Wednesday, May 21, 2008

U.S. Stocks Extend Drop on Fed Minutes; Financials Lead Retreat

By Eric Martin

May 21 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index to its biggest two-day drop since March, as the Federal Reserve signaled it is done cutting interest rates and record oil prices threatened to reduce profits at consumer companies.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. sent financial shares to their lowest since April 15. Target Corp. led retailers to their worst decline in a month and an index of airlines slid to an all-time low as crude climbed above $133 a barrel. Moody's Corp. slumped the most since 1999 after the credit ratings company said it is investigating whether it mistakenly assigned Aaa ratings to debt securities that later fell in value.

The S&P 500 lost 22.69 points, or 1.6 percent, to 1,390.71. The Dow Jones Industrial Average slid 227.49, or 1.8 percent, to 12,601.19. The Nasdaq Composite Index fell 43.99, or 1.8 percent, to 2,448.27. Four stocks retreated for every one that rose on the New York Stock Exchange.

``The American market is a bottomless pit right now,'' said Peter Schiff, president of Darien, Connecticut-based brokerage Euro Pacific Capital, which has more than $1 billion in customer accounts. ``The Fed can't cut rates any more. Oil is $132 a barrel and rising. Any company that collects revenues from American consumers is going to have terrible earnings, and share prices are going to fall.''

`Close Call'

All 10 industries in the S&P 500 slid after the minutes from the Fed's April meeting suggested record energy costs and rising public expectations for inflation threatened their ability to continue cutting rates. Policymakers also reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil

``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' the minutes said. ``Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.''

The S&P 500's 2.5 percent drop over the past two days was the benchmark's biggest decline since the Federal Reserve brokered JPMorgan Chase & Co.'s buyout of Bear Stearns Cos. in March.

Citigroup slid 4.8 percent to $21.06, while Bank of America lost 2.2 percent to $34.63 and JPMorgan fell 2.9 percent to $42.42.

Financials Tumble

The S&P 500 Financials Index slumped for a fourth day, losing 2.3 percent. The index has tumbled 34 percent over the past year, allowing technology companies to surpass the group as the biggest industry in the S&P 500, after global banks and securities firms racked up $379 billion in asset writedowns and credit losses related to the collapse of the subprime mortgage market.

Moody's plunged 16 percent to $36.91. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit- default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

McGraw-Hill Cos., the owner of Moody's rival Standard & Poor's, tumbled 5.5 percent to $41.18.

Lehman Brothers Holdings Inc. lost 5.8 percent to $39.56 after Merrill Lynch & Co. reduced earnings forecasts. Lehman will probably earn 6 cents a share in the quarter that ends May 30, down from Merrill's earlier estimate of 82 cents. Merrill analyst Guy Moszkowski lowered his full-year estimate to $2.80 per share from $3.88.

Crude's Rally

Target, the second-largest U.S. discount chain, tumbled 2.6 percent to $52.87, leading retailers in the S&P 500 to a 2.5 percent drop as a group.

Crude for July delivery climbed $4.19, or 3.3 percent, $133.17 a barrel after U.S. stockpiles unexpectedly dropped, spurring concern that rising fuel bills will leave consumers with less money to spend elsewhere.

At least five banks raised price forecasts for crude in the past week and options contracts betting that oil will exceed $200 a barrel in December have risen 46 percent this week, as futures for delivery in 2016 topped $141.

Homebuilders fell the most since March 26 and accounted for five of the top 10 declines in the S&P 500 on concern that higher borrowing costs will reduce demand. D.R. Horton Inc., the largest U.S. builder by market value, slumped 6.2 percent to $13.43. Smaller rival Lennar Corp. tumbled 7.4 percent to $17.43.

`Another Hurdle'

``Those who expected the Fed would continue to be able to reduce rates and thus provide a safety net to the economy and consumers who are in trouble are going to have to question that,'' said Michael Barron, chief executive officer of Knott Capital Management in Exton, Pennsylvania, which manages $1 billion. ``It's another hurdle the financial sector has in front of it.''

The AMEX Airline Index slumped 12 percent to an all-time low after Soleil Securities downgraded the industry to ``neutral'' from ``outperform'' and AMR Corp.'s American Airlines said it will slash U.S. capacity as much as 12 percent, retire as many as 85 jets and cut jobs to blunt surging fuel prices and slowing demand.

UAL Corp., parent of United Airlines, lost 30 percent to $8.15. Continental Airlines Inc. slid 13 percent to $14.20. AMR lost 24 percent to $6.22. Boeing Co., the world's second-biggest commercial airplane maker, fell 4.6 percent to $81.19.

Bankruptcy Speculation

``We now expect AMR to have trouble avoiding bankruptcy by sometime in 2009,'' Soleil analyst James M. Higgins wrote in a note to clients.

United spokeswoman Robin Urbanski didn't immediately return calls for comment. AMR spokesman Andy Backover said ``We've done a lot of work in recent years to avoid bankruptcy and to put ourselves in a better position to weather today's uncertainty.''

Medtronic Inc. climbed 3 percent to $50.43. Goldman Sachs Group Inc. upgraded the shares to ``buy'' from ``neutral'' after the company's fiscal fourth-quarter profit beat analysts' estimates yesterday as defibrillator sales recovered from a recall and the heart stent Endeavor began selling in the U.S.

Micron Technology Inc. climbed 1.8 percent to $8.36. The largest U.S. maker of computer-memory chips was upgraded to ``buy'' from ``hold'' at Deutsche Bank AG, which said it expects further price increases for dynamic random access memory.

Intuit Inc. gained the most in a month, rising 93 cents, or 3.4 percent, to $28.14. The world's largest maker of tax- preparation software said third-quarter profit rose 21 percent after more customers used its TurboTax software to file U.S. tax returns. Sales advanced 15 percent, topping analysts' estimates.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, fell 1.2 percent to 727.11. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 1.6 percent to 14,084.22. Based on its retreat, the value of stocks decreased by $282 billion.

Most Fed Officials Saw April Rate Cut as `Close Call' (Update4)

By Craig Torres

May 21 (Bloomberg) -- Most Federal Reserve officials viewed the decision to cut the benchmark interest rate as ``a close call'' in April, signaling they may hold off from further reductions.

``The risks to growth were now thought to be more closely balanced by the risks to inflation,'' minutes of the April 29-30 Federal Open Market Committee meeting, released in Washington today, said. Several policy makers judged ``it was unlikely to be appropriate'' to lower rates further unless data indicated a ``significant weakening'' in the outlook.

Stocks tumbled after the report stoked speculation Chairman Ben S. Bernanke and his colleagues are finished lowering borrowing costs as the threat of inflation rises. Questions about whether to lower the rate last month came even as officials cut their 2008 growth estimate by almost 1 percentage point.

``The Fed is wary about the economy, but cautious to act due to high inflation,'' said Christopher Low, chief economist at FTN Financial in New York. The report ``reinforced the idea of a pause'' from rate reductions, he said.

Investors anticipate officials will keep the rate at 2 percent when they next meet June 24-25. Fed officials cut the benchmark lending rate by a quarter point on April 30. The 2.25 percentage points of reductions this year were the fastest in almost two decades.

Warsh Remarks

Two district-bank presidents dissented from the April rate cut, while Fed Governor Kevin Warsh said today that central bankers should be ``inclined to resist'' calls for further moves ``even if the economy were to weaken somewhat further.'' Warsh made the remarks in a Washington speech.

The Standard and Poor's 500 Index dropped 1.6 percent to 1,390.71 at the close of New York trading. Treasury prices fell, raising yields on benchmark 10-year notes to 3.82 percent from 3.78 percent late yesterday.

In their April 30 statement, officials dropped previous language referring to ``downside'' risks to economic growth remaining even after the rate cut.

``The committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth,'' the minutes said today. Officials judged that the risk of another round of financial disruptions hobbling the economy had ``receded'' since their March meeting.

Growth Forecast

Fed officials lowered their 2008 economic growth projections to 0.3 percent to 1.2 percent from a January forecast of 1.3 percent to 2 percent. The figures represent the median estimates of the five current Fed governors and 12 district-bank presidents. Next year, the panel sees an expansion rate of 2 percent to 2.8 percent.

The group raised its expectations for inflation, excluding food and energy, to 2.2 percent to 2.4 percent this year, from 2 percent to 2.2 percent. The Commerce Department's so-called core personal consumption expenditures price index is seen rising 1.9 percent to 2.1 percent next year.

The April 30 statement said that ``substantial'' rate cuts over the past 12 months ``should help promote moderate growth over time.''

``Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and that fact that some indicators suggested that inflation expectations had risen in recent months,'' the minutes said.

`Calibrated' Stance

Fed Vice Chairman Donald Kohn said yesterday that ``monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation of the medium term.'' He also said the recovery in growth into next year may be ``relatively moderate'' as it will take time for investors to regain confidence and for housing demand to rise.

Traders see a 90 percent chance the FOMC will keep its target rate for overnight loans between banks at 2 percent when they next meet June 24-25, according to futures prices quoted on the Chicago Board of Trade. The contracts indicate a 23 percent likelihood officials will raise the rate in September.

``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' the minutes said today, referring to the April 29-30 meeting.

Policy makers lowered their growth forecasts after economic figures showed a continued decline in housing and slump in consumer confidence to the weakest since 1980. Businesses have also cut payrolls for five consecutive months.

`A Crawl'

``Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply,'' the minutes aid. ``The outlook for business spending remained decidedly downbeat.''

Construction of U.S. single-family houses in April dropped to the lowest level in 17 years, the Commerce Department said last week. Residential investment, a component of gross domestic product, has declined for nine consecutive quarters.

Fed officials are also contending with a surge in oil prices that has both depressed confidence and spending on other items and pushed up inflation.

Crude oil surpassed $133 a barrel today for the first time and has climbed about 37 percent this year. Food prices rose at a 6.1 percent annual rate for the three months ending April, according to the Bureau of Labor Statistics.

The Labor Department's gauge of consumer prices rose 3.9 percent in the 12 months ending in April, the sixth straight month that the rate exceeded 3.5 percent.

``Participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term,'' the minutes said.

The Reuters/University of Michigan Survey of households showed inflation expectations for the coming 12 months rose to 5.2 percent in May, the highest level since 1982. Consumers' estimate for price gains over the next five years increased to 3.3 percent, the fastest since 1996.

Oil Rises Above $134 on U.S. Supply Drop, Bank Price Forecasts

By Mark Shenk

May 22 (Bloomberg) -- Crude oil rose to a record above $134 a barrel in New York as U.S. stockpiles unexpectedly dropped and banks raised price forecasts because of supply constraints and demand growth.

Inventories fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, the Energy Department said yesterday. Oil for December 2016 delivery rose more than $20 a barrel, or 17 percent, after Goldman Sachs Group Inc. on May 16 raised its outlook to $141 a barrel for the second-half of the year.

``What we have here is a situation where essentially higher prices aren't generating any more supply,'' Paul Sankey, an analyst at Deutsche Bank Securities in New York, said in an interview with Bloomberg radio. ``What we have to do is keep pricing the commodity higher until demand starts falling,'' which ``is around $150 a barrel.''

Crude oil for July delivery rose $1, or 0.8 percent, to $134.17 a barrel at 9:04 a.m. in Sydney in after-hours trading on the New York Mercantile Exchange. It touched $134.42, the highest since trading began in 1983. Prices have more than doubled in the past year.

Yesterday, crude oil for July delivery rose $4.19, or 3.3 percent, to settle at $133.17 a barrel.

Gasoline futures advanced to a record $3.4234 a gallon. Gasoline for June delivery rose 2.15 cents, or 0.6 percent, to $3.4180 a gallon at 8:25 a.m. Sydney time. Yesterday, it rose 9.21 cents, or 2.8 percent, to settle at $3.3965 a gallon.

Higher Pump Prices

Heating oil for June delivery rose 3.91 cents, or 1 percent, to $3.9475 a gallon, after touching an all-time high of $3.9504. Yesterday, it increased 13.34 cents, or 3.5 percent, to close at $3.9084 a gallon.

Pump prices are following futures higher. Regular gasoline, averaged nationwide, rose 0.7 cent to a record $3.807 a gallon, AAA, the nation's largest motorist organization, said yesterday on its Web site.

An inventory increase of 300,000 barrels was forecast, according to the median of responses by 15 analysts surveyed by Bloomberg News before the inventory report's release.

The supply decline left stockpiles 0.9 percent below the five-year average for the week, the Energy Department said. Supplies were 0.8 percent above normal a week earlier.

Imports fell 7 percent to 9.24 million barrels a day, the report showed. Imports have averaged 9.86 million barrels a day so far this year, down 0.9 percent from the same period last year, according to department figures.

Refiners Cut Imports

``In this high-priced environment we are seeing refiners cut back on imports,'' said Antoine Halff, head of energy research at New York-based Newedge USA LLC. ``High prices and credit tightness are making it much harder to build supply.''

Brent crude oil for July settlement rose $4.86, or 3.8 percent, to $132.70 a barrel on London's ICE Futures Europe exchange yesterday. The contract touched $133.34, the highest since trading began in 1988.

The crude-oil market is ``well supplied,'' Libya's top oil official Shokri Ghanem said yesterday, rejecting calls for the Organization of Petroleum Exporting Countries to increase production to curb prices. OPEC, which pumps more than 40 percent of the world's oil, isn't planning to meet before its next scheduled conference in September to review production, he said.

``OPEC is playing with fire,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``While they may be right from a fundamental standpoint about crude supplies, at this time it will take more than words from them to bring prices down. We will need to see more gestures like the Saudis made, to lower prices.''

Saudi Increase

Saudi Oil Minister Ali al-Naimi told reporters on May 16 that the kingdom is planning a 300,000 barrel-a-day output increase, to bring June production to 9.45 million barrels a day.

``Once prices hit $150 or $200 like our friends at Goldman are saying, we are looking at $5 or $6 gasoline, which will really hurt demand and cause a recession,'' Mueller said.

Goldman analyst Arjun N. Murti said in a May 16 report that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

U.S. oil-company executives told Congress oil prices should be between $35 and $90 a barrel. Representatives of the five largest publicly traded oil companies appeared before the Senate Judiciary Committee to testify on record energy prices. Appearing yesterday were representatives of BP Plc, ConocoPhillips, Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc.

Strategic Reserve

The price of oil should be ``somewhere between $35 and $65 a barrel,'' John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell, said at the hearing yesterday. Other executives said prices should be as much as $90 a barrel.

Congress last week approved legislation to halt deliveries to the Strategic Petroleum Reserve in an effort to respond to record prices.

Airlines have been hit by higher jet fuel costs. The price of the fuel, the largest expense at many airlines, has climbed 88 percent in the past year and traded at a record $4.0592 a gallon in New York Harbor yesterday.

AMR Corp.'s American Airlines, the world's largest carrier, said it will cut ``thousands'' of jobs as it responds to high fuel prices and slowing demand.

Monday, May 19, 2008

Oil Trades Above $127 on Skepticism Saudi Move Will Cut Prices

By Mark Shenk

May 20 (Bloomberg) -- Crude oil was little changed amid skepticism that Saudi Arabia's decision to increase output by 300,000 barrels a day will be sufficient to reduce prices.

Saudi Arabia will boost production by about 3.3 percent to 9.45 million barrels a day in June, Oil Minister Ali al-Naimi said in Riyadh on May 16. The gain won't subdue prices because they have been driven higher by the weak U.S. dollar and not supply, OPEC President Chakib Khelil said yesterday.

``OPEC seems pretty happy with production where it is,'' said Tom Bentz, a broker at BNP Paribas in New York. ``The Saudi announcement of a 300,000 barrel-a-day production gain is not enough to send prices lower, it's not a huge amount.''

Crude oil for June delivery rose 20 cents to $127.25 a barrel at 8:25 a.m. in Sydney in after-hours trading on the New York Mercantile Exchange. Yesterday, the contract rose 76 cents, or 0.6 percent, to $127.05 a barrel, a record close. Prices are 92 percent higher than a year ago. Crude touched $127.82 on May 16, the highest price since trading began in 1983.

The Saudi announcement followed a meeting between President George W. Bush and King Abdullah. The desert kingdom is the world's largest oil exporter and the most influential member of the Organization of Petroleum Exporting Countries.

Khelil said the output increase represented a ``sovereign decision'' on the part of Saudi Arabia, rather than an agreement that had the backing of OPEC. Khelil spoke in an interview in Algiers where he is attending a conference.

OPEC Meeting

``OPEC could increase production at the Sept. 9 meeting if there is need in the market,'' Khelil said. ``Non-OPEC countries did not reach their expected production.''

Members of OPEC, who pump more than 40 percent of the world's oil, have kept production targets unchanged at the group's past three meetings, on March 5, Feb. 1 and Dec. 5.

The U.S. Energy Department last week said it won't proceed with plans to increase deliveries of oil to the Strategic Petroleum Reserve. The department is currently filling the reserve at a rate of about 68,000 barrels a day.

``Some people thought the Saudi announcement that they were increasing output and the Energy Department saying that deliveries to the SPR will end might be enough to calm the market,'' said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis. ``It doesn't look like that's the case.''

Brent oil for July settlement rose 7 cents to close at a record $125.06 a barrel on London's ICE Futures Europe exchange yesterday. The contract touched a $126.34 on May 16, an intraday high.

A Norwegian airport strike threatens to cut access to North Sea oil platforms. Unions shut six airports, including Bergen and Kristiansund, the two biggest bases for helicopter transport to and from oil platforms on the Norwegian continental shelf. The strike may extend today to Stavanger's Sola airport amid a labor dispute with Avinor AS, which operates 46 airports.

ConocoPhillips said it may have to cut output from the Ekofisk field if a strike spreads to Stavanger. Ekofisk pumps about 400,000 barrels of oil a day.

Saturday, May 17, 2008

Dollar Falls Most Against Euro in Seven Weeks on Sentiment, Oil

By Ye Xie and Bo Nielsen

May 17 (Bloomberg) -- The dollar fell the most against the euro since March as a drop in consumer confidence and record crude oil prices raised concern U.S. economic growth will slow.

The dollar's second consecutive weekly decline against the euro pared its increase from the all-time low reached last month to 2.7 percent. The Australian dollar rose to the strongest level against the greenback since 1984 as oil pushed up prices of other commodities. Mexico's peso rose to a five-year high, while the Brazilian real strengthened to the most since 1999.

``The economic backdrop in the U.S. argues against the continuing gains in the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.

The dollar fell 0.6 percent to $1.5577 per euro this week, from $1.5482 on May 9. It touched the record low of $1.6019 per euro on April 22. The yen declined 1.2 percent to 104.04 per dollar this week, from 102.87. Japan's currency fell 1.8 percent to 162.27 per euro, from 159.21, the biggest decline since the week ended April 18.

Crude oil rallied to the all-time high of $127.82 a barrel yesterday as Goldman Sachs Group Inc. raised its forecast for the second half of this year to an average of $141 a barrel, citing supply constraints.

The correlation coefficient between oil and the euro-dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time. The correlation is calculated based on the price changes of oil and the currencies.

`Higher' Oil

``There is no fresh catalyst to mount a successful rally in the U.S. dollar,'' said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. ``Oil prices are significantly higher.''

The Australian dollar increased 1.1 percent this week and touched 95.60 U.S. cents yesterday, the highest level since 1984, on higher commodity prices. Exports of raw materials, such as iron ore, account for 17 percent of Australia's economy. The Brazilian real rose to the nine-year high of 1.6402 versus the dollar, while Mexico's peso appreciated to 10.3912 the strongest in almost five years.

Iceland's krona was the best performer against the dollar among emerging-market currencies, increasing 6.9 percent to 74.69 after the central banks of Denmark, Sweden and Norway pledged as much as 1.5 billion euros ($2.3 billion) in emergency funds yesterday. The krona jumped 3.5 percent to 116.17 per euro. Before yesterday, it had slumped 24 percent against the euro this year.

Weaker Yen

Japan's currency fell against all of the major currencies this week as global stock gains and lower volatility increased carry trades, in which investors borrow funds in countries with low interest rates and buy assets where returns are higher.

The yen fell 4.9 percent to 13.95 against South Africa's rand and 4 percent to 63.48 against Brazil's real. The Bank of Japan is forecast by 35 economists surveyed by Bloomberg to hold the target lending rate at 0.5 percent next week. That compares with 11.75 percent in Brazil and 11.5 percent in South Africa.

Implied volatility on one-month dollar-yen options fell to 11.26 percent yesterday, from 12.70 percent on May 9, approaching the lowest since Feb. 27. Lower volatility tends to encourage carry trades by making it easier to predict profit. The Standard & Poor's 500 Index rose 2.6 percent this week, the biggest gain since mid-April.

The dollar weakened yesterday as a report showed confidence among U.S. consumers fell in May to the lowest level in almost 28 years. The Reuters/University of Michigan consumer sentiment index dropped to 59.5 this month, from 62.6 in April.

Sales of previously owned homes probably dropped in April to an annual rate of 4.85 million, the all-time low, according to the median forecast of 46 economists surveyed by Bloomberg News. The National Association of Realtors is scheduled to release the report on May 22.

Fed Rate Outlook

Futures on the Chicago Board of Trade yesterday showed 88 percent odds that the Fed will hold the target lending rate at 2 percent at its next meeting on June 25. The balance of bets is for a reduction of a quarter-percentage point. There's a 21 percent chance of an increase to 2.25 percent in September.

The euro got a boost on May 15 as the European Union's statistics office said gross domestic product in the 15 countries that use the currency increased to 0.7 percent in the first quarter. The pace exceeded the 0.5 percent estimate of 32 economists surveyed by Bloomberg News. Germany's 1.5 percent expansion from the previous quarter was more than double what economists had expected.

European Central Bank President Jean-Claude Trichet said yesterday the bank can't relax in its fight against inflation.

``There is no place for complacency,'' he said in a speech in Brussels. ``Price stability in the medium term has to be'' ensured. It's ``a necessary condition to sustain economic growth, job creation and social cohesion.''

The ECB has held its main refinancing rate at a six-year high of 4 percent since last June to control inflation, which accelerated to the fastest pace in 16 years in March.

Thursday, May 15, 2008

Bernanke Urges `Hunkering' Banks to Raise Capital (Update4)

By Steve Matthews and Scott Lanman

May 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke pushed banks to keep raising capital in the aftermath of losses from the credit crisis to avert deeper damage to the U.S. economy.

``Firms are hunkering down,'' Bernanke said at a conference in Chicago today. ``They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.''

Bernanke's remarks reflect concerns he and other Fed officials expressed this week that financial markets have yet to return to normal. The Fed chief also said the central bank is considering strengthening its guidance to banks on how they manage risk after ``weaknesses'' that contributed to the crisis.

While banks and securities companies have raised about $244 billion of capital since July, they may have further to go after writedowns and credit losses in excess of $333 billion. Bernanke and Treasury Secretary Henry Paulson have repeatedly said firms should keep increasing their funds, seeking to alleviate the impact of the credit crunch.

Citigroup Inc. and JPMorgan Chase & Co. are among companies raising capital this quarter. IndyMac Bancorp Inc., the second- biggest independent U.S. home lender, said this week it may raise a ``slug'' of money from outside investors.

`Proactive' Efforts

``I strongly urge financial institutions to remain proactive in their capital-raising efforts,'' Bernanke said in the text of his speech. ``Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.''

The Fed said in a weekly report today that its direct lending to banks rose to a record $14.4 billion in the week to May 14. Policy makers have increased the attractiveness of the resource by lowering the rate on the funds and extending the term.

Bernanke said that senior bank executives need to take a leadership role in strengthening risk management. The strongest banks didn't rely on credit-rating companies and took into account the danger of a slump in access to funds, he said.

``I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital,'' Bernanke said at the Chicago Fed conference on credit markets.

Rate Outlook

Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee next meets June 24-25. Investors anticipate the central bank's next move will be to raise, rather than lower, the benchmark rate from 2 percent, according to futures prices.

Bernanke said the credit crisis continues to confound the economy. ``Events continue to unfold,'' he said, adding that ``the financial stress we continue to experience'' stemmed from a separation of lending and distribution of credit to investors.

Sovereign wealth funds have contributed as much as a third of the capital banks have raised, which has been ``very positive,'' Bernanke said in response to questions. ``It has been very constructive to have this source of funding coming into our banking system,'' he said.

Banks are likely to heed the chairman's advice, said David Resler, chief economist at Nomura Securities International in New York.

`Wood to Cut'

Bernanke is ``just reminding us there's more wood to cut here,'' he said. ``They're going to continue to float new debt or equity into a market that's going to be a little more receptive to it because they see this as part of a process that's putting the problems behind them.''

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. That has increased the threat to economic growth already posed by the worst housing recession in a quarter century.

``Bernanke and the Fed have a systemic interest in growth and getting credit moving again,'' said Joe Belew, president of the Consumer Bankers Association in Arlington, Virginia, whose members include Citigroup and Wachovia Corp. ``That is all important. But underwriting has tightened and will remain tight until we work our way through existing portfolios.''

The Fed has created three new types of loans to financial companies since December to alleviate credit strains, including direct lending to firms other than commercial banks for the first time since the Great Depression.

Bernanke said the Fed was also conducting a review of how supervisors approach bank examinations.

``Supervisors must redouble their efforts to help organizations improve their risk-management practices,'' Bernanke said.

Wednesday, May 14, 2008

Dollar Bears Turn Bullish With Fed Near End of Cuts (Update1)

By Bo Nielsen

May 14 (Bloomberg) -- The U.S. dollar will strengthen against most major currencies in the next six months as the Federal Reserve stops reducing interest rates, a survey of Bloomberg users showed.

The end of rate cuts will boost the allure of American assets for international investors, according to U.S. respondents in the monthly Bloomberg Professional Global Confidence Index, which questioned 3,447 users from Chicago to London to Hong Kong. While users in the U.S. grew optimistic about the greenback, participants in Germany and France became pessimistic about the euro for the first time since the survey started in November.

After declining 15 percent in the previous 12 months to a record low 70.698 on March 17, the Dollar Index traded on ICE Futures in New York that compares the currency to those of six trading partners has risen 3.8 percent to 73.399. The median estimate of 54 economists surveyed by Bloomberg is for the Fed to keep its target rate for overnight loans between banks at 2 percent through March, while the European Central Bank lowers its main rate by half a percentage point to 3.5 percent.

``The broad-based dollar weakness, which has been the trend the last few years, has ended,'' said Paresh Upadhyaya, who helps oversee about $50 billion in currency assets at Putnam Investments in Boston and participated in the survey.

The index of expectations on the dollar for U.S. users rose to 57.6 for May from 42.87 in April and 30.3 in March. The measure is a diffusion index, meaning a reading above 50 indicates participants expect the currency to appreciate. Users in Germany registered 46.3, down from 56.25 in April and 61.85 the prior month.

Interest Rate Expectations

The Fed cut rates a quarter-percentage point to 2 percent on April 30 and said ``substantial'' easing since September would help foster economic growth.

``What we needed to see for the U.S. dollar to rally was the end in sight of the Fed easing cycle,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto, who has participated in past surveys.

Users in the U.S. are starting to anticipate that the federal funds rate will increase, with a reading of 51.3, compared with 27.74 in April. Their view on the U.S. economy improved to 15.69 from 10.55 in April.

Participants in Germany continued to forecast ECB rate cuts. The index that measures expectations for borrowing costs was little changed at 38.1 from 37.38 last month.

Treasuries, Bunds

The dollar gained 3.5 percent versus the euro since reaching a record low of $1.6019 on April 22 as the advantage in yields on two-year German bund over Treasuries of similar maturity narrowed 0.43 percentage point to 1.41 percent from 1.84 percent on March 31. The U.S. currency traded at $1.5460 at 3:17 p.m. in New York, from $1.5474 yesterday.

Participants in Brazil are the most bullish on their currency, at 71.54. The real has increased 22 percent this year versus the dollar and is the biggest gainer among the 16 most actively traded currencies. The real fell 0.4 percent to 1.6630 per dollar, from 1.6557 yesterday.

Brazil received an investment grade credit rating on April 30 for the first time from Standard & Poor's, sending the Bovespa stock index to a record high and yields on dollar- denominated bonds to an all-time low.

Yen Outlook Cools

Users in Japan were less optimistic about the yen, with a reading of 51.96, down from 61.39 in April. The currency traded at 105.27 yen per dollar after reaching 95.76 on March 21, the strongest in 13 years. It was little changed at 162.74 against the euro.

The Japanese currency gained 6.1 percent against the dollar in the last six months, fueled by losses in U.S. credit markets. Investors reduced so-called carry trades by selling high- yielding assets around the world financed with loans in Japan, which has the lowest interest rates among the Group of Seven countries. Speculators need to buy yen to end the trades.

``There's some caution still about carry,'' said Michael Metcalfe, the London-based head of macro strategy at State Street Global Markets, a unit of the world's largest money manager for institutions. ``If risk appetite proves durable, carry will come back.''

Japanese users were less optimistic about the yen than currency analysts. The median estimate of 40 strategists in a Bloomberg survey is for the yen to strengthen to 101 against the dollar and to 150 per euro by the end of March.

Tuesday, May 13, 2008

Bernanke Says Fed to Boost Loans to Banks as Needed (Update1)

By Craig Torres and Steve Matthews

May 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.

While markets have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''

Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take ``some time'' for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs.

Bernanke said the Fed's efforts have yielded ``some improvement,'' while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.

The central bank's extension of the federal safety net raised questions about whether the government should now use taxpayer money to stem mortgage foreclosures, the primary cause of market distress.

`Moral Hazard'

``A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard,'' Bernanke said. The belief that the Fed is always standing by would give ``financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks.''

Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee last month cut its benchmark rate by a quarter point to 2 percent and signaled it's ready for a pause after seven reductions.

Cleveland Fed President Sandra Pianalto said in a speech in Paris today that consumer prices are rising faster than she'd like and that inflation is a ``key risk'' to the economic outlook. Pianalto is a voter on the FOMC this year.

Kansas City Fed President Thomas Hoenig, San Francisco Fed chief Janet Yellen, Richard Fisher of the Dallas Fed and Charles Evans from Chicago are also scheduled to speak today. Bernanke spoke via satellite.

Regulatory Review

The Fed chairman said federal banking agencies are trying to address moral hazard through a review of ``policies and guidance regarding liquidity risk management to determine what improvements can be made.''

``Future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing,'' Bernanke said. ``Ultimately, market participants themselves must address the fundamental sources of financial strains -- through deleveraging, raising new capital, and improving risk management.''

That process will take time, he added, noting that ``once financial conditions become more normal, the extraordinary provision by the Federal Reserve will no longer be needed.''

The Fed announced May 2 that it would boost the Term Auction Facility, or TAF, to $150 billion per month from $100 billion, the third increase since the program began in December.

`Abnormally High'

Premiums in term dollar funding markets still ``remain abnormally high,'' Bernanke said. ``Funding pressures have also been evident in the strong participation at recent TAF auctions even after the recent expansion in auction sizes.''

The gap between three-month Treasury bill yields and three- month dollar-denominated loans in London, narrowed to 89 basis points yesterday, the least since Feb. 20. A basis point is 0.01 percentage point.

On March 11, the Fed announced the Term Securities Lending Facility, which allows primary dealers to swap up to $200 billion of AAA rated commercial and residential mortgage-backed securities and other collateral for the Fed's holding of Treasury securities for up to 28 days. The facility was aimed at helping dealers finance mortgage bonds.

The FOMC expanded the facility May 2 to include AAA rated asset-backed securities. The decision followed two separate requests by groups of Senate and House members that the Fed accept debt backed by student loans under the program.

``The Federal Reserve has had to innovate in large part to achieve what other central banks have been able to effect through existing tools,'' Bernanke said.

Bear Stearns Loan

Bernanke also repeated his defense of the Fed's rescue of Bear Stearns Cos. in March. The central bank invoked emergency authority on March 16 to start direct lending to government bond dealers, and arranged $30 billion in financing to facilitate the Bear Stearns takeover by JPMorgan Chase & Co.

``A bankruptcy filing would have forced Bear's secured creditors and counterparties to liquidate the underlying collateral,'' Bernanke said in his speech. ``Given the illiquidity of markets, those creditors and counterparties might have sustained losses.''

The Bear Stearns loan has been criticized by some former officials and Fed watchers, who said the central bank shouldn't substitute its own loans for fleeing creditors when institutions become insolvent.

Vincent Reinhart, former director of the Fed Board's Division of Monetary Affairs, called the Bear rescue the ``worst policy decision in a generation.''

Creditors also now perceive a wide safety net under investment banks, which the Fed doesn't supervise.

The cost of default protection on Merrill Lynch & Co. debt fell to 1.58 percentage point yesterday from 3.3 percentage points March 14, CMA Datavision's credit-default swap prices show.

Hoenig said May 6 the central bank's decisions are ``likely to weaken market discipline.''

Sunday, May 11, 2008

Dollar Bulls Gain Control as Futures Signal Euro Close to Peak

By Liz Capo McCormick

May 12 (Bloomberg) -- For the first time since December 2005, futures traders are turning bullish on the dollar.

The difference in the number of wagers by hedge funds and other large speculators on a gain in the greenback versus the euro, known as net longs, was 21,315 on April 29, figures from the Commodity Futures Trading Commission in Washington show. There were net-short positions in each of the previous 123 weeks. At the same time, traders have stepped up their purchases of options that profit from the dollar's appreciation.

The measures are making long-suffering proponents of the dollar optimistic that this time the currency's rally may hold, especially if the Federal Reserve's Open Market Committee refrains from additional interest-rate cuts. The Dollar Index traded on ICE Futures in New York, which tracks the currency against six trading partners, is up 3.3 percent from an all-time low of 70.698 set on March 17.

``There is kind of a sea change taking place at the moment,'' said Mitul Kotecha, head of foreign-exchange research in London at investment bank Calyon, whose forecasts on the euro-dollar exchange rate in the first quarter were more accurate than those of the two biggest currency traders. ``It's probably the early sign of perhaps a more sustained turnaround.''

The dollar has appreciated 3.4 percent to $1.5482 since dropping to $1.6019 per euro on April 22, the lowest since the European currency's debut in 1999. By the end of the year, the dollar will strengthen to $1.50, according to the median estimate of 40 strategists surveyed by Bloomberg.

Gaining Traction

The dollar's rebound gained traction last month after the Open Market Committee said ``substantial'' rate cuts since September would help foster growth. U.S. employers also eliminated fewer jobs in April than forecast by economists.

Meanwhile, a slide in business confidence in Germany and France, which account for about half the euro-region economy, renewed speculation the European Central Bank will reduce rates this year. An end to lower rates in the U.S. and the possibility of cuts in Europe raises the appeal of dollar-denominated assets.

``The recent shift to a neutral FOMC stance and from a very hawkish European Central Bank stance, together with U.S. data pointing to a stagnation rather than a deep contraction, have already contributed to the dollar's rally,'' said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman Inc. Chandler said he expects the dollar to reach $1.44 per euro by year-end.

Rate Futures

Interest-rate futures on the Chicago Board of Trade show an 82 percent chance the Fed will keep its target unchanged at 2 percent when policy makers next meet on June 25, with the balance of the odds calling for a quarter-percentage point cut.

The ECB will lower its 4 percent main refinancing rate to 3.75 percent by the end of September and 3.50 percent by year- end, according to the median estimate of 31 economists surveyed by Bloomberg.

As declining home sales and mortgage losses curbed economic growth, investor sentiment grew so negative on the dollar that even longtime pessimists such as Jim Rogers, chairman of Rogers Holdings, say the U.S. currency is due to rebound.

``I expect a nice rally in the American dollar because so many have been bearish on the American dollar, including me,'' he said on May 8 in Singapore. Rogers, who co-founded the Quantum fund with George Soros in the 1970s and correctly predicted the start of the commodities boom in 1999, cited the benefit of surging prices for U.S. agricultural products.

Contrarian Indicator

Futures can be viewed as a contrarian indicator because traders often rush to reduce positions when momentum in a currency shifts. The last time net longs were this high, in December 2005, the dollar was nearing the end of a one-year, 13 percent rally versus the euro. It weakened 11 percent in 2006 and depreciated by the same amount in 2007.

``It is more likely than not that reasons for speculators returning to selling the dollar will be greater than reasons for them to sell the euro,'' said Derek Halpenny, head of global- currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., who expects the euro to reach a record high within three months. ``I see risk that the ECB doesn't do anything this year and expect the Fed will ease again in 2008.''

Between May 2005 and the end of that year, futures traders were net long the dollar versus the euro 73 percent of the time. The U.S. currency gained 7.9 percent in that period.

Call Options

Net-short positions versus all currencies fell to $10 billion in the week ended April 29, from $22 billion in the prior period, according to CFTC data tracked by Morgan Stanley. Speculators had net-long bets on the dollar versus the pound and the euro. Hedge funds and other large speculators were net-short the euro for a second week in the period ended May 6.

In another bullish signal for the dollar, demand for one- month options that grant the right to sell the euro is greater than for those allowing for purchases. The so-called risk- reversal rate had a 0.44 percentage point premium for euro puts relative to calls on May 9.

As recently as March, demand for call options was greater than put options. On Jan. 28, the premium for euro calls reached 0.45 percentage point, the highest since April 2007.

``We may very well have seen the bottom in the dollar,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London, who forecasts the dollar will rise to $1.40 per euro by year-end. ``The dollar has regained some traction lately. Against the euro, the U.S. dollar is around 25 percent undervalued.''

King May Give Rate-Cut Clues in BOE Inflation, Growth Forecasts

By John Fraher

May 12 (Bloomberg) -- Bank of England Governor Mervyn King will this week map out how much room policy makers see for interest-rate cuts as they struggle with faster inflation and signs the economy may be heading for a recession.

King will present the central bank's quarterly economic forecasts in its inflation report on May 14. The Office for National Statistics will say tomorrow that consumer prices rose 2.6 percent in April from a year earlier, the most in 12 months, the median forecast of 37 economists in a Bloomberg survey shows.

U.K. policy makers are grappling with record food and oil prices just as the global credit squeeze and the worst housing downturn in 12 years threaten to derail the British economy. Economists predict the bank will lower the benchmark interest rate by a quarter point to 4.75 percent as soon as next month.

``The inflation report will be supportive of the need to cut interest rates further,'' said George Buckley, U.K. economist at Deutsche Bank AG in London. ``Inflation will eventually improve because of the economy, which we think will be substantially weaker than it's been over the past two years.''

A separate report today will probably show producer prices rose an annual 6.4 percent in April, accelerating from the fastest pace since 1991, a Bloomberg survey of 26 economists showed. That would be the most since February 1991. The statistics office will release that data at 9:30 a.m. today in London.

The Bank of England will cut its interest rate to 4.25 percent in three quarter-point steps by the end of the year, according to the median forecast of 22 economists. The central bank left it at 5 percent on May 8.

G-7 Rates

The Bank of England has been reluctant to cut its rate, the highest among the Group of Seven nations, as fast as the Federal Reserve. The U.S. central bank reduced its main rate to 2 percent on April 29, the lowest since 2004.

King said the same day that U.K. inflation may exceed the government's 3 percent limit this year for only the second time in the bank's decade-long history of rate-setting. The price of oil, which has more than doubled in the past year, rose above $125 per barrel for the first time on May 9, and wheat prices have increased 75 percent in the same period.

Bank of England forecasts will ``probably show further inflation threats and inflation risks,'' Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London, said in an interview on Bloomberg Television. At the same time, ``growth prospects may have continued to deteriorate. I'd say more bad news from the U.K.''

Voter Displeasure

The economic slowdown comes just as the popularity of Prime Minister Gordon Brown sinks. His Labour Party slumped to its worst performance since at least the early 1970s in local elections on May 1, the first ballot-box test since Brown took over from Tony Blair in June.

U.K. house prices posted the first annual decline since 1996 in April as mortgage lending dried up, the services industry expanded at the slowest pace in five years and construction shrank the most in almost a decade, reports showed in the past week.

Unemployment probably stopped falling in April, with no change in the claimant count, according to the median of 31 economists in a Bloomberg survey. The statistics office will release that data at 9:30 a.m. on May 14.

``The outlook for the economy is deteriorating quite quickly,'' Juergen Michels, an economist at Citigroup Inc. in London, said in an interview on Bloomberg Television. ``It's a bit of a dilemma'' for the Bank of England.

Friday, May 9, 2008

Oil Climbs Above $126 to Record as Dollar Weakens Against Euro

By Mark Shenk

May 9 (Bloomberg) -- Crude oil rose above $126 a barrel in New York to a record as the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline.

For a fifth day oil climbed to all-time highs as the euro strengthened on signs the European Central Bank will keep rates at a six-year high to cut inflation. Nigerian output fell to the lowest this decade in April because of a strike and attacks on oil installations.

``Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``There are also geopolitical concerns about places like Nigeria and Venezuela that are propping prices up.''

Crude oil for June delivery rose $2.27, or 1.8 percent, to a record closing price of $125.96 a barrel at 2:55 p.m. on the New York Mercantile Exchange. The contract surged to $126.27 today, the highest since futures began trading in 1983. Prices are up 8.3 percent this week, the biggest weekly gain in more than a year. Futures have more than doubled in the past year.

Brent crude oil for June settlement climbed $2.56, or 2.1 percent, to close at a record $125.40 a barrel on London's ICE Futures Europe exchange. The contract touched $125.90 today, the highest since trading began in 1988.

Oil at $200 is ``possible if we have a continuing devaluation of the dollar with respect to other currencies,'' OPEC President Chakib Khelil said yesterday at a press conference in Washington.

The dollar fell 9.6 percent since Sept. 18, when the Federal Reserve began cutting rates to ease financial-market strains and stave off a recession. The U.S. central bank cut rates seven times while the ECB has left rates unchanged. The dollar fell 0.6 percent to $1.5483 per euro at 3:27 p.m. in New York.

Fed Policy

``Fed policy is accommodating the rise in energy prices,'' said Bill O'Grady, director of fundamental futures research at Wachovia Securities in St. Louis. ``The Fed and federal government are putting more liquidity in people's pockets, which is being spent on expensive oil.''

The U.S. government started sending $117 billion in tax rebate checks last week as part of its fiscal stimulus plan.

Goldman Sachs analyst Arjun N. Murti wrote in a report on May 6 that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

``There's been a paradox, prices have surged over the last week while we've had bearish headlines,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``Clearly there's been a lot of fund buying on the back of Goldman's super-spike repot. They were right on the nose last time.''

OPEC Meeting

The Organization of Petroleum Exporting Countries, the producer of more than 40 percent of the world's oil, may meet before September to consider increasing output in an attempt to rein in record crude-oil prices, Libya's Shokri Ghanem said.

``We would consider among other options the possibility of increasing output as a way to ensure market stability,'' Ghanem, who is the chairman of Libya's National Oil Corp., said in a telephone interview today from Tripoli.

Nigerian Petroleum Minister of State H. Odein Ajumogobia said today that there are no plans for an additional OPEC meeting because oil supplies are adequate.

OPEC kept its production target unchanged at its past three meetings. The group last increased its target on Nov. 1.

``OPEC loves high oil prices, but they also value an orderly market,'' said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. ``It would not surprise me if they meet soon to discuss these issues.''

Lebanese Unrest

Gun battles raged across western and southern Beirut, leaving 10 people dead, as fighters from the Shiite group Hezbollah pressed their party's challenge to Lebanon's pro- Western government. Oil surged to a record $78.40 on July 14, 2006, on concern fighting in Lebanon between Israel and Hezbollah would spread through the Middle East.

``The unrest in Lebanon could be very important,'' O'Grady said. ``This could be an early indication of further violence in coming months.''

Gasoline and heating oil also touched records in New York on forecasts for increased fuel demand. An Energy Department report on May 7 showed that U.S. inventories of distillate fuel, a category that includes heating oil and diesel, fell last week.

Record Fuel Prices

Heating oil for June delivery climbed 12.62 cents, or 3.6 percent, to close at a record $3.636 a gallon in New York. The contract reached $3.6524 today, an all-time high. Some traders use heating-oil futures to hedge their diesel and jet-fuel purchases.

Gasoline futures for June delivery rose 6.34 cents, or 2 percent, to $3.2012 a gallon in New York after reaching a record $3.2038 today.

U.S. pump prices followed futures higher. Regular gasoline, averaged nationwide, rose 2.6 cents to a record $3.671 a gallon, AAA, the nation's largest motorist organization, said today.

Thursday, May 8, 2008

U.S. Stocks Rise, Led by Commodity Producers; Wal-Mart Climbs

By Elizabeth Stanton

May 8 (Bloomberg) -- U.S. stocks advanced, rebounding from their biggest drop in a month, after Wal-Mart Stores Inc. and News Corp. posted sales that topped analysts' estimates and commodity producers rallied on higher gold and oil prices.

Wal-Mart rose as shoppers seeking discounts boosted sales. News Corp., the owner of Fox television, jumped on revenue that was lifted by advertisements for ``American Idol'' and the Super Bowl. Freeport-McMoRan Copper & Gold Inc. and Chevron Corp. helped send raw-material and energy companies to the biggest gains in the Standard & Poor's 500 Index. Alcoa Inc. climbed to a six-month high after naming a new chief executive officer. The market's advance was limited as record oil prices pushed other consumer shares down.

The S&P 500 added 5.11, or 0.4 percent, to 1,397.68. The Dow Jones Industrial Average increased 52.43, or 0.4 percent, to 12,866.78. The Nasdaq Composite Index rose 12.75, or 0.5 percent, to 2,451.24. About six stocks gained for every five that fell on the New York Stock Exchange.

``Capital is going to go where the opportunity is and the opportunity right now is in the energy and material sector,'' said Gary Wolfer, who oversees $1.2 billion as senior vice president at Univest Wealth Management & Trust in Souderton, Pennsylvania. ``There's, for lack of a better term, a world economic party and that world is going to need a lot more'' commodities, he said.

Seven of 10 industry groups in the S&P 500 advanced as the market was also boosted by a government report showing initial jobless claims dropped last week more than economists had forecast.

Freeport, Alcoa

Freeport rallied 3.2 percent to $118.07. Gold rose to a one-week high as record energy costs and a weakening dollar boosted demand for a hedge against inflation. The dollar fell against the euro and the British pound after the European Central Bank and the Bank of England kept borrowing costs steady to fight inflation.

Alcoa Inc., the world's third-largest aluminum producer, rallied 4.1 percent to $39.65 for the biggest gain in the Dow average. Alcoa named Klaus Kleinfeld chief executive officer, replacing Alain Belda, who will step down after almost four decades with the company.

The S&P 500 Materials Index jumped 2.3 percent as 26 of its 28 companies advanced.

Chevron, the second-biggest U.S. oil company, climbed 2.3 percent and led energy shares to a 1.9 advance after crude climbed 16 cents to $123.69 a barrel.

`Carefully Scrutinizing'

Wal-Mart rose 33 cents to $57.16. Sales at stores open at least a year climbed 3.2 percent, beating the company's forecast for a gain of as much as 3 percent. Chief Executive Officer H. Lee Scott slashed prices on drugs and other products by as much as 30 percent in January to promote Wal-Mart as the low-cost store for shoppers struggling with rising food and fuel costs.

U.S. consumers at all income levels ``are carefully scrutinizing every single expense, and that's working to the benefit of the discounters,'' said David Dietze, president of Point View Financial Services in Summit, New Jersey, which manages $140 million. Dietze recommended Wal-Mart and Costco Wholesale Corp. in an interview on Bloomberg Television in December.

Wal-Mart closed at a three-year high of $58.61 on April 29. Costco, the largest U.S. warehouse-club chain, rose to a record $72.65 on May 6. Costco today said April sales at stores open at least a year advanced 8 percent, more than analysts estimated. The shares fell 88 cents to $71.20.

Murdoch's Day

News Corp. added 2.5 percent to $19.68. The media company controlled by Rupert Murdoch posted third-quarter revenue that topped analysts' estimates and profit that tripled from a year earlier because of a gain from the sale of its stake in DirecTV Group Inc.

Still, oil's fifth straight advance weighed on other consumer shares. The S&P 500 Retailing Index slid 1.9 percent, led by a 5.6 percent decline in Dillard's after the department- store chain posted a drop in same-store sales.

State Street Corp., the largest money manager for institutions, fell $1.27 to $72.73 on concern it may have to pay more than 12 times as much as it budgeted for client lawsuits over losses on subprime-mortgage investments. State Street helped send financial shares down 1.2 percent as a group.

CIT Group Inc., the commercial lender trying to escape a cash squeeze, dropped 2 percent to $12.25 after Fitch Ratings said it faces ``liquidity challenges.''

Freddie Mac and Fannie Mae, the biggest U.S. mortgage- finance companies, fell 2.2 percent and 4.9 percent, respectively. Wachovia Corp., the fourth-largest U.S. bank, lost 3.1 percent to $27.83.

Financial Shares

Banks, brokerage firms and insurance companies in the S&P 500 yesterday fell 3.7 percent as a group and led the market to its steepest decline in a month on concern new disclosure requirements for investment banks will limit their profits.

Financial companies led the market's rebound from a 19- month closing low on March 10, climbing 17 percent through May 6 as the S&P 500 gained 11 percent.

Earnings from Google Inc., Intel Corp., Boeing Co. and American Express Co. also fueled the advance. About 68 percent of companies in the index that reported first-quarter results so far have topped estimates, according to Bloomberg data.

`Encouraging' Earnings

``Earnings definitely are better than many expected, and that's encouraging,'' said Kelli Hill, portfolio manager at Ashfield Capital Partners in San Francisco, which manages $4.5 billion. ``What's continued to drive volatility is some of the guidance. Companies are being very, very conservative in setting themselves up for the second half.''

Crocs Inc., the maker of perforated plastic clogs, surged $1.44, or 14 percent, to $11.40. The company said full-year profit, excluding costs to close a factory, will be $1.70 to $1.80 a share. Analysts estimated $1.69, according to the average of five projections compiled by Bloomberg.

Barr Pharmaceuticals Inc. tumbled 23 percent to $38.10, the biggest drop in the S&P 500. The maker of generic drugs and the Plan B emergency contraceptive reported a first-quarter profit that missed analysts' estimates and lowered its full year earnings estimate.

Hansen Natural Corp. dropped $5.46, or 15 percent, to $30.14 after the maker of Monster energy drinks reported first- quarter profit of 29 cents a share, missing the average analyst estimate of 37 cents in a Bloomberg survey.

About 1.2 billion shares changed hands on the NYSE, 19 percent less than the three-month daily average.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, gained 0.5 percent to 719.55. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 0.4 percent to 14,121.06. Based on its advance, the value of stocks increased by $67.9 billion.

Wednesday, May 7, 2008

Euro Falls to Eight-Week Low Against Dollar Before ECB Meeting

By Stanley White

May 8 (Bloomberg) -- The euro fell to an eight-week low against the dollar on speculation the European Central Bank will keep interest rates unchanged at a policy meeting today while signaling concern that economic growth is slowing.

The 15-nation currency declined for a second day after the Financial Times said the U.S. and Europe want to see the dollar rise, citing officials it didn't identify. The British pound traded near a 2 1/2-month low versus the dollar before today's meeting of the Bank of England and after an industry report yesterday showed U.K. consumer confidence fell.

``The euro is likely to face renewed pressure to go lower,'' said Masanobu Ishikawa, Tokyo-based general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Data from the euro-zone suggest the ECB can't delay cutting rates indefinitely. The pound is even more vulnerable.''

The euro traded at $1.5314 at 11:20 a.m. in Tokyo, from $1.5392 yesterday in New York. It earlier touched $1.5285, the lowest since March 11. It has lost 4.2 percent since April 22, when it reached a record high of $1.6019. The euro fell to 160.38 yen from 161.23 yesterday, after reaching 160.20 yen, the weakest since April 15. The pound bought $1.9530, near the lowest since Feb. 21. The dollar was at 104.71 yen from 104.73.

The New Zealand dollar fell to 77.38 U.S. cents from 78.15 cents after a government report showed the country's employers cut the most workers in 19 years. The Australian dollar pared losses to trade at 94.20 U.S. cents after the number of employed in the nation rose for a record 18th month.

Asian Currencies

The dollar rose to 1,040.90 South Korean won from 1,026.15 and advanced to 42.60 Philippine pesos from 42.435. It gained 0.9 percent against Malaysia's ringgit to 3.1941 and 0.5 percent against the Singapore dollar to S$1.3727.

The ECB and the Bank of England are forecast to maintain their lending targets at 4 percent and 5 percent, respectively, at meetings today, according to Bloomberg News surveys.

The euro's losses may be limited by a surge in the price of crude oil to a record $123.93 a barrel, Ishikawa said. Rising energy prices have pushed the inflation rate higher in Europe, delaying ECB interest-rate cuts. The euro versus the dollar has had a correlation of 0.96 with the price of crude in the past 12 months. A reading of 1 would mean they moved in lockstep.

The euro weakened versus the dollar after the European Union said retail sales in the countries that share the single currency declined 1.6 percent in March from a year earlier, the biggest drop since the data began in 1995.

Pound Falls

The pound declined on speculation the BOE will lower interest rates later this year as the economy slows. U.K. house prices had the first annual decline since 1996 last month, growth in service industries slowed to a five-year low and manufacturing weakened, reports showed this week.

``The slowdown shown in recent euro-zone data is starting to weigh on the euro,'' BNP Paribas SA analysts led by Hans- Guenter Redeker wrote in a research note yesterday. Any gains in the pound are ``likely to prove short lived and limited, providing a renewed selling opportunity.''

The euro may fall to $1.48 at the end of this year, while the pound may decline to $1.92, BNP Paribas forecast.

The euro also weakened against the dollar after the Financial Times said it had reached levels that were ``unhelpful'' to both the U.S. and Europe, citing senior U.S. and European officials.

The U.S. intended the April 11 statement from the Group of Seven finance ministers and central bankers to signal it doesn't want the dollar to decline further, and sees the dollar as having been sold excessively, the FT reported, citing an unidentified senior U.S. official.

Dollar Policy

Luxembourg Prime Minister Jean-Claude Juncker, who also heads the group of euro-area finance ministers, said May 2 he's still concerned about the level of the euro, even though it's declined from a record high. Treasury Secretary Henry Paulson reiterated on May 1 his support for a ``strong dollar'' policy.

``The euro is definitely falling on the back of this FT article,'' said Ray Attrill, director of foreign-exchange research at Forecast Ltd. in Sydney. ``The U.S. is basically worried that the dollar will overshoot on the downside. It will reinforce the trend we've seen the last few days so we'll see some more euro weakness.''

The euro may fall to $1.5275 today, he said.

The dollar's advance versus the euro has gained momentum since the Federal Reserve said rate reductions to date were ``substantial'' after lowering its target lending rate on April 30 by a quarter-percentage point to 2 percent, its seventh cut since September.

Productivity Rises

U.S. productivity rose at a 2.2 percent annual rate in the first quarter after a 1.8 percent gain in the prior three months, the Labor Department said yesterday in Washington. The median forecast of economists surveyed by Bloomberg News was for an advance of 1.5 percent.

Futures on the Chicago Board of Trade show an 88 percent chance the Fed will keep borrowing costs on hold at its June 25 meeting. The balance of bets is for a reduction of a quarter- percentage point.

Oil Trades Near Record on Signs U.S. Economy May Spur Demand

By Christian Schmollinger

May 8 (Bloomberg) -- Crude oil was little changed near a record in New York on signs the U.S. economy was improving, spurring energy demand at a time when refineries are producing less fuel ahead of the peak summer demand season.

Worker productivity climbed at a higher rate in the first quarter than the previous three months, the Labor Department said yesterday. Domestic refineries operated at 85 percent last week, down from 89 percent at the same time last year, the Energy Department said yesterday. Oil jumped to a record $123.93 a barrel yesterday.

``People are surprised at the strength of the U.S. economy,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. ``They are more focused on the idea that we may have more demand than we expected. And that's going to be a big problem with the refinery runs being as soft as they are for this time of year.''

Crude oil for June delivery was at $123.56 a barrel, up 3 cents, at 9:37 a.m. in Singapore in after-hours trading on the New York Mercantile Exchange. Yesterday, futures rose $1.69, or 1.4 percent, to settle at $123.53 a barrel, the highest close since trading began in 1983.

Oil declined as low as $120.54 a barrel yesterday after an Energy Department report showed that crude supplies in the world's largest oil consumer rose more than forecast last week.

Supplies surged 5.65 million barrels, or 1.8 percent, to 325.6 million barrels last week, amid increased crude imports, an Energy Department report showed yesterday. Analysts in a Bloomberg News survey had forecast a gain of 1.63 million barrels. Gasoline inventories also rose.

Brent crude oil for June settlement was at $122.56 a barrel, up 24 cents, on London's ICE Futures Europe exchange at 8:46 a.m. Singapore time. The contract yesterday climbed $2.01, or 1.7 percent, to $122.32 a barrel. The contract touched $122.70 a barrel, a record intraday price.

Tuesday, May 6, 2008

U.S. Stocks Rise as Energy Producers, Financial Companies Gain

By Elizabeth Stanton

May 6 (Bloomberg) -- U.S. stocks rose, sending the Standard & Poor's 500 Index to a four-month high, as loosened government restrictions on Fannie Mae sparked a rebound in financial shares and oil companies advanced on record crude prices.

Fannie Mae gained, helping financials erase a 1.9 percent decline, on a regulatory decision that will enable the biggest mortgage-finance company to buy more home loans. Anadarko Petroleum Corp. climbed to a record after profit exceeded estimates and crude topped $122 a barrel. Advanced Micro Devices Inc. rallied the most since January on speculation the second- biggest maker of computer processors may be split up.

The Standard & Poor's 500 Index added 10.77, or 0.8 percent, to 1,418.26. The Dow Jones Industrial Average increased 51.29, or 0.4 percent, to 13,020.83. The Nasdaq Composite Index jumped 19.19, or 0.8 percent, to 2,483.31. Two stocks gained for each that fell on the New York Stock Exchange.

``It continues the trend where people are speculating the worst is over in terms of the financial sector,'' said Mark Bronzo, a portfolio manager at Security Global Investors in Irvington, New York, which manages $11 billion. In financials today, ``the reversal is impressive,'' he said.

The S&P 500 erased yesterday's retreat and pared its 2008 decline to less than 3.4 percent. The benchmark for U.S. equities has rebounded more than 11 percent since a 19-month low on March 10 after first-quarter earnings topped estimates at 69 percent of companies that have reported results so far, according to data compiled by Bloomberg.

Fannie Mae Gains

Fannie Mae climbed 8.9 percent to $30.81 after dropping as much as 7.3 percent. Regulators said they will loosen restrictions on Fannie Mae's capital once the company has raised $6 billion in new funding. Fannie Mae, which owns or guarantees one of every five U.S. home loans, needs fresh capital to weather credit and derivative losses that rose fivefold to $8.9 billion.

The money raised will enable Fannie Mae to ``emerge from this crisis'' in a stronger position, Chief Executive Officer Daniel Mudd said.

Fannie Mae fell earlier after posting a first-quarter loss of $2.19 billion and cutting its dividend. Freddie Mac, Fannie Mae's smaller competitor, added $1.81 to $27.33.

`Heavy Lifting'

``Fannie Mae is doing the heavy lifting it needs to do to get back into operating shape,'' said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $74 billion. ``To the extent you've got a strong player that has to do some fairly heavy lifting, it does make you wonder about how much work is going to have to be done by other firms.''

The S&P 500 Financials Index climbed 0.9 percent. Gains for the group were limited as Merrill Lynch & Co. said so-called Level 3 assets, the most difficult kind to value, climbed 70 percent in the first quarter and Legg Mason Inc. posted a bigger-than-expected loss after bailing out money-market funds hurt by subprime mortgages.

Merrill fell 0.1 percent to $51.35. Legg Mason lost 10 percent to $56.30 for the biggest drop in the S&P 500.

Anadarko rallied the most since February 2001, rising 9.4 percent to $74.53. The company reported 20 percent more first- quarter profit than analysts estimated, according to Bloomberg data, as record crude prices boosted results.

Energy companies gained the most among 10 groups in the S&P 500, adding 2.2 percent. Crude oil rose to a record $122.73 a barrel in New York on threats to supplies in Nigeria and Iraq and growing Asian fuel consumption. Supply shortfalls will probably send oil to between $150 and $200 a barrel within two years, Goldman Sachs Group Inc. analyst Arjun N. Murti said in a report.

Energy Rally

Exxon Mobil Corp., the largest U.S. energy company, rose 56 cents to $90.07. Chevron Corp., the second-biggest, added $1.25 to $96.87. Ten of the 36 energy companies in the S&P 500 rose to 52-week highs.

``Energy works even if commodity prices level off because the relative ability to generate profits here looks better than most other sectors,'' said Daniel Manion, manager of the $1.3 billion Sentinel Common Stock Fund in Montpelier, Vermont. The fund has outperformed 82 percent of similar funds over the past five years, according to Bloomberg data.

Advanced Micro rose 59 cents, or 9 percent, to $7.12 for the second-biggest gain in the S&P 500 after Anadarko. Investors are betting that the company will soon announce details of a plan to separate its manufacturing business from its chip design and development operations, according to CRT Capital Group analyst Ashok Kumar in San Francisco.

Beer Here

Molson Coors Brewing Co. climbed the most since Feb. 12, adding 7.4 percent to $57.10. The third-largest U.S. beer maker reported 13 percent more first-quarter profit than analysts estimated as sales in the U.S., Canada and U.K. grew.

About 1.23 billion shares changed hands on the NYSE, 18 percent less than the three-month daily average, according to Bloomberg data.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, gained 0.8 percent to 729.79. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 0.8 percent to 14,308.52. Based on its advance, the value of stocks increased by $137.25 billion.

Monday, May 5, 2008

Fed Survey Shows More U.S. Banks Tighten Loan Terms (Update1)

By Scott Lanman

May 5 (Bloomberg) -- The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

The quarterly Senior Loan Officers' Survey, published in Washington today, underscores the Fed's concern that $318 billion of credit losses and writedowns among financial firms is causing a credit crunch. The survey, conducted last month, also indicates that the Fed's interest-rate cuts and loans to banks have failed so far to defuse the threat to the six-year economic expansion.

``It's going to be a headwind to growth,'' said Keith Hembre, chief economist at Minneapolis-based FAF Advisors Inc., which oversees $107 billion. ``The change from being readily available and cheap to less available and more expensive is going to deter a lot of borrowing activity.''

Most banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank's quarterly survey of senior loan officers released today in Washington. The proportion of banks raising such rates rose to a net of 70 percent compared to 45 percent in a January report.

The survey data were available to central bank policy makers last week when they cut interest rates by a quarter percentage point.

The report covered 56 domestic banks and 21 foreign institutions. The American banks together have $6.1 trillion in assets, representing about 64 percent of the country's $9.5 trillion total for all domestically chartered, federally insured commercial banks.

`Downside' Risks

Policy makers last week signaled they are ready to hold off on further rate cuts as they assess the impact of the 3.25 percentage points of reductions since September. They dropped a reference to ``downside'' risks to growth from their previous statement.

At the same time, officials acknowledged in their April 30 statement that ``tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.''

Traders anticipate that the Fed will leave its main interest rate unchanged at 2 percent through October, based on futures prices on the Chicago Board of Trade.

``The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey,'' today's Fed report said.

Commercial Property

In commercial real estate, a net 80 percent of U.S. banks said they tightened lending standards, about the same as the January survey. The results of both surveys are about the highest since the central bank began seeking information on the subject in 1990. A net 35 percent of U.S. banks reported slower demand, less than January's 47 percent.

For home loans, the proportion of U.S. banks making it tougher for prime borrowers, those with the best credit, rose to about 60 percent from 53 percent. About one-fourth of U.S. banks reported slower borrowing for prime mortgages and 30 percent said nontraditional loans were weaker, both ``significantly smaller'' numbers of banks than in the January survey.

``I think we're back to 1980s lending'' in terms of acceptable credit records and down payments, David Kittle, the chairman-elect of the Mortgage Bankers Association, said today. Kittle, chief executive officer of Principle Wholesale Lending Inc. in Louisville, Kentucky, spoke at a conference hosted by the trade group in Boston.

Middle Market

The Fed's rate reductions since September have failed to put much of a dent in the cost of a mortgage. The average rate on a 30-year fixed mortgage was 6.06 percent last week, down from 6.46 percent at the start of September though up from 5.45 percent in January, according to Freddie Mac.

A net 15 percent of large U.S. banks said demand increased from large and middle-market companies for commercial and industrial loans. The respondents attributed the rise to borrowing that ``shifted to their banks from other bank or nonbank sources,'' which became ``less attractive.''

At the same time, a similar proportion said demand from small companies slowed, citing a drop in ``customers' needs to finance investment in plant and equipment,'' the Fed said.

In response to special survey questions on home-equity lines of credit, about half of U.S. banks said they tightened terms on existing loans, mainly because of declines in home values below appraised values, as well as increased defaults and changes in borrowers' finances.

Services Growth

Today's report comes amid signs the U.S. economy is weathering the housing and credit contractions. A report today showed service industries unexpectedly grew for the first time since December, while the economy as a whole expanded at a 0.6 percent annual pace in the first quarter, matching the pace of the last three months of 2007.

Fed Chairman Ben S. Bernanke is scheduled later today to speak in New York on mortgage foreclosures, his first public comments since last week's Federal Open Market Committee meeting.

Bernanke's speech coincides with the advance of legislation backed by Democrats that would create a program at the Federal Housing Administration insuring as much as $300 billion in refinanced mortgages. The House is scheduled to consider the bill on Wednesday.

Foreclosure filings rose 57 percent in March from a year earlier, according to Irvine, California-based RealtyTrac Inc.

Euro May Extend Gain on Bets ECB to Hold Rate at Six-Year High

By Bo Nielsen

May 6 (Bloomberg) -- The euro may extend its gain versus the dollar on speculation the European Central Bank will hold its main refinancing rate at a six-year high this week to control inflation.

The 15-nation currency advanced the most in almost two weeks yesterday as ECB President Jean-Claude Trichet said risk of inflation is ``significant'' and the price of oil surged above $120 a barrel. Norway's krone and the Australian and New Zealand currencies advanced against the U.S. dollar as commodities rallied.

``The ECB meeting is a catalyst for a bit of euro strength,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. The central bank ``remains very much focused on inflation.''

The euro traded at $1.5498 at 6:01 a.m. in Tokyo, after increasing 0.5 percent yesterday. It reached a record $1.6019 on April 22. The euro was little changed at 162.52 yen. The dollar traded at 104.86 yen, following a 0.5 percent drop yesterday.

A rally in commodities yesterday helped Norway's krone rise 1 percent against the U.S. currency, while Australia's dollar increased 1.3 percent and New Zealand's dollar advanced 0.7 percent. Norway is the world's fifth-biggest oil exporter. Exports of raw materials contribute about 17 percent to Australia's economy. More than a third of New Zealand's export income comes from meat, wool and dairy.

The UBS Bloomberg Constant Maturity Commodity Index rose 0.8 percent yesterday for its second straight day of gains.

ECB Rate

The ECB will leave its main refinancing rate at 4 percent when policy makers meet May 8, according to all 53 economists surveyed by Bloomberg News. The Federal Reserve cut the target rate for overnight lending by a quarter-percentage point to 2 percent on April 30, the seventh reduction since September.

``The U.S. is going to continue to follow policies that make the dollar weaker,'' said Warren Buffett, chief executive officer of Berkshire Hathaway Inc., during Omaha, Nebraska-based Berkshire's annual shareholder meeting on May 3. He also said that he feels ``no need'' to hedge against currency risk when buying large companies outside the U.S.

Inflation expectations in the euro region, measured by the difference between the yields of nominal and inflation-protected bonds, increased. The so-called breakeven rate on 10-year French inflation-linked notes rose to 2.33 percentage points yesterday, from 2.08 percentage points a year ago, reflecting the rate of inflation investors expect over the next decade.

Trichet on Inflation

``Inflation risks are significant,'' said Trichet at a press conference yesterday in Basel, Switzerland. There's ``no time for complacency.'' He chaired a meeting of central bankers from the Group of 10 industrialized nations.

The dollar briefly extended its decline against the euro yesterday after a quarterly Fed survey showed a net 70 percent of U.S. banks increased loan rates over their cost of funds for commercial and industrial borrowing. That compares with 45 percent in the January survey, the Fed said.

Traders are betting for the first time since December 2005 that the dollar will gain versus the European currency, according to figures from the Washington-based Commodity Futures Trading Commission.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, known as net shorts, was 21,315 on April 29, compared with net longs of 18,907 a week earlier.

U.S. data ``is still showing the economy is slowing while the ECB will still sound hawkish this week,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``The euro is still supported.''

Sunday, May 4, 2008

Asian Stocks Climb on Rally in Commodities; BHP Billiton Gains

By Chen Shiyin

May 5 (Bloomberg) -- Asian stocks advanced, lifting the region's benchmark to an almost four-month high, after copper and crude oil prices rallied.

BHP Billiton Ltd., the world's largest mining company and Australia's biggest oil producer, advanced in Sydney. STX Pan Ocean Co. led shipping stocks higher after the price of transporting bulk commodities jumped to the highest in almost five months. Incitec Pivot Ltd. climbed after Australia's biggest fertilizer maker said its first-half profit almost tripled.

The MSCI Asia Pacific excluding Japan Index advanced 0.1 percent to 498.41 as of 9:29 a.m. in Hong Kong, with a measure of raw material suppliers adding 1.1 percent. The regional benchmark was poised for its highest close since Jan. 15.

Markets in Japan, South Korea and Thailand are closed for holidays. Australia's S&P/ASX 200 Index added 0.5 percent. Benchmark indexes open for trading elsewhere in Asia gained.

U.S. stocks rose on May 2, rounding off the market's first three-week advance since October, after a Labor Department report showed payrolls shrank by 20,000 workers in April, less than the 75,000 forecast by economists in a Bloomberg News survey.

A measure of six metals traded on the London Metal Exchange, including copper and nickel, gained 2 percent, with copper jumping 2.3 percent. Crude oil for June delivery surged 3.4 percent to $116.32 a barrel in New York, the biggest advance in a month.

Australia Will Probably Keep Key Rate at 12-Year High (Update1)

By Jacob Greber

May 5 (Bloomberg) -- Australia's central bank probably will keep interest rates unchanged for a second month to gauge whether the highest borrowing costs in 12 years are slowing the nation's economy enough to cool the fastest inflation since 1991.

Governor Glenn Stevens will leave the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to 24 of 25 economists surveyed by Bloomberg News. One forecasts a quarter- point increase.

The central bank raised interest rates in March for the fourth time in seven months after inflation surged above the 3 percent limit of its target range. Reports in the past month show consumer and business confidence have slumped, while retail sales and home building have slowed.

``Interest rates are at or near their peaks,'' said Craig James, chief equities economist at Commonwealth Bank of Australia Ltd. ``Higher-than-expected inflation figures justify another lift in rates, but there are a few more signs that recent rate hikes are working to slow the economy.''

Most economists surveyed by Bloomberg News say Stevens will leave the benchmark rate unchanged for the rest of this year as slower household and business spending bring annual inflation back within his target range of between 2 percent and 3 percent. He raised borrowing costs in March and February.

Stevens will announce the bank's decision at 2:30 p.m. in Sydney tomorrow.

Core Inflation

Surging gasoline, food and housing costs helped push core annual inflation to 4.4 percent in the first quarter, the highest rate in almost 17 years, a report showed on April 23.

An index measuring inflation rose at a record pace in April as costs for gasoline, health services and rents surged. Consumer prices climbed 4.3 percent from a year earlier, according to a gauge published by TD Securities Ltd. today.

Higher borrowing costs, as well as tighter credit standards for more risky borrowers, are working to ``foster the moderation in demand growth that was needed to ease the pressure on inflation,'' the central bank said on April 15.

The bank will lower its forecasts for economic growth and inflation when its quarterly policy statement is released on May 9, Stevens said at his half-yearly testimony to parliament's economics committee in Sydney on April 4.

``Higher interest rates and costs for staple items are forcing highly leveraged consumers to reorganize spending priorities,'' said Joshua Williamson, an economist at TD Securities Ltd. in Sydney. ``Despite the threat of high ongoing inflation,'' the chances of Stevens cutting rates ``shouldn't be underestimated,'' he said.

Losing Momentum

Recent reports suggest the $1 trillion economy's 17th year of expansion is losing momentum. March home-building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.

Gross domestic product slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent.

Households, facing higher gasoline and food costs, have also been battered by extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.

Retail sales excluding food slid 0.3 percent in March from February, according to Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.

Global Rates

Australia's central bank has raised borrowing costs 12 times since May 2002, when the rate was 4.25 percent. By contrast, Federal Reserve Chairman Ben S. Bernanke lowered the benchmark U.S. interest rate by a quarter point to 2 percent last week, the seventh cut since September. The U.K. and Canada have also cut rates this year.

Concern that the lowest unemployment rate in 33 years is driving up wages was a key reason Australian policy makers raised borrowing costs in March.

The Reserve Bank forecast in March that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers in Australia.

The jobless rate probably held at 4.1 percent in March after employers added 10,000 workers, according to a survey of 25 economists. The unemployment report will be released on May 8.

Bloomberg Survey

Following is a table of forecasts for the chance of an interest-rate increase tomorrow, the rate on June 3 and at the end of the third and fourth quarters:

Chance May 6 June 3 Q3 Q4
of move Rate Rate
Median 20% 7.25% 7.25% 7.25% 7.25%
High Forecast 55% 7.5% 7.5% 7.50% 7.50%
Low Forecast 5% 7.25% 7.25% 7% 6.75%
No. of replies 25 25 25 25 25
4Cast 20% 7.25% 7.25% 7.25% 7.25%
ABN Amro 20% 7.25% 7.25% 7.25% 7.25%
AMP Capital 30% 7.25% 7.25% 7.25% 7.25%
ANZ Bank 25% 7.25% 7.25% 7.25% 7.25%
Ausbil Dexia 30% 7.25% 7.25% 7.25% 7.25%
Barclays Capital 20% 7.25% 7.25% 7.25% 7.25%
BT Financial 12.5% 7.25% 7.25% 7.25% 7.25%
Bank of America 5% 7.25% 7.25% 7.5% 7.5%
Citigroup 25% 7.25% 7.25% 7.25% 7.25%
Commonwealth Bank 55% 7.5% 7.5% 7.5% 7.5%
Deutsche Bank 40% 7.25% 7.25% 7.5% 7.5%
Goldman Sachs 35% 7.25% 7.25% 7.25% 7.25%
ICAP Australia 33% 7.25% 7.25% 7.5% 7.5%
JPMorgan Chase 30% 7.25% 7.25% 7.25% 7.25%
Lehman Brothers 10% 7.25% 7.25% 7% 6.75%
Macquarie 15% 7.25% 7.25% 7.5% 7.5%
Merrill Lynch 25% 7.25% 7.25% 7.25% 7.25%
National Australia 15% 7.25% 7.25% 7.25% 7.25%
Nomura Australia 30% 7.25% 7.25% 7.5% 7.5%
RBC Capital 10% 7.25% 7.25% 7.25% 7.25%
St. George Bank 20% 7.25% 7.25% 7.25% 7.25%
Suncorp Banking 10% 7.25% 7.25% 7.25% 7.50%
TD Securities 30% 7.25% 7.25% 7.25% 7%
UBS Australia 20% 7.25% 7.25% 7.25% 7.25%
Westpac Bank 20% 7.25% 7.25% 7.25% 7.25%

Thursday, May 1, 2008

U.S. Stocks Climb, Led by Shares of Banks, Technology Companies

By Eric Martin

May 1 (Bloomberg) -- U.S. stocks rose to the highest level since January as a rally in the dollar and better-than-estimated technology earnings prompted investors to shun commodities and shift into shares of banks, retailers and computer companies.

Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. led financial stocks to a two-month high as the dollar advanced 1.1 percent against the euro on speculation the Federal Reserve is done cutting interest rates. Symantec Corp. surged the most in six years after the world's biggest maker of security software said fourth-quarter profit tripled, while Comcast Corp. posted its steepest rise since 2002 on new Internet-access subscribers.

The Standard & Poor's 500 Index jumped 23.75 points, or 1.7 percent, to 1,409.34, its first close above 1,400 since Jan. 14. The Dow Jones Industrial Average added 189.87, or 1.5 percent, to 13,010, the first close above 13,000 since Jan. 3. The Nasdaq Composite Index rose 67.91, or 2.8 percent, to 2,480.71. Three stocks rose for each that fell on the New York Stock Exchange.

``There's a lot of money in the short-dollar, long- commodity trade and it doesn't take much to whipsaw back,'' said Jon Fisher, a Minneapolis-based portfolio manager at Fifth Third Asset Management, which oversees about $22 billion. ``That money's got to rotate somewhere else, and today it's rotating into technology and financials, two laggard sectors this year.''

Dollar Rally

The dollar advanced to a five-week high against the euro and increased versus the Japanese, Swiss, British and other currencies a day after the Fed cut its benchmark rate by a quarter point to 2 percent and signaled that if may be finished reducing borrowing costs. All 10 industry groups in the S&P 500 rose today except for energy and commodity producers as a better-than-forecast report on manufacturing also lifted stocks.

The Dow average pared its yearly decline to 1.9 percent and the S&P 500 reduced its 2008 loss to 4 percent. The S&P 500 yesterday completed its biggest monthly gain sine 2003, climbing 4.8 percent in April, as results from Google Inc. to Intel Corp. to Boeing Co. and American Express Co. eased concern profits will deteriorate.

Financial shares climbed 3.9 percent as a group today, contributing the most out of 10 industry groups to the S&P 500's advance.

Bank of America, the second-biggest U.S. bank by assets, rallied $1.85 to $39.39. Citigroup, the largest, climbed $1.04, or 4.2 percent, to $25.99. JPMorgan Chase, the No. 3, added $1.60, or 3.4 percent, to $49.25.

Financials also got a boost after Kuwait's $250 billion sovereign wealth fund said it may increase its stakes in Merrill Lynch & Co. and Citigroup as it pursues investments in U.S. and European companies battered by subprime-mortgage related losses.

`A Lot of Opportunities'

``The valuation in the markets in the U.S. and Europe, we think, has created a lot of opportunities,'' Bader al-Saad, the Kuwait Investment Authority's managing director, said in an interview with Bloomberg Television. ``We have confidence in the management'' of Citigroup and Merrill, he said.

Merrill, the third-largest securities firm, rose $2.56, or 5.1 percent, to $52.39.

Companies in the S&P 500 trade for an average 15.3 times their estimated profit in the next 12 months.

MBIA Inc. posted the steepest advance in the S&P 500 after the world's largest bond insurer, which has lost 83 percent of its value in the past 12 months, said it has enough capital to retain its AAA rating. MBIA gained $1.34, or 13 percent, to $11.74.

Symantec, Comcast

Symantec had the second-steepest rise in the S&P 500, gaining $2.12, or 12 percent, to $19.34. The world's biggest maker of security software said quarterly profit tripled, beating analysts' estimates, after businesses and consumers renewed subscriptions and bought more programs to protect information.

Comcast rose $1.76, or 8.6 percent, to $22.31. The largest U.S. cable-television company said first-quarter sales rose 14 percent, more than analysts estimated, on new Internet-access subscribers. Profit fell 13 percent from a year earlier, when results were bolstered by a one-time gain.

The advance in technology companies was led by Symantec, Intel Corp. and SanDisk Corp.

Intel added $1.03, or 4.6 percent, to $23.29. The world's largest chipmaker is stepping up production to meet higher-than- expected demand for Atom, a new processor for low-cost portable computers. Intel Chief Executive Officer Paul Otellini is using the processors to attract consumers who want stripped-down computers for word processing and surfing the Internet.

SanDisk gained $1.94, or 7.2 percent, to $29.03. The biggest maker of memory for digital cameras expects a sales boost from U.S. consumers spending their federal tax rebate checks, Chief Executive Officer Eli Harari said.

`Pretty Stable'

Chipmakers also climbed after the Semiconductor Industry Association said global semiconductor sales rose 3.8 percent in the first quarter as consumers bought more electronic devices.

``It's reassurance for the market that sales did not fall off dramatically in the last quarter,'' said Michael Shinnick, manager of a $93 million mutual fund with the ability to bet against companies, at 1st Source Bank in South Bend, Indiana. The firm manages $3.5 billion. ``As an industry, things are still pretty stable.''

Profits at the 41 technology companies in the S&P 500 that have reported first-quarter earnings so far have been 6.9 percent higher than analysts estimated, trailing only companies that sell consumer-discretionary products, including clothing and electronics, in beating projections.

`Rising Tide'

``The technology names are one of those areas reporting fairly good earnings, and that's being reflected in the stock prices,'' said Randy Bateman, who oversees $15 billion as chief investment officer of Huntington Bancshares Inc. in Columbus, Ohio. The firm allocates 17 percent of its assets to technology stocks and owns shares of Oracle Corp., Microsoft Corp. and Cisco Systems Inc. ``It looks like it's not just centered in one name, but that the rising tide carries all boats.''

Energy shares fell the most in the S&P 500, dropping 2.2 percent as a group, following a third day of declining oil prices and lower-than-forecast earnings at Exxon Mobil Corp.

Exxon's first quarter net income rose to $10.9 billion, or $2.03 a share, from $9.28 billion, or $1.62, a year earlier, the company said. Per-share profit at the largest U.S. oil producer was 10 cents short of the average analyst estimate in a Bloomberg survey. Exxon tumbled $3.37, or 3.6 percent, to $89.70.

Oil Retreats

Oil retreated as the dollar rose. Crude for June delivery lost 94 cents, or 0.8 percent, to $112.52 a barrel. Chevron Corp., the second-biggest U.S. energy company, slipped $1.21 to $94.94.

Apache Corp., the Houston-based oil and natural-gas producer that operates on five continents, fell after reporting first-quarter profit of $2.99 a share, missing the $3.02 average estimate of analysts surveyed by Bloomberg. Apache lost $8.27, or 6.1 percent, to $126.41.

Raw-materials producers retreated as gold, silver and copper retreated. Freeport-McMoRan Copper & Gold Inc., the world's second-largest producer of copper, lost $5.79, or 5.1 percent, to $107.96. Newmont Mining Corp., the world's third- largest gold producer, dropped 98 cents, or 2.2 percent, to $43.23.

Airlines Gain

An index of airlines advanced for a sixth day, the longest streak of consecutive gains in more than a year, after people familiar with the talks said American Airlines and British Airways Plc are in discussions to broaden their Oneworld alliance to add Continental Airlines Inc. and seek antitrust immunity to set prices and schedules.

AMR Corp., American's parent, gained $1.13, or 13 percent, to $9.90. Continental added $1.27, or 7.1 percent, to $19.25.

Home Depot Inc. gained the most in a month, rising $1.07, or 3.7 percent, to $29.87. The world's biggest home-improvement retailer will eliminate 1,300 jobs, close 15 stores and scrap plans for 50 as the company tries to catch up to Lowe's Cos. in customer service. The company said it will slow its expansion of floor space to 1.5 percent next year from 2.5 percent this year.

An index of retailers in the S&P 500 gained 3 percent on prospects a stronger dollar will boost consumer spending.

Target Corp., the second-largest U.S. discount chain, gained $1.11, or 2.1 percent, to $54.24.

Las Vegas Sands Corp. dropped $4.29, or 5.6 percent, to $71.93. The world's largest casino company by market value posted an unexpected first-quarter loss as revenue rose less than analysts estimated.

Economy Watch

Industrial shares climbed 1.5 percent as a group after the Institute for Supply Management said its manufacturing index was 48.6 in March, higher than the reading of 48 projected by economists. Honeywell International Inc., the world's largest maker of airplane instruments, rose $1.27, or 2.1 percent, to $60.67.

The Labor Department reported that first-time claims for unemployment insurance rose more than forecast last week, to 380,000, and the total number of Americans receiving benefits climbed to 3.019 million, the highest level since April 2004. The inflation measure tracked by the Federal Reserve, which strips out food and fuel prices, increased to 0.2 percent in March, twice the rate predicted by economists in a Bloomberg survey.

JDS Uniphase Corp. lost $2.31, or 16 percent, to $12, the sharpest retreat in the S&P 500. The maker of equipment for testing telecommunications networks forecast sales that missed analysts' estimates.

About 1.39 billion shares traded on the New York Stock Exchange, 7.5 percent less than the three-month daily average.

The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, decreased 9.2 percent to 18.88. The so-called VIX gauges the cost of insuring against declines in the S&P 500.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, climbed 1.9 percent to 729.75. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 1.6 percent to 14,220.24. Based on its advance, the value of stocks increased by $286 billion.