Brazil’s Real Falls as U.S. Slump Hurts Demand for Local Assets

By Adriana Brasileiro

Nov. 26 (Bloomberg) -- Brazil’s real fell for the first time in three days on signs the U.S. economic slump is worsening, curbing demand for higher-yielding, emerging-market assets.

The real declined 1.8 percent to 2.3577 per dollar at 9:10 a.m. New York time, from 2.3147 yesterday. Brazil’s real is the worst performer against the dollar in the past three months among the 16 major currencies tracked by Bloomberg, having tumbled 31 percent.

“The market is nervous and investors are reacting irrationally at any bad news,” said Rodrigo Boulos, treasurer at Banif Investment Bank in Sao Paulo.

Durable goods orders in the U.S. fell more than twice as much as forecast in October. Consumer spending dropped 1 percent last month, the most since 2001.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

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Ten-Year Gilt Yields Fall to Record Lows on Consumer Spending

By Matthew Brown and Anchalee Worrachate

Nov. 26 (Bloomberg) -- U.K. government bonds rose, sending the yield on the 10-year gilt to the lowest level in almost two decades, after a government report showed consumer spending dropped the most since 1995 and investment slumped.

The benchmark 10-year note advanced for a second day and the pound snapped three days of gains against the dollar after the Office for National Statistics said gross domestic product had its first quarterly decline in 16 years, matching an earlier reading on Oct. 24. U.K. stocks dropped for the first time in three days, with the FTSE 100 Index declining 1.8 percent.

“The economy is on its knees, inflation expectations are falling and asset prices are falling,” Laurence Mutkin, head of asset allocation at Morgan Stanley in London, said in a Bloomberg Television interview. That’s “very good news for government bonds.”

The yield on the 10-year gilt declined seven basis points to 3.80 percent as of 11:22 a.m. in London, the lowest level since at least 1981. The two-year note yield rose two basis points to 2.18 percent. Yields move inversely to bond prices.

A slump in global growth and almost $1 trillion of losses and writedowns at financial institutions fueled demand for the relative safety of government fixed-income this year. The Organization for Economic Cooperation and Development said yesterday that the world’s largest economies need further interest-rate reductions and tax cuts.

U.K. industrial production fell by 1.1 percent in the quarter and manufacturing dropped by 1.3 percent, the statistics office said today. Construction declined 0.7 percent.

Yield Spread

The difference in yield, or spread, between U.K. two- and 10-year notes narrowed seven basis points to 162 basis points today. It widened to a peak of 199 basis points Nov. 17 as investors favored two-year notes on speculation the Bank of England will keep cutting interest rates to buoy the economy, steepening the so-called gilt yield curve.

“People are extending out of the curve as the front end prices in pretty low rates from the Bank of England and anticipates the extra supply that we’re going to get,” Jason Simpson, a fixed-income strategist at Royal Bank of Scotland Group Plc in London, said in a telephone interview today. “There’s no reason to expect it not to go lower.”

The U.K. will sell a record amount of gilts this year as the looming recession chokes tax revenue. The government will issue 146.4 billion pounds ($225 billion) of debt in the year through March 31, the Debt Management Office said Nov. 24. That’s 83 percent more than the Treasury originally estimated.

Pound Falls

The pound declined to $1.5357, from $1.5472 yesterday. Against the euro, the U.K. currency traded at 84.49 pence, from 84.43 pence.

Bank of England Deputy Governor Charles Bean said yesterday the pound’s slide this year is the “right sort of magnitude.”

“There is a distinction between a decline in sterling that is necessary as part of the rebalancing process and one where external investors lose faith in the policy framework the U.K. operates under,” Bean told lawmakers yesterday. “It results in pressure on sterling, an old-fashioned sterling crisis. That I would be much more worried about.”

“We wouldn’t chase the pound,” said Geoffrey Yu, a currency strategist in London at UBS AG, the world’s second- largest foreign-exchange trader. “The risk is that it will fall further from here. The Bank of England is cutting interest rates, as well as talking down its currency.”

Interest-rate cuts and a deteriorating balance-of-payments outlook will cause the pound to weaken to at least 87 pence per euro in three months, Dresdner Kleinwort said.

Policy makers will need to lower the benchmark rate to at least 1.5 percent from the current 3 percent as the economy falters, according to Michael Klawitter, a currency strategist in Frankfurt for the bank.

‘Less Foreign Capital’

“The 87 pence forecast is looking cautious, given the challenges the U.K. is facing,” said Klawitter. “Given the fact that the Bank of England will continue cutting rates and the U.K. is running substantial deficits, it will attract considerably less foreign capital than in the past.”

The pound lost 31 percent against the yen, 23 percent versus the dollar and 6.5 percent against the euro since June. Gross domestic product will contract 1.25 percent in 2009, the most since 1991, according to Treasury forecasts, as the worst global financial crisis since the Great Depression takes its toll on the economy.

U.K. gilts returned 4.1 percent this month, according to Merrill Lynch & Co.’s U.K. Gilts Index. U.S. and European government bonds handed investors 4.7 percent and 3.5 percent, respectively, Merrill’s U.S. Treasury Master and EMU Direct indexes showed.

To contact the reporters on this story: Matthew Brown in London on mbrown42@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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Yen Rises on Speculation Global Recession Will Curb Carry Trade

By Ye Xie and Andrew Macaskill

Nov. 26 (Bloomberg) -- The yen rose against the euro as drops in consumer spending and durable-goods orders prompted speculation investors will sell higher-yielding assets and pay back low-cost loans in Japan’s currency.

The dollar gained versus the euro for the first time in four days as evidence the U.S. recession is deepening led investors to take refuge in government debt. The yen had its biggest gain against the South African rand and Brazilian real among major currencies on bets carry trades will unwind.

“The yen is the barometer for risk,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second-largest bank. “There’s little confidence in the market. It doesn’t look like the economy will pick up any time soon.”

The yen strengthened 1.1 percent to 123.04 per euro at 8:39 a.m. in New York, from 124.43 yesterday. The U.S. dollar fell 0.1 percent to 95.10 yen from 95.22. The euro fell 1 percent to $1.2933 from $1.3064. The pound declined 1.4 percent to $1.5251.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose to 85.583 from 85 yesterday. The index climbed to 88.463 on Nov. 21, the highest level since April 2006.

South Africa’s rand tumbled 1.3 percent to 9.5594 yen while the Brazilian real slumped 1.3 percent to 40.5582 on bets investors will unwind trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s target lending rate of 0.3 percent compares with 12 percent in South Africa and 13.75 percent in Brazil.

Bank of America

Bank of America Corp. raised its forecast for the yen against the dollar on expectations the Bank of Japan will delay cutting interest rates and Japanese investors will refrain from funneling funds into overseas assets offering higher returns.

The yen will only weaken to 97 per dollar at year-end and 100 at the end of March, compared with previous forecasts of 101 and 105, respectively, the bank said.

Japan’s currency remained higher after China’s central bank slashed its key interest rate by the most in 11 years to 5.58 percent to prevent an economic slump.

European Central Bank President Jean-Claude Trichet said in an interview with an Egyptian newspaper posted on the bank’s Web site that there may be “negative figures” for economic growth in the euro area next year.

Thailand’s baht slid as low as 35.35 per dollar, the weakest level since February 2007, as anti-government protesters stormed the main terminal at Bangkok’s international airport.

U.S. Spending

U.S. consumer spending, the biggest contributor to the U.S. economy, fell 1 percent last month, after declining 0.3 percent in September, the Commerce Department said today. Orders for long-lasting goods declined 6.2 percent, following a 0.2 percent decline in September.

Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures released by the Commerce Department yesterday.

The global recession may spur investor demand for the relative safety of Treasuries, helping to underpin the dollar, said UBS AG, the world’s second-largest foreign-exchange trader.

The yield on the benchmark 10-year U.S. note fell eight basis points to 3.03 percent today, approaching the record 2.99 percent reached less than a week ago.

“If the U.S. figures intensify recessionary fears, then we will see the dollar strengthening against the euro paradoxically,” said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “Fundamentals are not driving the market at the moment, so higher risk aversion is positive for the dollar.”

Government Debt

U.S. government securities returned 4.7 percent in November, heading for their biggest monthly gain since 1985, according to Merrill Lynch & Co.’s U.S. Treasury Master index.

The euro snapped a three-day winning stretch versus the dollar after a technical chart some traders use to predict price movements signaled its 3.8 percent gain in the past five days was excessive.

“The euro has run out of steam; there is nothing else to propel it forward,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., a custodian of $23 trillion of financial assets. “The dollar is still well- underpinned by risk aversion.”

The euro’s 14-day stochastic oscillator versus the dollar was about 85. A level above 80 suggests a reversal may occur.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Andrew Macaskill in London at amacaskill@bloomberg.net

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Copper Leads Gains on London Metal Exchange as China Cuts Rates

By Claudia Carpenter

Nov. 26 (Bloomberg) -- Copper led gains in London after China, the biggest user of industrial metals, cut interest rates the most in 11 years to ward off an economic slump.

The People's Bank of China slashed its one-year lending rate to 5.58 percent from 6.66 percent, less than three weeks after the government unveiled $586 billion in spending on housing and roads to help spur growth. China is the world's largest buyer of copper and aluminum.

``This should encourage lending so that should increase commerce,'' said Randy North, a trader at RBC Capital Markets in London. ``We'll see some of the measures beginning to have an impact in the second quarter.''

Copper for delivery in three months gained $105, or 2.8 percent, to $3,800 a metric ton as of 11:41 a.m. on the London Metal Exchange. Aluminum increased $5 to $1,815 a ton.

Copper has tumbled 43 percent this year and aluminum is down 25 percent.

China, the biggest contributor to global growth, will expand at the slowest pace in almost two decades next year, the World Bank forecast yesterday. Manufacturing contracted by the most on record in October as property prices fell and recessions in the U.S., Japan and Europe reduced demand for exports.

Copper inventories fell 875 tons to 286,350 tons, the first drop since Oct. 21. Stockpiles slid in Italy, the Netherlands, Singapore and South Korea, according to figures from the London Metal Exchange. The stocks are still up 45 percent this year.

Inventory Changes

Lead inventories fell 125 tons to 40,950 tons, the lowest since Nov. 6, 2007. Stockpiles of lead have dropped 10 percent this year, while aluminum inventories are up 88 percent and zinc stockpiles have more than doubled.

The three-month lead contract jumped $21 to $1,211 a ton.

``Lead is the most tightly supplied market on the LME,'' said Johan Gahm, an investor in Stockholm who follows industrial metals. Demand is being buoyed by demand for products such as electric bikes, while supplies are falling because of mine closures in the zinc market. Lead is a byproduct of zinc output.

Lead production cuts and delays announced since October equal 4.7 percent of estimated 2008 lead mine output, Gahm said.

Zinc gained $30 to $1,280 a ton, nickel added $200 to $10,700 a ton and tin jumped $300 to $13,200 a ton.

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

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Cheapest Gulf Stocks May Get Cheaper as Oil Retreats

By Michael Patterson

Nov. 26 (Bloomberg) -- Stocks in Dubai, Abu Dhabi and Saudi Arabia that more than doubled the past four years are unraveling as lower oil and real-estate prices weaken economies in the biggest crude-producing region.

The MSCI GCC Countries Index of 115 gulf companies, already down 57 percent in 2008 through yesterday, may drop 20 percent in the next six months, said Jeff Chowdhry, who helps oversee $150 billion at F&C Asset Management. Ten months after the index traded at 20 times reported earnings, Emaar Properties PJSC, the Middle East’s largest developer, trades below 3 times profit; Emirates NBD PJSC, the U.A.E.’s biggest bank, is valued at 5.

Now some of the world’s biggest emerging-market investors say valuations may fall further because prices don’t reflect the collapsing property market and 66 percent tumble in oil since its July 11 record. Templeton Asset Management’s Mark Mobius says stock markets in South Africa and China are more attractive.

“If anyone’s got any Middle Eastern stocks I would be taking this opportunity to sell,” Chowdhry, F&C’s head of emerging-market equities, said in an interview from London. “It’s a combination of a deteriorating fundamental outlook, bubble valuations which are just starting to unwind in real estate and banks, plus liquidations in funds.”

Cheapest Shares

The Dubai Financial Market General Index of 29 companies in the emirate surged 493 percent from 2004 to 2007 as residential property prices climbed four-fold in the last five years and a 195 percent rise in oil boosted government spending. The Abu Dhabi Securities Exchange General Index jumped 159 percent during that period, while Saudi Arabia’s Tadawul All Share Index gained 149 percent.

All three indexes tumbled more than 40 percent this year and traded this week at the cheapest levels on record compared with earnings, cash flow and net assets, according to data compiled by Bloomberg.

The Dubai index today added 0.5 percent at 11:21 a.m. London time, while the Abu Dhabi gauge declined 1.7 percent. The Tadawul index lost 0.9 percent.

Emaar Properties, the second-worst performer this year in the Dubai index, is valued at 2.4 times earnings after falling 83 percent in 2008. Dubai-based Emirates NBD trades for 5 times profit after a 71 percent retreat.

The Dubai index’s 69 percent decline in 2008 through yesterday was the steepest among benchmarks in the world’s 50 biggest equity markets. China’s CSI 300 Index lost 66 percent, while India’s Sensitive Index dropped 57 percent.

Forced Selling

Templeton’s Mobius said Nov. 17 that he’s “aggressively” buying in other emerging markets such as China and South Africa and it’s too early to go “bargain hunting” in the Gulf.

“We really didn’t like the Middle East because it was up too high and there were so many other bargains around,” Mobius, who manages about $24 billion of emerging-market assets as executive chairman at Templeton, said in an interview from Johannesburg.

While the deteriorating outlook for profits caused the retreat in Gulf stocks at the start of the year, this month’s 20 percent decline in the MSCI GCC index is mostly the result of sellers who dumped shares to repay loans, according to Oliver Bell, the head of emerging-market specialist equities at Pictet Asset Management, which oversees about $91 billion.

Arabtec Holding Co., the construction company building the world’s tallest tower in Dubai, has tumbled 42 percent this month and traded for 1.8 times earnings this week, the cheapest since Bloomberg began tracking the data in 2005.

Growth Slows

“It’s left some companies where the fundamentals really haven’t changed that much and yet they are trading at ridiculous valuations that give you a once in a lifetime opportunity,” said Bell, who runs Pictet’s Middle East and North Africa equity fund in London. Bell isn’t buying yet, because “at the end of the day you’re catching a falling knife,” he said.

Middle East economic growth will slow to 5.3 percent next year from 6.1 percent in 2008, the International Monetary Fund estimates. The IMF expects China’s economy to grow at an 8.5 percent pace next year and India to expand by 6.3 percent, according to the Washington-based fund’s World Economic Outlook.

Property prices in Dubai fell 4 percent in October, and declined 5 percent in Abu Dhabi, signaling a “turning point” in the markets, London-based HSBC Holdings Plc said in a Nov. 12 research note.

HSBC and London-based Lloyds TSB Group Plc, two of the largest banks operating in the U.A.E., restricted lending in the region this month. Dubai’s two largest mortgage lenders, Amlak Finance PJSC and Tamweel PJSC, will be taken over by a government-owned bank.

‘Property Bubble’

“The property bubble has just recently burst and the impact of that on psychology is going to take place here for a few more months,” said Cliff Quisenberry, who advises hedge funds at University Place, Washington-based research and consulting firm Investment Frontiers Research LLC.

Abu Dhabi, which owns nearly 8 percent of the world’s proven total oil reserves and runs the largest sovereign wealth fund, may cushion the region’s economy from losses at banks and real-estate developers. The emirate won’t allow Dubai’s state- owned companies default on debt payments, Abu Dhabi Commercial Bank Chief Executive Officer Eirvin Knox said this month in an interview in Abu Dhabi.

F&C’s Chowdhry says oil’s tumble from a July record $147.27 a barrel to $50.77 yesterday may hamper the ability of governments to rescue developers and construction companies while they shore up financial companies such as Amlak.

‘Daunting’

Middle East oil-producing nations excluding Kuwait may post “sizeable” fiscal and current account deficits if oil averages $50 a barrel next year, Citigroup Inc. said in a research note last week. Economic challenges facing the Gulf nations are becoming “increasingly daunting,” the New York-based bank said.

Lenders in the region are competing for local deposits after overseas investors pulled money, said Fahmi Alghussein, an executive director at New York-based Morgan Stanley. That’s pushing up interest rates on certificates of deposit and luring cash from stocks, Alghussein said.

“Banks are chasing depositors for funds in the region,” said Alghussein, who runs Morgan Stanley’s Middle East equity sales and distribution from Dubai. “That’s pushing money out of equities and other asset classes. As long as you have that, there’s no catalyst to invest in equities.”

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

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German Stocks Snap Two Days of Gains; SAP, BASF Lead Declines

By Stefanie Haxel

Nov. 26 (Bloomberg) -- German stocks declined for the first time in three days as European Central Bank President Jean-Claude Trichet said the euro-area economy may contract in 2009.

SAP AG dropped for a first time this week after Societe Generale SA recommended selling shares of the world’s largest maker of business-management software. BASF SE, the biggest chemical producer, fell 3.8 percent.

Germany’s benchmark DAX Index slipped 47.08, or 1 percent, to 4,513.34 at 1:02 p.m. in Frankfurt, having earlier risen as much as 1.1 percent. DAX futures expiring next month declined 1.6 percent. The broader HDAX Index fell 0.9 percent to 2,244.33.

Trichet said there may be “negative figures” for growth next year, according to an interview with an Egyptian newspaper posted on the ECB Web site today. Europe’s economy slipped into its first recession in 15 years in the third quarter, upping the pressure on lawmakers to reduce the cost of borrowing.

The U.S. recession may have deepened as consumer spending, the biggest part of the economy dropped in October by the most since the 2001 contraction, economists said before a government report today. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis.

“We are seeing the biggest stimulation of the U.S. economy on the one hand and recession concerns on the other,” said Robert Halver, head of research at Baader Bank in Frankfurt.

‘Another Warning’

SAP lost 74 cents, or 2.7 percent, to 26.72 euros. Societe Generale lowered its recommendation to “sell” from “hold,” citing the “risk of another warning” on fourth-quarter license revenue.

BASF fell 96 cents, or 3.8 percent, to 24.23 euros.

Deutsche Telekom AG dropped 12.5 cents, or 1.1 percent, to 10.87 euros. The stock was cut to “underperform” from “market perform” at Sanford C. Bernstein & Co.

Europe’s biggest phone company “is likely to either reduce or disappoint investor expectations for 2009 as the recession impacts their business more seriously and as the U.S. business suffers increasingly at the hands of competition,” Robin Bienenstock, an analyst in London, wrote in a report today. The share-price estimate was cut to 10 euros from 12.50.

E.ON AG lost 1.17 euros, or 4.3 percent, to 26.14. Germany’s biggest utility settled a European Union antitrust investigation by agreeing to sell its extra-high voltage network and divest about 5,000 megawatts of generation capacity.

To contact the reporter on this story: Stefanie Haxel in Frankfurt at shaxel@bloomberg.net.

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Europe Stocks, U.S. Futures Fall on Economy; GDF Suez, GM Drop

By Sarah Jones

Nov. 26 (Bloomberg) -- European stocks fell for the first time in three days and U.S. index futures declined on concern recessions around the world are deepening.

GDF Suez SA sank 5.7 percent as the world's second-largest utility forecast a ``shortfall'' in the fourth quarter unless natural gas prices are raised. General Motors Corp. and Home Depot Inc. slumped more than 3 percent in Germany.

``Policy makers are recognizing the sense of urgency involved in responding to this crisis,'' said Mike Lenhoff, who helps oversee about $36.4 billion as chief strategist at Brewin Dolphin Securities Ltd. in London. ``The market is trying to establish some kind of platform. We haven't seen good news flow and won't see it for months.''

Europe's Dow Jones Stoxx 600 Index slid 2.5 percent to 193.88 as of 1:35 p.m. in London, after earlier rising as much as 0.7 percent. Futures on the Standard & Poor's 500 Index lost 2.1 percent. The MSCI Asia Pacific Index was little changed.

Stocks in Europe and U.S. index futures extended declines after a report showed orders for U.S. durable goods fell twice as much as forecast in October as the credit freeze deepened and sales tumbled.

Earlier, BCE Inc., Canada's largest phone company, said it might not be able to complete its takeover on schedule, sending stocks lower. BHP Billiton yesterday scrapped its $66 billion bid for Rio Tinto Group, citing turmoil in the financial markets.

The Stoxx 600 has fallen 47 percent in 2008, headed for its worst year on record, as credit losses and writedowns approached $1 trillion in the worst financial crisis since the Great Depression.

`Negative Figures'

National benchmark indexes declined in all 18 markets in western Europe. The FTSE 100 lost 2.7 percent, with Royal Dutch Shell Plc and BP Plc slipping more than 4 percent. France's CAC 40 sank 3.4 percent, led by GDF Suez and Total SA. Germany's DAX slipped 2.9 percent.

European Central Bank President Jean-Claude Trichet said there may be ``negative figures'' for economic growth in the euro area next year.

``Negative figures for growth in 2009 are gradually appearing,'' Trichet said in an interview with an Egyptian newspaper posted on the ECB Web site today. For the euro area, ``we will see exactly what the macroeconomic projections are in the forthcoming days.''

Europe's economy slipped into its first recession in 15 years in the third quarter.

GDF Suez tumbled 5.7 percent to 30.905 euros. The world's second-biggest utility said it expects a ``shortfall'' of 440 million euros ($570.3 million) in the fourth quarter unless French state-set prices for natural gas are raised before the end of the year.

GM, Home Depot

``Current tariffs notably do not take into account spikes in oil prices over the summer,'' the Paris-based company said today in a presentation posted on its Web site. GDF Suez didn't elaborate on what measure of profit the shortfall related to.

General Motors, the carmaker that's seeking U.S. aid to survive, declined 3.9 percent to $3.42 in Germany. Home Depot, the world's biggest home-improvement retailer, lost 3.3 percent to $21.52.

The 6.2 percent drop in bookings of goods meant to last several years was the biggest in two years and followed a revised 0.2 percent decrease in September, the Commerce Department reported. A separate report from Commerce showed consumer spending fell by the most since the 2001 recession.

Tiffany & Co. fell 7.6 percent to $19.25 in pre-market trading after cutting its outlook as sales growth shrank. The world's second-largest luxury-jewelry retailer reduced its forecast full-year earnings of $2.30 to $2.50 a share, lower than the $2.82 to $2.92 it had projected.

Shell, Total

Shell, Europe's largest oil company, sank 4.7 percent to 1,634 pence. BP, the region's second-biggest, dropped 4.9 percent to 495.25 pence. Total, the largest refiner, slumped 3.5 percent to 40.29 euros.

Crude fell $3.73, or 6.8 percent, to $50.77 a barrel yesterday in New York. Oil climbed 65 cents today.

Merrill Lynch & Co. cut its 2009 oil price forecast to $50 a barrel from $90 to reflect the ``very weak'' economic outlook and falling global demand for oil. The bank lowered its 2010 estimate to $70 from $100.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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BCE, Nexen, Suncor, Thomson Reuters: Canada Equity Preview

By John Kipphoff

Nov. 26 (Bloomberg) -- The following companies may have unusual price changes in Canadian trading today. Stock symbols are in parentheses, and share prices are from the previous close in Toronto.

The Standard & Poor’s/TSX Composite Index added 1.99 points, or less than 0.1 percent, to 8,442.86.

Canadian oil producers Suncor Energy Inc. (SU CN), Nexen Inc. (NXY CN), Canadian Oil Sands Trust (COS-U CN) and Pengrowth Energy Trust (PGF-U CN) were cut to “underperform” from“buy” at Merrill Lynch & Co. after the brokerage reduced its 2009 oil price forecast to $50 from $90 to reflect the “very weak” economic outlook. Husky Energy Inc. (HSE CN) and Petrominerales Ltd. (PMG CN) were downgraded to “neutral” from “buy.”

Suncor rose 1.5 percent to C$23.30. Canadian Oil Sands fell 1 percent to C$23.45. Pengrowth dropped 2.1 percent to C$11. Husky added 1.2 percent to C$31. Petrominerales declined 7.4 percent to C$8.05.

BCE Inc. (BCE CN): Canada’s largest phone company said the credit slump may prevent its C$52 billion ($42 billion) takeover from closing on time, signaling the buyout may collapse.

The shares may fall as low as C$24 according to bids already submitted on the Toronto Stock Exchange. That’s 37 percent below yesterday’s closing price and 44 percent less than the C$42.75 a share offered by the Ontario Teachers’ Pension Plan and its partners.

Canadian National Railway Co. (CNR CN): The nation’s largest railroad and its smaller rival Canadian Pacific Railway Ltd. (CP CN) lost a bid at the federal court of appeals to reverse a government-ordered rate cut for grain shipments.

Canadian National, which had sales of C$7.9 billion in 2007, said the decision will reduce annual grain revenue by C$23 million ($19 million). Canadian National fell 0.6 percent to C$42.95. Canadian Pacific dropped 2.4 percent to C$37.74.

Rogers Sugar Income Fund (RSI-U CN): The owner of a sugar manufacturer said that the Toronto Stock Exchange authorized it to buy back more than 6.38 million of its units, or 10 percent of the total outstanding. Recent prices of the units do not reflect their value, Montreal-based Rogers Sugar said in a statement on Marketwire. The units rose 2 percent to C$3.54.

Thomson Reuters Corp. (TRI CN): The provider of financial and legal data was cut to “sell” from “hold” by Royal Bank of Scotland analysts led by Paul Gooden in London. The shares were unchanged at C$28.75.

To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.

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U.K. Stocks Slip, Led by Shell, BP; Merrill Cuts Oil Forecasts

By Adam Haigh

Nov. 26 (Bloomberg) -- U.K. stocks dropped for the first time in three days, led by energy producers on concern the global economic slowdown will damp demand for commodities and crimp profits.

Royal Dutch Shell Plc and BP Plc, Europe’s two largest oil producers, fell more than 3 percent as Merrill Lynch & Co. slashed its 2009 oil price forecast to reflect the “very weak” economic outlook.

The benchmark FTSE 100 Index lost 74.62, or 1.8 percent, to 4,096.63 at 12:18 p.m. in London. The FTSE All-Share Index dropped 1.5 percent, and Ireland’s ISEQ Index gained 0.7 percent.

U.K. consumer spending dropped the most since 1995 and investment fell in the third quarter as the economy slid into a recession, crippled by the financial crisis.

“It’s best to remain defensive,” said Christian Gattiker, Zurich-based head of equity strategy at Bank Julius Baer & Co. which manages about $307.6 billion globally. “We are underweight equities and hold an overweight position in cash. Given all the macro news flow and the distortion in credit markets, it’s still too early to become risk hungry,” he told Bloomberg Television.

U.K. gross domestic product dropped 0.5 percent from the second quarter, the first decline in 16 years, the Office for National Statistics said today in London. The result matched a previous estimate and the median prediction of 32 economists in a Bloomberg News survey. Consumer spending fell 0.2 percent and fixed investment dropped by 2.4 percent.

The benchmark FTSE 100 index has lost 36 percent in 2008, headed for its worst year since at least 1984, as global credit losses and writedowns approached $1 trillion.

Shell Declines

Shell, Europe’s biggest oil producer, lost 4.3 percent to 1,639 pence and BP, the second largest, dropped 4 percent to 499.5 pence.

Merrill cut its 2009 oil price estimate to $50 a barrel from $90, citing falling global demand. The bank’s 2010 forecast was lowered to $70 a barrel from $100. The brokerage said earlier this month that global demand will contract by 400,000 barrels a day next year.

The following stocks also rose or fell in the U.K. market. Stock symbols are in parentheses:

U.K. companies:

United Utilities Group Plc (UU/ LN) slid 28 pence, or 4.4 percent, to 616. The U.K.’s largest publicly traded water company said that while it can meet financing needs into 2010, it’s “facing increasing cost pressures” in power and bad debts.

Xaar Plc (XAR LN) slid 11 pence, or 19 percent, to 47 pence. The U.K. maker of ink-jet printer parts said it sees no improvement in the fourth-quarter so far.

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

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U.S. Stock Futures Fall as Data Points to Deepening Recession

By Elizabeth Stanton

Nov. 26 (Bloomberg) -- U.S. stock futures tumbled, indicating the Standard & Poor’s 500 Index may snap a three-day advance, after orders for durable goods fell twice as much as forecast and consumer spending declined the most since 2001.

Caterpillar Inc., General Motors Corp. and Boeing Co. led declines in Dow Jones Industrial Average stocks trading in Europe after the government reported a 6.2 decrease in bookings of goods meant to last several years, the biggest drop in two years. Home Depot Inc. lost 3.3 percent and McDonald’s Corp. slipped 2.1 percent after the Commerce Department said purchases shrank by 1 percent last month.

“The reality is 2009 is pretty much set up to be a rough year economically,” Hayes Miller, head of the North American investment team at Baring Asset Management, told Bloomberg Television. Baring Asset Management oversees $39 billion.

Futures on the S&P 500 expiring in December lost 1.8 percent to 838.1 at 8:47 a.m. in New York. Dow Jones Industrial Average futures fell 1.4 percent to 8,330, while Nasdaq-100 Index futures slipped 0.5 percent to 1,129.75.

The S&P 500 yesterday climbed for a third day after the deepening recession prompted the Federal Reserve to commit as much as $800 billion to help resuscitate lending to homeowners, consumers and businesses. The index swung between gains and losses more than 20 times before closing 0.7 percent higher.

2008 Tumble

The index has tumbled 42 percent this year as credit- related losses and writedowns at financial companies worldwide approached $1 trillion, threatening global economic growth.

China’s central bank slashed its key lending rate by the most in 11 years today, extending efforts to prevent an economic slump less than three weeks after unveiling a 4 trillion-yuan ($586 billion) stimulus plan.

U.S. President-elect Barack Obama and Timothy Geithner, his choice for Treasury Secretary, are going to take over an economy that will shrink 2.05 percent this quarter, based on a Bloomberg survey of banks and securities companies. That would be the largest contraction in almost two decades.

Stock dividends are disappearing at the fastest rate in 50 years as the global credit crunch forces 91 U.S. companies led by Citigroup Inc., Genworth Financial Inc. and New York Times Co. to conserve cash, according to data compiled by Standard & Poor’s.

Capital ratios at Citigroup Inc. and other U.S. banks will fall and the government’s cash injections just “plug holes” in the companies’ balance sheets, Oppenheimer & Co.’s Meredith Whitney said in a Bloomberg Television interview.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

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Stimulus plans centre stage

Specialists work on the floor of the New York Stock Exchange in New York November 25, 2008.
REUTERS/Lucas Jackson

By Jeremy Gaunt

LONDON (Reuters) - Massive stimulus plans to drive the world out of recession took center stage on Wednesday with Europe considering a more than 130 billion euro boost following the U.S. Federal Reserve's $800 billion credit market bailout.

Underlining the troubles facing industry, Toyota Motor Corp had its top-notch credit rating cut for the first time in a decade.

French Economy Minister Christine Lagarde said an economic stimulus plan to be unveiled later in the day by the European Commission may amount to more than a previously expected 130 billion euros ($168.9 billion).

The Commission is set to urge the European Union's 27 countries to unite on a two-year dash for growth, even if it means breaking the region's national deficit targets.

Under draft proposals seen by Reuters, the EU executive cites the scope for further interest rate cuts, and suggests a variety of possible stimulus policies ranging from tax cuts to increased social benefits.

"The measures have to be targeted so that after the two years, when we have got out of the crisis period, we can get back to the principles of managing public finances, controlling and reducing deficits, reducing public debt," Lagarde told French media.

European Central Bank President Jean-Claude Trichet was quoted in Egypt's Al Ahram newspaper as saying that the ECB would do what it takes to provide liquidity to financial markets over the short term.

Elsewhere, Indonesia has approached Australia, the World Bank and other creditors to help cover its budget deficit next year, an Indonesian finance ministry official said.

The moves in Europe follow Tuesday announcement by the U.S. central bank, the Federal Reserve, of an $800 billion plan to buy mortgage-related debt and back consumer loans.

Under the life-support intervention, it is putting $600 billion toward mortgage-related debt and securities and $200 billion to support consumers.

Equity markets slipped on Wednesday over worries about the impact of huge stimulus programs on national accounts. Japan's Nikkei average shed 1.3 percent and the index of top European shares was down 1.2 percent in early trade.

SLIDING ECONOMIES

Governments across the world are struggling to keep their economies from sliding deep into recession.

The Organisation for Economic Cooperation and Development forecast on Tuesday that growth among its 30 member nations would contract by 0.4 percent next year, with "negative growth" in 19 countries.

Chancellor Angela Merkel told Germany's parliament that the financial crisis would lead to a sharp economic slump.

More evidence of the deteriorating global economy's impact on business came when Fitch Ratings downgraded Toyota's long-term foreign and local debt ratings to AA from AAA, with a negative outlook.

"The negative developments in the industry are so substantial and fundamental that even the strongest player -- Toyota -- can no longer support an 'AAA' rating," said Fitch Director Tatsuya Mizuno.

On Tuesday, another casualty was mining company BHP Billiton's $66 billion bid for rival Rio Tinto. BHP blamed the financial crisis and sliding metals prices.

(Additional reporting by Reuters bureaux worldwide, editing by Mike Peacock)

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HSBC leads HK shares up 3.8 pct;metals,property jump

* Metals surge on scuppered BHP-Rio deal

* Banks, exporters supported by Fed's $800 bln rescue plan

* Wharf up after Goldman Sachs adds it to conviction buy list

* Local property counters rally on Morgan Stanley upgrades

(Updates to close)

By Parvathy Ullatil

HONG KONG, Nov 26 (Reuters) - Hong Kong shares rose 3.8 percent on Wednesday, with HSBC (0005.HK: Quote, Profile, Research, Stock Buzz) and exporters rallying on the U.S. Federal Reserve's latest rescue plan, while metal producers surged after BHP Billiton scuppered its bid for rival Rio Tinto.

But turnover remained thin and price momentum stayed weak, suggesting the market's two-day rally may be short-lived.

"There are very few funds flowing in despite the big gains on the index, which means there is no stability yet. The market will likely drop tomorrow," said Linus Yip, strategist with First Shanghai Securities.

Shares in U.S-focused consumer goods exporter Li & Fung (0494.HK: Quote, Profile, Research, Stock Buzz) jumped 7.7 percent on the U.S. Federal Reserve's plan to spur consumer lending by buying up billions of dollars of debt and mortgage-backed securities.

Europe's top lender, HSBC Holdings, tracked gains in its Wall Street peers to climb 5.9 percent, while Standard Chartered (2888.HK: Quote, Profile, Research, Stock Buzz), which was hammered on Monday on its planned $2.69 billion rights issue, bounced back 10.5 percent.

"With the focus on the mortgage market this time, this rescue plan is expected to lift consumer lending and encourage spending. Export companies are all rallying today," said Kenny Tang, research head at Redford Securities.

The benchmark Hang Seng Index .HSI ended up 490.85 points at the day's high of 13,369.45.

Mainboard turnover edged up to HK$41.7 billion from HK$41.2 billion at midday on Tuesday.

The China Enterprises Index of top locally listed mainland Chinese firms .HSCE had gained 4.2 percent to 6,934.11.

More talk of interest rate reductions on the mainland sent China Construction Bank (0939.HK: Quote, Profile, Research, Stock Buzz) up 4.3 percent, while top lender ICBC (1398.HK: Quote, Profile, Research, Stock Buzz) gained 2.7 percent. Property developer R&F Guangzhou (2777.HK: Quote, Profile, Research, Stock Buzz) added 10.5 percent.

METALS SURGE

Aluminum Corp of China (2600.HK: Quote, Profile, Research, Stock Buzz) soared 8.5 percent on BHP Billiton's (BHP.AX: Quote, Profile, Research, Stock Buzz) dropped bid for rival Rio Tinto, a planned mega-merger which would have created a global mining giant.

The company's parent, Chinalco, said it planned to increase its holding in Rio (RIO.L: Quote, Profile, Research, Stock Buzz) (RIO.AX: Quote, Profile, Research, Stock Buzz) to at least 14.99 percent from the 12 percent it holds now [ID:nHKG83636].

"Chalco has nothing to do with BHP or Rio directly but the entire metals and mining pack is higher today after the threat of a BHP-Rio monopoly was removed," said Castor Pang, strategist with Sun Hung Kai Financial.

"The stock has dropped very sharply this year and investors are not expecting any more bad news from the company in the short term, helping a big rebound today."

Chinese steelmakers joined peers around the world in heaving a sigh of relief on the scuppered deal, which would have controlled a third of the world's seaborne trade in iron ore.

Angang Steel (0347.HK: Quote, Profile, Research, Stock Buzz) jumped 13.3 percent, while on the Shanghai bourse, Baoshan Iron & Steel (600019.SS: Quote, Profile, Research, Stock Buzz) bulked up 3.9 percent on the news, defying a mostly flat broad market.

Wharf Holdings (0004.HK: Quote, Profile, Research, Stock Buzz), a Hong Kong-based property conglomerate, rallied 12.9 percent after Goldman Sachs added the stock to its conviction buy list on its cheap valuations. The U.S. investment bank said further stimulus measures from China to revive its ailing property sector would help the stock.

Other property counters also gained, with Sun Hung Kai Properties (0016.HK: Quote, Profile, Research, Stock Buzz) vaulting 8.6 percent after Morgan Stanley upgraded it to equal weight from underweight follwing a 45 percent drop in the stock since mid-September. Sino Land (0083.HK: Quote, Profile, Research, Stock Buzz) which was raised to overweight from equal weight jumped 8.2 percent.

(Editing by Anne Marie Roantree)

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Nikkei slips 1.3 percent as fear and optimism war

* Nikkei slips 1.3 percent

* Investors torn between optimism over Fed, fear over economy

* Exporters pare losses as yen pulls back, but still down

* Defensive shares provide support, but some are sold (Adds stocks, details)

By Elaine Lies

TOKYO, Nov 26 (Reuters) - Japan's Nikkei average fell 1.3 percent on Wednesday as a weaker yen helped exporters such as Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) cut losses and optimism over a U.S. Federal Reserve bailout warred with fears over the global economy. Panasonic Corp (6752.T: Quote, Profile, Research, Stock Buzz) shed well over 3 percent after Goldman Sachs said it had broken off talks for now on the possible sale of Goldman's shares in Sanyo Electric Co Ltd (6764.T: Quote, Profile, Research, Stock Buzz), while car makers fell after more poor U.S. data underlined its bad economy.

Still, not all the news was bad. Elpida Memory, battered by heavy selling in recent weeks, soared 22.7 percent to rise by its daily limit after the Nikkei business daily reported the chipmaker has developed the world's smallest dynamic random access memory (DRAM) chip. Though the market welcomed the Federal Reserve's massive new programme to aid the beleaguered American consumer, a programme that helped the Dow and S&P 500 extend gains on Tuesday, many players noted that numerous problems remain and have yet to be adequately dealt with.

"The Fed appears to have moved quickly, but how soon will this policy actually have an impact? In a way, its scale underlines how serious the situation is," said Takashi Ushio, head of the investment strategy division at Marusan Securities.

"The problems of GM and Ford still remain, so there's still a lot of uncertainty."

The Fed said it will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae (FNM.P: Quote, Profile, Research, Stock Buzz), Freddie Mac (FRE.P: Quote, Profile, Research, Stock Buzz) and the Federal Home Loan banks. It will also purchase up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. [ID:nN25261467]

The central bank also teamed up with the Treasury Department to launch a $200 billion facility to support consumer finance.

In very thin trade, the benchmark Nikkei .N225 had shed 110.71 points to 8,213.22, while the broader Topix .TOPX was down 1.7 percent to 817.22 as investors grappled with the meaning and potential of the recent U.S. moves.

"As far as the U.S. financial sector goes, it seems as if the worst is over, and (President-elect Barack) Obama is moving very energetically on the economy," said Takahiko Murai, general manager of equities at Nozomi Securites. "But there is also a sense it may already be too late." WARY EYE ON YEN Investors were carefully watching the moves of the yen, which was edging up against both the dollar and the euro although it was off earlier highs .

"The market has gained some confidence after the Fed put that much money into its bailout, the only thing I'm really worried about right now is currencies," said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

Exporters were hit by a report showing the U.S. economy shrank at a faster rate in the third quarter than was originally estimated, while the fall in U.S. house prices accelerated. [ID:nN25493180]

Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) was nailed by the stronger yen, the poor U.S. economic outlook, and its first ratings cut in a decade by a major ratings agency to become the fourth-largest drag on the Nikkei 225 by volume weight.

Fitch Ratings said it had downgraded Toyota's long-term foreign and local currency issuer default ratings and senior unsecured debt ratings to AA from AAA. Toyota shares fell 4.6 percent to 2,985 yen.

Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz) fell 1.9 percent to 2,050 yen and Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) lost 2.9 percent to 2,820 yen. Hitachi Ltd (6501.T: Quote, Profile, Research, Stock Buzz) fell 4 percent to 429 yen.

Panasonic, the world's largest maker of plasma TVs, said this month that it wanted to buy smaller rival Sanyo but had not set a price with Goldman and Sanyo's two other main shareholders [ID:nT305137]. It lost 3.6 percent to 1,347 yen.

While the market was bolstered by a strong showing by communications shares and some defensive stocks such as soy sauce giant Kikkoman Corp (2801.T: Quote, Profile, Research, Stock Buzz), other defensives were sold.

Elpida climbed to 432 yen after the Nikkei report, and the company confirmed that the new 1-gigabit DDR3 DRAM chip, using a 50-nanometre process, is less than 40 square millimetres. It plans to start mass production during the January-March quarter in 2009.

Trade was very thin, with 1.67 billion shares changing hands on the Tokyo exchange's first section compared with last week's daily average of 2.1 billion, the lowest since mid-September.

Declining shares outnumbered advancing ones by nearly 3 to 1.

(Reporting by Elaine Lies; editing by Sophie Hardach)

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European shares fall in early trade, led by oils

LONDON, Nov 26 (Reuters) - European shares fell in early trade on Wednesday, snapping a two-day gain, with oils the biggest casualties.

At 0808 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was down 1.2 percent at 823.16 points.

The index rose 0.6 percent on Tuesday, and 8.9 percent on Monday but has lost more than 44 percent this year, hurt by a credit crisis and economic slowdown.

"The Fed's move (to encourage lending) was taken low-key by the market," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin. "You can't force banks to lend if they don't want to. Earnings worries are still there. Markets are waiting to see a deceleration of the rate of economic decline. If there are signs of stability, we could have a rally." Crude prices CLc1 slipped 0.6 percent to $50.48 a a barrel. Total (TOTF.PA: Quote, Profile, Research, Stock Buzz), ENI (ENI.MI: Quote, Profile, Research, Stock Buzz), BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), and BG (BG.L: Quote, Profile, Research, Stock Buzz) fell between 1.5 and 2.5 percent.

Across Europe, Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC-40 .FCHI were down 1.2 to 1.7 percent. (Reporting by Brian Gorman)

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Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Nov 26 08 08:29 GMT |

Overview & economic commentary The 2nd estimate of UK Q3 gdp is not expected to spring any surprise this morning provided that the ONS makes no backward revisions. This implies that growth is forecast to have contracted by 0.5% q/q. However, the availability of more complete data for foreign trade and activity in the services and construction sectors means that a revision cannot completely be ruled out. But with most of the bad news for Q3 already priced in and markets expecting more weak growth data for Q4, we suspect that today's data should not make a meaningful impact on expectations for UK interest rates. The DMO will auction £700mn worth of 2047 index-linked gilts. A very busy day lies ahead in the US where a number of data releases have been brought forward because of Thanksgiving tomorrow. US initial claims and personal spending are set to attract most attention as participants look for updates on labour markets and consumption trends. A substantial rise in weekly claims above 500,000 over the last two weeks points to steep losses in employment in November. How this is affecting the mood of US households will emerge this afternoon in the spending figures for October. A monthly decline in real terms similar to the one witnessed in September is pretty rare and is a testimony to the weakness of the US economy. We suspect that a 2nd successive drop may be inevitable in October. This has not occurred since the last (shallow) recession of 2001. Preliminary CPI data from Germany are forecast to show a drop in annual CPI below the ECB's 2% target for the first time since February 2007. Currency commentary FX markets were relatively quiet in Asia, catching their breath after the sharp swings yesterday which saw the dollar lose quite a bit of ground. The Fed's injection of $500bn in GSE MBS and $200by injection in ABS markets should help credit, mortgage and swap spreads to narrow. In fx, we expect no kneejerk reaction to the UK gdp data at 9.30, unless the data are revised down. Whether we get some follow through buying in equities may depend on US data this afternoon. Position squaring ahead of Thanksgiving suggests risk appetite may be cut back, with treasuries set to attract some flight-to-quality/ month-end buying. Inflation data from Germany could show a drop below 2% and squeeze 10yr bunds to 3.30%. We are looking to hear from ECB president Trichet and Mr Weber. A$/yen failed to test 64.0 resistance and the pull back below 62.0 could set the cross up for a re-test of 60.0 if equities falter. In EM, a 3rd straight day of gains for the rand pulled $/rand below 9.9740 support and this could trigger a short-term snap back towards 9.50. Major data and events today UK GDP (2nd estimate) (09:30) Q3 (prel) -0.5% Y-O-Y +0.3% Q3 (f'cast) -0.5% Y-O-Y +0.3% Median -0.5% Range -0.5%:-0.5% German CPI (07:00) (prel) Oct -0.2% Y-O-Y +2.4% Nov (f'cast) -0.1% Y-O-Y +1.8% Median -0.3% Range -0.6%:+0.1% US Initial claims (w/e 22/11) (13:30) Previous 542K Forecast 525K Median 531K Range 500K:560K US Durable goods orders (13:30) Sep +0.9% Oct (f'cast) -2.0% Median -2.7% Range -6.5%:+0.5% US Personal income (13:30) Sep +0.2% Y-O-Y +3.9% Oct (f'cast) +0.3% Y-O-Y +3.9% Median +0.1% Range -0.4%:+0.4% US Personal spending (13:30) Sep -0.3% Y-O-Y +3.8% Oct (f'cast) -0.7% Y-O-Y +2.9% Median -1.0% Range -2.0%:-0.4% US PCE deflator (13:30) (Oct) Sep Y-O-Y +4.2% Median +3.3% Range +3.0%:+3.9% US Core PCE deflator (13:30) Sep +0.2% Y-O-Y +2.4% Oct (f'cast) +0.1% Y-O-Y +2.3% Median +0.1% Range -0.1%:+0.2% US Chicago PMI (14:45) Oct 37.8 Nov (f'cast) 38.0 Median 38.0 Range 33.5:43.0 University of Michigan confidence (final) (15:00) Nov (prel) 57.9 Nov (f'cast) 57.0 Median 57.9 Range 55.0:58.8 US New home sales (15:00) Sep 0.46mn Oct (f'cast) 0.45mn Median 0.44mn Range 0.38m:0.47m UK DMO auction of £700m index-linked Treasury gilt at 0.75%, due 2047 US Treasury sells $26bn 5yr notes (18:00) ECB members Trichet (08:30) and Weber (16:00) speak Chart of the day: The worsening US labour market has caused household pessimism to spread Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com 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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EUR/USD Revisits 1.30 After The Fed Announcement Of New Liquidity Measures

Daily Forex Fundamentals | Written by KBC Bank | Nov 26 08 08:26 GMT |

Sunrise Market Commentary US Treasuries rally, as Fed unveils more rescue programs The Fed added two facilities to its ever larger arsenal that should help this time Main Street by supporting the availability of consumer loans and by helping to bring mortgage rates down. Agency debt and spread products rallied, but more surprisingly, also Treasuries joined the party. European Community will issue 3-year bond to finance Hungary rescue plan (FT) Yesterday, the corrective flattening of the European yield curve continued, as 2-year yields extended their rebound on comments from the ECB, which pointed towards a 50 bps rate cut, while 10-year yields tracked US yields lower. Today, attention will be focused on the EU stimulus package as well as on the pricing of the 3-year bond of the EC. EUR/USD revisits 1.30 after the Fed announcement of new liquidity measures EUR/USD extended Monday's rebound. The gains occurred after the announcement of a new plan from the Fed to support the financing of the economic activity. USD/JPY also lost ground after the announcement. Is this a first sign of dollar weakness due to the aggressive monetary steps in the US? The Sunrise Headlines US Equities were unable to gain on the new $800 billion financial stimulus package. Stocks closed almost flat after a volatile trading session. Asian stocks trade mixed after Toyota's debt rating was cut from AAA to AA by Fitch. The US Fed announced new measures to revive the financial system. First, the Fed will buy op to $600 billion of mortgage bonds issued or guaranteed by government- sponsored housing enterprises such as Fannie Mae and Freddie Mac. In the other program, it will lend up to $200 billion to holders of AAA-rated securities backed by student loans, auto loans, credit card loans and small business loans. Today, the European Commission will unite on a plan to tackle recession even if it means busting the region's national deficit targets. The proposals explicitly cite the scope for further rate cuts and suggest a variety of possible stimulus policies. South Korea's top financial regulator recommended adopting the aggressive spending policies taken by other countries to cushion the economy from a global recession even if it means a budget deficit. Crude oil ($ 50.99) fell 7% on Tuesday despite the Federal Reserve's stimulus package. The calendar is again well-filled today with the German CPI figures, US durables, Chicago PMI, new home sales and weekly claims Currencies: EUR/USD Revisits 1.30 After The Fed Announcement Of New Liquidity Measures EUR/USD On Tuesday, EUR/USD showed very interesting price action. The pair hovered in a 1.2800/1.2900 trading range during morning trading in Europe. However it jumped from the 1.28 area to levels above 1.30 early in US trading. The move occurred after the Fed had announced two new facilities to encourage a better functioning of the credit markets. In this respect it is important to try to understand the driver behind this move. One explanation might be that the markets considered the measures as a positive step to support stability of the financial system and revitalize the economy. In the recent past, this kind of positive news tended to support EUR/USD. However, the reaction on the stock (and of the oil price) on those measures was rather muted and short-lived. In our view this creates some doubts on the reason behind the forceful jump in EUR/USD. At least part of the explanation could also be that markets grow a bit uncertain/nervous that the Fed is moving less to conventional measures. The fact that USD/JPY also lost ground after the announcement (USD/JPY is supposed to rise in case of global positive news) suggests that at least part of the move could be interpreted as dollar weakness rather than EUR/USD strength. On top of that, the move only indicates the Fed's determination to go far in the process of monetary easing while at the same time the ECB is holding on to a much more gradual approach. Also this is an ambiguous factor for currency trading (some will say that the ECB is behind the curve), but it could have played a role. Whatever the reason behind the move, EUR/USD for the second day in a row recorded a decent gain. The pair closed the session at 1.3064 compared to 1.2953 on Monday evening. Today, in Europe, the first German inflation data are scheduled for release. The EU will also publish its economic stimulus package. The US calendar is well filled with the durable orders, the income and spending data, the claims, the Chicago PMI, the Final Michigan confidence and the new homes sales scheduled for release. With such a long list of eco indicators, it is almost sure that at least one will bring some kind of surprise. Question is whether it will impact the currency market. Recently, global market sentiment has been the dominant factor EUR/USD trading. However, after yesterday's move, we are very keen to see whether something has changed in the 'established' trading logic on the currency market. For quite some time, negative eco news and risk avers investor behavior have supported the dollar (and the yen) and have weighed on the single currency. This theme was an important factor behind the decline of EUR/USD from highs above 1.60 to the correction low in the 1.2330 area. However, since end October the single currency has developed a consolidation pattern between 1.2330 and 1.3294. Until recently, the correlation between EUR/USD and indicators of risk aversion and economic had remained relatively high, but the euro gradually showed more resilien We don't draw firm conclusions from yesterday's price action yet. However, over the previous days we already suggested that markets could look out for another trading theme. The jury is still out, but we grew more alert. Could the aggressive measures of monetary easing potentially become a (temporary?) negative factor for the dollar or will EUR/USD continue to trade in line with the swings in global risk aversion has been the case in the recent past? EUR/USD: extends rebound Support comes in at 1.2899/64 (Broken LTMA/Break-up hourly), at 1.2803/99 (St low/Neckline double bottom), at 1.2730/18 (Boll Midline/ Break-up), at 1.2687 (MTMA), at 1.2640 (MTMA/ST break-up), at 1.2565 (Week low) and at 1.2424 (Reaction low). . Resistance is seen at 1.3006 (Breakdown hourly), at 1.3081/95 (Week high/Boll top), at 1.3116 (05 Nov high) and at 1.3294 (Week high). The pair is slightly overbought. USD/JPY From a technical point of view, since the last week of September EUR/USD has tumbled from the 1.4866 reaction high to 1.2330 on October 28. Over the last three weeks the EUR/USD decline shifted into a lower gear and has established a sideways trading pattern. We are EUR/USD negative and are holding on to that tactics long term. However, over the past week; we indicated to take partial profit in case of return action towards the bottom of the range as we had the impression that the chances were rising for a more pronounced EUR/USD rebound. The price action on Monday and Tuesday perfectly fits our short-term approach. The power of this move could be an indication that the correction may have somewhat further to go. So, we are still not in a hurry to reinstall EUR/USD short positions at the current levels. We're not that far yet, but break above 1.3294 would be the indication that something has changed in the EUR/USD trading framework (Stop-loss). Yesterday, USD/JPY drifted lower throughout the trading session. The pair started trading in Asia in the 0.9700 area and ceded gradually ground during the day to close the session at 95.22, rather close to the intraday lows. The move was a bit surprising as the stock markets didn't perform that bad. The pair gained a few ticks on the Fed announcement of the new measures, but almost immediately resumed its decline. In line with our analysis for EUR/USD, we tend to raise the question whether this move, at least partly, should be considered as underlying dollar weakness. This morning, there were no important Japanese eco data. Japanese stocks show some moderate losses (1.33%). USD/JPY is holding close to yesterday's lows in the 95.00 area. Looking at the charts, global market stress hammered the USD/JPY cross rate through the key 103.50 range bottom early October and the pair set a new reaction low at 90.93 four weeks ago. A temporary easing of global market tensions sparked a USD/JPY rebound. The pair set a reaction high in the 100.55 on November 04, but the rebound ran into resistance. Longer-term, we are preferring a scenario of the yen remaining well supported as there is still very little prospect for a sustained improvement in the global economic picture anytime soon. Recently, we favoured a sell-onupticks approach as long as the pair holds below this 100.55 mark. We are holding on to that view. Yesterday, we suggested that the (upward) correction in USD/JPY could go somewhat further in case of an easing in global market tensions. However, in this respect, yesterday's price action should be considered as very disappointing from a dollar point of view. The USD/JPY downtrend remains very well in place USD/JPY: disappointing USD performance Support stands at 94.82 (Reaction low), at 9440/23 (MT reaction low/Daily envelope), at 94.08 (Boll bottom), at 93.55 (Last Week low)), at 92.57 (Daily channel bottom) and at 90.87 (Year low). Resistance comes in at 95.55 (STMA), at 96.27 (MTMA/dailyu envelope), at 97.09/43 (Boll midline/ Reaction high), at 97.75 (MT Reaction high), at 9825 (Reaction high) and at 99.11 (Weekly envelope). The pair is neutral territory. EUR/GBP On Tuesday, EUR/GBP traded sideways in the 0.8500/0.8565 area during the firs hours of European trading. Early in the US, it even looked as if sterling was heading for a substantial daily loss. However, sterling regained ground later in the session. We didn't see much fundamental news behind this move. Cable outperformed EUR/USD after the announcement of the Fed measures. BoE's Bean indicated that the fall in sterling over the past year has been a central part of rebalancing Britain's economy. Nevertheless, EUR/GBP closed the session at 0.8443, compared to 0.8532 on Monday evening. Today, the details of the UK Q3 GDP will be published. The aggressive BoE rate cut three weeks ago and their negative assessment of the UK economy triggered an aggressive sterling selling wave. The quick loss of interest rate support and the very negative outlook for the UK economy have caused sterling to lose a lot, if not all, its attractiveness. The break above the high profile 0.8200 resistance area has made the technical picture outright negative for sterling/positive for EUR/GBP. After the sterling crash two weeks ago some correction/consolidation has kicked. Longer-term the risk is for additional sterling losses. The tentative signs of bottoming out at the end of last week were confirmed earlier this week. Yesterday's, EUR/GBP performance was a bit disappointing. Nevertheless, we hold on to our cautious buy-on-dips approach for EUR/GBP. A drop below 0.8334 would be a first warning signal to our ST EUR/GBP positive bias. The pair must return below the 0.8215/53 area (Break-up/uptrend line) to call off the red alert for sterling. EUR/GBP: sterling tries to fight back Support stands at 0.8414 (MTMA), at 0.8396/86 (Reaction low/daily envelope), at 0.8334/20 (Reaction low/Weekly envelope), at 0.8252 (Uptrend line), and at 0.8215 (Break-up). Resistance is seen at 0.8472 (Reaction high), at 0.8527 (daily envelope), at 0.8568 (Reaction high), at 0.8585 (Weekly envelope), at 0.8634 (Reaction high) and at 0.8662 (reaction high). The pair is in neutral territory. News US: Third quarter GDP contracts by 0.5% According to the preliminary report, third quarter GDP contracted by 0.5% while the BEA advance report showed a contraction of 0.3% in GDP. Looking at the details, personal consumption was downwardly revised (-3.7% from -3.1%), while private investment was upwardly revised (0.4% from -1.9%) due to residential investment showing a less severe decline (-17.6% from -19.1%). The lower level of Q3 GDP was also due to a wider net export deficit than estimated a month ago and slower pace of inventory liquidation. GDP is expected to drop further in the fourth quarter of 2008 and in the first half of 2009 as the headline decline was still mitigated by government consumption, net exports and inventories. The S&P Case Shiller house price index fell 17.4% Y/Y in September, more than the consensus estimate of -16.9% Y/Y. The three months annualized figure deteriorated sharply from -9.16% to -14.02%, but is still below the peak of -24.88% reached in March. These figures show a little acceleration in the month-on-month declines probably due to the increased turmoil in financial markets (decline credit availabilityconsumer confidence at rock bottom levels because of fears about unemployment). The OFHEO house price index dropped 1.3% M/M in September, while an outcome of -0.7% M/M was expected. The previous figure was downwardly revised from - 0.6% M/M to -0.8% M/M. Home prices showed a record drop and the seventh decline in a row which indicates that housing market conditions are deteriorating and a recovery is not yet around the corner. The Richmond Fed manufacturing index declined to -38 (from -26) in November while the consensus was seeking for only a more moderate drop (-27). The details showed a bleak picture as shipments (-31 from -24), new orders (-48 from -35), number of employees (-32 from -15) and average workweek (-30 from -14) all weakened sharply. Both prices paid (1.51 from 3.66) and prices received (-1.19 from 2.06) came down sharply. It is however important to note that manufacturers became more confident about their business prospects for the coming six months, albeit from historical all-time lows. . Consumer confidence (Conference Board) rose from an upwardly revised 38.8 in October to 44.9 in November, while the consensus was looking for an outcome of 38.0. The expectations sub-index improved (46.7 from 35.7), while the present situation showed a slight decline (42.2 from 43.5). Consumers were more pessimistic about labour market conditions, but the outlook for the labour market improved. While encouraging, the still very low level of confidence suggests that the impact of the rise on spending won't be substantial. Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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