Indonesia Keeps Rate Unchanged Amid Inflation Risks

By Aloysius Unditu and Novrida Manurung

Oct. 5 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a second straight month amid signs of a pickup in consumer prices.

Bank Indonesia held its reference rate at 6.5 percent, Deputy Governor Budi Mulya told a news conference in Jakarta today. The decision was expected by all 22 economists in a Bloomberg News survey.

The central bank stopped cutting rates in August after slashing borrowing costs for nine straight months to help shield Southeast Asia’s largest economy from the global recession. Inflation unexpectedly accelerated last month and is expected by economists to breach Bank Indonesia’s target next year.

“As growth begins to accelerate, upward price pressures will build quickly,” said James Lord, an economist at Capital Economics Ltd. in London. “We expect rates to start to move up soon, most likely from January. But there is a significant risk -- a 30 percent chance -- that Bank Indonesia moves rates up before year end.”

Bank Indonesia raised its forecast for economic expansion this year to 4.3 percent from an earlier estimate of 4 percent. Growth in the third quarter is predicted at 4.2 percent, up from 4 percent in the previous three months. Still, growth has slowed from last year, when the economy expanded 6.1 percent, as the global recession erodes demand for exports.

Economic Recovery

A benchmark interest rate of 6.5 percent “is conducive for the process of economic recovery” and will help spur lending, Bank Indonesia’s Mulya said.

The $514 billion economy may expand as much as 5.5 percent next year, the central bank also said today. A recovery in the world economy, continued strong domestic consumption, and increased investment will accelerate growth, Bank Indonesia said.

Consumer prices climbed 2.83 percent last month from a year earlier, after rising 2.75 percent in August, the Central Statistics Bureau said in Jakarta on Oct. 1. Prices advanced 1.05 percent in September from August, the biggest increase in 14 months.

Inflation may accelerate to between 4 percent and 6 percent next year compared with this year’s estimate of 3.5 percent to 5.5 percent, the central bank said today.

Inflation may quicken in the coming months and into 2010 as the government raises energy prices, said Helmi Arman, an economist at PT Bank Danamon Indonesia in Jakarta. Crude oil price has gained 57 percent this year, increasing the cost of fuel and electricity subsidies. Oil may average $70 a barrel this year, the central bank said today.

Electricity Prices

PT Perusahaan Listrik Negara, Indonesia’s state utility, on Sept. 9 said it’s proposing an increase in electricity tariffs of as much as 30 percent next year.

Bank Indonesia slashed its policy rate by a cumulative 300 basis points from December to August as inflation slowed to a nine-year low of 2.71 percent in July.

Inflation eased in the months before September amid stable food costs. The price of rice, the staple for Indonesia’s 240 million people, held at 7,550 rupiah ($0.78) a kilogram in September from August, according to data from PT Food Station Tjipinang Jaya, Indonesia’s biggest market for the grain.

Danamon’s Arman expects consumer prices to gain 6.7 percent next year, prompting Bank Indonesia to commence incremental 25- basis-point increases in its reference rate toward 7.5 percent starting in March.

Earthquake Damage

Arman said a 7.6-magnitude earthquake that struck off Indonesia’s Sumatra island on Sept. 30 was unlikely to have any major impact on inflation as the three regions hit by the temblor only have a 2.7 percent weight in the nation’s consumer price index.

The death toll as of 9 a.m. today was 603, Indonesia’s National Disaster Management Agency said on a notice board at an operations center in the capital of West Sumatra province. At least 30,630 homes were destroyed, it said.

Central banks across Asia have stopped cutting interest rates and are signaling their next moves may be to increase borrowing costs as the region leads the world out of the deepest global slump since the Great Depression.

Bank Negara Malaysia on Aug. 25 kept its benchmark interest rate unchanged at 2 percent for a fourth straight meeting amid signs the economy is stabilizing. Bangko Sentral ng Pilipinas maintained the rate it pays lenders for overnight deposits at 4 percent for a second meeting on Oct 1.

“Bank Indonesia will likely wait for more signs that the global recovery is on track before hiking,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France’s Credit Agricole SA.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@blomberg.net Novrida Manurung at nmanurung@bloomberg.net

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Eurozone September Final Services PMI (Table)

By Kristian Siedenburg

Oct. 5 (Bloomberg) -- Markit Economics today released the September final purchasing managers’ index for the eurozone. The PMI’s are designed to provide a single figure snap-shot for the Eurozone. It is based on a survey of over 2,000 business executives in the Euro area and it’s designed to provide the most up-to-date picture of business conditions. Anything above 50 indicates expansion; below 50, a contraction. The greater the divergence from 50, the greater the rate of change.

==============================================================================
                        Sept.   Flash    Aug.    July    June     May   April
                         2009     PMI    2009    2009    2009    2009    2009
==============================================================================
Services PMI              50.9    50.6    49.9    45.7    44.7    44.8    43.8
==============================================================================
NOTE: The PMI series, is one of the most closely watched business surveys in
the world. It provides up-to-date, accurate and often unique monthly
indicators of economic trends.

Source: Markit Economics

To contact the reporter on this story: Kristian Siedenburg in Budapest at ksiedenburg@bloomberg.net

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Bank of Korea Can Use Non-Rate Tools as Prices Rise, Yoon Says

By Shamim Adam and Francine Lacqua

Oct. 5 (Bloomberg) -- South Korea still needs expansionary economic policy and the central bank has other tools available before raising interest rates if it decides it needs to contain rising asset prices, Finance Minister Yoon Jeung Hyun said.

Any winding back of fiscal stimulus by the government or interest-rate increases from the Bank of Korea would be “premature” because the economy still faces uncertainties, Yoon said in an Oct. 3 interview in Istanbul, where he is attending the annual meetings of the World Bank and the International Monetary Fund.

Leaders from the Group of 20 nations last month pledged to preserve the global economic recovery and wait to pull back emergency government assistance until “the time is right.” South Korea’s government allocated extra spending and frontloaded the budget earlier this year in response to the crisis, while the central bank cut interest rates to a record low.

“This is not the time to implement exit strategies because there are many obstacles to overcome to reach a robust recovery,” Yoon, 63, said. “Private sector demand and investment hasn’t yet recovered fully because of the global crisis in the past year. We have some way to go.’

Central bank Governor Lee Seong Tae last month signaled borrowing costs may be raised to stem rising property prices and mortgage lending. The central bank kept its key rate unchanged at 2 percent for a seventh month on Sept. 10. Policy makers next meet on Oct. 9.

South Korea’s inflation rate was 2.2 percent in September, remaining below the central bank’s target of between 2.5 percent and 3.5 percent for a fourth month.

“We don’t have problems with inflation,” Yoon said.

Asset Prices

The decline in borrowing costs has fueled consumer credit, with bank lending to households expanding for a seventh straight month in August, led by demand for mortgages. Home prices climbed for a fifth month in August.

Asset prices are on a course to “normalize” after hitting a bottom during the financial crisis, Yoon said, adding that the gains are “not a serious” problem.

“For South Korea, the central bank has a lot of tools before raising the interest rate” if it chooses to unwind loose monetary policy, Yoon said. “The interest rate is decided by the Bank of Korea and we believe they will judge it wisely and consider every index comprehensively.”

President Lee Myung Bak said Sept. 30 the government needs to continue its expansionary fiscal policy until signs of an economic recovery are stronger. The government on Sept. 28 announced a proposal to increase next year’s spending by 2.5 percent to help sustain economic growth.

‘Cautiously Optimistic’

South Korea is one of the fastest nations in the region to recover from the crisis as the economy expanded 2.6 percent in the second quarter, the quickest pace since 2003. The International Monetary Fund on Oct. 1 raised its economic growth forecast for South Korea, saying the economy will contract 1 percent this year, less than previously anticipated.

“We are cautious and cautiously optimistic because we still have many uncertainties in the economic sector,” Yoon said. “We still need expansionary macroeconomic policies.”

Exports fell at the slowest pace in 11 months in September, helped by increased overseas sales of cars and semiconductors, while manufacturers’ confidence was at a two- year high.

Gains in the won, Asia’s best-performing currency against the dollar last quarter, boosted concern the government will intervene to minimize the impact of a stronger exchange rate on exporters. It climbed more than 8 percent in the three months ended September and reached the strongest in a year on Oct. 1.

Smooth Volatility

The currency appreciation is not hurting the nation’s exports and the government will take steps to smooth exchange- rate volatility and guard against speculative trades, Yoon said.

The government will use market operations to smooth any volatility in the currency, similar to policy makers in other countries, “particularly if there are signs of speculation,” Yoon said.

“Korea’s exports situation is much better than other countries,” he said. “The exchange rate hasn’t impeded exports because of the quality of products and marketing. We respect the market’s view” on what the level of the currency should be.

To contact the reporters on this story: Shamim Adam in Istanbul at sadam2@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net

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European Manufacturing, Services Expand, PMI Shows

By Emma Ross-Thomas

Oct. 5 (Bloomberg) -- Europe’s manufacturing and services industries expanded more than initially estimated in September, adding to signs the economy is gaining steam after the worst recession in six decades.

A composite index of both industries in the euro-area economy rose to 51.1, up from 50.4 in August and higher than an initial estimate of 50.8, London-based Markit Economics said today in a statement. A reading above 50 indicates expansion and the gauge, which is based on a survey of purchasing managers, had remained below that level for 14 months before topping it in August. Economists had projected the index would rise to 50.9 in September, according to a Bloomberg News survey.

The euro-area economy barely contracted in the second quarter as Germany and France, the region’s largest economies, returned to growth. The economy will grow 0.3 percent in 2010, the International Monetary Fund said on Oct. 1, as it trimmed its estimate for this year’s contraction to 4.2 percent from the 4.8 percent it forecast in July.

While there are “encouraging signs” of a recovery, the world economy remains fragile and labor markets are yet to improve, the Group of Seven ministers and central bankers said in a statement on Oct. 3 after talks in Istanbul. Euro-area unemployment rose to 9.6 percent in August, the highest in more than a decade, and the IMF last week forecast it will reach 11.7 percent next year, higher than in the U.S. or the U.K.

Monetary Policies

“Pressure to cut jobs in the face of weak pricing power remained widespread, with job losses accelerating in Germany, Italy and France,” Chris Williamson, chief economist at Markit, said in a statement. “But we estimate that the monthly rate of job losses is now running at around 100,000, compared to a peak of 367,000 earlier in the year.”

The German economy, Europe’s biggest, probably expanded around 0.75 percent in the third quarter from the previous three-month period, when it grew 0.3 percent, Bundesbank President Axel Weber told reporters in Istanbul on Oct. 3. He said the recovery “continues to rely on support from fiscal and monetary policies, and that shouldn’t be withdrawn too quickly.”

The IMF also said central banks in Europe should keep interest rates low and possibly extend non-standard stimulus measures because the region’s recovery is likely to be “slow and fragile.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Fujii May ‘Take Action’ on Yen; G-7 Seeks ‘Stability’

By Mayumi Otsuma and Simon Kennedy

Oct. 5 (Bloomberg) -- Japanese Finance Minister Hirohisa Fujii issued his clearest warning yet that his nation is open to intervening in the currency market even as the Group of Seven declined to criticize the tumbling dollar.

“If currencies show some excessive moves in a biased direction, we will take action,” Fujii said Oct. 3 in Istanbul after a meeting of G-7 finance ministers and central bankers. He declined to say if the yen is now trading in such a way.

Fujii’s position has shifted since his initial remarks on taking office last month, when he opposed seeking a “weak” yen and selling the currency which last week rose to an eight- month high of 88.24 against the dollar. The gain is threatening the profits of exporters from Canon Inc. to Toyota Motor Corp.

The yen pared earlier gains against the dollar as Fujii’s language raised the risk of the first currency-market action by a G-7 nation since 2004. The change in his stance reflects a slide in the U.S. currency that has sparked concern from Canada to France over the potential impact on economic recoveries.

Fujii’s remarks went further than the G-7 did in a statement that stopped short of issuing a specific call for a stronger dollar.

“Japan is thinking more about the currency’s effect on the real economy, and if necessary they’ll intervene,” Gerard Lyons, the London-based chief economist of Standard Chartered Bank, said in Istanbul. “For now they seem to want to talk it down, but eventually they’ll have to do something about it.”

Yen Pares Gains

The yen traded at 89.75 per dollar at 11:28 a.m. in Tokyo, little changed from 89.81 late Oct. 2 in New York, after earlier climbing as high as 89.23. The dollar fell to $1.4640 per euro from $1.4576.

Fujii, 77, said last month he opposed stepping into the foreign-exchange market in principle, before revising that comment to say he wasn’t an advocate of a strong currency and that Japan was open to acting should the market move “abnormally.” Fujii said in Istanbul that his early comments about the yen “have been a bit misunderstood,” and that currencies should be set by markets.

Fujii is confusing traders and likely still wants the yen to gain as the ruling Democratic Party of Japan, which won power in August, tries to refocus the economy toward domestic demand and away from exports, said Stephen Jen, a managing director at BlueGold Capital Management LLP in London.

Maintain Stance

“I doubt Finance Minister Fujii will materially change his stance until Japan is pushed deep into recession,” Jen said.

Japan hasn’t entered the foreign exchange market since the central bank, at the request of the Finance Ministry, sold a record 14.8 trillion yen ($164 billion) in the first quarter of 2004 to restrain the currency. In his first tenure as finance chief, from August 1993 until June 1994, Fujii oversaw more than 1.3 trillion yen ($15 billion) of yen sales. The G-7 hasn’t intervened as a group since September 2000.

The yen’s appreciation threatens to undermine Japan’s export-driven economic recovery as the jobless rate hovers near a record high and deflation continues. Tokyo-based Canon, the country’s biggest maker of office equipment, estimates every 1 yen appreciation against the dollar will lower its second-half operating profit by 4.2 billion yen.

The “current level around 90 yen is a bit painful,” Yukitoshi Funo, executive vice president of Toyota City-based Toyota, the world’s largest seller of hybrid autos, said on Sept. 25. “I think the yen should be a little weaker.”

Different Tone

Fujii struck a different tone than his G-7 colleagues, who repeated that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

That means further declines in the dollar are likely, said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York. In April 2008, the G-7 spoke out against a declining dollar by complaining about “sharp fluctuations in major currencies.”

“If the G-7 wanted to push back more forcefully, they could have,” said Drossos, a former manager of the Federal Reserve’s foreign-exchange portfolio. “Since they didn’t, they may be tolerant of recent moves or they may recognize their limitations in slowing recent trends.”

The dollar may also be undermined as governments and central bankers seek to tackle so-called imbalances such as the U.S. trade deficit and China’s current-account surplus, said Marco Annunziata, chief economist at UniCredit Group in London.

Circle to Square

“This inevitably validates dollar weakness” he said. “This was an impossible circle for the G-7 to square.”

Still, French Finance Minister Christine Lagarde said after the meeting that there is a need for a “strong dollar.” U.S. Treasury Secretary Timothy Geithner told reporters that “it is very important to the United States that we continue to have a strong dollar.”

The G-7 kept pressure on China to allow greater flexibility in the yuan in the interest of smoothing out lopsided flows of trade and investment. While the dollar has dropped 14 percent against a basket of seven currencies since early March, it has gained 0.3 percent against the yuan, which is managed by Chinese authorities.

That is handing Chinese exporters an advantage in overseas markets and forcing other nations to shoulder the burden of the dollar’s dive.

Set By Market

“We all need to have our currencies fluctuate” if their relative values are to be set by the market, Canadian Finance Minister Jim Flaherty said in an interview yesterday. He added: “There’s clearly upward pressure on the Canadian dollar.”

Lagarde said she was “struck” by Chinese pledges to bolster domestic demand. It was “very precise language” that, if followed, will help “address global imbalances” and “have consequences on exchange rates,” she said.

G-7 officials said the global economic recovery is “fragile” and promised to maintain stimulus programs until growth takes hold. They met in Turkey before this week’s annual meetings of the International Monetary and World Bank and a week after the G-20 leaders named that forum as the primary arena for international economic policy-making.

The transfer of power toward the G-20, which includes emerging markets such as China and Brazil, prompted the G-7 finance officials to say they would tighten the schedule of their meetings, work more in parallel with G-20 events and issue statements only on merit. G-20 finance chiefs will meet next month in Scotland.

“We agreed that we want to work more informally again in the future, taking a step back to what it used to be like in the past,” said German Deputy Finance Minister Joerg Asmussen.

To contact the reporters on this story: Mayumi Otsuma in Istanbul at motsuma@bloomberg.netSimon Kennedy in Istanbul at skennedy4@bloomberg.net

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British Pound Erases Advance Versus Dollar to Trade at $1.5940

By Gavin Finch

Oct. 5 (Bloomberg) -- The pound erased its advance against the dollar and extended its declines against the euro.

The U.K. currency was trading little changed at $1.5942 as of 8:13 a.m. in London. Sterling was 0.3 percent lower at 91.71 pence per euro.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Goldman Says Macro Backdrop ‘Quite Friendly’ for Risky Assets

By Daniel Tilles

Oct. 5 (Bloomberg) -- The global economy remains favorable for higher-risk assets even after market declines, according to Goldman Sachs Group Inc.

“With the market lower, the near-term risk-reward is more balanced and our core view is that the macro backdrop is still quite friendly for risky assets,” Dominic Wilson, a senior economist at the bank in New York, wrote in a report received yesterday. “The tactical issue is still the difficulty in identifying strong upcoming positive catalysts. Third-quarter earnings might help now the market is down, but without a strong prior it is hard to be sure.”

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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Crude Oil Falls on Concern Global Demand Recovery Will Be Slow

By Yee Kai Pin and Ben Sharples

Oct. 5 (Bloomberg) -- Crude oil fell for a second day in New York on concern demand in the U.S., the biggest energy user, will be slow to rebound as the nation’s jobless rate increased.

Oil extended losses from Oct. 2, when prices tumbled as much as 3.5 percent after a Labor Department report showed the U.S. lost more jobs than estimated in September. Economist Nouriel Roubini, the New York University professor who predicted the financial crisis, said Oct. 3 equity and commodity markets may decline in coming months as the gradual pace of the economic recovery disappoints investors.

“Everyone wants to believe the economy will rebound slowly, will not lose ground, but I have no confidence,” said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo. “Any support will be psychological.”

Crude oil for November delivery fell as much as 67 cents, or 1 percent, to $69.28 a barrel, in electronic trading on the New York Mercantile Exchange. The contract was at $69.76 a barrel at 4:05 p.m. Singapore time. Futures have gained 56 percent this year.

Oil lost 1.2 percent on Oct. 2, the biggest decline since Sept. 24, to settle at $69.95 a barrel. U.S. unemployment climbed to 9.8 percent, the highest since 1983, from 9.7 percent in August, according to the Labor Department.

“We continue to expect this volatility in the data to persist until the oil market emerges from the shoulder-month period and the economic recovery gains more solid footing,” analysts at Goldman Sachs Group Inc., led by Allison Nathan, said in a report today.

‘Easy Money’

Governments around the world have injected $2 trillion in stimulus while central banks have cut interest rates to close to zero in efforts to revive growth. This “easy money” has created asset bubbles, causing markets to rise too quickly, Roubini said in an interview in Istanbul.

Asian shares extended last week’s losses, with the MSCI Asia Pacific Index pulling back 0.8 percent to 113.60 as of 3:56 p.m. in Tokyo. On Oct. 3, the Standard & Poor’s 500 Index retreated 1.8 percent to close at 1,025.21, posting its first two-week drop since July. The Dow Jones Industrial Average was down 1.8 percent at 9,487.67. European equities fluctuated between gains and losses.

“The equity markets are starting to realize that things may have run too hard, too quickly,” said Mark Pervan, senior commodity strategist at ANZ Banking Group Ltd. in Melbourne. “It’s all pointing downward.”

Brent crude oil for November settlement fell to as low as $67.28 a barrel on the London-based ICE Futures Europe exchange, down 79 cents, or 1.2 percent. It was at $67.79 a barrel at 4:05 p.m. Singapore time. The contract lost 1.6 percent on Oct. 2, the biggest decline since Sept. 24.

“Traders are trying to get a handle on which factors are moving this market right now, and prices have been moving erratically in response to a number of conflicting signals,” Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut, said in a note.

Surpassing Saudis

Russia surpassed Saudi Arabia as the world’s largest oil producer last month. Russia increased its output 1.7 percent to a post-Soviet high in September from a year earlier, after OAO Rosneft starting pumping from a new field in August. Production rose to 10.01 million barrels a day from 9.84 million barrels, the Energy Ministry’s CDU-TEK unit said Oct. 2.

“Russia again saw record production levels, so that’ll hang on the market,” Pervan said.

Saudi Arabia was the world’s largest oil producer in 2008, according to U.S. Energy Department data and estimates from Bloomberg News.

The kingdom pumped 8.015 million barrels a day last month, based on a Bloomberg survey. It has cut output by 17 percent from 9.6 million barrels a day in July 2008 as part of an effort by the Organization of Petroleum Exporting Countries to support prices by curtailing shipments.

To contact the reporters on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net; Ben Sharples in Melbourne at bsharples@bloomberg.net

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Stock Seers Say Gross 5% May Only Be Normal in Debt

By Lynn Thomasson and Michael Tsang

Oct. 5 (Bloomberg) -- Wall Street projections for the fastest U.S. profit growth in two decades are putting some of the biggest equity investors at odds with Bill Gross.

Money managers are betting that more than two years of declining earnings, the longest stretch since the Great Depression, will end in 2010 when net income rises 26 percent before expanding 22 percent in 2011, according to data compiled by Bloomberg. Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., says the economy won’t grow fast enough to sustain the steepest rally since the 1930s and equity returns will be limited to 5 percent a year.

While investors drove the Standard & Poor’s 500 Index up 52 percent since March anticipating a U.S. recovery from the first global recession since World War II, the gauge fell 1.8 percent last week as the unemployment rate rose to the highest level since 1983. Even though 3,800 analyst estimates in a Bloomberg survey show profits will rebound next year, their average predictions indicate companies will start reporting a ninth quarter of declining earnings this week.

“I reject this notion of a 5 percent return and ‘new normal,’” said Fritz Meyer, the Denver-based senior market strategist of Invesco Aim, which oversees $149 billion. “I wouldn’t be surprised if the rate of recovery is even better.”

Futures, Quarterly Rallies

Futures on the S&P 500 added 0.3 percent at 8:43 a.m. in London today amid speculation that a report from the Institute for Supply Management will show service industries in the U.S. stabilized last month.

The S&P 500 posted the steepest back-to-back quarterly gains since 1975 in the past six months as the U.S. government and Federal Reserve lent, spent or guaranteed $11.6 trillion to revive the economy. Profit gains will push combined S&P 500 earnings above $92 a share within two years, an all-time high, according to the estimates compiled by Bloomberg.

Economic reports last week told a different story as the Labor Department said unemployment rose to 9.8 percent, the Tempe, Arizona-based Institute for Supply Management’s factory gauge showed that manufacturing expanded less than economists estimated and the New York-based Conference Board said that consumer confidence unexpectedly fell.

Analysts’ forecasts sound “excessively optimistic,” Gross, the co-chief investment officer at Newport Beach, California-based Pimco, said in an Oct. 1 interview. “It’s very rosy and very Goldilocks and unlike the scenario that we see, which is a ‘new normal’ with very slow growth rates.”

Alcoa, GE

Alcoa Inc. is scheduled to release third-quarter results on Oct. 7, the first among Dow Jones Industrial Average companies. Fairfield, Connecticut-based General Electric Co. and Intel Corp. of Santa Clara, California, are also among the 45 S&P 500 companies that will report in the next two weeks.

Analysts surveyed by Bloomberg estimate that operating income at S&P 500 companies dropped 23 percent in the July-to- September period. The two-year streak of profit declines for U.S. companies would continue in the year’s final three months if not for a 132 percent gain in earnings at financial firms, according to forecasts compiled by Bloomberg.

Bulls say equities are cheap because estimates show profits will surge 54 percent the next two years, the steepest increase since 64 percent from 1986 to 1988. That’s faster than the 46 percent expansion predicted for companies in the Shanghai Composite Index, even though economists forecast China’s economy will grow three times as much as the U.S. in 2010.

Inexpensive Market

The S&P 500 traded for 20.2 times the reported operating income of its companies last month, the most since 2004. Using estimated 2011 earnings drives the valuation down to 11.1, or only 10 percent higher than the 24-year low based on trailing results reached in March.

“The market is inexpensive,” said Mary Chris Gay, a fund manager at Baltimore-based Legg Mason Inc., which oversees $693 billion. “It would not be unreasonable to expect the market to be up 25 to 30 percent over the next year.”

Demand from China, the world’s biggest consumer of metals and second-largest buyer of oil, may help push earnings at U.S. commodity producers 149 percent higher over the next two years, the steepest increase among the S&P 500’s 10 industries, excluding financials, the estimates show.

Profits at New York-based Alcoa, the largest U.S. aluminum company, will rebound to 88 cents a share in 2011 after an 83- cent loss this year, according to the average analyst estimates. Irving, Texas-based Exxon Mobil Corp., the biggest U.S. oil company, is projected to almost double earnings in two years.

‘Maybe Even Surprise’

“It’s quite possible that next year’s earnings could reach levels that are expected and maybe even surprise to the upside,” said Linda Duessel, who helps manage $402 billion as equity-market strategist at Federated Investors Inc. in Pittsburgh. “The market is becoming more used to the idea that we are in a recovery.”

The profit growth forecast by analysts for 2010 is 11 times faster than the expansion in GDP projected by economists surveyed last month, the highest ratio on record, based on data compiled by Bloomberg going back 60 years.

Gross says his expectation for inflation-adjusted growth of no more than 2 percent isn’t enough to push annual stock returns above 5 percent. His new normal encompasses heightened government regulation and lower consumption as Americans reduce debt.

Total Return

The S&P 500 increased 11 percent on average in the five years ended in 2007, before falling 38 percent last year. The index posted the biggest annual decline since 1937 as the collapse of subprime mortgages spurred $1.6 trillion in writedowns and credit losses at financial companies globally and sent the U.S., Europe and Japan into the first simultaneous recessions since World War II.

During the last two bull markets, the S&P 500 had an average total return of 18.6 percent a year, according to data compiled by Bloomberg.

Since 1970, U.S. government bonds have returned 4.6 percent annually after adjusting for inflation, according to Chicago- based Ibbotson Associates Inc. data compiled by the London Business School and Credit Suisse Group AG in Zurich.

“The fact is that stocks are up almost 50 percent from the bottom and so if we’re talking about stock prices, as opposed to corporate profits, it would be fair to say a lot of that’s already in the market,” Gross said. “The V shape stands very little chance of being realized, either from profits or stock prices.”

Post-Recession Growth

Fritz Reynolds, who oversees the Reynolds Blue Chip Growth Fund in Maui, Hawaii, says the economic revival will be too slow to support analysts’ profit projections.

The U.S. economy will expand 2.4 percent next year, rebounding from the worst contraction since the Great Depression, according to a Bloomberg News survey of economists last month. In the four quarters following the other two recessions since World War II that lasted more than a year -- the 1973 to 1975 and 1981 to 1982 downturns -- growth averaged 6.2 percent and 7.8 percent, respectively, data compiled by Bloomberg show.

Demand from China may not be enough to maintain commodity prices as stockpiles of raw materials rise and shipping rates drop. Oil inventories rose 12 percent in the past year, Energy Department figures show, while the Baltic Dry Index, a barometer for raw-material demand, slid 41 percent in the third quarter.

“Analyst estimates seem pretty high,” said Reynolds, whose $46 million Reynolds Blue Chip fund has outperformed 99 percent of rivals in the past five years. “What makes me cautious is that it was just nine months ago that things were really bad in the economy.”

House Divided

The dilemma that investors face can be seen in the diverging forecasts at JPMorgan Chase & Co., where New York- based chief U.S. strategist Thomas Lee advises clients buy companies most tied to economic growth, while European analysts led by Mislav Matejka say investors should pare holdings.

Lee recommended in a Sept. 18 report that investors buy so- called cyclical stocks over defensive ones because profits are rising and they’re cheaper relative to historical valuations.

Matejka, Lee’s counterpart in Europe, said in an Oct. 1 note that the rally in cyclicals will slow because the stocks are expensive. Energy shares in the Dow Jones Stoxx 600 Index trade for 14.8 times income, compared with an average of 10.4 over the last five years, according to data compiled by Bloomberg.

David Kelly, who helps oversee $474 billion as chief market strategist for JPMorgan Funds in New York, says increasing earnings means stocks remain a buy.

“The uplift in profits should be very dramatic,” said Kelly. “We have embarked upon a recovery. So far, I don’t see any reason for that recovery not to proceed.”

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.

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Finance Firms See First Recovery Signs in Two Years, CBI Says

By Poppy Trowbridge

Oct. 5 (Bloomberg) -- U.K. financial firms see signs of recovery and banks report feeling “more confident” for the first time since the global economic crisis began in 2007, according to a survey by the Confederation of British Industry and consulting firm Pricewaterhouse Coopers LLP.

Overall business volumes across the financial-services industry rose in the three months to September, 32 percent of those surveyed said in a report released today. For the first time in two years, more respondents reported seeing a rise in business volumes, than a decline, according to the report. Still, 24 percent of respondents said business fell in the period. Securities traders and investment managers saw “strong” volume growth, according to the report.

“Signs of a brighter outlook are appearing in the financial-services sector,” said Ian McCafferty, the CBI’s chief economic adviser. “Business volumes have increased for the first time since the onset of the credit crunch. This is concrete evidence of the gradual path to recovery.”

Britain is pulling out of its worst economic slump in at least a generation as consumer confidence improves and mortgage approvals pick up. The International Monetary Fund raised its forecast on Oct. 1 for U.K. economic growth next year.

While financial companies are more optimistic about the future, they remain worried a lack of demand will crimp expansion plans, according to the survey. As many as 60,000 U.K. financial jobs may be cut this year, McCafferty told journalists at a briefing on the report last week. That compares with 34,000 positions eliminated in 2008, CBI data show.

“Future demand is still a major concern for financial- services firms,” McCafferty said. “Further pain will continue to be felt in job losses and lower investment.”

Rising Bad Loans

Bankers’ optimism is also partly offset by concern about rising bad loans and the potential impact of new regulation.

The U.K.’s five biggest banks agreed last week to impose limits on bonus pay. HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Standard Chartered Plc accepted rules that restrict the amount they can devote to their bonus pools and how much they can set aside for deferred payments to executives and traders, adopting a program sketched out by the Group of 20 nations.

Provisions for bad loans at Lloyds, the U.K.’s biggest mortgage lender, have already peaked Chief Executive Officer Eric Daniels said in August. The bank had provisions of 13.4 billion pounds ($21.3 billion) in the first half. RBS reported an unexpected first-half loss that month after setting aside 7.52 billion pounds to partly cover bad loans.

Lloyds and RBS have agreed to insure about 576 billion pounds of risky assets with the government. HSBC, Europe’s biggest bank, avoided a government bailout, even after posting $67 billion of provisions for bad loans in the past 3 1/2 years.

U.K. Competitiveness

There’s “no real expectation” that the U.K. financial- services industry will return to the buoyant position it occupied three or four years ago, according to the CBI. Sixty- six percent of those surveyed said the financial crisis has damaged the country’s competitiveness.

The CBI surveyed 89 companies, including insurers, banks, building societies, securities and commodities brokers, private equity houses and investment management firms, from Aug. 19 to Sept. 2.

To contact the reporter for this story: Poppy Trowbridge in London at ptrowbridge@bloomberg.net

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European Stocks Fluctuate; Basic-Resource Producers Advance

By Andrew Rummer

Oct. 5 (Bloomberg) -- European stocks fluctuated between gains and losses as an advance by basic-resource producers offset declines by automakers and household-goods companies.

The Dow Jones Stoxx 600 Index was little changed at 234.23 as of 8:27 a.m. in London, having earlier dropped 0.2 percent and risen as much as 0.2 percent.

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Savings at 24-Year High Means Lasting Recovery for McCaughan

By Lynn Thomasson

Oct. 5 (Bloomberg) -- The U.S. economy’s recovery from its worst recession since the 1930s will be helped as savings climb to the highest level in 24 years, according to Jim McCaughan, the chief executive officer of Principal Global Investors.

Americans will keep up to 9 percent of their disposable income in the bank, the most since 1985, said McCaughan, who oversees $201 billion, in an Oct. 2 interview. While less spending will cut U.S. growth and profits at retailers, it will make the expansion last longer by reducing household debt and the nation’s trade deficit, he said.

“You’re going to see a pretty tepid recovery,” McCaughan said in New York. “You’ll have a less leveraged personal sector and financial sector. You’ll get growth. It won’t be 5 percent, it will be 2 percent. That isn’t so bad.”

The outlook echoes predictions from Richard Clarida of Newport Beach, California-based Pacific Investment Management Co. and Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. Clarida, whose firm runs the world’s largest bond fund, estimated the savings rate may exceed 8 percent. Shilling said Americans are on a decade-long “savings spree” that will restrain the economy. Both spoke in Bloomberg Radio interviews last month.

Consumers lost $9.67 trillion of wealth last year as the housing bubble burst and the Standard & Poor’s 500 Index fell 38 percent, the most since 1937. The declines spurred them to push savings up to 5.9 percent in May, the highest since 1998. The rate slid to 3 percent in August, above the three-year low of 0.8 percent in April 2008, Commerce Department data show.

Belt Tightening

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” according to a Bloomberg News poll from Sept. 17. More than three in four adults said they reduced spending in the past year, the survey showed.

Best Buy Co., the largest electronics retailer, said profit during the three-month period that ended Aug. 29 fell 22 percent as sales of digital cameras, video games and DVDs dropped. The Richfield, Minnesota-based company reported record sales of $45 billion in the fiscal year ended in February.

“You need a more balanced economy,” McCaughan said. “Consumer spending got to 70 percent of the U.S. economy. That’s actually unsustainable.”

The median economist surveyed last month by Bloomberg forecast U.S. growth of 2.4 percent next year and 2.9 percent in 2011. That compares with the gross domestic product expansion that exceeded 3 percent in 2004 and 2005 as consumers used cash extracted from their real-estate holdings to fuel spending.

More Failures

McCaughan predicted more failures at smaller banks as they struggle with mounting losses on real-estate loans. Larger lenders have been strengthened by government cash infusions, he added. Almost 100 U.S. banks have collapsed this year, the most since the savings-and-loans crisis of the early 1990s.

“There will be more land mines” in regional lenders, McCaughan said. “The large U.S. banks have been very good at being transparent. They’ve raised a lot of capital, so I think they’re in fundamentally quite a strong position.”

Principal Financial Group Inc., the asset manager’s Des Moines, Iowa-based corporate parent, is issuing more commercial mortgages and expects “good returns” following almost two years of reduced lending, McCaughan said.

“There’s opportunity in commercial real estate,” he said. “But there’s not a rush to get in.”

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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Dollar Falls as G-7 Leaders Refrain From Criticizing Weakness

By Yoshiaki Nohara and Ron Harui

Oct. 5 (Bloomberg) -- The dollar fell against the euro for a second day after Group of Seven finance chiefs refrained from calling for measures to stop the U.S. currency’s decline.

The yen pared earlier gains against the dollar as Japanese Finance Minister Hirohisa Fujii said the government will intervene if the yen moves in a “biased direction.” Australia’s dollar rose against the greenback after a report showed the nation’s services shrank at a slower pace.

“Given the huge amount of rhetoric from various officials leading up to the meeting, warning in particular about excessive currency strength against the dollar and the negative impact on economic recovery, the relatively weak statement leaves the door open to further dollar weakness over coming weeks,” Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, wrote in a report dated today.

The dollar fell to $1.4633 per euro at 7:55 a.m. in London from $1.4576 in New York on Oct. 2. It touched a one-year low of $1.4844 on Sept. 23. It dropped to $1.5970 per British pound from $1.5946, and slid to 1.0324 Swiss francs from 1.0350 francs.

The yen declined to 131.41 per euro from 130.90 in New York on Oct. 2. The Japanese currency was at 89.81 per U.S. dollar from 89.81.

G-7 Statement

The G-7 met at the end of a week in which policy makers from France to Canada signaled concern that a sliding dollar risks impeding their recoveries from recession. Traders were bracing for stronger language to arrest the slump in the U.S. dollar which has dropped 13 percent against a basket of seven currencies since early March.

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” G-7 officials said in a statement after talks on Oct. 3, repeating language they used in April.

The statement was “insufficient to support” the dollar, Bank of America-Merrill Lynch foreign-exchange strategist Tomoko Fujii wrote in a report today. Morgan Stanley analysts Sophia Drossos and Stewart Newnham wrote in a separate report the G-7’s stance was consistent with an aim to rebalance global demand, which is positive for “higher-beta currencies.”

A weaker dollar risks hurting economies outside the U.S. by making the exports of companies such as Japan’s Canon Inc. more expensive. The Dollar Index, which tracks the greenback against the currencies of six trading partners including the euro and the yen, lost 0.4 percent to 76.757 today.

Australia’s dollar gained 1 percent to 87.34 U.S. cents from 86.52 after the country’s performance of services index rose 1.3 points to 49.3. The figure is just short of the 50 level separating expansion from contraction. Commonwealth Bank of Australia and the Australian Industry Group released the figure in Sydney today.

‘Excessive Moves’

The yen retreated against 14 of its 16 major counterparts after Japan’s Fujii issued his clearest warning yet that his nation is open to intervening in the currency market.

“If currencies show some excessive moves in a biased direction, we will take action,” Fujii said after the G-7 meeting. He declined to say if the yen is trading in such a way.

Fujii’s position has shifted since his initial remarks on taking office in September. He formerly opposed seeking a “weak” yen. The currency last week rose to an eight-month high of 88.24 against the dollar, threatening exporters’ profits.

Stocks and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors, Nouriel Roubini, who predicted the financial crisis, said in an Oct. 3 interview in Istanbul.

“Markets have gone up too much, too soon, too fast,” Roubini said, “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V- shaped, but more like U-shaped.”

ECB Meeting

The European Central Bank will keep its main refinancing rate unchanged at 1 percent at the Oct. 8 meeting, according to all 53 economists surveyed by Bloomberg.

“The ECB is likely to leave rates unchanged this week,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. “Given Europe’s rate advantage over that in the U.S., the euro will probably be bolstered.”

The dollar also declined on speculation Federal Reserve officials this week will reiterate that the bank’s benchmark interest rate will remain at a record low. New York Fed President William Dudley will speak in New York today. Kansas City Fed President Thomas Hoenig is set to speak at an economic forum in Denver tomorrow.

Boston Fed President Eric Rosengren said last week the U.S. central bank and the government should maintain policies that support economic growth until a self-sustaining recovery is assured.

“It is important that monetary and fiscal policy continue to support the economy until private-sector spending has resumed, and until we are confident that the recovery will continue,” Rosengren said on Oct. 2 in Boston.

The benchmark interest rate is as low as zero in the U.S. and 0.1 percent in Japan, compared with 3 percent in Australia and 2.5 percent in New Zealand, attracting investors to the South Pacific nations’ assets.

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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Gold Advances as Dollar, Equity Drop Boosts Investment Demand

By Glenys Sim

Oct. 5 (Bloomberg) -- Gold rose for a second day in Asia as the dollar and stock markets tumbled, boosting demand for the precious metal as an alternative investment.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by the metal, expanded 1.2 metric tons to 1,096.55 tons on Oct. 2, data on the company’s Web site showed. The trust’s holdings increased 3.1 percent in the past month and are 3.3 percent off the record 1,134.03 tons reached June 2.

“We’re seeing a recovery in investment and even jewelry demand as other currencies appreciate against the dollar and gold becomes cheaper for those who hold other currencies,” Dick Poon, manager of the precious metals trading desk at Heraeus Ltd., said from Hong Kong. “The approach of the yearend festive season will likely take gold to a record.”

Gold for immediate delivery traded 0.3 percent higher at $1,005.65 an ounce at 2:30 p.m. in Singapore, extending last week’s 1.2 percent advance. December-delivery bullion on the Comex division of the New York Mercantile Exchange was little changed at $1,006.50 an ounce.

Eleven of 24 traders, investors and analysts surveyed by Bloomberg, or 46 percent, said gold will rise this week as a weakening dollar prompts investors to buy the metal. Nine forecast lower prices and four were neutral.

Gold has risen about 1.1 percent in the past month as the Dollar Index, which tracks the greenback against the currencies of six trading partners including the euro and yen, lost 1.9 percent. The benchmark MSCI Asia Pacific Index slid for a third day today to the lowest in almost a month.

Jewelry Demand

“Orders by jewelry makers are ongoing,” said Poon. “While it’s nowhere near the highs we saw in previous years, it has definitely improved from the first quarter of this year.”

The October-December period is the busiest season for jewelry sales in India, the world’s largest consumer of the metal, spurred by the wedding season and the Diwali holiday. The country’s gold imports probably fell for the fifth month in September as rising prices deterred jewelry buyers, a traders’ group said Sept. 30.

The country’s overseas purchases may total 50 tons in September, compared with 54 tons a year ago, said Harmesh Arora, vice president of the Bombay Bullion Association Ltd., citing preliminary data.

Among other precious metals for immediate delivery, silver gained 1.1 percent to $16.3425 an ounce, platinum and palladium were little changed at $1,282 an ounce and $296 an ounce respectively.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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Asian Stocks Fall as Roubini, U.S. Data Fuel Growth Concerns

By Jonathan Burgos and Masaki Kondo

Oct. 5 (Bloomberg) -- Asian stocks fell for a third day, led by technology and mining companies, as economist Nouriel Roubini said share prices may drop and a report showed the U.S. lost more jobs than estimated.

Samsung Electronics Co., which gets 19 percent of sales from America, slumped 5.7 percent in Seoul. Mitsui & Co., which counts commodities as its biggest source of profit, lost 3.4 percent after oil and metal prices decreased. Hana Financial Group Inc. tumbled 14 percent after the Maeil Business Newspaper reported it may sell new shares.

The MSCI Asia Pacific Index declined 0.8 percent to 113.60 as of 3:56 p.m. in Tokyo, extending its three-day slump to 3.7 percent. The gauge fell 2.8 percent last week, the most since the five days ended Aug. 21, on concern a seven-month rally had outpaced the prospects for a revival in the global economy.

“The expectations of recovery that gave the market an extra boost have come apart,” said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co., which oversees the equivalent of $14 billion. “Resource shares won’t rise until we see a vigorous recovery in demand.”

South Korea’s Kospi Index dropped 2.3 percent, while Singapore’s Straits Times Index lost 0.5 percent. Australia’s S&P/ASX 200 Index fell 0.3 percent. China’s markets are closed today for a holiday.

Japan’s Nikkei 225 Stock Average dropped 0.6 percent, while the Topix Index slipped 0.8 percent. Bearing maker Nachi- Fujikoshi Corp. and tool manufacturer Mori Seki Co. dropped more than 3 percent on reports of losses. Among stocks that rose, Fast Retailing Co., Japan’s biggest casual-clothing retailer, climbed 15 percent after sales at its Uniqlo chain surged.

U.S. Economy

Futures on the Standard & Poor’s 500 Index added 0.4 percent. The gauge retreated 0.5 percent on Oct. 2 after a Labor Department report showed payrolls dropped more than economists had estimated in September. Orders placed with U.S. factories fell 0.8 percent in August, the Commerce Department said, while economists had forecast orders would be unchanged.

“Markets have gone up too much, too soon, too fast,” Roubini, the New York University professor who predicted the financial crisis, said in an interview in Istanbul on Oct. 3. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”

The MSCI gauge has climbed 61 percent from a five-year low on March 9 as stimulus measures worldwide dragged economies out of recession. Stocks in the index are priced at an average 22 times estimated earnings, more than 17 times for companies in the S&P 500.

Group of Seven

Asian exporters fell on concern U.S. demand is faltering. Samsung Electronics, the world’s largest maker of computer- memory chips, declined 5.7 percent to 747,000 won.

Honda Motor Co., which generates 47 percent of its revenue in North America, retreated 2.8 percent to 2,595 yen. Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., declined 3.7 percent to HK$28.70.

Mitsui, Japan’s No. 2 trading house, dropped 3.4 percent to 1,086 yen. Larger rival Mitsubishi Corp., which derives almost half of its sales from commodities, declined 2.9 percent to 1,726 yen. Korea Zinc Co. slumped 7.4 percent to 163,500 won.

Crude oil slid 1.2 percent on Oct. 2, the most in a week. A gauge of six metals, including copper and nickel, fell 2 percent in London, adding to the previous day’s 2.8 percent drop.

Following the U.S. data from Oct. 2, Group of Seven finance chiefs said after a weekend meeting that “disorderly” swings in currencies threaten economic growth. Policy makers from France to Canada have signaled worry that a sliding dollar risks impeding their recoveries from the deepest global recession since World War II.

Second Slump?

Recent data spurred concern the economic recovery in the U.S. is faltering. Reports released in the past two weeks showed manufacturing, orders for goods made to last several years and sales of new homes missed estimates.

Michael Geoghegan, HSBC Holdings Plc’s chief executive officer, is convinced there will be a second global economic slump and as a result doesn’t want the bank to grow too fast, the Financial Times cited him as saying. HSBC shares lost 0.8 percent to HK$85.85 in Hong Kong.

Hana Financial, South Korea’s fourth-largest financial company, tumbled 14 percent to 35,050 won. The company may sell as much as 2 trillion won ($1.7 billion) of new shares, the Maeil Business Newspaper reported yesterday on its Web site. Hana Financial said it hasn’t decided whether to sell the stock.

Loss Forecasts

Mori Seiki declined 3.4 percent to 953 yen. The company increased its full-year loss forecast due to sluggish demand.

Nachi-Fujikoshi dropped 3.7 percent to 180 yen. The company reported a net loss of 7.25 billion yen ($81 million) for the nine months ended Aug. 31, compared with 7.14 billion yen profit a year earlier, as sales slumped.

Fast Retailing jumped 15 percent to 13,530 yen. The company said sales at Uniqlo in Japan advanced 32 percent last month, the biggest increase in 10 months, on higher demand for jeans and jackets.

Aristocrat Leisure Ltd., the world’s second largest maker of slot machines, surged 7.4 percent to A$5.55. JP Morgan Chase & Co. upgraded the stock to “overweight” from “neutral” and raised its 12-month share-price target to A$6.40 from A$4.

To contact the reporters for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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S&P 500 2010 EPS Estimate Raised to $76 at Credit Suisse

By Alexis Xydias

Oct. 5 (Bloomberg) -- Credit Suisse Group AG strategists reiterated a recommendation to hold more global equities than are reflected in benchmarks, and raised their 2010 earnings-per- share estimate for the Standard & Poor’s 500 Index to $76 from $71.

The S&P 500 may end 2009 at 1,100 because a growing U.S. economy and expanding earnings will spur investors to allocate more money to equities, the strategists wrote in a report today.

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German Stocks Fluctuate; BMW Falls as Volkswagen, K+S Advance

By Julie Cruz

Oct. 5 (Bloomberg) -- German stocks swung between gains and losses as Nouriel Roubini’s forecast that equity markets may drop in the coming months helped offset speculation a report today may show U.S. service industries stabilized in September.

The benchmark DAX Index fell 0.1 percent to 5,464.66 as of 9:24 a.m. in Frankfurt, after rising as much as 0.2 percent earlier. The measure has dropped 4.7 percent from this year’s high on Sept. 28 amid concern share prices have outpaced the prospects for economic growth and corporate earnings.

New York University Professor Roubini, who predicted the financial crisis, said in an interview Oct. 3 that stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors.

The Institute for Supply Management’s index of non- manufacturing businesses, which reflects almost 90 percent of the economy, probably rose to 50 from 48.4 in August, according to the median of 64 forecasts in a Bloomberg News survey. Fifty is the dividing line between expansion and contraction.

Bayerische Motoren Werke AG lost 1.4 percent to 31.39 euros as Commerzbank AG cut its recommendation for the world’s biggest maker of luxury cars to “hold.” Daimler AG, the second- largest, slipped 0.9 percent to 32.50 euros.

Volkswagen AG, Europe’s biggest carmaker, added 1.2 percent to 110.77, the biggest advance among the 30 DAX stocks. K+S AG, the region’s biggest producer of potash, climbed 1.1 percent to 36.70 euros.

Solarworld AG rallied 2.8 percent to 15.60 euros, ending two days of losses. The solar company is adding 350 megawatts of production capacity at its Hillsboro site in Oregon because of “good growth prospects” in the U.S.

MediGene AG rose 1.6 percent to 5.03 euros, the first gain in three days. The company obtained an additional patent from the European Patent Office on the manufacturing process for its EndoTAG-1 drug.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

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