Japan Exports Fall at Slower Pace as Recession Eases

By Jason Clenfield

May 27 (Bloomberg) -- Japan’s export slump moderated in April, helping the country post an unexpected trade surplus and adding to signs the worst recession since World War II is easing.

Shipments abroad fell 39.1 percent from a year earlier, after dropping 45.5 percent in March and a record 49.4 percent in February, the Finance Ministry said today in Tokyo. From a month earlier, exports rose 1.9 percent, a second straight gain.

Exports to the U.S., China and Europe all fell at the slowest pace this year, adding weight to Bank of Japan Governor Masaaki Shirakawa’s contention that the economy will resume growing this quarter. U.S. consumer confidence jumped the most in six years, a report showed yesterday, and China’s $586 billion stimulus plan is spurring demand for Japanese machinery.

“Exports are getting back on a sustainable growth path, and that’s good news because they’re the sole pillar of support for the economy,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The overall economy will probably remain stagnant as there is no help from consumer spending and business investment.”

The Nikkei 225 Stock Average rose 1.7 percent at 12:31 p.m. in Tokyo. The yen traded at 95.46 per dollar from 95.27 before the report was published. Japan’s currency has gained 3.3 percent this month, threatening to exacerbate losses forecast this year by exporters including Toyota Motor Corp.

Imports Fall

Imports fell 35.8 percent from a year earlier, the ministry said, and the trade surplus narrowed 85 percent to 69 billion yen ($725 million). Economists predicted a deficit of 55 billion yen and a drop in exports of 42 percent.

Shipments to the U.S. fell 46.3 percent last month, less than March’s 51.4 percent decline. Exports to China dropped 25.8 percent, moderating from 31.6 percent, and sales to Europe slid 45.4 percent from 56.1 percent.

Goldman Sachs Group Inc. last week raised its ratings of construction equipment-makers Hitachi Construction Machinery Co. and Komatsu Ltd., citing the prospect of increased sales to China, where the stimulus package is driving building investment. Nissan Motor Co. said last month that sales of passenger cars in China rose 36 percent in March.

Toyota’s U.S. sales had a “slight uptick” this month, indicating that the market may have reached its bottom, Jim Lentz, president of the automaker’s U.S. sales unit, said last week. Rival Honda Motor Corp. plans to boost output at domestic factories and increase shipments this quarter as U.S. dealerships clear inventories, the Wall Street Journal reported.

Production Rebound

Industrial production probably rose 3.3 percent in April from a month earlier, the biggest jump in at least six years, economists expect a Trade Ministry report will show on May 29. Output climbed in March for the first time in six months.

Gross domestic product shrank at a record 15.2 percent annual pace last quarter. Governor Shirakawa said this week that while the economy may resume growing in the current quarter, any recovery will “inevitably be mild.”

At their April 30 meeting, a few Bank of Japan board members said additional policy measures weren’t necessary amid signs that the economy will recover, albeit gradually and after “some time,” minutes showed today. The central bank has been buying corporate debt to channel funds to companies since it cut the benchmark interest rate to 0.1 percent in December.

Extraordinary Measures

“Financial-market conditions are much better now, so it’s natural for the BOJ to think about ending its extraordinary measures for helping companies,” said Morita at Barclays.

Exports across Asia have been mixed. While shipments abroad fell at a slower pace in Taiwan and South Korea last month from March, Singapore and China suffered bigger drops.

Two quarters of record contractions in GDP have shrunk the Japanese economy to its 2003 size. Even as declines in overseas shipments moderate, Japan is exporting little more than half as much as last year and producing a third less. The recession, while moderating, is spreading to consumers as companies fire workers and cut wages to minimize losses.

“Exports and industrial production have stabilized, but this only gets the economy out of the emergency room,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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Copper Trades Near Two-Week High After U.S. Equities Advance

By Bloomberg News

May 27 (Bloomberg) -- Copper was little changed in Asia after touching a two-week high earlier as an equity rally and a jump in consumer sentiment in the U.S. boosted demand prospects for industrial metals.

The metal used in pipes and wires gained as much as 1.1 percent on the London Metal Exchange after U.S. stocks advanced for the first time in five days and U.S. consumer confidence jumped the most in six years. The U.S. is the second-largest copper user.

“There isn’t much downside risk to copper, with the U.S. economy expected to improve gradually,” Chen Yonglin, an analyst at Citic Newedge Futures Co., said from Shanghai today. “The metal is likely to go up even when the summer lull kicks in,” he said, referring to the traditional slowdown in demand from processors in China during the summer months.

Copper for three-month delivery on the London Metal Exchange advanced to $4,710 a metric ton before trading at $4,665 at 10:30 a.m. in Singapore.

September-delivery copper on the Shanghai Futures Exchange added as much as 1.9 percent to 37,090 yuan ($5,425) a ton before trading at 36,890 yuan.

Among other LME-traded metals, aluminum gained 0.2 percent to $1,455 a ton, zinc added 0.3 percent to $1,504, lead declined 0.2 percent to $1,442 and nickel was little changed at $13,400 a ton. Tin hadn’t traded as of 10:28 a.m. in Singapore.

--Li Xiaowei, John Liu. Editors: Matthew Oakley, Richard Dobson.

To contact the reporter on this story: John Liu in Shanghai at jliu42@bloomberg.net

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Newcrest’s Smith Says Global Economy May Have Turned Corner

By Rebecca Keenan

May 27 (Bloomberg) -- The global economy may have turned a corner, Newcrest Mining Ltd. Chief Executive Officer Ian Smith said.

Underlying fundamentals remain in place while the medium- term outlook for emerging nations is solid, Smith told an industry gathering in Canberra today.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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Rubber Futures Climb on Signs Recessions Easing in U.S., Japan

By Aya Takada

May 27 (Bloomberg) -- Rubber advanced for the second time this week after data signaled easing recessions in the U.S. and Japan, the world’s two largest economies, raising optimism demand will recover for the commodity used in tires.

Japan’s exports fell at a slower pace in April, data from the Finance Ministry showed today, adding to signs the country’s worst recession since World War II may be moderating. Confidence among U.S. consumers jumped in May by the most in six years, fueling speculation the economy will recover later this year.

“Market sentiment improved thanks to good economic data from the U.S. and Japan,” Kazuhiko Saito, chief analyst at Tokyo-based commodity broker Fujitomi Co., said today in a telephone interview.

Natural rubber for November delivery, the most-active contract, traded at 163.8 yen a kilogram ($1,721 a metric ton) on the Tokyo Commodity Exchange at 10:20 a.m. local time, up 0.9 percent from its settlement yesterday.

Japan’s shipments abroad slumped 39.1 percent in April from a year earlier, after dropping 45.5 percent in March, the Finance Ministry said today in Tokyo. From a month earlier, exports rose 1.9 percent, a second straight gain.

Overseas demand has shown signs of stabilizing since the first quarter, when an unprecedented drop in exports propelled the Japanese economy to its sharpest contraction since records started in 1955. Toyota Motor Corp. says the U.S. market may have bottomed, and Japanese manufacturers such as Komatsu Ltd. stand to benefit from renewed demand in China.

The Conference Board’s sentiment index surged to 54.9, higher than forecast, according to figures from the New York- based research group yesterday. U.S. stocks climbed for the first time in five days on speculation a lifting of the gloom surrounding the worst recession in half a century may spur consumers, who account for 70 percent of the economy, to spend.

Rubber futures increased after crude oil climbed to the highest settlement in more than six months in New York yesterday, boosting the cost of making rival synthetic products.

Futures also advanced after the Japanese currency dropped to a one-week low against the dollar, increasing the appeal of yen-denominated contracts, Saito said.

Rubber for September delivery on the Shanghai Futures Exchange, the most-active contract, lost 0.2 percent to 14,735 yuan ($2,155) a ton at 9:23 a.m. local time.

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net

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Waratah Coal, Chinese Mine Partner Seek $3.1 Billion

By Jason Scott

May 27 (Bloomberg) -- Waratah Coal Inc., the Australian company proposing a $5.15 billion venture in Queensland, signed an agreement with China Metallurgical Group Corp. to seek funding for as much as 60 percent of the project.

An estimated $3.1 billion of “debt funding” will be sought from Chinese banks, the Brisbane-based company said today in a statement to the Australian stock exchange. China Metallurgical, a state-owned construction and resources exploration company, will be the project’s engineering, procurement and civil contractor, and will buy 30 million metric tons of coal a year, it said.

The project, named “China First” and described by Waratah Coal as Australia’s largest thermal coal mine, will create about 6,000 jobs during construction and employ 1,500 workers once operating, it said.

On May 22, the company said it had expanded proposed capacity at the Galilee Basin mine by 60 percent, giving it increased targeted annual capacity to 40 million tons.

The venture will comprise the mine, a 490-kilometer (305- mile) rail line and export terminal, with shipments due to start in the second half of 2013, making it Australia’s largest coal project, Waratah said.

Waratah was acquired by closely held Mineralogy earlier this year and its securities delisted from the Toronto and Australian stock exchanges in April.

To contact the reporter on this story: Jason Scott in Perth at Jscott14@bloomberg.net;

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BlueScope Defers Restart of Port Kembla Blast Furnace

By Madelene Pearson

May 27 (Bloomberg) -- BlueScope Steel Ltd., Australia’s largest steelmaker, confirmed it will defer the planned restart of the No. 5 blast furnace at its Port Kembla works until market conditions improve.

A decision to restart the furnace won’t be made before Aug. 17 when the company is scheduled to announce its full-year results, Melbourne-based BlueScope said today in a statement to the Australian stock exchange. It will take four to six weeks to reach normal operations once the furnace is restarted, it said.

“The restart will be deferred until market conditions improve,” BlueScope said in the statement. “In the meantime, the company will complete the last stages of the project, apart from the commissioning.”

BlueScope fell 0.9 percent to close at A$2.10 in Sydney trading yesterday.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

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Greenback Slumps on Equity Rally

by Korman Tam

The greenback relinquished gains against the euro and Aussie on the Tuesday session as UK and US markets returned from holiday. The US equity bourses lauded earlier upbeat economic reports, with a sharp unexpected rise in the Conference Board’s May consumer confidence survey to its highest level in 8 months at 54.9, versus a revised 40.8 a month earlier – triggering a sharp rally in the Nasdaq, up 3.45% and the Dow Jones, advancing by over 2.5%. The Richmond Fed manufacturing survey reversed some of its previous month’s declines, as the composite index edged up to 4 in May versus -9 in April, while the manufacturing shipments component improved to 9 from -3 and the services index held steady at -29.

However, not all the reports were positive, with the S&P Case-Shiller home price survey reinforcing current downward pressure on the housing market. The S&P Case-Shiller index in March slumped by 2.2% on a monthly basis and plunged by 18.7% on an annualized basis.
Euro Recovers on Shift to Risk

The euro slid overnight against the greenback, tumbling to 1.3860 initially following further dismal economic data from the Eurozone. However, the single currency regained its footing in the New York session on the heels of an equity rally prompted by US data, sending the euro back toward the 1.40-handle.

Germany’s GDP plunged in Q1, marking its steepest drop on record with economic activity posting a 3.8% quarterly decline versus a revised 2.2% contraction in the previous quarter, while tumbling by 6.8% on an annualized basis compared with a 1.7% contraction a year earlier. A breakdown of Germany’s growth figures revealed a decline of 9.7% in exports and a loss of 5.4% in imports, while gross capital investment fell by 7.9% and private consumption increased by 0.5%.

Economic reports from the Eurozone were also disappointing, with industrial orders deteriorating further in March with a 0.8% decline versus a revised 0.0% reading in the previous month. On an annualized basis, industrial orders fell by 26.9%, versus an upwardly revised 34.2% figure a year earlier. The seasonally adjusted March current account deficit improved by more than expected, shrinking to 6.5 billion euros from 7.8 billion euros previously.

EURUSD hovers just beneath the 1.40-level, with support seen at 1.3960, followed by 1.3930 and 1.39. Additional floors will emerge at 1.3860, backed by 1.3820 and 1.38. On the upside, interim resistance starts at 1.40, followed by 1.4020 and 1.4050. Subsequent ceilings are eyed at 1.4080, backed by 1.41 and 1.4140.


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Although Deficit Still Persists In Some Asian Countries The Trade Balance Is Improving

Daily Forex Fundamentals | Written by ecPulse.com | May 26 09 07:36 GMT |

Philippine and New Zealand released today their trade balance as well as the exports and imports, as it indicated that although deficit still persists in both countries the trade balance is improving therefore confirming that the worst part of this economic crisis might of ended and that its time for stability and recovery to take place. New Zealand's economy is still suffering from the worst global crisis since the Great Depression as global demand has dropped significantly in recent months since consumption worldwide was badly hurt determining commodities prices to fall by 30% in April from the same month last year. The report has shown that the deficit in the trade balance of goods during the month of April witnessed a slight contraction to 4108, compared to the previous revised reading which showed a deficit of 4676. This resulted from a decline in both exports and imports as the exports reached to 3.65 billion New Zealand dollars compared to the month of March when exports reached to 4.04 billion New Zealand dollars, therefore exports fell 4.6% from the same period last year. Weak global demand had a considerable affect on New Zealand's economy being one of the first countries that fell into the spiral of global recession since New Zealand's exports of raw materials such as oil and aluminum declined, but imports also fell as in April they reached to 3.37 billion New Zealand dollars compared to the month of March when imports reached to 3.72 billion New Zealand dollars and also less than the expected 3.53 billion New Zealand dollars. With the decline in business confidence in New Zealand during the first quarter of this year to its lowest levels since 1974 have increased rates of layoffs and the unemployment rate which was reflected on the behavior of consumers determining them to reduce spending that dropped driving imports to decline by 18% compared to the same period last year the highest decline since records began in 1962. Philippine today also released its report on the trade balance during the month of March where the actual reading showed the deficit narrowed to 363 million dollars compared with the month of February when it showed a deficit of 552 million dollars. On the other hand imports fell in March to 3269.4 million dollars declining by 36.2% compared with the previous value of 3058.8 million dollars recorded during the previous month when it declined by 31.9%. However since export levels are still near their lowest levels as global demand has not seen enough improvement we cant confirm that the economic crisis had ended yet most probably the worst part of this economic crisis might of ended and that its time for stability and recovery to take place. China's economy is expected to be one of the first to recover from this economic crisis since economic indicators showed some stability therefore the Chinese government predicted a growth rate of 8% at the end of this year, and the recovery of such a huge economy the third largest in the world will have a significant role in supporting the global demand and could be the real starting point for the Asian region In more economic data South Korea announced its consumer confidence index during the month of May coming at 105.0 which is better than the previous reading of 98.0, and the reason behind the improvement in consumer confidence is the government stimulus plan which aimed to support internal growth by reducing taxes and supporting companies by provide liquidity through banks, in addition to the reduction in interest rates by the central bank attracting more investments to the country. Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, 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, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk

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Morning Forex Overview

Daily Forex Fundamentals | Written by Dukascopy Swiss FX Group | May 26 09 07:33 GMT |

Previous session overview The euro fell against the yen and dollar in Asia Tuesday after a report in the U.K.'s Daily Telegraph about Germany's bad loan problems added to worries over the gloomy economic outlook in Europe, causing Japanese investors to sell the European currency. The Daily Telegraph reported that Germany's financial regulator, BaFin, has warned that the toxic debts of the country's banks will blow up "like a grenade" unless they take advantage of the government's bad bank plans to prepare for the next phase of the crisis. The report grabbed the attention of Japanese investors who had until then been focused on the U.S. economy, dealers said. They pushed the euro down by four-fifths of a yen to JPY132.05 from its levels in New York late Monday. Tuesday's Asia session got off to a slow start, with many pairs continuing to trade in a tight consolidation range following the US holiday. But risk would quickly come off the table, as traders took the opportunity to take profits on recent gains. EURUSD felt the heat, with the pair barreling back through the USD1.40 handle to deal below USD1.3950. The Pound was little changed with the market recovering from Asian losses during a quiet day of trade. Reports that China FX managers were вЂ˜negative' on the Pound did little to dent the bullish tone the pair has recently developed. The Australian dollar was weaker in Asian trade late Tuesday as the U.S. currency selloff of the past week eased to a halt amid thin volumes in foreign exchange markets. Market expectation The euro is lower with some U.S. dollar bids before a scheduled U.S. Treasury sale of two-year notes Tuesday. Traders paused in the sharp selling of the dollar last week, which was prompted in part by worries about the longer-term sustainability of the U.S.'s triple-AAA credit rating. For EURUSD Support seen placed toward USD1.3950, with stops positioned on a break of USD1.3940. A break here can open a deeper move toward USD1.3920 ahead of USD1.3900/1.3890. Offers USD1.3995/05, a break above may allow for a move back toward USD1.4020/25 ahead of USD1.4050/60. Looking ahead, traders said the U.S. unit could face further downward pressure against the yen and the euro if demand for U.S. government bonds proves weak in the coming auctions. Such results could fuel worries over Washington's ability to keep financing its ballooning budget deficit, dealers said. Concern could also grow that long-term U.S. interest rates - which move in the opposite direction from bond prices - would rise to the detriment of the nation's economy if demand for U.S. bonds falls, dealers said. The greenback could then fall to a three-month low of JPY93.00. It may also slide as much as to USD1.4050 per euro, dealers said. Dukascopy Swiss FX Group Legal disclaimer and risk disclosure This overview can be used only for informational purposes. Dukascopy SA is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.

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Forex Technical Analytics

Daily Forex Technicals | Written by FOREX Ltd | May 26 09 07:40 GMT |

CHF The estimated test of key resistance range levels for the implementation of pre-planed short positions has not been confirmed and further activity fall of both parties with preservation of minimal bullish party advantage gives grounds for the preservation of trading plans made before almost unchanged. So, we can assume probability of further rate correction period with rate return to 1,0880/1,0900 resistance levels where it is recommended to evaluate development of the activity of both parties in accordance with the charts of a shorter time interval. As for the short-term sales on condition of the formation of topping signals the targets will be 1,0820/40, 1,0760/80 and (or) further break-out variant up to 1,0700/20, 1,0640/60, 1,0580/1,0600. The alternative for buyers will be above 1,0940 with the targets of 1,0980/1,1000, 1,1060/80. GBP The estimated test of key supports for the implementation of pre-planned long positions has not been confirmed and activity fall of both parties as the result of previous trading day gives grounds to suppose probability of rate range movement with preservation of trading plans made before almost unchanged. So, we can assume probability of rate return to 1,5780/1,5800 supports, where it is recommended to evaluate development of the activity of both parties in accordance with the charts of a shorter time interval. As for the short-term buying positions on condition of formation of topping signals the targets will be 1,5860/80, 1,5920/40 and (or) further break-out variant up to 1,5980/1,6000, 1,6060/80, 1,6120/40. The alternative for sales will be below 1,5700 with the targets of 1,5620/40, 1,5560/80. JPY The estimated test of key supports has been confirmed on condition for the implementation of pre-planned long positions. OsMA trend indicator marks parity of both parties activity and gives grounds to suppose possibility of rate range movement without clarifying the choice of planning priorities for today. Therefore, for opened short-term sales positions the targets will be 95,00/20, 95,60/80 and (or) further break-out variant up to 96,20/40, 96,80/97,00, 97,40/60.The alternative for sales will be below 93,80 with the targets of 93,20/40, 92,60/80, 92,00/20. EUR The estimated test of key supports has not been confirmed and further activity fall of both parties as the result of previous trading day gives grounds for keeping of trading plans made before almost unchanged. So, we can assume probability of rate return to 1,3900/20 supports where it is recommended to evaluate development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term buying positions on condition of the formation of topping signals the targets will be 1,3960/80, 1,4040/60 and (or) further break-out variant up to 1,4100/20, 1,4160/80, 1,4200/20. The alternative for sales will be below 1,3860 with the targets of 1,3800/20, 1,3740/60, 1,3680/1,3700. FOREX Ltd www.forexltd.co.uk

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Forex Technical Update

Daily Forex Technicals | Written by India Forex | May 26 09 07:02 GMT |

Rupee: Rupee continues to weaken due to month-end dollar demand by importers taking Usd-Inr to 47.60 levels. The overall outlook for rupee still remains bullish, thus exporters should look for opportunities to cover their exposures around 47.90 - 48.20 levels. (USD/INR : 47.55). Bullish. Euro: Euro is trading slighly below the 1.40-level after touching the highs of 1.4050 on Friday. The daily and weekly charts flat in the overbought region indicating further upside. The 4-hourly charts are due for some correction and can take Euro to 1.3910 levels (21 4-hourly EMA) and then to 1.3800 (100 weekly EMA). Such dips / retracements should be considered as a buying opportunity in Euro. On the upside sustained trading above 1.40 can push Euro higher to 1.4170 (50% of the fall from 1.6038 to 1.2329). Avoid shorts in Euro. (Eur/Usd:1.3970). Short Term Bullish. Pound: Cable traded sideways in 100 pips yesterday with a low of 1.5834. The lacklustre was due to US and UK market holiday. The daily & 4-Hourly charts are highly overbought with resistance around 1.6035 (38.2% of the fall from 2.0158 to 1.3502) and then at 1.6228 (55 Weekly EMA). Although correction is due, yet avoid initiating short positions as Cable is still in an uptrend. Initiate longs around 1.5770-1.58 levels for 150-200 pips. Stay cautious on shorts before 1.62. (Gbp/Usd: 1.5885). Short term Bullish Yen: The Usd/Jpy pair surged to 95.20 levels before closing lower at 94.82. The 4-hourly & hourly charts are yet to get completely oversold. The pair is taking resistance around the 21 4-houlry EMA beyond which the next resistance comes around 95.20 where shorts in the pair could be considered. Overall outlook remains bearish and a test of 92.50 is probable. (Usd/Jpy: 94.69). Bearish Australian Dollar: Aussie continues trade below the 0.7800 weekly resistance. Major charts are overbought and indicating a selling bias. A correction upto 0.7550 (21 Daily EMA) could be seen where longs can be entered. On the upside only a decisive break above 0.7800 resistance can push Aussie towards 0.7935 (50% Retarcement of the fall). Shorts around 0.7910 for 200 pips correction could also be targetted. (Aud/Usd: 0.7783).Bullish Gold: Gold traded sideways in $7 yesterday with the daily charts overbought. Contrarily the hourly charts are highly oversold with support around $950 (21 4-hourly EMA) and then at $937 (cluster support). We maintain our view for going long in Gold at corrections around $937 - 940 as the overall bias for gold is bullish. Bullish (Gold- 954.62) Dollar Index: DX is pressing against our support target of 80.20 (as mentioned in our charts) breaking of which can bring further bearishness to 79.66. The stochastic continues to be flat in the oversold region. A small rebound could be expected from 79.66 support. (DI- 80.20) ) Bearish India Forex http://www.indiaforex.in DISCLAIMER These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsible for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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India’s Political Stability Will Aid Recovery, Mukherjee Says

By Cherian Thomas

May 25 (Bloomberg) -- Pranab Mukherjee, named this weekend as India’s finance minister, will likely take advantage of the government’s stable majority to introduce measures to revive the economy amid a global slump.

The 73-year-old Congress party veteran told the Economic Times yesterday the new government’s numerical strength would encourage credit flows and boost confidence. Mukherjee has been acting in the finance portfolio since January as Prime Minister Manmohan Singh, 76, recovered from surgery.

Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, inherits one that is now open and exposed to the worst worldwide recession since the Great Depression of the 1930s. He earned a reputation as a trouble shooter in Singh’s cabinet since 2004 by resolving spats among ministries and coalition partners.

“He is a deliverer,” said Alastair Newton, a political analyst at Nomura International Plc in London. “He will have challenges in the economic portfolio given the political realities -- market expectations are high.”

The Bombay Stock Exchange’s benchmark stock index surged by a record 17 percent on May 18, the first day after Singh’s re- election, as investors bet the resounding victory will enable the new finance minister to ease foreign investment rules and sell state assets -- policies that were stalled by Singh’s communist partners in his previous term.

Congress has the support of 322 lawmakers in the lower house of parliament, with the party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.

‘Strong Endorsement’

The victory was as much Mukherjee’s as Singh’s. As the No. 2 in the cabinet, he backed the prime minister’s policies ranging from creating jobs in rural areas and writing off farmers’ loans to closer ties with the U.S., renewing a relationship that began in the early 1980s when he appointed Singh as the central bank governor.

“Despite the strong endorsement from voters, the finance minister may have a tough job pushing through some much-needed reforms,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “It’s very hard for politicians, for example, to do away with subsidies, which may result in a backlash. Expectations should be tempered.”

India spends one trillion rupees ($21 billion), or a tenth of its budget, on food, fuel and other subsidies each year in a country where the World Bank estimates three-quarters of the people live on less than $2 a day. About 13 percent of spending goes to defense and 20 percent to pay interest on national debt. That leaves little for other needs, such as health, education and power plants, boosting borrowings.

Ballooning Deficit

The federal government budget deficit was at 6 percent of gross domestic product for the year ended March 31, more than double the target of 2.5 percent of GDP.

Moody’s Investors Service places India’s long-term local currency rating at Ba2, two levels below investment grade, and lower than the ratings assigned to Colombia, Romania and Kazakhstan. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.

Investors will be looking at how much fiscal stimulus Mukherjee, who was on the boards of the International Monetary Fund and the World Bank in the 1980s, can provide in his first policy statement -- the budget for this year -- expected in early July.

Singh’s government said before the elections that stimulus of at least another 1 percent of GDP is needed to prop up an economy that’s growing at its slowest pace since 2003.

Policy Conflicts

Mukherjee, who first became a minister in 1973, estimated in February that India may need to raise a record 3.62 trillion rupees from bond sales in the fiscal year that started April 1. The central bank governor Duvvuri Subbarao said May 22 that borrowings have “already expanded rapidly” and that it goes against his efforts to keep borrowing costs low.

“The government faces a challenge to balance two conflicting issues -- to stimulate the economy while preventing fiscal position from further erosion,” said Takahira Ogawa, S&P’s director of sovereign ratings. “There is a possibility for the government to implement various measures to further expand the economy and consolidate the fiscal situation.”

Singh’s administration, which doesn’t need communists’ support for a majority in parliament, could raise as much as $20 billion from sale of state-run companies, according to Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.

Asset Sales

Among the companies that could be placed on the block are NHPC Ltd., India’s largest producer of electricity from water, explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd.

Still, analysts such as Seema Desai at Eurasia Group, a London-based political-risk advisory firm, expect economic changes will be “selective and gradual.”

“There is a significant segment within the party that is suspicious of sweeping pro-market reforms,” Desai said.

Mukherjee, who last year successfully rallied China, Japan, Russia and 42 other nations to end India’s nuclear isolation and resume supplies without signing the Nuclear Non-Proliferation Treaty, needs to bring the same acumen to gain support of his party colleagues, many of whom are still tied to the original socialist principles of the Congress party.

At stake is a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non- state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

“Mukherjee is a seasoned politician with excellent skills to bring people around,” said N. Bhaskara Rao, chairman at the Centre for Media Studies in New Delhi. “Expectations from him will be high.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

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Thailand’s GDP Contracts as Exports, Spending Slump

By Suttinee Yuvejwattana

May 25 (Bloomberg) -- Thailand’s economy shrank the most in a decade as exports and spending slumped, pushing the nation into its first recession since the Asian financial crisis.

Gross domestic product fell 7.1 percent last quarter from a year earlier, after declining a revised 4.2 percent in the previous three months, the government said today. The median estimate of 17 economists in a Bloomberg survey was for a 6.5 percent drop.

“The first quarter should be the worst,” said Rajeev Malik, a Singapore-based economist at Macquarie Group Ltd. “There is a strong likelihood the economy will grow in the fourth quarter.”

Exports, Thailand’s main economic driver, sank 16.4 percent last quarter, prompting companies including General Motors Corp. and Seagate Technology Inc. to cut production and fire workers. The central bank said last week there are signs the contraction is moderating, and the stock market is poised for its best quarterly advance since 2003.

“We can see light at the end of the tunnel,” Ampon Kittiampon, secretary-general at the National Economic and Social Development Board, said at a briefing on the economic report today. “We hope the government’s second stimulus package can jump-start the economy by the fourth quarter.”

The government “will do whatever we can” to ensure economic expansion by this year’s final quarter, Prime Minister Abhisit Vejjajiva said on May 20. The same day, the Bank of Thailand ended its most aggressive string of rate cuts ever, keeping borrowing costs at 1.25 percent even while saying risks to the economy remain.

‘Worst is Behind’

Production has picked up in electronic and automotive industries and exports, and consumer demand is recovering, Finance Minister Korn Chatikavanij said May 7.

“Orders have started to come back,” said Santi Vilassakdanont, chairman of the Federation of Thai Industries, a group of manufacturers. “The worst is behind us and things should get better now.”

Thailand’s economy will contract less each quarter before returning to growth in the final three months of this year, the median estimate of the economists surveyed by Bloomberg shows. The Bank of Japan on May 22 raised its view of the economy on signs that a record contraction in the first quarter represented the worst of the recession. Singapore and Taiwan last week said their economies may be past the worst.

Stocks, Baht

Exports have fallen for six months through April, the longest contraction in seven years.

Thailand’s benchmark SET Index declined 0.6 percent to close at 550.51, trimming its quarterly advance to 28 percent. The baht slipped 0.1 percent against the dollar.

“I don’t see any strong sign of recovery yet,” said Veeravat Kanchanadul, Senior Executive Vice President at Charoen Pokphand Group, Asia’s biggest animal-feed producer. “We can’t be sure about the state of the economy when small players are still struggling.”

Manufacturing declined 14.9 percent in the first quarter, compared with a revised 6.7 percent drop in the previous three months. Private consumption fell 2.6 percent. Total investment retreated 15.8 percent.

GDP may shrink as much as 3.5 percent this year, the government’s economic adviser, the NESDB, said today. That would be the first annual contraction in 11 years and matches the median estimate of economists surveyed by Bloomberg. The economy grew 2.6 percent last year.

Far From Good

Consumer confidence is at its lowest level in seven years. An emergency decree was imposed for 13 days in Bangkok last month to quell anti-government riots that left two people dead.

“Business was really bad after the riots,” said Doris Gerecht, general manager at Bangkok’s Montien Hotel, adding that occupancy has averaged about 50 percent so far this year compared with 75 percent a year ago. “We’re starting to see a bit of a pickup in corporate bookings, but things are still far from good.”

Thailand’s economy hasn’t shrunk for two straight quarters since the first three months of 1999. That was the last of eight quarterly contractions triggered two years earlier, when the nation cut a peg to the dollar that had overvalued the baht and slashed exports. The economic crisis eventually extended to the Philippines, Indonesia, Malaysia, Taiwan and South Korea.

Political Rifts

Premier Abhisit has pledged to call elections once stability is restored in the nation of 66 million people. The protesters say the prime minister’s rule is illegitimate because he came to office after a court dissolved the former ruling party.

Power in Thailand has shifted between parties allied to former Prime Minister Thaksin Shinawatra and his opponents since the 2006 coup that ousted him, hurting successive governments’ ability to implement spending plans.

Abhisit’s seven-party coalition is strong enough to pass a borrowing plan and next year’s 1.7 trillion-baht ($49 billion) budget, he said last week. That’s in addition to a 1.4 trillion- baht, four-year investment plan, and a 116.7 billion-baht stimulus package aimed at stemming this year’s economic slide.

GDP contracted a seasonally adjusted 1.9 percent in the first quarter from the previous three months, according to today’s statement. Economists surveyed by Bloomberg expected a 1.7 percent decline.

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net

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Oil Above $50 Saves Gulf States During Crisis

By Henry Meyer

May 25 (Bloomberg) -- While their biggest customers may continue to wallow in recession into 2010, the oil-producing nations of the Persian Gulf are again luring foreign investment and looking for places to park their own wealth.

Crude prices that have stabilized above $50 a barrel mean the Middle East’s oil-rich economies are likely to pull out of the global financial crisis sooner than the rest of the world. Saudi Arabia, the largest Arab economy and the world’s biggest oil exporter, is attracting renewed interest from investors including leveraged-buyout firm KKR & Co. Qatar and Abu Dhabi have returned to international capital markets.

Stock markets are rallying across the region, led by Saudi Arabia, whose Tadawul All Share Index ended last week up 26 percent for the year to date, after tumbling 56.5 percent in 2008.

“The expected resilience of oil prices puts the Gulf countries in a relatively privileged position compared to Europe and the U.S.,” says Eckart Woertz, an economist at the Gulf Research Center in Dubai. “In 2010, that is likely to lead to some resumption of growth, unlike in developed-market economies.”

Crude oil traded at $61.61 a barrel on the New York Mercantile Exchange at 10:33 a.m. in Singapore -- up 81 percent from around $34 on Feb. 12. Prices will remain above $50 for the rest of this year and top $60 next year, according to the median forecast of analysts surveyed by Bloomberg.

Providing a Cushion

While that’s still less than half the record $147.27 a barrel reached last July, savings built up during the boom from 2003 to 2008 are providing a cushion for most of the Gulf’s petroleum producers to get them through the worst recession since World War II.

“Oil prices are going up and confidence levels are coming back, things are going in the right direction,” Mohammed al- Shihi, the director-general of the U.A.E. economy ministry, told a conference today in Abu Dhabi.

Saudi Arabia’s economy will shrink 0.9 percent this year, according to the International Monetary Fund’s April forecast, while the United Arab Emirates is projected to decline 0.6 percent and Kuwait 1.1 percent. By comparison, the U.S. may contract 2.8 percent, the European Union 4 percent and Japan 6.2 percent, the IMF says.

By next year, the IMF expects the Gulf oil states to resume expanding, with Saudi Arabia growing 2.9 percent and Kuwait 2.4 percent, while advanced economies as a whole have no growth.

Oil Reserves

As a result, the six states in the Gulf Cooperation Council, which hold 40 percent of global oil reserves, are already luring fresh capital from abroad. The Qatari joint venture of Newbury, England-based Vodafone Group Plc, the world’s largest mobile-phone company, raised about $1 billion last month in the country’s first initial public offering in nearly a year.

Gulf oil exporters “have accumulated such big financial surpluses, and with ambitious expansionary fiscal budgets, things will be OK,” National Bank of Kuwait SAK Chief Executive Officer Ibrahim Dabdoub said in a May 14 interview at the World Economic Forum in Jordan. “We have started to see some green shoots here and there.”

International investors have taken notice. A Euromoney investment conference last week in the Saudi capital of Riyadh drew 1,600 participants, including representatives of Bank of New York Mellon, HSBC and Barclays Capital. Saudis in traditional white robes and red-and-white headdresses crowded a five-star hotel along with businessmen in suits from the U.S. and Europe.

Best Prospects

Abu Dhabi, with more than 90 percent of the emirates’ oil, has the best prospects in the region, along with Saudi Arabia and Qatar, the world’s largest exporter of liquid natural gas, says Simon Williams, chief regional economist at HSBC Holdings Plc in Dubai.

By contrast, the picture is a good deal grimmer in Dubai, which lacks the oil reserves of its U.A.E. partner Abu Dhabi and other neighbors. Dubai’s real-estate boom crashed last year, and it will continue to flounder, says Timothy Ash, head of emerging-market economics in London at Royal Bank of Scotland Group Plc.

The second-biggest of seven states making up the U.A.E., Dubai ran up debts of $80 billion and had to cancel projects including a waterfront development twice the size of Hong Kong Island. The traffic jams that clogged roads last year are gone; once-scarce taxis now sit outside residential buildings waiting for fares. Dubai property prices may fall as much as 70 percent from their peak, UBS AG predicts.

Hiring in Dubai

Even in Dubai, though, Emaar Properties PJSC, the U.A.E.’s biggest real-estate developer, says it is hiring 1,600 people for its retail, hospitality and leisure businesses, including three new attractions at Emaar’s Dubai Mall and three new hotels. And in the other Gulf economies, the presence of oil translates into a quickening of prospects.

“There is inherent stability in these markets,” says Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd.,which oversees about $100 billion globally. “Next year you will see this region outperform other emerging and global markets.”

Mostaque says he is particularly interested these days in shares of Saudi consumer companies such as Riyadh-based food producer Almarai Co.

KKR is studying Saudi investments as it aims to take advantage of the region’s “most attractive markets,” says Makram Azar, head of Middle Eastern operations. This month, KKR named Ford M. Fraker, former U.S. ambassador to Saudi Arabia, as a senior adviser.

Diminishing Risk

Investors perceive diminishing risk on Gulf-region bonds, according to trading in credit default swaps. The cost of protecting against default by the Dubai government fell to 488 basis points on May 8 from a record high of 977 in February, CMA Datavision prices show. Saudi Arabia’s bond-default risk declined to about 162 basis points last week, from 335 basis points in February.

The apparent end of plans for a Gulf monetary union -- the U.A.E. pulled out of the project on May 20 -- won’t alter the region’s growth outlook because all the countries in the proposed union except for Kuwait already peg their currencies to the dollar, Woertz says.

In another sign that markets are opening up for Gulf borrowers, Qatar and Abu Dhabi raised $6 billion by selling bonds to international investors last month. Aldar Properties PJSC, Abu Dhabi’s biggest real-estate developer, sold $1.25 billion of 5-year notes May 21, becoming the first such firm in the U.A.E. to issue debt since August.

Sovereign Wealth

Meanwhile, Gulf sovereign-wealth funds, which turned their attention inward to shoring up domestic banks and domestic stock markets, now have an “appetite and cash available for selected strategic acquisitions” abroad, Woertz says.

Saudi Arabia has sovereign assets of around $438 billion, up from $335 billion at the start of 2008, according to estimates by RGE Monitor in New York. Abu Dhabi holds a fund of about $300 billion, and Kuwait has about $210 billion.

In March, Abu Dhabi agreed to buy 9.1 percent of German carmaker Daimler AG for 1.95 billion euros ($2.6 billion). Earlier this month it won approval to buy Nova Chemicals Corp., Canada’s largest chemical maker, for $499 million.

The region’s continued dependence on oil and gas is a “strength, not a weakness” that generates long-term surpluses, says HSBC’S Williams.

“I expect all of the region’s economies to fare well, including Dubai, which has a compelling economic case as the service hub for a rapidly growing and prosperous part of the world,” he says.

To contact the reporter on this story: Henry Meyer in Dubai at hmeyer4@bloomberg.net.

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German Business Confidence Rises for a Second Month

By Christian Vits

May 25 (Bloomberg) -- German business confidence rose for a second month in May as interest-rate cuts and government stimulus packages boosted expectations that the worst recession since World War II will ease later in the year.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 84.2 from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Chancellor Angela Merkel’s coalition is trying to pull Germany out of recession with a spending plan worth about 82 billion euros ($115 billion.) While the government expects the economy to contract 6 percent in 2009, Bundesbank President Axel Weber says there are “some grounds” to be optimistic about a recovery later this year.

“While the increase in the Ifo index was less than expected, the message is still positive,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “The worst is over, but we won’t see a crackling recovery.”

While Ifo’s measure of expectations increased to 85.9 from 83.9, a gauge of current conditions fell to 82.5 from 83.5. The euro fell a third of a cent after the report to $1.3958.

Rate Cuts Urged

“The expectations are signaling that we are approaching the lower turning point, however the current situation’s still weak,” said Ifo economist Gernot Nerb. “We certainly would propose cutting interest rates further, to come down to 0.5 percent.”

The European Central Bank this month reduced its benchmark rate to 1 percent, a record low, and ECB President Jean-Claude Trichet didn’t rule out taking it lower still. “We did not decide that the new level of our policy rates was the lowest level,” he said.

The global slump in demand is forcing companies to scale back production and cut jobs as earnings wilt.

“Capacity utilization is extremely low, more companies will go bankrupt and the labor market will suffer,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “We’ll see a certain stabilization of the economy, but this won’t be a proper upswing.”

Germany’s leading economic institutes predict the country will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million. German unemployment rose for a sixth straight month in April, taking the jobless rate to 8.3 percent.

Signs of Stabilization

Metro AG, Germany’s largest retailer, on May 5 reported a wider first-quarter loss as slumping consumer spending hurt revenue.

Still, German manufacturing activity contracted at the slowest pace in seven months in May, Markit Economics said May 21, and investor confidence rose more than economists forecast this month, climbing to a three-year high.

“The pace of contraction has weakened and some leading indicators have noticeably recovered,” the Bundesbank said in its monthly report last week. It will take time for the full impact of the government’s stimulus program and the ECB’s “very expansive monetary policy” to flow through, it added.

“There are some grounds for being optimistic,” Weber said in London on May 13. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track.”

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net

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Rand, World’s Best Currency, May Gain 4%: Technical Analysis

By Garth Theunissen

May 25 (Bloomberg) -- South Africa’s rand, the world’s best-performing major currency this year, may rally another 4 percent if it breaks through 8.23 per dollar and stays there, based on technical analysis by Barclays Plc-owned Absa Capital.

Candlestick charting shows the rand closed stronger than its opening levels everyday last week, suggesting it’s “fighting” to appreciate further, said Judy Padayachee, a technical analyst at Johannesburg-based Absa. Even so, it has yet to remain stronger than the so-called “resistance” level of 8.23 per dollar, according to Padayachee.

The rand traded 0.7 percent weaker today at 8.3375 per dollar as of 7:15 a.m. Johannesburg, from a close of 8.2801 on May 22 when it traded as strong as 8.2070. The currency’s 5.2 percent rally last week was its best five-day winning streak since the period ended April 3.

“The rand is struggling to sustain levels below 8.23,” Padayachee said on May 22. “We’ve seen a lot of dollar buying whenever it gets near the 8.23 mark, which suggests that’s where a lot of options” to sell rand and buy dollars kick in, she added.

A battle is being fought between “rand bears” and “rand bulls,” Padayachee said. The currency closed 1.1 percent weaker than its best levels reached against the dollar on May 20, showing rand bears won the session, she said. On May 21 the currency closed within 0.2 percent of its best level, a day for the bulls, Padayachee said. The currency ended 0.9 percent weaker than it highest level on May 22.

If the rand can maintain gains at levels stronger than 8.23 per dollar, it may rally to 8, the currency’s “next major pivot level,” Padayachee said.

The rand has appreciated 15 percent against the dollar this year on speculation the worst of the global economic crisis since World War II may be over. The currency slumped 28 percent in 2008 as the collapse of Lehman Brothers Holdings Inc. led to the seizure of credit markets and financial firms worldwide posted more than $1 trillion in writedowns and debt-related losses since the beginning of 2007.

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

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IMF’s Lipsky Says Rising Oil Reflects Confidence About Growth

By Lorenzo Totaro

May 25 (Bloomberg) -- International Monetary Fund First Deputy Managing Director John Lipsky said rising oil prices reflect expectations that the recession may be easing and that demand is poised to recover.

The increase reflects “a general improvement in sentiment on signs that the sharpest period of decline in the global economy is over,” Lipsky said in the text of a speech at a meeting of energy ministers of the Group of Eight nations in Rome today. Prices also rose on “expectations that the contraction in oil demand may bottom out soon.”

Crude oil traded at $61.27 a barrel in after-hours electronic trading on the New York Mercantile Exchange and at $61.36 at 12:34 p.m. in Singapore -- up 81 percent from around $34 on Feb. 12, the low for this year. Prices will remain above $50 for the rest of this year and top $60 next year, according to the median forecast of analysts surveyed by Bloomberg.

Lipsky also said policy makers should find ways to reduce oil price volatility and its consequences on the global economy.

“Rapid oil price changes are detrimental to both global growth and to global economic and financial stability,” he said. Policy makers should “address the principal factors underlying large oil price swings.”

The Washington-based lender said last month that the world economy will shrink 1.3 percent this year. It also said Saudi Arabia, the largest producer in the OPEC, will see its gross domestic product shrink 0.9 percent this year, while the United Arab Emirates will decline 0.6 percent and Kuwait 1.1 percent. By 2010, the IMF expects the Gulf oil states to resume expanding, while advanced economies as a whole have no growth.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

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Dollar Index May Decline to Five-Month Low: Technical Analysis

By Ron Harui

May 25 (Bloomberg) -- The Dollar Index may extend its decline to a five-month low after it fell below so-called support at 81.457 and 80.161, according to Standard Chartered Bank, citing trading patterns.

Support at 81.457 is the 250-day moving average, based on Standard Chartered’s chart. The 80.161 level is the 50 percent retracement of the rally from the March 2008 low of 70.698 to the March 2009 high of 89.624, based on a series of numbers known as the Fibonacci sequence, Standard Chartered said.

“The break down below the 250-day moving average is bearish and leaves the focus on further potential losses,” Callum Henderson, global head of currency strategy in Singapore at Standard Chartered, wrote in a research note today. “The breach of the 50 percent retracement of the rally from the 70.698 low at 80.161 leaves the 61.8 percent retracement open next, coming in at 77.828.”

The Dollar Index traded at 80.206 as of 9:01 a.m. in London from 79.958 in New York on May 22 when it touched 79.805, the lowest level since Dec. 29. The index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, has weakened 5.2 percent so far this month.

Next support below the 77.828 level is the Dec. 18 low of 77.688, which is a “potential watershed zone” for the Dollar Index, according to Henderson. Support is where buy orders may be clustered.

Daily momentum indicators such as the 14-day relative strength index and the moving average convergence/divergence chart show a sell signal for the Dollar Index, Henderson wrote.

The RSI is a technical gauge that compares the magnitude of gains and losses. MACD charts can indicate whether a price shift is a change in trend or a short-term deviation by comparing moving averages based on nine-, 12- and 26-day periods.

Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance or below support indicates a currency may move to the next level.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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Yen Falls as North Korea Holds Nuclear Test, Launches Missile

By Ron Harui and Gavin Finch

May 25 (Bloomberg) -- The yen fell from the near highest level in more than two months against the dollar after North Korea conducted its first nuclear test in three years and may have also launched a short-range missile, posing a threat to the region’s security.

The euro slipped versus the dollar and pared its gain against the pound after a report showed German business confidence in May rose less than economists forecast. New Zealand’s dollar declined versus the greenback on concern export revenue will drop after the U.S. increased subsidies for its dairy products.

“The missile test may have been conducted to escalate geopolitical risk,” said Akifumi Uchida, Tokyo-based deputy general manager of the marketing unit at Sumitomo Trust & Banking Co., Japan’s fifth-largest lender. “Japan also is geographically close to North Korea so this doesn’t augur well. The yen is being sold.”

The yen weakened to 94.97 per dollar by 10:12 a.m. in London, from 94.78 on April 22, after earlier rising as high as 95.21. Japan’s currency was little changed at 132.70 per euro. The euro traded at $1.3978, from $1.3998.

Currency markets may be volatile today due to thinner volumes with the U.S. and U.K. closed for holidays, said Besa Deda, chief economist at St. George Bank Ltd. in Sydney.

‘Self Defense’

North Korea said its underground nuclear test was part of measures to “bolster up its nuclear deterrent for self defense,” according to a statement from the official Korean Central News Agency. The test may complicate efforts to get North Korean leader Kim Jong Il to return to six-nation talks aimed at ending its nuclear weapons program.

“This is not a pretty picture, especially with this kind of external issue and the North’s stern stance,” said Kim Yong Tae, who helps oversee the equivalent of $1.2 billion in assets as a fund manager in Seoul at Yurie Asset Management Inc. “Investor sentiment will be negatively impacted and it’s going to be difficult to expect big gains” in the short-term.

North Korea also fired a short-range missile with a range of 130 kilometers (81 miles), South Korea’s Yonhap News reported, citing an unidentified diplomatic source.

The won was little changed at 1,248.82 per dollar at the close of trading in Seoul after earlier dropping as much as 1.7 percent. The MSCI World Index of shares fell 0.1 percent.

The yen slumped to an eight-month low against the dollar on Oct. 9, 2006, when the North Korea government said it had detonated its first nuclear bomb. A nuclear test is a threat to Japan, as Tokyo is 809 miles (1,295 kilometers) from North Korea’s capital of Pyongyang.

‘Grave Concern’

President Barack Obama said North Korea’s claim it conducted a nuclear test is of “grave concern,” according to an e-mailed statement from the White House. The test is in “blatant defiance“ of a United Nations Security Council resolution, Obama said.

Losses in the yen against the dollar may be tempered after credit-default swaps for Japan fell last week while those for the U.S. advanced, indicating an improving perception of the Asian nation’s credit quality relative to that of the world’s largest economy.

The cost to protect buyers of Japanese sovereign bonds for five years slipped to 45.97 on May 22, the lowest since Jan. 28, according to CMA DataVision. The price for the U.S. climbed to 42.51, the highest since April 28, from 37.75 the previous day.

Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a borrower fails to adhere to its debt agreements.

Credit Rating

Standard & Poor’s cut its outlook on the U.K.’s AAA credit rating on May 21, spurring speculation the same will happen to the U.S.’s grade. Pacific Investment Management Co.’s co-chief investment officer, Bill Gross, said last week the U.S. will “eventually” lose its top rating.

“Now that the safety of U.S. Treasuries has been called into question, money managers may try to more shift funds away from dollar-denominated assets,” said Hiroshi Maeba, deputy managing director of foreign-exchange trading in Tokyo at Nomura Securities Co., a unit of Japan’s biggest brokerage by assets.

The euro fell from near its highest level this year against the dollar after the Ifo institute said its German business climate index rose to 84.2, from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Futures traders increased their bets to the most in 10 months that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on May 22.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 12,250 on May 19, the largest since July 15, compared with net longs of 10,415 a week earlier. Futures are agreements to buy or sell assets at a set price and date.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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Most Asian Stocks Rise, Led by Mining Shares; Kospi Declines

By Jonathan Burgos

May 25 (Bloomberg) -- Most Asian stocks rose as gains in metal prices boosted mining companies and health-care stocks rallied. South Korean shares fell after North Korea conducted a nuclear test.

BHP Billiton Ltd., the world’s biggest mining company, added 1.2 percent in Sydney after a measure of metals traded in London climbed the most in two weeks on May 22. Shionogi & Co. jumped 5.7 percent, pacing advances by health-care stocks, after the Nikkei newspaper reported the company aims to sell a new drug for influenza as early as 2010. LG Electronics Inc., the world’s third-largest maker of mobile phones, sank as much as 6.3 percent in Seoul after what North Korea described as a “successful” underground nuclear test today.

More than five stocks advanced for every four that declined on the MSCI Asia Pacific Index, which was little changed at 99.37 at 7:17 p.m. in Tokyo. The gauged has rallied 41 percent from a more than five-year low on March 9. South Korea’s Kospi sank 0.2 percent, having earlier dropped 6.3 percent.

“The market has rallied so much,” said Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer & Co., which manages $350 billion. “Investors will take profit on any sign of bad economic news or political jitters. We need a bigger catalyst for this rally to be sustainable.”

Japan’s Nikkei 225 Stocks Average added 1.3 percent, paring an earlier 1.9 percent climb. North Korea also launched short- range missiles, Yonhap News reported, without saying where it obtained the information.

Commodity Prices

Ishikawa Seisakusho Ltd., which makes weapons for national defense forces, soared 17 percent in Tokyo on speculation demand for its products will rise because of a more aggressive North Korea. Singapore Petroleum Co. surged 20 percent after PetroChina Co. agreed to buy a stake. Goodman Group, Australia’s largest industrial real estate investment trust, sank 13 percent after regulators lifted an eight-month ban on short-selling financial companies.

Futures on the Standard & Poor’s 500 Index were little changed. Markets are closed in the U.S. today for a public holiday. The gauge fell 0.2 percent in New York on May 22. BankUnited Financial Corp. was shut by federal regulators and its assets were sold in the largest U.S. bank failure this year.

BHP added 1.2 percent to A$33.87 in Sydney. Mitsubishi Corp., a trading housing that gets more than half of its profit from commodities, advanced 1.3 percent to 1,750 yen in Tokyo.

A gauge of six metals in London advanced 2.7 percent on May 22, the most since May 6. Copper futures in New York climbed 2.3 percent, while gold added 0.8 percent.

“With higher commodity prices, resource-related shares will stay resilient,” said Hiroichi Nishi, general manager at Nikko Cordial Securities Co. in Tokyo.

‘More Defensive’

Shionogi jumped 5.7 percent to 1,952 yen. The Osaka-based pharmaceutical company is currently analyzing phase 3 test data for the drug Peramivir, a company spokesman said, confirming the Nikkei report.

LG closed 1.4 percent lower at 109,500 won while steelmaker Posco lost 0.6 percent to 396,000 won as North Korea’s Korean Central News Agency said the nuclear test would “bolster its nuclear deterrent for self-defense.” The won earlier fell by the most in more than a week.

Renewed military hostility from North Korea threatens to prolong an economic contraction that has erased about $3 trillion from Asian markets since Sept. 30, 2008. Japan, which has proposed $264 billion in spending to revive the economy, and South Korea both said they were setting up task forces in response to the test.

North Korea’s test “can push people back into a more defensive mode until the dust settles,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne. “The geopolitical backdrop is going to be very important given markets have had a huge run.”

Singapore Petroleum

The MSCI Asia Pacific has climbed 41 percent since slumping to a more than five-year low on March 9 amid speculation the worst of the financial crisis had passed. Stocks included in the measure were valued at an average 1.4 times the book value of assets as of May 22, 17 percent higher from the end of 2008.

Ishikawa Seisakusho soared 17 percent to 70 yen. Howa Machinery Ltd., a maker of firearms, climbed 9.1 percent to 60 yen.

North Korea’s first nuclear weapons test on Oct. 9, 2006, sent the MSCI Asia index down 0.5 percent. The gauge rebounded to finish the month up 2.9 percent and rose 3.1 percent in both November and December of that year.

Singapore Petroleum surged 20 percent to S$6.05. PetroChina said yesterday it will buy 234.5 million shares at S$6.25 per share from Keppel Corp. Keppel, the world’s biggest builder of oil rigs, climbed 4.6 percent to S$7.28.

Short-Selling Targets

Singapore’s Straits Times Index added 1 percent, resuming price updates after an unspecified disruption that had been investigated by index compiler FTSE Group.

PetroChina, the country’s largest oil producer, lost 0.8 percent to HK$8.32 in Hong Kong.

In Sydney, Goodman Group slumped 13 percent to 21 cents. Macquarie Office Trust, an office property trust, slipped 6.5 percent to 14.5 cents. Suncorp Metway Ltd., which offers banking and insurance services, slid 2.9 percent to A$6.07.

The companies were among those that took advantage of the country’s ban on shorting financial stocks to sell shares while shielded from “bear raids,” where successive short sales drive stock prices lower. Australian companies have raised $21 billion in equity sales this year, according to a Financial Times report that cited Dealogic research.

“Investors recognize the level of risk associated with financial companies’ near-term profits,” said Angus Gluskie, who manages about $230 million at White Funds Management Pty. in Sydney. “Consequently, they are being viewed as reasonable short-selling targets at present.”

To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

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