European July Economic Confidence Increases More Than Forecast

By Jurjen van de Pol

July 30 (Bloomberg) -- European confidence in the economic outlook increased more than economists expected in July, adding to signs the deepest recession in more than six decades may be bottoming out.

An index of executive and consumer sentiment in the 16 nations that use the euro rose to 76, the highest since November, from 73.2 in June, the European Commission in Brussels said today. Economists had forecast an increase to 75, according to the median of 24 estimates in a Bloomberg News survey.

The growing confidence is the latest evidence that Europe may have seen the worst of the recession as indications of a global recovery improve prospects for the region. Stocks rose around the world as companies from Alcatel-Lucent SA to Honda Motor Co. reported earnings that beat analysts’ estimates.

“We are getting a step closer to the end of the recession, although there remains a risk of a renewed setback,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam.

Paris-based Alcatel-Lucent, the world’s largest supplier of fixed-line phone networks, today posted its first profit in 11 quarters, aided by cost cuts. Jeronimo Martins SGPS SA, Portugal’s biggest retailer, on July 27 reported first-half earnings that beat some analysts’ estimates as it profited from improved margins at its Portuguese retail business.

Even as signs mount that the worst of the recession is passed, unemployment in Germany, Europe’s largest economy, rose this month as companies cut jobs to protect profits, the Federal Labor Agency said today. With rising unemployment curbing consumer spending, European retail sales fell for a 14th month in July, the Bloomberg purchasing managers index showed today.

Capacity Utilization

Euro-area capacity utilization for the current quarter declined to 69.5 percent, the lowest since the data series began in 1990, the European Commission said in its report today.

The European Central Bank expects the region’s economy to resume expansion in the middle of next year. The ECB, which has pumped billions of euros into markets to support lending, kept its benchmark interest rate at a record low of 1 percent on July 2 and has started buying as much as 60 billion euros ($84.4 billion) of covered bonds, securities backed by mortgages and public-sector loans.

“After a phase of stabilization, a phase of recovery is expected around mid-2010,” ECB President Jean-Claude Trichet said on July 2. “The current rates are appropriate,” he said, adding that inflation pressures will be “dampened.”

Price Expectations

Today’s report showed that consumer sentiment in the euro region improved to minus 23 in July from minus 25 in June. A measure of manufacturers’ confidence increased to minus 30 from minus 32, while confidence among retailers also improved.

A gauge of consumers’ price expectations declined to minus 12, the lowest since the data were first collected in 1990, according to the commission.

Euro-area consumer prices may have fallen 0.4 percent this month from a year earlier, economists forecast in a Bloomberg survey. While falling prices enable consumer to buy more, rising job insecurity may curb spending.

“We still have a substantial increase in unemployment ahead of us, which could hamper the recovery of consumer sentiment,” said Van Vliet at ING.

Europe’s unemployment rate may rise to 9.7 percent in June, the highest in more than 10 years, according to the median forecast of 24 economists in a Bloomberg survey. The European Union statistics office in Luxembourg will publish the jobless and inflation data tomorrow at 11 a.m.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net

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Britain Entices Speculators to Trade Power as Brown Bemoans Oil

By Lars Paulsson

July 30 (Bloomberg) -- Britain, the only European power market to shrink in the past six years, wants hedge funds, banks and commodity firms to trade more electricity at a time when Prime Minister Gordon Brown seeks to quash oil speculation.

The U.K. energy market regulator, called Ofgem, is considering asking companies to post electricity prices to attract more participants such as Rampart Capital, a London- based hedge fund that plans to start trading U.K. power. Nasdaq OMX Group Inc. will start an electricity auction on Sept. 28 in an attempt to make the market more transparent.

The electricity market “is rubbish,” Alistair Buchanan, Ofgem’s chief executive officer, said on July 2 in London. “We know we’ve got a structural weakness in Great Britain.”

The U.K.’s decline in electricity trading may inflate power costs for consumers in Europe’s second-largest economy, to the benefit of generators and suppliers from Centrica Plc to Electricite de France SA. While the British regulator seeks to revive interest in power markets, Brown is lobbying the Group of Seven leaders to rein in oil speculation after crude jumped 42 percent this year.

Power markets are linked to oil, which helps set the price of fuels used to generate electricity, and some of the largest energy traders buy and sell both commodities.

The U.K.’s biggest utilities, enlarged by at least $51 billion of takeovers from 2004 that gave them control of both power production and sales, have squeezed out smaller traders, Ofgem says. Iberdrola SA and Electricite de France led the acquisitions in Britain, with more than four times the value of similar deals in Germany, data compiled by Bloomberg show.

Powering Down

While Germany traded eight times the amount of electricity it consumed last year, the multiple in Britain was 2.7 times, according to Prospex Research Ltd. in London. Companies traded some 937 terawatt-hours of U.K. electricity last year, down 58 percent from 2,235 terawatt-hours in 2003, according to Prospex.

Brown, who declined through his press office to comment on the U.K. power market, railed against volatility in oil at a July 6 press conference with French President Nicolas Sarkozy. Crude rose to more than $72 a barrel in New York last month after selling for less than $34 in February. It settled yesterday at less than $64 a barrel in New York.

“Where there is undue speculation or speculation that is unfair in the oil market, we have got to look at whether there are mechanisms that exist that are making that accentuated and, if there are, we are going to have to be prepared to take action,” Brown told reporters that day.

After Enron

Consolidation in the U.K. energy market began after power prices plunged 40 percent in the four years ending in 2002. The demise of the biggest energy trader, Enron Corp., also led American companies to scale back U.K. operations.

Now traders are calling for more activity and market data. Louis Dreyfus Energy Services LP, a commodity trader, submitted a so-called modification proposal on July 28 to market operator Elexon Ltd., seeking to boost information about power generation by fuel type. The current arrangements with an aggregated number are “a barrier to entry,” according to Kristian Lande, who trades U.K. gas and German power at Louis Dreyfus.

“Transparency brings liquidity,” he said on the phone from Lausanne, Switzerland.

The Nordic market, which trades 7.3 times the amount of power it consumes, according to Prospex, “is a good example” for the U.K. to follow because of its wide variety of participants, Ofgem spokesman Chris Lock said. Traders from U.S. hedge fund manager Tudor Investment Corp. to Russia’s OAO Gazprom and UPM-Kymmene Oyj, Europe’s biggest producer of paper for publications, all trade Nordic power futures, according to the Web site of Nord Pool ASA, the regional exchange.

Nasdaq Entry

Nasdaq OMX, which operates stock markets in 50 countries, will be the third exchange to attempt a revival in the U.K. after winning a tender arranged by industry-backed Power Trading Forum. The company may offer futures after introducing the auction for day-ahead electricity, which it hopes will become a price benchmark.

Geir Reigstad, head of Nasdaq OMX Commodities, said he expects more U.K. trading by utilities, banks and funds.

“It’s a question of how long it will take to establish that reference price, and from that point onwards, the market will start to grow,” he said in an interview from Oslo.

APX-Endex, the Dutch exchange, will offer U.K. power futures on Sept. 18 to complement its short-term contracts, which also includes a day-ahead auction.

Competition between exchanges is “a step in the right direction,” Rampart Chief Investment Officer Marcello Romano, 40, said in a phone interview. “Ultimately, it’s likely there will be one winner.” His hedge fund plans to trade natural gas, U.K. electricity and northwest European power from August.

Active Trading

London-based ICE Futures Europe, whose Brent crude contract is used to price two-thirds of the world’s oil, was the first to set up a U.K. power futures exchange in 2004. The effort failed to boost activity.

“The current U.K. market structure for power, with six vertically integrated utilities, does not readily lend itself to active trading,” Jason Pegley, ICE Futures Europe’s head of utility markets, said in an interview.

Amsterdam-based Energy Capital Management BV, a fund that trades energy from Dutch and German power to carbon-emission allowances, has stayed out of the U.K. in part because of its lack of liquidity.

“We’re not in a rush to enter,” said Marcel Melis, chief executive officer of Energy Capital Management BV, whose MMT Energy Fund has returned 14 percent in the past year.

The U.K. market is recovering. Electricity trades rose 16 percent in Britain last year, according to Prospex. Dusseldorf- based E.ON AG, Germany’s biggest utility and one of the six largest in the U.K., is among those that increased its transactions.

‘Main Drivers’

“The activity of vertically integrated players is clearly increasing, and they seem to be the main drivers of the liquidity growth” last year, said Tom Sargent, E.ON’s director of western European power, in an e-mailed response to questions. E.ON boosted electricity trading in the two years ended in March by 68 percent to 4.7 times the amount it generated, he said.

While independent generators International Power Plc, Drax Group Plc and InterGen remain in the U.K., “the market share of independent generators has been reduced from a few years ago,” Ofgem said in a report.

“Vertically integrated players combining more or securing more generation, then that all points towards a less liquid market, less competition,” International Power’s Chief Executive Officer Philip Cox said in an interview on July 1.

To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net

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Pound Strengthens After House Prices Increase for a Third Month

By Anna Rascouet

July 30 (Bloomberg) -- The pound snapped a two-day decline against the dollar after a report showed British house prices climbed in July for a third month.

The U.K. currency also strengthened for a fourth day versus the euro as mortgage lender Nationwide Building Society said the average cost of a home rose 1.3 percent, beating the 0.2 percent median forecast of 14 economists surveyed by Bloomberg. The FTSE 100 Index of stocks advanced for a second day amid a revival in risk appetite as BT Group Plc earnings beat analysts’ estimates.

“It’s the housing angle,” said Daragh Maher, deputy head of global foreign-exchange strategy at Calyon, the investment- banking arm of Credit Agricole SA. “There is underlying demand for sterling, which means that when you get a good number, the market is pretty quick to come in and start buying afresh.”

The pound appreciated 0.9 percent to $1.6521 as of 10:08 a.m. in London, the biggest gain since July 20. It advanced 0.7 percent to 85.20 pence per euro. Sterling rose against all but one of its 16 most-traded counterparts.

The pound is 0.3 percent higher against the U.S. currency this month, on course for its fifth consecutive monthly gain. It’s little changed versus the euro, after rising the three previous months.

Former Bank of England policy maker Stephen Nickell said in a statement today that Britain needs to build more houses than he estimated last year because the recession hurt construction. At least 237,800 extra homes are required each year until 2031, the National Housing and Planning Advice Unit, of which Nickell is chairman, said in a report.

Gilt Returns

Construction slumped last year as the U.K. slid into the worst recession in at least three decades. The pound tumbled 26 percent against the dollar in 2008 and sank 23 percent versus the euro.

The yield on the 10-year gilt was little changed at 3.97 percent. The two-year note yield fell 2 basis points to 1.33 percent.

Gilts lost investors 1.9 percent this month, according to Merrill Lynch & Co.’s U.K. Gilts Index. German debt returned 0.3 percent, while Treasuries lost 0.4 percent, Merrill indexes showed.

U.K. government bonds may keep falling, with the yield on the 10-year gilt climbing to 4.10 percent, a team of technical strategists at Barclays Capital, led by Jordan Kotick in New York, wrote yesterday in a report.

To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net

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Poland Lures Putnam as Zloty Leads Emerging Markets

By Piotr Skolimowski and Pawel Kozlowski

July 30 (Bloomberg) -- Five months after investors fled Poland on concern eastern Europe was headed for a banking crisis, money is flooding back to one of the few countries to escape the global recession.

Morgan Stanley, Putnam Investments and Brown Brothers Harriman & Co. forecast more gains in the zloty following a 6 percent rally that made it July’s best performer against the euro among 26 emerging-market currencies. Citigroup Inc. raised its outlook on Polish shares to “overweight” this week as the WIG20 Index extended its longest monthly rally since 2006. Bonds are soaring after investors bought $3.5 billion of government notes, more than twice the amount planned.

The European Union’s largest eastern economy is back in favor after Prime Minister Donald Tusk pledged to support the zloty, the International Monetary Fund provided a $20.6 billion flexible credit line and the country posted the only positive quarterly growth rate among the EU’s 10 eastern members.

“In Poland we’ve seen a dramatic change from poor fundamentals last year to pretty good fundamentals now,” said Paresh Upadhyaya, who helps manage $21 billion in currencies as senior vice president at Putnam in Boston. Putnam plans to sell the euro and buy the zloty because the currency is “fundamentally undervalued,” Upadhyaya said.

Best Worldwide

Foreign investors poured 2.6 billion euros ($3.7 billion) into Polish bonds and stocks in April and May, the most recent months for which central bank data are available, after seven months of outflows. Poland’s 10-year dollar bonds have surged since the sale this month, reducing the yield to 220 basis points over similar-maturity U.S. Treasuries from 290 basis points, or 2.9 percentage points.

The WIG20 share index rose 9.6 percent in July, headed for its fifth month of gains. The zloty’s 6.1 percent appreciation against the dollar was the second-biggest worldwide after the Canadian dollar. PKO Bank Polski SA and Bank Pekao SA, the country’s largest lenders, jumped more than 18 percent. Coal mine Lubelski Wegiel Bogdanka SA climbed 42 percent since raising the equivalent of $178 million in eastern Europe’s largest initial public offering in June.

Even after the rally, Polish shares are cheaper than the emerging-market average with a price-to-estimated-earnings ratio of 14.4 for the WIG20 compared with 15.3 for the MSCI Emerging Markets Index, according to data compiled by Bloomberg. A strengthening zloty and a 30 percent jump in per-share earnings next year, more than the average in emerging markets, will boost stock market returns, Citigroup strategist Andrew Howell said.

Buy Zloty

“Poland was really unfairly punished,” said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York. “Poland is less exposed to the global crisis in the sense that it’s got a pretty large domestic market, so it’s not quite as export-dependent as the Czech Republic, Hungary and some of the other Europeans.”

Brown Brothers Harriman recommends buying the zloty for gains of 7.4 percent by yearend to 69.3 against Hungary’s forint and of 3.4 percent to 6.33 per Czech koruna. ING Groep NV says the currency will rise 4.5 percent to 4 per euro by Dec. 31. Pasquale Diana, a London-based economist at Morgan Stanley, predicts the zloty will surpass 4 per euro in the first half of 2010 “provided risk appetite remains constructive.” Citigroup expects the zloty to strengthen to 4.1 against the European currency by the end of the first quarter.

The zloty gained 0.4 percent to 4.1802 per euro, and the WIG20 index advanced 0.7 percent to 2,054.21 as of 10:50 a.m. in Warsaw.

Brink of Crisis

Poland’s currency plunged 27 percent against the euro in the six months to March 31, the biggest decline among emerging markets monitored by Bloomberg, as a 16 percent slump in fourth- quarter exports sparked concern companies would fail. The weakening exchange rate threatened to trigger defaults in a contry where 71 percent of mortgages are denominated in foreign currencies, according to the most recent data from the financial regulator at the end of March.

Moody’s Investors Service warned Feb. 17 that eastern Europe’s downturn may become more severe because of a dependence on western banks, which faced potential downgrades on bad loans. It listed Hungary, Romania and the Baltics among the most vulnerable.

“Eastern Europe was on the brink of a severe macroeconomic crisis,” Citigroup’s Howell wrote in a July 24 report. “There is an element of ‘guilt by association’ that has probably led Poland to be punished more than its fundamentals deserve,” Howell said.

‘Blinded to Risks’

Poland’s parliament agreed this month to widen the budget deficit by 48 percent to 27.2 billion zloty. The gap may reach 6.6 percent of gross domestic product this year and 7.3 percent in 2010, more than double the EU’s 3 percent limit, according to the European Commission’s forecast.

While the Treasury has doubled its target for state-asset sales next year to 25 billion zloty ($8.4 billion) to finance the budget, the government is struggling to garner support. Tusk said last week Poland won’t rush to sell its stake in KGHM Polska Miedz SA, the copper producer with the biggest European mine output, after opposition from unions and the Peasants Party, a coalition member. Tusk, who may run in presidential elections in April, also said the government won’t raise taxes next year.

“People bought into a story of Poland being insulated to the global slowdown, which has completely blinded them to risks stemming from fiscal deterioration,” said Neil Shearing, an emerging Europe economist at Capital Economics Ltd. in London. “This may come to haunt the markets next year as the government will have to consider more radical fiscal tightening, making the recovery sluggish.”

Economy Expanding

The zloty’s depreciation, which ended in February as the Finance Ministry began selling euros from EU grants, has helped boost Poland’s competitiveness and limited damage from the world recession, said ING strategist Daniel Salter in Moscow.

Poland had a current-account surplus for a fourth month in May. Consumer goods prices have fallen faster than in any other country, based on a 30 percent drop in McDonald’s Corp. hamburgers charted by the Economist magazine’s Big Mac Index.

The government predicts 0.2 percent growth this year as lower taxes lift consumer spending, which makes up 61 percent of the economy, compared with 52 percent in the Czech Republic and Hungary, according to data from Citigroup and BNP Paribas SA. The median estimate of 14 economists surveyed by Bloomberg is 0.5 percent growth. Hungary expects a contraction of 6.7 percent and the Czech state predicts a 4.3 percent decline.

The IMF credit in May is helping to shield Poland from more financial market turmoil.

“Poland is probably the only country in Europe that could actually post growth this year and that’s something people find attractive,” said Morgan Stanley’s Diana.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.netPawel Kozlowski in Warsaw at pkozlowski@bloomberg.net

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Norway to Be First to Raise Rates, Deutsche Bank Says

By Josiane Kremer

July 30 (Bloomberg) -- Norway’s central bank may be the first among the world’s richest economies to raise interest rates as the global crisis shows signs of abating and inflation overshoots the bank’s target, Deutsche Bank AG said.

“Domestic inflation pressures will be the main reason why Norges Bank will have to be one of the first, if not the first, central bank to hike rates in the industrialized world,” Henrik Gullberg, a strategist at Deutsche Bank AG in London, said in a telephone interview. “The market is pricing in the probability of an initial rate hike at the beginning of next year.”

The world’s fifth-largest oil exporter has fared better through the global slump than most, thanks to continued investments in its petroleum industries, which make up about a quarter of output. Record low borrowing costs and the country’s biggest stimulus package in more than three decades have also helped soften the impact of the global crisis and now risk overheating the economy.

“They cannot afford the luxury of other central banks to wait too long,” Gullberg said. “Norges Bank will start to focus on the timing of the tightening cycle before other central banks. The rate path is not really compatible with the actual development we have seen in the Norwegian economy.”

The krone gained 0.4 percent against the euro to trade at 8.7524 as of 9:28 a.m. in Oslo. Against the dollar, the krone gained 0.5 percent to trade at 6.2212.

Svein Gjedrem, governor of Norges Bank, would overtake Mervyn King at the Bank of England, as well as Ben S. Bernanke at the U.S. Federal Reserve and Jean-Claude Trichet at the European Central Bank in reversing a spate of rate cuts.

September Election

Gjedrem has lowered the benchmark rate seven times from a five-year high of 5.75 percent in September to a record low 1.25 percent in June. Prime Minister Jens Stoltenberg, who faces an election in September, has pledged to push through stimulus measures equivalent to 3 percent of non-oil gross domestic product to support the labor market.

“Norway is an exception,” Gullberg said. “They have a lot of ability to stimulate the domestic economy by using the oil wealth and that is what they are doing.”

The support measures, designed to jolt the Nordic nation out of its first recession in two decades, have boosted domestic demand, with retail sales up 2.6 percent in May since March. Policy makers pushed through stimulus measures even after inflation overshot the central bank’s 2.5 percent target every month since June last year.

Underlying inflation, which strips out the impact of taxes and energy, accelerated to an annual 3.3 percent in June, the fastest pace in eight months.

Krone Losses

Prices have also gained after the krone lost 17 percent against the dollar in the past year and about 8 percent against the euro. The krone, the third-worst performer against the euro since the end of June 2008, may return more in the next year against the euro than all 48 other foreign-exchange trades tracked by global investment banks, according to median predictions in Bloomberg surveys.

Norwegian home owners, the second richest in the world, have floating rates on home loans, meaning lower central bank rates are quick to feed through to mortgage costs. At the same time, job security is high, with about a third of the labor force employed in the public sector. Residential property values rose 5.3 percent in the three months ended June from the first quarter, the second consecutive quarterly gain.

Finance Minister Kristin Halvorsen has warned consumers against embarking on spending sprees. “I fear that maybe some of the consumers will invest in the housing market” on the assumption that “the interest rate will be at a very low level for many years ahead,” Halvorsen said in a June 22 interview.

Outperformer

Norway, the only Scandinavian country outside the European Union, will suffer a milder recession than Sweden, Finland and Denmark as well as the euro region. The mainland economy, which excludes oil and shipping, will shrink 1.5 percent this year and grow 0.9 percent next year, according to the Organization for Economic Cooperation and Development. That compares with a 4.8 percent slump in the 16-member euro area this year and no growth for the region in 2010.

Norway’s jobless rate was 2.7 percent in June, down from this year’s high of 2.8 percent in April, the Oslo-based Labor and Welfare Organization said on July 2.

Norges Bank “will start hiking much earlier than all the others because clearly Norway is outperforming all the other advanced economies,” said BNP Paribas economist Gizem Kara. Though she says Norway will lead the way in monetary tightening, the forecast is based on a delayed global recovery, meaning the first increase won’t be until the beginning of 2011.

‘Dare to Raise’

The Fed will start raising its overnight bank lending rate from 0.25 percent in the third quarter next year, according to the median in a July 10 Bloomberg survey of 53 economists. The European Central Bank will increase borrowing costs from 1 percent in the fourth quarter next year, a June 26 survey of 40 economists showed.

“It will be interesting to see if Norges Bank dares to increase its interest rate before the rest of the world starts to hike,” said Katrine Boye, an economist at Nordea Bank AB in Oslo. “If they don’t make these increases, the economy could eventually overheat.”

To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net.

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Citigroup ‘Moving Extremely Fast’ on Asset Sales

By Soraya Permatasari

July 30 (Bloomberg) -- Citigroup Inc., rescued by the U.S. government after a record loss last year, is “moving extremely fast” on asset sales, Chief Executive Officer Vikram Pandit said.

“We created and set targets for Citi in terms of asset reductions, in terms of risk reduction, in terms of cost reduction and we have met every target and we met them on time, as well,” Pandit told reporters in Kuala Lumpur today. “We’re actually moving extremely fast.”

Pandit, 52, has sold units in developed countries including Japan and is turning his focus to emerging markets after the global credit crisis sent the U.S. economy into a recession. The CEO credited asset sales with helping New York-based Citigroup post a profit for the first two quarters this year.

Citigroup today agreed to sell its stake in a Japanese asset management unit to Sumitomo Trust & Banking Co., Japan’s fifth- largest bank, for 75.6 billion yen ($795 million). The U.S. bank has also sold assets in Japan to Sumitomo Mitsui Financial Group Inc. and Nomura Holdings Inc. since May.

“Our costs are down by about 25 percent, our assets are down by close to 25 percent, our risk is down more than that and so we continue to turn the company around,” Pandit said.

Pandit also said he expects the bank’s profitability in Asia-Pacific to increase, as the region is home to emerging markets including China. Citigroup plans to add four branches in Malaysia next year, he said.

Government Stake

The executive predicted in June that Citicorp, Citigroup’s biggest operation by revenue, will derive half of its future business from emerging markets. The U.S. government is taking a 34 percent stake in Citigroup after a $28 billion loss last year.

“We are one of the largest players in the emerging markets,’ Pandit said today. “And these are markets that are likely to grow pretty well over the next so many years.”

Asia-Pacific accounted for almost 25 percent of Citicorp’s revenue in the second quarter and nearly 40 percent of net income, James Griffiths, a Hong Kong-based Citigroup spokesman, said in an e-mail.

Pandit has argued that foreign markets offer the best opportunity for Citigroup to rebuild a capital base eroded by the financial crisis and repay the bailout funds. Citigroup has a bigger presence than rivals outside the U.S., while its domestic bank-branch network is one-sixth the size of San Francisco-based Wells Fargo & Co.’s.

Islamic Subsidiary

Citigroup also plans to set up a standalone Islamic banking subsidiary in Malaysia, Pandit said. The bank has submitted an official application to Bank Negara Malaysia, the central bank, to establish the unit, he said.

Pandit was in Singapore yesterday after visiting Hong Kong earlier this week, according to people familiar with the visit, who declined to be identified because the CEO’s itinerary isn’t public. Regional chief Ajay Banga quit in June to become president of MasterCard Inc.

“Vikram is here to connect with employees and clients and conduct business in a key region for Citi,” Griffiths said.

The three people who replaced Banga were Shengman Zhang, chairman of Asia Pacific, and Stephen Bird and Shirish Apte, regional co-CEOs.

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.netChan Tien Hin in Kuala Lumpur at thchan@bloomberg.net

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Obama Says Recession Nears End as Data Improve While Polls Fall

By Nicholas Johnston and Edwin Chen

July 30 (Bloomberg) -- President Barack Obama sought to reconcile improving economic data and his own sagging poll ratings by telling Americans that many are still struggling even as an end to the recession may be near.

The president opened two events yesterday outside Washington designed to focus on health care with a defense of his economic policies, saying they stopped a “freefall.”

“We may be seeing the beginning of the end of the recession,” Obama told about 2,000 people at a high school gymnasium in Raleigh, North Carolina, a state where the unemployment rate is 11 percent. “But that’s little comfort if you’re one of the folks who have lost their job, and haven’t found another.”

The president’s remarks were designed to reassure the public that he understands the impact of the worst recession in five decades, which has pushed the national unemployment rate to 9.5 percent. It has also depressed Obama’s approval ratings and complicated his drive to overhaul the health-care system.

Forty-eight percent of registered voters say Obama’s policies have failed to end the recession or slow the pace of job losses while 45 percent agreed the president’s approach averted a worse crisis, according to a poll conducted July 22- 26 for National Public Radio.

The economy also may be a drag on Obama’s effort to push Congress to pass health-care legislation, his top domestic priority. The NPR poll found the economy and jobs are the top concern of Americans, cited by 39 percent of those polled. Health care trailed with 12 percent.

Economic Data

The administration can point to data suggesting the economy is poised to rebound. Housing starts unexpectedly rose in June as construction of single-family dwellings jumped by the most since 2004 and industrial production shrank in June at the slowest pace in eight months, according to government figures.

The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, and the benchmark Standard & Poor’s 500 Index has risen 15 percent since Obama’s inauguration.

Obama said he arrived in office facing “the worst economy of our lifetimes” and that the bank rescues begun under former President George W. Bush were necessary to avoid a collapse of the financial system. Propping up General Motors Corp. and Chrysler LLC was necessary to save thousands of jobs, he said.

And without naming Bush, he blamed his predecessor for the government financial shortfall, projected to rise to a record $1.84 trillion this year.

“They basically handed me a bill for $1.3 trillion,” Obama said in remarks to workers at a Kroger grocery store in Bristol, Virginia.

Health Care and Economy

As he has at other events pushing for an overhaul of the nation’s health-care system, Obama said medical care must be revamped to ensure future economic growth and lower medical costs to help reduce the federal debt.

At both of yesterday’s events, before his remarks on health care and questions from the audience, Obama turned to the economy. He cited a recent cover of Newsweek magazine that says “The Recession is Over.”

“Now, I imagine that you might’ve found the news a little startling. I know I did,” Obama said in North Carolina. “Here’s what’s true: We have stopped the freefall. The market’s up and the financial system is no longer on the verge of collapse.”

“So there’s no doubt that things have gotten better,” he added.

Seeking Patience

He also asked for patience.

Addressing “some critics in Washington,” Obama said many of the public works projects intended to boost the economy haven’t gotten fully under way, with only about a quarter of the total spending already committed.

“There’s a lot of misinformation out there about the recovery package,” Obama said in Virginia. “A lot of this is going to take time to complete. And it’s not solving all of our problems all at once.”

White House Press Secretary Robert Gibbs said that Obama decided to talk about the economy during a trip with two health-care town-halls to tell Americans that the country still has “a long way to go to create jobs.”

“He just wanted to provide people with an update on where we are,” Gibbs told reporters traveling with the president en route to Bristol, Virginia for his second event.

The president and his aides have been deflecting questions about whether the economy needs a second stimulus, saying most of the impact of the package passed by Congress won’t kick in until late this year and in 2010.

They also have stressed that the jobless rate, which Obama has said he expects will exceed 10 percent nationally this year, will lag behind other economic measures. The unemployment rate in June was the highest since August 1983.

“There is a bit of a lag here in people’s perceptions, in part because the economy is improving but the job market is still very poor,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

To contact the reporters on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.netEdwin Chen in Bristol, Virginia, at Echen32@bloomberg.net;

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Pimco’s Gross Favors ‘Strong’ Company Bonds, Stocks

By Wes Goodman

July 30 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should favor debt and stocks of “strong” companies, and assets in emerging markets with improving economic growth.

Investors in riskier assets will get “haircuts” because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Gross said. The U.S. economy will begin to recover in the second half of 2009, he wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds are outperforming Treasuries in 2009, the first time in three years, as signs of improvement in the economy led investors to seek higher-yielding assets. Franklin Templeton Investments, a mutual fund company that oversees $450 billion, and JPMorgan Chase & Co., the second-largest U.S. bank, are also recommending company bonds.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote. “A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.”

Gross also favors emerging markets where growth prospects are “tilted upward,” according to the report.

‘Tangible Earnings’

“Stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope,” Gross wrote. High-risk bonds, commercial real estate and lower-quality municipal bonds “may suffer,” the report said.

Federal Reserve Chairman Ben S. Bernanke used the term “green shoots” in an interview aired March 15 on CBS Corp.’s “60 Minutes” to describe signs of improvement in the economy.

U.S. corporate bonds rated A to AAA by Standard & Poor’s returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co. The U.S. Treasury Master Index handed investors a 4.9 percent loss, according to Merrill. MSCI’s World Index of stocks has returned 13 percent so far in 2009.

The Templeton Global Bond Fund is avoiding debt issued by the U.S., the U.K., and Germany and has sold Japanese yen it purchased last year, said John Beck, the company’s co-director of international bonds.

‘Bullish View’

Templeton is favoring U.S. bank debt and municipal bonds, Beck, who is based in London, told reporters on July 27 during a trip to Singapore. The company, which is in San Mateo, California, is also investing in a mix of local-currency and dollar-denominated securities in emerging markets, he said.

JPMorgan has a “bullish view” on high-grade corporate bonds, it said in a report July 24.

“Money continues to be allocated to the high-grade bond asset class,” said the report by JPMorgan analysts including Eric Beinstein, co-head of U.S. credit strategy, in New York.

For the week ended July 22, high-grade bond funds drew $1.4 billion, above the 13-week average of $1 billion, the report said.

The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end.

U.S. Contraction

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II.

The U.S. economy shrank 1.5 percent in the second quarter according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. The first-quarter contraction was 5.5 percent.

Gross’ $161 billion Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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Dollar Weakens as Signs Global Slump Easing Damps Safety Demand

By Matthew Brown and Yasuhiko Seki

July 30 (Bloomberg) -- The dollar declined for the first time in three days after a government report showed Japanese manufacturers boosted production for a fourth month, sapping demand for safe-haven currencies.

The U.S. currency fell the most against the pound of its 16 major counterparts after a report showed U.K. house prices rose for a third month and a rally in stocks spurred investor appetite for riskier assets. New Zealand’s dollar declined the most in three weeks after the nation’s central bank kept its benchmark interest rate unchanged for a second month and Reserve Bank Governor Alan Bollard said rates may fall further.

“The dollar is under pressure as risk comes back on today,” said Gavin Friend, a markets strategist at National Australia Bank in London. “We’re not out of the woods yet when it comes to risk aversion. Tomorrow’s U.S. gross domestic product numbers will be key for giving the market some direction.”

The Dollar Index, which the ICE uses to track the dollar against currencies including the yen, pound and Swedish krona, fell 0.4 percent to 79.297 as of 9:23 a.m. in London. The pound strengthened 0.7 percent to $1.6494. The dollar was little changed at $1.4054 per euro and 95.02 yen.

The New Zealand dollar fell as much as 1.5 percent, the biggest decline since July 16, before trading down 0.6 percent at 65.36 U.S. cents.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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Sumitomo Metal Industries Deepens Forecast for Full-Year Loss

By Masumi Suga and Yasumasa Song

July 30 (Bloomberg) -- Sumitomo Metal Industries Ltd., Japan’s third-biggest steelmaker, more than doubled its forecast for a loss this fiscal year because of a delayed recovery in export markets for its seamless pipes.

The company may post a net loss of 45 billion yen ($474 million) in the year ending March 31 compared with its April forecast for a 20 billion yen loss, Sumitomo Metal Industries said in a statement today. The first-quarter loss was 32.4 billion yen from net income of 43.5 billion yen a year earlier.

Sumitomo Metal joined larger domestic rivals Nippon Steel Corp. and JFE Holdings Inc. in reporting a loss as the industry cut excess inventories after the recession stifled demand for steel in cars, electronic devices, and buildings. ArcelorMittal, the world’s largest mill, yesterday reported a net loss of $792 million, missing analyst estimates for the quarter.

Sales in the first quarter fell 36 percent to 290.5 billion yen, the company said.

Sumitomo Metal Industries, Japan’s largest maker of seamless pipes, fell 5.1 percent to 240 yen as of 2:40 p.m. on the Tokyo Stock Exchange. The shares have advanced 11 percent this year.

Nippon Steel, the world’s second-largest mill, yesterday widened its first-half loss forecast by 33 percent to 80 billion yen saying Asian export markets were weaker than it had anticipated. The company had a net loss of 42.25 billion yen, compared with a profit of 82.8 billion yen a year earlier, and reiterated its break-even forecast this fiscal year.

JFE, Japan’s second-largest steelmaker, forecast a profit of 1.6 billion yen this quarter, compared with a loss of 41.6 billion yen in the three months ended June 30, based on figures derived from the half-year estimate released July 28. The company forecast full-year net income of 24 billion yen, 88 percent lower than a year earlier.

Japan’s crude steel production dropped 34 percent in June from a year earlier to 6.89 million metric tons last month, the Tokyo-based Japan Iron & Steel Federation said. That followed a 44 percent drop in April and a record 47 percent in March.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Yasumasa Song in Tokyo at ysong9@bloomberg.net.

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Corn, Soybeans Rebound as Dollar Slips, Boosting Demand Outlook

By Jae Hur and Luzi Ann Javier

July 30 (Bloomberg) -- Corn and soybeans gained as the dollar rally stalled, increasing demand prospects for U.S. crops. Wheat climbed from the lowest price since March.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, slipped for the first time in three days, making U.S. supplies more attractive to buyers holding other currencies. The index yesterday touched the highest level since July 17, prompting the biggest drop in commodity prices in eight weeks.

“The dollar’s retreat has helped corn and soybeans rebound moderately,” said Toshimitsu Kawanabe, an analyst at Tokyo- based commodity broker Central Shoji Co. Investors appeared to be reluctant to take significant positions before the U.S. Department of Agriculture releases its supply and demand outlook on Aug. 12, he said.

December-delivery corn advanced 0.5 percent to $3.2975 a bushel on the Chicago Board of Trade at 3:07 p.m. Singapore time, gaining for the first time in three days. The most-active contract has dropped 10 percent this month, extending June’s 16 percent loss.

Soybeans for November delivery climbed 1.2 percent to $9.2725 a bushel. The oilseed declined 5.5 percent this month, after plunging 17 percent in June.

Exporters in the U.S., the world’s biggest supplier of soybeans, sold 232,000 metric tons of the oilseed to China for delivery in the marketing year that begins Sept. 1, the U.S. Department of Agriculture said yesterday.

Crop Development

Cool temperatures will continue to slow development for soybean and corn crops in the Midwest in next five days “and possibly longer,” DTN Meteorlogix LLC said in a report dated yesterday. The Midwest is the largest growing region in the U.S.

“It’s not easy to sell aggressively because of unusually cool weather in the Midwest that may delay the crops’ growth, and speculation that the USDA may revise corn planting acres lower from its June 30 estimates, while the outlook for higher yields keeps investors from active buying,” Kawanabe said.

The USDA is scheduled to release Aug. 12 the result of a survey of farmers in Illinois, Indiana, Kentucky, Missouri, North Dakota, Ohio and Pennsylvania, which will show the effect of cold weather on corn plantings.

The Dollar Index fell as much as 0.6 percent to 79.174 after gaining as much as 1 percent yesterday. The Reuters/Jefferies CRB Index of 19 commodities dropped 2.7 percent yesterday, the steepest loss since June 22, led by declines in crude oil, heating oil, natural gas and silver.

Wheat for September delivery added 0.4 percent to $5.1375 a bushel. The grain fell 0.9 percent yesterday after touching $5.05, the lowest since March 4.

Japan, Asia’s biggest wheat importer, bought 144,000 tons of milling wheat for October shipment, including 102,000 tons from the U.S., in a tender today.

Argentina will get more dry weather in the coming week, affecting wheat crops, the Buenos Aires Cereals Exchange said in its weekly weather report yesterday. The nation was the world’s sixth-largest wheat exporter in the 2008-2009 marketing year, according to the USDA.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net; Luzi Ann Javier in Singapore at ljavier@bloomberg.net

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NYSE Euronext Has Second-Quarter Loss After Severance Payments

By Nandini Sukumar and Edgar Ortega

July 30 (Bloomberg) -- NYSE Euronext, the world’s largest owner of stock exchanges, reported a second-quarter loss after severance payments and a one-off charge to end a post-trade contract eroded earnings.

The net loss was $182 million, or 70 cents a share, in the period ended June 30, compared with net income of $195 million, or 73 cents, a year earlier, the New York-based company said in a statement today. Second-quarter results included a $442 million “negative impact from merger expenses and exit cost,” the company said.

Reduced fees at NYSE Euronext’s seven equity exchanges eroded gains from increased trading as the MSCI World Index staged its biggest quarterly rally in a decade. Chief Executive Officer Duncan Niederauer has stemmed market-share losses to London-based Chi-X Europe Ltd. and U.S. rivals including Bats Global Markets of Kansas City, Missouri. Niederauer told shareholders in April that he will seek to sustain profit by cutting an additional $100 million in costs this year.

NYSE Euronext declined 0.7 percent to $27.02 in New York trading yesterday. For the year, the stock has slipped 1.3 percent, compared with a 39 percent jump in the FTSE/Mondo Visione Exchanges Index that tracks 18 bourses.

Chicago-based CME Group Inc., the world’s largest exchange operator by market value, reported a 10 percent increase in net income last week. Deutsche Boerse AG, the No. 2 exchange operator, is scheduled to report earnings next week, along with NYSE’s smaller rival Nasdaq OMX Group Inc.

To contact the reporters on this story: Edgar Ortega in New York at ebarrales@bloomberg.net; Nandini Sukumar in London at nsukumar@bloomberg.net.

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Asian Stocks Rise After Japanese Profit Reports; China Rebounds

By Patrick Rial and Masaki Kondo

July 30 (Bloomberg) -- Asian stocks rose, rebounding from earlier declines, as better-than-expected earnings from Honda Motor Co. and Nissan Motor Co. bolstered investor confidence in the prospects for a global economic recovery.

Honda Motor Co. and Nissan Motor Co. gained more than 7 percent in Tokyo. Mitsubishi Electric Co., which makes everything from air conditioners to factory robots, soared 15 percent in Tokyo after saying the worst is over for the company. Commonwealth Bank of Australia led gains by the nation’s banks after upgrades by Citigroup Inc. China’s benchmark climbed, recovering from its biggest drop in eight months yesterday.

The MSCI Asia Pacific Index added 0.7 percent to 109.95 as of 5:32 p.m. in Tokyo, reversing a decline of as much as 0.3 percent. The gauge dropped yesterday for the first time in 12 days. The 13 percent rally swelled prices to 24.7 times estimated profit, the highest ratio since March 30.

“Positive earnings surprises are supporting the market although the current valuations can’t be justified without further improvement in earnings prospects,” Hiroshi Morikawa, a senior strategist at Tokyo-based MU Investments Co., which manages the equivalent of $13 billion.

Stocks rose in Hong Kong and China after the People’s Bank of China said it would maintain “moderately loose” monetary policy and use “market tools instead of quantity controls” to control lending. The Hang Seng Index gained 0.5 percent, while the Shanghai Composite Index rebounded from a 5 percent decline yesterday to rise 2.1 percent.

Nikkei 225, Benchmarks

Japan’s Nikkei 225 Stock Average rose to its highest level since Oct. 6, climbing 0.5 percent to 10,165.21 as the nation’s manufacturers boosted production for a fourth month. Sony Corp., which reported a smaller-than-forecast quarterly loss after the close of trading, jumped 6.8 percent.

Futures on the U.S. Standard & Poor’s 500 Index climbed 0.3 percent, after dipping 0.5 percent yesterday.

Mitsubishi Electric soared 15 percent to 710 yen, its steepest gain since October and the biggest advance in the MSCI World Index. The company posted a narrower-than-expected 8.25 billion yen ($87 million) net loss for the latest quarter as sales of heavy equipment rose.

“The worst is already behind us,” Hiroki Yoshimatsu, an executive officer, said at a news briefing.

A third of the 36 companies in the Nikkei 225 that published results through yesterday beat analyst estimates, compared with 17 percent with worse-than-expected earnings, according to data compiled by Bloomberg.

Japanese Carmakers Rise

Honda, Japan’s second-largest carmaker, jumped 8.7 percent to 3,010 yen. The automaker raised its operating profit forecast yesterday after Tokyo markets closed to 70 billion yen for the year to March 2010, citing cost cuts. Nomura raised its rating on the carmaker to “buy” from “neutral.”

Nissan soared 10 percent to 694 yen. Japan’s No. 3 automaker posted a first-quarter net loss that was less than a third of what analysts had projected. Mazda Motor Co. gained 8.6 percent to 264 yen.

“Companies are coming out with results that give investors a sense of relief,” said Mitsushige Akino, who oversees about $631 million at Ichiyoshi Investment Management Co. in Tokyo.

Commonwealth Bank, Australia’s largest by market value, jumped 4.3 percent, and National Australia Bank Ltd. rose 3.8 percent. Both were raised to “buy” from “hold” at Citigroup, which identified 10 reasons for optimism on Australian lenders, including narrowing credit spreads and the “elimination” of solvency risk.

Oil, Metals Drop

Cnooc Ltd., China’s biggest offshore oil explorer, sank 1.5 percent to HK$10.26 in Hong Kong. BHP Billiton Ltd. slid 0.8 percent to A$37.15 in Sydney. Sumitomo Metal Mining Co., Japan’s biggest nickel and gold producer, tumbled 3.9 percent to 1,392 yen after reporting a 78 percent drop in first-quarter profit and as nickel fell the most in more than two weeks.

Crude oil declined 5.8 percent in New York yesterday, the most since April 20, and a gauge of metals in London fell 1.8 percent.

“We’re in that situation where the short-term consequences of a recovery are obvious, but the long-term issues are not so obvious,” said David Murray, chairman of the Future Fund, the Australian sovereign-wealth fund. “It’s a little bit of a time- out at the moment.”

Manila Electric Co., the largest power retailer in the Philippines, fell the most in four months on speculation a bidding war between the company’s two biggest owners will end. The stock tumbled 18 percent, the most in the MSCI Asia Pacific.

‘Anxiety, Choppiness’

The index rallied 55 percent through yesterday from a more than five-year low on March 9 on rising confidence the worst of the global recession has passed. Japanese manufacturers increased production 2.4 percent in June, a report from the Trade Ministry showed today, capping the fastest quarterly output expansion in more than half a century.

“Given the extent of the rally, it will create anxiety and short-term choppiness among investors,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $95 billion. “The fact that world economic indicators have improved shows earnings will recover, so at this point in the cycle there should be no worries about valuations.”

A report last week by the Ifo institute showed German business confidence rose for a fourth month in July, suggesting Europe’s largest economy is on the path to recovery. Meanwhile, initial jobless claims in the U.S. have come in under 600,000 for the last three weeks, according to government data, and economists expect them to total 575,000 in a report today.

Carlsberg Brewery Malaysia Bhd., Malaysia’s biggest beermaker, gained 6.1 percent to 4.50 ringgit, the highest since November 2007. Credit Suisse Group AG and RHB Research Institute Sdn. upgraded their ratings on the stock.

NEC Electronics declined 5.3 percent to 967 yen, the sharpest decline since July 13. The company’s loss widened amid a slump in demand for devices used in automobiles, flat-panel televisions and handsets.

Techtronic Industries Co., which makes Hoover vacuum cleaners and Ryobi power tools, sank 5.9 percent to HK$6.65 in Hong Kong after saying it will raise funds by selling new shares.

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

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Gold, Little Changed in London, May Rise as Equities Advance

By Claudia Carpenter

July 30 (Bloomberg) -- Gold, little changed in London today, may rise after two straight drops as higher equities signal increased willingness to take on risk, weighing on the dollar.

The Dollar Index, a gauge of the currency’s value against six counterparts, fell as much as 0.6 percent after adding 1.3 percent in the prior two sessions, when gold dropped 2.5 percent. Bullion and the greenback tend to move inversely. The MSCI World Index of shares advanced as much as 0.5 percent after two retreats in a row.

Gains in equities are a sign of “falling risk aversion,” which may reduce demand for the dollar, pushing gold higher, said Carsten Fritsch, a Commerzbank AG analyst in Frankfurt.

Bullion for immediate delivery climbed 78 cents, or 0.1 percent, to $930.78 an ounce by 9:12 a.m. in London. The metal is heading for a weekly drop after two straight gains. Gold futures for December delivery added 0.3 percent to $932.80 an ounce on the New York Mercantile Exchange’s Comex division.

The euro advanced as much as 0.3 percent against the dollar. China is buying the single European currency “in size,” according to David Thurtell, an analyst at Citigroup Inc. in London.

“The dollar is likely to go lower, and thus gold higher today,” he said by e-mail.

Investors sold another 10.38 metric tons of gold from the SPDR Gold Trust, the biggest exchange-traded fund holding bullion, according to the company’s Web site.

Gold gained for a second week last week even as investors reduced ETF holdings. A lack of jewelry demand to absorb sales may “suggest downward moves could be magnified,” said James Moore, an analyst at TheBullionDesk.com in London. Gold is likely to remain dependent on moves in the dollar and equities, he said.

Platinum for immediate delivery fell 0.3 percent to $1,173 an ounce, palladium rose 0.8 percent to $256.42 an ounce, and silver climbed 0.3 percent to $13.35 an ounce.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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Japan’s Topix Rises in Longest Streak in 4 Years; Honda Surges

By Masaki Kondo

July 30 (Bloomberg) -- Japan’s Topix index rose for a 10th day in its longest winning streak in four years after Mitsubishi Electric Corp. reported a narrower-than-expected quarterly loss and Honda Motor Co. boosted its annual profit target sevenfold.

Mitsubishi Electric, which made scoreboards for the Dallas Cowboys football stadium, surged 15 percent. Nissan Motor Co. jumped 10 percent after a first-quarter loss was narrower than analysts had estimated. Honda, Japan’s No. 2 automaker, soared 8.7 percent as cost reductions contributed to the higher earnings outlook. Sumitomo Metal Mining Co. sank 3.9 percent after first-quarter profit fell and oil and metals prices slid.

The Topix added 6.58, or 0.7 percent, to close at 936.94 in Tokyo, marking its longest stretch of gains since August 2004. The Nikkei 225 Stock Average added 51.97, or 0.5 percent, to 10,165.21, its highest close since Oct. 6. While both gauges advanced, about five stocks fell for four that rose.

“Positive earnings surprises are supporting the market,” said Hiroshi Morikawa, a senior strategist at Tokyo-based MU Investments Co., which manages the equivalent of $13 billion. “Cost cuts are rational actions for individual companies but they are reducing somebody’s revenue and diminishing demand, which will eventually lead to a deeper economic slump.”

Mitsubishi Electric surged 15 percent to 710 yen, posting the steepest jump on the MSCI World Index, followed by Nissan and Honda. The company today reported a first-quarter net loss that was less than half analyst estimates.

Nissan, Japan’s No. 3 automaker, gained 10 percent to 694 yen. It posted a first-quarter net loss that was less than a third of analysts’ projections.

Valuation Concerns

Honda, whose estimated price-to-earnings ratio reached 100, surged 8.7 percent to 3,010 yen and was the most actively traded stock by value in Tokyo. The company raised its operating profit forecast yesterday, after markets closed, to 70 billion yen ($737 million) for the year to March 2010, citing cost cuts. Nomura Holdings Inc. lifted its rating on the carmaker to “buy” from “neutral.”

Rising valuations have some investors questioning whether earnings prospects can justify current share prices. Fifteen percent of Nikkei-listed shares trade at more than 50 times estimated net income, compared with 5 percent for the S&P 500, according to Bloomberg data.

“The absolute level of profit is still low. Unless earnings continue to recover, current valuations can’t be justified,” for Honda said Mitsushige Akino who oversees the equivalent of $631 million at Ichiyoshi Investment Management Co. “With sales unlikely to grow, the success of cost cuts and business restructuring divide winners and losers.”

Sony Speculation

Sony Corp., maker of the PlayStation 3 game machine, soared 6.8 percent to 2,505 yen. After the close of Tokyo stock trading, the company reported a first-quarter net loss that’s less than half analysts’ projections.

“Earnings reports from automakers were seen as precursors for good results from electronics makers, including Sony, and prompted short-sellers to unwind their positions on those shares,” said Ayako Sera, a strategist at Sumitomo Trust & Banking Co. in Tokyo, which manages $266 billion in assets.

Sumitomo Metal, the nation’s No. 1 nickel producer, slid 3.9 percent to 1,392 yen. First-quarter net income plunged 78 percent as prices for copper and nickel fell. Nippon Oil Corp. lost 2.9 percent to 502 yen after cutting its full-year profit target. Nippon Mining Holdings Inc., its merger partner, sank 2.5 percent to 466 yen.

NEC Electronics Corp., Japan’s fourth-largest chipmaker, plummeted 5.3 percent to 967 yen, breaking a seven-day winning streak. A first-quarter net loss widened 16-fold from a year earlier, the company said yesterday after markets shut.

Nikkei futures expiring in September rose 0.9 percent to 10,200 in Osaka and added 1.7 percent to 10,205 in Singapore.

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

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