached a record $1.27 trillion for the first 10 months of the fiscal year and broke a monthly high for July, the government said Aug. 12.

Still, there is no viable immediate alternative to the U.S. dollar for now as the euro region lacks a political union while Japan’s economic weakness makes it impossible to consider the yen for such a role, Pimco’s Mewbourne wrote. The currencies of emerging states such as China can’t play a reserve role as long as they are subject to capital controls, which restrict international traders to using non-deliverable forwards, he wrote.

Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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Yen Rises as Decline in Asian Stocks Spurs Demand for Safety

By Yoshiaki Nohara and Ron Harui

Aug. 19 (Bloomberg) -- The yen rose against the dollar and euro as renewed concerns about the strength of the economic recovery spurred demand for Japan’s currency as a refuge.

The yen gained against all 16 major counterparts after Chinese shares led equities in the region lower and the Daily Telegraph cited Germany’s economic state secretary as saying the nation is preparing countermeasures for a new credit crunch early next year.

“Risk aversion, shown in a drop in Asian stocks, is causing the yen to be bought as a refuge,” said Masashi Hashimoto, a senior analyst at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “Signs China’s economy is faltering are weighing down on the global economic outlook.”

The yen rose to 132.81 per euro as of 7:54 a.m. in London from 133.84 yesterday in New York. Japan’s currency advanced to 94.20 per dollar from 94.69 after earlier gaining to 94.14, the highest level since July 29. The dollar traded at $1.4096 per euro from $1.4136.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slumped 4.6 percent. The MSCI Asia Pacific Index of regional shares fell 0.7 percent.

The Daily Telegraph reported German economic state secretary Hartmut Schauerte said companies with weak balance sheets may struggle to roll over loans that need to be paid back in coming months.

Europe Concern

European Central Bank council member Axel Weber said in an interview in the Sueddeutsche Zeitung newspaper on Aug. 17 that the ECB will “closely monitor” banks’ lending to firms while saying that there are no signs of a credit crunch in Germany.

“There are worries that the financial turmoil in Europe, including the U.K., may deepen again,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “Risk aversion is returning, causing buying of the yen and the dollar.”

The yen typically rises during times of financial turmoil because Japan’s trade surplus means the nation doesn’t have to rely on overseas lenders. The dollar benefits as the world’s main reserve currency.

South Korea’s won fell 0.7 percent to 1,255.85 per dollar from 1,246.65. A government report showed this month South Korea’s exports, which make up more than half of the economy, fell for a ninth month in July as demand from China, the U.S., and Japan weakened amid the global recession.

‘Clear Signs’

“On one hand, the economy is in better shape; on the other hand, you really need clear signs of future growth to push the currency stronger,” said Nizam Idris, a currency strategist at UBS AG in Singapore. The won will end this year at 1,250 and rise to 1,200 by the end of 2010, Idris said.

Gains in the dollar were limited after Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

The U.S. currency will drop the most against emerging- market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

‘Monetary Medicine’

The U.S. must address the massive amounts of “monetary medicine” that have been put into the financial system and now pose threats to the world’s largest economy and the dollar, billionaire Warren Buffett wrote in a New York Times commentary yesterday.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, declined to 78.919 from 78.937 yesterday, after earlier touching 78.823, the lowest level this week.

The yen reversed earlier declines against the dollar and the euro amid speculation Japanese exporters bought the currency.

“There’s talk of keen yen-buying interest from exporters,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “This is likely to put currencies such as the dollar under downward pressure.”

Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Iluka Swings to Loss in First Half After Writedowns

By Jason Scott and Rebecca Keenan

Aug. 19 (Bloomberg) -- Iluka Resources Ltd., the world’s biggest zircon producer, swung to a first-half loss after taking one-time charges for writing down the value of two deposits in Australia and closing unprofitable mines.

The net loss was A$55.8 million ($46.1 million), or 14.2 cents a share, in the six months to June 30, from A$15.6 million, or 5 cents a share, the year before, Perth-based Iluka said today in a statement. Sales fell 57 percent to A$182.3 million.

The global financial crisis forced Iluka to idle half its production in Western Australia and cut its workforce there by a third. The company had a A$78.9 million loss from continuing operations.

“It remains difficult to predict the path of the recovery or the timing for the restoration of more ‘normal’ underlying demand trends,” Managing Director David Robb said in a separate statement. He cut Iluka’s full-year zircon sales forecast as much as a third to between 200,000 and 250,000 metric tons.

Shares of Iluka have declined 28 percent this year compared with an 18 percent gain on the benchmark S&P/ASX 200 Index.

To contact the reporters on this story: Jason Scott in Perth at Jscott14@bloomberg.netRebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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Rubber Drops as Chinese Equities Slump Threatens to Hurt Demand

By Aya Takada

Aug. 19 (Bloomberg) -- Rubber dropped by as much as 2.3 percent, reversing earlier gains, as a sell-off in Chinese stocks raised concern the world’s third-largest economy may slow, curbing demand for raw materials.

Futures in Tokyo declined for the third time in four days after China’s stocks fell, briefly driving the benchmark index into a so-called bear market, more than 20 percent below this year’s high, on concern the country’s economic recovery will falter as the government reins in lending.

“A slowdown in the Chinese economy could have a significant influence on commodity demand as the nation was the main driver of the global economic recovery,” Kazuhiko Saito, chief analyst at Tokyo-based commodity broker Fujitomi Co., said today by phone.

January-delivery rubber, the most-active contract, lost 1.6 percent to settle at 192.7 yen a kilogram ($2,045 a metric ton) on the Tokyo Commodity Exchange.

The Shanghai Composite Index fell 4.3 percent to 2,785.584. The index has lost 19.8 percent since reaching a 14-month high on Aug. 4 and is 59 percent below its record level, reached on Oct. 16, 2007.

Chinese Prime Minister Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package, coupled with record bank lending in the first six months, helped the Shanghai index to more than double from an October low. The rally faltered as new loans in July declined to less than a quarter of June’s level.

Rubber futures earlier jumped by as much as 3.9 percent on speculation tire makers may step up raw material purchases to meet demand from carmakers. Nomura Holdings Inc. raised its stance on the Japanese auto industry to “bullish” from “neutral”, citing a recovery in demand.

Toyota Motor Corp. will raise its global production plan to 6.67 million vehicles this business year, up from 6.3 million units, because of increasing sales of hybrid vehicles, the Yomiuri newspaper said today. Hideaki Homma, a Toyota spokesman, denied the report later.

January-delivery rubber on the Shanghai Futures Exchange lost 1.1 percent to 18,005 yuan ($2,634) a ton.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net;

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Fortescue Says Remains in Financing Talks With China

By Rebecca Keenan and Stephen Engle

Aug. 19 (Bloomberg) -- Fortescue Metals Group Ltd., Australia’s third biggest iron ore exporter, remains in talks with Chinese groups to secure as much as $6 billion to expand.

“We have held discussions with major Chinese financiers to extend credit to around $5.5 billion to $6 billion to Fortescue,” Chief Executive Officer Andrew Forrest said today in an interview on Bloomberg TV. Fortescue wants to have the financing secured by the end of September, it said on Aug. 17.

Fortescue has been seeking funding as a cash squeeze and lower iron ore prices forced it to put expansions on hold. The Perth-based company may need between $3 billion and $4 billion to proceed with plans to almost double output, Hunan Valin Iron & Steel Group, its second-largest shareholder, said in May.

Fortescue rose 2.3 percent to A$4.50 at the 4:10 p.m. Sydney time close on the Australian stock exchange. It has more than doubled this year, compared with an 18 percent gain in the benchmark index. Forrest wouldn’t be specific on who the company is talking to.

Securing financing is a condition of Fortescue’s agreement with Baosteel Group Corp., China’s largest steelmaker, and the China Iron & Steel Association to cut contract iron ore prices by 35 percent.

The price agreement is deeper than the 33 percent reduction offered by Rio Tinto Group, the largest exporter of Australian iron ore, and 47 percent less than the current spot price for benchmark ore from Australia.

Price Agreement

The steel association said it wants to apply the price agreement to all ore purchased by the country, eliminating differences between contract and spot prices.

“CISA is very much a part of China’s correct belief that their people deserve a stable iron ore pricing system and not one that has a benchmark with responsible supplies and then a speculative and hugely volatile and expensive price for short term supplies,” Forrest said. “ It is clearly not in China’s best interest to have this two-tiered, dysfunctional system.”

Fortescue will sell 20 million tons of iron ore in the six months ending Dec. 31, and China will give it priority to negotiate 2010 prices, the Perth-based company said. China bought 444 million tons of ore last year from suppliers.

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

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Gold Declines as China’s ‘Bear Market’ Boosts Demand for Dollar

By Kim Kyoungwha

Aug. 19 (Bloomberg) -- Gold fell, erasing an earlier advance, as Chinese stocks entered a so-called bear market, boosting the attractiveness of the dollar.

The Dollar Index, a gauge of the U.S. currency, rose as the Shanghai Composite Index fell on concern the nation’s economic recovery will falter as the government reins in lending. The MSCI Asia Pacific Index of regional shares also declined.

“People are wary of unease in China and other regional stock markets, which is reviving demand for the dollar,” said Hwang Il Doo, a senior trader with KEB Futures Co. in Seoul. “Still, I don’t expect any abrupt decline in gold prices.”

Gold for immediate delivery, which tends to move inversely to the dollar, fell as much as 0.4 percent to $934.90 an ounce, before trading at $935.63 at 2:52 p.m. in Singapore. Earlier, the metal gained as much as 0.4 percent as the dollar slipped.

The Shanghai Composite Index declined 4.7 percent to 2,774.77 as of 2:44 p.m. local time today, increasing its loss since the 14-month high on Aug. 4 to 20.2 percent. A drop of 20 percent is typically defined as a bear market.

Earlier, the precious metal rose after Pacific Investment Management Co., which runs the world’s biggest bond fund, said that the dollar will probably drop as it loses its status as a reserve currency.

Pacific Investment Management, a unit of Munich-based insurer Allianz SE known as Pimco, said that investors should consider cutting holdings of the U.S. currency, according to a report from Curtis A. Mewbourne, a Pimco portfolio manager.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar,” Mewbourne wrote.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged at 1,065.49 metric tons as of Aug. 18, according to the company’s Web site.

Among other precious metals for immediate delivery, silver fell 0.9 percent to $13.88 an ounce, platinum shed 1 percent to $1,219.50 an ounce and palladium lost 1.5 percent to $269.75.

To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net

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Japanese Stocks Fall to Lowest This Month on Valuation Concerns

By Masaki Kondo

Aug. 19 (Bloomberg) -- Japan’s benchmark stock indexes extended this week’s declines to their lowest levels this month on concern share prices had risen too high given the outlook for earnings growth.

Kawasaki Kisen Kaisha Ltd., a shipping line that forecast a loss last month, fell 2.3 percent after transport rates dropped. Tokio Marine Holdings Inc., Japan’s biggest listed insurer, sank 2 percent after regulators said new guidelines may cut solvency ratios. Sony Corp., expecting a second year of losses, sank 3.9 percent after cutting the price of its PlayStation 3 game player.

The Nikkei 225 Stock Average drifted between gains and losses at least 10 times before finishing down 80.96, or 0.8 percent, at 10,204.00 in Tokyo. The broader Topix index fell 6.41, or 0.7 percent, to 943.25. Both gauges sank to a level not seen since July 30.

“Equities are not cheap relative to their earnings prospects and people are feeling the recent rally has been stretched to its limit,” said Naoki Fujiwara, chief fund manager at Tokyo-based Shinkin Asset Management Co., which oversees the equivalent of $3.7 billion.

The Nikkei surged 46 percent from a 26-year low on March 10 through yesterday as government spending boosted production and corporate earnings. The rally lifted companies in the gauge to 41 times estimated net income, from as low as 9.5 times last year, according to Nikkei Inc., which compiles the gauge.

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

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Asian Stocks Fall as China Enters Bear Market; Sony Declines

By Jonathan Burgos and Shani Raja

Aug. 19 (Bloomberg) -- Asian stocks fell, dragging China’s key index into a so-called bear market, as Maanshan Iron & Steel Co. reported losses and shipping rates slumped.

Maanshan Steel, China’s No. 4 listed steelmaker, lost 7.5 percent, while China Cosco Holdings Ltd., the world’s largest operator of dry-bulk ships, slumped 7.4 percent in Shanghai. Tokio Marine Holdings Inc. dropped 2 percent after Japanese regulators said new guidelines will hurt insurers’ solvency ratios. Sony Corp. sank 3.9 percent after cutting the price of its PlayStation 3 game player.

The MSCI Asia Pacific Index fell 0.6 percent to 109.94 as of 4:11 p.m. in Tokyo, erasing an earlier gain of 0.6 percent. The gauge has rallied 56 percent from a more than five-year low on March 9 amid speculation the global economy is recovering.

“We may need to see a healthy pullback,” said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $14 billion. “Investors are still waiting for better entry levels.”

Japan’s Nikkei 225 Stock Average lost 0.8 percent to 10,204, while Hong Kong’s Hang Seng Index sank 1.9 percent. China’s Shanghai Composite Index dropped 4.3 percent, taking its drop from this year’s high on Aug. 4 to 20 percent, the level that typically signals a bear market.

Among stocks that rose today, Honda Motor Co. added 2 percent after Nomura Holdings Inc. upgraded Japan’s auto industry. Qantas Airways Ltd., Australia’s biggest airline, advanced 3.5 percent as it signaled improving passenger volumes.

Home Depot, Target

Futures on the Standard & Poor’s 500 Index lost 0.3 percent. The U.S. gauge rose 1.1 percent yesterday, aided by better-than- estimated earnings at Home Depot Inc. and Target Corp.

A third of the 508 companies in the MSCI Asia Pacific Index that have reported results since early July have beaten analysts’ profit estimates, while 18 percent have missed, according to data compiled by Bloomberg.

“The earnings season has been surprising,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $95 billion. “It’s given investors confidence the recovery is coming through and that valuations will be supported by strong earnings. Still, markets have rallied a long way and are vulnerable to bad news.”

Maanshan Steel dropped 7.5 percent to 4.81 yuan in Shanghai. The company posted a half-year loss for the second consecutive period as the global recession crimped demand from homebuilders and automakers.

Baltic Dry

Shipping stocks declined after the Baltic Dry Index, which measures the cost of shipping commodities, sank 2.5 percent in London yesterday, the biggest drop in a week

China Cosco Holdings slumped 7.4 percent to 13.82 yuan. STX Pan Ocean Co. Ltd., South Korea’s biggest bulk carrier, dipped 4.5 percent to 11,750 won in Seoul. Mitsui O.S.K. Lines Ltd., the world’s largest operator of iron-ore vessels, slipped 2.2 percent to 568 yen in Tokyo.

Finance companies were the biggest drag on the MSCI Asia Pacific Index. Tokio Marine, Japan’s largest publicly traded insurer, lost 2 percent to 2,650 yen. T&D Holdings Inc., the second-biggest, dropped 1.2 percent to 2,845 yen.

Japan’s financial regulator said yesterday that solvency ratios at almost all insurers will probably fall once a new standard takes effect. The measure, which will affect how companies calculate their ability to pay claims, is under review and expected to be released by June.

Sony, Nintendo

Sony sank 3.9 percent to 2,500 yen. The company cut the price of its PlayStation 3 console by 25 percent, bowing to demands from game publishers and increasing the pressure on industry leader Nintendo Co. to follow. Nintendo lost 0.5 percent to 24,480 yen.

Japanese automakers rose after Shotaro Noguchi, an analyst at Nomura in Tokyo raised his stance on the industry to “bullish” from “neutral.” The companies are likely to see a recovery in demand in developed nations due to government subsidies, which may lead them to raise their forecasts, Noguchi wrote in a report.

Honda Motor Co., which makes 51 percent of its revenue in North America, climbed 2 percent to 3,070 yen. Nissan Motor Co., Japan’s No. 3 automaker, added 0.7 percent to 706 yen.

The MSCI Asia Pacific Index rally since March has lifted the average valuation of shares in the gauge to 24 times estimated earnings, compared with 17 times for the S&P 500 and 14 times for the Dow Jones Stoxx 600 Index in Europe.

Qantas surged 3.5 percent to A$2.69. The company said there are signs passenger volumes are improving and yields are stabilizing after reporting its first loss in six years.

Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, gained 3.7 percent to A$44.28. The company said first-half profit fell 12 percent to A$898 million ($743 million) from a year earlier on lower oil prices. That compares with the market consensus of A$878 million cited by UBS AG.

To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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