N.Z. May Cut Key Rate By Record 100 Basis Points

By Tracy Withers

Oct. 22 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably cut interest rates tomorrow by a record amount to limit damage from the global financial crisis.

The Reserve Bank will cut the official cash rate by 1 percentage point to 6.5 percent, according to nine of 11 economists surveyed by Bloomberg. Two say Bollard will lower the rate by three-quarters of a point when he announces his decision at 9 a.m. in Wellington.

Central banks are cutting rates worldwide in an attempt to unfreeze credit markets as the financial meltdown threatens to spark a global recession. New Zealand's economy is already contracting, which prompted Bollard to start lowering borrowing costs in July to kick-start consumer and business spending.

``The global situation is deteriorating rapidly,'' said Brendan O'Donovan, chief economist at Westpac Banking Corp. in Wellington. ``New Zealand will face tighter credit and weaker exports. A large cut is clearly warranted.''

Since the central bank began using the official cash rate in 1999, the most it has either raised or lowered borrowing costs is a half point. Earlier this month, the Reserve Bank of Australia cut its target rate by 1 percentage point, the biggest adjustment since 1992.

New Zealand's dollar has slumped 20 percent the past three months, reaching a three-year low of 57.92 U.S. cents on Oct. 8, amid expectations of further interest-rate cuts. The currency bought 60.92 cents at 12:30 p.m. in Wellington.

Economic Recession

Bollard cut the rate by a quarter point in July and a half point to 7.5 percent on Sept. 11 as New Zealand entered its first recession in 10 years, contracting 0.2 percent in the second quarter after shrinking in the three months to March.

He forecast another contraction in the third quarter. Companies also expect a drop in sales in the final three months of the year, according to a survey by the New Zealand Institute of Economic Research Inc. released on Oct. 7.

Growth in 2008 will probably slow to 0.5 percent from 3 percent in 2007 amid a slump in consumer confidence and a plunge in the housing market, the Treasury Department said this month. Exports, which make up 30 percent of the economy, are slowing as a drought curbs farm production and world butter and cheese prices decline.

Faster Inflation

While the economy stalls, high fuel and food prices have driven faster inflation. Consumer prices rose at the fastest pace in 18 years in the year ended Sept. 30, Statistics New Zealand said yesterday.

Still, Bollard expects the inflation rate will slow to 3 percent by early 2010, giving him scope to cut interest rates. The central bank is required to keep average price gain between 1 percent and 3 percent.

``The economy will operate at a below-potential pace for some time,'' said Robin Clements, chief New Zealand economist at UBS AG in Christchurch. ``The Reserve Bank should have far greater confidence in the prospect for inflation to come back within the target.''

The International Monetary Fund said on Oct. 8 expansion in the world's advanced economies next year will be the slowest since 1982. Global growth may be 3 percent -- a level the fund itself has called the dividing line between a global recession and expansion.

Earlier this month, the Federal Reserve, the European Central Bank and counterparts in London, Sweden and Canada cut their benchmark interest rates by half a point to restore confidence in markets and limit damage to their economies.

Bollard, 57, will cut the rate again in December to 6 percent, according to the economists surveyed by Bloomberg. The rate will be 5.5 percent by March, the lowest level since April 2004, they forecast.

Consumer confidence is falling and the housing market is contracting. House prices dropped 6.1 percent in September from a year earlier. House sales are close to a 16-year low.

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

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Bank of Japan May Pay Interest on Reserves, Morgan Stanley Says

By Mayumi Otsuma

Oct. 22 (Bloomberg) -- The Bank of Japan may announce next week that it will start paying interest on reserves lenders deposit at the central bank to counter the global financial turmoil, Morgan Stanley said.

``The BOJ is likely to team up with other central banks to expand liquidity provisions in the run-up to year-end when funding supply and demand tightens,'' Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo, wrote in a report published yesterday. ``This may mean more urgent consideration of interest payments on reserves'' and the bank may announce the plan as soon as Oct. 31, when it releases its economic outlook.

The step would discourage lenders from hoarding cash and help the central bank provide more funds without worrying about the overnight lending rate falling below its target of 0.5 percent. The Federal Reserve adopted the measure on Oct. 6, and BOJ Governor Masaaki Shirakawa last week said he ordered his staff to hammer out a similar plan as soon as possible.

``Paying interest would allow the Bank of Japan to flood the money market with liquidity without cutting its benchmark rate,'' said Naoki Iizuka, a senior economist at Mizuno Securities Co. in Tokyo. ``It shows the bank intends to counter the financial turmoil with liquidity rather than a rate cut.''

The Fed's reserve payments are about 10 basis points below the 1.5 percent benchmark rate, giving commercial banks an incentive to park excess cash at the central bank rather than invest it at lower rates in the market. The Bank of Japan would also set the rate on reserve payments below its benchmark target, economists said.

Bottom End

``The reserve deposit rate would set the low end for rates in the overnight lending market,'' Sato wrote. ``For the BOJ, this would be an effective way to control fluctuations in the overnight rate via a new fund absorption route.''

The measure, if implemented, would follow other actions by the central bank as part of global efforts to free up credit after the bankruptcy of Lehman Brothers Holdings Inc. last month made banks reluctant to lend for fear of not being repaid.

The bank today accepted bids for $50.2 billion in loans from 40 financial institutions after last week saying it will offer lenders as many dollars as they need. Also on Oct. 15 it expanded the range of collateral it accepts for lending.

Shirakawa this month said the most essential contribution central banks can make to weather the financial turmoil is to provide liquidity. The bank didn't participate in the joint rate cuts by central banks in North America and Europe on Oct. 8, saying Japan's borrowing costs are already ``very low.'' The policy board last week unanimously kept the overnight call rate unchanged at 0.5 percent, the lowest among major economies.

The interest payments might not have much effect in Japan because the financial system remains stable and lenders aren't hoarding much cash, said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo and a former central bank official.

``Paying interest on reserves and encouraging banks to put up funds at the central bank is meaningful if there is a concern about a country's financial system, but that's not the case in Japan now,'' he said. Shirakawa isn't related to the central bank governor.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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King Says Bank of England Will Act as Recession Seems Likely

By Brian Swint and Jennifer Ryan

Oct. 22 (Bloomberg) -- Bank of England Governor Mervyn King said Britain's worst banking crisis since World War I is likely to push the economy into a recession, requiring policy makers to act ``promptly'' to prevent inflation from slowing too much.

``The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,'' King said in a speech to executives in Leeds, England yesterday. The Monetary Policy Committee ``will act promptly to ensure that inflation remains on track to meet our target.''

King said house prices will continue to fall and the pound may depreciate further in his first explicit acknowledgement that a U.K. recession is likely. The financial crisis led Gordon Brown's government to bail out the British banking system and will push the economy to its first full-year contraction since 1991, the National Institute of Economic and Social Research said today.

``We are far from the end of the road back to stability,'' King said. ``But the plan to recapitalize our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner.''

Manufacturing confidence is at the lowest since 1980, the Confederation of British Industry said yesterday, and house prices fell at the biggest annual rate in at least six years this month, Rightmove Plc said Oct. 20. Gross domestic product will fall 0.9 percent in 2009 and consumer spending will drop 3.4 percent, Niesr, whose clients include the central bank, said today.

Recession `Likely'

``Over the past month, the economic news has probably been the worst in such a short period for a very considerable time,'' King said. ``Indeed, it now seems likely that the U.K. economy is entering a recession. The balance of risks to inflation in the medium term shifted decisively to the downside.''

The fastest consumer-price gains in a decade, spurred by higher utility bills, are adding to the squeeze on consumer spending, King said. Still, the 50 percent drop in oil prices since July and the recapitalization of banks are two pieces of ``good news'' about the outlook, he said.

King cautioned against expecting borrowing costs to rebound to levels before the credit freeze took hold. The gap between the three-month London interbank offered rate and the base rate was 1.6 percentage points yesterday. The last time the benchmark rate was 4.5 percent, in July 2006, the gap was 0.29 percentage point.

`Age of Innocence'

``The age of innocence -- when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates -- will not quickly, if ever, return,'' King said. ``I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks.''

Brown's government took controlling stakes in Royal Bank of Scotland Group Plc and HBOS Plc as part of a 37 billion pound ($64 billion) bailout. It also promised 250 billion pounds in interbank loan guarantees to help unfreeze money markets after Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, destroying confidence among banks.

``Not since the beginning of the First World War has our banking system been so close to collapse,'' King said. ``It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted. The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else.''

Investor Confidence

The decline in credit-default swaps for U.K. banks is ``the single most important diagnostic statistic'' for investor perceptions of bank solvency, King said. He said bank credit derivatives have fallen ``markedly'' since the government announced its bank stakes plan, suggesting the measures are having a ``major impact'' in restoring confidence.

Contracts on Royal Bank of Scotland Group Plc have dropped to 103 basis points, falling 203 basis points since Oct. 7, the day before the government announced its bailout plan, CMA Datavision prices show.

King said that higher national debt incurred by the bailout ``need not prove inflationary'' and that the government may be able to reduce its stakes in banks ``within a reasonable period.'' He said one method would be ``by selling units in a bank reconstruction fund.''

Investors overseas may also be less willing to put their money in the U.K., King said. ``Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run.''

Economists including Citigroup Inc.'s Michael Saunders and UBS AG's Amit Kara predict that the Bank of England will follow the Oct. 8 emergency interest-rate reduction with another half- point cut at the next scheduled meeting on Nov. 6. Minutes of last month's meeting, showing how each of the nine panel members voted, will be published today.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.

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New-Home Sales to Drop 12%, Starts by Record in 2009, MBA Says

By Dan Levy

Oct. 22 (Bloomberg) -- U.S. new-home sales will fall 12 percent next year as housing starts drop by a record, Mortgage Bankers Association Chief Economist Jay Brinkmann said.

``We expect residential investment to decline further through the first half of 2009, due to the excess supply of houses and weakened demand from the recession,'' Brinkmann said yesterday at the group's annual meeting in San Francisco. The MBA also predicts that the U.S. economy will contract in the first half of 2009.

U.S. housing starts will drop to 525,000 in the second quarter of 2009, a record 70 percent decline from the peak in the third quarter of 2005, according to the forecast. Mortgage originations for home purchases will fall 20 percent this year to $912 billion, Brinkmann said.

National average home prices will fall through most of 2009, driven by declines in California and Florida, and unemployment will likely accelerate to 7.8 percent by the first part of 2010, Brinkmann said. Sales will increase by as much as 25 percent in 2010, reducing the glut of new houses, and mortgage originations for purchase will increase by about 2 percent, Brinkmann said.

California, Florida, Nevada and Arizona accounted for 46 percent of U.S. homes entering foreclosure at the end of the second quarter, and had a combined 87 percent increase in foreclosures from the previous quarter, Brinkman said in an interview.

Those states also had the highest U.S. foreclosure rates in August, RealtyTrac Inc., an Irvine, California-based seller of default data, reported last month. Nevada led with one foreclosure filing for every 91 households, followed by California, Arizona and Florida.

Home prices in 20 U.S. cities fell in July at the fastest pace on record, according to the S&P/Case-Shiller home-price index, as mounting foreclosures and contracting consumer spending signaled that the worst housing recession since the 1930s had yet to trough.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

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CPC Offers to Sell 2,000 Tons of LPG for October Delivery

By Yu-huay Sun

Oct. 22 (Bloomberg) -- CPC Corp., Taiwan's state oil refiner, offered to sell 2,000 metric tons of liquefied petroleum gas for October delivery, the Taipei-based company said on its Web site.

Details of the company's planned sale are as follows:

--------------------------------------------------------------
Product:      LPG mixture
Quantity:     2,000 metric tons +/-5%
Delivery:     Oct. 26-Oct. 31
Loading Port: Kaohsiung (southern Taiwan)
Bid Close:    Oct. 23, 2 p.m. Taiwan time
--------------------------------------------------------------

LPG, a by-product of oil refining and crude and natural gas output, is used for cooking, heating and as a motor fuel in Asia.

To contact the reporter on the story: Yu-huay Sun in Taipei ysun7@bloomberg.net

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Lehman Dynamic Spreads Through Chinese Economy: William Pesek

Commentary by William Pesek

Oct. 22 (Bloomberg) -- The Beijing Olympics sure do seem like a lifetime ago.

It's not that television viewers forgot the impressive images from August or even China's first spacewalk in September. It's more about the astonishing news of late, including Wall Street's collapse, outrage over Russia's tussle with Georgia, violence in Bangkok, chatter about Kim Jong Il's health and geopolitical flare-ups.

China's milk scandal also has dominated headlines and delivered the latest blow to the Made-in-China brand. Previous safety scares involved seafood, dumplings, pet food, toothpaste, medicine and toys. A move by Mattel Inc., the biggest toymaker, to recall tens of millions of Chinese-made products was a public- relations debacle.

The brouhaha over tainted milk brought things to another level. That would be less problematic if trends in the global economy weren't weighing on China, as evidenced by the slowest growth since 2003.

What's interesting about China being hurt by Wall Street's meltdown is that its own quality-control woes derive from similar circumstances.

At the heart of the crisis that toppled Lehman Brothers Holdings Inc. is an out-of-control system built on debt. At the heart of China's problems is frantic development that also cuts corners to meet overambitious targets. The habits of both have huge implications, but aren't easily changed because they are ingrained. The common dynamic is greed, meeting over-inflated goals, creative accounting and a sense of hubris.

Subprime Crisis

As the U.S. subprime crisis deepened a year ago, pundits said the fallout was containable and overblown. So did Chinese officials more recently as infected milk powder began sending children to the hospital.

Over time, it became clear melamine-laced milk products that killed at least four babies and sickened about 53,000 in China were everywhere. More than 20 countries and markets worldwide banned Chinese milk and foods. It wasn't unlike the process of realizing just how many countries were exposed to hard-to-price collateralized-debt obligations or Lehman bonds.

Just as the credit crisis has shaken Wall Street to its core, safety concerns are a bigger problem for China than many realize. It's one thing to fake DVDs and Prada bags. When a lack of regulation and oversight forces companies such as Unilever, Cadbury Plc and Japan's Kanematsu Corp. to recall goods, China has a true dilemma on its hands.

Crisis Territory

China's economy grew 9 percent in the third quarter, the weakest since the epidemic of severe acute respiratory syndrome, or SARS, shook Asia five years ago.

If Donald Straszheim is right, things could get worse. The Newport Beach, California-based vice chairman of Roth Capital Partners says Chinese growth will slow to about 8 percent in the fourth quarter and 6.5 percent in 2009. If you are the U.S., Europe or Japan, that kind of growth sounds splendid. For developing China, it would be crisis territory.

When the central bank cut its one-year lending rate by 0.27 percentage point recently, analysts assumed China was being a good global citizen. It's now clear the move reflected recognition of how vulnerable China's export-driven economy is to a deep U.S. recession. It also suggested deflation is a bigger worry than inflation.

Still Overheating?

It's a difficult balancing act. Economists such as Diana Choyleva of Lombard Street Research in London say China ``is still overheating'' even as it considers efforts to boost growth.

That problem may take care of itself as the global outlook darkens. ``Upstream inflationary pressures from commodity and energy prices have softened and will pass on to consumer-goods prices in the months ahead,'' says Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.

All this will contain an element of whiplash for those who believed China would avoid the U.S.'s woes. As the U.S., Japan and perhaps Europe experience a contraction, there's little that China can do to shield itself.

A critical mass of China's 1.3 billion people isn't ready to create a domestic market. Nor can China easily find other export markets to offset Group of Seven economies. China can keep cutting rates, increasing infrastructure spending and tweaking taxes, yet that may not be enough.

Different This Time

That also goes for the Communist Party's aim to double rural incomes to boost domestic consumption. Such steps include extending the tenure of farmers' leases and increasing their ability to trade and borrow against land. Three years ago, that might have helped. Coming in late 2008, as the global credit crisis spreads, the impact may be eclipsed by falling income as exports slow.

Investors in the past tended to lose money betting against China. The country has a remarkable track record of steering its way around crises. It dodged Asia's 1997 meltdown, the technology-stock implosion in the early 2000s and the gloom following the Sept. 11 attacks.

This time, things really are different. Just as Wall Street needs to change its ways, China must diversify its economy. In both cases, it's easier said than done.

The worst financial crisis since the Great Depression won't leave China unscathed. If things get that bad, Chinese officials will have more to cry over than tainted milk.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net



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OPEC Risks Split Over Oil Cuts as Economies Reel, Prices Drop

By Grant Smith and Margot Habiby

Oct. 22 (Bloomberg) -- OPEC, founded five decades ago to unify oil producers, risks dividing members as the group plans to cut output and raise prices just as developed nations face their worst recession since 1983.

Iran's energy minister, Gholamhossein Nozari, said yesterday OPEC may slash output quotas by 2.5 million barrels a day, or 8.7 percent, an amount about equal to what's pumped from Kuwait. The Algerian minister and OPEC president, Chakib Khelil, said two days earlier the reduction may be only 1 million barrels.

The debate in the Organization of Petroleum Exporting Countries pits Saudi Arabia, the group's biggest producer and a U.S. ally, against Venezuela and Iran, two nations that oppose U.S. foreign policy and advocate higher oil costs. Crude plunged 52 percent to $70.89 yesterday from its July 11 record of $147.27 on the New York Mercantile Exchange.

``The divisions arise in OPEC because what countries need and want varies,'' said Gareth Lewis-Davies, an oil analyst at Dresdner Kleinwort Group Ltd. in London. ``The Saudis are playing a long-term political game. Other countries have higher costs.''

Saudi Arabia needs oil prices of less than $30 a barrel to balance its government budget, according to Merrill Lynch & Co. estimates. The United Arab Emirates requires $40 a barrel and Qatar $55.

Iran, with double the population of Saudi Arabia, has a breakeven point of about $100 a barrel, according to Edward Morse, managing director and chief economist at Louis Capital Markets LP in New York. In Venezuela, where President Hugo Chavez's government is spending oil revenue on social programs, the figure is about $120, he said.

Below $50

Oil options trading shows the probability that crude will fall below $50 a barrel by June has more than doubled in 10 days, Deutsche Bank AG said in an Oct. 17 report. There is a 9 percent likelihood that June 2009 crude oil contracts will expire below $50, up from 4 percent, Deutsche said.

The world's industrialized economies will expand next year at the slowest pace since 1982, the International Monetary Fund said Oct. 8. Growth will weaken to 0.5 percent in 2009, from 1.5 percent this year, sending U.S. unemployment to its highest level in 16 years, the agency said.

Oil demand may fall for the first time in 15 years this year as the worst financial crisis in decades tips economies into recession, according to the Centre for Global Energy Studies, a London-based consulting company.

Different Agendas

``OPEC members have completely different agendas,'' Merrill Lynch analysts led by Francisco Blanch said in an Oct. 20 report. ``History shows that it is difficult to maintain discipline in a falling price environment, and OPEC cohesion has already started to decline.''

Eleven years ago, OPEC members bickered about output quotas as oil slid 28 percent in 10 months amid the onset of the Asian financial crisis. At a meeting in Jakarta in November 1997, they raised quotas, ignoring the turmoil that slowed Asian economies and cut oil demand. Prices fell another 44 percent by December 1998 to below $11 a barrel.

``OPEC members are worried that they will be slow to react and oil prices will drop to $50 or $40 a barrel,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

After the late 1990s price drop, Saudi Arabia, Venezuela and non-OPEC nation Mexico led efforts to cut production to boost prices.

``The death of OPEC typically comes up as a question or a theme at times when prices are falling dramatically,'' said Tim Evans, an energy analyst at Citi Futures Perspective in New York. ``It is exactly at those moments when the OPEC membership tends to recognize that they need to come up with a combined response to the market.''

`Consensus to Reduce'

Algeria's Khelil said ``there is a consensus to reduce production, but there is no agreement on how much to cut'' on Algerian television Oct. 19.

Saudi Arabia, where officials haven't made any comments before this week's meeting, is likely to resist a cut of more than 1 million barrels because it's conscious of the political response in the U.S. and other consuming countries, said John Sfakianakis, chief economist at Saudi British Bank in Riyadh.

``I don't think we will see a 2 million-barrel cut, given the reaction that this will have both by the market and by the politicians,'' Sfakianakis said in a phone interview.

Saudi King Abdullah said at a June 22 oil summit in Jeddah that the world's largest oil-exporting nation seeks ``reasonable'' prices to producers and consumers.

`Absolutely Scandalous'

U.K. Prime Minister Gordon Brown said last week that it was ``absolutely scandalous'' that OPEC is considering cuts as the global economy risks falling into a recession.

At OPEC's last meeting in September, the group's members agreed to adhere more strictly to production quotas, trimming output by about 500,000 barrels a day.

Saudi Arabia produced 9.45 million barrels a day in September, according to Bloomberg estimates. Its output target is set at 8.94 million barrels. Iran, OPEC's second-largest producer, trimmed production by 130,000 barrels to 3.95 million barrels day, close to its quota of 3.82 million barrels, according to Bloomberg estimates.

Saudi Arabia will probably forge a compromise for production cuts to be taken over coming months instead of all at one time, analysts said.

``Everyone recognizes that oil needs to be taken off the market,'' Morse said in a phone interview. ``If they cut a million, they will almost certainly have to go in for a second round of cuts.''

OPEC members will meet again in Algeria in December.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net.



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British Pound to Weaken Toward $1.60, Goldman Says

By Candice Zachariahs

Oct. 22 (Bloomberg) -- Britain's pound may weaken 4.2 percent against the dollar, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, citing charts used to predict price movements.

``After a correction higher, prices have weakened again, turning the short-term momentum bearish,'' Edgeley wrote in a research note yesterday. The pound closed below $1.7045 yesterday, opening up ``a target around $1.60,'' he wrote, citing weekly and monthly stochastic and trend strength indicators.

The pound traded at $1.6704 at 7:27 a.m. in Tokyo from $1.6707 yesterday. It has fallen 10 percent over the past month.

Britain probably faces a recession and policy makers will act to prevent inflation from slowing too far after the country's worst banking crisis since World War I, Bank of England Governor Mervyn King said yesterday. House prices will extend declines and the pound may depreciate further, King said, his first explicit acknowledgement that the U.K. may be heading into a recession.

``Rate differentials also support the move,'' Edgeley wrote. The Bank of England and the Federal Reserve on Oct. 8 reduced benchmark rates by 0.5 percentage point to 4.5 percent and 1.5 percent, respectively, to calm financial markets rocked by seizure in credit markets.

``Not since the beginning of the First World War has our banking system been so close to collapse,'' King said yesterday.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net



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Australian, New Zealand Dollars Drop on Global Growth Concerns

By Candice Zachariahs
Enlarge Image/Details

Oct. 22 (Bloomberg) -- The Australian dollar pared loses after a report showed inflation accelerated in the third quarter, prompting speculation the central bank will cut interest rates less than previously expected. New Zealand's dollar also fell.

The currencies declined for a second day against the dollar and the yen as the Standard & Poor's 500 index slid after earnings reports from companies including Texas Instruments Inc. fell short of analyst estimates, fanning concern about a global slump. Traders were betting at the end of last week that the Reserve Bank of Australia would cut borrowing costs by 75 basis points, or 0.75 percentage points, at its Nov. 4 policy meeting.

The inflation report ``doesn't change the likelihood that the Reserve Bank will move to cut interest rates; it probably does temper it to a degree,'' said Peter Jolly, head of markets research at NabCapital in Sydney, the investment-banking unit of National Australia Bank Ltd. ``This outcome tells us, certainly no more than 50 basis points.''

The Australian dollar rose as high as 68.25 U.S. cents from 67.92 cents just before the report. It traded at 67.86 at 12:34 p.m. in Sydney, from 69.15 cents in late Asian trading yesterday. New Zealand's dollar declined 1 percent to 60.83 cents from 61.45 cents.

Australia's dollar was 2.8 percent lower at 68.03 yen, while New Zealand's fell 1.9 percent to 60.98 yen.

The currencies weakened today after stocks in the U.S. dropped. Texas Instruments, the second-largest U.S. semiconductor maker, slumped to a five-year low after the company announced fourth-quarter sales and earnings forecasts that missed analyst projections.

Global Slump

``The global economy is transitioning from the financial aspects of the crisis to the real economic consequences,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. ``The global growth cycle is turning down very aggressively. The kiwi and Aussie dollars in that environment are going to remain very heavy,'' he said, referring to the currencies by their nicknames.

The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk appetite, rose to 53.11 yesterday. The VIX has averaged 26.34 this year, more than a third higher than in 2007, and rose to a record 70.33 on Oct. 17.

Benchmark interest rates are 6 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 percent in the U.S., attracting investors to the South Pacific nations' assets. The risk in such trades is that currency market moves will erase profits.

Faster Inflation

Australia's annual inflation accelerated to 5 percent in the third quarter, the fastest pace since 2001, driven by costs for housing and food, according to government figures released today. Economists surveyed by Bloomberg estimated the consumer price index increased 4.8 percent from a year earlier.

The Reserve Bank will lower borrowing costs by at least 50 basis points at its next policy meeting to 5.5 percent, according to a separate Bloomberg survey of economists. Traders were betting on Oct. 17 that the central bank would lower its benchmark rate by 75 basis points, according to a Credit Suisse index based on overnight swaps trading.

The Reserve Bank of New Zealand Governor Alan Bollard will probably cut interest rates by a record 1 percentage point tomorrow, according to a separate Credit Suisse index. Nine of 11 economists surveyed by Bloomberg News expect a cut to 6.5 percent, with two forecasting a reduction of 75 basis points.

The cut will be of ``secondary importance'' said Bagrie, as markets focus on ``wider global themes''.

Australian government bonds fell for the first day in three. The yield on the benchmark 10-year note rose 5 basis points to 5.193 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.426, or A$4.26 per A$1,000 face amount, to 100.447. A basis point equals 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.3550 percent today from 6.338 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net



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Euro Falls to 20-Month Low Per Dollar on Bets ECB Will Cut Rate

By Stanley White and Candice Zachariahs
Enlarge Image/Details

Oct. 22 (Bloomberg) -- The euro fell to a 20-month low against the dollar on speculation the European Central Bank will cut interest rates to bolster growth as the global economy heads for recession.

The single European currency also slid to the weakest in four years versus the yen as Asian stocks declined, reducing demand for higher-yielding assets funded by loans in Japan. The British pound tumbled to a five-year low after Bank of England Governor Mervyn King said the country is likely in a recession. The Australian and New Zealand dollars dropped after prices of commodities the two countries export declined.

``It's easy to sell the euro,'' said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``The ECB has a lot of scope to lower rates. Market sentiment isn't in the euro's favor.''

The euro fell to $1.2956, the weakest level since February 2007, before trading at $1.2970 as of 12:15 p.m. in Tokyo from $1.3063 late yesterday in New York. It dropped to 130.07 yen, the lowest since April 2004, and last traded at 130.11. Japan's currency was at 100.32 per dollar from 100.14.

The pound dropped to $1.6487, the lowest since September 2003, and traded at $1.6509 from $1.6706. It also declined for a third day against the euro to 78.57 pence.

The Australian dollar weakened 2 percent to 67.77 U.S. cents. New Zealand's dollar declined to 60.51 cents from 61.45. The Aussie, as Australia's currency is known, pared declines after the government reported a 5 percent inflation rate for the third quarter, more than the 4.8 percent forecast by economists in a Bloomberg News survey.

Euribor Futures

Investors bet the ECB will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8, part of coordinated reductions by major central banks.

The implied yield on the three-month Euribor contract expiring in June fell to 3.23 percent yesterday, the lowest level since January 2006. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year.

``The economic fallout of the crisis will lead to more aggressive policy actions in major countries,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The yen and the dollar will be the beneficiaries.''

Losses to Accelerate

The euro will depreciate to $1.26 in eight weeks, said Fitzpatrick. He's recommending clients buy the dollar and the yen ``pretty much against everything.''

The dollar has gained 23 percent since touching a record low of $1.6038 per euro on July 15 on speculation the U.S. currency will benefit as the European economy slows.

The British pound fell for a fourth day against the greenback after a report yesterday showed U.K. manufacturing confidence dropped to its weakest level in almost three decades.

``It now seems likely that the U.K. economy is entering a recession,'' BOE Governor King said in a speech to executives in Leeds, England yesterday. ``The balance of risks to inflation in the medium term shifted decisively to the downside.''

The pound may continue its slide ahead of the release of minutes from the central bank's last meeting due at 9:30 a.m. in London today. Citigroup Inc. and UBS AG predict the Bank of England will follow the Oct. 8 emergency rate cut to 4.5 percent with another half-point reduction when it meets Nov. 6. Barclays Capital forecast that the bank rate will fall to 3 percent by the fourth quarter of 2009.

Pound Indicators

The pound may weaken toward $1.60, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, citing weekly and monthly stochastic and trend strength indicators.

The Australian and New Zealand dollars fell after the UBS Bloomberg Constant Maturity Commodity Index yesterday declined toward its lowest level since January 2007 as prices of copper, gold and crude oil dropped. Raw materials account for 60 percent of Australia's exports and 70 percent of New Zealand's.

The kiwi, as New Zealand's currency is known, also fell as traders bet the country's central bank will lower interest rates by a record 1 percentage point from 7.5 percent tomorrow, according to a Credit Suisse index based on overnight swaps trading. Nine of 11 economists surveyed by Bloomberg News expect a cut to 6.5 percent, with two forecasting a reduction of 75 basis points.

New Zealand Rate

``The market is fully anticipating a 100 basis-point cut,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. ``It's going to be of secondary importance to the wider global themes of equity market sentiment, the flow and impact from the financial crisis to the real economy and the deleveraging process that we're seeing around the globe.''

The yen rose to a four-year high against the euro and traded near a one-week high versus the dollar on speculation a slowing global economy will prompt investors to pare holdings of higher- yielding assets funded with the Japanese currency.

The MSCI Asia-Pacific Index of regional shares lost 2.6 percent. Japan's Nikkei 225 Stock Average fell 2.9 percent after Nikkei English News reported that Mitsubishi UFJ Financial Group Inc. missed its profit forecast and Toyota Motor Corp. may record its first sales decline in a decade.

``Currency markets will take their cue from global equities,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``That should support the yen as sentiment may not be strong enough to take on risk.''

In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net



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Indian Rupee to Drop to Record of 52 on Rate Cut, Barclays Says

By Anoop Agrawal

Oct. 22 (Bloomberg) -- India's rupee will fall to a record low against the dollar by year-end on speculation the central bank will add to cuts in the benchmark interest rate, reducing demand for the nation's assets, according to Barclays Bank Plc.

The currency will weaken by about 6 percent to an all-time low of 52, said Peter Redward, head of research for emerging Asia at the U.K.'s second-biggest bank. Reserve Bank of India Governor Duvvuri Subbarao will reduce the repurchase rate for a second time this week on Oct. 24 by as much as 0.5 percentage point to 7.5 percent, according to Redward.

India's central bank on Oct. 20 unexpectedly lowered the repurchase rate for the first time since 2004 by 1 percentage point to 8 percent. It reduced the reserve requirement for banks three times in October to prevent global credit-market turmoil from curbing growth in Asia's third-largest economy. The rupee declined to a record low on Oct. 10 of 49.26.

``The central bank's moves are predominantly focused on liquidity management and financial markets stability,'' Singapore-based Redward said in a telephone interview this week. ``That will still not be an attraction for overseas investors which is why we think the rupee will weaken further.''

The rupee closed at 48.9950 per dollar yesterday in Mumbai, according to data compiled by Bloomberg. The currency has dropped almost 20 percent this year, the second-worst performance in Asia after South Korea's won.

Current-Account Deficit

India's currency will also weaken on speculation the current-account deficit will widen, Redward said.

A shortfall in the current account, the broadest measure of trade, signals more money is flowing out of the nation than is coming in.

``The current-account situation is worrisome and will keep the bias in favor of the dollar,'' according to Redward.

India's central bank reduced the so-called cash reserve ratio by 2.5 percentage points to 6.5 percent since Oct. 11 freeing up 1 trillion rupees ($20.4 billion) with banks. It will bring the measure to as low as 4.5 percent by March, Barclays forecast.

After the cut in India's borrowing costs on Oct. 20, the rate advantage for a global investor over the U.S. narrowed to 6.5 percentage points from 7.5 percentage points. The gap in comparison to Malaysia shrank to 4.5 percentage points from 5.5 points and with Thailand to 4.25 percentage points from 5.25 points.

The rupee in 2008 erased its 12.3 percent gain of last year after international funds sold a record $11.9 billion of stocks, according to the stock market regulator.

India's current account shortfall, the amount by which imports exceed exports, remittances and other income from abroad, increased to $10.7 billion in the three months to June 30 from a $1.04 billion gap in the previous quarter, the Reserve Bank of India said Sept. 30.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.



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Crude Oil Falls as Waning Demand Outweighs Prospect of OPEC Cut

By Nesa Subrahmaniyan

Oct. 22 (Bloomberg) -- Crude oil fell for a second day in New York as weakening fuel demand outweighed prospects of a production cut by OPEC at an emergency meeting in two days.

Oil prices dropped as stocks declined and the U.S. dollar climbed to 20-month high against the euro, reducing the appeal of commodities as an inflation hedge. OPEC, supplier of more than 40 percent of the world's oil, is poised to announce an output cut at an emergency meeting this week.

``It's about the real economy and that's going to drag demand down,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``The market may have priced in an OPEC cut already so they may have to do a little more than what the market expects.''

Crude oil for December delivery fell as much as $1.36, or 1.9 percent, to $70.82 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $71.20 a barrel at 10:19 a.m. Singapore time.

The November contract expired yesterday, after declining $3.36 to settle at $70.89 a barrel. Prices, which have tumbled 52 percent from the record $147.27 on July 11, are down 19 percent from a year ago.

Investors looking for protection against the dollar's decline earlier this year helped lead crude oil, gold, corn and gasoline to records.

Gold, copper and soybeans also fell yesterday. Investors often sell crude and other dollar-priced commodities when the U.S. currency gains, undermining their use as an inflation hedge. The dollar was at $1.3014 per euro at 9:45 a.m. in Singapore after rising 2.1 percent yesterday and reaching $1.3051, the strongest level since February 2007.

`Chronic Mismatch'

U.S. gasoline demand dropped 6.4 percent last week from a year ago, the 26th consecutive weekly decline, a MasterCard Inc. report yesterday showed.

``There's a chronic mismatch between demand and supply,'' said Michael Ivanovitch, president of MSI Global Inc. ``There's very little growth in the U.S. and Europe.''

The Organization of Petroleum Exporting Countries may disregard pleas from consuming nations on the brink of recession by cutting output by at least 1 million barrels this week, a Bloomberg News survey showed.

Thirty of 33 analysts surveyed yesterday and today forecast that OPEC will decide to cut output by 1 million barrels a day or more at the meeting in Vienna which was brought forward from November. That's more oil than Australia consumes. OPEC also may signal plans for an additional reduction of at least 500,000 barrels by early 2009.

Trim Supplies

Iran, OPEC's second-largest producer, said it favors a cut of between 2 million and 2.5 million barrels a day. Ministers from Algeria, Libya, and Qatar have said OPEC, which provides 40 percent of the world's oil, will need to trim supplies.

Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

OPEC will need ``more than one attempt'' to stabilize prices and may take ``several months before the desired result is achieved,'' Macquarie Group Ltd. energy research analyst David Johnson said in a report yesterday.

OPEC forecasts an excess of supply at the end of the year and start of 2009, the group's Secretary General Abdulla el- Badri told reporters yesterday in Moscow. El-Badri said that OPEC will try to balance the market, though it may not be able to achieve this goal on its own.

The U.S. Energy Department will probably report today that oil and gasoline supplies rose last week, a Bloomberg News survey showed. Crude-oil inventories climbed 2.65 million barrels in the week ended Oct. 17, according to the survey. It would be the fourth-straight weekly gain.

``The most critical data point to watch is U.S. implied petroleum demand. This has weakened substantially over the last months,'' Credit Suisse Group said in a research note today. An increase in inventories would be negative and ``risks are skewed to the downside in our view at least until the OPEC meeting.''

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.

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Korean Won Falls on Foreigner Share Sales, Growth Concerns

By Kim Kyoungwha

Oct. 22 (Bloomberg) -- South Korea's won fell for a second day against the dollar as overseas investors cut their holdings of the nation's stocks on concern a global slump will hurt exports and the economy.

The currency lost 32 percent this year, Asia's worst performer, as prospects of a global recession prompted funds to withdraw from emerging-market assets such as in Korea, increasing purchases of dollars. The Maeil Business Newspaper reported today that the country's trade account is likely to be in deficit this month as overseas sales cool.

``Demand for dollars outweighs supplies as foreign investors keep selling stocks and importers accelerate their purchases,'' said Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul. ``There's some caution that the central bank may intervene to block the dollar from rising above 1,400.''

The won declined 3.2 percent to 1,363.50 as of 11:25 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. Global funds sold more Korean shares than they bought for a sixth day, according to Korea Exchange.

The government's forecast for a trade surplus this month may prove wrong because export growth is slowing, the Maeil Business Newspaper reported. Imports exceeded overseas sales by $2.7 billion in the first 20 days of this month, it said, citing unidentified officials at the Ministry of Knowledge Economy and the customs office.

Bonds Gain

Local government bonds rose on speculation the central bank will cut interest rates to spur spending and investment in Asia's fourth-largest economy.

Economic growth is likely to fall short of 4 percent in the second half of this year and the first half of 2009, central bank Governor Lee Seong Tae said yesterday. The Bank of Korea reduced borrowing costs for the first time in four years on Oct. 9, taking the benchmark interest rate to 5 percent.

``The atmosphere is very favorable for the bond market,'' said Nam Goong Won, a fund manager with Korea Exchange Bank in Seoul. ``The next source of concern, the economic slowdown, is fueling expectations that interest rates will be cut further.''

The yield on the 5.5 percent note due June 2011 fell 4 basis points, or 0.04 percentage point, to 4.96 percent, according to Korea Exchange. The price of the security rose 0.11, or 11 won per 10,000 face amount to 103.33.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.



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Output at World No. 1 Copper Mine Down 32%, BHP Says

By Jesse Riseborough

Oct. 22 (Bloomberg) -- Production from Escondida, the world's largest copper mine, slumped 32 percent in the September quarter because of declining ore grades and electrical failures at the mill, owner BHP Billiton Ltd. said.

Total mill output at the mine in Chile fell to 208,600 metric tons in the three months ended Sept. 30 from 305,200 tons a year earlier, Melbourne-based BHP said today in a statement. BHP's share of copper sales dropped 27 percent to 118,200 tons.

``Escondida's production was impacted by declining ore grade and poor reliability in the electrical motor of the Laguna Seca SAG mill,'' said BHP, which owns a 57.5 percent stake in the operation. ``Escondida has reduced throughput to minimize potential of further stoppages.''

Electrical faults at the mill may take as long as nine months to repair and total copper production will decline by 10 to 15 percent over the next two years, Chief Executive Officer Marius Kloppers said in an interview last month. The price of copper has slumped 34 percent this year, dropping below $2 a pound yesterday for the first time since December 2005, amid speculation a global recession will reduce demand.

BHP, the world's largest mining company, fell 5.6 percent to A$27.68 at 10:11 a.m. Sydney time on the Australian stock exchange.

Lower ore quality and equipment failures may help cut annual copper output in Chile, the biggest supplier of the metal, for the first time since 2005, Eduardo Titelman, executive vice president of the state-run Chilean Copper Commission, said yesterday in an interview.

Chile Output Falling

Chile will produce 5.45 million metric tons of copper this year, down 2 percent from 5.56 million tons in 2007, The group's July forecast for prices to average $3.40 a pound next year probably now reflects a ``best case'' scenario, Titelman said.

BHP declared force majeure at the mine on Oct. 13, allowing it to miss copper concentrate deliveries, because of the equipment failure.

Total material mined at Escondida rose 20 percent to 99.4 million tons in the quarter, from 83 million tons a year earlier, BHP said. The average copper grade declined to 1.32 percent from 1.63 percent, it said.

Rio Tinto, the target of a hostile $77 billion bid by BHP, owns 30 percent of Escondida. A group led by Mitsubishi Corp. holds 10 percent.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net;



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Gold Little Changed as Haven Appeal Dims on Lending Rate Drop

By Dave McCombs

Oct. 22 (Bloomberg) -- Gold traded little changed at near a one-month low in Asia as signs the global credit crisis may be easing cut demand for precious metals as a store of value.

The metal has dropped 7.8 percent in the past five days as Asian money market rates fell and governments worldwide made trillions of dollars available to banks, encouraging lending. South Korea this week joined Europe, Australia and Hong Kong in providing banks with state backing amid a global lending drought.

``The shine is off gold as a safe haven,'' Jonathan Barratt, managing director of Commodity Broking Services in Sydney, said today by phone. ``Financial players across the board have been given some good indications that guarantees on deposits mean you don't have to worry.''

Gold for immediate delivery fell as much as 0.4 percent to $768.38 an ounce and traded little changed at $772.25 an ounce at 11:39 a.m., Tokyo time. It fell yesterday to $766.10 an ounce, the lowest since Sept. 15. Silver for immediate delivery was at $10.13 an ounce, 0.2 percent down from New York yesterday.

The metal will probably trade in a ``narrow range'' this week and may decline to as low as $745 an ounce, Barratt said.

Results of the Federal Reserve's $150 billion auction of one-month loans yesterday suggest the central bank's increase in funds available and the government's capital injections to banks are discouraging cash hoarding.

Banks and securities firms bid for less than the entire amount offered through the Term Auction Facility, or TAF, for the second consecutive auction. Financial institutions had bid for more than the amount since the Fed began the auctions in December.

Gold for December delivery rose 0.6 percent to $772.30 an ounce in after-hours electronic trading at 11:41 a.m. Tokyo time on the Comex division of the New York Mercantile Exchange.

Gold for August delivery on the Tokyo Commodity Exchange fell 2.5 percent to 2,473 yen a gram ($766 an ounce).

To contact the reporter for this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net.



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China's Stocks Fall on Profit Concerns; Huaneng Power Drops

By Chua Kong Ho

Oct. 22 (Bloomberg) -- China's stocks fell, led by smelting companies and power producers, on speculation a slowdown in the world's fourth-largest economy will accelerate profit declines.

Jiangxi Copper Co., China's second-biggest smelter of the metal, declined 2.4 percent after third-quarter profit slumped 27 percent. Huaneng Power International Inc., a unit of the nation's No. 1 power producer, sank 4.3 percent after reporting a $322 million third-quarter loss on higher coal prices and tariff caps. Anhui Conch Cement Co. slid 4.3 percent, leading cement producers lower as profit trailed some analyst estimates.

The CSI 300 Index, which tracks yuan-denominated stocks traded in Shanghai and Shenzhen, declined 31.54, or 1.7 percent, to 1,849.87 at 9:43 a.m. local time, extending this year's drop to 65 percent. About 18 stocks fell for each that advanced, with all 10 industry groups on the index lower.

``Surging costs have hit power producers badly even as electricity consumption has fallen due to the economic slowdown,'' said James Liu, who oversees about $1 billion as deputy chief investment officer at APS Asset Management in Shanghai. ``Overall market sentiment remains poor. I expect the government to introduce more measures to stimulate the economy.''

China's economy grew 9 percent in the third quarter from a year earlier, the statistics bureau said Oct. 20, the slowest pace in five years as the global financial crisis cut demand for exports.

Power Producers

Jiangxi Copper fell 2.4 percent to 10.60 yuan, after saying profit in the third quarter declined 27 percent to 919.5 million yuan, due to lower prices of the metal. Zhuzhou Smelter Group Co., China's largest zinc smelter, plunged 2.9 percent to 4.36 yuan, after reporting a third-quarter loss of 5 million yuan.

Huaneng Power lost 4.3 percent to 6.46 yuan, as it reported a 2.2 billion yuan loss in the third quarter, due to higher coal costs and state caps on electricity tariffs.

GD Power Development Co., northeastern China's largest electricity producer, sank 2.7 percent to 5.45 yuan. The company said Oct. 16 profit may have dropped more than 80 percent in the first nine months. Shenzhen Energy Group Co., which supplies power to cities in the southern Guangdong province, fell 2.8 percent to 7.40 yuan.

Anhui Conch fell 4.3 percent to 17.60 yuan. Third-quarter profit rose 13 percent to 704.3 million yuan, the company said. UBS AG cut its price estimate on the stock by 56 percent to 23.9 yuan, citing weakening demand. Tangshan Jidong Cement Co. fell 1.1 percent to 5.54 yuan, while Huaxin Cement Co. dropped 2.4 percent to 9.65 yuan.

``We think the softening demand is more severe than previously assumed and hence have turned more cautious on the cement price outlook,'' Shanghai-based UBS AG analyst Mick Mi wrote in a note today.

The Shanghai Composite Index, a measure of stocks on the larger of China's two exchanges, fell 1.7 percent to 1,924.53. The Shenzhen Composite Index dropped 1.6 percent to 511.05.

The following stocks also rose or fell in China. Stock symbols are in parentheses after company names:

China Shipping Development Co. (600026 CH), the nation's largest oil carrier, gained 0.08 yuan, or 1.1 percent, to 7.70 yuan, after third-quarter profit rose 28 percent to 1.54 billion yuan, lifted by the country's rising imports of crude.

Western Mining Co. (601168 CH), China's fourth-largest producer of zinc concentrate, declined 0.22 yuan, or 3.4 percent, to 6.35. The company reported a 32 percent decline in third- quarter profit to 282.8 million yuan on weaker demand and lower metals prices.

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



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Japan Stocks Drop on Profit Concern, Euro Weakness; Sony Drops

By Masaki Kondo

Oct. 22 (Bloomberg) -- Japan stocks fell for the first time in four days on concern the slowing global economy will weigh on profits and as the tumbling euro cut the value of European sales.

Mitsubishi UFJ Financial Group Inc., Japan's largest listed bank, sank 6.1 percent on a report the lender's six-month earnings probably dropped by half. NEC Electronics Corp., the nation's third-biggest chipmaker, tumbled by a record 19 percent after reversing its earnings forecast to a loss. Sony Corp., which gets about a quarter of its sales in Europe, lost 6.3 percent after euro retreated to a four-year low against the yen.

``As the domestic economy worsens, big banks can't avoid a slump in earnings as bad loans mount,'' said Mitsushige Akino, who oversees about $468 million at Tokyo-based Ichiyoshi Investment Management Co. ``Semiconductor stocks are what investors are most reluctant to buy right now. There is no end in sight to how bad the industry will get.''

The Nikkei 225 Stock Average dropped 265.18, or 2.9 percent, to 9,041.07 at the 11 a.m. trading break in Tokyo, its first retreat since Oct. 16. The broader Topix index fell 31.69, or 3.3 percent, to 924.95, with more than five stocks declining for each that rose. All but one of 33 industry groups on the Topix slumped.

Mitsubishi UFJ fell 6.1 percent to 797 yen, while closest rival Mizuho Financial Group Inc. dived 4.7 percent to 348,000 yen. Sumitomo Mitsui Financial Group Inc., Japan's third-biggest listed bank by assets, dropped 5.7 percent to 518,000 yen. Banks contributed the most to the Topix's decline, followed by electronics makers.

First-half profit at Mitsubishi UFJ will likely drop about 50 percent because of an increase in bad-loan costs and writedowns on shareholdings, Nikkei said today. Mizuho and Sumitomo Mitsui may post earnings that are lower than their estimates, the newspaper said.

Chip Demand

NEC Electronics plunged 19 percent to 1,227 yen, headed for the steepest drop since it listed on the bourse in July 2003. The company yesterday said it will probably have a net loss of 8 billion yen ($79.7 million) in the year to March 31 because demand for semiconductors slumped. The company had previously forecast it would break even this year.

NEC Corp., the parent of the chipmaker, tumbled 9.4 percent to 337 yen, making it the third-biggest loser on the Nikkei, while Advantest Corp., the world's biggest maker of memory-chip testers, plunged 7.1 percent to 1,404 yen.

``There is no escaping the drop off we're going to have in profits and the market is taking any bad news on earnings as a signal to sell,'' said Jun Morita, who helps oversee $365 million at Chiba Bank Ltd. in Tokyo.

Euro Effect

Sony, the world's largest maker of home video-game consoles, lost 6.3 percent to 2,530 yen. Endoscope maker Olympus Corp., which counts Europe as its biggest overseas market, stumbled 5.6 percent to 2,275 yen. Konica Minolta Holdings Inc., the world's second-largest maker of film used in liquid-crystal displays, dived 10 percent to 772 yen, after KBC Securities Japan cut its price estimate by almost half, citing a weaker European currency.

The yen appreciated against the euro to as much as 130.18, the strongest level since June 2004, from 135.27 at the close of stock trading in Tokyo yesterday. A 1 yen change against the euro affects Sony's annual operating profit by 7 billion yen, the company said in May, while it changes Konica's profit by about 850 million yen, according to KBC.

Nikkei futures expiring in December retreated 2.1 percent to 9,050 in Osaka and slumped 1.8 percent to 9,070 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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Argentina Default Looms as Pension Funds Seizure Roils Markets

By James Attwood and Bill Faries

Oct. 22 (Bloomberg) -- Argentina's planned seizure of $29 billion of private pension funds stoked concern the nation is headed for its second default in a decade.

Investors say President Cristina Fernandez de Kirchner's decision may further hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.

Argentine bond yields soared above 24 percent before the announcement late yesterday, and the Merval tumbled 11 percent. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations.

``It's the final of many nails in the coffin from an institutional investor perspective,'' Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is ``disappearing into irrelevance.''

The government's proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. Fernandez said yesterday her decision is ``in a context where the biggest countries'' are taking steps to protect their banks because of the global financial crisis.

``Instead, we're taking them for our retirees and workers,'' she said during a rally in Buenos Aires.

Borrowing Needs

Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said yesterday.

South America's second-largest economy hasn't had access to international capital markets since its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government's 2005 payout of 30 cents on the dollar, and Fernandez has said she's considering proposals to offer a new deal.

The cost of protecting Argentina's bonds against default soared yesterday, as five-year credit-default swaps based on Argentina's debt jumped 2.38 percentage points to 32 percentage points, according to Bloomberg data. The contracts to protect against or speculate on default pay the buyer face value should a borrower fail to adhere to its debt agreements.

The proposed takeover ``makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people,'' said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.

Investment Mix

Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an ``enormous error.''

Currently, about 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator's Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.

``It's a short-term fix that may cause more fiscal and macro pain in the long haul, which has been typical of the last two administrations,'' said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc.

Volume Quadrupled

Since the pension system began in 1994, trading volume on the Buenos Aires stock exchange has quadrupled. The funds were net buyers of domestic equities for a third straight month in September, investing about $144 million, according to Deutsche Bank AG. They have about $4.1 billion in domestic stocks, strategist Guilherme Paiva wrote in an Oct. 15 note.

The government's plan is ``one additional factor to count against Argentine assets,'' said Vinicius Silva, an emerging market strategist at New York-based Morgan Stanley, which recommends that emerging-market equity investors have a ``zero' weighting in the country.

Nestor Kirchner, Fernandez's husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth. The rules forced the funds to ``repatriate'' about $3 billion in mostly Brazilian assets, Sebastian Palla, chairman of the country's pension fund association, said in February.

Fund Sales

Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. The Merval is down 51 percent this year compared with 39 percent for the Bovespa in neighboring Brazil.

Bond markets also have tumbled. Yields on the government's 8.28 percent bonds due in 2033 have almost tripled to 24.69 percent from 8.83 percent a year ago.

Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion.

The latest move is ``much, much worse,'' said McNamara at Augustus Asset Managers Ltd.

``It's not just shoving a little bit of debt in at the edge, it's taking over the whole system,'' he said. ``It does even more damage to the concept of encouraging people to invest in the domestic financial industry.''

To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.netBill Faries in Buenos Aires wfaries@bloomberg.net

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Asian Stocks Drop on Growth Concerns, Commodities; NEC Declines

By Patrick Rial and Satoshi Kawano

Oct. 22 (Bloomberg) -- Asian stocks slumped, snapping a two- day rally, as weaker earnings at companies including NEC Electronics Corp. and Singapore Petroleum Co. heightened concern the global economy is headed for a recession.

NEC Electronics plunged the most on record after reversing its profit forecast to a loss, causing parent NEC Corp. to drop 9.4 percent. Mitsubishi UFJ Financial Group Inc., Japan's largest listed bank, slumped 6.1 percent after a newspaper reported earnings probably dropped by half. Posco retreated 3 percent after announcing steel production cuts. Singapore Petroleum plunged after third-quarter profit tumbled 99 percent.

``Whether you are talking about the U.S. or over here, there is no escaping the drop-off we're going to have in profits,'' said Jun Morita, a fund manager at Chiba Bank Ltd. in Tokyo, which has $3.1 billion in tradable securities. ``The market is taking any bad news on earnings as a signal to sell.''

The MSCI Asia Pacific Index declined 2.5 percent to 90.39 as of 11:32 a.m. in Tokyo. The gauge rallied 6.2 percent in the past two days as money market rates dropped around the globe, boosting confidence the financial crisis is abating.

The index has plunged 43 percent this year, set for its worst annual performance since it was created in 1987, as credit market turmoil caused losses and writedowns of more than $660 billion at financial institutions and slowed global growth.

World's Cheapest

The slump has brought shares on the index to 1.2 times book value, making Asian equities cheaper than those in the U.S. and Europe. The S&P traded at 1.8 times book value, while stocks in Europe's Dow Jones Stoxx 600 Index are valued at 1.4 times.

Japan's Nikkei 225 Stock Average declined 2.9 percent to 9,041.07, led by Konica Minolta Holdings Inc., after the yen surged to a four-year high against the euro. Losses by South Korea's Kospi index were limited as Samsung Electronics Co. climbed after scrapping its bid for SanDisk Corp. Equity benchmark indexes throughout the region dropped.

Standard & Poor's 500 Index futures rose 0.5 percent in trading today after Apple Inc. posted a 26 percent gain in profit, beating estimates. U.S. stocks slid yesterday as companies from Texas Instruments Inc. to Freeport-McMoRan Copper & Gold Inc. reported profit and revenue that missed analysts' estimates. The S&P 500 Index lost 3.1 percent.

NEC Electronics, Japan's third-biggest chipmaker, tumbled 19 percent to 1,227 yen, the steepest fall since the stock was listed in July 2003.

Semiconductor Declines

The company yesterday said it will probably have a net loss of 8 billion yen ($79.8 million) this year because demand for semiconductors slumped, reversing an earlier forecast to break even. NEC, which owns 70 percent of the company, declined 9.4 percent to 337 yen.

Powerchip Semiconductor Corp., Taiwan's largest memory-chip maker, lost 3.4 percent to NT$4.61 after reporting a third- quarter loss that was more than double analysts' estimates after prices fell because of oversupply.

Samsung, the world's biggest computer-memory maker, rebounded from a loss to climb 0.4 percent to 521,000 won after saying it scrapped plans to buy SanDisk, citing ongoing turmoil in financial markets and the declining value of the target.

Toshiba Corp., which partners with SanDisk in flash memory production, jumped as much as 3.2 percent to 382 yen on relief the company won't be squeezed out of the market.

Bank Profits

Mitsubishi UFJ fell 6.1 percent to 797 yen. The bank's first-half profit may fall about 50 percent because of higher costs to dispose of bad loans and writedowns on its shareholdings, the Nikkei newspaper said today.

Closest rivals Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. may post earnings that are lower than their estimates, the newspaper said. Mizuho lost 4.7 percent and Sumitomo Mitsui sank 5.7 percent.

``We've only just started to see the impact of the growth slowdown on the real economy,'' said Angus Gluskie, who helps oversee A$450 million at White Funds Management in Sydney. ``The companies that have been reporting now haven't been materially impacted by the slowdown yet.''

Posco, the largest steelmaker in South Korea, tumbled 3 percent to 311,500 won. Nippon Steel Corp., the world's second- biggest producer, lost 5 percent to 323 yen. BlueScope Steel Ltd., Australia's largest steelmaker, slid 5.7 percent to A$4.47.

Posco said today it will slash output of stainless steel by about a third this quarter, reining in production to cope with a slowdown in demand. Shoji Muneoka, chairman of the Japan Iron & Steel Federation and president of Nippon Steel, said yesterday Japanese producers may lower output this quarter on slower demand.

Profit Plunge

Singapore Petroleum, the only refiner traded on the Singapore exchange, tumbled 14 percent to S$2.58, set for its biggest loss in a decade. Third-quarter profit plunged 99 percent from a year earlier as falling crude prices caused the company to write down the value of its inventory.

BHP Billiton Ltd., the world's biggest mining company, declined 4.7 percent to A$27.92 after the London Metal Exchange Index fell 3.3 percent to the lowest level since November 2005.

First-quarter iron ore output rose 15 percent, crude-oil and condensates output surged 43 percent, while production from Escondida -- the world's largest copper mine -- slumped 32 percent in the September quarter, BHP said today.

Sumitomo Metal Mining Co., Japan's biggest nickel maker, tumbled 7.2 percent to 798 yen after Credit Suisse Group cut its rating on the shares to ``neutral'' from ``outperform,'' citing lower forecasts for metals prices.

Stronger Yen

Konica Minolta, the world's second-largest maker of film used in liquid-crystal displays, tumbled 10 percent to 772 yen. The company sees an 850 million yen drop in operating profit for every 1 yen gain against the euro, according to KBC Securities. Olympus Corp., which generates more than a quarter of its sales in Europe, slumped 5.6 percent to 2,275 yen.

The yen strengthened to as much as 130.07 per euro today, the highest since June 2004. The stronger yen reduces the value of sales generated overseas.

Mazda Motor Corp., 33 percent owned by Ford Motor Co., dropped 7.4 percent to 263 yen on speculation Ford may unload its stake in the company to raise cash. Mazda also counts Europe as its second-largest market.

Hyundai Motor Co., South Korea's biggest, lost 3.4 percent to 56,400 won. Isuzu Motors Ltd., Japan's third-biggest maker of commercial vehicles, tumbled 8.1 percent to 193 yen.

Citic Tumbles

Citic Pacific Ltd. fell for a second day, declining 11 percent to HK$5.80, after falling 55 percent yesterday on the news that the unit of China's biggest state-owned investment company may lose as much as $2 billion on currency bets.

Hong Kong lawmakers urged regulators to investigate Citic Pacific's delay in disclosing its currency-hedging loss, the South China Morning Post said.

National Australia Bank Ltd., the nation's largest by assets, rose 3.7 percent to A$25.57. Australia & New Zealand Banking Group Ltd., the third biggest, gained 1.8 percent to A$19.19.

Australian funding costs fell for a third consecutive day as banks' deposits at the central bank dropped and the Reserve Bank of Australia pumped A$2.46 billion ($1.67 billion) into the financial system today.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Satoshi Kawano in Tokyo at Skawano1@bloomberg.net

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