FOREX-Yen slumps to 20-mth low following LDP victory

Dec 17 (Reuters)

 The yen fell to its lowest level in over a year-and-a half against the U.S. dollar on Monday as part of a broad skid after Japan's conservative LDP party, pledged to hyper-easy monetary policy, won a landslide victory at an election.

The dollar rose as far as 84.48 yen, reaching its highest since April 2011, from around 83.50 late in New York on Friday. The euro jumped to around 111.30 yen from 109.81.

The higher-yielding Australian dollar climbed above 89.00 yen for the first time since May 2011.
Japan's conservative Liberal Democratic Party (LDP) surged back to power in an election on Sunday just three years, giving ex-Prime Minister Shinzo Abe a chance to push his radical economic recipe.

Abe has called for "unlimited" monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000.
The Bank of Japan meets later this week and analysts expect the central bank will ease policy further to support an economy already in recession.

Soros Buying Gold as Record Prices Seen on Stimulus

By Nicholas Larkin and Debarati Roy - Nov 21, 2012 5:39 AM GMT+0800 Gold’s 12-year rally, the longest in at least nine decades, is poised to continue in 2013 as central bank stimulus spurs investors from John Paulson to George Soros to accumulate the highest combined bullion holdings ever. Enlarge image Soros Buying Gold as Record Prices Seen on Stimulus. The metal will rise every quarter next year and average $1,925 an ounce in the final three months, or 11 percent more than now, according to the median of 16 analyst estimates compiled by Bloomberg. Paulson & Co. has a $3.66 billion bet through the SPDR Gold Trust, the biggest gold-backed exchange- traded product, and Soros Fund Management LLC increased its holdings by 49 percent in the third quarter, U.S. Securities and Exchange Commission filings show. Central banks from Europe to China are pledging more steps to boost growth, raising concern about inflation and currency devaluation. Investors bought 247.5 metric tons through ETPs this year, exceeding annual U.S. mine output. While both sides said talks Nov. 16 between President Barack Obama and Congress over the so-called fiscal cliff were “constructive,” the Congressional Budget Office has warned the U.S. risks a recession if spending cuts and tax rises aren’t resolved. “We see gold as a hedge against the follies of politicians,” said Michael Mullaney, who helps manage $9.5 billion of assets as chief investment officer at Fiduciary Trust in Boston. “It’s a good time to garner some protection in portfolios by having some real asset like gold.” Longest Streak Gold advanced 11 percent to $1,728.85 in London this year, headed for a 12th consecutive annual gain, the longest streak in data compiled by Bloomberg going back to 1920. Prices reached a record $1,921.15 in September 2011. The Standard & Poor’s GSCI gauge of 24 commodities slipped 0.3 percent and the MSCI All- Country World Index (MXWD) of equities climbed 8.2 percent. Treasuries returned 2.7 percent, a Bank of America Corp. index shows. Bullion held through ETPs, the first of which listed in 2003, reached a record 2,604.2 tons yesterday, valued at $144.9 billion. That exceeds the official reserves of every nation except the U.S. and Germany, World Gold Council data show. The SPDR Gold Trust (GLD) alone holds 1,342.2 tons. Soros increased his investment in the trust to 1.32 million shares in the third quarter, the most since 2010, a Nov. 14 SEC filing showed. The stake, with each share representing about a 10th of an ounce, is valued at $221.4 million. Prices advanced 60 percent since January 2010, when Soros called gold the “ultimate asset bubble.” Michael Vachon, a spokesman for the 82-year-old who made $1 billion breaking the Bank of England’s defense of the pound in 1992, declined to comment. Official Reserves Paulson, who became a billionaire in 2007 by wagering against the subprime mortgage market, owns 21.8 million shares in the SPDR Gold Trust, making him the biggest shareholder, a Nov. 15 SEC filing showed. The 56-year-old raised his stake by 26 percent in the second quarter and his holding of about 66 tons exceeds the official reserves of nations from Brazil to Bulgaria to Bolivia. The New York-based hedge fund company reduced its investments in Anglogold Ashanti Ltd. (ANG) and Gold Fields Ltd., the third- and fourth-biggest producers. Armel Leslie of Walek & Associates, a spokesman for Paulson’s fund, declined to comment. Paul Touradji’s Touradji Capital Management LP sold all of its 82,000 shares in the SPDR Gold Trust in the third quarter, according to an SEC filing. Lone Pine Capital LLC, the hedge fund run by Stephen Mandel Jr., cut its stake by 31 percent to 2.6 million shares, and Dan Loeb’s Third Point LLC lowered its bet by 10 percent to 130,000 shares, filings showed last week. Officials from all three companies declined to comment. Nine Strategists While some investors expect stimulus to devalue currencies, the median of nine strategist estimates compiled by Bloomberg show the U.S. Dollar Index, a measure against six major trading partners, will average 82.8 next year, from 80.9 now. Steven Englander, Citigroup Inc.’s head of G-10 strategy, said in an interview this month that the currency market is signaling it isn’t yet convinced the Federal Reserve will fulfill its pledge to pump record amounts of cash into the economy through 2015. Third-quarter demand for gold fell 11 percent, the most since 2009, as China’s slowing growth curbed purchases, the London-based World Gold Council said Nov. 15. India, the biggest buyer in the quarter, consumed 24 percent less in the year’s first nine months as bullion priced in rupees reached a record in September. The Washington-based International Monetary Fund cut its 2013 forecast for world growth twice since July, to 3.6 percent. Inflation Adjusted While prices rose 25 percent since November 2010, the size of the futures market, based on contracts outstanding, fell 30 percent, bourse data show. The metal, down 3.7 percent from this year’s high, has yet to exceed previous records when adjusted for inflation, with its 1980 record of $850 equal to $2,398 today, data compiled by the Fed Bank of Minneapolis show. Hedge funds and other large speculators pared bets on a rally in futures traded on the Comex bourse in New York by 29 percent since Oct. 9, U.S. Commodity Futures Trading Commission data show. They’re still holding a net-long position of 140,162 futures and options, about 10 percent more than this year’s average, and increased wagers by 7.7 percent last week. The Fed said Oct. 24 it will maintain $40 billion in monthly purchases of mortgage debt and probably hold interest rates near zero until mid-2015. The European Central Bank said it’s ready to buy bonds of indebted nations and the Bank of Japan raised its asset-purchase program for the second time in two months on Oct. 30. Quantitative Easing Gold rallied 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011. Investors buying bullion as a hedge against inflation and a weaker dollar generally earn returns only through price gains, increasing its allure as interest rates decline. It rose sixfold since the end of 2000, beating the 34 percent advance in the S&P 500, with dividends reinvested, and the 91 percent return on Treasuries. The Dollar Index fell 26 percent. The first face-to-face meeting between Obama and leaders from Congress on the fiscal cliff yielded optimism and few details about how it would be resolved. The $607 billion of automatic spending cuts and tax increases is scheduled to take effect in January. U.S. equities and Treasuries rose Nov. 16 and gold futures were little changed. Options Trading Credit Suisse Group AG’s Tom Kendall, the most accurate gold forecaster tracked by Bloomberg over the past two years, sees prices averaging $1,880 in the fourth quarter next year and UniCredit SpA’s Jochen Hitzfeld, ranked second, expects $1,950. Deutsche Bank AG’s Daniel Brebner, the next most accurate, predicts $2,300 in the third quarter. Options traders are also bullish, with the seven most widely held contracts conferring the right to buy at prices from $1,800 to $2,200 between November and March, Comex data show. Central banks added to reserves for 19 consecutive months through August, the longest streak since 1964, IMF data show. Nations from Russia to South Korea to Mexico bought more to bring combined holdings to 31,461 tons, equal to about 18 percent of all the metal ever mined. Barrick Gold Corp. (ABX), the world’s largest producer, will report a 41 percent gain in profit to a record $5.04 billion next year, the mean of 10 analyst estimates compiled by Bloomberg shows. The Toronto-based company’s shares fell 25 percent this year and will gain 43 percent in the next 12 months, according to the average of 23 forecasts. Monetary Stimulus Analysts predict Newmont Mining Corp. (NEM) and AngloGold Ashanti, the next-biggest, will also report the most profit ever next year. “It looks as though global monetary stimulus is likely to continue, particularly in the wake of growing fiscal austerity,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion of assets. “That puts pressure on the monetary authorities to stimulate the economy and that will debase the currencies and put a bid under gold.”

BOJ seen defying easing calls as political pressure heats up

By Leika Kihara TOKYO, Nov 20 (Reuters) - The Bank of Japan is expected to stand its ground by keeping monetary policy unchanged on Tuesday in the face of calls from the country's likely next prime minister to pursue "unlimited" easing. The leader of the main opposition, Shinzo Abe, has put the central bank at the centre of economic debate ahead of a Dec. 16 national election that surveys show his party would win, signalling his government would put the bank under much greater pressure to ease policy. Abe has even suggested revising the Bank of Japan law, a step critics say is aimed at clipping the central bank's independence and forcing it to print money to finance public debt that is already double the size of Japan's economy. However, economists expect the central bank to keep monetary policy steady on Tuesday, having eased in September and October. It will prefer to hold fire so it can size up the government to be formed after the Dec. 16 vote for the powerful Lower House. Markets will also look to see how BOJ Governor Masaaki Shirakawa responds to the increased political heat when he addresses a media briefing following the policy meeting. "The BOJ will stand pat this month and probably ease in December by boosting bond purchases by 10 trillion yen ($123 billion)," said Izuru Kato, chief economist at Totan Research. "Even so, it will remain under pressure for more action." Japan's economy shrank 0.9 percent in the September quarter and given headwinds to growth in the current quarter, is widely expected to have slipped into a recession. The BOJ may reflect that by cutting its assessment of the economy and thus signal a readiness to loosen policy as early as next month. Abe, the leader of the Liberal Democratic Party (LDP), has called on the BOJ for bolder policy action, including "unlimited easing", pushing interest rates to zero or below zero and directly underwriting bonds issued to fund public works spending. The comments pushed the yen to a near seven-month low against the dollar and raised expectations the BOJ may act at its next rate review on Dec. 19-20, just after the election. The BOJ is unlikely to give in to some of the extreme demands, such as underwriting debt, but is weighing options beyond its asset-buying and lending programme, its main policy tool, having cut policy rates effectively to zero, sources say. For now, though, many central bankers prefer to hold fire to scrutinise the impact of easing in September and October, which brought the size of the asset buying and lending programme to 91 trillion yen -- roughly equal to Japan's annual state spending. Shirakawa has warned that flooding markets with cash alone will not push up prices when interest rates are already near zero. Japan has been dogged with deflation for years despite the BOJ's ultra-easy policy. The BOJ set a 1 percent inflation target in February and has eased policy four times so far this year. Abe has talked of setting an inflation target of 2 percent or 3 percent. Despite the political pressure, the BOJ is caught in a dilemma. Bank notes in circulation are rising and the balance of deposits that commercial banks park with the BOJ is at a record high of 44 trillion yen as a result of its ultra-loose policy. But bank lending rose a meagre 0.9 percent in the year to October, a sign the extra cash has not prompted companies and households to borrow more for new spending. Under the current law, the BOJ is free to set monetary policy. But the government nominates the governor, deputy governors and board members, which need parliament approval, giving it power to sway the direction of policy. Government pressure has frequently driven the central bank into easing policy, particularly when a rise in the yen raised calls for measures to ease the impact of the stronger currency on the export-reliant economy. While Abe's remarks have helped lift Tokyo share prices on expectations of bolder monetary stimulus, some analysts say his demands are unrealistic and they doubt whether he will stick to them once in power. Many economists also warn that threatening central bank independence or forcing it to underwrite public debt could trigger an unwelcome spike in bond yields by raising doubts in markets about Japan's ability to keep its fiscal house in order.

ECB seen holding rates, waiting to unleash bond plan

By Eva Kuehnen FRANKFURT | Thu Nov 8, 2012 9:01am GMT (Reuters) - The European Central Bank is expected to leave interest rates on hold on Thursday, waiting instead to show its mettle with a new bond-purchase programme that is ready for use as soon as Spain asks for help. The bank said last month it was ready to buy bonds of debt-strained governments such as Spain and Italy once they had signed up to a European bailout programme. So far no request has been made, but the announcement alone has calmed markets. Underlying economic problems persist, however, and gloomy data indicated earlier this week that the euro zone economy risked shrinking more than expected in the fourth quarter, which the ECB could eventually respond to by cutting rates. ECB President Mario Draghi gave a downbeat assessment of the euro zone economy in a speech to German bankers on Wednesday. "Unemployment is deplorably high," he said. "Overall economic activity is weak and it is expected to remain weak in the near term. And the growth of money and credit are subdued." "In this context, inflation is well contained," he added. "We expect it to fall below 2 percent next year." While a Reuters poll gave an 80 percent chance the ECB will hold its main refinancing rate at 0.75 percent on Thursday, most of the 73 analysts polled expected it will be cut to a new record low of 0.5 percent within the next few months. The ECB's policymaking Governing Council began meeting at around 0800 GMT in Frankfurt. It announces its decisions at 1245 GMT. "We expect the ECB to remain firmly on hold," said Goldman Sachs economist Dirk Schumacher. "Neither the data that have become available since last month nor actions from euro area governments justify additional measures at this point." Before cutting rates further, the ECB will focus on making sure that its record low rates reach companies and households across the euro zone, a mechanism that has been broken by the debt crisis. The new bond-purchase plan -- dubbed Outright Monetary Transactions (OMT) -- is the ECB's designated tool to fix this mechanism. It just needs to be activated and that can only be done by the respective governments requesting a bailout. CALLING FOR HELP Investors and euro zone policymakers have been urging Spain to seek aid from Europe's bailout funds, but Spanish Prime Minister Mariano Rajoy has so far avoided seeking help, saying he wants assurances ECB intervention would bring down Spain's debt costs. Pressure has eased somewhat as yields on Spanish government bonds have dropped by around 2 percentage points since Draghi said in late July the ECB was ready to do "whatever it takes to preserve the euro" - a pledge that heralded the bond-buy plan. Some economists have now raised the possibility that the OMT might not have to be activated considering its impact so far. But Matteo Cominetta, European economist at UBS, said eventually the OMT would be put the test because of the large amount of Spanish sovereign debt coming up for renewal next year - roughly 140 billion euros according to Reuters data. "Next year, you will have a record supply of Spanish bonds up for renewal in a situation where macro economic data will remain very bad for a long time in Spain," Cominetta said. The European Commission said in its autumn forecasts on Wednesday that Spain would suffer a recession almost three times deeper at 1.4 percent in 2013 than the 0.5 percent contraction predicted by Madrid, unless it takes additional steps. The Commission also said the euro zone economy would barely grow next year, but pick up in 2014. Euro zone inflation eased in October to 2.5 percent year-on-year from 2.6 percent in September, thanks to slower energy price growth, though it stayed above the ECB target of below but close to 2 percent.

Trade Deficit in the U.S. Widened in August as Exports Dropped

By Alex Kowalski - Oct 11, 2012 8:30 PM GMT+0800 The U.S. trade deficit widened in August as slower global growth reduced demand for American exports. The gap grew 4.1 percent to $44.2 billion from $42.5 billion in July, Commerce Department figures showed today in Washington. Exports decreased to the lowest level since February. A separate report showed the cost of goods shipped to the U.S. rose more than forecast in September. A stagnant Europe and slower growth in China and other emerging markets may curtail demand for American products, which had been a source of strength for U.S. manufacturers earlier this year. At the same time, the pickup in energy costs may push up the nation’s import bill, keeping the trade gap elevated. “You have these headwinds from overseas,” Ryan Wang, an economist at HSBC Securities USA Inc. in New York, said before the report. “There’s an ongoing recession in Europe and growth momentum is positive but slowing in the other parts of the world that matter most for U.S. exports.” The median forecast in a Bloomberg survey of 73 economists projected the deficit would expand to $44 billion. Estimates ranged from a gap of $41 billion to $47.5 billion. July’s deficit was revised from an initially reported $42 billion. Fewer Americans than forecast filed first-time claims for unemployment benefits last week, which may reflect difficulty adjusting the data for seasonal swings at the start of a new quarter, figures from the Labor Department also showed today. Applications for jobless benefits dropped 30,000 to 339,000 in the week ended Oct. 6, the fewest since February 2008. Economists forecast 370,000 claims, according to the median estimate in a Bloomberg survey. One state accounted for most of the plunge in claims, a Labor Department spokesman said as the data were issued to the press. Exports Decline The trade report from the Commerce Department showed exports decreased 1 percent in August to $181.3 billion. Imports decreased 0.1 percent to $225.5 billion, also the weakest since February, from $225.7 billion in the prior month. A drop in purchases of autos, clothing and aircraft swamped a jump in oil imports. After eliminating the influence of prices to produce the numbers used to calculate gross domestic product, the trade deficit climbed to $48.4 billion from $47 billion.

Special Report: Greece's other debt problem

By George Georgiopoulos and Stephen Grey Athens | Thu Sep 27, 2012 4:44am EDT (Reuters) - The two main political parties in Greece are facing their own financial crisis. New Democracy and Pasok, the key members of the country's coalition government, are close to being overwhelmed by debts of more than 200 million euros, say rivals, as the big parties head for a slump in state funding because of falling public support. In Greece's state-financed political system, parties that receive more votes get more funding. Relying on past good results, the big political parties have pledged future state funding as collateral for bank loans. But in the most recent poll their support collapsed, leaving them with big loans and facing much smaller incomes. Banking sources familiar with the issue say that conservative New Democracy and socialist Pasok now owe a combined 232 million euros to Greek banks. Some of the loans are going unpaid, those sources say. The debts far exceed the combined 37 million euros the parties received in state funding last year - a figure set to decline. The parties' debts raise questions about potential conflicts of interest because the government is in hock to a financial system that it also needs to reform. Athens is already struggling to implement spending cuts and reforms demanded by the European Union, International Monetary Fund (IMF) and European Central Bank (ECB) in return for the 130 billion euro bailout keeping Greece afloat. On Wednesday unions called a nationwide strike protesting against austerity. Leandros Rakintzis, Greece's independent inspector-general of public administration, believes the financial crunch the two big parties face is proof that Greece's political funding system is flawed. "This is all about the exchange of favors," he said. "These parties cannot pay the debt so it's a vicious circle in which they come to depend on the banks. It creates an interdependence of politicians and banks." The loan pressures will intensify early next year when state funding is recalculated to reflect declines in the parties' support. At present, funding is still based on the proportion of votes each party won in the June 2009 election. But in January funding will change to reflect votes cast in June 2012. At that election Pasok saw its share of the vote plunge from 43 percent to 12 percent, while New Democracy's share fell from 33 percent to 29 percent. The big winner was leftist Syriza, which opposed the bailout terms. Its share of the vote shot up to 27 percent from 4.6 percent in 2009, and it now stands to receive significantly more funding. Costas Tsimaras, the general manager of New Democracy, the biggest party in the Greek parliament, told Reuters the bulk of its bank loans were currently being paid on time, but "a small proportion of the loans may have become late, non-performing." For the parties to keep on top of the loans, he said, they should be restructured. "It will be very difficult for the parties to pay back the debt if there is no arrangement. Down the road, a political decision needs to be made to give parties the capacity to service their liabilities, some type of settlement on these loans." Pasok did not respond to requests for comment. STATE HANDOUTS Like many European countries, Greece provides some public funding for political parties and their election campaigns: last year the state handed out a total of 54 million euros. Each year parties receive tax-free funding equal to 0.102 percent of annual state revenue, plus another 0.01 percent for "research and education" purposes. When national or European parliamentary elections take place an extra 0.022 percent of annual state revenue is handed out. Private companies, owners of media and foreign nationals are banned from funding parties. Individuals giving more than 600 euros have to be identified and are allowed to give only up to 15,000 euros a year, though it is unclear how well these rules are enforced. The lion's share of the state funding pie, 80 percent, is divided between parties that win seats in parliament, each one receiving amounts proportional to the votes they score. That funding does not include the cost of MPs salaries and other parliamentary expenses, which are paid separately. Greece is among the most generous of EU countries to political parties. It provided an average of 6.5 euros per registered voter per year between 2007 and 2011 - the fourth highest funding in the EU after Luxembourg, Cyprus and Finland, according to Forologoumenos, a Greek taxpayer association that tracks state spending on politics. By another measure, Greece hands out three times the amount spent by Germany on political parties. Per valid vote cast, Athens spends an average 9.4 euros versus Germany's 3.1 euros, says Forologoumenos. In 2011 New Democracy, led by Antonis Samaras, received 16.9 million euros and Pasok, now led by Evangelos Venizelos, 21.7 million. That state funding accounted for about 75 percent of New Democracy's income, the party said, though the proportion fluctuates from year to year. Pasok did not comment on how much it depends on public funds. In 2010, when Greece's debt crisis exploded and forced Athens to seek a bailout, the country spent a total of 65 million euros on funding parties in a country of 11 million people. Germany, with a population more than seven times larger, limits state funding of political parties to 150 million euros. For German lawmaker Klaus-Peter Willsch, the generous state funding in Greece is emblematic of the country's financial malaise. "This self-serving mentality will not come to an end as long as Greece is funded by the solvent states in the euro zone," he said. "The fact that Greek parties get three times as much funding per vote as in Germany is part of the problem." Willsch, a member of Angela Merkel's Christian Democrats who sits on the Bundestag's powerful budget committee, voted against the Greek bailouts. MIND THE GAP Even with state funding, Greek parties have had to borrow to fill the shortfall between their revenue and expenditure. The main lender has been state-owned ATE Bank. By this year New Democracy owed ATE 105 million euros and Pasok owed ATE 96 million, according to banking sources. A senior source in the Greek parliament confirmed these amounts to Reuters. Separately, Piraeus Bank, the country's fourth largest, lent New Democracy 15 million euros and Pasok 6.5 million euros. Three other banks made small loans to the parties. A banker familiar with the matter told Reuters that some of the loans "are non-performing, they are past due more than 90 days". Piraeus denies any problem. "Piraeus Bank's loans to political parties are a small percentage of the total. They were given against guarantees of state funding. The loans are performing," said a Piraeus spokesman. In late July, ATE had to be rescued from collapse, with parts of the bank, including the political loans, being taken over by rival Piraeus Bank. At the time the political loans were performing, said a source at ATE and a senior government official. Piraeus has filed a lawsuit against Reuters, claiming 50 million euros in damages after Reuters published a report about a series of property deals between the bank and companies run by the family of its chairman. Reuters stands by the accuracy of its reports. A banker with knowledge of the political loans said limits should be set "on the percentage of state funding that can be accepted as collateral and for how many years in the future. Otherwise, one would have to be a Houdini to know for sure what amount of state funds a party will be entitled to far out in the future, 10 years down the road." For the parties, some pressures are already evident. One former staff member of Pasok, who asked not to be named, said that payments to party workers had been irregular since September last year. New Democracy said its staff were paid on time. "We do not owe a single euro to anyone on the payroll," said general manager Tsimaras. However, he added: "Our bills to suppliers do face some delays." A Pasok staff member said party funding had sometimes been spent poorly. In 2009, for instance, the party built a fully-equipped gym at its new headquarters and employed a personal trainer. "It is now a smaller party and costs have to be reined in," said the party staffer. Pasok did not respond to requests for comment. RISING ANGER Greece is now in its fifth year of recession and is struggling to meet fiscal targets set by its euro zone partners and the IMF. The gap between government spending and revenues is projected at 7.3 percent this year, based on IMF estimates. The country's accumulated debt stands at 332 billion euros, equal to 163 percent of GDP. Greek Prime Minister Antonis Samaras asked in August to be given a "breathing space" by the EU and IMF, which are pressing for more public spending cuts. At the same time, critics say the political system itself should tighten its belt. "State funding to political parties must be adjusted to what the Greek economy can afford and not be far off from the corresponding average in the European Union," said Yannis Sarris, the general manager of small party Dimiourgia Xana, which calls itself the ‘common sense' party. Others say it is politically unacceptable for parties to be propped up with bank loans when many businesses are unable to obtain credit even against sound collateral. The small Democratic Alliance party (which folded into New Democracy at the June election) has previously called for a 50 percent cut in state funding to parties. "On the one hand we have a country on the brink of bankruptcy, a suffering society, victim of an unprecedented tax onslaught," Democratic Alliance deputy Christos Markoyannakis told parliament in December last year. "On the other, we face the absolute provocation by those bearing the biggest share of responsibility for the country's crisis. As long as the cash flows into party coffers, all is fine and dandy." The Group of States against Corruption (GRECO), a body set up by the Council of Europe, has also leveled serious criticisms at the way Greece funds its politics. It has urged Athens to improve transparency of party funding, to strengthen controls over small donations for fear that rich donors could abuse the system, and to ensure that loans are repaid under their original terms - otherwise they risk becoming de facto donations. The group concluded: "There is in Greece a general public mistrust of the system of political financing and supervision, which may be attributed to an overall inefficient and opaque system of supervision, in which political parties are both judge and jury. "This system has failed, under current law, to uncover and sanction any - even minor - infringement of the rules on political financing." So far, none of GRECO's 16 recommendations have been implemented, the organization says. The omens for reform are not encouraging. Last year Nikos Alivizatos, a constitutional lawyer, helped draft a new law to correct shortcomings of the current system, including barring banks from lending to political parties. The legislation was shelved because the two main parties were keen to maintain the status quo, say political observers.

By Ambrose Evans-Pritchard 8:56PM BST 24 Sep 2012 “The IMF is evolving from a liquidity mechanism into a bank. This is neither in keeping with the legal and institutional role of the IMF or with its ability to handle risks,” said the Bundesbank in its monthly report. The bank said the Fund was right to help rescue Greece, Ireland and Portugal but said monitoring levels were slipping and there had been a “watering down” of standards. The scale of loans risks “overwhelming the IMF’s institutional structure”. The unprecedented attack came as the IMF’s chief, Christine Lagarde, called for urgent measures across the world to head off a fresh global slump. While praising the latest emergency measures of central banks in the US, Europe and Japan, she said this was not enough to secure recovery. The Europeans must activate their new machinery, while the US must prevent a “dramatic tightening” of fiscal policy later this year. Failure to act “would effectively plunge the country off a 'fiscal cliff'", cutting US growth by up to 2pc. She said this would pose a “serious threat for the global economy”. Ms Lagarde also said emerging economies need to bolster their defences against “potential spill-overs”, if necessary by injecting “additional stimulus”. The Bundesbank’s broadside against the Fund caused consternation in Washington, where Asian and Latin American members of the Board think the IMF has been doing Germany’s work for it, shouldering too much of the risk trying to hold the eurozone together. There is irritation in IMF circles over the way the Fund has been dragged into badly-constructed rescue packages. The Fund has refused to lend any more money to Greece, saying the country cannot regain economic viability unless EU bodies take losses. Ms Lagarde’s Keynesian team is deeply at odds with Germany’s hard-money hawks. A leaked memo from Germany’s finance ministry previously called the IMF the “Inflation Maximizing Fund” after it suggested that a burst of inflation might lift the world off the reefs. Germany has weathered the slump so far but there are signs that extreme austerity and deepening slump across southern Europe has begun to engulf the country. Germany’s IFO business confidence index has fallen for the past five months, sinking this month to its lowest since mid-2009. Capital Economics said the crash in the manufacturing expectations index points to a 10pc fall in industrial output. “It is only a matter of time before the economy starts to contract," it said. The OECD expects a “light recession” in Germany, with grave knock-on effects for struggling EMU states relying on the German locomotive to pull them along. Separately, EU diplomats said a taskforce is working on plans to boost the European Stability Mechanism (ESM) or bail-out fund from €500bn to €2 trillion by offering guarantees to private creditors to co-invest. The package should be ready by early November. While it has support from Germany’s government, it may face trouble in the Bundestag and Finland’s parliament since it exposes taxpayers to bigger losses in any default. “We always find a solution in the end,” said one official.

Fasten Your Seatbelts, FX Investors

By: Kelley Holland The forex markets will soon be littered with event risk, this strategist says. Enjoying the dog days of August? You'd better because we're in for a bumpy ride. The slow times are about to end, says Camilla Sutton, chief currency strategist at Scotiabank. "September is littered with event risk," she wrote in a note to clients, with key events likely to sway both the euro and the dollar at different times. The fun actually starts at the tail end of August. That's when China will release its latest PMI report - oh, and Federal Reserve Chairman Ben Bernanke is scheduled to give a little speech in Jackson Hole. European Central Bank President Mario Draghi will speak a day later, and then on September 6, "we expect the ECB to clarify the details of its bond buying program" at its monthly meeting, Sutton says. A week later, Germany's top court is due to issue its ruling on the constitutionality of providing aid to troubled euro zone countries, and on September 13 the Fed could announce another round of quantitative easing, which would probably push the dollar[.DXY 81.34 -0.32 (-0.39%) ] lower. On top of all that, it's unclear when or whether Spain will request aid, Sutton says. "Delaying a request for aid threatens rising yields and ultimately another weight on EUR." And while "commentary following the meetings between Chancellor Merkel, President Hollande and Prime Minister Samaras appear to support the view that Greece will receive its next tranche of €31bn," she says, "a negative report would push Grexit back into the headlines and limit any EUR gains."

U.S. Stocks Advance on Europe as Earnings Beat Estimates

U.S. Stocks Advance on Europe as Earnings Beat Estimates By Rita Nazareth - Aug 7, 2012 4:48 AM GMT+0800 U.S. stocks rose, sending the Standard & Poor’s 500 Index to a three-month high, as German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan and earnings beat forecasts. Hewlett-Packard Co. (HPQ), Bank of America Corp. (BAC) and Caterpillar Inc. (CAT) increased at least 1.5 percent. Cognizant Technology Solutions Corp. (CTSH), a provider of consulting and outsourcing services, climbed 11 percent after raising its forecast. Best Buy Co. surged 13 percent after founder Richard Schulze offered to take the electronics retailer private at $24 to $26 a share. Knight Capital Group Inc., the firm driven to the brink of bankruptcy by trading losses last week, tumbled 24 percent. About five stocks advanced for every three that fell on U.S. exchanges at 4 p.m. in New York. The S&P 500 (SPX) rose 0.2 percent to 1,394.23, gaining 2.1 percent in two days. The Dow Jones Industrial Average added 21.34 points, or 0.2 percent, to 13,117.51. Volume for exchange-listed stocks in the U.S. was 5.7 billion shares, or 15 percent below the three-month average. “The earnings season has surprised because expectations were so low given the economic soft patch which hit the second quarter,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management. His firm oversees about $320 billion. The prospect for bond purchases by the ECB “has also boosted bullish attitudes among investors.” U.S. stocks followed European shares higher as Merkel’s government backed the ECB’s bond-buying plan announced last week, her deputy spokesman Georg Streiter said today. About 73 percent of the S&P 500 companies which reported second-quarter results have beaten earnings estimates even as 59 percent missed sales projections, data compiled by Bloomberg show. Biggest Gains Seven out of 10 groups in the S&P 500 rose today as commodity and technology shares had the biggest gains. Hewlett- Packard, the world’s largest maker of personal computers, added 2.4 percent to $18.69. Bank of America gained 2.8 percent to $7.64. Caterpillar, the largest maker of construction and mining equipment, climbed 1.6 percent to $86.35. Cognizant surged 11 percent to $64.21. The company is gaining revenue as its clients seek savings by outsourcing tasks to India and other lower-cost nations amid a slowing global economy, Chief Financial Officer Karen McLoughlin said. The company has also been building an emerging-technologies business focused on data analysis and mobile solutions. Best Buy jumped 13 percent to $19.99. Credit Suisse Group AG, Schulze’s financial adviser, is confident it can obtain financing for an offer, according to a letter sent to the board today. The offer is at least 36 percent more than Best Buy’s closing price Aug. 3, and the midpoint of the range gives the company an equity value of $8.5 billion. Job Cuts Navistar International Corp. (NAV) advanced 10 percent to $24.62. The maker of International brand trucks jumped after Crain’s Chicago Business reported that the company has told employees it’s considering options for the business including job cuts. ViroPharma Inc. (VPHM) gained 14 percent to $22.66 after it won U.S. regulatory approval to expand manufacturing of Cinryze, the company’s drug to treat hereditary angioedema, an inherited disease in which patients have attacks of inflammation of the face and throat, which can be fatal. NII Holdings Inc. (NIHD) climbed 19 percent to $8.08. The wireless carrier that operates the Nextel brand in Latin America rose after Wells Fargo & Co. predicted its second-quarter results would top the average analyst estimates. Zimmer Holdings Inc. (ZMH) added 1.3 percent to $59.78. The company and Seikagaku Corp. won a U.S. patent-infringement trial brought by Sanofi’s Genzyme over a treatment for arthritis in the knee. Bankruptcy Risk Investors also watched the latest developments with Knight (KCG) Capital, which received a $400 million cash infusion after a deal reached yesterday. The company faced too much bankruptcy risk to make its share price the top priority as it negotiated a rescue, said Thomas Joyce, the chairman and chief executive officer. The Jersey City, New Jersey-based company, one of the country’s biggest market makers, had to lock up an infusion of capital to preserve its businesses, Joyce said in a telephone interview today. Knight fell 24 percent to $3.07 as investors prepared for hundreds of millions of shares to enter the market via convertible securities. “This was absolutely the right thing to do for this organization,” Joyce said. “We understand the dilution is a large amount, but for the future of Knight Capital Group, as tough as it was to see happen, it was the right thing to do.” ‘Dry Powder’ Tyson Foods Inc. (TSN) slipped 8 percent to $14.17. The largest U.S. meat processor cut its full-year sales forecast and said profit will be lower after the cost of animal feed rose because of the country’s drought. The company is also cutting capital expenditures and stock buybacks partly to keep “a lot of dry powder around for an opportunistic acquisition,” Chief Executive Officer Donnie Smith said. AES Corp. (AES) slumped 4.4 percent to $11.71. The power producer with operations in 27 countries reported that 2012 profit would be at the lower end of guidance. HCA Holdings Inc. (HCA) lost 4 percent to $25.55. The biggest U.S. hospital operator said its cardiology practices had come under scrutiny from the U.S. Justice Department. Interpublic Group of Cos. tumbled 7.8 percent to $10.11 after Publicis Groupe SA said it hasn’t held takeover talks with the ad company or engaged a bank to support discussions, following a newspaper report saying the French company may bid. FreightCar America Inc. (RAIL) slid 8.7 percent to $19.15 after the maker of railroad freight cars posted quarterly profit and sales that trailed analysts’ estimates. S&P Downgrade Global investors can’t get enough American securities a year after S&P downgraded U.S. government debt. The dollar has outperformed its peers in the past 12 months, rising by 10 percent against a basket of six currencies. U.S. stocks have been the best performing equity market in terms of dollars, with the Dow Jones Industrial Average advancing 14 percent. Treasuries also have done better since the S&P action late on Aug. 5, 2011, returning 6.7 percent to investors compared with 6.1 percent for other government bonds. “We’re seeing negative data come in from a lot of parts of the world,” said Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, and a former chief economist at the International Monetary Fund. “The rest of the world is looking at the United States and saying, ‘I wish we were the United States.’”

Australian Stock Futures Rise on China Stimulus Outlook

By Adam Haigh - Jul 16, 2012 7:11 AM GMT+0800 Australian stock futures rose amid speculation China may take more economic stimulus measures, boosting the earnings outlook for companies that generate sales in the Pacific nation’s biggest trading partner. American Depositary Receipts of BHP Billiton Ltd. (BHP), the world’s largest mining company, gained 1.3 percent. Shares of Whitehaven Coal Ltd. (WHC) may be active after a group led by Australian Nathan Tinkler offered to buy the rest of the miner at a 51 percent premium to its most recent closing price, valuing the company at A$5.3 billion ($5.4 billion). ADRs of Cnooc Ltd. (883), China’s largest offshore oil producer, rose 0.8 percent as crude prices advanced for a fourth day. Futures on Australia’s S&P/ASX 200 Index advanced 0.8 percent to 4,082 as of 6:59 a.m. in Sydney. Japan’s equity markets are closed today for a public holiday. New Zealand’s NZX 50 Index rose 0.3 percent in Wellington. “There remains significant capacity for China to stimulate further,” said George Boubouras, Melbourne-based head of investment strategy at UBS AG’s Australian wealth-management unit. The Swiss bank has about $1.5 trillion in assets under management. “This is not only from a monetary perspective, which includes further rate cuts or lowering the reserve required ratio again, but also the ability for additional targeted fiscal stimulus.” Futures on the Standard & Poor’s 500 Index fell 0.2 percent today. The underlying gauge gained 0.2 percent last week as a rally in JPMorgan Chase & Co. (JPM) and speculation China will boost stimulus measures tempered concern about earnings and the global economy. JPMorgan jumped 6.4 percent for the week as Chief Executive Officer Jamie Dimon said the bank will probably post record earnings for 2012 even after reporting a $4.4 billion trading loss. China Rates China’s central bank may cut interest rates by as much as one percentage point in the coming year to spur lending, the swap market signals, as slowing industrial production and exports cool the economy. China needs to expand consumption and restructure the economy, Vice Premier Li Keqiang said during an inspection tour in central Hubei province, the official Xinhua News Agency reported July 15. This comes two days after a report showed China’s gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years. China’s Premier Wen Jiabao warned the momentum for a recovery in economic growth isn’t yet in place and that “difficulties” may persist for a while, the official Xinhua News Agency reported. ‘Bearing Fruit’ Even so, the current pace of economic expansion is within the targeted range and government measures to stabilize growth are “bearing fruit,” the premier said during an inspection tour in southwest Sichuan province, according to Xinhua yesterday. The article didn’t mention government policies for the property market. China is facing downward pressure on economic growth and will maintain “proactive” fiscal policy in 2012, the People’s Bank of China said in its stability report on its website after the close of Hong Kong and Chinese markets on July 13. The MSCI Asia-Pacific (MXAP) fell 2.8 percent last week, the largest weekly drop since May, amid concern slowing economic growth from China and Korea to Australia will hurt corporate profits. Investors are demanding policymakers do more to stimulate growth even after central banks in China, Europe, Taiwan, South Korea and Brazil cut interest rates in the past fortnight to bolster economies against the impact of Europe’s debt crisis and the faltering recovery in the U.S. Commodities Rise The MSCI Asia Pacific Index fell 11 percent from its 2012 high on Feb. 29 through July 13, paring this year’s gain to 1.3 percent. Shares in the measure are valued at 11.7 times estimated earnings on average, compared with 13.1 times for the Standard & Poor’s 500 Index and 10.7 times for the Stoxx Europe 600 Index. The Thomson Reuters/Jefferies CRB Index of raw materials climbed 1.3 percent July 13. West-Texas Intermediate crude oil futures advanced 0.1 percent today, gaining for a fourth day. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in New York gained 1.3 percent to 87.77 on July 13, trimming its loss last week to 3.7 percent.

Asian Stocks Snap Six-Day on European Economic Slowdown

By Jonathan Burgos - Jul 5, 2012 10:14 AM GMT+0800 Asian stocks fell, with the regional benchmark index headed for its first loss in seven days, as a worsening economic slump in Europe overshadowed expectations the European Central Bank will cut interest rates today. Esprit Holdings Ltd. (330), a clothier that counts Europe as its largest market, slid 1.5 percent in Hong Kong. Aquarius Platinum Ltd. tumbled 8.9 percent in Sydney after saying output will decline. Mitsubishi UFJ Financial Group Inc. (8306), Japan’s biggest publicly traded lender by market value, gained 1 percent in Tokyo after Bank of Japan Governor Masaaki Shirakawa said today the BOJ will continue monetary easing. The MSCI Asia Pacific Index (MXAP) lost 0.4 percent to 118.77 as of 11:12 a.m. in Tokyo, with almost three shares falling for every two that rose. The gauge climbed yesterday to its highest level since May 10 after euro-zone leaders last week agreed to relax conditions for rescuing lenders, easing concern about the region’s debt crisis. “The market remains skeptical that policy measures in Europe will be in place in a timely fashion,” said Tim Schroeders, a portfolio manager who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. “Significant details still need to be addressed, but for the time being the initiatives to tackle the debt crisis have broadened.” Japan’s Nikkei 225 Stock Average (NKY) lost 0.1 percent after swinging earlier gaining as much as 0.3 percent. Australia’s S&P/ASX 200 Index fell 0.2 percent. Hong Kong’s Hang Seng Index both dropped 0.4 percent, while China’s Shanghai Composite Index declined 1.2 percent.

FOREX-Euro, sterling on defensive as central bank action eyed

FOREX-Euro, sterling on defensive as central bank action eyed By Ian Chua SYDNEY, July 5 (Reuters) - The euro wallowed near one-week lows on Thursday, struggling to find any traction ahead of a widely expected interest rate cut by the European Central Bank. The single currency traded at $1.2522 early in Asia, having fallen around 0.7 percent on Wednesday in trading made subdued by a U.S. holiday. Surveys showing all of Europe's biggest economies are in recession or heading there added to the gloom. Support is seen around $1.2495, the 76.4 percent retracement of Friday's dramatic rally sparked by an EU deal to tackle the region's debt crisis. Traders said part of the euro's weakness overnight was due to heavy selling against the Swedish crown, which surged to an 11-1/2 year high after the Swedish central bank kept interest rates on hold at 1.5 percent. Traders said the absence of stronger hints on future rate cuts by the Riksbank saw the crown squeeze higher, pushing the euro down some 1 percent to as far as 8.6495 crowns, lows not seen since late 2000. The euro also lost ground on the yen, slipping to 100.06 from Wednesday's session high of 100.65. It hit a fresh all-time low on the New Zealand currency at NZ$1.5541 . Softness in the single currency saw the dollar index bounce to 82.199, off Friday's trough of 81.430. Against the yen, the greenback held firm at 79.92, continuing to slowly recover from a low of 79.08 set last Friday. With expectations mounting that the ECB, Federal Reserve and also the Bank of England will have to do more to stimulate their respective economies, the market continued to favour high-beta currencies. The Australian dollar, already lifted by upbeat retail sales data on Wednesday, was at $1.0270, having climbed as high as $1.0320 -- its best level since early May. The ECB is due to announce its decision at 1145 GMT, followed by a news conference at 1230 GMT. A Reuters poll of economists showed the majority expect the ECB to cut its main rate by 25 basis points to 0.75 percent. They were evenly split on whether the ECB will lower its deposit rate. A reactivation of the ECB's bond-buy plan, however, is seen unlikely for now, although it is the tool many investors would like it to use to cap the bond yields of countries embroiled in the euro zone crisis. Barclays Capital analysts expect the ECB to lower its main rate by a more aggressive 50 basis points and see a quarter point cut as well to the deposit rate to zero. "We suggest that selling the EUR and buying a relatively 'high beta' currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems," they wrote in a note. The BOE is expected to launch a third round of monetary stimulus as it moved to counter a recession and the effects of a worsening debt crisis in the euro zone. That is weighing on sterling, which has fallen to $1.5592 , down more than a full U.S. cent from Friday's peak.

GLOBAL MARKETS-Shares, euro consolidate from lows, remain vulnerable

By Chikako Mogi TOKYO, May 28 (Reuters) - Asian shares and the euro edged up from lows on Monday as surveys showing a lead in opinion polls for Greece's pro-bailout camps helped ease risk aversion and calm fears of a disorderly exit from the euro bloc. The MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.2 percent, after hitting its lowest level since late December on Friday. The pan-Asia stock index posted a third consecutive week of losses last week, shedding 0.8 percent for its longest losing streak in six months. The index has now wiped out all its gains for the year, having been up some 15 percent from end-2011 levels in late February. Japan's Nikkei average opened up 0.3 percent. It posted its longest weekly losing run in 20 years last week. Investors sold off riskier assets and fled to the safety of the U.S. dollar last week on mounting concerns about Greece and instability in the Spanish banking sector amid a lack of immediate policy responses from European leaders. Currency speculators raised long dollar positions to the highest level since at least mid-2008 while euro short positions rose to the highest on record, Commodity Futures Trading Commission data showed on Friday. Speculators also were net short on the Australian dollar, having cut their net long positions all month. "In the absence of bold policy responses from Europe so far, we recommend being long the USD and JPY," Barclays Capital analysts said in a research note. "Should data or headlines surprise to the upside, safe haven longs may see some unwind, and we favour fading these moves," they said. Trading is expected to be subdued on Monday amid a lack of key economic data and a U.S. market holiday for Memorial Day. U.S. crude rose 0.5 percent to $91.31 a barrel on Monday while Brent was up 0.1 percent at $106.97 a barrel. EURO ON GUARD The euro was up 0.4 percent at $1.2561 on Monday while the Australian dollar inched up 0.1 percent to $0.9810, well above a six-month low of $0.9690 hit last week. The euro fell to its lowest since July, 2010, on Friday at $1.2495, after the president of Catalonia, Spain's wealthiest autonomous region, said it was running out of options for refinancing more than 13 billion euros ($16.27 billion) in debt due this year. Sentiment has been weakening on fears that rising bank rescue costs could force the euro zone's fourth largest economy to seek an international bailout. A government source said on Sunday that Spain may recapitalise its fourth-largest bank, Bankia, which last week asked for 19 billion euros in funding ($24 billion). with government bonds in return for shares. On a positive note, surveys showed on Saturday Greece's conservatives have regained an opinion poll lead that would allow the formation of a government committed to keeping the country in the euro zone. Uncertainty, however, will persist until Greece holds the crucial election on June 17, keeping markets guarded. Switzerland is drawing up plans for emergency measures including capital controls in case the euro collapses, although it does not expect to need them and will continue to defend a cap on the franc in the meantime, the head of the central bank said. Investors cut their risk exposure across assets. Data from EPFR Global showed in the week ending May 23, Emerging Markets Equity, Commodities and Energy Sector Funds and Europe Equity Funds all saw redemptions in excess of $1 billion while High Yield Bond Funds had their biggest outflows in over nine months.

U.S. Manufacturing Grows at Fastest Pace in a Year

Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the U.S. expansion. The Institute for Supply Management’s factory index climbed to 54.8 last month, exceeding the most optimistic forecast in a Bloomberg News survey and the best reading since June, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 signal growth. The world’s largest economy may pick up after slowing in the first three months of the year as the increase in bookings indicates American assembly lines will keep churning out more goods. Combined with a report showing manufacturing in China also accelerated, the figures sent the Dow Jones Industrial Average to the highest level since 2007 as the data eased concern global growth was slackening. Manufacturing “continues to be a bright spot in the recovery,” said Ellen Zentner, a senior U.S. economist at Nomura Securities International Inc. in New York. “We have yet to see a drop-off in foreign demand for U.S.-manufactured goods, and that comes despite all the concerns of a slowdown in the global economy.” The Dow gained 0.5 percent to close at 13,279.32 at the close in New York. The yield on the benchmark 10-year Treasury note rose to 1.95 percent from 1.91 percent late yesterday. Elsewhere, China’s manufacturing expanded for a fifth month in April to reach the highest level in a year. The news wasn’t universally good as a U.K. manufacturing index fell more than forecast in April as export orders fell the most since May 2009. Survey Results The median forecast in a Bloomberg News survey of 79 economists projected the ISM index would drop to 53 from a reading of 53.4 in March. Estimates ranged from 52 to 54. The gauge averaged 55.2 in 2011 and 57.3 a year earlier. The group’s orders gauge climbed to the highest level in a year, while its production measure put it its best performance since March 2011 and employment advanced to a 10-month high, today’s report showed. The group’s export index also improved. “We seem to have good, strong order books filling up for the next few months, and that bodes well,” Bradley Holcomb, chairman of the ISM’s factory survey said in a telephone interview. “Things are moving forward and moving forward at a good sustainable level, not indicating at this point any slowdowns.” Auto Sales Stronger auto production bolstered the U.S. economy from January through March, which may keep supporting manufacturing. Motor vehicle output added 1.12 percentage points to growth, the most since the third quarter of 2009 and accounting for half of the 2.2 percent increase in gross domestic product. Cars last quarter sold at the fastest pace in four years, according to industry data. The pickup in demand is holding up so far in the second quarter. Chrysler Group LLC led the five largest automakers by U.S. sales in exceeding analysts’ estimates for April. Chrysler’s sales climbed 20 percent and Toyota Motor Corp.’s deliveries rose 12 percent. Purchases were little changed at a 14.38 million annual rate last month after 14.32 million in March, according to data from Ward’s Automotive Group. Manufacturers mentioned gains in automotive and high- technology industries, the Fed said in its Beige Book business survey, published April 11. The firms “expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices,” the Fed said in the report. Industrial Demand 3M Co. (MMM), the maker of fuel system tune-up kits and Post-it Notes, posted first-quarter profit that beat analysts’ estimates because of rising U.S. auto and industrial demand. The St. Paul, Minnesota-based company’s industrial and transportation unit posted sales of $2.66 billion, an 8.6 percent increase. At the same time, other areas may not be helping to support manufacturing in coming months. Business spending on equipment and software in the first quarter rose at the weakest in almost three years, a Commerce Department report showed last week. Overseas demand for U.S. made-goods also risks fading as global growth slows. Spain’s economy contracted in the first quarter, putting the euro region’s fourth-largest economy into its second recession since 2009. The U.K. economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the prior three months as Britain slid into its first double dip recession since the 1970s. ‘Uneven’ Economy “The global economy is uneven,” John Faraci, chairman and chief executive officer of International Paper Co. (IP), said during an April 27 earnings call. “We got a recession going on in Western Europe. The growth has slowed in China and India. And North Americas is a recovering but far from fully recovered economic environment.” Another report today showed construction spending in the U.S. grew less than forecast in March as state and local government agencies continued to pull back. The 0.1 percent increase followed a 1.4 percent decline in February that was larger than previously estimated, the Commerce Department reported. The median estimate of economists surveyed by Bloomberg called for a 0.5 percent increase.

Japan Tankan Confidence Not Improving, Threatens Rebound

By Keiko Ujikane and Masahiro Hidaka - Apr 2, 2012 8:51 AM GMT+0800


Sentiment among Japan’s largest manufacturers failed to improve in March as executives predicted the yen will rebound against the dollar, hurting exporters' sales and profits.

The quarterly Tankan index was unchanged from minus 4 in December, the Bank of Japan said today in Tokyo. That was less than the median estimate of 25 economists surveyed by Bloomberg News for a reading of minus 1. A negative number means pessimists outnumber optimists.

Sony said in that it predicted its loss in the year ended on March 31 would widen to 220 billion yen, more than double its previous estimate. Photographer: Akio Kon/Bloomberg

A weakening currency and gains in stock prices this year are giving only a limited boost to confidence as exporters struggle to regain ground lost when the yen surged to a postwar record in October. Today’s report showed that executives expect the sentiment index to remain negative at minus 3 in June and the yen to strengthen about 6 percent from today’s level to average 78.14 per dollar this fiscal year.

“The Tankan signals business managers think it will take awhile for the economy to regain momentum,” Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former BOJ official. “They’re still concerned about the risk of the yen appreciating again because they’ve been traumatized by a strong currency.”

The yen weakened 0.3 percent to 83.12 per dollar as of 9:33 a.m. local time. The Nikkei 225 Stock Average rose 0.9 percent after reports of stronger-than-forecast consumer sentiment and spending in the U.S.
Sony, Panasonic

Sony Corp. (6758) more than doubled its annual loss forecast, while Panasonic Corp. (6752) and Sharp Corp. predicted record losses.

A government report last week showed that industrial production unexpectedly dropped in February after previously rebounding as disruptions from flooding in Thailand faded away. Policy makers are counting on reconstruction spending after last year’s earthquake and tsunami to help propel a rebound from a contraction in 2011.

Gross domestic product may have expanded an annualized 1.7 percent last quarter after a 0.7 percent contraction in the final three months of last year, according to the median estimate in a Bloomberg News survey of analysts.

The Japanese currency hit a post-World War II high of 75.35 against the dollar in October, eroding profits of exporters earned abroad and jeopardizing their competitiveness. Expanded monetary stimulus by the central bank on Feb. 14 aided weakening.
Monetary Policy

Sony, Japan’s largest electronics exporter, said in February that it predicted its loss in the year ended on March 31 would widen to 220 billion yen, more than double its previous estimate. Panasonic, Japan’s biggest appliance maker, also widened its annual net-loss forecast to a record 780 billion yen, it said in February. Sony earned 70 percent of its revenue outside Japan and Panasonic 48 percent.

Weakness in business confidence may increase the chance that the BOJ will consider expanding its asset-purchase program, Dai-Ichi Life Research’s Kumano said.

BOJ policy board members are scheduled to meet April 9-10 and April 27. The central bank held off from expanding asset purchases at its meeting in March as it monitored improvements in the economy. It expanded bond purchases by 10 trillion yen and set a 1 percent inflation goal in February. Consumer prices excluding fresh food rose 0.1 percent in February.

U.S. Sales of New Homes Probably Climbed to One-Year High

By Timothy R. Homan - Mar 23, 2012 12:01 PM GMT+0800


Purchases of new homes in the U.S. probably rose in February to the highest level in more than a year, economists said before a report today.

Sales, tabulated when contracts are signed, climbed 1.3 percent to a 325,000 annual pace, the fastest since December 2010, according to the median estimate in a Bloomberg News survey of 78 economists. That would mark the fifth gain in six months.
Enlarge image Sales of New Houses in U.S. Probably Climbed

Affordability is increasing as hiring picks up, incomes grow, home prices steady and mortgage rates hold near record lows. At the same time, builders face increasing competition from foreclosures, which are hurting all property values.

“We’re in the early stages of a recovery in sales,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “We’ve seen builders saying things are improving, and the weather’s been pretty good.”

The Commerce Department report is due at 10 a.m. in Washington. Economists’ forecasts ranged from 310,000 to 350,000.

New-home sales have lost their ability to forecast the broader market as demand shifts to previously owned houses. Purchases of existing homes are calculated when a deal closes about a month or two later. New properties made up almost 7 percent of the market last year, down from a high of 15 percent during the last decade’s housing boom.

Existing-home purchases eased to a 4.59 million annual rate last month from a 4.63 million pace in January, the National Association of Realtors reported this week. Even with the decline, January and February sales marked the strongest start to a year since 2007.

Warmer Weather

Warmer weather may have may have encouraged more Americans to shop for new properties last month. The average temperature was 38.2 degrees Fahrenheit (3.4 Celsius), 3.6 degrees warmer than the 20th century average and the 17th warmest February in 118 years, according to the National Oceanic and Atmospheric Administration.

Among other signs that housing is improving, builders this year have broken ground on homes at the fastest pace since October-November 2008, according to Commerce Department figures released this week. Permits for construction climbed to the highest level since 2008, the same report showed.

The National Association of Home Builders/Wells Fargo sentiment index held in March at the highest level since June 2007. Sales expectations climbed for a sixth month, according to the March 19 report.

Investors also are upbeat about prospects for the industry. The S&P Supercomposite Homebuilding Index has advanced 25 percent this year through yesterday, compared with the 11 percent gain in the broader S&P 500.

Positive Outlook

Ryland Group Inc. (RYL), which builds homes with an average price of $255,000 in 13 states, said it has a positive outlook for 2012.

“We finished the year on a strong note, entered the year optimistic and still feel fairly optimistic today,” Larry Nicholson, president and chief executive officer at the Westlake Village, California-based company, said March 6 at an investor conference. “The good thing about the traffic we are seeing is it’s new traffic. We feel a lot better than we did a year ago.”

Nonetheless, foreclosures remain a concern. Filings fell 8 percent in February, the smallest year-over-year decrease since October 2010, as lenders began working through a backlog of seized properties, RealtyTrac Inc. said last week.

“February’s numbers point to a gradually rising foreclosure tide,” Brandon Moore, RealtyTrac’s chief executive officer, said in the statement. “That should result in more states posting annual increases in the coming months.”

To hold down borrowing costs like mortgage rates, Federal Reserve policy makers last week said they will continue to swap $400 billion in short-term securities with long-term debt to lengthen the average maturity of the central bank’s holdings, a move dubbed Operation Twist.

Bloomberg Survey
============================================
New Home New Home
Sales Sales
,000’s MOM%
============================================
Date of Release 03/23 03/23
Observation Period Feb. Feb.
-------------------------------------------
Median 325 1.3%
Average 326 1.5%
High Forecast 350 9.0%
Low Forecast 310 -3.4%
Number of Participants 78 78
Previous 321 -0.9%
-------------------------------------------
4CAST 320 -0.3%
ABN Amro 324 1.0%
Action Economics 328 2.2%
Aletti Gestielle 325 1.3%
Ameriprise Financial 325 1.3%
Analytical Synthesis 326 1.6%
Banca Aletti 325 1.3%
Banesto 326 1.6%
Barclays Capital 321 0.0%
BBVA 318 -0.9%
BMO Capital Markets 325 1.3%
BNP Paribas 330 2.8%
BofA Merrill Lynch 310 -3.4%
Briefing.com 320 -0.3%
Capital Economics 325 1.3%
CIBC World Markets 325 1.3%
Citi 320 -0.3%
Comerica 320 -0.3%
Commerzbank AG 325 1.3%
Credit Agricole CIB 324 0.9%
Credit Suisse 330 2.8%
Daiwa Securities America 338 5.3%
Danske Bank 322 0.3%
DekaBank 330 2.8%
Desjardins Group 330 2.8%
Deutsche Bank Securities 325 1.3%
DZ Bank 318 -0.9%
Exane 330 2.8%
Fact & Opinion Economics 327 1.9%
First Trust Advisors 325 1.3%
FTN Financial 325 1.3%
Goldman, Sachs & Co. 328 2.0%
Helaba 330 2.8%
High Frequency Economics 350 9.0%
HSBC Markets 321 0.0%
Hugh Johnson Advisors 325 1.3%
IDEAglobal 330 2.8%
IHS Global Insight 327 1.9%
Informa Global Markets 323 0.6%
ING Financial Markets 330 2.8%
Insight Economics 325 1.3%
Intesa Sanpaulo 330 2.8%
J.P. Morgan Chase 320 -0.3%
Janney Montgomery Scott 321 0.0%
Jefferies & Co. 325 1.3%
Landesbank Berlin 320 -0.3%
Landesbank BW 325 1.3%
Market Securities 316 -1.6%
MET Capital Advisors 315 -1.9%
Mizuho Securities 328 2.0%
Moody’s Analytics 332 3.4%
Morgan Keegan & Co. 326 1.6%
Morgan Stanley & Co. 335 4.4%
National Bank Financial 330 2.8%
Natixis 325 1.3%
Nomura Securities 322 0.3%
OSK Group/DMG 314 -2.2%
O’Sullivan 330 2.8%
Parthenon Group 320 -0.3%
Pierpont Securities 335 4.4%
PineBridge Investments 337 5.0%
PNC Bank 345 7.5%
Raymond James 330 2.8%
RBC Capital Markets 310 -3.4%
RBS Securities 315 -1.9%
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Societe Generale 335 4.4%
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Stone & McCarthy Research 325 1.3%
TD Securities 335 4.4%
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Westpac Banking Co. 328 2.0%
Wrightson ICAP 330 2.8%
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Record China Bank Profits to Be Overshadowed by Bad Loans

By Bloomberg News - Mar 21, 2012 10:21 AM GMT+0800


China’s biggest banks, set to post record profits for a fifth year, may report 2011 results marred by an increase in bad loans as an economic slowdown and faltering property market trigger defaults by borrowers.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four biggest local rivals may post a 15 percent increase in combined fourth-quarter net income when they report this month, according to analyst estimates compiled by Bloomberg. Their non-performing loans rose for the first time since the third quarter of 2008, the banking regulator said last month.
Enlarge image Record Profits at Chinese Banks

China’s efforts to bolster banks’ risk buffers and curb inflation following a two-year, $2.7 trillion credit boom have pushed up funding costs, slowed the economy and triggered defaults, prompting Standard & Poor’s to warn March 12 that a jump in bad loans may curb profitability. Fresh evidence of mounting defaults may clip the average 42 percent rally in shares of the banks in Hong Kong over the past five months.

“It’s time to take profits off the table,” said May Yan, a Hong Kong-based analyst at Barclays Capital Inc., who cut her rating on the industry to “neutral” last month, citing weakness in the economy and banking sector. “The rebound of NPLs is not temporary. It’s the beginning of a worrisome trend.”
Rising Bad Loans

Non-performing loans at Hong Kong-listed Chinese banks, which include Beijing-based ICBC, China Construction Bank Corp. and Agricultural Bank of China Ltd. (1288), may rise an average 40 percent in 2012, Yan forecast. The bad-loan ratio at the five biggest banks could climb to about 1.9 percent in 2013 from 1.1 percent in 2011, she said.

The economy expanded 8.9 percent last quarter, or at the slowest pace in 2 1/2 years, as Europe’s debt crisis curbed export demand and the property market weakened. The slowdown has extended into this year, with factory output in the first two months rising the least since 2009, while home prices posted the worst performance in a year, data showed this month.

Still, China’s 3,800 banks had fourth-quarter net income of $35.4 billion, a third more than the total earnings of 7,357 U.S. lenders including Bank of America Corp. and JPMorgan (JPM) Chase & Co., data from the China Banking Regulatory Commission and the Federal Deposit Insurance Corp. showed. The five largest Chinese banks accounted for 139.5 billion yuan ($22 billion) of profit, according to the analysts’ estimates.
Roads, Bridges

The earnings have been driven by accelerated loan growth after China’s government unveiled a 4 trillion-yuan stimulus package to bolster the economy following a slump in global equity and credit markets in 2008. That triggered an explosion in credit to local governments and property developers, and a surge in investments in infrastructure such as roads and bridges.

A year after the boom ended in 2010, defaults began to climb. Bad loans at China’s five largest banks rose to 299.6 billion yuan as of Dec. 31, from 287.9 billion yuan at the end of September, according to data from the regulator in February. The non-performing loan ratio remained at 1.1 percent, it said.

The actual increase in defaults is probably higher than the official data because lenders write off the worst assets at the end of the year, China International Capital Corp. analysts Mao Junhua and Luo Jing wrote in a note last month.
Missed Repayments

Mountain China Resorts Holdings Ltd., a partner of Club Mediterranee SA in China, said last week that it failed to repay 30 million yuan of bank loans on time. Shandong Helon Co., the fiber maker that in December became China’s first company to lose its investment-grade credit rating, missed 397 million yuan in loan payments in January.

Publicly traded Chinese banks’ bad loans may jump 26 percent this year as the economy slows, while profit growth will be cut by almost half, to 15 percent, and the average net interest margin may shrink 4 basis points from last year’s 2.7 percent, CICC forecast. A basis point is 0.01 percentage point.

“We are monitoring the NPL trend very, very closely, but it’s far from the stage of sending everybody into a panic,” said Yang Jianxun, a Shenzhen-based fund manager at Dacheng Fund Management Co., which oversees the equivalent of $12.7 billion. “The problem will be contained and banks’ valuations are still attractive from a long-term perspective.”

Shenzhen Development Bank Co. (000001), the first Chinese lender to report full-year earnings, posted a 26 percent increase in fourth-quarter non-performing loans following increased lending to smaller businesses, which have higher default rates, President Richard Jackson said on March 8.
Bankruptcies, Suicides

Among its branches, the ratio is the highest in Wenzhou, reflecting the difficulties faced by entrepreneurs in the coastal city, the bank said. More than 80 indebted businessmen in the small exporters’ hub disappeared, committed suicide or declared bankruptcy from April through September because of loans due to informal lenders, the official Xinhua News Agency said in October.

Property companies listed in China and Hong Kong face a worse cash shortage this year than in 2008, when China’s house prices fell for the first time since people were allowed to own homes, CEBM Group Ltd., a Shanghai-based investment advisory firm, said in January.

Residential prices will need to see a “meaningful correction” by falling 20 percent to 30 percent from last year’s peak before the government relaxes property rules, Qu Hongbin, an economist at HSBC Holdings Plc, said on March 19.
May Avert Crash

Prices may post a “single-digit” decline this year, billionaire developer Vincent Lo, chairman of Shui On Land Ltd., said in an interview in Beijing on March 8. The market won’t see a crash, he said.

Premier Wen Jiabao, who this month pared the 2012 economic growth target to 7.5 percent, said home prices remain far from a reasonable level and relaxing restrictions on sales could cause market “chaos.”

While Chinese banks’ bad debt have increased, total lending is growing faster. The ratio of non-performing loans to total credit should be “stable” after lending grew 15.8 percent last year, Morgan Stanley predicted in a March 7 note.

Agricultural Bank, the nation’s third-largest lender, may report tomorrow that fourth-quarter profit rose 16.6 percent to 28.84 billion yuan, according to a Bloomberg survey of analysts.

Construction Bank, the second-largest, is set to report a 29 percent gain on March 25. ICBC may say on March 29 that earnings rose 14 percent while Bank of China Ltd. (3988), ranked No. 4, will probably post a 2 percent increase in profit. The four banks are all based in Beijing.
Lower Valuations

Shanghai-based Bank of Communications Co., the fifth- largest lender, may post a 6.9 percent increase in net income on March 28.

The five banks are trading at an average 6.1 times their estimated earnings in 2012, compared with 9.5 times at New York- based JPMorgan and 13.8 times at Charlotte, North Carolina-based Bank of America, according to data compiled by Bloomberg.

Standard & Poor’s warned last week that China’s banks could face a slump in earnings growth in 2012 due to a slowing economy, falling property prices and the challenges of refinancing “sizable” local government debt.

The banks’ reported bad-debt ratio tied to local government financing vehicles is “not possible” unless they’re rolling over debt, said Liao Qiang, a Beijing-based S&P analyst. He estimated last year that as much as 30 percent of loans to such entities may sour without central-government support, and will probably be the biggest source of non-performing assets for the industry.
Local Governments

Yunnan Highway Development & Investment Co., a financing vehicle of the southwestern province, in April told creditors including Construction Bank (939) and ICBC that it wouldn’t be able to make principal payments on about 100 billion yuan of loans, Caixin Online reported in June. The provincial government later promised to assume payment.

In northern Liaoning province, about 85 percent of local government financial vehicles didn’t have sufficient income to pay principal and interest payments on debt due in 2010, Caixin said in September, citing a speech by the head of the provincial audit office.

China’s first audit of local-government borrowing showed 80 percent of their 10.7 trillion yuan of debt at the end of 2010 was bank loans and more than half will mature in 2011- 2013. More than 35 billion yuan of money borrowed for local development went into the stock and property markets or prohibited projects, the audit showed.

The credit boom also sapped lenders’ finances. BoCom said last week it plans to raise 56.6 billion yuan in a private placement to boost its core capital adequacy ratio above the 9.5 percent minimum required under the new capital rules. Agricultural Bank’s core capital ratio at 9.36 percent as of Sept. 30 was also below the mandatory minimum.

European Stocks Gain Before Greek Debt Swap

By Peter Levring - Mar 8, 2012 5:46 PM GMT+0800


European stocks rose for a second day as Japan’s economy shrank less than the government initially estimated and a deadline on Greece’s debt swap approached. Asian shares and U.S. index futures gained.

European Aeronautic, Defence & Space Co. rallied to a five- year high after doubling its dividend and predicting earnings will climb. Aviva Plc added 2.3 percent as the U.K.’s second- biggest insurer by market value reported operating profit that exceeded estimates. Enel SpA (ENEL), Italy’s biggest energy company, sank 5.9 percent after cutting its dividend.
Enlarge image A Pedestrian Passes The Aviva Plc Headquarters

The Stoxx Europe 600 Index (SXXP) advanced 1.3 percent to 263.44 at 9:44 a.m. in London. The benchmark gauge has surged 7.7 percent this year as the European Central Bank lent more than 1 trillion euros ($1.3 trillion) for three years to the region’s banks to ease liquidity.

“European equity markets are set to open higher as traders begin to turn optimistic over the Greek bond swap deal and the U.S. continues the string of strong economic data,” Jonathan Sudaria, a trader at Capital Spreads in London, wrote in e- mailed comments.

Standard & Poor’s 500 Index futures added 0.7 percent before a report at 8:30 a.m. in Washington that economists in a Bloomberg survey forecast may show initial claims for U.S. jobless benefits held at 351,000 last week. The MSCI Asia Pacific Index (MXAP) advanced 1.3 percent.
Japanese Economy

Japan’s economy contracted less than initially estimated last quarter, improving prospects for the recovery from last year’s earthquake. Gross domestic product shrank an annualized 0.7 percent in the three months ended Dec. 31, the Cabinet Office said, compared with a preliminary estimate of a 2.3 percent contraction. The median forecast of 21 economists surveyed by Bloomberg was for a 0.6 percent contraction.

Investors with about 60 percent of the Greek bonds eligible for the nation’s debt swap have so far indicated they’ll participate, putting the country on the verge of the biggest sovereign restructuring in history. The offer, which ends at 10 p.m. Athens time today, aims to reduce the 206 billion euros of privately held Greek debt by 53.5 percent.

ECB policy makers will keep the benchmark rate at a record low of 1 percent today, 55 of 58 economists in a Bloomberg News survey predict. The decision is due at 1:45 p.m. Frankfurt time and ECB President Mario Draghi will unveil the bank’s new economic projections at a 2:30 p.m. press conference.
ECB Forecasts

The bank is also expected to lift its 2012 inflation forecast above the 2 percent price-stability threshold today, limiting its ability to cut interest rates further even as it lowers the outlook for growth, economists said.

The Bank of England will today hold its key rate at 0.5 percent and maintain its commitment to buy an additional 50 billion pounds ($79 billion) of bonds by May after lifting its target for asset purchases to 325 billion pounds last month, according to economists. That decision is due at noon in London.

EADS rallied 9 percent to 29.25 euros, the highest price since May 2006. The maker of Airbus passenger jets agreed to pay a dividend of 45 cents a share, more than doubling the payout from last year and exceeding analyst estimates of a 30-cent dividend. Earnings before interest, taxes and one-time items will increase to more than 2.5 billion euros in 2012, from 1.8 billion euros last year, EADS said.

Aviva (AV/) increased 2.3 percent to 359.2 pence. The insurer reported operating profit that fell 2 percent to 2.5 billion pounds ($4 billion), surpassing the 2.45 billion-pound median estimate of analysts in a Bloomberg survey.
Gemalto, Klepierre

Gemalto NV (GTO) jumped 5.5 percent to 45.57 euros as the inventor of the smart chip used in bank and phone cards forecast revenue and operating profit will increase this year.

Klepierre (LI) SA, France’s second-largest publicly traded owner of shopping centers, climbed 5.6 percent to 24.70 euros. Simon Property Group Inc., the biggest U.S. mall owner, agreed to pay BNP Paribas SA 28 euros a share for 28.7 percent of Klepierre in a deal worth about 1.52 billion euros.

Deutsche Post AG (DPW) advanced 3.3 percent to 13.34 euros. Europe’s largest postal service said profit in 2012 will rise as much as 6.6 percent as growth in global trade helps the company’s DHL express and freight business.

Enel retreated 5.9 percent to 2.86 euros. The utility cut its dividend payout by a third to 40 percent of ordinary net income as it seeks to raise funds to cut debt.

Annual net income fell to 4.15 billion euros from 4.4 billion euros a year earlier, hurt by a windfall-profit tax imposed in Italy, the company said. That missed the 4.3 billion- euro average estimate of 17 analysts surveyed by Bloomberg.

Wirecard AG (WDI) sank 4.3 percent to 13.79 euros. The German provider of software and systems for online payments said it plans to sell 10.2 million new shares to fund acquisitions in the payment processing sector.

Opening Statement to House of Representatives Standing Committee on Economics

Glenn Stevens
Governor

Sydney - 24 February 2012


When we last met with the Committee in August, we had entered a period of heightened uncertainty about the global economy and financial system. The investment community was focusing increasingly on the high levels of public debt in major countries, and especially on the situation in the euro area, where budgetary pressures, banking pressures and competitiveness issues within the single currency area make for a very difficult set of problems. There was considerable instability in markets. But our view at that time – tentatively – was that we were not witnessing a repeat of the events of late 2008.

Admittedly, the second half of 2011 saw some very anxious moments. There was a flight from risk that pushed up borrowing costs for major countries like Spain and Italy, but pushed them down for countries like Germany and the United States to the lowest levels for more than 50 years in spite of the fiscal challenges the US itself faces. Funding markets for European banks in particular effectively closed for a few months, and for other banks became much more difficult and certainly more expensive.

The palpable fear before Christmas that Europe was on the brink of some sort of very bad financial event has lessened over our summer. The anxiety has not gone entirely away, and nor will it for some time. But the worst has not happened. Financial markets, while hardly brimming with confidence, have recovered somewhat over the past couple of months. Banks are able to access term funding markets again, albeit at higher cost. High-frequency gauges of business conditions and confidence have stabilised over the past couple of months in Asia and North America, and even in Europe. We have not seen the very steep fall that we saw in all these indicators in late 2008.

The actions of the European Central Bank contributed greatly to the stabilisation of financing conditions, essentially by removing, for a time, questions over the funding of European banks. The efforts of European leaders to craft a stronger framework for euro-wide governance on the fiscal side have also continued. A great deal more needs to be done to place European banks and sovereigns onto a stable footing, and to boost potential growth in Europe. But progress is being made.

Forecasts for the global economy in 2012 have been marked lower, mainly due to the effects of the problems in the euro area. Revisions to the IMF's forecasts in particular have been given great prominence. Our own forecasts have come down too, though they had already been a bit weaker than the IMF's. On these forecasts, global GDP will grow by about 3¼ per cent in 2012. That is down from about 3¾ per cent in 2011, which was about the average rate of growth over the past 15 years. On its face, this performance, should it occur, would be no disaster. After all, growth is going to be below average some of the time.

If we look for things to worry about, we will certainly find them. The global outlook has a very uneven composition: some countries, particularly in Europe, will record very weak outcomes. Moreover it is unlikely that a moment will come any time soon when we will be able to say the problems in Europe are behind us. Progress will be slow and there will be periodic setbacks and bouts of heightened anxiety – that is the nature of these things.

But equally, we should recognise that things have not been uniformly bad recently. The US economy has not experienced the ‘double dip’ some had feared six months ago, but instead has continued growing. The US corporate sector is in very strong shape, is cashed up and will at some point be able to start moving ahead more quickly. It appears American corporations have stepped up the pace of hiring in the past few months.

In China, the slowing in growth we have seen seems to have been roughly what the policymakers were looking for, and they appear to be getting on top of their inflation and housing boom problems. Around the rest of Asia, activity has also slowed, in part reflecting trade links with Europe. But it has not slumped and as inflation comes down, policymakers have increased room to respond. The pressure on European banks to shed assets has led to some tightening of trade credit in the Asian region, but at this stage the system seems to be adjusting to that without major drama. We have not, to date, seen the collapse of trade credit and trade flows we saw in late 2008.

Commodity prices, which had declined noticeably from their peaks in the first half of 2011, have actually moved sideways, or in some cases picked up a bit, for a few months now. They remain high by historical standards. That seems roughly consistent with the group of countries that makes up Australia's main trading partners expanding at a reasonable pace – expected by the IMF to be over 4 per cent this year, not very different from last year. Again, we do not, at this point, see the signs of the rapid collapse in global demand we saw three years ago.

At home, most of the information coming in suggests the economy has grown at close to an average pace over the past year. This outcome was weaker than we had expected a year ago. It was partly due to the effects of flooding on resource production but also due to softer outcomes in the non-resource side of the economy. CPI inflation has come down, as expected, as the impact of last summer's floods on food prices reverse. In underlying terms, inflation was about 2½ per cent over 2011, also a slightly lower outcome than we had, at one point, thought might occur. The labour market was generally softer in 2011 after a year of unusual strength in 2010 (though the unemployment rate at its latest reading was virtually unchanged from a year earlier).

These changes to the macroeconomic picture, against a backdrop of a period of intensified international turmoil, saw the Board lower the cash rate by 50 basis points in the closing months of 2011. Perhaps surprisingly in the face of developments in wholesale funding costs, this was initially fully reflected in a reduction in most lending rates, though there has been a partial reversal of that recently. We have repeatedly made clear that the shifting relationship between the cash rate and other rates in the economy is a factor the Board takes into consideration in setting the cash rate. That will remain the case. Recent developments do not materially affect the capacity of monetary policy to achieve its goals.

Looking ahead, the Bank's central expectation is for growth to be close to trend, and inflation close to the target, over the coming one to two years. There are, naturally, risks surrounding this central view. Those are spelled out in the latest Statement on Monetary Policy.

Perhaps what is most noteworthy about the Australian economy is the way in which the drivers of growth have changed in recent times. The Bank has spoken at length before about the terms of trade, and the resulting resource investment boom, which is still building and which will take the share of business investment in GDP to its highest level for 50 years. We have spoken also about how, on the other side, household behaviour has
changed – people are saving more and borrowing less. Spending is growing in line with income, but people are spending their money differently. The retail sector is finding it has to adapt to this changed environment. Some other industries are struggling with the high exchange rate. Meanwhile certain service sectors are growing quite smartly. Hence, while the economy overall has recorded ‘average’ growth, few sectors are in fact experiencing ‘average’ performance themselves – some are clearly quite weak relative to average, while some others are much stronger.

The Bank is quite aware of these differences and the pressures they bring to businesses and individuals. But we also know that monetary policy cannot remove the forces generating different paces of growth in our economy. We have to keep our eye on the overall performance of demand and prices. We are acutely conscious that history may offer limited guidance in assessing the net impact of the disparate and very powerful forces that are at work. Nonetheless, that is the assessment we must try to make.

Our most recent assessment was that, with growth near trend, inflation consistent with the target, interest rates about average and an outlook suggesting more of the same, the setting of policy was about right for the moment. Of course, we continue to reassess things each month.

My colleagues and I are here to respond to your questions.

Euro jumps vs dollar and yen, but may top soon

By Gertrude Chavez-Dreyfuss
NEW YORK | Thu Feb 23, 2012 4:45pm EST


(Reuters) - The euro jumped to a 2-1/2-month high against the dollar and a multi-month high versus the yen on Thursday as solid data on Germany, Europe's biggest economy, offset a bleak economic forecast from the European Commission.

The euro traded above its 100-day moving average on Thursday for the first time since late October after the Ifo think-tank reported that business sentiment in Germany rose for a fourth straight month in February, boosting optimism on the country's economy.

The euro, however, retreated from the highs after the European Commission said the euro zone economy was heading into its second recession in just three years.

The commission, the executive arm of the European Union, said growth in the wider EU will stagnate, warning that the 17-nation single currency area has yet to break its vicious cycle of debt.

"The move higher in the euro today is valid and reasonable, partly triggered by the German Ifo data and partly due to the Greek bailout agreement early this week," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York. "That deal essentially removed a tail risk for the euro zone.

"But how long can the euro's gains last?" he added. "My sense is that it will top out between $1.34-$1.35 because the European Central Bank is still expanding its balance sheet, which is good for risk appetite but not for the euro."

In late afternoon New York trading, the euro was up 0.9 percent at $1.33654. It soared to a session high of $1.33747, which was its strongest level since December 12 on trading platform EBS, as it took out stops above $1.3350.

The data on German business sentiment from the Munich-based Ifo think-tank was the key trigger for the euro, raising hopes that the German economy is improving and will avoid recession despite the problems facing indebted euro zone countries.

The euro broke above a key 100-day moving average around $1.33093 for the first time in 3-1/2 months.

The next target would be $1.3435, the 50 percent retracement of the decline from the late October peak to the mid-January trough.

One-month implied volatility on euro/dollar dropped to 9.76 percent on Thursday, the lowest since April 22, seemingly suggesting diminishing anxiety about the euro zone debt crisis.

Mark McCormick, currency strategist at Brown Brothers Harriman in New York, said next week's long-term refinancing operation by the ECB should further support the euro.

The European Central Bank next week is expected to lend nearly 500 billion euros to banks, although some forecasts go as high as 1 trillion euros.

A potential fly in the ointment could be Greece once again. Athens may vote on a private sector involvement bill that includes a provision to retroactively write down some of its debt on bond holders not participating in the debt swap.

McCormick said uncertainty stemming from the implementation of the private sector involvement and Greek elections should temper euro gains coming from the ECB's financing operation, keeping the euro confined to its recent trading range.

Andrew Wilkinson, chief economist at Miller & Tabak Co in New York, said the euro is destined for "bearish euphoria that is bound to feel the pull of gravity," although he said the currency "still appears to have $1.3500 engraved on its front."

Against the yen, the single currency rose to 106.999 yen, its strongest level since November 9 on trading platform EBS. The yen remained under pressure after recent monetary easing. The euro was last at 106.910 yen, up 0.4 percent on the day.

The dollar fell 0.4 percent against the yen to 79.950, off a seven-month high of 80.406 yen hit on Wednesday.

Analysts said there are no signs of hitting a peak in dollar/yen just yet, and a further rally is expected. The next target would be around 81.63 yen, which is the 61.8 percent retracement of the decline from the April 2011 peak of 85.530 to the record low hit on October 31.

The dollar, meanwhile, fell to a 3-1/2-month low versus the Swiss franc of 0.90120 franc. Traders said stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 franc.

The euro also fell against the franc to 1.20460 francs after breaking through a reported options barrier at 1.2050 francs. The pair edged nearer to the 1.20 franc floor the Swiss National Bank has pledged to defend.