Fed to Lower Policy Rate to 1% and Retain Easing Bias

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 18 08 08:15 GMT |

We still expect the Fed to lower the Funds rate by another 50 basis points before the year's out with the odds favouring the move at the October 29 meeting. Economic data have been weaker-than-expected and risk a sharper downturn in Q3 and Q4 than in our baseline forecast. More worrying is the lack of traction in financial markets from the spate of policy actions with equity markets still preparing for the worst while the 3-month Libor rate is lower but remains relatively elevated. Yesterday's Beige Book provided no sign that any region of the US economy is seeing an improvement in conditions. While we believe the aggressive policy actions will eventually boost investor and consumer confidence and allay uncertainty in financial markets thereby reducing the cost of funds for financial institutions and ultimately credit spreads, the Fed will continue to keep the financial system flush with cash and interest rates extremely accommodative until a decisive turn is evident. This is unlikely to occur quickly and we maintain the view that the economy will only start to revive in late 2009. As long as the downside risks to economic growth remain paramount, the Fed will maintain a bias toward additional monetary policy stimulus which means that they may feel the need to continue easing in 2009 as a supplement to liquidity injections and targeted market operations. Our consensus view is that the 1% funds rate plus narrowing credit spreads will be sufficient to avoid a protracted economic recession although given the depth of the negative sentiment, we cannot rule out additional interest rate cuts. We expect the Fed to hold the policy rate at 1% throughout 2009 and forecast only a modest increase in term rates over the year ahead. This is a change from our previous forecast that the Fed would be in a position to increase the policy rate before the end of next year. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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New Zealand Dollar: Will Higher Inflation Boost the Kiwi?

Daily Forex Fundamentals | Written by DailyFX | Oct 18 08 08:01 GMT |

Trading the News: New Zealand Consumer Prices What's Expected Time of release: 10/20/2008 21:45 GMT, 17:45 EST Primary Pair Impact : NZDUSD Expected: 1.6% Previous: 1.6% Impact of the New Zealand Consumer Prices on NZDUSD over the last 3 months 2Q 2008New Zealand Consumer Prices The consumer price index for New Zealand surged 1.6% in the second quarter on the back of rising food and energy costs, highlighting the fastest rate of inflation in 18 years. In addition, prices pressures increased 4.0% from a year earlier, which could lead the RBNZ to hold a hawkish outlook despite the downturn in the $104B economy. Meanwhile, market participants have already raised concerns that the economy may face a period of stagflation as economic growth contracted in the first quarter despite mounting price pressures, and has certainly left RNBZ Governor Alan Bollard in a complex situation. However, Dr. Bollard expects the slowdown in the economy to bring inflation back within the bank's 3% limit in 2010, and stated that he is likely to lower the benchmark rate this year as New Zealand teeters on the brink of a recession. 1Q 2008New Zealand Consumer Prices Consumer prices in New Zealand rose 0.7% in the first quarter of 2008 on higher food and fuel prices. Although, the quarterly rate of price appreciation was lower than the prior quarter the annualized rate printed at 3.4% exceeding the prior quarter's 3.2%. The increase in inflation from the reduced the chances of a RBNZ rate cut at the central bank's next policy meeting. The country's benchmark rate at an all-time high of 8.25% has begun to weigh on growth. The expected global slowdown has heightened fears that the economy may cool faster than expected and into a recession. The mixed inflation data would leave traders confused and the resulting price volatility would have left us on the sideline. 4Q 2007New Zealand Consumer Prices New Zealand inflation rose 1.2% for the last three month's of 2007. The increase exceeded expectations of 1.0% and pushed the yearly level to 3.2%, above the RBNZ's target band of 1-3%. Rising costs in food and fuel made the biggest contributions to the headline number. However, there was an unexpected easing of the stripped down non-tradable measure to 0.7%. The lower core reading was welcomed news to Governor Bollard, as his recent rate hikes may be starting to cool the economy. Although we didn't trade this release, the bullish reading and the subsequent price volatility may have triggered a long trade. However, the lack of follow through would have resulted in a 50 point loss. How To Trade This Event Risk Consumer prices in New Zealand are anticipated to rise another 1.6% in the third quarter amid the recent pullback in commodity prices. In addition, the annual rate of inflation is widely expected to reach 5.1% from 4.0% in the previous quarter, which is greater than the 4.9% forecast projected by the RBNZ. Despite mounting price pressures, the downturn in the housing sector paired with slowing demands from the global economy has pushed the economy into a recession for the first time since 1998, which led Governor Alan Bollard to lower the benchmark interest rate for the first time in five years as he expects slowing growth to drag inflation back within the bank's 3% limit over the next two years. As the RBNZ is scheduled to meet next Wednesday, price action for the given event risk could be muted as market participants forecast the central bank to cut another 100bp to lower the key interest rate to 6.50% from 7.50%. However, as rising price pressures continues to pose a threat to the economy in the near-term, Governor Alan Bollard may hold back from delivering a 1% reduction as risks of a stagflation remains. Moreover, lowered interest rate expectations paired with mounting concerns for the $104B economy could weaken the New Zealand dollar further as investors continue to limit their risk appetite. Despite expectations for a rate cut by the RBNZ, the minor recovery in stock prices has spurred price action for the Kiwi, and pushed the currency higher against the U.S. dollar this week. Therefore, a uptick in inflation paired with a rise in the stock market could favor a bullish outlook for the New Zealand dollar in the near-term. As a result, an annual reading of 5.1% or higher would support a long NZDUSD trade, and we will look for a green, five-minute to confirm entry on two lots of the kiwi-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches it target. Conversely, if the CPI release fails to meet expectations, there will be a greater chance that the central bank will in fact deliver a 100bp cut, which would only fuel bearish sentiment for the NZDUSD. Accordingly, we will follow the same strategy for a short trade as the long position mention above, just in reverse. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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NZ Q3 CPI Preview: A Generational High

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Oct 18 08 08:07 GMT |

We expect Q3 CPI to rise 1.7%. Annual inflation above 5% for first time in 18 years. Inflation outlook considerably softer, as credit crunch bites. RBNZ focused on financial and economic stability. An eighteen year old will see something for the first time in their life next week - more than 5% annual inflation in New Zealand. The last time annual inflation was above 5% was in 1990 following an increase in GST. We expect annual inflation for Q3 to print at 5.2%, following a 1.7% surge in prices in Q3 itself. At least the quarterly number is within the RBNZ's target band! The market median forecast for the quarter is 1.6%, with a range of 1.2% to 1.7%. The RBNZ had 1.3% for the quarter and 4.9% for the year in their September Monetary Policy Statement. Food, transport, and housing to lift CPI Key drivers behind the increase in the CPI over the quarter are expected to be: Food prices. Rising world food prices and a weather-induced lift in fresh fruit and vegetable prices will see food prices lift 3.6%, boosting the CPI by 0.64 percentage points. Transport prices. A range of influences adding to a 0.44 percentage point contribution. Petrol prices peaked early in the quarter and drifted lower, but petrol prices averaged about 4% higher in Q3 than in Q2. Higher public transport fares and international and domestic airfares on the back of higher fuel costs will add to the transport component in the CPI. We expect lower vehicle prices to partly offset the increases elsewhere in the transport group. Housing-related prices. We expect a 0.27 percentage point contribution to the CPI driven by the usual increase in local authority rates at this time of year and higher household energy prices. Alcohol prices. The annual indexation of excise duty on alcoholic drinks will see a 0.22 percentage point contribution to the CPI. In addition to the expected decline in motor vehicle prices noted above, we also expect falls in the household contents and services group as well as the clothing and footwear group. We suspect some additional discounting occurred as retailers attempted to clear seasonal stock in a generally weak retailing environment. The large increase in food and petrol prices will drive a 2.0% increase in tradable prices, while non-tradable prices are expected to rise 1.3% on housing-related, alcohol (beer) and passenger transport prices. Note too that annual non-tradable inflation is expected to leap from 3.4% to 4.2% as the health and education subsidies from Q3 2007 drop out of the annual calculations. A result on our expectation would be higher than the RBNZ's 3.9% forecast for annual non-tradable inflation published in the September Monetary Policy Statement. Note that estimates of tradable and non-tradable inflation have wider confidence bands this quarter as expenditure weights for these components have not been pre-released with the re-weighting material discussed below. Reweighting: out with the old, in with the new The Q3 CPI will be the first release following the latest regular overhaul of the index. The revamp of the CPI brings in new items (such as heat pumps) and drops others (such as hiring video cassette tapes), and adjusts the weights on items to better reflect recent spending patterns. The old and new weights for the broad groups of the CPI are shown in Table 1. We estimate the upshot from the re-weighting for the immediate quarter is small; at most inflation will be 0.1% higher in Q3 that it would have been if the old weights had been used. This result comes from goods and services increasing in price this quarter (like food, rates and electricity) now having a larger weight, while some goods expected to fall in price this quarter (like clothing and footwear) now having a smaller weight. Beyond the immediate quarter we suspect the re-weighting will see inflation lower than it would have been under the old weights. Take the weight on housing for example. With the housing boom now over, the disinflation effects of the housing slump will now have a larger influence on the overall CPI than under the old weights. The same applies to the increased weight on petrol. That said the influence of the CPI revamp on the inflation outlook appears trivial compared to the radically changing economic outlook and its likely influence on actual prices. Implications Inflation concerns are receding rapidly, despite our expectation that NZ will print its first above 5% annual inflation rate in 18 years. Retreating petrol prices will see headline inflation peel back over the coming 12 months. More fundamentally, a worsening economic outlook as the international credit crunch bites will see previous capacity constraints relax. The RBNZ will remain focused on financial and economic stability over coming months, with current inflation taking a backseat. Westpac Institutional Bank Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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Bank of Canada to Cut Policy Rate by a Further 50 Basis Points

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 18 08 08:16 GMT |

The combination of a deteriorating outlook for the US economy, falling commodity prices and persistent financial market volatility are boosting the downside risks to Canada's economic outlook and will likely see the Bank of Canada lower the policy rate by 50 basis points at next week's meeting. Despite a concerted effort by global central banks and governments to ease market concerns about counterparty risk and shore up investor confidence, financial markets continue to flail with equity markets unable to sustain gains. Wholesale funding costs have started to ease but remain elevated meaning that the cost of capital for businesses and households is staying high and availability limited. A rate cut next week would follow up on the 50 basis points ease announced by the Bank on October 8 when the Bank joined several other central banks in a coordinated policy move. The Bank of Canada highlighted the significant tightening in credit conditions, weakening demand for Canadian exports and more moderate growth in domestic demand in the October 8 press release and said that "this action will provide timely and significant support to the Canadian economy." Given the steady decline in commodity prices since October 8, inability of equity markets to sustain an improved tone and increasingly weak US data reports, we think it is likely that the Bank will choose to act aggressively next week and cut the policy rate to 2%. Additionally, Friday's reports showing that business lending conditions tightened further in September according to both senior loan officers and Canadian businesses will give the Bank incentive to supplement its already-stimulative monetary policy stance. Should the Bank decide to hold the policy rate steady or cut by a smaller 25 basis point increment next week, we would look for a cut at the December meeting meaning that the overnight rate would still end 2008 at 2%. Our assessment remains that growth in Canada will be stronger than the US in 2009 although the pace will be slower than the economy's potential. The support for the domestic economy coming from the terms of trade will lessen going forward on lower commodity prices and the recession in the US will trim demand for Canadian exports. Our view that the significant tightening in credit conditions will begin to ease in the months ahead will go some distance to shoring up consumer and business confidence and prevent the economy from slipping into a recession. However the risk that spreads remain wide and lending standards tight cannot be discounted and supports the case for the Bank to move aggressively in the near term and then hold the policy rate at 2% for several quarters. Our forecast that the economy will return to a firmer growth path in the second half of 2009 suggests that the Bank will be in a position to make a small step toward removing some of this stimulus in the final quarter of next year and raise the overnight rate to 2.25%. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Government to boost Chinese property market

By Liu Shanshan (chinadaily.com.cn)

Facing a housing market lull which could drag China's economy further in the backdrop of a worldwide financial crisis, Beijing is probing possibilities to loosen its macro control to activate the real estate sector.

As many as 18 Chinese cities, including Shanghai,Guangzhou,Hangzhou and Xi'an, have announced detailed policies to boost their property market, which have seen at least four months of consecutive drops in housing prices.

Propelled by the local governments' measures, the central government is believed to be studying market trends. Analysts predict that Beijing is expected to jump on the bandwagon by rectifying its strict regulatory decrees of higher taxation, and removing draconian control on bank lending to anyone buying second homes.

Speaking on the sidelines of a press conference Thursday in Beijing, Du Ying, deputy minister of the National Development and Reform Commission, told reporters that the real estate industry, a major sector of China's fixed-asset investment, that a major drive behind the country's past rapid economic rise is declining, and the government is "closely watching developments".

Some Chinese economists caution that a worsening slump in the real estate market in China would not only undermine the healthy growth of the economy, but also put the country's financial system at risk.

The worsening financial crisis, now sweeping the world and hardening the lives of many, originated from the subprime debacle in mid 2007 in the United States. Because of the sudden bust of a 10-year American housing boom, a rocketing number of American homeowners were unable to pay mortgages, and the banks were troubled by mountain-high bad debts.

To prevent the same scenario from happening, the 18 Chinese cities have resorted to measures, including doling out subsidies to private homebuyers, unprecedented since former Prime Minister Zhu Rongji launched privatization policies of housing; cutting taxes on housing deeds, and even giving permanent urban residents permits to lure outside homebuyers, in Hangzhou's case.

Shanghairaised the mortgage ceiling of the housing accumulation fund by one-fifth, into which employees and employers deposit money every month in return for lower mortgage rates, a move expected to encourage city residents to apply for a larger housing loan.

Regulatory Macro Control

Like the United States and Europe,China also witnessed a sizzling real estate sector since 2000, led by Shanghai,Guangzhou, and other relatively developed coastal cities, that benefited from the reform and opening-up policies. Buoyed by increasing incomes, a rising number of well-off urban residents purchased their own homes, in addition to cars and other luxuries, and become China's middle-class.

However, the laissez-faire development of the property market has led to skyrocketing prices, which resulted in many grievances from homebuyers. At one time, the selling price of per square meter for a downtown Shanghai plush apartment was reported at more than 120,000 yuan (US$17.60). The housing price hikes also created run away inflation in 2007.

This led to Beijing putting on the brakes in August 2007 by introducing higher taxes on housing prices, collecting more fees, and imposing 110 percent mortgage rates on second apartments, effectively controlling hoarding and speculation. As a result, housing prices began to decline.

Waning Property Market

In Shenzhen, China's first special economic zone, housing prices have declined more than 40 percent from its peak last year. Sales in Beijing, Shanghai and all other major cities have reported a substantive drop.

Statistics released by the state media, Xinhua, show the housing sales volume in Beijing during the National Day holiday decreased by 72 percent, compared with the same period last year. This period is traditionally a sales peak time for real estate transactions. Despite the deep price cuts made by property developers, only 69 apartments on average were sold per day during that week.

As the backbone of China's state revenues, the weakening property demand may hit the country's public coffers and fiscal policies as well.

The fall in property sales market will lead to a reduced demand for construction materials like steel, cement and lumber, and at the same time trigger slumps in China's fixed-asset investment sector. Combined with a sharp drop in exports initiated by Wall Street's stock plunge and global financial turmoil, China may face big risks in a slowdown of GDP growth rates and even an economic downturn.

The sluggish property market has also sparked concerns over the country's capital safety, mainly from the banks. There are fears that domestic financial institutions may be caught in the same dilemma as their US counterparts, some of whom went belly up due to the subprime crisis.

Wait-and-see Homebuyers

The 18 Chinese cities used many measures to stimulate their real estate markets: extending the length of time homeowners can pay back mortgages, reducing property taxes of private house owners and canceling restrictions on buying a second home. These policies were a great impetus for Chinese salary earners who took out all their savings to buy a home a year ago, but in the current bleak housing market, more and more potential homebuyers would rather wait and see regardless of those favorable policies.

Many potential buyers believe there is still room for further price adjustments and think it is too risky to buy homes now, given the instability of the global economy. "I will not open my purse until April or May next year, when I believe housing prices may undergo a 30 percent drop," said a Beijing resident surnamed Yu, who wants to buy a home in the Chinese capital.


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Asian Currencies: Won Rebounds After Biggest Drop in a Decade

By Lilian Karunungan

Oct. 18 (Bloomberg) -- South Korea's won rebounded yesterday, following the biggest drop in a decade on Oct. 16, on speculation the government will prop up confidence in financial markets. Indonesia's rupiah and Thailand's baht gained.

The won snapped a two-day slide, paring this year's loss to 29 percent after the Bank of Korea said it will trade directly with banks in the swap market to help boost foreign currency liquidity. The government needs to raise spending and cut taxes to shelter the economy from the global turmoil, Finance Minister Kang Man Soo said yesterday.

``The move by the central bank provided a psychological boost to the currency market,'' said Kim Sung Soon, a currency dealer with state-run Industrial Bank of Korea in Seoul. ``The unrest remains though, as we all are not sure of how this global turmoil will pan out in the months ahead.''

The won rose 2.9 percent to 1,334 per dollar in Seoul yesterday, according to Seoul Money Brokerage Services Ltd. The rupiah advanced 0.7 percent to 9,810 in Jakarta, from 9,875 Oct. 16, according to data compiled by Bloomberg.

The won has lost 8.3 percent this month as banks and companies scramble for dollars to service debt, while global turmoil in financial markets makes overseas borrowings even more expensive.

Gains Limited

The change in the trading system will ``help ease the recent market jitters in the foreign-currency money market,'' the Seoul-based Bank of Korea said in a statement yesterday. Currently, the central bank trades first with intermediary banks, which then trade with local banks.

Kang and other policy makers held an emergency summit yesterday, seeking steps to restore confidence in the economy after stocks plunged to a three-year low. The Kospi share index tumbled 2.7 percent yesterday, extending this year's loss to 38 percent.

South Korea's foreign reserves fell for a sixth month in September to $239.7 billion, from $243.2 billion in August, after authorities provided dollars in the swap market to boost liquidity and help stem the won's drop.

``Further gains in the won may be limited as heavy foreign stock sales in the past few days will spur some demand for the dollar,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. Still, ``exporters are willing to sell dollars on dips in the won, which will provide some buffer.''

Indonesia's rupiah posted its first weekly gain in a month as the central bank sold dollars to limit losses stemming from a slump in the stock market.

Indonesia approved on Oct. 16 a plan giving authorities power to rescue troubled banks and insurance companies. The nation's benchmark share index fell 4.7 percent yesterday for a fourth weekly drop.

Intervention Caution

``Market players are cautious about central bank intervention,'' said Tetsuo Yoshikoshi, a market analyst at Sumitomo Mitsui Banking Corp. in Singapore.

The currency, which declined past 10,000 last week for the first time in three years, advanced 1.4 percent this week. Central banks arrange sales or purchases of currencies to influence exchange rates.

Thailand's baht ended a two-week drop on speculation cooperation among Asian governments will boost confidence among investors. Indonesia's President Susilo Bambang Yudhoyono wrote to counterparts in the region, proposing a meeting with Japan, China and South Korea to find ways to weather the credit crisis.

``We are seeing some resilience in the baht,'' said Carl Rajoo, a regional economist at Forecast Singapore Pte Ltd. ``Fundamentally, Thailand is still quite robust although politics will continue to weigh on the currency.''

The baht rose to 34.26 a dollar from 34.27 on Oct. 16, according to data compiled by Bloomberg.

Elsewhere, the Philippine peso was little changed at 48.085 a dollar, according to Tullett Prebon Plc. The Malaysian ringgit was at 3.5261 versus 3.5265 on Oct. 16. Taiwan's dollar was little changed at NT$32.550 and Vietnam's dong fell 0.1 percent to 16,605.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@blooomberg.net;


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Asia Stocks Rise for First Week in Seven on Government Measures

By Chua Kong Ho

Oct. 18 (Bloomberg) -- Asian stocks rose for the first week in seven after money market rates fell as governments in the region stepped up efforts to unlock credit markets.

Mitsubishi UFJ Financial Group Inc. and Westpac Banking Corp. rose more than 6 percent as Singapore and Malaysia joined Hong Kong and Australia in guaranteeing bank deposits. Tokyo Electric Power Co. climbed 16 percent as oil prices traded at half their July record and investors sought companies whose earnings are sheltered from a slowdown in overseas markets. The decline in oil and metals prices dragged BHP Billiton Ltd., the world's largest mining company, down 11 percent.

``The focus is on what the next policy response will be and the movements of the short-term money markets,'' said Naoteru Teraoka, who helps oversee $21 billion at Chuo Mitsui Asset Management Co. in Tokyo. ``Long-term investors are sitting on the sidelines waiting out this period.''

The MSCI Asia Pacific Index climbed 1.6 percent to 87.29 this week, its first weekly gain since August. A measure of utility companies had the biggest gains among the index's 10 industry groups, with raw-materials producers posting the largest decline.

The MSCI Asian index had its biggest-ever advance and decline this week, as investors weighed the likelihood that governments will succeed in preventing a financial industry collapse and limit the severity of a global economic slowdown.


Japan's Nikkei 225 Stock Average surged the most in its 59- year history on Oct. 14 after U.S. and European governments said they will take stakes in banks. The measure had its biggest slump since 1987 on Oct. 16 after U.S. retail sales declined, finishing the week with a 5 percent gain.

Perceived Risk

Hong Kong's Hang Seng Index fell 1.6 percent in the week, the seventh weekly decline and the longest losing streak since October 2002, as the city's Chief Executive Donald Tsang said he doesn't rule out a recession.

Mitsubishi UFJ, Japan's largest listed bank, gained 7 percent to 760 yen. Commonwealth Bank of Australia Ltd. added 4.7 percent to A$41.41 in Sydney. Westpac Banking advanced 6.4 percent to A$21.48.

The Singaporean and Malaysian deposit guarantees on Oct. 16 followed central banks in the U.S. and Europe earlier in the week committing $2 trillion to rescue financial companies from the credit crisis. The pledges drove the MSCI Asia Pacific index up 12 percent on Oct. 13-14. Institutions worldwide have posted $660 billion of losses related to U.S. mortgage investments.

The rate Australian banks charge each other for three-month loans fell to 5.66 percent from 6.2 percent a week ago. Hong Kong's three-month interbank offered rate for local dollar loans dropped the most since Sept. 26, down 0.15 percentage point to 4.2 percent. Perceived default risk in the region also declined, with measures of credit-default swaps falling in Japan and Australia.

Crude Oil Declines

Tokyo Electric, Asia's largest power producer, climbed 16 percent to 2,585 yen. Kansai Electric Power Co. gained 17 percent to 2,250 yen. Both companies use heavy oil in some of their plants.

Crude oil futures dropped to $71.85 a barrel in New York this week, bringing its plunge from a July peak to more than 50 percent. A measure of six metals traded on the London Metal Exchange, including copper and zinc, fell for a fifth week on concern demand for base metals will drop as economic activity slows.

BHP slumped 11 percent to A$24.59. Rio Tinto Group tumbled 14 percent to A$62.62, while Jiangxi Copper Co. sank 10 percent to 10.43 yuan in Shanghai.

MSCI's Asian index tumbled 31 percent in the previous six weeks as credit markets seized up, economies slowed and companies failed, making the region's equities their cheapest ever. Shares on the index were valued at 9.8 times earnings yesterday, near a record low reached on Oct. 10.

``Valuations at the moment are pretty reasonable. What I am worried about is that earnings will have to be downgraded,'' said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd. ``When you have an oversold situation, you can buy almost anything because it's a snap-back rally.''

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


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U.S. Economy: Sentiment Drops by Record; Starts Fall

By Shobhana Chandra and Bob Willis
Enlarge Image/Details

Oct. 17 (Bloomberg) -- Confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low, posing an increasing threat to consumer spending that accounts for more than two-thirds of the economy.

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 57.5 this month from 70.3 in September. The measure averaged 85.6 last year. Construction of single-family homes dropped 12 percent last month to a 544,000 annual rate, the Commerce Department said in Washington.

Today's figures show that the tightening credit crunch has spurred a further step down in the three-year real-estate recession. Falling property values, along with the crash in stocks, threaten to cause the first decline in consumer spending since 1991, and put pressure on the Federal Reserve to cut interest rates again this month.

``Even gasoline-price decreases were overpowered by the massive destruction of wealth,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``Things are pretty awful in the economy and that should make itself felt through weaker consumer spending.''

Treasuries rose and stocks dropped. Benchmark 10-year note yields fell to 3.91 percent at 4:10 p.m. in New York. The Standard & Poor's 500 Stock Index fell 0.6 percent to close at 940.55.

Economists' Forecasts

The confidence index was forecast to fall to 65, according to the median of 61 economists surveyed by Bloomberg News.

Starts on all residential properties, including condominiums, slid to a 817,000 annual pace, below all 74 forecasts in a Bloomberg News survey.

Builders will find it difficult to lure buyers into the market after stock prices plunged this month and banks made it harder to qualify for a mortgage. Declines in construction are likely to continue to hurt economic growth well into 2009, extending the housing slump into a fourth year.

``Builders have stopped building in large measure, but they waited too long to stop building,'' Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in a Bloomberg Television interview. ``At this point they've got to clear the inventory.''

Recovery Delayed

The biggest housing slump in a generation was showing signs of nearing a bottom when financial markets began to implode in September, leading to the government takeover of mortgage finance companies Freddie Mac and Fannie Mae, the failure of banks and a $700 billion government rescue plan this month.

``These things are putting a new nail'' in the real-estate market's coffin, David Seiders, chief economist at the National Association of Homebuilders, said in an interview on Bloomberg Television yesterday. ``This sort of vicious feedback loop is still in play.''

Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981.

Starts of single-family homes dropped to record lows in three of four regions in September, led by a 24 percent slump in the Midwest.

The University of Michigan's index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 56.7 from 67.2.

Record Low

Its gauge of current conditions, which reflects Americans' perceptions of their financial situations and whether it is a good time to buy big-ticket items like cars, slumped to 58.9, the lowest level ever, from 75.

There was mixed news on price expectations. Consumers said they projected an inflation rate of 4.5 percent over the next 12 months, compared with 4.3 percent in the September survey. Over the next five years, the figures tracked by Fed policy makers, Americans expected a 2.8 percent rate of inflation, down from the prior month and the slowest estimate in a year.

Regular unleaded gasoline prices slid to an average $3.08 a gallon at the pump on Oct. 15, from $3.63 on Sept. 30, according to AAA.

Shoppers are paring expenses. Sales at U.S. stores open at least a year rose 1 percent last week from a year earlier, slowing for the eighth time in nine weeks, the International Council of Shopping Centers and Goldman Sachs Group Inc. said in a statement on Oct. 14.

Wal-Mart Stores Inc., the world's largest retailer, reaffirmed its profit forecast for the third quarter after shoppers seeking discounted groceries and household goods helped to boost the Bentonville, Arkansas-based company's September sales.

Consumers ``continue to look for basics for their families,'' Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, said in an Oct. 8 statement.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net



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Platinum Drops to Lowest Close in Three Years on Demand Concern

By Halia Pavliva

Oct. 17 (Bloomberg) -- Platinum, used in jewelry and car parts, plunged in New York to the lowest closing price since July 2005 on concern that an economic slump may curb demand for goods ranging from vehicles to wristwatches. Palladium gained.

Confidence among U.S. consumers sank more than forecast this month as job losses and financial-market turmoil raised the risk that spending will slump. Building started on the fewest U.S. single-family homes in 26 years, indicating that a three- year housing-market slump hasn't ended. A collapse in U.S. subprime-mortgage lending sparked a global financial crisis.

``The markets are still dealing with heaps of raw emotion, and greed is conspicuously absent from the mix of fear, panic, desperation, and even capitulation, that is flooding the average institution's or investor's psyche these days,'' Jon Nadler, a senior analyst at Kitco Metals & Minerals Inc. in Montreal, said today in a note to clients. U.S. consumer confidence and homebuilding data ``show more gloom in the system.''

Platinum futures for January delivery fell $10.30, or 1.2 percent, to $881 an ounce on the New York Mercantile Exchange, the lowest closing price for a most-active contract since July 20, 2005. The price fell 12 percent for the week.

``Fund liquidation remains the name of this game, and it appears that no amount of individual investor interest has been thus far able to stem the declines,'' Nadler said. ``One of these days, the noble metals will have to snap back from these oversold conditions.''

The price is down 62 percent from a record $2,308.80 in March. The most-active contract has fallen 42 percent this year.

Auto Sales

Prices collapsed partly because auto sales have plunged in the U.S., the world's biggest market. More than 60 percent of global platinum consumption is for parts in exhaust-emissions filtering components for car and truck engines, according to London-based metals trader Johnson Matthey Plc.

Platinum lost 50 percent in the third quarter and 31 percent last month, the worst such declines since at least 1986.

``Many assets are undergoing distress liquidation, as investors rush for the door,'' John Reade, the head of metals strategy at UBS AG in London, said today in a research report. ``This deleveraging has become self re-enforcing and has the potential to push individual commodity prices to silly levels -- just look at platinum, now trading only 10 percent above gold on a spot basis and at a discount a few years forward.''

Palladium futures for December delivery rose $1.40, or 0.8 percent, to $174.50 an ounce in New York. The price plummeted 56 percent in the third quarter and 34 percent last month, the biggest declines since at least 1986. Most-active futures have dropped 54 percent this year.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net.



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Mexico's Peso Has Biggest Weekly Advance in Almost Two Years

By Michael J. Moore

Oct. 17 (Bloomberg) -- Mexico's peso had its biggest weekly gain since December 2006 amid speculation a global credit crisis may ease soon and as the central bank bought the currency to stem a two-month rout.

The peso gained 1.7 percent in the week, rebounding from a 14 percent tumble last week that was the biggest weekly decline since the Mexican government abandoned a currency peg in December 1994. The central bank bought $2.3 billion worth of pesos, following purchases of $8.9 billion worth last week that drew down foreign reserves from a near-record $84 billion.

``People are regaining some calm after these past couple weeks have been quite a roller coaster,'' said Mario Correa, an economist at Grupo Financiero Scotiabank Inverlat SA in Mexico City. ``It helps to know that Banco de Mexico seems to be willing to keep selling some more dollars to keep the exchange rate checked or behaving in an ordinate fashion.''

The peso fell 0.3 percent today to 12.8760 per dollar today, from 12.8343 yesterday. Mexico's currency traded at 13.0930 a week ago.

The central bank may stop using its foreign reserves to prop up the peso soon, central bank Governor Guillermo Ortiz said in an interview on the Televisa network yesterday. He said new peso purchases wouldn't be as large as last week's interventions.

The bank bought $6.4 billion worth of pesos on Oct. 10 alone. Reserves reached a record $86.9 billion on July 18, up 52 percent from three years earlier as a rally in oil, Mexico's biggest export, buoyed dollar inflows.

`Worse and Worse'

The central bank held its benchmark overnight lending rate at 8.25 percent today. A rate cut would have worked against the bank's efforts to prop up the peso, said Rafael Camarena, an economist at Banco Santander SA.

Concern that the economic slowdown in the U.S., the buyer of 80 percent of Mexico's exports, will lead to weaker growth in Mexico has pushed the peso down 23 percent from a six-year high on Aug. 4. U.S. reports on housing, consumer confidence and industrial production this week all signaled that the world's biggest economy is deteriorating faster than expected.

Mexican President Felipe Calderon plans to boost public spending next year to create jobs and spur growth, buffering the economy against the global slowdown. Lawmakers approved a bill Oct. 14 for part of the 2009 budget that proposes the largest deficit since 1990.

``The fact that the U.S. economy and therefore the Mexican economy will contract has largely been priced in,'' said Benito Berber, a strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``People are not looking at the Mexican data, but at the U.S. data, and it keeps getting worse and worse, so that validates a lot of the level that we're at.''

Bonds Fall

Higher-yielding, emerging-market currencies such as the peso have been hammered over the past month as investors pulled out of carry trades amid the worst financial crisis since the Great Depression. In the carry trade, investors fund themselves with low-cost loans in countries such as Japan and invest in countries with higher interest rates.

The yield on Mexico's benchmark 10 percent peso bonds due in 2024 rose 31 basis points, or 0.31 percentage point, this week to 9.42 percent. The bond's price fell 2.69 centavos to 104.75 centavos per peso, according to Banco Santander SA.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net



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U.S. Banks Asks Paulson to Clarify Case for Rescue

By Rebecca Christie

Oct. 17 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson needs to better explain why his $700 billion rescue program will benefit the economy, not just the banking industry, the American Bankers Association told him in a letter.

Paulson has made $250 billion available for purchasing preferred shares in banks so they can increase lending to businesses and consumers. Nine of the biggest institutions agreed to take $125 billion; the remainder will be available to ``thousands'' of others, federal regulators say.

Banks that sign up for capital injections shouldn't automatically be branded as troubled, Edward Yingling, the ABA's president, wrote in the letter today. Conflicting messages from officials, coupled with calls from some policy makers for more restrictions on participants, may be discouraging community bankers from signing up, Yingling said.

Lenders would be interested ``but not if they are going to run the risk of being labeled -- falsely -- as needing government support, or of appearing to be asking for a handout, or of being subjected to additional unknown government requirements or restrictions in the future,'' Yingling said.

Yingling said many banks aren't undercapitalized, even though current conditions make it tough to raise new funds. These banks could lend more if they take part in the Treasury's program, he wrote.

``There is simply no reason for these banks to run these risks to their reputations or their economic futures,'' Yingling said.

`Clarify' Details

``ABA requests that the Treasury and regulators clarify for the banking industry, the media, other policymakers, and most importantly, the American public the purpose of these programs and what they mean for and about the banks that participate,'' he said.

Treasury spokeswoman Brookly McLaughlin didn't respond immediately to a request for comment.

Big banks already have agreed to participate in the capital injection program. Citigroup, JPMorgan, Bank of America, Goldman Sachs Group Inc., Wells Fargo & Co., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp. will get the initial $125 billion, said John Dugan, head of the Office of the Comptroller of the Currency.

The $250 billion will alleviate credit losses and build confidence in the banking system, while the guarantee removes uncertainty that has eroded a willingness to fund balance sheets, said Dugan, who oversees more than 1,500 banks including Citigroup, Bank of America and JPMorgan Chase.

``What the government just did, particularly with the guarantee but also with the capital, is relieve that intense funding pressure, that intense run risk that can lead suddenly to a bank failing that's otherwise solvent,'' Dugan said today in an interview in his Washington office.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net.



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Gold Drops Most in Week Since August on Ebbing Inflation Fears

By Halia Pavliva

Oct. 17 (Bloomberg) -- Gold fell in New York, ending its worst week in two months, as a report showed single-family home construction sank to the slowest pace in 26 years, easing inflation concerns as the economy cools. Silver also slid.

Last month, building began on the fewest U.S. single-family homes since February 1982, fueling concerns that an economic slump may deepen. Some investors sell gold and other precious metals to raise cash when the cost of credit rises and slowing economic growth reduces inflation pressures.

Gold fell ``on the back of drastically trimmed inflation expectations and the nauseating volatility in the global equity markets,'' Jon Nadler, a senior analyst at Kitco Metals & Minerals Inc. in Montreal, said today in a note to clients. The Dow Jones Industrial Average's trading range has exceeded 500 points for seven straight New York Stock Exchange sessions.

Gold futures for December delivery dropped $16.80, or 2.1 percent, to $787.70 an ounce on the Comex division of the New York Mercantile Exchange. The price slid 8.3 percent from last week, the biggest such decline for a most-active contract since Aug. 15.

Silver futures for December delivery declined 30 cents, or 3.1 percent, to $9.335 an ounce on the Comex. The price earlier sank to $9.09, the lowest for a most-active contract since Feb. 16, 2006. The price has dropped 37 percent this year, while gold is down 6 percent.

`Under Pressure'


``The lack of jewelry demand and ongoing deleveraging is likely to keep gold and other precious metals under pressure in the near term,'' John Reade, the head of metals strategy at UBS AG in London, said earlier today in a research report. ``Deleveraging may present some fantastic opportunities for long-term value investors that can live with negative short-term marks on their portfolio.''

UBS will review its short-term forecasts for gold and other precious metals on Oct. 20, Reade said.

Building began on 6.3 percent fewer U.S. homes last month from August, falling to an annual rate of 817,000 units, the Commerce Department said today in Washington. Building permits, a sign of future construction, dropped 8.3 percent to the lowest annual pace since November 1981.

Construction starts on single-family houses slid 12 percent to a 544,000 annual rate last month, the slowest since 1982.

U.S. stock indexes rose, indicating the Standard & Poor's 500 Index was headed for the biggest weekly gain since March 2003, as investors buoyed by Google Inc.'s strong earnings followed Warren Buffett's advice to get greedy in times of fear.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net.


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Copper Rebounds on Bets Demand to Increase After Price Slump

By Millie Munshi

Oct. 17 (Bloomberg) -- Copper rose, rebounding from the lowest price since January 2006, on speculation that a plunge in the past five months may encourage buyers to step up purchases as mine disruptions threaten supply.

Workers demanding higher wages at Freeport-McMoRan Copper & Gold Inc., the world's biggest publicly traded producer, threatened to resume a strike at a mine in Peru next week. Copper has lost almost half its value from a record in May on concern that slowing global growth will erode demand.

``Copper has gone lower than I thought it would, and it has fallen very quickly,'' said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. ``There has been a lot of liquidation already, so a lot of people have hit the sidelines now and are trying to figure out the next move.''

Copper futures for December delivery rose 9.4 cents, or 4.5 percent, to $2.1795 a pound on the Comex division of the New York Mercantile Exchange. Yesterday, the metal touched $2.0405, the lowest for a most-active contract since Jan. 6, 2006. The price reached a record $4.2605 on May 5.

Union members have gone on strike twice this year at Freeport's Cerro Verde, the third-largest copper mine in Peru. Leoncio Amudio, the general secretary of the mine's union, said on Oct. 15 that workers are pressing for an 11 percent wage increase.

Copper also rose as gains in global equity markets renewed investor confidence. Industrial metals have the highest correlation of all commodities to shares, according to Deutsche Bank AG.

``The stock market rally carried on into this morning and helped to boost metals prices,'' Mike Rapson, an analyst at MF Global Ltd. in New York, said in a report.

Weaker Demand

This week, copper climbed 1.6 percent, ending a four-week slide that drove prices down 33 percent.

Last month, building started on the fewest U.S. single- family homes in 26 years, dropping 12 percent from August to a 544,000 annual rate, the Commerce Department said today. Builders are the biggest users of copper, accounting for about 46 percent of demand.

``The numbers were lousy, and it shows that there won't be a turnaround in housing anytime soon,'' Zeman said. ``Copper will continue to suffer until we stop seeing all of this extremely lousy economic data.''

On the London Metal Exchange, copper for delivery in three months rose $160, or 3.4 percent, to $4,810 a metric ton ($2.18 a pound).

JPMorgan Securities Ltd. this week forecast 2009 copper prices will average 30 percent lower than an August estimate, citing slowing global growth.

The metal will average $4,888 a ton next year, London-based analyst Michael Jansen said in a report. That compared with the earlier estimate of $6,950.

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net.



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Corn, Soybeans Rise as Export Demand Climbs After Price Slump

By Jeff Wilson

Oct. 17 (Bloomberg) -- Corn rose the most in five weeks and soybeans gained for a second straight day on signs that a price slump this month will revive demand for shipments from the U.S., the world's largest exporter of the crops.

U.S. export sales of corn jumped 68 percent the week ended Oct. 2, the Department of Agriculture said today. Soybean sales were double the previous four-week average, and sales of soybean meal, an animal feed, were the most since May, agency data show. Yesterday, corn dropped to an 11-month low, and soybeans touched the lowest since August 2007.

``The export sales were a surprise to the trade because of all the talk about declining demand,'' said Roy Huckabay, an executive vice president at the Linn Group in Chicago. ``The market feels sold out with the price drop beginning to stir some buying.''

Corn futures for December delivery rose 18.5 cents, or 4.8 percent, to $4.03 a bushel on the Chicago Board of Trade, the biggest percentage gain for a most-active contract since Sept. 12. Yesterday, corn fell to $3.71, the lowest since Nov. 2. Before today, the price dropped 21 percent this month.


Soybean futures for January delivery climbed 26.5 cents, or 3 percent, to $9.0675 a bushel. Yesterday, the price gained 0.9 percent after touching $8.38, the lowest since Aug. 27, 2007. Before today, soybeans dropped 16 percent in October.

This week, corn dropped 1.3 percent, and January soybeans were down 2 percent, extending slides to three weeks.

Corn rose to a record $7.9925 on June 27, and soybeans reached an all-time high of $16.3675 on July 3. The U.S. is the biggest producer of both crops.

Soybean Sales Climb

Cumulative soybean sales for delivery before Aug. 31 were 12.07 million metric tons, up 6.7 percent from a year earlier, the USDA said. The largest sales last week were to unnamed buyers, with China the second-biggest.

U.S. sales for delivery to China, the biggest global importer of the oilseed, are up 2.5 percent to 5.82 million tons, or 48 percent of planned shipments.

``Export commitments are 446 million bushels versus 423 million a year ago and a record for this date,'' William Tierney, the head of North American research at LMC International in Washington, said in an e-mail. ``The USDA is underestimating exports by 75 million to 100 million bushels,'' based on sales today relative to the historical pace, he said.

Billionaire investor Warren Buffett recommended buying equities, boosting stocks and sending commodities higher.

``The stock-market rally and Buffett's endorsements lifted market confidence across the board,'' said Thomas Uhlmann, a floor broker at Penson GHCO in Chicago. ``The export sales were a big story because they showed that grain demand is still elastic.''

The Reuters/Jefferies CRB Index of 19 raw materials rose as much as 3.1 percent. Yesterday, the measure dropped to the lowest in four years.

Corn is the biggest U.S. crop, valued at a record $52.1 billion in 2007, followed by soybeans at $26.8 billion, government figures show.

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net


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Coffee Price Gains as Equity Indexes Rise; Cocoa Futures Fall

By Shruti Date Singh

Oct. 17 (Bloomberg) -- Coffee prices climbed the most in almost four weeks in New York as U.S. equities headed for the first weekly gains in a month. Cocoa futures fell.

The Standard & Poor's 500 Index is heading for a 5.9 percent increase after plunging 18 percent last week. The declines in equities prompted investors to sell commodities to generate cash and to protect themselves from a slower economy that might cut demand for raw materials, including coffee. The Reuters/Jefferies CRB Index of 19 commodities gained as much as 3.1 percent today.

``The big thing that happened was stocks held their lows,'' said Jack Scoville, a vice president for Price Futures Group in Chicago. ``That's kind of allowed the selling pressure to ease. A broad range of commodities are putting in positive performances.''

Arabica coffee futures for December delivery rose 2.65 cents, or 2.3 percent, to $1.156 a pound on ICE Futures U.S. in New York. The gain is the biggest for a most-active contract since Sept. 22.

On Oct. 8, coffee dropped to the lowest price since July 2007 as investors reduced stakes in commodities amid falling liquidity and a slowing economy.

In London, robusta coffee futures for January delivery rose $33, or 1.9 percent, to $1,794 a metric ton on the Liffe exchange.

Cocoa Market

Cocoa futures for December delivery fell $2 to $2,122 a metric ton in New York. The price yesterday reached $2,093, the lowest for a most-active contract since Jan. 22.

Cocoa may approach $2,000 if equities slide again and on concern a slowing economy may reduce demand, said Hector Galvan, a trading consultant for RJO Futures in Chicago.

Prices may slump amid ``a potentially weaker demand outlook for chocolate, which is generally viewed as a luxury item,'' Standard Chartered Bank said in a report on Oct. 9. Cocoa will average $2,438 a ton in New York next year, down from a projected average of $2,567 in 2008, the bank said.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.



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Wheat Rises on Bets U.S. Exports to Climb Following Price Slide

By Jeff Wilson

Oct. 17 (Bloomberg) -- Wheat rose for the first time in four sessions on speculation that demand will increase for supplies from the U.S., the biggest seller of the grain, after prices touched a 16-month low yesterday.

The export price of soft red-winter wheat in New Orleans has dropped 58 percent from the record in March, increasing the appeal of U.S. supplies to purchasers including Egypt, the biggest global buyer, said Jerry Gidel, a market analyst at North American Risk Management Services Inc. in Chicago. A gauge of transportation expenses has dropped to a six-year low.

``U.S. wheat is very competitively priced on the world export market,'' Gidel said. ``The drop in shipping costs should help to boost sales.''

Wheat futures for December delivery rose 11 cents, or 2 percent, to $5.6625 a bushel on the Chicago Board of Trade, advancing 0.5 percent for the week, the first such gain in eight weeks. Yesterday, the price touched $5.43, the lowest for a most-active contract since June 11, 2007. Wheat is down 58 percent from a record $13.495 in late February.

U.S. export sales of wheat totaled 435,573 metric tons for the week ended Oct. 9, down 15 percent from the previous week, the Department of Agriculture said today.

Wheat is the fourth-biggest U.S. crop, valued at $13.7 billion in 2007, government data show. Corn is the largest at $52.1 billion last year, followed by soybeans and hay.

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net.

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JPMorgan Picks 16 U.S. Stocks to Hold in a Recession

By Elizabeth Stanton

Oct. 17 (Bloomberg) -- JPMorgan Chase & Co. recommended 16 companies, including McDonald's Corp. and Merck & Co., that may outperform the U.S. stock market during the ``global recession'' it expects to unfold during the next two years.

The ``Franchise 16'' list merges the strongest convictions of its 78 stock analysts with a ``top-down'' view that the banking crisis threatens global growth, said Thomas J. Lee, chief U.S. equity strategist at the New York-based bank.

``There is growing demand from clients for core holdings that outperform in a global recession,'' Lee said in a phone interview. ``Every week that passes that credit markets remain challenged, there's incremental damage to the macro economy.''

The group of companies rose 1.2 percent today, compared with a 0.6 percent drop in the Standard & Poor's 500 Index. Lee lowered his 2009 earnings estimate for companies in the index and his year-end forecast for the benchmark.

The 16 companies, including Dow Jones Industrial Average components 3M Co., Hewlett-Packard Co., McDonald's and Merck score high in three criteria, JPMorgan said. The requirements are low debt levels, return of cash to investors in the form of dividends or buybacks, and profitability. In addition, they're viewed by the bank's analysts as having the ability to prosper in a global slowdown.

JPMorgan, the largest U.S. bank by market value, this week said the world economy is already in a recession and cut its global growth forecast for 2009 to 0.9 percent from 2.1 percent.

Lee said the decision to compile the list was made two weeks ago, after the moved to fresh lows for the year that extended its year-to-date loss to 25 percent on Oct. 3. Since then, the main benchmark for U.S. equities has fallen a further 14 percent, deepening the loss to 36 percent.

`No Risk Appetite'

``We did it to provide something for clients to focus on beyond the distractions of current market conditions,'' Lee said. Fundamental analysis of stocks in the past two weeks has been ``overwhelmed by de-leveraging, the seizure in the credit markets, and the fact that there's almost no risk appetite.''

Lee cut his 2009 earnings estimate for the S&P 500 to $75 from $88, after lowering it from $93 on Oct. 3. He reduced his year-end forecast for the benchmark to 1,125 from 1,375. That represents a 20 percent gain from today's close.

The Franchise 16 list is distinct from JPMorgan's U.S. Analyst Focus List of researchers' favorite companies among the 1,200 they cover.

The new list includes 16 companies because only that many met the criteria established for it, Lee said.

``Maybe the number will change,'' he said.

The companies are:

3M Co.
Baxter International Inc.
Colgate-Palmolive Co.
CA Inc.
Devon Energy Corp.
General Mills Inc.
Gilead Sciences Inc.
Google Inc.
Hewlett-Packard Co.
McDonald's Corp.
Merck & Co.
Monsanto Co.
Nucor Corp.
Philip Morris International Inc.
Union Pacific Corp.
Visa Inc

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

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Brazil Stocks Fall on Earnings Growth Concern; Bolsa Retreats

By Alexander Ragir

Oct. 17 (Bloomberg) -- Brazilian stocks fell, narrowing the Bovespa index's gains for the week, as concern that slowing global growth and currency-related losses will hurt earnings overshadowed a rebound in commodity prices.

Aracruz Celulose SA, the world's biggest eucalyptus-pulp maker, tumbled almost 10 percent after posting its first quarterly loss in six years on a $1 billion charge from bad currency bets. BM&FBovespa SA, Latin America's biggest securities exchange, led a retreat in financial stocks after Citigroup Inc. said earnings growth next year may drop to 1 percent from 24 percent this year. Cia. Vale do Rio Doce and Petroleo Brasileiro SA gained, limiting the Bovespa index's losses today.

The Bovespa slid 42.63, or 0.1 percent, to 36,399.09. The index gained 2.2 percent this week, the first five-day gain in a month. The BM&FBovespa MidLarge Cap index slipped 0.1 percent, while the BM&FBovespa Small Cap index rose 1.6 percent. Mexico's Bolsa fell 0.7 percent today. Chile's Ipsa rose 1.5 percent for a five-day gain of 16 percent, the biggest among 89 global indexes.

``All the volatility is coming because there's a lot of big investors re-allocating money in different asset classes and deleveraging,'' said Milton Milioni, president of MM Milioni Investimentos in Sao Paulo. ``That brings the risk that what is cheap today, may be cheaper tomorrow.''

Aracruz dropped 9.8 percent to 3.33 reais today. The third- quarter net loss of 1.64 billion reais ($764 million) compares with net income of 260.9 million reais a year earlier. The losses sparked speculation other companies may face the same troubles. The Brazilian real has lost 26 percent against the U.S. dollar since reaching a nine-year high of 1.5545 per dollar Aug. 1.

Solvency Concerns

Losses from Brazil's 60 billion reais ($28 billion) derivatives market threaten the solvency of several businesses after the real's unexpected drop against the dollar since Aug. 1, said Paulo Vieira da Cunha, a hedge fund manager and former Brazilian central bank deputy governor.

BM&FBovespa fell 3 percent to 6.50 reais. Banco do Brasil SA, Latin America's biggest bank, slid 1.7 percent to 15.09.

The global economic slowdown will ensure ``much weaker earnings growth in coming quarters'' in Latin America, wrote Citigroup equity strategist Geoffrey Dennis in a note to clients.

Vale advanced 3.6 percent to 23.15 reais.

``Vale has shown the market it's ready to grow, and is carrying forward its several growth opportunities with a disciplined approach,'' wrote Credit Suisse Group analyst Roger Downey. ``Furthermore, Vale confirmed its bullish view on the long-term fundamentals of the industry.'' The Reuters/Jefferies CRB Index of 19 raw materials gained 2.4 percent to 282.14.

Petroleo Brasileiro SA, Brazil's state-controlled oil company, gained 3.6 percent to 22.99 reais as oil rose $2.

The Bovespa jumped 15 percent on Oct. 13, the most in nine years, after the government injected as much as $46 billion in the financial system and Europe, the U.S. and Asia agreed to support banks. Uniao de Industrias Petroquimicas SA, a Brazilian petrochemicals company which said it earned 465 million reais ($214 million) from the sale of a port terminal unit that day, rose 34 percent this week for the biggest gain in the Bovespa.

Bolsa Falls

Mexico's Bolsa index fell for a third day, led by homebuilders on speculation they would produce profits from government-backed mortgages even as Mexico's economy slows.

Urbi Desarrollos Urbanos SAB, Mexico's largest seller of low-income housing, had the biggest gain in four years after IXE Grupo Financiero SA advised buying shares on the outlook for earnings. Urbi gained 19 percent to 16.7 pesos.

For the week, the Bolsa gained 2.1 percent.

In Chile, Lan Airlines SA rose 5.8 percent to 5,500 pesos, extending a weekly gain to 17 percent, the steepest since May 2003. The biggest air carrier probably will benefit from lower fuel costs, helping offset a global economic slowdown, said Patricio Hernandez, who covers the stock for Banchile Inversiones.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

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Canada Stocks Have Best Week Since '02; Royal Bank, EnCana Gain

By Whitney Kisling and John Kipphoff

Oct. 17 (Bloomberg) -- Canadian stocks rose, sending the main index to its biggest weekly gain in six years, as financial shares climbed on accounting rule changes and energy companies advanced on higher oil prices.

EnCana Corp. led the rally among energy shares as crude rebounded from a 13-month low and Royal Bank of Canada paced the biggest weekly gain among banks and insurers in a decade, after Canada's Accounting Standards Board said it will give financial companies the flexibility to delay potential debt writedowns stemming from ``fair value,'' or ``mark-to-market'' accounting.

``That doesn't hurt. During the crash, mark-to-market exacerbated the panic liquidation,'' said Gavin Graham, director of investments at BMO Asset Management in Toronto, which manages about $45.3 billion. ``We've probably seen the bottom in the market, though we won't know for sure until later.''

The Standard & Poor's/TSX Composite Index climbed 3.2 percent to 9,562.49 in Toronto. Canada's benchmark gained 5.5 percent this week, the most since October 2002, after U.S. and European governments injected $2 trillion to rescue banks teetering amid the worst financial crisis since the 1930s. It was the first weekly gain in a month.

The S&P/TSX, which derives three-quarters of its value from commodity producers and financial companies, has still fallen 37 percent from its June 18 record after commodity prices slumped on concern that more than $660 million in credit losses at global financial institutions worldwide will cause a recession.

Record Advance

Royal Bank added 1.3 percent to C$46.47 today. Canada's largest lender notched a 13 percent advance this week, the best such rally since at least 1983, when Bloomberg's record begin.

Canadian Imperial Bank of Commerce gained 6.6 percent today to C$58. The fifth-biggest lender, whose writedowns of $6.3 billion account for two-thirds of Canadian lenders' total, climbed 18 percent this week, also the most since at least 25 years. Bank of Montreal climbed 5.5 percent to C$43.75. The 17 percent gain for the week was another record.

A measure of financial shares in the S&P/TSX added 1.6 percent today and had a weekly advance of 9.9 percent, the steepest since October 1998.

Crude oil for November delivery rose 2.9 percent to $71.85 a barrel after the Organization of Petroleum signaled it will announce a production cut at a meeting next week. Oil has tumbled more than 50 percent since reaching a record $147.27 in July on speculation that a world recession will curb fuel use.

`Enormous' Volatility

``The volatility remains enormous. We may revisit the lows as people figure out how deep the recession will be,'' said Graham. The world's governments and central bankers ``won't allow the 1930s to happen again. Banks are starting to outperform. Oil stocks were only pricing in $60 oil anyway.''

Encana, Canada's biggest energy company by market value, gained 7.3 percent to C$49.88 and added 15 percent for the week, the most since January 2002.

Suncor Energy Inc., the second-largest oil-sands mining company, climbed 8.4 percent to C$26.22. Husky Energy Inc. rallied 11 percent to C$32.90, the most since February 2002. Enbridge Inc., Canada's biggest pipeline company, added 7 percent to C$37.46. Oilexco Inc. surged 22 percent to C$4.37 after dropping 80 percent in a year before today.

A gauge of energy shares added 6.6 percent today, the most among the 10 industries in the S&P/TSX. Up 9.9 percent this week, the energy group is still trading 49 percent below its June 18 record.

``When you drop that fast and furious, it's natural to have some sort of snapback rally,'' said Andrew Martyn, who helps manage about C$450 million at Toronto-based Davis-Rea Ltd. ``It looks like people are doing a little bit of bargain hunting.''

Raw-materials producers dropped 11 percent this week, led lower by bullion mining companies, as gold tumbled the most in two months on easing inflation concerns, and copper touched the lowest since 2006 as U.S. house construction extended a slump.

Barrick Gold Corp., the world's biggest bullion miner, dropped 3.6 percent to C$28.01 today and fell 20 percent for the week, the most since the week of the October 1987 ``Black Monday'' crash. Goldcorp Inc. slid 5 percent to C$23.51 and slid 21 percent this week.

To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

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BB&T, Constellation, Unica, Weis Markets: U.S. Equity Preview

By Whitney Kisling

Oct. 17 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading on Oct. 20. Stock symbols are in parentheses, and share prices are as of 6:20 p.m. in New York, unless otherwise specified.

Standard & Poor's 500 Index futures expiring in December lost 0.8 percent to 933.5. Dow Jones Industrial Average futures slid 2.2 percent to 8,771. Nasdaq-100 Index futures dropped 0.9 percent to 1,311.

BB&T Corp. (BBT US): The Winston-Salem, North Carolina- based company is one of three regional banks that may join nine large U.S. banks that have agreed to sell stakes to the government. The shares fell 1.2 percent to $33.14.

Marshall & Isley Corp. (MI US), Wisconsin's largest bank, and PNC Financial Services Group Inc. (PNC US), based in Pittsburgh, are the other two companies weighing the government's offer to purchase preferred shares. Marshall & Isley slid 0.4 percent to $19.64 in regular trading, and PNC dropped 5.6 percent to $57.94 in regular trading.

Constellation Energy Partners LLC (CEG US): The fuel and energy distributor filed a statement for a proposed merger with MidAmerican Energy Holdings Inc. The two companies agreed to a ``definitive merger'' on Sept. 19. Constellation shares lost 1.1 percent to $24.06 in regular trading.

Unica Corp. (UNCA US): The Waltham, Massachusetts-based provider of software products that's lost 36 percent this year said it's cutting about 4 percent of its workforce in its fiscal first quarter. The shares rose 9.2 percent to $6.50 in late trading.

Weis Markets Inc. (WMK US): The food market operator for the Northeastern U.S. said third-quarter earnings dropped to $8.1 million, or 30 cents a share, compared with $10.8 million, or 40 cents, a year earlier. Weis recorded a $1.7 million pretax impairment charge from closing a store in the fourth quarter and said rising costs hurt earnings. The shares dropped 8.9 percent to $31.30 in regular trading.

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net

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U.S. Stocks Drop as Housing, Consumer Data Offset Buffett Buys

By Eric Martin

Oct. 17 (Bloomberg) -- U.S. stocks fell, capping a day that sent the Standard & Poor's 500 Index swinging between gains and losses at least 28 times, as worsening consumer confidence and housing data overshadowed Warren Buffett's advice to buy shares.

Caterpillar Inc., the largest maker of bulldozers, and homebuilder D.R. Horton Inc. slumped more than 7 percent on a Commerce Department report that construction of single-family homes plunged to the lowest level in a quarter century. The Dow Jones Industrial Average climbed more than 300 points before surrendering gains in the final hour of trading.

The S&P 500, which rose as much as 4 percent, ended down 5.88 points, or 0.6 percent, at 940.55, trimming its best weekly advance since February. The Dow retreated 127.04, or 1.4 percent, to 8,852.22 to cap its best week since 2003. The Nasdaq Composite Index slipped 0.4 percent to 1,711.29. Four stocks fell for every three that gained on the New York Stock Exchange.

``The market's a discounting mechanism and it's discounting a very dire scenario,'' said Gus Scacco, a money manager at AG Asset Management in New York, which oversees $1.8 billion. ``You're factoring in risks that go beyond earnings.''

The expiration of options added to trading swings today, sending the Chicago Board Options Exchange Volatility Index, or VIX, to a record. The S&P 500 climbed 4.6 percent this week, rebounding from its worst weekly drop in 75 years. The index is down 36 percent in 2008 as losses and writedowns from mortgage- related investments at banks worldwide swelled to $660 billion. The Dow added 4.8 percent this week.

Whipsawed

Investors were whipsawed this week as governments injected $2 trillion to bail out banks amid growing signs the credit crisis will spur a contraction in the global economy. The S&P 500 posted its biggest gain since the 1930s on Oct. 13, rallying 12 percent, before plunging the most since the crash of 1987 on Oct. 15 as retail sales had their steepest drop in three years.

Europe's Dow Jones Stoxx 600 Index added 3.8 percent today, while the MSCI Asia Pacific Index rose 0.4 percent.

The S&P 500 is valued at 11.5 times estimated profit for its companies. When that price-to-earnings ratio sank to 10.9 on Oct. 10, the index was the cheapest compared with the multiple using trailing profit since June 1985.

Caterpillar lost $3.05, or 7.2 percent, to $39.32, the steepest drop in the Dow average. The company had its share- price estimate lowered to $46 from $66 at Credit Suisse Group AG.

Housing Slump

D.R. Horton slid 8.3 percent to $6.77 and helped lead an S&P index of homebuilders to a 2.4 percent retreat. Housing starts slid to an 817,000 annual pace last month, down 6.3 percent from August's 872,000 level that was lower than previously estimated, the Commerce Department said. Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981.

Wal-Mart Stores Inc., the largest retailer in the world, slumped 1.6 percent to $53.77. Confidence among Americans fell by the most on record, with the Reuters/University of Michigan preliminary index of consumer sentiment losing to 57.5 this month from 70.3 in September.

American International Group Inc. tumbled 33 cents, or 14 percent, to $2.10 as the Federal Reserve said it needed to tap two-thirds of its $122.8 billion credit line. The company, once the world's biggest insurer, has borrowed $82.9 billion in the month since it agreed to a U.S. takeover, the Fed said yesterday, up from $70.3 billion a week ago.

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. each dropped at least 2.8 percent, sending the S&P 500 Financials Index to a 2.3 percent loss.

Robotic Surgery

Intuitive Surgical Inc. dropped 12 percent to $189.13. Next year's profit estimates for the maker of robotic systems for surgeries are too high because spending by hospitals likely will slow, Oppenheimer & Co. analyst Amit Hazan wrote in a note today.

The VIX, which measures the cost of using options as insurance against further declines in the S&P 500, jumped 4 percent to a record close of 70.33 as almost 80 million options expired. The most widely owned S&P 500 options expiring this week were October 1,150 puts.

The S&P 500's 18 percent retreat from that strike price through yesterday rewarded buyers of those contracts, which increased almost sixfold in value this month. Even after yesterday's 4.3 percent surge, the index had slumped 22 percent in three weeks through yesterday.

`Buying Opportunities'

The S&P 500 has slumped 40 percent from its record last October, while the Dow has lost 38 percent from its peak the same month.

``Bear markets create great buying opportunities,'' William Latimer, who helps oversee $9.5 billion as director of research at O'Shaughnessy Asset Management Inc. in Stamford, Connecticut, said in a Bloomberg Television interview. ``We don't run screaming from stores when we see sale signs in the window, we go looking for something to buy and that's exactly what investors need to be doing here.''

Stocks rose earlier after Buffett, the world's second- richest person, recommended buying U.S. shares.

``I've been buying American stocks,'' Buffett wrote in a New York Times column. ``A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread.''

Recession Picks

JPMorgan recommended 16 companies, including Monsanto Co. and Merck & Co., that may outperform the U.S. stock market during the ``global recession'' it expects to unfold during the next two years. Monsanto, the world's biggest seed producer, added $1.75, or 2.2 percent, to $80. Merck gained 31 cents to $28.50. An index of the 16 companies added 1.2 percent.

Google rallied $19.52, or 5.5 percent, to $372.54. The company reported third-quarter profit, excluding some items, of $4.92 a share as customers continued to buy Web ads even as the economy slows. That beat the $4.75 average analyst estimate in a Bloomberg survey.

Gilead Sciences Inc. rose $1.64, or 4 percent, to $43.03. Third-quarter profit for the largest U.S. maker of AIDS medications topped analysts' estimates by 3 cents on rising demand for its combination drugs.

The S&P 500 fell in 11 of the past 13 trading days as the earnings outlook for companies in the index deteriorated. Profits fell 33 percent on average for the 69 companies that reported third-quarter results since Oct. 7, according to Bloomberg data.

Wall Street analysts forecast a 7.5 percent drop in earnings in the third quarter in a Bloomberg survey last week and widened their estimates to a decrease of 11 percent today.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

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