By Whitney Kisling and Elizabeth Campbell
Oct. 7 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading today. Stock symbols are in parentheses, and share prices are as of 7:30 a.m. in New York, unless otherwise specified.
Advanced Micro Devices Inc. (AMD US) surged 15 percent to $4.85. The computer-chip maker that's struggling to compete with industry-leader Intel Corp. (INTC US) and the Advanced Technology Investment Company of Abu Dhabi plan to create a semiconductor manufacturing company to address global foundry demand. The Mubadala Development Co. also will boost its investment in AMD to 19.3 percent, AMD said.
Alcoa Inc. (AA US): The largest U.S. aluminum producer may report later today a fourth straight quarterly decline in profit on lower prices, slowing demand and costs from shutting down a Texas smelter, according to analysts. The shares lost 5.9 percent to $18.11 in regular trading yesterday.
American International Group Inc. (AIG US) jumped 7.2 percent to $4.15. Axa SA (AXA US), the Paris-based insurer, said it may consider buying U.S. and Asian assets of the U.S. insurer that agreed to be bailed out by the U.S. government. Yesterday, AIG said it was seeking a ``strategic partner'' to buy a minority stake in its Asian life insurance unit.
Bank of America Corp. (BAC US) fell 8.8 percent, to $29.40. The lender said it will cut its dividend by 50 percent and sell $10 billion in common shares after third-quarter profit slumped 68 percent.
Deutsche Bank AG (DB US) lost 8.2 percent to $59.54. Germany's biggest bank said it doesn't plan to raise capital and expects to report a tier I capital ratio of about 10 percent by the end of the third quarter. Regulators monitor the ratio to asses a bank's ability to absorb loan losses. In July, Deutsche Bank said its target range was 8 percent to 9 percent.
First Solar Inc. (FSLR US) slid 9 percent to $146.50. The world's largest maker of thin-film solar modules was cut to ``sell'' from ``buy'' at Goldman Sachs Group Inc. SunPower Corp. (SPWR US) was also downgraded to ``sell.'' The solar-module marker rose 8.2 percent to $65.75 in late trading yesterday.
International Business Machines Corp. (IBM US) fell 0.4 percent to $100.22. The world's biggest seller of computer services was cut to ``equal-weight'' from ``overweight'' at Barclays Plc on the ``risks from a weakening economy and large exposure to financial services.'' Barclays reduced its fourth- quarter earnings-per-share estimate to $2.88 from $3.19 and its share-price estimate to $108 from $130.
Ivanhoe Energy Inc. (IVAN US): The oil and natural-gas producer will sign an oil production deal this week with state- owned energy company PetroEcuador, Mines and Oil Minister Galo Chiriboga said. The stock dropped 12 percent to $1.10 in regular trading yesterday.
Regis Corp. (RGS US) fell 48 cents, or 1.9 percent, to $24.60 in late trading yesterday. The company, which runs Supercuts and Cost Cutters hair salons, forecast fiscal 2009 profit from continuing operations of as much as $2.03 a share. In August, the company forecast as much as $2.29.
Royal Bank of Scotland Group Plc (RBS US) led a decline in British banks. The U.K. government may invest at least 45 billion pounds ($79 billion) in the country's biggest banks to boost capital depleted by mortgage-related losses, three people with knowledge of the situation said. The government already bailed out Bradford & Bingley Plc and handled the takeover of HBOS Plc.
RBS fell 28 percent to $1.90. Barclays Plc (BCS US) slid 10 percent to $21.01. Lloyds TSB Group Plc (LYG US) fell 6.4 percent to $16.46.
RBS also had its credit rating cut by Standard & Poor's for the first time in almost a decade because of its deteriorating financial state.
Royal Caribbean Cruises Ltd. (RCL US): The world's second- largest cruise operator said it will sell its half-interest in Island Cruises to First Choice Holidays Ltd., the other 50 percent owner in the joint venture. The stock dropped 1.8 percent to $17.96.
SLM Corp. (SLM US): The U.S. student lender known as Sallie Mae said it reduced commitments under its FFELP asset-backed commercial paper program to $21.9 billion from $26 billion and received fee rebates of $10.2 million after the cut. The stock lost 4.2 percent to $9.59 in regular trading yesterday.
Walt Disney Co. (DIS US) fell 2.7 percent to $27.50. The second-biggest U.S. media company was downgraded to ``underperform'' from ``neutral'' by Merrill Lynch & Co., which said that ``almost 60 percent of Disney's revenue is economically sensitive.'' Merrill cut its 2009 earnings-per-share forecast to $2.40 from $2.47 and its share-price projection to $27 from $34.
To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Elizabeth Campbell in New York at ecampbell11@bloomberg.net
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Tuesday, October 7, 2008
U.S. Stock Futures Advance on Fed Plan to Buy Commercial Paper
By Elizabeth Stanton
Oct. 7 (Bloomberg) -- U.S. stock-index futures advanced, erasing earlier declines, after the Federal Reserve said it will purchase short-term corporate loans to help unlock credit markets.
National City Corp. and Sovereign Bancorp Inc. climbed more than 6 percent while General Electric Co. added 3 percent after the central bank said it will create a fund to backstop the U.S. commercial paper market. Advanced Micro Devices Inc. rallied 22 percent on plans to spin off its manufacturing plants as part of an $8.4 billion investment from Abu Dhabi.
Standard & Poor's 500 Index futures expiring in December jumped 15.3 points to 1,068.6 at 9:06 a.m. in New York. Dow Jones Industrial Average futures added 95 to 10,059. Nasdaq-100 futures rose 1.3 percent to 1,425.
U.S. stocks dropped yesterday, driving the Dow average below 10,000 for the first time in four years, as bank bailouts in Europe widened.
Asian shares pared declines today and most European stocks advanced after Australia's central bank reduced interest rates by the most since 1992.
``With the Australians cutting interest rates by 100 basis points, it has got investors hopeful that there are going to be significant cuts in either Europe or America,'' said Felix Wintle, head of U.S. equities at Neptune Asset Management in London, where he helps oversee about $4.1 billion. ``That is what is getting people excited.''
Futures on the Chicago Board of Trade show a 50 percent probability the Fed will reduce its 2 percent target rate by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting, with the rest of the odds pointing to a half-point cut. Traders a month ago saw no chance of a three-quarter point cut.
AMD Rallies
AMD, the chipmaker struggling to compete with Intel Corp., said Abu Dhabi will pay $700 million for a stake in a new company that will own two plants in Germany and build another in New York. The new company, which will assume $1.2 billion of AMD's debt, will receive as much as $6 billion from Abu Dhabi to expand the factories and get $1.4 billion in operating capital. Abu Dhabi will also pay $314 million to double its stake in AMD to 19 percent.
Third-quarter profits are forecast to decrease an average 5.6 percent for companies in the S&P 500, according to an Oct. 3 survey of analysts by Bloomberg. The slump would mark the fifth straight quarter of declining earnings.
Financial companies are forecast to lead the drop in profits with a 64 percent decrease, followed by an 11 percent slide in earnings at retailers, hoteliers, restaurant chains and other so-called consumer discretionary companies.
Valuation Watch
The S&P 500 has tumbled 32 percent from its record last October. Still, the benchmark index for U.S. equities trades at 20 times the earnings of its companies over the past 12 months, 11 percent more than its price-to-earnings ratio as the 5 1/2- year long profit expansion came to a close at the end of the second quarter of 2007. The gauge is valued at 12.6 times estimated earnings of its companies over the next 12 months.
``Nobody is talking about valuation, but on very conservative earnings expectations for the next 12 months this market at minimum is starting to look reasonably valued,'' Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., told Bloomberg Television. The unit manages $162 billion. ``Times when it feels almost irresponsible to shore up equities, they tend to be good buying opportunities historically.''
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
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Oct. 7 (Bloomberg) -- U.S. stock-index futures advanced, erasing earlier declines, after the Federal Reserve said it will purchase short-term corporate loans to help unlock credit markets.
National City Corp. and Sovereign Bancorp Inc. climbed more than 6 percent while General Electric Co. added 3 percent after the central bank said it will create a fund to backstop the U.S. commercial paper market. Advanced Micro Devices Inc. rallied 22 percent on plans to spin off its manufacturing plants as part of an $8.4 billion investment from Abu Dhabi.
Standard & Poor's 500 Index futures expiring in December jumped 15.3 points to 1,068.6 at 9:06 a.m. in New York. Dow Jones Industrial Average futures added 95 to 10,059. Nasdaq-100 futures rose 1.3 percent to 1,425.
U.S. stocks dropped yesterday, driving the Dow average below 10,000 for the first time in four years, as bank bailouts in Europe widened.
Asian shares pared declines today and most European stocks advanced after Australia's central bank reduced interest rates by the most since 1992.
``With the Australians cutting interest rates by 100 basis points, it has got investors hopeful that there are going to be significant cuts in either Europe or America,'' said Felix Wintle, head of U.S. equities at Neptune Asset Management in London, where he helps oversee about $4.1 billion. ``That is what is getting people excited.''
Futures on the Chicago Board of Trade show a 50 percent probability the Fed will reduce its 2 percent target rate by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting, with the rest of the odds pointing to a half-point cut. Traders a month ago saw no chance of a three-quarter point cut.
AMD Rallies
AMD, the chipmaker struggling to compete with Intel Corp., said Abu Dhabi will pay $700 million for a stake in a new company that will own two plants in Germany and build another in New York. The new company, which will assume $1.2 billion of AMD's debt, will receive as much as $6 billion from Abu Dhabi to expand the factories and get $1.4 billion in operating capital. Abu Dhabi will also pay $314 million to double its stake in AMD to 19 percent.
Third-quarter profits are forecast to decrease an average 5.6 percent for companies in the S&P 500, according to an Oct. 3 survey of analysts by Bloomberg. The slump would mark the fifth straight quarter of declining earnings.
Financial companies are forecast to lead the drop in profits with a 64 percent decrease, followed by an 11 percent slide in earnings at retailers, hoteliers, restaurant chains and other so-called consumer discretionary companies.
Valuation Watch
The S&P 500 has tumbled 32 percent from its record last October. Still, the benchmark index for U.S. equities trades at 20 times the earnings of its companies over the past 12 months, 11 percent more than its price-to-earnings ratio as the 5 1/2- year long profit expansion came to a close at the end of the second quarter of 2007. The gauge is valued at 12.6 times estimated earnings of its companies over the next 12 months.
``Nobody is talking about valuation, but on very conservative earnings expectations for the next 12 months this market at minimum is starting to look reasonably valued,'' Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., told Bloomberg Television. The unit manages $162 billion. ``Times when it feels almost irresponsible to shore up equities, they tend to be good buying opportunities historically.''
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
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Volkswagen Can Thank Lehman, Hedge Funds for Gains
By Alexis Xydias
Oct. 7 (Bloomberg) -- Volkswagen AG, Europe's largest automaker, just became this year's best performing stock on the continent, benefiting from hedge-fund trading strategies and the collapse of Lehman Brothers Holdings Inc.
Volkswagen is up 190 percent this year after surging as much as 55 percent today. The company was one of only four in the Dow Jones Stoxx 600 Index that advanced yesterday in the worst decline for the European gauge since October 1987. The owner of the Audi brand today surpassed Toyota Motor Corp. as the world's biggest carmaker by market value.
With analysts forecasting profit growth will slow to 1 percent in 2009 from 17 percent this year, the Wolfsburg, Germany-based car producer's earnings outlook isn't boosting its price. Instead traders who shorted the shares on expectations they would decline on Porsche SE's bid for a majority stake were forced to close their positions, according to three people in the securities-lending business who declined to be identified. The failure of Lehman, which lent Volkswagen shares to short-sellers, probably helped trigger a so-called short-squeeze, they said.
``This is a popular, crowded short play that has caused the shares to become disconnected with the company's fundamentals,'' said Renaud Berenguier, who advises hedge funds on equity trading at Aurel BGC in Paris. ``You take one of the biggest prime-brokering lenders, and one of the most shorted stocks in Europe, and this is the result.''
Volkswagen Profits
About 15 percent of Volkswagen's common shares as of last month were shorted, or borrowed and sold on expectations they can be repurchased later at a lower price, according to London- based research firm Data Explorers. That was the most in Germany's 30-stock DAX Index.
Net income for Volkswagen, owner of the Skoda and Seat brands, will be little changed in 2009 from the estimated 4.83 billion euros ($6.52 billion) it will earn in 2008, according to the average projection of analysts surveyed by Bloomberg. The German automaker is confident of meeting its 2008 performance targets, Chief Executive Officer Martin Winterkorn said Oct. 1 in a Bloomberg Television interview at the Paris Motor Show.
Volkswagen rose 5.2 percent to 292.35 euros yesterday, the biggest climb in the Stoxx 600, which tumbled 7.6 percent. The carmaker's advance yesterday gave it a 2008 gain that surpassed the 86 percent rise by London-based Enodis Plc, which supplies salad bars, cookers and worktops to U.S. fast-food chains. Volkswagen jumped as much as 55 percent to 452 euros in Frankfurt today, the biggest intraday gain since at least 1989, while the Stoxx 600 fell as much as 1.6 percent.
``This stock has become a barometer of hedge-fund pain'' that rises when markets fall, said Aurel's Berenguier.
`Unprecedented Short Squeeze'
This year's surge left Volkswagen's shares valued at 35.2 times earnings, more than three times as expensive as the other eight companies in the Bloomberg Europe Autos Index. Christine Ritz, a spokeswoman for Volkswagen, said the carmaker doesn't comment on its share price.
Volkswagen's ``current lofty valuation is the result of an unprecedented short squeeze in the stock, driven by the unwinding of several trades popular with hedge funds,'' said Tucker Golden, managing partner at New York-based hedge fund Solas Capital Management LLC.
Natixis Securities analyst Georges Dieng wrote in a Sept. 22 note that short covering has lifted Volkswagen's share price to levels that weren't justified by the carmaker's earnings prospects. New York-based Lehman was ``supposedly a big lender'' of Volkswagen's stock, he wrote, citing market ``assumptions.'' Paris-based Dieng and 31 other analysts tracked by Bloomberg recommend selling Volkswagen's shares, while only two rate the stock a ``buy.'' Six have a ``hold'' or equivalent rating.
27 Percent Jump
Banks that lent Volkswagen's stock to Lehman for use in short sales by their clients probably recalled their loans when the brokerage collapsed on Sept. 15, according to the three people who declined to be identified because the transactions aren't public. In order to keep their client accounts balanced in the meantime, the lenders were likely forced to buy the shares in the open market, the people said.
The process may have spurred Volkswagen's 27 percent jump on Sept. 18, when a recall request would expire under German securities trading settlement periods. The lenders' buying may have sparked further purchases from borrowers of the stock in a so-called short-squeeze.
While Volkswagen's shares rallied, the Stoxx 600 slipped for a fourth session. The next day, Volkswagen had its steepest loss since 1989, falling 14 percent even as the Stoxx 600 surged 8.3 percent, the biggest gain on record.
Lehman's Collapse
Lehman said it had more than $613 billion of debt and $639 billion of assets when it collapsed last month in the biggest bankruptcy in history. The firm was ranked fifth among 26 prime brokers for its services in a survey of lenders by International Securities Finance magazine.
Emma Thorogood, a spokeswoman for PricewaterhouseCoopers, Lehman's bankruptcy administrator in London, declined to comment on the brokerage's equity holdings.
The plan by Stuttgart, Germany-based Porsche, Volkswagen's biggest shareholder, to buy a majority stake in the automaker may have contributed to the number of short bets, Golden said.
Traders wagered that the spread between Volkswagen's regular shares, which carry voting rights, and its preferred stock, which doesn't, would narrow in favor of the latter, Golden said. The voting rights would become less valuable as Porsche, maker of the 911 sports car, increases control.
Porsche said on Sept. 16 that it had raised its Volkswagen stake by 14.4 million shares, to 35.1 percent. The carmaker has said it plans to boost the holding to more than 50 percent by the end of November.
`Driven by Speculation'
Porsche probably acquired an option to buy the extra shares, Deutsche Bank AG's Frankfurt-based analyst Jochen Gehrke wrote in a note in August. The counterparties in this agreement likely bought the stock to hedge their obligations and later lent it to short-sellers in a transaction that may have amounted to about 30 percent of Volkswagen's free float, Deutsche Bank estimated at the time.
Porsche's head of investor relations, Frank Gaube, didn't return two telephone messages seeking a comment.
The spread between the common and preferred shares reached a record 340.47 euros today. The widening of the gap inflicted losses on investors who had bet on a convergence.
``Many investors short the common shares because the valuation is very high,'' said Sven Diermeier, an analyst at Independent Research Gmbh in Frankfurt. ``The fundamental data of the company don't justify the valuations the stock has at the moment. The share is driven by speculation.''
To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.
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Oct. 7 (Bloomberg) -- Volkswagen AG, Europe's largest automaker, just became this year's best performing stock on the continent, benefiting from hedge-fund trading strategies and the collapse of Lehman Brothers Holdings Inc.
Volkswagen is up 190 percent this year after surging as much as 55 percent today. The company was one of only four in the Dow Jones Stoxx 600 Index that advanced yesterday in the worst decline for the European gauge since October 1987. The owner of the Audi brand today surpassed Toyota Motor Corp. as the world's biggest carmaker by market value.
With analysts forecasting profit growth will slow to 1 percent in 2009 from 17 percent this year, the Wolfsburg, Germany-based car producer's earnings outlook isn't boosting its price. Instead traders who shorted the shares on expectations they would decline on Porsche SE's bid for a majority stake were forced to close their positions, according to three people in the securities-lending business who declined to be identified. The failure of Lehman, which lent Volkswagen shares to short-sellers, probably helped trigger a so-called short-squeeze, they said.
``This is a popular, crowded short play that has caused the shares to become disconnected with the company's fundamentals,'' said Renaud Berenguier, who advises hedge funds on equity trading at Aurel BGC in Paris. ``You take one of the biggest prime-brokering lenders, and one of the most shorted stocks in Europe, and this is the result.''
Volkswagen Profits
About 15 percent of Volkswagen's common shares as of last month were shorted, or borrowed and sold on expectations they can be repurchased later at a lower price, according to London- based research firm Data Explorers. That was the most in Germany's 30-stock DAX Index.
Net income for Volkswagen, owner of the Skoda and Seat brands, will be little changed in 2009 from the estimated 4.83 billion euros ($6.52 billion) it will earn in 2008, according to the average projection of analysts surveyed by Bloomberg. The German automaker is confident of meeting its 2008 performance targets, Chief Executive Officer Martin Winterkorn said Oct. 1 in a Bloomberg Television interview at the Paris Motor Show.
Volkswagen rose 5.2 percent to 292.35 euros yesterday, the biggest climb in the Stoxx 600, which tumbled 7.6 percent. The carmaker's advance yesterday gave it a 2008 gain that surpassed the 86 percent rise by London-based Enodis Plc, which supplies salad bars, cookers and worktops to U.S. fast-food chains. Volkswagen jumped as much as 55 percent to 452 euros in Frankfurt today, the biggest intraday gain since at least 1989, while the Stoxx 600 fell as much as 1.6 percent.
``This stock has become a barometer of hedge-fund pain'' that rises when markets fall, said Aurel's Berenguier.
`Unprecedented Short Squeeze'
This year's surge left Volkswagen's shares valued at 35.2 times earnings, more than three times as expensive as the other eight companies in the Bloomberg Europe Autos Index. Christine Ritz, a spokeswoman for Volkswagen, said the carmaker doesn't comment on its share price.
Volkswagen's ``current lofty valuation is the result of an unprecedented short squeeze in the stock, driven by the unwinding of several trades popular with hedge funds,'' said Tucker Golden, managing partner at New York-based hedge fund Solas Capital Management LLC.
Natixis Securities analyst Georges Dieng wrote in a Sept. 22 note that short covering has lifted Volkswagen's share price to levels that weren't justified by the carmaker's earnings prospects. New York-based Lehman was ``supposedly a big lender'' of Volkswagen's stock, he wrote, citing market ``assumptions.'' Paris-based Dieng and 31 other analysts tracked by Bloomberg recommend selling Volkswagen's shares, while only two rate the stock a ``buy.'' Six have a ``hold'' or equivalent rating.
27 Percent Jump
Banks that lent Volkswagen's stock to Lehman for use in short sales by their clients probably recalled their loans when the brokerage collapsed on Sept. 15, according to the three people who declined to be identified because the transactions aren't public. In order to keep their client accounts balanced in the meantime, the lenders were likely forced to buy the shares in the open market, the people said.
The process may have spurred Volkswagen's 27 percent jump on Sept. 18, when a recall request would expire under German securities trading settlement periods. The lenders' buying may have sparked further purchases from borrowers of the stock in a so-called short-squeeze.
While Volkswagen's shares rallied, the Stoxx 600 slipped for a fourth session. The next day, Volkswagen had its steepest loss since 1989, falling 14 percent even as the Stoxx 600 surged 8.3 percent, the biggest gain on record.
Lehman's Collapse
Lehman said it had more than $613 billion of debt and $639 billion of assets when it collapsed last month in the biggest bankruptcy in history. The firm was ranked fifth among 26 prime brokers for its services in a survey of lenders by International Securities Finance magazine.
Emma Thorogood, a spokeswoman for PricewaterhouseCoopers, Lehman's bankruptcy administrator in London, declined to comment on the brokerage's equity holdings.
The plan by Stuttgart, Germany-based Porsche, Volkswagen's biggest shareholder, to buy a majority stake in the automaker may have contributed to the number of short bets, Golden said.
Traders wagered that the spread between Volkswagen's regular shares, which carry voting rights, and its preferred stock, which doesn't, would narrow in favor of the latter, Golden said. The voting rights would become less valuable as Porsche, maker of the 911 sports car, increases control.
Porsche said on Sept. 16 that it had raised its Volkswagen stake by 14.4 million shares, to 35.1 percent. The carmaker has said it plans to boost the holding to more than 50 percent by the end of November.
`Driven by Speculation'
Porsche probably acquired an option to buy the extra shares, Deutsche Bank AG's Frankfurt-based analyst Jochen Gehrke wrote in a note in August. The counterparties in this agreement likely bought the stock to hedge their obligations and later lent it to short-sellers in a transaction that may have amounted to about 30 percent of Volkswagen's free float, Deutsche Bank estimated at the time.
Porsche's head of investor relations, Frank Gaube, didn't return two telephone messages seeking a comment.
The spread between the common and preferred shares reached a record 340.47 euros today. The widening of the gap inflicted losses on investors who had bet on a convergence.
``Many investors short the common shares because the valuation is very high,'' said Sven Diermeier, an analyst at Independent Research Gmbh in Frankfurt. ``The fundamental data of the company don't justify the valuations the stock has at the moment. The share is driven by speculation.''
To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.
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UK bank funding talk hits stocks, sterling
By Natsuko Waki
LONDON (Reuters) - World stocks fell again on Tuesday and sterling hit a 2-1/2 year low after talk of government funding hit UK banks, erasing gains in the benchmark index made after Australia's surprisingly large interest rate cut.
Royal Bank of Scotland fell more than 30 percent while Lloyds also lost 18 percent after traders cited speculation of funding talks with the government.
In Iceland, the government has dismissed the board of directors of Landsbanki and has put the Icelandic bank in receivership. The crown currency lost 35 percent to record lows of 350 per euro, on top of a 30 percent fall on Tuesday.
Earlier, Australia cut interest rates by a full percentage point to 6 percent, its biggest move in 16 years. This has boosted speculation other major countries might follow suit, especially as finance chiefs from Group of Seven rich countries meet in Washington this weekend.
Interbank money markets -- blocked for months by banks' refusal to lend to each other -- remained log jammed, with the cost of borrowing euros for three-month staying as high as 5.38 percent on Reuters system.
"A concerted move by central banks to cut global rates would be seen as an unmitigated positive ... the market's suspecting that's the case," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.
"The macro backdrop is deteriorating and while the pace of the deleveraging process has taken everyone by surprise by its intensity the inevitable consequence is going to a longer and deeper economic downturn."
The FTSEurofirst 300 index fell 1.15 percent after falling 7.8 percent to four-year lows on Tuesday. MSCI main world equity index fell 0.5 percent, having lost more than 9 percent this month alone.
The low-yielding yen fell half a percent to 101.89 per dollar and fell from a five-year peak against the Australian dollar after Australia's interest rate cut. The dollar fell a quarter percent against a basket of major currencies.
Sterling fell as low as $1.7322 with interest rate futures pricing in the chance that the Bank of England would cut interest rates by at least 50 basis points.
"The focus is on the RBA and what it has done for rate expectations elsewhere," said Adam Cole, global head of currency strategy at RBC. "The risk of larger moves by central banks has risen significantly."
The December Bund future gained 9 ticks, underpinned by capital seeking safer government bonds.
Emerging sovereign spreads tightened 7 basis points while emerging stocks fell 0.5 percent, after falling more than 10 percent on Tuesday.
U.S. light crude rose 2 percent to $89.58 a barrel, while gold also gained to $872.10 an ounce.
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UK bank shares plunge on government funding talk
LONDON (Reuters) - Shares in British banks fell sharply on Tuesday on reports the big industry players had held emergency funding talks with the government overnight, traders said.
Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) was the biggest loser, with its shares down 39 percent at 98 pence.
Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) shares fell 20 percent and Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) fell 12 percent. All three banks declined to comment on the reports. The UK Treasury also declined to comment but said it would do whatever it takes to maintain stability in the banking system.
The BBC said the three big banks had asked the Treasury for 15 billion pounds ($26 billion) each.
A report by Bloomberg LLP said the government may invest at least 45 billion pounds ($79 billion) in banks including Royal Bank of Scotland Group Plc and Barclays Plc to bolster capital depleted by mortgage-related losses. It cited two people with knowledge of the situation.
"There is a report of them (Barclays and RBS) seeking funds," a trader said.
The cost of insuring the debt of the three banks fell sharply on the reports. Five-year senior credit default swaps on RBS were about 30 basis points tighter at 270 basis points and about 20 basis points tighter at 230 basis points on Barclays, a trader said. That means investors have to pay 270,OOO and 230,000 euros to insure 10 million euros of the respective banks' debt against default.
The credit trader said the move was based on speculation that the government is considering injecting capital in banks in return for equity stakes.
"It's more of an equity story, as it look like shares will be diluted, while a capital increase is credit positive which explains how the CDS has reacted," the trader said.
(Reporting by Dominic Lau and Natalie Harrison; Writing by Dan Lalor and Andrew Callus; Editing by Quentin Bryar)
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Iceland FSA issues statement on Landsbanki takeover
REYKJAVIK, Oct 7 (Reuters) - Iceland's market authority said on Tuesday it would take control of Landsbanki (LAIS.IC: Quote, Profile, Research, Stock Buzz), the island's second largest bank by value.
The statement comes after the country's banking minister told Icelandic radio that the bank would be taken over.
"Based on new legislation, the Icelandic Financial Supervisory Authority (IFSA) proceeds to take control of Landsbanki to ensure continued commercial bank operations in Iceland," the authority said in a statement.
"Domestic deposits are fully guaranteed, as declared by the government. Landsbanki's domestic branches, call centres, cash machines and internet operations will be open for business as usual. The objective of the IFSA's action is to guarantee a functioning domestic banking system."
The move is the latest step by authorities to control a crisis in the financial sector that has already led to the part-nationalisation of Glitnir (GLB.IC: Quote, Profile, Research, Stock Buzz) and new legislation to give the govenrment sweeping powers over the banking sector.
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Kaupthing-not approached by govt over intervention
STOCKHOLM, Oct 7 (Reuters) - Icelandic bank Kaupthing (KAUP.IC: Quote, Profile, Research, Stock Buzz) said on Tuesday it had not been approached by authorities over any intervention, adding it had received a 500 million euro ($679.5 million) from the central bank.
"Kaupthing has not been approached by the Icelandic FSA regarding any intervention in Kaupthing's operations," the bank said in a statement.
Late Monday, Iceland adopted sweeping powers over its battered banks as its financial system tottered and its currency plunged. Kaupthing said it was committed to working with the government to ensure regular workings of the Icelandic financial system.
(Reporting by Niklas Pollard)
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FOREX-Euro recovers, c.banks eyed after RBA rate cut
* Euro recovers, sterling hits 2-1/2-year low
* RBA rate cut stokes speculation of cuts by other c.banks
* Pound stung by reports of RBS emergency funding
By Naomi Tajitsu
LONDON, Oct 7 (Reuters) - The euro rose on Tuesday on growing speculation that some central banks may follow a surprisingly big interest rate cut by the Reserve Bank of Australia and lower their own rates to stem economic deterioration.
Sterling hit a 2-1/2-year low after talk that the Royal Bank of Scotland was seeking government funding raised concerns about troubles in the UK banking sector.
The yen fell after the RBA's stunning rate cut decision, but investors remained wary of taking on risky trades that involve selling the yen for higher-yielding currencies. Markets brushed off the Bank of Japan's decision to hold interest rates at 0.5 percent.
The RBA's 1 percentage point rate cut ultimately boosted the Australian dollar and ramped up expectations that other central banks may also lower rates as the global banking sector screams for help to deal with the credit crisis.
European Union finance ministers were meeting in Luxembourg on Tuesday to hammer out ways to alleviate market turmoil, instil confidence in the banking system and ensure that savers do not lose money on their deposits [nPEK327881].
The meeting comes ahead of a gathering of finance ministers from the Group of Seven industrialised countries in Washington on Friday.
Analysts said the RBA's move -- which trumped expectations for a 50 basis point cut -- had raised the possibility of monetary loosening by other central banks, particularly the Bank of England, which holds a policy meeting this week.
"The focus is on the RBA and what it has done for rate expectations elsewhere," said Adam Cole, global head of currency strategy at RBC. "The risk of larger moves by central banks has risen significantly."
The euro
Sterling
FOCUS ON BANKS, C.BANKS The BoE is expected to cut rates by 25 basis points from 5.0 percent on Thursday, according to a Reuters poll last week. But some in the market see a possibility of a 50 basis point cut, with some analysts arguing that the banking crisis and a deteriorating economy should take the front seat, rather than inflation risks.
Currencies were initially boosted by an early rise in European shares , but trimmed gains after equities fell into negative territory.
The Australian dollar
The yen stumbled across the board, boosting the dollar
The Japanese currency slipped against other currencies, pushing the euro up around 1 percent
Analysts said that the RBA's decision may have increased the possibility of a hefty BoE rate cut, while adding that the chances of an emergency cut by the European Central Bank were low, at least for now.
"Policymakers ... particularly in Europe tend not to rush into things and hopes of some coordinated rate cutting either ahead of or following this weekend's G7 meeting may prove misplaced," analysts at Calyon said in a research note. Analysts said that markets were awaiting a speech by ECB President Jean-Claude Trichet later in the day to see if he will offer any clues into the central bank's rate outlook, adding that any suggestion that a rate cut may come soon could boost the euro.
"Whilst Trichet's more dovish stance following last week's ECB meeting prompted a sell off of the euro, the reaction to the Australian decision indicates that if he does hint at possible rate cuts the EUR should rally," they said.
(Editing by David Stamp) ((naomi.tajitsu@reuters.com; Tel: +44207 542 5830, Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))
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GLOBAL MARKETS-UK bank funding talk hits stocks, sterling
* MSCI world equity index down 0.5 pct at 264.40
* UK bank shares plunge on talk of government funding
* Money markets stressed despite global rate cut hopes
By Natsuko Waki
LONDON, Oct 7 (Reuters) - World stocks fell again on Tuesday and sterling hit a 2-1/2 year low after talk of government funding hit UK banks, erasing gains in the benchmark index made after Australia's surprisingly large interest rate cut. Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) fell more than 30 percent while Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz) also lost 18 percent after traders cited speculation of funding talks with the government.
In Iceland, the government has dismissed the board of directors of Landsbanki (LAIS.IC: Quote, Profile, Research, Stock Buzz) and has put the Icelandic bank in receivership. The crown currency lost 35 percent to record lows of 350 per euro
Earlier, Australia cut interest rates by a full percentage point to 6 percent, its biggest move in 16 years. This has boosted speculation other major countries might follow suit, especially as finance chiefs from Group of Seven rich countries meet in Washington this weekend.
Interbank money markets -- blocked for months by banks' refusal to lend to each other -- remained logjammed, with the cost of borrowing euros for three-month staying as high as 5.38 percent
"A concerted move by central banks to cut global rates would be seen as an unmitigated positive ... the market's suspecting that's the case," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.
"The macro backdrop is deteriorating and while the pace of the deleveraging process has taken everyone by surprise by its intensity the inevitable consequence is going to a longer and deeper economic downturn."
The FTSEurofirst 300 index fell 1.15 percent after falling 7.8 percent to four-year lows on Tuesday. MSCI main world equity index .MIWD00000PUS fell 0.5 percent, having lost more than 9 percent this month alone.
The low-yielding yen fell half a percent to 101.89 per dollar
Sterling fell as low as $1.7322
"The focus is on the RBA and what it has done for rate expectations elsewhere," said Adam Cole, global head of currency strategy at RBC. "The risk of larger moves by central banks has risen significantly."
The December Bund future FGBLc1 gained 9 ticks, underpinned by capital seeking safer government bonds.
Emerging sovereign spreads 11EMJ tightened 7 basis points while emerging stocks .MSCIEF fell 0.5 percent, after falling more than 10 percent on Tuesday.
U.S. light crude CLc1 rose 2 percent to $89.58 a barrel, while gold
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European shares fall 1 pct as bank woes grow
FRANKFURT, Oct 7 (Reuters) - European shares turned sharply negative early on Tuesday, having risen more than 2.5 percent in initial trading, as banks took a beating amid reports of additional funding needs.
At 0831 GMT, the FTSEurofirst 300 index of top European shares was down 1.2 percent at 993.09 points, having risen as much as 2.6 percent.
Banks were the top weighted losers on the index, with Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) down 33 percent on speculation that it was in talks for UK government funding, and Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) down 14 percent on talk of a capital increase, though a financial source dismissed the speculation.
The FTSEurofirst 300 fell 7.8 percent to a four-year-low close on Monday. (Reporting by Peter Starck)
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Financial crisis drives Nikkei to 5-year closing low
*Nikkei tumbles to 5-year closing low on financial crisis
*Exporters hit by global economic outlook, firm yen
*Australian rate cut sparks hopes for more global measures (Adds stocks, details)
By Aiko Hayashi
TOKYO, Oct 7 (Reuters) - Japan's Nikkei average fell 3 percent to post a five-year closing low on Tuesday as panic over the global financial crisis prompted investors to dump stocks.
The benchmark had fallen more than 5 percent in the morning but trimmed those losses on bargain hunting and after a rate cut by Australia's central bank raised hopes that more countries would take measures to contain the crisis.
A firm yen and the gloomy outlook for the global economy hurt exporters such as Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) and automakers, whose earnings have been badly undercut by worsening economies overseas. FXNEWS [FRX/]
"The market has been in panic since last week, and a lot of people are moving into cash," said Koichi Ogawa, chief portfolio manager at Daiwa Asset Management. "It's not really moving on sense, there are a lot of people who may have no choice but to sell."
The Nikkei .N225 shed 317.19 points to 10,155.90, the lowest close since December 2003. It earlier fell more than 5 percent to 9,916.21.
The broader Topix fell 2.2 percent to 977.61 after earlier also falling more than 5 percent.
U.S. stocks slid for a fourth straight day on Monday, pushing the Dow below 10,000 for the first time in four years, on fears the world was hurtling towards recession despite efforts to fight the fast-spreading financial crisis [.N]
"Once the market drops to this level, investors begin to expect governments will come up with some counter-measures," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.
"As if to prove their expectations, Australia just cut interest rates by 1 percent and that gave the market hope that others might follow suit."
Australia's central bank chopped its benchmark interest rate by one full percentage point to 6.0 percent on Tuesday, taking a bold move to protect the domestic economy and banking system from an increasingly hostile global environment. [ID:nSYD359267]
While Japan has remained comparatively unscathed until now, policymakers admitted on Tuesday that the crisis is taking a toll, with Finance Minister Shoichi Nakagawa saying Japan's economy was worsening. [ID:nTKF003044]
Separately, Prime Minister Taro Aso said U.S. financial conditions were very severe, and Tokyo should be prepared for its impact on Japanese exports, which drive its economy.
Amid the market turmoil, the projected price-earnings ratio of the Nikkei stock average tumbled to a 37-year low at 12.78 times on Monday, according to the Nikkei business daily.
"Stocks may seem cheap with the Nikkei's PER below 13 times, but this alone won't prompt buying of Japanese stocks as the current market correction came from outside factors," said Yutaka Miura, senior technical analyst at Shinko Securities.
"U.S. and European stocks need to rise before Japanese stocks can go higher."
EXPORTERS DRAG
Honda Motor Corp (7267.T: Quote, Profile, Research, Stock Buzz) slid 5 percent to 2,570 yen and Toyota Motor Co (7203.T: Quote, Profile, Research, Stock Buzz) dropped 4.9 percent to 3,710 yen.
Canon dropped 4.1 percent to 3,530 yen and Kyocera Corp (6971.T: Quote, Profile, Research, Stock Buzz), hit by the double punch of the strong yen and a fall in its U.S. peers, lost 3.5 percent to 7,200 yen.
Sharp Corp (6753.T: Quote, Profile, Research, Stock Buzz) tumbled 9.3 percent to 910 yen after the consumer electronics maker cut its annual operating profit outlook by one-third due to sluggish domestic sales of mobile phones, missing market expectations by a wide margin. [ID:nT314929]
Individual Japanese investors were also fearful.
"There's no way I can predict what's going to happen next," said Tetsuo Kurosaki, a 59-year-old company executive. "The European market is also influenced and I bought products from there so I'm even more worried."
Trade picked up on the Tokyo exchange's first section, with 2.97 billion shares changing hands, compared with last week's daily average of 2.08 billion.
Declining stocks outpaced advancing ones by more than 4 to 1. (Editing by Edwina Gibbs) (Reporting by Aiko Hayashi; Additional reporting by Elaine Lies and Chika Osaka)
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Wakeup Call: Financial Markets Under Even More Severe Pressure
| Daily Forex Fundamentals | Written by Saxo Bank | Oct 07 08 07:57 GMT | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AUD getting creamed after surprise rate cut from RBA. Money Markets more tight than ever. Stocks collapsing yesterday, but showing some buying interest overnight, in anticipation of rate cuts. Calendar
What's going on?
FX
Equities
Futures
Analysis Disclosure & Disclaimer Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Saxo Bank utilizes financial information providers and information from such providers may form the basis for an analysis. Saxo Bank accepts no responsibility for the accuracy or completeness of any information herein contained. Any recommendations and other comments in Saxo Bank's analysis derive from objective fundamental macro economical and company specific calculations, statistical and technical analysis, and subjective general market assessment. If an analysis contains recommendations to buy or sell a specific financial instrument, such recommendation should be seen as Saxo Bank's opinion that the specific instrument will respectively outperform the relevant market or underperform compared to the market. Saxo Bank's recommendations should statistically correspond to an even distribution between buy and sell recommendations. The recommendations may expire promptly due to market volatility and in general, Saxo Bank does not anticipate its recommendations to be valid more than one month. An analysis will be updated if and only if a market development or other issues relevant to the analysis render a new analysis on the same topic relevant. Saxo Bank's analysis does not cover any specific financial product over time but only products which Saxo Bank's strategy team finds it important to cover at any given point in time. In order to prevent conflicts of interest, Saxo Bank has established appropriate business procedures, incl. procedures applicable to research and analysis to ensure objective research reports. Saxo Bank's research reports have not been discussed with the parties, e.g. issuers of securities, mentioned in the analysis. Saxo Bank is under supervision by the Danish Financial Supervisory Authority. Saxo Bank does not engage in corporate finance activities and accordingly, Saxo Bank's employees, incl. the persons responsible for an analysis, do not receive remuneration associated with investment banking transactions. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Technical Analysis for Major Currencies
| Daily Forex Technicals | Written by Crown Forex | Oct 07 08 07:50 GMT | | |
EUROThe euro reached the key support level for the downside channel which resides alongside 1.382% correctional level for the last upside move that extend between 11-22, in September. We can see that the support level is getting weaker and at the same time momentum indicators are heavily oversold and for that we expect an upside correction while the problem is finding solid support that might support the upside move while it might be 161.8% level at 1.3335 yet we recommend high caution applied in trading. The trading range for today might extend among the resistance level at 1.3805 and the support level at 1.3555; while the general trend remains to the downside targeting 1.3555 and 1.3420 as long as 1.5080 remains intact. Support: 1.3550, 1.3500, 1.3420, 1.3360, 1.3335 GBPWe are still within the downside channel where its main resistance resides at 1.7635 and continued trading below this level set further decline and attempts to breach 1.7475 once more which is the only support level that can provide sterling with upside momentum over intra and short term basis. The trading range for today might extend among the resistance level at 1.7740 and the support level at 1.7280; while the general trend remains to the downside targeting 1.7280 and 1.6965 as long as 1.9400 remains intact. Support: 1.7475, 1.7435, 1.7390, 1.7340, 1.7280 JPYThe pair raced to technical pattern's targets pointed before at 101.50 which is 61.8% correction for that upside wave that started in March yet the pair extended to reach near 100 levels. The pair acquired 61.8% as we said and full targets now reside at 98.55 yet in many cases the pair settles for the 61.8% of the full target in similar patterns; yet continued trading below the Neckline for the pattern at 104.60 we do not expect the pair to revert positive. The trading range for today might extend among the resistance level at 106.20 and the support level at 98.55; while the general trend remains to the downside targeting 100.20 and 98.55 as long as 104.60 remains intact. Support: 102.00, 101.50, 100.80, 99.65, 98.55 CHFA breakthrough was seen on 1.1410-20 levels yet the pair is still trading around those levels and for that we can not confirm the breach; though we still see the heading to the upside yet momentum indicators are heavily overbought over four-hour basis and for that we see high volatility today with tendency to a downside correction. The correction will be confirmed with trading below 1.1410 yet we do not see the decline capable of altering the upside headings over the medium term while 1.1370 creates solid support for the pair. The trading range for today might extend among the resistance level at 1.1690 and the support level at 1.1235; while the general trend remains to the upside targeting 1.1455 and 1.1685 as long as 1.0570 remains intact. Support: 1.1405, 1.1370, 1.1300, 1.1270, 1.1235 Recommendation: Buy the pair above 1.1400 and take profits at 1.1550, while place stop loss below 1.1360 CADThe strong upside wave that lead us to set the second target which is the key resistance for the current upside wave which resides at 1.0975 and the second target at 1.1000 we can now see a historical resistance at 1.1045, while at the same time the pair did not set any Fibonacci level for the downside that started on 20-01-2002; while now we should assess closings at 1.1045 as a couple of days closings above the level is capable to create a new steep upside wave. Today we see heavy buying saturation in addition to slight divergence on direction indicators and for that we expect a downside correction that is not to affect the medium term upside trend. The 1.0870 which are the key support levels for the intraday upside channel and continued trading above those levels will resume the upside after easing some buying pressures. The trading range for today might extend among the resistance level at 1.1170 and the support level at 1.0775; while the general trend remains to the upside targeting 1.1285 and 1.1760 as long as 1.0350 remains intact. Support: 1.0940, 1.0870, 1.0825, 1.0800, 1.0775 disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk. | |
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Daily Financial Market Outlook
| Daily Forex Fundamentals | Written by Lloyds TSB | Oct 07 08 08:05 GMT | | |
| Overview & economic commentary Financial markets will continue to focus on unfolding events in credit and banking markets. Speeches by ECB President Trichet, ECB member Constancio, Fed chairman Bernanke and Fed member Stern, as well as the publication of the minutes of the 16 September Fed policy meeting, will be be gleaned for hints of interest rate cuts and/or further policy action. Economic data published today includes UK industrial and manufacturing output for August, which have declined in each month since March. We expect manufacturing output to have declined by another 0.1% on a monthly basis in August, representing a 1.5% annual fall, as surveys by manufacturing businesses have been very weak, see chart below. However, industrial output may have risen by 0.1% in August, leading to a reduction in the annual decline to 1.7% from 1.9% in July, due to stronger performance of the energy industries. US consumer credit data is also due - we expect a borrowing figure of $6.5bn in August, compared with $4.6bn in July. Also published today, German factory orders may show 0.4% growth on the month, after eight consecutive months of decline. Overnight, the Reserve Bank of Australia slashed interest rates by 100bps to 6%, more than expectations of a half-point reduction, while Japan held rates at 0.5% as expected. Other data published this morning included the Japanese leading index and coincident confidence indices for August, both disappointing and providing further indication that Japan's economy is very weak Currency commentary The 100bps reduction in Australian interest rates overnight led to a fall in the A$/US$ to near 0.70, but it has since recovered to around 0.73, though still well down on last week's close of 0.7791. The Japanese yen fell overnight, reversing some of the sharp fall in $/Y yesterday, currently trading above 102. €/Y also pared some of yesterday's sharp fall to a 3-year low and is currently around 139.60. Germany factory orders are the key eurozone data release this morning, but markets will be looking to ECB speakers today. including President Trichet this afternoon, for further clues on whether interest rates may be reduced. The euro has also suffered from uncoordinated attempts by European governments to restore confidence in the banking sector. £/$ fell to a low of 1.7336 yesterday but is currently above 1.75, however weak industrial production figures this morning could weigh on the pound. £/€ rose to 1.2984 yesterday and is currently just below 1.29 Major data and events today
Chart of the day: Will UK official manufacturing output growth data continue to trend downwards as suggested by the PMI surveys?
Lloyds TSB Bank Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business. | |
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China to Slash Rates, Spend to Fuel Growth, Morgan Stanley Says
By Kevin Hamlin
Oct. 7 (Bloomberg) -- China will cut interest rates as many as five times by the end of 2009 and will step up spending to limit the effect of the ``global financial tsunami'' on the nation's economic growth, Morgan Stanley said.
The central bank will cut borrowing costs by 27 basis points each time, reducing the one-year lending rate to as low as 5.85 percent next year from 7.2 percent now, Qing Wang, a Hong Kong- based economist, said in a note today. Government spending may add as much as 3 percentage points to economic growth, he said.
Global growth is slowing after the collapse and bailout of banks in the U.S. and Europe propelled the cost of borrowing in money markets to the highest ever. Slowing economic growth in Europe and the U.S., which account for 40 percent of China's total exports, will translate into lackluster exports, falling corporate profit and easing inflation, Wang said.
``A substantial improvement in the inflation outlook should help ease the lingering concerns about the inflationary consequences of an expansionary macroeconomic policy,'' Wang said. ``We expect a decisive policy shift toward boosting growth in the coming weeks and months.''
Wang cut his forecast for inflation next year to 2.5 percent from 4 percent. He lowered his estimate for economic growth in China next year to 8.2 percent from 9 percent and lowered his forecast for this year to 9.8 percent from 10 percent.
More spending and tax cuts would contribute between 1 and 3 percentage points to growth, Wang said.
China can ``afford to run multiyear fiscal deficits without running into debt sustainability problems,'' because it has public debt of only 30 percent of gross domestic product, Wang said.
Property Market Risk
The main risk to his forecast was a ``meltdown'' in the property sector across the country, ``which would lead to a massive collapse in real-estate investment, Wang said.
The consequences would be so serious that even pro-growth policies wouldn't prevent the economy growing less than 7 percent, he said.
The probability of this happening is less than 25 percent, Wang estimated, contradicting a Sept. 12 report by Jerry Lou, a Morgan Stanley strategist, who said the ``likelihood of a property sector meltdown is high.''
China thus has ample room for monetary and fiscal initiatives to help offset the impact of slower global growth, he added. This would entail ``unwinding'' tightening measures introduced since last year, including ``the 162 basis points interest rate hike, the 850 basis points hike of the required reserves ratio, and stringent administration bank lending quotas,'' he said.
The People's Bank of China cut the one-year lending rate to 7.20 percent from 7.47 percent, the first reduction in six years, last month.
Morgan Stanley forecasts that the U.S. economy will contract by 0.2 percent next year and that growth in the Europe will reach only 0.2 percent. It expects a 1 percent contraction in Japan.
To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net
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Bonello Says ECB Plans to Take `Prudent Approach' on Rates
By Blanche Gatt and Gabi Thesing
Oct. 7 (Bloomberg) -- European Central Bank council member Michael Bonello said policy makers plan a ``prudent approach'' when weighing the need for lower interest rates as the credit crunch clouds the outlook for the economy.
``We will be assessing the information as it comes in and take a decision at the next meeting after due deliberation,'' Bonello, who heads Malta's central bank, said in an interview in Valletta yesterday. ``Particularly in these uncertain times, that is the most prudent approach to take.''
Investors raised bets the ECB will cut rates in November after President Jean-Claude Trichet on Oct. 2 said inflation pressures are easing as growth slows. The financial crisis is worsening in Europe, with governments forced to bail out banks and guarantee consumers' deposits after credit costs soared to records. Europe's Dow Jones Stoxx 600 Index yesterday plunged the most since 1987, dropping 7.6 percent.
``Major efforts are being made to mitigate the impact of the financial turmoil on the real economy, but you have various elements at play in different countries and what the overall impact is going to be at the end of the day is unpredictable,'' said Bonello, 63. ``There are several indications that the tempo of activity is slowing down, but we have to wait for the GDP number for the third quarter to know exactly the extent of this weakening.''
The economy of the 15 nations sharing the euro contracted 0.2 percent in the second quarter and third-quarter gross domestic product figures are due on Nov. 14. The ECB will publish new growth and inflation forecasts in December.
Rate-Cut Bets
The Frankfurt-based central bank last week left its benchmark interest rate at 4.25 percent, a seven-year high. Investors have fully priced in a reduction to 4 percent by December, Eonia forward contracts show.
The world's biggest financial institutions have recorded almost $600 billion in writedowns and losses tied to the U.S. mortgage market since the start of 2007, driving Lehman Brothers Holdings Inc. into bankruptcy on Sept. 15 and forcing governments to rescue banks in the U.S., U.K. and Europe.
Bonello, who declined to comment on specific bailouts, said the measures are ``all designed to restore confidence.''
The ECB has held off cutting rates because of its concern that the jump in inflation will become entrenched through a wage- price spiral as workers seek compensation for the higher cost of living.
While inflation in Europe slowed to 3.6 percent in September after crude oil prices retreated from a July record of $147.27 a barrel, it is still above the ECB's 2 percent limit. Trichet said Oct. 2 that inflation risks have ``not disappeared.''
``The Governing Council has repeatedly warned that second- round effects, which come from the impact of past energy and food-price increases on price and wage-setting behavior, risk setting off a wage-price spiral,'' Bonello said. ``That would make domestic goods and services less competitive on foreign markets, it would threaten output and employment, so that is something which one wants to avoid as much as possible.''
To contact the reporters on this story: Blanche Gatt in Malta at bgatt@bloomberg.net; Gabi Thesing in Frankfurt at gthesing@bloomberg.net.
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Oct. 7 (Bloomberg) -- European Central Bank council member Michael Bonello said policy makers plan a ``prudent approach'' when weighing the need for lower interest rates as the credit crunch clouds the outlook for the economy.
``We will be assessing the information as it comes in and take a decision at the next meeting after due deliberation,'' Bonello, who heads Malta's central bank, said in an interview in Valletta yesterday. ``Particularly in these uncertain times, that is the most prudent approach to take.''
Investors raised bets the ECB will cut rates in November after President Jean-Claude Trichet on Oct. 2 said inflation pressures are easing as growth slows. The financial crisis is worsening in Europe, with governments forced to bail out banks and guarantee consumers' deposits after credit costs soared to records. Europe's Dow Jones Stoxx 600 Index yesterday plunged the most since 1987, dropping 7.6 percent.
``Major efforts are being made to mitigate the impact of the financial turmoil on the real economy, but you have various elements at play in different countries and what the overall impact is going to be at the end of the day is unpredictable,'' said Bonello, 63. ``There are several indications that the tempo of activity is slowing down, but we have to wait for the GDP number for the third quarter to know exactly the extent of this weakening.''
The economy of the 15 nations sharing the euro contracted 0.2 percent in the second quarter and third-quarter gross domestic product figures are due on Nov. 14. The ECB will publish new growth and inflation forecasts in December.
Rate-Cut Bets
The Frankfurt-based central bank last week left its benchmark interest rate at 4.25 percent, a seven-year high. Investors have fully priced in a reduction to 4 percent by December, Eonia forward contracts show.
The world's biggest financial institutions have recorded almost $600 billion in writedowns and losses tied to the U.S. mortgage market since the start of 2007, driving Lehman Brothers Holdings Inc. into bankruptcy on Sept. 15 and forcing governments to rescue banks in the U.S., U.K. and Europe.
Bonello, who declined to comment on specific bailouts, said the measures are ``all designed to restore confidence.''
The ECB has held off cutting rates because of its concern that the jump in inflation will become entrenched through a wage- price spiral as workers seek compensation for the higher cost of living.
While inflation in Europe slowed to 3.6 percent in September after crude oil prices retreated from a July record of $147.27 a barrel, it is still above the ECB's 2 percent limit. Trichet said Oct. 2 that inflation risks have ``not disappeared.''
``The Governing Council has repeatedly warned that second- round effects, which come from the impact of past energy and food-price increases on price and wage-setting behavior, risk setting off a wage-price spiral,'' Bonello said. ``That would make domestic goods and services less competitive on foreign markets, it would threaten output and employment, so that is something which one wants to avoid as much as possible.''
To contact the reporters on this story: Blanche Gatt in Malta at bgatt@bloomberg.net; Gabi Thesing in Frankfurt at gthesing@bloomberg.net.
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Asia Will Help World Avoid Recession, Camdessus Says
By Clarissa Batino and Francisco Alcuaz Jr.
Oct. 7 (Bloomberg) -- Growth in Asia will prevent the world's economy from sliding into a recession, said Michel Camdessus, former managing director of the International Monetary Fund.
``Thanks to the dynamism of Asia, the global economy will avoid recession,'' Camdessus, 75, said in a speech in Manila today. ``The U.S., Europe and Japan will suffer this year and next from a severe slowdown.''
World economic growth stumbled in the last quarter and will hover around zero through the fourth quarter and the first three months of 2009, meriting the description of a ``mild recession,'' JPMorgan Chase & Co. said in a report yesterday. UBS AG predicts expansion worldwide of 2.2 percent next year, below the 2.5 percent level they view as a downturn.
Camdessus headed the IMF during the Asian financial crisis a decade ago, when the fund arranged over $100 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed. In return, governments were forced to cut spending, raise interest rates and sell state-owned companies.
The IMF will cut its global economic-growth forecast ``pretty significantly'' this month as the financial crisis throttles lending, Managing Director Dominique Strauss-Kahn said Oct. 4. The fund estimated global growth of 4.1 percent for 2008 and 3.9 percent in 2009.
``It certainly looks like there will be a global recession,'' said David Cohen, an economist at Action Economics in Singapore. ``The data and situation around the world over the past week has taken a turn for the worse.''
`Monetary Complacency'
The global economy will probably grow 3 percent, matching the pace of the last decade, and policy makers need to remain vigilant against the threat of inflation, leaving no room for ``monetary complacency,'' Camdessus said.
``We shouldn't lose sight of the fact that inflation is a problem now in the world together with the financial crisis,'' he said. ``You could never relax and believe inflation is over for long.''
Australia's central bank today cut its benchmark interest rate by one percentage point, the most since a recession in 1992, triggering a rebound in Asian stocks on speculation other countries will follow to unlock credit markets. Banks around the world have been hoarding cash, driving up lending rates, even as central banks including Australia's pump money into the financial system.
``It's a slightly different experience now than we had back in 1997 and 1998,'' said Cohen at Action Economics. ``Now the U.S. dollar is firmer and so is the Japanese yen. Even with the problem right now in the U.S. and Japanese economies, they don't have to worry about cutting interest rates if they want to.''
Scapegoats
Critics said the IMF's policies during the Asian crisis deepened the region's recession, and the IMF said in 1999 it ``badly misgauged'' the severity of the collapse, acknowledging its fiscal prescriptions for the three countries were too harsh.
``There were plenty of scapegoats, I was one among others,'' Camdessus said. Still, broadening the responsibilities of the IMF beyond balance of payments and monetary policy ``could have prevented the present crisis.''
The U.S., Europe and Asia should jointly take the lead in reforming global markets, he said. Global markets may recover before the end of next year with work by ``all countries with proper coordination.''
``I don't look for regulation that would stifle flexibility but we cannot have these sectors produce toxic products unregulated,'' Camdessus said. ``This is a must.''
To contact the reporter on this story: Francisco Alcuaz Jr. in Manila at falcuaz@bloomberg.net; Clarissa Batino in Manila at cbatino@bloomberg.net
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BOJ Says Economy `Sluggish,' Holds Key Rate at 0.5%
By Mayumi Otsuma
Oct. 7 (Bloomberg) -- The Bank of Japan acknowledged that a recovery in the world's second-largest economy may be delayed, saying there are ``substantial uncertainties'' about the outlook.
``Economic growth has been sluggish and these conditions may persist for some time given that the slowdown in overseas economies is becoming clearer,'' the bank said today after leaving the benchmark rate at 0.5 percent in a unanimous vote. It said the economy will pick up ``in the longer run.''
The Nikkei 225 Stock Average dipped below 10,000 for the first time since December 2003 today on concern the seizure in credit markets will deepen a slowdown in the country's export markets. Morgan Stanley cut its growth forecast for Japan today, saying the economy will shrink in the year ending March 31 as companies cut investment and global credit dries up.
``The pressure for a rate cut is increasing,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. ``The Bank of Japan is admitting the recovery will be delayed, given the weakening economy and tumbling markets.''
Banks around the world are hoarding funds, crippling money markets in the U.S. and Europe as the crisis that brought down Lehman Brothers Holdings Inc. spreads. The turmoil has wiped $21 trillion from world stock markets in the past year and prompted investors to sell higher-yielding assets and buy yen.
`Longer Run'
``Although there are substantial uncertainties, the economy, in the longer run, is expected to return gradually onto a moderate growth path'' as energy costs ease and markets abroad pick up, the central bank said. The words ``in the longer run'' were absent from last month's statement.
Japan's currency is trading near a three-year high against the euro and the strongest in five months versus the dollar, and that may hurt exporters, Economic and Fiscal Policy Minister Kaoru Yosano said today.
The yen weakened to 102.61 per dollar at 2:08 p.m. in Tokyo from 102.67 shortly before the announcement. The Nikkei fell 2.8 percent to 10,178.51 after earlier reaching as low as 9,916.21.
The Reserve Bank of Australia slashed its benchmark rate by one percentage point to 6 percent today, the biggest reduction since 1992.
Bank of Japan policy makers will release projections for gross domestic product and inflation on Oct. 31. The central bank in July lowered its forecast to 1.2 percent for the year ending March 31 and 1.5 percent for the following year.
Lower Growth
``The Bank of Japan will probably lower growth projections not only for the current fiscal year but also for the following year,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``With overseas economies facing liquidity issues, we anticipate a wave of freezes or reductions in capital spending plans, which is likely to affect domestic consumption.''
Deepening market turmoil in recent days has increased investors' expectations for a rate cut. Investors see a 31 percent chance the Bank of Japan will lower borrowing costs by December, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. The odds of a reduction by March are 50 percent.
``We expect the BOJ to ease monetary policy by 25 basis points as early as October-December in response to growing downside economic risk and tightening financial conditions resulting from yen appreciation and the stock-market decline,'' said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc., who also cut his growth forecast for Japan today.
Little Support
Izuru Kato, chief market economist at Totan Research Co. in Tokyo, said a rate cut would provide little support for the economy, though it can't be ruled out ``if global financial turbulence exacerbates.''
Other analysts say a reduction won't be an easy option for a central bank that says Japan's monetary conditions are already ``accommodative.'' Should ``downside risks'' decrease, the bank must consider the risk that keeping rates low for too long may overstimulate the economy, today's statement said.
``Given that BOJ board members consider current interest rates sufficiently accommodative, they wouldn't casually choose to cut rates,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo.
Economy Minister Yosano said last week cutting the key rate ``wouldn't be effective'' because it is already low.
Policy makers also said global inflation remains high and price expectations at home need to be watched closely.
Rate Cut
All 31 economists surveyed by Bloomberg News expected the benchmark overnight rate to stay at 0.5 percent today. Of 25 economists who gave predictions through June, two said the bank will cut rates and the rest expect no change. Governor Masaaki Shirakawa will speak at a press conference at 3:30 p.m.
Recent data suggest Japan's companies may face the revival of three excesses of inventory, capacity and labor that weighed on growth since an asset bubble burst in the 1990s. Shirakawa said last month the absence of these problems will shelter the economy from a significant slowdown.
Industrial output fell at the fastest pace in at least five years in August as shipments declined, pushing the inventory- shipment ratio to the highest level since March 2002. The central bank's quarterly Tankan survey released last week showed fewer companies had labor shortages and large manufacturers said they had excess capacity for the first time since 2005.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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Indonesia Raises Key Interest Rate as Inflation Gains
By Aloysius Unditu and Arijit Ghosh
Oct. 7 (Bloomberg) -- Indonesia's central bank raised its policy rate to slow inflation and boost the rupiah after the nation's stock index plunged 10 percent yesterday amid a global credit crisis.
Bank Indonesia Governor Boediono and his seven colleagues raised the BI Rate to 9.5 percent today, from 9.25 percent. Fourteen of 19 economists surveyed by Bloomberg News forecast today's move, with five expecting no change.
Indonesia refrained from joining Australia, which cut rates today by the most since a recession in 1992, China and Taiwan in reducing borrowing costs after inflation accelerated last month to a two-year high. Still, today's increase may be the last this year as the central bank shifts its focus to supporting growth, said Helmi Arman at PT Bank Danamon Indonesia.
``They must be careful not to overdo'' rate increases because it could affect growth, said Arman, based in Jakarta. ``At 9.5 percent there will already be a quite thick spread over inflation expectations.''
A benchmark rate of 9.5 percent would be ``adequate'' to keep price gains between 6.5 percent and 7.5 percent next year, Deputy Governor Hartadi Sarwono said in an interview on Aug. 8. Today's decision marked the sixth straight increase in the policy rate by Bank Indonesia.
``The move to increase the rate is consistent with our monetary-policy strategy,'' Boediono said at a briefing in Jakarta. ``The policy to stabilize the rupiah is directed toward avoiding excessive fluctuation.''
Rupiah Declines
The rupiah fell 0.2 percent to 9,595 against the dollar at 12:01 p.m. in Jakarta, extending yesterday's 1.5 percent decline. The currency has dropped 2.3 percent in the past month, increasing the cost of importing fuel, soybean and wheat.
``The need to support the rupiah should help Bank Indonesia justify its decision to raise the rate,'' said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta.
Consumer prices rose 12.1 percent from a year earlier last month, after gaining 11.85 percent in August.
``We expect inflation to remain above 11 percent through January, and for that reason,'' the central bank was expected to raise the rate, Michael Spencer, chief Asia economist at Deutsche Bank AG, said in a note to investors. ``Slowing growth and, eventually, falling inflation should see the central bank cutting rates in the second half of 2009.''
Accelerating inflation and a rout in commodity stocks led to the biggest decline in the benchmark stock index yesterday since the 2002 Bali bombings.
Indonesia's President Susilo Bambang Yudhoyono yesterday said his government seeks to keep economic growth at 6 percent and will remain alert amid the credit-crisis ``tsunami,'' which started in the U.S.
To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Aloysius Unditu in Jakarta at aunditu@bloomberg.net
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Australia Cuts Rate by Most Since 1992; Stocks Rise
By Jacob Greber
Oct. 7 (Bloomberg) -- Australia's central bank cut its benchmark interest rate by one percentage point, the most since a recession in 1992, triggering a rebound in Asian stocks on speculation other countries will follow to unlock credit markets.
``Rumors are now circulating that today's aggressive move by the Reserve Bank of Australia is the precursor for coordinated rate cuts by global central banks,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.
Today's reduction, twice as much as economists forecast, took the overnight cash rate target to 6 percent, the lowest since November 2006. Banks around the world have been hoarding cash, driving up lending rates, even as central banks including Australia's pump money into the financial system.
Reserve Bank Governor Glenn Stevens said in Sydney today that ``an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.''
Australia's S&P/ASX 200 stock index jumped 1.7 percent to 4,618.7 at the close in Sydney, reversing a drop of 0.5 percent immediately before today's decision. The MSCI Asia Pacific Index pared a 3.2 percent loss before the rate decision, and was down 1.2 percent. Futures on the U.S. S&P 500 Index also rose.
The Australian dollar initially fell before rising to 72.72 U.S. cents at 5 p.m. in Sydney from 72.06 cents before the central bank announcement. The currency has tumbled 26 percent since hitting a 25-year high of 98.49 cents on July 16.
Credit Rout
The Reserve Bank reduced Australia's benchmark interest rate by a quarter point a month ago after pushing borrowing costs to a 12-year high with a dozen similar increases between May 2002 and March this year. None of 21 economists surveyed by Bloomberg News forecast the size of today's cut. Sixteen predicted a half point and five tipped a quarter point.
The bank's move came after a rout wiped more than $2 trillion from global markets yesterday, sending the Dow Jones Industrial Average to its first close below 10,000 since 2004.
``It's obvious there's a need for synchronized global rate cuts,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``You've got the most savage tightening in financial markets in anyone's living memory and all the big central banks have sat on their hands.''
Robertson said the Bank of England is ``long overdue'' to slash borrowing costs by up to 1 percentage point, followed by the U.S. Federal Reserve and the European Central Bank.
ECB President Jean-Claude Trichet said policy makers discussed an interest-rate reduction on Oct. 2 for the first time since the credit squeeze began. Still, they left the benchmark unchanged at 4.25 percent.
`Shock Decision'
The ECB is due to meet again on Nov. 6, and Fed policy makers on Oct. 29. U.K central bankers, who meet Oct. 9, are forecast to lower their benchmark by at least 25 basis points.
Central banks in Thailand and South Korea also meet this week to review borrowing costs.
China will cut interest rates as many as five times by the end of 2009 and will step up spending to limit the effect of the ``global financial tsunami'' on the nation's economic growth, Hong Kong-based Morgan Stanley economist Qing Wang said today.
``This is a shock,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, said of today's decision. ``The Reserve Bank is clearly realizing monetary conditions were way too tight and they needed to do something about it pretty quickly.''
Economy Slows
Australia's economy grew 0.3 percent in the three months through June, the slowest quarterly expansion since the end of 2004, as consumer spending contracted for the first time since 1993.
Home-buyers have also become less willing to borrow after companies such as Qantas Airways Ltd. and Ford Motor Co. started firing workers. Banks have taken ``a more cautious attitude to lending'' and tripled provisions for bad debts, according to a Reserve Bank report last month.
Credit provided by banks and financial institutions to home buyers rose 0.4 percent in August, the smallest monthly increase in 22 years, and house-building approvals fell for a second month.
Today's decision means the ``economy could come roaring back to life very quickly if we can solve the liquidity problem,'' said billionaire Gerry Harvey, chairman of Australian retailer Harvey Norman Holdings Ltd. ``I just worry about the liquidity.''
Global Threat
The threat of slower global growth, coupled with ``the most difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier forecast,'' Stevens said today.
The Reserve Bank said in August that gross domestic product would expand 2 percent this year, after growing 4.3 percent in 2007.
Commonwealth Bank of Australia and Westpac Banking Corp., the nation's biggest lenders, cut their standard variable home loan rates by 80 basis points today.
That will reduce the monthly repayments on an average A$250,000 ($182,000) mortgage by almost A$140. About 90 percent of Australian home buyers have variable interest-rate loans that traditionally move with the central bank's benchmark.
The central bank is ``responding to the fear that is out there,'' said Alan Oster, chief economist at National Australia Bank Ltd. ``People are really nervous and they're not sure what to do. They're not investing.''
Australian Prime Minister Kevin Rudd said the government ``welcomes the decisive action by the Reserve Bank.''
Australia's rate cut won't necessarily start a coordinated effort among the biggest central banks to reduce borrowing costs because the Bank of Japan met today and held its benchmark at 0.5 percent, said Tsutomu Komiya, an investment manager at Daiwa Asset Management Co. in Tokyo with the equivalent of $94.4 billion in assets.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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