Euro Falls on Speculation G7 Finance Officials to Discuss Gain

By Yoshiaki Nohara and Ron Harui

Oct. 1 (Bloomberg) -- The euro fell against the dollar on speculation finance ministers and central bankers will discuss the European currency’s strength at a Group of Seven meeting this week.

Europe’s single currency dropped versus 13 of its 16 major counterparts on prospects the euro region’s finance ministers and central bankers meeting today in Goteborg, Sweden will signal that currency gains are unwelcome. The yen fell against the dollar as economic reports from China and South Korea sparked demand for higher-yielding assets in emerging markets.

“The recent appreciation of the euro is beginning to bother policy makers in the eurozone, where deflationary pressure is strong,” said Takeshi Makita, a Tokyo-based economist at Japan Research Institute Ltd., a unit of Japan’s third-largest banking group Sumitomo Mitsui Financial Group Inc. “As the region’s economy will rely on exports to achieve a recovery, it’s natural for policymakers to start verbal intervention to stem a harmful rise of the euro.”

The euro declined to $1.4568 as of 8:01 a.m. in London from $1.4640 in New York yesterday. The 16-nation currency traded at 131.22 yen from 131.33 yen. The yen dropped to 90.07 per dollar from 89.70.

European Union Monetary Affairs Commissioner Joaquin Almunia said the Eurogroup will discuss the currency’s advance in preparation for Group of Seven meetings, Reuters reported. G- 7 finance chiefs are meeting in Istanbul this weekend.

The yen fell against 12 of its 16 major counterparts after a report today showed China’s Purchasing Managers’ Index gained to 54.3 in September from 54.0 in August. Markets in Hong Kong and China are closed for holidays.

China PMI

“The China PMI increase means that the global economy is set for a steady expansion,” said Tomoko Fujii, senior currency strategist at Bank of America Securities-Merrill Lynch in Tokyo.

South Korea’s government said overseas sales fell 6.6 percent from a year earlier in September, less than August’s 20.9 percent slide and the 10.5 percent decline forecast by economists in a Bloomberg survey. Confidence among local manufacturers is at a two-year high, according to a monthly survey published yesterday by the Bank of Korea.

“Solid data are brightening the economic outlook, improving risk appetite,” said Tetsuya Inoue, chief researcher for financial markets and technology studies at Nomura Research Institute. “As emerging-market currencies benefit, the yen is being sold somewhat.”

The dollar advanced against the yen after the Bank of Japan’s Tankan survey showed companies plan to deepen investment cuts, spurring a drop in Asian stocks and boosting demand for the relative safety of the U.S. currency.

Tankan Survey

Large businesses aim to cut spending 10.8 percent this year, more than the 9.4 percent planned three months ago, the central bank said in Tokyo today. Confidence at big manufacturers rose for a second quarter after plunging to a record low in March.

“It’s an unusual situation for large companies to plan cuts in capital spending,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo. “They can’t be confident about the medium- to long-term outlook due to the big gap in supply versus demand.”

The Nikkei 225 Stock Average slid 1.5 percent and the MSCI Asia-Pacific Index of regional shares dropped 1.2 percent. The dollar benefits from risk aversion because it is the world’s main reserve currency.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

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ICAP Sees Lower Profit as Derivatives Business Slows

By John Glover

Oct. 1 (Bloomberg) -- ICAP Plc, the world’s largest broker of transactions between banks, said first-half profit was “slightly” lower than a year earlier as its credit and equity derivatives businesses slowed.

Revenue in the period increased 6 percent, London-based ICAP said in a statement today. Pretax profit for the year to March 2010 will be in line with analysts’ expectations of between 309 million pounds ($493 million) and 354 million pounds, the company said.

“In electronic broking, markets have been quieter than the very active conditions a year ago,” Chief Executive Officer Michael Spencer said in the statement. “Cost reductions and other measures have helped to hold margins.”

The slump in credit markets last year spurred ICAP’s customers to increase trading, boosting the amount of business it handles. As markets calmed this year amid unprecedented government efforts, trading in some of ICAP’s markets slowed.

ICAP fell 4.5 pence, or 1 percent, to 418.2 pence at 8:05 a.m. in London after slumping as much 4.85 percent.

The broker has gained 44 percent this year, valuing the company at 2.7 billion pounds, compared with an increase of 16 percent on the U.K.’s benchmark FTSE 100 Index. The FTSE 350 Banks Index of U.K. financial companies has climbed 36 percent year-to-date.

Pretax profit before one-off items and impairments, ICAP’s preferred measure of performance, was 346 million pounds in the fiscal year to March 2009, it said in May.

“Many of the markets in which we operate are benefiting from the continuing low short-term interest rates, steep yield curves and substantial corporate and government bond issuance,” Spencer said in the statement. “Both credit and equity derivatives have experienced more difficult conditions.”

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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British Pound Rises Against Euro, Climbs 0.2% to 91.37 Pence

By Daniel Tilles

Oct. 1 (Bloomberg) -- The pound rose against the euro, strengthening 0.2 percent to 91.37 pence as of 7 a.m. in London. The British currency fell 0.3 percent to $1.5931.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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Bernanke to Urge ‘Strong’ Consumer Protection in House Hearing

By Scott Lanman and Craig Torres

Oct. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will tell lawmakers that protecting consumers of financial services is “vitally important,” while omitting prior criticism of an Obama administration proposal to shift such powers from the Fed to a new agency.

“It is vitally important that consumers be protected from unfair and deceptive practices in their financial dealings,” Bernanke says in testimony obtained by Bloomberg News and prepared for a hearing today of the House Financial Services Committee. “Strong consumer protection” helps preserve savings and promote confidence in financial firms and markets, he said.

Bernanke doesn’t discuss the proposal for a separate agency in the testimony, after saying in July that there would be disadvantages to creating one. That may soften a clash with Representative Barney Frank, the panel’s chairman, who said at a hearing yesterday that the Consumer Financial Protection Agency must be created because the Fed and other bank regulators did little to police lending abuses.

The Federal Reserve had a “lackadaisical record” on consumer protections and will cede its oversight power and funding to the agency, Frank said.

Frank, a Massachusetts Democrat, released a “report card” on Sept. 23 that he said demonstrated the Fed’s “poor record” in “using the tools provided by Congress to protect consumers from abusive financial-industry practices.”

July Criticism

The hearing with Bernanke is scheduled for 9 a.m. in Washington.

The 55-year-old Fed chief previously testified on potential changes to financial regulation in July, when he said there would be disadvantages to creating a consumer financial- protection agency.

Rules created by the Fed in recent years “benefited from the supervisory and research capabilities” of the central bank, Bernanke said in July.

The Fed chairman comes to Capitol Hill as Congress is preparing the most extensive overhaul of financial regulations since the Great Depression.

In response to congressional criticism, Fed officials have stepped up their scrutiny of bank lending, are overhauling their approach to supervision and trying to strengthen their commitment to consumer protection.

The Fed announced on Sept. 15 that it would begin looking at consumer compliance in non-bank subsidiaries of bank holding companies. Inside the Fed, Bernanke has also emphasized an integral approach to supervision, drawing on expertise across the Fed’s divisions, including Consumer and Community Affairs.

Rate Cut

The Fed chairman didn’t comment on the economy or interest rates in his prepared remarks. Central bankers left the benchmark lending rate unchanged in a range of zero to 0.25 percent last week and committed to buy the full amount of their $1.25 trillion mortgage-backed securities purchase program.

Lawmakers have shunned an Obama administration proposal that would give the Fed authority over the capital, liquidity, and risk management practices at systemically important financial institutions.

Instead, Frank said on Sept. 14 legislators will vest that authority in a council of regulators.

Bernanke says in today’s prepared testimony that the central bank is “well suited to serve as the consolidated supervisor for those systemically important financial institutions” not already under the Fed’s umbrella.

Also in the prepared remarks, Bernanke reiterates his call for other changes to regulation, including finding a way to wind down big financial companies without harming the financial system and allowing the government to “impose losses on shareholders and creditors of the firms.”

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

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Greenspan Says U.S. Will Need to Tighten Credit, Raise Taxes

By Albert R. Hunt and Rich Miller

Oct. 1 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. will have to both tighten credit and raise taxes as the economy pulls out of the worst recession since the 1930s.

“The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic,” Greenspan, 83, said in an interview with Bloomberg Television yesterday.

The budget deficit this year is forecast to widen to $1.6 trillion, boosted in part by President Barack Obama’s $787 billion stimulus package. Between 2010 and 2019, deficits will total $7.1 trillion, according to the Congressional Budget Office.

Greenspan also said the Fed will have to withdraw money from the financial system to avoid inflation. The central bank has doubled its balance sheet over the last year to $2.2 billion as it battled the recession that began in December 2007.

The economy will grow at a 3 percent to 4 percent annual pace in the next six months before slowing in 2010, Greenspan predicted. Growth will be aided by a surge in the stock market and inventory restocking by companies. Share prices are likely to “flatten out, even though earnings are doing very well.”

The Standard & Poor’s 500 Index has jumped 56 percent from its low for the year on March 9, an ascent that’s had a “very positive” impact on the economy, Greenspan added. The index fell 0.3 percent yesterday to 1,057.08.

Job Cuts

The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year. An unexpected decline in a gauge of business activity released yesterday, along with a private report showing employers cut more jobs than forecast, indicate a recovery may be slow to take hold.

Greenspan, who was appointed Fed chairman in 1987 by President Ronald Reagan and served until January 2006, praised the steps has taken by his successor, Ben S. Bernanke, to help pull the economy out of recession.

“The Fed has done a splendid job,” he said.

Still, the size of the Fed’s balance sheet is “not sustainable” and will eventually have to be reduced to “something just north of $1 trillion,” he said.

“My concern is that legislation or other actions on the part of Congress may prevent” the Fed from withdrawing the stimulus, Greenspan said. “Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”

Representative Ron Paul of Texas, a Republican, is leading an effort in Congress to repeal the central bank’s immunity to audits of monetary policy.

Consumption Tax

Greenspan said that the odds are growing that the U.S. will have to enact some form of consumption tax to help reduce the federal budget deficit.

Obama has pledged to bring down the deficit without raising taxes on middle-income Americans. The CBO estimates that this year’s budget shortfall will equal 11.2 percent of the economy, the most since World War II.

Greenspan said he is “quite impressed” by Obama and called him “a very intelligent man.”

“But I don’t think he is sufficiently in control of a very serious budget problem,” the former Fed chief said.

Greenspan said that an overhaul of financial regulations is needed. Treasury Secretary Timothy Geithner has proposed the most sweeping changes to the rules governing Wall Street in seven decades, including giving the Fed authority to monitor risk across the financial system while stripping it of its consumer-protection role.

‘Broke Down’

“It’s very obvious that a lot of things which were in place in the regulatory area in the markets failed,” Greenspan said. “It broke down and it’s got to be fixed.”

Bernanke has opposed ceding the central bank’s power to regulate the safety of financial products to a new agency. Greenspan, for his part, called such power “peripheral” to the Fed’s main role.

He also cautioned against responding to the financial crisis with excessive regulation. While agreeing that the government should have a say on executive compensation in the institutions that are receiving government aid, Greenspan voiced wariness about extending that control to other banks.

“You have to be careful here because this should be a relationship between shareholders, directors and executives,” he said.

To contact the reporters on this story: Albert R. Hunt in Washington at ahunt1@bloomberg.net; Rich Miller in Washington rmiller28@bloomberg.net

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U.S. Factories Probably Expanded at Fastest Rate in Three Years

By Courtney Schlisserman

Oct. 1 (Bloomberg) -- U.S. manufacturing probably expanded last month at the fastest pace in more than three years and consumer spending in August grew the most since 2003 as the recession eased, economists said ahead of reports today.

The Institute for Supply Management’s factory gauge rose to 54 in September from 52.9 the month before, according to the median forecast in a Bloomberg News survey of economists. Fifty is the dividing line between expansion and contraction. Another report may show purchases rose 1.1 percent in August.

A record drawdown in inventories earlier this year and stimulus programs such as “cash for clunkers” set the stage for more production and a return to economic growth last quarter. While output and spending may slow in coming months as the government’s measures expire, economists say a recovery is under way.

“As long as manufacturing gauges continue to expand, it’s going to suggest that the recovery in the economy is more durable,” said Jonathan Basile, an economist at Credit Suisse in New York.

The Tempe, Arizona-based purchasing managers’ factory report is due at 10 a.m. New York time. Estimates in the Bloomberg survey of 80 economists ranged from 51.5 to 56. The projected reading would be the highest since April 2006.

A Commerce Department report due at 8:30 a.m. may show the August gain in consumer spending was accompanied by a 0.1 percent increase in personal incomes, according to the survey.

The National Association of Realtors, meanwhile, may say the number of contracts to buy previously owned homes rose in August at a slower pace than the prior month.

Clunker Effect

Ford Motor Co, General Motors Co. and Honda Motor Co. are among automakers that have cited the popularity of the Obama administration’s cash-for-clunkers plan as they announced production increases for the coming months.

The program, which ended Aug. 24, offered discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan produced almost 700,000 sales before it ended, the Transportation Department said Aug. 26.

Economists yesterday said the end of the incentive may have helped fuel a weaker-than-forecast September reading for the Institute for Supply Management-Chicago’s business survey, which found activity dropped. The Chicago group is not a chapter of the national Institute for Supply Management.

Other gauges released last month indicate the expansion in manufacturing is accelerating. The Federal Reserve Bank of Philadelphia said its economic index rose to 14.1, the highest since June 2007, while a similar measure from the New York Fed increased to 18.9, the highest since November 2007.

Fed Assessment

The Federal Open Market Committee last week left the target rate for overnight loans between banks at a record low of between zero and 0.25 percent, while policy makers said for the first time since August 2008 that the economy is growing.

“Economic activity has picked up following its severe downturn,” Fed policy makers said Sept. 23 in a statement. “Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.”

GM said last week that it will add a third shift at three U.S. plants taking on additional production from factories slated to close or be idled. The facilities getting the new shifts are in Fairfax, Kansas; Fort Wayne, Indiana; and Delta Township, Michigan, GM said in a statement. The changes will restore 2,400 jobs, the Detroit-based company said.

An additional 600 jobs will be restored at stamping and powertrain facilities, Tim Lee, the company’s vice president of global manufacturing, said on a conference call.

Inventory Cuts

Leaner inventories are helping factories return to work as companies restock shelves. Stockpiles dropped at a record $160.2 billion annual rate in the second quarter, the Commerce Department said yesterday, after shrinking at a $113.9 billion pace in the first three months of the year.

Even so, an unexpected drop in durable-goods orders in August was a reminder that companies remain cautious.

“As we look at the economic data, it’s certainly encouraging,” DuPont Co. Chairman Charles O. Holliday said in an interview on Sept. 23. Nonetheless, he said, the third- largest U.S. chemical maker must not “get ahead of ourselves to build inventory too fast or assume we’re going to come out in a rapid-fire order, because I assume we’ll come out at a much different pattern than before.”

                      Bloomberg Survey

=============================================================== =

Pers Pers ISM Pending

Inc Spend Manu Homes

MOM% MOM% Index MOM% =============================================================== =

Date of Release 10/01 10/01 10/01 10/01 Observation Period Aug. Aug. Sept. Aug. - -------------------------------------------------------------- - Median 0.1% 1.1% 54.0 1.0% Average 0.1% 1.1% 53.9 1.0% High Forecast 0.5% 1.6% 56.0 3.0% Low Forecast -0.1% 0.1% 51.5 -2.5% Number of Participants 76 80 80 35 Previous 0.0% 0.2% 52.9 3.2% - -------------------------------------------------------------- - 4CAST Ltd. 0.2% 1.1% 53.5 -0.5% Action Economics 0.2% 1.0% 53.0 0.4% AIG Investments 0.0% 1.0% 54.0 0.5% Aletti Gestielle SGR 0.2% 1.4% 53.0 --- Ameriprise Financial Inc 0.2% 0.9% 54.0 0.4% Argus Research Corp. 0.1% 0.1% 53.0 --- Banesto 0.2% 1.0% 53.5 1.5% Bank of Tokyo- Mitsubishi 0.1% 1.3% 53.3 --- Bantleon Bank AG 0.1% 1.2% 53.8 --- Barclays Capital 0.1% 1.2% 56.0 --- Bayerische Landesbank 0.1% 1.2% 53.5 --- BBVA -0.1% 0.7% 55.7 0.5% BMO Capital Markets 0.2% 1.4% 53.5 2.0% BNP Paribas 0.2% 1.1% 54.0 --- BofA Merrill Lynch Resear 0.1% 1.1% 55.0 --- Briefing.com 0.0% 1.2% 55.7 1.0% Calyon 0.2% 0.9% 51.5 --- Capital Economics 0.3% 1.3% 55.0 1.5% CIBC World Markets 0.1% 1.5% 56.0 --- Citi 0.1% 0.9% 54.0 --- ClearView Economics 0.2% 1.2% 53.5 2.0% Commerzbank AG 0.2% 1.2% 55.0 1.0% Credit Suisse 0.1% 1.1% 54.5 --- Daiwa Securities America 0.1% 0.6% 54.0 --- Danske Bank 0.2% 1.3% 55.0 --- DekaBank 0.2% 0.9% 53.5 --- Desjardins Group 0.2% 1.2% 53.5 --- Deutsche Bank Securities 0.1% 1.4% 53.0 2.7% Deutsche Postbank AG --- 1.0% 53.5 --- DZ Bank 0.1% 1.2% 54.8 1.4% First Trust Advisors 0.0% 1.6% 54.0 --- Fortis --- 0.9% 53.5 --- FTN Financial 0.1% 1.5% 55.0 --- Goldman, Sachs & Co. 0.0% 1.1% 55.0 --- Helaba 0.1% 1.2% 53.0 --- Herrmann Forecasting 0.1% 1.0% 54.6 -1.8% High Frequency Economics 0.0% 0.9% 52.9 2.0% HSBC Markets 0.1% 1.0% 55.0 1.5% Ibersecurities 0.3% 1.2% 52.0 0.8% IDEAglobal 0.1% 0.8% 55.0 --- IHS Global Insight 0.1% 0.8% 53.5 --- Informa Global Markets 0.2% 1.2% 53.5 1.5% ING Financial Markets 0.1% 1.5% --- 1.5% Insight Economics 0.0% 1.5% 54.0 2.0% Intesa-SanPaulo 0.2% 1.0% 54.0 --- J.P. Morgan Chase -0.1% 0.8% 53.5 0.0% Janney Montgomery Scott L 0.2% 1.2% 53.5 1.5% Jefferies & Co. 0.2% 1.0% 54.0 --- Johnson Illington Advisor 0.4% 0.4% 53.0 --- Landesbank Berlin -0.1% 1.3% 54.5 --- Maria Fiorini Ramirez Inc 0.1% 1.2% 53.5 --- MFC Global Investment Man 0.0% 1.2% 55.0 --- Mizuho Securities 0.0% 1.3% 52.0 0.5% Moody’s Economy.com 0.0% 1.1% 54.7 -1.0% Morgan Keegan & Co. 0.1% 0.6% --- --- Morgan Stanley & Co. 0.1% 1.1% 53.0 --- National Bank Financial --- --- 56.0 --- Natixis 0.0% 1.0% 54.2 0.9% Newedge 0.1% 1.2% 53.5 --- Nomura Securities Intl. 0.4% 1.0% 52.1 --- Nord/LB 0.0% 1.0% 53.5 --- PNC Bank 0.1% 1.0% 53.3 --- Raymond James 0.1% 1.1% 54.5 --- RBC Capital Markets 0.1% 1.3% 55.0 --- RBS Securities Inc. 0.1% 1.0% 54.5 --- Ried, Thunberg & Co. --- 1.2% 54.0 1.0% Schneider Foreign Exchang 0.2% 1.4% 52.0 0.6% Scotia Capital 0.2% 1.0% 55.0 --- Standard Chartered 0.1% 1.0% 55.0 3.0% Stone & McCarthy Research 0.2% 1.5% 52.0 --- TD Securities 0.1% 1.1% 54.5 1.0% Thomson Reuters/IFR 0.2% 0.9% 53.0 1.9% Tullett Prebon 0.1% 0.9% 54.3 --- UBS 0.1% 1.0% 53.5 1.4% UniCredit Research --- --- 54.0 --- Union Investment 0.1% 1.1% 54.5 --- University of Maryland 0.2% 0.9% 53.5 1.0% Wells Fargo & Co. 0.5% 0.8% 54.5 --- WestLB AG 0.1% 1.0% 54.0 --- Westpac Banking Co. 0.2% 1.3% 53.5 2.0% Woodley Park Research 0.3% 1.1% 53.5 -2.5% Wrightson Associates --- 1.2% 54.0 1.0% =============================================================== =

To contact the reporter on this story:
Courtney Schlisserman in Washington at
cschlisserma@bloomberg.net.

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IMF Says Rising Joblessness to Weigh on U.S. Growth Next Year

By Timothy R. Homan

Oct. 1 (Bloomberg) -- Rising unemployment and the waning effects of President Barack Obama’s $787 billion stimulus program will restrain a U.S. economic recovery next year, the International Monetary Fund predicted.

The world’s largest economy is forecast to expand 1.5 percent next year, after contracting 2.7 percent in 2009, the IMF said today in a semiannual report. In July, the Washington- based lender projected 0.8 percent expansion for 2010.

“The U.S. economy is showing increasing signs of stabilization,” the IMF said in its World Economic Outlook. At the same time, “combined with the impact of rising unemployment, the temporary nature of the fiscal stimulus, and subdued growth in trading partner economies, growth will remain sluggish,” the fund said.

Government stimulus plans such as an auto-rebate program and first-time homebuyer tax credits gave manufacturing and housing -- main contributors to a U.S. recession that started in December 2007 -- a boost from July through September. Federal Reserve policy makers are among those concerned that gains in consumer spending will not be sustained as unemployment climbs and incomes stagnate.

The U.S. economy contracted at a 0.7 percent pace from April through June, the Commerce Department said yesterday in Washington. The jobless rate in the U.S. is likely to peak above 10 percent in the second half of next year, helping to keep core inflation below 1 percent through most of 2010, according to today’s IMF report.

Markets ‘Stressed’

“Although financial conditions have improved significantly in recent months, markets remain stressed, and this will weigh on investment and consumption,” the fund said. It added that recapitalizing banks and repairing their balance sheets are an “indispensable condition for sustained growth.”

Bank losses on bad assets are projected to increase from July 2009 through next year by $420 billion in the U.S., the IMF said yesterday in a separate report. American banks have already written down $610 billion, and capital-raising efforts will not be enough to offset future losses, according to that report.

Today the IMF warned that the “massive increase in bank reserves” must not result in “excessive credit growth and lead to inflation.” The Fed will have difficulty reducing the quantity of longer-term assets on its balance sheet, exposing the central bank to “significant interest-rate risk,” according to the report.

Unemployment

Fed Chairman Ben S. Bernanke is trying to revive lending and cut the 9.7 percent unemployment rate while preventing a surge in inflation from the $1 trillion expansion of the Fed’s balance sheet.

The IMF added its views to debates in the U.S. Congress, saying the Obama administration’s plan for overhauling financial regulations is “sensible” and should be done in a “comprehensive fashion, rather than in piecemeal.” The IMF also said expanding health-care coverage should be budget neutral, and measures are needed to bring down costs in order to maintain debt sustainability.

The legacy of the crisis, the IMF said, is “a high and rising debt trajectory that could become unsustainable without significant medium-term measures.” Similarly, potential growth during that period is likely to register below 2 percent “for a considerable time.”

To contact the reporter on this story: Timothy R. Homan in Istanbul at thoman1@bloomberg.net

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Rubber Advances After Japan Manufacturers’ Confidence Improves

By Aya Takada

Oct. 1 (Bloomberg) -- Rubber advanced after a report showed confidence among Japan’s largest manufacturers rose for a second quarter, boosting optimism that demand may increase for the raw material used to make tires.

Futures in Tokyo rose as much as 4.2 percent to 205 yen a kilogram ($2,284 a metric ton), matching the one-week high reached on Sept. 24. The Tankan index of sentiment among makers of cars, electronics and other goods climbed to minus 33 from minus 48 in June, the Bank of Japan said today. Confidence rose as global government stimulus spending rekindled exports.

“The good data gave support to industrial commodities including rubber,” Kazuhiko Saito, chief analyst at Tokyo-based commodity broker Fujitomi Co., said today by phone.

March-delivery rubber gained 2.6 percent to 201.8 yen a kilogram on the Tokyo Commodity Exchange at 11:20 a.m. local time. Prices extended a 21 percent increase the past three months, the largest quarterly gain since the period ended March 31, 2006.

Futures also increased as manufacturing in China, the world’s largest rubber consumer, expanded for a seventh month in September on stimulus spending and record growth in new loans.

The official Purchasing Managers’ Index increased to a seasonally adjusted 54.3 from 54.0 in August, the Federation of Logistics and Purchasing said today in Beijing.

The Shanghai Futures Exchange is closed for a holiday as the nation celebrates its 60th anniversary today. The January- delivery contract surged as much as 7 percent to the highest level since Sept. 17 yesterday.

Prices climbed amid speculation China may buy surplus rubber from the local market as demand may weaken after the U.S. imposed tariffs on tire imports from the country, Takaki Shigemoto, a commodity analyst at research and investment company TOS, said yesterday.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net

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Crude Oil Falls on Concern U.S. Economic Recovery May Stall

By Yee Kai Pin and Ben Sharples

Oct. 1 (Bloomberg) -- Crude oil in New York fell as traders booked profits from yesterday’s rally on concern the pace of fuel demand recovery in the U.S., the biggest energy-consuming nation, may stall.

Oil slipped below $70 a barrel after an unexpected drop in U.S. business activity and as companies cut more jobs than estimated. Prices rallied 5.9 percent yesterday, the most since April 2, after the Energy Department posted a surprise drawdown in gasoline stockpiles.

“Yesterday seemed like a rather disproportionate rise,” said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. “There’s a lot of data out in the next couple of days in the U.S. that would really affect perceptions of the outlook and have a bearing on the movement in oil prices.”

Crude oil for November delivery fell as much as 78 cents, or 1.1 percent, to $69.83 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $70.07 a barrel at 2:56 p.m. in Singapore. Futures have gained 57 percent this year.

The Institute for Supply Management-Chicago Inc.’s business barometer slid to 46.1, trailing the most pessimistic estimate from economists. Companies in the U.S. cut September payrolls by a larger-than-forecast 254,000 jobs, a report from ADP Employer Services showed, indicating the labor market may be slow to recover.

“The poor economic news suggests oil should not go too much higher in price because the U.S. economy is not improving as quickly as hoped,” Mike Sander, an investment adviser at Sander Capital in Seattle, said in an e-mail. “The economy is still in dire shape.”

Gasoline Drawdown

U.S. gasoline inventories fell 1.7 million barrels to 211.5 million in the week to Sept. 25, the Energy Department said yesterday. Stockpiles were forecast to rise 1 million barrels, based on the median of estimates in a Bloomberg News survey of analysts.

Crude oil supplies climbed 2.8 million barrels to 338.4 million, the report showed. Distillate stockpiles, which include heating oil and diesel, rose 323,000 barrels to 171.1 million. That’s a sixth weekly increase even as refinery output and imports dropped.

“While gasoline demand looks fine, distillate demand remains very weak, with an 11.6 percent year-on-year decline for September-to-date,” analysts at Barclays Capital, led by Paul Horsnell, said in an overnight report.

The investment bank maintained its forecast for oil in New York to average $76 a barrel in the fourth quarter. Prices rose 1 percent in the three months to yesterday, a third quarterly increase.

‘Sharp Reaction’

“We had a very sharp reaction given data that had both positive and negative aspects,” said Commonwealth Bank of Australia’s Moore. “We’re essentially still in a range of $65 to $75.”

U.S. stock markets fell following the Chicago business activity report. The Standard & Poor’s 500 Index lost 0.3 percent to 1,057.08 in New York, while the Dow Jones Industrial Average also slipped 0.3 percent to 9,712.28.

Asian shares mirrored the decline on concern the region’s economic recovery may falter. The MSCI Asia Pacific Index lost 1.2 percent to 116.55 at 3:33 p.m. in Tokyo. European stock- index futures were little changed.

China’s manufacturing expanded in September at the fastest pace in 17 months on stimulus spending and this year’s record growth in new loans. The country, Asia’s largest oil consumer, marks 60 years of Communist Party rule today.

Reduced Profits

South Korea, Asia’s third-biggest oil importer, bought less crude oil in September as refiners cut output in response to reduced profits. Imports fell to 67.4 million barrels, 2.5 percent less than the same month last year, according to the Ministry of Knowledge Economy.

Brent crude oil for November settlement fell as much as 73 cents, or 1.1 percent, to $68.34 a barrel on the London-based ICE Futures Europe exchange. The contract traded at $68.58 a barrel at 2:55 p.m. Singapore time. Yesterday, it rose 5.5 percent, the steepest increase since Sept. 16, to settle at $69.07 a barrel.

Yesterday’s rally “had a lot to do with some end-of- quarter window-dressing,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a note to clients. “Today we wipe the slate clean as we begin a new quarter. Let’s see if the bulls can keep the pressure on.”

To contact the reporters on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net; Ben Sharples in Melbourne at bsharples@bloomberg.net

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Acron May Borrow $2.2 Billion From Sberbank, VTB to Fund Mines

By Maria Kolesnikova

Oct. 1 (Bloomberg) -- OAO Acron, Russia’s third-largest nitrogen fertilizer producer, said it may borrow as much as $2.2 billion from state-run banks OAO Sberbank and VTB Group to fund an expansion.

The company is in talks to get a credit line of as much as $550 million at Sberbank for a phosphate mining project and another for “three times” that amount at VTB to fund a potash mine, Chairman Alexander Popov said in an interview in Moscow. The Velikiy Novgorod-based company expects to sign the loan agreements in November, he said.

Acron needs about $3.5 billion to build phosphate and potash mines to satisfy its raw-material needs. It has proposed placing the deposits in a joint venture with the government in exchange for the loans required for their development. Acron may also consider selling its 8.1 percent stake in OAO Silvinit, Russia’s biggest potash producer, to finance the mining projects, Popov said.

The company is seeking government guarantees on as much as 10 billion rubles ($332 million) of the Sberbank and VTB facilities and a deferral on interest repayments, Popov said yesterday. It expects to pay less than 9 percent interest on the dollar- denominated loans, he said.

VTB spokesman Maxim Lunyov and Sberbank spokesman Alexander Baziyan declined to comment.

Acron is also in talks about developing the potash and phosphate deposits with other potential partners, who would provide funding or will buy some of the output, Popov said. Acron will only consume 25 percent of the potash produced and 40 percent of the phosphates when the mines reach full capacity, he said.

The company expects to sell its potash output independently rather than join an existing trading group, he added.

Acron may also sell 3.5 billion rubles in bonds by the year-end as part of a plan to refinance short-term debt, Popov said.

To contact the reporters on this story: Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net

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Copper May Drop on Concern U.S. Economic Recovery May Falter

By Glenys Sim

Oct. 1 (Bloomberg) -- Copper, little changed in Asia, may decline on speculation an economic recovery in the U.S. may falter after an unexpected drop in business activity.

Stockpiles of the metal monitored by London Metal Exchange warehouses gained 16 percent last month. The Institute for Supply Management-Chicago Inc.’s business barometer trailed economists’ estimates. Companies in the U.S. cut payrolls by a greater-than-forecast 254,000 jobs, a report from ADP Employer Services showed.

“We would remain cautious in the near-term as inventories are not turning lower yet,” said Stefan Graber, an analyst at Credit Suisse Group in Singapore.

London Metal Exchange copper for delivery in three months was little changed at $6,170 a metric ton at 10:45 a.m. in Singapore. December delivery copper on the Comex division of the New York Mercantile Exchange lost 0.4 percent to $2.8085 a pound. China’s markets are closed for an eight-day holiday.

China’s manufacturing expanded at the fastest pace in 17 months in September on stimulus spending and this year’s record growth in new loans. The Purchasing Managers’ Index rose to a seasonally adjusted 54.3 from 54.0 in August, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. Still, this is lower than the median estimate of 55 in a Bloomberg News survey of 13 economists. A reading above 50 indicates an expansion.

Global Stockpiles

Stockpiles monitored by London Metal Exchange warehouses rose 0.4 percent to 345,650 tons yesterday. Reserves in Shanghai warehouses fell to 96,719 tons this week, still more than five times the level at the start of the year.

The metal’s losses were limited by the weaker U.S. currency. The dollar index, a weighted measure against six major currencies including the euro and yen, was little changed after dropping the most in a week yesterday.

Among other LME-traded metals, aluminum was little changed at $1,888 a ton, zinc fell 0.2 percent to $1,965 a ton, and lead slid 0.2 percent to $2,280 a ton. Nickel lost 0.5 percent to $17,800 a ton, while tin hadn’t traded as of 10:49 a.m. in Singapore.

To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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Vale Says Sudbury to Resume Nickel Production Today Amid Strike

By Diana Kinch

Oct. 1 (Bloomberg) -- Vale SA, the world’s second-biggest nickel producer, said it will restart partial production today at Sudbury, its largest nickel unit in Canada, amid a strike.

The company will operate its Clarabelle processing mill at Sudbury for an initial 48-hour period starting today, Cory McPhee, Toronto-based spokesman with Vale Inco Ltd., said yesterday in an e-mailed statement. Preparatory work continues at Sudbury mines Coleman and Garson Ramp, where the company expects to restart output early next week, he said.

About 3,300 of almost 4,600 employees at Sudbury walked off the job on July 13 after talks broke down over a labor contract, leading to the longest strike in Vale’s 67-year history. Output was paralyzed and customers were supplied by stockpiles.

“We are ready to resume partial production,” McPhee said. “Although we would prefer to be operating normally, the resumption of partial production is a matter of doing what’s best for the business.”

Earlier this month Vale said it would restart Sudbury by retraining staff members who hadn’t joined the strike. The restart will provide employment for 1,200 Sudbury workers, McPhee said. No talks are planned for Sudbury strikers, he said.

Most installations at Sudbury, which also produces copper, have been at a standstill since May 1, when Vale reduced output because of low market demand. This was followed by a maintenance shutdown in June and July before the strike erupted.

Vale’s Sudbury restart may cause nickel prices to fall, according to Paul Gray, a London-based analyst with Goldman Sachs JBWere.

Too Much Nickel

Nickel will remain in oversupply for the foreseeable future and may hit an average of $6.50 a pound in 2010 “significantly lower than current cash prices,” Gray said at a conference in Belo Horizonte on Sept. 22. “Demand has suffered hugely because of lower stainless steel demand this year.”

Prices of nickel, mainly used in stainless steel, may not recover to their 2006 levels until 2012, the analyst said.

Output at another Vale nickel mine in Canada, Voisey’s Bay, remains halted because of a strike. Voisey’s Bay has the capacity to produce 50,000 metric tons a year of nickel concentrate.

The unit hasn’t produced since the third week of June when it started maintenance work before the strike, Tom Paddon, a Voisey’s Bay general manager, said in an interview on Sept. 22.

Voisey’s Bay

About 200 of the 500 employees at Voisey’s Bay are on strike, he said.

Vale stopped operations at Thompson on Aug. 1, the same day a strike halted its Voisey’s Bay plant in Newfoundland.

OAO GMK Norilsk Nickel is the world’s largest nickel producer. About 75 percent of Vale’s nickel production comes from Canada.

Vale rose 0.2 percent to 36.60 reais in Sao Paulo trading yesterday. The stock has gained 12 percent in the past year, half the 24 percent increase for Brazil’s benchmark Bovespa index.

To contact the reporter on this story: Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.net

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Japanese Stocks Fall, Dragging Nikkei 225 to Close Below 10,000

By Masaki Kondo

Oct. 1 (Bloomberg) -- Japanese stocks fell, dragging the Nikkei 225 Stock Average below 10,000 for the first time in two months, after reports showed companies planned to further cut spending and U.S. businesses reduced more jobs than estimated.

Fanuc Ltd., Japan’s biggest maker of robots, fell 3.1 percent after the central bank’s Tankan report showed companies will cut capital spending by more than a 10th this year. Canon Inc., which gets 28 percent of its sales from the Americas, lost 2.8 percent on concern companies may miss earnings forecasts because of a stronger-than-expected yen. Mitsubishi UFJ Financial Group Inc. slid 5.4 percent after saying it will write down its stake in its consumer-lending unit.

The Nikkei 225 declined 1.5 percent to 9,978.64 in Tokyo, its first close below 10,000 since July 24. The broader Topix index fell 1.5 percent to 896.12, with more than five stocks dropping for each that advanced.

“The current business climate is hardly enticing companies to invest,” said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $96 billion. “The economy is not in good shape yet and consumer spending is unlikely to stage a rapid recovery.”

Yesterday, the Nikkei 225 and Topix capped their first monthly drop since February as concern mounted that Japan’s newly installed administration will fail to accelerate an economic recovery. Topix-listed shares trade at 38.3 times estimated net income for this year, the lowest level since April 29, according to data compiled by Bloomberg.

Reduced Capital Spending

U.S. companies cut payrolls by 254,000 jobs last month, ADP Employer Services said yesterday, more than economists had estimated.

Fanuc dived 3.1 percent to 7,800 yen, and Kawasaki Heavy Industries Ltd., the maker of Japan’s first industrial robots, dropped 4 percent to 219 yen.

Japanese large enterprises plan to cut capital spending by 10.8 percent this year, more than the 9.4 percent reduction foreseen three months ago, according to the Bank of Japan’s quarterly Tankan survey released this morning. Economists had estimated a 9 percent decrease.

Canon, the world’s biggest maker of digital cameras, fell 2.8 percent to 3,530 yen. Sony Corp., which gets 23 percent of its sales from the U.S., lost 2.8 percent 2,580 yen.

Japan’s large manufacturers expect the yen to trade at 94.08 per dollar in the second half, according to the Tankan, while the yen appreciated to as much as 89.66 today.

Crumbling Expectations

“The Tankan report confirmed that most companies haven’t yet taken the negative effects of the strong yen into account,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co., which oversees the equivalent of $4 billion. “Expectations that businesses will lift their annual forecasts when reporting their first-half results are falling apart.”

Electronics makers as a group were the second-biggest drag on the Topix, following banks.

Mitsubishi UFJ, Japan’s largest listed bank, dropped 5.4 percent to 456 yen and was the most actively traded share by value in Japan. The bank will take a 28 billion-yen charge on its stake in Acom Co., Mitsubishi UFJ said yesterday. The bank boosted its investment in the consumer lender to 40 percent last year, and Acom’s shares have plunged by half in the past six months.

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

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German Stocks Extend Gains as Munich Re Rallies on Buyback Plans

By Christiane Lenzner

Oct. 1 (Bloomberg) -- German stocks advanced for the first time in three days as Munich Re said it will resume its share- buyback program.

The benchmark DAX Index added 0.5 percent to 5,705.54 as of 9:20 a.m. in Frankfurt. Munich Re, the world’s largest reinsurer, rallied 2.5 percent to 111.78 euros on plans to repurchase shares with a volume of as much as 1 billion euros ($1.46 billion) by the 2010 annual general meeting.

Salzgitter AG and Allianz SE also advanced, adding more than 1 percent each.

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Asian Stocks Fall on Growth Concern; Honda, Advantest Decline

By Shani Raja

Oct. 1 (Bloomberg) -- Asian stocks fell for the first time in three days on concern the region’s economic recovery may falter after a Bank of Japan survey showed companies plan to deepen investment cuts.

Fanuc Ltd., Japan’s largest maker of robots, fell 3.1 percent after the central bank’s Tankan report showed companies will cut capital spending 10.8 percent this year. Hyundai Motor Co., South Korea’s largest automaker, slumped 8.1 percent on concern export earnings will be hurt after the won rose against the dollar and Chicago business activity dropped. Advantest Corp. slumped 5.8 percent after Credit Suisse Group AG cut its rating.

“The data is looking a bit more mixed,” said Rob Patterson, who helps manage $3.4 billion at Argo Investments Ltd. in Adelaide. “The rally has been very strong and probably a bit overdone. We need more evidence of an economic recovery and the proof will be in the next earnings results.”

The MSCI Asia Pacific Index declined 1.2 percent to 116.55 as of 3:33 p.m. in Tokyo. The gauge has surged 65 percent from a five-year low on March 9 as stimulus measures around the world dragged economies out of recession.

Japan’s Nikkei 225 Stock Average sank 1.5 percent, while South Korea’s Kospi Index lost 1.7 percent. Australia’s S&P/ASX 200 Index dropped 0.9 percent. Markets in Hong Kong and China are closed for holidays.

Elpida Memory Inc. sank 8.6 percent in Tokyo after the U.S. vowed to use World Trade Organization sessions to press Japan over subsidies to the chipmaker. In Seoul, shipbuilder Hanjin Heavy Industries & Construction Co. slumped 6.5 percent in Seoul, falling for a second day on concern France’s CMA CGM will cancel new vessels. StarHub Ltd. fell 6.5 percent in Singapore after losing sports-channel broadcast rights.

Business Index

Futures on the Standard & Poor’s 500 Index dropped 0.1 percent. The gauge fell 0.3 percent yesterday after the Institute for Supply Management-Chicago Inc. said its business measure decreased to 46.1 in September, while economists had projected the gauge would rise.

Fanuc dived 3.1 percent to 7,800 yen, while Kawasaki Heavy Industries Ltd., the maker of Japan’s first industrial robots, dropped 4 percent to 219 yen.

Japanese large enterprises plan to cut capital spending by 10.8 percent in the year to March 2010, more than the 9.4 percent reduction foreseen three months ago, according to the BOJ’s quarterly Tankan survey released this morning. Economists had estimated a 9 percent decrease.

“The current business climate is hardly enticing companies to invest,” said Yoshinori Nagano, a senior strategist at Tokyo- based Daiwa Asset Management Co., which oversees the equivalent of $96 billion. “The economy is not in good shape yet.”

Stronger Won

Stocks also sank after the ISM’s Chicago report, while separate figures from ADP Employer Services showed that U.S. companies cut payrolls by 254,000 jobs last month, more than economists estimated.

Toyota Motor Corp., which got 31 percent of its revenue in North America last year, lost 1.7 percent to 3,510 yen. Canon Inc., which makes digital cameras and office equipment, dropped 2.8 percent to 3,530 yen.

Hyundai Motor dropped 8.1 percent to 102,500 won as the stronger won threatened to cut the repatriated value of overseas sales for the company, which last year earned 62 percent of revenue outside South Korea. The stock fell even after Hyundai Motor reported a 61 percent jump in September sales.

Kia Motors Corp., South Korea’s second-biggest carmaker, slumped 6.7 percent to 17,350 won.

Best Performer

The won, Asia’s best performing currency against the dollar in September, was recently little changed at 1,178.25 versus the U.S. currency, according to data compiled by Bloomberg. The won earlier climbed to the highest in a year after South Korea said exports last month dropped at the slowest pace since November.

The climb in Asian equities in the past seven months has been fueled by better-than-estimated economic and earnings reports. Australian retail sales climbed 0.9 percent in August, the first gain in three months, the country’s statistics bureau reported yesterday.

Confidence among Japan’s largest manufacturers increased for a second-straight quarter, rising to minus 33 from minus 48 in June, the Bank of Japan’s Tankan survey showed today. The number matched economists’ estimates. A negative figure means pessimists outnumber optimists.

Rising Valuations

The MSCI index gained 14 percent last quarter, less than the previous three months’ 28 percent advance, as concerns emerged the stock rally may have overvalued company earnings prospects. The average price of the gauge’s shares rose to 1.6 times book value on Sept. 17, up from 1 at the measure’s five- year low on March 9.

The index added 4.1 percent in September, a seventh monthly advance that was its longest stretch of gains since the 10 months ended July 2007.

Advantest, the world’s largest maker of memory-chip testers, slumped 5.8 percent to 2,345 yen. The company was downgraded to “underperform” from “neutral” at Credit Suisse.

Elpida, Japan’s biggest computer memory-chip maker, sank 8.6 percent to 1,076 yen. U.S. Trade Representative Ron Kirk promised in a letter made public yesterday to use sessions at the WTO over subsidies and a separate meeting of countries with semiconductor production to get more information from Japan and Taiwan about the aid to Elpida.

Hanjin Heavy slumped 6.5 percent to 22,150 won as Lloyd’s List reported the company may be the most at risk among South Korean shipyards of having orders cancelled by CMA CGM, the world’s third-largest container line.

CMA CGM said two days ago it will renegotiate or cancel orders as it begins talks with creditors on debt restructuring in a bid to stave of bankruptcy. Hanjin Heavy tumbled 11 percent yesterday.

In Singapore, StarHub fell 6.5 percent to S$2.03 after it lost the right to broadcast Barclays Premier League football games and ESPN Star Sports to Singapore Telecommunications Ltd. SingTel, as Southeast Asia’s biggest telephone operator is known, added 0.3 percent to S$3.26.

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

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European Stocks Advance as Tandberg Rallies; Asian Shares Drop

By Sarah Jones

Oct. 1 (Bloomberg) -- European stocks gained after the International Monetary Fund increased its forecast for global growth and Cisco Systems Inc. agreed to buy Tandberg ASA. Asian shares retreated.

Tandberg, the world’s biggest videoconferencing-equipment maker, jumped 12 percent after agreeing to be bought by Cisco for about $3 billion. Munich Re climbed 2 percent after the world’s biggest reinsurer announced the resumption of its share- buyback program.

Europe’s Dow Jones Stoxx 600 Index added 0.5 percent to 243.74 at 8:20 a.m. in London as the IMF raised its forecast for global growth next year to 3.1 percent from 2.5 percent as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out of its worst recession since World War II.

The Stoxx 600 surged 18 percent in the past three months, the biggest quarterly gain since 1999, as the European Central Bank kept interest rates at a record low and the French and German economies unexpectedly exited recessions. The rebound has sent price-earnings valuations on the index to the highest levels since 2003.

The MSCI Asia Pacific Index fell 1.1 percent today as the Bank of Japan’s Tankan survey showed companies plan to deepen investment cuts. Markets in Hong Kong and China were closed for holidays. Futures on the Standard & Poor’s 500 Index were little changed before reports on U.S. manufacturing and consumer spending that may add to evidence the worst recession since the 1930s is easing.

Greenspan

Former Federal Reserve Chairman Alan Greenspan yesterday said the U.S. will have to both tighten credit and raise taxes as the world’s largest economy recovers.

“The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic,” Greenspan said in a Bloomberg Television interview.

The economy will grow at a 3 percent to 4 percent annual pace in the next six months before slowing in 2010, Greenspan predicted. Growth will be aided by a surge in the stock market and inventory restocking by companies. Share prices are likely to “flatten out, even though earnings are doing very well.”

Tandberg rallied 12 percent to 154.5 kroner as Cisco, the world’s largest maker of networking equipment, agreed to buy the Norwegian company for 17.2 billion kroner ($2.96 billion) to expand its video-conferencing products. Cisco will pay 153.50 kroner a share in cash, 11 percent more than Tandberg’s closing price yesterday.

Munich Re Rises

Munich Re advanced 2 percent to 111.18 euros. The reinsurer said it will repurchase shares with a volume of as much as 1 billion euros ($1.5 billion) by the time the company holds its 2010 annual general meeting.

Michelin & Cie. fell 1.4 percent to 52.87 euros. The Wall Street Journal reported that Jean-Dominique Senard, chief financial officer of the world’s second-largest tiremaker, said the economic recovery is shaky and may soon fade. The newspaper cited an interview.

France Telecom SA declined 1.1 percent to 18 euros after Citigroup Inc. lowered its recommendation to “sell” from “hold,” saying the company may suffer from fibre-communication regulation and a new mobile-phone operator in its home market.

Reports today may show U.S. manufacturing expanded last month at the fastest pace in more than three years and consumer spending in August grew the most since 2003. The Institute for Supply Management’s factory gauge rose to 54 in September from 52.9 the month before, according to a Bloomberg News survey of economists. Fifty is the dividing line between expansion and contraction.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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CIT May Pit Bondholders Against Each Other With Debt Swap Offer

By Pierre Paulden and Linda Shen

Oct. 1 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender, will seek board approval as soon as this week for a voluntary debt exchange that may pit bondholders against each other and leave shareholders almost wiped out.

The company has been in talks with a steering committee of bondholders before a deadline today to present a restructuring plan, according to a person familiar with the matter who declined to be identified because the negotiations are private. At the same time, New York-based CIT is proposing that debt holders vote on a pre-packaged bankruptcy plan in case the exchange fails, the person said.

CIT may adopt a plan similar to one used by Residential Capital LLC in December in which the company offered higher priority for repayment to holders of bonds that mature sooner, according to Adam Steer, an analyst at CreditSights Inc. in New York. CIT needs to exchange debt to raise sufficient equity to meet Federal Reserve capital requirements and fund itself, he said.

“We have seen exchanges in the past that pit long-dated bondholders against short-dated bondholders,” Steer said in an interview. “We believe CIT’s exchange could have a similar dynamic.”

A CIT spokesman, Tim Lynch, declined to comment on the exchange terms.

CIT needs to cut debt after posting more than $5 billion in losses during the past nine quarters and losing access to the unsecured debt markets it relied on for funding. The company said in July it may seek court protection from creditors after Chief Executive Officer Jeffrey Peek failed to win a second government bailout and had to turn to bondholders for $3 billion in rescue financing.

Bondholder Protection

The cost to protect CIT debt from default through Dec. 20 jumped 4 percentage points yesterday to 26 percent upfront, according to CMA DataVision. The cost of credit-default swaps implies that traders have priced in a 45 percent chance the company defaults in three months, an increase of 7 percentage points, a standard pricing model used by Bloomberg shows. The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding.

CIT said in an Aug. 17 regulatory filing that it has to come up with a plan “acceptable” to the majority of a bondholder steering committee that provided it with emergency cash by Oct. 1.

The restructuring plan for CIT, which had a net loss of $1.62 billion in the second quarter, may include debt-for- equity-swaps and offers to extend debt maturities, CIT said in an Aug. 17 regulatory filing.

“To do what they want to do out of court, they need very high consent levels to eliminate the problem of holdouts,” said Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut.

Court Authority

If CIT fails to convince enough creditors in each class of bonds to swap their debt, the company can file for bankruptcy and use the “authority of the courts to force the rest of each class to take the deal offered,” he said.

About $9.14 billion of CIT loans and bonds mature through 2010, including $1.15 billion by the end of this year, according to data compiled by Bloomberg. The company has $43 billion of loans and bonds, Bloomberg data show.

CIT fell 99 cents, or 45 percent, to $1.21 in New York Stock Exchange composite trading yesterday, contributing to a 73 percent decline this year.

CIT’s $750 million of 4.75 percent notes due December 2010 declined 2.125 cents to 69.375 cents on the dollar, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The $750 million of 6.1 percent notes due in March 2067 fell 3.25 cents to 15 cents on the dollar, Trace data show.

Bankruptcy Chances

The cost to protect against a CIT default for five years rose to the highest since Sept. 21. Credit-default swaps increased 2 percentage points to 36 percent upfront, according to CMA DataVision.

That means it would cost $3.6 million initially and $500,000 annually to protect $10 million of CIT debt from default for five years. The cost suggests traders have priced in an 83 percent chance of default by December 2014.

“It’s still highly possible they end up in bankruptcy court,” Steer said. The company needs to balance the demands of holders of near-term debt with the longer-dated bonds, he said.

In a pre-packaged bankruptcy, a company and its creditors agree to a reorganization plan before the business files for protection.

“If bankruptcy is inevitable, a pre-pack is a cleaner option to resolve claims quicker,” said Brian Charles, a debt analyst at brokerage firm RW Pressprich & Co. in New York. “If the company feels it can manage through the bankruptcy quickly, it can preserve franchise value.”

Ripple Effect

CIT funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.

A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” CIT said in internal documents obtained by Bloomberg News in July that make the case for its importance to the U.S. economy.

A pre-packaged bankruptcy would “wipe out the common equity” of CIT, said Sandler O’Neill & Partners LP analyst Michael Taiano in New York.

CIT is considering an offer of financing from Citigroup Inc. and Barclays Capital, according to other people familiar with the situation. Bondholders are also seeking to provide about $2 billion in loans as the restructuring deadline approaches, the people said. CIT may choose other options, they said.

Spokesmen for Citigroup and Barclays Capital and declined to comment.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net

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Bank of America, Lawson, Penske, Xyratex: U.S. Equity Preview

By Lu Wang

Oct. 1 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Ascent Solar Technologies Inc. (ASTI US): The developer of solar modules used in outer space said it plans to sell 4 million shares, raising money to fund production expansion.

Bank of America Corp. (BAC US): The biggest U.S. bank said Chief Executive Officer Kenneth Lewis told the company’s directors he intends to retire Dec. 31.

Lawson Software Inc. (LWSN US): The St. Paul, Minnesota- based company reported 80 percent more profit than analysts estimated in the first quarter, boosted by orders for new software from health-care companies and government customers.

Penske Automotive Group Inc. (PAG US): The publicly held chain of more than 300 dealerships said it has terminated its discussions with General Motors Co. to acquire the Saturn brand, citing concerns directly related to the future supply of vehicles beyond the supply period it had negotiated with GM.

UAL Corp. (UAUA US): The parent of United Airlines said it will sell at least 19 million shares of common stock and $175 million in convertible debt, joining an industrywide push to add cash before the slow winter travel season.

Xyratex Ltd. (XRTX US): The provider of data storage and network technology reported profit excluding some items of 36 cents a share in the third quarter, exceeding the average analyst estimate by 88 percent.

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

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