Bills Yielding Zero as Stocks Soar Make 1938 Moment

By Liz Capo McCormick and Daniel Kruger

Nov. 23 (Bloomberg) -- For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence in U.S. financial markets that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. As 1939 began, stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.

While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings.

“The question is what are you going to do with all the money that has been created?” said James Hamilton, a former visiting scholar at the Fed who teaches at the University of California, San Diego. “It’s not a contradiction at all to see very low short-term yields and at the same time have people trying to buy stocks. They are both reflecting that same force.”

Dipping Below Zero

Three-month bill rates closed at 0.005 percent last week, down from 0.11 percent at the end of September and the year’s high of 0.34 percent in February. Traders said the rate dipped below zero on some bills due in January on Nov. 19.

As money poured into bills, the S&P 500 ended little changed on the week at 1,091.38, up 64 percent from the low this year of 666.79 on March 6. The S&P GSCI Index of 24 commodities rose 46 percent this year, rebounding from last year’s 43 percent slump. Investors in high-yield, high-risk, or junk, corporate bonds earned a record 52 percent this year, according to Merrill Lynch & Co. indexes.

“A lot of these markets have been driven by excess liquidity and are not necessarily supported by economic fundamentals,” said Thomas Girard, a managing director at New York Life Investment Management who helps oversee $115 billion in fixed-income assets. “Clearly there is a class of investors that are nervous,” said Girard, who is avoiding bills and instead buying high-rated corporate bonds.

‘Not Obvious’

Bernanke, who has been studying the causes of the Depression since he was a graduate student at Massachusetts Institute of Technology, said on Nov. 16 that it’s “not obvious” that asset prices in the U.S. are out of line with underlying values. He didn’t address asset prices outside of the country. In 1989, he wrote an article with Mark Gertler, a New York University economics professor, for the American Economic Review in which they presented a detailed model that helps to explain the cascade of events that led to the collapse of markets in the years after the 1929 crash.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” Bernanke said in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

Equity investors say they have history on their side. The S&P 500 rose an average 8.4 percent in the six months before the last five increases in the Fed’s target rate for overnight loans between banks and added another 82 percent in the bull markets that followed, according to data compiled by Bloomberg. Shares typically rise before central banks push up interest rates because markets anticipate economic expansion first.

‘Enough of It’

The median estimate of economists surveyed by Bloomberg News is for policy makers to keep their target rate for overnight loans between banks in a range of zero to 0.25 percent until the third quarter of 2010.

The Fed will raise the rate to 0.50 percent by the end of September and to 1 percent by the close of 2010, the survey shows. The median prediction of analysts and strategists surveyed by Bloomberg is for the rate to be at 1.13 percent in the first quarter of 2011.

“There’s clearly room for the stock market to do better,” said Mark Bronzo, a money manager in Irvington, New York, at Security Global Investors, which oversees $21 billion. “If money is all going into short-term securities, at some point, investors will say ‘enough of it’ and the next incremental change will be for money to chase riskier assets.”

The bulls got a boost last week when the Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year as China powers a global recovery. The economy of the group’s 30 countries will expand 1.9 percent in 2010, the Paris-based organization said in a Nov. 19 report, up from a prediction of 0.7 percent in June.

‘Recovery in Motion’

“We now have numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, said.

Demand for bills has also been driven by banks adding the safest securities to improve balance sheets at year-end, a drop in sales as the Treasury lessens its dependence on short-term financing and fewer alternatives as companies cut back on sales of commercial paper.

“I don’t see negative yields in this current environment as anything anomalous,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge and former economist at the Office of the Comptroller of the Currency.

Recovery Doubts

Even so, bond investors doubt the strength of the recovery after the Federal Housing Administration said last week that foreclosures on prime mortgages and home loans insured by the agency rose to three-decade highs in the third quarter. Builders broke ground on 529,000 houses at an annual pace in October, down 11 percent from September and the fewest since April’s record low, Commerce Department figures showed Nov. 18.

“Everything is not dandy in this world,” said Axel Merk, who manages more than $550 million as president of Palo Alto, California-based Merk Investments LLC and has been buying bills. “Sure money is flowing into risky assets and people are leveraging up, but it is only available to those with pristine credit. It is still a very difficult environment for people to function in and many would still rather hold Treasuries.”

In Treasury auctions during the week ended Nov. 6, the combined bids for the $86 billion in one-, three- and six-month bills sold was a record $361 billion, $100 billion more than the peak set during the height of the credit crisis last year, according to Jim Bianco, president of Bianco Research in Chicago.

The bid-to-cover ratio for the three-month bill auction reached 4.29 in September, the highest since 1998. The ratio has averaged 3.9 since September, up from 2.74 in 2008. When the U.S. sold $32 billion of four-week bills Nov. 16, the figure was 3.79.

‘Tremendous Demand’

“We cannot spin a positive story from the fact that a third-of-a-trillion dollars a week is trying to lock down Treasury bill yields of less that 0.05 percent,” Bianco said. “There is still tremendous demand for the front end of the curve despite the fact that people are saying things like there is no yield there and that cash is trash.”

Yields on government bonds are falling, too, with the average dropping to 2.20 percent last week from 2.50 percent in August, according to the Merrill Lynch Global Sovereign Broad Market Plus Index.

Finance officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s monetary policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery. The central bank’s target rate has been between 0 and 0.25 percent since December.

‘Process of Reflation’

Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said that the “systemic risk” of new asset bubbles is rising with the Fed keeping rates at record lows.

“The Fed is trying to reflate the U.S. economy,” Gross said in his December investment outlook on Nov. 19. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

Economic growth will be unlike most post-recession periods with banks reluctant to lend, the personal savings rate lower, the labor market less cyclical, excess housing supply greater and state and local budget gaps larger, according to Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. His forecast of 2.1 percent growth in 2010 is below the 2.6 percent median of 63 economists surveyed by Bloomberg News.

Yield Curve

The flight into bills may mean that yields on shorter- maturity debt hold at about record lows into 2010 as longer-term yields rise. The so-called yield curve that measures the gap in rates between 2- and 10-year Treasury notes expanded to 2.66 percentage points this month, the widest since July.

That benefits Citigroup Inc., JPMorgan Chase & Co. and banks which have taken $1.7 trillion in writedowns and losses since the start of 2007 and which make money on the difference between the rates they pay on short-term deposits and the interest income generated on loans.

“A lot of people have been hiding out in the front end of the curve, waiting to see how this economy turns out,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Fed and are required to bid at Treasury auctions. “As a short-term parking mechanism, Treasury bills provide great liquidity and safety.”

Allure of Bills

The allure of bills increased last quarter after the government dropped its guarantee of money market mutual funds, said Merk, who is now only putting his fund’s dollar-denominated cash in bills. The Treasury’s guaranteed money market mutual fund deposits a year ago to stem an investor run the week after Lehman Brothers Holdings Inc.’s bankruptcy led to the collapse of the $62.5 billion Reserve Primary Fund, triggering a run on assets. The guarantee expired Sept. 18.

The supply of bills will decline about 10 percent from September through February as the Treasury cuts its Supplementary Financing Program for the Fed to $15 billion from $200 billion, said Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey. When the Treasury sells bills at the Fed’s behest, it drains reserves from the banking system and makes the central bank’s job of controlling rates easier.

“Bill yields can stay down here for a considerable period,” said Robert Auwaerter, head of fixed income at Valley Forge, Pennsylvania-based Vanguard Group Inc., which manages $1 trillion in assets. “There’s still a demand for high-quality assets at the front end of the curve, and a lack of alternatives.”

Commercial Paper Contraction

Unsecured commercial paper outstanding was $1.24 trillion in the week ended Nov. 11. While that is up from a seasonally adjusted $1.07 trillion in July, it’s below the $2.22 trillion reached in July 2007, before the collapse of the subprime mortgage market.

Demand for bills typically rises at year-end as banks buy more to bolster their balance sheets at that time, said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Securities, a New-York based brokerage for institutional investors.

Fed officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices, people with knowledge of the matter said last week. Supervisors are examining whether banks such as JPMorgan, Morgan Stanley and Goldman have enough capital for the risks they take, how much they know about the strength of their counterparties.

“At some point reality is going to bite us in the backside,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “We are living in the best of times and the worst of times. Unfortunately the best of times cannot continue celebrating like this when the economic fundamentals are worsening rapidly.”

To contact the reporters on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net; Daniel Kruger in New York at dkkruger1@bloomberg.net.

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South African Economy Rebounds as World Cup Nears

By Nasreen Seria

Nov. 23 (Bloomberg) -- South Africa’s spending to host the 2010 FIFA World Cup, the world’s most-watched sporting event, and a rebound in manufacturing may have pulled the economy out of its first recession in 17 years in the third quarter.

The economy expanded an annualized 0.5 percent in the three months through September, ending three consecutive quarters of contraction, according to the median estimate of 23 economists surveyed by Bloomberg. Statistics South Africa will release the data at 11:30 a.m. in Pretoria tomorrow.

Construction has expanded more than 10 percent in the first half as the government spends $115 billion over three years to build a high-speed rail link in Johannesburg, erect stadiums for next year’s soccer tournament and build roads. That is cushioning the economy at the same time that manufacturers begin to recover from a collapse in exports.

“Construction has been powering along,” said Dennis Dykes, chief economist at Johannesburg-based Nedbank Group Ltd., South Africa’s fourth-biggest bank. “Investment has been absolutely massive.”

Africa’s biggest economy contracted an annualized 3 percent in the three months through June as manufacturing, which accounts for 14 percent of gross domestic product, plunged 10.9 percent following a slump in consumer spending and exports. Construction grew 12.2 percent in the same period.

The yield on the benchmark 13.5 percent security due September 2015 was at 8.36 percent as of 11:56 a.m. in Johannesburg, up from a low of 7.01 percent on Dec. 18 last year at the depths of the global financial crisis.

Tourism Boost

South Africa is building or renovating 10 stadiums for next year’s soccer tournament, which is being held in Africa for the first time. The government expects the games, which begin on June 11, to attract 450,000 non-African visitors, boosting GDP by about 1 percent.

Murray & Roberts Holdings Ltd., the country’s largest construction company, is building some of the stadiums and the Gautrain rapid speed train that will link Johannesburg, the country’s biggest city, to the capital, Pretoria, about 50 kilometers (30 miles) away. The Johannesburg-based company posted an 18 percent jump in profit in the year through June 30.

Highways around Johannesburg are being dug up as part of the National Road Agency’s project to upgrade 185 kilometers of roads in the Gauteng province by May, at a cost of about 22 billion rand ($2.9 billion).

“We need to produce additional capacity to ensure that our economy can continue to grow,” said Nazir Alli, chief executive officer of the agency. “We’re spending lots of time and money on increasing capacity and improving our roads.”

Creating Jobs

The government is betting that spending on public infrastructure projects, which it estimates will climb to 9.8 percent of GDP in the year through March 2013, will help to stimulate growth and jobs in an economy where almost one in four people are without work.

“Large-scale public infrastructure projects, including those linked to the World Cup, have been instrumental in supporting domestic demand as private investment and consumption shrank,” the Organization for Economic Cooperation and Development said in a report on Nov. 19.

The economy will probably expand 2.7 percent next year after contracting 2.2 percent in 2009, the OECD said. That is better than the government’s forecast of 1.5 percent growth in 2010.

State-owned power utility Eskom Holdings Ltd. is spending 385 billion rand over the next five years building power plants and expanding electricity capacity to prevent a repeat of shortages that shut gold and platinum mines, the country’s biggest export earners, for five days last year. Transnet Ltd. is spending 80.5 billion rand on pipeline, rail and port projects over the next five years.

Manufacturers

Manufacturers are also starting to turn the corner. Production rose 2.5 percent in the third quarter from the previous three months, when it contracted 3 percent, the statistics office said on Nov. 10.

“Manufacturing has turned the tide,” said Johan Rossouw, chief economist of Vunani Securities in Cape Town. “We are seeing the lagged effects coming through from monetary and fiscal policy. But the rand’s strength could be a significant dampener and prevent a strong resurgence.”

The rand has climbed 40 percent against the dollar since March, hurting exporters and making imports cheaper. Seardel Investment Corp., South Africa’s biggest clothing and textile maker said on Nov. 5 the rand’s gains are of “significant concern” as it’s made the local industry uncompetitive.

Event                                             Date
Netcare Ltd. annual earnings                      Nov. 23
African Bank Investments Ltd. annual earnings     Nov. 23
Nampak Ltd. annual earnings                       Nov. 23
Telkom South African Ltd. annual earnings         Nov. 23
Harmony Gold Mining Co. annual general meeting    Nov. 23
Gross domestic product                            Nov. 24
Adcock Ingram Healthcare Ltd. annual earnings     Nov. 24
Tiger Brands Ltd. annual earnings                 Nov. 24
RMB/BER business confidence index                 Nov. 25
Consumer price inflation                          Nov. 25
Massmart Holdings Ltd. annual general meeting     Nov. 25
Remgro Ltd. annual earnings                       Nov. 25
Argent Industrial Ltd. annual earnings            Nov. 25
Producer price inflation                          Nov. 26
Naspers Ltd. annual earnings                      Nov. 26
Liberty Holdings Ltd. third-quarter earnings      Nov. 27
FirstRand Ltd. annual general meeting             Nov. 27
DRDGold Ltd. annual general meeting               Nov. 27
Sasol Ltd. annual general meeting                 Nov. 27
African Rainbow Minerals Ltd. annual general meeting Nov. 27

To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net

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Crude Oil Rises on Iranian Military Test, Weaker U.S. Dollar

By Grant Smith

Nov. 23 (Bloomberg) -- Crude oil rose from a one-week low after an Iranian military exercise renewed concerns over Middle Eastern supply, while the weaker dollar heightened oil’s appeal as an inflation hedge.

Iran is testing an air defense system this week, in the largest military exercises the country has conducted to assess the vulnerability of its nuclear plants. The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates.

“The Iranian test is supportive psychologically,” said Eugen Weinberg, senior analyst at Commerzbank AG in Frankfurt. “The market will only focus on positive news for as long as the dollar is weak, the Fed is generous with liquidity and the wall of money keeps pouring into commodities.”

Crude oil for January delivery rose as much as $1.13, or 1.5 percent, to $78.60 a barrel in electronic trading on the New York Mercantile Exchange. It was at $78.44 at 11:18 a.m. London time.

The December contract expired on Nov. 20 down 74 cents, or 1 percent, to $76.72 a barrel. Oil traded between $74.79 and $82 the past five weeks after surging in early October.

“We are seeing the oil price higher today and a lot of that has to do with the fact the U.S. dollar is a bit softer,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. “You get investment inflows into commodities as a hedge against dollar weakness.”

Iran Sanctions

Iran, the world’s fourth-largest oil producer, is under three sets of United Nations Security Council sanctions, the first imposed in December 2006, for its refusal to halt uranium enrichment for its nuclear program.

The U.S. and its European allies suspect Iran of using the program to develop atomic weapons. The government in Tehran says the technology is for domestic power generation.

The U.S. Dollar Index, a measure of the currency against its six major counterparts, dropped 0.8 percent today to 75.04 after posting its first weekly advance this month.

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 7.1 percent versus the euro.

Hedge-fund managers and other large speculators decreased their bets on rising oil prices for a third week, according to U.S. Commodity Futures Trading Commission data.

Speculative net-long positions, the difference between orders to buy and sell the commodity, fell 1.9 percent to 86,348 contracts in the week ended Nov. 17, the Washington-based commission reported last week.

Brent crude oil for January settlement rose as much as $1.27, or 1.65 percent, to $78.32 a barrel on London’s ICE Futures Europe exchange. It was at $78.47 a barrel at 11:17 a.m. London time. It fell 0.6 percent to $77.20 on Nov. 20.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net

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Europe Manufacturing, Services Expansion Accelerates

By Simone Meier

Nov. 23 (Bloomberg) -- Europe’s services and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession in more than 60 years.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was the highest since November 2007. A reading above 50 indicates expansion.

The European economy is gathering strength after global governments spent billions on stimulus measures to encourage spending. While euro-area exports increased the most in more than a year in September, the euro’s strength is making goods less competitive abroad just as rising unemployment undermines consumer spending, threatening the recovery.

“It’s another pretty solid reading,” said James Nixon, European chief economist at Societe Generale SA in London. “It shows that the recovery is being sustained from the third quarter into the fourth.”

An index of services rose to 53.2 from 52.6, Markit said. A gauge of manufacturing increased to 51 from 50.7.

Governments around the world have spent $2 trillion to fight the recession and the European Central Bank has cut its key interest rate to a record low of 1 percent and purchased covered bonds to stimulate bank lending. ECB President Jean- Claude Trichet said on Nov. 17 that the bank expects the euro- area economy to recover only “at a gradual pace” in 2010.

Benchmark Bond

The euro was little changed against the dollar on the report, trading at $1.4971 at 9:53 a.m. in London, up 0.7 percent on the day. The yield on the German 10-year benchmark bond rose 0.3 basis point to 3.27 percent.

Adding to signs of recovery, European investor confidence rose for a fourth month in November and industrial output also increased in September. In Germany, where Chancellor Angela Merkel’s government is spending 85 billion euros ($127 billion) to boost Europe’s largest economy, business confidence rose to the highest in 13 months in October.

German Finance Minister Wolfgang Schaeuble said on Nov. 20 that the nation’s economy will probably expand at a weaker pace in the current quarter than the 0.7 percent in the previous three months. Merkel on Dec. 2 will host a meeting to consider additional stimulus measures, according to Schaeuble.

‘Very Optimistic’

Puma AG, the second-largest European sporting-goods maker controlled by Paris-based PPR SA, said on Nov. 17 it expects to be profitable in the fourth quarter. HeidelbergCement AG, Germany’s largest cement maker, said earlier this month that it is “very optimistic” about 2010 and 2011.

The Dow Jones Stoxx 600 Index has risen 24 percent over the past four months, bringing annual gains to 31 percent. Germany’s DAX benchmark has advanced 18 percent this year.

The ECB said on Nov. 12 that professional forecasters expect Europe’s economy to expand 1 percent in 2010 instead of a previously projected 0.3 percent. In 2009, the economy may shrink 3.9 percent, less than the 4.5 percent contraction forecast in August, according to the survey.

“We are approaching recovery, positive territory,” European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said on Nov. 18. Still, “we shouldn’t be over- optimistic.”

Weaker Dollar

The euro’s 18 percent gain against the dollar since mid- February is threatening to curb a recovery and hurting companies including European Aeronautic, Defence & Space & Co. The owner of Airbus SAS said on Nov. 16 that third-quarter earnings slumped 77 percent, partly because of a weaker dollar.

Companies across the euro region continue to cut jobs and reduce costs to help bolster earnings. European unemployment rose to 9.7 percent in September from 9.6 percent in the previous month. That’s the highest since January 1999.

Hugo Boss AG, Germany’s largest clothing maker, expects sales to remain “challenging” in the first half of next year, Chief Executive Officer Claus Dietrich Lahrs said on Nov. 17. The Metzingen-based company may see a “soft recovery” in the U.S. market, while sales in western Europe, the company’s largest market, may stagnate over the coming months, he said.

“The recovery may lack stamina and could well slow early in 2010,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures, and to keep interest rates down at 1 percent until deep into 2010.”

The ECB has already signaled it is in no rush to withdraw stimulus measures as the economy gathers strength. ECB Executive Board member Jose Manuel Gonzalez-Paramo said on Nov. 13 that the exit will be “gradual and opportune.”

“There are many reasons to expect a general recovery in 2010, but it will not be the end of the problems,” ECB council member Guy Quaden said on Nov. 17. “After that we’ll have to face and discuss the problems of an exit strategy.”

To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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U.K. Companies Will Rely Less on Banks After Crisis, CBI Says

By Brian Swint

Nov. 23 (Bloomberg) -- U.K. companies plan to rely less on banks for credit in favor of funding from bonds and equities, according to a survey for the Confederation of British Industry.

Fifty percent of companies will decrease financing from bank debt after the recession, the CBI survey of 66 company executives published in London today showed. Forty-two percent see no change in bank funding and 8 percent expect to increase it, according to the survey conducted by Ipsos MORI between Oct. 22 and Nov. 17.

“Companies will want to take lower risks with their balance sheets for some time to come,” CBI Director General Richard Lambert told reporters in a briefing last week. “The cost of credit is expected to be higher, and banks will be more risk averse.”

Lambert, who hosts the CBI’s annual conference today in London, said Britain may be on the brink of a “new era for business” after the deepest recession since the 1980s. The outlook for the U.K. economy may become clearer this week with Bank of England Governor Mervyn King’s testimony to lawmakers tomorrow and gross domestic product data the day after.

The British economy contracted 0.4 percent in the three months through September, the government reported a month ago. Economists forecast the figure to be revised up to a 0.3 percent drop when the statistics office publishes the second estimate for third-quarter GDP on Nov. 25, along with a breakdown of the data’s spending components.

Strauss-Kahn, King

International Monetary Fund Managing Director Dominique Strauss-Kahn will speak on the global economy at the CBI conference at 9:30 a.m. in London.

King, along with other central bank policy makers Paul Tucker, Paul Fisher, Andrew Sentance and Adam Posen, will testify to Parliament’s Treasury Select Committee at 9:45 a.m. in London tomorrow. The bank’s latest economic forecasts showed that economic growth may pick up enough to return inflation to the 2 percent target in three years.

Banks’ reluctance to lend has exacerbated the slump that has now lasted six quarters, the longest stretch since records began in 1955. About 27 percent of companies see a “slight improvement” in their access to finance next year, and 4.5 percent predict a “significant improvement,” the CBI survey showed.

“What we now need is a more balanced, less risky pathway to growth -- one in which short-term returns may be lower, but the long-term rewards for management success will be a lot more sustainable and secure,” said Lambert, a former member of the central bank’s Monetary Policy Committee. “There are important questions around how businesses are going to finance growth and investment in the future.”

Financial Strength

The financial strength of U.K. companies has started to improve, according to a separate report released today by Experian Plc, the world’s largest credit-checking company. Its index of businesses’ financial positions rose to 81.14 in October from 79.80 a year earlier, signaling that companies now have a smaller chance of failing.

Confidence among members of the Institute of Chartered Accountants in England and Wales has also risen for a third quarter, another report showed today. The group’s index of sentiment, based on 1,001 responses in a telephone survey from Aug. 5 to Oct. 24, climbed to 24.6 from 4.8 in the previous three months.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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Dollar Weakens on Speculation Fed to Maintain Stimulus Measures

By Matthew Brown and Ron Harui

Nov. 23 (Bloomberg) -- The dollar fell for the first time in three days against the euro on speculation the Federal Reserve will keep its stimulus measures in place and ensure interest rates remain low.

The U.S. currency slid against all but one of its 16 major counterparts after Fed Bank of St. Louis President James Bullard said in New York yesterday that he supported extending the central bank’s purchases of mortgage-backed securities beyond the first quarter of next year. The yen weakened as commodities and stocks advanced, boosting demand for higher-yielding currencies such as the South African rand.

“The central bank language at the moment is still pretty dovish and that’s making riskier assets more attractive than the dollar into the end of the year,” said Mark O’Sullivan, director of dealing in London at Currencies Direct Ltd.

The dollar weakened the most in two weeks to $1.4975 per euro as of 10:41 a.m. in London, from $1.4862 in New York last week. The yen depreciated to 133.10 versus the euro, from 132.09, and was unchanged at 88.88 per dollar. The South African rand was the biggest gainer versus the dollar, strengthening 1.5 percent to 7.4960.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined 0.8 percent to 75.078. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Fed’s Bullard

U.S. policy makers repeated on Nov. 4 that they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities by March and said they will buy $175 billion of agency debt, down from a previous maximum of $200 billion. They kept their benchmark rate in a range of zero to 0.25 percent and repeated borrowing costs will stay low for an “extended period.”

In his speech, Bullard said “unemployment is high, and labor markets are lagging,” while repeating his view that the economic recovery in the U.S. has started.

Futures contracts on the Chicago Board of Trade on Nov. 20 showed a 32 percent chance the Fed raise rates by June, down from 68 percent odds a month ago.

The yen and dollar also declined as gold climbed to a record and shares advanced for the first time in three days. Bullion for immediate delivery rose as much as 1.5 percent to $1,167.88 an ounce, and the MSCI World Index jumped 0.9 percent.

Low Rates

Benchmark interest rates are as low as zero in the U.S. and 0.1 percent in Japan, compared with 3.5 percent in Australia, attracting investors to the South Pacific nation’s higher- yielding assets.

Futures traders decreased bets the euro will strengthen against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 20.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 11,956 on Nov. 17, compared with 25,173 a week earlier.

Investors locking in gains in December won’t be enough to strengthen the dollar into year-end, and history shows that the euro tends to rise against the U.S. currency in December, Steven Barrow, head of group of 10 currency strategy in London at Standard Bank Plc, wrote in a research report today.

‘Ample Liquidity’

“The ample provision of global liquidity, through central- bank action and dollar weakness is not turning around,” Barrow wrote. “Given that the dollar has spent most of its life falling, a strong euro seasonal in December does not seem to be consistent with the idea of year-end profit-taking.”

The euro advanced against the yen for the first time in three days on speculation the European Central Bank will gradually end its stimulus measures. The ECB last week tightened the rules for the collateral it accepts against loans as it tries to restore the “proper functioning” of markets and prepares the ground to slow unconventional liquidity programs.

“Most guesses are that the ECB will provide one or two six-month fixed rate operations,” Brown Brother Harriman & Co. strategists led by Marc Chandler in New York wrote in their daily currency report today. “That overall shift in emphasis to looking at an exit policy should see the euro supported by interest-rate differentials against both dollar and sterling.”

The euro extended its gains as reports showed Europe’s services and manufacturing industries expanded at the fastest pace in two years in November.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. A reading above 50 indicates expansion. Economists had projected the index would rise to 53.4, according to the median of 16 estimates in a Bloomberg News survey.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Ron Harui in Singapore at =1161 or rharui@bloomberg.net

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Philippines Rice Imports May Be 10% of Global Trade

By Luzi Ann Javier and Cecilia Yap

Nov. 23 (Bloomberg) -- Rice imports by the Philippines, the world’s biggest importer, may account for as much as 10 percent of next year’s global trade after storms destroyed crops, draining supplies and driving prices higher.

Rice futures advanced today after the Southeast Asian nation said it may purchase a record 3 million tons next year in a “worst case scenario,” National Food Authority spokesman Rex Estoperez said today. Global trade is estimated by the U.S. Department of Agriculture to be 29.5 million tons in 2010.

Rising Philippine imports may extend a rally in prices, which have jumped 37 percent from this year’s low in March, as drought in India slashes production, fueling speculation that the country will be a net importer for the first time in more than two decades. Rice surged to a record last year as concerns over food shortages prompted countries like India and Vietnam to curb exports, sparking food price riots across the globe.

“When you get into a tendering procedure, there is always a multiplier effect which artificially pushes the market up,” Shahzad Naqi, chief executive officer of Peak Holding Pvt., a Karachi-based rice exporter, said by phone today. “Whenever there are 10 suppliers offering 100,000 tons each, they are drawing down” supplies, he said.

The Philippines issued its fourth tender today for next year’s rice supplies, seeking offers for 600,000 metric tons on Dec. 15, according to a National Food Authority notice in the Philippine Daily Inquirer newspaper.

The country is advancing imports after recent storms destroyed 1.3 million tons of rice. The latest tender takes planned purchases for 2010 so far to 2.05 million tons.

‘Multiplier Effect’

Imports may be to 2.4 million tons next year, from 1.78 million tons this year, if next year’s first harvest meets the government target, Estoperez said.

“You never know what will happen next year; there could be another typhoon or El Nino,” taking the nation’s imports to 3 million tons, Estoperez told reporters in Manila today.

“We’re taking advantage of the better price,” National Food Deputy Administrator Vic Jarina said today. “Other countries are not in the market yet and the price is good. We foresee maybe next year India will come in and prices will go up.”

Rice futures for January delivery traded in Chicago advanced as much as 1 percent to $15.32 per 100 pounds at 5:43 p.m. in Singapore. The price reached a record $25.07 in April 2008. The export price of Thai 100 percent grade-B white rice, the regional benchmark, has gained 6.9 percent to $561 a ton from this year’s low of $525 in October.

Indian Imports

India won’t import rice because it has adequate supplies to meet demand, Trade Minister Anand Sharma said on Nov. 20, days after saying the country was in talks with Thailand and Vietnam, the two biggest exporters, to buy grain.

Thailand’s Prime Minister Abhisit Vejjajiva said Nov. 18 that India was seeking to buy a total 2 million tons in government-to-government contracts.

Philippine imports of 2 million tons may be enough to cover the nation’s requirements at the start of 2010, said Jarina, who chairs the committee that buys rice for the government. The inter-agency panel may decide to purchase more depending on the outlook for crops.

Still, three record tenders scheduled between Dec. 1 and Dec. 15 totaling 1.8 million tons may test exporters’ ability to draw enough supplies to meet Philippine needs, Naqi said.

“Either they don’t get the total quantity, or they get a higher price, or they may go to government-to-government negotiations,” Naqi said, referring to the tenders.

The National Food Authority wants the 25 percent broken white rice delivered between February and May next year and has set a budget of 15.26 billion pesos ($325 million), the state- run food buyer said.

The Philippines purchased 250,000 tons in a tender earlier this month.

To contact the reporters on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Cecilia Yap in Manila at cyap19@bloomberg.net

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Palmer Open to Talks With Rinehart on Coal Mine Plans

By Jesse Riseborough and Heidi Couch

Nov. 23 (Bloomberg) -- Billionaire Clive Palmer would consider sharing port and rail lines with Australia’s richest woman Gina Rinehart to cut the combined A$15 billion ($14 billion) cost of their two Queensland coal projects.

“If she’s got a couple of billion dollars and she’d like to put it down on the table, we’re happy to share infrastructure,” Palmer, 55, said in an interview in Brisbane, adding he hasn’t had talks with Rinehart. “If she hasn’t got the cash we’ll have to wait until she gets it.”

Palmer and Rinehart are seeking to fund coal and iron ore projects in partnership with Chinese state-owned enterprises to tap surging demand after iron ore and thermal coal prices tripled this decade. Palmer is seeking as much as $3 billion in the initial public offering of Resourcehouse Ltd. in Hong Kong.

“There’s scope for savings on both ends, it is just a matter of whether they can come to commercial terms” on port and rail, said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney. “If you’ve got more trains running on the same bit of track it makes the unit costs lower so I think there is scope for savings.”

Resourcehouse is aiming to start building the China First coal mine, port and rail project in the Galilee Basin in Queensland next year and has agreed sales accords with Metallurgical Corp. of China Ltd., which will also help arrange financing.

“China First coal has got the right to mine 1.4 billion tons of coal, which is enough to keep Hong Kong fires burning for the next 20 to 40 years,” Palmer said in the Nov. 20 interview. “That’s just the beginning.”

Rinehart’s Project

Rinehart’s Hancock Prospecting Pty. is seeking to start a coal project in 2012 and has sought Chinese partners to help develop it. Hancock director Tad Watroba couldn’t immediately be reached for comment.

Palmer has been gauging demand for a $2 billion to $3 billion Hong Kong IPO for Resourcehouse being managed by UBS AG and Macquarie Group Ltd., according to a preliminary share sale document e-mailed to fund managers Nov. 9. It’s in talks with Export-Import Bank of China for A$5.5 billion in debt funding for the coal project and has signed sales accords with unidentified Chinese state-owned power companies, Palmer said.

China Metallurgical has agreed to buy a 10 percent stake in the project for between A$700 million to A$800 million. It’s also agreed to purchase 75 percent of the estimated 40 million tons a year in sales from the mine, he said.

Fortune Doubled

Palmer, Australia’s fifth-richest person and chairman of Resourcehouse, was the only person in the top-10 of Business Review Weekly Magazine’s annual rich 200 list whose wealth increased last year. Palmer’s fortune more than doubled to A$3.4 billion, according to the list that was published in May. He also owns the Gold Coast United soccer club.

Rinehart is chairwoman of closely held Hancock, founded by her father Lang who discovered the mines that made Australia the world’s biggest iron ore exporter. She is Australia’s fourth richest person with an estimated wealth of A$3.5 billion.

Hancock’s Alpha mine is estimated to produce 30 million tons of power station coal a year for at least 30 years and the project is estimated to hold in excess of 3.5 billion tons of the fuel, according to a presentation on Hancock’s Web site. The railroad is estimated to cost A$2.5 billion, the mine will cost A$3 billion and the port will cost A$2.5 billion.

Macquarie said in a Nov. 6 report the China First mine is estimated to cost A$3.4 billion, rail A$2 billion, port and infrastructure at A$1.8 billion and other project costs at about A$300 million.

Resource IPOs

Resourcehouse’s potential IPO comes as United Co. Rusal, the world’s largest aluminum maker, studies raising as much as $3 billion in a Hong Kong IPO by December, two people familiar with its plan said last month.

“If there is going to be an IPO in Hong Kong we will have to get a good response from investors to raise the sort of funds that we will need to do in the public market,” Palmer said.

Palmer is seeking to tap investor demand for coal and iron ore producers after the Bloomberg World Mining Index almost doubled this year because of a rebound in demand for commodities, driven by China. This quarter may be the busiest for Hong Kong IPOs since the U.S. subprime-mortgage market collapse triggered a global stocks rout in 2007.

“We’ve been very successful doing deals outside IPOs and extracting good value,” Palmer said. “To be attractive an IPO has got to be able to be a better financial alternative. I’m not sure whether they are or not at this stage.”

To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net; Heidi Couch in Sydney hcouch@bloomberg.net.

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Sugar May Be Headed for 17% Drop, Ex-Morgan Stanley Trader Says

By Claudia Carpenter

Nov. 23 (Bloomberg) -- Sugar prices may drop 17 percent by the end of January as speculators exit the market after prices failed to repeat recent gains, according to Jean Bourlot, Morgan Stanley’s former head of agriculture trading.

Raw-sugar futures are heading for a second monthly decline after rising to a 28-year high in September on speculation that supplies would be curbed by bad weather in Brazil and India. The “risk is greater than the reward” now, and sugar is no longer a so-called asymmetrical trade that will only rise, according to Bourlot, who said rice prices may climb further.

“Although every trade house and investment bank is painting a rosy picture about sugar, we will have a nice flush very soon,” Bourlot said by e-mail last week from Sydney, where he manages his own money. “If you had bought sugar back in August, your return will have been close to zero, which is poor in three months.”

Hedge funds and other large speculators have cut net long positions, or bets on price gains, in New York raw-sugar futures to the lowest since April, according to U.S. Commodity Futures Trading Commission figures on Nov. 20. The sweetener for March delivery traded at 22.85 cents a pound on ICE Futures U.S. at 9:58 a.m. in London. The contract may fall to about 19 cents by the end of January, according to Bourlot.

Too Much Speculation

“I have been bullish on raw sugar for 18 months but believe, contrary to before, this trade is not asymmetrical any more,” he said. There is still too much speculative money in the sugar market, according to Bourlot, who worked at Morgan Stanley for 11 years until January. India and Brazil are the world’s two largest producers.

“Sugar is now the most consensual trade in the commodities space,” meaning that analysts are more in agreement about gains for raw-sugar futures than for any other commodity, he said. Bourlot advised buying March 2011 sugar futures when prices fall, citing “nonexistent” global inventories against future crop failures.

Rice may rise about 15 percent in two months, according to Bourlot, who traded oil options for Morgan Stanley for nine years in New York and London and was head of agriculture for 2 1/2 years in London. The Philippines, the world’s largest buyer of the grain, may make record purchases after storms destroyed crops.

“If you are looking for an asymmetrical trade in the commodities space, you should buy rice,” Bourlot said. Rice futures for March delivery, currently trading at 15.5 cents a pound on the Chicago Board of Trade, may rise to 18 cents by the end of January, he said.

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

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Gold Jumps to Record as Slumping Dollar Spurs Investment Demand

By Nicholas Larkin and Glenys Sim

Nov. 23 (Bloomberg) -- Gold jumped to a record in London and New York as a slumping dollar boosted bullion’s appeal as an alternative asset. Other precious metals also gained.

The U.S. Dollar Index, a gauge of the greenback’s value against six currencies, slid as much as 0.8 percent after Federal Reserve Bank of St. Louis President James Bullard said he supported extending the central bank’s purchases of mortgage- backed securities. Bullion climbed 32 percent this year as the currency index dropped 7.7 percent. Russia’s central bank said it bought more gold last month.

“All this buying shows no confidence in the dollar,” said Bernard Sin, head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. “We’re going to see some physical demand in the festive season,” which may push prices to $1,200 an ounce, he said.

Gold for immediate delivery climbed as much as $17.28, or 1.5 percent, to $1,167.88 an ounce and traded at $1,166.03 by 11:27 a.m. in London. Gold futures for December delivery on the New York Mercantile Exchange’s Comex division increased 1.7 percent to $1,165.80 an ounce, the seventh advance in a row, after reaching $1,167.80.

The metal rose to a record $1,166 in the morning “fixing” in London, from $1,140 at the afternoon fixing on Nov. 20. Some mining companies use fixings to sell production. The metal denominated in sterling also reached a record today, climbing as high as 703.24 pounds an ounce.

‘Investor Interest’

“Investor interest has spilled over from those seeking a hedge against the dollar to other buying interests, such as central-bank buying,” said Stefan Graber, an analyst at Credit Suisse Group AG in Singapore.

Gold rallied 10 percent in the past month and is heading for a ninth annual gain, the longest winning run since at least 1948. India’s purchase of 200 metric tons from the International Monetary Fund spurred speculation other central banks will follow suit. Central banks are the biggest holders of gold.

Russia’s central bank increased its gold holding to 19.5 million ounces last month from 19 million ounces the month before, Bank Rossii said on its Web site.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged for a second day at 1,117.49 tons on Nov. 20, according to its Web site. The fund’s holdings reached a record 1,134 tons on June 1.

American Eagle

Sales of American Eagle gold coins by the U.S. Mint almost doubled in the first 10 months to 1.07 million ounces, data on its Web site showed. The mint sold 99,500 ounces of the coins so far this month. The U.K.’s Royal Mint last week said it quadrupled production of gold coins in the third quarter.

Among other precious metals for immediate delivery in London, silver climbed as much as 2.1 percent to $18.89 an ounce, a 16-month high, and last traded at $18.82. Platinum gained as much as 1.9 percent to a 14-month high of $1,473.75 an ounce and was last at $1,470.50. Palladium rose 2.2 percent to $372.23 an ounce.

Silver held in ETF Securities Ltd.’s exchange-traded products rose 0.4 percent to a record 22.634 million ounces on Nov. 20, according to the company’s Web site. Platinum holdings added 0.2 percent to a record 425,799 ounces, while palladium assets increased 1.3 percent to a record 602,793 ounces.

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Glenys Sim in Singapore at gsim4@bloomberg.net

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Asian Stocks Rise on China Growth Optimism, Higher Metal Prices

By Shani Raja

Nov. 23 (Bloomberg) -- Asian stocks rose for the first time in three days as the head of China’s top economic planning agency pledged to maintain “consistent, stable” policies to boost growth, while higher metal prices boosted mining companies.

China Construction Bank Corp., the nation’s second-biggest lender, gained 4.1 percent in Hong Kong after the comments by Zhang Ping, chairman of the National Development and Reform Commission. Newcrest Mining Ltd. added 3.2 percent in Sydney as gold prices rose to a record. James Hardie Industries NV, the top seller of home siding in the U.S., surged 6.4 percent after forecasting earnings at the top end of a range.

The MSCI Asia-Pacific excluding Japan Index added 1.1 percent to 411.72 as of 8:01 p.m. in Tokyo, with all 10 of its industry groups advancing. The gauge has risen 66 percent this year, on course for its steepest annual gain since 1993, as governments worldwide enacted spending programs and cut borrowing costs to revive economic growth.

“People remain positive that the recovery is in place,” said Tim Schroeders, who helps manage $1.1 billion at Pengana Capital Ltd. in Melbourne. “But we’re not getting carried away. Valuations are fairly reflective of a bullish economic environment, and you don’t need much in terms of softer-than- anticipated growth or a withdrawal of stimulus measures to make investors nervous.”

Japan’s markets were closed for a holiday. Hong Kong’s Hang Seng Index climbed 1.4 percent with only five of its 42 stocks retreating. China’s Shanghai Composite Index added 0.9 percent. Australia’s S&P/ASX 200 Index rose 0.7 percent, with Rio Tinto Group climbing 3.6 percent after metal prices in London advanced. South Korea’s Kospi Index lost 0.1 percent.

U.S., China

Futures on the Standard & Poor’s 500 Index rose 1 percent. The index slipped 0.3 percent on Nov. 20 as earnings at Dell Inc. and D. R. Horton Inc. trailed estimates and concern grew that the European Central Bank will phase out stimulus measures.

ECB President Jean-Claude Trichet said Nov. 20 the central bank will remove liquidity in order to ensure the bank doesn’t fuel inflation.

China Construction Bank gained 4.1 percent to HK$7.40 and was the biggest contributor to the MSCI index’s advance. Industrial & Commercial Bank of China Ltd., the nation’s largest lender, added 3.3 percent to HK$6.97.

China will focus on expanding domestic demand and keep “consistent, stable” macroeconomic policy including fiscal and monetary expansion, the NDRC’s Zhang said at an American Chamber of Commerce event in Beijing on Nov. 20. China should be able to achieve its 8 percent growth target for this year, Zhang said.

Government Spending

The Organization for Economic Cooperation and Development on Nov. 19 raised its forecast for economic growth in China this year to 8.3 percent from 7.7 percent. Growth will accelerate in 2010 to 10.2 percent, the OECD said in a report.

Four trillion yuan ($586 billion) of government spending and $1.3 trillion of new bank lending this year have helped revive growth in China, the world’s third-largest economy.

All 10 industry groups in the MSCI index rose, led by materials stocks. Newcrest Mining climbed 3.2 percent to A$37, Lihir Gold Ltd. added 3.4 percent to A$3.70, and Zijin Mining Group Co., China’s largest gold producer, increased 4.8 percent to HK$8.80 in Hong Kong. The precious metal climbed for a seventh straight session in after-hours trading today to as much as $1,167.80 an ounce.

A measure of six industrial metals traded in London, including aluminum and copper, advanced 0.7 percent on Nov. 20, bringing gains last week to 4.6 percent. BHP Billiton Ltd., the world’s biggest mining company, rose 1.1 percent to A$40.46, and Rio Tinto, the third-biggest, climbed 3.6 percent to A$73.78.

James Hardie Forecast

James Hardie jumped 6.4 percent to A$7.87. The maker of building materials said profit excluding compensation payments to asbestos victims will be closer to the top analyst forecast of $115 million. The lower end of the range was $77 million.

This year’s gain in the MSCI Asia-Pacific Excluding Japan has swelled the price of its stocks to 17.7 times estimated earnings on average, from 8.2 times in October 2008, according to data compiled by Bloomberg. That compares with valuations of 17.3 times for the Standard & Poor’s 500 Index in the U.S. and 15.2 times for the Dow Jones Stoxx 600 Index in Europe.

Among stocks that fell, Hanjin Shipping Co., South Korea’s largest shipping line, dropped 2.9 percent to 18,200 won after the Baltic Dry Index, a measure of shipping rates for commodities, ended a 16-session streak that propelled it 56 percent higher. STX Pan Ocean Co., South Korea’s biggest bulk carrier, slipped 4.2 percent to 11,550 won.

“The global economy, whilst in recovery mode, is still vulnerable,” said Chris Weston, an institutional dealer at IG Markets in Melbourne. “Take away the stimulus at the wrong time and it could send it back into a double-dip scenario.”

Sims Metal Management Ltd. fell 4.1 percent to A$21.29 in Sydney after the world’s biggest recycler of scrap metal completed a A$400 million ($369 million) share sale.

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

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European, Asian Shares Advance; U.S. Stock-Index Futures Rise

By Adam Haigh

Nov. 23 (Bloomberg) -- European and Asian shares advanced and U.S. stock-index futures rose amid speculation the economic recovery is strengthening and as higher commodity prices boosted the earnings outlook for raw-material producers.

BHP Billiton Ltd. and Rio Tinto Group climbed at least 3 percent in London as copper and oil gained. Renault SA, Europe’s second-biggest automaker, increased 4.3 percent after Credit Suisse Group AG advised buying the shares. James Hardie Industries NV, the top seller of home siding in the U.S., surged 6.4 percent in Sydney after forecasting full-year earnings at the top end of a range of analyst estimates.

Europe’s Dow Jones Stoxx 600 Index advanced 1.5 percent to 247.22 at 10:20 a.m. in London as all 19 industry groups rose. The gauge has surged 56 percent since March 9 as governments worldwide enacted spending programs and cut borrowing costs to revive economic growth. The rally has pushed the index to more than 53 times its companies’ reported earnings, near the highest level since 2003, according to Bloomberg data.

“Valuations are really not that excessive and you have a good stimulus coming from monetary policy at the moment,” said Lucy MacDonald, chief investment officer at RCM UK Ltd., which has about $72 billion in assets under management. She spoke in a Bloomberg Television interview.

Standard & Poor’s 500 Index futures gained 1 percent before a report that may show sales of existing U.S. homes increased. The MSCI Asia-Pacific Excluding Japan Index rose 1 percent. Japan’s markets were closed for a holiday.

European Economy

Europe’s services and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession in more than 60 years.

A composite index based on a survey of purchasing managers in services and manufacturing in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today. A reading above 50 indicates expansion. The German, French and Italian economies have exited recession this year amid about $12 trillion in spending by governments worldwide and record low-interest rates.

“We are rather confident in developed-market equities and we don’t see any reason to starting reducing our position,” said Andrew Popper, London-based chief investment officer at SG Hambros Bank Ltd. “We aren’t in the midst of an asset bubble as far as the developed markets are concerned.”

Mining Companies

BHP Billiton, the world’s largest mining company, added 3 percent to 1,862 pence, leading a measure of basic-resource producers to the steepest increase among 19 industry groups in the Stoxx 600. Rio Tinto, the third-biggest, gained 3.7 percent to 3,264.5 pence.

Copper advanced as much as 2.4 percent in London and prices of lead, nickel and zinc climbed. Newcrest Mining Ltd., Australia’s largest gold producer, rose 3.2 percent to A$37 in Sydney and Randgold Resources Ltd. rallied 4.1 percent to 5,155 pence as gold jumped to a record.

Total SA, Europe’s third-biggest oil company, surged 2.1 percent to 42.32 euros as crude increased.

The S&P GSCI index of 24 commodities rose 1.3 percent in London, extending its annual advance to almost 48 percent, the best performance since 1973.

Renault, which owns 44 percent of Yokohama-based Nissan Motor Co., gained 4.3 percent to 33.36 euros. Credit Suisse raised its recommendation on the shares to “outperform” from “underperform,” citing “exposure to fast improving cash flows” at Nissan.

James Hardie

James Hardie jumped 6.4 percent to A$7.87. The company said profit excluding compensation payments to asbestos victims will be closer to the top analyst forecast of $115 million. The lower end of the range was $77 million.

Cadbury Plc rose 1.9 percent to a record of 815.5 pence after Nestle SA was said to weigh a takeover, the Wall Street Journal said Hershey Co.’s controlling trust wants the U.S. company to make an offer, and Reuters reported that Kraft Foods Inc. may raise its bid.

Sales of existing U.S. homes probably increased in October to the highest level in more than two years, spurred in part by a tax credit that lured first-time buyers, economists said before a National Association of Realtors report due at 10 a.m. in Washington. Purchases rose 2.3 percent to a 5.7 million annual rate, according to the median forecast of 60 economists surveyed by Bloomberg News.

For the first time since the equity rally began in March, the biggest U.S. stocks are beating the smallest as the dollar’s descent sends investors to companies with the most business in international markets.

The Dow Jones Industrial Average of companies with $111.4 billion in median market value rose 6.2 percent this quarter, compared with the 2.6 percent loss by the S&P SmallCap 600 Index, whose members are worth $572.3 million on average. The Dow had trailed by 26 percentage points following the stock market’s low on March 9.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

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