Yen’s Biggest Drop in Decade No Anomaly With Options

By Yasuhiko Seki and Ron Harui

Dec. 7 (Bloomberg) -- Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade.

Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after the U.S. Labor Department said employers cut the fewest jobs since the recession began. The yen sank 4.5 percent versus the greenback for the week, the most since February 1999 and retreating from a 14-year high. Traders sold yen and bought dollars on speculation interest rates in the U.S. will increase before June.

“The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said.

Options showed declining bets the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price.

Weekly Tumble

The yen tumbled 3.6 percent versus the euro last week, the sharpest slide since the five days to April 3. The yen also fell 4.5 percent against the dollar, the most since the week ended Feb. 19, 1999, when it slumped 5.9 percent. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began.

The yen traded at 89.90 per dollar as of 11:53 a.m. in Tokyo from 90.56 last week, and was at 133.87 versus the euro from 134.54.

“What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”

Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability the U.S. central bank will raise its target rate for overnight bank borrowing to 0.5 percent by June from the current range of zero to 0.25 percent, up from 12.6 percent odds a month ago.

‘Finally Turning’

UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi-uddin, the Zurich-based bank’s global head of currency strategy, wrote in a note to clients.

The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital.

Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns.

Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand.

Libor

The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate.

Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline than a gain.

Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4.

The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro.

‘Urgent Steps’

Fujio Mitarai, head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act.

Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S.

The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8.

Stimulus Plan

“The BOJ’s action worked,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.”

A stimulus plan worth as much as 4 trillion yen may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay.

Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc.

“There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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China Lending Boom May Hamper Banks’ Asset Quality, BIS Says

By Joost Akkermans and Christopher Anstey

Dec. 7 (Bloomberg) -- China’s lending boom may erode the quality of bank balance sheets as a jump in lending was “unavoidably” linked to an easing of credit standards, the Bank for International Settlements said.

“While strong loan growth in China has fuelled the current economic recovery, it is not without risks,” the Basel, Switzerland-based BIS said in a quarterly report published today. The credit expansion “raised concerns about excessively loose credit conditions.”

The warning underscores a need for higher loss provisions at the nation’s lenders that China’s financial regulator has already identified. The agency is pushing banks to raise ratios of reserves to non-performing loans to 150 percent by the end of this year, according to the BIS.

“Some of the banks are in need of additional capital” given the surge in credit this year, Jing Ulrich, Hong Kong-based chairwoman of China equities and commodities at JPMorgan Chase & Co., said in a Bloomberg Television interview before the BIS release. “Some time next year we will see some more banks coming to the market to raise equity capital,” she said, adding that the central bank may boost the reserve requirement ratio.

Chinese officials encouraged a $1.3 trillion credit boom in the first 10 months of 2009 to aid stimulus plans, pushing the economy to its fastest pace of growth in a year last quarter. A “significant” part of loans doled out by banks may have flowed into equity and property markets, the BIS said.

Investment Projects

The credit-fueled increase in investments “may imply additional demand for loans in the future, to complete the underlying project,” the document said. Should China tighten monetary policy, that could “leave projects incomplete and lead to a build-up of bad loans.”

China Banking Regulatory Commission Vice Chairman Wang Zhaoxing wrote in an article published in China Finance magazine that the agency has asked the nation’s larger lenders to increase their minimum capital adequecy ratios to 11 percent.

The regulator last year raised the minimum required capital adequacy ratio for publicly traded banks to 10 percent from 8 percent. It said in September it plans to tighten capital requirements by capping cross-holdings of subordinated bonds.

Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, had a capital adequacy ratio of 12.6 percent as of Sept. 30, while Construction Bank Corp. was at 12.11 percent. Bank of China Ltd.’s capital adequacy ratio stood at 11.63 percent and the ratio at Bank of Communications Ltd. was 12.52 percent.

China has been among Asian nations that have strengthened guidelines for bank loss provisioning in recent years, in part stemming from their experience during the region’s 1997-98 financial crisis, the BIS said in its report.

“This has contributed to stronger banking systems in the region,” the bank said.

The BIS was founded in 1930 and is the world’s oldest international financial organization, according to its Web site. The BIS says it serves as a bank for central banks and acts as a forum for policy discussions and analysis among central banks.

To contact the reporter on this story: Joost Akkermans in Hong Kong at jakkermans@bloomberg.net

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Darling Weighs Bonus Levy, Scrapping Tax Cut for Rich

By Gonzalo Vina

Dec. 7 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling is considering a levy on bankers’ bonuses and this week may reverse a tax cut for Britain’s richest households in efforts to win over voters before next year’s election.

Darling yesterday refused to rule out a tax on excessive bonus payments, although he pledged to hold back from measures that would harm Britain’s banks. He said that lowering the inheritance tax for the richest people is no longer a priority for the pre-budget report on Dec. 9.

“We are not going to be held to ransom by people who believe you can pay extremely large bonuses regardless of what’s going on,” Darling told BBC television yesterday. “You have to be fair. You have to be reasonable. But you have got to keep an eye on what the long-term effects are.”

Darling and Prime Minister Gordon Brown are seeking to persuade voters that David Cameron’s Conservative Party, which is sticking to a similar inheritance tax plan, is siding with the rich at a time when the country is recovering from the worst economic crisis since World War II. That strategy has helped Brown’s Labour Party erode Cameron’s lead in opinion polls.

Bank shares fell in London trading today. Royal Bank of Scotland Group Plc slid 2 percent to 33.95 pence and Lloyds Banking Group Plc lost 2.3 percent to 54.73 pence. The FTSE 350 Banks Index declined 1.4 percent, the biggest drop in more than a week.

Pound Weakens

The pound weakened against the dollar and the euro. The British currency dropped to $1.6386 as of 10:33 a.m. in London, from $1.6474 at the end of last week. It weakened to 90.47 pence per euro, from 90.18 pence.

Darling said he has not yet seen bonus plans from government-controlled Royal Bank of Scotland and that he has the power to veto any proposals he considers excessive. Darling has also said that he is opposed to punitive measures that would damage a bank’s capital position, making it less likely that he will introduce an industry-wide windfall tax.

“It’s not a black and white world,” Darling said.

The government may impose a one-year windfall tax on British banks that would raise several hundred million pounds, the BBC reported, without attribution. Options may include a “super-tax” on big bonus earners, a larger employers’ national insurance charge or a direct tax on investment banks, the BBC said.

Conservative Plans

George Osborne, the Conservative lawmaker who shadows Darling in Parliament, told the same program that he “wouldn’t rule out” a charge on excessive individual bonuses if his party defeats Labour in the election, which has to take place before June.

An ICM Research poll for the Sunday Telegraph showed that the Conservatives are on course to obtain a majority of between 20 and 25 seats in the 646-seat House of Commons. A ComRes Ltd. survey Dec. 1 showed that the U.K. may be heading for a hung Parliament where no party has an outright majority, with Cameron leading Brown by 10 percentage points, down 3 points from October.

Darling stepped up the attack yesterday, saying Osborne’s plea to voters to endure tougher times isn’t consistent with tax cuts for the rich.

A YouGov Plc poll in yesterday’s Sunday Times showed that more than half of the 2,000 people interviewed viewed the Conservatives as the party of the rich. Cameron said Brown had been “spiteful’ in his efforts to tell voters of his privileged upbringing and elite schooling.

Not ‘First Priority’

“I really can’t believe it would be the first priority of any government, at this time, to give a tax cut to the top 2 percent of estates in this country,” Darling said yesterday.

Darling said in 2007 that he would raise the inheritance tax threshold to 350,000 pounds ($578,000) from 325,000 pounds for single people and to 700,000 pounds from 650,000 pounds for couples, starting April 2010. Cameron’s Conservatives want to abolish the tax for single people with estates below 1 million pounds and for couples with estates below 2 million pounds.

“If the Labour Party wants to say don’t aspire to get on in life, then so be it,” Osborne said. “It’s part of their lurch to the left.”

Darling said this week’s pre-budget statement will spell out some detail on how he plans to implement his pledge to reduce the deficit by as much as half over four years. In the April budget, the Treasury forecast a shortfall of 175 billion pounds in the year through March 2010, or 12.4 percent of gross domestic product -- the largest in British postwar history.

Cost Cutting

Darling told the BBC yesterday that he will scrap a 12.4 billion-pound computer program for the National Health Service that is being developed mainly by iSoft Plc. Similar reductions, rather than staff cuts in schools and hospitals, would indicate “the direction of travel” in this week’s report, he said.

“The NHS had quite an expensive IT system and I don’t think we need to go ahead with it now,” he said.

Brown said today the government will reduce spending by more than 12 billion pounds over the next four years through efficiency gains. Ministers had found 3 billion pounds of new savings since April, including 1.3 billion pounds by “streamlining” central government, he said in a speech in London.

Brown said on Dec. 4 in his weekly podcast that a plan to move more government services online would save about 400 million pounds a year.

Today, he promised to reduce the pay bill for senior civil servants by 20 percent over the next three years, and said that more civil service jobs will be moved from London and the southeast of England to parts of the country where living costs are lower. The government will halve spending on consultants and cut its marketing budget by a quarter, Brown said.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

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Treasury Said to Link Citigroup Sale to TARP Payback

By Bradley Keoun

Dec. 7 (Bloomberg) -- The U.S. Treasury Department aims to hold off on selling its 34 percent stake in Citigroup Inc. until the bank and regulators agree on a broader plan to repay all obligations remaining from last year’s $45 billion government bailout, a person close to the department said.

Treasury officials are concerned that a sale now of its 7.7 billion shares in the New York-based bank may weaken investor demand should Citigroup subsequently be required to raise capital as a condition of exiting the bailout program, said the person, who declined to be identified because the government hasn’t publicly discussed the plans.

Citigroup executives have pressed Treasury for at least three months to sell the stake as a first step toward leaving the bailout program, according to people familiar with the matter. They want to escape government-imposed pay limits that may make the company vulnerable to employee-poaching by unfettered rivals. Bank of America Corp., the only other large U.S. bank under pay limits, last week announced a plan to exit the program.

“This should be well thought-out for the benefit of all constituencies, and in this case that includes shareholders, the government and the taxpayers,” said Dennis Santiago, chief executive officer of analysis firm Institutional Risk Analytics in Torrance, California. “Just because Bank of America goes doesn’t mean you have to rush Citigroup.”

Kuwaiti Sale

The Kuwait Investment Authority, the Gulf nation’s sovereign-wealth fund, said yesterday it sold its stake in Citigroup for $4.1 billion, earning a $1.1 billion profit.

Citigroup shares fell to $4.00 in European trading today, down 1.5 percent from their $4.06 close in New York trading on Dec. 4. The shares have tumbled 47 percent this year, paring Citigroup’s market value to about $92 billion.

The government is trying to wind down bailout programs extended as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through the Troubled Asset Relief Program will eventually be recovered.

While holding off on a sale of its Citigroup stake, the Treasury has pushed regulators behind the scenes to accelerate discussions with all large banks about their plans to exit TARP, the person close to the department said.

Commercial Property

Mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011. Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York.

That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients. The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said.

In November, the Federal Reserve asked nine of the biggest U.S. banks to submit plans to repay the government’s capital injections. In testimony last week before the Senate Banking Committee in Washington, Federal Reserve Chairman Ben S. Bernanke said Bank of America got approval to exit TARP only after regulators “felt it was safe and reasonable and appropriate.”

Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, agreed to raise at least $18.8 billion of capital, according to a Dec. 2 press release. It said later that it had raised $19.3 billion.

Free to Sell

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid their bailout funds in June. San Francisco-based Wells Fargo & Co., which still has $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds, as Citigroup and Bank of America did.

In October, Citigroup CEO Vikram Pandit, 52, said he was “focused on repaying TARP as soon as possible.” He said, “We’re going to do so in consultation with the government and our regulators.” At least twice since September, he has said the Treasury is free to sell its shares at any time.

The Treasury got the shares in September, when $25 billion of the bailout funds were converted into common stock. The shares are now worth $31.2 billion, based on the closing price on Dec. 4, giving Treasury a paper profit of more than $6 billion.

Kuwait, Singapore

The Kuwait investment fund that got about 900 million shares in a related preferred-stock conversion last year yesterday converted them before selling the stock. In September, a Singapore government fund that got about 2.1 billion shares in the conversion said it had used open-market sales to reduce the stake to less than 1.14 billion shares.

The U.S. government doesn’t want to be viewed as trying to time the market, so part of Citigroup’s TARP exit plan would include a formal process for disposing of the common stake, the person said. Even if Treasury sold now at a profit, it might be second-guessed later if the shares rose further, the person close to the department said.

“We don’t comment on individual banks but are committed to maximizing returns on bank investments and restoring stability at the least possible cost to taxpayer,” Treasury spokesman Andrew Williams said.

Citigroup spokesman Jon Diat declined to comment on the Treasury’s plans or the bank’s timeline for repaying TARP funds.

Asset Guarantees

Citigroup’s discussions with banking regulators over a TARP exit may gain momentum now that Bank of America’s plan is set and regulators focus on Citigroup, the person close to Treasury said. The bank’s regulators, which include the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., haven’t commented on when the bank might be allowed to exit.

Citigroup still has $20 billion in bailout funds along with guarantees from the Treasury, FDIC and Federal Reserve on $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets.

The lender’s exit plan may be more complicated than Bank of America’s because the government must decide how to handle the Treasury’s common stake and what to do about the asset guarantees, the person close to the department said.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

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Crude Oil Declines, Trades Below $75 a Barrel, as Dollar Gains

By Rachel Graham

Dec. 7 (Bloomberg) -- Crude oil dropped for a fourth day, trading below $75 a barrel as the dollar gained amid speculation the U.S. Federal Reserve may start raising interest rates.

Oil closed at its lowest since Oct. 14 last week after a better-than-forecast U.S. jobless report bolstered the dollar. Commodities including gold and crude oil typically weaken when the dollar gains in value. Saudi Arabian Oil Minister Ali al- Naimi said the price near $75 a barrel is “perfect.”

“A stronger dollar is automatically bad for commodities and can put oil under pressure,” Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich, said by phone from Vienna. “There are fears that interest rates might go up, this is helping the dollar.”

Crude oil for January delivery fell as much as 91 cents, or 1.2 percent, to $74.56 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $74.77 a barrel at 9:11 a.m. London time. Futures have gained 68 percent this year.

The dollar strengthened to $1.4778 per euro as of 8:56 a.m. in London, the strongest level since Nov. 4, from $1.4858 in New York last week.

Crude oil prices are in “the right range” and there is no need to reduce inventories, Saudi Arabian Oil Minister Ali al- Naimi said on Dec. 5.

“Inventories are coming down, the price is perfect, and all investors, consumers, producers -- they’re all very happy,” al-Naimi said in Cairo, where Arab oil ministers were holding an annual meeting.

Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries.

To contact the reporter on this story: Rachel Graham in London rgraham13@bloomberg.net

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Yen’s Biggest Drop in Decade No Anomaly With Option

By Yasuhiko Seki and Ron Harui

Dec. 7 (Bloomberg) -- Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade.

Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after the U.S. Labor Department said employers cut the fewest jobs since the recession began. The yen sank 4.5 percent versus the greenback for the week, the most since February 1999 and retreating from a 14-year high. Traders sold yen and bought dollars on speculation interest rates in the U.S. will increase before June.

“The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said.

Options showed declining bets the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price.

Weekly Tumble

The yen tumbled 3.6 percent versus the euro last week, the sharpest slide since the five days to April 3. The yen also fell 4.5 percent against the dollar, the most since the week ended Feb. 19, 1999, when it slumped 5.9 percent. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began.

The yen traded at 89.90 per dollar as of 11:53 a.m. in Tokyo from 90.56 last week, and was at 133.87 versus the euro from 134.54.

“What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”

Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability the U.S. central bank will raise its target rate for overnight bank borrowing to 0.5 percent by June from the current range of zero to 0.25 percent, up from 12.6 percent odds a month ago.

‘Finally Turning’

UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi-uddin, the Zurich-based bank’s global head of currency strategy, wrote in a note to clients.

The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital.

Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns.

Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand.

Libor

The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate.

Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline than a gain.

Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4.

The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro.

‘Urgent Steps’

Fujio Mitarai, head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act.

Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S.

The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8.

Stimulus Plan

“The BOJ’s action worked,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.”

A stimulus plan worth as much as 4 trillion yen may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay.

Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc.

“There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Dollar Fear Trumps Greed in Guarding Against Rebound

By Liz Capo McCormick

Dec. 7 (Bloomberg) -- Traders in the $3.2-trillion-a-day foreign-exchange market are paying the highest prices in more than a year to protect against a sudden rebound in the dollar after its worst annual performance since 2003.

That possibility may be less remote, according to Bill Gross, manager of the world’s biggest bond fund, who says a prolonged period of record-low interest rates may foster the “systemic risk” of new asset bubbles. Dubai’s effort to delay debt repayments reminded traders how the U.S. Dollar Index surged 16 percent in the two months after the September 2008 collapse of Lehman Brothers Holdings Inc. when investors sought a haven from the turmoil and poured money into U.S. assets.

“American investors have a lot of exposure now to foreign markets,” said Mansoor Mohi-uddin, the chief currency strategist at Zurich-based UBS AG, the largest foreign-exchange trader behind Deutsche Bank AG as measured by Euromoney Institutional Investor Plc. “If investors become risk-averse again, which happened last year due to Lehman’s bankruptcy and could happen now for a whole host of reasons, they are likely to go into less risky assets like U.S. Treasuries, which would help the dollar.”

While Intercontinental Exchange Inc.’s Dollar Index fell to a 16-month low last month, implied volatility on three-month call options granting the right to buy the greenback versus the euro exceeded that for options to sell it by 1.61 percentage points. The Dollar Index tracks the currency against the euro, yen, U.K. pound, Canadian dollar, Swiss franc and Swedish krona.

Risk-Reversal Rates

The so-called 25-delta risk-reversal rate, which was flat as recently as October, hasn’t shown such high relative demand for dollar calls since hitting a record 2.595 percentage points in November 2008. When the implied volatility of dollar calls exceeds puts, like now, the gap is expressed as a negative number, which would be minus 2.595 percentage points.

Investors are waiting for “the BOB event, a bolt out of the blue,” said John Alkire, the chief investment officer at Morgan Stanley Asset & Investment Trust Management in Tokyo. “The world had a mini-BOB,” when financial markets tumbled after Dubai announced plans to restructure some of its $59 billion in debt, said Alkire, who helps oversee $40 billion.

The Dollar Index had its biggest two-day gain in a month on Nov. 26-27, rising 1 percent, as Dubai’s proposal to delay debt payments shook investor confidence by risking the biggest sovereign default since Argentina’s in 2001.

It surged 1.7 percent on Dec. 4, the most since Jan. 20, after the Labor Department said employers cut the fewest jobs in November since the recession began. The Dollar Index traded at 75.566 as of 6:08 a.m. in London from 75.911 in New York late last week.

Double-Dip

Besides the financial turmoil in the United Arab Emirates, investors are also wary of the global economy falling back into recession with U.S. unemployment above 10 percent for the first time since 1983, non-performing U.S. commercial mortgage loans as measured by Moody’s Investors Service rising to 8.3 percent and the potential for stocks to fall after the steepest rally in the Standard & Poor’s 500 Index since the 1930s.

International Monetary Fund Managing Director Dominique Strauss-Kahn said on Nov. 23 that about half of bank losses from the global financial crisis have yet to be reported. The IMF said in September that banks, which have taken $1.72 trillion in losses and writedowns as measured by Bloomberg since the start of 2007, may have $1.5 trillion in toxic debt on their books.

“When viewed from 30,000 feet, there is even a systemic risk that new asset bubbles are in the formative stage,” Gross, the co-chief investment officer of Pacific Investment Management Co., wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site Nov. 19.

High Stakes

It’s not only currency traders that are concerned about a reversal in markets.

Forecasts for the fastest U.S. earnings growth in 15 years are failing to convince equity traders that the S&P 500 will extend its rally. S&P 500 options to protect against declines in stocks over the next year cost 40 percent more than one-month contracts, the biggest premium since 1999, data compiled by Barclays Plc and Bloomberg show.

Record-low interest rates in the U.S. have encouraged investors to borrow in U.S. dollars and reinvest the proceeds in countries with higher ones, such as Australia and New Zealand. The so-called carry trades, which contribute to weakness in the dollar, produced returns of about 50 percent over the past nine months, Bloomberg data show.

U.S. mutual fund investors raised the percentage of foreign assets in their holdings to 25.9 percent in October, matching the peak reached in mid-2008, based on Investment Company Institute data tracked by UBS. During the financial crisis, the percentage fell to 23 percent, after more than doubling from 2002.

Rising Volatility

The dollar has depreciated 6.2 percent against the euro this year, 23 percent versus Australia’s currency and 19 percent versus the New Zealand dollar.

Investors are buying options to protect their positions “given that recent moves in the exchange rate have been nasty on the downside,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd. “Investors bullish on the euro are prepared to pay a premium for the automatic stop-loss the options provide while also keeping their cash position in play.”

JPMorgan Chase & Co.’s G7 Volatility Index rose to 14.43 last month from the low this year of 12.32 in September. The 10- year average before the 2008 credit crunch was 9.9 percent.

Strategists are cutting their forecasts for the greenback. The dollar will depreciate to $1.55 against the euro by March from $1.49 last week, and to $1.62 by June, according to JPMorgan. Since September, the median June 2010 estimate for Australia’s dollar has risen to 94 U.S. cents from 85, and jumped to 74 U.S. cents from 67 for New Zealand’s currency.

No Policy Changes

Any flight to the dollar may prove short-lived, with the Federal Reserve signaling it will keep rates at a range of zero to 0.25 percent for an extended period, according to Axel Merk, president of Palo Alto, California-based Merk Investments LLC.

“If Dubai signals one thing, it’s that the odds of the central bank policy makers around the world mopping up all the liquidity they’ve provided anytime soon may be rather low,” said Merk, who manages more than $550 million in mutual funds that specialize in currencies.

Dollar bears also say the U.S. government shows little concern about the currency’s decline, paving the way for further depreciation. That’s because a weaker greenback has helped to bolster exporter earnings. U.S. exports increased for the last five months, the Commerce Department said Nov. 13.

Undue Speculation

The depreciating dollar is proving no deterrent to demand for U.S. financial assets. For every $1 of debt sold by the Treasury this year, investors put in bids for $2.59, up from $2.19 at this point in 2008.

Traders pushed up the cost to protect against a rise in the dollar after Fed policy makers said last month that their decision to cut rates to zero may be fueling undue financial- market speculation.

Its policy of keeping rates low might cause “excessive risk-taking” or an “unanchoring of inflation expectations,” according to minutes of the Nov. 3-4 Federal Open Market Committee meeting. The committee members also said the dollar’s decline has been “orderly.”

Nouriel Roubini, the New York University professor who predicted the financial crisis, said last week that Dubai’s attempt to reschedule debt underscores the global economy’s vulnerability to a setback.

‘Vulnerabilities’ Remain

“Although Dubai World’s financing issues are not a surprise and are relatively small given global credit losses, they are a reminder that the vulnerabilities and imbalances that contributed to the credit crunch have not disappeared,” Roubini said on his RGE Web site on Dec. 2.

The three-month risk reversal rate for options on the Australia-U.S. dollar exchange rate reached minus 3.57 percent on Nov. 27, the most since February. On the same day the New Zealand-U.S. dollar exchange rate, it hit minus 3.92 percent, the biggest negative since February.

“People saved money in the past by not insuring themselves, which proved to not be a great trade,” said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country’s largest bank by assets. “There is plenty of incentive and opportunity to hedge now. People are much more willing to buy insurance.”

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.

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U.K. Factory Slump to End in 2010 as Exports Rebound, EEF Says

By Jennifer Ryan

Dec. 7 (Bloomberg) -- U.K. factory production will begin growing again next year as exports rebound, said the Engineering Employers Federation.

Production will grow 0.9 percent in 2010 after contracting 10.4 percent this year, the London-based lobby group said today. A measure of expected export orders rose to six points, the first positive reading since the third quarter of 2008, according to a survey by EEF and BDO Stoy Hayward LLP.

The report adds to signals the U.K. is emerging from the longest recession on record after the British Chambers of Commerce said yesterday the recovery has started. The Bank of England will probably maintain its bond purchase plan at 200 billion pounds ($331 billion) this week as it assesses the strength of signs of a rebound.

“We’re clearly through the worst effects of the global economic downturn,” said Lee Hopley, chief economist at the EEF. “The recovery is in sight, but it’s not expected to be quick or easy. Companies are quite cautious.”

A measure of manufacturing output shows rose to minus 3 from minus 25 in the third quarter. The group polled 618 companies from Nov. 4 to Nov. 25.

The bank will decide to keep unchanged its bond program, according to all 52 economists in a Bloomberg News survey. All 50 economists in a separate poll said policy makers will hold their key interest rate at 0.5 percent. The bank announces its decision at noon in London on Dec. 10.

Pre-Budget Report

The bank’s decision will come a day after Chancellor of the Exchequer Alistair Darling presents his pre-budget report to Parliament, where he will update tax and spending plans.

“Businesses and markets need a clear signal on where the balances of tax rises and spending cuts are going to come from, when the fiscal tightening is going to start,” Hopley said. “The job of the PBR is a clear steer on some of the details. What business needs is that certainty, and now is the time to start providing some of that detail.”

The BCC said yesterday Britain’s gross domestic product will decline 4.6 percent this year, compared with a September estimate of a 4.3 percent drop, the London-based lobby group said in an e-mailed statement. In 2010, the economy, which returned to growth this quarter, will expand 1 percent, compared with a previous forecast of 1.1 percent.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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Gold Can’t Beat Checking-With-Interest 30 Years After Last Peak

By Nicholas Larkin and Millie Munshi

Dec. 7 (Bloomberg) -- Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5,000 years during the last peak in January, 1980.

Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back.

“You give up a lot of return for the privilege of sleeping well at night,” said James Paulsen, who oversees about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet.”

While gold’s nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers at Barclays Plc, HSBC Holdings Plc, SCM Advisors LLC and Brinker Capital Inc. say buy-and-hold investors shouldn’t always own bullion. The accumulation of gold is part of a record $60 billion Barclays estimates will flow into commodities this year.

Hoarding Bullion

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland’s central bank, spurred by a plunging dollar and concern that the at least $12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation. The collapse of U.S. real estate in 2007 froze credit markets and left the world’s biggest financial companies with $1.72 trillion of losses and writedowns, data compiled by Bloomberg show.

The U.S. Mint suspended production last month of most American Eagle coins made from precious metals because of depleted inventories. The U.K.’s Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods Ltd., the London department store, began selling gold bars and coins for the first time in October.

Those sales contributed to a 32 percent rally in gold this year, the most since 1979, beating the 25 percent gain in the S&P 500, with dividends reinvested, and a 2.4 percent drop in Treasuries. Investors bought gold as the U.S. economy, the world’s biggest, shrank 3.8 percent in the 12 months ended in June, the worst performance in seven decades. Gross domestic product expanded at a 2.8 percent annual rate in the third quarter.

Longest Winning Streak

A weakening dollar also contributed to bullion’s longest winning streak since at least 1948. The U.S. Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6 percent decline in 2009, bolstering demand for a hedge.

Buy-and-hold investors may not have done so well. One dollar put into a U.S. checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 percent to 20 percent. Banks were paying 5 percent on the accounts in January 1981, according to a report in the New York Times.

The S&P 500 returned 2,182 percent from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1,089 percent through the beginning of this month, according to Merrill Lynch’s Treasury Master Index.

‘Useless Asset’

“Gold is a useless asset to hold long term,” said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management’s Absolute Return fund in London. “I’m not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great.”

Those who bought gold when it reached a two-decade low of $251.95 in August 1999 have seen a 387 percent return, more than four times the 82 percent gain in Treasuries. An investment in the S&P 500 lost 0.4 percent through the end of last month. Interest on checking accounts shrank to 0.14 percent this year from 0.89 percent in 1999.

Since the S&P 500 peaked in October 2007, investors in the index lost 25 percent, holders of Treasuries made 16 percent and gold buyers are up 64 percent.

‘Very Conservative Investments’

“There are people that just stayed in very conservative investments in cash and government bonds,” said Larry Hatheway, global head of asset allocation at UBS AG in London, who recommends investors hold about 1 percent of their assets in bullion. “Surely they would have been a lot better off being in gold.”

Buying bullion at $35 when U.S. President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $2,000 in the next five years, said HSBC’s Morris. Ian Henderson, manager of $5 billion at JPMorgan Chase & Co., said he’s adding to his gold-related holdings because of “the momentum behind it.” Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $2,000 over the next decade.

“Our sense is that this bubble is more at the beginning stages than on the brink of collapse,” said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.

Touradji Capital

Touradji Capital Management LP, the New York hedge fund founded by Paul Touradji, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest producer, during the third quarter, according to a Nov. 13 filing with regulators. The stake, Touradji’s biggest equity holding, is worth $95 million.

Paulson & Co., the hedge-fund firm run by billionaire Paulson, will start a gold fund on Jan. 1 investing in mining companies and bullion-related derivatives, according to a person familiar with the plan. Einhorn, who runs New York-based Greenlight Capital Inc., told a presentation in New York in October that he’s buying gold to bet against the dollar.

Paul Tudor Jones, in an Oct. 15 letter to clients of his Tudor Investment Corp., said gold is “just an asset that, like everything else in life, has its time and place. And now is that time.”

Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.

‘Knee-Jerk Reaction’

Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages $221 billion. He doesn’t recommend increasing gold holdings, which are a “very small” part of commodity allocations.

Inflation has yet to accelerate. U.S. consumer prices will rise 2 percent next year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg. Prices will shrink 0.4 percent this year.

“People have this knee-jerk reaction and say that you want gold as a hedge against inflation,” said Maxwell Bublitz, who helps oversee $3.5 billion as the chief strategist at San Francisco-based SCM Advisors LLC and recommends investors hold no more than 5 percent of their assets in the metal. “But the history of gold in regard to inflation shows that it’s not a great hedge.”

Copper Doubles

Investors seeking to protect themselves against inflation should buy commodities, which are cheaper than gold, said Wells Capital’s Paulsen. Copper, after more than doubling this year, is still 27 percent away from the record $8,940 a metric ton reached in July 2008.

“Theoretically, it does have a spot in portfolios, a small one,” Bublitz said. “You’re probably going to get entry points that are a lot better than where gold is now.”

To contact the reporters on this story: Nicholas Larkin at nlarkin1@bloomberg.net; Millie Munshi in New York at mmunshi@bloomberg.net.

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U.S. Stock-Index Futures Fall; Alcoa, Barrick, Citigroup Drop

By Daniela Silberstein

Dec. 7 (Bloomberg) -- U.S. stock-index futures declined on concern a nine month rally in equities has outpaced the prospects for economic growth and as metals prices retreated.

Alcoa Inc., the largest U.S. aluminum producer, and Barrick Gold Corp. dropped in Europe as gold and copper prices fell in London. Citigroup Inc. and Bank of America Corp. slipped more than 1 percent as traders increased bets the Federal Reserve will lift interest rates.

Futures on the Standard & Poor’s 500 Index expiring this month lost 0.4 percent to 1,104 at 10:13 a.m. in London. Dow Jones Industrial Average futures decreased 0.3 percent to 10,366 and Nasdaq-100 Index futures slipped 0.4 percent to 1,784.75. European stocks also declined, while Asian shares rose.

“There is nervousness about the rally we’ve had since March and some people are seeing the end of the flagpole,” said Gerold Kuehne, who manages about $127 million in U.S. equities at LLB Asset Management AG in Vaduz, Liechtenstein. “People will be taking profits after the recent gains.”

Record-low interest rates and about $12 trillion in spending by governments worldwide have spurred a 63 percent rally in the S&P 500 since March 9. The measure is valued at about 22 times its companies’ reported earnings, near the highest since 2002, according to weekly data compiled by Bloomberg.

U.S. stocks advanced last week, lifting the S&P 500 to the biggest gain in three weeks, after the unemployment rate unexpectedly fell, Chinese manufacturing grew at the fastest pace in five years and investors speculated a Middle Eastern debt crisis was averted.

Fed Funds

Futures traders see a 4.4 percent chance that the Fed may lift its benchmark interest rate to 0.5 percent in January. This compares with a 1.8 percent probability a week ago.

Forecasts for the fastest U.S. earnings growth in 15 years are failing to convince options traders that the S&P 500 Index will extend its biggest rally since the 1930s.

S&P 500 options to protect against declines in stocks over the next year cost 22 percent more than one-month contracts, the highest since 1999, data compiled by London-based Barclays Plc and Bloomberg show. The gap shows concern that analyst estimates for record earnings by 2011 may prove exaggerated, endangering an advance since March.

Alcoa lost 0.8 percent to $12.89 and Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, slipped 0.7 percent to $79.29. Copper fell in London from the highest in almost 15 months on speculation demand may flag as inventories rise in London Metal Exchange warehouses. Aluminum, nickel and zinc also slipped.

Gold Declines

Barrick, the world’s biggest gold miner, declined 1.2 percent to $42.18. Newmont Mining Corp., the largest U.S. producer, retreated 1.6 percent to $51.23 as the precious metal dropped.

Citigroup fell 1.4 percent to $4. The bank of which the U.S. government owns 34 percent must start the capital-raising effort needed to pay back $20 billion of bail-out funds within 10 days or wait more than a month, the Financial Times reported, citing unidentified people close to the situation. Unless the company begins the process by Dec. 14 or 15, it will become unfeasible to do so until after fourth-quarter results are announced in mid-January, the newspaper said.

Bank of America, the largest U.S. lender, declined 1.5 percent to $16.04.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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European Stocks, U.S. Index Futures Fall; Asian Shares Advance

By Adria Cimino

Dec. 7 (Bloomberg) -- European stocks fell as a decline in metal prices weighed on basic-resource companies and investors speculated the Federal Reserve may raise interest rates as early as January. U.S. index futures dropped, while Asian shares rose.

Fresnillo Plc, the world’s largest primary silver producer, and Xstrata Plc slid more than 2 percent. Siemens AG, Europe’s biggest engineering company, retreated 2.2 percent after Morgan Stanley cut its recommendation on the shares. Nutreco Holding NV advanced 2.6 percent after ING Groep NV advised investors to buy the stock.

The Dow Jones Stoxx 600 Index, a benchmark measure for the region, slipped 0.7 percent to 247.27 as of 9:50 a.m. in London. Stocks gained last week following government reports that showed manufacturing in China and Europe expanded and employers in the U.S. cut the fewest jobs in November since the recession began.

“There’s a bit of tension on interest rates since the good employment figures” in the U.S., said Matthieu Giuliani, a fund manager at Palatine Asset Management in Paris, which oversees about $4.43 billion in stocks. “Basic-resources shares are very sensitive to economic growth. I would be cautious on the industry.”

Futures traders see a 4.4 percent chance that the Fed may lift its benchmark interest rate to 0.5 percent in January. This compares with a 1.8 percent probability a week ago.

Record-low interest rates and about $12 trillion in spending by governments worldwide have spurred a 56 percent rally in the Stoxx 600 since March 9. The gauge is trading at about 56 times its companies’ reported earnings, near the highest level since June 2003, according to weekly data compiled by Bloomberg.

U.S. Futures

U.S. stocks rose during the last trading session, lifting the Standard & Poor’s 500 Index to the biggest weekly gain in three weeks. S&P 500 futures slipped 0.4 percent today.

Forecasts for the fastest U.S. earnings growth in 15 years are failing to convince options traders that the S&P 500 will extend its biggest rally since the 1930s.

S&P 500 options to protect against declines in stocks over the next year cost 22 percent more than one-month contracts, the highest since 1999, data compiled by London-based Barclays Plc and Bloomberg show. The gap shows concern that analyst estimates for record earnings by 2011 may prove exaggerated, endangering an advance that pushed the S&P 500 up 63 percent since March.

The MSCI Asia Pacific Index added 0.1 percent today.

Asian Shares

Canon Inc., the world’s largest maker of cameras and which gets 28 percent of revenue in the Americas, added 3.3 percent in Tokyo as the U.S. jobs report on Dec. 4 buoyed confidence in an economic recovery. Billabong International Ltd., a clothing maker that gets more than half its revenue in the Americas, added 4.9 percent in Syndey.

Basic-resources shares declined 1.9 percent, the biggest drop among the 19 industry groups in the Stoxx 600, as copper, lead and nickel all dropped on the London Metal Exchange. Gold and silver also retreated.

Fresnillo lost 2.1 percent to 847 pence. Xstrata, the world’s fourth-biggest copper supplier, slid 2.4 percent to 1,041 pence.

Siemens retreated 2.2 percent to 62.10 euros. Morgan Stanley cut its recommendation on the shares to “equal weight” from “overweight,” saying “losses in non-core operations are likely to continue to weigh on reported earnings and cash flow.”

Analyst Recommendations

Bayer AG dropped 1.9 percent to 52.72 euros, snapping four days of gains. Germany’s biggest drugmaker and its partner, Johnson & Johnson, have decided to postpone their response on the rivaroxaban anti-clotting agent to the U.S. Food and Drug Administration, which is part of the application process for the treatment.

Nutreco advanced 2.6 percent to 38.07 euros after the world’s largest maker of fish feed was raised to “buy” from “hold” at ING.

Randstad Holding NV gained 3.1 percent to 33.82 euros. The second-biggest temporary staffing company was upgraded to “buy” from “hold” at Deutsche Bank AG.

European stocks may rally 17 percent by the end of 2010 amid earnings growth and an improvement in economic leading indicators, according to JPMorgan Chase & Co. strategists.

“The near term catalysts are a strong earnings reporting season, positive payrolls, rebound in leading indicators and increasing risk allocation in new year,” Mislav Matejka, London-based head of European equity strategy wrote in a report dated today.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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U.K. Stocks Decline, Led by Mining Companies on Metals Prices

By Adam Haigh

Dec. 7 (Bloomberg) -- U.K. stocks retreated the most in a week as lower metals prices weighed on raw-material producers.

Rio Tinto Group and Xstrata Plc led a retreat among mining shares as copper fell in London. Scottish and Southern Energy Plc lost the most in more than two months after saying returns allowed by the energy regulator will be “significantly” lower.

The benchmark FTSE 100 Index dropped 46.84, or 0.9 percent, to 5,275.52 as of 8:34 a.m. in London. The measure has rebounded 50 percent from its low on March 3 as governments committed about $12 trillion and central banks cut interest rates to record lows to end the global recession and revive credit markets. The FTSE All-Share Index slid 0.9 percent today and Ireland’s ISEQ Index retreated 1.3 percent.

“There is definitely a lack of appetite here,” said Manus Cranny, senior markets analyst at MF Global in London. “Metals prices are really under pressure.”

Rio Tinto, the world’s third largest mining company, slid 1 percent to 3,092.5 pence. Xstrata lost 1.7 percent to 1,048 pence. Copper, lead, nickel and tin prices declined on the London Metal Exchange.

Scottish and Southern Energy slid 2 percent to 1,102 pence. The utility company said returns allowed by Ofgem during the next five years will be “significantly’ lower than under the last price review.

Shanks Group Plc, the U.K. waste recycling company, surged 46 percent to 131.8 pence after saying it received a “highly preliminary and unsolicited approach” regarding a potential offer of 135 pence per share from a private equity group.

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

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German Stocks Decline as ThyssenKrupp, Siemens, Bayer Retreat

By Cornelius Rahn

Dec. 7 (Bloomberg) -- German stocks dropped as steelmakers declined with metal prices and Morgan Stanley downgraded shares of Siemens AG.

The benchmark DAX Index slid 1 percent to 5,757.85 as of 9:43 a.m. in Frankfurt, erasing a 0.8 percent gain on Dec. 4. A nine-month rally has left the measure valued at about 62 times its companies’ reported earnings, near the highest level since 2002, according to weekly data compiled by Bloomberg. The broader HDAX Index also fell 1 percent today.

ThyssenKrupp AG and Salzgitter AG, Germany’s biggest steelmakers, dropped 1.5 percent to 24.94 euros and 1.3 percent to 63.93 euros, respectively. Basic-resources companies were the worst performers among 19 industry groups in the pan-European Dow Jones Stoxx 600 Index today, falling as much as 1.7 percent.

Siemens slid 2.1 percent to 62.18 euros, the lowest in a month based on closing prices. Europe’s biggest engineering company was downgraded to “equal-weight” from “over-weight” at Morgan Stanley, which said in a report to clients that “losses in non-core operations are likely to continue to weigh on reported earnings and cash flow.”

Bayer AG fell 1.6 percent to 52.85 euros, snapping four days of gains. Germany’s biggest drugmaker and its partner, Johnson & Johnson, have decided to postpone their response on the rivaroxaban anti-clotting agent to the U.S. Food and Drug Administration, which is part of the application process for the treatment.

A report today may show German factory orders climbed for an eighth month in October, according to a Bloomberg News survey of economists. The figures are scheduled for 12 p.m. local time.

The following shares rose or fell in German markets. Stock symbols are in parentheses.

Arcandor AG (ARO GY) jumped 31 percent to 22 cents, the biggest increase in a month. None of the company’s remaining 120 Karstadt department stores will be closed next year, as the unit has returned to profit and two dozen prospective buyers have expressed interest, Bild am Sonntag cited insolvency official Rolf Weidmann as saying.

SMA Solar Technology AG (S92 GY) surged 4.1 percent to 96.35 euros, a third straight increase. The German maker of solar-power equipment has its share-price estimate raised to 110 euros from 82 euros at Citigroup Inc.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

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