European Stocks Drop as Italian Bond Yields Jump to Euro Record

By Adria Cimino - Nov 9, 2011 8:42 PM GMT+0700

European stocks dropped for the third day in four after the spread between Italian and German bond yields widened to the most since the introduction of the euro and Italy’s credit-default swaps jumped to a record. Asian shares rose and U.S. index futures declined.

HSBC Holdings Plc (HSBA), Europe’s largest bank, retreated 6 percent. Dexia SA (DEXB) slumped 11 percent as the lender said its shareholder equity shrank because the Belgian government nationalized its unit in the country. Deutsche Post AG (DPW), Europe’s biggest postal service, jumped 3.6 percent after raising its full-year forecast.

The Stoxx Europe 600 Index fell 2 percent to 235.75 at 1:40 p.m. in London. Stocks earlier climbed as much as 1 percent after Italian Prime Minister Silvio Berlusconi offered to resign. The benchmark measure has still rallied 9.7 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

“This is a negative spiral in terms of Italian debt,” said Yves Maillot, head of investments at Robeco Gestions SA in Paris, which oversees $6.8 billion. “We already were in a perilous situation. The level of debt in Italy is a very, very big problem. In spite of the good news of changes in Italian leadership, the problem is deeper.”

Futures on the Standard & Poor’s 500 Index expiring in December slid 2.5 percent, while the MSCI Asia Pacific Index gained 0.8 percent as a report showed China’s inflation slowed.

Italian Bond Yields

Italian 10-year bonds underperformed similar-maturity benchmark German bunds, driving the difference in yield between the securities to 500 basis points for the first time since before the euro was introduced in 1999. The spread widened to 501 basis points, or 5.01 percentage points.

Italy’s two-year notes slid, pushing the yield on the securities above the rate on 10-year bonds. The 10-year note yield climbed to 7.34 percent, a euro-era record.

The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA. That exceeded the previous record of 534 set on Sept. 22.

The cost to protect against losses in European stocks compared with U.S. stocks rose to the highest level since July. Implied volatility for Euro Stoxx 50 Index options expiring in three months rose to 1.36 times the measure for S&P 500 Index options. That was the highest ratio since July 20, according to data compiled by Bloomberg.

Austerity Measures

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to write the austerity bill, said Mario Baldassarri, head of the Senate Finance Committee.

LCH.Clearnet Ltd. increased the extra deposit it demands from clients to trade all Italian government bonds and index- linked securities.

In Greece, Prime Minister George Papandreou’s talks on forming an interim government to avert the economy’s collapse dragged into a third day as a near-agreement with the biggest opposition party stalled on European Union demands for written commitments. The makeup of Greece’s new government is to be announced today, the Associated Press reported, citing a government official who it did not name.

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, a report today showed. Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said. The measure declined 0.6 percentage points from September, its biggest slide since February 2009.

A German panel said it sees growth slowing to 0.9 percent next year because of the debt crisis.

HSBC, Mediaset Sink

HSBC dropped 6 percent to 505.4 pence, contributing the most to the Stoxx 600’s slide. The bank said pretax profit at its investment bank led by Samir Assaf fell to about $1 billion in the third quarter from a year-earlier. Bad-loan provisions increased to $3.89 billion from $3.15 billion, mainly related to its U.S. unit, the bank said.

Bank shares fell 3.7 percent, among the biggest drops of the 19 industry groups in the Stoxx 600, as Greek and Italian lenders slid. Piraeus Bank SA (TPEIR) retreated 5.6 percent to 25.5 euro cents, while Banca Popolare dell’Emilia Romagna Scrl (BPE) lost 4.3 percent to 5.59 euros. Alpha Bank AE (ALPHA) sank 4.9 percent to 1.16 euros.

Dexia, Mediaset Slide

Dexia, the lender being broken up after running out of short-term funding, plunged 11 percent to 37 euro cents. The bank said shareholder equity shrank 84 percent after the nationalization of its Belgian bank unit and declines in the value of government bond holdings.

Mediaset SpA (MS), the broadcaster controlled by Berlusconi, tumbled 8.9 percent to 2.28 euros after the premier offered to resign once parliament approves stability measures.

Admiral Group sank 29 percent to 851 pence for the biggest decline on the Stoxx 600 and the shares’ largest retreat since 2004. The U.K. car insurer that owns the confused.com website said full-year pretax profit will be toward the lower end of analysts’ estimates.

Legrand SA (LR) sank 4.7 percent to 24 euros. KKR & Co. and Wendel SA completed the sale of 24.3 million shares in the world’s largest maker of wiring devices at 24 euros apiece, the companies said.

Deutsche Post, CGGVeritas

Deutsche Post rallied 3.6 percent to 11.08 euros. The company lifted its full-year forecast as increasing express shipments in Asia and parcel volume from Internet retailing boosted third-quarter earnings. Earnings before interest and taxes in 2011 will exceed 2.4 billion euros, the company said. That compared with an earlier prediction for Ebit at the upper end of a 2.2 billion-euro to 2.4 billion-euro range.

CGGVeritas added 2.8 percent to 16.71 euros. The company reported third-quarter net income of $41 million and said it remains “confident” of achieving its full-year objectives. The seismic surveyor made a loss of $33 million in the year-earlier period.

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

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Microsoft, AOL, Yahoo, strike ad alliance

Wed Nov 9, 2011 1:38am EST

(Reuters) - Yahoo Inc, Microsoft Corp and AOL Inc have set up an advertising partnership as Google and Facebook's online ad dominance grows.

The alliance, announced on Tuesday, allows each of the companies to sell each other's unsold premium advertising inventory -- known as display ads -- by early next year.

Display units are big splashy units that appear on Web pages and attract marketers interested in branding their products or services. Typically, these ads command higher rates.

Rik van der Kooi, corporate vice president of the Microsoft Advertising Business Group characterized the partnership in a statement as a "rising tide that lifts all boats."

"The spirit of the deal is important and we support it," said Nick Beil, president of the VivaKi Nerve Center, part of the advertising holding firm Publicis Groupe SA

Beil said the alliance was attractive because it broadens the potential reach of brand advertisers looking for premium inventory.

While the companies are striking a partnership, they still actively competing with each other for both advertiser spending and publisher partners, as well as maintain their own set of controls.

Yahoo, AOL and Microsoft executives said they are not expecting any issues from the Department of Justice, which could potentially frown upon the partnership because it could reduce competition or effect ad pricing.

"We're not reducing competition in any way, shape or form," said van der Kooi during a news call. "As a result of transparency, the competition is only going to increase. (We) don't expect any issues on that side."

Both Facebook and Google Inc are expected to increase their share of online display advertising in the United States in 2011 by 9.3 percent and 16.3 percent respectively, according to estimates from research firm eMarketer.

Meanwhile, AOL, Microsoft and Yahoo are forecast to lose share, with Facebook expected to surpass Yahoo for the first time this year.

"Other players in the industry are welcome to join us. This is not in response to anybody in particular," van der Kooi added.

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Olympus Urged to Purge Execs Over Losses

By Mariko Yasu and Naoko Fujimura - Nov 9, 2011 8:11 AM GMT+0700

Olympus Corp. (7733)’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

The Japanese camera maker’s shares slumped by their maximum limit for a second day after it yesterday reversed weeks of denials that there was any wrongdoing in its past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. And after Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

“Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

Olympus plunged by 150 yen, or its 20 percent limit, following a 300 yen, or 29 percent drop yesterday.

Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

Cayman Links

At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers from the city center.

Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.

Cockroaches

Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 76 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

“Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.

‘Tobashi’

Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. (8604) tumbled 15 percent to the lowest in 37 years.

“There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

Nomura Unaware

“We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

“The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

Bowed in Apology

Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

“It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net

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Interactive’s Chief Bought 8 Million MF Global Shares as Broker Collapsed

By Matthew Leising and Nina Mehta - Nov 9, 2011 7:37 AM GMT+0700

Thomas Peterffy, whose Interactive Brokers Group Inc. (IBKR) declined to buy assets from MF Global Holdings Ltd., said he purchased 8 million shares in the futures broker as its stock plunged.

Interactive Brokers said in an e-mailed statement that the company, not Peterffy, purchased the stock. MF Global shares have fallen 98 percent from their peak this year. The week before it filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents.

“I started to buy the stock as it went down,” Peterffy, chairman and chief executive officer of Greenwich, Connecticut- based Interactive Brokers, said today in a phone interview. He was worth $1.5 billion in 2009, according to Forbes, and he has the power to elect all board members at Interactive Brokers. “You win a few, you lose a few,” he said.

The firm, which Peterffy founded, said in its quarterly filing today that it owned MF Global shares valued at $16.7 million as of Sept. 30. Following the bankruptcy filing, Interactive Brokers reduced the value of those shares plus subsequent investments in the stock to zero, recognizing a $28.8 million loss, today’s filing with the Securities and Exchange Commission shows.

‘Huge Tragedy’

Customers of MF Global, the holding company for the broker- dealer that was run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, have been able to transfer only a portion of their accounts to new brokers. The broker-dealer unit, MF Global Inc., faces liquidation. The lack of access to customer cash at MF Global is a “huge tragedy,” Peterffy said.

“It’s a horrible black spot on the futures industry,” he said. “The next time something like this happens, the positions should be immediately liquidated and the money distributed.”

Peterffy said an investment banker at Evercore Partners Inc. called him before MF Global collapsed to find out if he was interested in taking over any of the firm’s customer accounts. He said in the interview that he couldn’t talk about discussions he had with MF Global from the morning of Oct. 28 until the morning of Oct. 31 because he signed a non-disclosure agreement.

Interactive Brokers is no longer interested in taking over any of MF Global’s accounts, Peterffy said.

‘Not Infected’

“We would like to be a broker that is not infected by any of this event,” he said.

The Interactive Brokers executive had courted a business arrangement with MF Global for years, starting when the company’s customer assets were still part of Refco Inc. Refco went bankrupt two months after its August 2005 initial public offering that raised $670 million. CEO Phillip Bennett was later convicted of hiding hundreds of millions of dollars in bad debt. Man Group Plc outbid Interactive Brokers and bought Refco for $323 million. MF Global became a public company when it was spun off of Man Group in 2007.

An agreement between MF Global and Interactive Brokers would have given the owner of the futures broker use of Interactive Broker’s trading and risk-management systems, while Peterffy’s company would have used MF Global’s sales force.

“They were strong in sales and they had no technology,” Peterffy said. “Interactive Brokers is weak in sales and has the best technology.”

Technology Talks

Peterffy said he held discussions with CEOs Kevin Davis and Bernard Dan and global head of retail operations J. Randy MacDonald about MF Global using his company’s technology. The firms were close to finalizing a deal before Dan left MF Global and again in October, he said. The agreement would have led to MF Global running its equities and foreign exchange business on Interactive Brokers’ technology platform, with futures added later, Peterffy said.

“It’s been a many-years-long project for me that never came to fruition,” he said.

Corzine, 64, increased risk-taking at MF Global as part of his strategy to re-make the owner of the futures broker into an investment bank. The company suffered a ratings downgrade and loss of customers’ trust in late October related to its largest- ever quarterly loss and $6.3 billion in investments in European sovereign debt.

Discrepancies over missing customer funds used to back futures trades doomed a potential acquisition by Interactive Brokers, said Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee. The deal could have averted the bankruptcy filing.

‘Lots of Uncertainties’

“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Stoll said in a Nov. 1 interview.

Customers of MF Global whose money is trapped at the broker say the safeguards meant to protect them failed. The company filed for bankruptcy on Oct. 31, listing debt of $39.7 billion and assets of $41 billion after failing to find a buyer in the days leading to its collapse.

“It’s a huge tragedy,” Peterffy said. “I simply can’t understand why it is being dealt with the way it is. I agree that some of the money should be given to the clients as soon as possible.”

CME Group Inc., which has audit power over MF Global as part of its self-regulatory authorization, and James Giddens, the trustee overseeing the liquidation of MF Global, are working to locate money that is missing from client accounts. The U.S. Commodity Futures Trading Commission is investigating a $593 million-shortfall in those accounts, a person with knowledge of the regulatory probes said on Nov. 4.

“Never bend the rules,” Peterffy said about what he learned from the MF Global implosion. “You bend the rules a little bit and then it’s a slippery slope.”

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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Indian Trade Deficit Widens the Most Since at Least 1994, Pressuring Rupee

By Tushar Dhara - Nov 9, 2011 12:04 PM GMT+0700

India’s trade deficit widened the most in October in at least 17 years, adding pressure on the rupee, Asia’s worst performing currency this year.

Merchandise exports rose 10.8 percent to $19.9 billion last month from a year earlier, Commerce Secretary Rahul Khullar told reporters in New Delhi yesterday. Imports gained 21.7 percent to $39.5 billion, causing a trade deficit of $19.6 billion. That’s the biggest shortfall since April 1994, according to data compiled by Bloomberg.

India’s trade gap increased as merchandise shipments grew at the slowest pace in two years, dragged down by waning demand for engineering and petroleum products in Europe, Khullar said. The deficit may enlarge as higher oil costs boost the value of imports, said Hemendra Bhatia, chief currency strategist at Ahmedabad, India-based Vadilal Enterprises Ltd.

“The rupee will remain under pressure,” Bhatia said in an interview yesterday. “Exports will weaken because of the global slowdown.”

He expects the currency to fall to as much as 51.20 per dollar by the end of December.

The rupee dropped 0.6 percent to 49.79 against the dollar at 10:29 a.m. in Mumbai, weakening more than 10 percent since Jan. 1. The yield on the 7.80 percent government bond due April 2021 rose seven basis points, or 0.07 percentage point, to 9.10 percent. The BSE India Sensitive Index advanced 0.1 percent.

Inflation Risks

The Reserve Bank of India said last month that the rupee’s weakness adds to pressure on inflation, which has stayed above 9 percent since the start of December.

Still, the central bank said on Oct. 25 that its 13 interest-rate increases since mid-March 2010 will help curb inflation and signaled it was nearing the end of monetary tightening. It predicted India’s economy will expand 7.6 percent in the year ending March 31, lower than the 8 percent it estimated earlier.

“The impact of the rupee will show up in rising exports only later this year,” Khullar said. “We are having a very difficult autumn. Our exports are predominantly targeted toward Europe and clearly that’s where growth rate has contracted.”

Exports of engineering goods grew 2.6 percent in October from a year earlier, while petroleum products advanced 9.4 percent in the month, Khullar said.

Deficit Concerns

The trade deficit for the first seven months of the year that started April 1 was $93.7 billion and “that is clearly something to be worried about, because at this rate you’re clearly going to breach the $150 billion mark for the fiscal year,” he said.

India imports almost three-quarters of its oil requirements. Oil prices have gained 6.4 percent in New York this year.

Meanwhile, European finance ministers pledged to roll out a bulked-up rescue fund next month, leaving Greece and Italy on the front lines until then in the fight against the debt crisis.

As economic recoveries falter in the U.S. and Europe, India’s government plans to increase shipments to Africa and Latin America as it targets $500 billion in exports by 2014.

Exports may also get a boost after Pakistan last week granted trade concessions to India.

Under the so-called most-favored nation status, Pakistan will give its South Asian neighbor equal standing in international trade by removing non-tariff barriers, lowering customs duties and raising import quotas. India granted most- favored nation status to Pakistan in 1996.

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Thai Investments Put Japan Inc. in Flood’s Path

By Dave McCombs - Nov 8, 2011 10:01 PM GMT+0700

Japan, Thailand’s biggest foreign investor, may also be the largest overseas economic victim of record floods forcing companies including Toyota Motor Co., Hitachi Ltd. (6501) and Canon Inc. (7751) to halt output in the country.

Toyota, Asia’s biggest carmaker, scrapped its annual profit forecast yesterday, saying it needs more time to assess the financial toll from Thailand’s worst floods in almost 70 years. Canon, having shifted some camera production to the southeast Asian nation, cut its full-year profit outlook last month because of damage to output from the disaster.

Japan’s most profitable exporters built up factories in Thailand in the past three decades to cut labor costs and stem the erosion of profit caused by the yen’s appreciation against the dollar. Japanese direct investment in Thailand jumped 35 percent to about 100 billion baht ($3.4 billion) in 2010, led by the auto, metals and machinery industries, according to the Thai Ministry of Industry’s Board of Investment.

“Japan has shifted production to Thailand and other Asian nations because of the stronger yen, so among the G-3 nations, Japan faces the biggest impact from the Thai floods,” said Takahiro Sekido, chief Japan economist in Tokyo at Credit Agricole CIB. “Looking at the increase in trade and direct investment in Thailand in recent years, connectivity is rising and the floods will have an impact on Japan’s economy.”

Japan’s mainstay manufacturers, in particular, will be hit hard by the floods, Junichi Makino, chief economist at SMBC Nikko wrote in an Oct. 25 report. Full-year profits of listed Japanese non-financial companies may be cut by 3.9 percent this fiscal year as a result of the disaster, Makino estimates.

Toyota Hit

“If the Thai floods continue to reduce production for three months, Toyota’s operating profit may be cut by 200 billion yen,” said Koji Endo, an auto analyst at Advanced Research Japan. Toyota was already producing at full capacity to recover from the impact of the March earthquake in Japan, so there is a limit to what it can do to recover from losses from the Thai floods, he said.

The renewed threat to factories as water courses toward Bangkok’s central business district may worsen the effect of floods that have prompted Thailand’s central bank to slash its 2011 economic growth forecast and damped the earnings outlook for Japanese companies including Sony Corp. (6758), Nikon Corp. (7731) and Isuzu Motors Ltd. (7202)

Flooding across the region may also lead to “serious food shortages,” the United Nations Food & Agriculture Organization said in a report dated Oct. 21.

Damaged Farmland

About 12.5 percent of rice farmland in Thailand has been damaged, along with 6 percent in the Philippines, 12 percent in Cambodia, 7.5 percent in Laos and 0.4 percent in Vietnam, as storms hit the region since September, according to the report.

Toyota and rivals including Isuzu are still unable to determine when they can restore production in the country as damages from the flood are still being assessed. Isuzu extended its production halt until Nov. 11 because of parts shortages, it said in a statement yesterday. Separately, Toyota said it will extend output reductions until Nov. 18.

The floods may push back expansion plans at Toyota and Honda until the first quarter of 2012, Tracy Handler, a Troy, Michigan-based analyst at IHS Automotive, said Nov. 5.

Japanese manufacturers including Toyota may have more difficulty shifting output away from Thailand, where they have more concentrated supply chains than U.S. and European rivals including Ford Motor Co., said Sekido of Credit Agricole.

Thailand-Centric

“Ford, for instance, can probably shift production to North America or Mexico, but Thailand probably plays a more important role for Japanese companies,” he said. “American and European companies also have production lines in Thailand, but Japan is the closest geographically.”

Japan is the largest investor in Thailand, representing 57 percent of projects that were granted investment incentives last year, according to Thailand’s Board of Investment.

The setbacks come just as Japanese automakers and electronics manufacturers are restoring output after the March 11 earthquake and tsunami led to parts and power shortages that slashed output. The country’s exporters are also reeling from the yen’s gain to a postwar high on Oct. 31.

Nobuyuki Nakahara, a former Bank of Japan (8301) policy board member, urged the central bank to boost monetary easing 10-fold to weaken the currency.

“The Japanese economy will collapse unless the yen weakens to 100 yen per dollar,” Nakahara, a policy board member between 1998 and 2002, said in a Nov. 4 interview in Tokyo.

Third Recession

Japan fell into its third recession in a decade after the record earthquake and tsunami on March 11. Industrial output declined 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected.

The Thai disaster is affecting the global supply chain at Japanese auto and electronics makers, further disrupting output. After Toyota halted output at its Southeast Asian production base, a shortage of parts prompted the company to cancel plans to run factories overtime in North America, where it had intended to make up for production lost because of the March 11 quake.

“This will not only impact Japan’s exports to Thailand, but also affect global supply chain of Japanese companies,” said Yoshimasa Maruyama, a chief economist at Itochu Corp. (8001) in Tokyo. “Production of Japanese firms in the U.S., Japan and other areas may also decrease.”

To contact the reporter on this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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Treasuries Snap Two-Day Drop as Lagarde Highlights Global Slowdown Risks

By Masaki Kondo - Nov 9, 2011 2:33 PM GMT+0700

Treasuries snapped a two-day drop as government data sapped confidence in the global economy that International Monetary Fund Managing Director Christine Lagarde said is at risk of a “lost decade.”

Benchmark 10-year yields declined after a Chinese report showed inflation slowed in the world’s second-biggest economy. U.S. data today may indicate more Americans filed for unemployment benefits last week. A $32 billion auction of three- year Treasury notes yesterday attracted the highest demand since at least 1993 before a sale of $24 billion of 10-year debt today.

“The global economic situation is likely to help keep Treasury yields low,” said Masazumi Fukuoka, chief dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest listed lender. “China is slowing down.”

The yield on the 10-year note dipped one basis point to 2.07 percent at 6:57 a.m. London time, according to Bloomberg Bond Trader prices. The yield increased four basis points yesterday. The 2.125 percent securities maturing in August 2021 added 3/32, or $0.94 per $1,000 face value, to 100 16/32.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” Lagarde said at a forum in Beijing today. “Ultimately, we could face a lost decade of low growth and high unemployment.”

China’s Economy

China’s statistics bureau said today producer prices rose 5 percent in October from a year earlier, less than any of 24 analyst forecasts in a Bloomberg News survey. Consumer prices gained 5.5 percent, in line with the median projection in a separate Bloomberg poll. The 0.6 percentage point decline from September’s rate was the biggest since February 2009.

Industrial output growth slowed to 13.2 percent last month from 13.8 percent in September.

Japan’s 10-year yields were little changed at 0.98 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. They reached 0.965 percent on Sept. 22, the least since Nov. 9, 2010.

Exit Berlusconi

U.S. bonds slumped and stocks advanced yesterday after Italy’s Prime Minister Silvio Berlusconi offered to quit, stoking speculation the country will appoint a new leader who can curb its debt.

Berlusconi’s coalition has been unraveling since contagion from the euro region’s debt crisis led the country’s bond yields to surge, prompting Italy’s European Union allies and the European Central Bank to demand more austerity measures to balance the budget and try to spur growth.

U.S. government bonds have returned investors 8.5 percent in 2011, poised for the biggest annual gain since 2008, according to an index compiled by Bank of America Merrill Lynch.

“Treasuries are being bought in a flight to quality amid increased uncertainty caused by the prolonged debt problem in Europe,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest listed bank by market value..

Demand for Treasuries was limited as Asian stocks advanced, reducing the allure of U.S. government debt as a refuge.

The MSCI Asia Pacific Index of shares climbed 1.3 percent after the Standard & Poor’s 500 Index rose 1.2 percent in New York yesterday.

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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Lagarde Warns of ‘Lost Decade’ for Global Economy

By Bloomberg News - Nov 9, 2011 12:21 PM GMT+0700

International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.

“In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech at a forum in Beijing today. “There are dark clouds gathering in the global economy.” China and India echoed the call for cooperation in a separate statement.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said. European leaders are looking to China as a potential source of funds as a sovereign-debt crisis threatens to engulf Italy, the third-biggest economy in the euro area.

Asian stocks rose for the first day in three today as easing inflation in China left more room for officials to support economic growth. A 5.5 percent gain in consumer prices in October was the least in five months, a government report showed.

China and India said that the global economy is in a “critical phase,” in a statement after the fifth meeting in a so-called financial dialogue between the two nations, usually held each year. The comments were dated yesterday and posted on a Chinese government website today.

International Cooperation

“In emerging markets, where growth is relatively stronger, there are clear signs of a slowing as developments in advanced economies begin to weigh on these countries,” the two nations said. “In the face of these challenges, both sides recognized that strengthening of international policy cooperation is needed at this juncture.”

The MSCI Asia Pacific Index rose 1 percent as of 1:25 p.m. in Tokyo.

In Italy, Prime Minister Silvio Berlusconi has offered to resign as his nation struggles with taming its debt burden and borrowing costs climb. Hong Kong Chief Executive Donald Tsang said this week that the world economy faces a 50 percent chance of a recession.

In Asia, policy makers need to respond nimbly should conditions worsen, Lagarde said today. They “can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central-bank swap lines,” she said. Lagarde cited high unemployment in advanced economies and economic and financial market declines that reinforce each other as concerns.

`Downward Spiral'

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” she said. “Ultimately, we could face a lost decade of low growth and high unemployment.”

Japan’s so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.

In Asia, “countries need to prepare for any storm that might reach their shores,” Lagarde said. At the same time, a balancing act is required, because “some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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European Stock Futures Rise as Italy’s Silvio Berlusconi Offers to Resign

By Adria Cimino - Nov 9, 2011 2:20 PM GMT+0700

European stock futures advanced after Italian Prime Minister Silvio Berlusconi offered to resign, boosting optimism that the region’s debt crisis won’t spread. Asian stocks climbed and U.S. index futures declined.

Futures on the Euro Stoxx 50 Index, a benchmark for the euro area, jumped 1.1 percent to 2,330 at 7:16 a.m. in London. Futures on the U.K.’s FTSE 100 Index expiring in December added 0.7 percent. Futures on the Standard & Poor’s 500 Index expiring the same month slipped 0.4 percent, while the MSCI Asia Pacific Index gained 1.1 percent.

“Investors are clearly encouraged by the fact there will now be change at the top and for the time being at least, this is bringing the bulls back into play,” Terry Pratt, an institutional trader at IG Markets, wrote.

The Stoxx Europe 600 Index has rallied 12 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to present the text of the measures.

Europe’s inability to contain its debt crisis pushed the yield on Italy’s benchmark 10-year bond to 6.77 percent yesterday, the highest since the euro’s introduction in 1999 and near the 7 percent level that drove Greece, Ireland and Portugal to seek international bailouts. Italy’s 1.9 trillion euro-debt ($2.6 trillion) is bigger than that of Greece, Spain, Portugal and Ireland combined.

To contact the editor responsible for this story: Will Hadfield at whadfield@bloomberg.net

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Asian Stocks, Won Snap Two-Day Drop

By Shiyin Chen and Jonathan Burgos - Nov 9, 2011 3:06 PM GMT+0700

Stocks gained a third day and metals advanced after Chinese inflation slowed and Italian Prime Minister Silvio Berlusconi offered to resign. U.S. equity-index futures declined, while Treasuries climbed.

The MSCI All Country World Index rallied 0.4 percent at 8:06 a.m. in London and the Stoxx Europe 600 Index jumped 0.8 percent. Standard & Poor’s 500 contracts slid 0.5 percent after a 1.2 percent gain yesterday. Treasury 10-year yields decreased three basis points. The euro slid 0.3 percent against the dollar. The won strengthened for the first time in three days after South Korea’s unemployment rate fell. Nickel and tin each gained 1.1 percent, while Brent oil advanced for a fifth day.

China’s consumer price inflation slowed to 5.5 percent in October from 6.1 percent the previous month, while producer prices fell by more than economists had forecast, signaling the government may be able to reduce measures to cool its economy. Italy’sBerlusconi agreed to step down after the approval of an austerity plan in a vote next week, following a surge in the nation’s bond yields to a euro-era record yesterday.

“Now that we see inflation easing, it suggests that Asian central banks can switch to a more pro-growth strategy,” said John Woods, Hong Kong-based chief Asian strategist at Citigroup Inc.’s private bank. “The markets will take the near-term resolution of political uncertainties in Europe positively,”

About six shares advanced for every one that fell on the Stoxx 600. Italy’s FTSE MIB Index increased 1.4 percent, France’s CAC 40 rose 1.1 percent and the U.K.’s FTSE 100 Index added 0.8 percent.

The MSCI Asia Pacific index rose 1.1 percent, rebounding from a two-day 0.9 percent loss. Japan’s Nikkei 225 Stock Average and Australia’s S&P/ASX 200 Index climbed 1.2 percent each and Hong Kong’s Hang Seng Index added 1.7 percent.

Nomura, Olympus

Nomura Holdings Inc. rose 4.1 percent in Tokyo, rebounding from yesterday’s 15 percent plunge, after Japan’s biggest securities firm said it is unaware of any involvement in Olympus Corp.’s concealment of losses. Olympus sank 20 percent, extending yesterday’s 29 percent plunge.

Industrial & Commercial Bank of China (1398) Ltd., the world’s largest lender by market value, gained 3.6 percent in Hong Kong, pacing an advance among Chinese companies. The decline in consumer prices matched analysts’ forecasts and was the slowest since May. The producer price index was expected to fall to 5.8 percent, according to economists surveyed by Bloomberg News.

Separate figures showed industrial production rose 13.2 percent last month and retail sales increased 17.2 percent.

“The trend is in favor of China taking measures to improve economic development,” Peter So, co-head of research at CCB International Securities Ltd., said in a Bloomberg Television interview in Hong Kong.

Copper, Oil

Copper for three-month delivery rallied as much as 2.1 percent to $7,959.75 a metric ton on the London Metals Exchange, rebounding from a three-day, 1.3 percent decrease. Nickel added 1.1 percent and tin climbed 1.1 percent.

December-delivery Brent crude rose 0.4 percent to $115.47 a barrel on speculation Iran’s nuclear plans will threaten Middle East stability. New York-traded oil was little changed at $96.81 a barrel. U.S. gasoline supplies dropped 1.49 million barrels last week, the American Petroleum Institute said. An Energy Department report today may show they rose 1 million barrels, according to a Bloomberg News survey.

South Korea’s won strengthened as much as 0.9 percent to 1,111.38 per dollar. The unemployment rate fell to 3.1 percent in October from 3.2 percent the previous month, Statistics Korea said today. The median estimate in a Bloomberg News survey of 11 economists was for an increase to 3.3 percent. Taiwan’s dollar rose 0.1 percent to NT$30.066, and Malaysia’s ringgit gained 0.3 percent to 3.114.

Berlusconi’s Pledge

The 17-nation euro traded at 106.99 yen from 107.52 yesterday and pared yesterday’s 0.4 percent gain versus the dollar. Berlusconi’s pledge to resign came after he failed to muster an absolute majority on a routine parliamentary ballot after key lawmakers defected from his party this week.

The yield on Italy’s benchmark 10-year bond jumped 11 basis points yesterday to 6.77 percent before Berlusconi’s announcement, the most since the euro’s introduction in 1999 and near the 7 percent level that drove Greece, Ireland and Portugal to seek international bailouts. The extra premium investors demand to hold the debt instead of German bunds closed at a euro-era record 497 basis points. The yield was little changed today.

LCH Clearnet SA increased the so-called deposit factor charged for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, according to a document on its website dated yesterday. That compares with a charge of 6.65 percent announced in an Oct. 7 document.

Bond Risk

The cost of protecting Asia-Pacific corporate and sovereign bonds from default decreased, with the Markit iTraxx Japan index falling three basis points to 175 basis points, Citigroup Inc. prices show. The gauge is set for its biggest one-day drop since Nov. 4, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Treasury 10-year yields declined to 2.05 percent, following a four-basis-point increase yesterday. The U.S. is scheduled to sell $24 billion of 10-year securities today and $16 billion of 30-year bonds tomorrow, after an auction of three-year notes yesterday attracted the highest demand on record.

Futures signal the S&P 500 may snap a two-day, 1.8 percent rally. International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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China Inflation, Output Cools on Europe Crisis

By Bloomberg News - Nov 9, 2011 1:05 PM GMT+0700

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, Europe’s crisis threatens exports and a credit squeeze hits small businesses.

Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said on its website today. The 0.6 percentage point decline from September’s rate was the biggest since February 2009. Industrial output growth slowed to 13.2 percent.

Most economists expect Premier Wen Jiabao’s government to loosen fiscal or monetary policy without cutting interest rates as inflation stays above a full-year target of 4 percent, a Bloomberg News survey showed this week. HSBC Holdings Plc said today that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.

“The combination of easing inflationary pressures, a protracted euro debt crisis and a potential property market slump has set the scene for an imminent policy easing,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. “The time is right” for a cut in lenders’ reserve requirements, he said.

Industrial output growth was the least in a year and compared with a 13.8 percent gain in September, Bloomberg data show. Economists’ median estimate was for a 13.4 percent gain.

China’s inflation may moderate further as raw-material costs decline, reflecting headwinds to the global recovery from faltering U.S. growth and the prospect of a recession in Europe. Producer prices rose 5 percent, less than any of 24 analysts forecast and the smallest increase in a year, today’s data showed.

Swaps Decline

The benchmark Shanghai Composite Index rose 0.1 percent as of 2:01 p.m. local time. China’s swap market is starting to indicate chances for an interest-rate reduction in the coming year. The cost of fixing borrowing costs for a year fell below the 3.5 percent benchmark savings rate last month and reached 3.125 percent today.

Five of 13 forecasters in the Bloomberg News survey predicted no change in the one-year deposit rate before the end of 2012, five predicted an increase and three saw a cut.

Food costs rose 11.9 percent last month from a year earlier after a 13.4 percent increase in September, the statistics bureau said. Pork climbed 39 percent after a 44 percent jump.

Food accounted for 3.62 percentage points of the overall increase in consumer prices, the bureau said. Non-food inflation eased for a second month to 2.7 percent.

Credit Boom

The People’s Bank of China raised interest rates five times from October 2010 to July and boosted banks’ reserve requirements nine times to a record 21.5 percent for the biggest lenders to rein in a credit boom that fueled consumer and property prices.

The cost of housing in China has started to decline after a two-year government campaign to curb speculation and limit purchases. Poly Real Estate Group Co., China’s second-largest developer by market value, said Nov. 7 its contracted sales fell 39 percent from a year earlier last month. Barclays Capital estimates home prices may decrease by 10 percent to 30 percent in the next year.

“Without a doubt, the Chinese housing market is entering a difficult period,” Barclays’ Hong Kong-based economists led by Huang Yiping said in a Nov. 8 research note.

Farmer Subsidies

The government raised subsidies for farmers to increase food supplies, reduced transport charges to limit costs and told companies to refrain from putting up prices. The National Development and Reform Commission told liquor makers including Kweichow Moutai Co. and Wuliangye Yibin Co. in September to hold off planned price increases of as much as 30 percent.

Falling costs for commodities such as oil and an improved supply of pork are helping to ease price pressures even as the government is set to miss its full-year inflation target.

Gasoline and diesel prices were cut by 3.5 percent and 3.9 percent respectively on Oct. 9 for the first time this year after crude oil costs dropped. An index of manufacturers’ input prices fell the most in 17 months in October, China’s logistics federation and the statistics bureau said on Nov. 1.

The central bank may reduce reserve requirements for smaller lenders to help ease a credit squeeze, according to economists at banks including Mizuho Securities Asia Ltd. and Societe Generale SA.

The move would be part of a “fine tuning” of economic policies pledged by Wen last month to protect the economy against global economic turmoil. The government has already announced tax cuts for companies, trial reform of the value- added tax system and increased credit for smaller companies.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Apple’s IPhone 4S Gets Consumer Reports’ Recommendation After Antenna Fix

By Adam Satariano - Nov 9, 2011 4:50 AM GMT+0700

Consumer Reports is recommending the new iPhone 4S after Apple Inc. (AAPL) fixed an antenna glitch that left the magazine unwilling to endorse the previous model.

The iPhone 4S, released last month, doesn’t have the same reception problems as the iPhone 4, even though the devices have similar body designs, Consumer Reports said today on its website. The flaw had caused the iPhone 4 to drop calls when gripped a certain way. After initially playing down the issue, which became known as “Antennagate,” Apple gave out free cases and issued a software update designed to fix the glitch.

“While it closely resembles the iPhone 4 in appearance, it doesn’t suffer the reception problem we found in its predecessor in special tests in our labs,” said Mike Gikas of Consumer Reports.

The endorsement provides another boost to the iPhone 4S, which has already broken sales records for Apple and its carrier partners. The company sold more than 4 million of the devices in its debut weekend, more than twice as many as the iPhone 4 in its rollout in 2010. The iPhone is Apple’s top-selling product, accounting for 39 percent of sales last quarter.

Consumer Reports also praised the new phone’s battery, countering the complaints of some users, who say the new model’s power doesn’t last as long. Apple said earlier this month that it was working on a software update to address those concerns.

Still, the iPhone 4S isn’t better than new smartphones based on Google Inc. (GOOG)’s Android operating system, the magazine said. The Galaxy S II from Samsung Electronics Co. and the Droid Bionic from Motorola Mobility Holdings Inc. also earned top marks from Consumer Reports.

Apple rose $6.50 to $406.23 at the close today in U.S. trading. Shares of the Cupertino, California-based company have climbed 26 percent this year.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Iran Worked to ‘Miniaturize’ Weapon Design

By Jonathan Tirone and Margaret Talev - Nov 9, 2011 6:51 AM GMT+0700

Iran continued working on nuclear weapons at least until last year, including efforts to shrink a Pakistani warhead design to fit atop its ballistic missiles, a report from United Nations inspectors said.

The International Atomic Energy Agency, drawing on evidence collected over eight years, reported yesterday that Iran carried out “work on the development of an indigenous design of a nuclear weapon including the testing of components.”

The IAEA document shows that Iran worked to redesign and miniaturize a Pakistani nuclear-weapon design by using a web of front companies and overseas experts, according to the report and an international official familiar with the IAEA’s investigation.

Such a warhead could be mounted on Iran’s Shahab-3 missile, which has the range to reach Israel, according to the report.

The IAEA report adds to international pressure on Iran to answer questions about its program. It was released amid reports in Israeli media that Prime Minister Benjamin Netanyahu is pressing his Cabinet to support possible military action to halt Iran’s nuclear program.

The U.S. may pursue additional sanctions against Iran following release of the report and is waiting to see how Iran responds, according to two U.S. officials who briefed reporters on condition of anonymity. Iran already is under UN sanctions and the U.S. has put sanctions on Iranian government agencies, financial institutions and government officials.

Sporadic Development

The administration officials said the IAEA’s conclusions don’t conflict with U.S. intelligence estimates that Tehran’s government scaled back nuclear weapons development in 2003 while maintaining capability to resume. The officials said Iran’s nuclear weapons efforts have proceeded sporadically since 2003 and that the U.S. believes advancement since then hasn’t been dramatic.

In its report, the international agency said, “some activities relevant to the development of a nuclear explosive device continued after 2003” and “some may still be ongoing.”

Until now, atomic inspectors had only voiced concerns publicly about the “possible existence” of weapons work in Iran.

State-run PressTV said Iran “has rejected” the IAEA report as “unbalanced and politically motivated.” Iran has told IAEA inspectors that evidence used against the Persian Gulf country was forged.

The agency’s report brought calls in the U.S. for tougher action against Iran.

Call for Action

It’s “further proof that the U.S. and other responsible nations must take decisive action to stop the regime from acquiring a nuclear capability,” said U.S. Representative Ileana Ros-Lehtinen, a Florida Republican who is chairman of the House Foreign Affairs Committee.

The IAEA report also “could increase the risk of a military attack on Iran’s nuclear facilities” and therefore “justified a certain risk premium on the price of oil,” Commerzbank wrote today in a research note. Crude oil for December delivery rose $1.28 to $96.80 a barrel on the New York Mercantile Exchange, the highest settlement since July 28. Futures are up 5.9 percent this year.

Iran worked on high explosives design and the development of a neutron generator, the part of an atomic bomb that starts a nuclear chain reaction, according to the senior international official.

Four-Year Program

“Iran embarked on a four-year program, from around 2006 onwards, on the further validation of the design of this neutron source,” the IAEA report said, citing one member state that shared information with inspectors.

The IAEA revealed details of “large-scale high explosives” experiments conducted near Marivan in 2003. The experiments, which drew on technology shared by a Russian nuclear scientist, would have helped Iran calibrate the explosive impact of a bomb’s uranium core, according to the report.

“The information comes from a wide variety of independent sources, including from a number of member states, from the agency’s own efforts and from information provided by Iran itself,” the report said.

It is the first time that the IAEA has published a comprehensive analysis of Iran’s nuclear-weapons work. Data before 2003 is more comprehensive than information seen thereafter, according to the senior official. The Vienna-based agency shared a copy of the information with Iranian authorities before the report was published, the official said.

Uranium Supply

Iran increased its supply of 20 percent-enriched uranium to 73.7 kilograms from 70.8 kilograms reported in September at a pilot nuclear facility in Natanz about 300 kilometers (186 miles) south of Tehran, the IAEA said. Iran has produced 4,922 kilograms of uranium enriched to less than 5 percent compared with 4,543 kilograms in the last IAEA report.

About 630 kilograms of low-enriched uranium, if further purified, could yield the 15 kilograms to 22 kilograms of weapons-grade uranium needed by an expert bomb maker to craft a weapon, according to the London-based Verification Research, Training and Information Center, a non-governmental observer to the IAEA that is funded by European governments.

To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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MF Global Settlement Over Losses in Doubt After Bankruptcy

By David Glovin and David Voreacos - Nov 9, 2011 6:24 AM GMT+0700

A $90 million settlement of an investor lawsuit against MF Global Holdings Ltd. and its former parent, Man Group Plc (EMG), over a 2008 wheat-trading loss was cast into doubt by the futures broker’s bankruptcy filing.

A Manhattan federal judge is scheduled to decide on Nov. 18 whether to approve the settlement. The case is a class-action, or group, suit against MF Global, Man Group, underwriters of MF Global’s initial public offering in July 2007, and some of the firm’s officers and directors.

The settlement allows investors to back out of the deal if they’re not paid the full $90 million, court records show. Lawsuits against the firm were automatically halted after MF Global filed for bankruptcy protection on Oct. 31. A bankruptcy judge must decide whether MF Global may contribute to the accord. MF Global’s portion of the settlement, which covers shareholders from July 2007 to February 2008, is $2.5 million.

“If the bankruptcy court gives us approval, we’ll go forward,” Mark Rosen, a lawyer for the investors, said in an interview today. “It’s not in our hands right now. It’s in the hands of the bankruptcy court.”

Rosen wouldn’t say what investors would do if the bankruptcy court refuses to permit the suit against MF Global to proceed. Man Group is contributing $32.5 million to the settlement of litigation with a group of public pension funds. Court records don’t identify other contributors.

Lawyers for Man Group and MF Global’s underwriters didn’t return calls seeking comment on the prospects for the settlement.

Wheat Futures

MF Global sought bankruptcy protection last month after disclosing investments related to $6.3 billion in European sovereign debt. Its operating unit, MF Global Inc., is being overseen by a trustee probing possible fraud. The Federal Bureau of Investigation is also investigating, according to a person familiar with the matter.

Jon Corzine, a former New Jersey governor and ex-Goldman Sachs Group Inc. (GS) co-chairman, quit as MF Global’s chief executive officer on Nov 4.

MF Global listed $39.7 billion in debt and $41 billion in assets and said it has about $26 million in cash. About $593 million of customer funds are unaccounted for, according to a person with knowledge of probes into the collapse.

The investor lawsuit follows an earlier scandal. Shares of the broker fell 28 percent on Feb. 28, 2008, after the firm disclosed that Evan Brent Dooley, an employee in the office in Memphis, Tennessee, lost $141.5 million making bad wheat futures trades.

Risk Management

Investors said they lost $1.14 billion after shares fell. MF Global’s underwriters included Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM)

Dooley, who was fired by MF Global, was indicted by a federal grand jury in Chicago for wire fraud and violations of the Commodity Exchange Act. He’s accused of persuading MF Global to open a trading account in his name and acting as guarantor by misrepresenting his financial condition. The case is pending.

The investor complaint accuses MF Global of lying in its public filings about its “highly touted risk management.”

It focuses on Dooley’s trading and what the complaint said was “wholly inadequate” back-office systems that were “overwhelmed” after the 2005 acquisition of assets from Refco Inc. Refco went bankrupt two months after its August 2005 IPO that raised $670 million. CEO Phillip Bennett was convicted of hiding hundreds of millions of dollars in bad debt.

‘Key Risk Areas’

“Controls over key risk areas such as broker trading and broker execution of trades requested by customers were either nonexistent or, at best, ineffective,” the complaint said.

The complaint cited an “overstretched risk management back office” and a failure to require brokers to adhere to internal margin trading requirements and Commodity Futures Trading Commission regulations.

Aside from the Dooley trading losses, the lawsuit cited a $77 million settlement by the firm and an employee over trading losses involving an offshore hedge fund.

The CFTC filed a fraud lawsuit claiming that MF Global helped a Philadelphia hedge fund, Philadelphia Alternative Asset Management Co., hide trading losses from investors. The fund collapsed in 2005, and a receiver worked to recover assets for investors.

In December 2007, MF Global and the employee settled, agreeing to pay $69 million for the receivership estate, $6 million in legal costs and $2 million in a civil penalty to the CFTC.

The case is Rubin v. MF Global, 08-cv-2233, U.S. District Court, Southern District of New York (Manhattan). The bankruptcy case is MF Global Holdings Ltd. (MF), 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in Manhattan federal court at glovin@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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Japan Membership in U.S.-Led Trade Pact May Open $48 Billion Farm Market

By Aya Takada and Yasumasa Song - Nov 9, 2011 7:44 AM GMT+0700

Japan’s participation in a free trade group led by the U.S. could open up the country’s agriculture markets worth $48 billion to foreign exporters of rice, sugar and beef, boosting global prices.

Membership in the Trans-Pacific Partnership could lift sales for Tyson Foods Inc. (TSN) and Fonterra Cooperative Group Ltd., as participants aim to eliminate import tariffs within a decade, according to Norinchukin Research Institute. Prime Minister Yoshihiko Noda, who risks splitting his party if he supports joining the trade talks, has said markets must be opened to boost the weak economy, which is struggling to recover from the March earthquake and nuclear disaster.

Tariff elimination could deepen the country’s reliance on food imports to almost 90 percent from 60 percent, the agriculture ministry has forecast. Imports could tighten global supplies and boost prices of rice, which has gained 12 percent this year, and cattle futures, which have advanced 14 percent. Noda’s Democratic Party of Japan is divided over whether to promote trade to lift economic growth or protect farmers who may be harmed by lower tariffs and increased competition.

“Rice exporters in the U.S. and beef shippers from the U.S. and Australia would benefit the most if Japan joins,” Tetsuhide Mikamo, director at Marubeni Research Institute in Tokyo, said in an interview. “The markets are the most protected as domestic growers lack price-competitiveness.”

The partnership could boost the gross domestic product of the world’s third-largest economy by 2.7 trillion yen ($34.7 billion), or 0.54 percent, the cabinet office has forecast.

Rice Imports

A decision on whether to enter talks on the partnership, which would slash tariffs, including a 778 percent duty on rice, is expected this week. Noda is set to meet U.S. President Barack Obama at the Asia-Pacific Economic Cooperation conference this weekend in Honolulu.

The removal of import tariffs and ending of the state- trading system for rice, which restricts imports from entering the retail network, will boost rice purchases from the U.S. and Vietnam, driving most domestic growers out of business, said Nobuhiro Suzuki, a professor of global agricultural sciences at the University of Tokyo.

As much as 90 percent of domestic rice production, or 7.6 million metric tons, could be replaced by imports in the long term, he said, as the government protects growers with an import tariff of 341 yen a kilogram to maintain self-sufficiency.

“Domestic production will be phased out if tariffs are eliminated,” Suzuki said in an interview.

Wheat, Sugar

Under the state trading system, the agriculture ministry buys rice from overseas for sales mainly to feedmakers, alcohol companies and processed foodmakers. Elimination of the system may expand opportunities for trading companies such as Marubeni Corp. (8002), Japan’s largest grain trader, to boost imports for sales to retailers such as its affiliate supermarket operator Daiei Inc. (8263)

The negotiations for the Trans-Pacific Partnership, known as TPP, have involved Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam, in addition to the U.S.

Still, an influx of cheap flour and dairy products from overseas could mean lost sales to Japanese food makers such as Nisshin Seifun Group Inc. (2002) and Morinaga Milk Industry Co. Non-TPP countries Canada and Thailand may also lose sales of wheat, rice and sugar if Japan becomes the 10th member. Increased imports of meat and dairy by Japan would reduce purchases of feed grains such as corn and soybean meal.

Survival

Almost all of Japan’s sugar production, worth 150 billion yen a year, could be replaced by imports should tariffs be removed, according to Tetsuro Shimizu, vice president of basic research at Norinchukin Research Institute. For wheat, 99 percent of Japanese output worth 80 billion yen would be taken over by imports. Imports could also substitute Japanese beef, pork and chicken worth 1.1 trillion yen, he said.

Japanese farmers can survive without being protected by import duties if the government supports streamlining farm operations and supplements their incomes, as consumer tastes for domestic food will remain strong, said Kazuyuki Kinbara, director for international affairs at lobby group Keidanren. The group is Japan’s largest with 1,281 companies, including Nippon Steel and carmaker Toyota Motor Corp. Free-trade agreements will also expand opportunities for Japanese farmers to boost exports, he said

“The TPP will have a negative influence on Japan’s agricultural production, but its overall impact on the Japanese economy should be positive,” said Kenichi Kawasaki, managing director at the economic research department of Nomura Securities Co. “If Japan opens up its markets to foreigners, overseas investors will also be lured to the country.”

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net

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Hong Kong’s Tsang ‘Pessimistic’ on Global Growth as City Risks Recession

By Ye Xie and Sophie Leung - Nov 9, 2011 8:08 AM GMT+0700

Hong Kong Chief Executive Donald Tsang said the city’s economy may have slipped into a recession in the third quarter as Europe’s debt crisis roiled markets.

Growth may be as little as 2 percent next year after a likely expansion of 5 percent this year, Tsang said in an interview at Bloomberg LP’s head office in New York yesterday. That would compare with a 7 percent expansion last year.

Hong Kong exports declined in September for the first time in almost two years, and the benchmark Hang Seng Index plunged 21 percent in the third quarter. Third-quarter economic figures are due Nov. 11, with seven of 15 economists in a Bloomberg News survey forecasting a second straight contraction, meeting the technical definition of a recession.

“It’s very likely Hong Kong has entered into a recession, and I doubt if that will be a brief one,” said Law Ka Chung, chief economist at Bank of Communications Co. Ltd. in Hong Kong. “There are so many bombs in Europe waiting to explode and the impact on the global economy may be huge, similar to what we saw in late 2008.”

Europe’s crisis and elevated U.S. unemployment have sapped demand for Asian exports, contributing to an easing in economic growth in nations from China to South Korea. Taiwan’s economy shrank 0.28 percent in the third quarter from the previous three months, the first contraction since 2009, a government report showed Oct. 31. Hong Kong’s second-quarter decline was 0.5 percent.

‘Bad Times’

“I am pessimistic about short-term global growth,” said Tsang, 67. “I am afraid a major eruption in the largest market in the world, i.e. Europe, is going to affect everyone on earth and Hong Kong cannot be totally exempted,” he said, adding that while a full-year recession is very unlikely, it’s “possible” to have “a couple of quarters of bad times.”

Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Shares of Sun Hung Kai Properties Ltd., the world’s biggest developer by market value, fell 18 percent this year, worse than a 15 percent slide in the benchmark index.

The city won’t relax housing curbs, Tsang said, adding that prices will moderate over time and the market “will not totally collapse.”

Fiscal Surplus

A career civil servant who was previously the city’s financial and chief secretary, Tsang will step down as chief executive in June after more than seven years in office. Under his watch, the economy grew 26 percent and unemployment fell to a 13-year low as Hong Kong’s proximity to China boosted exports, retail spending and services.

Economic growth in China and Hong Kong’s fiscal surplus, enough to fund two years of operations with no revenue, will help the city weather the global slowdown, Tsang said.

Chinese Vice Premier Li Keqiang, in a visit to Hong Kong in August, announced plans to encourage more two-way investment in stock markets to help support the city’s economy. Hong Kong is also seeking to become the offshore center for the Chinese currency to cement its status as Asia’s major financial hub.

About 8 percent of China’s foreign trade is conducted in yuan, with the majority of that settled in Hong Kong, Tsang said. Yuan trade settlement in Hong Kong may reach 1.5 trillion yuan ($237 billion) by the end of this year, he said.

Currency Peg

At an event in New York Nov. 7, Tsang reiterated that his government is committed to retaining the Hong Kong dollar’s fixed link to the U.S. currency, defying speculators who bet against the peg.

“We want a stable currency,” Tsang said Nov. 7. “I am sure the market speculators want us to change and remove the peg; I am sorry, we are going to disappoint you. We won’t do that. It will stay this way.”

Hong Kong’s policy makers have kept its currency at about HK$7.80 per dollar since 1983, giving up the power to set monetary policy independently. William Ackman, founder of hedge fund Pershing Square Capital Management LP, said in September that he’s using options to wager that Hong Kong will allow its currency to appreciate because the peg stokes inflation.

Consumer prices rose 7.9 percent in July, the fastest pace since 1995. Inflation slowed to 5.8 percent in September.

Rising consumer prices are a global phenomenon that has less to do with the currency peg, Tsang said Nov. 7. Hong Kong will maintain the link at least until the yuan becomes fully convertible, “which won’t be tomorrow,” Tsang said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Oil Trades Near Three-Month High on Berlusconi Plan, U.S. Fuel Stockpiles

By Ben Sharples - Nov 9, 2011 6:55 AM GMT+0700

Oil traded near a three-month high in New York as investors speculated that an offer to resign by Italy’s Prime Minister Silvio Berlusconi brings Europe closer to resolving its debt crisis. U.S. fuel stockpiles declined.

Futures were little changed after climbing for a fifth day yesterday. Berlusconi offered to step down as soon as Parliament approves austerity measures pledged to European partners. U.S. gasoline supplies dropped 1.49 million barrels last week, the American Petroleum Institute said. An Energy Department report today may show they rose 1 million barrels, according to a Bloomberg News survey.

Crude oil for December delivery was at $96.86 a barrel, up 6 cents, in electronic trading on the New York Mercantile Exchange at 10:52 a.m. Sydney time. The contract yesterday advanced $1.28 to $96.80, the highest settlement since July 28. Prices are 6 percent higher the past year.

Brent oil for December settlement gained 44 cents, or 0.4 percent, to $115 a barrel on the London-based ICE Futures Europe exchange yesterday. The European benchmark contract closed at a premium of $18.20 to New York crude, compared with a record settlement of $27.88 on Oct. 14.

Supplies of distillate fuel, a category that includes heating oil and diesel, fell 2.88 million barrels, the API said. They may decrease 2.2 million barrels, according to the median of 13 analyst estimates before today’s Energy Department report.

Crude inventories climbed 148,000 barrels, the API said. Analysts forecast a gain of 500,000 barrels in the survey.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

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Thiel’s Fund Said to Raise Up to $600 Million to Invest in Next Facebooks

By Ari Levy - Nov 9, 2011 4:59 AM GMT+0700

Founders Fund, the venture capital firm started by Facebook Inc. investor Peter Thiel, is raising as much as $600 million for its fourth fund, according to two people familiar with the matter.

The San Francisco-based firm aims to close the fund this month and will use the capital to invest in early-stage technology companies and more mature startups, said the people, who declined to be named because the fundraising is private.

Founders Fund is trying to bring in more than double the amount it did for its third fund last year, a $250 million pool focused on the Internet, science and engineering. The firm is raising money following the slowest quarter for venture capital fundraising in eight years. Venture firms raised $1.72 billion in the third quarter, down 53 percent from the same period a year earlier, according to the National Venture Capital Association.

Founders Fund didn’t immediately respond to an e-mailed request for comment.

Thiel, 44, co-founded PayPal Inc. and served as chief executive officer until the company was bought by EBay Inc. (EBAY) for $1.5 billion in 2002. He used his fortune to start hedge fund Clarium Capital Management and to invest in startups, including putting the first outside money in Facebook in 2004.

Spotify, Yammer

Along with his firm’s co-founders, Ken Howery and Luke Nosek, Thiel raised the first capital for Founders Fund in 2005 and the second fund in 2007.

Other Founders Fund investments include Spotify Ltd., Europe’s largest legal online music site; Yammer Inc., a social- networking service for businesses; and Quantcast Corp., which measures audience traffic on websites. The firm also invested in Elon Musk’s Space Exploration Technologies Corp., or SpaceX, which is building rockets to carry satellites into space and supply the International Space Station.

After a slowdown last quarter, venture fundraising may be picking up. Kleiner Perkins Caufield & Byers said in a U.S. Securities and Exchange filing last week that it’s seeking $250 million for a China fund. TriplePoint Capital, a provider of venture debt, said last month it raised a $1 billion fund, and ABS Capital Partners said it raised $500 million.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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China Telecom Plans to Offer Wireless Service to U.S. Consumers in 2012

By Olga Kharif - Nov 9, 2011 3:02 AM GMT+0700

China Telecom Corp. plans to start selling a wireless service to U.S. consumers under its own brand early next year, seeking to sign up Chinese-Americans, students and tourists who travel often between the two countries.

China’s biggest fixed-line provider will offer users of the service handsets with two lines, one that will work in the U.S. and another in China, Donald Tan, president of China Telecom Americas, said in an interview. Tan declined to discuss pricing, though he said the cost would be “competitive.”

China Telecom, seeking to gain a toehold in the U.S. consumer market, is already in trials with several possible wholesale partners, and will soon choose one as the service’s network, Tan said. He declined to name the U.S. test partners. If the wireless service takes off, China Telecom may consider building or buying its own wireless network in the U.S., Tan said.

“If the service is growing fast, maybe we can set up our own infrastructure,” Tan said. “The money is no big problem for us.”

At the end of June, the Chinese company had $9.6 billion in total current assets, including about $4 billion in cash.

China Telecom’s ability to build or acquire a wireless network in the U.S. may be subject to review by government agencies, such as the Federal Communications Commission or the Department of Justice. Last month, the U.S. government barred Huawei Technologies Co., China’s largest phone-network equipment maker, from participating in a nationwide emergency network because of national security concerns.

Traditional Phone Service

Beyond its fixed-line business, China Telecom provides broadband service and is the country’s third-largest wireless provider behind China Mobile Ltd. and China Unicom (Hong Kong) Ltd. The company, which has 191 million wireline broadband and mobile subscribers, is also looking at making acquisitions to beef up its traditional phone service. It could spend “hundreds of millions or billions” on wireline acquisitions in the U.S., though none is imminent, Tan said.

“We want some acquisitions in the U.S. and other countries on this continent,” Tan said. “It’s a very quick way to growth.”

Verizon Communications Inc. (VZ) and AT&T Inc. (T) are customers of China Telecom’s wireline services. Sprint Nextel Corp. (S) and China Telecom have already interconnected their traditional phone networks.

The wireless service will be China Telecom Americas’ biggest initiative next year, Tan said. As China Telecom’s largest international subsidiary, it has marketed services to U.S. corporations for more than 10 years, offering a wireline broadband link to China. Now the company is turning to consumers, particularly in cities like Los Angeles, Chicago and New York that have large Chinese communities, Tan said.

“During the past 10 years, we went after the enterprise,” Tan said. “Now we need to get more brand awareness in the retail market.” The company may advertise the new service in Chinese neighborhoods, as well as at conferences and events, he said. More than 1 percent of Chinese people live in the U.S., Tan said.

If the wireless service is successful in the U.S., China Telecom may expand it to other markets such as Canada, Tan said.

To contact the reporter on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net.

To contact the editor responsible for this story: Thomas Giles at tgiles5@bloomberg.net

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