Swiss Franc Weakens Versus Euro as Hildebrand Says Ready to Act

By Lukanyo Mnyanda and Simone Meier

Jan. 11 (Bloomberg) -- The Swiss franc weakened against the euro after the country’s central bank President Philipp Hildebrand said policy makers will seek to prevent “excessive appreciation” of the currency.

The franc dropped as much as 0.3 percent against the euro as Hildebrand said in a statement read by spokesman Werner Abegg from Zurich today that the Swiss National Bank will “monitor foreign-exchange market developments very closely” even as it doesn’t have a currency target. The franc had its biggest monthly gain versus the euro in a year during December as traders bet the central bank had relaxed its resistance to a stronger currency.

The comments “suggest the SNB is certainly not going to let euro-Swiss collapse from here,” said Geoff Kendrick, director of currency strategy in London at UBS AG. “The chance of SNB intervention has clearly increased again following those comments.”

The franc was 0.1 percent lower at 1.4768 as of 9:44 a.m. in Zurich, after trading as weak as 1.4795.

The SNB began selling the franc in March in an effort to ward off deflation and combat the nation’s economic slump. The currency strengthened to less than 1.50 per euro last month for the first time since the sales began on speculation the fading prospect of deflation would allow policy makers to tolerate the franc’s appreciation.

Consumer Prices

“Markets wanted to test and see the new limits,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. SNB policy makers “certainly try to prevent volatility in the franc.”

The SNB may have sold the franc in currency markets today at the same time as the statement, Heller said. Abegg declined to comment on whether the SNB intervened.

Swiss consumer prices increased 0.3 percent in December from a year earlier, lower than the 0.5 percent advance forecast by economists in a Bloomberg survey, a government report showed last week. For the whole of 2009, prices fell 0.5 percent, the statistics office said.

“Deflation risks remain significant,” UBS’s Kendrick said.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Simone Meier in Dublin at smeier@bloombert.net

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Canadian Dollar Offers Buying Opportunity on Jobs Data, UBS Says

By Justin Carrigan

Jan. 11 (Bloomberg) -- The Canadian dollar may offer buying opportunities after the nation’s employers unexpectedly cut jobs last month, according to UBS AG.

The economy lost 2,600 positions in December, compared with a forecast gain of 20,000 and an increase of 79,100 jobs in November, a government report showed on Dec. 8.

“The release was disappointing but this may offer fresh entry levels for Canadian dollar-longs on the crosses as the economy continues to benefit from a U.S. recovery,” Brian Kim, a currency strategist at UBS in Stamford, Connecticut, wrote in an e-mailed report yesterday.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Dollar No Match for Aussie, Loonie Approaching Parity

By Oliver Biggadike and Candice Zachariahs

Jan. 11 (Bloomberg) -- The biggest monthly rebound in the Dollar Index since January means faster gains for Australia’s and Canada’s currencies as the recovering U.S. economy boosts demand for their commodities.

The Canadian and Australian dollars will strengthen to trade at parity with the greenback or better together in 2010 for the first time in 34 years, appreciating at least 2.6 percent and 7.4 percent, three of last year’s four best forecasters for both currencies say. Traders are favoring the so-called loonie and Aussie over the dollar on the Chicago Mercantile Exchange even while betting more than ever on the Dollar Index advancing.

Accelerating U.S. growth will spur demand for Canadian oil and natural gas as China’s expansion boosts purchases of Australian iron ore and coal, pushing both currencies higher, said Sacha Tihanyi, a foreign-exchange strategist in Toronto at Bank of Nova Scotia. The loonie and Aussie both rose last week even as the People’s Bank of China took steps to curb lending.

“The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery,” said John Kyriakopoulos, head of currency strategy in Sydney at National Australia Bank Ltd., the most accurate predictor for both currencies last year.

“We’re forecasting parity for the Aussie dollar, and we actually think the Canadian dollar will go through parity” by March, he said. The bank is the most bullish of last year’s most accurate forecasters on the two currencies, predicting gains of about 11 percent for each by Sept. 30.

Most Since 2007

The Australian dollar rose 0.7 percent to 93.16 U.S. cents as of 2:15 p.m. in Sydney and was 2009’s third-best performer among the 16 most-traded currencies. Canada’s loonie, nicknamed for the aquatic bird on its dollar coin, advanced 0.4 percent to C$1.0260, after gaining the most since 2007 last year.

IntercontinentalExchange Inc.’s Dollar Index -- a gauge against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has rallied 3.7 percent since Nov. 25 after a 16.7 percent slide from 2009’s March 5 closing high.

Three of the four best loonie forecasters in 2009 -- National Australia, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co. -- predict parity by June 30; the other, Canadian Imperial Bank of Commerce, sees it there by Dec. 31.

As for the best Aussie predictors, National Australia says that currency will equal the greenback by March 31; CIBC sees it there by year-end; JPMorgan estimates it will be stronger than parity in the second quarter and Commonwealth Bank of Australia is calling for it to stop 2 cents short of one U.S. dollar.

Biggest Gains

Of the most active currencies, the Aussie, loonie, Brazilian real, Norwegian Krone, South African rand and New Zealand dollar, known as commodity currencies, posted 2009’s biggest gains against the dollar. The Reuters/Jefferies CRB Index of raw material prices had its best performance since 1979, gaining 23.5 percent.

History shows that a U.S. recovery coincides with increases in commodities, the Aussie and loonie.

After the U.S. came out of the 2001 recession, the currencies rose 48 percent and 23 percent, respectively, in the two years ending with 2003 as the world’s biggest economy expanded almost 6 percent. After falling 31 percent in 2001, the Standard & Poor’s GSCI Index of 24 commodities rose 39 percent and 11 percent in the next two years.

The Australian and Canadian dollars have rallied about 49 percent and 27 percent from last year’s lows as U.S. growth rebounded to 2.2 percent in the third quarter after shrinking 6.4 percent in the first.

Economic Forecasts

The U.S. economy’s expansion will accelerate to 2.6 percent in 2010, compared to 3.1 percent for Australia and 2.55 percent for Canada, according to the median estimates in Bloomberg economist surveys. Goldman Sachs Group Inc. predicts the S&P GSCI Enhanced Total Return Index of commodities will gain 17.5 percent this year.

“A lot of the Canadian dollar gains up to now have been happening in the absence of strong growth in the U.S.,” said Tihanyi of Bank of Nova Scotia. “Through this year, you’re going to see growth come back to what you might see in a normal year, and along with that you’re going to see a pickup in trade and demand for Canadian products.” Canada’s third-largest lender forecasts parity by June 30.

The Canadian dollar rose versus the greenback for a fourth day on Jan. 5, when the U.S. Commerce Department reported that automakers increased sales in December. The loonie climbed again the next day for its longest winning streak in two months.

Record Lending

The Canadian and Australian dollars are gaining support from the global recovery as China’s central bank tries to curb record lending. The nation may have exceeded its 8 percent growth target for 2009 by 0.5 percentage point, said Zhang Xiaoqiang, deputy head of the National Development and Reform Commission, in a Jan. 5 statement.

Commonwealth Bank of Australia, among the five most- accurate forecasters for the Aussie and loonie, expects both currencies to end 2010 short of parity after peaking in the second quarter as Federal Reserve interest-rate increases add to the greenback’s appeal. Median Bloomberg survey forecasts see the Australian dollar falling 3.4 percent by Dec. 31 as the Canadian currency drops 5 percent.

“The U.S. dollar will strengthen in anticipation of rate hikes,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank.

Canadian policy makers will warn traders against pushing the loonie higher to prevent damage to the economy, said Sebastien Galy, a foreign-exchange strategist at BNP Paribas SA in New York.

‘Pretty Vociferous’

“The problem with the Canadian dollar is the reaction function of the central bank; they’ve been pretty vociferous about talking down the currency,” Galy said.

Seven days after the loonie reached C$1.0207 on Oct. 15, its closest brush with parity since July 2008, Bank of Canada Governor Mark Carney said action to weaken the currency “is always an option.” Within two weeks, it fell 6.1 percent to a one-month low of C$1.0870. Measured in U.S. cents, Canada’s dollar hit 97.97 before falling to 92.

For the Aussie, the risk is a pause in rate increases. Reserve Bank of Australia Deputy Governor Ric Battellino described its monetary policy on Dec. 16 as “back in the normal range” because lenders had raised rates more than the policy makers had.

Weighing on Aussies

“Any paring back of those interest-rate hike expectations will weigh on the Aussie,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney, who sees the currency peaking at 93 U.S. cents. “A sooner and stronger-than- expected recovery in the U.S. is going to benefit Canada more than the likes of Aussie.”

Currency strategists have pushed up first-quarter forecasts for the Australian dollar, with the median prediction now at 93 U.S. cents, from 65 cents in March, more than estimates for the New Zealand dollar, real, krone, ruble and Canadian dollar.

Futures traders are becoming more bullish about the loonie and Aussie even as they increase bets on the U.S. dollar, data from the U.S. Commodity Futures Trading Commission show. Contracts profiting from gains against the greenback outnumbered bearish wagers by more than 40,000 on each currency last week, the most in five weeks for the Aussie and 10 for the loonie.

Investors had an unprecedented 51,050 bets that the Dollar Index would rise as of Dec. 29, according to the CFTC data. Even after such wagers fell to 48,623 last week, bullish contracts outnumbered bearish ones by more than 5 to 1, the most since March, when the dollar started last year’s slide.

Major Exports

Canada sits on the largest pool of oil reserves outside the Middle East. The nation is also the world’s third-largest exporter of natural gas after Russia and the U.S., according to the Energy Information Administration.

Australia is the biggest shipper of iron ore and coal. Merchandise exports to China, the nation’s largest trading partner, grew 29 percent in 2009’s first 11 months from the same period in 2008. Australia also sells gold, crude oil and liquefied natural gas.

The Aussie and the loonie last traded at parity together in 1976, before the November election of a secessionist Parti Quebecois government in Quebec helped trigger “a protracted selloff” in the Canadian dollar, according to James Powell’s “A History of the Canadian Dollar” on the Bank of Canada’s Web site.

Past Parity

The loonie most recently had the same value as an American dollar in July 2008 after rising to that level in September 2007 for the first time in three decades. It hit its strongest level of 90.58 Canadian cents per U.S. dollar two months later. The Aussie last reached parity in 1982, before the government allowed it to float freely the following year.

With the U.S. dollar showing renewed strength, Barclays Plc’s wealth management unit is advising investors to maximize returns on bets that the Aussie and loonie will rise along with commodity prices by purchasing the currencies with yen.

“If you had to pick a country in the world that’s most short of commodities, it’s Japan,” said Aaron Gurwitz head of global investment strategy at Barclays Wealth in New York.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

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Rice Export Prices Unlikely to Decline, Mohanty Says

By Luzi Ann Javier

Jan. 11 (Bloomberg) -- Rice export prices will probably be sustained at about $600 per metric ton after drought and floods damaged crops in India and the Philippines, an agricultural economist said. Rice futures rallied in Chicago.

“It is safe to say that the rice price is not going back to $300 per ton any time soon and is likely to remain around $600 in the near term,” Samarendu Mohanty, a senior economist at the International Rice Research Institute, said in a report to be published today, without citing a definite time frame.

The Asian rice price benchmark jumped to $607 per ton in Thailand last week from 2009’s low of $525 as the Philippines, the world’s biggest importer, advanced purchases and on concern India may become a net importer after a drought parched crops last year. The grain has averaged $616 since Dec. 2, according to Bloomberg data.

Higher costs for the staple for half the world’s population may push more people in least developed nations into hunger and some Asian governments may be forced to subsidize rice, widening their budget deficits, Frederic Neumann, senior Asia economist at HSBC Holdings Plc., said by phone from Hong Kong.

“One thing we saw in 2008 is that a gradual increase may well turn into a sudden spike and this could lead to political challenges further down the road,” he said.

Rice rose to a record in Chicago in April 2008 and the Asian benchmark export prices jumped to their highest level ever a month later, after India and other exporting countries curbed shipments, adding to concerns of shortages that sparked riots from Haiti to Egypt.

Import Tenders

The Philippines may need to buy between 500,000 and 1 million tons overseas, adding to purchases from tenders last quarter, the U.S. Rice Producers’ Association said in a report published Jan. 8. State-run National Food Authority purchased about 2.2 million tons of overseas supplies in the tenders for delivery this year, spokesman Rex Estoperez said last week.

Rice futures in Chicago have jumped 34 percent from last year’s low of $11.195 per 100 pounds. The March-delivery contract rose for the first time in five sessions, gaining as much as 1 percent to $15.10 in after-hours trading in Chicago, reversing a 0.5 percent loss earlier.

Futures may rise to $16 per 100 pounds in the next three months as the Philippines remains in the import market, Peter McGuire, managing director at CWA Global Markets Pty, said by phone from Sydney today.

Global rice stockpiles are forecast to decline 2.7 percent to 121.1 million tons at the end of the 2009-2010 season because of smaller crops in countries including India, the Philippines, Iraq, Nepal, and Pakistan, the UN Food and Agriculture Organization said last month.

Global Stockpiles

Still, the global inventory will be higher than the 110.8 million tons in the 2007-2008 season, the FAO said.

“Unfortunately, most of these additional stocks, with the exception of Thailand, will not be available to the market in case prices start to rise,” Mohanty said in the report sent to Bloomberg News by e-mail.

India’s government will have 42 million tons available for sale to the poor in the marketing year ending March 31, against a requirement of 25 million tons, the U.S. Department of Agriculture’s Foreign Agricultural Service said last month.

Stockpiles in India “should provide much-needed relief to the market,” because it will mean the South Asian nation does “not need to turn to imports,” Mohanty said.

India, the world’s second-biggest producer, may harvest 71.65 million tons of the monsoon-sown rice, higher than the 69.45 million tons forecast in November, the government said last month. Warehouses held 15.35 million tons on Oct. 1, the start of the new marketing year, the government said Jan. 5.

India Imports

“Regardless of the press from the Indian government, the belief is widespread throughout the rice trade that something between 2 and 3 million tons of imported rice will be bought there sometime in the next three months,” the U.S. Rice Producers said.

A purchase in excess of 2 million tons by India will make the South Asian nation a net importer for the first time in more than two decades. India, which ships higher-value basmati rice, was forecast by the U.S. Department of Agriculture last month to export 2 million tons this year.

“We see the human and political imperative there to make this unavoidable,” U.S. Rice Producers said, referring to India importing as much as 3 million tons. “It is difficult to see prices falling much, if any, given the world situation.”

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

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Dollar Slides to 3-Week Low on U.S. Jobs Report, Global Growth

By Bo Nielsen and Ron Harui

Jan. 11 (Bloomberg) -- The dollar fell to a three-week low against the euro as traders pared bets that the Federal Reserve will bring forward interest rate increases after last week’s weaker-than-expected U.S. jobs report.

The dollar declined against 15 of the 16 most-traded currencies tracked by Bloomberg after Reserve Bank of St. Louis President James Bullard signaled rates may remain low for some time. The Australian dollar rose to the strongest level in five weeks versus the greenback after a Chinese report yesterday showed exports climbed for the first time in 14 months.

“The payrolls report doesn’t change the big picture of U.S. recovery, but it pushed out the start of Fed tightening, and that has made some people change their positions,” said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. “As long as the U.S. data doesn’t deteriorate sharply, risk appetite will do fine and we’ll see a generally weaker dollar.”

The dollar dropped to $1.4512 per euro as of 9:44 a.m. in London from $1.4409 in New York last week, after declining to $1.4535, the weakest since Dec. 17. The U.S. currency slid to 92.35 yen from 92.66 yen. The yen fell to 134.04 per euro from 133.46.

China’s customs bureau said on its Web site yesterday that exports rose a greater-than-expected 17.7 percent in December from a year earlier and imports surged 55.9 percent.

Commodity Currencies

Australia’s dollar advanced 0.7 percent to 93.12 U.S. cents, after climbing to 93.20, the highest since Dec. 3. China is the world’s biggest buyer of iron ore, while Australia is the biggest exporter of the material.

New Zealand’s dollar rose 0.4 percent to 73.98 cents. The Canadian dollar advanced 0.5 percent to 97.33 U.S. cents and reached 97.53 cents, the highest since Oct. 15.

“The China data keeps alive the view that the emerging market economies will drive economic activity with the U.S. and the euro-zone lagging behind,” Derek Halpenny, the European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note clients today.

Futures on the Chicago Board of Trade show a 34 percent chance the U.S. central bank will raise its zero to 0.25 percent target lending rate by at least a quarter-percentage point by June, down from 60 percent odds a week earlier. The Labor Department said on Jan. 8 employers unexpectedly cut 85,000 jobs in December, compared with economists’ forecasts for no change.

U.S. benchmark interest rates compare with 0.1 percent in Japan, 3.75 percent in Australia and 2.5 percent in New Zealand, attracting investors to the South Pacific nations’ assets.

‘Sluggish Recovery’

The U.S. jobs report “fits into a pattern of a choppy and sluggish recovery marked by an underlying improvement but with invariable setbacks,” Michael Hart, a Citigroup Inc. currency analyst in London wrote in a research report today. “The dollar sold off in response, in line with a recent pattern that saw it increasingly de-link from successive risk waves.”

The Fed’s near-zero interest-rate policy is “on hold” for now, Bullard said in Shanghai today. He also didn’t see the fed’s liquidity increase as inflationary.

The Dollar Index, which the ICE futures exchange uses to track the greenback against currencies of six major U.S. trading partners including the euro, declined for a second day, losing 0.5 percent.

The Swiss franc weakened versus the euro after central bank President Philipp Hildebrand said the bank will continue to prevent “any excessive appreciation” of the currency.

The Swiss National Bank doesn’t have an exchange-rate target but will “monitor foreign exchange market developments very closely,” Hildebrand, who became head of the central bank on Jan. 1, said in a statement issued in Zurich today.

Loonie, Aussie Parity

The franc weakened to as low as 1.4795 per euro from 1.4753 yesterday and later traded at 1.4775.

The Canadian and Australian dollars will rise to trade at parity or better with the greenback together in 2010 for the first time in 34 years, appreciating at least 3 percent and 8 percent, three of last year’s four best forecasters for both currencies say.

Traders are favoring the so-called loonie and Aussie over the dollar on the Chicago Mercantile Exchange even while betting more than ever on the Dollar Index advancing.

Accelerating U.S. growth will spur demand for Canadian oil and natural gas as China’s expansion boosts purchases of Australian iron ore and coal, pushing both currencies higher, said Sacha Tihanyi, a foreign exchange strategist in Toronto at Bank of Nova Scotia. The loonie and Aussie both rose last week even as the People’s Bank of China took steps to curb lending.

“The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery,” said John Kyriakopoulos, head of currency strategy in Sydney at National Australia Bank Ltd., the most accurate predictor for both currencies last year.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

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Corn, Soybeans May Fall as Rain Boosts South American Crops

By Jeff Wilson

Jan. 11 (Bloomberg) -- Corn and soybeans may fall on speculation that rain in South America will improve prospects for crops that most farmers will begin harvesting next month, slowing demand for supplies from the U.S., the biggest exporter.

Nineteen of 32 traders and analysts surveyed on Jan. 8 from Tokyo to Chicago said corn will drop, and 25 of 35 respondents said soybeans would fall. Last week, corn futures rose 2.1 percent to $4.23 a bushel on the Chicago Board of Trade, the highest weekly settlement since June. Soybeans slumped 2.5 percent to $10.22 a bushel, the fifth drop in six weeks.

The gains in corn last week were anticipated by the majority of respondents surveyed Dec. 31, while the drop in soybeans was a surprise. Since 2004, the surveys have forecast price moves accurately 53 percent of the time for corn and 54 percent for soybeans.

Bearish on corn: 19 Bearish on soybeans: 25 Bullish on corn: 13 Bullish on soybeans: 10

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net

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Oil Rises to a 15-Month High on Cold Weather, Weaker Dollar

By Grant Smith and Yee Kai Pin

Jan. 11 (Bloomberg) -- Crude oil rose to a 15-month high as the cold snap stoked demand for heating fuel while a sliding dollar heightened crude’s appeal for hedging inflation.

Oil advanced a second day after a government report yesterday showed that crude imports to China, second-largest energy consumer, climbed to a record 203.8 million metric tons last year. Russia failed to agree on oil supplies to Belarus for 2010 during talks in Moscow on Jan. 9, raising the prospect of a disruption to European imports.

“Oil continues to trend higher this morning as cold weather and a weaker dollar trigger speculative buying,” said Christopher Bellew, senior broker at Bache Commodities Ltd in London. “But once the weather in the U.S. improves, plentiful supplies of physical oil may soon weigh on prices.”

Crude oil for February delivery rose as much as 92 cents, or 1.1 percent, to $83.67 a barrel in electronic trading on the New York Mercantile Exchange. That’s the highest since Oct. 14, 2008. It was at $83.43 a barrel at 9:50 a.m. London time.

Futures have risen in 11 of the past 12 sessions as freezing temperatures in the U.S., Europe and Asia boosted heating fuel demand. More cold weather is forecast for China in the next two days.

The cold snap “has done its part in eating away at the distillates stockpiles, but really it’s the industrial demand that the market is going to be focusing on,” said Toby Hassall, commodity analyst at CWA Global Markets Pty in Sydney.

Fuel Inventories

U.S. stockpiles of distillates like heating oil fell for a fourth week even as imports and refinery output increased, an Energy Department report on Jan. 6 showed. Inventories including heating oil and diesel were at 159 million barrels in the week ended Jan. 1, the lowest since July.

Negotiations between Russia and Belarus broke down because of disputes over customs duties and the re-export of refined oil products from Belarus, Russian Energy Ministry spokeswoman Irina Yesipova said by telephone. The countries had planned to sign an agreement on supplies before Jan. 1.

U.S. retail sales expanded 0.5 percent in December, based on the median forecast from 57 economists surveyed by Bloomberg News before a Jan. 14 Commerce Department report. Industrial production probably rose 0.6 percent, another report may show.

Exports in China, the world’s fastest-growing major economy, climbed 17.7 percent in December from a year earlier, the first increase in 14 months, the customs bureau said on its Web site yesterday. Imports jumped 55.9 percent.

“Asia has obviously performed well throughout this recession,” Hassall said. “Beyond the short term, the global economy, and the U.S. in particular, the largest consumer of oil, is in the early stages of a recovery, which suggests that demand is on the mend.”

Investment Appeal

The dollar dropped to a three-week low against the euro on signs Asia’s economic growth is gaining pace, bolstering the investment appeal of commodities. The U.S. currency slid as much as 1 percent to $1.4535 per euro, the weakest since Dec. 17, from $1.4409 in New York on Jan. 8.

Chevron Corp., the second-largest U.S. energy producer, said the Makaraba-Utonana pipeline it operates in southern Nigeria’s Delta state was breached on Jan. 8, shutting in 20,000 barrels a day of crude oil production.

Nigeria, which vies with Angola for Africa’s top oil producer, is the fifth-biggest source of U.S. crude imports. Attacks by armed groups in Nigeria’s oil-rich delta region have cut the country’s output by more than 25 percent since 2006.

Brent crude oil for February settlement rose as much as 88 cents, or 1.1 percent, to $82.25 a barrel on the London-based ICE Futures Europe exchange. It was at $82.04 a barrel at 9:52 a.m. London time.

To contact the reporters on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net

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Asian Stocks Advance as China Trade Figures Boost Metal Prices

By Shani Raja and Anna Kitanaka

Jan. 11 (Bloomberg) -- Asian stocks rose, lifting the MSCI Asia Pacific excluding Japan Index for the 13th time in 14 days, after Chinese trade figures boosted metals prices and the nation’s regulators approved index futures and short sales.

BHP Billiton Ltd., the world’s biggest mining company, gained 2 percent as copper rose in after-hours trading in New York. Posco, the steelmaker that is due to report profit on Jan. 14, jumped 3.1 percent in Seoul after Hyundai Securities Co. raised its share-price target. Brokerage China Everbright Ltd. surged 10 percent in Hong Kong, leading financial shares higher on speculation Chinese trading volumes will rise.

The MSCI Asia Pacific excluding Japan Index added 1.2 percent to 432.48 as of 6:02 p.m. in Hong Kong. Japanese markets are closed today for a holiday. The broader MSCI Asia Pacific Index, which includes Japan, increased 34 percent last year on optimism growth around the region is accelerating.

“The whole recovery story is unfolding very well,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which oversees about $75 billion. “Recovery in China is on track and the fact that export numbers are very strong shows external demand from the developed world is gaining traction.”

China’s Shanghai Composite Index and Hong Kong’s Hang Seng Index both climbed 0.5 percent. Chinese exports climbed 17.7 percent from a year earlier, the first increase in 14 months, and imports jumped 55.9 percent, the customs bureau said yesterday. The S&P/ASX 200 Index rose 0.8 percent in Sydney. Taiwan’s Taiex Index increased 0.5 percent.

Metals Demand

Futures on the Standard & Poor’s 500 Index gained 0.5 percent. The gauge rose 0.3 percent to a 15-month high on Jan. 8 as speculation the Federal Reserve will leave interest rates near zero overshadowed an unexpected decrease in jobs.

Material producers accounted for 32 percent of the MSCI Asia Pacific excluding Japan Index’s advance today on optimism that growth in China, the world’s third-largest economy, will stimulate demand for metals. Copper futures in New York gained as much as 2.6 percent today.

BHP Billiton Ltd., the world’s biggest mining company, gained 2 percent to A$44.47. Rio Tinto Group, the world’s third- biggest mining company, added 1.3 percent to A$80.

Posco, South Korea’s largest steelmaker, climbed 3.1 percent to 625,000 won. Hyundai Securities Co. raised its share- price estimate to 750,000 won, citing an improvement in the global steel industry. BlueScope Steel Ltd., Australia’s largest steelmaker, climbed 1.9 percent to A$3.30.

Risk Appetite

Aluminum Corp of China Ltd., the country’s largest producer of the metal, added 7.2 percent to HK$10.64 after increasing alumina prices for a second time in a week.

The Chinese trade figures revived investor appetite for risk, dragging the dollar lower and boosting demand for bullion as an alternative asset. Gold for immediate delivery strengthened 1.4 percent to $1,153.90 an ounce, extending the 0.6 percent advance from Jan. 8.

Newcrest Mining Ltd., Australia’s largest gold producer, climbed 1.7 percent to A$36.82 while rival St. Barbara Ltd. surged 6.5 percent to 33 Australian cents.

China Everbright surged 10 percent to HK$22.45 in Hong Kong. Citic Securities Co., China’s largest brokerage by market value, rose 3.6 percent to 33.42 yuan. Morgan Stanley recommended buying shares with large weightings after the China Securities Regulatory Commission on Jan. 8 cleared an overhaul of trading laws that will permit short sales and stock-index futures.

“Big-cap stocks will be given a premium for their high liquidity, as index futures are expected to bring more market participants,” said Chen Wenzhao, a strategist at China Merchants Securities Co. in Shanghai. “The export data offer another piece of evidence that the economic recovery is strengthening.”

Orient Overseas Surges

In Hong Kong, Orient Overseas International Ltd. surged 11 percent to HK$46.80 after Goldman Sachs Group Inc. raised its share-price estimate 14 percent on speculation revenue from its real-estate projects in China will increase.

Orient Overseas, Hong Kong’s biggest container line, is involved in property development through a subsidiary. The stock was the second-best performer on the MSCI Asia Pacific excluding Japan Index today. China Everbright was the third-best performer.

Optimism for global growth grew last week as the U.S. government reported a 1.1 percent increase in factory orders. The gain was more than twice as much as economists anticipated. Taiwan’s exports climbed in December at the fastest pace since February 1995, the government said on Jan. 7.

‘No Imminent Threat’

Australian advertisements for job vacancies surged by the most in 2 1/2 years, Australia & New Zealand Banking Group Ltd. reported today. Sales at U.S. retailers rose 0.5 percent last month, the third consecutive increase, according to the median forecast of 57 economists surveyed by Bloomberg News ahead of Commerce Department figures due Jan. 14.

“We see no imminent threat to what remains a supportive mix for risk assets,” Morgan Stanley strategists Gerard Minack and Jason Todd wrote in a report today. “The macro data remain consistent with moderate expansion in developed economies, and something better in emerging economies.”

The MSCI Asia Pacific Index’s 34 percent rise last year outpaced gains of 23 percent by the S&P 500 and 28 percent for Europe’s Dow Jones Stoxx 600 Index amid bets Asian growth will outstrip the rest of the world. Stocks in the MSCI gauge trade at an average of 20 times estimated earnings, compared with 15 times for the S&P 500 and 13 times for the Stoxx 600.

Among stocks that fell, WorleyParsons Ltd. lost 1.4 percent to A$30.04 in Sydney after Australia’s biggest engineering company was downgraded to “sell” from “neutral” at UBS AG.

Auckland International Airport Ltd., New Zealand’s largest airport operator, declined 2.9 percent to NZ$2.02 in Wellington. The company agreed to pay A$133 million ($123 million) for a stake in two airports in Australia’s Queensland state.

To contact the reporters for this story: Shani Raja in Tokyo at sraja4@bloomberg.net; Anna Kitanaka in Tokyo at akitanaka@bloomberg.net.

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Dubai Index Declines on Below Market Offer for Arabtec Stake

By Zahra Hankir

Jan. 10 (Bloomberg) -- Dubai shares dropped for the first time in four days after Abu Dhabi-based Aabar Investments PJSC agreed to buy a stake in Arabtec Holding PJSC for 20 percent less than the company’s previous closing price.

Arabtec, United Arab Emirates’ biggest construction company, retreated the most in a month. Emaar Properties PJSC, the U.A.E.’s biggest developer, declined to the lowest level this year. The DFM General Index lost 1.2 percent, the biggest fluctuation among the seven Gulf markets, to 1,814.33. Most other Gulf benchmarks advanced.

“The Arabtec news is negative in the short-term because of shareholder dilution,” said Yazan Abdeen, a fund manager at ING Investment Management (Dubai) Ltd. In the longer-term, Arabtec will benefit on two levels, “first, cash, which will make the working capital of the company more efficient, and second, the amount of backlog that Aabar will bring to the table.”

Aabar, the Abu Dhabi government-owned investor, said Jan. 7 it plans an offer to buy 70 percent of Arabtec through the purchase of mandatory convertible bonds that will convert into shares at a price of 2.3 dirhams each, it said. That’s a 20 percent discount to Arabtec’s closing share price on Jan. 7.

Alaqaria

Arabtec tumbled 6.9 percent, the biggest one-day drop since Dec. 9, to 2.69 dirhams. The shares have increased 21 percent in the past two weeks. Aabar added 4.6 percent, bringing the gain this year to 11 percent, and pushing Abu Dhabi’s benchmark index up 0.2 percent.

Emaar shares dropped 2.5 percent to 3.95 dirhams, the lowest since Dec. 31.

Oman’s MSM30 Index advanced 0.5 percent, the Kuwait Stock Exchange Index rose 0.7 percent and Bahrain’s measure increased 0.1 percent. Saudi Arabia’s Tadawul All Share Index and Qatar’s DSM 20 Index each lost less than 0.1 percent.

Qatar Real Estate Investment Co., also known as Alaqaria, jumped the most in four years after Barwa Real Estate Co. agreed to purchase the developer of industrial and residential projects.

Alaqaria soared 9.7 percent, the most since March 2006, to 30.5 riyals. Barwa added 2.7 percent to 33.9 riyals, the highest close in almost three weeks.

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net.

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Hong Kong Discount to Chinese Stocks May Disappear

By Lu Wang

Jan. 11 (Bloomberg) -- China’s approval for short sales and stock index futures paves the way for foreign investors to bet on a convergence in valuations between Shanghai and Hong Kong.

The China Securities Regulatory Commission cleared the overhaul of trading laws on Jan. 8 that will also permit buying equities with brokerage loans. The rules apply to Chinese citizens and the 94 international institutions authorized for mainland trading by the government.

Allowing investors to profit from share declines will make trading more efficient in China and may eventually reduce the valuation gap with Hong Kong, where an index of mainland-based companies is priced at a 38 percent discount, according to ING Groep NV. China’s benchmark Shanghai Composite Index is valued at about 34 times earnings, second behind Taiwan’s Taiex Index as the most expensive in Asia, data compiled by Bloomberg show.

“It’ll make it easier for market players to conduct the arbitrage,” said Philip Schwartz, who manages $1.3 billion of international equities at ING Investment Management in New York. “It’s going to be more from Shanghai side down because these stocks are traditionally more expensive. The arbitrage may work, but it may take a very, very long time.”

Amsterdam-based ING, the largest Dutch financial services company, was approved to invest in mainland local-currency stocks and bonds under the qualified foreign institutional investor, or QFII, program in 2003. Schwartz said he doesn’t short sell a stock or do arbitrage.

Short Sales

In a short sale, an investor borrows an asset and sells it, hoping to profit from a decline by repurchasing it later at a lower price. An investor arbitraging China might buy shares in Hong Kong and sell short the same company trading on the mainland.

“I would do the trade immediately if I could,” said Michael Cheah, who manages $2 billion at SunAmerica Asset Management in Jersey City, New Jersey. “This is a natural development in the Chinese stock market. The real test will be when we have a sell-off, will they suspend shorting?”

The Shanghai Composite climbed 1.3 percent to 3,239.02 as of 10:57 a.m. local time, after rising as much as 3.5 percent, its biggest gain in three months. The CSI 300 Index, which tracks the 300 biggest stocks traded in Shanghai and Shenzhen, added 0.7 percent, after jumping as much as 3.3 percent earlier. The Hang Seng China Enterprises Index, made of shares of mainland companies traded in Hong Kong, increased 1.7 percent.

Sinopec, PetroChina Valuations

China Petroleum & Chemical Corp.’s shares in Hong Kong are valued at 17.3 times reported earnings, less than half the 38.2 multiple for the stock in Shanghai. For PetroChina Co., the nation’s biggest oil producer and the world’s largest company by market value, the shares in Hong Kong trade at a 34 percent discount to Shanghai, based on Jan. 8 prices prior to the government’s announcement.

Pakistan imposed curbs that kept stocks from falling below their closing prices on Aug. 27, 2008, for almost four months, shielding investors from a record sell-off. The price curbs stalled most trading, leading JPMorgan Chase & Co., the biggest U.S. bank by assets, to end its stock brokerage services there in November 2008.

China, whose economy grew 8.9 percent in the third quarter of 2009, currently bars overseas investors from trading yuan- denominated stocks and bonds on the mainland except through the QFII program.

Kenneth Fisher, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc., said that the short selling and futures investments won’t necessarily lower prices.

‘Increased Arbitrage Trend’

“We have seen in many places an increased arbitrage trend that is not consistent with one direction or the other,” said Fisher, who has $808 million of investments in China through Hong Kong shares and American depositary receipts. “What is consistent is that it creates more liquidity.”

Index futures may help ease fluctuations in the world’s third-largest equity market by value after the Shanghai Composite doubled in 2007, then slumped 65 percent in 2008 before rebounding 80 percent last year. Until now, Chinese investors could only profit from gains in equities.

China’s stock market will become “more rational” with the introduction of stock index futures, margin trading and short selling, Deutsche Bank AG said in a report yesterday.

More Hedge Funds

The relaxation may spur the creation of more hedge funds in Asia, according to Ken Heinz, the president of Hedge Fund Research Inc., based in Chicago. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from speculating on whether the price of assets rise or fall.

“It means we have the ability to hedge more positions to the market to reduce risk,” said Chris Ruffle, China co- chairman of Edinburgh-based Martin Currie Investment Management Ltd., which manages $19 billion, including shares of Chinese companies. “It also offers a certain flexibility, and if you want to increase or reduce weightings, you can do it much more rapidly than buying individual stocks.”

Brazil approved short selling and margin accounts in 1996, according to the press department for BM&FBovespa, operator the country’s biggest exchange. The number of hedge funds in Brazil more than doubled since 2001 to 4,400 last year, exchange data show.

More Liquidity, Efficiency

“It without a doubt created more liquidity and more efficiency,” said Marcelo Mesquita, a partner at Rio de Janeiro-based Leblon Equities Gestao de Recursos Ltda. and former head of Brazil equities strategy for UBS AG. “It helped organize the market. When the market is organized, it works faster, prices fall and it becomes more efficient.”

The first stock index contracts, based on China’s CSI 300, may begin trading after the Communist party’s annual congress in March, an official with knowledge of the matter said.

Morgan Stanley advised investors to buy shares of brokerages and the index’s largest companies by weighting, saying that the new rules may boost trading volumes by 50 percent “in the long term.”

Foreign investors should “focus” on China Merchants Bank Co. and Bank of Communications Co., among the largest stocks on the CSI 300 whose Hong Kong-traded shares show “high positive correlation” with their mainland counterparts, Morgan Stanley analysts Jerry Lou and Allen Gui advised in a note today.

The rules will increase trading and brokerages will benefit, according to James O’Leary, who helps manage $3 billion at Navellier & Associates in New York. Still, O’Leary said he prefers investing in Chinese companies through Hong Kong and the U.S.

“It’s still the People’s Republic of China,” he said. “If they don’t like what’s going on there, they can just stop immediately without any warning.”

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

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German Stocks Gain for Second Day on China Exports; K+S Rises

By Cornelius Rahn

Jan. 11 (Bloomberg) -- German stocks advanced for a second day after Chinese trade figures added to signs the global economy is picking up.

The benchmark DAX Index rose 0.8 percent to 6,085.64 as of 9:39 a.m. in Frankfurt, set for its biggest increase in a week. The gauge has surged 66 percent from last year’s low in March as Germany exited its worst recession since World War II. The broader HDAX Index added 0.8 percent today.

China, the driver of the global recovery, yesterday said exports climbed 17.7 percent from a year earlier, the first gain in 14 months, and imports surged 55.9 percent. The third-largest economy expanded an estimated 8.5 percent last year.

K+S AG rallied 2.7 percent to 47.28 euros, headed for its highest close since June 2009, after Europe’s biggest producer of potash was raised to “outperform” from “underperform” at CA Cheuvreux.

Metro AG, Germany’s largest retailer, advanced 2.2 percent to 41.33 euros, snapping a four-day drop. The head of Metro’s Real superstores, Joel Saveuse, said he expects food prices to start rising “moderately” in 2010, Focus magazine reported.

Commerzbank AG, Germany’s second-biggest lender, climbed 4.2 percent to 7.10 euros, its sixth consecutive gain in the longest winning streak since May 2009. Deutsche Bank AG, the country’s largest, increased 1.1 percent to 53.78 euros.

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

Bauer AG (B5A GY) climbed for a sixth day, adding 4.2 percent to 33.75 euros. The builder and construction-equipment maker was rated “buy” in new coverage at BofA Merrill Lynch Global Research.

Bilfinger Berger AG (GBF GY), Germany’s second-biggest builder, rallied 3.5 percent to 57.70 euros. The company was raised to “buy” from “hold” at Deutsche Bank, which lifted its share-price estimate to 64 euros from 51 euros.

Centrotec Sustainable AG (CEV GY) jumped 9.1 percent to 10.67 euros, poised for its biggest advance in four months. The company expects operating profit of 30 million euros ($43.5 million) to 32 million euros in 2010.

Continental AG (CON GY), Europe’s second-largest auto-parts maker, rose for a seventh day, adding 2 percent to 47.77 euros. Continental and Schaeffler Group, which owns 90 percent of the company’s shares, shelved plans to merge, Handelsblatt reported, citing unidentified people familiar with the prospectus for Continental’s stock sale.

Gerresheimer AG (GXI GY), a German medical-packaging company, rose 1.2 percent to 25.30 euros. The company said it set up a new facility for medical plastic systems in Indaiatuba, Brazil, which will start operations early in 2010.

Software AG (SOW GY), Germany’s second-largest software maker, dropped 2.5 percent to 77.92 euros, its biggest decline since Dec. 3. The stock was cut to “hold” from “accumulate” at Equinet AG, which said in a report that positive effects from the acquisition of IDS Scheer AG are now “priced in.”

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

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U.K. Stocks Rise; BHP Billiton, Cairn Energy, Barclays Advance

By Adam Haigh

Jan. 11 (Bloomberg) -- U.K. stocks rose, led by raw- material producers, after Chinese trade figures added to signs the global economic recovery is accelerating.

BHP Billiton Ltd., the world’s biggest mining company, gained 1.5 percent as copper increased. BP Plc, Europe’s second-largest oil company, Cairn Energy Plc and Barclays Plc advanced more than 1 percent after Citigroup Inc. advised buying the shares.

The benchmark FTSE 100 Index rose 45.57, or 0.8 percent, to 5,579.81 as of 8:24 a.m. in London. The gauge surged 22 percent in 2009 for its biggest annual rally since 1997 and has rebounded 59 percent since March 3 as central banks cut interest rates to record lows and governments worldwide committed about $12 trillion to revive the economy. The FTSE All-Share Index and Ireland’s ISEQ Index also gained 0.8 percent today.

“We expect equities to strengthen further over the balance of 2010 as economic conditions continue to improve,” JP Morgan Cazenove strategists Darren Winder and Robert Griffiths wrote in a report to clients.

China yesterday said exports climbed 17.7 percent from a year earlier, the first increase in 14 months, and imports surged 55.9 percent. The third-largest economy grew an estimated 8.5 percent last year, leading the world out of the worst recession since World War II.

Miners Advance

BHP Billiton added 1.5 percent to 2,147 pence. Rio Tinto Group, the third largest mining company, gained 2.8 percent to 3,740 pence. Copper, lead, nickel and tin rallied in London.

BP Plc added 1.1 percent to 628.2 pence and Cairn Energy advanced 3.5 percent to 374.4 pence after Citigroup Inc. raised its recommendation on both companies to “buy” from “hold” and lifted their “long-term” estimate for oil to $80 a barrel from $65.

Barclays, the U.K.’s second largest bank, gained 1.7 percent to 326 pence. Citigroup upgraded the shares to “buy” from “neutral.”

“In our view the market is applying too low a rating to Barclays’ earnings, considering these earnings to be ‘low quality,’ and continuing to view the stock as relatively ‘high risk,’” London-based Citigroup analyst Leigh Goodwin wrote in a report today.

SABMiller Plc dropped 1.9 percent to 1,804 pence after the world’s second-largest brewer lost out to rival Heineken NV in a bid for the beer division of Fomento Economico Mexicano SAB, or Femsa. Heineken agreed to buy the beer division of Femsa in an all-share transaction valued at 5.3 billion euros ($7.7 billion).

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

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Bank Profits Means Stocks at 15% Discount to S&P 500

By Lynn Thomasson

Jan. 11 (Bloomberg) -- No U.S. industry has faster profit growth than banks and brokers, and no group is more hated by investors.

Analysts say earnings at financial companies rose 120 percent in the fourth quarter, accounting for all of the income increase in the Standard & Poor’s 500 Index, and will triple by 2011, climbing four times as fast as the market. Should the estimates prove correct, the shares are trading at a 15 percent discount to the index, data compiled by Bloomberg show.

That’s not enough for money managers burned by the 84 percent drop in the stocks from February 2007 through March and more than 160 U.S. bank failures in the past two years. Financial companies are the least-favored equities, according to a Bank of America Corp. survey of investors with $617 billion in assets that showed 38 percent of 123 money managers are holding fewer shares than are in benchmark indexes.

“The stocks are clearly too cheap,” said Mark Giambrone, a fund manager who bought PNC Financial Services Group Inc. and Bank of America stock for USAA Investment Management Co., which oversees about $74 billion in San Antonio. “There may be some bumps in the road ahead, but for the most part those are reflected in the valuations.”

So far the analysts have proven right after the S&P 500 Financials Index gained 15 percent in 2009. Now, Jennifer Thompson, whose ratings for New York-based research firm Portales Partners LLC returned 31 percent in the past two years, eight times the gain for all the companies she follows, said PNC and Fifth Third Bancorp are poised to rally.

Most Bullish

Analysts are more bullish on bank stocks in the S&P 500 than any other industry based on their average share-price forecasts, which call for a 14 percent rally, according to data compiled by Bloomberg. That would extend the group’s 145 percent rally since March that was spurred by better economic data and government rescues of companies from New York-based Citigroup Inc. to American International Group Inc.

The industry has risen the most of 10 in the S&P 500 during the past 10 months. The benchmark index itself gained 2.7 percent last week and closed at 1,144.98 on Jan. 8. Futures on the gauge added 0.4 percent to 1,146.10 as of 12:56 p.m. in New York.

The S&P 500 Financials Index of 78 banks, brokerages and insurers remains down 60 percent since peaking in February 2007. The slump is twice the drop of the S&P 500, which has lost 27 percent from its October 2007 record, after the subprime mortgage market collapse caused $1.71 trillion in losses and writedowns for financial firms worldwide and led to the demise of New York-based Lehman Brothers Holdings Inc. and Bear Stearns Cos., data compiled by Bloomberg show.

Need Proof

Investors need more proof before buying banks, said Bob Doll, who helps oversee $3.2 trillion as vice chairman and chief investment officer for global equities at New York-based BlackRock Inc., the world’s biggest asset manager. The default rate on commercial mortgages held by U.S. banks more than doubled to 3.4 percent in the third quarter, according to Real Estate Econometrics LLC, a research firm in New York.

“Are all the assets that are classified as performing going to perform?” Doll said in a Jan. 6 interview. “That is the concern. We would wait for some price pullback and have patience before buying.”

Goldman Sachs Group Inc. and American Express Co., both based in New York, and 26 other S&P 500 financial firms are scheduled to release earnings by Jan. 22, according to data compiled by Bloomberg. The fourth-quarter reporting season starts today. New York-based Alcoa Inc., the largest U.S. aluminum maker, is forecast to post profit of 6 cents a share, reversing a loss in the year-earlier period.

Biggest Jump

Analysts are counting on the financial industry to snap nine straight quarters of earnings declines for the S&P 500. Without financial firms, income for companies in the index may fall 2.8 percent on average. With them, profit is forecast to jump 62 percent, the most in 21 years, data compiled by Bloomberg and S&P show.

Combined profit for banks, brokerages and insurers in the S&P 500 will rise to $19.51 a share in 2011, up threefold from 2009, Bloomberg data show. The companies trade for 10.5 times that forecast, the second-lowest multiple behind energy companies. The S&P 500 is priced at 12.4 times 2011 income, according to the data.

Banks and brokers may also be cheap relative to their assets minus liabilities. The industry is valued at 1.15 times book value, or 43 percent below the past decade’s average, Bloomberg data show.

Bank of America is forecast to post the largest gain among the biggest U.S. banks, data compiled by Bloomberg show. Profit may climb to 93 cents a share in 2010 from a 20-cent loss last year, analysts say. It is rated “buy” by 25 of the 32 analysts with ratings on the stock, Bloomberg data show.

Economic Expansion

“What we’re looking at is an improvement in the economy that will result in consistent declines in loan losses over the next two or three years, which will result in huge increases in bank earnings,” Richard Bove, an analyst at Stamford, Connecticut-based Rochdale Securities LLC, said in a Jan. 7 interview on Bloomberg Radio. He recommends investors purchase Bank of America, based in Charlotte, North Carolina.

Profit at Pittsburgh-based PNC is forecast to climb 44 percent through 2011, giving the shares a price-earnings ratio of 11.9, Bloomberg data show. Cincinnati-based Fifth Third may post profit of 79 cents a share in 2011, reversing a loss of 67 cents last year and giving it an earnings multiple of 14.

“The bank group in general is still trading at a historically cheap level,” said Portales’s Thompson. “There’s the potential for significant price expansion once banks transition from trading on tangible book to projected earnings.”

Fed Stimulus

Financial companies are also benefiting as the Federal Reserve keeps interest rates near zero. The yield curve measuring the difference between 2- and 10-year Treasury yields reached a record 2.88 percentage points last month, allowing banks to profit from the difference.

Net interest margin, the difference between what banks earn from loans and pay to depositors, may widen to 3.54 percent in 2010, the highest level since 2003, according to forecasts for the 173 lenders followed by New York-based KBW Inc.

That may not last, according to Baring Asset Management Inc.’s Hayes Miller, who recommends holding fewer shares of U.S. banks before Fed Chairman Ben S. Bernanke winds down emergency programs to damp concern inflation will accelerate as the economy picks up.

Fed funds futures show a majority of traders are betting the central bank will boost its target rate for overnight loans between banks from the current range of zero to 0.25 percent by its August meeting.

‘More Difficult’

“It’s going to be more difficult to extract profits,” Miller, whose firm oversees $47.5 billion, said in an interview from Boston. “The expectations for banking profitability are predicated on a steeper-sloped yield curve than we think we’re going to have once the Fed begins to exit.”

Financial stocks posted the only declines among 10 industries in the S&P 500 between October and December, data compiled by Bloomberg show. While the benchmark index climbed 5.5 percent in the fourth quarter, banks, brokerages and insurers collectively fell 3.7 percent. The slump followed record quarterly gains of 25 percent and 35 percent.

The potential for more losses in mortgages and commercial real estate loans is already reflected in the price for most bank stocks, said Mark Bronzo, a fund manager for Security Global Investors in Irvington, New York.

“If I was leaning one way, it would be towards adding to our overweight in bank stocks,” said Bronzo, whose firm oversees $21 billion. “When a group is under-owned like this and the risks are known, the odds are that they have further upside.”

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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