Tuesday, January 27, 2009

German January Business Confidence Unexpectedly Rises (Update2)

By Christian Vits

Jan. 27 (Bloomberg) -- German business confidence unexpectedly rose for the first time in eight months after the European Central Bank lowered interest rates and the government doubled its economic stimulus package to fight the recession.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83 from 82.7 in December. Economists expected a drop to 81, the median of 37 forecasts in a Bloomberg News survey shows.

Chancellor Angela Merkel’s coalition this month agreed to spend about 80 billion euros ($105 billion) over two years to stem the worst recession since World War II. The International Monetary Fund expects Germany’s economy, Europe’s largest, to contract 2.5 percent this year.

The increase in the Ifo index “is a small ray of hope, but it doesn’t necessarily mean that the worst is over,” said Holger Schmieding, chief European economist at Bank of America Corp. in London. “The outlook remains for the economy to shrink significantly in the first and second quarters, bottom out in the third and start to recover in the fourth.”

The euro rose more than half a cent to $1.3330 after the Ifo report. While a sub-index measuring executives’ assessment of current conditions fell to 86.8 from 88.8, a gauge of expectations rose to 79.4 from 76.9.

Fiscal Stimulus

The government’s spending plan amounts to about 1.6 percent of gross domestic product, making it the biggest stimulus program in Europe. The cost of crude oil has dropped almost 70 percent from a July peak of $147 a barrel, increasing consumers’ and companies’ purchasing power.

Still, the global recession has damped export demand, prompting companies to curb production and cut jobs. German manufacturingorders extended their worst decline on record in November, industrial production fell for a third straight month and exports plunged 10.6 percent from October.

Volkswagen AG and Bayerische Motoren Werke AG said this month they’ll reduce hours for a total of 86,000 workers to rein in production as the global slowdown saps demand for vehicles.

“Nobody can make reliable forecasts for 2009,” Lothar Steinebach, Chief Financial Officer at Henkel AG, the German maker of Persil detergent, said Jan. 24. “At the moment we cannot call the bottom of this downturn.”

Stabilizing business expectations may pave the way for an economic recovery to begin in the second half of the year, said Andreas Scheuerle, an economist at DekaBank in Frankfurt. The ECB will cut interest rates further, “but won’t keep up the speed with which it has acted until now,” he said.

The ECB this month cut its benchmark lending rate by half a percentage point to 2 percent, the fourth reduction since early October, and signaled another move is likely in March.

Bundesbank President Axel Weber, a member of the ECB’s Governing Council, said yesterday he expects a first-quarter contraction in Germany to be “followed by a phase of stabilization and in the next year a slight revival.”

Thursday, January 22, 2009

Pound Nears Record Low Versus Yen on Nationalization Concerns

By Lukanyo Mnyanda

Jan. 22 (Bloomberg) -- The pound declined for a fourth day against the yen, trading near a record low, on speculation a deepening financial crisis will force the U.K. government to seize control of the country’s banks.

The pound was also close to a 23-year low versus the dollar before a government report tomorrow that may show the British economy shrank the most since 1990. The yen gained against the euro and the dollar as a French report showed consumer spending fell in December more than economists expected. The Swiss franc weakened after Swiss National Bank Vice President Philipp Hildebrand pledged to sell “unlimited” amounts of the currency to curb its appreciation.

“It’s the economy, and everyone is so negative on sterling at the moment,” said Lee Ferridge, a senior macro strategist in London at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions. “I’m not prepared to buy it right now.”

The pound fell to 122.07 yen as of 7:02 a.m. in New York, from 124.88 yesterday, when it slid to a record low of 119.42. The U.K. currency declined to $1.3759 from $1.3955. It yesterday touched $1.3622, the lowest level since September 1985. Against the euro, the pound dropped to 94.17 pence from 93.27.

Japan’s currency climbed to 115.28 per euro from 116.54 yesterday, when it reached 112.12, the strongest since March 2002. The yen gained to 88.72 a dollar, from 89.49 yesterday after advancing to 87.13, the highest since July 1995. The Swiss franc dropped to 1.1567, from 1.1532 per dollar and was at 1.5019 against the euro, from 1.5022.

Sterling Losses

Investors should consider reducing “long” euro positions versus the pound on speculation the euro-area economic slump will deepen, said Ferridge, who expects the pound to keep weakening versus the dollar. A long position is a bet that the price of a currency or security will rise.

Sterling lost 5.5 percent versus the dollar and 4.8 percent against the euro in the past five days as the U.K. government’s plan for a second bank bailout in three months raised concern the financial crisis is worsening.

Britain’s currency slumped a fifth day against the euro, even after French Finance Minister Christine Lagarde said the Bank of England needs to do more to prevent its depreciation.

The U.K. central bank hasn’t been “very efficient in providing more support for the British currency,” Lagarde told lawmakers in Paris yesterday.

The pound’s slide indicates investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co. strategists including London-based Emma Lawson wrote in a report today.

Further Deterioration

Britain’s gross domestic product probably contracted 1.2 percent in the fourth quarter from the previous three months, according to a Bloomberg News survey of economists before tomorrow’s report from the Office for National Statistics. The pound stayed lower after the Financial Services Authority said U.K. home repossessions rose 92 percent in the third quarter.

“A lot of negative news has already been priced into sterling,” Brian Kim, a UBS strategist in Stamford, Connecticut, wrote in a report yesterday. “We would stress caution before chasing further moves to the downside, especially on the euro axis.”

The Bank of England will lower its benchmark rate by a half-percentage point to 1 percent at its Feb. 5 meeting, a separate Bloomberg survey showed.

Gains in the yen were tempered after Japan’s top currency official said he didn’t rule out action to curb its advance.

Falling Exports

“We are closely monitoring movements in the currency market,” Naoyuki Shinohara, vice finance minister for international affairs, told reporters in Tokyo today. Asked whether Japan will intervene to curb the yen’s advance, Shinohara said he had no comment.

Bank of Japan Governor Masaaki Shirakawa said in Tokyo today that the yen’s gains hurt Japanese exporters and the economy in the short term.

Japan’s exports plunged a record 35 percent in December from a year earlier, a report from the Finance Ministry showed today. China’s economy expanded 6.8 percent last quarter from a year ago, the slowest pace in seven years, its statistics bureau said. South Korea’s economy shrank a larger-than-expected 5.6 percent in the fourth quarter, the Bank of Korea said.

Toyota Motor Corp., Sony Corp. and Honda Motor Co. are cutting jobs and closing production lines as profits and sales dwindle.

Geithner Comments

The Bank of Japan kept the benchmark rate at 0.1 percent in a unanimous vote today. The decision was forecast by economists surveyed by Bloomberg. Japan has intervened in the currency markets, selling a record 20.4 trillion yen ($229 billion) in 2003, and 14.8 trillion yen in the first quarter of 2004.

“The BOJ probably won’t accept the yen breaching the 85 level” against the dollar, Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank, said in a telephone interview yesterday. “Risk aversion will remain at elevated levels and the yen will continue to be seen as a safe haven.”

Timothy Geithner, U.S. President Barack Obama’s nominee for Treasury Secretary, said at his confirmation hearing yesterday that it’s important for America’s biggest trading partners to refrain from setting or manipulating exchange rates.

The euro slid to $1.2987 after a French report showed that consumer spending on manufactured goods, which accounts for about 15 percent of the economy, declined 0.9 percent from November. Economists expected a 0.2 percent drop, a Bloomberg survey showed.

The franc weakened against the dollar after Hildebrand said in a speech in St. Gallen, Switzerland, late yesterday the central bank “is able to sell unlimited Swiss francs versus another currency.”

Tuesday, January 13, 2009

Bernanke Urges ‘Strong Measures’ to Stabilize Banks (Update7)

By Craig Torres

Jan. 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth.

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said in a speech today at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

Bernanke’s remarks indicate he may be seeking to influence deliberations among lawmakers and President-elect Barack Obama’s economic aides on how to deploy the next $350 billion of the financial-rescue fund approved in October. While some Democrats have focused on offering aid to troubled homeowners, the Fed chief’s comments show he’s more concerned about a continued choking off of credit to companies and households.

Bernanke “is waking up to the reality that it is worse than he thought,” said Janet Tavakoli, president and founder of Tavakoli Structured Finance in Chicago. “We don’t have any investment banks that are doing just fine. The whole situation is very tenuous.”

The Fed chairman recommended three approaches on troubled assets. Public purchases of the bad assets are one possibility, as was originally planned under U.S. Treasury Secretary Henry Paulson’s Troubled Asset Relief Program, or TARP.

Troubled Assets

The government could also agree to absorb, in exchange for warrants or a fee, part of the losses on a specified portfolio of troubled assets, he said. Regulators used that method recently with their bailout of Citigroup Inc.

Another measure “would be to set up and capitalize so- called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad banks,” he said.

While the U.S. Treasury has already channeled $350 billion in taxpayer funds to recapitalize banks and rescue companies including American International Group Inc. and Citigroup, financial stocks have been hammered in recent days amid deepening concern about credit losses.

The Standard & Poor’s 500 Index rose 0.2 percent to 871.79 in New York today, as a rebound in oil prices lifted energy producers.

Speaking separately today, Fed Vice Chairman Donald Kohn urged using the second half of the $700 billion TARP to reduce foreclosures, help revive credit markets and continue direct aid to banks.

‘Preventable Foreclosures’

“Although a number of efforts are under way to address the problem of preventable foreclosures, more needs to be done,” Kohn said in testimony prepared for a House Financial Services Committee hearing.

Bernanke’s warning about toxic assets is “a call to use the second half of TARP for what it was intended for,” said Christopher Low, chief economist at FTN Financial in New York. “It was sold as something to get the mortgage market functioning again, which is something Congress would like to see because that gets back to homeowners.”

Obama asked President George W. Bush yesterday to inform Congress of the intent to release the second half of the $700 billion bailout fund. Lawrence Summers, the incoming White House economic director, pledged changes in how the TARP will be used, without offering specifics in a letter to congressional leaders.

Slumping Economy

Obama is pressing Congress for a stimulus plan of about $775 billion, including tax cuts and spending on everything from roads and schools to the energy network, to help pull the world’s largest economy out of a slump that’s in its second year.

Economists slashed forecasts for U.S. growth and projected the Fed won’t be able to start raising interest rates until 2010, according to a Bloomberg News survey published today. The economy will shrink 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in the survey taken from Jan. 5 to Jan. 12.

Bernanke also said that efforts to reduce preventable foreclosures “could strengthen the housing market and reduce mortgage losses” and increase financial stability.

The Fed chairman said the favorable treatment that financial institutions are receiving from the government is “unavoidable” because the economy needs credit to grow. Still, aid should be accompanied by stronger supervision and regulation, he said.

“Financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking,” he said. “It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”

Hampered Policy Makers

Bernanke reiterated his call for a regulatory procedure for resolving a large, failing nonbank institution. The absence of such a process hampered policy makers during the failures of Bear Stearns Cos. and Lehman Brothers Holdings Inc. last year.

“A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets,” Bernanke said. “The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.”

The Fed chairman’s speech also presented a narration of the central bank’s response to the crisis so far, and he said the U.S. central bank still has “powerful tools” to influence growth and prices.

Too Risky

Bernanke has expanded the size and types of assets on the Fed’s balance sheet more than any other chairman in the institution’s history. During the past year he increased the Fed’s holdings by more than $1 trillion, in part with credits that banks and brokers considered too risky.

He said the Fed can continue to use communication to guide markets on how the central bank’s economic outlook is likely to shape their policy.

The central bank cut its main interest rate to as low as zero last month and pledged to expand its assets if necessary. The Fed plans to buy as much as $600 billion of bonds and mortgage-backed securities sold by federally chartered mortgage finance companies.

The Federal Open Market Committee is also considering purchases of longer-term Treasury securities. “In determining whether to proceed with such purchases, the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets,” Bernanke said.

Bolster Markets

Fed officials will begin a program next month to bolster securitization markets for consumer credit. The Term Asset-Backed Securities Loan Facility, the Fed’s newest emergency program to increase liquidity, will finance up to $200 billion in securities backed by loans to small businesses, students, credit-card holders and car buyers. The facility has $20 billion of support from the U.S. Treasury.

If the program proves successful, “its basic framework can be expanded to accommodate higher volumes of additional classes of securities as circumstances warrant,” Bernanke said.

The Fed will “unwind” its emergency lending programs “when credit markets and the economy have begun to recover,” Bernanke said. Policy makers can then return to the “traditional means of making monetary policy,” setting a target for the federal funds rate.

Monday, January 12, 2009

Euro Falls Versus Dollar, Yen on Speculation ECB Will Cut Rates

By Anchalee Worrachate and Ron Harui

Jan. 12 (Bloomberg) -- The euro fell for a second day against the dollar as the International Monetary Fund’s Managing Director Dominique Strauss-Kahn said Europe is “underestimating the needs” of fiscal stimulus for the economy.

The currency also dropped to a one-month low versus the yen as traders increased bets the European Central Bank will cut its main interest rate to the lowest level since 2005 this week to help pull the 16-nation economy out of a recession. The yen rose against all 16 major currencies tracked by Bloomberg as falling Asian and European stocks damped demand for carry trades.

“The way to play it in the near term is to short the euro going into the announcement because the likelihood is that the ECB is going to cut,” said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “My preference is short the euro against the yen. Economic reports throughout the week are likely to add to the environment of high risk aversion.”

The euro dropped to $1.3342 as of 8:43 a.m. in London, from $1.3476 in New York on Jan. 9. The currency declined to 120.28 yen from 121.81 and traded as low as 120.11, the weakest since Dec. 12. Against the British pound, the euro rose to 89.16 pence from 88.78 pence. The yen strengthened to 90.13 per dollar, from 90.39 last week.

The yen strengthened to 62.52 against Australia’s dollar from 63.59 and strengthened to 52.79 versus New Zealand’s dollar from 53.49 as investors trimmed holdings of higher-yielding assets funded in Japan.

ECB Futures

The yield advantage for two-year German government bonds over those of Japan narrowed to 1.13 percentage points, the least in 18 years, according to data compiled by Bloomberg.

The euro may weaken to $1.30 to the dollar and 117 yen by the end of first quarter, according to Calyon. The European common currency lost 5.2 percent against the yen, 4.5 percent against the dollar and 7.9 percent against the British pound this year.

Korea’s won fell 1.2 percent to 1,358.75 per dollar, according to Seoul Money Brokerage Services Ltd., after the Hankyoreh newspaper reported, citing a senior Bank of Korea official it didn’t identify, that the economy shrank more than 4 percent in the final quarter of 2008.

The euro dropped for a sixth day against the yen as traders bet the ECB will cut its 2.5 percent benchmark interest rate by as much as 0.75 percentage point on Jan. 15. The implied yield on the Eonia forward contract fell to 1.748 percent on Jan. 9 from 1.813 percent on Jan. 8. Eonia is the euro overnight index average.

‘Soft’ Data

“The recent run of soft euro-zone data has heightened expectations that the ECB will cut,” Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a research note today. “Concern about the euro-zone outlook will likely keep the euro-dollar defensive early this week.”

The IMF’s Strauss-Kahn warned there will be “some decrease” in the fund’s economic forecasts. In November, the IMF predicted global growth of 2.2 percent this year, with U.S. gross domestic product shrinking by 0.7 percent, Japan’s by 0.2 percent and the euro area’s by 0.5 percent. He spoke in a Jan. 9 interview with Bloomberg News.

The ECB cut its main refinancing rate by 1.75 percentage points in the fourth quarter, while the Federal Reserve reduced its benchmark rate by 2 percentage points to as low as zero in the same period.

Scandinavian Currencies

The world’s biggest foreign-exchange traders are snapping up Sweden’s krona and Norway’s krone.

Current-account surpluses and forecasts by the Organization for Economic Co-operation and Development that Nordic economies will avoid the worst of the global recession made the currencies Goldman Sachs Group Inc.’s top picks for 2009, with potential gains of more than 17 percent.

Deutsche Bank, the biggest trader in the $3.2 trillion-a- day foreign-exchange market, said last week the krona and krone are “well placed” for a rebound.

“It’s pretty clear the Scandinavian currencies weakened excessively last year,” said Thomas Stolper, a currency analyst at Goldman Sachs in London. “These economies should hold up better than euroland and with improvements in market conditions some of this misalignment will be reversed.”

Sweden’s krona declined to 7.9790 per dollar from 7.9232 on Jan. 9, while Norway’s krone fell to 7.0327 from 6.9908.

Russia’s ruble may retreat 10 percent against its dollar- euro basket this month as companies and banks buy foreign currency to repay more than $80 billion of debt this year, according to Societe Generale SA.

U.S. Retail Sales

The ruble weakened to 31.0015 per dollar, the lowest level since May 2003, before trading at 30.9545, according to data compiled by Bloomberg.

Japan’s currency gained for a fourth day against the Australian and New Zealand dollars before a U.S. government report this week that may show retail sales contracted for a fifth month in December, adding to signs a recession in the world’s largest economy is deepening.

Sales at U.S. retailers declined 1.2 percent last month, capping the longest stretch of declines since records began in 1992, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the report on Jan. 14.

Asian stocks fell, following losses in Europe and the U.S. on Jan. 9. The MSCI AC Asia-Pacific excluding Japan Index of regional shares dropped 2.8 percent.

“We expect the Australian dollar to head lower against the dollar and the yen in line with weaker equity markets,” analysts led by David Woo, London-based global head of foreign- exchange strategy at Barclays Capital, wrote in a research note today.

‘Significant Response’

Any losses in the dollar may be limited as U.S. President- elect Barack Obama is making “significant” changes to his economic stimulus program after members of his own party called elements of the plan inadequate, according to lawmakers.

“He’s clearly setting up expectations for quite a significant response,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We may see the dollar recover further ground over the course of this week.”

The dollar may rise to $1.3300 per euro this week, Morriss said.

Obama’s plan for a two-year stimulus program of about $775 billion ran into turbulence in Congress last week when lawmakers criticized elements including a job-creation tax incentive and the share dedicated to tax cuts. Some said Obama’s plan wouldn’t do enough to reduce the nation’s dependence on foreign oil while others called for more infrastructure spending.

Sunday, January 4, 2009

Gold May Rise for Fifth Week as Investors Seek Store of Value

By Pham-Duy Nguyen

Jan. 5 (Bloomberg) -- Gold may rise for the fifth straight week on speculation that the recession will deepen in 2009 and global political tensions will heighten, boosting the appeal of the precious metal as a store of value.

Sixteen of 24 traders, investors and analysts surveyed from Mumbai to Chicago from Dec. 30 through Jan. 2 advised buying gold, which rose almost 1 percent last week to $879.50 an ounce in New York. Four said to sell, and four were neutral.

Gold climbed 5.5 percent in 2008, while the Standard & Poor’s 500 Index fell 38 percent and the Reuters/Jefferies CRB Index of 19 raw materials dropped 36 percent. The metal gained for an eighth straight year.

Most analysts surveyed from Dec. 24 to Dec. 26 anticipated gold’s gains last week. The survey has forecast prices accurately in 145 of 244 weeks, or 59 percent of the time.

Papademos Says ECB May Cut Rates If Inflation Slows (Update1)

By Scott Lanman and Simon Kennedy

Jan. 4 (Bloomberg) -- European Central Bank Vice President Lucas Papademos said further interest rate cuts may be necessary if inflation keeps slowing.

If price stability is threatened by weakening inflation “an easing of monetary policy could be warranted in order to keep inflation over the medium term at levels close to but below 2 percent,” Papademos said in a speech at a conference of economists in San Francisco today.

Having reduced the ECB’s key interest rate by 175 basis points since early October to 2.5 percent, the bank’s policy makers enter the New Year under pressure to cut more deeply amid Europe’s first recession in 15 years. A report scheduled for release next week will probably show inflation fell below the ECB’s target of just below 2 percent in December for the first time since July 2007.

While pledging that inflation would not be allowed to fall “significantly” below 2 percent for a protracted period, Papademos said any rate cut “to low levels must be judged with special care because of its longer term implications for price stability.” Similar comments from other officials have prompted some investors and economists to bet the ECB will leave its key rate unchanged when its governing council next convenes Jan. 15.

“The ECB will do what is necessary to ensure that medium- term inflation will be in line with our definition of price stability,” Papademos said.

‘Remain Weak’

The euro-area economy is likely to “remain weak” this year and may even contract in the first half, Papademos said. While inflation could “drop considerably” around the middle of the year, the risk of deflation is “nil,” he said.

The ECB last month predicted its 22-nation economy would contract about 0.5 percent this year, the first annual decline since the euro began trading a decade ago. Economists at Bank of American Corp. are among those anticipating an even weaker performance with a prediction for a 2.5 percent shrinkage.

Retail sales fell for a seventh month in December, manufacturing shrank at a record pace and lending to the private sector stagnated, reports showed in the past week. Data scheduled for release on Jan. 6 will show the inflation rate fell to 1.8 percent in December from 2.1 percent the previous month, according to the median of 20 forecasts given by economists.

Recent data confirm the economy faces downside risks, yet “do not suggest that the outlook for medium-term growth in the euro-area is likely to fall below the lower range” of the ECB’s forecasts, Papademos said. The foot of the ECB’s range of predictions is for the economy to contract 1 percent this year before growing 0.5 percent next year.

Defended the ECB

Papademos defended the ECB for not cutting interest rates quicker, arguing that inflation risks had been “on the upside and were increasing” until the middle of last summer. The bank’s willingness to then pare rates at the fastest pace in its history showed it had “responded in a timely manner to diminished inflation risks,” he said.

The financial crisis has resulted in a “growing recognition” that bank regulation needs to be strengthened and consolidated in the euro area, he said. In an interview published yesterday with Germany’s WirtschaftsWoche magazine, he said that may eventually mean the ECB and its network of regional central banks win new powers to supervise banks whose businesses spread across national borders.

“Enhancement of the current supervisory framework should be fully exploited,” he said today.