Economic Calendar

Thursday, December 17, 2009

EURUSD Breaks Lower, Eyes 1.4200 Levels

Daily Forex Fundamentals | Written by AC-Markets | Dec 17 09 11:00 GMT |

News and Events:

EURUSD has now fallen over 4.5% in the 2 weeks since the surprise non-farm payrolls, and the exit of USD short positions in the market now looks less like a temporary correction and more like a trend reversal with every passing day. Despite still being in the sweet spot of low US rates against a backdrop of improving global data, the truth is that US data has just been a little bit too good lately. Fed policy makers remain understandably cautious about the outlook for 2010, which is why even subtle alterations to the wording of their statement have significant impacts on market psychology. The acknowledgement yesterday that the decline in the labour market is “abating”, gives markets the first hints that the US is getting back on track sooner than anticipated, and the USD will not settle for its role as carry trade funding currency for long. EURUSD's collapse through 1.4480 support overnight leaves very little technical support expected until 1.4180 levels, and given the ongoing negative news about Greece's credit rating and the fragile state of Austria banking system, the fundamental outlook offers little consolation for EURUSD bulls. Another currency suffering today is GBP, after this morning's reading of UK Retail Sales was starkly lower than consensus forecasts, printing -0.3% MoM, 3.1% YoY (expected: 0.5% MoM, 3.7% YoY). GBPUSD had been trading around 1.6230 levels ahead of the release, but 1.6200 support rapidly gave way to a slump down to 1.6111 lows, and a close below 1.6150 leaves us open now to a revisit of 1.6000. The US economic releases this afternoon are by no means first tier data, with only Leading Indicators and Philadelphia Fed expected; however given the pervading mood of the market to unwind USD shorts, we would expect upside surprises to have a disproportionately large effect on USD pairs.

Advanced Currency Markets - Forex Issues and Risks

Today Key Issues:

  • 12:00 CAD CPI, % m/m (y/y) Nov exp: 0.3 (0.8) prev: -0.1 (0.1)
  • 15:00 USD Philadelphia Fed mfg index Dec exp: 16.0 prev: 16.7
  • 15:00 USD Leading indicators, % m/m Nov exp: 0.7 prev: 0.3

The Risk Today:

EurUsd After failing to climb back above 1.4600 (hitting 1.4590) we saw short term wave 4 come to an end before wave 5 has taken the pair to the major support level at 1.4360. This level is also the lower range of the new downtrend so if short sellers are looking to book some profits pre- weekend / Christmas, then this is a highly likely place for them to do it before undergoing a choppy sideways action higher. IF we drop out of the bottom of the channel then the longer term target of EURUSD 1.3500 will be in play, but for now we advise cutting some EURUSD shorts and waiting for the re-entry, ideally at 1.4684. The prior support at 1.4515 has now become resistance so expect it provide a hurdle in the meantime.

GbpUsd GBPUSD finally looks to have broken out of its one month bearish channel, as Retail Sales data quickly prompted a collapse through 1.6200 levels to breach the lower end of the channel at 1.6166. A close below 1.6166 opens up a move towards 1.6000-1.6040 area, and for now, good supply at 1.6200 should cap any rallies.

UsdJpy The pair has continued on its 3-week uptrend since bottoming at 84.81 in 27th Nov, topping at 90.26 in early Asian trading today. Long positions are still favored with bids coming in at 89.50, and resistance at 90.86 (coinciding with 9 month downtrend line) plus resistance at 91.80.

UsdChf On Tuesday we said that we were probably still in wave 3 of 5 and that 1.0360 would attract longs in the short term. That scenario has played out perfectly, confirming the wave counts, and tells us that we are now likely in wave 5 of 5 and accompanied by some increasingly divergent momentum indicators. Wave 5's can be a great place to make some big bucks and fast – our October gold trade from 1006 to 1188 is a typical example – but in this case the divergences are a concern for me and I would now wait for a meaningful correction of this entire 5 wave move.

1.4845 1.6355 88.83
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot


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.


Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Dec 17 09 10:21 GMT |


Current level-1.4411

EUR/USD is in a broad consolidation, after bottoming at 1.2331 (Oct.28,2008). Technical indicators are neutral, and trading is situated between the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169.

Yesterday's consolidation was limited below 1.4607 resistance and a sharp sell-off followed, bottoming at 1.4369. The overall bias remains negative for 1.4170 main target with an initial resistance at 1.4499, followed by the crucial 1.4590

Resistance Support
intraday intraweek intraday intraweek
1.4499 1.5146 1.4369 1.4170
1.4590 1.5290 1.4273 1.3740


Current level - 89.74

The overall downtrend has been renewed with the recent break below 87.12. Trading is situated below the 50- and 200-day SMA, currently projected at 89.50 and 93.54.

The slide below 89.93 was confirmed to be only a corrective pattern and a new high followed, at 90.26. Intraday important support is 89.35 as that level is a combination between a static and a dynamic support and an eventual break below that area will target directly 87.35. Current intraday bias is negative, but the uptrend from 87.35 is still intact.

Resistance Support
intraday intraweek intraday intraweek
90.27 90.77 90.77 93.40
89.35 87.35 83.45 79.60


Current level- 1.6212

The pair is in a downtrend after peaking at 1.7042. Trading is situated above the 50- and 200-day SMA, currently projected at 1.6454 and 1.5258.

Yesterday's break above 1.6320 resistance resulted in a fast upswing to 1.6410, which we believe was the final wave in the prolonged consolidation above 1.6130. A break below 1.6180 will confirm, that the downtrend is renewed towards 1.59+ main target.

Resistance Support
intraday intraweek intraday intraweek
1.6270 1.6410 1.6840 1.7042
1.6180 1.6130 1.59+ 1.5706

DeltaStock Inc. - Online Forex & Securities Broker

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U.K. Retail Sales Slip For The First Time In Six Months, Despite Of Recovery Signs

Daily Forex Fundamentals | Written by | Dec 17 09 11:02 GMT |

Notwithstanding the remarkable improvement witnessed in the United Kingdom since the second quarter of the current year, retail sales slumped in November after rising for two consecutive months.

Retail sales plunged to -0.3% in November from the revised 0.6%, bellow estimates of 0.5%. The reading retreated after touching the highest level in 17 months in October, when it was boosted by the clothing amid Halloween and schools.

Sales are expected to incline, as we near to Christmas and New Year holidays. In addition, recovery signs emerging from the second largest economy in the Europe are suggesting that the slump is over.

In November, the fall came mostly from sales at non-food stores which dropped 0.9% on the month. Sales at department stores plummeted 4.4% on the month, the strongest slump since 1988. Volumes of textile sales, clothing and footwear dwindled 1.8% from October, the sharpest fall since May.

Although the economy mitigated the pace of contraction in the third quarter to 0.3%, relative to 0.6% and 2.4% contractions witnessed in the second and third quarters respectively and unemployment slowed down in the last three months, retailers are still suffering.

The unemployment rate inched up at its slowest pace since 2008 to 7.9% in the three months ending October from 7.8% in September and August. Jobless claims benefits retreated by 6,300 in November to 1.63 million, while the claimant rate lingered at 5%. Average earnings including bonuses increased to 1.5% from 1.4% and the reading excluding bonuses was unchanged at 1.7%.

Currently, companies are shedding fewer employees as they return to profitability again amid the turnaround and recovery in global demand, which is spurring retailers' sales as households have higher purchasing power. However, the rate is still considered high and threatening.

On the year, retail sales declined to 3.1% from the revised of 3.7%, bellow median estimates of 3.7%.

After the news; the pound slipped to a low of 1.6145 after reaching a high of 1.6339 earlier today, while in stock markets FTSE sagged 19.97 points or 0.38% to 5300.29 at 09:29 GMT.

It is worth noting that MPC members kept the borrowing cost at its low level of 0.5% and the APF program at 200 billion pounds in December, as the economy improves and inflation rose in November near the lower boundary of 2% set by the bank.

Analysts expect the economy to leave recession in the fourth quarter, as it currently gathers strength. The Bank of England anticipates the economy Britain will return to growth in the last quarter. The economy is expected to expand 2.2% next year and 4.1% in 2011, according to policy makers’ projections announced in November.


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India Food Prices Climb 19.95%, the Most in 11 Years

By Kartik Goyal and Manish Modi

Dec. 17 (Bloomberg) -- India’s wholesale food prices rose at the fastest pace in eleven years, making it more likely that the central bank will raise borrowing costs to curb inflation.

An index of food articles compiled by the commerce ministry increased 19.95 percent in the week ended Dec. 5 from a year earlier, following a 19.05 percent gain in the previous week. A measure of fuel and electricity prices rose 3.95 percent, the ministry said in a statement in New Delhi today.

Policy makers in Asia have started to exit monetary stimulus as the global economic recovery causes the focus to shift from reviving growth to fighting inflation. Australia and Vietnam have already begun raising interest rates as inflation accelerates across Asia, with China’s consumer prices rising for the first time in 10 months in November.

“When growth is subdued, inflation can be ignored,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc., Japan’s largest brokerage. “However, with both growth and inflation surprising on the upside, we believe that a policy action is imminent.”

India’s economy expanded 7.9 percent in the three months to Sept. 30 from a year earlier, the fastest pace in 1 1/2 years, giving policy makers room to shift their focus to soaring food inflation that threatens to undermine the popularity of Prime Minister Manmohan Singh. Singh got re-elected this year on promises to alleviate poverty in a nation where about 800 million people live on less than $2 a day.

Parliament Disruption

Opposition lawmakers yesterday accused the government of being ineffective in tackling soaring food prices and disrupted parliament, forcing the speaker of the lower house to adjourn for the day.

A panel of Indian lawmakers said in a report presented to parliament today that the government “failed to intervene” in a timely manner to address this “burning issue.” The standing committee of finance demanded a probe into the surge in sugar prices and suggested developing a mechanism to provide food items directly to consumers to overcome hoarding.

The central bank may tighten monetary policy to help contain a spillover from food-price inflation after gauging prices in December, Chakravarthy Rangarajan, economic adviser to the prime minister, said Dec. 15. The Reserve Bank of India is scheduled to review interest rates on Jan. 29.

Inflation is accelerating across Asia as the region emerges from the worst global recession since World War II. Consumer prices in Pakistan rose 10.51 percent in November from a year earlier and Sri Lanka’s inflation quickened to a six-month high.

Action Needed

India’s inflation is accelerating as the weakest monsoon since 1972 and floods in some parts of the country hurt farm output and caused shortages. Varma expects inflation to accelerate to 8 percent by March 31, more than the central bank’s 6.5 percent estimate.

Reserve Bank Governor Duvvuri Subbarao said last week that action may be needed to stabilize inflation expectations if food-price increases persist for “a long time.” The central bank could reduce liquidity or raise policy rates, Rangarajan said Dec. 15.

Benchmark 10-year bond yields were unchanged at 7.68 percent after the food price report, according to the central bank’s trading system.

Potato prices more than doubled in the week ended Dec. 5 from a year earlier, vegetable costs climbed 41.09 percent, the price of pulses rose 40.1 and wheat gained 13.9 percent, today’s report showed.

Policy Tightening

Subbarao started to withdraw India’s monetary stimulus in October by ordering lenders to put a greater proportion of deposits in government bonds, even as he kept the reverse repurchase rate unchanged at 3.25 percent since April.

“Rising inflation tends to immediately fuel expectations of policy tightening,” said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. “Irrespective of whether RBI touches first the repurchase rate or the cash reserve ratio, it will try to ensure that the impact on lending rates is not much,” to protect growth.

India releases weekly inflation data for wholesale food and fuel prices and an aggregate monthly wholesale index, which rose 4.78 percent in November, the most in 10 months.

To contact the reporter on this story: Kartik Goyal in New Delhi at


U.K. Retail Sales Unexpectedly Dropped in November

By Scott Hamilton

Dec. 17 (Bloomberg) -- U.K. retail sales unexpectedly fell in November for the first time in six months as the recession prompted consumers to spend less at clothing and department stores in the approach to Christmas.

Sales dropped 0.3 percent on the month after rising 0.6 percent in October, the Office for National Statistics said today in London. The median forecast was for a 0.5 percent gain, according to a Bloomberg News survey of 28 economists.

The U.K. faces a “bumpy and uneven” path out of recession as unemployment keeps increasing, Bank of England policy maker Kate Barker said in an interview this week. The central bank has kept its benchmark interest rate at a record low and pledged to spend as much as 200 billion pounds ($327 billion) on bonds to aid the economy.

“Consumers remain under pressure and they’re not going out and splurging before Christmas,” said Peter Dixon, an economist at Commerzbank AG in London. “The Bank of England won’t be panicking on the back of this. If we do get a rebound in mid- December going into January, this will just be seen as a blip.”

The pound fell as much as 0.4 percent after the release of the data and traded at $1.6164 as of 9:42 a.m. in London. The yield on the two-year gilt fell as much as 3 basis points and traded at 1.217 percent.

Non-food sales fell 0.9 percent in November, outweighing a 0.4 percent increase in food sales, the statistics office said. Clothing and department stores led the drop. On the year, sales rose 3.1 percent after gaining 3.7 percent in October.

‘Cautious’ on Christmas

JJB Sports Plc, the unprofitable sporting goods retailer, said today that it was “cautious” about its performance over Christmas and the New Year and trading will “remain difficult.” Tesco Plc, the world’s third-largest retailer, on Dec. 8 reported slowing sales growth that missed analysts’ estimates.

The economy has lost more than 600,000 jobs since the recession began, with the ax falling hardest on people under the age of 24. The effects of the slump will also be felt with more increases in unemployment that may continue to rise for several more quarters, Barker said.

The weakness of the job market is making it harder for Prime Minister Gordon Brown to resuscitate his popularity in time for an election which he must call by June. Barker said on Dec. 15 that it is possible the economy may see another quarter of contraction and that pressures on inflation are mainly “downward.”

Policy makers are trying to prevent inflation from undershooting the 2 percent target in the medium term. Inflation accelerated to 1.9 percent in November and will pick up before then dipping below the goal, the central bank’s forecasts show.

The retail price deflator, a measure of cost changes, showed a 0.5 percent annual drop in November, the statistics office said today.

To contact the reporter on this story: Scott Hamilton in London at


Hong Kong Risks ‘Sharp Corrections’ in Asset Prices

By Sophie Leung

Dec. 17 (Bloomberg) -- Hong Kong’s central bank said the city may face “sharp corrections” in asset prices should fund flows reverse, adding to concerns voiced by Japan, China and South Korea on the dangers of speculative capital.

A rally in the stock market was fueled by an influx of capital as investors’ risk appetite gained and they bet on an improving outlook for China’s economy, the Hong Kong Monetary Authority said in a quarterly report yesterday. Outflows may bring “volatilities in the real economy,” the HKMA said.

Housing prices in Hong Kong have gained for 10 months, while the benchmark Hang Seng Index has surged 48 percent this year. Financial officials in Japan and China, Asia’s two largest economies, warned last month that the Federal Reserve’s interest rate policy risks spurring speculative capital that may inflate asset prices and derail an economic recovery.

“It’s highly probable that the asset markets would show fluctuations once the fund flows reverse if the U.S. raises interest rates,” Peng Wensheng, a Hong Kong-based economist with Barclays Capital, said. “The risk isn’t restricted to Hong Kong, but extends to emerging markets, especially in Asia.”

The Hang Seng Index fell 1.2 percent at the close, led by property companies. New World Development Co., a developer controlled by billionaire Cheng Yu-tung, dropped 3.3 percent.

No. 1 Threat

The HKMA left its base lending rate unchanged today at a record-low 0.5 percent after the U.S. Federal Reserve stayed put. The city’s rates track those in the U.S. because Hong Kong’s dollar is pegged to the U.S. currency. The Fed repeated yesterday its pledge to keep borrowing costs “exceptionally low” for an extended period.

Asset bubbles are the No. 1 threat to financial stability in Asia, Norman Chan, HKMA’s chief executive officer, said Dec. 14. More than HK$640 billion ($83 billion) has flowed into the city since October last year, he said.

The Fed has kept benchmark interest rates near zero percent since December 2008 to revive lending after the worst financial crisis since World War II. China’s “moderately loose” monetary policy has fueled record lending in that country.

“The resultant loose monetary environment may heighten the risks of asset-price and consumer-price inflation through the expectation and credit channels,” the HKMA said yesterday.

Hong Kong has kept its base rate at 0.5 percent since December and asked banks to help support the economy. The HKMA has also added money to the market by buying U.S. dollars to prevent the city’s currency from strengthening beyond its fixed- exchange rate maximum.

Asian Problem

Donald Tsang, Hong Kong’s chief executive, said Nov. 13 that he was “scared” that money flowing into Asia could lead to another crisis.

“We have a U.S. dollar carry trade at the moment,” Tsang said. “Where is the money going -- it’s where the problem’s going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

Prices for existing Hong Kong homes rose 29 percent this year, according to the Centa-City Leading Index, a weekly measure developed by Centaline Property Agency Ltd. and the City University of Hong Kong.

The price jump has sparked a public outcry, spurring the government to tighten down-payment requirements for luxury homes for the first time since 1991 to curtail speculation.

Billionaire’s Forecast

Hang Lung Properties Ltd. Chairman Ronnie Chan said Dec. 4 that Hong Kong’s home market is a “good bet,” joining billionaire Lee Shau-kee in forecasting rising prices. Sun Hung Kai Properties Ltd. Vice Chairman Raymond Kwok said Dec. 3 that property prices in Hong Kong are still “reasonable.”

Home prices plummeted during the 1997-98 Asian financial crisis, falling 56 percent in October 1998 from a record high a year earlier, according to the Centa-City index. The 2000 dot- com bubble burst, the Sept. 11, 2001, terrorist attacks and SARS disease epidemic in 2003 caused prices to fall as much as 70 percent from the pre-crisis peak.

Hong Kong’s economy grew for a second straight quarter in the three months through Sept. 30 this year as consumption and investment gained. The economy will further improve next year, and consumer-price inflation is expected to “remain anchored” in the first half of 2010, HKMA said in its report.

Consumer prices rose 2.2 percent in October from a year earlier, after the biggest fall in five years in August, as the government scrapped subsidies and the economic recovery encouraged spending.

To contact the reporter on this story: Sophie Leung in Hong Kong at


ECB Said to Start Consulting Banks, Investors on Collateral

By Esteban Duarte and Gabi Thesing

Dec. 17 (Bloomberg) -- European Central Bank officials are moving closer to forcing banks to provide more information about the collateral they give the ECB in return for loans.

ECB policy makers may today approve the start of a consultation process with banks, investors and market participants asking them to suggest how residential mortgage- backed securities can be made more transparent, according to two people involved in the process. The Governing Council meets today in Frankfurt.

The ECB is trying to better monitor the quality of the assets it’s holding in return for the funds it’s pumped into the European banking system during the crisis. European banks have created about 1.1 trillion euros ($1.6 trillion) of asset-backed securities since June 2007, which they can use as collateral for ECB loans.

The ECB’s push “will increase transparency for investors and better information will attract new investors,” said Dipesh Mehta, a London-based securitization analyst at Barclays Capital. “U.S. investors already find the European transactions hard to look at without loan by loan data.”

Banks, investors and other market participants have about two months to comment, the people said. An ECB spokeswoman declined to comment.

ECB Vice President Lucas Papademos said on Dec. 12 the bank plans to take steps to help revive the asset-backed bond market which was dormant for more than a year until September, when Volkswagen AG and Lloyds Banking Group Plc sold investors 1.7 billion euros ($2.5 billion) of the securities.


Under the terms of the collateral consultation, officials want banks to provide information about individual loans such as the value of the property backing a mortgage, details on cash flow and whether the borrower is in arrears, the people said.

Banks in Europe have pledged about 217 billion euros of asset-backed securities as collateral at the ECB, Barclays Capital estimates.

The ECB has already tightened the rules for asset-backed securities it accepts as the central bank moves toward unwinding its emergency liquidity measures. The ECB said Nov. 20 it wants to ensure “high credit standards” are met and aims to restore “the proper functioning of the ABS market.”

Banks have used asset-backed bonds, notes secured by mortgages and credit card bills, more than any other type of debt as collateral in exchange for ECB funding.

The ECB has used money market operations as one of its main policy tools in response to the financial crisis. The ECB yesterday said it loaned banks 96.9 billion euros at its last tender of 12-month funds, more than the 75 billion euros forecast by a Bloomberg News survey of economists.

The ECB may also approve a similar consultation on the securities backed by the loans of small-and-mid-sized companies and commercial mortgages, said the people.

To contact the reporters on this story: Esteban Duarte in Madrid at; Gabi Thesing in London at


Dollar Rises to 3-Month High as U.S. Economic Outlook Improves

By Yasuhiko Seki and Yoshiaki Nohara

Dec. 17 (Bloomberg) -- The dollar climbed against 15 of its 16 major counterparts as signs the U.S. recovery is gaining momentum boosted demand for the greenback. The euro sank to a three-month low after Greece’s downgrade reignited credit concerns in the currency’s 16-nation region.

The greenback rose before reports forecast to show U.S. initial jobless claims slowed and a gauge of the outlook for the world’s largest economy improved for an eighth month. The Federal Reserve said yesterday the U.S. economy is strengthening, while Standard & Poor’s cut Greece’s rating one level on its rising debt burden. The Australian dollar sank to a 10-week low as Asian stocks fell, curbing demand for higher-yielding assets.

“An improvement of the labor market enhances confidence in the U.S. economy,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “The dollar will fare well.”

The dollar rose to $1.4369 per euro, the highest since Sept. 8, before trading at $1.4406 as of 7:35 a.m. in London from $1.4531 in New York yesterday. The U.S. currency was at 89.70 yen from 89.78 yen after earlier hitting 90.26, the strongest level since Dec. 7. The euro sank to 129.17 yen from 130.46 yen.

U.S. initial jobless claims fell to 465,000 last week from 474,000 in the week to Dec. 5, according to a Bloomberg survey of economists before the Labor Department’s report. A separate poll showed the Conference Board’s index of leading indicators, a gauge of the U.S. outlook for the next three to six months, rose 0.7 percent in November, following a 0.3 percent gain the previous month. Both reports are scheduled for release today.

Household Spending

“Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in its policy statement yesterday after meeting in Washington. Deterioration in the labor market is “abating.”

Policy makers held the target rate for overnight lending between banks at zero to 0.25 percent, a decision forecast by all 98 economists in a Bloomberg survey.

“There’s some acknowledgement of improved economic conditions including the labor market,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “We still think there’s a signal that informs the market there will be some Fed balance sheet shrinkage coming through in 2010,” a supportive factor for the dollar, he said.

Bullish on Dollar

Investors turned bullish on the dollar for the first time since March as the U.S. economy showed evidence of a sustained recovery, a survey of Bloomberg users indicated.

Sentiment toward the currency rose to 51.99 in December, according to the survey. A reading above 50 indicates Bloomberg users expect the dollar to strengthen. The reading was last above 50 in March, when it reached 53.41.

“With the key driving force gradually shifting toward interest-rate differentials from risk sentiment, good economic data may begin to support the dollar more directly,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo.

The euro fell for a third day against the dollar after S&P joined Fitch Ratings in downgrading Greece, which has the widest budget deficit in the European Union.

The rating was lowered by one level to BBB+ from A-, S&P said in a statement late yesterday. Fitch on Dec. 8 cut Greek debt to BBB+. Austria said on Dec. 14 that it was nationalizing Hypo Alpe-Adria Bank and injecting as much as 450 million euros ($649 million) into the lender.

BOJ Meeting

“Concerns over the health of finances in some member countries, including Greece, together with uncertainties over the depth of financial woes in the Austrian banking sector will continue to weigh on the euro,” said Keiji Matsumoto, currency strategist in Tokyo at Nikko Cordial Securities Inc.

The Australian dollar weakened as a decline in Asian stocks pared demand for riskier assets. The currency slumped 1.2 percent to 89.00 U.S. cents, after hitting 88.73 cents, the weakest since Oct. 7. The MSCI Asia Pacific Index reversed earlier gains, losing 0.9 percent.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at; Yoshiaki Nohara in Tokyo at


Fed Says U.S. Economy Still Needs Low Rates After Markets Heal

By Scott Lanman

Dec. 17 (Bloomberg) -- Federal Reserve officials declared financial markets healthy enough to remove most emergency aid without going as far on their support for the U.S. economy.

The Fed, after concluding a two-day meeting yesterday, said most of its lending programs would expire as scheduled Feb. 1 because of “improvements in the functioning of financial markets.” Policy makers said the labor market is stabilizing yet kept a pledge to keep interest rates “exceptionally low” for an “extended period.”

The statement reinforced economists’ forecasts that the Fed will wait from six months to a year before raising borrowing costs. By confirming plans to end its aid to bond dealers, short-term debt markets and money-market mutual funds, the Fed signaled it sees a waning in the “unusual and exigent” conditions that prompted creation of the programs in 2008.

“The nastiness of the storm has dissipated,” said Paul Ballew, a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “Concern about the financial market has passed, but they’re looking at weak labor markets and sluggishness in the real economy.”

The Fed’s Open Market Committee, in a unanimous decision, left its target for the benchmark interest rate unchanged in a range of zero to 0.25 percent. The central bank cut the rate on overnight interbank loans to that level a year ago.

The Senate Banking Committee is scheduled to vote today on recommending Fed Chairman Ben S. Bernanke’s nomination for a second term to the full Senate for approval. The panel meets at 9:30 a.m. in Washington. While a majority have said they will probably support Bernanke, some lawmakers fault his handling of the financial crisis and plan to oppose his reappointment.

Stocks Rally

Stocks have rallied as low interest rates have caused investors to seek higher returns. The Standard and Poor’s 500 Index is up 23 percent this year. The Fed’s purchases of $1 trillion in mortgage-backed securities helped push the average rate on a 30-year fixed-rate home loan to 4.71 percent in the week ending Dec. 3, the lowest since mortgage buyer Freddie Mac of McLean, Virginia, began keeping records in 1971.

The Libor-OIS spread, a gauge of banks’ willingness to lend, has narrowed to 0.10 percentage point, from a record 3.64 points in October 2008. The TED spread, the difference between what the Treasury and banks pay to borrow dollars for three months, has narrowed to 0.22 percentage point, from as high as 4.64 percentage points in October 2008.

Yesterday, the central bank retained its March deadline of completing the $1.25 trillion in mortgage-backed securities purchases and $175 billion of federal agency debt. Officials are gradually slowing the pace of purchases.

‘More Supportive’

Data since the FOMC’s last meeting Nov. 3-4 indicate that “economic activity has continued to pick up and that the deterioration in the labor market is abating,” the statement said. “Financial market conditions have become more supportive of economic growth,” while the economy is “likely to remain weak for a time,” policy makers said.

“They upgraded the growth outlook a bit,” said James O’Sullivan, chief economist at MF Global Ltd. in New York. “Officials are signaling more optimism on growth and more confidence in a sustained recovery. They are not ready to signal an imminent rate hike yet.”

Central bankers omitted a sentence from previous statements saying the Fed will “employ a wide range of tools” to promote growth and stable prices, and another saying the Fed is “monitoring the size and composition of its balance sheet.”

Dollar Loans

The Fed said it would end four emergency-lending programs as scheduled Feb. 1, keeping a deadline set in June, and work with foreign central banks to close currency swaps that provided dollar loans to banks outside the U.S.

The programs include aid to money-market funds, which began in September 2008 after the failure of Lehman Brothers Holdings Inc.; a backstop to the market for commercial paper, or short- term debt issued by corporations, which started in October 2008; and two plans backing bond dealers, which began in March 2008.

The total balances of the assistance plans dropped to $30.5 billion as of Dec. 9 from $1.17 trillion a year earlier.

“By allowing these programs to expire, the Fed no longer thinks we’re in unusual and exigent circumstances, although we are in circumstances that still require zero percent interest rates for an extended period,” said John Ryding, founder and chief economist at RDQ Economics LLC in New York and a former Fed researcher.

Employers cut payrolls by 11,000 jobs in November, the fewest in 23 months, and the unemployment rate fell to 10 percent from 10.2 percent.

Bernanke said in a Dec. 7 speech that the economy still faces “formidable headwinds” in the form of tight credit and a weak labor market.

“The real test will be: Will the Fed really end mortgage- backed securities purchases by the end of the first quarter?” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It will cause mortgage rates to rise because the Fed is such a big buyer. A lot of builders and real estate agents are going to be screaming.”

To contact the reporter on this story: Scott Lanman in Washington at


Crude Oil Falls as Dollar Reaches Three-Month High Against Euro

By Nidaa Bakhsh and Ann Koh

Dec. 17 (Bloomberg) -- Crude oil fell as the dollar strengthened against the euro, limiting the appeal of commodities as a currency hedge.

Crude snapped two days of gains as the dollar rose to a three-month high against the euro after the U.S. Federal Reserve said yesterday the economy is strengthening and the deterioration in the labor market is abating. Oil rose the most in a month yesterday after the Energy Department said U.S. crude inventories declined to the lowest since the week ended Jan. 9.

“It’s a bit of the dollar” that’s causing the decline in prices today, Thina Saltvedt, a commodities analyst at Nordea Bank AB in Oslo, said by telephone. “Demand, although improving, is still sluggish.”

Crude oil for January delivery fell as much as 54 cents, or 0.7 percent, to $72.12 a barrel in electronic trading on the New York Mercantile Exchange. It was at $72.15 a barrel at 8:56 a.m. London time.

Yesterday, the contract added $1.97 to $72.66. Futures in New York have gained 62 percent this year.

The dollar advanced against 15 out of 16 of its most-traded counterparts, strengthening to $1.4396 per euro at 8:54 a.m. in London, from $1.4531 in New York yesterday.

U.S. crude stockpiles fell 3.69 million barrels last week to 332.4 million, more than a median 2 million-barrel drop forecast by analysts in a Bloomberg News survey. Distillate supplies, a category that includes heating oil and diesel, fell 2.95 million barrels to 164.4 million as output declined.

Refineries operated at 79.9 percent of capacity last week, down 1.1 percentage points from the previous week, the report showed. Analysts polled by Bloomberg News predicted a 0.3 percentage point gain.

“The crude draw is more than people expected,” said Clarence Chu, a trader with options dealers Hudson Capital Energy in Singapore. “If you look at refinery runs, they’re down more than 1 percent. That shows refiners aren’t turning crude into products.”

China Demand

An estimate of oil consumption in China, the world’s second-largest energy user, fell last month, according to a newsletter published by the official Xinhua News agency.

China’s apparent demand for crude oil was 32.4 million metric tons in November, slipping from a record 33.4 million tons in October, China Oil, Gas & Petrochemicals said citing data from the National Bureau of Statistics.

In Japan, Idemitsu Kosan Co., the country’s second-largest refiner, may close refineries and cut capacity because of the global oversupply of oil products, company chairman Akihiko Tembo said today.

Brent crude oil for February settlement fell as much as 64 cents, or 0.9 percent, to $73.65 a barrel on the London-based ICE Futures Europe exchange. The contract was at $73.92 a barrel at 8:45 a.m. London time.

To contact the reporter on this story: Nidaa Bakhsh in London at; Ann Koh in Singapore at


Gold Drops in Asia as Dollar Strength Erodes Investment Demand

By Glenys Sim

Dec. 17 (Bloomberg) -- Gold declined, reversing early gains, as the dollar’s strength eroded demand for the precious metal as an alternative investment.

The dollar rose against all of its 16 major counterparts before reports forecast to show U.S. initial jobless claims slowed and a gauge of the outlook for the world’s largest economy improved for an eighth month. The Federal Reserve said yesterday the economy is strengthening.

“In times of crisis where you don’t trust paper money, where you don’t trust the financial system, then people like the physical aspect of holding gold,” Adrian Mowat, JPMorgan’s chief Asian and emerging markets strategist, said in a Bloomberg Television interview. “As we get a recovery I think gold is going to look like a very poor asset class to own as we go into next year.”

Gold for immediate delivery dropped as much as 1.1 percent to $1,125.40 an ounce and traded at $1,128.20 at 3:30 p.m. in Singapore. Earlier it climbed as much as 0.4 percent to $1,141.88 an ounce, 6.9 percent off its record of $1,226.56 reached Dec. 3.

February-delivery bullion on the Comex division of the New York Mercantile Exchange was 0.7 percent lower at $1,127.90 an ounce after gaining as much as 0.6 percent earlier. The metal for June delivery in Shanghai slid as much as 1.1 percent to 249.62 yuan a gram ($1,137 an ounce).

Bullion is still up 29 percent this year, heading for its ninth straight annual gain, as low U.S. interest rates and increased government spending depressed the dollar. The dollar advanced as much as 0.8 percent against a basket of six major currencies, and reached a three-month high against the euro.

Among other precious metals, silver fell 1.5 percent to $17.435 an ounce, platinum slid 0.6 percent to $1,443.50 an ounce, while palladium dropped 1.2 percent to $370.50 an ounce.

To contact the reporter on this story: Glenys Sim in Singapore at


Rubber Advances to Almost 15-Month High as Revival Lifts Demand

By Aya Takada

Dec. 17 (Bloomberg) -- Rubber climbed to the highest level in almost 15 months after the Federal Reserve said the economy is strengthening, increasing speculation demand for the commodity used in tires will increase.

Futures in Tokyo rose as much as 3.8 percent, extending yesterday’s 4.2 percent rally, the best performance in four months. Prices gained as Japan’s currency fell to the lowest level in more than a week against the dollar, making yen- denominated contracts more attractive to investors.

“Investors are seeking to buy commodities, especially those backed by tight fundamentals,” Shuji Sugata, research manager at Mitsubishi Corp. Futures Ltd. in Tokyo, said today by phone. “Rubber may be their choice as its demand is boosted by rising car sales in China.”

Rubber for May delivery climbed as high as 273.8 yen per kilogram ($3,039 a metric ton), the highest level since Sept. 29, 2008, before settling at 272.1 yen on the Tokyo Commodity Exchange. Prices rose as much as 10 yen, triggering an exchange trading circuit breaker for a second day.

The yen lost as much as 0.5 percent to 90.26 per dollar, the lowest level since Dec. 7, before trading at 90.09 at 3:34 p.m. Tokyo time. The dollar advanced after the Federal Open Market Committee said yesterday that “deterioration in the labor market is abating” and that “household spending appears to be expanding at a moderate rate.”

China Tariffs

Rubber also rallied after China’s Ministry of Finance said it will cut tariffs on natural rubber imports, stoking speculation Chinese purchase of the commodity will increase.

Rubber for March delivery on the Shanghai Futures Exchange climbed by as much as 4.1 percent to 23,280 yuan ($3,409) a ton, the highest level since August last year. The contract ended at 22,960 yuan at 3 p.m. local time.

The so-called temporary tariff rate for ribbed smoked sheet rubber will be set at 20 percent of the import price or 1,600 yuan ($234) a metric ton, whichever is lower, the ministry said yesterday. The tariff for technically specified rubber is set at 20 percent of the imported price or 2,000 yuan per ton, it said.

Rubber futures in Tokyo have almost doubled this year as China, the world’s largest consumer, led a recovery in demand as the government’s stimulus measures boosted the nation’s car sales to a record.

China’s full-year auto sales may be about 13 million, according to Booz & Co., which advises carmakers and investors in China. By 2015 output in the country may reach 15 million, according to Koji Endo, managing director of Advanced Research Japan in Tokyo.

In the cash market, shippers in Thailand, the largest producer and exporter, raised the price of so-called RSS-3 grade rubber for January shipment to $2.90 a kilogram today from $2.75 yesterday, according to Takaki Shigemoto, an analyst at research and investment company JSC Corp. in Tokyo.

To contact the reporter on this story: Aya Takada in Tokyo


Copper Declines as Dollar Rally Curbs Appeal of Raw Materials

By Glenys Sim

Dec. 17 (Bloomberg) -- Copper fell as a dollar rally reduced interest in raw materials as alternative investments.

The dollar surged to the highest level since Sept. 8 against a basket of six major currencies, including the euro and yen, before reports forecast to show U.S. initial jobless claims slowed and a gauge of the outlook for the world’s largest economy improved for an eighth month. The Federal Reserve said yesterday the economy is strengthening.

“The relationship between metals and the dollar has broken down a little in the past week as economic data has been supportive,” said Shanghai Tonglian Futures Co. analyst Shi Hai. “Still, if we see strong gains in the dollar, it will weigh on all commodities, including metals.”

Copper for delivery in three months on the London Metal Exchange fell as much as 0.8 percent to $6,980 a metric ton and traded at $6,990 at 11:56 a.m. in Singapore. The metal closed above $7,000 a ton yesterday for the first time since Dec. 4. March-delivery copper on the Comex division of the New York Mercantile Exchange slid 0.8 percent to $3.1805 a pound.

The dollar strengthened against 15 of its 16 major counterparts, rising to a three-month high against the euro today. Dollar-denominated commodities become more expensive for holders of other currencies when the dollar advances.

Copper in Shanghai pared gains after jumping to the highest level in more than 15 months in early trade on optimism the economic rebound will continue amid signs of an increase in demand. March-delivery copper on the Shanghai Futures Exchange added as much as 1.6 percent to 56,180 yuan ($8,228) a ton, the highest price for a most-active contract since Sept. 5, 2008, before trading at 55,660 yuan.

Chasing Gains

“The Shanghai market is chasing overnight gains made in London as the consumption outlook seems to be improving,” said Jiangsu Holly Futures Brokerage Co. analyst Lu Wei. “However, I don’t think there is much demand above $7,000 a ton as supplies are ample at this moment.”

LME copper rose the most in a month yesterday as builders in the U.S., the largest copper user after China, broke ground on 574,000 homes at an annual rate last month, an 8.9 percent increase from October. That followed a 10 percent drop the prior month. Permits for future construction climbed to the highest level in a year.

The worst postwar recession has damped consumption of the metal used in construction and automobiles, boosting LME stockpiles by 39 percent this year. The global copper market recorded a surplus of 196,000 tons in January to October, the World Bureau of Metal Statistics said yesterday.

Among other LME-traded metals, aluminum fell 0.5 percent to $2,264 a ton, zinc dropped 1.3 percent to $2,402 a ton, and lead slid 0.9 percent to $2,388 a ton. Nickel lost 1.3 percent to $17,275 a ton, while tin declined 0.5 percent to $15,400 a ton by 11:43 a.m. in Singapore.

To contact the reporter for this story: Glenys Sim in Singapore at


Asia Stocks Decline, Led by Banks, on Interest-Rate Concern

By Masaki Kondo and Ian Sayson

Dec. 17 (Bloomberg) -- Asian stocks fell, led by financial companies, on expectations the U.S. Federal Reserve will raise interest rates next year and after Hong Kong’s central bank said the city is at risk of “sharp corrections” in asset prices.

Westpac Banking Corp. dropped 1.1 percent in Sydney and China Overseas Land & Investment Ltd. lost 1.9 percent in Hong Kong. National Australia Bank Ltd. tumbled 4.7 percent after saying it will sell stock to fund the purchase of AXA Asia Pacific Holdings Ltd. FAW Car Co.’s 4.1 percent paced declines in Shanghai on concern a flood of share sales will divert funds from existing equities. Rio Tinto Group, the second-biggest producer of iron ore, advanced 1.2 percent as the Fed said the economy is improving.

The MSCI Asia Pacific Index dropped 0.8 percent to 118.74 as of 5:32 p.m. in Tokyo, erasing an earlier 0.1 percent advance. The gauge has climbed 32 percent this year on signs government spending and lower interest rates bolstered economies.

“With the improving economic data, investors are looking at the possibility that the stimulus packages will be pulled out earlier than expected and that interest rate increases would follow,” said Marvin Fausto, who helps manage $9.56 billion as chief investment officer at Banco de Oro Unibank Inc. in Manila, the nation’s largest bank by assets. “An early exit and increase in interest rates can throw the ongoing recovery off track.”

The Shanghai Composite Index dropped 2.3 percent, while Japan’s Nikkei 225 Stock Average dipped 0.1 percent.

James Hardie Industries NV, the top seller of home siding in the U.S., rallied 2 percent in Sydney after a U.S. government report showed housing starts increased.

Labor Market

Futures on the Standard & Poor’s 500 Index fell 0.3 percent. The gauge erased most of its advance in New York yesterday after yields on 10-year Treasury notes rose on concern the Fed is preparing investors for higher interest rates next year. The index closed 0.1 percent higher.

“Deterioration in the labor market is abating,” the Federal Open Market Committee said after meeting in Washington. “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.”

Financial shares as a group were the heaviest drag on the MSCI Asia Pacific Index. Westpac Banking, Australia’s second- largest bank by market value, lost 1.1 percent to A$23.35. Commonwealth Bank of Australia, No. 1, also declined 1.1 percent to A$52.08.

Capital Inflow

National Australia Bank tumbled 4.7 percent to A$26.65 after the lender said it will sell A$1.5 billion ($1.33 billion) in stock next year to help fund the purchase of AXA Asia Pacific’s operations in Australia and New Zealand. AXA Asia surged 13 percent to A$6.37.

The Hang Seng Index fell 1.2 percent, paring its advance for the year to 48 percent, after the Hong Kong Monetary Authority said this year’s equity gains were fueled by an influx of capital and an outflow of funds may bring “volatilities in the real economy.”

China Overseas Land, the Hong Kong-listed developer controlled by China’s construction ministry, fell 1.9 percent to HK$16.64. Sun Hung Kai Properties Ltd., Hong Kong’s biggest developer by market value, slid 2.1 percent to HK$114.70. A gauge of real-estate companies posted the steepest decline among the four industry groups on the Hang Seng today after surging 63 percent this year.

No. 1 Threat

Asset bubbles are the No. 1 threat to financial stability in Asia, Norman Chan, HKMA’s chief executive officer, said this week. More than HK$640 billion ($83 billion) has flowed into the city since October last year, he said.

The MSCI Asia Pacific Index has gained 68 percent from a more than five-year low on March 9, as central banks slashed borrowing costs and government boosted spending worldwide to shore up demand. Dividend yields on the gauge fell to 2.3 percent, nearing the lowest level for at least a year reached on Dec. 8, according to data compiled by Bloomberg.

FAW, which makes passenger cars in China with Volkswagen AG, dropped 4.1 percent to 24.80 yuan after more than tripling this year. Chongqing Changan Automobile Co., the Chinese partner of Ford Motor Co., slid 3 percent to 13.80 yuan. Automakers led declines on the prospect investors will sell this year’s best- performing shares to take part in initial public offerings.

Investors may subscribe to more than 1 trillion yuan ($146.4 billion) worth of shares in 10 IPOs this week, the China Business News said on Dec. 14. China First Heavy Industries today won approval for an IPO to raise some 8.39 billion yuan.

Home Starts

James Hardie gained 2 percent to A$8.10. Builders broke ground on 574,000 homes last month in the U.S., an 8.9 percent annualized increase from the prior month, the Commerce Department said. Consumer prices rose 0.4 percent in November from a month earlier, the Labor Department said.

Rio Tinto advanced 1.2 percent to A$71.65. Inpex Corp., Japan’s biggest oil producer, jumped 3.6 percent to 683,000 yen.

The London Metals Index, a measure of six metals including copper and zinc, climbed 2.3 percent yesterday. Crude oil for January delivery jumped 2.8 percent to $72.66 a barrel, rising the most in a month.

To contact the reporter for this story: Masaki Kondo in Tokyo at; Ian Sayson in Manila at


Greenspan Says S&P 500 Rally Means Need for Stimulus Abating

By Jeff Kearns

Dec. 17 (Bloomberg) -- The biggest stock market advance in seven decades is reducing the need for additional government stimulus measures, according to former Federal Reserve Chairman Alan Greenspan.

The Standard & Poor’s 500 Index’s 64 percent jump since March made Americans richer by restoring $5.4 trillion to U.S. equities and helped spur a 1.3 percent increase in retail sales last month, data compiled by Bloomberg and the Commerce Department show.

“The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that’s occurred since early March,” Greenspan, 83, said in a telephone interview yesterday from Washington. “Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent.”

Increasing spending beyond the $11.6 trillion already pledged may also be unnecessary because higher stocks will help boost profits and make loans easier to come by, Greenspan said. Earnings among S&P 500 companies are forecast to rise 65 percent in the fourth quarter, ending the longest series of declines since World War II, data compiled by Bloomberg show.

“When stock prices go up, the market value of common stock or of equity in banks and other financial institutions rises,” he said. “And the market value of liabilities is importantly affected by the size of the equity market value cushion on banks’ balance sheets.”

Wealth Effect

Net worth for U.S. households increased to $53.4 trillion in the third quarter, up $2.7 trillion from the prior period, helped by share gains, according to a Fed report released on Dec. 10. Assets in so-called defined contribution plans such as 401(k) retirement accounts and IRAs climbed 35 percent to $1.93 trillion from the first quarter to the third, the data show.

Retail spending rose in November at more than twice the 0.6 percent median estimate in a Bloomberg survey, Commerce Department data showed. The Reuters/University of Michigan index of consumer sentiment for December increased to 73.4 from 67.4 the month before.

“All of the statistical evidence indicates that the level of household wealth is a major factor in consumer expenditures and indeed apparently finances directly and indirectly about 15 percent of consumer outlays,” Greenspan said. “The impact on consumption expenditures is significant, largely because the amount of wealth is five times the level of income.”

Adding Liquidity

Greenspan ran the central bank from 1987 to 2006, a period in which the S&P 500 climbed more than sixfold, including dividends, according to data compiled by Bloomberg. He reduced interest rates to a half-century low of 1 percent in 2003 and didn’t raise them for a year, helping spur a 16 percent gain in home prices in 2004 and setting the stage for a housing-market collapse that led to more than $1.7 trillion in global bank losses and writedowns.

Fed policy makers pledged yesterday to keep their target rate for overnight loans between banks “exceptionally low” for an extended period after a two-day meeting in Washington. U.S. stocks erased most of their increase and 10-year Treasury yields rose on concern Chairman Ben S. Bernanke is preparing investors for higher interest rates next year after holding them near zero since December.

“Financial market conditions have become more supportive of economic growth,” policy makers wrote. Along with government actions, “market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability,” they said.

Mutual Funds

U.S. mutual funds are poised for their biggest gain since 2003, according to Morningstar Inc. data. Funds that invest in stocks returned an average 31 percent this year, according to the Chicago-based provider of investment research, after losing 39 percent last year.

“There’s no need for a second stimulus,” said Philip Orlando, who helps manage $392.3 billion as chief equity market strategist at Federated Investors Inc. in New York. “People feel better about themselves. They’ve had some of their lost money restored, and now they’re going to go out and spend some of it.”

Employers in the U.S. cut the fewest jobs in November since the recession began, and the unemployment rate unexpectedly fell, the Labor Department said on Dec. 4. Payrolls decreased by 11,000, compared with the median forecast for a 125,000 decline in a Bloomberg survey of economists, while the jobless rate dropped to 10 percent.

Ratings cuts by S&P on U.S. issuers have declined each quarter this year, falling to 145 downgrades in the current three-month period from 282 in the third quarter, 554 in the second and 756 in the first, Bloomberg data show. Three-hundred forty-two companies have been upgraded in the second half of the year, compared with 204 ratings increases in the first six months of 2009.

“Equity is there to cushion liabilities,” Greenspan said. “The greater the market value of equities, the greater the support for the liabilities, which means bond prices and their ratings go up.”

To contact the reporter on this story: Jeff Kearns in New York at


U.S. Delays Sale of Citigroup Stake as Shares Sell at Discount

By Michael J. Moore and Michael Tsang

Dec. 17 (Bloomberg) -- Citigroup Inc., the last of the four largest U.S. banks to seek funds to exit a taxpayer bailout, raised $17 billion by selling stock for a price so low that the U.S. delayed plans to shrink its one-third stake in the lender.

Citigroup sold 5.4 billion shares at $3.15 apiece, less than the $3.25 the government paid when it acquired its stake in September. The New York-based bank said the Treasury won’t sell any of its shares for at least 90 days.

Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co., which together raised more than $31 billion this month to exit the Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup’s bid to buy Wachovia Corp. last year, leapfrogged its rival by completing a $12.25 billion share sale Dec. 15. JPMorgan Chase & Co. repaid $25 billion in June.

“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. “Citigroup needs to show steps to reinstall the quality of the brand.”

With the sale, Citigroup’s common shares outstanding increased to 28.3 billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at the end of 2007.

“More shares outstanding means less value per share,” said Edward Najarian, an analyst at International Strategy and Investment Group in New York, who has a “hold” rating on the shares. “The whole structure of their deal to pay back TARP wasn’t very good for common shareholders and that is being reflected in the pricing.”

Abu Dhabi

The lender’s shares fell 24 cents, or 7.2 percent, to $3.21 in trading after U.S. markets closed. The $3.15 price is a 20 percent discount from the closing price on Dec. 11, before Citigroup announced the plan to repay TARP.

The government decided not to participate in the equity offering based on the pricing of the shares, according to a Treasury official. The U.S. expects to divest its ownership stake in Citigroup shares during the next 12 months, the official said.

The bank said it also raised $3.5 billion by selling “tangible equity units,” securities that make quarterly payments of 7.5 percent a year and include a requirement to buy Citigroup shares in 2012. The total of $20.5 billion was the largest public equity offering in the history of U.S. capital markets, according to Citigroup.

Citigroup’s Dec. 15 announcement that Abu Dhabi Investment Authority was trying to abort an accord to buy $7.5 billion of Citigroup stock may also have hurt confidence in the bank’s secondary stock offering, said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon.

Abu Dhabi “certainly couldn’t help,” Howells said.

Treasury Stake

Citigroup said earlier this week that it would sell at least $20.5 billion of equity and debt to exit TARP. After that announcement, the Treasury said it would sell as much as $5 billion of its stake, in conjunction with the bank’s secondary offering, with the rest to be sold over the next year.

The Treasury holds $25 billion in common stock in Citigroup, along with a $20 billion preferred equity stake and further preferred shares granted in connection with an asset- guarantee agreement. At the offering price of $3.15, the 7.7 billion shares are valued about $770 million less than the Treasury’s cost.

Bank of America, the largest U.S. lender, raised its funds on Dec. 3. The Charlotte, North Carolina-based bank, which yesterday named Brian Moynihan as its new chief executive officer, sold 1.286 billion so-called common equivalent securities at $15 each, a 4.8 percent discount to its closing price that day. Wells Fargo, whose largest shareholder is billionaire investor Warren Buffett’s Berkshire Hathaway Inc., completed its sale at a 1.9 percent discount.

“Hitting all of the shares at the market at the same time is a bad idea,” said Michael Johnson, chief market strategist at M.S. Howells & Co., a Scottsdale, Arizona-based broker- dealer.

To contact the reporters on this story: Michael Moore in New York at mmoore55@bloomberg.netMichael Tsang in New York at