Faber Says S&P 500 May Drop 20% on Economic, Earnings Prospects

By Rita Nazareth

Jan. 27 (Bloomberg) -- The Standard & Poor’s 500 Index may retreat 20 percent from a 15-month high because stocks are expensive given prospects for economic and profit growth, Marc Faber said.

The benchmark index for U.S. stocks, which closed at 1,150.23 on Jan. 19, may fall to 920, said Faber, 63, who recommended buying stocks in March, before the biggest rally since the Great Depression. The index surged 70 percent from a 12-year low in March before dropping 5.1 percent to 1,092.17 through yesterday. The S&P 500’s price-earnings ratio had jumped to 25, the highest since 2002, data compiled by Bloomberg show.

“The market has become overbought,” Faber, who publishes the Gloom, Boom and Doom report, said in a phone interview from Switzerland. “There isn’t a meaningful improvement in the economy taking place. The economy may disappoint somewhat in the next few months. The statistics that are being published are very questionable. The economy has stabilized, but isn’t really expanding.”

Consumer spending, which accounts for about 70 percent of the economy, probably increased at a 1.8 percent annual rate in the fourth quarter after rising at a 2.8 percent pace in the previous three months, economists said before a Jan. 29 report from the Commerce Department. The jobless rate held at 10 percent in December, near a 26-year high, the Labor Department said on Jan. 8.

Not That Great

“With unemployment staying at a relatively high level and with the revenue side being weak, I don’t think that corporate profits will be that great in 2010,” Faber said. “Basically, the profits have been boosted by aggressive cost-cutting. The revenue side of corporations is weak.”

A record nine-quarter profit slump for S&P 500 companies is projected to have ended in the fourth quarter with a 73 percent increase in earnings. Sales at the 122 S&P 500 companies that have reported results for the period since Jan. 11 have increased 13 percent, Bloomberg data show.

Faber, who advised investors to buy U.S. stocks on March 9, when the S&P 500 reached its lowest level since 1996, said the gauge may end the year lower than the close on Dec. 31. The index rose 23 percent in 2009, ending the year at 1,115.10.

“This year, investors will never achieve returns as high as in 2009,” he said. “Stocks are relatively high compared to the fundamentals.”

Financials, Commodities

While Faber said he cannot predict which industries will be the laggards, he highlighted weakness among financial and commodity-related companies.

“Financials have already been quite weak,” Faber said. “It’s kind of a warning sign for the market. They may weaken further, especially the banks. Also commodities-related stocks could weaken somewhat as commodity prices ease.”

The S&P 500 Financials Index rallied 146 percent from a 17- year low in March before dropping 5.2 percent last week as President Barack Obama called for limiting the size and trading activities of financial institutions as a way to reduce risk- taking and prevent another financial crisis. Measures of energy and raw-materials and energy shares in the S&P 500 have retreated more than 1.5 percent in 2010.

Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 climbed 10 percent between then and its record of 1,565.15 seven months later.

In his interview this week, Faber said that the S&P 500 may rise as high as 1,250 or 1,300 this year before declining again.

“Usually March, April are seasonally strong months,” he said. “We’ll get a rebound. In general, high-quality and large market capitalization stocks are reasonably priced considering you have zero interest-rates. As these markets go down, the high-quality, large-market-cap stocks will go down less than the smaller-cap stocks.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

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U.S. Stock Futures Fluctuate; Yahoo Gains, Caterpillar Falls

By Daniela Silberstein and Elizabeth Stanton

Jan. 27 (Bloomberg) -- U.S. stock-index futures fluctuated as a disappointing profit forecast at Caterpillar Inc. offset higher-than-estimated sales at Yahoo! Inc.

Caterpillar, the largest maker of bulldozers and excavators, declined 4.4 percent after projecting 2010 profits that fell short of the average analyst estimate. Yahoo, owner of the second-most-used Internet search engine in the U.S., advanced after online advertising revenue exceeded projections. Berkshire Hathaway Inc.’s Class B stock soared 8.3 percent after being picked to join the Standard & Poor’s 500 Index.

Futures on the S&P 500 expiring in March rose 0.1 percent to 1,088.4 as of 8:47 a.m. in New York. Dow Jones Industrial Average futures fell 4 points, or less than 0.1 percent, to 10,134 and Nasdaq-100 Index futures added 0.2 percent to 1,799.5. Stocks in Europe and Asia fell.

“If we have good economic data and good earnings reports the market will gain a foothold again,” said Peter Braendle, who helps oversee about $50 billion at Swisscanto Asset Management in Zurich. “I can imagine that we can come back up as fast as we fell. I’m surprised that we saw such a setback at the beginning of the year already.”

Tumble From Peak

After closing at a 15-month high on Jan. 19, the S&P 500 slumped 5.1 percent in its biggest three-day drop in 10 months as President Barack Obama called for limits on risk- taking by banks and China moved to restrict lending and cool economic growth. The move erased the index’s gain for the year. Valued at more than 18 times forecast earnings at the start of the year, the benchmark now trades at 14.2 times projected profit.

Stocks fell yesterday as investors speculated the Federal Reserve policy makers, concluding a two-day meeting in Washington today, may signal more plans to unwind stimulus measures and as Elliott Wave International Chief Executive Officer Robert Prechter said a new bear market may have begun.

A record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the fourth quarter with a 73 percent increase in profits. More than 130 companies in the index are scheduled to release results this week, including Procter & Gamble, 3M Co., Microsoft Corp. and Amazon.com Inc.

Earnings Season

About three-quarters of the companies that have reported fourth-quarter results have beaten analyst estimates for per-share earnings, according to Bloomberg data.

The Fed Open Market Committee, gathering while Chairman Ben S. Bernanke awaits a Senate vote on whether to confirm him for a second term, is expected to keep the benchmark for short-term interest rates in the zero to 0.25 percent range, where it’s been since December 2008. Investors’ focus has been on how and when the central bank will signal its intention to start raising rates, and to dismantle the programs by which it has financed risky assets for the banking system.

The Fed may also take a chance the housing market can stage a comeback without its support by announcing today it will stick to the plan to end a $1.25 trillion program of mortgage-debt purchases in March. The statement is scheduled to be released at around 2:15 p.m.

Housing Market

Americans probably bought more new homes in December, signaling a government tax credit will prevent the industry from backsliding, economists expect a government report today to show. Purchases rose 3 percent to an annual pace of 366,000, according to the median estimate of 70 economists surveyed by Bloomberg News. The figures are due at 10 a.m. Washington time.

Caterpillar fell 4.4 percent to $53.40 in pre-market New York trading. The company forecast 2010 profit of about $2.50 a share. Analysts, on average, estimated per-share earnings of $2.70.

Yahoo advanced 3.2 percent to $16.50. Excluding revenue passed on to partner sites, sales were $1.26 billion, beating the average estimate of $1.23 billion in a Bloomberg survey of analysts. The company’s total sales fell 4.1 percent to $1.73 billion, yet still edged out its own forecast of $1.6 billion to $1.7 billion.

Berkshire Hathaway Class B shares soared 8.3 percent to $73.61 in early trading. The company was picked to join the S&P 500, the benchmark index for U.S. stocks that investors with about $1 trillion in assets mimic. The firm will replace Burlington Northern Santa Fe Corp. after completing the takeover of the railroad, S&P said yesterday.

BlackRock

BlackRock Inc., the world’s largest money manager, said fourth-quarter net income rose as last month’s purchase of Barclays Global Investors lifted fee revenue and investors poured $82 billion into funds. Adjusted net income, including certain one-time items, was $2.39 a share. Eleven analysts surveyed by Bloomberg on average expected BlackRock to earn $2.08 a share. The stock added 2.1 percent to $229.32 in Germany.

U.S. Steel Corp. dropped 1 percent to $49.10. The second-largest U.S.-based steelmaker was downgraded to “neutral” from “buy” at Goldman Sachs Group Inc. after the company reported a wider-than-estimated quarterly loss yesterday.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net. Elizabeth Stanton in New York at estanton@bloomberg.net

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United Kingdom Expands While Confidence In Germany Climbs To 18-Month High!

Daily Forex Fundamentals | Written by ecPulse.com | Jan 26 10 09:52 GMT |

As the global outlook reveals more bright signs that the worst recession since post world era is over, confidence levels continue to inch higher, although the improvement we are witnessing currently is as a result of the temporarily measures taken by the central bank and governments around the world. First on our calendars, we see that confidence in Germany inched higher as IFO survey regarding business climate in January which measures the level of confidence in the business sector rose to 95.8 from the revised prior 94.6 from 94.7. Also the survey released the current assessment which is an index on the current German business conditions along with expectations for the upcoming conditions in the next six months. The survey for January inclined to 91.2 from the revised previous reading of 90.4 from 90.5. Furthermore, the IFO expectations for January jumped to 100.6 higher than the revised previous reading of 98.9 from 99.1 and also surpassed the market expectations of 99.1. Germany is the biggest nation in the euro zone contributing nearly a quarter of the euro zone GDP, and the higher the confidence levels rose to an 18-month high, shows that businesses and consumers are optimistic about the outlook of the nation therefore hinting that the recession loosening its grip on the economy. The highlight of today was on the United Kingdom releasing its fourth quarter GDP advanced reading which showed that the economy expanded to 0.1% from the prior third quarter contraction of 0.2%, the markets were projecting an expansion of 0.4%. On the year, the contraction eased to -3.2% from -5.1% which is worse than the predicted contraction of 3.0 percent. The Bank of England is using 200 billion pounds towards buying gilts, and this measure has so far been successful into helping ease the economic recession in the UK as we have been witnessing an improvement in the dominate sectors that support GDP while the severe decline in general price levels have eased. The UK is the last economy out of the major nations to step out of the recession, while next week, officials will discuss the economic progress and decide to whether continue the APF program or start to pull the measures gradually like other major economies. The BoE anticipates that the UK will expand in the last quarter of this year. The economy is expected to grow 2.2% this year and 4.1% in 2011, according to policy makers' projections announced in November. 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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China Raises Reserve Ratio & Scares Risk Takers

Daily Forex Fundamentals | Written by AC-Markets | Jan 26 10 10:26 GMT |

Market Brief USD rallied back in the Asian session, as news that China was again raising its reserve requirements on select banks and S&Ps lowering of Japans outlook spooked investors. Yesterday, Wall Street was able to close on a postive note, but news from China and Japan clouded the sentiment.The Nikkei closed down -1.78%, while Shanghai was down -2.42%. After an encouraging start, the EURUSD traded higher to 1.4180 and pushing JPY cross higher as well, but around midday sentiment shifted and risk correlated trades tumbled. With Australia on holiday, Tokyo were the main players in AUD, selling the pair down to 0.8960 as high beta trades came under the knife. Outside Asia, political issues in the US continued to also weigh on risk taking, particularly Bernanke's potential confirmation of a second term. While the White House sounds confident that the Senate will confirm the current chairman, and positive comment have helped ease concerns, Obama public mandate is currently being questioned, a rogue senators effecting the vote should be priced in. In Japan, the BoJ voted unanimously to keep the policy rate unchanged at 0.1%. The meeting went widely as expected with no new policies or adjustments to existing schemes/operations being announced. Core CPI forecast was revised higher for fiscal 2010 to -0.5% y/y from -0.8% y/y previously, which was followed up by FM Kan stating that Japan could be clearly out of a deflationary environment in 2-3 years with the BoJ help. While he didn't elaborate on what monetary policy tools the BoJ has to achieve this feat, they could include increasing the central banks monthly purchases of JGB. Later in the day the S&P inexpertly lowered Japan's sovereign rating outlook from 'stable' to 'negative'. Japan's rating remains at AA, fiscal outlook is unlikely to improve as the new government spending plans restrict any positive adjustment to surge debt and we would expect other rating agencies to also lower in the near term. UK GDP just sqeeked out recession with today q/q print of 0.1% vs. 0.4% exp , -0.2% prior read (y/y -3.2% vs. -3.0% exp). Perhaps Chancellor Darling comments on today's GDP data that he remains 'cautious' was more than just easing the markets optimism (however, historically UK GDP are revised upwards). The economic data was very close to the bone and can easily be revised down. The disappointing report causedthe GBPUSD to collapse to 1.6150 from 1.6230. 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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China Raises Reserve Ratio & Scares Risk Takers

Daily Forex Fundamentals | Written by AC-Markets | Jan 26 10 10:26 GMT |

Market Brief USD rallied back in the Asian session, as news that China was again raising its reserve requirements on select banks and S&Ps lowering of Japans outlook spooked investors. Yesterday, Wall Street was able to close on a postive note, but news from China and Japan clouded the sentiment.The Nikkei closed down -1.78%, while Shanghai was down -2.42%. After an encouraging start, the EURUSD traded higher to 1.4180 and pushing JPY cross higher as well, but around midday sentiment shifted and risk correlated trades tumbled. With Australia on holiday, Tokyo were the main players in AUD, selling the pair down to 0.8960 as high beta trades came under the knife. Outside Asia, political issues in the US continued to also weigh on risk taking, particularly Bernanke's potential confirmation of a second term. While the White House sounds confident that the Senate will confirm the current chairman, and positive comment have helped ease concerns, Obama public mandate is currently being questioned, a rogue senators effecting the vote should be priced in. In Japan, the BoJ voted unanimously to keep the policy rate unchanged at 0.1%. The meeting went widely as expected with no new policies or adjustments to existing schemes/operations being announced. Core CPI forecast was revised higher for fiscal 2010 to -0.5% y/y from -0.8% y/y previously, which was followed up by FM Kan stating that Japan could be clearly out of a deflationary environment in 2-3 years with the BoJ help. While he didn't elaborate on what monetary policy tools the BoJ has to achieve this feat, they could include increasing the central banks monthly purchases of JGB. Later in the day the S&P inexpertly lowered Japan's sovereign rating outlook from 'stable' to 'negative'. Japan's rating remains at AA, fiscal outlook is unlikely to improve as the new government spending plans restrict any positive adjustment to surge debt and we would expect other rating agencies to also lower in the near term. UK GDP just sqeeked out recession with today q/q print of 0.1% vs. 0.4% exp , -0.2% prior read (y/y -3.2% vs. -3.0% exp). Perhaps Chancellor Darling comments on today's GDP data that he remains 'cautious' was more than just easing the markets optimism (however, historically UK GDP are revised upwards). The economic data was very close to the bone and can easily be revised down. The disappointing report causedthe GBPUSD to collapse to 1.6150 from 1.6230. 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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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Jan 26 10 09:37 GMT |

EUR/USD Current level-1.4086 EUR/USD is in a downtrend, after peaking at 1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169. The consolidation above 1.4031 was completed at 1.4195 high and the pair is ready to renew its downtrend towards 1.3924. The intraday bias is negative with resistance around 1.4127 and risk limit above 1.4180. Resistance Support intraday intraweek intraday intraweek 1.4127 1.4260 1.4030 1.40+ 1.4180 1.5146 1.3924 1.3740 USD/JPY Current level - 90.07 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. Obviously the resistance around 90.80 is intact and yesterday's high at 90.58 was the final of the consolidation above 89.77, so further depreciation is to be expected, towards 88.53 Resistance Support intraday intraweek intraday intraweek 90.80 93.40 89.77 88.90 92.04 95.60 88.52 79.60 GBP/USD Current level- 1.6228 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. Yesterday's break above 1.6170 has neutralized the bearish momentum and although the crucial 1.6283 is still intact, we are rather neutral on that pair. Important on the downside is 1.6077. Resistance Support intraday intraweek intraday intraweek 1.6283 1.6410 1.6170 1.5833 1.6410 1.7042 1.6077 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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Vietnam Sells $1 Billion of Bonds in 2nd Global Issue

By David Yong and Veronica Navarro Espinosa

Jan. 26 (Bloomberg) -- Vietnam raised $1 billion from its second global bond sale, offering higher yields than lower-rated Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.

The Southeast Asian nation’s government sold 10-year bonds to yield 6.95 percent, or 3.33 percentage points more than Treasuries, according to Bloomberg data. Barclays Plc, Citigroup Inc. and Deutsche Bank AG managed the sale. Indonesia paid 2.28 percentage points more and the Philippines gave an extra yield of 1.84 percentage points in sales earlier this month.

Vietnam’s sale raised money for energy and infrastructure projects that will support growth in an economy suffering a shortage of foreign exchange, accelerating inflation and a widening trade deficit. The central bank set a 7 percent limit on the yield, the minimum amount investors AllianceBernstein L.P. and Western Asset Management Co. estimated would be required to attract sufficient orders.

“I like the country and see continuing inflows into emerging markets,” said Francesca di Cesare, a bond manager who helps oversee the equivalent of $10 billion at Aletti Gestielle SGR SpA in Milan and bought the notes. “Vietnam is not a frequent issuer and thus offers a diversification factor.”

Twice Subscribed

Demand for the notes reached $2.4 billion, more than double the amount on offer, said a person close to the transaction who declined to be identified because he’s not allowed to speak publicly. Indonesia’s $2 billion sale this month drew orders for more than twice debt on offer and the $1.5 billion issue by the Philippines was subscribed more than six times. Investors in the U.S. bought 56 percent of the Vietnam notes, while Asian buyers accounted for 28 percent and Europe funds 16 percent.

The 2020 notes were bid at a yield of 6.837 percent, according to prices provided by the Royal Bank of Scotland Group Plc. The benchmark VN Index of shares rallied 3.5 percent to 497.90, the biggest gain in three weeks.

Developing nations from Turkey to Slovenia sold more than $14 billion in overseas bonds so far this year, compared with $24.7 billion at the start of 2005, according to Bloomberg data. Greece yesterday sold 8 billion euros ($11.3 billion) of five- year bonds at premium yields, the first sales since the nation’s debt was downgraded last month by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

Increased Volatility

The JPMorgan Chase & Co. EMBI Global Spread was 3.15 percentage points as of 9:20 a.m. in London, up from 2.94 points at the end of last year. Vietnam has a 0.23 percent weight in the index, which tracks the dollar-denominated bonds of 37 emerging-market countries.

Vietnam delayed its debt issue on Jan. 22 because of increased market volatility as global stocks slumped after President Barack Obama unveiled measures to curb risk-taking by U.S. banks. The sale was completed yesterday in New York to yield about a percentage point more than was paid this month by the Philippines and Indonesia, which carry lower debt ratings from S&P.

The bond sale outcome was “important and successful,” opening an international funding channel for the government and businesses, Vietnam’s finance ministry said in an e-mailed statement today.

“The outlook for Vietnam remains constrained by questions around the government’s ability to rein in the fiscal deficit, reduce the trade imbalance and moderate inflation,” analysts at debt-research firm CreditSight Inc. wrote in a report.

Policy Balance

Vietnam is struggling to balance policies that spur growth with efforts to ensure its economy remains stable, said Jan. 15. The nation is rated Ba3 by Moody’s, three levels below investment grade, with a negative outlook. The ranking is on par with the Philippines and one grade weaker than Indonesia. S&P rates Vietnam BB, one level higher than the BB- ranking for Indonesia and the Philippines.

The government sold $750 million of 10-year bonds to yield 7.125 percent at its inaugural sale in October 2005, a premium of 2.56 percentage points over similar-maturity Treasuries. The 2016 notes yielded 6.13 percent yesterday or an equivalent of 3.35 points spread, according to Bloomberg data.

“Investors got nothing” for the additional four years of maturity in the new bonds, said Tim Condon, head of Asia research at ING Groep NV in Singapore. “Nor was there a new issue premium.”

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net. Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

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Sarkozy Says French Economic Growth May Exceed 1.4% Estimate

By Helene Fouquet and Gregory Viscusi

Jan. 26 (Bloomberg) -- France’s 2010 economic growth may exceed the government’s 1.4 percent forecast, President Nicolas Sarkozy said, helping spur hiring.

“We’ve doubled our economic growth forecast for this year, it will be 1.4 percent and maybe more,” Sarkozy said on French television channel TF1 late yesterday. “And you’ll see unemployment will fall starting this year.”

France’s economy emerged from recession last year, growing 0.3 percent in the second and third quarters, and prompting the government to double its economic forecast. Sarkozy was more confident than his finance minister on employment, pledging an end to job losses in the “coming weeks, months.”

Finance Minister Christine Lagarde said Jan. 20 that Europe’s second-largest economy was likely to lose a further 71,000 jobs this year after 373,000 were lost in 2009. Insee, the national statistics office, said Dec. 18 unemployment will continue to rise through the middle of the year to 10.2 percent. Unemployment stood at a three-year high of 9.5 percent at the end of the third quarter.

Sarkozy, who participated in a live television show with French voters for the first time since his May 2007 election, has said he’d consider that France has “exited the crisis only when unemployment starts falling.”

To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net; Gregory Viscusi in Paris at gviscusi@Bloomberg.net.

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German Business Confidence Rises to 18-Month High

By Gabi Thesing

Jan. 26 (Bloomberg) -- German business confidence rose more than economists forecast to an 18-month high in January as the global economic recovery boosted exports.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 95.8 from 94.6 in December. That’s the highest since July 2008 and the tenth straight increase. Economists expected a gain to 95.1, according to the median of 41 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March last year.

Rising foreign sales, fueled by Asian demand, may help offset a slide in domestic spending and ensure Germany’s economy continues to expand. The government said last week it will raise its 2010 growth forecast to 1.5 percent from 1.2 percent even as some of its stimulus measures expire. Europe’s largest economy shrank 5 percent last year, the most since World War II.

Today’s report “laid to rest some of the concerns that the economy is running out of steam,” Carsten Brzeski, an economist ING Group in Brussels, said in a telephone interview. “The recovery is still very strong. It’s industry-led, which should hopefully also support the labor market.”

Ifo’s gauge of executives’ expectations jumped to 100.6, the highest since July 2007, from 98.9. A measure of current conditions gained to 91.2 from 90.4.

The euro rose after the report to $1.4103 from $1.4084.

Mixed Picture

Recent data have painted a mixed picture of the state of the German recovery. While investor and consumer confidence declined this month, the country’s manufacturing industries expanded more than economists expected and the Economy Ministry unexpectedly revised up its estimate of November factory orders last week.

That prompted Bundesbank President Axel Weber to say on Jan. 22 that he’s “a bit more optimistic” about the outlook for German growth. At the same time, cold weather and weak consumption “speak against too much euphoria,” he said.

Ifo economist Gernot Nerb said the increase in business confidence was partly due to exports boosting manufacturing. Sentiment in the construction sector also improved, he told Bloomberg Television in an interview.

Government Subsidy

Germany’s Volkswagen AG, Europe’s largest carmaker, said on Jan. 11 it wants to increase its worldwide market share further in 2010 after reporting record sales for 2009. Sales in China surged 37 percent. Still, the company’s Skoda Auto division forecasts sales in Germany, the brand’s largest market, will fall 37 percent this year after a government subsidy on new car purchases expired.

The prospect of rising unemployment will weigh on household spending in Germany, Klaus Baader, co-chief European economist at Societe Generale SA in London, wrote in a note to investors. There is “virtually no scope for gains in private consumption in 2010,” he said.

Metro AG, Germany’s largest retailer, said on Jan. 12 it expects economic conditions to “remain challenging” this year.

The outlook for the global economy and the euro’s 7 percent drop against the dollar since November bode well for exporters. The U.K., Germany’s fourth-largest export destination, exited recession in the fourth quarter, a report showed today.

Confidence in the world economy rose in January, the Bloomberg Professional Global Confidence Index showed Jan. 14, with Asia’s index outpacing those of other economic blocs.

The International Monetary Fund will probably raise its estimate for 2010 world growth this month from a 3.1 percent forecast in October, John Lipsky, the organization’s first deputy managing director, said Jan. 6.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

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Bernanke Gains More Senate Support, Plans Additional Meetings

By Scott Lanman, Joshua Zumbrun and Vivien Lou Chen

Jan. 26 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke gained more support from U.S. senators for a second term and prepared to work around a two-day policy meeting that starts today to visit lawmakers.

Democrats including Missouri’s Claire McCaskill and Maryland’s Barbara Mikulski were among the senators who said yesterday they would vote for the 56-year-old Fed chief or were leaning in his favor, along with Utah Republican Robert Bennett. Republicans Tom Coburn of Oklahoma and Florida’s George LeMieux said they would decide after meeting with Bernanke this week.

Stocks rebounded from the biggest three-day decline since March amid growing confidence Bernanke will be confirmed. The number of likely Bernanke supporters rose to 42 from 31 the day before, while about 17 senators remained opposed or leaning against the former Princeton University economist.

“I encouraged Chairman Bernanke to meet with as many members as possible,” Senate Majority Whip Richard Durbin, an Illinois Democrat and supporter, said after they met. “He has an Open Market Committee meeting this week that he said he can’t miss and I said, ‘Well, I sure don’t want the economy to come down, that’s not good for either one of us.’ So he’s going to try to balance that but spend as much time on the Hill as he can.”

The Standard & Poor’s 500 Index advanced 0.5 percent to 1,096.78 yesterday in New York, trimming a 1 percent gain after a report showed sales of existing homes fell more than estimated. Wavering support for Bernanke among some Democrats helped drive stock prices lower on Jan. 22, triggering a 2.2 percent plunge in the S&P 500.

Fed Independence

The timing of the confirmation vote, which may occur just before Bernanke’s four-year term ends on Jan. 31, and the controversy it has generated in the Senate highlight the risks to the central bank’s independence at a time when policy makers are considering their strategy for an eventual exit from record low interest rates.

“The fact he’s taking a hit on so much of this and so many senators think they can score short-term political points from beating up on him” means the U.S. risks losing “the benefits of having an independent central bank,” said Anil Kashyap, a former Fed economist who teaches at the University of Chicago.

“The impulse to use Mr. Bernanke as a political punching bag raises the specter that, instead of doing the right thing, Congress may seek to pressure the Fed to print its way out of this crisis,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an opinion piece posted on the Wall Street Journal’s Web site.

Interest Rates

Bernanke and fellow members of the Federal Open Market Committee are likely to keep interest rates close to zero after their meeting ends tomorrow and to repeat a pledge to leave borrowing costs unchanged for an “extended period,” economists said.

Bernanke has drawn fire from some lawmakers for lax bank regulation prior to the financial crisis and for bailouts of firms such as American International Group Inc. The Democratic party’s loss of a seat in Massachusetts last week added to pressure on senators facing re-election at a time of rising voter anger over the economy.

“Both Democrats and Republicans have run for cover, given the result of that Massachusetts election, and sought to make a populist case against Wall Street and by association the Fed chairman,” said former Fed economist David M. Jones, 71, president of Denver-based DMJ Advisors and author of four books on the central bank.

Split With Obama

Last week, two Democrats who face re-election this year, Barbara Boxer of California and Russ Feingold of Wisconsin, said they will oppose Bernanke, splitting with President Barack Obama, who nominated him for a second term in August. Bernanke, a Republican, was first picked by President George W. Bush.

Opponents including John McCain of Arizona, who lost the 2008 presidential election to Obama, blame Bernanke for failing to avert the financial crisis that plunged the nation into the worst recession since World War II.

“While I appreciate the service that Chairman Bernanke has performed as Federal Reserve Chairman, I believe that he must be held accountable for many of the decisions that contributed to our financial meltdown,” McCain said yesterday in a statement.

Durbin and other supporters, including Christopher Dodd, the Senate Banking Committee chairman, say the Fed’s unprecedented actions to pump money into the economy saved the nation from a more severe recession after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008.

‘Darkest Days’

“I have some concerns about some of the past decisions that have been made, but there’s one thing I know for certain: During the darkest days of this economic recession, when this country was teetering on a depression, this man and his leadership at the Federal Reserve made a difference,” Durbin said yesterday after meeting with Bernanke.

“I thought he was very frank and candid in acknowledging that mistakes were made at many different levels, including in Congress,” Durbin said.

Bernanke pledged “transparency and accountability” at the central bank, especially on the bailout of New York-based insurer AIG, while reiterating his opposition to Congressional audits of monetary policy, Durbin said. The House Oversight Committee holds a hearing this week after getting 250,000 pages of documents from the New York Fed on the AIG rescue.

Under Senate rules, Bernanke’s supporters need 60 votes for a motion to limit debate on the confirmation, which then would need a majority.

Durbin said some Democrats who oppose Bernanke will vote to end debate, allowing his nomination to move forward. In addition, “We will need some Republican support.”

Democrat Sheldon Whitehouse of Rhode Island has “serious concerns about” Bernanke yet “will not join any filibuster” on the nomination, according to Matt Thornton, a spokesman.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net.

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German Business Confidence Rises to 18-Month High

By Gabi Thesing

Jan. 26 (Bloomberg) -- German business confidence rose more than economists forecast to an 18-month high in January as the global economic recovery boosted exports.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 95.8 from 94.6 in December. That’s the highest since July 2008 and the tenth straight increase. Economists expected a gain to 95.1, according to the median of 41 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March last year.

Rising foreign sales, fueled by Asian demand, may help offset a slide in domestic spending and ensure Germany’s economy continues to expand. The government said last week it will raise its 2010 growth forecast to 1.5 percent from 1.2 percent even as some of its stimulus measures expire. Europe’s largest economy shrank 5 percent last year, the most since World War II.

Today’s report “laid to rest some of the concerns that the economy is running out of steam,” Carsten Brzeski, an economist ING Group in Brussels, said in a telephone interview. “The recovery is still very strong. It’s industry-led, which should hopefully also support the labor market.”

Ifo’s gauge of executives’ expectations jumped to 100.6, the highest since July 2007, from 98.9. A measure of current conditions gained to 91.2 from 90.4.

The euro rose after the report to $1.4103 from $1.4084.

Mixed Picture

Recent data have painted a mixed picture of the state of the German recovery. While investor and consumer confidence declined this month, the country’s manufacturing industries expanded more than economists expected and the Economy Ministry unexpectedly revised up its estimate of November factory orders last week.

That prompted Bundesbank President Axel Weber to say on Jan. 22 that he’s “a bit more optimistic” about the outlook for German growth. At the same time, cold weather and weak consumption “speak against too much euphoria,” he said.

Ifo economist Gernot Nerb said the increase in business confidence was partly due to exports boosting manufacturing. Sentiment in the construction sector also improved, he told Bloomberg Television in an interview.

Government Subsidy

Germany’s Volkswagen AG, Europe’s largest carmaker, said on Jan. 11 it wants to increase its worldwide market share further in 2010 after reporting record sales for 2009. Sales in China surged 37 percent. Still, the company’s Skoda Auto division forecasts sales in Germany, the brand’s largest market, will fall 37 percent this year after a government subsidy on new car purchases expired.

The prospect of rising unemployment will weigh on household spending in Germany, Klaus Baader, co-chief European economist at Societe Generale SA in London, wrote in a note to investors. There is “virtually no scope for gains in private consumption in 2010,” he said.

Metro AG, Germany’s largest retailer, said on Jan. 12 it expects economic conditions to “remain challenging” this year.

The outlook for the global economy and the euro’s 7 percent drop against the dollar since November bode well for exporters. The U.K., Germany’s fourth-largest export destination, exited recession in the fourth quarter, a report showed today.

Confidence in the world economy rose in January, the Bloomberg Professional Global Confidence Index showed Jan. 14, with Asia’s index outpacing those of other economic blocs.

The International Monetary Fund will probably raise its estimate for 2010 world growth this month from a 3.1 percent forecast in October, John Lipsky, the organization’s first deputy managing director, said Jan. 6.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

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U.K. Economy Resumes Growth By Less Than Forecast

By Scott Hamilton

Jan. 26 (Bloomberg) -- The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent.

Bank of England policy makers will study the data as they assess the strength of the recovery and decide next week whether to halt bond purchases and prepare to withdraw emergency stimulus measures. The weakness of the pickup may hamper Prime Minister Gordon Brown’s efforts to win an election by June as he campaigns on his plans to curb the budget deficit.

“It’s clearly disappointing,” Simon Hayes, chief U.K. economist at Barclays Capital and a former Bank of England official, said in a telephone interview. “The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.”

The pound fell as much as 0.4 percent after the release and traded at $1.6147 as of 9:44 a.m. in London. The yield on the two-year government bond was down 1 basis point at 1.202 percent.

Record Drop

The recession, which lasted for six consecutive quarters, has shaved 6 percent off GDP, the statistics office said. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949, officials said.

The economy contracted 3.2 percent from a year earlier in the fourth quarter, compared with a median decline of 3 percent forecast in a Bloomberg News survey of 30 economists.

The data, the first for the fourth quarter from a Group of Seven nation, means Britain is the last of them to exit the recession sparked by the worst financial crisis since the Great Depression. The U.S. will release GDP data for the fourth quarter on Jan. 29.

Brown said yesterday that he is confident the U.K. is emerging from recession, though the economy “remains fragile” and the biggest mistake Britain could make would be to withdraw economic stimulus measures too early. Brown and Conservative leader David Cameron are battling to convince voters they are best placed to cut the ballooning budget deficit without hurting the economic recovery.

Services, Manufacturing

Services, which make up 76 percent of GDP, expanded 0.1 percent on the quarter. Industrial production grew 0.1 percent and within that, manufacturing rose 0.4 percent, the statistics office said. Construction output stayed unchanged from the previous three months.

Close Brothers Group Plc, the 131 year-old London-based investment bank, said last week earnings this year will be “solid” after reporting a “good” end to the year. “However, this will depend on the prevailing economic environment and financial market conditions,” the company said Jan. 22.

Bank of England Governor Mervyn King said last week the U.K. faces “a long period of healing” as “at this very early stage of the recovery, it is particularly difficult to judge the medium-term prospects for the economy.” Policy makers will decide next week whether to halt bond purchases after buying 200 billion pounds ($325 billion) so far.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

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Pound Drops Versus Dollar, Euro as GDP Falls Short of Estimates

By Matthew Brown

Jan. 26 (Bloomberg) -- The pound fell against the dollar and the euro and gilts rose after a report showed the U.K. economy grew less than forecast in the fourth quarter, even as it exited its longest recession on record.

Sterling weakened from within half a penny of the strongest level against the 16-nation currency in five months. Gross domestic product expanded 0.1 percent in the final three months of 2009 after contracting 0.2 percent in the third quarter, the Office for National Statistics said today. The U.K. faces a “fragile” recovery as the government addresses the record budget deficit, Confederation of British Industry director general Richard Lambert said yesterday.

“Growth is slow and inflation is rising, and weakness of the exchange rate has to happen,” said Hans-Guenter Redeker, head of foreign-exchange strategy in London at BNP Paribas SA. “We are massively bearish on the pound.”

The pound depreciated 0.3 percent to 87.34 pence per euro as of 10:13 a.m. in London. It strengthened to 86.51 pence on Jan. 20, the strongest level since Aug. 21. The British currency dropped 0.7 percent to $1.6127.

Economists predicted a 0.4 percent increase in fourth- quarter U.K. GDP, according to a Bloomberg survey. The lowest forecast was for 0.2 percent growth.

Government bonds rose, sending the yield on the 10-year gilt down 4 basis points to 3.87 percent. The 4.5 percent security due March 2019 rose 0.27, or 2.7 pounds per 1,000-pound face amount, to 104.76. The two-year note yield declined 3 basis points to 1.20 percent.

U.K. government bonds returned 0.7 percent this year, compared with 1.2 percent for German bunds and 1.4 percent for U.S. Treasuries, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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Euro May Fall to 7-Month Low Against Dollar: Technical Analysis

By Ron Harui

Jan. 26 (Bloomberg) -- The euro may fall to a seven-month low of $1.38 should it close below so-called support at $1.4118, said Pak Lai Ng, a technical analyst at Forecast Pte in Singapore, citing trading patterns.

Europe’s currency is likely to test the $1.4118 level in coming days because daily momentum charts such as the moving average convergence/divergence, or MACD, show a sell signal for the euro versus the dollar, Ng said. The support is a 38.2 percent retracement of the euro’s rise from its March low of $1.2457 to the November high of $1.5144, based on a series of numbers known as the Fibonacci sequence.

“The focus is still on the downside for the euro-dollar,” Ng said in an interview. “Momentum indicators are all on the negative side.”

The euro bought $1.4157 as of 9:15 a.m. in Tokyo from $1.4151 in New York yesterday. It dropped to $1.4029 on Jan. 21, the lowest level since July 30. The 16-nation currency has weakened 1.2 percent in January and is heading for a second monthly loss, its longest since February 2009.

The target of $1.38 represents a 50 percent retracement of the euro’s rally from the March low, Ng said. That level was last reached on June 16, according to data compiled by Bloomberg.

MACD charts can indicate whether a price shift is a change in trend or a short-term deviation by comparing moving averages based on 9-, 12- and 26-day periods. Fibonacci charts are based on the theory that securities tend to rise or fall by specific percentages after reaching a new high or low. A break below support or above resistance indicates a currency may move to the next level.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Support is a level where buy orders may be clustered, while resistance is where there may be sell orders.

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

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Dollar to Benefit From Japan Outlook Cut, Mizuho Asset Says

By Theresa Barraclough

Jan. 26 (Bloomberg) -- The dollar and U.S. Treasuries are likely to benefit from Japan’s outlook downgrade by Standard & Poor’s, according to Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

S&P cut Japan’s outlook to “negative” citing diminishing “flexibility” to cope with the nation’s swelling debt load. The credit-rating company said the Democratic Party of Japan’s policies “point to a slower pace of fiscal consolidation than we had previously expected,” adding that the rating could be cut if the government fails to come up with measures to spur growth and economic data remains weak.

The outlook revision is likely to push 10-year Treasury yields down to 3 percent by the end of March as investors seek safer assets, said Akira Takei, a fund manager in Tokyo at Mizuho Asset. The company has reallocated about 5 percent of its European holdings to U.S. Treasuries, he said.

“The knee-jerk reaction is the weaker yen, but the big winner is the dollar,” Takei said. “It’s caused a flight-to- quality bid, and the dollar will be stronger against other major currencies. Treasuries are the best place to be during turmoil.”

The dollar pared earlier losses versus the yen after the announcement, strengthening as much as 0.3 percent before trading at 90.22 yen at 7:19 a.m. in London, from 90.28 yesterday in New York.

Ten-year Treasury yields declined five basis points to 3.58 percent, according to BGCantor Market Data.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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Fed Weighs Interest on Reserves as New Benchmark Rate

By Scott Lanman

Jan. 26 (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades.

The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The central bank needs to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check, said Marvin Goodfriend, a former Fed economist. Policy makers are concerned that the Fed funds rate, at which banks borrow from each other in the overnight market, may fail to meet the new target, damaging their credibility and their ability to control inflation as the economy recovers.

‘Extended Period’

The choice of a benchmark is the “front line of defense against inflation, and also it’s at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery,” said Goodfriend, now a professor at Carnegie Mellon University in Pittsburgh.

The Federal Open Market Committee is likely to maintain its pledge to keep interest rates “exceptionally low” for an “extended period” in a statement at about 2:15 p.m. tomorrow, economists said. The Fed probably won’t raise interest rates from record lows until the November meeting, according to the median of 51 forecasts in a Bloomberg survey of economists this month.

Fed Chairman Ben S. Bernanke, in July Congressional testimony, called interest on reserves “perhaps the most important” tool for tightening credit.

Inflation Concerns

Banks’ excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007. The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt.

By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

The new policy may be similar to what the Bank of England does now, said Philip Shaw, chief economist at Investec Securities in London. The U.K. central bank’s benchmark interest rate, now at 0.5 percent, is the rate it pays on the reserves it holds for commercial banks. It may drain excess liquidity from the system by selling back the gilts it has purchased through its so-called quantitative easing program, Shaw said.

Communications Strategy

Policy makers will need to adopt a communications strategy to explain the new benchmark because “people might have had a hard time getting their mind around the idea that the official rate had become the interest on reserves rate,” said Kenneth Kuttner, a former Fed economist who has co-written research with Bernanke and now teaches at Williams College in Williamstown, Massachusetts.

Without a federal funds target, banks might have to find a new way to set the prime borrowing rate, the figure most familiar to consumers that that is now pegged at three percentage points above the fed funds target.

In the past, the Fed had controlled the rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers to prevent a financial meltdown.

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

‘Risk Free’

“In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve,” Bernanke said in an October speech in Washington.

The New York Fed has been testing another tool, reverse repurchase agreements, as a way of pulling cash out of the financial system. In that case, the Fed would sell securities and buy them back at an agreed-upon later date.

There could be complications to using the deposit rate. Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed, said William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro.

Also, the Fed’s direct control over a policy rate --instead of targeting a market rate -- could skew trading and financing toward short-term borrowing once investors know the rate won’t change between Fed meetings, said Vincent Reinhart, a former Fed monetary-affairs director.

The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents, Reinhart said.

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.

“The Federal Reserve Act puts a very high weight on comity,” said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. Using interest on reserves for setting policy “can change the tenor of the discussions, and I don’t know how they get around it.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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BHP, Rio Face EU Investigation of Australia Iron Ore Venture

By Rebecca Keenan and Brett Foley

Jan. 26 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group face a European Union investigation into whether their Australian iron-ore joint venture curbs competition.

Regulators will probe whether the deal between the world’s second- and third-largest iron-ore producers is a restrictive business agreement, the European Commission, the EU antitrust authority in Brussels, said in a statement yesterday. It didn’t give a deadline to complete the investigation.

BHP and Rio say the 50-50 venture, combining mines, rail, ports and workforces in Western Australia’s Pilbara region, will save them at least $10 billion. The agreement will also concentrate power in the market for the steelmaking ingredient and result in higher prices for customers, steel industry group Eurofer, representing producers including ArcelorMittal and ThyssenKrupp AG, said in a statement.

“We expect them to get it approved despite the opposition,” said Tony Robson, a Toronto-based analyst at BMO Capital Markets. “Given that BHP and Rio Tinto have canned plans to jointly market a fraction of their output and given that we also see rising production from others globally, then it looks in part that the potential is the other way around. The market is actually fragmenting.”

BHP and Rio Tinto, amid pressure from steelmakers, in October scrapped a plan to jointly market as much as 15 percent of ore from their planned venture.

The companies said on Dec. 5 that they expected to complete the deal by the end of 2010. The venture will also be reviewed by the Australian Competition and Consumer Commission, as well as antitrust authorities in Japan and Germany.

Second Attempt

“It’s impossible to put specific timing on how long this investigation will take,” commission spokesman Jonathan Todd told reporters in Brussels yesterday. “The commission will try to complete the investigation as quickly as possible.”

The proposed venture is the second attempt to combine the mining companies’ iron-ore operations in Western Australia. Melbourne-based BHP abandoned a hostile bid for Rio in November 2008, citing Rio’s debt, falling commodity prices and regulatory hurdles. The bid faced a probe from the commission, which had “serious doubts” over a combination that would control more than a third of global iron-ore exports.

“The Japanese steel industry continues to view the establishment of the JV as a move that would restrict competition just as last year’s proposed acquisition of Rio Tinto by BHP Billiton would have,” Shoji Muneoka, chairman of the Japan Iron & Steel Federation, said in a Dec. 7 statement on the group’s Web site.

Steelmakers Contend

Brazil’s Vale SA, the largest iron-ore producer, BHP and Rio account for 68.5 percent of iron ore shipped by sea, according to the Brussels-based World Steel Association.

“If the planned merger is approved, mining companies will likely have more influence on pricing,” said Yoshiyuki Takano, a Tokyo-based analyst at Tokai Tokyo Securities Co. “Steelmakers would need to strengthen partnerships to contend with miners.”

The EU investigation will probe “the effects of the proposed joint venture on the worldwide market for iron ore transported by sea,” it said in the statement.

“This is very much a production joint venture only, between ourselves and BHP Billiton which will enable us to deliver more iron ore to the market, faster and at lower costs,” Rio spokesman Nick Cobban said by phone yesterday. “It won’t affect pricing as pricing will continue to be decided by the market as a whole with both ourselves and BHP competing.”

Iron Ore Prices

Iron ore for immediate delivery into China surged to $131.20 a metric ton on Jan. 8, the highest in at least 13 months, according to data compiled by The Steel Index, a venture of Steel Business Briefing Ltd.

Producers may benefit from a 31 percent jump in contract prices in the year starting April 1 to the second-highest level on record, according to the mean estimate of 17 analysts surveyed by Bloomberg. Nomura Holdings Inc. and Bank of America Merrill Lynch see gains of as much as 50 percent.

“We will continue to work with the European Commission and aim to convince them of the benefits for the venture and why it will not raise competition concerns,” BHP’s London-based spokesman Ruban Yogarajah said by phone.

To contact the reporters on this story: Brett Foley in London at bfoley8@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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