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* Zinc rallies after China cancels export rebates

* Copper, aluminium steady ahead of U.S. economic data

(Adds fresh comment/details, changes dateline PVS SYDNEY)

By Julie Crust

LONDON, July 31 (Reuters) - Zinc futures jumped over 6 percent on Thursday after top producer China cancelled export rebates in a move that could curb the flow of Chinese zinc into the world market.

Copper and aluminium futures were steady as traders looked ahead to a raft of U.S. economic data later in the day.

Three month zinc MZN3 traded on the London Metal Exchange at $1,927 a tonne by 1043 GMT, up from Wednesday's close of $1,870. It eased from an earlier two-week peak of $1,984 after LME stocks increased by 3,000 tonnes to 157,325 tonnes, the highest level since September 2006.

"A mixture of positioning, techincals and now fundamentals leaves the zinc market poised for a nasty squeeze higher," John Reade, analyst at UBS, said in a research note.

"With the market apparently extremely short zinc, this could be a trigger for a sharp move higher to $2,000 a tonne or beyond," he said.

The Chinese tax rebate of five percent for super high-grade zinc, used as a galvanizing agent on steel, will come into effect from Aug 1. [ID:nHKG92342]

DATA AWAITED Three-month copper MCU3 was little changed at $8,085 a tonne at 1008 GMT, versus $8,030 previously.

Prices fell back from the day's high after inventory data showed LME stocks jumped 4,450 tonnes to 142,400.

Aluminium MAL3 inched up to $2,977 from $2,960, also paring gains as LME inventories continued their steady rise to stand at their highest level since May 2004.

"This is part of the broader trend for stocks," said Gayle Berry, analyst at Barclays Capital. "Stocks tend to rise during the summer months, particularly July and August.

The market will be looking for further direction from U.S. economic data. Second-quarter gross domestic product and jobless figures are due at 1230 GMT, while U.S. Treasury Secretary Henry Paulson will speak about markets and the economy at 1700 GMT.

Although copper prices are down by some 9 percent from an all-time high of $8,930 on July 2, supply is still tight and prices are up 20 percent on the year.

Japan's Sumitomo Metal Mining Co Ltd (5713.T: Quote, Profile, Research, Stock Buzz) on Thursday set lower copper proccessing fees with miner BHP Billiton (BHP.AX: Quote, Profile, Research, Stock Buzz) (BLT.L: Quote, Profile, Research, Stock Buzz) at less than $45 per tonne and 4.5 cents a pound. [ID:nT167704]

"Compare that to two years ago when prices were $120/t and 10 cents and it shows that copper concentrate supply is very very tight," Jeremy Gray, analyst at Credit Suisse, said in a research note.

Miners pay smelters a fee, known as treatment and refinement charges (TC/RCs), to turn copper concentrates into metal and when raw materials are in short supply, miners have the upper hand in negotiations.

"We are still convinced copper will hit $12,000 per tonne," Gray said.

Lead MPB3 edged up to $2,200 a tonne from $2,180 a tonne Stocks at LME warehouses rose 275 tonnes to 91,000, but have fallen more than 9 percent so far this month.

"The general trend is falling," said Barclay Capital's Berry. "Underlying consumption is healthy, but the market is being driven by the supply side...particularly in China."

Western Mining (601168.SS: Quote, Profile, Research, Stock Buzz), China's second-largest lead miner, on Wednesday cut its lead and zinc production forecast for 2008. [ID:nPEK167112]

Nickel MNI3 fell to $18,849 from $18,750, while tin traded at $22,600 from $22,500/22,550.

Metal Prices at 1057 GMT

Metal Last Change Pct Move End 2007 Ytd

Pct

move LME Cu 8065.00 35.00 +0.44 6670.00 20.91 SHFE Cu* 61770.00 970.00 +1.60 56880.00 8.60 LME Alum 2975.00 15.00 +0.51 2403.00 23.80 SHFE Alu* 19135.00 15.00 +0.08 18180.00 5.25 COMEX Cu** 371.65 3.70 +1.01 303.05 22.64 LME Zinc 1910.00 40.00 +2.14 2370.00 -19.41 SHFE Zinc* 15580.00 235.00 +1.53 18950.00 -17.78 LME Nick 18650.00 -100.00 -0.53 26350.00 -29.22 LME Lead 2200.00 20.00 +0.92 2550.00 -13.73 LME Tin 22400.00 50.00 +0.22 16400.00 36.59 ** 1st contract month for COMEX copper * 3rd contact month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07

(Reporting by Julie Crust; Editing by Clare Black)

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Gold bounces after slide, softer dollar supports

By Jan Harvey

LONDON (Reuters) - Gold bounced in Europe on Thursday as investors, encouraged by a slight softening of the dollar and a firmer tone to oil, hunted bargains after the metal hit a five-week low in the previous session.

Traders are awaiting key U.S. data, including U.S. preliminary GDP figures due out later on Thursday and payrolls numbers on Friday, that are expected to set fresh direction to trade.

Gold climbed to $912.70/913.70 an ounce at 5:50 a.m. EDT from $907.20/908.40 an ounce late in New York on Wednesday. The precious metal dropped as low as $893.50 an ounce in the last session, its weakest since June 26, as the dollar rose.

"The dollar is slightly weaker compared to yesterday and the oil price is higher, (which) explains gold's move back above the $900 level," said Calyon metals analyst Robin Bhar.

The dollar weakened a touch against the euro on Thursday, retreating after it climbed on above-consensus ADP jobs data on Wednesday.

The greenback's dip supported a wave of bargain hunting as investors took advantage of Wednesday's more than 1 percent slide in gold prices. A softer dollar tends to benefit gold, as it encourages buying of the precious metal as a currency hedge.

Oil prices are also supporting buying on Thursday, as crude largely held the nearly $5 gains it posted in the previous session. Gold is often bought as a hedge against oil-led inflation.

"Gold will take its cue from what happens to currencies and the oil price," Bhar at Calyon added. "Today and tomorrow, we get some fairly key US data."

This session will see the release of first estimate U.S. GDP data for the second quarter, which is expected to show a 2.0 percent annualized growth rate, compared to 1.0 percent in the first quarter.

Chicago purchasing managers' index data are also due at 11:45 a.m. EDT, while Treasury Secretary Henry Paulson is due to speak on markets and the economy at 3 p.m. EDT. All could affect the dollar, and consequently gold.

PGMs RECOVER

Platinum and palladium, both largely used by carmakers as a component in autocatalysts, ticked up on Thursday, having slipped in gold's wake in the previous session.

Spot platinum rose to $1,750.00/1,770.00 an ounce from $1,725.00/1,745.00 late in New York on Wednesday.

"Concerns of slowing growth in the US and western Europe continue to dampen platinum's sentiment," said James Moore, an analyst at TheBullionDesk.com.

"However, with many auto-makers reporting strong sales in the BRIC nations, metal loadings are likely to increase in the coming year due to tighter emissions," he added.

"With the metal to see a substantial supply deficit this year we anticipate further price weakness will be limited."

Spot palladium rose to $375.50/383.50 an ounce from $371.50/379.50 late in New York. Silver edged up to $17.52/17.57 an ounce from $17.50/17.56.

(Reporting by Jan Harvey; Editing by Peter Blackburn)

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Cigarettes out for Alicia Keys concert in Jakarta

Thu Jul 31, 2008 7:01am EDT

JAKARTA (Reuters) - The Indonesian unit of Philip Morris International has pulled promotional material with cigarette branding for a concert it is sponsoring by R&B singer Alicia Keys after complaints from anti-smoking campaigners. The Grammy Award-winning American singer is due to perform in the Indonesian capital Jakarta later on Thursday as part of her "As I Am" world tour, promoting her chart-topping album of the same title.

"We respect those who are concerned and disagree" with the firm's sponsorship, said Niken Rachmad, a spokeswoman for Indonesia's second-biggest cigarette maker, PT Hanjaya Mandala Sampoerna Tbk.

Campaign for Tobacco-Free Kids sent letters to Keys and to Philip Morris Chief Executive Louis Camilleri requesting the withdrawal of the cigarette firm's sponsorship of the concert.

"Approximately 35 percent of the population smokes, and an estimated 200,000 deaths per year in Indonesia are caused by tobacco-related illness," Campaign for Tobacco-Free Kids said in its letter to the New York-born singer, which can be seen here

The group said it was particularly concerned because "an estimated 78 percent of current Indonesian smokers started before the age of 19".

Cigarettes in Indonesia, the world's fifth-largest tobacco market, are among the cheapest in the world, priced at around $1 a pack.

The $8-billion tobacco industry also plays an important economic role, with tax on cigarettes accounting for about 10 percent of government income in the past, while the sector provides millions of jobs.

As a result, Indonesia is reluctant to sign the Framework Convention on Tobacco Control (FCTC), aimed at cutting cigarette consumption, while bans on smoking in public areas are rarely enforced.

Sampoerna is a subsidiary of Altria Group Inc's Philip Morris, the largest cigarette-maker in the United States.

(Reporting by Evelyn Djuwidja and Tyagita Silka; Editing by Ed Davies)



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European Inflation Probably Quickened to 4.1 Percent

By Fergal O'Brien

July 31 (Bloomberg) -- Inflation in Europe probably accelerated to the fastest pace in more than 16 years in July, increasing pressure on the European Central Bank to raise interest rates even as economic growth slumps.

The inflation rate rose to 4.1 percent from 4 percent in June, according to the median estimate of 36 economists in a Bloomberg News survey. That would be the highest since April 1992. The European Union statistics office in Luxembourg is scheduled to publish its initial estimate of the data at 11 a.m. today.

The ECB, which aims to keep inflation just below 2 percent, raised its key interest rate by a quarter point to 4.25 percent on July 3, a seven-year high. The risk is that higher borrowing costs will exacerbate the economic slowdown. Europe's manufacturing and service industries are contracting and confidence in the economic outlook this month plunged the most since the Sept. 11 terrorist attacks in 2001.

``It's a difficult situation,'' said Stephane Deo, an economist at UBS AG in London. ``The ECB decided to hike in July, focusing on inflation rather than growth. We see another rate hike in September or October, but it's a very close call.''

The euro climbed against the dollar before the report. It traded at $1.5620 at 9 a.m. in Frankfurt after touching $1.5522 yesterday, the weakest since June 24.

`Perfect Storm'

Still, most investors have pared bets on the ECB raising rates again, Eonia forward contracts show. The March contract yielded 4.32 percent today, down from 4.61 percent on July 21.

``A perfect storm is engulfing the euro zone, with the economy hit by numerous headwinds to growth including the exchange rate, tighter credit conditions, weaker external demand, a squeeze on real income growth for households and latterly, higher policy rates,'' Ken Wattret, chief euro-region economist at BNP Paribas in London, wrote in a note to clients yesterday. ``We see a much higher probability of a recession.''

The ECB has said Europe's economic fundamentals are sound. In June, it forecast the pace of euro-area expansion will slow to about 1.5 percent in 2009 from 1.8 percent this year and 2.7 percent in 2007.

Euro-region unemployment was probably unchanged at 7.2 percent in June, the lowest since the data series began in 1993, another survey of economists shows. The EU statistics office will also release that report at 11 a.m. today.

`Room for Maneuver'

``We haven't exhausted our room for maneuver'' on interest rates, ECB council member Klaus Liebscher said in an interview published July 25. ``We're far from giving the all clear on the inflation development.''

Crude oil has risen almost 60 percent in the last 12 months, reaching a record $147.27 a barrel on July 11, while prices for commodities including steel, corn and wheat have also soared.

The ECB wants to prevent companies passing on higher costs and has urged workers not to seek pay increases to compensate for increased living expenses, saying this may unleash a wage-price spiral. Workers at Deutsche Lufthansa AG, Europe's second-biggest airline, are striking in pursuit of a 9.8 percent pay claim.

ArcelorMittal Chief Financial Officer Aditya Mittal yesterday said the company, the world's largest steelmaker, would continue to increase prices this year and next. A European Commission gauge of companies' selling-price expectations rose to a 13-year high in July and Italian wage growth accelerated to 3.6 percent in June, the highest in more than three years.

Second-Round Effects

These ``second-round effects are likely to persist or even intensify in the euro area over the remainder of the year,'' said Gareth Claase, an economist at Royal Bank of Scotland Plc in London. ``Given the ECB's concern about this issue, weak recent activity data does not preclude that the ECB will raise rates again.''

The ECB isn't alone in weighing the risk of stagnating growth against the danger of accelerating inflation. Bank of England policy makers were split three ways in their decision to keep interest rates unchanged this month.

The Swiss central bank has left borrowing costs unchanged since late 2007 as faltering economic growth limits its ability to counter the country's fastest inflation in 15 years.

Federal Reserve Chairman Ben S. Bernanke this month abandoned his June assessment that the threat of an economic downturn had diminished, telling lawmakers that both growth and inflation risks are increasing.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.



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German Decline in Unemployment Slows as Economy Cools

By Rainer Buergin

July 31 (Bloomberg) -- German unemployment, enjoying its longest decline since reunification in 1990, fell at a slower pace in July as the economy cooled.

The number of people out of work, adjusted for seasonal swings, dropped 20,000 in July to 3.25 million after falling 38,000 in June, the Nuremberg-based Federal Labor Agency said today. Economists expected a decline of 20,000, according to the median of 30 forecasts in a Bloomberg News survey. The adjusted unemployment rate held at 7.8 percent, a 16-year low.

Companies in Europe's largest economy are becoming reluctant to hire as the outlook darkens. Business confidence fell the most this month since the Sept. 11 terrorist attacks seven years ago and consumer confidence fell to the lowest since June 2003. Even so, July's drop in the jobless total is the 38th in 40 months.

``It's clear that this isn't going to continue for very much longer,'' said Eckhart Tuchtfeld, an economist at Commerzbank AG in Frankfurt, who expected the jobless total to decline by 20,000. ``Risks for economic growth have clearly increased.''

Today's news followed an unexpected drop in manufacturing orders in May, the sixth straight decline, and the biggest decrease in industrial production in more than 9 years that month.

`Positive'

``The labor market's dynamism has decreased somewhat compared with a year ago,'' said Frank-Juergen Weise, the chief of the Labor Agency, in a Bloomberg Television interview. ``But the development remains positive overall.''

In Europe, the main destination for German exports, factory orders dropped more than twice as much as forecast in May. Growth in the U.S., the biggest buyer of German cars and chemicals outside Europe, will slow in the second half, according to an index of leading economic indicators published July 21.

``The labor market is a trailing indicator,'' said Tuchtfeld. ``It follows hard data such as manufacturing orders and industrial output and indicators like business sentiment with a time lag.''

Signs that the expansion is also cooling on the other side of the Atlantic may ease concern at the European Central Bank that prices are getting out of control. The ECB increased its main lending rate to a 7-year high of 4.25 percent this month as inflation accelerated to 4 percent, the fastest pace 16 years.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said ``there's a risk of stagflation, and of course I'm worried about it,'' Finnish newspaper Kauppalehti reported on July 18, citing an interview. Stagflation is a combination of high inflation and sluggish growth.

Still Hiring

While the U.S. probably lost jobs in July for a seventh straight month, companies in Germany are still hiring. Amadeus Fire AG, a temporary-employment agency, recruited more than 600 specialists in the second quarter. Software company PC-Ware AG said July 1 it will add up to 50 people in Germany this year in consulting and sales to the 1,485 it already employs.

With next year's growth expected to be half of this year's, hiring may end. The prospect of a continued drop in unemployment is ``on a knife edge,'' Manfred Weber, managing director of the BDB banking association, said July 29.

Seventy-seven percent of Germans expect ``high'' unemployment to remain a problem ``long-term,'' according to a Forsa survey commissioned by Stern magazine. Forsa polled 1,000 people on July 24 and July 25. The margin of error was 3 percentage points.

The jobless rate in the 15 euro nations probably held at 7.2 percent in June, the lowest since the data series began in 1993, according to the median of a Bloomberg survey of 33 economists. Eurostat will publish the figures today at 11 a.m.

According to the latest comparable data from the Organization for Economic Cooperation and Development, Germany's jobless rate was 7.4 percent in May, the same as in France, and compared with 4 percent in Japan and 5.5 percent in the U.S. The OECD average that month was 5.7 percent.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.



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Australia Facing `Once-in-100-Year' Housing Slump

By Jacob Greber

July 31 (Bloomberg) -- Australia may be headed for a housing recession similar to those roiling the U.S. and U.K.

The cause is a combination of rising default rates, the biggest drop in home prices in five years, the highest borrowing costs in a decade and slowing economic growth.

Prices in the property market -- described by the International Monetary Fund in April as one of the world's most ``overvalued'' -- will fall 30 percent by 2010, according to Gerard Minack, senior economist at Morgan Stanley in Sydney. Prices dropped in all of Australia's major cities last month for the first time since just before the Great Depression.

``I panicked'' when the figures came in, said John Edwards, chief executive officer of Residex Ltd., a Sydney company that tracks property prices. ``We've been doing this for 20 years and have data that goes as far back as 1865, and it's really abnormal.''

Prices fell in Sydney, Melbourne, Brisbane, Perth, Adelaide, Darwin, Hobart and Canberra by between 0.6 percent and 2.2 percent, according to Residex. The national median house price fell almost 3 percent to A$458,000 ($435,000).

``Australia is headed for a once-in-100-year real-estate slump,'' Edwards said. ``I have never seen the convergence of so many negatives.''

Rising property prices drove a decade-long consumer spending boom that saw Australia's $1 trillion economy weather fallout from the 1997 Asian financial crisis and the collapse of Internet stocks in 2000.

Soaring Prices

Household debt has almost doubled since 1999 to around 160 percent of incomes, a higher ratio than in the U.S. and U.K., according to AMP Capital Investors. The median national house price soared about 140 percent in the same period.

``By every metric I can think of, Australian houses are too expensive,'' Minack said, costing an average of six years' earnings, double what Americans paid before their property market started falling in 2006.

The Washington-based IMF says Australian house prices were overvalued by almost 25 percent in the decade through 2007 when compared with household income and ability to pay debt. Only Ireland, the Netherlands and the U.K. were higher.

A crash would ``result in a significant negative wealth shock'' for Australians, whose spending accounts for about 60 percent of the economy, Minack said.

While growth is expected to continue for a 17th straight year in 2008, the Reserve Bank of Australia forecasts it will slow to 2.25 percent from 3.9 percent in 2007. A government report today showed retail sales fell 1 percent in June, the biggest drop in six years.

Bank Stocks

A housing recession may also trigger losses at lenders including Commonwealth Bank of Australia and Westpac Banking Corp., whose stock has fallen more than 20 percent this year.

The nation's five largest lenders have added an average 105 basis points to mortgage rates so far in 2008 as the global credit squeeze drove up funding costs. They were also reacting to moves by central bank Governor Glenn Stevens, who raised the benchmark lending rate twice this year by a total of 50 basis points to a 12-year high of 7.25 percent to curb inflation. Prices gained 4.5 percent in the second quarter from a year earlier, the fastest pace since 2001.

The increases have added A$250 to monthly payments on an average A$250,000 home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes on mortgage payments in the March quarter, the most in the 22 years the institute has measured affordability.

`Mortgage Stress'

Sydney research company Fujitsu Consulting says 923,000 households will face ``mortgage stress'' by September, up from 171,000 a year earlier who said they were having trouble repaying loans. Australia's population is 21 million, and 6.9 million households have mortgages.

As the pressure mounts, consumers are spending less on televisions, cars and vacations, hurting retailers including department store chain David Jones Ltd.

Ratings agency Standard & Poor's reported July 23 that payments more than 30 days late on so-called prime home loans increased for a sixth month to a record 1.49 percent in May. Some 14.5 percent of subprime loans were 30 days late, with 7.9 percent more than 90 days late.

John McGrath, chief executive officer of McGrath Estate Agents in Sydney, said the number of unsold homes in his market is rising, auction rates are falling and the time it takes to sell properties is up 50 percent from a year ago to 45 days.

``We're not even in the ballpark when it comes to affording a house in Sydney,'' said Anthony Duckworth, 30, a married father of one who works for a catering company.

Commuting Distance

With A$160,000 in savings, he would need a A$600,000 mortgage to buy a family home in Australia's biggest city -- double what he can afford. So he plans to buy north of Sydney and commute.

The central bank says lending grew in May at the slowest annual pace since 1991, when the property market collapsed amid mortgage rates as high as 18 percent. Home-loan approvals dropped by the most in eight years.

``It's like a debt tsunami out there,'' said Sandra Saker, who manages a Salvation Army service for families in Sydney overwhelmed by financial problems. ``Five years ago, the maximum debt people came in with was about A$200,000. Now we see people coming in with over A$1 million.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net



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Housing Slump Hits Northern Ireland Economy Harder Than Bombs

By Colm Heatley

July 31 (Bloomberg) -- Jim Kingham says the credit crunch is hurting his Belfast-area moving company more than the violence that ravaged Northern Ireland for 35 years.

Kingham has fired nine of his 12 workers at A1 Shortnotice, based in Newtownards, as house prices plunge and sales dry up.

``You can take me back to the days of the bombings,'' says Kingham, who has run A1 for 40 years. ``Business was better then. Five of my six lorries haven't left the yard for months.''

The credit-market rout is undermining the peace dividend for one of the U.K.'s poorest regions. Northern Ireland's economy is stalling as house prices, which surged as violence came to an end, fall at the fastest rate in the U.K. and building reaches a 12-year low.

``First-time buyers are now frozen out; the investors have packed up,'' says Alastair Adair, a professor at the University of Ulster in County Antrim who helps compile the province's main house-price index. ``It's a real problem for the economy.''

Northern Ireland's economy will grow 1 percent this year and next, less than half the rate in 2007, according to a forecast by Ulster Bank, a unit of Royal Bank of Scotland Group Plc.

The province had expected an economic revival following the restoration of a power-sharing government between Catholics and Protestants last year. The accord settled a conflict that claimed 3,500 lives during a period known as the Troubles.

Leading up to the deal, house prices rose at the fastest pace in Europe, data from the Royal Institute of Chartered Surveyors show. They climbed 79 percent in the two years ending in the second quarter of 2007, according to Nationwide Building Society, the U.K.'s biggest customer-owned lender.

Frenzy Ends

``Properties would go on the market and the same day there was maybe 10 or 20 bids in,'' says Desmond Turley, managing director of Ulster Property Sales in Belfast. ``It was frenzied. Now it's different. The level of interest just isn't there.''

On average, U.K. house prices fell 4 percent in the second quarter from a year earlier, according to Nationwide. In Northern Ireland, prices plunged 19 percent.

The credit crunch has deterred local buyers and investors from south of the border, real estate agents say.

``The investors aren't around any more,'' says Stephen McCarron, who runs a real estate agency in Derry, in the northwest of the province. ``During the boom nothing surprised me, and 40 percent of property deals in the city were made by southern investors.''

McCarron says he sold 10 houses to a buyer from the Republic of Ireland in May 2007, after the man walked into his office with 1 million pounds ($2 million) to spend.

`Murder Mile'

At the peak of the boom, a five-bedroom house on Alliance Avenue in Belfast sold for 800,000 pounds. The North Belfast thoroughfare had been dubbed ``Murder Mile'' because 40 people were killed on or near the road during the conflict.

Four years ago in Dunmore, in north Belfast, homebuyers lined up overnight to buy property just yards from a park split by a 25-foot-high corrugated iron wall erected to keep Protestants and Catholics apart, Turley says. Prices in the area fell 25 percent in the past 12 months.

In April, Belfast-based Northern Bank, owned by Danske Bank A/S, withdrew the 100 percent mortgages it had offered to borrowers in the province, following the lead of other banks.

Others raised lending rates, choking off demand for mortgages. While home loans fell 40 percent across the U.K. in the first five months of the year, they slid 60 percent in Northern Ireland, according to the London-based Council for Mortgage Lenders. That's helped send prices tumbling.

Maeve Egan bought a two-bedroom apartment in west Belfast for 130,000 pounds in 2006. Now it's worth 30 percent less, and she can't afford the 800-pound monthly mortgage payment after failing to find a roommate.

Moving Home

``I'm living in my mum's house and renting the flat out just to pay the mortgage,'' says Egan, adding that she's cut her spending on clothes and holidays. ``I can hardly afford to go out through the door because of it.''

Tom Gray, owner of Budget Travel in Belfast, says sales are down 12 percent this year. Car sales in the province have fallen 9 percent from last year, the biggest drop in the U.K., according to the Society of Motor Manufacturers and Traders Ltd.

``There is a risk that the property prices will slip a bit more,'' says Alan Bridle, economist at Bank of Ireland Plc. ``The associated business-service side has caught the chill as well.''

Back at A1, Jim Kingham is mulling packing up one last time.

``I don't think we'll continue that much longer,'' he says. ``Even during the Troubles it wasn't as hard as it is now.''

To contact the reporter on this story: Colm Heatley in Belfast at cheatley@bloomberg.net



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U.K. House Prices Drop Most Since 1991 as Confidence Weakens

By Brian Swint and Svenja O'Donnell

July 31 (Bloomberg) -- U.K. house prices declined the most in almost two decades in July and consumer confidence fell to a record low as the economy edged closer to a recession.

The average value of a home dropped 8.1 percent from a year earlier, the biggest decline since at least 1991, Nationwide Building Society, Britain's fourth-biggest mortgage lender, said today. An index of confidence based on a survey of 2,001 people fell 5 points to minus 39, the lowest since the data began in 1974, GfK NOP Ltd. said.

Britain's economic outlook has deteriorated in the past month after ``bad news'' on retail sales and other data, Bank of England policy maker David Blanchflower said yesterday. The economy's weakness has helped erode support for Prime Minister Gordon Brown, whose ruling Labour Party had the lowest support since the early 1980s in a Populus Ltd. poll published this week.

``These data reinforce our view that the U.K. economy is going into recession,'' Michael Saunders, chief western European economist at Citigroup Inc., said in a research note. ``With monetary and fiscal policy both hamstrung, most of the economic pain still lies ahead.''

On the month, house prices dropped 1.7 percent from June, the ninth consecutive decline, bringing the average value of a home to 169,316 pounds ($335,400), Nationwide said.

Mortgage lenders stung by the credit-market rout have exacerbated the property downturn by raising borrowing costs. The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, Bank of England data on July 9 showed.

S&P Report

About 1.7 million U.K. homeowners are likely to see the value of their houses fall below the amount they owe on their mortgage, Standard & Poor's said yesterday.

``The weakening economy and poor housing market sentiment do not suggest that the market will recover quickly,'' said Fionnuala Earley, chief economist at Nationwide. ``The risk of an economic recession in the U.K. is now clearly rising.''

GfK's main measure of consumer confidence is now 4 points below the result for March 1990. Gauges of the general economic situation and the climate for major purchases dropped to the lowest on record, the report showed. The index of consumers' personal financial situation over the next 12 months fell nine points to minus 18, the lowest in 14 years.

The Confederation of British Industry's retail sales index dropped to the lowest in 25 years in July, and banks granted the fewest mortgages since at least 1999 last month, reports this week showed.

Inflation Risk

Bank of England Governor Mervyn King is refusing to rule out a recession and said in May that the economy may experience ``the odd quarter or two of negative growth.'' At the same time, inflation surged to 3.8 percent in June, the most in more than a decade and almost double the central bank's 2 percent target.

The central bank left the benchmark interest rate unchanged at 5 percent at its meeting on July 10. The Monetary Policy Committee will next decide on rates on Aug. 7.

``There has been some pretty bad news since our last meeting,'' Blanchflower said in an interview on the BBC's Radio Ulster station yesterday. ``There's been fairly bad news on retail sales and on a number of things. So we're going to reconsider and take another vote'' next week.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.



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China's Debt Rating Raised to A+ by Standard & Poor's

By Nipa Piboontanasawat

July 31 (Bloomberg) -- China's debt ratings were raised by Standard & Poor's as its foreign-exchange reserves surged and the economy withstood a U.S. slowdown.

China's long-term rating was raised one level to A+, the fifth-highest grade, putting the country on a par with Italy.

The world's fastest-growing major economy expanded by more than 10 percent for a 10th straight quarter in the three months through June and the currency reserves swelled to a record $1.8 trillion. An improved government balance sheet offers ``greater resilience'' in the event of a sharp economic downturn, the ratings company said in a statement.

``The upgrade is expected and China deserved it,'' said Frank Gong, head of China research at JPMorgan Chase & Co. in Hong Kong. ``China's external payment abilities have continued to improve and its economic growth is faster than other countries.''

China's first upgrade by the ratings company in two years ``reflects continuing improvements in the government's fiscal position, the country's strong external asset position and its exceptional economic growth potential,'' Standard & Poor's said. The strengths outweigh the possibility of bank loans turning soar in a slump, it said.

China's export growth has slowed this year as the U.S. economy falters.

The ratings outlook is stable, Standard & Poor's said. The short-term rating rose to A-1+, the highest level, from A-1. China's foreign debt stood at $392.6 billion at the end of March.

Inflation, Stability

Credit-default swaps linked to China's government debt fell 1.5 basis points to 54.5 basis points at 3:38 p.m. in Hong Kong, according to Barclays Capital's prices. That means it costs $54,500 a year to protect $10 million of China's debt from default for five years. The cost has fallen from 72 basis points at the end of June.

``The rating was raised probably because China has limited inflation and a stablized economy,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``It won't impact the yuan's exchange rate in the short term as the central bank has shown its intention to slow down the yuan appreciation. But it will affect people's long-term expectation of yuan appreciation.''

China's currency has climbed 6.9 percent against the dollar this year.

Standard & Poor's raised Hong Kong's long-term rating to AA+, the second-highest level, from AA, putting the economy on a par with Belgium.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net



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Republicans in Congress Grab Oil Drilling as Political Lifeline

By Laura Litvan and Daniel Whitten

July 31 (Bloomberg) -- Congressional Republicans, confronted with a slowing economy, an unpopular president and ethics embarrassments that threaten a wave of voter wrath, are clinging to a political lifeline: drilling for oil.

Republican demands that Congress open new areas to drilling to address record gasoline prices have put Democrats on the defensive. Several measures unrelated to energy legislation have languished as Republicans blocked Senate Majority Leader Harry Reid's bids to change the legislative subject away from drilling.

``It's one issue where Republicans see a glimmer of hope,'' said Nathan Gonzales, an editor of the nonpartisan Rothenberg Political Report in Washington.

Polls this year have shown more public support for expanded domestic oil exploration as the price of gasoline has jumped. With Congress unlikely to agree on an energy plan, Republicans are making clear drilling will be a pivotal topic in the election campaign.

``Energy is going to be the No. 1 issue in the presidential race and in the Senate races, because it affects everyone,'' said Senator John Ensign of Nevada, the chairman of the National Republican Senatorial Committee.

The Moratorium

Republican presidential candidate John McCain recently focused his campaign on the issue, and rarely misses an opportunity to tout his support of expanding oil drilling. Americans are hurting, he says, because of the high price of fuel. This week he used a California oil field as a backdrop when he repeated his call for increased exploration.

Yesterday, President George W. Bush and Senate Republican Leader Mitch McConnell of Kentucky held back-to-back press conferences to urge more drilling and to blame Democrats for intransigence.

``The only thing standing now between the American people and these vast oil resources is the United States Congress,'' Bush said.

Democrats say Republicans will pay a price in the election because they are obstructing debate on measures that would expand alternative sources of energy or curb oil speculators.

``The Republicans have blocked everything,'' Reid said on the Senate floor yesterday. The Republican drilling plan wouldn't put a drop of oil into the marketplace for at least 13 years, Democrats said.

Independent analysts are predicting that Republicans will lose seats in both the House and Senate in the November elections.

Stevens Indicted

The party's outlook may have dimmed further yesterday because of the indictment of Alaska Senator Ted Stevens, the party's longest-serving current senator. Stevens was accused of making false statements on Senate financial disclosure forms by failing to report more than $250,000 in gifts and renovations on his house.

Stevens, 84, is one of the Senate's leading proponents of drilling and his legal problems won't help the Republicans' cause.

Still, party lawmakers today weren't diverted from their oil drilling strategy and their consistent position has gained public support, polls show.

A July 27-29 CNN poll found that 69 percent of 1,041 adults surveyed supported expanded offshore drilling, while just 30 percent opposed it. The Opinion Research Corp. survey had a margin of error of plus or minus 3 percentage points.

Record Prices

Oil was $125.69 a barrel yesterday, after reaching a record $147.27 on June 11. The average pump price of regular unleaded gasoline was $3.96 a gallon July 28, after reaching $4.11 a gallon July 14, according to weekly Energy Department reports.

Along with McCain, some other Republicans on the ballot in November have changed their positions to embrace offshore oil drilling.

McCain supported the federal moratorium on offshore drilling in his failed 2000 bid for the Republican presidential nomination. The Arizona senator, 71, reversed himself in June.

He said his view had changed because of the impact of soaring gasoline prices on consumers and the country's continuing reliance on foreign oil.

Senator Elizabeth Dole, a North Carolina Republican, in late June changed her stance on oil exploration off North Carolina's coast, and now supports lifting a moratorium on offshore drilling.

In Colorado, an independent group, the American Future Fund, launched a radio ad in Colorado that calls on Democratic Representative Mark Udall to support oil drilling. Udall is running for Senate against Republican Bob Schaffer.

``Gas prices are at an all-time high,'' the ad says. ``But Congress -- led by Nancy Pelosi and Mark Udall -- has blocked real solutions.''

Environmental Groups

Democratic leaders in both chambers have worked to put off votes this year amid opposition from environmental groups and signs of fissures in their ranks over oil drilling. In the Senate, Democrats such as Ben Nelson of Nebraska and Jim Webb of Virginia have indicated they support more exploration.

In the House, 17 Democrats -- most in close races this fall -- yesterday voted with Republicans against a routine resolution adjourning Congress for an August recess, after Republicans said Congress shouldn't leave without a full debate on energy policy.

At a news conference, House Majority Leader Steny Hoyer, a Maryland Democrat, repeated more than a dozen times that ``Democrats are for drilling,'' explaining that they want more drilling on land already leased for exploration.

Asked whether he expects the issue to echo into the fall, he said, ``There could be an energy fight over almost anything.''

To contact the reporter on this story: Laura Litvan in Washington at = llitvan@bloomberg.net and Daniel Whitten in Washington at +1-

dwhitten2@bloomberg.net



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PetroChina Plans to Maintain Oil Exploration Spending

By Wang Ying

July 31 (Bloomberg) -- PetroChina Co., the world's second- biggest company by market value, will maintain spending on oil exploration to gain from rising demand and record crude prices.

``Next year's exploration budget will be similar to 2008's levels,'' President Zhou Jiping said in Beijing today after a meeting with shareholders to approve a bond sale of as much as 60 billion yuan ($8.8 billion).

Benchmark New York oil prices have gained 62 percent in the past year, reaching a record $147.27 a barrel on July 11, spurring investments in new fields. PetroChina plans to spend 132.3 billion yuan on exploration and production, its 2007 annual report shows. BP Plc said yesterday it plans capital spending of $22 billion this year, excluding acquisitions.

``Non-core'' business spending will be cut by 20.7 billion, Zhou said today, without elaborating. Parent China National Petroleum Corp. plans to cut 5 percent of its workforce over the next three year to cut costs, the National Business Daily newspaper said earlier this month, citing a company newsletter.

The domestic bonds approved today will have maturities of as long as 15 years and may be sold in stages, PetroChina said in June. The funds are for working capital and to improve its debt structure, company said.

PetroChina shares climbed 0.6 percent to HK$10.36 in Hong Kong trading at the market's midday break. The stock has fallen 11 percent in the last year, compared with a 1.7 percent decline in the benchmark Hang Seng Index.

Jidong Nanpu

PetroChina will spend 12.8 billion yuan to boost production capacity at its Changqing and Daqing fields, the company said in its Shanghai-listing prospectus last year.

The Beijing-based explorer and refiner will use 1.5 billion yuan to develop part of the Jidong Nanpu field, China's biggest oil discovery in almost 50 years, and 6 billion yuan to expand an ethylene plant at Daqing.

PetroChina's capital expenditure will increase 15 percent to 207.9 billion yuan this year, the company said in March. Spending plans will include the acquisition of foreign assets from its parent, Chairman Jiang Jiemin said then. The Hong Kong- listed company intends to buy China National Petroleum Corp.'s share of an overseas oil and gas exploration joint venture, CNPC Exploration & Development Co.

To contact the reporter on this story: Wang Ying in Beijing at ang30@bloomberg.net.



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CRB Index Drops Most in 28 Years as Gas, Nickel Fall

By Millie Munshi

July 31 (Bloomberg) -- Tumbling prices for natural gas, nickel and corn are turning July into the worst month for the Reuters/Jefferies CRB Commodity Index in 28 years.

The CRB Index of 19 commodities slumped 9.7 percent since June 30, the biggest decline since a 10.5 percent drop in March 1980, when the U.S. economy was mired in recession. Natural gas plunged 31 percent to lead July's biggest losers. Corn and nickel slumped 14 percent.

The dollar's rebound from a record low against the euro eroded the appeal of raw materials as an alternative to stocks and bonds, especially for investors who snapped up commodities earlier this year and sent prices to records. Demand also is easing in China, which expanded at the slowest pace since 2005 in the second quarter, Lehman Brothers Holdings Inc. analyst Edward Morse said in a report on July 23.

``This is one of the biggest tests in this cycle because the economic background is so poor,'' said Sean Corrigan, who helps oversee $8.5 billion at Diapason Commodities Management SA in Lausanne, Switzerland. ``Many don't like the fact that they missed the boom, so there's a great deal of rejoicing when there is a big correction.''

Commodities may face ``a very severe correction,'' said Dennis Gartman, an economist at the Gartman Letter in Suffolk, Virginia, who said in June that prices for gold and other commodities may fall. ``The unwillingness of the dollar to hit new lows and the idea of slower demand means it won't be surprising if these markets have further down to go.''

Energy Costs

Higher energy costs, reduced access to credit and a continuing pullback in housing have hobbled the U.S. economy and created ``significant downside risks to the outlook for growth,'' Federal Reserve Chairman Ben S. Bernanke said during congressional testimony July 16 in Washington.

At the same time, the outlook for the dollar and the prospect for rising interest rates hurt demand for commodities as an alternative asset class.

The U.S. currency has rallied 2.9 percent from a record low of $1.6038 per euro on July 15 and may reach $1.50 per euro by the end of the year, according to the median of 36 forecasts in a Bloomberg survey.

``A speculative bubble could be bursting,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. ``People had been pouring money into commodities over the last couple years, and especially earlier this year. That might have been the last big push.''

Equities Rebound

Some investors also are putting money back into stocks. The Dow Jones Industrial Average has rebounded from a two-year low on July 15, helped by a decline in oil and a gain in the dollar.

``Some of the momentum has come out of commodities and people seem to rotating into stocks and financials,'' said Evan Smith, who helps manage $1.5 billion at U.S. Global Investors Inc. in San Antonio.

Crude oil tumbled 14 percent from a record $147.27 a barrel on July 11 on signs that energy costs, after doubling in the past three years, were curbing demand. Record prices have ``restrained'' growth in energy consumption, Goldman Sachs Group Inc. analysts said in a report on July 30.

U.S. motorists drove less in May than a year earlier, a seventh consecutive monthly drop, as the pump price of gasoline headed for a record, the Federal Highway Administration reported this week. Retail gasoline has dropped all but one day since reaching a record $4.114 a gallon on July 17, AAA said.

``Weakness in energy prices and a rally in the U.S. stock market'' are reinforcing the idea that air is ``coming out of the commodity bubble,'' Edward Meir, an analyst at M.F. Global Ltd. in Darien, Connecticut, said in a report yesterday.

Rogers' Rally

Still, investor Jim Rogers, who predicted the start of the commodity rally in 1999, said in a July 14 interview from Singapore that the bull-run has a ``long way to go.'' At the time, Rogers, the chairman of Rogers Holdings, advised buying agricultural commodities.

Marc Faber, an investor who publishes the Gloom, Boom & Doom Report and forecast the so-called Black Monday stock-market crash in 1987, said industrial commodities will decline through the rest of the year.

``The world is in recession already,'' Faber said July 23 during an interview from Chicago. ``I put out a negative view for industrial commodities for the second half of 2008 and I stick to this view.''

In China, where record expansion spurred a rally for commodities, growth may slow to 10.1 percent this year and 9.45 percent in 2009, after the economy expanded 11.9 percent in 2007, according to the median of 11 estimates in a Bloomberg survey.

Copper Imports

Chinese imports of copper and alloys plunged 19 percent in June from a year earlier. The metal has dropped 14 percent since reaching a record $4.2605 a pound in New York on May 5 on concern consumption will drop.

Copper, aluminum, nickel, lead and zinc rose on the London Metal Exchange today. Among other commodities, gold, platinum and robusta coffee also advanced. Crude oil was little changed at $126.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange, as of 4:05 a.m. local time.

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net

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Cosmo Oil Finds Oil Leak; Chiba Refinery Operation Unaffected

By Yuji Okada

July 31 (Bloomberg) -- Cosmo Oil Co., Japan's fourth-biggest refiner, said operations at Chiba refinery in eastern Japan were not affected by a crude-oil leak into Tokyo Bay from a pipeline that connects an offshore berth and the refinery.

The company is now investigating the size of the oil leak, found this morning, spokesman Katsuhisa Maeda said by phone. The Chiba refinery has a total capacity of 240,000 barrels a day.

To contact the reporter on this story: Yuji Okada in Tokyo at yokada6@bloomberg.net



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China May Not Raise Fuel Price Before Olympics, PetroChina Says

By Wang Ying

July 31 (Bloomberg) -- China, the world's second-biggest energy consumer, is unlikely to increase fuel prices before the Beijing Olympics next month, the chairman of PetroChina Co. said.

PetroChina, which has been receiving rebates on the 17 percent value-added tax levied on crude-oil imports, is unsure if the state subsidies for selling fuels below cost will continue in the third quarter, Chairman Jiang Jiemin said today.

The world's second-largest company by market value is still in talks with the Chinese government on windfall taxes levied on crude-oil sales, Jiang said after a shareholders meeting in Beijing.

To contact the reporter on this story: Wang Ying in Beijing at ang30@bloomberg.net.



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Shell's Second-Quarter Net Gains on Record Crude

By Fred Pals

July 31 (Bloomberg) -- Royal Dutch Shell Plc, Europe's biggest oil company, said second-quarter profit climbed 33 percent, boosted by record crude prices and higher natural gas.

Net income rose to $11.56 billion, or $1.87 a share, from $8.67 billion, or $1.38, a year earlier, The Hague-based company said today. Excluding gains or losses from holding inventories and one-time items, profit was $7.83 billion, which didn't include additional fair value adjustments of $750 million. The median estimate of 11 analysts surveyed by Bloomberg was for profit of $8.3 billion.

Shell Chief Executive Officer Jeroen van der Veer plans to counter lost output in Nigeria and Russia by mining Canadian oil sands and developing a Qatari gas-to-liquids venture. U.S. oil futures climbed above $140 a barrel for the first time in June and natural-gas prices were 50 percent higher on the year.


``These are a good set of numbers,'' Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said in a telephone interview today. ``Earnings at exploration and production were excellent,'' said Kenney, who has a ``buy'' rating on the stock.

Shell's London-listed Class A shares added 24 pence, or 1.3 percent, to 1,861 pence as of 8:35 a.m. in London. The stock is down 12 percent this year, compared with a 15 percent decline for BP Plc, Europe's second-biggest oil producer, which earlier this week posted a 28 percent increase in profit to $9.47 billion.

Exxon

Exxon Mobil Corp., the world's biggest energy company, may later today report a 26 percent increase in net income to $12.9 billion, the highest ever for a U.S. company without one-time gains, according to the average of seven analyst estimates compiled by Bloomberg.

Of the 34 analysts tracked by Bloomberg who cover Shell, 22 recommend buying the shares, eight advise holding the stock and four say ``sell.''

Overall crude and natural-gas output fell 1.6 percent from a year ago. Including bitumen from oil sands, production averaged 3.126 million barrels of oil equivalent a day.

Shell's output has fallen for the past five years as the company ceded a stake in Russia's Sakhalin-2 venture and militant attacks in Nigeria kept fields offline.

Militant Attacks

The company lost about 160,000 barrels a day in production in Nigeria in the second quarter as militants attacked facilities and blew up pipelines. Shell suspended export obligations for its Bonny Light crude this week after the latest militant raid.

Shell is turning to so-called unconventional projects to replace aging fields as high oil prices encourage energy-rich nations to hold onto a bigger slice of their resources.

Earlier this month, Shell agreed to buy Duvernay Oil Corp. for about C$5.9 billion ($5.8 billion), including assumption of debt, to expand gas output from hard-to-tap formations in western Canada.

Van der Veer said in June he expects to sign oil agreements with Iraq shortly. Iraq has been negotiating technical service contracts with Shell and other oil companies as it seeks to almost double crude output to 4 million barrels a day in the coming years.

Profit at Shell's refining business slid 63 percent in the quarter on higher costs as oil prices outpaced gains in gasoline. Refining margins fell by half to $8.19 a barrel in the second quarter from $16.61 a year earlier, according to BP data.

``It is disappointing mostly because the products division is not performing,'' said Kenney.

((Shell will hold a Webcast presentation, starting at 2 p.m. London time. To register and listen go to http://www.shell.com/home/content/investor-en.

To contact the reporter on this story: Fred Pals in Amsterdam at fpals@bloomberg.net


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BG to Post Origin Bid Document as Target Drops Appeal

By Angela Macdonald-Smith

July 31 (Bloomberg) -- BG Group Plc, the U.K. company offering A$13.8 billion ($13 billion) for Origin Energy Ltd., will mail its formal bid document next week to shareholders after the Australian target dropped a complaint to a regulator.

The offer document will be posted to shareholders starting Aug. 4, Reading, England-based BG said today in an e-mailed statement. Shareholders should ``take no action and ignore all correspondence and contact'' from BG, said Sydney-based Origin, which is seeking to fend off the hostile, all-cash bid.

Origin shares have traded above the A$15.50 a share bid price since the offer was made, signaling investors expect the company to attract a higher price. BG may raise the bid in September once Origin secures an alternative proposal for its coal-seam gas assets, which it says are worth more than the U.K. company is offering, Credit Suisse Group said yesterday.

Origin will release its formal rejection of BG's offer in mid-August, outlining its reasons, the company said today in a statement to the Australian stock exchange.

Origin fell 25 cents, or 1.6 percent, to A$15.85 in Sydney.

The Australian company withdrew an appeal to the national takeovers regulator that sought to block BG sending out the bid document. Origin said that BG addressed each of its 15 objections to wording in the document in amended bid statements released on July 24 and July 30.

``Origin sought these changes to ensure BG's disclosure is not misleading to Origin shareholders,'' it said in the statement.

Origin may be worth between A$18 and A$20 a share, UBS AG said in a July 30 report, adding ``there is a large degree of variability around the value'' of Origin's coal-seam gas resources

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net



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Japan Individuals Buy Australian, New Zealand Dollars

By Kosuke Goto

July 31 (Bloomberg) -- Japanese individual investors bought record amounts of Australian and New Zealand dollars on the Tokyo Financial Exchange yesterday, as gains in the yen made the higher-yielding currencies cheaper.

Pensioners, housewives and businessmen also bought the southern hemisphere currencies after rising global equities improved their appetite for riskier investments. The Bank of Japan's target lending rate of 0.5 percent is the lowest among industrialized economies.

``Japan's absolute interest-rate disadvantage matters, prompting retail investors to buy high-yielding currencies on dips,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp., the second-largest U.S. lender. ``With the market turmoil calming down, Japanese individuals' risk appetite is improving.''

The difference in the number of wagers by Japanese individual investors on an advance in the Australian dollar compared with those on a drop -- so-called net longs -- rose to 92,009 contracts yesterday, the most since July 2006 when Japan's largest financial futures market started collecting data.

Net-long positions on the New Zealand dollar against the yen reached a record 204,647 contracts. The contracts are denominated in 10,000 units of the foreign currency. Holdings of six major currencies, excluding the U.S. dollar, also reached an all-time high of 340,420 contracts.

The exchange's share of so-called margin trading, borrowing money to buy and sell currencies, was 8.6 percent in 2007 based on figures from the Financial Futures Association of Japan.

Yen Appreciation

The Australian dollar fell to a two-week low of 101.72 yen today after a government report showed retail sales dropped the most in six years, adding to signs the economy is slowing. It last traded at 101.88 yen as of 6:51 a.m. in London from 102.11 yen late yesterday in New York.

Against the New Zealand dollar, the yen climbed to 78.96 yesterday, the highest since May 12, as central bank Governor Alan Bollard said borrowing costs ``have room to fall.'' It traded at 79.15 today.

Japan's currency has appreciated 1.1 percent versus the Australian dollar and 0.8 percent against the New Zealand dollar in the past five days as funds reduced so-called carry trades.

In such trades, investors secure funds in countries with low borrowing costs, and buy assets in countries with higher rates, like Australia's 7.25 percent and New Zealand's 8 percent, earning the spread between the two. The risk is that currency moves erase those profits.

Rebuilding

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign-exchange market, Daiwa Asset Management Co., the biggest investor in the nation's debt, last week predicted the rally is coming to an end.

Daiwa, which holds 4 percent of the government's bonds, expects the currency to close the year at $1, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

Japanese individuals tend to buy or sell whenever currencies threaten to break out of a range. Earlier this month, they reduced net long positions on the Australian dollar, as the currency reached the strongest in eight months against the yen on July 23. Those positions fell to 36,400 contracts on July 21, less than half a then record of 79,920 contracts on July 1. They have since rebuilt those bets on gains in the currency.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net.



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Asian Currencies: Taiwan Dollar Falls on Growth; Yuan Declines

By David Yong and Judy Chen

July 31 (Bloomberg) -- Taiwan's dollar fell for a third day, leading losses in Asian currencies, as demand waned on concern slower economic growth in the island will spur investors to sell local assets.

The currency fell by the most in more than two months after overseas investors sold more local stocks than they bought for the past three days, according to the Taiwan Stock Exchange. China's yuan declined, paring its monthly gain to the smallest since March 2007, on speculation the government prefers a slower pace of appreciation to help exporters.

``We expect growth in Taiwan to decelerate in the second half because of slowing domestic demand,'' said Cheng Cheng- mount, chief economist at Citibank Taiwan Ltd. in Taipei. ``Foreign investors have also recently sold down stocks quite heavily and these factors could explain the currency weakness.''

Taiwan's dollar fell 0.4 percent to NT$30.638 against the U.S. currency as of 12:56 p.m. local time, according to Taipei Forex Inc. The local dollar headed for its biggest monthly loss since January 2007. The yuan weakened 0.1 percent to 6.8325, according to the China Foreign Exchange Trade System, paring this month's advance to 0.3 percent.

``The market got ahead of itself going long Taiwan on closer ties with China,'' said Callum Henderson, head of currency strategy at Standard Chartered Bank in Singapore. ``While that makes a lot of sense in the long run, in the short term, people are focusing on weaker Asian growth.''

Slower Growth

Taiwan's economic growth may slow to 3.8 percent in the second half this year, from 6.1 percent in the first quarter and an estimated 5 percent in the second quarter, Cheng said.

Traders in the forwards market have pared their bets on the extent of the yuan's gains in the next 12 months. Non- deliverable forwards contracts show it will reach an implied rate of 6.5240 per dollar in the next year, compared with a prediction of 6.4445 at the end of June. The contracts are agreements in which assets are bought and sold at current prices for future delivery.

``Investors have reduced expectations for how far the yuan will rise this year,'' said Chen Yue, a Shenzhen-based currency trader at China Merchants Bank Co., the nation's sixth-largest lender. ``The appreciation has added to difficulties for the economy.''

The People's Bank of China didn't reiterate its pledge to ``increase the exchange rate's flexibility'' in a July 27 statement following a central bank meeting.

Thailand's baht fell 0.2 percent to 33.54 per dollar, extending its losing streak to five months on speculation overseas investors will sell the nation's stocks because of heightened political risks.

Tax Evasion

A Bangkok Criminal Court today convicted the wife of former Prime Minister Thaksin Shinawatra and her brother for tax evasion, the first in a series of lawsuits against his family since he was ousted in 2006.

``The political situation will continue to worsen,'' said Han Sia Yeo, a Singapore-based strategist at Bank of America Corp. ``We expect the baht to weaken from here.''

South Korea's won rose for the first time in three days on speculation the central bank bought the currency to stem its slide. Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.

The won has declined 7.4 percent this year, the second-worst performer of the 10 most-active Asian currencies outside of Japan. Confidence among manufacturers for August fell to the lowest level in more than three years, a Bank of Korea report showed today.

Upside Capped

``The market received a number of orders suspected to be coming from the authorities as the dollar keeps rising,'' said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul. ``The dollar's upside appears to be capped now.''

The won climbed 0.2 percent to 1,011.90 per dollar, according to Seoul Money Brokerage Services Ltd. It is headed for a 3.3 percent gain this month, the biggest advance since January 2006.

Elsewhere, Malaysia's ringgit was little changed at 3.2630 per dollar, the Singapore dollar gained 0.1 percent to S$1.3685 and Vietnam's dong was unchanged at 16,760. The Philippines peso dropped 0.2 percent to 44.24 against the dollar.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.



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Australian Dollar Falls to 6-Week Low; Kiwi Is Little Changed

By Ron Harui and Candice Zachariahs

July 31 (Bloomberg) -- The Australian dollar fell to a six- week low after a government report showed retail sales dropped the most in six years, adding to signs the economy is slowing. The New Zealand dollar was little changed.

Australia's currency, known as the Aussie, headed for its first monthly loss since March after Reserve Bank of Australia figures showed lending to business and consumers rose at the slowest pace since 2002. New Zealand's currency traded near a 10-month low after the nation's business confidence fell for the first time in four months in July.

``The momentum of money has been toward the RBA pulling a rate cut forward from next year, and this report just fueled the fire,'' said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. ``It's negative for the Aussie dollar.''

The Australian dollar declined to 94.53 U.S. cents at 4:50 p.m. in Sydney from 94.71 cents late in Asia yesterday. It earlier touched 94.12 cents, the weakest since June 19. The currency bought 101.98 yen from 102.10 yen. It was poised for a fourth monthly gain versus the yen, having risen 0.2 percent.

The New Zealand's dollar traded at 73.43 U.S. cents from 73.31 cents late in Asia yesterday. It had earlier touched 73.11 cents, the weakest since Sept. 26. The currency traded at 79.23 yen from 79.03 yen. It has dropped 2.1 percent this month versus the yen, and was set for a second monthly loss.

Australia's retail sales fell 1 percent from May, when they rose a revised 0.9 percent, the Bureau of Statistics said. The median in a Bloomberg News economist survey was for no change. Credit provided by banks and other financial companies rose 0.4 percent from May, the central bank said. That was less than the 0.6 percent median estimate in a separate survey.

Australia's Trade Balance

The Aussie has fallen 1.4 percent this month as traders are betting the RBA will lower its 7.25 percent benchmark interest rate by 46 basis points in the next 12 months, up from 45 basis points yesterday, according to a Credit Suisse Group index based on interest-rate swaps.

Losses in Australia's currency were limited as the government said the trade balance turned to a surplus in June after coal and meat exports jumped, supporting the 17-year economic expansion. The surplus was A$411 million ($387 million) compared with a revised deficit of A$253 million in May. The median estimate of 24 economists surveyed by Bloomberg News was for a A$100 million shortfall.

New Zealand's dollar headed for a second monthly decline as a net 43.2 percent of companies expect the economy will worsen over the next 12 months, compared with 38.7 percent in June, a report from ANZ National Bank Ltd. in Wellington showed today.

`In the Mire'

The currency, known as the kiwi, may fall for a fourth day on speculation the Reserve Bank of New Zealand will cut interest rates to support economic growth. RBNZ Governor Alan Bollard emphasized yesterday an ``easing bias'' in monetary policy.

``Today's survey was yet another indicator confirming that the New Zealand economy is well and truly in the mire,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

The kiwi has slid 1 percent the past five days, the second- worst performance among the 16 most-active currencies, after the RBNZ cut its official cash rate a quarter-percentage point to 8 percent on July 24 and signaled more rate reductions.

Traders are betting the RBNZ will cut its 8 percent benchmark interest rate by 149 basis points in the next 12 months, up from 143 basis points yesterday, according to a Credit Suisse Group index based on interest-rate swaps.

Excessive Loss

Losses in New Zealand's currency may be limited as technical charts some traders use to predict price movements signaled this month's 3.7 percent drop was too rapid.

``There's sentiment the kiwi has been oversold,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``So, we're seeing some buying back of the kiwi.''

The New Zealand dollar's 14-day stochastic oscillator versus the U.S. currency was 7.4 today, according to data compiled by Bloomberg. A level below 20 suggests the kiwi has fallen too fast.

The chart measures the closing price of a security relative to its highs and lows during a particular period to try to predict whether it will rise or fall.

Australia's government bonds gained. The yield on the benchmark 10-year note fell 4 basis points, or 0.04 percentage point, to 6.23 percent. The price of the 5.25 percent security due March 2019 rose 0.275, or A$2.75 per A$1,000 face amount, to 92.498.

New Zealand's government debt advanced. The yield on the 10-year note fell 4 basis points, or 0.04 percentage point, to 6.12 percent. The price of the 6 percent security due December 2017 rose 0.245 to 99.107. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net



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South Africa's Rand Trades Near Six-Month High Against Dollar

By Garth Theunissen

July 31 (Bloomberg) -- South Africa's rand was near a six- month high against the dollar before a report that may show producer inflation in the continent's biggest economy accelerated last month.

Factory gate inflation quickened to an annual 17 percent, from 16.4 percent in May, according to the median estimate of 16 economists surveyed by Bloomberg News. Consumer-price growth was 11.6 percent in June, from 10.9 percent the previous month, a report showed yesterday. Pretoria-based Statistics South Africa will release the producer-inflation report at 11:30 a.m. in Johannesburg.

The rand rose as much as 0.4 percent to 7.3595 per dollar, and fell to 7.4023 by 9:23 a.m. in Johannesburg, from 7.3918 yesterday, when it reached 7.3516, the strongest since Feb. 4. Against the euro, the rand lost 0.5 percent to 11.5684.

South Africa's currency has gained for six weeks, climbing 10.2 percent since June 12, when the central bank raised interest rates a half-point to a five-year high of 12 percent. It has offered the best carry-trade return against the dollar, euro and yen over that period, according to data compiled by Bloomberg.

The rand remains the second-worst performer of the 16 most- traded currencies this year, falling more than 7 percent versus the dollar and about 13 percent against the euro.

In carry trades, investors borrow money at a low interest rate to buy assets that offer better returns. They earn the spread between the cost of borrowing and the profit from higher- yielding investments, taking the risk currency moves will erase their returns.

South Africa's main interest rate is 1,150 basis points above that of Japan and 925 basis points higher than Switzerland's.

Government bonds snapped seven days of gains, with the yield on South Africa's benchmark 13.5 percent security due September 2015 adding 4 basis points to 9.45 percent. The yield on the 13 percent note maturing August 2010 climbed 7 basis points to 10.65 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net



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Turkish Lira Rises Versus Dollar as Court Rejects Political Ban

By Yon Pulkrabek

July 31 (Bloomberg) -- Turkey's lira rose for a fourth day against the dollar after the court rejected a case to ban Prime Minister Recep Tayyip Erdogan's Justice and Development Party yesterday.

The lira climbed as much as 1.9 percent to 1.1612 per dollar, its highest level since Jan. 15, and was at 1.1636 by 9:08 a.m. in Istanbul, from 1.1835 late yesterday.

``Overall, this a very positive result for Turkey,'' analysts led by Nick Chamie at RBC Capital Markets wrote in a client note. ``It reduces political uncertainty and it keeps the pro-reform AKP party in power.''

Under Erdogan, Turkey has posted 23 consecutive quarters of economic expansion and attracted a record $40 billion in foreign direct investment in the past two years.

The Constitutional Court ruled to reduce state funding for the party as a punishment for violating a constitutional ban on basing government policies on religious edicts.

To contact the reporter on this story: Yon Pulkrabek at ypulkrabek@bloomberg.net



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California's Discount Foreclosure Sales Point to Housing Bottom

By Dan Levy and Daniel Taub

July 31 (Bloomberg) -- California led the U.S. into the worst housing recession since the 1930s. Now the most populous state may be the first to find the bottom.

In Stockton, the U.S. metro area with the highest foreclosure rate, home sales more than doubled in the second quarter after prices fell by an average 37 percent, said PMZ Real Estate Corp., the area's largest broker. Across the state, sales rose for three consecutive months starting in April after 30 straight months of declines, the California Association of Realtors said. About 40 percent of those transactions were foreclosure sales, DataQuick Information Systems reported.

``California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,'' said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, in an interview. ``This signals the beginning of the end.''

Almost $1.3 trillion of homeowner equity was lost in California since home prices peaked in December 2005, Zandi said. Discounts of as much as 50 percent will extend into 2010, helping clear a glut of foreclosures and leading to a more balanced housing market, said Ryan Ratcliff, an economist at the Anderson Forecast at the University of California in Los Angeles, and Christopher Thornberg, principal of Beacon Economics LLC in Los Angeles.

``Half off in a decent neighborhood is close to the bottom,'' said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund. Property markdowns of 30 percent to 40 percent give the market ``price illumination if not sunshine,'' he said.

`Beginning to Happen'

California led the U.S. in default notices and bank seizures for the 18th straight month in June and had seven of the 10 metro areas with the highest foreclosure rates, according to Irvine, California-based RealtyTrac Inc., which sells default data. That drove down prices and led to ``discounted distressed sales,'' with two-thirds of transactions under $500,000, compared with 40 percent a year earlier, the California Association of Realtors said.

The amount of time it would take to deplete the supply of homes decreased to 7.7 months from 10.2 months a year earlier, and the median price fell 38 percent to $368,250 last month, according to the Realtors.

``Things are beginning to happen,'' said Karl Case, professor of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller home-price index. ``We're not going to get reestablished in a stable market unless that inventory gets cleared out.''

Birth of Subprime

California led the boom in the U.S. housing market, as prices in the state more than doubled from 2000 to 2005, fueled by historically low interest rates, according to the Chicago-based National Association of Realtors.

As values soared, California gave birth to the subprime mortgage industry that specialized in lending to borrowers with poor or limited credit, who often used them to buy homes they couldn't afford, said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.

Subprime products included ``zero-percent'' loans that needed no down payment, adjustable-rate mortgages, known as ``exploding ARMs'' because low interest rates rose after two or three years, and ``Alt-A'' or ``no-doc'' loans requiring no proof of income.

Almost half of the 25 biggest U.S. subprime lenders were based in the state, including New Century Financial Corp. in Irvine and ACC Capital Holdings in Orange, and a quarter of the country's subprime loans were issued there, more than in any other state, according to Inside Mortgage Finance and data from San Francisco-based research firm LoanPerformance.

County Breakdowns

Defaults on those loans began to accelerate in 2006, helping to push California into the lead in foreclosures.

Foreclosure sales accounted for 75 percent of June's total in Merced County, home to the Merced metro area with the country's second-highest foreclosure rate; 72 percent in Stanislaus County, home to the Modesto metro area with the third-highest foreclosure rate; and 66 percent in San Joaquin County, home to Stockton, data from DataQuick in La Jolla, California, and RealtyTrac show.

Sales of foreclosed properties equaled 63 percent of the total in Sacramento County, 62 percent in Riverside County, 58 percent in Solano County, 57 percent in San Bernardino County and 49 percent in Contra Costa County. Prices dropped as much 37 percent in those counties, DataQuick reported.

`Seen the Light'

About 1 million U.S. homes will be in some stage of foreclosure by the end of the year, and properties seized by banks will eventually sell at an average discount of 30 percent to 33 percent, said Rick Sharga, executive vice president for marketing at RealtyTrac.

Discounts will be higher in areas such as Stockton, about 80 miles east of San Francisco in California's agricultural Central Valley, and Riverside, 50 miles east of Los Angeles, that experienced above-average levels of new construction at the peak of the housing boom and where lenders made a disproportionate number of subprime loans, Sharga said.

PMZ, the Stockton-based brokerage, closed 1,707 home transactions in the second quarter, about 80 percent of them foreclosure sales, said Michael Zagaris, the company's president. Foreclosed homes are now getting multiple bids and the supply of homes for sale in San Joaquin and Stanislaus counties shrank to 4.9 months in June from 18.2 months a year earlier, he said.

``We've found the bottom,'' Zagaris said. ``The financial institutions have seen the light and are allowing the market to find its own level.''

Loan Values

Bank-owned properties attract investors who can rent out the homes for 10 percent of the purchase price annually, said Sean O'Toole, founder of real estate auction Web site ForeclosureRadar in Discovery Bay, California. ``Those deals are starting to pop up and putting a floor on the market,'' he said.

Bruce Norris, president of the Norris Group investment firm in Riverside, said he purchased foreclosed properties for one- third of the outstanding loan value during the past two months.

Norris bought a three-bedroom home in the Moreno Valley section of Riverside for $106,000, a 65 percent discount on the $300,000 loan held by Bear Stearns Cos., now part of JPMorgan Chase & Co. He got a 61 percent discount on a home with $258,750 in loans held by Deutsche Bank AG, and a 63 percent discount for a home with $324,000 in loans held by Morgan Stanley, he said.

``The banks are stuck wholesaling to people like me,'' Norris said. ``They are starting to move product faster than the market would normally allow.''

Housing Bill

Banks will foreclose on about 700,000 properties with subprime mortgages this year, more than double the number a year ago, Sharga estimated. The increase is prompting overwhelmed banks to hire more workers to process purchase offers.

Executives from Charlotte, North Carolina-based Bank of America Corp. and Wells Fargo & Co. in San Francisco told Congress last week that they've accelerated the pace of loan modifications and added personnel to help homeowners avoid foreclosure. Wells Fargo, which services one in eight U.S. mortgages, expanded its staff to more than 1,000 from 200 in 2005.

The housing bill signed by President George W. Bush yesterday is intended to stem foreclosures and includes a program backed by the Federal Housing Administration to insure as much as $300 billion in refinanced mortgages, including many subprime loans.

Housing in Stockton and Riverside sprang up during the boom as builders purchased cheap land and potential buyers sought affordable homes away from expensive coastal cities, said Levy at the Center for the Continuing Study of the California Economy.

Stockton Couple

Inland home values mirrored coastal gains until a wave of ``insane'' subprime and Alt-A mortgages started in 2005 and resulted in record defaults, Levy said.

``All of those markets suffering from higher foreclosures are where prices went too high and leverage was applied too excessively,'' Pimco's Gross said. The housing bill will ``put a floor on certain mortgages'' and help stop price declines, he said.

Homeowners like computer consultant David Imig and his wife, Deborah, who live in the Stockton area and owe more than their house is worth, aren't helped by the bill. They paid $462,000 for a three-bedroom at the market peak in 2005. Now, their neighbor's foreclosed home is on sale for half its original price.

``We're a good $100,000 down,'' Imig said. ``If we could move without taking a huge bath, we would.''

Past Busts

Previous California housing busts had roots in local economic woes and U.S. monetary policy. The state lost 350,000 jobs in the early 1990s, about two-thirds in the aerospace industry, according to the Cato Institute and Los Angeles County Economic Development Corp. Home prices tumbled 12 percent. In the early 1980s, existing-home sales dropped 61 percent amid interest rates of more than 14 percent and a national recession, the state Realtors said.

California may rebound more quickly from this decline than regions with fewer delinquencies and vacant homes, according to Zandi of Moody's Economy.com. The foreclosure process is ``more efficient'' than in states such as Florida where courts are involved, and Californians are typically ``more optimistic'' about housing after experiencing busts that were followed by property booms, Zandi said.

``They know it's going to be a good investment five or 10 years down the road,'' Zandi said. ``The fundamentals are good: supply constrained markets with lots of population growth, a solid and diversified economy and important global links'' in Los Angeles and San Francisco, he said.

`Bidding War'

It may take until 2010 for foreclosure sales to work their way out of the system in areas where defaults have soared, said Thornberg of Beacon Economics.

``Those sales are going to have a very large impact on prices for the next year or so until those homes get absorbed by the market,'' he said. ``Housing markets don't bounce, they splat. They hit bottom and they stay there.''

That's good news for buyers like Peggy Thorpe. She outbid seven offers for a foreclosed house in Vallejo, east of San Francisco, and still got a 34 percent discount. It was the sixth time since May she made an offer for a home in foreclosure.

``This time I jumped higher,'' said Thorpe, 43, who works at a vineyard in Napa and paid $190,500 for the three-bedroom home with a loan balance of $289,000. ``There's an extreme bidding war right now.''

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net; Daniel Taub in Los Angeles at dtaub@bloomberg.net



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