German Stocks Decline; Beiersdorf, Volkswagen Shares Lead Drop

By Cornelius Rahn

Jan. 12 (Bloomberg) -- German stocks declined for the first time in three days after Alcoa Inc. began the U.S. earnings season with a lower-than-estimated profit.

The benchmark DAX Index fell 0.7 percent to 5,995.81 as of 10:53 a.m. in Frankfurt, heading for its biggest drop this year. The gauge gained 24 percent last year as government spending, record-low interest rates and recovering exports helped Europe’s largest economy to exit recession. The broader HDAX Index decreased 0.7 percent today.

Alcoa, the largest U.S. aluminum producer, posted fourth- quarter earnings that trailed estimates as the company conducted a higher number of metals trades that boosted revenue while carrying no profit. The shares sank 6.9 percent to $16.24 in German trading.

China’s central bank today sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year. The third-largest economy grew an estimated 8.5 percent last year, leading the world from the worst recession since World War II.

Beiersdorf AG, the German maker of Nivea skin creams, fell 2.6 percent to 44.05 euros. The company said 2009 profit fell about 33 percent as sales of beauty products and adhesive tapes slumped in the economic crisis.

Volkswagen AG, Europe’s largest automaker, snapped four days of gains, declining 2.2 percent to 65.45 euros. Seat, Volkswagen’s Spanish unit, may cut 330 non-production jobs in Spain after a decline in demand, Agence France-Presse reported, citing James Muir, Seat’s chairman.

BofA Merrill Lynch Global Research raised the allocation of equities in its monthly investment strategy report today to 65 percent of total assets, from 60 percent. Strategist Michael Hartnett said investors should cut investments in bonds to 30 percent, from 35 percent previously, and hold 5 percent in cash.

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

Draegerwerk AG (DRW3 GY), a German maker of medical equipment, advanced for a fourth day, adding 1.9 percent to 36 euros. The stock was upgraded to “buy” from “hold” at Equinet AG.

OHB Technology AG (OHB GY) plunged 4.9 percent to 14.66 euros, a second day of declines. The German aerospace company as cut to “neutral” from “overweight” at HSBC Holdings Plc.

SGL Carbon SE (SGL GY), the world’s largest maker of carbon and graphite products, jumped 6.1 percent to 23.95 euros, its biggest gain since October. The shares were raised to “buy” from “neutral” at Goldman Sachs group Inc., which added the stock to its “conviction buy” list.

Solarworld AG (SWV GY), a German solar company, dropped 2 percent to 16.03 euros. Germany could bring forward a 9 percent cut in solar subsidies to the middle of the year from the end of 2010, Financial Times Deutschland cited Solarworld Chief Executive Officer Frank Asbeck as saying. Conergy AG (CGY GY) slumped 4.4 percent to 82.9 cents, its second day of declines.

Tognum AG (TGM GY), a diesel-engine maker, slid 3.4 percent to 12.64 euros, its first decline in four days. Tognum was cut to “neutral” from “buy” at Goldman Sachs.

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

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U.K. Stocks Fall; Vedanta, Shell, BP Decline While Tesco Gains

By Adam Haigh

Jan. 12 (Bloomberg) -- U.K. stocks declined as raw-material producers retreated, offsetting a gain in Tesco Plc shares after the U.K.’s biggest retailer posted better-than-expected holiday sales.

Eurasian Natural Resources Corp. and Vedanta Resources Plc sank at least 2 percent, as China’s central bank sold bills at a higher yield for the second time in a week, increasing the likelihood of an interest-rate increase in the first half of the year. Royal Dutch Shell Plc and BP Plc, Europe’s biggest oil producers, tracked crude prices lower. Tesco gained 2.4 percent after saying revenue growth in the holiday season accelerated as shoppers splashed out on its “Finest” range of food and champagne.

The benchmark FTSE 100 Index slid 18.73, or 0.3 percent, to 5,519.34 as of 10:17 a.m. in London. The FTSE All-Share Index declined 0.4 percent and Ireland’s ISEQ Index slid 1.3 percent.

The FTSE 100 surged 22 percent in 2009 for its biggest annual rally since 1997 and has rebounded 58 percent since March 3 as central banks cut interest rates to record lows and governments worldwide committed about $12 trillion to revive the economy.

ENRC slid 2 percent to 990 pence, while Vedanta Resources lost 2 percent to 2,771 pence. The People’s Bank of China sold one-year bills at a yield of 1.8434 percent after last week guiding three-month rates higher. Lu Ting, a Bank of America- Merrill Lynch economist, said today’s move reflects banks’ expectations for a “moderate” increase in the benchmark rate in 2010.

Shell, BP

Royal Dutch Shell fell 1.5 percent to 1,898 pence. BP sank 0.9 percent to 629.7. Crude oil fell for a second day on forecasts cold weather in the eastern U.S. will abate this week, curbing heating fuel demand in the world’s biggest energy user. Crude oil for February delivery fell as much as 93 cents, or 1.1 percent, to $81.59 a barrel in electronic trading on the New York Mercantile Exchange.

Tesco gained 2.4 percent to 427.95 pence. Sales at U.K. stores open at least a year rose 4.9 percent, excluding gasoline and adjusting for value-added tax, in the six weeks ended Jan. 9. That compares with the prior quarter’s 2.8 percent gain and the 3 percent median estimate of 10 analysts surveyed by Bloomberg.

Game Group, the U.K.’s biggest electronic-games retailer, sank 6.3 percent after saying sales for the 49 weeks to Jan. 9 fell 11 percent.

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

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European Stocks, U.S. Futures Fall After Alcoa Misses Estimates

By Adria Cimino

Jan. 12 (Bloomberg) -- European stocks declined for a second day and U.S. index futures dropped after earnings from Alcoa Inc. missed analysts’ estimates. Asian shares gained.

Norsk Hydro ASA, Europe’s third-largest aluminum producer, led a drop among basic-resources companies in the Dow Jones Stoxx 600 Index, while Alcoa tumbled 6.9 percent in early New York trading. Beiersdorf AG, the German maker of Nivea skin creams, slid 2.9 percent after reporting lower-than-projected profit. Japan Airlines Corp. plunged 45 percent in Asia on speculation it will file for bankruptcy.

Europe’s Stoxx 600 fell 0.7 percent to 256.96 of 9:44 a.m. in London. Record-low interest rates in the U.S. and Europe and about $12 trillion in commitments from governments worldwide have spurred a 63 percent rally in the measure since March 9. The gauge is trading at about 59 times its companies’ reported earnings, near the highest valuation since June 2003, according to weekly data compiled by Bloomberg.

“Alcoa’s results are a reason for the market to take a breather after the gains,” said Bruno Ducros, a Paris-based fund manager at CamGestion, which oversees about $4.3 billion in stocks. “Investors are going to be very focused on earnings and that will set the trend for the market. The market can’t afford to have disappointing earnings.”

Intel Corp. and JPMorgan Chase & Co. are among U.S. companies scheduled to report results this week. Combined profit for companies in the Standard & Poor’s 500 Index surged 62 percent during the fourth quarter in the first increase since 2007, according to estimate compiled by Bloomberg survey.

U.S., Asia

U.S. stocks advanced yesterday, sending the S&P 500 higher for a sixth day. Futures on the gauge slipped 0.5 percent today, while the MSCI Asia Pacific Index rose 0.3 percent.

Alcoa posted quarterly earnings that trailed estimates as the company conducted a higher number of metals trades that boosted revenue while carrying no profit. The shares plunged 6.9 percent to $16.25 in pre-market trading.

Norsk Hydro sank 2.7 percent to 48.96 kroner. Basic- resources shares were among the worst performers among 19 industry groups in the Stoxx 600 today, dropping 1.6 percent.

Beiersdorf slid 2.9 percent to 43.88 euros. The company said 2009 profit fell about 33 percent as sales of beauty products and adhesive tapes slumped in the economic crisis. Net income dropped to 379 million euros ($550 million) from 567 million euros in 2008, the company said, citing provisional figures. That missed the 399 million-euro average of 12 analysts’ estimates compiled by Bloomberg.

Analyst Downgrades

Alstom SA, a French maker of high-speed trains and energy- generation equipment, dropped 3.3 percent to 51.94 euros after Societe Generale SA cut its recommendation on the stock to “sell” from “hold,” citing “rising competition from China” in a report to clients.

Assa Abloy AB tumbled 3.4 percent to 138.10 kronor as Goldman Sachs Group Inc. lowered its recommendation on the lockmaker to “sell” from “neutral.”

Japan Airlines, Asia’s biggest carrier, plunged to a record low. Prime Minister Yukio Hatoyama said today that shareholders should take responsibility “in general” for JAL, which has been bailed out at least three times in nine years.

Hatoyama declined to comment on the possibility of JAL being delisted when speaking to reporters today in Tokyo. The government has previously said that JAL, unprofitable in three of the last four years, will continue flying. JAL spokeswoman Sze Hunn Yap declined to comment.

Air France-KLM dropped 2.4 percent to 12.05 euros. Europe’s biggest carrier in November said it was prepared to invest in Japan Airlines. Deutsche Lufthansa AG, the region’s second- largest carrier, retreated 2.4 percent to 12.51 euros.

Tesco, Heineken

Tesco Plc climbed 2.1 percent to 426.55 pence. Sales at U.K. stores open at least a year rose 4.9 percent, excluding gasoline and adjusting for value-added tax, in the six weeks ended Jan. 9, Britain’s largest retailer said today. That compares with the prior quarter’s 2.8 percent gain and the 3 percent median estimate of 10 analysts surveyed by Bloomberg.

Heineken NV, which yesterday said it agreed to buy the beer division of Fomento Economico Mexicano SAB, added 1.6 percent to 34.55 euros after Royal Bank of Scotland Group Plc raised its recommendation on the brewer to “buy” from “hold.”

The trade deficit in the U.S. probably widened in November as imports climbed faster than exports, economists said before a report at 8:30 a.m. in Washington.

China’s central bank sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year. The People’s Bank of China sold one-year bills at a yield of 1.8434 percent after last week guiding three-month rates higher.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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

By Lynn Thomasson

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

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

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

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

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

Most Bullish

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

The industry has risen the most of 10 in the S&P 500 during the past 10 months. The benchmark index gained 2.7 percent last week and added 0.2 percent today to close at 1,146.98 as of 4:02 p.m. in New York.

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

Need Proof

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

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

Goldman Sachs Group Inc. and American Express Co., both based in New York, and 26 other S&P 500 financial firms are scheduled to release earnings by Jan. 22, according to data compiled by Bloomberg. The fourth-quarter reporting season starts today. New York-based Alcoa Inc., the largest U.S. aluminum maker, posted fourth-quarter profit excluding certain items of 1 cent a share today, trailing analysts’ estimates, as the company faced higher energy and currency costs.

Biggest Jump

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

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

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

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

Economic Expansion

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

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

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

Fed Stimulus

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

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

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

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

‘More Difficult’

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

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

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

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

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

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Markets Shrug Off Weak NFP & Continues To Buy Risk

Daily Forex Fundamentals | Written by AC-Markets | Jan 11 10 11:15 GMT |

News and Events: Markets seem to have shrugged off the disappointing US non-farm payrolls data, with equity and commodity prices rallying as yields slipped. Friday closed with the S&P up 0.3% and yield curve steepened further, with US 2yrs rates dropping 5bp. Comments from Fed's Bullard today gave risky assets a boost, as he noted major G10 economies monetary policies were to stay exceptionally loose for some time, while liquidity programs would not pose a risk to price stability. In this environment of choppy improvement of global economic data and commitment by central banks to keep rates on the low end, risk correlated trades should continue to perform well, especially within the commodity bloc and EM space. Interestingly, recent CFTC positing report showed a large increase in AUD long positions by 10.6k to 47.1k, illustrating the markets positive view on commodity trades. Last week, the EUR underperformed against the USD, as lingering worries over the sovereign debt situation of EU members such as Greece weighed on the single currency. Meanwhile, the FT cited a senior credit analyst from a major ratings agency, saying that Portugal now faces a credit-rating downgrade unless its government takes real steps to trim its budget deficit. These mounting concerns could hinder the ECB hand in withdrawing stimulus and adjusting policies. That said, we will be looking to trade USD weakness against NOK, SEK, AUD and CHF over EUR and JPY. In China, December's export and import numbers released Sunday came in much stronger than the market expected (exports surged 17.7% y/y) and likely to pick up further in Q1 2010. With China's recovery vital for both commodity and EMs currencies, any withdrawal of stimulus, even efforts to curb speculative behavior in the local property market could cause significant selling (tightening expected in late Q2 2010). In Switzerland , Reuters reported that SNB chairman Hildebrand stated SNB to continue to prevent any excessive appreciation of CHF vs. EUR, saying that the SNB has no exchange rate target and will monitor FX developments very closely. The market reacted sharply to these comment, trading the EURCHF up to 1.4796 from1.4755. Given the SNBs track record on weakening the CHF there is little doubt the central bank will follow through on these threats if they deem warranted. On a side note, Swiss retail sales slipped to 0.6% y/y while November's strong 3.1% reading was revised down to 0.6%, numbers that won't help remove the central banks deflationary concerns Today Key Issues: 00:00 CHF BIS bi-monthly meeting (final day) 08:15 NOK Retail sales, % y/y Nov 3.1 prior 09:00 CPI, % m/m (y/y) Dec 0.3 (1.5) prior 12:30 USD G10 Chairman Trichet hosts a press conference at the conclusion of meeting 17:45 JPY Atlanta Fed President Lockhart (FOMC non-voter) speaks on the economic outlook 23:50 Current account, ¥ trn Dec 1.01 exp The Risk Today: EurUsd Fridays NFP clearly hurt USD bulls. Break above 1.4484 puts focus on 1.4570 (38.2% retrace of 1.5145-1.4218) ahead of 1.4590 high. The critical support zone between 1.4250/80 was solid and the range high at 1.4500 fell easily. markets seem to be adjusting there bearish EURUSD outlook would suggest upside potential over the rest of the month and a return to 1.48. A close below 1.4250 would reinstate a target of 1.4055 GbpUsd Strong reversal above bearish trendline resistance at 1.6150 gives the pair a bullish tone. 200-day moving average at 1.6112 forms first area of good demand, and beyond there expect prior resistance levels to still be in play: 1.6248 (Dec 18 highs), followed by 1.6323 (100 day moving average), and above there the 1.6400 psychological barrier. UsdJpy USDJPY has been trading heavy today, but it still looks like we will remain range bound between the range lows of 91.10 lows and decent supply ahead of 94.00. Risk are skewed to the downside. A break below 91.10 would indicate a resumption of the larger downtrend that has been in play since mid 2007, but this seems like the less likely scenario in our view. Look for bids ahead of trendline support at 91.10 (before 90.60) , and plenty of offers coming in around today's highs at 93.77 to contain the pair. UsdChf Todays strong move thru 1.0225 will have traders watching retracement levels at 1.0115 ahead of 1.0000. On the upside next levels to watch outside the range are 1.0508 key high and beyond there the 1.0700 major resistance (38.2% correction of the move from 1.1970 down to 0.9918). EURUSD GBPUSD USDJPY USDCHF 1.4665 1.6335 95.00 1.0350 1.4600 1.6235 94.00 1.0293 1.4575 1.6195 93.77 1.0245 1.4518 1.6150 92.45 1.0167 1.4410 1.6020 91.10 1.0115 1.4330 1.6000 90.00 1.0045 1.4300 1.5900 89.10 1.0000 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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U.K. Financial Company Pessimism Increases, CBI Says

By Gavin Finch

Jan. 11 (Bloomberg) -- U.K. financial-services companies are more pessimistic than at any time in the past year on the outlook for business growth, according to the Confederation of British Industry.

“The bounce in U.K. financial-services activity over the past six months is not expected to last as we enter 2010,” Ian McCafferty, chief economic adviser at Britain’s biggest lobby group said in an e-mailed statement. “Firms see their business volumes falling back again, with no further improvement in profitability over the next three months.”

The number of financial-services companies expecting a reduction in business volumes in the first quarter was 13 percent more than those anticipating a rise, the CBI said.

That’s the worst balance since December 2008, when the global economy was reeling following the collapse of Lehman Brothers Holdings Inc., according to the statement. The U.K. faces a “bumpy and uneven” path out of recession, Bank of England policy maker Kate Barker said last month.

Factors preventing the expansion of business included “uncertainty about demand,” increased competition and growing regulatory requirements, the survey showed. Companies told the CBI it’s unlikely that financial markets will deteriorate further.

Securities traders expect a “sharp” drop in profits in the first quarter of 2010 as proprietary trading income plummets, the CBI said.

‘Tough Going’

“The industry as a whole expects the coming quarter to be pretty tough going,” said John Hitchins, U.K. banking leader at PricewaterhouseCoopers LLP, which conducted the survey with the CBI. “They think things will get better in the medium term, and that the worst is over.”

The number of traders expecting income from investment and trading to fall in the first quarter was the most on record, the group’s quarterly financial-services survey showed.

The Financial Services Authority will force as many as 5,000 bankers earning more than 1 million pounds ($1.6 million) a year to defer 60 percent of their bonuses for three years, The Sunday Times reported yesterday. The move follows last year’s government decision to tax bonuses above 25,000 pounds at 50 percent.

The CBI surveyed 83 financial-services companies, including banks, building societies, insurers, brokers and fund managers from Nov. 18 to Dec. 2. The CBI represents about 240,000 companies that employ one-third of Britain’s private sector workforce. The survey began in 1989.

U.K. private businesses are more optimistic than a year ago on the economic outlook, according to a survey by Grant Thornton U.K. LLP and Experian Plc. The survey, which includes family owned firms, found that 58 percent expected revenue to increase in 2010, compared with 37 percent who forecast gains at the start of 2009.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Bernanke Bond Spread Most Since 2007 Shows Decoupling

By Daniel Kruger and Anchalee Worrachate

Jan. 11 (Bloomberg) -- The correlation between Treasuries and German bunds that has prevailed since credit markets started freezing in 2007 is breaking down as U.S. economic growth leaves Europe behind.

Yields on U.S. 10-year Treasury notes rose twice as fast as German debt with a similar maturity since the start of December, according to data compiled by Bloomberg. The bonds had traded almost in tandem since April 2007 as investors sought a refuge from the first global recession in six decades and then shifted to higher-yielding assets in 2009.

Pacific Investment Management Co., FAF Advisors Inc. and Fischer Francis Trees & Watts, who oversee more than $1.1 trillion, are buying bunds and selling U.S. debt to profit as the markets decouple. Strategists say Treasuries may post a second year of losses in 2010 because Federal Reserve Chairman Ben S. Bernanke will raise interest rates as America’s gross domestic product increases 2.6 percent while Germany’s expands 1.9 percent, Bloomberg surveys show.

“We’re going to continue to see this differentiation,” said Timothy Palmer, a money manager who helps oversee currencies and international debt in Minneapolis at FAF, which has $15 billion invested in taxable bonds. “Our view has been to be favorably disposed to European bonds over the U.S.”

Pimco Buys Bunds

Pacific Investment has accumulated the equivalent of $20 billion of bunds in the past month for its flagship Pimco Total Return Fund, Bill Gross, the co-chief investment officer at the Newport Beach, California-based firm, said in a Bloomberg Radio interview on Jan. 8. That’s about 10 percent of the fund’s $204 billion in assets, he said.

Yields on 10-year U.S. notes climbed 45 basis points to 3.83 percent since the Labor Department said on Dec. 4 that U.S. employers cut the fewest jobs since the recession began. Comparable yields on bunds, the benchmark for the 16 countries that share the euro, rose 21 basis points to 3.39 percent.

The difference in yields grew to as much as 0.49 percentage point last month, the most since July 2007. The gap narrowed 2 basis points to 0.45 percentage point on Jan. 8 after the December jobs report showed U.S. employers unexpectedly cut 85,000 positions. The Labor Department also revised the November figure to a gain of 4,000 jobs, the first increase since the recession began in December 2007.

Europe’s unemployment rate jumped to 10 percent last month, the highest in more than 11 years, according to the European Union statistics office. Economists expected 9.9 percent, after the 9.8 percent initially reported for October, a Bloomberg survey showed.

Profit Potential

Ten-year Treasury yields were little changed at 3.83 percent last week, while comparable bund yields were steady at 3.39 percent.

Trading of Treasuries was closed in Japan today for a holiday. Bunds hadn’t started changing hands as of 1:09 p.m. in Tokyo.

JPMorgan Chase & Co.’s head of European interest-rate strategy in London, Pavan Wadhwa, expects the U.S. yield will reach 4.1 percent by June 30 while the rate on bunds declines to 3.35 percent. An investor who sells $10 million of Treasuries and bets on bunds would earn a profit of about $210,000 if the forecasts are right, excluding currency fluctuations.

The firm’s weekly index measuring sentiment toward Treasuries fell to minus 15 on Jan. 4, the most bearish reading since March 2007. Back then, 10-year U.S. yields were just beginning to rise, surging as much as 0.75 percentage point to 5.32 percent by mid-June of 2007.

Declining Correlation

Treasuries lost 1.32 percent last quarter, while bunds returned 0.13 percent, including reinvested interest, according to Bank of America Merrill Lynch indexes. The 44-day correlation coefficient fell to 0.54 on Jan. 8 from a three-year high of 0.76 on Nov. 19. A value of one would mean U.S. and German 10- year yields moved in lockstep.

Decoupling became a favored term for investors and economists before credit markets seized up when they predicted a U.S. slowdown wouldn’t curtail expansion in Europe, Asia and Latin America. Instead, when the U.S. economy contracted 1.9 percent in 2008, German GDP fell 1.8 percent and Japan’s shrank 4.1 percent.

With economies emerging from the first global recession since World War II, investors say the U.S. will improve faster than Europe. U.S. GDP likely increased 3 percent last quarter, compared with a drop of 1.85 percent in Germany, according to the median estimates of economists surveyed by Bloomberg.

Reducing Stimulus

Euro-area growth will be restrained as governments reduce stimulus measures and unemployment rises, three research institutes said last week. GDP in the region probably rose 0.3 percent in the fourth quarter from the third, Germany’s Ifo institute, Italy’s Isae and France’s Insee said Jan. 8.

“As the data flows through and we put together two consecutive quarters of 4 to 4.5 percent GDP, there’s going to be a period toward the end of the first quarter where it’s going to be looking fairly sustainable,” said David Tien, a money manager at Fischer Francis in New York who helps oversee $19 billion. “The trend right now of a stronger U.S. is getting on track and definitely has room to run.”

Even investors who question the strength of the U.S. recovery favor bunds. Pimco’s Gross, who said Jan. 8 that America’s economy is still too fragile for the Fed to back away from its stimulus measures, reduced the Total Return Fund’s holdings of government-related securities to 51 percent in November from a five-year high of 63 percent in October. The firm doesn’t break down the data according to sovereign issuers.

‘Shaking Hands’

Before paring government debt, Gross had said Pimco bought Treasuries with the proceeds of mortgage-backed debt sales to the Fed as part of the firm’s “shaking hands with the government” strategy. That’s when the central bank embarked on so-called quantitative easing programs, acquiring assets including mortgages and government securities to reduce borrowing costs and stimulate growth.

The Fed and U.S. agencies have lent, spent or guaranteed $8.2 trillion to lift the economy from the worst recession since the Great Depression, data compiled by Bloomberg shows. The Treasury sold a record $2.11 trillion in notes, bonds and inflation-linked securities last year.

“German bonds are basically yielding the same as U.S. Treasuries and their programs have not been quantitative-easing- oriented,” Gross said in a Jan. 6 Bloomberg radio interview. “You move to a country where fiscal conservatism and the lack of check writing have taken place.”

Fiscal Divergence

U.S. yields will grind higher because America’s fiscal outlook will remain weak for the next several years, Gross said. That contrasts with Germany, where a constitutional amendment has mandated a balanced budget by 2016, he said.

Treasury 10-year yields may rise 30 to 40 basis points by May, causing the gap between bunds and U.S. notes to widen to 100 basis points or more from the current 45 basis points, Gross said. A basis point is 0.01 percentage point.

Treasury yields will rise more than bunds because the European Central Bank’s sole focus on fighting inflation will cause ECB President Jean-Claude Trichet to raise interest rates faster than Bernanke, according to Kommer van Tright, head of interest rates at Rotterdam-based Robeco Groep NV.

The ECB’s main refinancing rate has been 1 percent since May, while the Fed’s target for overnight loans between banks has been in a range of zero to 0.25 percent in December 2008.

“The Fed is more likely to be behind the curve than the ECB as they might hold rates lower for longer for the sake of improving the labor market or overall economic conditions,” said van Tright, who’s firm manages $180 billion.

‘Relative Strength Game’

German 10-year yields averaged 0.27 percentage point less than Treasuries the past decade, and 0.06 percentage point below comparable U.S. debt in the 1990s.

The gap widened to as much as 1.20 percentage points in October 2005 as the Fed increased rates. It began to shrink in mid-2006, with bunds yields eventually exceeding those on Treasuries by 0.88 percentage point in December 2008 as investors rushed for the safety of America’s debt in the wake of Lehman Brothers Holdings Inc.’s collapse three months earlier.

That’s also after the Fed said it was considering buying Treasuries to keep borrowing costs from rising and to revive credit markets.

“It’s a relative strength game that’s going on,” said George Goncalves, chief fixed-income rates strategist in New York at Cantor Fitzgerald LP. “This can last for a while but it won’t last forever.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.

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Trichet May Signal Central Bankers’ Risk Concern

By Simon Kennedy and Christian Vits

Jan. 11 (Bloomberg) -- European Central Bank President Jean-Claude Trichet, who warned investors against taking on too much risk two years before the financial crisis started, may be about to sound the alert again.

Trichet and fellow central bankers met financial executives in Basel, Switzerland, yesterday after officials signaled concern banks are rebuffing tougher regulation and embracing risk as the turmoil ebbs.

Risk is back in the spotlight as China witnesses a record increase in credit, Goldman Sachs Group Inc. posts record earnings and the MSCI World index of stocks logs a 74 percent gain since March. Federal Reserve Chairman Ben S. Bernanke and Chinese central bank governor Zhou Xiaochuan will attend talks in Basel today of the Group of 10 central banks, which Trichet chairs.

“As liquidity is still abundant there’s certainly a danger that an excessive risk taking behavior returns,” said Carsten Brzeski, an economist at ING Group in Brussels. “However, central banks face a dilemma as they can hardly do more than calling on the banks at the moment.”

Trichet, who warned in November 2005 about “an underestimation of risks by financial markets,” is scheduled to brief reporters around 1 p.m. local time today.

‘Fragilities’

He may join the chorus of officials voicing concern about excessive risk taking, which led to the credit bust of 2007. Financial Stability Board Chairman Mario Draghi told reporters on Jan. 9 that markets may be overly optimistic about the recovery. Fed Bank of Kansas City President Thomas Hoenig said Jan. 7 that the Fed should move “sooner rather than later” to reduce stimulus.

“The markets are becoming risky again, bankers are becoming risk-takers again,” Draghi, who is also governor of the Bank of Italy, said in Basel. “At the same time, bankers should be aware of the fragilities in the system.”

The Bank for International Settlements, which is hosting today’s gathering, last month warned that low rates often spur banks to take on too much risk. In the U.S., regulators told banks on Jan. 7 to guard against possible losses from an eventual end to low interest rates.

“It is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases” in borrowing costs, the Federal Financial Institutions Examination Council, which includes the Fed, said in a statement.

‘Some Concerns’

ECB Governing Council member Ewald Nowotny said in Basel today that unfounded risk-taking isn’t a “major problem” in the euro area. “But we do see signs worldwide of excessive risk-taking,” he told reporters. “There are some concerns especially for the U.S. authorities.”

Markets are rediscovering their appetite for risk after central bankers truncated the recession with record low interest rates and governments around the world bailed out the banking system. The Fed has cut its benchmark rate to almost zero and taken on more than $1 trillion of assets on its balance sheet to combat the credit freeze, while its Japanese counterpart’s benchmark is also near zero. The ECB’s main rate is at a record- low 1 percent.

“The massive amount of financing and cheap funding that continues to be available to banks is a fertile ground for heavier risk taking,” Karsten Schroeder, chief executive officer of Amplitude Capital LLP, a Swiss money manager, told Bloomberg Television.

Stock-Market Rally

Goldman Sachs and JPMorgan Chase & Co. are among the banks taking advantage of low rates, a stock-market rally and the demise of competitors like Lehman Brothers Holdings Inc. to bolster profits. Banks have also increased lobbying against reforms aimed at restricting how much risk they can take.

Commercial bankers, who traditionally attend the January meeting in Basel, met with policy makers to discuss risk taking and regulation yesterday. Deutsche Bank AG Chief Executive Officer Josef Ackermann was among those scheduled to be there.

“There won’t be much sweet talk,” Juergen Michels, chief euro-region economist at Citigroup Inc. in London, said before the meeting. “Central banks could threaten to follow up with action if banks don’t stop taking excessive risks.”

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net.

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US Economic Indicators Preview

Weekly Forex Fundamentals | Written by BHF-BANK | Jan 11 10 10:24 GMT |

(Week of 11 to 17 January 2010) Trade deficit (Nov): widening due to higher import prices Retail sales (Dec): another increase led by car sales Consumer prices (Dec): moderate rise due to lower gasoline prices NY Empire manufacturing index (Jan): rebound after December plunge Industrial production (Dec): utilities and the inventory cycle have a positive impact UMI consumer sentiment (Jan): stable after marked improvement in December The trade deficit narrowed significantly in October, from $35.7bn to $32.9bn. This was due partly to further solid gains in exports and partly to a decline in the price and volume of imported petroleum. In November, import prices rose by 1.7% mom, which indicates that the nominal trade deficit could have widened to about $35bn, even though the weak dollar and stabilisation of global growth are continuing to bolster exports. After surging in November, import prices are likely to have gone down by at least 0.5% mom in December, as average crude oil prices declined by 4.5% mom. The Congressional Budget Office (CBO) estimates that December's budget deficit will have hit $92bn, about $40bn more than in December 2008. There is generally a budget surplus in December, because of corporations' quarterly income tax payments and taxes on year-end bonuses, but due to the economic crisis, those tax receipts dropped again. However, adjusted to eliminate variation attributable to shifts in the timing of payments, the deficit in December 2009 would only be about $11bn higher than in the previous December. The Beige Book could state that the economic recovery is being led by manufacturing and the inventory cycle, whereas activity in many sectors is still subdued as a result of moderate domestic demand and tight bank lending. The labour market deterioration is slowly petering out, and consumer spending is picking up modestly, but residential real estate appears to have weakened again after the initial deadline of the tax credit for first-time home buyers. Due to high unemployment and idle capacity, inflationary pressure could be reported as benign again. Retail sales increased by 1.3% mom in November, as higher sales at gasoline stations contributed about 0.5 percentage points. However, slightly lower gasoline prices will have dampened retail sales in December. Given that domestic vehicle sales rose by 2.5% mom, retail sales could have gone up by about 0.6% mom. Less cars, the increase could have been a mere 0.2% mom, after 1.2% mom in November. At the beginning of the new year, Christmas gift vouchers could have a positive impact; some of them could already have been spent just after Christmas, which would boost the December figures. The University of Michigan's (UMI) final December consumer sentiment index was revised downward from 73.4 to 72.5, but it remained much higher than the November level of 67.4. Despite a rise in gasoline prices at the beginning of the new year, we expect UMI's consumer sentiment to have remained stable in January, as the weekly ABC consumer comfort poll continued to recover. CPI's annual rate turned positive again in November for the first time in eight months, because the favourable base effects from the energy side have evaporated. Lower gasoline prices and discounts could have led to a modest increase in consumer prices of 0.1% mom in December, after 0.4% mom in November. But the annual rate will nevertheless rise sharply again to about 2.7%. Core CPI, which was stable in November, could have risen slightly by 0.1% mom. The annual rate would then continue to approach the 2% mark, but due to ongoing resource slack and high unemployment, core CPI rates are expected to decelerate again in the course of 2010. Initial jobless claims rose modestly by 1k to 434k in the week ending 2 January, but the 4-week moving average declined to 450.3k - the lowest level since mid- September 2008, before the financial crisis escalated. We predict that initial jobless claims will have remained more or less unchanged in the week ending 9 January. Business inventories could have risen noticeably by 0.6% mom in November, the second increase after 13 declines in a row. We already know that factory inventories went up by 0.2% mom, but wholesale inventories jumped by 1.5% mom. The New York Empire manufacturing index plummeted from 23.5 to a mere 2.6 in December, thus barely indicating growth. However, the Philadelphia Fed index went up and the national ISM manufacturing index actually rose to a 3 ½ year high. Although we expect manufacturing activity to decelerate again in the near future, the decline of the New York Empire manufacturing index appears exaggerated, and we forecast that it will have recovered to 11.0 in January. Industrial production rose by 0.8% mom in November, led by a sharp increase of 1.1% mom in manufacturing production. The restocking of inventories is having a positive impact on production at present, and as the ISM production component went up to 61.8 in December, manufacturing is expected to have expanded again. Furthermore, after an unseasonably warm November, cold December temperatures could have raised utility output noticeably, by at least 0.2 percentage points. We predict that total industrial production will have increased by 0.7% mom in December. At 71.9%, capacity utilisation could have reached its highest level in 2009. BHF-BANK http://www.bhf-bank.com This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHFBANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.

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China Trade Rebound Aids Global Economic Recovery

By Bloomberg News

Jan. 11 (Bloomberg) -- China’s exports surged in December and imports rose to a record in a stronger-than-forecast trade rebound that may lessen the case for governments to sustain stimulus programs this year.

Exports climbed 17.7 percent from a year earlier, the first increase in 14 months, and imports jumped 55.9 percent, the customs bureau said on its Web site yesterday. Year-on-year comparisons are affected by the tumble that began in late 2008, when the global credit crisis deepened.

“A global recovery is gaining momentum and countries’ exits from stimulus may come earlier than expected, including for China,” said Wang Hu, a Shanghai-based economist at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “Soaring imports are more evidence that China’s economy may face an increasing danger of overheating.”

China’s central bank last week guided three-month bill yields higher for the first time since August, suggesting that the government wants to rein in liquidity to limit the risks of real-estate bubbles and resurgent inflation. Stronger exports may fuel overseas calls for gains by the yuan against the dollar after policy makers halted appreciation for 17 months to help manufacturers weather slumping demand.

The trade report spurred the currencies of Australia and New Zealand on bets their economies will benefit from the increase in shipments to China. The Australian dollar rose 0.4 percent to 92.85 U.S. cents and its New Zealand counterpart gained 0.5 percent to 74 cents as of 10:19 a.m. Sydney time.

Property Lending

China’s State Council pledged yesterday to step up “guidance” of property lending and counter inflows of speculative capital after a record expansion of credit in 2009 that was part of government efforts to prop up growth.

None of 21 economists in a Bloomberg News survey forecast such large gains in exports or imports. China’s shipments to the U.S. and the European Union grew 15.9 percent and 10.2 percent respectively from a year earlier, the data showed. Imports from Australia and Malaysia more than doubled.

China overtook Germany as the world’s No. 1 exporter of goods in 2009 even as the Asian nation reported yesterday its first annual decline in shipments in more than 25 years.

The data “could add more pressure on the renminbi,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong, using another term for the yuan. The “handsome recovery of China’s external trade” mirrored gains by other nations in the region, Lu said.

Taiwan Trade

Taiwan reported its biggest export gain in 14 years in December after shipments plunged a year earlier.

Export gains may make China, the world’s fastest-growing major economy, less dependent on government stimulus measures, including spending on railways, roads and power grids.

In December, exports were $130.7 billion and imports were $112.3 billion, leaving a trade surplus of $18.4 billion. The customs bureau said the import value was unprecedented and exports were the fourth-largest on record.

“The rebound in export growth is no surprise given the collapse in trade at the end of 2008,” said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong. “But this is still good news and reflects a real improvement in external demand.”

Growth Outlook

Among other positive signs for the global economy, the International Monetary Fund has said it will probably raise its estimate for 2010 world growth from 3.1 percent. European executive and consumer confidence jumped in December to a level last seen before the demise of Lehman Brothers Holdings Inc. in 2008, a report showed last week.

For the full year, China’s exports fell 16 percent and imports declined 11.2 percent. The trade surplus was $196.1 billion, sliding for the first time since 2003 and falling short of 2008’s record $295.5 billion.

December’s numbers show the slump is over for China’s exporters, Huang Guohua, a statistics official with the customs bureau, said yesterday in an interview broadcast on state television. That comment contrasts with Chinese leaders saying in the past month that the economic recoveries of China and the world are not yet on solid foundations.

Chinese imports are being boosted by the nation’s economic acceleration, manufacturers buying materials for processing into exports, and an increase in commodity prices. On the nation’s east coast, Qingdao Port Group Co. is expanding wharves to handle iron-ore imports.

Claiming Credit

“Surging imports show that the economic stimulus policies are effectively boosting domestic demand, which also helps to drive the global economic recovery,” the customs bureau said in a statement.

For all of 2009, iron-ore imports surged 42 percent from a year earlier, those for copper and its products soared 63 percent, and purchases of aluminum and its products climbed 164 percent, the data showed.

While Premier Wen Jiabao said Dec. 27 that the nation will “absolutely not yield” to calls for currency gains, yuan forwards indicate that the government will allow appreciation of 3 percent against the dollar in the next year. The yuan closed at 6.8275 per dollar on Jan. 8.

Yuan forwards rose to their highest level in more than a month on Jan. 8 after the central bank guided the increase in three-month bill yields. The currency gained 21 percent in three years after a fixed exchange rate was scrapped in July 2005.

China surpassed Germany in 2007 to become the third-largest economy and is forecast to overtake Japan this year, assuming the No. 2 spot behind the U.S.

Germany shipped 734.6 billion euros ($1.05 trillion) of exports in the first 11 months of last year, the Federal Statistics Office said Jan. 8. That compared with China’s $1.07 trillion over that period.

--Paul Panckhurst, Li Yanping. Editors: Paul Panckhurst, Chris Anstey

To contact Bloomberg News staff for this story: Paul Panckhurst in Beijing at +86-10-6649-7574 or ppanckhurst@bloomberg.net

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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Jan 11 10 10:39 GMT |

EUR/USD Current level-1.4512 EUR/USD is in a downtrend, after peaking at1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated between the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169. As expected, the pair couldn't break below 1.4257 and reversed at 1.4264, advancing beyond 1.4499 resistance. Current bias is positive, well supported at 1.4460 and the pair is targeting 1.4630-70 resistance area. Crucial on the downside is 1.4260. Resistance Support intraday intraweek intraday intraweek 1.4534 1.4499 1.4460 1.4170 1.4670 1.5146 1.4260 1.3740 USD/JPY Current level - 92.43 The overall downtrend has been renewed with the recent break below 87.12. Trading is situated below the 50- and 200-day SMA, currently projected at 89.50 and 93.54. The reversal around 93.40 is already a fact and current intraday bias is negative, so we'll expect further depreciation towards 91.15-24 support area. Intraday resistance comes at 92.80. Resistance Support intraday intraweek intraday intraweek 93.40 93.40 92.10 86.01 93.70 95.60 91.25 79.60 GBP/USD Current level- 1.6141 The pair is in a downtrend after peaking at 1.7042. Trading is situated between the 50- and 200-day SMA, currently projected at 1.6454 and 1.5258. As expected, the pair broke through 1.6070 resistance, stating that a bottom has been set at 1.5896 and the bias is positive for 1.6240, en route to our main target at 1.6410. Nevertheless, current upswing is a part of the consolidation pattern above 1.5833, so 1.6070 remains crucial support on the downside Resistance Support intraday intraweek intraday intraweek 1.6240 1.6410 1.6070 1.5706 1.6410 1.7042 1.5896 1.5352 DeltaStock Inc. - Online Forex & Securities Broker www.deltastock.com RISK DISCLAIMER: These analyses are for information purposes only. They DO NOT post a BUY or SELL recommendation for any of the financial instruments herein analyzed. The information is obtained from generally accessible data sources. The forecasts made are based on technical analysis. However, Delta Stock’s Analyst Dept. also takes into consideration a number of fundamental and macroeconomic factors, which we believe impact the price moves of the observed instruments. Delta Stock Inc. assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon the information on this page. Delta Stock Inc. shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, losses or unrealized gains that may result. Any information is subject to change without notice.

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Pound Rises Against Dollar on Signs of Global Economic Recovery

By Anna Rascouet

Jan. 11 (Bloomberg) -- The pound rose against the dollar for the third time in four days as stocks advanced on signs the global economic recovery is gathering momentum and a report showed U.K. businesses are more optimistic than a year ago.

The British currency also strengthened against the yen as the FTSE 100 Index jumped as much as 0.9 percent, the most in a week, following a Chinese report showing exports climbed 17.7 percent from a year earlier and imports surged 55.9 percent. Grant Thornton U.K. LLP and Experian Plc said a net 16 percent of unlisted U.K. companies surveyed are confident about their prospects for 2010, up from net minus 47 percent a year earlier.

“You have to look at the general backdrop,” said Neil Mellor, a London-based currency strategist at BNY Mellon Corp. “If risk appetite is on the rise, then sterling will rise against the dollar. The news is mixed, but this is broad positive sentiment that’s behind the move.”

The pound rose 0.8 percent to trade at $1.6149 as of 10:27 a.m. in London today. It appreciated 0.7 percent to 149.46 yen, and weakened 0.1 percent to 89.82 pence per euro.

The yield on the 10-year gilt was little changed at 4.06 percent. The two-year note yield also stayed little changed at 1.25 percent.

While optimism for Britain’s private companies rose, a separate report showed U.K. financial-services companies are more pessimistic than at any time in the past year on the outlook for business growth. The Confederation of British Industry said today the number of companies expecting a reduction in business volumes in the first quarter was 13 percent more than those anticipating an increase.

The pound’s gains today came in the wake of seven weekly declines in eight against the dollar as investors bet Prime Minister Gordon Brown’s bid to renew his term the next election this year will drive him to deepen the nation’s budget deficit, hurting the nation’s credit rating.

Pacific Investment Management Co.’s Head of Global Portfolio Management Scott Mather told the Wall Street Journal last week that the U.K. has an 80 percent chance of seeing its credit rating cut if it maintains its current debt-reduction plan.

To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net.

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