Shrinking Trade Surplus May Help China Rebuff on Yuan

By Sophie Leung - Jan 9, 2012 6:27 PM GMT+0700
Enlarge image

Shipping containers are stacked at the Yangshan deep water port in Shanghai. China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Photographer: Kevin Lee/Bloomberg

Play Video

Jan. 9 (Bloomberg) -- David Roche, president of Independent Strategy and a former Morgan Stanley global strategist, talks about the outlook for the European debt crisis, and its impact on emerging stock and commodity markets. Roche speaks with Rishaad Salamat and Susan Li on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

China’s trade surplus may narrow to an eight-year low in 2012 as slowing external demand undermines exports, a shift that may help the nation rebuff overseas criticism for maintaining an undervalued exchange rate.

Bank of America Corp., Credit Agricole CIB and Haitong Securities Co. estimate the surplus (CNFRBAL$) this year will slip below $102 billion in 2005. For December, the excess shrank to $8.8 billion, according to the median of 20 estimates in a Bloomberg News survey (CNFRBAL$), indicating an annual surplus of $147.2 billion.

The latest monthly figures are due tomorrow, before the arrival in Beijing of U.S. Treasury Secretary Timothy F. Geithner, who said last year that China’s yuan hadn’t risen fast enough. With a prolonged crisis in Europe, the biggest Chinese trading partner, Premier Wen Jiabao may have little appetite to accommodate Geithner’s request, analysts said.

“The dollar-yuan exchange rate could be quite close to the equilibrium value and the room for further rapid yuan appreciation is limited” given a shrinking trade surplus, said Lu Ting, an economist at Bank of America in Hong Kong. “As China comes close to a balance of trade, political pressures from the U.S. will have to cool eventually.”

Yuan Outlook

The yuan weakened 0.08 percent to 6.3146 per dollar as of 4:30 p.m. in Shanghai, retreating further from a high last month, when it surpassed 6.3 for the first time in 18 years. It will gain 2.4 percent to 6.14 yuan per dollar by the end of this year, compared with a 4.7 percent increase last year, according to the median estimate of 28 analysts in a Bloomberg News survey.

A diminishing surplus may damp liquidity growth, giving China’s central bank more scope to cut banks’ required reserve ratio. People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible global economic shocks. JPMorgan Chase & Co. sees a further cut in the reserve ratio as soon as this week.

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing, data showed yesterday. New loans totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

PBOC Move

The PBOC lowered the reserve ratio for the first time in almost three years in December to encourage lending. Expectations for more monetary easing escalated after inflation cooled to the slowest pace in 14 months in November and industrial output growth weakened.

Economic growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. Hitachi Construction Machinery Co., Japan’s second-largest heavy-equipment maker, said last month that Chinese demand for excavators will decline in the first half of 2012 as the government prolongs a crackdown on property speculation.

China’s exchange-rate management has seen it accumulate the world’s largest currency reserves, with holdings at $3.2 trillion as of September. As the trade surplus fell and inflows of overseas capital diminished, gains in the reserves moderated. Quarterly growth slowed for four straight quarters through September, according to data compiled by Bloomberg.

Reserves Stabilize

“With the gradual stabilization of foreign-exchange reserves and close to zero current-account surpluses, China will have more arguments to oppose Washington’s demand on currency appreciation,” said Herve Lievore, an economist for Asia at AXA Investment Managers in Hong Kong.

China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Estimates for December signal a 19 percent drop in the trade surplus last year from 2010. Commerce Minister Chen Deming said Jan. 5 the excess probably dipped 13 percent to $160 billion, or 2 percent of gross domestic product.

The U.S. Treasury said last month it will seek further gains in the yuan and called the currency undervalued, while declining to brand China a manipulator of its exchange rate. Geithner’s visit this week is part of a trip that also features a stop in Tokyo, with talks scheduled to include discussions on sanctions on Iran for its nuclear development plans.

Share of GDP

Hu Yifan, chief economist at Haitong in Hong Kong, who previously worked at the World Bank, sees the annual trade surplus in a range of $70 billion to $100 billion. Credit Agricole’s Dariusz Kowalczyk predicts the excess at $60 billion. China’s merchandise surplus as a share of GDP rose to a record of 7.5 percent in 2007, when the surplus hit $262.2 billion.

“Given the European debt crisis and sharp slowdown of the European economy, China’s decline in its trade surplus will likely be faster than expected,” said Ma Jun, an economist at Deutsche Bank AG, who rated as top China analyst and Asia economist by Institutional Investor magazine’s 2011 poll. Ma said the surplus may shrink to zero by 2015.

A shrinking labor force and rapid aging of the population in a nation of 1.3 billion people will also reduce China’s surplus, Ma said. Such demographic changes will account for about 60 percent of the drop in the excess in the coming decade, Ma said in his 2011 book “Locus of Money,” based on the assumption that yuan will rise 3 percent annually against the dollar.

Not all economists are predicting a shift to balanced trade. BNP Paribas SA senior China economist Ken Peng, the most accurate forecaster of Chinese economic data in Bloomberg News surveys in 2011, said “China would still have a structural trade surplus, just because of the amount of migrant people employed in the exports industry.”

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

Read more...

U.S. Stock-Index Futures Fluctuate Before Alcoa Releases Results

By Tom Stoukas - Jan 9, 2012 6:41 PM GMT+0700

Play Video

Jan. 9 (Bloomberg) -- Jonathan Golub, chief U.S. market strategist at UBS Securities LLC, talks about the outlook for U.S. stocks, global markets and his investment strategy. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stock-index futures fluctuated as the German and French leaders met in Berlin to discuss the European debt crisis and Alcoa Inc. prepared to unofficially kick off the earnings season.

Alcoa, which is due to become the first company in the Dow Jones Industrial Average to report fourth-quarter results after the close of trading today, rose 0.9 percent. Merck (MRK) & Co. declined in German trading after Jefferies Group Inc. downgraded the drugmaker.

Standard & Poor’s 500 Index (SPX) futures expiring in March dropped less than 0.1 percent to 1,273.2 at 11:39 a.m. in London. Dow futures slipped 1 point to 12,308. The S&P 500 climbed 1.6 percent last week as reports on manufacturing from America to China bolstered optimism about the global economy.

Federal Reserve Bank of St. Louis President James Bullard said the Fed probably won’t begin a new round of bond purchases following “encouraging” data showing the U.S. economy gained 200,000 jobs in December.

“Hopefully, we will keep this momentum going in 2012,” Bullard told reporters on Jan. 7 after a speech in Chicago. “The tone of the data has been very strong” and the central bank “probably could wait and see for now” before deciding whether there is a need for more accommodation, he said.

Merkel, Sarkozy

German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today for the first time in 2012 as they seek to refine a plan for rescuing the euro over the next three months. The two leaders gather in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area.

Among the various moving parts in planning to resolve the crisis are Greek negotiations with bondholders, in their seventh month, to cut the country’s debt load in half. Olivier Blanchard, the International Monetary Fund’s chief economist, said in a CNBC interview that haircuts for Greece “could have to be larger.”

Alcoa (AA), the largest U.S. aluminum producer, climbed 0.9 percent to $9.24 in German trading.

S&P 500 companies earned (SPX) $24.74 a share in the fourth quarter, according to analyst estimates compiled by Bloomberg as of Jan. 6. The 6 percent gain would be the smallest against a year-earlier quarter since September 2009.

Merck fell 0.8 percent to $38.18 in Germany after Jefferies downgraded its recommendation on the shares to “hold” from “buy,” citing valuations.

Inhibitex Inc. (INHX) more than doubled to $25.01 in pre-market New York trading as Bristol-Myers Squibb Co. (BMY) agreed to buy the Alpharetta, Georgia-based biopharmaceutical firm to boost its position in hepatitis C medicines.

Motorola Mobility Inc. slipped 0.6 percent to $38.23 in Germany. The phone maker that agreed to be bought by Google Inc. reported preliminary fourth-quarter sales that trailed analysts’ estimates, citing mounting competition and higher legal costs.

To contact the reporter on this story: Tom Stoukas in Athens at astoukas@bloomberg.net

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

Read more...

Pennsylvania Agency’s Sale Will Pay for Building Tied to Dauphin Default

By Brian Chappatta - Jan 9, 2012 7:00 PM GMT+0700

The Pennsylvania Economic Development Financing Authority (26718MF) plans to sell $106.4 million in bonds to buy a Harrisburg (9661MF) office building connected to bonds in default.

The Dauphin County General Authority (26630MF) bought the Forum Place building in the state capital in 1998 with $86.2 million raised with revenue bonds that went into default by 2002, according to a July 2006 SEC opinion in a related matter. The agency said the county defaulted after the building’s occupancy rate fell to 45 percent from almost 100 percent as state agencies moved out.

The state authority, known as Pedfa, will lease the nine- floor Forum Place to the nonprofit Capital Region Economic Development Corp., according to a preliminary official statement for the sale. The offering is planned for as early as this week. Dauphin County will use the money to refund building debt.

Bondholders called for full repayment of about $59.5 million of the county’s debt in April, plus about $3.2 million in accrued interest, according to a notice filed July 15. The interest was paid the same day, the notice said.

A county revenue bond maturing in January 2025 traded as low as 25 cents on the dollar in November 2004. Last month, the same security traded from about 42 cents to 60 cents on the dollar, according to data compiled by Bloomberg.

‘Sustainable’ Structure

The new securities will repay holders of the defaulted bonds in full and “replace the existing debt structure with a sustainable one,” Stephen Drizos, the authority’s director, said by e-mail. The debt will mature from 2013 to 2034.

The development company’s president, David Black, said it will lease the 376,000 square feet (35,000 square meters) of office space plus a 1,090-space parking garage to the state General Services Department, which manages public buildings. The agency already rents 96 percent of the space, under a 25-year deal signed Feb. 4, 2009, the preliminary statement shows.

“The parking makes the lease more attractive and it helps the county with the sale of this building,” said Troy Thompson, a General Services Department spokesman. Tenants also include the U.S. Social Security Administration and the Pennsylvania Local Government Commission, the statement says.

The risk that rental payments won’t meet debt service needs is “modest,” Moody’s Investors Service said in a statement. The credit-rater scores the debt Aa3, its fourth-highest grade.

Harrisburg Debt

The authority finances projects such as industrial and commercial facilities, while the development company works on projects in Cumberland, Dauphin and Perry counties, according to the offering document.

Harrisburg, the seat of Dauphin County, skipped payments on securities related to a municipal incinerator owned by the Harrisburg Authority, and the county covered some of the obligations. The city of about 49,500 residents listed about $60 million in unpaid debts tied to the trash-to-energy plant in a bankruptcy court filing last year.

A bankruptcy petition from the City Council was rejected in November, a ruling that has been appealed. U.S. Bankruptcy Judge Mary D. France said the council wasn’t authorized to act on the city’s behalf before the court.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

Read more...

Stocks in Europe Falter as Leaders Meet

By Julie Cruz - Jan 9, 2012 6:42 PM GMT+0700
Enlarge image

Financial traders monitor data on computer screens below a display of the DAX index curve at the Frankfurt Stock Exchange during the final seconds of the last day of trading for 2011 in Frankfurt, Germany on Dec. 30, 2011. Photographer: Simon Dawson/Bloomberg

Play Video

Jan. 9 (Bloomberg) -- Willem-Mark Nabarro, head of European equities at Exane BNP Paribas, talks about the region's debt crisis and his investment strategy. Nabarro also discusses the meeting later today between German Chancellor Angela Merkel and French President Nicolas Sarkozy. He speaks with Caroline Hyde on Bloomberg Television's "First Look." (Source: Bloomberg)

Play Video

Jan. 9 (Bloomberg) -- Jonathan Golub, chief U.S. market strategist at UBS Securities LLC, talks about the outlook for U.S. stocks, global markets and his investment strategy. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

European stocks retreated, paring three weeks of gains for the benchmark Stoxx Europe 600 Index, as German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today to agree new rules for the euro. U.S. index futures fluctuated, while Asian shares rose.

UniCredit SpA (UCG) tumbled as rights to buy the bank’s shares slumped in their first day of trading in Milan. Nokia Oyj (NOK1V) fell 3.3 percent as supplier RF Micro Devices Inc. reported preliminary quarterly revenue that trailed its earlier forecast. Renault (RNO) SA advanced 1 percent after Citigroup Inc. recommended buying the carmaker’s shares.

The Stoxx 600 (SXXP) slid 0.3 percent to 246.87 at 11:38 a.m. in London, after earlier rising as much as 0.4 percent. The gauge gained 1.2 percent last week as economic reports from around the world added to optimism that the global economy can weather the fallout from the euro area’s sovereign-debt crisis. Standard & Poor’s 500 Index futures slipped 0.1 percent, while the MSCI Asia Pacific Index gained 0.3 percent.

“We believe that a combination of weaker earnings numbers, a further deterioration in euro-zone growth in the first quarter, and further political tensions are likely to push equities down before they recover more sustainably, most likely later in the first half,” a team of strategists at Goldman Sachs Group Inc., led by Peter Oppenheimer in London, wrote in a report dated Jan. 8. “There remain several issues in Europe that are likely to put upward pressure on sovereign yields over the next couple of months that are also likely to weigh on equities.”

Merkel-Sarkozy Meeting

Merkel and Sarkozy meet today for the first time in 2012 to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. They hold a joint press conference at about 1:30 p.m. in Berlin.

Italian Prime Minister Mario Monti will also visit Berlin this week. Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government before the next European Union summit meeting in Brussels on Jan. 30.

A report showed that German industrial output (GRIPIMOM) declined in November. Production fell 0.6 percent from October, when it rose 0.8 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.5 percent drop, according to the median of 30 estimates (GRIPIMOM) in a Bloomberg News survey.

“The outlook for 2012 is highly conditional,” said Frederic Buzare, a fund manager at Dexia Asset Management in Brussels. “If euro-zone members act in unison, demonstrate a shared vision and are specific about the details, this may put a floor underneath the sovereign crisis. It is now likely that, although 2012 will be lost in terms of growth, at least financial stability could be safeguarded, and that’s the bottom line.”

U.S. Earnings Season

Alcoa Inc., the largest U.S. aluminum producer, plans to release results after markets close today, the first company in the Dow Jones Industrial Average (INDU) to report earnings from the final quarter of 2011. Investors will watch to see how the difference in economic growth in the U.S., Europe and Asia affects companies’ earnings.

UniCredit rights (UCGAA), which each entitle holders to buy two new shares in Italy’s largest bank for 1.943 euros, traded at 66.1 euro cents, 51 percent lower than their indicative price at the end of last week. The shares slumped 11 percent to 2.33 euros and were suspended for volatility at least twice.

Nokia, Temenos Fall

Nokia dropped 3.3 percent to 4.02 euros. RF Micro Devices, Nokia’s most important power-amplifier supplier, said sales for the December quarter probably fell 19 percent to about $225 million, the fourth straight quarterly decline. That compared with a previous company forecast of $250 million.

Temenos Group AG (TEMN) sank 5.4 percent to 14.85 Swiss francs after saying Mark Austen resigned from his position on the company’s board of directors with immediate effect. The company had previously announced it would not seek Austen’s re-election at its next shareholder meeting, Temenos said yesterday.

Renault climbed 1 percent to 28.58 euros in Paris after Citigroup upgraded the carmaker to “buy” from “neutral.”

Persimmon Plc advanced 3.9 percent to 499.8 pence, its eighth day of gains for the longest winning streak since 2004. The U.K.’s second-largest homebuilder (PSN) by market value said 2011 results will be toward the top end of analyst estimates. The company said its underlying operating margin will approach 10 percent. Persimmon also forecast a 50 percent increase in pretax profit.

Rentokil Initial Plc (RTO) jumped 3.1 percent to 66.6 pence, its highest price in a month, after Credit Suisse Group AG raised the world’s biggest pest-control company to “outperform” from “neutral.”

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

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

Read more...

Treasury 10-Year Yields Approach Highest in Almost Month on U.S. Economy

By Anchalee Worrachate and Wes Goodman - Jan 9, 2012 7:17 PM GMT+0700

Treasury 10-year note yields approached the highest level in almost a month before reports this week forecast by economists to show U.S. retail sales and consumer confidence increased.

Debt securities fell last week following the biggest annual rally since 2008 as the unemployment rate dropped in December. German Chancellor Angela Merkel is meeting French President Nicolas Sarkozy today to discuss the region’s debt crisis. The U.S. government will sell $66 billion of notes and bonds this week in its first auction of the securities in 2012.

“Economic figures out of the U.S. have surprised on the upside, and we are seeing some upward pressure on Treasury yields,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “But the rise in yields could be limited if the euro debt crisis worsens, and I don’t think we’ve passed the worst of the crisis yet.”

Yields on 10-year notes rose one basis point, or 0.01 percentage point, to 1.97 percent at 7:08 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 3/32, or 94 cents per $1,000 face amount, to 100 1/4. Yields touched 2.04 percent on Jan. 6, the highest level since Dec. 13, and increased eight basis points last week.

Treasuries have trailed German bonds and British gilts this month, losing 0.4 percent compared with decreases of 0.1 percent for German and U.K. debt, according to indexes compiled by the European Federation of Financial Analysts Societies.

Outlook on Treasuries

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the outlook through June rose to 45 for the seven days ended Jan. 6, from 44 a week earlier. A figure below 50 shows investors expect Treasuries to decline.

The U.S. government will sell $32 billion of three-year notes tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on Jan. 12.

The Federal Reserve is scheduled today to sell as much as $8.75 billion of securities due from April to September 2012 as part of the program of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-dated debt to cap borrowing costs and foster economic growth.

U.S. reports this week are forecast to add to evidence that the recovery of the world’s largest economy is gathering momentum.

Retail Sales

Retail sales (RSTAMOM) gained 0.3 percent in December after increasing 0.2 percent in the previous month, according to the median forecast in a Bloomberg News survey before the Commerce Department’s report on Jan. 12.

The Thomson Reuters/University of Michigan preliminary consumer confidence gauge for January rose to a seven-month high, a separate survey showed before data on the following day.

The U.S. added 200,000 jobs in December, surpassing the median forecast of economists, the Labor Department reported last week. The unemployment rate fell to 8.5 percent, the lowest level since February 2009.

The difference (USGGBE10) between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, has widened to 2.09 percentage points from 1.95 percentage points at the end of last year. The 10-year average is 2.13 percentage points.

Treasuries pared their decline today after a report showed German industrial production dropped in November at a faster pace than economists forecast.

Projected Yields

Benchmark 10-year yields will climb to 2.6 percent by Dec. 31 from 1.88 percent at the end of 2011, according to the median forecast of economists and strategists in a Bloomberg News survey. Traders aren’t as optimistic, expecting an increase to 2.25 percent, based on forwards that use current trading levels to predict future rates.

The divergence shows traders see Europe’s debt crisis continuing to stoke demand for safety and containing yields even as the economy improves.

Predictions last year by both groups for a selloff proved wrong as Treasuries due in 10 years or more returned the most since 1995, even as President Barack Obama increased publicly traded debt (DEBPMARK) outstanding to a record $9.88 trillion and Standard & Poor’s stripped the U.S. of its AAA rating on Aug. 5.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Read more...

Euro Strengthens Before Merkel-Sarkozy Meeting; S&P Futures Little Changed

By Stephen Kirkland and Lynn Thomasson - Jan 9, 2012 7:19 PM GMT+0700

The euro rebounded from the lowest level against the dollar since September 2010 as leaders began discussing plans to shore up the currency. European stocks fell, U.S. index futures were little changed and Chinese shares rose.

The euro appreciated 0.4 percent to $1.2762 at 7:15 a.m. in New York, snapping a three-day decline. The German 10-year bund yield increased three basis points. The Stoxx Europe 600 Index dropped 0.2 percent, and Standard & Poor’s 500 Index futures swung between gains and losses. The Shanghai Composite Index advanced 2.9 percent, and Hungary’s BUX Index rose 1.9 percent. Wheat jumped 1.7 percent, and oil slid 0.5 percent in New York.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting in Berlin to consider measures designed to rescue the euro over the next three months. A round of talks among euro-area leaders will follow before the next summit in Brussels on Jan. 30. Alcoa Inc. is due to release fourth-quarter results after the market closes today, unofficially starting the U.S. earnings season.

“It looks like it’s a bit of a relief rally,” said Chris Walker, a currency strategist at UBS AG in London. “The euro’s picked up as traders don’t want to be caught short ahead of the Sarkozy-Merkel meeting. We’re not looking for any new policy to be announced today, but there’s still some headline risk.”

The euro climbed 0.2 percent versus the yen, after sliding to the lowest since December 2000. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, slipped 0.3 percent, falling for the first time in four days.

Greek Bonds

The yield on the Greek two-year note fell 307 basis points to 132.44 percent, with the price rising to about 28 percent of face value. The Spanish 10-year yield declined 16 basis points, narrowing the difference with bunds by 18 basis points, while the Portuguese-German 10-year spread fell three basis points.

The cost of insuring against default on European sovereign debt rose to a record, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbing as much as four basis points to 386, before trading little changed.

The yield on the 10-year Treasury note (USGG10YR) rose one basis point to 1.97 percent. The government will sell $32 billion of three- year notes tomorrow, $21 billion of 10-year debt the following day, and $13 billion of 30-year bonds on Jan. 12.

GlaxoSmithKline Plc (GSK) lost 2.5 percent, the most in two months, after the U.K.’s biggest drugmaker said it will hold further talks with U.S. regulators on requirements for a filing for the experimental drug Relovair for use against asthma.

UniCredit SpA, Italy’s largest lender, tumbled 11 percent as rights to buy its shares slumped in their first day of trading in Milan.

U.S. Earnings

Alcoa gained 1 percent in German trading. The biggest U.S. aluminum producer may say it lost 1 cent a share in the fourth quarter, according to the average of 18 estimates in a Bloomberg survey of analysts. Companies in the S&P 500 may report earnings grew 6 percent in the quarter from a year earlier, the smallest quarterly gain since September 2009, according to projections compiled by Bloomberg as of Jan. 6.

The MSCI Emerging Markets Index (MXEF) added 0.4 percent. Chinese stocks gained the most in almost three months after the central bank reported lending and money supply growth that exceeded economists’ estimates in December. Hungarian shares rose for the first time in five days after Prime Minister Viktor Orban told state news service MTI yesterday his government was open to “any kind” of credit line with the International Monetary Fund.

The BSE India Sensitive Index slipped 0.2 percent after Prime Minister Manmohan Singh said the economy will have grown about 7 percent in the year to March 31, less than a December forecast of 7.5 percent.

Wheat jumped to $6.35 a bushel, the first increase in four days. Silver gained 0.4 percent and corn and soybeans advanced more than 0.9 percent. Oil in New York fell to $101.05 a barrel.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

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

Read more...

Stocks in Europe Erase Decline as Leaders Meet

By Julie Cruz - Jan 9, 2012 5:27 PM GMT+0700
Enlarge image

Financial traders monitor data on computer screens below a display of the DAX index curve at the Frankfurt Stock Exchange during the final seconds of the last day of trading for 2011 in Frankfurt, Germany on Dec. 30, 2011. Photographer: Simon Dawson/Bloomberg

Play Video

Jan. 9 (Bloomberg) -- Willem-Mark Nabarro, head of European equities at Exane BNP Paribas, talks about the region's debt crisis and his investment strategy. Nabarro also discusses the meeting later today between German Chancellor Angela Merkel and French President Nicolas Sarkozy. He speaks with Caroline Hyde on Bloomberg Television's "First Look." (Source: Bloomberg)

European stocks were little changed, after three weeks of gains for the benchmark Stoxx Europe 600 Index, as German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today to agree new rules for the euro. U.S. index futures and Asian shares swung between gains and losses.

Renault (RNO) SA advanced 1.8 percent after Citigroup Inc. recommended buying the carmaker’s shares. Nokia Oyj (NOK1V) fell 2.8 percent as supplier RF Micro Devices Inc. reported preliminary quarterly revenue that trailed its earlier forecast.

The Stoxx 600 (SXXP) slid 0.2 percent to 247.11 at 10:26 a.m. in London, after earlier rising as much as 0.4 percent. The gauge gained 1.2 percent last week as economic reports from around the world added to optimism that the global economy can weather the fallout from the euro area’s sovereign-debt crisis. Standard & Poor’s 500 Index futures slipped 0.1 percent, while the MSCI Asia Pacific Index gained 0.3 percent.

“We believe that a combination of weaker earnings numbers, a further deterioration in euro-zone growth in the first quarter, and further political tensions are likely to push equities down before they recover more sustainably, most likely later in the first half,” a team of strategists at Goldman Sachs Group Inc., led by Peter Oppenheimer in London, wrote in a report dated Jan. 8. “There remain several issues in Europe that are likely to put upward pressure on sovereign yields over the next couple of months that are also likely to weigh on equities.”

Merkel-Sarkozy Meeting

Merkel and Sarkozy meet today for the first time in 2012 to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. They meet at 11 a.m. in Berlin and hold a joint press conference at about 1:30 p.m.

Italian Prime Minister Mario Monti will also visit Berlin this week. Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government before the next European Union summit meeting in Brussels on Jan. 30.

German industrial production (GRIPIMOM) probably dropped 0.5 percent in November, according to the median estimate (GRIPIMOM) of economists surveyed by Bloomberg News before the figures are released today. Production increased 0.8 percent in October.

Alcoa Inc., the largest U.S. aluminum producer, plans to release results today after markets close, the first company in the Dow Jones Industrial Average (INDU) to report earnings from the final quarter of 2011. Investors will watch to see how the difference in economic growth in the U.S., Europe and Asia affects companies’ earnings.

Renault, Persimmon Advance

Renault climbed 1.8 percent to 28.83 euros in Paris after Citigroup upgraded the carmaker to “buy” from “neutral.”

Persimmon Plc advanced 3.8 percent to 499.2 pence, its eighth day of gains for the longest winning streak since 2004. The U.K.’s second-largest homebuilder (PSN) by market value said 2011 results will be toward the top end of analyst estimates. The company said its underlying operating margin will approach 10 percent. Persimmon also forecast a 50 percent increase in pretax profit.

Rentokil Initial Plc (RTO) jumped 2.9 percent to 66.5 pence, its highest price in a month, after Credit Suisse Group AG raised the world’s biggest pest-control company to “outperform” from “neutral.”

Nokia dropped 2.8 percent to 4.04 euros. RF Micro Devices, Nokia’s most important power-amplifier supplier, said sales for the December quarter probably fell 19 percent to about $225 million, the fourth straight quarterly decline. That compared to a previous company forecast of $250 million.

Temenos Group AG (TEMN) sank 3.8 percent to 15.10 Swiss francs after saying Mark Austen resigned from his position on the company’s board of directors with immediate effect. The company had previously announced it would not seek Austen’s re-election at its next shareholder meeting, Temenos said yesterday.

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

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

Read more...

Debris Litters New Zealand Beach After Stricken Ship Rena Splits in Half

By Chris Bourke and Robert Fenner - Jan 9, 2012 2:06 PM GMT+0700

Shipping cargo and debris are littering a beach on New Zealand’s North Island after Rena, the 236-meter (774 foot) container vessel stranded on a reef since October, yesterday split into two in rough seas.

Officials were forced to close Waihi Beach on New Zealand’s northeastern coast after containers washed ashore and some looting was reported, New Zealand police said in a statement. Teams are removing debris from the beach including timber, milk powder and plastic material, Maritime New Zealand said in a statement on its website.

Aerial observations showed there was little change overnight to the Rena’s position on the Astrolabe reef, the agency said. Both sections were about 30 meters apart, with the rear separating after stormy weather, Maritime New Zealand said yesterday. The ship ran aground on Oct. 5 near Tauranga, 100 miles (160 kilometers) southeast of Auckland.

“There is inevitably going to be a lot of mess and disturbance for the next few days while this is cleaned up and we would like people to use common sense and stay well away from the debris,” National On Scene Commander Alex van Wijngaarden said in the statement.

Twelve containers have come ashore, while defense force personnel are using mine-clearing equipment to check for debris in harbor channels, Maritime New Zealand said. Workers tagged 21 containers with buoys this morning and plan to collect them when weather conditions improve.

Worst Oil Spill

As much as 350 metric tons of oil may have leaked from the vessel since the grounding, according to Maritime New Zealand. That makes it the worst oil spill the nation has experienced.

While there were no signs of “significant” spills from the vessel over the weekend, response teams were prepared if any releases should occur, according to the statement. Three little blue penguins were discovered to be oiled after the break-up.

“The ship is badly damaged with the severe movement breaking off many of the hatch covers and releasing containers,” Maritime N.Z. salvage manager David Billington said yesterday. While there hasn’t been a “significant release of oil, with the Rena in its current fragile state, a further release is likely.”

The Liberian-flagged ship, owned by Athens-based Costamare Shipping Co. (CMRE), was carrying 2,171 containers and about 1,700 metric tons of fuel oil when it struck the reef, according to Maritime New Zealand. The Rena was hit by seven-meter waves in the past two days and a three-nautical-mile exclusion zone around the vessel remains in place because of the risk caused by drifting containers.

Hazardous Cargo

The cargo included four containers of ferrosilicon, a solid substance that can be hazardous when in contact with water and can emit hydrogen, the agency said.

The Rena’s master and the second officer in charge of the navigational watch have been charged under New Zealand’s Maritime Act for operating a vessel in a manner causing unnecessary danger or risk, the maritime agency said in a statement on Oct. 13.

The charge carries a maximum penalty of NZ$10,000 ($7,800) or 12 months’ imprisonment, it said at the time.

A tanker moored alongside the Rena took off 1,000 tons of oil since the grounding after leaking fuel had blackened beaches in the area and killed seabirds.

Separately, a phosphate ship that broke its moorings in rough seas at Christmas Island, more than 800 kilometers off Australia’s northwestern coast, at the weekend is breaking up, the Australian Broadcasting Corp. reported. The Panamanian- registered MV Tycoon, which had been loading phosphate, was pushed against a sea wall by heavy swell and 15 crew were taken off the ship by navy personnel, according to the report.

To contact the reporters on this story: Chris Bourke in Wellington at cbourke4@bloomberg.net; Robert Fenner in Melbourne at rfenner@bloomberg.net

To contact the editor responsible for this story: Chris Bourke at cbourke4@bloomberg.net

Read more...

Shrinking China Trade Surplus May Buttress Wen Rebuff of Pressure on Yuan

By Sophie Leung - Jan 9, 2012 10:42 AM GMT+0700

Play Video

Jan. 9 (Bloomberg) -- David Roche, president of Independent Strategy and a former Morgan Stanley global strategist, talks about the outlook for the European debt crisis, and its impact on emerging stock and commodity markets. Roche speaks with Rishaad Salamat and Susan Li on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

China’s trade surplus may narrow to an eight-year low in 2012 as slowing external demand undermines exports, a shift that may help the nation rebuff overseas criticism for maintaining an undervalued exchange rate.

Bank of America Corp., Credit Agricole CIB and Haitong Securities Co. estimate the surplus (CNFRBAL$) this year will slip below $102 billion in 2005. For December, the excess shrank to $8.8 billion, according to the median of 20 estimates in a Bloomberg News survey (CNFRBAL$), indicating an annual surplus of $147.2 billion.

The latest monthly figures are due tomorrow, before the arrival in Beijing of U.S. Treasury Secretary Timothy F. Geithner, who said last year that China’s yuan hadn’t risen fast enough. With a prolonged crisis in Europe, the biggest Chinese trading partner, Premier Wen Jiabao may have little appetite to accommodate Geithner’s request, analysts said.

“The dollar-yuan exchange rate could be quite close to the equilibrium value and the room for further rapid yuan appreciation is limited” given a shrinking trade surplus, said Lu Ting, an economist at Bank of America in Hong Kong. “As China comes close to a balance of trade, political pressures from the U.S. will have to cool eventually.”

Yuan Outlook

The yuan was at 6.3176 as of 11:36 a.m. in Shanghai, retreating further from a high last month, when it surpassed 6.3 for the first time in 18 years. It will gain 2.4 percent to 6.14 yuan per dollar by the end of this year, compared with a 4.7 percent increase last year, according to the median estimate of 28 analysts in a Bloomberg News survey.

A diminishing surplus may damp liquidity growth, giving China’s central bank more scope to cut banks’ required reserve ratio. People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible global economic shocks. JPMorgan Chase & Co. sees a further cut in the reserve ratio as soon as this week.

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing, data showed yesterday. New loans totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

PBOC Move

The PBOC lowered the reserve ratio for the first time in almost three years in December to encourage lending. Expectations for more monetary easing escalated after inflation cooled to the slowest pace in 14 months in November and industrial output growth weakened.

Economic growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. Hitachi Construction Machinery Co., Japan’s second-largest heavy-equipment maker, said last month that Chinese demand for excavators will decline in the first half of next year as the government prolongs a crackdown on property speculation.

China’s exchange-rate management has seen it accumulate the world’s largest currency reserves, with holdings at $3.2 trillion as of September. As the trade surplus fell and inflows of overseas capital diminished, gains in the reserves moderated. Quarterly growth slowed for four straight quarters through September, according to data compiled by Bloomberg.

Reserves Stabilize

“With the gradual stabilization of foreign-exchange reserves and close to zero current-account surpluses, China will have more arguments to oppose Washington’s demand on currency appreciation,” said Herve Lievore, an economist for Asia at AXA Investment Managers in Hong Kong.

China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Estimates for December signal a 19 percent drop in the trade surplus last year from 2010. Commerce Minister Chen Deming said Jan. 5 the excess probably dipped 13 percent to $160 billion, or 2 percent of gross domestic product.

The U.S. Treasury said last month it will seek further gains in the yuan and called the currency undervalued, while declining to brand China a manipulator of its exchange rate. Geithner’s visit this week is part of a trip that also features a stop in Tokyo, with talks scheduled to include discussions on sanctions on Iran for its nuclear development plans.

Share of GDP

Hu Yifan, chief economist at Haitong in Hong Kong, who previously worked at the World Bank, sees the annual trade surplus in a range of $70 billion to $100 billion. Credit Agricole’s Dariusz Kowalczyk predicts the excess at $60 billion. China’s merchandise surplus as a share of GDP rose to a record of 7.5 percent in 2007, when the surplus hit $262.2 billion.

“Given the European debt crisis and sharp slowdown of the European economy, China’s decline in its trade surplus will likely be faster than expected,” said Ma Jun, an economist at Deutsche Bank AG, who rated as top China analyst and Asia economist by Institutional Investor magazine’s 2011 poll. Ma said the surplus may shrink to zero by 2015.

A shrinking labor force and rapid aging of the population in a nation of 1.3 billion people will also reduce China’s surplus, Ma said. Such demographic changes will account for about 60 percent of the drop in the excess in the coming decade, Ma said in his 2011 book “Locus of Money,” based on the assumption that yuan will rise 3 percent annually against the dollar.

Not all economists are predicting a shift to balanced trade. BNP Paribas SA senior China economist Ken Peng, the most accurate forecaster of Chinese economic data in Bloomberg News surveys in 2011, said “China would still have a structural trade surplus, just because of the amount of migrant people employed in the exports industry.”

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

Read more...

China Lending, Money Supply Growth Exceed Economist Estimates in December

By Bloomberg News - Jan 9, 2012 10:13 AM GMT+0700
Enlarge image

Chinese Premier Wen Jiabao. Photographer: Michele Tantussi/Bloomberg

Play Video

Jan. 9 (Bloomberg) -- David Li, head of UBS AG's China operations, talks about the outlook for People's Bank of China monetary policy, the nation's economy and stock market. He speaks with Rishaad Salamat on Bloomberg's Television's "On the Move Asia." (Source: Bloomberg)

Play Video

Jan. 9 (Bloomberg) -- Ha Jiming, Goldman Sachs’s vice chairman for China, talks about the outlook for China's monetary policy and economy. Ha speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing as the nation’s central bank said it must be prepared for possible shocks from the U.S. and Europe.

New loans (CNLNNEW) totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply (CNMS2YOY), rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook, echoing comments by Premier Wen Jiabao. The central bank will “very likely” follow up last month’s reduction in lenders’ reserve requirements with another cut this week, JPMorgan Chase & Co. said today.

“This is better-than-expected monetary data, suggesting monetary conditions have started to ease,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd., who previously worked at the World Bank. Liu said he expects that the central bank may cut the reserve requirement again before the Lunar New Year on Jan. 23. “Such easing will help ensure a soft landing for the Chinese economy,” he said.

The statement posted to the central bank’s website yesterday didn’t contain a figure for China’s foreign-exchange reserves, which are usually released with lending and money supply data issued at the end of each quarter.

External Shocks

Stocks in China rose. The Shanghai Composite Index (SHCOMP) was 1.5 percent higher at 10:53 a.m. local time. The measure lost 1.6 percent last week.

The benchmark money-market rate had the biggest weekly decline (CNRR007) since November last week as the central bank refrained from selling bills to help ease a cash shortage ahead of the week-long New Year public holiday. The seven-day repo rate rose 19 basis points to 4.50 percent as of 10 a.m. in Shanghai.

The PBOC said Jan. 6 it will suspend debt sales ahead of the festival and buy securities from the market or financial institutions to boost liquidity if needed.

Zhou yesterday said in an interview with the official Xinhua News Agency that the global economy will face “a string” of difficulties in 2012 as a result of the European debt crisis, uncertainties in the U.S. and slowing growth in emerging markets. China must be ready to pick appropriate policy instruments to combat external shocks, Zhou was cited as saying.

‘Relatively Difficult’

Fighting inflation (CNCPIYOY) is not as urgent now as it was in early 2011, Xinhua cited Zhou as saying after a two-day meeting of financial regulators in Beijing. The National Financial Work meeting, which was attended by senior officials including Premier Wen, is held every five years to form development plans for the financial sector, Xinhua reported.

Wen last week pledged to fine tune monetary policy to preserve growth as business conditions in the first quarter may be “relatively difficult.” The nation’s export growth slowed in November to the weakest pace since 2009.

China is scheduled to release data for December exports, imports and trade balance tomorrow. It’s also due to issue December inflation figures on Jan. 12 and data for annual 2011 and fourth-quarter economic growth on Jan. 17, according to the statistics bureau.

The central bank’s data yesterday showed that December money supply grew at the fastest pace since July. The 12.7 percent pace reported for November was the weakest since 2001.

Ease Liquidity

Lending in December was the highest monthly figure since April (CNLNNEW). The median estimate of 18 economists surveyed by Bloomberg was for 575 billion yuan of loans in the month.

For the year, lending totaled 7.47 trillion yuan, according to the statement. The central bank may target lending in 2012 of 9 trillion yuan to 9.5 trillion yuan, said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong.

The central bank still needs to ease liquidity in the money market to achieve more lending this year, Kowalczyk said. He said there is likely to be a cut of 250 basis points this year in the amount banks have to hold as reserves, with the first cut before the Lunar New Year holiday. The PBOC’s previous reduction, announced Nov. 30, was the first since 2008.

JPMorgan expects three reductions in the reserve ratio in the first half of this year and a 15 percent increase in new lending to 8.2 trillion yuan for the full year, Hong Kong-based economists led by Zhu Haibin said in a note today.

Reduced Possibility

In contrast, Societe Generale says the central bank’s Jan. 6 announcement “significantly reduced” the probability of a cut in reserve requirements ahead of the New Year holiday and has pushed back its call for a reduction to later in the first quarter. The bank is sticking to its call for four cuts totaling 200 basis points this year, Hong Kong-based economist Yao Wei said in a note today.

Easing in monetary conditions as indicated by the December data could reduce the urgency for further policy easing, said Ken Peng, a Beijing-based economist at BNP Paribas SA.

In addition to lending and money supply, the December data showed Chinese banks added 1.43 trillion yuan of deposits in the month. These funds largely came from the release of fiscal deposits into the commercial banking system as government agencies conducted concentrated spending at the end of the year, Peng said.

A “tepid” M1 money supply growth of 7.9 percent in December suggests that the increased bank deposits may have a “lifting impact” on January money supply, Peng said.

In a separate statement yesterday, the central bank said it will continue to implement prudent monetary policy this year while maintaining policy continuity and controlling inflation expectations (CNCPIYOY). It will also make adjustments more targeted, flexible and forward looking, the central bank said.

--Henry Sanderson. With assistance from Victoria Ruan in Beijing, Fion Li in Hong Kong. Editors: John Liu, Nerys Avery.

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net

Read more...

Draghi May Copy Bernanke on Path to Low Rates

By Simon Kennedy - Jan 9, 2012 7:01 AM GMT+0700

European Central Bank President Mario Draghi may act more like Ben S. Bernanke than Jean-Claude Trichet in 2012.

With the euro area’s debt crisis pulling its economy into a second recession in three years, Draghi soon may cut the ECB’s benchmark interest rate (EURR002W) below 1 percent for the first time and help banks by further inflating its balance sheet, which already has ballooned 17 percent since he took office Nov. 1.

Such activism would mark a reversal from a year ago -- when the Trichet-led ECB was pivoting toward higher rates -- and is causing economists at Bank of America Corp. and Jefferies International Ltd. to declare that Draghi is behaving more like Federal Reserve Chairman Bernanke than his ECB predecessor. If the slump drags down Germany, Europe’s largest economy, and fans deflation, it may even prompt the bank to consider Fed-style asset buying, providing relief it now balks at for governments.

“There is a sizable difference in just two months between Trichet and Draghi,” said Laurence Boone, chief European economist at Bank of America Merrill Lynch in Paris. “If you put Bernanke at one end of a scale and Trichet at the other, then Draghi would be moving toward Bernanke.”

The likelihood of looser monetary policy leaves UBS AG forecasting the euro will record a third consecutive annual decline against the dollar. While the currency may enjoy occasional fillips on optimism that officials are stepping up their crisis-fighting, it will slide to $1.25 by the end of the year, predicts Beat Siegenthaler, a Zurich-based foreign- exchange strategist at UBS, the world’s third-largest currency trader. It ended European trading last week at $1.27.

‘Pumping Liquidity’

“The single biggest reason to expect the euro to underperform in 2012 is that the ECB is highly likely to keep pumping liquidity into the system,” Siegenthaler said.

Investors may glean their first insight into the ECB’s 2012 strategy on Jan. 12, when Draghi chairs a policy-setting meeting of its 23-member Governing Council for a third time. The Frankfurt-based central bank will leave its key refinancing rate at 1 percent, according to the median (EURR002W) of 51 forecasts in a Bloomberg News survey.

By the middle of the year, the council will reduce its benchmark to 0.5 percent, a record low, say BofA Merrill Lynch and Jefferies, as well as Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital.

Contracting Economy

Juergen Michels, chief euro-area economist at Citigroup in London, is among the most pessimistic about the economy. He estimates it will contract 1.2 percent this year and 0.2 percent in 2013 after 1.5 percent expansion last year. That will push inflation to about 1.1 percent in the second quarter of 2013 from 2.8 percent (ECCPEST) last month. The ECB’s goal is just below 2 percent.

Such a backdrop will force the ECB to cut rates to 0.5 percent in the second quarter and swell its balance sheet by buying more government and so-called covered bonds, along with easing again the collateral criteria it imposes when lending to banks, he said.

Recession indicators for the region already are flashing red. Data last week showed unemployment holding at a 13-year high of 10.3 percent (UMRTEMU) and confidence (EUESEMU) in the economic outlook falling to the lowest in more than two years. Services and manufacturing output contracted for a fourth month in December.

Household Loans

The rate of expansion in M3 money supply (ECMAM3YY), which the ECB uses as a measure of future price pressures, fell to 2 percent in November from 2.6 percent in October, while the annual growth rate for loans to households and companies slowed a percentage point to 1.7 percent from the previous month.

Driving the slide is a debt crisis that began in Greece in late 2009 and has since infected Italy and Spain, the region’s third and fourth largest economies. The year begins with Italy (GBTPGR10) still paying 5 percentage points more than Germany (GDBR10) to borrow for 10 years and facing the need to redeem about 53 billion euros ($67 billion) of debt in the first quarter.

The economic pain is set to intensify. A fiscal squeeze of almost 2 percentage points of gross domestic product this year will help push unemployment above 11 percent for the first time, JPMorgan Chase economists predict. Lending standards also may tighten as banks struggle to fund themselves.

“Either the ECB acts boldly enough to get the euro-zone confidence crisis under control, allowing global growth to regain momentum, or the crisis spirals out of control, pushing the world into a severe recession,” said Holger Schmieding, chief economist at Berenberg Bank in London.

Cheaper Currency

Not everyone is as fearful. Erik Nielsen, chief global economist at UniCredit Group in London, forecasts the euro-area economy will expand 0.6 percent this year as its cheaper currency spurs trade, allowing the ECB to keep its refinancing rate at 1 percent. The central bank’s liquidity provisions at the end of last year also have helped restrain some borrowing costs for nations including Italy and Spain.

“We think we are close to the bottom” of the turmoil, Nielsen said.

Greater stimulus would be a switch from a year ago, when inflation concerns were pushing Trichet’s ECB to shift toward rate increases. Policy makers raised their benchmark 25 basis points in April and again in July to 1.5 percent. They also debated ways to wean banks off aid before becoming addicted.

Easier monetary policy also would imply the ECB is more aggressive than when it last faced a recession in 2008. It raised its main rate even after the slump had begun, and officials later chafed at pushing it below 1 percent, because doing so might distort markets and lessen pressure on banks to recapitalize.

Near Zero

A recovering global economy then handed them a reason not to go as low as the Fed. The rate on overnight loans among banks in the U.S. has been near zero (FDTR) since late 2008, when the central bank also began a program of asset purchases known as quantitative easing.

Draghi -- like Bernanke, a former student at the Massachusetts Institute of Technology -- already has made his mark at the ECB, which is mandated to focus only on inflation; the Fed also must try to contain unemployment.

The same week Draghi, 64, became president, he oversaw an unexpected rate reduction and warned of a “mild recession,” with a second cut the next month. His central bank also loaned 523 European banks 489 billion euros for three years, an unprecedented amount and period, and weakened collateral rules, allowing its balance sheet to soar to a record 2.73 trillion euros at the end of last year.

‘More Preemptive’

“The ECB is being more preemptive and aggressive now,” said Greg Fuzesi, an economist at JPMorgan Chase in London, who predicts central bankers will cut their key rate to 0.5 percent, keep offering banks long-term cash beyond February and provide financial support for the International Monetary Fund.

Draghi’s grounding as an economist -- compared with Trichet’s background as a French bureaucrat -- is one reason for his greater pragmatism, said David Owen, chief European financial economist at Jefferies in London. Draghi was the first Italian to secure an economics doctorate from MIT in Cambridge, Massachusetts, and worked at Goldman Sachs Group Inc.

Boone at BofA Merrill Lynch says Draghi appears less committed to the “separation principle” -- the idea that the ECB should discriminate between measures to ease markets and steps to guide the economy. Changes on the ECB’s six-person Executive Board, which split under Trichet over bond-buying, also embolden him, she said.

Ignoring Germany

Two new members joined this month from the finance ministries of France and Germany, and Draghi last week agreed to put Belgium’s Peter Praet in charge of economics, ignoring calls from Germany that one of its nationals keep the job.

The ECB still may be unwilling to pare its benchmark too close to zero, to maintain a corridor between it and the smaller deposit rate (ECBRON), which it pays on overnight loans parked with it, said James Nixon, co-chief European economist at Societe Generale SA. A much lower benchmark would make it unattractive for money-market funds and banks to lend, he said.

“As the whole thrust of providing liquidity is to get money markets to work, changing incentives is not helpful,” said Nixon, who anticipates the ECB will stop cutting the refinancing rate at 0.75 percent.

If the economy keeps deteriorating even after the rate cuts and more liquidity is needed, the ECB may end up following the Fed and Bank of England by buying assets in bulk and not offsetting the purchases, said Owen at Jefferies. Such an initiative may come as soon as March and initially involve promising to buy as much as 500 billion euros of bonds across the region over three months, he said.

Unlimited Firepower

The ECB has so far refused to use its unlimited firepower to defeat the fiscal crisis. Officials warn that doing so would amount to a bailout of governments and lessen pressure on them to restore fiscal order. While it has bought the bonds of some stressed countries, Draghi says the program is aimed at stabilizing markets and is temporary and limited.

The result has been ECB asset purchases totaling about 3 percent of GDP, compared with more than 15 percent by the Fed and Bank of England, according to Berenberg’s Schmieding.

Bundesbank President Jens Weidmann, who opposed buying Italian and Spanish bonds, said Jan. 3 it would be “profoundly wrong” to step up the purchases to contain the fiscal crisis. The influence of Germany’s central bank at the ECB shouldn’t be underestimated and means it would back quantitative easing only if its price-stability mandate is jeopardized, said Stephen Jen, managing partner at SLJ Macro Partners LLP in London.

‘Fiscal Compact’

Draghi has echoed German officials in demanding governments introduce a “fiscal compact” to control budgets in the future.

“Mr. Draghi is closer in his thinking and ideology to the views held within the Bundesbank than people appreciate,” Jen said.

A deep recession in which inflation fell short of the ECB’s aim still may spur quantitative easing. Before he left the Executive Board last month, Lorenzo Bini Smaghi told the Financial Times he saw “no reason” why the bank couldn’t take such a step if “economic conditions justify it.”

Ed Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York, says the ECB already has joined the “QE Club” indirectly with its lending to banks, which then can use the funds to buy government debt.

Save Banks

That view is rejected by Stephen King, chief economist at HSBC Holdings Plc in London, who says the ECB is, for the moment, trying to save banks and keep open the channel through which lower interest rates are transmitted rather than actively aid growth and governments.

ECB data also suggest banks are recycling the cash into overnight deposits at the central bank rather than lending it or purchasing bonds. Financial institutions left 455.3 billion euros with the ECB on Jan. 5, a record amount.

The irony is that if it ultimately buys more government debt to defend price stability from deflationary forces, the ECB could quell the debt crisis anyway by reducing bond yields, King said.

“Things have to get worse in the euro zone before they get better,” he said. “If you have a recession and concerns of too-low inflation, you have a conventional reason for unconventional policy.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Read more...

Merkel Meets Sarkozy to Draft EU Fiscal Rules as Part of Euro-Rescue Plan

By Patrick Donahue - Jan 9, 2012 4:03 PM GMT+0700

German Chancellor Angela Merkel and French President Nicolas Sarkozy will drive forward their agenda for stricter budget rules as they seek to craft a master plan for rescuing the euro over the next three months.

The euro and stocks rose as the two leaders prepared to meet in Berlin to flesh out a rulebook for budgetary discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. At their first meeting of 2012, they will also discuss a financial-transaction tax and a Jan. 30 European summit that will focus on bolstering growth.

The German and French leaders have sponsored a plan to draw up new fiscal guidelines by March to resolve a crisis that began in Greece more than two years ago. As the contagion moves to the euro-area’s core, policy makers are struggling to persuade investors they can contain the risk and assure the single currency’s survival. Merkel and Sarkozy will meet at 11 a.m. and hold a joint press conference at about 1:30 p.m. Berlin time.

Fixing the crisis requires more “German largesse” through the current bailout programs, Goldman Sachs Group Inc. Chief European Economist Huw Pill told a London conference today. “Starting today with Mrs Merkel’s meeting with Mr Sarkozy, it’s important we do start to see some progress.”

Euro, Stocks

The euro rose 0.4 percent to trade at $1.2769 at 9:46 a.m. Frankfurt time. The single currency has extended its decline against the U.S. dollar last year, sliding 1.5 percent so far this year. The Euro Stoxx 50 (SX5E) Index rose 0.3 percent.

Borrowing costs for sovereign debt have increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region’s most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.

The meeting will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on Jan. 30. Italian Prime Minister Mario Monti also will visit Berlin this week, and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.

Among the various moving parts in planning to resolve the crisis are Greek negotiations with bondholders, in their seventh month, to cut the country’s debt load in half. Olivier Blanchard, the International Monetary Fund’s chief economist, said Jan. 6 that debt reduction for Greece “could have to be larger” and the numbers will have to be worked out.

‘Not Good’

“The numbers are not good” for Greece, Blanchard said on CNBC television. “There’ll have to be substantial haircuts.”

Assembling the fiscal compact, which anchors debt limits into national constitutions and accelerates sanctions for violators, will entail creating a framework for euro members and other European Union states to draw up rules among themselves. The refusal by the U.K. to participate in a plan to alter EU treaties could complicate efforts by euro-area governments seeking to use EU institutions to police any new debt scheme.

Europe is “slowly but surely” mastering the debt crisis, even if a solution has taken longer than hoped, European Union President Herman Van Rompuy told Belgian broadcaster RTBF.

“We’ll put this crisis behind us, but it has taken longer than we hoped for,” Van Rompuy said yesterday. “We often acted a bit late and our decisions were often a bit too weak. But in most cases, we’ve worked in the right direction.”

Belgian Test

Europe’s newfound powers over national taxing and spending will get their first test this week when the European Commission prods Belgium to make deeper savings just a week into the budget year.

Under authority granted last month, the commission on Jan. 11 will decide whether an emergency Belgian spending freeze is enough to put the deficit on track to fall below euro-area limits in 2012. A negative verdict would expose Belgium to potential sanctions in a precedent-setting trial of rules.

Merkel and Sarkozy may also discuss funding for the European bailout fund today. Germany’s opposition to increasing the so-called firewall for struggling states was underscored last week, with German lawmakers expressing their resistance to raising the 500 billion-euro ($636 billion) ceiling for the permanent European Stability Mechanism, scheduled to go into effect this year.

No More

“There won’t be 1 cent more,” Markus Ferber, a European Parliament lawmaker from the Merkel-aligned Christian Social Union, said at a party meeting in the Bavarian town of Wildbad Kreuth on Jan. 5. Hans Michelbach, the ranking CSU member in the German parliament’s finance committee, said in an interview that “you can’t keep throwing more money at the problem, and that’s what increasing the ceiling would mean.”

The German and French leaders are also likely to discuss options for introducing a financial-transaction tax after Sarkozy said that France was ready to go it alone if necessary. Germany favors a Europe-wide tax.

Bringing the Italian premier into the fold contrasts with the tendency by Merkel and Sarkozy to hone a Franco-German position on crisis matters. It may mark a vote of confidence in the unelected Monti, who has pushed through budget cuts demanded by the EU after the resignation of Silvio Berlusconi.

Comments by Sarkozy and Italian Economic Development Minister Corrado Passera suggested a joint push for a greater European Central Bank role, a move Merkel has resisted.

Europe must have a “real central bank with the tools to do the job on stability and liquidity in the markets,” Passera said at a conference in Paris last week. Sarkozy said “all EU members and institutions must meet their responsibilities.”

To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net.

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

Read more...

No Consensus on Chinese Stocks With Guotai Seeing 36% Gain

By Bloomberg News - Jan 9, 2012 2:34 PM GMT+0700

Even after a two-year bear market wiped 33 percent from China’s benchmark stock index (SHCOMP), there’s no consensus on the direction in equity prices this year among the nation’s biggest and most accurate brokerage firms.

The Shanghai Composite Index (SHCOMP) will gain 36 percent because slowing inflation will let policy makers cut interest rates and bank reserves, according to Zhang Han, a strategist at Guotai Junan Securities Co., the only major brokerage to foresee the slump. China International Capital Corp., led by the son of a former premier, forecasts a “slight” drop since the economy isn’t slowing enough to permit “aggressive” reductions in borrowing costs, said Hao Hong, CICC’s global equity strategist.

While China avoided the global recession in 2009 and is growing more than twice as fast as the world economy, the index has been the worst among the 10 biggest markets in the past two years, according to data compiled by Bloomberg. The central bank boosted rates and reserve requirements to curb property prices and inflation that reached a three-year high in July. Premier Wen Jiabao said on Jan. 3 that business conditions may be “relatively difficult” this quarter and monetary policy will be adjusted.

“Liquidity will improve as a result of the government’s easing policies,” Zhang said in a telephone interview from Shanghai on Dec. 21. “That’ll help stocks to rebound in the first quarter.”

Earnings Growth

Zhang forecasts the Shanghai Composite, which tracks mostly yuan-denominated A shares, will rise to 3,000 this year from 2,199.42 at the end of 2011. Overseas fund managers need to be approved as qualified institutional investors to buy A shares.

Corporate earnings may rise 10 percent this year, Zhang said. Profit growth in the MSCI BRIC Index (MXBRIC) of the four largest emerging markets will slow to 5 percent from 19 percent last year, according to more than 12,000 analyst estimates compiled by Bloomberg as of Dec. 28.

The Shanghai Composite rose 2.9 percent at the close, the biggest gain in three months. It dropped 1.6 percent in the first week of trading in 2012, compared with gains of more than 2 percent for gauges in Brazil, Russia and India, the other BRIC nations.

HIT Shouchuang Technology Co., a department-store owner based in Ningbo city, was the Chinese index’s best-performing (SHCOMP) stock last week with a 12 percent gain. Markor International Furniture Co., a furniture maker located in the western city of Urumqi, tumbled 21 percent for the worst performance.

The largest advance in the Shanghai Composite last year was a 195 percent surge by Shanghai-based China Fortune Land Development Co. Irico Display Devices Co., a manufacturer of television picture tubes based in Shaanxi province, sank 66 percent, the biggest decline of 2011.

Record Low

The Shanghai gauge traded at a record low (SHCOMP) 8.7 times estimated profit on Jan. 5, compared with a ratio of 9.2 for Brazil’s Bovespa Index, 5.4 for Russia’s Micex Index and 13.8 for India’s BSE India Sensitive Index, according to data compiled by Bloomberg.

Goldman Sachs Group Inc. (GS), which coined the term BRIC a decade ago, said in a Dec. 7 report that economic growth for the largest emerging nations may have peaked because of a smaller supply of new workers.

Chinese stocks will “struggle” this year as national economic growth (CNGDPYOY) exceeding 9 percent and inflation at 4 percent won’t warrant an “aggressive” easing, CICC’s Hong wrote in a Dec. 16 e-mail. Equities may plunge in the first half before recouping losses later in the year, the strategist said, without giving an index target because of company policy.

Slowdown, Volatility

‘The theme is slowdown and volatility,’’ said Hong. “It would be hasty to make a move now.”

Equities are on the “brink of capitulation” after more than 100 stocks in the Shanghai and Shenzhen (SZCOMP) stock exchanges plunged by the maximum daily limit on Jan. 5, Hong wrote in a report today. He favors utility, energy, telecommunications and consumer-staple companies.

Beijing-based China Shenhua Energy Co. (601088), the nation’s biggest coal producer, trades for 9.4 times estimated profit, data compiled by Bloomberg show. Shanghai-based China United Network Communications Ltd. (600050), the best-performing telecommunications stock in the CSI 300 Index last year, is valued at 18.9 times.

Hong isn’t in the majority in the brokerage industry. Twelve of 13 firms surveyed by Bloomberg forecast Chinese stocks will rise this year. The nation’s equities haven’t posted three straight years of declines since the Shanghai Stock Exchange opened in 1990.

Templeton’s Mobius

China will boost domestic consumption to offset an export slowdown and allow for faster gains in the yuan to tame inflation, Mark Mobius, who helps oversee about $40 billion as executive chairman of Templeton Emerging Markets Group, said in an e-mail on Dec. 14.

“The Chinese leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest gross domestic product growth of any major country in the world,” Mobius said. He favors consumer stocks (SHCOMP) because they will benefit most from rising Chinese incomes.

Kweichow Moutai Co. (600519), the country’s largest maker of baijiu liquor, is valued at 17.9 times profit. Net income for the company, based in Guizhou province, is expected to rise 37 percent in 2012, according to analyst estimates compiled by Bloomberg.

Slowing Growth

China’s economy has expanded at an average pace of 10.3 percent annually over the last decade, data compiled by Bloomberg show. Growth slowed to 9.1 percent in the three months ended Sept. 30 from 9.5 percent in the previous quarter as shipments to Europe, China’s biggest export market, slumped. While manufacturing contracted in November for the first time since February 2009, it expanded last month, according to China Federation of Logistics and Purchasing data.

UBS AG cut its prediction on Nov. 29 for growth in 2012 to 8 percent from 8.3 percent, while Citigroup Inc. (C) reduced its forecast to 8.4 percent from 8.7 percent. Average economic growth in the BRIC nations will slow to 6.1 percent this year from a high of 9.7 percent in 2007, according to September estimates by the International Monetary Fund. The IMF estimates global production will expand 4 percent.

Guotai’s Zhang said China’s economy will “bottom out” by the second quarter and easing inflation will allow the central bank to reduce interest rates for the first time since 2008. Chinese consumer-price growth jumped to a three-year high of 6.5 percent in July before slowing to 4.2 percent in November, close to the government’s full-year target of 4 percent.

Property Developers

The People’s Bank of China cut banks’ reserve-requirement ratios from a record high for the first time in three years on Nov. 30. The central bank may lower the ratios as much as four times this year to encourage lending to small companies hurt by a credit squeeze, Zhang said. He recommends shares of property developers, brokerages and chemical producers.

Shenzhen-based China Vanke Co. (000002) and Guangzhou-based Poly Real Estate Group Co. are the nation’s largest publicly traded property companies. Vanke and Poly Real trade at record-low valuations of 6.5 times and 6.6 times estimated profit respectively, data compiled by Bloomberg show.

The companies’ valuations have declined the past two years as the government introduced limits on owning property to cool surging prices. China’s home prices fell for a fourth month in December, according to SouFun Holdings Ltd., the nation’s biggest real estate website. The decelerating economy may spur the government to relax enforcement on property restrictions by the second quarter, Andy Rothman, a China macro strategist at CLSA Asia-Pacific Markets, said in a Dec. 22 interview.

Debt Crisis

Brokerages underestimated inflation last year, leading to overly optimistic predictions for stocks, according to Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse Asset Management Co., which oversees about $8.3 billion.

A sustained rebound for Chinese equities will depend on whether Europe can contain its sovereign debt crisis, CICC’s Hong said. China’s exports to the European Union rose 5 percent in November, a quarter of the pace reported in July and August, according to customs data on Dec. 10. The region accounts for 18 percent of Chinese exports, according to Shanghai-based Shenyin & Wanguo Securities Co.

Premier Wen said China faced “problems of weakening external demand” in his Jan. 3 statement. China will maintain a “prudent” monetary policy and a “proactive” fiscal policy this year, the official Xinhua news agency reported Dec. 10.

Chinese Banks

Nomura Holdings Inc. (8604) forecasts Shanghai’s A shares will rebound between 15 percent and 20 percent in 2012 after valuations dropped to the cheapest in Asia, Michael Kurtz, chief Asian equity strategist, said at a Dec. 19 press conference in Beijing. The brokerage favors Chinese financial, energy and material companies.

Industrial & Commercial Bank of China Ltd. (601398), the nation’s biggest lender, and Bank of Communications Ltd., the country’s fifth largest, trade at 6.2 times and 4.9 times estimated earnings, according to data compiled by Bloomberg. That compares with 8.4 times for financial companies in the MSCI Emerging Markets Index.

The Chinese banks may report annual net income increases of at least 19 percent in 2012, analyst estimates (601328) compiled by Bloomberg show.

“We remain positive on Chinese equities,” said Templeton’s Mobius. “China is one of the fastest growing major economies in the world and is expected to play a major role in the global economy.”

Major Brokerages’ Forecasts for Chinese Stocks in 2012
----------------------------------------------------------
Brokerage             Index                          Target
CICC                  Shanghai Composite               none
Citic Securities      Shanghai Composite             *2,800
Shenyin & Wanguo      Shanghai Composite              3,000
Guotai Junan          Shanghai Composite              3,000
Galaxy Securities     Shanghai Composite              3,100
GF Securities         Shanghai Composite              3,100
Sinolink Securities   Shanghai Composite              3,200
BNP Paribas           Shanghai Composite        20-25% Gain
UBS                   Shanghai Composite     Up to 30% Gain
Citigroup             Shanghai A-Share Index  **2,400-2,800
Credit Suisse         Shanghai A-Share Index          2,900
Nomura                Shanghai A-Share Index    15-20% Gain
Goldman Sachs         CSI 300 Index                   3,200
----------------------------------------------------------
*Citic’s prediction is for the first quarter.
**Citigroup sees A share-index trading in range and may reach as
high as 3,200

--Zhang Shidong, Allen Wan in Shanghai. With assistance from Zheng Lifei in Beijing and Bonnie Cao in Shanghai. Editors: Darren Boey, Laura Zelenko

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Allen Wan in shanghai at awan3@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

Read more...