Technical Analysis for Major Currencies

Daily Forex Technicals | Written by Crown Forex | Sep 15 08 07:25 GMT |

EURO Trading below the 1.4550 level has to pressure the pair to the downside further where as we said yesterday, this level is where the medium term and short term trends intersect. Today, after the sharp fall seen, the upside correction that occured from 1.4215 reaching the 1.43 level was enough to add bearish momentum to the pair as we still expect high volatility that perhaps will take the pair to the next medium term target at 1.41. The trough of the bearish movements seen yesterady was at the 200% correction level for the upside wave that ended yesterday. From here we see the importance of the 1.4230 level but today we expect further downside movements where if the pair closes below 1.4230, our next target will be at 1.4120. The trading range for today is among the key support at 1.4085 and key resistance at 1.4420 The general trend is to the downside as far as 1.5080 remains intact with the targets at 1.4040 and 1.3860 Support: 1.4245, 1.4230, 1.4175, 1.4120, 1.4085 Resistance: 1.4295, 1.4320, 1.4345, 1.4395, 1.4420 Recommendation: Sell the pair below 1.4320 with targets at 1.4215 and 1.4125 and stop loss above 1.4430 GBP The sterling pound also reached the 23.6% correction after strong bullish movements that ended trading last week. We could witness high volatility on the pair as short term momentum indicators show a downside correction for the vigorous upside movements. If trading remains below the 1.8080 level, this will confirm furthe downside movements today. The trading range for today is among the key support at 1.7780 and the key resistance at 1.8370. The general trend is to the downside assured by the breach of the 1.7800 levels with targets at 1.7600 and 1.7280 Support: 1.8000, 1.7940, 1.7900, 1.7830, 1.7780 Resistance: 1.8080, 1.8130, 1.8215, 1.8340, 1.8370 JPY With trading below the 106.00 level, this has opened the way towards the 38.2% correction at 105.00. We expect to witness sideways volatility on the pair with tendencey to the downside for today where the medium term trend remains to the upside but if the pair declined and remains below the 105.00 level, we might witness this trend weakening. The trading range for today is among the key support at 104.60 and the key resistance at 107.60. The general trend is to the upside as far as 103.00 remains intact with targets at 111.00 and 113.24 Support: 105.50, 105.00, 104.85, 104.60, 103.90 Resistance: 106.05, 106.40, 106.60, 107.20, 107.60 CHF Similar to other pairs, the Swiss Franc also has undergone a correction just above the 23.6% fibonacci level to assure that this is just a weak dollar wave. On the other hand, the time has come to see a sideways correction for the pair where we expect it to continue for the remainder of the day but with tendency to the upside after the pair has gathered momentum due to it reaching the mentioned correction at 1.1088. The trading range for today is among the key support at 1.0990 and the key resistance at 1.1310. The general trend is to the upside as far as 1.0570 remains intact with targets at 1.1025 and 1.1455 Support: 1.1110, 1.1085, 1.1060, 1.1010, 1.0990 Resistance: 1.1190, 1.1200, 1.1250, 1.1285, 1.1380 CAD The pair has breached the key support for the short term upside channel at 1.0625 but we see that the 1.0560 level has enough strength to help the pair rebound to the upside yet we expect the mentioned level to be broken to test the level at 1.0500. However, at the end we will notice that these downside movments are nothing but a correction for the upside medium term wave. The trading range for today is among the key support at 1.0475 and the key resistance at 1.0810. The general trend is to the upside as far as 1.0350 remains intact with targets at 1.0825 and 1.1000 Support: 1.0575, 1.0560, 1.0530, 1.0500, 1.0475 Resistance: 1.0660, 1.0695, 1.0715, 1.0755, 1.0810 Crown Forex disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

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Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Sep 15 08 07:29 GMT |

Overview & economic commentary The minutes of the BoE September MPC meeting are the highlight of the UK event calendar this week. Market participants will be on the lookout for any changes in the discussions and ultimately the MPC vote that would signal a possible change in the balance of risks that interest rates could be cut once CPI inflation peaks. The testimony to the Treasury Select Committee last week gave no indication that the MPC voted differently this month compared to July and August when there was a 3-way split, but we think Besley could drop his call for a rate hike. UK CPI inflation data for August are due on Wednesday and are forecast to show a rise to 4.9% from 4.4% in July. The threat of high inflation becoming entrenched - a possibility supporting our call for no change in base rate - was highlighted last week when the quarterly inflation survey from the BoE revealed that inflation expectations rose to 4.4% in Q3. UK unemployment figures will be published on Thursday and could fuel fears about the economy. The total claimant count has started to rise by an average of 20,000 since June and with various sectors under pressure from falling demand, we suspect that unemployment is likely to drift upwards over the coming months as companies cut costs. In the US, we expect the Fed to keep interest rates steady at 2.0% tomorrow. The troubled banking sector and the rise in unemployment rate above 6% in August could lead the Fed to issue a less hawkish statement and lead FOMC voter Fisher to drop his call for higher interest rates. Interest rates are also forecast to stay unchanged in Switzerland at 2.75% when the SNB meets on Thursday. Currency commentary Developments in the US banking sector came to a head this weekend and the threat of bank failures triggered a major clearout in stocks/commodities and has already led to a sharp fall in the dollar. The Fed rate decision and statement on Tuesday will probably be key to judge whether there is any chance of a shift in bias and whether futures markets are right to price in 30% odds of an interest rate cut by year-end. Sterling managed to recover some ground last week and is bid above 1.80 against the dollar this morning. UK CPI data and the MPC minutes may be pivotal later this week to where sterling goes from here. €/£ moved back to the middle of the trading range around 0.80 (£/$ above 1.77), but weak euro zone data will probably be required to prevent a run-up back towards the highs of around 0.81. A heavy sell-off in global stocks have propped up demand for the chf and the yen. With regard to the SNB, we wonder whether the 14% rise in $/chf since July may result in a more hawkish statement. Major data and events today Today US Empire manufacturing survey, capacity use, industrial production French current account ECB speakers: President Trichet (10:00), Tumpel-Gugerell Tuesday UK CPI, RPI, RPIX, official house prices (DCLG) US CPI, TICs, FOMC interest rate decision (no change at 2% expected) German CPI, ZEW survey EU-15 CPI Canada manufacturing shipments RBA publishes minutes of September monetary policy meeting Wednesday UK unemployment, average earnings, unit wage costs, CBI industrial trends survey US current account, housing starts, building permits EU-15 trade balance Japan interest rate decision (no change at 0.5% expected) Canada int’l secs transactions BoE publishes minutes of 3/4 September MPC meeting RBA Governor Stevens speaks Thursday UK retail sales, PSNCR, PSNB, money supply, M4 sterling lending US initial claims, Philadelphia Fed survey Canada wholesale sales BoJ publishes its monthly economic report BoE speaker: Dale SNB interest rate decision (no change at 2.75% expected) Friday German producer prices Japan leading index, coincident index ECB speaker: Stark Chart: Rise in US unemployment and a troubled banking sector have led futures markets to price in no change in interest rates until March-09 Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.

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Swinging Real, Won Point to More Pain Amid Slowdown

By Liz Capo McCormick

Sept. 15 (Bloomberg) -- Swings in emerging-market currencies may foreshadow further losses for traders already suffering from the broadest declines this decade.

Volatility in options covering currencies from the Brazilian real to the South Korean won is rising at a faster rate than those for the euro and pound, according to JPMorgan Chase & Co. indexes. Rising volatility was an element of past financial market upheavals, including the global slump in stock markets from 2000 through 2002 after the technology bubble burst.

The trigger this time is speculation that developing nations can no longer withstand simultaneous slowdowns in the economies of the U.S., Europe and Japan and the resulting lower appetite for high-risk assets. The 26 emerging-market currencies tracked by Bloomberg are down an average 5.5 percent since June, compared with an increase of 2.2 percent in the first half of 2008.

``Anyone who still believes strongly in the decoupling theory on an economics basis has to throw that book out the window now,'' Mike Moran, senior currency strategist at Standard Chartered Bank in New York, said. ``This has been a second awakening for the currency markets, with the first being that the secular dollar weakness the past couple years has clearly come to an end.''

Morgan Stanley, the second-biggest U.S. securities firm, is advising clients to sell emerging currencies in Asia, Latin America, Eastern Europe and the Middle East, and buy the dollar. Stock valuations suggest that earnings in emerging markets will drop as much as in 2001-2002, when profits fell 18 percent from their peak, New York-based Morgan Stanley estimated.

`Getting Worse'

``Any of these emerging currencies could move down another 5 percent to 10 percent,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London. ``This is a three-month story already, and it's getting worse and worse. What we are dealing with is the aftermath of an energy shock and a credit crunch that is hitting every single economy.''

Emerging-market currencies led by the Czech Koruna and the Polish zloty gained today as Lehman Brothers Holdings Inc. prepared to file for bankruptcy, reversing a rally in the dollar.

The global economy will expand 2.8 percent in 2009, just 0.3 percentage point above the pace deemed a worldwide recession and last witnessed in 2001, according to a report released by Zurich-based UBS AG on Sept. 11. Back then, the currencies of developing economies fell an average 6.8 percent.

The biggest losers since June in emerging markets have been the Iceland krona, Bulgarian lev and Brazilian real. Each has fallen more than 10 percent. Only China's yuan has appreciated, gaining 0.15 percent.

Sell Rupee, Won

India's rupee and South Korea's won may decline the most because the ability to buy and sell financial assets such as stocks is easier for foreign investors in those countries than in most other developing nations, Jen said.

The rupee today touched 45.995 per dollar, a two-year low, and has weakened 6.2 percent since mid-year. The won, which has tumbled 8.8 percent since July, was trading at 1,111.35 against the U.S. currency as of 12:30 p.m. in Singapore. It reached 1,159 on Sept. 3, the lowest level since August 2004.



Now, rising volatility may extend declines in emerging- market currencies. Traders use implied volatility to gauge expectations for currency swings and in setting options prices.

Volatility was an element of past upheavals, including the global slump in stock markets from 2000 through 2002 after the technology bubble burst. Swings in developing-nation exchange- rates then outpaced those of the major economies by almost 6 percentage points, according to New York-based JPMorgan indexes.

`Driving Factor'

``Movements in implied volatility are better than any backward looking indicator,'' said Gordian Kemen, a fixed-income strategist at Lehman Brothers Inc. in New York. ``It's very forward looking. When volatility goes up it many times becomes a driving factor on its own.''

Options indicate traders expect the currencies to fluctuate at an annualized rate of 11.91 percent, compared with 8.71 percent on July 25. That's just below the peak of 12.5 percent going back through 2000, when JPMorgan began tracking the data.

What's more, volatility implied from emerging-market options surpassed that of major currencies this month for the first time since June.

JPMorgan's implied volatility index for emerging economies three-month options, was 11.91 percent at the end of last week; while its index for developed nations was 11.57 percent. That's a switch from the past year, when volatility in developed nations averaged 1 percentage point more than emerging markets as investors bet a rise in commodity prices produced in places like Brazil, India and Russia would allow their economies to weather a U.S.-led slowdown.

Reserves Bolstered

One-month implied volatility on options for the won more than doubled to almost 23 percent, the highest since 1999, from 10 percent in July. Implied volatility on the rupee more than tripled to about 13 percent from 4 percent in February.

The rise in commodities prices has bolstered the reserves of many emerging markets, meaning they may fare better now than in prior bouts of economic weakness, according to Alex Patelis, head of international economics for Merrill Lynch & Co.

``Yes, it's not pleasant, but it's not as bad as it used to be,'' Patelis said in a Bloomberg Radio interview. ``The reason is the shock is emanating from the United States this time around, rather than from emerging markets themselves.''

Foreign-exchange reserves in Brazil have risen 27 percent over the past year, compared with increases of 43 percent in Russia, 36 percent in China and 25 percent in India, according to data compiled by Bloomberg.

Snap-Back

The potential for a snap-back in stock markets may limit any declines in exchange rates.

Declines in oil, nickel and wheat from records have pushed the MSCI Emerging Market Index down by more than a third since October, leaving the index 25 percent below its 200-day moving average. Over the past two decades, the difference grew this wide only in the aftermath of Sept. 11, the $40 billion Russian default and Mexico's currency devaluation in 1994. Each time, the index rallied 20 percent or more in the next three months.

While the International Monetary Fund expects growth in emerging markets may slow to 6.7 percent next year from 6.9 percent in 2008, that's better than advanced economies, which are likely to decelerate to 1.4 percent from 1.7 percent.

And though volatility is rising, some strategists still anticipate gains in emerging markets. The rupee is forecast to rebound to 43.53 per dollar, while the won will trade at 1,109 per dollar by year-end, according to estimates of at least 24 contributors surveyed by Bloomberg.

Brazilian Real

Working against emerging-market currencies is an easing of inflation pressures as commodities including gold and oil decline, meaning central banks have scope to leave interest rates unchanged, or even cut them, said Standard Chartered's Moran.

Brazil's real fell to the lowest level since February on Sept. 11, weakening to 1.8374 per dollar, after central bankers split on whether to raise borrowing costs further. The currency is little changed versus the dollar since December, after almost doubling in the previous five years.

``Emerging market volatility is playing catch-up,'' said Naomi Fink, a Tokyo-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``There is going to be a further re-pricing of risk that will affect emerging markets. Credit was plentiful in the emerging market countries too.''

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

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Forex Technical Update

Daily Forex Technicals | Written by Rcpl Forex | Sep 15 08 07:06 GMT |

Euro: Euro's pullback rally was witnessed on Friday that took Euro from the lows of 1.3882 to 1.4480 (21 daily EMA) levels despite stronger Michigan Survey of the US. Strong resistance is expected at 1.4680 levels (38.2% retracement). The daily stochastic is supporting a strong upside while the hourly and 4-hourly is overbought and some downside could be witnessed. Initiate shorts around 1.4430-40 levels targeting 60 pips intraday.(Eur/Usd:1.4420). Pound: The long awaited relief rally in pound was witnessed in the late US session on Friday as USD delivers lower than expected PPI numbers. The hourly and 4-hourly charts show slight downside whereas the daily stochastic indicates buying pressure. Strong resistance is expected around 1.8390 level (200 4-hourly EMA) where shorts can be accumulated. On the downside support is at 1.7800 (21 & 55 EMA 4-hourly EMA). (Gbp/Usd: 1.8052). Yen: Usd/Jpy pair witnessed a 110 pips sideways movement on Friday's session, however opened weak with a gap today at 105.26 levels. The 4-hourly and daily stochastic are showing further downside. Upside could be curbed around 107 levels. Intraday shorts can be initiated at those levels since the bias remains on the downside for the pair. (Usd/Jpy 105.85). Rupee: Rupee was weakest since Nov 2006 this morning as it shied just 4 paisa from 46 levels as against its Friday's close of 45.75. Fall in Asian stocks still raises concerns of further fund outflow. Rupee fell 2.4% last week, taking the year's loss to 16% against the rampaging dollar. Easing of crude oil prices also adds to the rupee weakening. A short term reversal can be witnessed with rupee strengthening to 45 levels. Exporters should partially hedge their near term exposures. (Usd/Inr: 45.91). Swiss Franc: Usd/Chf pair weakened almost 110 pips from the highs of 1.14 levels on Friday. Further, the pair opened with a gap-down of almost 145 pips this morning and is currently trading around 1.11 levels. The hourly & 4-hourly charts are oversold while Daily & weekly charts are overbought and shows further correction. Crucial resistance comes in at 1.1225 levels (55 Daily EMA) where shorts can be considered targeting 1.10 levels. Focus is on the Swiss Retail Sales & PPI. (Usd/Chf: 1.1120). Australian Dollar: Aussies recovered almost 400 Pips in the last two trading sessions on the back of correction in USD against all major crosses and Gold. It is trading just above an important level of 0.8190 (55 4-hourly EMA). Sustained trading above this level may take AUD to 0.8330 (100 4-hourly EMA). However with overbought 4-hourly and hourly, slight correction upto 0.8170 levels could be witnessed. (Aud/Usd-0.7970). Gold: Gold rebounded strongly after touching the lows of $735 last week. Currently Gold is trading around $783 with resistance coming in at $803 (21 Daily EMA & 100 4-hourly EMA). Although the 4-hourly stochastic is extremely overbought, further upside upto $800 could be witnessed as daily chart is oversold. (Gold: $783.35). Dollar index : Dollar index touched the psychological 80 levels last week however, could not sustain at those levels. Currently trading at 77.67 levels, the stochastic indicates further downside at 60.41%. RCPL FOREX www.rcplforex.com DISCLAIMER These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsible for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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FX Technical Analysis

Daily Forex Technicals | Written by Mizuho Corporate Bank | Sep 15 08 06:14 GMT |

EURUSD Comment: A massive 'spike low' and 'doji' on the weekly chart, gapping higher today, as we recover from the sharpest ever sell-off. We ought to see follow-through to this move this week allowing the Euro to recover towards 1.4900. Strategy: Buy at 1.4395, adding to 1.4255; stop below 1.4140. Short term target 1.4700, then 1.4900. Direction of Trade: ↗ Chart Levels: Support Resistance 1.4340 1.4482 1.4255* 1.4500 1.4150 1.4545 1.4045 1.4700 1.3882** 1.4900* GBPUSD Comment: Bouncing strongly from very oversold levels. Expect more follow-through today as we rally towards retracement resistance and the 26-day moving average at 1.8350. Strategy: Buy at 1.8110, adding to 1.7935; stop below 1.7750. Short term target 1.8300, then 1.8600. Direction of Trade: ↗ Chart Levels: Support Resistance 1.7995 1.8125 1.7935 1.8280 1.7835 1.8350 1.7665 1.8500 1.7535 1.8600 USDJPY Comment: Gapping lower in holiday-thin markets as we break below the Ichimoku 'cloud'. This is very thick and should cap prices this week, bearing down over the coming month, as financial markets unravel quickly. Think, evaluate carefully, move tactically, and remember, cash is king. Strategy: Sell at 105.85, adding to 106.70; stop well above 107.25. Short term target 105.50/105.25, then 104.00 and the 103.25. Direction of Trade: ↘ Chart Levels: Support Resistance 105.50 106.15 105.26* 106.70 104.99 106.90 104.40 107.25* 103.77* 108.00* EUR/JPY Comment: Yen crosses are taking a breather as we let other currencies catch up. We continue to expect consolidation today, and maybe all week, as we prepare for another massive slide later this month. Strategy: Sell at 152.30; stop well above 153.60. Short term target 150.85, then 149.75 again. Direction of Trade: →↘ Chart Levels: Support Resistance 151.90 153.00 150.81 153.56 150.60 154.00 150.15 156.00 149.50 157.01* Mizuho Corporate Bank Disclaimer The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

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Singapore Stocks: Cosco, Singapore Exchange, Singapore Telecom

By Simeon Bennett and Chen Shiyin

Sept. 15 (Bloomberg) -- Singapore's Straits Times Index declined 74.72, or 2.9 percent, to 2,495.95 at the 12:30 p.m. trading break, on course for its lowest since September 2006. Just one of the benchmark gauge's 30 constituents advanced.

The following companies rose or dropped in Singapore trading. Stock symbols are in parentheses.

Bank stocks: DBS Group Holdings Ltd. (DBS SP), the city's biggest bank, fell 40 cents, or 2.4 percent, to S$16.62, its fifth straight day of losses. United Overseas Bank Ltd. (UOB SP), Singapore's No. 2 bank, declined 66 cents, or 3.6 percent, to S$17.90. Oversea-Chinese Banking Corp. (OCBC SP), Singapore's third-largest, lost 24 cents, or 3.1 percent, to S$7.45.

Financial stocks fell across Asia after Lehman Brothers Holdings Inc., once the fourth-largest U.S. investment bank, said it intends to file for bankruptcy and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

Shipbuilders: Cosco Corp. Singapore Ltd. (COS SP), the shipbuilding and bulk unit of China's biggest shipping company, tumbled 14 cents, or 8.3 percent, to S$1.55, on course for its lowest since April 1999, on concern that slowing global economic growth will hurt demand for new vessels and bulk shipping. Yangzijiang Shipbuilding Holdings Ltd. (YZJ SP), a Chinese shipbuilder, tumbled 4 Singapore cents, or 6.9 percent, to 54 cents. The shares have both plunged 73 percent this year, the biggest declines on the Straits Times Index.

``Shipyards are cyclical stocks that will be affected by the global slowdown,'' said Daphne Roth, Singapore-based head of equity research in Asia at ABN Amro Private Bank, with about $30 billion of Asian assets. ``Cosco Singapore hasn't won any orders this year and with a lot of orders already contracted, there's concern about oversupply in 2009.''

Singapore Exchange Ltd. (SGX SP), the operator of the city- state's securities and derivatives markets, slumped 21 cents, or 3.4 percent, to S$5.91, sliding to the lowest since January 2007. Citigroup Inc. cut its share-price estimate by 27 percent to S$4.70 and reiterated its ``sell'' rating on the stock, saying a looming recession will weigh on turnover.

Singapore Petroleum Co. (SPC SP), the city-state's only publicly traded refiner and explorer, dropped 18 cents, or 4 percent, to S$4.37, poised for its lowest since March 2007. The company cut fuel prices at its service stations by 5 Singapore cents per liter, it said in a Sept. 12 statement after the close of trading.

Singapore Telecommunications Ltd. (ST SP), Southeast Asia's largest phone company, fell 12 cents, or 3.6 percent, to S$3.24, the biggest drag on the Straits Times Index. The company will review a decision of the Indonesian Supreme Court to uphold a ruling that Temasek Holdings Pte breached the nation's anti- monopoly laws before deciding its course of action, Singapore Telecommunications said.

The court upheld a ruling Sept. 12 by the competition regulator, which said Temasek breached antitrust laws by using indirect stakes in PT Telekomunikasi Selular, known as Telkomsel, and PT Indosat to fix prices.

To contact the reporters on this story: Simeon Bennett in Singapore at sbennett9@bloomberg.net; Chen Shiyin in Singapore at schen37@bloomberg.net.



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Australia Stocks: Centro, Macquarie Group, Newcrest, OZ, Santos

By Shani Raja and Ian C. Sayson

Sept. 15 (Bloomberg) -- The S&P/ASX 200 Index fell 86.10 points, or 1.8 percent, to 4,817.70 at the close of trading in Sydney. The S&P/ASX 200 Index futures contract due in September lost 2 percent to 4,827. The All Ordinaries Index decreased 1.7 percent to 4,875.

The following is a list of companies whose shares were actively traded in Australia. Stocks symbols are in parentheses after company names.

Financial stocks: Macquarie Group Ltd. (MQG AU), Australia's biggest securities company, dropped A$4.55, or 10 percent, to A$39.46, its lowest close since Oct. 27, 2004, after Lehman Brothers Holdings Inc. will file for bankruptcy in the U.S. after potential buyers abandoned talks.

National Australia Bank (NAB AU) sank A$1.14, or 4.8 percent, to A$22.82, the lowest since April 2000.

Gold mining companies: Newcrest Mining Ltd. (NCM AU), Australia's biggest gold producer, advanced A$1.60. or 8.2 percent, to A$21.10, the most since June 27 and the benchmark's fifth-biggest gainer. Lihir Gold Ltd. (LGL AU), the second- largest producer of the metal on the Australian stock exchange, was the second-best performer, surging 23 cents, or 13 percent, to A$2.05, the most since January.

Gold rose for a second day in Asia as the dollar fell and Lehman Brothers prepared to file for bankruptcy, boosting the metal's appeal as a store of value. Gold for immediate delivery rose 2.4 percent to $783 an ounce at 3:38 p.m. Sydney time.

Mining shares: Minara Resources Ltd. (MRE AU), Australia's second-largest nickel producer, gained 2 cents, or 1.9 percent, to A$1.07. OZ Minerals Ltd. (OZL AU), the world's second-largest zinc mining company, had its biggest gain since Aug. 22, rising 9 cents, or 7 percent, to A$1.45.

A measure of six metals traded on the London Metal Exchange advanced 2.9 percent, with zinc climbing 5.1 percent and copper 2.8 percent.

Centro Properties Group (CNP AU), the shopping mall owner facing a Sept. 30 deadline to repay some of its debt, slumped 3 cents, or 31 percent, to a record low 7.2 cents, after a planned U.S. asset sale fell through. Babcock & Brown Ltd. (BNB AU) and Allco Finance Group Ltd. (AFG AU), likewise selling assets to reduce debt, also plunged.

Macquarie DDR Trust (MDT AU), an Australian real estate investment trust, dropped 5.5 cents, or 14 percent, to 33 cents, the most since July 22. The company's future distributions will be paid half-yearly instead of quarterly, and largely ``after ongoing capital maintenance needs'' have been met, the company said Sept. 12, when its shares fell 6.1 percent.

Mt. Gibson Iron Ltd. (MGX AU) advanced 7 cents, or 3.5 percent, to A$2.06, the tenth-best performer on the benchmark. Perpetual Ltd. became a substantial holder in the company after acquiring a 5 percent stake, according to a stock exchange filing on Sept. 12, when the stock rose 2.1 percent.

Santos Ltd. (STO AU), Australia's third-biggest oil and gas producer, fell 57 cents, or 2.9 percent, to A$18.80, the most since Sept. 4. The company faces a blow-out in the clean-up bill from a mud flow in East Java that started in 2006 and affects 75,000 people, the Australian Financial Review reported. Santos said today it believes its provision for the disaster is adequate.

To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.netShani Raja in Sydney at sraja4@bloomberg.net.



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France Stocks Update: CAC 40 Falls 143.30 to 4,189.36

By Daniel Hauck

Sep. 15 (Bloomberg) -- France's benchmark stock index, the CAC 40, fell 3.31 percent at 9:05 a.m.

The index of 39 companies traded on the Paris Bourse fell 143.30 to 4,189.36. Among the stocks in the index, none rose and 39 fell.

Declines in the CAC 40 were led by Total Sa, Bnp Paribas and Axa Sa. About 5.80 million shares traded in the CAC 40.



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Russia's Market Plunge May Temper Medvedev's Georgia Moves

By Henry Meyer

Sept. 15 (Bloomberg) -- When it comes to containing Russia, the invisible hand of the markets may be the West's most potent weapon.

Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia.

The country's biggest business association, the Russian Union of Industrialists and Entrepreneurs, will raise the issue today at a meeting with President Dmitry Medvedev, said Igor Yurgens, a board member and adviser to Medvedev.

``This is a natural alarm clock,'' Yurgens said in an interview. ``It's a concern to big owners, it's a concern to the Russian economy. There are limits to what Russia can do alone if it chooses to be isolated.''

After rejecting Western appeals not to recognize breakaway Georgian regions, Medvedev last week signaled compromise for the first time. He agreed to implement a European Union- brokered cease-fire and pull troops back into the disputed territories of South Ossetia and Abkhazia.

Last month's five-day war, triggered by Georgia's effort to retake South Ossetia, sent equity, debt and currency markets reeling, reflecting investor worries that commercial ties would fray.

Feeling a `Jolt'

Finance Minister Alexei Kudrin acknowledged the impact Sept. 11, saying Russian companies felt a ``jolt'' as reaction to the war added to the fallout from turmoil in global financial markets. Medvedev called for officials to do ``everything necessary'' to attract capital. Central-bank chairman Sergey Ignatiev said the bank was taking ``massive measures'' to provide extra funds to lenders.

The U.S. dollar-denominated RTS index has plunged more than a quarter since war broke out Aug. 7 -- even after a 3.3 percent bounce Sept. 12 -- putting its loss since July 1 at 42 percent. The ruble is close to a 13-month-low and investors have pulled $35 billion from Russia since the war, according to BNP Paribas SA. That is the worst capital flight since the 1998 debt default; the cost to insure against default has risen to a four-year high.

That's making it pricier for the two biggest energy companies, OAO Gazprom, where First Deputy Prime Minister Viktor Zubkov succeeded Medvedev, 43, as chairman, and OAO Rosneft, whose chairman is Deputy Prime Minister Igor Sechin, to borrow abroad.

Sberbank Loan

State-run OAO Sberbank, Russia's largest bank, was the first Russian company to price a loan since the war. To borrow $1.2 billion, it was forced to pay almost double the interest- rate margin above the London interbank offered rate that it paid in November, or 85 basis points.

Among those feeling the pinch are the owner of steelmaker OAO Severstal, Alexei Mordashov, who was listed as the world's 18th richest person with $21.2 billion by Forbes magazine in May. The value of his stake in the company is some $2 billion, or 15 percent, lower than it was before Aug. 7, putting it at about $12 billion.

``The government will soften its stance because Gazprom needs to refinance, Rosneft too,'' said Irina Yassina, a researcher at the Moscow-based Institute for Economy in Transition. ``This isn't just a question of national security, it's a matter of personal wealth of top officials.''

While losses have mounted, complaints have been muted. The reluctance of those with the most at stake to criticize the government stems from the fate of Mikhail Khodorkovsky, once Russia's richest man.

Prison

Khodorkovsky is now serving an eight-year prison term for fraud and tax evasion, charges he blames on his political opposition to Vladimir Putin, 55, then Russia's president, now its prime minister, and still the paramount source of political power in the country.

Alexander Lebedev, a billionaire who owns 30 percent of OAO Aeroflot, says the government has intimidated even the wealthy into silence. ``Businessmen are frightened,'' Lebedev, whose stake in the airline is worth some $190 million less than before the conflict, said in an interview.

While he criticized the government's ``stupid, militaristic rhetoric'' since the war, he said he had no means to convey his concerns. But the need for action is urgent, Lebedev said: ``There is panic on the markets, liquidity has practically dried up.''

Billionaire Vladimir Potanin, the main shareholder in OAO GMK Norilsk Nickel, the biggest mining concern, complained to Medvedev last month about the credit squeeze, state-owned news agency Itar-Tass reported. Sergei Porshakov, an official at Potanin's holding company Interros, confirmed the meeting with Medvedev, though he declined further comment.

Unyielding

Rhetoric from Russia's leaders has remained unyielding as U.S. and European officials express concern over Russian aims in former Soviet states, particularly Ukraine.

Even with central-bank sales of dollars to prop up the ruble, Russia still has $573.6 billion of foreign reserves, the world's third-largest stockpile, giving it plenty of financial ammunition to withstand Western condemnation.

Yet investors say Russia, the world's biggest energy exporter, may have to curtail ambitions to broaden an economy now largely dependent on oil and gas.

``Unless they come to terms with what caused the market to collapse, they won't build the foundations for sustainable growth,'' said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow.

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net



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Germany Stocks Update: DAX Index Falls 176.67 to 6,058.22

By Daniel Hauck

Sep. 15 (Bloomberg) -- Germany's benchmark stock index, the DAX Index, fell 2.83 percent at 9:05 a.m.

The index of 30 companies traded on the Frankfurt Stock Exchange fell 176.67 to 6,058.22. Among the stocks in the index, none rose and 30 fell.

Declines in the DAX were led by Allianz Se, Deutsche Bank Ag and Siemens Ag. About 4.98 million shares traded in the DAX.



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Emerging-Market `Panic' May End as Profits Spur 20% Stock Gain

By Michael Tsang and Eric Martin

Sept. 15 (Bloomberg) -- Emerging-market companies, earning more for shareholders than ever before, are getting no respect just as their stocks drop to levels that preceded rallies.

More than $500 billion in credit-market losses and falling prices of oil, nickel and soybeans pushed the MSCI Emerging Markets Index down more than a third since October, leaving it 24.7 percent below its 200-day moving average. In the past two decades, the difference grew that wide only in the aftermath of Sept. 11, the 1998 Russian debt default and Mexico's 1994 peso devaluation, data compiled by Bloomberg show. In every case, the index gained 20 percent or more in the next three months.

This time, prospects for a rebound are even greater as developing-nation economies grow twice as fast as a decade ago, says Uri Landesman, head of global growth and international equities at ING Groep NV's asset management unit in New York. Return on equity, or a company's profit made with money invested by shareholders, rose to 16.8 percent this quarter, the highest for emerging markets since Bloomberg began tracking MSCI Inc. data in 2003 and a level Morgan Stanley says may be a record.

``You're more than getting paid for your risk,'' said Landesman, who oversees $5 billion. ``When you have a panic like this, the baby gets thrown out with the bathwater.''

Equity prices in the MSCI index average 9.8 times forecast earnings over the next 12 months, the cheapest in a decade versus reported profits. Valuations have fallen even as developing economies are projected to expand 6.7 percent next year, double the average rate during the 1990s, with one-tenth the inflation, according to the Washington-based International Monetary Fund.

Equity Return

While return on equity for industrialized-nation stocks fell almost 10 percent from an all-time high in October as global economic growth slowed, developing-nation companies increased profitability, data compiled by Bloomberg show.

Return on equity at China Mobile Ltd., the world's largest wireless carrier by users, climbed to 27.76 percent in the first half, the most on record dating back to 2003. China Mobile said last month that second-quarter profit jumped 51 percent, beating analysts' estimates.

Even so, the Beijing-based company, which lost 45 percent of its value this year in the biggest decline since 2001, is trading at 10.1 times estimated 2009 profit. That's the lowest valuation compared with reported earnings in more than five years.

CEZ AS, the Czech Republic's biggest utility, reported a return on equity of 27.6 percent in the second quarter, the highest since at least 2002, data compiled by Bloomberg show.

No Respect

The company, located in Prague, raised its full-year profit forecast after saying last month second-quarter earnings rose 68 percent on cost cuts and higher electricity prices. Still, CEZ plummeted 21 percent this year and traded at a record low 9.7 times next year's forecast earnings last week.

``Emerging-market equities should get respect,'' said Brett Hammond, New York-based chief investment strategist at TIAA-CREF, which oversees $420 billion and is buying shares in developing nations. ``The fundamentals are what's driving earnings. They're still robust compared to anything in the developed world.''

After emerging-market stocks surged more than fourfold in the past five years, investors grew skeptical of growth prospects as commodity prices fell by the most in almost three decades and the biggest U.S. housing bust since the Great Depression caused $514 billion in asset writedowns and credit losses for banks.

``The air is coming out of those emerging-market stocks,'' said Jeffrey Kleintop, chief market strategist at LPL Financial in Boston, which oversees $273 billion. ``What we're seeing is a really nasty bear market and it can stay oversold for as long as it stayed overbought in the bull market run-up.''

Pulling Out

Kleintop said LPL started trimming its emerging-market holdings in the first quarter and sold out completely in July.

Investors have pulled almost $29 billion from emerging- market equity funds this year, the most ever on a net basis, data compiled by EPFR Global, a Cambridge, Massachusetts-based fund research firm, and New York-based Merrill Lynch & Co. show.

The 14-week stretch of redemptions also matches the longest streak since EPFR started tracking the data in 2000.

Traders in currency markets are also betting on further declines as the economic slowdowns in the U.S., Europe and Japan make investors less willing to take on risk. Volatility on options for currencies from the Brazilian real to South Korean won versus the dollar is rising at a faster pace than those to buy or sell the euro and yen, according to JPMorgan Chase & Co.

The MSCI Emerging Markets Index plummeted 31 percent this year, the biggest year-to-date drop in a decade.

Commodities Slump

Raw-materials producers, which make up about a third of the index, accelerated the decline as 19 commodities such as crude oil, metals and farm products averaged the biggest monthly loss since 1980. The index fell 2.1 percent to 855.47 last week, and slumped 24.7 percent below its average price in the past 200 trading days. The gap, which tracks the depth and speed of a sell-off and gauges investor pessimism, signaled similar bearishness only three times in the MSCI gauge's 20-year history.

In the wake of the Asian financial crisis and Russia's default on $40 billion of ruble-denominated debt, the index plunged 37 percent below its 200-day moving average in September 1998. During the so-called Tequila Crisis that began when Mexico devalued its currency in December 1994, emerging markets hit bottom after tumbling 22.7 percent below the average.

The benchmark index slid 24.3 percent below the 200-day mean in September 2001 after terrorists crashed commercial jetliners into New York's World Trade Center and the Pentagon.

Worst Ever

This year's plunge is one of the worst in history, with less than a 0.3 percent chance of occurring at any given time, based on volatility-adjusted probabilities compiled by Bloomberg.

History shows that each of the three prior troughs heralded the start of a bull market for emerging-market equities. Developing-nation stocks climbed an average 24 percent in the next three months and 36 percent over a 12-month span.

The steepest drop preceded the biggest rally, with the MSCI index jumping 27 percent between September and December 1998.

``It's been an incredibly quick and deep sell-off, and very little has been spared,'' said Greg Lesko, who oversees $900 million at Deltec Asset Management Corp., a New York-based hedge fund. ``We're seeing real value out there, and when we see real value we like to be buying it.''

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.



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Bankers Petroleum, CanWest, High River: Canada Stock Preview

By John Kipphoff

Sept. 15 (Bloomberg) -- The following companies may have unusual price changes in Canadian trading on Sept. 15. Stock symbols are in parentheses, and share prices are from the previous close in Toronto.

The Standard & Poor's/TSX Composite Index rose 1.2 percent to 12,769.58.

Bankers Petroleum Ltd. (BNK CN); New Gold Inc. (NGD CN) will be added to the S&P/TSX on Sept. 22, S&P said in a statement on its Web site.

The following stocks will be deleted on Sept. 22, S&P said: CanWest Global Communications Corp. (CGS CN); Centerra Gold Inc. (CG CN), Fronteer Development Group Inc. (FRG CN); High River Gold Mines Ltd. (HRG CN); Shore Gold Inc. (SGF CN).

High River Gold (HRG CN): The owner of the Berezitovy mine in Siberia said it engaged CIBC World Markets Inc. and Cormark Securities Inc. as financial advisers. The move is part of a review of strategic alternatives for maximizing shareholder value, Toronto-Based High River said in a statement on Marketwire. The shares gained 9.1 percent to 60 cents.

Transat A.T. Inc. (TRZ/B CN): Canada's largest tour operator was raised to ``outperform'' from ``sector perform'' by Nicholas Morton at RBC Capital Markets. The Toronto-based analyst set a share-price target of C$34. The shares rose 1 percent to C$17.

To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.



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Banorte, CMPC, Cosan, Cresud, Sare: Latin Equity Preview

By William Freebairn and Paulo Winterstein

Sept. 15 (Bloomberg) -- The following companies may have unusual price changes today in Latin America trading. Stock symbols are in parentheses, and share prices are from the previous close. Preferred shares are usually the most-traded class of stock in Brazil.

The MSCI Latin America Index rose 3.4 percent Sept. 12 to 3,535.77.

Argentina

Cresud SACIF y A (CRES AF): Argentina's Buenos Aires Cereals Exchange predicts another week of scarce rainfall in the Pampas region, worsening a drought that may affect grain crops. Rainfall in the agricultural zone, known as the Pampas, will be scarce through Sept. 20, exchange climatologist Eduardo Sierra said in a weekly weather report. Rainfall between Sept. 20 and Sept. 26 will be ``scarce'' to ``moderate,'' he wrote in a forecast e-mailed Sept. 12. Cresud, a Buenos Aires-based agricultural company, rose 0.6 percent to 3.39 pesos.

Brazil

Cosan SA Industria & Comercio (CSAN3 BS) and Sao Martinho SA (SMTO3 BS): The European Parliament's vote to require at least 5 percent of road transport fuel in 2015 to come from biofuels is potentially negative for Cosan and Sao Martinho, Brazil's biggest publicly traded makers of ethanol, as it is a reduction of the previous target of 10 percent, Fator Corretora chief analyst Lika Takahashi wrote in a Sept. 12 note. Cosan, the world's biggest sugarcane processor, rose 3.2 percent to 19.60 reais. Sao Martinho fell 0.7 percent to 21.20 reais.

Chile

Empresas CMPC SA (CMPC CC): Chile's No. 2 pulp producer probably will rise 32 percent to 20,519 pesos in 12 months on prospects of higher prices and production, Celfin Capital said. Analysts including Cesar Perez-Novoa gave the Matte Group- controlled company an initial ``buy'' rating, they wrote in a Sept. 12 research note. CMPC rose 3 percent to 15,499 pesos.

Mexico

Grupo Financiero Banorte SA (GFNORTEO MM): Mexico's largest publicly traded lender won't see a ``meaningful impact'' from non-performing loans in its credit card division because they account for a small portion of assets, Joaquin Lopez-Doriga, the company's managing director of corporate affairs, said in an interview Sept. 12. Banorte rose 1 percent to 36.56 pesos.

Sare Holding SAB (SARE MM): Standard & Poor's announcement Sept. 12 that it may lower the credit rating of Mexico's fifth- largest homebuilder reflects slowing sales in the Mexican home market, brokerage Actinver said. Reduced public mortgage financing, higher credit costs and stricter lending requirements will slow growth for homebuilders, Actinver said in a research note. Sare was unchanged at 7.50 pesos.

To contact the reporter on this story: William Freebairn in Mexico City at wfreebairn@bloomberg.net; Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net.



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Merrill Lynch, Bank of America, Lehman: U.S. Equity Preview

By Lu Wang

Sept. 15 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading. Stock symbols are in parentheses and share prices are as of 4 p.m. in New York on Sept. 12, unless otherwise specified.

American International Group Inc. (AIG US): The insurer struggling to avoid credit downgrades is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported. The stock tumbled 31 percent to $12.14 in regular trading.

Amylin Pharmaceuticals Inc. (AMLN US): Billionaire investor Carl Icahn raised his stake in the maker of the Byetta diabetes drug to 7.33 percent, according to a filing with the U.S. Securities and Exchange Commission. The stock rose 3.6 percent to $20.18.

Caterpillar Inc. (CAT US): The world's largest maker of construction equipment said it won a ruling that may help it block rivals from shipping hydraulic excavators to the U.S. The stock gained 1 percent to $65.46.

Lehman Brothers Holdings Inc. (LEH US): The once fourth- largest U.S. investment bank said it intends to file for bankruptcy after Barclays Plc and Bank of America Corp. (BAC US) abandoned talks to buy the crippled firm. Lehman fell 14 percent to $3.65. Bank of America gained 2.1 percent to $33.74.

Magellan Midstream Partners LP (MMP US): The U.S. oil products distributor said two of its pipelines are shut because of Hurricane Ike. Magellan Midstream rose $1.13, or 3.3 percent, to $35.46.

Merrill Lynch & Co. (MER US): Bank of America cemented its status as the largest U.S. consumer bank by agreeing to acquire Merrill Lynch, the world's biggest brokerage firm, for about $50 billion. Merrill declined 12 percent to $17.05.

M&T Bank Corp. (MTB US): The lender said it would take a third-quarter charge on holdings of Fannie Mae (FNM US) and Freddie Mac (FRE US), the mortgage buyers taken over by the government. The stock gained 4.1 percent to $78.17.

McAfee Inc. (MFE US): The security software developer may gain 30 percent during the next year to $48 as the company posts better-than-expected earnings and offers protection for corporate networks, Barron's reported, citing Jefferies & Co. analyst Katherine Egbert. The stock fell 3.5 percent to $36.22.

Middleby Corp. (MIDD US): The maker of Toastmaster ovens and Pitco fryers may rise to $95 amid a slowing U.S. economy that curbs Americans' dining-out habits, Barron's reported, citing Roth Capital Partners analyst Anton Brenner. Middleby rose 0.7 percent to $55.89.

Take-Two Interactive Inc. (TTWO US): Electronic Arts Inc. (ERTS US), the second-largest video-game publisher, said it has ended discussions with Take-Two and won't make a proposal to buy the publisher of the best-selling ``Grand Theft Auto.'' Take-Two gained 1.1 percent to $21.89.

Textron Inc. (TXT US): The largest maker of business jets through its Cessna brand won a $250.1 million contract to provide armored security vehicles to the U.S. Army, the Department of Defense said on its Web site. The stock rose 0.4 percent to $38.92.

Walgreen Co. (WAG US): The largest U.S. pharmacy chain, offered to buy Longs Drug Stores Corp. (LDG US) for $3 billion in cash, or $75-a-share, challenging CVS Caremark Corp.'s (CVS US) month-old agreement to acquire the California retailer. Walgreen fell 60 cents to $36.07. Longs said it recommends shareholders accept CVS's offer. Longs fell 7 cents to $71.66 and CVS declined 2 cents to $37.64.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net



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Global Stocks, U.S. Futures, Dollar Tumble on Lehman Bankruptcy

By Chua Kong Ho and Shani Raja
Enlarge Image/Details

Sept. 15 (Bloomberg) -- Stocks in Europe and Asia tumbled, while U.S. futures and the dollar slumped as credit market turmoil pushed Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. to accept a takeover from Bank of America Corp.

UBS AG, the European bank hardest hit by subprime-related losses, sank 7.2 percent, and Macquarie Group Ltd., Australia's biggest investment bank, slumped 10 percent as the New York Times reported American International Group Inc. is seeking a $40 billion bridge loan from the Federal Reserve. Stock indexes fell more than 3 percent in France, Spain, Taiwan, the Philippines and India. Standard & Poor's 500 Index futures expiring in December retreated 2.9 percent to 1,220.20.

The dollar declined against the yen, while Treasuries and gold rose, as investors sought safer assets. The cost to protect corporate bonds from default surged on concern the tumult on Wall Street will tip the global economy into a recession.

``It's mayhem,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets. ``If you thought the U.S. economy was slowing, that fear has been amplified, and that has implications for overall global economic activity.''

Europe's Dow Jones Stoxx 600 Index declined 2.7 percent as of 8:30 a.m. in London, while the MSCI Asia Pacific excluding Japan Index lost 1.5 percent. Stock markets in Japan, South Korea, Hong Kong and China are closed for holidays, tempering losses for the Asian gauge.

Centro Properties Group, the shopping mall owner facing a Sept. 30 deadline to repay some of its debt, plunged 31 percent to 7.2 Australian cents after a planned U.S. asset sale fell through. Indiabulls Financial Services Ltd., an Indian lender backed by billionaire Lakshmi Mittal, tumbled 12 percent.

Global Rout

The MSCI World Index has slumped 20 percent this year as the worst U.S. housing recession since the Great Depression caused the subprime debt market to collapse, widening credit spreads and weighing on global economic growth.

To help Wall Street brace for Lehman's bankruptcy, the Federal Reserve widened the collateral it accepts for emergency loans to securities firms. A group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.

Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy after Barclays Plc and Bank of America abandoned talks to buy the crippled firm. Bank of America agreed to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion.

`Cathartic Sell-Off'

``We need that final cathartic sell-off in the markets to say here's the bottom, it held, that's it, and this is the kind of event that could trigger it,'' said Peter Sorrentino, who helps manage $16.5 billion at Huntington Asset Management in Cincinnati.

UBS lost 7.2 percent to 21.82 francs. Societe Generale SA, France's third-largest bank by assets, sank 5.8 percent to 61.26 euros.

Macquarie declined 10 percent to A$39.46, the most since Jan. 22. Babcock & Brown Ltd., an Australian infrastructure manager, tumbled 15 percent to A$1.625. Shin Kong Financial Holding Co., the owner of Taiwan's third-largest life insurer, tumbled 6.9 percent to NT$14.80. Indiabulls slumped 12 percent to 199 rupees.

The U.S. dollar fell 1.9 percent to 105.93 yen as investors reduced so-called carry trades, where funds are borrowed in a country with low interest rates and used to buy assets where returns are higher, earning the spread between the two. India's rupee slumped to a two-year low as investors dump riskier assets, including emerging-market securities.

Treasuries surged, sending two-year notes up the most since January. The yield on two-year notes dropped 33 basis points, or 0.33 percentage point, to 1.88 percent as of 11:06 a.m. in Singapore, according to bond broker BGCantor Market Data.

Stagnation?


``Trading started with a bang,'' said Andrew Brenner, co- head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``Banks are no longer lending. All this is going to get people talking about a Fed ease.''

Traders see a 12 percent chance the Fed will cut its benchmark lending rate to 1.75 percent from 2 percent on Sept. 16, according to Fed funds futures. That's up from nil a week ago.

The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.

``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''

Default Swaps

Credit-default swaps in Australia and Asia outside Japan rose by the most in at least five months, data compiled by Bloomberg show.

Lihir Gold Ltd. surged the most in nine months in Sydney, jumping 15 percent to A$2.09. Newcrest Mining Ltd., Australia's largest gold producer, added 7.7 percent to A$21.01. Gold for immediate delivery rose as much as 2.6 percent to $785.70 an ounce today.

``The global credit crisis has permeated through all markets,'' said Jason Teh, who helps manage the equivalent of $5.7 billion at Investors Mutual Ltd. in Sydney. ``The real economy will feel the effects of this because it takes time for the banking system to restore itself.''

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.netShani Raja in Sydney at sraja4@bloomberg.net.



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Sri Lanka Central Bank Keeps Interest Rate Unchanged

By Anusha Ondaatjie

Sept. 15 (Bloomberg) -- Sri Lanka's central bank kept its benchmark interest rate unchanged for a 19th straight meeting to spur growth as falling commodity prices helped ease Asia's third-fastest inflation.

The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent, the Colombo-based bank said in a statement today. All 10 economists surveyed by Bloomberg News predicted the decision.

Sri Lanka's policy makers have avoided joining counterparts across Asia in raising borrowing costs this year, choosing instead to focus on reducing money supply to tackle inflation. Price gains may slow further after easing a second month in August, the central bank said last month.

The central bank kept rates unchanged to ``stimulate the economy,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``The bank needs to watch out on inflation in doing this.''

Economic growth probably slowed for a second consecutive quarter in the three months ended June 30, constrained by the highest interest rates since 2002 and escalating violence in the island's civil war.

The South Asian economy expanded 5.9 percent in the second quarter from a year earlier, after growing 6.2 percent in the previous three months, according to the median forecast of eight analysts in a Bloomberg News survey. The statistics department is due to release the data in Colombo this week or next.

Under Siege

The Liberation Tigers of Tamil Eelam are under siege in their last remaining bases in Wanni in northern Sri Lanka after losing control of the east to the army in July last year, the worst defeat in their 25-year struggle for a separate homeland.

Consumer prices in the capital Colombo rose 24.9 percent last month from a year earlier, after climbing 26.6 percent in July. The central bank said in January it was targeting annual inflation of about 10 percent for 2008.

An increase in the production of food and falling global commodity costs will help ease price pressures further, the central bank said on Aug. 20.

``Pressures on the price levels emanating from international commodity prices have further moderated,'' the central bank said today. ``These favorable developments on both demand and supply sides are likely to shape inflation expectations also so as to contain inflation further.''

Sri Lanka policy makers have kept monetary policy tight by reducing the amount of funds in the banking system, instead of raising interest rates.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.



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Bank of England Should Cut Rate by Half a Point, CBI Says

By Brian Swint and Craig Stirling

Sept. 15 (Bloomberg) -- Britain's main business lobby said the Bank of England should slash its benchmark interest rate in November by the most in seven years to rescue the U.K. from a recession.

``Our members are having a tough time,'' Richard Lambert, director of the Confederation of British Industry, told reporters in London. ``There's scope for a half-point cut in November,'' assuming the inflation outlook doesn't change. ``We are now almost certainly in a mild recessionary phase.

The Bank of England has kept its main rate at 5 percent since April on concern that the fastest inflation in at least a decade will become embedded in the economy. The European Commission says the U.K. has already entered its first recession since 1991 after growth ground to a halt in the second quarter, ending the longest stretch of uninterrupted expansion in a century.

The central bank, which hasn't cut its key rate by more than a quarter point since the aftermath of the September 2001 terrorist attacks, should reduce its benchmark to 4.5 percent this year and to 4 percent in early 2009, the CBI said.

The economy will contract 0.2 percent in the third quarter and 0.1 percent in the final three months of the year, the CBI said. The lobby cut its full-year projection to 1.1 percent from a forecast of 1.7 percent in June. Growth will slump to 0.3 percent next year, the new forecasts show.

Rate Cuts

The slowdown may nevertheless cool inflation and make it easier for the Bank of England to help the economy, Lambert said. Inflation will reach 5 percent this year before slowing to 2.3 percent by the fourth quarter of 2009, the CBI's forecasts show.

``We hope and believe that this will give the Bank of England scope to cut interest rates,'' said Lambert, who sat on the central bank's Monetary Policy Committee between 2003 and 2006. ``There is a significant risk that in 2010 inflation will actually be undershooting the 2 percent target by quite a way.''

Figures tomorrow will probably force Bank of England Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling.

Inflation accelerated to 4.6 percent in August from 4.4 percent in the previous month, according to the median of 28 forecasts in a Bloomberg News survey of economists. That would be the fastest pace in at least 11 years. The central bank's mandate requires the governor to write a letter to the chancellor when the rate strays more than 1 percentage point from the target.

King will also release the bank's proposals for changing its money-market operations this week and invite comments from financial institutions and investors. The central bank will introduce a new facility to replace the Special Liquidity Scheme, an emergency lending program for banks which expires in October.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Craig Stirling in London at cstirling1@bloomberg.net.



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Treasuries Show Paulson `Bazooka' Misfire; Bonds Gain

By Daniel Kruger

Sept. 15 (Bloomberg) -- U.S. bond prices show Henry Paulson's ``bazooka'' fired blanks when he took over beleaguered mortgage-finance companies Fannie Mae and Freddie Mac.

Instead of instilling confidence in the credit markets, the Treasury secretary's plan to place the government-sponsored enterprises in conservatorship on Sept. 7 only served to underscore weakness in the world's biggest economy and the plight of U.S. financial institutions. Lehman Brothers Holdings Inc., American International Group Inc., Merrill Lynch & Co. and Washington Mutual Inc. all plunged last week.

For the first time since May, bond investors from New York to Tokyo are piling into Treasuries on speculation the Federal Reserve may need to cut interest rates by year-end.

``They pulled out the bazooka, yet they only got 24 hours of favorable response from the financial markets,'' said Thomas Girard, a money manager who helps oversee $110 billion in fixed- income assets at New York Life Investment Management in New York. ``That's got to be a little bit worrisome.''

Girard said he is taking advantage of any decline in U.S. government debt prices to add to his holdings of the securities.

The yield on the benchmark two-year Treasury fell 12 basis points last week, or 0.12 percentage point, to 2.21 percent, and is down from this year's high of 3.11 percent on June 13. The price of the 2.375 percent note due August 2010 rose 7/32, or $2.19 per $1,000 face value, to 100 10/32, according to BGCantor Market Data.

Treasuries surged today in Asia, sending two-year yields down to 1.87 percent as of 11:19 a.m. in Singapore, as Lehman prepared to file for bankruptcy. It was the biggest decline since January. Bank of America Corp. agreed to buy Merrill, a person with knowledge of the deal said. American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion loan from the Fed, the New York Times reported.

The Fed widened the collateral it accepts for loans to Wall Street bond dealers, while a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.

`Not Enough'

Interest-rate derivatives imply that banks remain hesitant to lend amid speculation credit losses will increase as the slowdown deepens. It costs banks 1.35 percentage points more than the government to borrow cash for three months. The difference, or TED spread, was 1.04 percentage points on Sept. 5.

``We're still concerned about credit tightening by U.S. banks,'' said Masataka Horii, one of four managers of the $52 billion Kokusai Global Sovereign Open fund in Tokyo. ``The government GSE rescue plan will help, but it is not sufficient.''

Kokusai Global, the second-biggest actively managed bond fund behind the $132 billion Pimco Total Return Fund, increased its Treasury holdings to 27 percent of assets in August, the most since April 2007, from 20 percent in March.

Financial institutions have taken more than $500 billion in writedowns and losses since the start of 2007, according to data compiled by Bloomberg. Renewed concern that losses will increase, further weighing on an economy growing at the slowest pace since 2001, are driving investors to Treasuries.

Ease Speculation

Futures on the Chicago Board of Trade show a 36 percent chance the Fed will cut its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point this year. Not since May have traders put on bets for a reduction in borrowing costs. On Sept. 5, futures were indicating there was no chance policy makers would lower borrowing costs. The Fed meets tomorrow to set interest rates.

Treasuries of all maturities returned 2.3 percent since June 30, compared with an average of 2.06 percent for all types of corporate and mortgage bonds, according to indexes compiled by New York-based Merrill Lynch & Co.

Paulson announced a plan on Sept. 7 to place Washington- based Fannie and Freddie, of McLean, Virginia, in conservatorship as their losses mounted, allowing the government to buy as much as $100 billion of preferred stock in the companies as needed.

Rescue Plans

Just two months earlier, when Paulson sought congressional approval to grant unlimited credit to Fannie and Freddie in times of financial strife, the Treasury secretary indicated that he would unlikely use those powers. Instead, he said the move would bolster confidence in the companies and markets.

``If you have a bazooka in your pocket, and people know you have a bazooka, you may never have to take it out,'' he said at the time.

Past efforts by the government and Fed to jump-start the credit markets only temporarily reduced demand for Treasuries.

Two-year note yields rose 26 basis points to 1.74 percent on March 11, the biggest increase since 1996, after the Fed said it would accept mortgage debt as collateral for as much as $200 billion in Treasuries to be auctioned through a new Term Securities Lending Facility. By March 14, yields had fallen back to their prior levels.

`Stop-Gap Measure'

Three months earlier, on Dec. 12, yields soared 21 basis points to 3.13 percent when the Fed announced a joint effort with foreign central banks to increase their lending programs. Three weeks later, yields were back down to 2.88 percent.

``The whole credit crisis is going to keep a bid in Treasuries for some time to come,'' said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory Services Ltd., which oversees $6 billion. ``This is more of a stop-gap measure to pass it off to the next administration,'' he said of the takeover of Fannie and Freddie.

Traders in the forward markets, where financial instruments are sold for future delivery, are pricing three-month cash from December to March at 94 basis points over the expected federal funds rate. That's up from 85 basis points at the start of last week and an average of 7 basis points in 2006.

What's different now is that the budget deficit is accelerating, causing the Treasury to step up its borrowing as its supports Fannie and Freddie. Economists at New York-based Goldman Sachs Group Inc. forecast that the shortfall for fiscal 2009 beginning Oct. 1 will reach a record $565 billion. The Bush administration estimated a $490 billion deficit for the period.

`Falling Apart'

The median forecast of 32 economists and strategists is for two-year yields to rise to 2.64 percent by year-end, according to a survey by Bloomberg. If accurate, investors who by the securities now would have a loss of 0.37 percent.

Bond market bulls say the government's takeover of Fannie and Freddie may do little to encourage companies to hire, or for consumers to increase spending. The Commerce Department in Washington said Sept. 12 that sales at retailers fell 0.7 percent in August when excluding automobiles, the most this year. A week earlier, the government said the unemployment rate climbed to a five-year high of 6.1 percent in August.

``While it was a necessary step, it's not a sufficient step to prevent the economy from falling apart,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``It does not address the fundamental economic backdrop of a weak consumer, declining jobs, a weak global economy and a continued decline in housing prices.''

Buy Treasuries

Pollack said he favors Treasuries maturing in fewer than 10 years. Those securities tend to outperform longer-dated debt when the Fed cuts rates.

``Housing's problems go deeper than just mortgage rates,'' said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 19 primary dealers of U.S. government debt that trade with the Fed. ``The concern was always what happens when unemployment starts rising and people are forced to sell the house.''

Credit Suisse told clients on Sept. 8 they should buy 10- year Treasuries, saying yields may fall to 3.3 percent. The yield on the benchmark 4 percent security due in August 2018 ended last week at 3.72 percent.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net



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New Zealand Manufacturing Adds to Signs Economy Is in Recession

By Tracy Withers

Sept. 15 (Bloomberg) -- New Zealand manufacturing slowed in the second quarter, adding to signs the economy was in a recession in the first half of the year.

Manufacturing sales, excluding inflation, fell 1 percent from the first quarter when they declined 0.2 percent, Statistics New Zealand said today in Wellington. Economists adjust that number to account for inventory build-up to match the way the statistics bureau reports gross domestic product.

Reserve Bank Governor Alan Bollard has cut the benchmark interest rate by three-quarters of a percentage point the past seven weeks as the economy contracts. The central bank said the economy is probably in a recession for the first time in 10 years.

``Manufacturing was on the soft side and will probably shave a bit off expectations'' for second-quarter GDP, said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington.

Ebert estimates the economy contracted 0.4 percent in the second quarter. The GDP report will be published on Sept. 26.

``There are probably risks toward the negative'' around that forecast, he said. Before today, he was expecting a 0.3 percent contraction.

Manufacturing was curbed after a drought slowed milk production and forced farmers to send stock for slaughter earlier than usual. Sales from the meat and dairy industry fell 9.4 percent in the quarter, the statistics agency said.

Retail Sales

The slowdown in second-quarter manufacturing adds to falling retail sales, construction and exports, suggesting the economy shrank further after it contracted 0.3 percent in the first quarter.

Retail spending slumped 1.5 percent in the three months ended March 31, the biggest drop in at least 13 years. Construction fell 7.3 percent and exports slipped 3.7 percent, according to reports last week.

``Confidence in manufacturing plunged to low levels in the first half,'' said Jane Turner, economist at ASB Bank Ltd. in Auckland. ``Demand has weakened substantially'' and the currency was high early in 2008, which slowed orders, she said.

Bollard cut the official cash rate a quarter point on July 24, his first reduction in five years, saying the weak economy would ease inflation. Last week, he cut by a half point, more than expected by most economists, to 7.5 percent.

Twelve of 15 economists surveyed by Bloomberg News last week expect Bollard to cut the benchmark interest rate by a quarter point at his next review on Oct. 23. Three expect a half-point reduction.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.



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Europe Shuns U.S.-Style `Active Role' on Economy, Bank Bailouts

By Simon Kennedy and John Rega

Sept. 15 (Bloomberg) -- European finance ministers and central bankers said they had no plans to follow the U.S. in stimulating their economy and failed to agree on ways of rescuing any foundering financial institution.

As U.S. officials in Washington monitored the slide of Lehman Brothers Holdings Inc., European policy makers concluded talks in Nice, France, without breaking new ground on how to share the bailout cost if a bank collapse threatened to spread across the region. They also signaled restraining inflation and budget deficits was a better strategy to revive economic growth than lowering taxes and interest rates.

``U.S. policy makers have generally taken a more active role in supporting the economy and stabilizing financial markets, while the euro zone has opted for a less-interventionist stance,'' said Natacha Valla, a former economist at the European Central Bank and now at Goldman Sachs Group Inc. in Paris.

The transatlantic divide in monetary and fiscal policies may mean the economy of the 15-nation euro region takes longer to rebound after contracting 0.2 percent in the second quarter. The European Commission projects the weakest growth since 2003 this year as Germany and Spain slip into a recession and Italy and France stagnate.

``Europe faces a long-lasting slowdown and only gradual recovery,'' said Dario Perkins, an economist at ABN Amro Holding NV in London.

Cost-Sharing Plan

The lack of a cost-sharing plan means the pain would be even greater should a pan-European financial institution run into troubles similar to those that battered Bear Stearns Cos., Fannie Mae and Freddie Mac in the U.S., said Nicolas Veron, an economist at Bruegel, a Brussels-based research organization.

Ministers have so far agreed only to knit bank supervisors closer together and pledged to cooperate in managing any crisis. Unwilling to commit taxpayer money up front, they resisted calls to devise a plan for splitting the bill should a bailout become necessary to prevent a collapse of the financial system.

``The policy response would be slower and less efficient given the lack of a framework and that would pose a significant cost to the economy if something happened,'' said Veron.

By contrast, the U.S. has been able to step in swiftly to help ailing institutions. The government this month assumed control of Fannie Mae and Freddie Mac, while in March the Federal Reserve helped finance JPMorgan Chase & Co.'s purchase of Bear Stearns.

Biggest Banks

The U.S. has the advantage that the institutions it monitors are largely contained within its borders. Europe's biggest banks held an average of 24 percent of their assets in European countries other than their own in 2006, double the amount of 1997, according to Bruegel.

European policy makers also face more constraints than their U.S. counterparts in responding to weakening growth. One is inflation, which remains above the ECB's 2 percent limit. Governments have their hands tied by EU rules that require budget deficits to be below 3 percent of gross domestic product.

Neither restraint exists in the U.S., allowing the Fed to cut its benchmark rate to 2 percent and President George W. Bush to enact $168 billion of stimulus. Europe's strategy amounts to a bet that expansion can be better revived by controlling inflation and budgets than by pump-priming growth with short-term stimulus that generates higher prices and bigger deficits.

Spending taxpayers' funds on fiscal programs to spark growth would be ``like burning money,'' German Finance Minister Peer Steinbrueck said. Luxembourg Finance Minister Jean-Claude Juncker questioned the success of the U.S. approach, and said declines in the euro and oil price would help Europe.

Fiscal Easing

``This should calm the ECB a bit as it increasingly fears that fiscal easing would oppose the central bank's efforts to bring down inflation over time,'' said Juergen Michels, an economist at Citigroup Inc. in London.

ECB President Jean-Claude Trichet, who has demanded governments control their budgets, said the test would be ``implementation in practice.'' Price stability remains the bank's ``fundamental concern,'' he said.

Rather than driving up deficits, the European officials said they plan to cushion their economy by allowing automatic stabilizers such as higher welfare payments to kick in. They also pledged to make their economies more flexible, increase financial- market transparency and lend more money to small- and medium-sized industries.

``We're not going to sit on our hands,'' French Finance Minister Christine Lagarde said.

Still, slowing growth alone will be enough to end four years of fiscal consolidation with JPMorgan predicting a budget deficit of 2 percent of GDP in the euro area next year, up from 0.6 percent last year.

Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc., predicts an extended period of weak growth may prompt countries such as France and Italy to ``exploit'' a revised rule that allows a temporary breach of the limit in times of weak expansion. Italy, France, Ireland, Portugal and Greece are at risk of breaching the deficit ceiling next year, according to Commerzbank AG.

To contact the reporters on this story: Simon Kennedy in Nice, France, at skennedy4@bloomberg.net. John Rega in Nice, France, at jrega@bloomberg.net.



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Europe Shuns U.S.-Style `Active Role' on Economy, Bank Bailouts

By Simon Kennedy and John Rega

Sept. 15 (Bloomberg) -- European finance ministers and central bankers said they had no plans to follow the U.S. in stimulating their economy and failed to agree on ways of rescuing any foundering financial institution.

As U.S. officials in Washington monitored the slide of Lehman Brothers Holdings Inc., European policy makers concluded talks in Nice, France, without breaking new ground on how to share the bailout cost if a bank collapse threatened to spread across the region. They also signaled restraining inflation and budget deficits was a better strategy to revive economic growth than lowering taxes and interest rates.

``U.S. policy makers have generally taken a more active role in supporting the economy and stabilizing financial markets, while the euro zone has opted for a less-interventionist stance,'' said Natacha Valla, a former economist at the European Central Bank and now at Goldman Sachs Group Inc. in Paris.

The transatlantic divide in monetary and fiscal policies may mean the economy of the 15-nation euro region takes longer to rebound after contracting 0.2 percent in the second quarter. The European Commission projects the weakest growth since 2003 this year as Germany and Spain slip into a recession and Italy and France stagnate.

``Europe faces a long-lasting slowdown and only gradual recovery,'' said Dario Perkins, an economist at ABN Amro Holding NV in London.

Cost-Sharing Plan

The lack of a cost-sharing plan means the pain would be even greater should a pan-European financial institution run into troubles similar to those that battered Bear Stearns Cos., Fannie Mae and Freddie Mac in the U.S., said Nicolas Veron, an economist at Bruegel, a Brussels-based research organization.

Ministers have so far agreed only to knit bank supervisors closer together and pledged to cooperate in managing any crisis. Unwilling to commit taxpayer money up front, they resisted calls to devise a plan for splitting the bill should a bailout become necessary to prevent a collapse of the financial system.

``The policy response would be slower and less efficient given the lack of a framework and that would pose a significant cost to the economy if something happened,'' said Veron.

By contrast, the U.S. has been able to step in swiftly to help ailing institutions. The government this month assumed control of Fannie Mae and Freddie Mac, while in March the Federal Reserve helped finance JPMorgan Chase & Co.'s purchase of Bear Stearns.

Biggest Banks

The U.S. has the advantage that the institutions it monitors are largely contained within its borders. Europe's biggest banks held an average of 24 percent of their assets in European countries other than their own in 2006, double the amount of 1997, according to Bruegel.

European policy makers also face more constraints than their U.S. counterparts in responding to weakening growth. One is inflation, which remains above the ECB's 2 percent limit. Governments have their hands tied by EU rules that require budget deficits to be below 3 percent of gross domestic product.

Neither restraint exists in the U.S., allowing the Fed to cut its benchmark rate to 2 percent and President George W. Bush to enact $168 billion of stimulus. Europe's strategy amounts to a bet that expansion can be better revived by controlling inflation and budgets than by pump-priming growth with short-term stimulus that generates higher prices and bigger deficits.

Spending taxpayers' funds on fiscal programs to spark growth would be ``like burning money,'' German Finance Minister Peer Steinbrueck said. Luxembourg Finance Minister Jean-Claude Juncker questioned the success of the U.S. approach, and said declines in the euro and oil price would help Europe.

Fiscal Easing

``This should calm the ECB a bit as it increasingly fears that fiscal easing would oppose the central bank's efforts to bring down inflation over time,'' said Juergen Michels, an economist at Citigroup Inc. in London.

ECB President Jean-Claude Trichet, who has demanded governments control their budgets, said the test would be ``implementation in practice.'' Price stability remains the bank's ``fundamental concern,'' he said.

Rather than driving up deficits, the European officials said they plan to cushion their economy by allowing automatic stabilizers such as higher welfare payments to kick in. They also pledged to make their economies more flexible, increase financial- market transparency and lend more money to small- and medium-sized industries.

``We're not going to sit on our hands,'' French Finance Minister Christine Lagarde said.

Still, slowing growth alone will be enough to end four years of fiscal consolidation with JPMorgan predicting a budget deficit of 2 percent of GDP in the euro area next year, up from 0.6 percent last year.

Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc., predicts an extended period of weak growth may prompt countries such as France and Italy to ``exploit'' a revised rule that allows a temporary breach of the limit in times of weak expansion. Italy, France, Ireland, Portugal and Greece are at risk of breaching the deficit ceiling next year, according to Commerzbank AG.

To contact the reporters on this story: Simon Kennedy in Nice, France, at skennedy4@bloomberg.net. John Rega in Nice, France, at jrega@bloomberg.net.



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World May Face `Japan-Like' Economic Stagnation, GIC's Tan Says

By Shamim Adam

Sept. 15 (Bloomberg) -- The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.

Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.

``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' Tan said. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''

An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world's second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.

The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world's largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.

`More Severe'

``If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,'' Tan said. ``A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.''

Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm's plans.

Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.

Emerging Markets

Japan's economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.

Emerging markets will account for more than half of the world's growth in the next decade, from about a fifth in 2000, Tan predicts.

``Growth in emerging markets can be expected to remain relatively robust,'' he said. ``Emerging economies will displace the G-7 as the world's largest economies over the next two to three decades.''

A rising ``middle-class'' in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.

Natural Resources

``International tensions could rise as countries compete for natural resources, especially food, energy and water,'' Tan said. ``Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.''

Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.

Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.

``Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,'' Tan said.

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



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