Olympus Adviser Axes Closed Brokerage Soon After SEC, FINRA Examinations

By David Glovin and John Helyar - Nov 22, 2011 4:04 PM GMT+0700

Axes America LLC, the now-defunct brokerage firm that advised Olympus Corp. in a transaction being investigated by the FBI, ceased operations in March 2008 soon after U.S. regulators began examining its books, records show.

Beginning in 2006, New York-based Axes America served as adviser to Olympus in its $2.1 billion acquisition (7733) of Gyrus Group Plc, a British medical device manufacturer, in 2008. PriceWaterhouseCoopers LLP, which examined the transaction for the Olympus board, reported last month that the Tokyo-based company paid $687 million in fees to Axes America and a related Cayman Islands fund, Axam Investments Ltd.

Olympus, which subsequently said it paid inflated fees to advisers to hide losses, is under investigation in the U.S., U.K. and Japan.

Axes America disclosed in a Feb. 28, 2008 filing with the U.S. Securities and Exchange Commission that the SEC had examined its books and records in November 2007 and FINRA -- the Financial Industry Regulatory Authority -- had done so in January 2008. The firm described both actions as “routine” and said it was “confident of a favorable outcome.”

Axes withdrew its registration as a broker-dealer on March 5, 2008 -- six days after its disclosure of the SEC and FINRA reviews, according to SEC records.

“The timing of the two is too coincidental,” said Anthony Catanach, who teaches accounting at the Villanova University School of Business, in a phone interview. “It’s extremely suspicious.”

Gyrus Probe

Investigators including the Federal Bureau of Investigation and the SEC have begun an examination of the Gyrus deal and three other acquisitions by Olympus, according to a person familiar with the matter. Part of the probe of the camera and endoscope maker centers on fees paid to Axam Investments, according to another person familiar with the matter.

Former Olympus President Michael C. Woodford, who was fired after he questioned the fees and other transactions, will return to Tokyo tomorrow. He is due to meet prosecutors and attend his first board meeting since his Oct. 14 dismissal. Woodford remains a member of the board, as does former Chairman Tsuyoshi Kikukawa, who stepped down over the scandal.

Japanese banker Hajime Sagawa served as a director of Axam Investments and headed Axes America. Axam Investments, described in corporate records as an investment and holding company, was struck from the Cayman Islands registry in June 2010 for non- payment of license fees, PriceWaterhouseCoopers said.

SEC Criticisms

Michelle Ong, a FINRA spokeswoman, declined to comment on Axes America’s disclosure of the agency’s 2008 examination. John Nester, an SEC spokesman, declined to comment on whether the Axes America examination differed from periodic reviews the agency conducts on all broker-dealers to evaluate compliance systems.

The SEC has been criticized for failing to uncover the decades-long fraud of Bernard Madoff. More recently, the agency has come under fire for destroying some enforcement documents and bungling a $557 million lease for new office space.

Axes America was formed in Delaware in 1997 and registered as a broker-dealer in 1998, according to its SEC filings. The firm dissolved on Dec. 3, 2008, nine months after it withdrew its registration. In 2007, all of its revenue was earned from a single company, Axes America said in an SEC filing.

By the time of Axes America’s February 2008 SEC filing, the agency hadn’t issued a final determination letter and the FINRA review was “ongoing,” according to the brokerage.

Fraud Risk

Of the $687 million in fees to Axes America and Axam Investments from 2006 to 2010, Olympus had paid $17 million to Axes America by Nov. 26, 2007, including $14 million in 2007 alone, PriceWaterhouseCoopers said in its report.

The remainder of fee -- a total $670 million -- was paid to Axam Investments from September 2008 to March 2010, PriceWaterhouseCoopers said.

Berson & Corrado LLC, an accounting firm in New York and Ramsey, New Jersey, served as Axes America’s auditor. Mark Corrado, a partner at that firm, didn’t respond to e-mails or phone calls about Axes America’s audited filings.

Catanach questioned whether the audits of Axes America in 2006, 2007 and 2008 were sufficient to find that the brokerage complied with Generally Accepted Accounting Principles, the standard typically used to review company finances, as auditors had found.

Axes America’s advisory fee revenue jumped from $324,000 in 2005 to $3.2 million in 2006, signaling that the nature of its business had “dramatically changed,” said Catanach, who is also the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services in Bryn Mawr, Pennsylvania.

That should have triggered a new review of internal controls, the “underlying economics” of the transaction, and the role of related parties, he said.

“One big fraud risk factor is that 100 percent of revenue comes from one source,” he said. “This puts huge pressure on the client to succumb to ‘customer’ wishes.”

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; John Helyar in Atlanta at jhelyar@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Buying Focus Media Shares on Bullish Goldman Sachs, BofA Reports Lost 66%

By Nikolaj Gammeltoft - Nov 22, 2011 3:44 PM GMT+0700

Investors who bought Focus Media Holding Ltd. (FMCN) shares following bullish reports last week by firms, including Bank of America Corp. and Goldman Sachs Group Inc., lost as much as 66 percent after short seller Carson Block questioned its accounting.

The Shanghai-based advertising network plunged 39 percent after falling as low as $8.79 yesterday and largest shareholder Fosun International Ltd. (656) fell as much as 6.7 percent today. Block’s Muddy Waters LLC said Focus Media overstated the number of television screens in its ad network and may have overpaid for takeovers to mask losses. Analysts from at least 10 firms had “buy” ratings prior to the report, Bloomberg data show.

“As a fund manager, if I see a sell recommendation from Muddy Waters, I’m going to sell and ask questions later, and it looks like that’s what people did,” Robert Lawton, managing partner at Catoosa Fund LP in Los Angeles, said in a phone interview yesterday.

More than $1.36 billion of Focus Media’s value was wiped out, the biggest erosion of market capitalization following a Muddy Waters report since June, when it said Toronto-traded timber producer Sino-Forest Corp. was misleading investors.

“The people who hold short positions in the market are spreading rumors for profit,” said a blog post today attributed to Focus Media Chairman and Chief Executive Officer Jason Jiang. “We are confident in fourth-quarter performance.”

Fosun, which holds a 16 percent stake in Focus Media according to data compiled by Bloomberg, fell 6.5 percent to HK$4.16 at the close of trading in Hong Kong after earlier dropping as low as HK$4.15.

Fosun ‘Studying Report’

“Fosun is seriously studying Muddy Waters’ report on Focus Media and we won’t make further comment,” the company said in a statement today. “Fosun will continue to invest in outstanding companies with China growth potential.”

Catherine Leung, Goldman Sachs’s Hong Kong-based analyst on the stock, raised her price estimate to $45 from $42 on Nov. 18, a day after Focus Media reported profit that beat analysts’ predictions by 12 percent, according to data compiled by Bloomberg. Bank of America’s Eddie Leung boosted his price forecast to $41 from $39, saying “execution remains solid,” according to a Nov. 18 note from the Hong Kong-based analyst.

Investor Scrutiny

Leslie Shribman, a representative of Goldman Sachs, and Bank of America’s Susan McCabe declined to comment.

Chinese stocks trading in the U.S. have faced investor scrutiny this year after companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations. Block helped fuel the speculation with reports on corporations, including Rino International Corp. (RINO) and Sino- Forest.

More than 35 companies based outside the U.S. have had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the U.S. Securities and Exchange Commission.

Focus Media is overstating the number of screens in its ad network by about 50 percent, Muddy Waters said. Block’s firm said Focus Media has also overstated the value of takeovers, leading to writedowns of $1.1 billion following $1.6 billion of acquisitions since 2005.

Muddy Waters said investors should assume the firm is betting against Focus Media shares. It’s the seventh company targeted by Muddy Waters and the second-largest by market value behind Sino-Forest.

Sino Forest

“Many of the items we discuss in this report are symptomatic of a highly troubled enterprise that is run solely for the benefit of insiders,” Muddy Waters said in the report, which was posted on its website. “The problems we have uncovered are likely the tip of the iceberg.”

The short seller spurred a 74 percent drop in Sino-Forest between June and August after saying the timber owner overstated the value of its assets. Before Muddy Waters issued its Sino- Forest (TRE) report, there were nine ratings on Sino-Forest shares, according to data compiled by Bloomberg. All of them were “buy” recommendations.

The average share-price estimate for Sino-Forest was C$30.75. The stock tumbled to C$4.81 before trading was halted by Canadian regulators. Analysts were on average forecasting that Focus Media will climb to $42.22 before yesterday’s report from Muddy Waters, compared with a closing level of $15.43.

Spreadtrum Backfires

Spreadtrum Communications Inc. (SPRD) has gained 83 percent since Muddy Waters published a letter dated June 28 to management asking about inventory and deferred costs on its balance sheet.

“This is the real Carson Block compared to his last report on Spreadtrum,” Eric M. Jackson, president and founder of Ironfire Capital, said in a telephone interview. The Naples, Florida-based hedge fund doesn’t have a position in Focus Media.

“He spends months preparing these things, does a lot of research, put it together in a comprehensive report, which is difficult for companies to blow off.”

Short selling, or selling borrowed shares with the hope of profiting when they fall, totaled 10 percent of Focus Media’s shares available for trading as of Nov. 18, the highest level since October 2010, according to Data Explorers, a New York- based research firm. Short sellers profit from price declines by selling borrowed securities and replacing them with stock bought at lower levels.

Options Trading

Focus Media put-option volume rose to a record 49,960 contracts on Nov. 15, six days before the Muddy Waters report, according to data compiled by Bloomberg. Volume set a new high of 140,746 yesterday, as December $17 puts were the most actively traded bearish contracts on the stock, jumping more than sevenfold to $3.90 each.

Focus Media’s 2005 U.S. initial public offering was managed by Goldman Sachs, Credit Suisse Group AG, CIBC World Markets Inc. and Piper Jaffray Cos., according to data compiled by Bloomberg. It has sold shares in six additional equity offerings since then, the data show.

The company’s shareholders also included, as of Sept. 30, Fred Alger Management Inc., Alkeon Capital Management LLC, American Century Investments Inc. and Capital World Investors.

Hibre Teklemariam, an external spokeswoman for Alger Management, didn’t respond to an e-mail and a telephone call seeking comment. Greg Jakubowsky, compliance officer at Alkeon, declined to comment. Justin Emily Wills, a spokeswoman for American Century Investments, and Chuck Freadhoff, a spokesman for Capital World Investors, also declined to comment, citing company policy not to comment on holdings.

Focus Media’s board members include Neil Shen, a founding and managing partner of Sequoia Capital China in Hong Kong. Shen did not return two telephone calls and one e-mail seeking comment.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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Hewlett-Packard’s Whitman Aims to Rebuild

By Aaron Ricadela - Nov 22, 2011 9:40 PM GMT+0700

Meg Whitman, who took over as Hewlett-Packard Co. (HPQ)’s chief executive officer two months ago, used her first earnings conference call to tell investors they need to lower their expectations.

Hewlett-Packard’s first-quarter profit forecast and full- year earnings outlook both missed analysts’ estimates -- a sign the company is still reeling from a technology-spending slump that led to the ouster of Whitman’s predecessor, Leo Apotheker.

The new CEO’s prescription for fixing Hewlett-Packard’s ailing businesses, such as personal computers and information- technology services, includes boosting research spending and limiting the size of acquisitions. The idea is to conserve cash and spur homegrown innovation, something the company neglected over the past decade. She said she’ll unveil more plans in the first half of next year.

“This is much bigger than just the quarter,” said Brian White, an analyst at Ticonderoga Securities LLC in New York, who has a “neutral” rating on Hewlett-Packard shares. “You’ve got a company that underwent years of underinvestment. They’ve got markets like PCs that are running into headwinds. And you’re seeing increased competition in the IT market.”

Hewlett-Packard fell 3.3 percent to $25.98 at 9:33 a.m. New York time. The stock had tumbled 36 percent this year before today.

‘Relatively Pessimistic’

Slow growth in Europe and the Americas will weigh on results next year, even as Asia looks more promising, Whitman said yesterday in an interview.

“We’re relatively pessimistic about the economic outlook in two of our three major regions,” Whitman said. “2012 just looks tough to me.”

Profit for the quarter ending in January will be 83 cents to 86 cents a share, excluding some items, the company said in a statement yesterday. The average estimate of analysts surveyed by Bloomberg was for $1.11 a share.

Excluding certain items, profit will be at least $4 a share in fiscal 2012, which began Nov. 1, Hewlett-Packard said. That missed the average forecast for profit of $4.58.

In the fourth quarter, which ended Oct. 31, Hewlett-Packard suffered declines in its printing, PC and server divisions, hurt by consumers and businesses curtailing spending. Apotheker was replaced on Sept. 22 after slashing forecasts three times in less than a year and jarring investors with a proposal to spin off the PC unit. The profit outlook for this quarter and fiscal 2012 show that Whitman has a more realistic sense of the company’s challenges, said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco.

Reachable Goal?

“Estimates now are at a level where they can hit rather than missing, which they developed a track record of doing,” said Whitmore, who has a “sell” rating on Hewlett-Packard.

Whitman told Wall Street analysts she plans to eschew large acquisitions next year, rebuild the company’s balance sheet and reduce the amount of “drama” at the company after Apotheker’s ouster.

“HP is getting back to business fundamentals in 2012,” she said during a conference call with analysts. “No more surprises.”

Fiscal 2011 profit was dragged down by after-tax one-time costs of $3.3 billion, or $1.56 a share. An August decision to stop making devices sporting WebOS, gained in last year’s $1.2 billion acquisition of Palm Inc., accounted for $1.64 billion of the expenses.

December Decision

The company was losing money on each TouchPad tablet it sold, prompting the move. Hewlett-Packard will make a decision about what to do with the WebOS software by early December, Whitman said in the interview. She will present her overall strategy to investors some time in the first half of 2012.

Fourth-quarter profit was $1.17, excluding some items. That exceeded the $1.13 estimate. Sales of $32.1 billion matched analysts’ projections. Results were buoyed by a 9 percent sales increase in the so-called BRIC countries -- Brazil, Russia, India and China -- that partly made up for declines in the U.S. and Europe.

Consumer spending remains soft and businesses are beginning to slow purchasing, Chief Financial Officer Cathie Lesjak said on the conference call.

Whitman, former CEO of online-commerce pioneer EBay Inc. (EBAY), is reversing some of the strategies pursued by Apotheker. She said on Oct. 27 that she’ll keep the PC business in house, and she’s sharing management responsibilities with Executive Chairman Ray Lane.

Autonomy Deal

At the same time, she’s working to integrate Autonomy Corp., a British software maker purchased by Hewlett-Packard under Apotheker. The $10.3 billion deal, unveiled Aug. 18, added to Hewlett-Packard’s debt.

The company doesn’t plan “large M&A” next year, though it may seek small software deals, Whitman said on the call. It likely won’t pursue targets more expensive than $500 million, she said. The company had $8 billion in cash on Oct. 31, compared with $10.9 billion a year ago.

“We need to rebuild our balance sheet,” she said. “Software may be the one area where there are some assets ready to move.”

Hewlett-Packard also plans more spending on research and development, Whitman said in the interview. The company spent 2.6 percent of sales on R&D in the fourth quarter, down from more than 4 percent seven years ago, according to Bloomberg data.

‘Biggest Brainiacs’

“We are still underinvested in almost every major segment,” she said. To help spur innovation, HP Labs director Prith Banerjee now reports directly to the CEO. Whitman also plans to spend a day in December meeting with researchers -- “some of the biggest brainiacs in the business,” she said.

Hewlett-Packard faces other challenges. Like rival Dell Inc. (DELL), it’s coping with flooding in Thailand, which has crimped the world’s supply of disk drives used in PCs. A decision by competitor Oracle Corp. to stop developing software for Intel Corp.’s Itanium chip is leading to sales declines in Hewlett- Packard servers that use the chips. In June, Hewlett-Packard filed a lawsuit in California against Oracle over its decision.

On Nov. 17, the company appointed activist shareholder Ralph Whitworth to its board. Whitworth, whose investment firm oversees $6.5 billion, told management his appointment would burnish credibility and that he’d press for share buybacks, higher dividends or more investment in research, a person with knowledge of the situation said.

“We’ve created confusion among many of our shareholders about what kind of company HP is,” Whitman told analysts. “We’ll be doing the hard work that will position us for consistent, profitable growth in 2013 and beyond.”

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Crude Oil Gains for First Time in Four Sessions on Sanctions Against Iran

By Moming Zhou and Mark Shenk - Nov 22, 2011 10:38 PM GMT+0700

Oil rose for the first time in four days as new sanctions against Iran and protests in Egypt raised concern that supplies will be disrupted.

Crude advanced as much as 1.8 percent after the U.S., the U.K. and Canada expanded measures aimed at thwarting Iran’s nuclear program. In Egypt, protesters gathered in Tahrir Square for a fifth day after deadly clashes between security forces and demonstrators spurred the Cabinet to offer to quit.

“There are new sanctions on Iran and rioters back on the streets of Cairo reminding us of the geopolitical risks that impact this market,” said Michael Wittner, the head of oil- market research at Societe Generale SA in New York. “The geopolitical risks never went away, but had moved to the background and are now back in the forefront.”

Crude for January delivery gained $1.37, or 1.4 percent, to $98.29 a barrel at 10:36 a.m. on the New York Mercantile Exchange. Prices have increased 7.5 percent this year. Trading ranged from $96.55 to $98.70.

Contract prices are rising through May, a market pattern known as contango. Last month the market moved into backwardation, with futures closest to expiration more expensive than those for later delivery.

Brent oil for January settlement on the London-based ICE Futures Europe exchange increased $1.73, or 1.6 percent, to $108.61 a barrel.

Targeting Iran

The U.S., the U.K. and Canada targeted Iran’s central bank and oil industry yesterday with sanctions aimed at cutting the regime off from international financial transactions. The actions are in response to a Nov. 8 United Nations atomic agency report concluding that previous efforts have not stopped the regime from clandestine nuclear-bomb work.

The new sanctions target companies that provide goods or services to Iran’s oil and gas industries. Existing U.S. laws have forced most international oil companies out of Iran. The new measures aim to stop it from obtaining technology and money from smaller foreign companies.

Iran is the second-largest oil producer in the Organization of Petroleum Exporting Countries, pumping 4.25 million barrels a day last year, according to the BP Statistical Review. Saudi Arabia is the top producer.

“Concern about the Iranian sanction seems to be supporting the oil market,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. “People are just worried about potential military action, whether that happens or not.”

Egypt Clashes

In Egypt, ministers put their resignations “at the disposal” of the ruling military council, Mohamed Hegazy, a government spokesman, told reporters late yesterday in Cairo.

Clashes in Cairo and other cities including Alexandria and Suez have left at least 25 people dead in the past week, in some of the deadliest violence since the uprising against Hosni Mubarak in January and February.

“There is still political concern about Iran and Egypt and it’s making people worried that we may see some supply problems,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Prices pared gains earlier after a government report showed the U.S. economy expanded less than previously estimated in the third quarter.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today. The median forecast of 81 economists surveyed by Bloomberg News called for no revision.

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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Gold Rebounds From One-Month Low as Sovereign-Debt Concerns Stoke Demand

By Debarati Roy and Nicholas Larkin - Nov 22, 2011 10:18 PM GMT+0700

Gold futures rebounded from the lowest in almost four weeks after mounting debt woes in the U.S. and Europe spurred demand for the metal as a store of value.

A U.S. congressional committee failed to reach agreement on reducing the budget deficit. Global equities have tumbled this month as Europe’s credit crisis escalated. Holdings in exchange- traded products backed by gold climbed to a record yesterday.

“The uncertainty around the budget-deficit talks is positive for gold in the long run,” Sterling Smith, an analyst at Country Hedging Inc. in St. Paul, Minnesota, said in a telephone interview. “We have seen an increase in physical interest.”

Gold futures for December delivery gained 1.1 percent to $1,696.30 an ounce at 10:16 a.m. on the Comex in New York. Yesterday, the metal touched $1,667.10, the lowest since Oct. 25.

Holdings in ETPs backed by physical metal climbed 2 metric tons yesterday to an all-time high of 2,341.94 tons, data compiled by Bloomberg show.

Silver futures for March delivery rose 2.6 percent to $32.005 an ounce on the Comex. Yesterday, the price slumped 4 percent.

To contact the reporters on this story: Debarati Roy in New York at droy5@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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Stocks Retreat on Slower U.S. Economic Growth; Spanish Bond Yields Surge

By Stephen Kirkland - Nov 22, 2011 9:31 PM GMT+0700

Play Video

Nov. 22 (Bloomberg) -- Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., talks about the outlook for global stock markets. Oliver also discusses the failure of a special debt-reduction committee in the U.S. Congress to reach an agreement, the nation's economy, and Europe's sovereign debt crisis. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Stocks fell, dragging the Standard & Poor’s 500 Index to a fifth straight loss, as the U.S. economy grew less than estimated and Spain’s three-month borrowing costs more than doubled at an auction. The dollar rose against most peers, while Treasuries were little changed.

The S&P 500 lost 0.2 percent at 9:30 a.m. in New York. The Stoxx Europe 600 Index slipped 0.2 percent, after earlier climbing 1 percent. Spain’s two-year note yield rose 18 basis points to 5.77 percent, with France’s yield six basis points higher. Copper snapped a three-day decline and gold rebounded from a one-month low to help lead commodities higher.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected by economists and down from a 2.5 percent prior estimate, Commerce Department data showed. Spain sold three-month bills at a yield of 5.11 percent, more than double the 2.292 percent yield the last time the debt was offered on Oct. 25.

“We haven’t any new bazooka to pull out of the bag,” Michael Meister, finance spokesman for German Chancellor Angela Merkel’s Christian Democratic party, said.

About $3.3 trillion has been wiped off global equity values this month amid concern Europe’s credit crisis is worsening. Stocks gained earlier after S&P and Moody’s Investors Service kept the U.S. credit rating unchanged following Congress’s failure to reach an agreement to cut the deficit, setting the stage for $1.2 trillion in automatic spending cuts.

One-Month Low

The S&P 500 slid to its lowest level since Oct. 7 yesterday. Hewlett-Packard Co. fell in pre-market trading after forecasting first-quarter profit and fiscal 2012 earnings that missed analysts’ estimates.

Three shares declined for every two that gained in the Stoxx 600. Thomas Cook Group Plc tumbled 72 percent as Europe’s second-largest tour operator said it held talks with banks on financing.

The yield on Spain’s 10-year bond rose eight basis points to 6.63 percent. The government also offered six-month bills at an average yield of 5.227 percent, compared with 3.302 percent last month.

The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds increased 27 basis points to 317 points after Belgium’s coalition talks were suspended as Elio Di Rupo offered to resign from leading the negotiations.

Money Markets Ease

The Greek two-year note yield climbed 60 basis points to 112.66 percent.

The cost for European banks to fund in the U.S. currency fell after increasing for six straight days, declining from the highest level since December 2008. The three-month cross- currency basis swap, the rate banks pay to convert euro payments into dollars, was 134 basis points below the euro interbank offered rate, from 139 yesterday.

The five-year Treasury yield was little changed at 0.90 percent before the government sells $35 billion of the securities, the second of three auctions this week totaling $99 billion. A two-year note sale attracted the highest demand ever yesterday as investors sought the safest assets.

The euro appreciated 0.1 percent to $1.3503, after climbing as much as 0.6 percent. The Swiss franc strengthened 0.3 percent against the dollar and 0.2 percent versus the euro, rising for the third consecutive day. The yen depreciated against most of its most actively traded peers monitored by Bloomberg, and the Dollar Index was little changed at 78.289.

Egypt Tumbles

The MSCI Emerging Markets Index slipped 0.1 percent, erasing earlier gains. Brazil’s Bovespa index lost 0.7 percent, and Turkey’s ISE National 100 Index dropped 2.1 percent. Egypt’s EGX 100 Index declined 5.5 percent, the most in almost two months, after the government offered to quit and fighting between protesters and security forces continued.

Copper rose 1 percent in London, following a three-day, 5.4 percent slump. Tin added 1.5 percent and zinc gained 1 percent. Gold futures rose 1 percent to $1,694.80 an ounce after falling 2.7 percent yesterday, the most in almost two months. Oil rallied 0.9 percent to $97.82 a barrel in New York, the first increase in four days.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

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

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U.S. Stocks Fluctuate on Credit Ratings, GDP

By Rita Nazareth - Nov 22, 2011 10:15 PM GMT+0700

U.S. stocks fell, dragging the Standard & Poor’s 500 Index to its longest slump in almost four months, as data showed the economy grew less than previously estimated and concern about Europe’s debt crisis intensified.

Hewlett-Packard Co. (HPQ) lost 4 percent after forecasting profit that missed estimates. Netflix Inc. sank 3.2 percent as the video-streaming and DVD subscription service agreed to sell $400 million in stock and convertible notes.

The S&P 500 fell for a fifth straight day, slipping 0.2 percent to 1,190.39 at 10:14 a.m. New York time. The benchmark gauge for American equities fell 5.2 percent in four days through yesterday. The Dow Jones Industrial Average retreated 45.18 points, or 0.4 percent, to 11,502.13 today.

Yesterday’s 1.9 percent drop in the S&P 500 pushed the index below levels (SPX) representing the top of a price range that prevailed in the two months after the U.S. was stripped of its AAA credit rating by S&P on Aug. 5. Rallies after the downgrade brought the S&P 500 to closing highs of 1,204.49 on Aug. 15, 1,218.89 on Aug. 31 and 1,216.01 on Sept. 16, according to data compiled by Bloomberg.

The congressional supercommittee’s failure to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

Rating Companies

S&P reaffirmed it would keep the U.S. credit rating at AA+ after stripping the government of its top AAA grade on Aug. 5. Moody’s Investors Service reaffirmed its AAA rating with a negative outlook. Fitch Ratings noted in a statement that it said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative, and that a review would be concluded by the end of this month.

Stock-futures fell as the Commerce Department said gross domestic product rose at a 2 percent annual rate from July through September, less than projected and down from a prior estimate of 2.5 percent. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Fed officials are divided over whether additional steps are needed to lower borrowing costs. Minutes of their Nov. 1-2 meeting, to be released today, may shed more light on their discussions.

More Losses

The recent retreat in U.S. stocks, led by banks and brokerages, is signaling more losses through the end of the year, a period in which the S&P 500 usually performs best, according to Bank of America Corp. (BAC)

Financial shares have posted the worst return (SPXL1) this month among the S&P 500’s 10 industries, dropping 9.9 percent through yesterday. The weakness in the group and the benchmark gauge’s decline below 1,200 suggested the index is at risk of sinking to this year’s intraday low of 1,074.77, said Mary Ann Bartels, Bank of America’s head of U.S. technical and market analysis.

“A seasonal year-end rally will likely turn into a Christmas Bah, Humbug,” Bartels wrote in a note to clients yesterday. She sees a 50 percent chance of “a European meltdown” that would send the S&P 500 to as low as 935.

Hewlett-Packard fell 4 percent to $25.80. The profit outlook for this quarter and fiscal 2012 show that Chief Executive Officer Meg Whitman has a more realistic sense of the company’s challenges, said Chris Whitmore, an analyst at Deutsche Bank AG. Leo Apotheker was replaced on Sept. 22 after slashing forecasts three times in less than a year and jarring investors with a decision to explore spinning off the PC unit.

Netflix (NFLX) slumped 3.2 percent to $72.09. Technology Crossover Ventures will purchase $200 million in zero-coupon senior convertible notes due 2018, and T. Rowe Price (TROW) Associates Inc. funds will buy $200 million in stock, Los Gatos, California- based Netflix said yesterday in a statement.

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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European Stocks Erase Losses as British Land Gains; Nokia Shares Retreat

By Sarah Jones - Nov 22, 2011 9:45 PM GMT+0700

European stocks erased losses as British Land Co. led a rally in real-estate companies, offsetting rising borrowing costs in the euro area.

Dexia SA led banks (SX7P) lower, slumping 8.9 percent, as Belgium’s bond yields rose to their highest level since 2008. Commerzbank AG slumped 10 percent on a report the lender may need more capital. Nokia Oyj (NOK1V) dropped 6.3 percent amid concern that the company has shipped fewer smartphones than estimated.

The benchmark Stoxx Europe 600 Index added 0.1 percent to 224.87 at 2:43 p.m. in London as banks and technology companies retreated. The gauge earlier dropped as much as 0.6 percent and advanced as much as 1 percent after Standard & Poor’s and Moody’s Investors Service reaffirmed America’s credit grades.

“The environment is very much presented as a black and white one, but actually it’s more complicated,” said Lucy MacDonald, chief investment officer for global equities at RCM UK Ltd. on Bloomberg Television. “That is the problem and that is what is causing volatility. There are numerous scenarios that could ensue.”

The Stoxx 600 slumped yesterday amid signs U.S. lawmakers would fail to reach an agreement on budget cuts, increasing the likelihood that the U.S. economy will face another credit downgrade. Banks sank as dollar funding costs and euro-area bond yields surged.

Spain’s three-month borrowing costs more than doubled at auction today, sending two-year yields toward the highest level since 2003, while Belgium’s 10-year bond yields rose to more than 5 percent, adding to concern the euro crisis is spreading.

U.S. Growth Revision

Stocks extended their selloff after a report showed that U.S. gross domestic product climbed at a 2 percent annual rate from July through September, down from a previous estimate of 2.5 percent, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision.

National benchmark indexes advanced in 9 of the 18 markets in western Europe. France’s CAC 40 Index gained 0.3 percent, Germany’s DAX Index lost 0.1 percent and the U.K.’s FTSE 100 Index added 0.5 percent.

Germany earlier today rejected calls from allies and investors to do more to counter market turmoil. Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic bloc said there is no “new bazooka to pull out of the bag.”

“We see no alternative to the policy we follow,” he said in a telephone interview. “We need to tell markets this very clearly.”

Dexia, UniCredit Slide

Dexia led a selloff in banks, tumbling 8.9 percent to 23.7 euro cents in Brussels. UniCredit SpA fell 2.1 percent to 71.6 euro cents in Milan, while BNP Paribas SA lost 3.7 percent to 25.87 euros in Paris.

Commerzbank dropped 10 percent to 1.22 euros after Reuters reported that Germany’s second-biggest lender may need about about 5 billion euros ($6.8 billion) in additional capital if the European (SXXP) Banking Authority toughens its requirements for lenders. The newswire cited unidentified people familiar with the bank’s own estimates.

Danske Bank A/S (DANSKE) still advanced, rising 2.4 percent to 75.70 kroner after Cevian Capital AB, a Swedish investment company, bought a 5.02 percent stake in Denmark’s largest lender on behalf of itself and Carl Icahn.

Nokia dropped 6.3 percent to 4.30 euros as Pacific Crest Securities Ltd. said in a report that the Finnish phone maker shipped fewer devices running Windows Phone 7 than predicted, while sales for the company’s Lumia product were “disappointing.”

Jefferies Group Inc. said in a note to clients that it has turned “incrementally cautious on Nokia,” due to signs that the company’s order book has slowed into the fourth quarter.

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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Supercommittee Failure Poses Threat to Economy

By Heidi Przybyla - Nov 22, 2011 9:55 PM GMT+0700

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Nov. 22 (Bloomberg) -- Senator Dick Durbin, a Democrat from Illinois, discusses the congressional deficit-reduction supercommittee's failure to reach an agreement. Durbin, speaking with Betty Liu on Bloomberg Television's "In the Loop," also talks about the banking industry. (Source: Bloomberg)

The implosion of the congressional supercommittee is likely to delay any major deficit-reduction agreement until after the next presidential election and may pose an immediate threat to the struggling U.S. economy.

The committee’s failure to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

The panel’s inability to agree on $1.2 trillion in budget cuts, which drove stocks down yesterday and Treasuries higher, also stoked doubts about U.S. lawmakers’ ability to overcome partisan gridlock and safeguard the nation’s fiscal health.

“They could not agree even on the smaller challenge of $1.2 trillion,” said former White House budget director Alice Rivlin, among a coalition of officials who pushed the panel to “go big” and find $4 trillion in savings, in an e-mail. “I do not see a way to get to the big deal before the election, if then. It is really discouraging!”

Still, Standard & Poor’s reaffirmed that it would keep the U.S. credit rating at AA+ after stripping the government of its top AAA grade on Aug. 5. Moody’s Investors Service reaffirmed its AAA rating with a negative outlook. Fitch Ratings noted in a statement that it said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative, and that a review would be concluded by the end of this month.

Trigger in Jeopardy

S&P said its rating would stand because the committee’s failure triggers $1.2 trillion in automatic spending cuts, which were put in place in the event no compromise could be reached. Easing those automatic spending limits may cause “downward pressure on the ratings,” S&P said in a statement.

That so-called trigger may be in jeopardy, with both Democrats and Republicans leery of steep cutbacks at the Pentagon that Defense Secretary Leon Panetta has called “Draconian.” Congress has succeeded in the past in undoing debt-reduction enforcement mechanisms.

Republican Senators Lindsey Graham of South Carolina and John McCain of Arizona already are looking for other cuts to take the place of those the Pentagon faces. Representative Howard McKeon of California said he would introduce legislation to prevent the spending reductions to defense.

“They have to really be careful not to mess with that,” said Robert Bixby, head of the nonpartisan Concord Coalition, which presses for debt reduction. “To dismantle it would be totally unacceptable.”

‘Radical’ Suggestion

Appearing this morning on Bloomberg Television, Senator Dick Durbin of Illinois, the chamber’s No. 2 Democrat, picked up on a Twitter suggestion from Illinois’ other senator, Republican Mark Kirk, that a bipartisan group of senators known as the Gang of Six take the lead in restarting deficit negotiations.

“I would like to see the leadership in the Senate say something that’s kind of radical: Let’s take this to the Senate floor,” said Durbin, who was part of the Gang of Six. “Any proposal that meets the president’s guidelines in terms of deficit reduction that is proposed on a bipartisan basis will get a vote on Feb. 1 or sometime around that date, and we’ll just have the debate and substitute amendments, and have a vote.”

That would encourage senators to “come up with something that’s bipartisan, that works, that’s an alternative” to the automatic cuts, he said. “It’s a challenge which the Gang of Six would accept, and I’d like to see us put something forward.” He said there would be a conference call this afternoon to discuss the “bipartisan opportunity.”

Economic Risk

Investors have largely shrugged off S&P’s August downgrade of U.S. debt to AA+ from AAA. After the move by the ratings company, the government’s borrowing costs fell to record lows as Treasuries rallied.

The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note was 1.96 percent at 9:32 a.m. in New York today, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index (SPX) was at 1191.15, down 0.15 percent, at 9:35 a.m.

Trouble may lie ahead for the economy. The supercommittee was considering rolling into its final product expiring tax provisions that must now be addressed before January.

Representative Dave Camp of Michigan, chairman of the tax- writing House Ways and Means Committee, has expressed concern about the cost of extending the payroll tax cut. Other Republicans on that panel, including Representative Kevin Brady of Texas, have said that they would be opposed to an extension.

Bad Hand?

Bill Hoagland, a former Republican staff director of the Senate Budget Committee, said this position puts Republicans in a bind. During the debt negotiations, they objected to ending the tax cuts for upper-income earners enacted under President George W. Bush. If Congress fails to extend the payroll tax cut, which affects many more Americans, “that’s going to play into somebody’s hand,” Hoagland said, meaning Democrats.

An end to the reduction in payroll taxes would subtract 0.5 percent from gross domestic product in 2012, while failing to extend unemployment benefits would cause a separate 0.3 percent decline, according to JPMorgan Chase & Co. chief U.S. economist Michael Feroli.

At the same time, any extension of the tax holiday will add to the nation’s debt now that there’s no broader deficit- trimming agreement.

“It’s certainly going to look awkward to do a number of these things that expand the deficit over the next year,” said Bixby.

Impairing Economic Growth

Earlier this year, the Congressional Budget Office estimated that U.S. debt will reach 187 percent of gross domestic product by 2035. Even after the trigger takes effect, the debt will grow to between 134 percent and 164 percent of GDP in 2035, according to the New York-based Peter G. Peterson Foundation, which works to focus public attention on the U.S.’s fiscal deficit.

“History suggests that a debt-to-GDP ratio of more than 60-90 percent can impair economic growth and produce crises,” Peterson said in a statement.

After addressing these more immediate agenda items, congressional lawmakers are likely to turn to altering the trigger’s equal blend of domestic and defense cuts.

So far, Graham and McCain have proposed a 10 percent reduction in pay for members of Congress and a 5 percent cut elsewhere in the budget. The two members of the Senate Armed Services Committee haven’t spelled out other targets.

$1 Trillion Reductions

If Republican efforts to reverse the automatic defense cuts fail, the Defense Department’s budget would face reductions of about $1 trillion over a decade, the most of any department.

The Pentagon already is cutting about $450 billion from its budget over the next decade as a result of the Budget Control Act that President Barack Obama signed into law Aug. 2, the same measure that created the supercommittee. The panel’s failure to reach an agreement increases the defense cuts by about $500 billion, excluding interest savings, starting in January 2013.

On the domestic side, the CBO estimates that 71 percent of the cuts would come from programs such as education, the environment, transportation, housing assistance and veterans’ health care.

An administration official who briefed reporters said the president will oppose any effort to alter the automatic cuts and will veto any attempt to undo the legislation. The White House is still hoping the enforcement mechanism, which doesn’t take effect for 14 months, will force Congress into a deal, said the official, who spoke on condition of anonymity.

Medicare, Medicaid

The supercommittee’s failure to reach an agreement takes the Medicaid health-insurance program for the poor off the table for potential cuts. Cuts to Medicare, the federal insurance program for the elderly and disabled, are limited to a maximum of 2 percent for payments to hospitals, doctors and other health providers and to private health plans participating in the Medicare Advantage program.

The supercommittee was largely derailed by a standoff between Democrats and Republicans over the expiration of the tax cuts enacted under Bush.

Republicans wanted to extend them all, and Democrats pushed to allow the tax breaks for top earners to lapse. If Congress does nothing, the cuts will expire in January 2013, and taxpayers will face higher rates on wages, capital gains and dividends.

“Republicans did overreach by taking the position they had to extend all of the expiring tax provisions,” said Hoagland. “Democrats were just completely unwilling to make any kind of fundamental structural changes to Medicare.”

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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France’s AAA Status in Tatters as Yields Surge

By Mark Deen and Paul Dobson - Nov 22, 2011 6:02 PM GMT+0700

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Nov. 22 (Bloomberg) -- Norbert Aul, a rates strategist at RBC Capital Markets, discusses political divisions over the European Central Bank's mandate and proposals for a joint euro-area bond. He talks from London with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

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Nov. 22 (Bloomberg) -- Investors aren’t waiting for Standard & Poor’s or Moody’s Investors Service to strip France, Europe’s second-biggest economy, of its top credit rating. The extra yield demanded to lend to AAA-rated France for 10 years was 154 basis points more than the German rate yesterday. David Tweed reports on Bloomberg Television's "Countdown." (Source: Bloomberg)

Investors aren’t waiting for Standard & Poor’s or Moody’s Investors Service to strip France, Europe’s second-biggest economy, of its top credit rating.

The extra yield demanded to lend to AAA rated France for 10 years was 158 basis points more than the German rate at 11:51 a.m. today. The gap was 200 basis points on Nov. 17, the widest spread since 1990, up from 28 in April. The French 10-year yield was at 3.5 percent, about midway between top-rated Holland and Belgium, which is graded one level lower at Aa1 by Moody’s. French borrowing costs are more than a percentage point above the AAA rated U.K.

“France isn’t trading like a AAA,” said Bill Blain, a strategist at Newedge Group in London, who recommends buying U.K. government debt. “The market has made its judgment already.”

The debt crisis that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain is close to reaching France. Moody’s said in a report published yesterday that any persistent increase in borrowing costs would amplify the French government’s challenges as economic growth slows.

President Nicolas Sarkozy has unveiled two sets of budget cuts since August to preserve the credit rating and try to calm jittery markets. Two-year yields on French debt have climbed 55 basis points since Aug. 31 to 1.67 percent, while the rate on German notes of similar maturity fell 30 points to 0.42 percent.

“The market is concerned about the dissolution of the euro itself, hence only bunds are acting as a safe haven,” said Richard McGuire, a fixed-income strategist at Rabo Bank International in London. Germany is the region’s largest nation.

Credit Suisse

French 10-year bond yields may climb above 5 percent, analysts at Credit Suisse Group AG said in a note to investors yesterday. Euro leaders must reach “a momentous deal” for fiscal and political union by mid-January to save the 17-nation bloc, Credit Suisse said in the report.

Yield spreads have widened for the other AAA rated euro- zone countries -- Austria, Finland, the Netherlands and Luxembourg -- bringing the crisis from the periphery to the so- called core.

France has the biggest debt burden of the top-rated euro nations, at 85 percent of gross domestic product. Its financial institutions also have the largest debt holdings in the five crisis-hit countries, at 681 billion euros ($921 billion) as of June, according to data from the Bank for International Settlements in Basel.

“France is not a AAA at all,” said Nicola Marinelli, who oversees $150 million at Glendevon King Asset Management in London. “French banks are very exposed to euro-zone periphery. If they were to mark to market these loans at current levels, there would be huge losses.”

Weak Metrics

Moody’s and S&P currently have a stable outlook on French credit, though both have signaled the nation’s rating is at risk. Moody’s said Oct. 17 that France’s debt metrics “are now among the weakest” in the AAA club. France might be downgraded in a stressed economic scenario, S&P said four days later.

The prospect of France taking on additional liabilities to support countries such as Greece and Italy is among the main threats to its rating, according to New York-based Moody’s.

S&P roiled global markets on Nov. 10 when it sent and then corrected an erroneous message to subscribers suggesting France had been downgraded.

France says to resolve the region’s crisis the European Central Bank needs to be the lender of last resort, supporting Europe’s rescue fund. The French proposal, which would allow the ECB to fund purchases of troubled sovereign debt, has the support of leaders such as U.K. Prime Minister David Cameron.

German Opposition

Germany and the ECB oppose the plan.

“We don’t have any new bazooka to pull out of the bag,” Michael Meister, a senior lawmaker in German Chancellor Angela Merkel’s coalition, said in a telephone interview in Berlin today, reiterating opposition to the ECB plan.

The stalemate has added to market perception that France, the second-biggest backer of the European Financial Stability Facility after Germany, may get dragged further into a crisis that this month led to the ouster of Italian Prime Minister Silvio Berlusconi and Greece’s George Papandreou.

“Where are the guardians of the euro?” asked Eric Chaney, chief economist at Axa SA in Paris. “The EFSF, the ECB? The markets are going to continue to test them. Markets are increasingly betting on a breakup of the euro zone.”

European leaders agreed last month to boost the EFSF to 1 trillion euros to help contain the crisis. The fund owes its AAA rating to guarantees from the euro region’s six top-rated nations. The EFSF’s lending capacity would fall by 35 percent if France is downgraded, Mizuho Corporate Bank Ltd. analysts said.

French Vote

Sarkozy, 56, who faces a presidential election in April or May, and his government have vowed to do everything to defend France’s creditworthiness. They point to a reserve in the country’s 2012 budget to compensate for any economic slump, and this month unveiled 18.6 billion euros in tax increases and spending cuts to defend the rating. They’ve pledged to do more if necessary to reduce the deficit to 4.5 percent of GDP next year and 3 percent in 2013, from 5.7 percent this year.

“France has shown its seriousness on the budget, we’ve adapted,” Finance Minister Francois Baroin said today on France 2 radio. “We’re borrowing at the best rates in the past decade and we’re watching the situation closely.”

The current 3.5 percent yield on 10-year bonds compares with an average 3.9 percent during the past decade. The French treasury completed its funding requirement for 2011 when it sold 7 billion euros of medium-term debt and 1.1 billion euros of indexed bonds on Nov. 17.

‘Self Fulfilling’

France’s medium and long-term funding costs had an average yield of 2.8 percent in 2011, the second lowest since the euro was created, according to Agence France Tresor, the country’s debt-management body. It was 2.5 percent in 2010.

The market has “taken on its own dynamic, with its own forecasts that are partly self fulfilling and very far from the any fundamental analysis,” Philippe Mills, the head of AFT, told journalists last week in Frankfurt.

With the election coming up, “it is by no means certain that the government will be able to implement the proposed fiscal tightening,” said Jennifer McKeown, an economist at Capital Economics in London. “The clear downside of France’s exposure to the euro zone’s south is that a failure to address the problems of Italy and the peripheral economies will have disastrous consequences.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net Paul Dobson in London at

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net

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Rupee Plunges to Record as India RBI Weighs Options to Stem Currency Drop

By Jeanette Rodrigues and Anoop Agrawal - Nov 22, 2011 3:09 PM GMT+0700

India’s rupee fell to a record, prompting the central bank to say it’s weighing action to stem the decline.

The rupee weakened 0.8 percent to 52.54 per dollar as of 12:31 p.m. in Mumbai bringing its decline to 15 percent this year. The BSE India Sensitive Index (SENSEX) of shares tumbled 21 percent in the period as investors sold emerging market assets on concern the U.S. and Europe will struggle to curb deficits.

The rupee’s drop this year, the worst performance among Asia’s 10 most-traded currencies, is raising costs for companies including Hindustan Unilever Ltd. (HUVR) and Maruti Suzuki India Ltd. (MSIL) A further fall will also spur inflation in Asia’s third-largest economy and increase fuel subsidy costs in a nation that imports 80 percent of its fuel. Inflation has held above 9 percent for 11 consecutive months.

“It is now very difficult to look for reversal in rupee depreciation when the Indian economy is struggling with high inflation, low growth,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. (IIB) in Mumbai. “It is possible that rupee has shifted into a higher base of 51 per dollar with the next objective at 54 to 56 per dollar.”

The currency dropped past the previous low of 52.18, reached on March 3, 2009. It earlier touched 52.73, the weakest level since at least 1973, when data became available.

Impact on Companies

“There is impact on companies and it’s a problem,” Reserve Bank of India Deputy Governor Subir Gokarn said. “But, any action we take now, if any, has to take into account the fact that these actions might have consequences further down the road.”

Offshore investors pulled $1.7 billion from local equities since foreign holdings reached a record $104.4 billion in July, according to data from the market regulator.

“What will hurt more is that the depreciation has been so steep and sudden,” Maruti’s Chief Financial Officer Ajay Seth said in an interview yesterday. “Volatility in the rupee will be severe in the next three to six months” because of global economic concerns, he said.

Finance Minister Pranab Mukherjee raised the government’s borrowing target by 13 percent to a record 4.7 trillion rupees ($89 billion) in September, signaling the gap in public finances is widening as a slowing economy cuts revenue. Income was 37.2 percent of the annual target in the six months through September, compared with 58.4 percent achieved a year earlier, official data show.

Growth Forecast Cut

The Reserve Bank cut the nation’s growth forecast to 7.6 percent from 8 percent, and the rupee’s slide inflated the import bill and pushed the trade shortfall to a 17-year high of $19.6 billion in October.

India’s current-account deficit could widen, from 2.6 percent of gross domestic product in the fiscal year through March 2011, if oil prices continue to push up the import bill, the central bank said last month.

India’s current account, the broadest measure of trade and investment flows, showed a deficit of $14.1 billion in the three months through June, compared with a shortfall of $5.4 billion the previous quarter, according to central bank data.

“The rupee is being pressured by India’s deficits and slowing growth with no sign of monetary easing,” said Suresh Kumar Ramanathan, a currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “We see the rupee’s peak at 54 to a dollar.”

‘No Bottom’

Three-month offshore forwards traded at 53.45 to the dollar, compared with 53.05 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. CIMB Investment Bank’s Ramanathan predicts the rupee could drop to 54 a dollar before March.

Infosys Ltd. (INFO) sees “no bottom,” for the rupee unless the central bank steps in, Chief Financial Officer V. Balakrishnan at India’s second-largest software exporter, said in an interview to Bloomberg UTV today. The volatility and uncertainties are “impacting the momentum of business,” he said.

The government yesterday signaled the central bank may not sell dollars “aggressively” to stem the local currency’s depreciation as rupee-liquidity is tight.

R. Gopalan, secretary of economic affairs at the finance ministry, said the central bank’s ability to intervene in the foreign-exchange market is “limited.” Banks borrowed 1.32 trillion rupees today from the monetary authority’s overnight facility, the most since March, according to data from the central bank.

‘Death Spiral’

“The Reserve Bank of India’s ability to intervene is hampered by the squeeze in system liquidity,” IndusInd’s Harding wrote in a note yesterday. “Aggressive intervention by the RBI in the spot market will lead to higher call money rate.”

India’s call money rate, at which banks lend to each other overnight, was at 8.65 percent, 15 basis points, or 0.15 percentage point, more than the RBI’s main lending rate. The central bank has raised its repurchase rate 13 times since the start of 2010 to 8.5 percent to help cool persistent inflation.

Eight of the 10 most-traded Asian currencies have declined this year, on concern the U.S. and Europe’s debt woes will slow global growth and sap demand for emerging-market assets.

The rupee’s fall is due to global uncertainty, and any central bank action may not help, Finance Minister Mukherjee told reporters in New Delhi today.

The rupee is expected to reverse its losses once the European crisis is resolved as its slide has been driven by global dynamics, central bank Governor Duvvuri Subbarao told reporters in the southern Indian city of Hyderabad today. The Reserve Bank will manage the volatility, he said.

Increased intervention is one option to stop the rupee’s “death spiral,” which is posing “serious macro-economic dangers,” Patrick Perret-Green, Singapore-based head of foreign-exchange and rates at Citigroup Inc., wrote in an e-mail today. “However, the likely cure will be time.”

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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U.K. October Budget Deficit Narrows as Cuts Bite

By Gonzalo Vina - Nov 22, 2011 4:54 PM GMT+0700

Britain’s budget deficit narrowed in October as Chancellor of the Exchequer George Osborne slashed spending at government departments.

Net borrowing excluding support for banks fell to 6.5 billion pounds ($10.2 billion) from 7.7 billion pounds a year earlier, the Office for National Statistics said in London today. The shortfall was in line with the median of 13 forecasts in a Bloomberg News survey. Outlays at government departments dropped 3.1 percent, limiting overall spending growth to 1.1 percent. Revenue rose 4.1 percent.

Osborne and Prime Minister David Cameron have made all but eliminating a budget deficit of 9 percent of economic output by 2015 the centerpiece of their economic strategy, rebuffing opposition criticism that the cuts are hobbling growth. Only Greece, Ireland, Portugal and Iceland face a tighter fiscal squeeze among advanced economies, according to the International Monetary Fund.

“It’s a tad better than expected,” saidRoss Walker, chief U.K. economist at Royal Bank of Scotland Group Plc. “The markets are asking ‘is there a medium-term strategy and is it working?’ The answer to both is yes.”

The pound was trading at $1.5632 as of 9:53 a.m. in London, down 0.1 percent on the day. The yield on the benchmark 10-year government bond was little changed at 2.19 percent.

Harder Than Envisaged

Cameron yesterday said bringing Britain’s debt under control is proving “harder than anyone envisaged” as Europe’s debt crisis hits economic growth, paving the way for the Office for Budget Responsibility to downgrade its forecasts next week.

Independent forecasts published by the Treasury last week showed the economy expanding by 1 percent this year, compared with the 1.7 percent the OBR predicted at the time of the March budget. The fiscal deficit in the fiscal year through March is forecast to be 6 billion pounds higher than predicted at 128 billion pounds. The budget office, which oversees economic forecasting for the Treasury, will publish is revised forecasts on Nov. 29.

October is a key month for the public finances as quarterly payments of tax on corporate profits pour in. Corporation tax receipts last month fell 6.4 percent from a year earlier and taxes from income and capital gains declined 3.3 percent, a sign weaker growth is undermining the revenue needed to cut the deficit.

In the first seven months of the fiscal year, the deficit was 68.3 billion pounds compared with 78.7 billion pounds a year earlier. Revenue in the period rose 5.1 percent from a year earlier, behind the 7.2 percent predicted for the full fiscal year by the OBR. Spending climbed 2.4 percent, less than the OBR’s 3.6 percent forecast for the year.

‘Progress’

The Treasury said the figures show Osborne is making “progress” with his plan to eliminate the structural deficit over the next four years.

“The difficult decisions which have delivered this reduction in borrowing have made the U.K. a relative safe haven in the sovereign-debt storm, but we are not immune to the turbulence in the euro zone and its impact on British businesses,” the Treasury said in an e-mailed statement.

The deficit in October including government support for banks was 3.4 billion pounds. There was a public-sector net cash surplus of 643 million pounds, below the cash surplus of 1 billion pounds that was predicted by analysts. Net debt climbed to a record 966.6 billion pounds, or 62.3 percent of GDP.

Excluding financial interventions, the deficit in September was revised down by 1.2 billion pounds as a result of revisions to departmental estimates, the statistics office said.

To contact the reporter on this story: {Gonzalo Vina} in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Yen Weakens Against Most Major Peers After U.S. Credit Ratings Affirmed

By Masaki Kondo and Mariko Ishikawa - Nov 22, 2011 3:18 PM GMT+0700

The yen weakened against most major counterparts after ratings companies affirmed the U.S. credit grades, sapping demand for Japan’s currency as a haven.

The yen was bought earlier after a U.S. Congress budget supercommittee failed to reach agreement on reducing the budget deficit. The euro gained before data that economist say will show European consumer confidence sank to a two-year low. South Korea’s won slid as Asian stocks fell, reducing the allure of currencies linked to global growth. India’s rupee declined to a record against the dollar.

“The rating companies’ decisions eased excessive risk- averse sentiment, spurring selling of haven currencies such as the dollar and yen,” said Daisaku Ueno, Tokyo-based president of Gaitame.com Research Institute Ltd., a unit of Japan’s largest online currency broker. “People are unwinding their positions before holidays in Japan and the U.S.” tomorrow and on Nov. 24 respectively.

The Japanese currency fell 0.5 percent to 104.24 per euro at 8:08 a.m. in London. It dropped 0.2 percent to 77.02 per dollar. The euro was 0.4 percent stronger at $1.3536 after touching $1.3422 on Nov. 17, the lowest since Oct. 10.

South Korea’s won declined 0.4 percent to 1,145.32 per dollar, weakening against all of its 16 major counterparts. The MSCI Asia Pacific Index of shares slid 0.2 percent.

India’s currency dropped past 52.18 per dollar, a level last seen on March 3, 2009, after Standard & Poor’s and Moody’s Investors Service reaffirmed the U.S. government’s credit grades, boosting demand for the greenback.

Deficit Talks

Yesterday was the deadline for the Congressional Budget Office to receive information for analyzing how a proposal would affect the U.S. deficit, in advance of the supercommittee’s Nov. 23 target date for reaching a deal. The failure to agree sets the stage for $1.2 trillion in automatic spending cuts.

“After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline,” panel co-chairmen Representative Jeb Hensarling and Senator Patty Murray said in an e-mailed statement yesterday.

President Barack Obama said he would veto any move to avoid the automatic spending cuts.

S&P said the committee’s failure doesn’t affect the U.S.’s AA+ rating and the negative outlook for the debt. The company stripped the U.S. of its top AAA credit grade on Aug. 5 after months of political gridlock about deficit cuts.

Moody’s affirmed the Aaa credit rating of the U.S. and maintained its negative outlook. Fitch Ratings reiterated that the talks failure would likely lead to a revision of the U.S. rating outlook to negative.

Fed Policy

The Federal Reserve will today release minutes of its Nov. 1-2 meeting when central bank officials lowered their U.S. economic-growth projections. The Fed is lengthening the maturity of its bond portfolio after two rounds of so-called quantitative easing, in which it bought U.S. debt to stimulate the economy through lower borrowing costs.

“Investors need to be aware that QE3 is highly likely in whatever form, maybe not this year, but certainly 2012,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker. “I don’t think we should take the prospect of QE3 off the table.”

The euro has fallen 2 percent over the past 12 months against developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes, as slumping government bonds spurred concern the region’s debt crisis is spreading to bigger nations, including Spain and Italy.

An index of European consumer confidence fell to minus 21 in November, the lowest reading since August 2009, according to a Bloomberg News survey of economists before the European Commission releases the data today.

“You would anticipate the data to be quite soft in Europe tonight and be a dampening factor for the euro,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “Fundamentally we still expect the outlook for the euro to be soft.”

To contact the reporters on this story: Masaki Kondo in Singapore at +65-INR mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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European Stocks Pare Gains as Germany Says No ‘New Bazooka’ for Euro Debt

By Sarah Jones - Nov 22, 2011 5:08 PM GMT+0700

European stocks pared their advance after Germany said that there is no “new bazooka” to combat the euro area’s debt crisis, offsetting rating companies reaffirmation of America’s creditworthiness. U.S. stock-index futures were little changed and Asian shares erased losses.

Antofagasta Plc (ANTO) led a rally in mining companies, both climbing 1 percent, as copper recouped some of yesterday’s losses. British Land Co. jumped 2.1 percent after analysts recommended buying the real-estate investment trust.

The benchmark Stoxx Europe 600 Index slipped 0.1 percent to 224.66 at 10:06 a.m. in London after tumbling 3.2 percent yesterday to its lowest level since Oct. 5. Futures on the Standard & Poor’s 500 Index expiring in December advanced 0.1 percent, while the MSCI Asia Pacific Index (MXAP) rose 0.1 percent, erasing losses of as much as 0.7 percent.

“This has the makings of another dead cat bounce,” said Terry Pratt, an institutional trader at IG Markets. “There’s still this double whammy of concerns -- the failure of the U.S. to reach a compromise over deficit reduction plans and the ongoing threat to global economic confidence by the euro zone’s sovereign-debt woes.”

Stocks slumped around the world yesterday amid signs U.S. lawmakers would fail to reach an agreement on budget cuts, increasing the likelihood that the world’s largest economy will face another credit downgrade. Banks tumbled as dollar funding costs and euro-area bond yields surged.

Automatic Spending Cuts

Standard & Poor’s and Moody’s Investors Service maintained their U.S. credit ratings after the close of European (SXXP) trading, even as Congress’s special debt-reduction committee failed to reach an agreement, setting the stage for $1.2 trillion in automatic spending cuts.

S&P reaffirmed it will keep its U.S. rating at AA+ after stripping the government of its top AAA grade on Aug. 5. Moody’s kept its AAA rating with a negative outlook. Fitch Ratings noted in a statement that it said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative, and that it will conclude a review by the end of this month.

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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World Bank Sees Soft Landing for China as Asia Withstands Europe: Economy

By Shamim Adam - Nov 22, 2011 4:34 PM GMT+0700

The World Bank said China is heading for a soft landing of growth in excess of 8 percent next year, and with most Asian nations has fiscal scope to cushion its economy from an escalation in Europe’s debt crisis.

Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will see its expansion moderate to 7.8 percent in 2012 from 8.2 percent this year, the Washington-based development lender said in a semiannual report today. While China faces the risk of a “strong” impact from a real-estate correction, its gross domestic product will rise 8.4 percent next year and about that pace thereafter, the bank said.

The report signals that Asia, which led the world out of the 2008-2009 recession, is poised to withstand the blows from any slump in demand for its exports or pull-back in credit by European banks. The World Bank said countries with high investment rates, such as China, should focus on boosting consumer spending in any fiscal stimulus, such as with social security and pension provision.

“Clearly the region is being affected by Europe and the global environment has weakened,” Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region, said in an interview with Bloomberg Television. At the same time, “imports into China are holding up quite nicely and it is becoming increasingly a market for consumption goods of manufacturing countries in the region.”

Stocks Reverse Drop

Asian stocks have retreated amid concern that the region’s export-reliant economies will suffer the impact of diminished global demand as the euro region struggles to stem its debt crisis. The MSCI Asia Pacific Index (MXAP) traded 0.2 percent higher as of 5:40 p.m. in Tokyo, paring this year’s decline to 18.2 percent.

In other economic releases today, Taiwan’s unemployment rate increased for the first time in five months in October. Hong Kong’s inflation unexpectedly held at 5.8 percent, exceeding the 5.7 percent median estimate of eight economists surveyed by Bloomberg News.

The U.S. Commerce Department may say today the economy expanded at a 2.5 percent annualized rate in the third quarter, the same as the government’s prior estimate, according to the Bloomberg survey median of 81 estimates. Mexico’s economic growth probably accelerated last quarter, with GDP climbing 3.9 percent from a year earlier, a separate report may show.

Canada Consumers

Canadian retail sales probably rose 0.5 percent in September from August, economists surveyed by Bloomberg News predict ahead of a Statistics Canada report today.

The World Bank’s growth projection for developing East Asia in 2011 was unchanged from a March estimate. For next year, the lender said in March that growth would be around 8 percent.

Asian policy makers have shifted their focus to shielding growth, rather than stemming inflation, as Europe’s debt woes and a struggling U.S. economy increase the risk of another global recession. Australia and Indonesia have cut interest rates this month, while the Philippines in October unveiled a fiscal stimulus package to spur the economy.

In China, “the risk in the short term of any hard landing is very limited -- we believe that a soft landing will take place,” Hofman said. The World Bank predicted China’s GDP growth will ease next year from a 9.1 percent pace in 2011.

A real-estate bust would have a “strong impact on domestic demand and consumer sentiment” in China, according to the report. Even so, the government has “ample fiscal space and room for monetary policy normalization should such a need arise, more so now that inflation seems to be on the wane again,” the bank said.

Sliding Currencies

The World Bank forecast China’s inflation rate to slow to 4.1 percent next year -- still “elevated” -- from 5.3 percent in 2011.

“Investors still do not fully discount the possibility of a disorderly sovereign debt restructuring in the advanced economies,” the World Bank said in its report. “Should such an event occur, it may well trigger another recession in Europe. Spillovers to developing East Asia will be substantial, through trade, financial flows, remittances, and consumer and investor sentiment.”

Emerging Asian nations felt the impact of Europe’s woes in September, when their currencies slid against the dollar, prompting them to use some of their foreign-currency holdings to limit the impact. The World Bank said that reserves “should be sufficient to withstand further shocks.”

India’s rupee fell to a record of 52.73 per dollar today, prompting Subir Gokarn, deputy governor at the central bank, to say he’s weighing the possibility of action to stem the declines.

‘Ready to Act’

East Asian countries had a median value of foreign-exchange reserves equivalent to 50.4 percent of gross domestic product as of mid-2011, or enough to cover 8.9 months worth of imports, according to the World Bank.

Policy makers in the region are “likely to hold off further policy tightening and stand ready to act should further negative shocks to growth occur or in the extreme case of a disorderly resolution of the euro zone debt problem,” it said.

In China, monetary conditions “remain accommodative” and there’s space for further fiscal stimulus if necessary, the World Bank said. The central bank said Nov. 16 that it can’t relax vigilance over inflation, as “the foundation of price stability is not yet solid,” while reiterating Premier Wen Jiabao’s pledge to “fine-tune” policies when needed.

‘Lingering Vulnerabilities’

“Policy makers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still-buoyant, if not overheated, economy,” the World Bank said. “To mitigate the vulnerabilities of continued low real interest rates, an easing of fiscal policy appears the most appropriate line of defense before the monetary policy stance is eased.”

While new capital rules being introduced in Europe will constrain the ability of the region’s banks to lend in Asia, high reserves and current account surpluses in most East Asian countries will protect them from the impact of possible renewed financial stress, the World Bank said.

“Bank credit flows remained stable through the first half of 2011 but represent an important risk, should European banks start deleveraging,” the Washington-based lender said. “Even if a definitive euro zone settlement is implemented successfully, European banks would likely need to deleverage and could reduce exposure to emerging markets.”

International banks reduced loans available to East Asian companies by about $36 billion between the middle of 2008 and the first quarter of 2009, the World Bank said.

“An impact of similar proportions now could mean that over $30 billion dollars flow out, constraining credit available to the private sector,” according to the report. European banks have about $427 billion of loans outstanding to developing East Asia, it said.

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

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

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