Ukraine’s Currency May Fall 24% More as IMF Limits Intervention

By Michael Patterson and Laura Cochrane

Dec. 19 (Bloomberg) -- Ukraine’s currency, down 50 percent against the dollar since June, may weaken another 24 percent as the International Monetary Fund restricts the former Soviet nation from halting the slide, Commerzbank AG says.

“It’s like a freefall, a falling knife,” said Michael Ganske, head of emerging markets in London for Commerzbank, Germany’s second-biggest bank. “The central bank has limited ammunition and ability and willingness to support the currency.”

The IMF’s $16.4 billion bailout package, agreed to last month, requires Ukraine to move toward a flexible exchange rate and prohibits reserves from falling more than 4 percent by yearend from about $32.8 billion now. While the pact permits intervention to stem “disorderly” swings, Ganske said such a decision “would be stupid.”

Ukraine’s central bank raised its refinancing rate to 18 percent yesterday from 17 percent to arrest the hryvnia’s decline after it fell as much as 18 percent in two days. The currency pared its decline yesterday to 9.1 per dollar from as weak as 9.78 as policymakers sold reserves and said a rate above 9 was “unacceptable.” At the start of the year, the dollar bought 5.04 hryvnia.

President Viktor Yushchenko threatened to fire central bank employees this week and Prime Minister Yulia Timoshenko demanded National Bank of Ukraine Governor Volodymyr Stelmakh’s dismissal. The country’s ruling coalition collapsed in September amid disagreement between Yushchenko and Timoshenko, before forming again this month.

Steel Stocks

Ukraine’s benchmark PFTS stock index has dropped 74 percent this year, the third-steepest retreat among 22 so-called frontier markets tracked by MSCI Inc. Mariupolsky Metallurgical Plant, Ukraine’s largest steel company by revenue, slid 92 percent in trading in Kiev.

The extra yield investors demand to own Ukrainian government bonds instead of U.S. Treasuries has increased more than nine times this year to 25.86 percentage points, according to JPMorgan Chase & Co.’s EMBI+ indexes. That compares with an almost three- fold increase in the main emerging-market index to 7.09 percentage points.

“I wouldn’t like to be in the shoes of the central bankers right now,” said Alexander Morozov, chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank. “There’s not much of a way out.”

Yushchenko’s economic aide Roman Zhukovskyi said this week that 60 percent of foreign-currency loans and mortgages may go into default because of the decline.

Default Swaps

Ukraine, with $105 billion of corporate and state debt, has the fourth-highest credit risk worldwide, credit-default swaps show. The cost to safeguard Ukraine’s bonds against default jumped more than 13 times this year to 31 percent of the amount of debt protected, behind Ecuador, which defaulted last week, at 59 percent, Argentina, which reneged on $95 billion of bonds in 2001, at 46 percent, and Venezuala at 33 percent, CMA Datavision figures on Bloomberg show.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Ukrainian companies need to repay as much as $4.1 billion this month as lenders refuse to refinance the debt amid the worst global financial crisis since the Great Depression, according to Dmitry Gourov, an economist focusing on Ukraine at UniCredit SpA in Vienna. Dollar loans made up 53 percent of credit issued by Ukrainian lenders as of Sept. 30, the central bank Web site says.

Shrinking Production

The economy, which relies on steel for 40 percent of exports, is weakening after production dropped 48.8 percent in November and prices tumbled. European hot rolled coil, the benchmark steel product, fell 47 percent since August to $425 a metric ton, according to data from U.K. industry publication Metal Bulletin.

The economy, which has expanded at an average annual rate of 7 percent since 2000, may shrink 5 percent next year, Oleksandr Shlapak, the president’s deputy chief of staff, said last month.

Industrial production shrank by a record 28.6 percent in November as steel, machine building and oil refining slumped, after a 19.8 percent decline in October, the Ukrainian Statistics Office said last week.

“This has to be stabilized now, and the only way to stabilize the situation is probably by tweaking the IMF program with more money and changing the conditions to reflect these new more difficult realities,” said Simon Johnson, a senior fellow at the Peterson Institute for International Economics in Washington and former chief economist of the IMF.

IMF Program

The IMF has allocated $4.5 billion to support the country’s banks, increase deposit insurance and boost funding for unemployment benefits, according to the last statement on the fund’s Web site, dated Nov. 5. Before the IMF deal, Natsionalnyi Bank Ukrainy drained $3.4 billion in November and $4.1 billion the previous month to manage the currency’s decline.

The IMF “doesn’t want to see its money wasted on defending a currency level that isn’t sustainable,” said Nick Chamie, head of emerging-market research at RBC Capital Markets in Toronto.

Balazs Horvath, the IMF representative in Kiev, said in an interview yesterday that the government needs to stick to the agreement “to keep the exchange rate from collapsing.”

The central bank will sell U.S. currency at a rate of 8.7 hryvnia per dollar today, 4.5 percent below the market exchange rate, Finance Minister Viktor Pynzenyk said in televised remarks yesterday. Central banks intervene when they buy or sell currencies to influence exchange rates.

‘Stricter Policy’

“We will have a stricter monetary policy,” Stelmakh, the central bank governor, said yesterday.

The central bank is calling for a law to force exporters to convert part of their revenue into hryvnia and a ban on household loans in foreign currencies, Petro Poroshenko, head of the central bank’s council, said late yesterday in Kiev.

“The central bank has asked exporters to sell their dollars, but in this situation exporters are reluctant to convert because they see a further dip,” said Mandar Jayawant, a managing partner at Singapore-based Frontier Investment & Development Partners, which manages private-equity funds in frontier markets and doesn’t have investments in Ukraine.

“The sovereign is in a position where it shouldn’t necessarily default on its debt,” Kevin Daly, who manages about $4 billion in emerging-market bonds at Aberdeen Asset Mangement in London, said in an interview on Bloomberg Television yesterday. “It clearly looks like it will continue to devalue.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Laura Cochrane in London at lcochrane3@bloomberg.net

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Japan Says Economy Won’t Grow in 2009 as Recession Deepens

By Toru Fujioka and Jason Clenfield

Dec. 19 (Bloomberg) -- Japan’s government slashed its economic growth forecast for next fiscal year as the global slowdown prompts companies to cut business investment.

Gross domestic product in the world’s second-biggest economy will probably be unchanged in the year starting April 1, lower than the government’s July forecast for a 1.6 percent expansion, the Cabinet Office said in Tokyo today. The forecasts are used to project tax revenue in the fiscal 2009 budget, due for release later today.

Meager growth means the government may have to sell more bonds to make up for declining tax revenue. The nation’s debt is the largest in the industrialized world, exceeding 170 percent of gross domestic product.

For the year ending March 31, the economy will contract 0.8 percent, matching the weakest reading since the nation’s last recession in 2001, the report said. Capital spending will drop 4.7 percent this year, which would be the biggest drop in a decade, the report showed. It will decline 4.2 percent in 2009, the government predicted.

Japan’s tax revenue will probably fall by 7.4 trillion yen ($84.4 billion) next fiscal year, a Finance Ministry official said yesterday. Receipts will total 46.2 trillion yen in the year ending March 31, 2010, 14 percent lower than this year’s projected revenue of 53.6 trillion yen, the person said under the condition of anonymity.

The government will probably need to sell about 35 trillion yen of new bonds next fiscal year to help pay for a shortfall in receipts, according to Naomi Hasegawa, a senior bond strategist at Mitsubishi UFJ Securities Co. in Tokyo.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.netJason Clenfield in Tokyo at jclenfield@bloomberg.net

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Trichet Says Deposit-Rate Cut May Help Revive Lending

By Sandrine Rastello and Helene Fouquet

Dec. 19 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said financial companies may begin lending more to each other after policy makers made it less attractive to turn to them for support.

The ECB yesterday cut the interest rate it pays banks to deposit money with it overnight and lifted the rate it charges for emergency loans. The shifts were the latest effort by the central bank to jolt risk-averse banks into freeing up credit as the euro area’s recession deepens.

“This could have a role in encouraging the money market to function more normally,” Trichet told reporters after meeting late yesterday with European finance chiefs in Paris.

Trichet and other officials have expressed concern that after cutting their benchmark interest rate at the fastest pace in the ECB’s 10-year history to 2.5 percent, further reductions may fail to bolster the economy as long as banks are refusing to lend to each other, consumers or companies.

From Jan. 21 the ECB’s deposit rate will be reduced to 100 basis points below its main rate and the marginal lending rate will be increased to 100 basis points above it, the ECB said yesterday after its governing council met in Frankfurt. Both are now separated from the bank’s key rate by 50 basis points.

“Banks have been hoarding cash and this is the ECB’s latest step to discourage them from doing so,” said Janet Henry, chief European economist at HSBC Holdings Plc in London. “We’re likely to see other measures taken to revive flows.”

Three-Month Loans

While the rate that banks say they charge each other for three-month loans yesterday fell to 3.13 percent, the lowest since July 2006, it is still 63 basis points higher than the ECB’s benchmark. The gap averaged 15 basis points in the seven years to August 2007, before the credit crisis began.

The new deposit and emergency rates will come into effect almost a week after the ECB’s governing council convenes on Jan. 15 to set its main rate, which it has lowered 175 basis points since early October.

Investors are betting on a cut of 25 basis points next month even as officials signal they may pause. Trichet said Dec. 15 that there is a limit to how far the central bank can pare rates. He said today he had “nothing to add” to those comments.

At the Paris talks, European officials expressed confidence that their economy would rebound from its first recession in 15 years. European Monetary Affairs Commissioner Joaquin Almunia said fiscal stimulus packages may add 0.9 percentage point to growth next year.

Conflicting Reports

The officials gave conflicting reports on how they view the euro’s recent surge against the pound and the dollar. While Italian Finance Minister Giulio Tremonti said he was “unconcerned” by it, French Finance Minister Christine Lagarde said it was a disadvantage to the region’s exporters.

Continuing its attempt to thaw frozen money markets, the ECB also said yesterday it will keep providing unlimited liquidity at a fixed rate “for as long as needed, and at least until the last allotment of the third maintenance period in 2009 on March 31.” Trichet said such lending showed critics “should not underestimate what we are doing.”

As banks have remained wary of lending since the Sept. 15 collapse of Lehman Brothers Holdings Inc., overnight deposits at the central bank have surged. Deposits rose to 200.4 billion euros ($286.4 billion) on Dec. 17, almost four times the daily average of 534 million euros in the year until Sept. 15. They reached a record 297.4 billion euros on Nov. 6.

Storing Cash

The lower deposit rate may not dissuade banks from storing cash at the ECB, said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc. Banks may have been leaving money with the central bank “because of counterparty risk considerations rather than to seek a return on these deposits,” he said.

Even if banks stop turning to the ECB they are unlikely to lend elsewhere, said Laurent Bilke, an economist at Nomura International in London. “It will not really increase credit to the economy,” he said.

If banks don’t begin lending more, the ECB may start to guarantee short-term interbank loans by creating a clearinghouse, Cailloux said. ECB Vice President Lucas Papademos said on Dec. 15 that is “a concept worth studying.”

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net.

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Bank of Japan May Cut Rate, Pump Funds Into Economy

By Mayumi Otsuma

Dec. 19 (Bloomberg) -- The Bank of Japan may trim interest rates today and introduce new ways of pumping funds into the banking system to bolster the ailing economy.

Governor Masaaki Shirakawa and his colleagues may lower the overnight lending rate from 0.3 percent, the second reduction in two months, economists said. The bank may also offer to buy more government bonds from lenders, start purchasing commercial paper from them and broaden the range of collateral it accepts.

The global economy is in the worst state since the Great Depression, intensifying the risk for a prolonged slump in Japan, Shirakawa told parliament on Dec. 16. The U.S. Federal Reserve’s decision later that day to cut its rate to as low as zero fueled speculation that Japan will follow suit.

“With the Fed action, it’s become more likely the Bank of Japan will also cut,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, who now expects a reduction to 0.1 percent today.

Investors yesterday saw a 57 percent chance that the policy board will lower the key overnight rate today, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 20 percent on the morning of Dec. 16.

The central bank will probably announce its decision by early afternoon. Shirakawa will speak at a press conference at 3:30 p.m. in Tokyo. Jiji Press and the Mainichi newspaper today reported the central bank will likely leave the rate unchanged.

Stronger Yen

The Fed’s reduction brought the U.S. key rate lower than Japan’s benchmark for the first time since 1993 and caused the yen to surge to a 13-year high, hurting Japanese exporters already reeling from a collapse in overseas demand.

Honda Motor Co. cited the yen’s gains and slumping sales as reasons for slashing its full-year profit forecast by 62 percent this week. President Takeo Fukui described the currency’s level of around 89 yen to the dollar as “abnormal” and called on the government and central bank to take “swift action.”

“With U.S. rates now lower than Japan’s, there’s the risk that the yen will keep strengthening,” said Nobuto Yamazaki, executive fund manager at Diam Asset Management in Tokyo. “Now that the U.S. has a zero-rate policy, there’s no point for the Bank of Japan to hold its key rate at 0.3 percent.”

Confidence among Japan’s major manufacturers fell the most in 34 years, the central bank’s quarterly Tankan survey showed this week. Nissan Motor Co., Canon Inc. and Sony Corp. are among the exporters cutting production, spending and jobs, deepening the country’s first recession since 2001.

The bank will probably lower its assessment of the economy today, said Teizo Taya, a former central bank policy maker.

‘Fallen Apart’

“The bank’s forecast that the economy would return to potential growth by 2010 has fallen apart,” said Taya, now head of the Daiwa Institute of Research in Tokyo. “A downward revision is just unavoidable.”

Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they want the central bank to inject more cash into the economy to help companies borrow.

Japanese banks’ borrowing costs fell for a second day yesterday, halting the longest increase since July 2006, on growing speculation the central bank will cut interest rates. The Tokyo three-month interbank offered rate, or Tibor, declined to 0.918 percent yesterday from a decade-high 0.922 percent on Dec. 16, according to the Japanese Bankers Association.

Some economists say the central bank will avoid lowering rates and instead focus on steps to provide more funds. Shirakawa has repeatedly said further rate reductions would impede the flow of funds in the economy by making it unprofitable to trade in the money market.

Zero-Rate Policy

“If we can trust BOJ officials’ remarks, the chance that it will adopt the zero-rate policy isn’t high, though we can’t rule it out completely,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

The central bank may offer to increase its monthly government bond purchases from lenders, one of its main tools for adding funds to the banking system. The purchases have been kept at 1.2 trillion yen ($13.7 billion) since October 2002.

The bank may also begin to buy commercial paper from lenders outright. Currently it accepts such short-term corporate debt only as collateral, with repurchase agreements. Prime Minister Aso announced last week that the government will start buying the securities.

Shirakawa said this week the bank hasn’t dismissed the possibility of buying commercial paper, while adding that policy makers must consider how buying riskier assets would affect its balance sheet.

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

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Samsung Bets on Shell’s Floating LNG Plan as Tanker Orders Fall

By Dinakar Sethuraman and Angela Macdonald-Smith

Dec. 19 (Bloomberg) -- Samsung Heavy Industries Co. and Hyundai Heavy Industries Co. are betting that Royal Dutch Shell Plc’s plan for untried floating gas-export terminals will spur billions of dollars in orders as the shipping market collapses.

A floating liquefied natural gas project may cost 50 percent as much as a typical onshore terminal and boost supplies of the cleaner-burning fuel. Orders for ships including tankers, dry bulk carriers and LNG vessels in the first 10 months of this year dropped 38 percent, said Clarkson Plc, the world’s largest shipbroker.

LNG projects may rescue shipbuilders buffeted by canceled orders from the global financial crisis at a time when onshore ventures are being stalled by rising costs and environmental objections. Shipyards will record the lowest orders in a decade for vessels transporting LNG, freeing space for floating plants, according to London-based Drewry Maritime Services Ltd.

“Everything has come together to give a very favorable atmosphere and conditions to develop these” ships, said Jos Leo, director of floating LNG at The Hague-based engineering company CB&I Lummus, part of Chicago Bridge & Iron Co. “There is momentum now.”

The challenge is that no one has managed to take a plant, the size of 170 soccer fields, that requires 50,000 cubic meters of concrete and 6,400 metric tons of structural steel, then shrink it to 4 percent of its size and send it 250 miles (402 kilometers) offshore. Shell and other backers of floating- platform technology say they can do just that.

Ship Orders

Samsung Heavy, based in Seoul, has contracts to build four such vessels by 2012, each costing about $1.2 billion, for Flex LNG Ltd., which wants to operate the world’s first floating LNG plant.

Daewoo Shipbuilding & Marine Engineering Co., Hyundai Heavy and Samsung Heavy, all in South Korea, made bids for Shell’s vessel, which may cost as much as $5 billion and be the world’s biggest. Shares of the three largest shipbuilders declined as much as 69 percent so far in 2008, compared with a 42 percent drop in Korea’s Kospi index.

Crude oil in New York tumbled 73 percent from a record $147.27 a barrel in July to a four-year low of $39.19 a barrel, and gas declined 59 percent from a 30-month high of $13.69 per million British thermal units in July on the New York Mercantile Exchange. Prices of LNG in Asia, which are linked to crude, declined 40 percent from a record $20 per million Btu. Global oil demand this year will fall for the first time since 1983, according to a U.S. Energy Department report.

Demand for liquefied gas, spurred by rising use of gas- fired generators and the shutdown of nuclear power plants in Japan, grew three times that of oil last year, according to BP Plc’s Statistical Review of World Energy.

Shipyards Available

“We are having space in our shipyards now to build these big vessels,” said J.S. Kim, a project manager at Ulsan-based Hyundai Heavy, the world’s largest shipbuilder. The financial crisis slowed orders for vessels, enabling shipbuilders to focus on technically advanced LNG platforms and drill ships, he said.

The advanced offshore products contributed 67 percent of Samsung Heavy’s $15.3 billion of contracts this year, surpassing orders for tankers for the first time in the company’s 34-year history, the company said.

“There’s more optimistic view for offshore products because demand is very strong,” Lee Jae Won, an analyst at Tong Yang Securities Inc. in Seoul. “Oil majors have plans to explore more oil and gas.”

Samsung Heavy won contracts for two LNG carriers this year, down from 11 in 2007, according to company spokesman Hwang In Chan. Orders for large container vessels fell to nine this year from 34 in 2007, he said.

Credit Crisis

The world’s biggest financial companies incurred more than $1 trillion in writedowns and credit losses since the start of last year, prompting banks to slow lending.

“The liquidity crunch raises an issue,” said Richard Nelson, a Singapore-based partner of global energy group at U.K. law firm Herbert Smith. “The industry may move toward balance- sheet funding.”

That switch means AAA-rated companies such as Exxon Mobil Corp. with about $37 billion in cash and Shell with $9.7 billion will have better ability to finance projects, while smaller ventures seek help.

“The credit markets are tough but for LNG projects the window is still open if projects are structured correctly,” said Philip Fjeld, Flex’s chief executive officer, who plans to focus on energy companies instead of banks to raise as much as $400 million next year. Each of Flex’s ships at 1.7 million tons of capacity is less than half of Shell’s vessels.

Floating LNG plants may cost $550 to $700 per ton of capacity, compared with $1,500 for onshore projects, Fjeld said. Such ventures may boost supplies by 12 million tons annually by 2015, a little more than growth in global demand last year.

Shorter Time

Floating LNG projects may find it easier to raise money compared with traditional LNG developments because of lower costs, shorter development time and less environmental effect, Erik Wojcik, director of energy and infrastructure finance at Societe Generale SA, said at a conference in Sydney.

Offshore versions may take less than half the time to build compared with onshore units, Citigroup Inc. said in April.

The floating carriers will initially operate in calmer waters because turbulent seas may cause the liquid fuel to swirl and slosh at tank walls, damaging the equipment. Operating in the hurricane-prone Gulf of Mexico is tougher, said Steven Chan, global head for LNG at U.K.-based Lloyd’s Register Asia, which inspects and certifies ships for safety.

Floating LNG will remain a “niche play” because of the small size of the plants, said Frank Harris, head of global LNG at Wood Mackenzie Consultants Ltd., a U.K. energy research firm.

Shell Interested

Shell, the world’s biggest non-government LNG producer, invited three groups to bid for the contract to build the world’s biggest floating LNG facility in June, said Saskia Kapinga, a Shell spokeswoman. The ship may be about 480 meters long and 80 meters wide with 270 people living onboard.

Petroleo Brasileiro, Brazil’s state oil company, may order at least one floating LNG plant from Schiedam, Netherlands-based SBM Offshore NV, a marine equipment supplier and installer, to develop the Western Hemisphere’s biggest oil find in three decades. For each barrel of oil at the deposit, called Tupi, there’s 700 to 1,000 cubic feet of gas that can be liquefied on a floating platform for shipment.

As vessel orders plunge, Samsung Heavy, Hyundai Heavy and Seoul-based Daewoo Shipbuilding will be counting on floating LNG to hold up earnings. Orders for vessels may tumble by half this year because of declining freight rates and a lack of financing, said London-based Drewry, a shipping consultant.

“Shipyards had the most phenomenal party from 2005 to 2008,” said George Horsington, general manager of Swire Production Solutions Ltd. in Singapore, which operates floating oil platforms. “Floating LNG, a perpetual hope of the industry, looks better than ever.”

To contact the reporter on this story: Dinakar Sethuraman in Singapore at o dinakar@bloomberg.net.

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Australia, New Zealand Dollars Sink on GE Outlook, Global Slump

By Candice Zachariahs

Dec. 19 (Bloomberg) -- The Australian and New Zealand dollars dropped as equities fell after General Electric Co’s debt-rating outlook was changed to negative, prompting investors to shun higher-yielding assets.

The currencies declined for the first day this week as crude oil, Australia’s fourth-most valuable commodity export, fell below $36 a barrel for the first time since 2004. The world economy will contract next year for the first time in almost half a century, according to the Institute of International Finance, which represents the world’s largest banks.

“The GE downgrade is another sign the world economy is in big trouble,” said Joe Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia Ltd. “For a small, open economy like Australia, our fortunes are tied to what happens overseas. We think the Aussie is going to end the year around 64 U.S. cents,” he said, referring to the currency by its nickname.

Australia’s currency pared loses after falling as much as 4.5 percent, the most since Oct. 24, and traded at 68.42 U.S. cents as of 12:18 a.m. in Sydney from 70.86 cents late in Asia yesterday. The currency slid 1.3 percent to 61.90 yen.

New Zealand’s dollar dropped 3 percent to 58.45 U.S. cents from 60.22 in Asia yesterday and bought 52.31 yen.

The currencies slipped after Standard & Poor’s said GE, the world’s biggest insurer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate.

‘Unholy Trinity’

The global economy has been hit by an “unholy trinity” of financial problems, the Institute of International Finance said yesterday. Banks lack adequate capital to cover holes in their balance sheets as they struggle to raise funds after suffering big losses on troubled assets, it said.

The Australian and New Zealand dollars were set for their second consecutive weekly gains, having strengthened over the last four days as the Federal Reserve reduced U.S. borrowing costs to as low as zero, fueling demand for currencies offering better returns. The Reserve Bank of Australia signaled in the minutes of its December meeting, released Dec. 16, that it may slow the pace of its most aggressive rate cuts since 1991.

Australia’s dollar advanced 4.2 percent from 66.44 cents in New York last week and 2.3 percent from 60.52 yen. New Zealand’s currency gained 6.9 percent from 54.68 in New York on Dec. 12 and 4.8 percent against the yen.

Investors should buy the Australian currency against the U.S. and New Zealand dollars in 2009 as weak economic data in both those countries “start to favor the Australian dollar,” wrote Sydney-based Joshua Williamson, a senior strategist at TD Securities Ltd., in a research note dated Dec. 18. “Any signs of a global recovery, if indeed there is such a surprise, would further support the Australian dollar.”

Annual Slide

The Australian dollar has dropped 20 percent against the U.S. dollar in 2008 and 37 percent versus the yen as slumping commodities and a global recession damped demand for the nation’s assets. New Zealand’s currency declined 23 percent versus its U.S. counterpart and 40 percent against the yen.

Australian government bonds were little changed with the yield on the 10-year note at 4.05 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.042, or A$0.42 per A$1,000 face amount, to 109.958.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, slid to 4.61 percent from 4.63 yesterday.

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

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Yen Declines Against Euro on Speculation BOJ Will Lower Rates

By Stanley White

Dec. 19 (Bloomberg) -- The yen fell against the euro on speculation the Bank of Japan will today lower borrowing costs and say it will buy commercial paper to combat a global recession.

The yen may also weaken for a second day against the dollar on speculation Japanese officials will intervene to stem its surge to a 13-year high. The dollar declined against the euro, heading for its biggest weekly loss since the 15-nation currency’s 1999 debut, after the Federal Reserve introduced near- zero interest rates and said it would focus on buying debt, a policy known as quantitative easing.

“It’s clear the BOJ has to respond with some combination of rate cuts and additional measures to improve liquidity,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The alternative of doing nothing would be taken as tacit approval of sharp yen appreciation.”

The yen declined to 127.72 per euro as of 9:46 a.m. in Tokyo from 127.44 late yesterday in New York, when it reached a six- week low of 130.92. It was little changed at 89.46 versus the dollar. The yen surged to 87.14 per dollar on Dec. 17, the highest level since September 1995. The dollar declined to $1.4277 versus the euro from $1.4240. The yen may weaken to 90 per dollar today, Ishikawa said.

The yen has appreciated 25 percent against the dollar this year, the most since 1987, as more than $1 trillion of credit- market losses sparked a seizure in money markets and threw the global economy into a recession.

Rate Decision

There’s a 50 percent chance the BOJ will lower its target lending rate from 0.3 percent today, according to calculations by JPMorgan using overnight interest-rate swaps. The central bank will announce its decision around midday in Tokyo. Governor Masaaki Shirakawa will hold a briefing at 3:30 p.m. local time.

“The BOJ is set to cut rates to 0.15 percent,” Fiona Lake, a Hong Kong-based analyst at Goldman Sachs Group Inc., wrote in a note to clients. “Contrary to history, the yen is likely to benefit given the Bank of Japan’s experience with this policy framework compared to elsewhere.”

The yen fell against the dollar and euro yesterday as Japan’s government signaled it may intervene in the foreign- exchange market for the first time in four years.

Finance Minister Shoichi Nakagawa said at a news conference in Tokyo that he has “the means” to limit the yen’s rally. Central banks buy or sell currencies when they seek to influence exchange rates.

‘Abnormal’

Honda Motor Co. President Takeo Fukui this week described the yen’s level as “abnormal” and called on the government and central bank to take “swift action.” Japan’s second-largest automaker cut its full-year profit forecast by 62 percent, citing a surging yen and falling sales in North America and Europe.

“The rhetoric from Japan picked up in a fairly significant way,” said Jim McCormick, London-based global head of foreign- exchange and local-markets strategy at Citigroup Inc., in an interview on Bloomberg Radio yesterday.

The last time Japan intervened on its own, it sold a record 20.4 trillion yen ($228 billion) in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen strengthened to 103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent 3.05 trillion yen as the currency reached a low of 147.66.

Declines in the yen may be limited by speculation the BOJ may introduce new measures to increase liquidity without lowering its benchmark rate. Jiji Press and the Mainichi newspaper both said today the BOJ will keep its benchmark rate at 0.3 percent, citing unidentified people familiar with the matter.

Weekly, Yearly Loss

“There are divided views on what exactly the BOJ will do,” said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan’s second-largest publicly traded lender. “At this point, traders will simply have to wait for the outcome. Should the BOJ keep rates on hold, then the yen would rally.”

The dollar headed for a 6.4 percent decline against the euro this week after the U.S. central bank lowered the fed funds target on Dec. 16 to a range of zero to 0.25 percent, the lowest among major economies. The Fed reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying U.S. government debt.

The U.S. currency gained 2.2 percent against the euro this year, 32 percent versus the British pound and 27 percent against the Australian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

Treasuries

Treasuries rallied yesterday, pushing yields on 10- and 30- year securities to record lows as demand for the safety of principal outweighed prospects for record debt sales. U.S. government bonds headed for their best year since 1995.

The pound was little changed at 94.70 pence per euro. It fell yesterday to a record low of 95.57 pence on speculation the Bank of England will follow the Fed in cutting the target lending rate to near zero. Sterling bought $1.5079 from $1.5015.

“We expect further economic weakness in the U.K.,” Brian Kim, a Stamford, Connecticut-based currency strategist at UBS AG wrote in a research note yesterday. “While fiscal and monetary stimulus will likely help combat the slowdown, we still target the pound at $1.45 in the next three months.”

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net;

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Hong Kong Dollar Strength Reflects End of Yuan Rally, ING Says

By Bob Chen

Dec. 19 (Bloomberg) -- A stalled rally in the yuan may be driving the flood of capital to Hong Kong that’s lifted the city’s currency to the upper end of its dollar peg, according to Tim Condon, ING Groep NV’s head of Asia research in Singapore.

The Hong Kong dollar has strengthened 0.6 percent since China checked the yuan’s advance in mid-July to help exporters weather a global recession. China’s currency climbed 21 percent in the three years after its fixed exchange rate was scrapped in July 2005, a rally that drew Hong Kong investors keen to profit from the appreciation.

Hong Kong residents can purchase up to 20,000 yuan ($2,928) per day to put on deposit and these funds can only be converted back into the city’s currency at a similar pace, Condon said.

“We think it’s the unwinding of renminbi revaluation trades,” he wrote in a Dec. 17 note. “If we are correct, USD/HKD selling pressure will switch suddenly when the liquidation of renminbi deposit accounts ceases.”

To profit from the forecast change, Condon suggests investors sell Hong Kong dollar interest-rate swaps against their U.S. dollar counterparts. The 10-year swap differential was minus 42 basis points late yesterday in Hong Kong and Condon predicts this will turn positive, making the trade profitable, should the city’s currency weaken.

Drift Lower

“If the Hong Kong dollar is not going to strengthen, the Hong Kong interest rates should not be priced below U.S. rates,” Condon said. “Once this technical driver stops then the fundamentals will take over, which argue for the Hong Kong dollar to drift toward the weak end of the band.”

In an interest-rate swap, two parties agree to exchange fixed payments for variable-rate payments over a set period. Condon’s trade involves making fixed payments in Hong Kong dollars and receiving fixed payments in the U.S. currency. Investors betting on falling rates will look to receive fixed rates, while those betting on higher rates will choose to pay variable costs.

The Hong Kong Monetary Authority has injected about HK$130 billion ($16.8 billion) of liquidity into the financial system since the city’s currency started trading around the upper limit of its peg two months ago. Pressure on the Hong Kong dollar to appreciate may have been caused by investors cutting carry trades, purchases of overseas assets funded in the city, Joseph Yam, the head of the de facto central bank, said last month.

Hong Kong pegged its dollar to the U.S. currency in 1983 and allows it to trade 5 cents on either side of HK$7.80 per dollar. It recently traded at HK$7.7500.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.

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Copper Drops by Limit in Shanghai as Global Stockpiles Climb

By Li Xiaowei

Dec. 19 (Bloomberg) -- Copper futures on the Shanghai Futures Exchange fell by the maximum daily limit after inventories climbed, signaling waning demand during the global recession.

Copper for March delivery fell 4 percent from the previous settlement price to 22,320 yuan ($3,269) at 9:02 a.m. local time.

To contact the reporter for this story: Li Xiaowei in Shanghai at Xli12@bloomberg.net

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Oil Set for Weekly Decline as Deepening Recession Cuts Demand

By Christian Schmollinger

Dec. 19 (Bloomberg) -- Crude oil headed for the second- biggest weekly decline in more than five years as a deepening global recession saps demand, countering efforts by OPEC to boost prices.

Oil has dropped 33 percent this month even as OPEC agreed to its largest production cut in more than a decade because traders speculated that falling demand would outweigh the reduction. Global oil use may decline the most since 1983, Deutsche Bank analyst Adam Sieminski said yesterday.

“Everyone is revising back demand forecasts and OPEC is desperately cutting in order to catch up to where the market is,” said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. “There is a feeling that OPEC isn’t in control.”

Crude oil for January delivery was at $36.47 a barrel, up 25 cents, at 10:21 a.m. Singapore time on the New York Mercantile Exchange. Oil has fallen 21 percent this week.

The January contract expires today. The more-active February contract rose as much as 78 cents, or 1.9 percent, to $42.45 a barrel. It was at $42.28 a barrel at 10:19 a.m. Singapore time.

Prices have tumbled 75 percent from a record $147.27 on July 11 and declined 62 percent this year, snapping six years of consecutive gains.

Brent crude oil for February settlement was at $43.54 a barrel, up 18 cents, on London’s ICE Futures Europe exchange. The contract yesterday declined $2.17, or 4.8 percent, to settle at $43.36 a barrel.

OPEC Cuts

The Organization of Petroleum Exporting Countries, which pumps 40 percent of the world’s oil, agreed Dec. 17 to cut output by 2.46 million barrels a day starting on Jan. 1. That’s larger than a 2 million-barrel reduction indicated on Dec. 16 by Saudi Arabian Oil Minister Ali al-Naimi before the OPEC ministers met in Oran, Algeria.

OPEC has called on other exporters to help it bolster prices. Non-OPEC members Russia and Azerbaijan signaled Dec. 17 that they may be willing to trim supplies to help the group.

World oil consumption next year will drop by 0.2 percent to 85.68 million barrels a day, OPEC said in a Dec. 15 report. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.

“We’re still in a state where the market is searching for a bottom,” said National Australia’s Burg. “That’s the case quite widely across all commodities.”

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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BDO, Metrobank to Gain From Philippine Rate Cut, CLSA's Dy Says

By Ian C. Sayson

Dec. 19 (Bloomberg) -- Banco de Oro Unibank Inc. and Metropolitan Bank & Trust Co., the two biggest Philippine lenders by assets, may gain the most after the nation's first interest rate cut in almost 11 months, CLSA Ltd. said.

Shares of Banco de Oro or BDO Bank, the biggest, may rise 17 percent to 27.75 pesos in 12 months, while Metrobank, as the No. 2 lender is called, may gain 29 percent to 30 pesos, said AlfredDy, head of Philippine research at CLSA.

The two banks may boost lending and market share after Bangko Sentral cut overnight rates by 50 basis points to 5.5 percent yesterday as the economy slows from a global slump. The cut follows reductions in other countries, including the U.S. where the Federal Reserve lowered its main interest rate to as low as zero for the first time on Dec. 16.

``Among banks, we prefer BDO and Metrobank because these are quite oversold and trading at significant discounts to book values,'' Dy, ranked No. 1 Philippine analyst this year by AsiaMoney, said in an interview today. The rate cut will help banks `` soften the blow of a global economic slump,'' he added.

BDO is trading at a 91 percent of its book value while Metrobank is 25 percent lower, according to Bloomberg data. The average for the 15 Philippine commercials banks is 1.3 times, and Bank of the Philippine Islands or BPI, the nation's biggest by market value, trades at twice its book value.

Shares of BPI may rise 15 percent to 45 pesos in a year, according to Dy, trailing the possible returns of both Metrobank and BDO Bank.

The interest rate cut should bring down borrowing costs and help prevent the credit market from tightening, Central bank Deputy Governor Diwa Guinigundo said yesterday. Slowing inflation allowed the bank to make a ``preemptive move'' to help the local economy amidst slowing global growth, he said.

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

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Asian Commodity Shares Drop on Oil, Metal Prices; Samsung Rises

By Patrick Rial and Shani Raja

Dec. 19 (Bloomberg) -- Asian commodity stocks slumped after crude fell below $36 a barrel and copper dropped to a four-year low, countering advances by technology shares as computer-memory chip prices rallied.

BHP Billiton Ltd., the world’s biggest mining company, sank 4.6 percent in Sydney, and Inpex Corp., Japan’s largest oil explorer, lost 1.9 percent. Panasonic Corp., which gets half its sales from outside Japan, rose 2.1 percent after the yen fell from a 13-year high. Samsung Electronics Co., the world’s biggest computer-memory maker, gained 3.3 percent after the benchmark gauge of memory-chip prices climbed for the first time in six weeks.

The MSCI Asia Pacific Index retreated 0.1 percent to 90.26 as of 9:58 a.m. in Tokyo, with three stocks advancing for every two that declined. The gauge has climbed 7.1 percent this week, and has gained 9.3 percent in December, putting it on course for its first monthly advance since April.

The MSCI Asia is still down 43 percent for the year, set for its worst annual performance in the benchmark’s two-decade history as the global financial crisis dragged the world’s biggest economies into recession. Analysts have slashed their average earnings-per-share estimate for companies on the index by 26 percent since the beginning of the year, data compiled by Bloomberg show.

Japan’s Nikkei 225 Stock Average gained 0.1 percent to 8,679.08, reversing an earlier 0.8 percent drop. Hitachi Construction Machinery Co., the world’s biggest maker of giant excavators, fell 2.1 percent after a newspaper said the company will scale back production.

Bank of Japan

Shares fell in Australia and New Zealand, and gained in South Korea. U.S. stocks slipped yesterday, with the Standard & Poor’s 500 Index declining 2.1 percent as S&P lowered General Electric Co.’s debt outlook.

The global recession has hurt commodities demand, creating a glut of oil that has driven prices down 75 percent from a record $147.27 on July 11. Crude oil futures declined 9.6 percent to $36.22 a barrel in New York yesterday, the lowest settlement since June 2004.

Today, the Bank of Japan will conclude its two-day policy meeting after its U.S. counterpart slashed its benchmark rate this week to as low as zero for the first time in its history.

Jiji Press and the Mainichi newspaper reported Japan’s central bank is likely to leave its interest rate unchanged, while traders see a 50 percent chance the BOJ will lower borrowing costs from 0.3 percent, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

To contact the reporters for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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Australia Stocks: Atlas, BHP, Paperlinx, Rio, Santos, Woodside

By Shani Raja

Dec. 19 (Bloomberg) -- The S&P/ASX 200 Index fell 60.70 points, or 1.7 percent, to 3,520.50 at 10:20 a.m. in Sydney, snapping a two-day gain. The broader All Ordinaries Index lost 50.30 points, or 1.4 percent, to 3,471.40, while the futures contract expiring in December dropped 1.8 percent to 3,508.

Mining shares: BHP Billiton Ltd. (BHP AU), the world’s largest mining company, slumped A$1.31, or 4.2 percent, to A$29.69, the most since Dec. 12. Rio Tinto Group (RIO AU), the world’s third-biggest mining company, dropped A$1.66, or 4.2 percent, to A$38.34.

Copper tumbled to the lowest price in more than four years as metal inventories climbed, signaling waning demand during the global recession. Copper futures for March delivery dropped 5.2 percent to $1.3015 a pound in New York.

A measure of six metals trading on the London Metal Exchange fell 2.8 percent, with copper slumping 4.6 percent.

Oil companies: Woodside Petroleum Ltd. (WPL AU) slumped A$1.66, or 4.9 percent, to A$32.15, the lowest since Dec. 5. Santos Ltd. (STO AU) declined 46 cents, or 3.3 percent, to A$13.64.

Crude oil fell below $36 a barrel for the first time since July 2004 on speculation the drop in demand will outpace OPEC supply cuts as the economy weakens. Crude for January delivery dropped 9.2 percent to $36.36 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange.

Atlas Iron Ltd. (AGO AU), an Australian iron ore producer, gained 2 cents, or 2.6 percent, to 79 cents, the highest since Nov. 5. Atlas signed a long-term sales accord with a “medium- sized” Chinese steel mill for 30 percent of production from its Pardoo project.

Fortescue Metals Group Ltd. (FMG AU) slumped 11 cents, or 4.7 percent, to A$2.25, the lowest since Dec. 8. Australia’s third-biggest producer of iron ore said $1.5 million of its cash has been frozen in accounts because of legal action relating to changes made to shipping contracts.

Paperlinx Ltd. (PPX AU) tumbled 23 cents, or 21 percent, to 83 cents, a record low. Australia’s largest paper maker said it will breach lending covenants after failing to complete some asset sales in Europe.

Qantas Airways Ltd. (QAN AU) surged 15 cents, or 6.2 percent, to A$2.58, the highest since Nov. 12. British Airways Plc said merger talks with Qantas Airways Ltd. were called off after the carriers failed to agree on who would control the new company.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Japan Bank Stocks Rise as Earnings Concern Eases; Inpex Falls

By Masaki Kondo

Dec. 19 (Bloomberg) -- Japan’s bank stocks rose as the government’s planned purchase of shares held by lenders eased writedown concerns. Inpex Corp. led oil producers lower as crude sank to a four-year low.

Mitsubishi UFJ Financial Group Inc., the nation’s largest listed bank, gained 4.2 percent, while No. 3 Sumitomo Mitsui Financial Group Inc. added 2.9 percent. Inpex, Japan’s largest oil and gas explorer, fell 4.2 percent after oil traded below $36 a barrel as the global recession sapped demand.

The Nikkei 225 Stock Average edged up 4.94, or 0.1 percent, to 8,672.17 as of 10:04 a.m. in Tokyo, set for a 5.3 percent weekly gain. The broader Topix index rose 3.30, or 0.4 percent, to 841.99, with 18 of its 33 industry groups rallying. The Topix added 3.5 percent on the week.

The Nikkei is set to lose 43 percent in 2008, its worst year on record, as Japan, the U.S. and Europe slipped into their first simultaneous recession since World War II and the yen soared to a 13-year high, diminishing the value of earnings overseas.

The Cabinet Office said today it will buy as much as 20 trillion yen ($223 billion) in shares held by domestic banks. Mitsubishi UFJ and four of its largest rivals are seeking to raise more than $30 billion after record declines in shareholdings eroded their capital.

Mitsubishi UFJ gained 4.2 percent to 565 yen, while Sumitomo Mitsui added 2.9 percent to 395,000 yen. Chuo Mitsui Trust Holdings Inc. rose 3.1 percent to 434 yen after Merrill Lynch & Co. upgraded the bank to “buy” from “neutral.”

Oil Glut

Inpex dived 4.2 percent to 597,000 yen, while closest rival Japan Petroleum Exploration Co. sank 2.2 percent to 3,610 yen. A gauge of mining companies posted the steepest dive among 33 industry groups on the Topix.

Slumping demand created a glut of oil, driving prices down 75 percent from a record $147.27 on July 11. Crude oil for January delivery declined 9.6 percent to $36.22 a barrel in New York yesterday, the lowest settlement since June 2004.

Asahi Glass Co., Asia’s biggest maker of the material, dropped 1.8 percent to 450 yen, set for the lowest level since September 1982. The company yesterday slashed its full-year profit target by 28 percent, because of plunging sales of glass for flat-panel displays. The company said it’s facing “drastically” diminishing demand globally.

The Bank of Japan will conclude its two-day policy meeting today after its U.S. counterpart cut its benchmark rate to as low as zero for the first time ever.

Jiji Press and the Mainichi newspaper said Japan’s central bank is likely to leave its interest rate unchanged, while traders see a 56 percent chance the BOJ will cut borrowing costs from 0.3 percent, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Nikkei futures expiring in March added 0.4 percent to 8,690 in Osaka and inched up 0.3 percent to 8,690 in Singapore.

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

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Canadian Stocks Fall on Oil; Canadian Natural, Barrick Decline

By John Kipphoff

Dec. 18 (Bloomberg) -- Canadian stocks fell the most in more than two weeks, led by energy companies and raw-materials producers, after crude oil fell below $36 a barrel for the first time since 2004 and gold prices retreated from a two-month high.

Canadian Natural Resources Ltd. and Barrick Gold Corp. each dropped more than 5 percent, pacing declines among the energy and mining shares that account for more than two-fifths of the main index’s value. National Bank of Canada retreated to the lowest in seven years after Deutsche Bank AG and other foreign lenders threatened to scuttle a plan to reschedule payments on C$32 billion ($27 billion) of Canadian commercial paper.

The Standard & Poor’s/TSX Composite Index fell 3.4 percent, to 8,425.35 in Toronto, the steepest drop since Dec. 1. The S&P/TSX has fallen 39 percent this year, poised for its worst annual drop, as commodity prices slumped from records and worldwide credit losses approached $1 trillion.

“The big story today is oil and resources,” said Paul Hand, managing director of equity trading at RBC Capital Markets in Toronto. “Materials and oil are weak, that’s why the S&P/TSX is down.”

Crude-oil futures dropped 9.6 percent to $36.22 a barrel in New York and touched $35.98, the lowest since June 29, 2004, on speculation that the drop in demand will outpace OPEC supply cuts as the economy weakens. Gold fell 0.9 percent from the highest price since Oct. 10 to $860.60 an ounce as the U.S. dollar rebounded, eroding the metal’s investment appeal.

Energy Companies

Canadian Natural, the nation’s fourth-biggest energy company by market value, fell 5 percent to C$45.10. Suncor Energy Inc., the world’s second-biggest oil-sands producer, dropped 7.2 percent to C$24.80. EnCana Corp., Canada’s largest, declined 2.1 percent to C$54.50.

Husky Energy Inc. dropped the most since Nov. 20, sliding 7.5 percent to C$29.01. The Canadian oil company controlled by Hong Kong billionaire Li Ka-shing said on Dec. 16 that it expects to cut capital spending to C$2.6 billion next year because of the global financial crisis. Husky forecast about C$3.6 billion in spending for 2008.

Goldcorp, the second-largest bullion mining company by market value, dropped 5.5 percent to C$34.49. Barrick Gold Corp., the biggest producer of the metal, slid 5.3 percent to C$40.50. Kinross Gold Corp. slid 12 percent to C$19.68.

A gauge of energy shares in the S&P/TSX declined 6.1 percent and a measure of raw-materials stocks fell 5.7 percent. Financial companies slid 1.7 percent as a group.

National Bank

National Bank fell 8.2 percent to C$25.62, the lowest price since Nov. 8, 2001. Banks backstopping the restructuring of the 30- to 90-day asset-backed debt held by Canadian banks said they’ll walk away from the deal tomorrow unless it’s completed. The paper hasn’t traded since August 2007, when investors began to shun the debt on concerns related to high- risk mortgage loans in the U.S. National Bank held about C$2.2 billion of the debt as of Oct. 31.

BCE Inc. rose 4.8 percent to C$23 after suing the Ontario Teachers’ Pension Plan and private-equity firms for compensation over their abandoned C$52 billion ($43.3 billion) takeover.

Trading was back to normal after a computer glitch shut the Toronto Stock Exchange and the TSX Venture Exchange most of yesterday.

TMX Group Inc. fell 1.6 percent to C$24.21, the lowest in two weeks. The operator of Canada’s two main equity bourses and the Montreal Exchange derivatives market apologized for the interruption. It was caused by a “network firmware issue” that made trading data unavailable to some members of the trading community, TMX Group said.

More than 773.8 million shares changed hands in Toronto as of 4:15 p.m., 23 percent more than at the same time last week.

“Everything is operating normally,” Hand said. “Whatever they did yesterday, whether they poured a cup of coffee in the trading engine or the vendor system -- they didn’t ever explain, whether they made an update and the patch didn’t work. Anyway, it’s all normal again so far.”

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

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Brazilian Stocks Decline on Commodity Slump; Bolsa Drops

By Alexander Ragir

Dec. 18 (Bloomberg) -- Brazilian stocks declined for a second day after oil and metal prices tumbled on concern the slowing global economy will reduce demand for commodities.

Petroleo Brasileiro SA and Cia. Vale do Rio Doce, the country’s two biggest stocks, fell more than 3 percent after oil prices dropped below $38 a barrel and copper tumbled to the lowest in four years. The Bovespa’s decline was limited as homebuilders and retailers rallied on speculation interest rates will be lowered. Gol Linhas Aereas Inteligentes SA rose for a third day on speculation lower oil may boost profit.

The Bovespa Index dropped 1 percent to 39,536.27. Mexico’s Bolsa lost 1 percent and Chile’s Ipsa gained 0.2 percent. The MSCI Emerging Markets index rose 0.2 percent.

Petrobras, which has the largest weighting in the index at 15 percent, fell 3.5 percent to 23.50 reais.

Brazil’s state-controlled oil company lost the most in two weeks on speculation the company may cut spending in 2009 after oil prices plunged 74 percent from a record.

“I don’t know that we necessarily can expect them to announce a headline number that is lower, but what they actually are going to spend next year, given the price of oil, I would expect it to be lower,” said Greg Lesko, who manages $750 million in emerging-market stocks at Deltec Asset Management in New York, including Petrobras.

Global miner Vale slid 4.1 percent to 25.31 reais.

The Reuters/Jefferies CRB Index of 19 commodities fell 2.2 percent.

Rate Outlook

Rossi Residencial SA, the third-biggest homebuilder, rose 1.1 percent to 3.60 reais. Lojas Renner SA, the largest publicly traded clothing retailer, climbed 3.2 percent to 16 reais.

“The committee considers that the risk of a less benign inflation scenario materializing has fallen compared to a few months ago, though remains a relevant possibility,” policy makers said, according to the minutes of their Dec. 9-10 meeting released today on their Web site.

The majority of policy makers discussed the possibility of cutting the benchmark interest rate by a quarter of a percentage point before deciding unanimously to leave the so-called Selic rate unchanged at 13.75 percent, citing an economic environment of “great uncertainty.”

The minutes may cement expectations that bank President Henrique Meirelles will cut rates at the bank’s next meeting Jan. 20-21, economists said.

Gol gained 7.8 percent to 11.22 reais. Fuel makes up about 40 percent of costs for airlines. Oil prices dipped to a four- year low yesterday after U.S. crude and fuel stockpiles gained and on concern OPEC members may not comply with agreed cutbacks.

Bolsa Gains

In Mexico, the Bolsa gained for a third day.

Coca-Cola Femsa SAB rose 2.9 percent to 56.21 pesos. Latin America’s biggest soft-drink maker is one of Citigroup Inc.’s top 10 Latin American stocks for 2009, the bank said in a report.

Grupo Mexico SAB fell for the first time in three days, retreating 4.7 percent to 9.12 pesos. Copper fell to the lowest in more than four years, with futures for March delivery slipping 4.6 percent in New York.

In Chile, Distribucion y Servicio D&S, Chile’s biggest grocer, rose 7.8 percent to 194.99 pesos, the most in two months on renewed speculation it will be acquired by another retailer.

“This stock is always with rumors that someone would buy it,” Alvaro Pipino, head of research at IM Trust, said. “There are new rumors around - although this time nothing specific on who the buyer would be.”

Elsewhere in Latin America, Argentina’s Merval fell 2.8 percent, Peru’s Lima General slid 2.9 percent and Colombia’s IGBC declined 1.8 percent.

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



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U.S. Stocks Decline on Cut in GE’s Credit Outlook, Oil’s Slide

By Whitney Kisling

Dec. 18 (Bloomberg) -- U.S. stocks fell for a second day as a deteriorating credit outlook for General Electric Co. spurred concern the financial crisis is worsening, while oil’s retreat below $36 a barrel dragged down energy shares.

GE tumbled 8.2 percent as Standard & Poor’s cut its debt outlook to “negative” on concern dwindling earnings at its financial unit may force a credit downgrade. Exxon Mobil Corp. and Chevron Corp. lost about 5 percent as crude slid to a four- year low on speculation production cuts aren’t enough to match a drop in demand. General Motors Corp. plunged 16 percent and Ford Motor Co. almost 10 percent after the White House said it hasn’t made a decision on how to bail out the nation’s carmakers.

The S&P 500 declined 2.1 percent to 885.28. The Dow Jones Industrial Average slid 219.35 points, or 2.5 percent, to 8,604.99, while the Russell 2000 Index of small companies fell 1.5 percent. Benchmark indexes drifted between gains and losses before sliding to session lows late in the day as GE sank.

“Here’s another bellwether company that is apparently not immune from the environment that we’re in and the stresses that that creates on balance sheets and cash flow,” Bartlett Geer, who oversees more than $3 billion at Boston-based Putnam Investments LLC, said of GE. “It just highlights the investor fears around downgrades and credit ratings.”

Early gains in stocks faded after the White House said that while President George W. Bush’s administration is “very close” to a decision on how to rescue the auto industry, it isn’t planning an announcement on the subject today.

40 Percent Slide

The S&P 500 has fallen 40 percent in 2008, poised for its biggest annual drop since 1931, as credit losses and writedowns at the world’s largest banks exceeded $1 trillion and the U.S. slipped into the deepest recession in a quarter century. The Conference Board’s index of leading economic indicators fell in November for the fifth time in seven months, reflecting the worsening outlook for the economy.

GE, the 106-year-old economic bellwether, and its GE Capital finance arm had their debt ratings outlook lowered to “negative” from “stable” at S&P to reflect concern earnings may erode further than previously thought. GE shares, which have fallen 57 percent this year, lost $1.43 to $15.96.

S&P’s warning on GE’s debt followed its reduced outlook yesterday on Toyota Motor Corp., Japan’s biggest automaker, which it cut to “negative” from “stable” as the global recession hurts demand for cars. Toyota’s American depositary receipts slipped 1.8 percent yesterday and continued their decline today, losing 4.3 percent to $65.54.

Energy Slump

Exxon, the largest U.S. crude producer, lost $4.06 to $77 as oil for January delivery fell below $36 a barrel for the first time since July 2004. Crude settled at $36.22, down 9.6 percent, after sinking to as low as $35.98 during the session in New York. Chevron retreated $3.79 to $73.03.

A group of 40 energy companies lost 5.6 percent and was the biggest drag on the S&P 500 among 10 industries.

The Organization of Petroleum Exporting Countries may not have trimmed production enough to bolster the more than $100 drop in prices since July. The group, which supplies more than 40 percent of the world’s oil, said yesterday it would cut output by 2.46 million barrels to 24.845 million barrels a day.

JPMorgan Chase & Co. reduced its 2009 average oil price forecast to $43 a barrel from $69 as a global economic slowdown kills demand. UBS AG said a slide in crude to less than $20 next year is possible.

GM fell 16 percent to $3.66. The biggest U.S. automaker, Chrysler and Ford Motor Co. will shutter about 59 factories over the next month as they struggle to adapt to the worst sales in 26 years and await a verdict on a U.S. rescue of the industry. Without $14 billion in federal aid, they will be out of money by early 2009, the carmakers say.

No ‘Disorderly Collapse’

The Bush administration won’t “allow a disorderly collapse” of the auto industry, White House spokeswoman Dana Perino said today.

GM also hasn’t resumed merger talks with Chrysler, the carmaker’s spokesman Tony Cervone said today. The Wall Street Journal reported yesterday that talks were under way.

Ford, the second-biggest U.S. automaker, fell 9.6 percent to $2.84.

U.S. Steel Corp., the largest U.S.-based steelmaker by 2007 sales, retreated 11 percent to $37.34 after Goldman Sachs downgraded the shares to “neutral” from “buy.” Investors should “take profits,” as the analysts said they “do not see any catalysts to remain constructive on the name” because the share price had passed their estimate of $41. AK Steel Holding Corp. slipped 11 percent to $9.83, helping send an index of companies that produce raw materials down 4.3 percent.

Discover Financial Jumps

Discover Financial Services rose 7.9 percent to $9.26 after the fourth-largest credit-card network posted a higher quarterly profit and joined investment banks and other card companies in applying to become a bank to become eligible for federal programs to bolster their finances.

Coca-Cola Enterprise Inc., the world’s largest soft-drink distributor, rallied 8.3 percent to $11.58 after the company boosted its full-year profit forecast, helped by stronger North American sales volume.

Insurance companies were among the biggest gainers in the S&P 500, as MetLife Inc. and Prudential Financial Inc. rallied more than 5.4 percent. The National Association of Insurance Commissioners completed a review of a proposal that would lower the amount of money carriers must hold against guarantees made to variable annuity clients. Annuities are retirement products that often guarantee income for life in exchange for an up-front payment. Last month, life insurers called for a speedier reform to loosen regulation of reserves.

Insurance Rally

The group, which has gained more than twice as much as the S&P 500 as the benchmark U.S. index rebounded 18 percent from an 11-year low on Nov. 20, is still down 61 percent in 2008. Today marked the first back-to-back declines in the S&P 500 since Nov. 20.

Ace Ltd., the insurer that moved its headquarters to Zurich from Bermuda, forecast operating income next year will be $7.25 to $8.25 a share, in line with the average analyst estimate, according to a Bloomberg News survey. The company may benefit from commercial property and casualty market conditions that are “in a state of change,” Chief Executive Officer Evan Greenberg said in a statement today.

Ace rose 1.5 percent to $51.76. MetLife climbed $2.18 to $36.07, while Prudential added $1.56 to $30.74.

European stocks retreated on lower forecasts from ASML Holding NV and Carrefour SA.

The MSCI Asia Pacific Index advanced to a six-week high, led by financial companies, on speculation lower interest rates will help revive economic growth.

VIX Retreats

The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 5 percent to 47.34, the lowest level since Oct. 3. The index gauges how much investors are paying for insurance against declines in the S&P 500.

An index of S&P 500 real estate companies fell 9.1 percent, the group’s first decline in three days, after Merrill Lynch & Co. cut Equity Residential, the largest U.S. real estate investment trust that owns apartment buildings, to “underperform” from “neutral.” The shares slid 12 percent to $28.86.

Take-Two Interactive Software Inc. tumbled 26 percent, the most since December 2001, to $8.91 after the publisher of the “Grand Theft Auto” video games unexpectedly projected a first- quarter loss and a profit shortfall for fiscal 2009.

MEMC Electronics Materials Inc. fell 13 percent to $14.52. The maker of silicon wafers for the solar industry reduced its sales forecast, saying revenue will be as much as $425 million in the fourth quarter. That trailed the average estimate of $485 million from analysts in a Bloomberg survey.

Moving Average Watch

Of the 500 companies in the S&P 500, only 20 traded above their 200-day moving average today, compared with 158 on Sept. 19. To some technical analysts, who study charts to make price predictions, surpassing a moving average suggests a majority of investors have turned bullish.

The S&P 500 rose above its 50-day moving average on Dec. 16 for the first time in more than three months after the Federal Reserve cut its benchmark lending rate to a record-low range of zero to 0.25 percent. The S&P 500 gained 5.1 percent that day, hitting a five-week high.

President-elect Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said. Obama’s transition team believes that the amount is necessary to reverse rising unemployment, said the adviser, who spoke on condition of anonymity.

Treasury Secretary Henry Paulson may ask Congress for the remainder of the $700 billion bank bailout funds as the first $350 billion may be exhausted with the rescue that President George W. Bush’s administration considers for General Motors Corp. and Chrysler LLC. The Treasury chief is discussing with aides strategies to seek congressional approval for the rest of the Troubled Asset Relief Program, people familiar with the deliberations said.

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

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