Markets ’At The Mercy’ of Europe’s Newsflow

By Stephen Kirkland and Rita Nazareth - Nov 7, 2011 10:31 PM GMT+0700

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Nov. 7 (Bloomberg) -- David Blanchflower, a professor at Dartmouth College and Bloomberg Television contributing editor, talks about reports that Italy's Prime Minister Silvio Berlusconi may resign. Giuliano Ferrara, editor of newspaper Il Foglio and a former Berlusconi spokesman, reported today that the premier may step down within hours and push for early elections. Blanchflower speaks with Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Gold rose to a six-week high, while stocks were little changed and the euro trimmed its drop, as investors weighed potential changes to the leadership of European nations reeling from the debt crisis.

Gold for December delivery climbed as much as 1.6 percent to $1,784.80 an ounce as of 10:27 a.m. in New York. The Standard & Poor’s 500 Index swung between gains and losses near the 1,253 level as the Stoxx Europe 600 Index decreased 0.3 percent, recovering most of an earlier 1.8 percent decline. The euro slipped 0.1 percent to $1.3770 after slumping 0.8 percent. The Swiss franc fell against all 16 of its most-traded peers on a report that the nation’s central bank may move to weaken the currency. Ten-year Italian bond yields rose to 6.55 percent after reaching 6.68 percent. U.S. Treasuries fluctuated.

Italy’s parliament will vote tomorrow on the 2010 budget report as Prime Minister Silvio Berlusconi’s majority unravels. Greek Prime Minister George Papandreou agreed yesterday to step down, paving the way for the formation of a new government to get international aid. European finance chiefs will meet in Brussels today to work on a plan to raise the region’s bailout fund.

“The market appears to be in no man’s land and at the mercy of Europe’s newsflow,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $44 billion, said in a telephone interview. “The Europeans are doing some heavy lifting. The leadership has a good understanding of what needs to be done and they’ve set a goal for themselves. They are now going through the sausage- making process of crafting a solution.”

The S&P 500 fell 2.5 percent last week, its first weekly retreat since September. Amgen Inc. rallied 5.1 percent today after saying it will repurchase as much as $5 billion in stock. Jefferies Group Inc. surged 3.7 percent after saying it cut gross holdings in sovereign debt of Portugal, Italy, Ireland, Greece and Spain.

European Shares

Among European stocks, automobile companies and utilities led gains. Carrefour SA dropped 2.8 percent after Citigroup Inc. lowered its recommendation for the world’s second-biggest retailer to “sell” from “neutral.” Sandvik AB, the largest maker of metal-cutting tools, sank 1.6 percent after offering 6.19 billion kronor ($933 million) to buy the remaining shares of its subsidiary Seco Tools AB.

Stocks and bonds pared losses after Giuliano Ferrara, editor of newspaper Il Foglio and a former Berlusconi spokesman, reported that the premier may step down within hours and push for early elections. Berlusconi denied he’s stepping down, Ansa said, citing comments from the premier.

Italy’s 10-year bond yield trimmed gains after climbing as much as 31 basis points. The extra yield investors demand to hold Italian 10-year bonds instead of German bunds, the euro region’s benchmark government securities, widened to as much as 491 basis points, or 4.91 percentage points, the most since the introduction of the euro in 1999, before retreating from the day’s high and trading at 466 basis points.

Allies Defected

Two Berlusconi allies defected to the opposition last week, and a third quit late yesterday. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.

The yield on the 10-year Greek bond rose 123 basis points to 27.99 percent, climbing for the sixth straight day, while the two-year note yield touched a euro-era record. Papandreou and Antonis Samaras, head of the main opposition party, agreed to form a government to lead Greece “to elections immediately after the implementation of European Council decisions on Oct. 26,” according to an e-mail from the office of President Karolos Papoulias in Athens.

The yield on the 10-year German bund increased less than one basis point to 1.83 percent, while the French 10-year yield rose six basis points, driving the difference in yield between the two securities five basis points higher to 128.

Ready to Act

The euro weakened 0.3 percent versus the yen.

The Swiss franc slid 1.5 percent versus the 17-nation euro and the dollar. Policy makers remain ready to act in case the franc’s strength increases the risk of deflation and threatens the country’s economy, Swiss National Bank President Philipp Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday.

The MSCI Emerging Markets Index of stocks rose 0.1 percent, recovering from a 0.7 percent drop. The Shanghai Composite Index slipped 0.7 percent, and South Korea’s Kospi Index (KOSPI) decreased 0.5 percent. Markets in India, Turkey, Malaysia and the Philippines were closed for a holiday.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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European Stocks, U.S. Futures Decline on Italy

By Sarah Jones - Nov 7, 2011 10:08 PM GMT+0700

European stocks fluctuated between gains and losses as a rally in automakers and utilities offset declines in health-care and telecommunication shares.

The Stoxx Europe 600 Index slipped 0.1 percent to 239.51 at 3:06 p.m. in London, having earlier climbed 0.3 percent and lost 1.8 percent.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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U.S. Stocks Drop as Investors Weigh Europe

By Rita Nazareth - Nov 7, 2011 11:09 PM GMT+0700

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Nov. 7 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based fund manager at Principal Global Investors, talks about global financial markets and his investment strategy. Chandgothia also discusses the Group of 20 summit and Europe's sovereign debt crisis. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Nov. 7 (Bloomberg) -- Andrew Freris, senior investment strategist for Asia at BNP Paribas Wealth Management, talks about the outlook for Greek politics and the nation's debt problems, and his investment strategy. Freris speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

U.S. stocks retreated, following the first weekly decline in the Standard & Poor’s 500 Index since September, as investors weighed prospects for political changes in Europe’s most-indebted countries.

Bank of America Corp. (BAC), Caterpillar Inc. (CAT) and Alcoa Inc. (AA) fell at least 1.4 percent, for the biggest losses in the Dow Jones Industrial Average. Jefferies Group Inc. (JEF), the investment bank that has battled investor concern that it will be hurt by Europe’s debt crisis, increased 1.7 percent after releasing details of its positions in sovereign bonds. Amgen Inc. (AMGN) rose 4.7 percent on plans to buy back as much as $5 billion in shares.

The S&P 500 declined 0.3 percent to 1,249.92 as of 11:08 a.m. New York time. The benchmark gauge slumped 2.5 percent last week. The Dow fell 25.77 points, or 0.2 percent, to 11,957.47.

“The market appears to be in no man’s land and at the mercy of Europe’s news flow,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $44 billion, said in a telephone interview. “The Europeans are doing some heavy lifting. They are going through the sausage-making process of crafting a solution. They just need to go from point A to point B. That’s challenging. It’s one of those days when you just have to put on your neck brace.”

Italian 10-year borrowing costs surged to a euro-era record as the focus shifted from Greece after Prime Minister George Papandreou agreed to step down to create a new unity government. Investors are betting Prime Minister Silvio Berlusconi may be forced to resign if he fails to win majority support in tomorrow’s vote on the 2010 budget report.

Failed to Agree

Global stocks slumped on Oct. 31 and Nov. 1 as Papandreou announced his desire to hold a referendum on a European Union bailout, spurring concern the deal would unravel. After rallying two straight days, the S&P 500 dropped on Nov. 4 as the Group of 20 nations failed to agree on increasing the International Monetary Fund’s resources to fight Europe’s debt crisis.

Some of the biggest companies retreated. Bank of America lost 1.7 percent to $6.38. Caterpillar sank 1.4 percent to $94.44. Alcoa slid 1.5 percent to $10.77.

Jefferies rose 1.7 percent to $12.27. The New York-based firm released a document summarizing its exposure to the debt of Italy, Spain, Ireland, Portugal and Greece. It also published a list of sovereign and government-guaranteed bonds from the five indebted nations in which Jefferies International Ltd. holds a position greater than half a million euros.

Financial shares tumbled the most in the S&P 500 last week, losing 5.4 percent, on concern about potential losses from Europe and as MF Global Holdings Ltd. filed for bankruptcy protection after making bets on European sovereign debt.

Reducing Margin

CME Group Inc. (CME) is reducing the initial margin required to back futures trades to ease the bulk transfer of accounts held by MF Global customers. The holding company for the broker- dealer run by former Goldman Sachs Group Inc. Co-Chairman Jon Corzine filed for bankruptcy protection on Oct. 31.

“The decision to roll back margin requirements is a positive,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in an e-mail. “Otherwise there would have been a tremendous amount of margin calls, which could have caused a good amount of selling in other markets to pay for the margin calls.”

Amgen rallied 4.7 percent to $57.77. The world’s largest biotechnology company plans to repurchase as much as $5 billion in common stock for $54-$60 per share.

S&P 500 companies are poised to report the biggest annual sales increase on record even as analysts reduce their estimate for growth in 2012. Revenue in the benchmark gauge of American common equity will rise 11 percent to $1,052.42 a share in 2011, according to more than 10,000 forecasts compiled by Bloomberg.

Estimates Cut

Projections for next year have been cut 1 percent in the past month after 43 percent of S&P 500 companies from 3M Co. to Amazon.com Inc. missed third-quarter forecasts, the most since 2009, data show.

Bulls say record gains in sales mean the economy is doing well enough for equities to rally after price-earnings ratios fell 20 percent below the six-decade average. To bears, the deceleration in growth shows the European debt crisis is curbing the economy and that stocks will resume declines after the S&P 500 posted its biggest monthly rally since 1991.

“Everybody thinks the world’s coming to an end, but corporate America is doing great and it’s a function of good sales,” Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees about $6 billion, said in a telephone interview on Nov. 3. “It’s not unusual that you get these short-term slowdowns during panicky markets. The sales estimates coming down is a good thing because it allows to companies to meet or beat more easily.”

To contact the reporter on this story: {Rita Nazareth} in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Berlusconi Struggles to Keep Power Before Key Votes

By Marco Bertacche - Nov 7, 2011 11:06 PM GMT+0700
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Italian Prime Minister Silvio Berlusconi pauses before speaking during a media conference at a G20 summit in Cannes on Nov. 4, 2011. Photographer: Michel Euler/AP

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Nov. 7 (Bloomberg) -- Kumar Palghat, a managing director at Kapstream Capital Pty in Sydney, talks about the outlook for Europe's debt crisis and its implications for global financial markets. Greek Prime Minister George Papandreou agreed to step down to allow the creation of a national unity government that will secure international financing and avert a collapse of the country’s economy.Palghat speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Prime Minister Silvio Berlusconi struggled to hold on to power and prove he can implement austerity measures pledged to European Union allies as reports of his imminent resignation sent Italian stocks surging.

Berlusconi denied a report by Giuliano Ferrara, his former spokesman and now editor of newspaper Il Foglio, who wrote today that the premier would step down “within hours.” Berlusconi will likely resign next week in return for support in a vote on the austerity and economic-growth measures, Ferrara said in a phone interview after his initial report.

Reports of his resignation were “totally unfounded,” Berlusconi said in an interview with newspaper Libero today. He said he would call on a confidence vote next week on the austerity measures and “look into the eyes of those who try to betray me.”

Italian stocks reversed early losses after Ferrara’s initial report on the resignation and bonds pared some of their drops. The FTSE MIB index (FTSEMIB) rose 2.4 percent at 4 p.m. in Milan, the biggest advance among Europe’s benchmark indexes, erasing a 2.7 percent decline. Italy’s 10-year bond yielded 6.45 percent, down from a euro-era record 6.68 percent.

Defections Mount

Berlusconi is struggling to keep his allies in line after key lawmakers announced defections before key parliamentary votes in coming days. The premier plans to stake the survival of his government in a confidence vote next week on implementation of measures pledged to the EU that aim to boost growth and trim the region’s second-largest debt. The first test comes tomorrow on a normally routine vote to rubber-stamp last year’s budget report that may indicate whether Berlusconi still has a majority in the 630-seat Chamber of Deputies.

A third member of Berlusconi’s party defected to the opposition last night, after two quit the party last week. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera last week. More than a dozen more are ready to ditch the coalition, Repubblica daily reported yesterday, without citing anyone.

“I fear we no longer have a majority in parliament,” Interior Minister Roberto Maroni said on a talk show yesterday. Maroni, a member of the Northern League party that underpins the ruling coalition, said he backs early elections.

Tomorrow’s Vote

The desertions may deprive Berlusconi of the support needed in the lower house for tomorrow’s vote on the 2010 budget report. The Chamber of Deputies failed to back the measure in an initial ballot last month, prompting Berlusconi to call a confidence motion, which he won with a thin 316-vote majority.

“Berlusconi may still be in office, but he has not been in power for some time,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an e-mailed response to questions. “He no longer administers.”

Berlusconi, 75, faces mounting pressure at home and abroad to show he can jump start an economy that has expanded less than the European average for more than a decade and cut a debt that tops that of Greece, Spain, Portugal and Ireland combined. The country faces an average of almost 20 billion euros ($27.5 billion) of bond maturities a month next year at a time when it must pay 470 basis points more than Germany to borrow for 10 years.

No Confidence

The yield on the benchmark bond is now close to the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. In a bid to boost confidence, Berlusconi on Nov. 4 asked the International Monetary Fund to monitor Italy’s debt- cutting efforts.

“A lot of people, as yields have gone higher in Italy, actually see value in Italian bonds,” Erik Nielsen, chief global economist at UniCredit SpA in London, said in an interview with Francine Lacqua on Bloomberg Television’s “On the Move.” “However, very few people can live with the volatility. We don’t know whether Italian bonds are going to go to 7 or 7.5 percent or what have you, so the volatility at this time of the year is just too much for investors.”

In Italy, governments routinely call confidence votes to bring rebellious lawmakers into line and speed the passage of legislation. Berlusconi has used the mechanism more than 50 times since his election in 2008.

With the ranks of Berlusconi’s majority thinning, opposition leaders are also trying to muster backing for a no- confidence vote to try to topple the leader, who has governed for more than half of the 17 years since he entered politics in 1994. Berlusconi has faced only one such vote, which he survived, in December of last year.

Forming Government

Should he fail to muster a majority in either type of confidence vote, the government would fall and President Giorgio Napolitano would then consult with political parties to see whether another majority could be formed. Napolitano could also try to build support for a so-called technical government led by a prominent figure charged with implementing the economic reforms and eventually preparing the country for new elections. If Napolitano cannot forge a new government, elections would be called and likely held two months after the consultations end.

Should Berlusconi win the confidence vote next week, he would likely resign and push Napolitano to agree to elections in January, rather than negotiating a new government, said Ferrara, who ruled a technical administration. Il Foglio’s biggest shareholder is Paolo Berlusconi, the premier’s brother.

Popularity Slumps

Berlusconi’s popularity is at a record low and his coalition trailed the main opposition alliance by 10 percentage points in a Nov. 1 poll by IPR Marketing conducted on Oct. 28. No margin of error was given.

Napolitano, 82, who consulted last week with all political parties about the crisis, called for unity at the weekend. Italy can’t mend itself “in a climate of war” and it’s “indispensible” that all parties back the austerity and growth measures promised to the European Union, Napolitano said.

Berlusconi’s government in August approved 45.5 billion euros in austerity moves, its second deficit-cutting plan in a month, to secure European Central Bank purchases of Italian debt after yields surged above 6 percent. The central bank is free to stop the buying if Italy fails to pass its reforms, ECB Governing Council member Yves Mersch told la Stampa daily in an interview.

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is second in Europe to that of Greece.

Berlusconi yesterday said he plans to govern until his term ends in 2013 and reiterated that Italy must swiftly approve its economic overhaul.

“Italy’s ability to gain market confidence will be determined by whether it will implement sound structural reforms within a realistic timeline,” Vladimir Pillonca, an economist at Societe Generale SA in London, said by e-mail. “Market confidence is extremely hard to restore once lost” and “until then, Italy will remain Europe’s epicenter of systemic risk.”

To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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World Dodges Slump With China-U.S. Buoy

By Rich Miller - Nov 7, 2011 5:40 PM GMT+0700

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Nov. 7 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based fund manager at Principal Global Investors, talks about global financial markets and his investment strategy. Chandgothia also discusses the Group of 20 summit and Europe's sovereign debt crisis. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

The global economy is showing signs of withstanding a European recession triggered by the debt debacle in Greece.

The U.S. unemployment rate fell to 9 percent last month, the lowest since April, from 9.1 percent in September, the Labor Department reported Nov. 4. Chinese manufacturing continued to expand in October, based on an index compiled by the China Federation of Logistics and Purchasing. Even in Japan, the world’s third-largest economy, growth is coming to life: Gross domestic product climbed last quarter for the first time in a year, rising 6 percent according to the median estimate of analysts polled by Bloomberg News.

“Barring Italy turning into Greece, we’ll have a slowdown in the world economy, but a manageable one,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London.

The cool-down will bring with it “some not-to-be-dismissed benefits, particularly in easing inflationary pressures,” he added. That easing will boost the spending power of American consumers and give officials in China and other emerging markets room to loosen fiscal and monetary policy.

The ability of the U.S. to avoid a contraction means the dollar probably will appreciate against the European currency, UBS Investment Bank Chief Economist Larry Hatheway and his team in London wrote in an Oct. 28 report. They see the euro falling to $1.25 by the end of next year from $1.3792 at 5:57 p.m. in New York Nov. 4 as global growth slows to 3.1 percent in 2012 from 3.2 percent this year.

Rising Equities

The U.S. stock market also will benefit, David R. Kotok, chairman and chief investment officer of Cumberland Advisors in Vineland, New Jersey, said in a Nov. 1 note to clients. He forecast the Standard & Poor’s 500 Index will finish the year at 1,350, compared with 1,253.23 at 4 p.m. on Nov. 4.

“The bear is going into hibernation for the winter, and the surprise will be to the upside,” Kotok said.

He is “fully invested” in the U.S. markets and “very underweight” in Europe, he told Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” Nov. 1.

U.S. stock futures fell today, indicating the Standard & Poor’s 500 Index will extend last week’s decline. S&P 500 futures expiring in December declined 1.3 percent to 1,235 at 10:27 a.m. in London. The euro fell 0.6 percent against the dollar to $1.3715, after dropping 2.5 percent last week.

Recession Risk

European Central Bank President Mario Draghi said Nov. 3 that the region is heading toward a “mild recession” after policy makers cut their benchmark interest rate by a quarter percentage point to 1.25 percent.

The euro area’s gross domestic product will shrink at a 0.5 percent to 1 percent annual rate this quarter and next before recovering in the second half of 2012, according to Allen Sinai, president of Decision Economics in New York.

Europe’s malaise already is taking its toll on the rest of the world economy. South Korea’s exports increased at the slowest pace in two years last month, partly because of the European debt crisis, and may slow further in the fourth quarter, according to the Ministry of Knowledge Economy.

LG Electronics Inc. (066570), the world’s third-largest maker of mobile phones, reported Oct. 26 that it lost 414 billion won ($373 million) in the three months ended September, as earnings dropped at its flat-panel unit. The Seoul-based company had a profit of 7.6 billion won in the 2010 third quarter.

Mid-Year Shock

Banks in emerging markets also feel the pinch as European counterparts seek to increase their capital base by cutting back on international loans. A survey of banks in developing countries released Oct. 21 by the Institute of International Finance found that their “funding conditions in international markets have deteriorated significantly.”

Still, the world economy as a whole has proved to be resilient after the mid-year shock to confidence from the crisis in Europe and squabble in the U.S. over raising the Treasury debt ceiling, said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York.

Purchasing managers at manufacturing companies throughout the world reported that business improved in October. The aggregate index increased to 50 last month from 49.8 in September; results above 50 indicate expansion.

The data suggest that the risks of a synchronized global contraction “continue to diminish,” Neal Soss, chief economist at Credit Suisse Holdings in New York and his colleague Henry Mo, wrote in a Nov. 2 report.

Car Sales Rebound

“At the moment, we don’t see recessionary situations as we assess the markets,” Rich Kramer, chief executive officer of Akron, Ohio-based Goodyear Tire & Rubber Co. (GT), told analysts on an Oct. 28 conference call. Third-quarter net income of $161 million topped the analysts’ estimates; the largest U.S. tire maker reported a loss of $20 million a year earlier.

Sales of cars and light-duty trucks rose 7.5 percent last month from a year ago to a 13.3 million seasonally adjusted annual rate, the most since February, according to Autodata Corp. in Woodcliff Lake, New Jersey.

After cutting back on saving and increasing spending, consumers should get a boost this quarter from falling inflation, Hensley said. He sees consumer prices rising at an annualized pace of just 0.5 percent in the final three months of the year, down from 3.1 percent in July-September.

The average price for unleaded gasoline fell almost 20 cents in September to $3.43 a gallon and held near there last month, according to AAA, the nation’s largest motoring group.

Disposable Income

U.S. households also are benefiting from smaller debt payments, thanks to record low interest rates from the Federal Reserve and their own efforts to put their finances in better shape, Sinai said. As a share of disposable income, those payments fell to an almost 17-year low of 11.09 percent in the second quarter from a peak of 13.96 percent in 2007, based on Fed data.

The course of consumer spending next year hinges on the U.S. Congress. A 2 percent cut in workers’ payroll taxes is set to expire at the end of this year. President Barack Obama has proposed extending and adding to it as part of his $447 billion jobs plan. Lawmakers have yet to act on the proposal.

Ebbing inflation also will be welcome news in China and other emerging markets, where policy makers have been struggling to contain price pressures.

“From the truly global perspective, the most important thing for me is not the next development in Europe, barring a breakdown in Italy, but what happens to Chinese inflation,” O’Neill said. The country’s central bank raised borrowing costs five times and boosted lenders’ reserve requirements nine times in the past 13 months.

Policy Easing

Chinese inflation may moderate to less than 5 percent in November and December, compared with a three-year high of 6.5 percent in July, said Zhu Jianfang, the most accurate forecaster of the data in Bloomberg News surveys during the past two years.

“Food and global oil prices have peaked, and that means inflation will fall,” said Zhu, a Beijing-based economist at Citic Securities Co. Ltd. “The decline will leave more room for policy easing, such as looser credit, to help sustain growth.”

Manufacturing in China expanded last month, albeit at a slower pace. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said Nov. 1.

Interest-Rate Cuts

Some central banks already are easing policy. Brazil cut interest rates for the second time this year on Oct. 19, lowering the benchmark Selic rate to 11.5 percent. Bank Indonesia reduced its key rate by 25 basis points to 6.5 percent on Oct. 11, paving the way for the biggest monthly gain in the country’s sovereign-bond market since March.

Asian policy makers “have a lot of room” to cut interest rates and expand fiscal policy, said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings Inc. in Hong Kong. “Asia’s public debt-to-GDP ratio is among the lowest of all the regions.”

In Japan, Prime Minister Yoshihiko Noda is proposing a third extra budget that the Cabinet Office estimates will increase GDP by about 1.7 percent. The budget, which will pay for rebuilding after the March earthquake, also will create about 600,000 jobs, the office said Oct. 28.

‘Well Timed’

The effort “is well timed,” said Cameron Umetsu, senior economist at UBS Securities Japan in Tokyo. “It helps to cushion some of the pain, and in that sense lends a certain degree of independence to the Japanese recovery.”

Sinai sees global growth holding roughly steady next year at just under 3 percent, adding his forecast that the world recovery will stay on track assumes Europe will contain the contagion from Greece’s debt crisis.

There are precedents for the world economy’s ability to hold up in the face of a European recession. Perhaps the most relevant, according to economists at the Washington-based Institute of International Finance, is the early 1990s, when a European Monetary System crisis drove the area into recession without derailing a U.S. recovery.

“In my 30 years in the business, Europe’s never been the locomotive” of the global economy, O’Neill said. “The contagion from Europe to the U.S. and China as the two key engines of the world is being exaggerated.”

To contact the reporter on this story: Richard Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Citigroup Puts $800M in Own Hedge Funds

By Donal Griffin and Bradley Keoun - Nov 7, 2011 12:00 PM GMT+0700

Citigroup Inc. (C), the third-biggest U.S. lender, invested about $800 million of shareholder’s money in its own private-equity and hedge funds during the third quarter as regulators seek to curtail the practice.

The bank invested the money in “Citi-advised” funds while selling $1.1 billion of separate hedge-fund and private-equity assets, New York-based Citigroup said in a Nov. 4 filing.

Regulators are drafting the so-called Volcker rule, which aims to restrict banks that accept deposits from making bets with shareholder money. The proposed rule would prohibit the banks from owning more than 3 percent of hedge funds and private-equity funds and also from investing more than 3 percent of Tier 1 capital in the funds.

“The $800 million of purchases primarily relate to funding of previously committed investments in Citi’s private-equity and hedge funds, which are more than offset by divestitures and liquidations,” Danielle Romero-Apsilos, a Citigroup spokeswoman, said in an e-mailed statement. “We continue to make significant progress toward meeting the requirements of the Volcker Funds portion of the new financial bill.”

The bank invested in funds managed by the Citi Capital Advisors unit, or CCA, which is run by former Morgan Stanley (MS) executives Jonathan Dorfman and James O’Brien. The division manages private-equity, venture-capital and hedge funds, according to its website. CCA’s managers seek to gain from assets including European corporate debt, subprime mortgage bonds and Indian infrastructure while also betting on global trends and emerging-market bonds.

$5 Billion

CCA manages about $5 billion of Citigroup’s money, a person familiar with the matter said in May. The division also handles money for external clients, a business that will be unaffected by the Volcker rule, which is named for former Federal Reserve Chairman Paul Volcker. CCA oversees about $18.8 billion in total, Romero-Apsilos said.

“Citi has a relatively low percentage of Tier 1 Capital deployed to hedge-fund and private-equity investments,” Romero- Apsilos said. “We are committed to growing our Citi Capital Advisors business as an institutional alternative asset manager of third-party investor capital.”

Funds in the Citi Holdings division also gained from the investments, Romero-Apsilos said. That unit had about $1 billion of assets in “retail alternative investments” at the end of September, according to a company presentation. Chief Executive Officer Vikram Pandit, 54, formed Citi Holdings to manage and sell unwanted assets after the bank received a $45 billion taxpayer bailout in 2008.

Difficult to Value

Citigroup classified the $800 million of investments as so- called Level 3 assets, according to the filing. These assets are difficult to value because market prices aren’t available and the bank has to rely on in-house models to calculate potential gains or losses. The bank had a net decrease in Level 3 investments of $1.3 billion for the quarter, the filing shows.

The bank didn’t disclose the funds that received the investments or how they performed this year. CCA’s Global Macro Fund, managed by Kevin Bespolka, is down about 3 percent through September, according to data compiled by Bloomberg. The fund bets on “interest-rate and currency-market volatility,” according to the bank’s website. A Bloomberg index of other so- called macro funds, whose managers bet on global trends, fell 3.9 percent, the data show.

Romero-Apsilos declined to comment on how much of the bank’s capital is currently invested in the funds. CCA’s Mortgage/Credit Opportunity Fund, run by Rajesh Kumar, manages $395 million, about 90 percent of which is Citigroup’s, a person familiar with the matter said in May.

‘Proprietary Capital’

Another investment vehicle, the Event Driven Fund, manages “only proprietary capital,” according to an April 2010 marketing brochure obtained by Bloomberg News. The fund is run by Mukesh Patel, a risk-arbitrage trader.

Citigroup shut its Quantitative Strategies fund this year after manager Shakil Ahmed became head of electronic market- making. The fund managed about $400 million and had no outside investors, a person familiar with the matter said in June.

“This doesn’t strike me as a shift in investment strategy because it’s only $800 million,” Charles Whitehead, an associate professor of law at Cornell Law School in Ithaca, New York, said in a phone interview. “It strikes me as relating to something else involving those hedge funds and private-equity funds. If it were part of an investment strategy, it would be an odd thing to do in light of the impending Volcker rule.”

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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World Dodges Recession With China-U.S. Buoy

By Rich Miller - Nov 7, 2011 5:40 PM GMT+0700

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Nov. 7 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based fund manager at Principal Global Investors, talks about global financial markets and his investment strategy. Chandgothia also discusses the Group of 20 summit and Europe's sovereign debt crisis. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Nov. 7 (Bloomberg) -- Robert Minikin, a senior foreign-exchange strategist at Standard Chartered Plc in Hong Kong, talks about the potential for intervention by the Chinese government in the European sovereign-debt crisis and the outlook for the yuan. Minikin also discusses the Group of 20 nations' summit last week. He speaks with Rishaad Salamat on Bloomberg Television's "One the Move Asia." (Source: Bloomberg)

The global economy is showing signs of withstanding a European recession triggered by the debt debacle in Greece.

The U.S. unemployment rate fell to 9 percent last month, the lowest since April, from 9.1 percent in September, the Labor Department reported Nov. 4. Chinese manufacturing continued to expand in October, based on an index compiled by the China Federation of Logistics and Purchasing. Even in Japan, the world’s third-largest economy, growth is coming to life: Gross domestic product climbed last quarter for the first time in a year, rising 6 percent according to the median estimate of analysts polled by Bloomberg News.

“Barring Italy turning into Greece, we’ll have a slowdown in the world economy, but a manageable one,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London.

The cool-down will bring with it “some not-to-be-dismissed benefits, particularly in easing inflationary pressures,” he added. That easing will boost the spending power of American consumers and give officials in China and other emerging markets room to loosen fiscal and monetary policy.

The ability of the U.S. to avoid a contraction means the dollar probably will appreciate against the European currency, UBS Investment Bank Chief Economist Larry Hatheway and his team in London wrote in an Oct. 28 report. They see the euro falling to $1.25 by the end of next year from $1.3792 at 5:57 p.m. in New York Nov. 4 as global growth slows to 3.1 percent in 2012 from 3.2 percent this year.

Rising Equities

The U.S. stock market also will benefit, David R. Kotok, chairman and chief investment officer of Cumberland Advisors in Vineland, New Jersey, said in a Nov. 1 note to clients. He forecast the Standard & Poor’s 500 Index will finish the year at 1,350, compared with 1,253.23 at 4 p.m. on Nov. 4. percent in German trading.

“The bear is going into hibernation for the winter, and the surprise will be to the upside,” Kotok said.

He is “fully invested” in the U.S. markets and “very underweight” in Europe, he told Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” Nov. 1.

U.S. stock futures fell today, indicating the Standard & Poor’s 500 Index will extend last week’s decline. S&P 500 futures expiring in December declined 1.3 percent to 1,235 at 10:27 a.m. in London. The euro fell 0.6 percent against the dollar to $1.3715, after dropping 2.5 percent last week.

Recession Risk

European Central Bank President Mario Draghi said Nov. 3 that the region is heading toward a “mild recession” after policy makers cut their benchmark interest rate by a quarter percentage point to 1.25 percent.

The euro area’s gross domestic product will shrink at a 0.5 percent to 1 percent annual rate this quarter and next before recovering in the second half of 2012, according to Allen Sinai, president of Decision Economics in New York.

Europe’s malaise already is taking its toll on the rest of the world economy. South Korea’s exports increased at the slowest pace in two years last month, partly because of the European debt crisis, and may slow further in the fourth quarter, according to the Ministry of Knowledge Economy.

LG Electronics Inc. (066570), the world’s third-largest maker of mobile phones, reported Oct. 26 that it lost 414 billion won ($373 million) in the three months ended September, as earnings dropped at its flat-panel unit. The Seoul-based company had a profit of 7.6 billion won in the 2010 third quarter.

Mid-Year Shock

Banks in emerging markets also feel the pinch as European counterparts seek to increase their capital base by cutting back on international loans. A survey of banks in developing countries released Oct. 21 by the Institute of International Finance found that their “funding conditions in international markets have deteriorated significantly.”

Still, the world economy as a whole has proved to be resilient after the mid-year shock to confidence from the crisis in Europe and squabble in the U.S. over raising the Treasury debt ceiling, said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York.

Purchasing managers at manufacturing companies throughout the world reported that business improved in October. The aggregate index increased to 50 last month from 49.8 in September; results above 50 indicate expansion.

The data suggest that the risks of a synchronized global contraction “continue to diminish,” Neal Soss, chief economist at Credit Suisse Holdings in New York and his colleague Henry Mo, wrote in a Nov. 2 report.

Car Sales Rebound

“At the moment, we don’t see recessionary situations as we assess the markets,” Rich Kramer, chief executive officer of Akron, Ohio-based Goodyear Tire & Rubber Co. (GT), told analysts on an Oct. 28 conference call. Third-quarter net income of $161 million topped the analysts’ estimates; the largest U.S. tire maker reported a loss of $20 million a year earlier.

Sales of cars and light-duty trucks rose 7.5 percent last month from a year ago to a 13.3 million seasonally adjusted annual rate, the most since February, according to Autodata Corp. in Woodcliff Lake, New Jersey.

After cutting back on saving and increasing spending, consumers should get a boost this quarter from falling inflation, Hensley said. He sees consumer prices rising at an annualized pace of just 0.5 percent in the final three months of the year, down from 3.1 percent in July-September.

The average price for unleaded gasoline fell almost 20 cents in September to $3.43 a gallon and held near there last month, according to AAA, the nation’s largest motoring group.

Disposable Income

U.S. households also are benefiting from smaller debt payments, thanks to record low interest rates from the Federal Reserve and their own efforts to put their finances in better shape, Sinai said. As a share of disposable income, those payments fell to an almost 17-year low of 11.09 percent in the second quarter from a peak of 13.96 percent in 2007, based on Fed data.

The course of consumer spending next year hinges on the U.S. Congress. A 2 percent cut in workers’ payroll taxes is set to expire at the end of this year. President Barack Obama has proposed extending and adding to it as part of his $447 billion jobs plan. Lawmakers have yet to act on the proposal.

Ebbing inflation also will be welcome news in China and other emerging markets, where policy makers have been struggling to contain price pressures.

“From the truly global perspective, the most important thing for me is not the next development in Europe, barring a breakdown in Italy, but what happens to Chinese inflation,” O’Neill said. The country’s central bank raised borrowing costs five times and boosted lenders’ reserve requirements nine times in the past 13 months.

Policy Easing

Chinese inflation may moderate to less than 5 percent in November and December, compared with a three-year high of 6.5 percent in July, said Zhu Jianfang, the most accurate forecaster of the data in Bloomberg News surveys during the past two years.

“Food and global oil prices have peaked, and that means inflation will fall,” said Zhu, a Beijing-based economist at Citic Securities Co. Ltd. “The decline will leave more room for policy easing, such as looser credit, to help sustain growth.”

Manufacturing in China expanded last month, albeit at a slower pace. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said Nov. 1.

Interest-Rate Cuts

Some central banks already are easing policy. Brazil cut interest rates for the second time this year on Oct. 19, lowering the benchmark Selic rate to 11.5 percent. Bank Indonesia reduced its key rate by 25 basis points to 6.5 percent on Oct. 11, paving the way for the biggest monthly gain in the country’s sovereign-bond market since March.

Asian policy makers “have a lot of room” to cut interest rates and expand fiscal policy, said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings Inc. in Hong Kong. “Asia’s public debt-to-GDP ratio is among the lowest of all the regions.”

In Japan, Prime Minister Yoshihiko Noda is proposing a third extra budget that the Cabinet Office estimates will increase GDP by about 1.7 percent. The budget, which will pay for rebuilding after the March earthquake, also will create about 600,000 jobs, the office said Oct. 28.

‘Well Timed’

The effort “is well timed,” said Cameron Umetsu, senior economist at UBS Securities Japan in Tokyo. “It helps to cushion some of the pain, and in that sense lends a certain degree of independence to the Japanese recovery.”

Sinai sees global growth holding roughly steady next year at just under 3 percent, adding his forecast that the world recovery will stay on track assumes Europe will contain the contagion from Greece’s debt crisis.

There are precedents for the world economy’s ability to hold up in the face of a European recession. Perhaps the most relevant, according to economists at the Washington-based Institute of International Finance, is the early 1990s, when a European Monetary System crisis drove the area into recession without derailing a U.S. recovery.

“In my 30 years in the business, Europe’s never been the locomotive” of the global economy, O’Neill said. “The contagion from Europe to the U.S. and China as the two key engines of the world is being exaggerated.”

To contact the reporter on this story: Richard Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Berlusconi’s Majority Unravels as Allies Push Him to Resign

By Marco Bertacche - Nov 7, 2011 6:25 PM GMT+0700

Prime Minister Silvio Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step down as Italy’s borrowing costs surged to euro-era records.

Giuliano Ferrara, editor of newspaper Il Foglio and a former Berlusconi spokesman, reported today that the premier may step down within hours and push for early elections. Italian stocks reversed early losses after the report and the FTSE MIB index advanced 2.4 percent at 12:15 p.m. in Milan, the only major European index to gain today. Italian bonds pared some of their losses after the report, with the 10-year bond yielding 6.53 percent, down from a euro-era record 6.68 percent earlier.

Two Berlusconi allies defected to the opposition last week, and a third quit late yesterday. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.

“I fear we no longer have a majority in parliament,” Interior Minister Roberto Maroni said on a talk show yesterday. Maroni, a member of the Northern League party, part of the prime minister’s coalition, said he backs early elections.

Berlusconi Confident

Berlusconi said yesterday he was confident he still had a majority. The desertions may deprive him of the needed support in the lower house for tomorrow’s vote on the 2010 budget report. The Chamber of Deputies failed to rubber-stamp the routine measure in an initial ballot last month, prompting Berlusconi to call a confidence ballot, which he won with 316 votes, barely a majority in the 630-seat body. A second defeat on the budget law would likely lead to another confidence vote, with the defections threatening the outcome.

“Berlusconi may still be in office, but he has not been in power for some time,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an e-mailed response to questions. “He no longer administers.”

Berlusconi, 75, faces mounting pressure at home and abroad as investor concern about the fraying government’s ability to cut the region’s second-biggest debt sent the yield on the nation’s 10-year bond to euro-area record today, driving the extra yield investors demand to hold the securities instead of benchmark German bunds to the highest since the introduction of the currency in 1999.

Risk Premium

The slump in Italy’s bonds pushed the difference in yield, or spread, with 10-year German securities up 17 basis points to 471 basis points at 12:15 p.m. in Rome.

The yield on the benchmark bond is now close to the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. In a bid to boost confidence, Berlusconi on Nov. 4 asked the International Monetary Fund to monitor Italy’s debt- cutting efforts.

In Italy, governments routinely call confidence votes to bring rebellious lawmakers into line and speed the passage of legislation. Berlusconi has used the mechanism more than 50 times since his election in 2008.

The euro weakened and gold reached a six-week high on concern about Berlusconi’s future. The 17-nation currency retreated 0.1 percent to $1.3775 at 11:20 a.m. in London. Credit-default swaps on Italy soared 24 basis points to 517 at 10 a.m. in London, approaching the record 534 set Sept. 22.

No-Confidence Vote

With the ranks of Berlusconi’s majority thinning, opposition leaders are also trying to muster backing for a no- confidence vote, regardless of the outcome of tomorrow’s ballot, to try to topple the leader who has governed for more than half of the 17 years since he entered politics in 1994. Berlusconi has faced only one such vote, which he survived, in December of last year.

Should he fail to muster a majority in either type of confidence vote, the government would fall and President Giorgio Napolitano would then consult with political parties to see whether another majority could be formed. Napolitano could also try to build support for a technical government led by a prominent figure charged with implementing the economic reforms and eventually preparing the country for new elections. If Napolitano cannot forge a new government, elections would be called and likely held two months after the consultations end.

Low Popularity

Berlusconi’s popularity is at a record low and his coalition trailed the main opposition alliance by 10 percentage points in a Nov. 1 poll by IPR Marketing conducted on Oct. 28. No margin of error was given.

Napolitano, 82, who consulted last week with all political parties about the crisis, called for unity at the weekend. Italy can’t mend itself “in a climate of war” and it’s “indispensible” that all parties back the austerity and growth measures promised to the European Union, Napolitano said.

Berlusconi’s government in August approved 45.5 billion euros ($63 billion) in austerity moves, its second deficit- cutting plan in a month, to secure European Central Bank purchases of Italian debt after yields surged above 6 percent. The central bank is free to stop the buying if Italy fails to pass its reforms, ECB Governing Council member Yves Mersch told la Stampa daily in an interview.

Bill Auction

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined.

Berlusconi yesterday said he plans to govern until his term ends in 2013 and reiterated that Italy must swiftly approve its economic overhaul. The government intends to present some of the measures as amendments to a bill that Parliament must vote on by Nov. 15, probably through a confidence motion.

“Italy’s ability to gain market confidence will be determined by whether it will implement sound structural reforms within a realistic timeline,” Vladimir Pillonca, an economist at Societe Generale SA in London, said by e-mail. “Market confidence is extremely hard to restore once lost” and “until then, Italy will remain Europe’s epicenter of systemic risk.”

Resignation Calls

Some of Berlusconi’s allies called on him yesterday to consider stepping aside for the nation’s sake. Senator Giuseppe Pisanu, a former interior minister and member of the premier’s party, urged Berlusconi to help form a government of “national unity and salvation.”

Roberto Formigoni, president of the Lombardy region for Berlusconi’s party, recommended the premier quit if he lacks a clear majority and called for a new government with centrist parties. Former Industry Minister Claudio Scajola said he’ll back the premier in the vote this week, while urging Berlusconi to then hand over power to his undersecretary, Gianni Letta.

“I don’t think it’s wise to face an international crisis of this magnitude where Italy has become the weakest link, with these tiny majority numbers,” Scajola said in an interview on Sky TG24 yesterday.

The defectors may abstain from the Nov. 8 lower-house vote, lawmaker Fabio Gava told Repubblica in an interview. That would likely leave Berlusconi short of an absolute majority even if he carried that vote and signal that he would risk being toppled in a confidence vote.

Berlusconi has been calling rebels to persuade them to return to the fold, Repubblica said. “We checked the numbers in the past few hours and we have a majority,” he said by phone at a rally yesterday in comments broadcast on Sky TG24.

To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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European Stocks Decline as Berlusconi Says He Won’t Quit as Prime Minister

By Sarah Jones - Nov 7, 2011 7:07 PM GMT+0700
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Italy's Prime Minister Silvio Berlusconi. Photographer: Chris Ratcliffe/Bloomberg

European stocks resumed their losses after a report that Italian Prime Minister Silvio Berlusconi said he’s not planning on stepping down.

The Stoxx Europe 600 Index slipped 0.6 percent to 238.3 at 12:06 p.m. in London. In response to earlier reports that he may quit within hours, Berlusconi denied that he’s stepping down, Ansa said, citing comments from the premier.

“We are all looking for the next policy maker’s speech,” Robert Talbut, chief investment officer at Royal London Asset Management, said in an interview with Bloomberg Television. “There is an enormous amount of uncertainty around how this crisis is going to play out.”

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Stocks Drop, Euro Weakens on Italian Vote Concern; Gold at Six-Week High

By Stephen Kirkland and Shiyin Chen - Nov 7, 2011 7:26 PM GMT+0700

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Nov. 7 (Bloomberg) -- John Woods, chief Asian strategist at Citigroup Inc.'s private bank, talks about Europe's debt crisis and its implications for Asia's financial markets. Woods speaks with Susan Li, Rishaad Salamat, John Dawson and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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Nov. 7 (Bloomberg) -- Robert Minikin, a senior foreign-exchange strategist at Standard Chartered Plc in Hong Kong, talks about the potential for intervention by the Chinese government in the European sovereign-debt crisis and the outlook for the yuan. Minikin also discusses the Group of 20 nations' summit last week. He speaks with Rishaad Salamat on Bloomberg Television's "One the Move Asia." (Source: Bloomberg)

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Nov. 7 (Bloomberg) -- David Blanchflower, a professor at Dartmouth College and Bloomberg Television contributing editor, talks about reports that Italy's Prime Minister Silvio Berlusconi may resign. Giuliano Ferrara, editor of newspaper Il Foglio and a former Berlusconi spokesman, reported today that the premier may step down within hours and push for early elections. Blanchflower speaks with Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Stocks fell, the euro weakened and Italy’s borrowing costs climbed to a record as concern Prime Minister Silvio Berlusconi will fail to win a majority for a parliamentary vote overshadowed Greece’s plan to form a unity government. Gold rose to a six-week high.

The Stoxx Europe 600 Index decreased 0.5 percent at 7:22 a.m. in New York, paring earlier declines of as much as 1.8 percent after a report that Berlusconi might resign. Standard & Poor’s 500 Index futures lost 0.6 percent. The euro dropped 0.3 percent to $1.3753, and the Swiss franc depreciated against all 16 of its most-traded peers. The yield on the 10-year Italian bond climbed to 6.68 percent. Gold jumped 0.5 percent.

Italy’s parliament will vote tomorrow on the 2010 budget report as Berlusconi’s majority unravels. Greek Prime Minister George Papandreou agreed yesterday to step down, paving the way for the formation of a new government to get international financing. European finance chiefs will meet in Brussels today to work on a plan to raise the region’s bailout fund.

“The crisis has shifted from Greece to Italy and this is a domino that would not fall quietly,” Kit Juckes, the head of foreign-exchange research at Societe Generale SA in London, wrote today in a report. “It is impossible to see what can be done to restore Italian confidence, other than rebuild confidence in Italian public finances, and that is a Herculean task.”

Carrefour Downgrade

Three shares retreated for every two that gained on the Stoxx 600. Carrefour SA dropped 3.9 percent after Citigroup Inc. lowered its recommendation for the world’s second-biggest retailer to “sell” from “neutral.” Sandvik AB, the largest maker of metal-cutting tools, sank 2.7 percent after offering 6.19 billion kronor ($933 million) to buy the remaining shares of its subsidiary Seco Tools AB.

Stocks and bonds pared losses after Giuliano Ferrara, editor of newspaper Il Foglio and a former Berlusconi spokesman, reported that the premier may step down within hours and push for early elections. Berlusconi denied he’s stepping down, Ansa said, citing comments from the premier.

Futures on the S&P 500 signaled the U.S. stocks gauge may extend last week’s 2.5 percent drop.

Italy’s 10-year bond yield traded 21 basis points higher at 6.58 percent, after climbing as much as 31 basis points. The extra yield investors demand to hold Italian 10-year bonds instead of German bunds, the euro region’s benchmark government securities, widened to as much as 491 basis points, or 4.91 percentage points, the most since the introduction of the euro in 1999, before trading at 474 basis points.

Allies Defected

Two Berlusconi allies defected to the opposition last week, and a third quit late yesterday. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.

The yield on the Greek bond due in October 2022 rose 79 basis points, climbing for the sixth straight day, while the two-year note yield surged to a euro-era record. Papandreou and Antonis Samaras, head of the main opposition party, agreed to form a government to lead Greece “to elections immediately after the implementation of European Council decisions on Oct. 26,” according to an e-mail from the office of President Karolos Papoulias in Athens.

The yield on the German bund declined two basis points, while the French 10-year yield rose nine basis points, driving the difference in yield between the two securities 11 basis points higher to 133, less than 10 basis points from the widest in the euro’s history. The cost of insuring European sovereign debt rose, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbing eight basis points to 331, the highest since Nov. 1.

Ready to Act

The euro weakened 0.4 percent versus the yen.

The Swiss franc slid 1.1 percent versus the 17-nation euro and the dollar. Policy makers remain ready to act in case the franc’s strength increases the risk of deflation and threatens the country’s economy, Swiss National Bank President Philipp Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday.

Gold jumped as much as 1.1 percent to $1,773.35 an ounce, the highest since Sept. 22. Lead, zinc, and nickel decreased at least 0.9 percent. German industrial production slipped 2.7 percent in September, more than the 0.9 percent decline predicted by 37 economists in a Bloomberg survey. Germany is the third-largest user of copper, after China and the U.S.

The MSCI Emerging Markets Index lost 0.4 percent. Hungary’s BUX slid 0.9 percent. The Shanghai Composite Index slipped 0.7 percent, and South Korea’s Kospi Index (KOSPI) decreased 0.5 percent. Markets in India, Turkey, Malaysia and the Philippines were closed for a holiday.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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Italy Yield Surge Sets Berlusconi on Bailout Path

By John Glover - Nov 7, 2011 6:51 PM GMT+0700

Italy’s record bond yields are sending the nation down the same path taken by Greece, Portugal and Ireland in the days before they were forced to seek rescues.

Italy’s 10-year notes traded above 5.5 percent for 40 days before breaching the 6 percent mark on Oct. 28 and reaching as much as 6.68 percent today. The bailed-out nations followed a similar trajectory, consistently averaging above 6 percent for about a month before crossing the 6.5 percent barrier. After that, it took an average of 16 days for yields to pass the unsustainable 7 percent level.

“The trend appears worryingly similar,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. “Clearly, the longer it lasts, the worse it gets.”

With almost 1.6 trillion euros ($2.2 trillion) of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. Prime Minister Silvio Berlusconi triggered the latest surge in yields after bowing to domestic demands to water down a 45.5 billion-euro austerity package.

Yields on Italy’s bonds rose even as the European Central Bank bought the securities. Italy’s 10-year borrowing costs have soared to a euro-era record of 473 basis points more than German bunds, the benchmark for Europe. Germany is able to borrow at a yield of 1.8 percent for 10 years, less than a third of the 6.52 percent Italy has to pay.

Debt Insurance

The cost of insuring Italy’s debt using credit-default swaps surged to 518 basis points today, approaching the record 534 reached in September, according to CMA. The contracts, whose cost has jumped from 405 basis points at the end of last month, rise as a borrower’s creditworthiness worsens.

“The acceleration in Italy’s bond yields is very, very frightening,” said Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London “It’s surprising how quickly a difficult situation can become an impossible one. Politicians always think they have lots of time, but when the market decides to withdraw support, it can do so very suddenly.”

Italy has to refinance 37 billion euros of bills and bonds by year-end and another 307 billion euros in 2012, Bloomberg data show. The nation pays an average of 4.15 percent for its debt, meaning next year’s interest payments will cost about 12.7 billion euros out of a total 54.4 billion-euro interest tab.

Refinancing next year’s maturities at 7 percent would cost about an additional 8.7 billion euros.

‘Very Difficult’

An increase of 1 percentage point in the nation’s borrowing costs boosts the interest bill by 0.2 percent of gross domestic product in the first year, 0.3 percent in the second and 0.5 percent in the third, said Mizuho’s Barbieri, citing Bank of Italy calculations. Yields are now more than 2 percentage points higher than the average since the inception of the euro.

“Italy will be difficult, very difficult,” said Mirko Santucci, the Italian-born head of credit at Swisscanto Asset Management AG in Zurich, which manages the equivalent of about $42 billion in fixed income and credit. “The government there has to take important decisions and we don’t see it being able to do that. That said, while I can imagine a Europe without Greece, I can’t imagine a Europe without Italy.”

Giuliano Ferrara, editor of newspaper Il Foglio and a former spokesman for Berlusconi, reported today that the prime minister may step down within hours and push for early elections. The beleaguered premier said yesterday he’s confident he has a parliamentary majority after two allied lawmakers defected to the opposition, and that he aims to complete his mandate through 2013.

‘Internal Divisions’

“The government’s internal divisions remain the main problem for a country that now, more than ever, needs stability and credibility,” said Annalisa Piazza, a fixed-income strategist at broker Newedge Group in London.

Berlusconi faced calls from the opposition to quit, and allies requested he broaden the backing for the government, after he announced Nov. 4 that he asked the International Monetary Fund to monitor Italy’s debt-reduction progress, while rejecting an offer of financial help.

The prime minister, who delayed the release of his latest album of love songs because of the euro-region crisis, has been distracted from governing as he faces trial on charges of corruption, fraud and paying for underage sex. He denies any wrongdoing.

Standard & Poor’s and Moody’s Investors Service both cited political instability and rising borrowing costs as risks to Italy meeting its fiscal goals when they downgraded the nation on Sept. 19 and Oct. 4.

Even so, investors shouldn’t draw too many parallels with what happened to smaller, less-diversified economies when they look at Italy, said Fabio Fois, a European economist at Barclays Capital in London.

“Investors want to see Italy doing the right thing,” said Fois. “The Italian economy is different and far larger, so the same yields don’t necessarily imply the same outcome as in Greece, Ireland and Portugal.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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Papandreou to Step Down in Accord on Unity Government

By Marcus Bensasson, Maria Petrakis and Natalie Weeks - Nov 7, 2011 4:15 PM GMT+0700

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Nov. 7 (Bloomberg) -- Andrew Freris, senior investment strategist for Asia at BNP Paribas Wealth Management, talks about the outlook for Greek politics and the nation's debt problems, and his investment strategy. Freris speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Nov. 7 (Bloomberg) -- Yannis Tsamourgelis, assistant professor at the University of the Aegean, talks about Greece's government and debt problems. Greek Prime Minister George Papandreou agreed to step down to allow the creation of a national unity government that will secure international financing and avert a collapse of the country’s economy. Tsamourgelis speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Greek Prime Minister George Papandreou will meet the opposition leader today after agreeing to step down to allow a national unity government to secure outside financing and avert a collapse of the country’s economy.

Papandreou and Antonis Samaras, leader of the main opposition party, agreed to form a government to lead Greece “to elections immediately after the implementation of European Council decisions on October 26,” according to an e-mailed statement yesterday from the office of President Karolos Papoulias in Athens. Papandreou already stated he won’t lead the new government, the statement said.

“If we take it to mean that Greece is making efforts to ensure that they continue to receive funding support from the euro zone, then the move is positive,” Sacha Tihanyi, a Hong Kong-based currency strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia, said today of the decision. “However, it would be much better to see sustained political stability out of the country.”

Both sides will meet again today to decide who will be the head of the new government, with a separate meeting to discuss the time frame and the government’s mandate, the statement said. Papoulias will also host talks with all political party leaders today. Feb. 19 is the “most appropriate” date to hold new elections, according to a statement yesterday from the Finance Ministry.

International Aid

Trying to preserve international aid before the nation runs out of money next month, Papandreou raced over the past 48 hours to clinch an agreement with the main opposition party before markets open today, healing divisions to secure an aid agreement. Samaras, who previously demanded elections and balked at joining forces with Papandreou’s socialist Pasok party, said he was “determined to help” reach an agreement as long as the premier stepped down first.

Concern that Greece will default on its debt has driven yields on its 10-year note to 26.7 percent as of Nov. 4, about 25 percentage points more than benchmark German bunds, a euro- era record. The euro has fallen 1.5 percent in the past six months among 10 developed-market peers tracked by Bloomberg Correlation-Weighted Currency Indexes.

Greek Yields Higher

Greek two-year notes reversed an advance, pushing the yield 314 basis points higher to 101.11 percent at 8:36 a.m. London time. The price of the securities slid to 31.5 percent of face value. The yield on the debt earlier dropped as much as 544 basis points to 92.54 percent. Greek benchmark 10-year bond yields fell four basis points to 26.73 percent.

The 17-nation euro erased early gains today and was down 0.5 percent to $1.3727 as of 10:11 a.m. in Athens as investor focus turned to Italy, as growing defections threaten to unravel Prime Minister Silvio Berlusconi’s majority before a key parliamentary vote tomorrow.

Greek Finance Minister Evangelos Venizelos has said he wants a unity government agreed on before euro-area finance ministers meet in Brussels later today. Lucas Papademos, former European Central Bank vice president, will head a Greek national unity government, To Vima newspaper reported, without citing anyone.

The premier’s capitulation caps a tumultuous 10 days that started with him securing a second bailout from the European Union, then roiling markets by unilaterally deciding to put the terms of that rescue to the Greek people in a vote, a plan he then dropped. Bowing to pressure from his party and the opposition, Papandreou pledged to stand aside for a government with wider support.

‘Positive Development’

Dora Bakoyannis, a former foreign minister who counts on the support of another four lawmakers in parliament as part of her Democratic Alliance group, said the decision is a “positive development,” necessary for the country’s “survival” and that decisive action must now be taken to quickly form the new government.

The meeting of Greek political party leaders scheduled for today may be canceled after two parties refused to attend, Athens-based newspaper Ta Nea said, without saying how it got the information. The Communist Party of Greece and the Syriza party declined the invitation from Papoulias to join the talks.

“A Greek unity government will give markets confidence,” Spyros Economides, a senior lecturer at the London School of Economics, said in telephone interview.

Referendum Scrapped

Papandreou, 59, met with Papoulias as pressure mounted on him to step down after he was forced to cancel the referendum that might have led to Greece being ejected from the euro. The premier won a confidence motion early on Nov. 5 after pledging to disaffected members of his ruling Pasok party that he would not stay on.

Italy’s Berlusconi also faces mounting pressure to step down as 10-year borrowing costs for the euro region’s third- biggest economy approach the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. The premier has reiterated that he won’t resign.

“With Papandreou’s decision, the focus will perhaps shift to Italy, where Prime Minister Berlusconi is facing intense pressure, and may well follow Papandreou’s footsteps should tension increase further,” Thomas Costerg, an economist at Standard Chartered Bank, said in comments made before yesterday’s announcement.

Bailout Accord

Officials from the Greek ruling party and New Democracy met in Athens late yesterday to discuss details of the bailout accord agreed after an Oct. 26 European summit, before Venizelos attends the Brussels meeting, government spokesman Elias Mosialos told reporters.

The main goal of a unity government is securing approval for the Oct. 26 agreement with international lenders, Papandreou told reporters in Athens on Nov. 5. Last month’s accord “is a prerequisite for our remaining in the euro,” he said, referring to the second financing package of 130 billion euros ($179.7 billion) agreed by EU leaders on that date.

The government will need the backing of 180 lawmakers to secure approval for Greece’s second aid package. Disbursement of funds was halted after German Chancellor Angela Merkel and French President Nicolas Sarkozy opposed Papandreou’s call for a referendum.

Austerity Measures

Papandreou survived a confidence vote in June called to rally support for austerity measures demanded by international lenders in return for a continuation of a 2010 bailout, the first for an EU nation. The EU and the IMF agreed to provide 110 billion euros in May last year in return for cuts in government spending and public sector jobs.

His referendum plan triggered a suspension in assistance by EU leaders less than a week after they’d approved the second rescue package and agreed with banks to write down the value of Greek debt by 50 percent.

The surprise referendum announcement triggered the biggest two-day slide in the MSCI World Index in almost three years and sent spreads on French, Greek and Italian bonds over bunds to euro-era records. France now pays 123 basis points more than Germany to borrow for 10 years.

The MSCI Asia Pacific Index lost 0.5 percent to 119.66 today after it fell 3.6 percent last week, the most since Sept. 23. Japan’s Nikkei 225 Stock Average fell 0.6 percent.

European stocks declined for the first week in six last week, with the Stoxx 600 Europe Index falling 3.7 percent compared with a 4.1 percent drop for the MSCI World Index.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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Carphone to Sell U.S. Mobile Venture Stake

By Paul Jarvis - Nov 7, 2011 3:36 PM GMT+0700

Carphone Warehouse Group Plc (CPW), Europe’s largest mobile-phone retailer, plans to sell its stake in its U.S. and Canadian joint venture to partner Best Buy Co. Inc. for 838 million pounds ($1.34 billion).

As much as 813 million pounds of the proceeds will be returned to shareholders through the issue to investors of Class B shares, the London-based company said today in a statement.

Carphone Warehouse also said its Best Buy Europe unit will close all 11 “big box” stores in the U.K. after the outlets posted a wider first-half loss of 46.7 million pounds.

The Best Buy Mobile venture was formed in 2006 with the intention of introducing a store chain in the U.S. offering customers a variety of network options. The unit has dedicated areas inside all Best Buy’s 1,106 U.S. large-format stores and 247 smaller standalone outlets. Its 5 percent market share compares with 1 percent when it started, Carphone Warehouse said in June.

Carphone Warehouse rose as much as 11 percent to 383.3 pence in London trading and was up 2 percent at 8:34 a.m.

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net

To contact the editor responsible for this story: Paul Jarvis at pjarvis@bloomberg.net

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Deutsche Telekom Loses Steam to German Rivals

By Cornelius Rahn - Nov 7, 2011 6:01 AM GMT+0700

Deutsche Telekom AG (DTE)’s German sales decline may have accelerated in the past quarter as competition from wireless and cable companies intensified, making it tougher to make up for a slump in markets such as Greece and Romania.

Europe’s biggest phone company has relied on Germany, whose economy has been less vulnerable to the region’s debt crisis, to balance customer losses in eastern Europe and at T-Mobile USA. Now, even broadband and television packages used to offset shrinking phone-line sales are slowing, and Deutsche Telekom may have to cut prices to stem market-share losses, analysts say.

Third-quarter revenue in Germany probably dropped 4.9 percent to 6 billion euros ($8.3 billion) from a year earlier, according to the average estimate of seven analysts compiled by Bloomberg. That compares with a decline of 3.4 percent in the previous three months and would be the third consecutive decrease. In the second quarter, Deutsche Telekom generated 55 percent of sales from continuing operations in Germany.

“At some point that drop has to stop and they have to say ’this far and no further,’” said Heinz Steffen, an analyst at Fairesearch GmbH, who has a “reduce” rating on the stock.

Deutsche Telekom’s German unit, led by Niek Jan van Damme, has focused on cost cuts, helping it attain a record ratio of adjusted earnings before interest, taxes, depreciation and amortization to sales of 40.7 percent in the second quarter. The company plans to fold its information technology systems into one unit, people familiar with the plan said last month. That would add to a cumulative 4.2 billion-euro cost-savings plan running from 2010 through 2012.

Margins Peak

“It’s going to be very hard” for the company to raise its Ebitda margins, said Will Draper, am Espirito Santo analyst. “Only if they cut a lot of additional costs.”

Deutsche Telekom’s third-quarter adjusted Ebitda may have dropped 3.9 percent to 3.8 billion euros as sales fell 3.5 percent, excluding the U.S. business, according to analyst estimates. The company is scheduled to report earnings Nov. 10.

Deutsche Telekom has dropped 6.6 percent to 9.02 euros this year in Frankfurt trading. The 21-company Bloomberg Europe Telecommunication Services Index lost 7.4 percent.

While Germany’s economy has been more resilient than Spain, Italy and France to the region’s debt crisis, growth is starting to cool there, too. Unemployment unexpectedly rose for the first time in more than two years in October, while business confidence fell to a 16-month low. Economic growth may slow to 0.8 percent next year from 2.9 percent, a government- commissioned report showed.

Weakening Powerhouse

“Any signs that the German economic powerhouse is showing some signs of weakness” may damp consumer demand and corporate spending, said Berenberg Bank analyst Paul Marsch.

In the second quarter, Deutsche Telekom’s revenue slipped 3.3 percent, excluding the U.S. unit, led by declines in Greece, Romania and Hungary. In the U.S., it’s fighting a government lawsuit to block the proposed $39 billion sale of T-Mobile USA to AT&T Inc.

At home, Deutsche Telekom is under attack from cable operators selling combined phone, broadband and TV services.

Kabel Deutschland Holding AG (KD8), Germany’s largest cable operator, said the number of phone and Web clients climbed 21 percent in the quarter ending June 30 for a total of 1.4 million. Unitymedia, the country’s second-largest cable company that’s owned by Liberty Global Inc. (LBTYA), posted a 57 percent increase in broadband subscribers last quarter. Deutsche Telekom had 85,000 net additions of broadband clients in Germany in the second quarter, after 130,000 a year earlier.

‘Big Problem’

“Cable is going to become a very, very big problem in Germany for Deutsche Telekom,” Espirito Santo’s Draper said.

Competition is also intense in the German mobile-phone market. Last month, for the first time, Deutsche Telekom shared a release of Apple Inc.’s popular iPhone with other providers. The company’s German mobile revenue fell 1.2 percent in the quarter ended June 30 even as data-plan sales picked up.

Royal KPN NV’s E-Plus unit, the only of the four wireless operators in Germany that has reported third quarter earnings, expanded its customer base by 11 percent to 22.1 million users.

Mobile customers at Telefonica SA (TEF)’s German division jumped 9.1 percent in the quarter ended June 30 to 17.7 million and Vodafone Group Plc (VOD) added 3.3 percent to 36 million. That compared with a 6.8 percent decline to 34.5 million customers at Deutsche Telekom, which included the automatic termination of unused prepaid cards introduced last year.

Entertain TV

To bolster sales, Deutsche Telekom is trying to counter slowing growth for its Entertain television offering.

The company aims to sell between 2.5 million and 3 million television packages by the end of 2012. It has sold 1.6 million packages by the end of 2010. The company added a net 44,000 TV customers in Germany in the second quarter, down from 75,000 a year earlier.

Deutsche Telekom’s TV product costs at least 22.95 euros per month. Kabel Deutschland’s cheapest TV package costs 18.90 euros.

The phone company has added distribution via satellite to gain customers in areas with less access to broadband lines and plans to extend the service to devices including tablet computers and mobile phones next year.

If Deutsche Telekom’s current broadband market share of 46 percent falls to 45 percent or below, the company “may signal to the market that they have to be more aggressive on prices,” said ING Financial Markets analyst Jeffrey Vonk. “Broadband market share will be crucial.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

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