Four Reasons Draghi’s Plan Alone Won’t Save Europe

Give Mario Draghi credit: The president of the European Central Bank on Thursday followed through on his promise of stronger action to ease pressure on such embattled European nations as Spain. Meeting in Frankfurt, the bank’s Governing Council agreed to buy unlimited amounts of the bonds of countries that meet certain stringent conditions for help. Spain, which is suffering from serious capital flight, is likely to be the first to seek aid under the awkwardly named Outright Monetary Transactions program.

But as powerful as Draghi is, there’s only so much a central banker can do to fix what ails Europe. Here are four obstacles the new plan doesn’t overcome:

Shortsightedness: By buying short-term bonds, the European Central Bank will help hold down short-term interest rates, but it’s not the cost of credit in the short term that’s the problem in Europe. The problem is sky-high long-term rates, which are linked to the cost of mortgage loans and some business borrowing. In the U.S., the Federal Reserve has been buying up long-term debt, but the ECB has no such intent. Draghi didn’t make clear why he’s avoiding long-term bonds.

More cuts to come: The deficit-cutting demands that Europe imposes on Spain will make its short-term problems even worse, as I wrote in a preview of the ECB action. The more Spain cuts spending, the higher its unemployment is likely to go. A truly united Europe would tide Spain over its financial crisis, but there is no appetite for such burden-sharing, especially given Spain’s dodgy record on reform to date.

Bound by banks: The ECB’s action could make national governments and their banks more dependent on each other, even though the goal of the ECB and the European Union is to lessen that fatal interdependence. Banks may be encouraged by the plan to load up even more on the debt of the countries where they’re based, says Raoul Ruparel, head of economic research for Open Europe, a research and advocacy group. The problem with interdependence is that banks and sovereigns are dragging each other down.

Fiscal disharmony: The ECB is doing the best it can, but it can’t deal with the fundamental problem of the euro zone, which is that the 17 nations share a currency but don’t have a banking or fiscal union to go with it. Fred Bergsten, director of the Peterson Institute for International Economics, predicts optimistically in the September/October issue of Foreign Affairs that “Europe will emerge from its current turmoil not only with the euro intact but also with stronger institutions and far better economic prospects for the future.” But getting to that nirvana will require action by more than just Draghi and the ECB Governing Council—which are by now stretched to their limit.

View the original article here

S&P 500 Rises Most Since ’87 as Bernanke Helps Offset Europe

January 19, 2012, 12:55 PM EST By Inyoung Hwang and Whitney Kisling

Jan. 19 (Bloomberg) -- U.S. stocks are off to the best start in 25 years as investors speculate Federal Reserve Chairman Ben S. Bernanke has done enough to insulate the economy from Europe’s debt crisis.

The S&P 500 has gained 4 percent, the most since it rose 10 percent over the first 11 days in 1987, according to data compiled by Bloomberg. Stocks are overcoming earnings that trailed estimates by the widest margin in three years as improvements in hiring, manufacturing and car sales extend the biggest fourth-quarter advance since 2003.

Bernanke has left the target rate on overnight loans between banks unchanged since the end of 2008, the longest stretch since at least 1971, data compiled by Bloomberg show. The policy may push more investors toward equities after yields on 10-year Treasuries finished 2011 within a quarter-point of a record low and the economy grew at an estimated 3.1 percent rate last quarter, said John Carey of Pioneer Investments.

“It’s probably a good idea not to fight someone so much bigger than you are,” Carey, a Boston-based money manager at Pioneer, said in a telephone interview on Jan. 18. The firm oversees about $220 billion. “The Fed will probably stay on its course,” he said. “I haven’t heard any indication that the Fed is considering boosting interest rates, so stocks will look attractive from an income point of view.”

Worst to First

Four companies whose declines were among the 10 biggest in the S&P 500 last year are among the 10 largest gainers in 2012. Netflix Inc., the Los Gatos, California-based movie service, climbed 42 percent, and First Solar Inc. in Tempe, Arizona, is up 27 percent. Charlotte, North Carolina-based Bank of America Corp., which lost 58 percent in 2011, gained 22 percent this year, while Sears Holdings Corp. in Hoffman Estates, Illinois, rose 24 percent after losing 56 percent.

The S&P 500 advanced seven of the first eight days this year, something that has occurred eight times since 1900, data compiled by JPMorgan Chase & Co. show. The mean return those years was 16 percent, the data show.

About $460 billion has been added to the value of American shares this year and the S&P 500 reached an almost six-month high yesterday, as economic reports outweighed concern that downgrades for European nations would worsen the debt crisis. France was stripped of its top rating by S&P and banks suspended talks with Greece over restructuring.

Economic Growth

“Europe is important but it’s not the end of the world if they see a recession,” James Dunigan, who helps oversee $107 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a Jan. 17 phone interview. “We’re starting to see that modest economic growth expectation for this year.”

The average forecast for U.S. gross domestic product growth this year has been rising since October. From a low of 2 percent, the median estimate in a survey of 72 economists has climbed to 2.3 percent, including a 0.2-point increase on Jan. 12 that represented the biggest one-day gain since projections for 2012 began, according to data compiled by Bloomberg.

Optimism about the economy is helping investors shrug off fourth-quarter earnings that have trailed estimates. Profit fell short of analyst forecasts by an average of 4.3 percent among the eight S&P 500 companies that posted results in the first week of earnings season, the data show. Three other quarters with a worse first week of earnings season were in 2007 and 2008 as the economy was slipping into to the worst recession since the 1930s.

Five-Month High

The S&P 500 increased 1.1 percent to 1,308.04 yesterday, the highest level since July 26. It climbed 1.4 percent over four days last week, reaching a five-month high of 1,292.48 on Jan. 11 even after Microsoft Corp., the world’s biggest software maker, said personal computer sales were probably worse than forecast in the fourth quarter.

“This year isn’t going to be about earnings,” James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management, said in a Jan. 17 phone interview. “There’s a lot of value in the market that could come just from people calming down about this recession, depression calamity. It’ll be about expanding that multiple.”

Combined S&P 500 profit is forecast to reach $104.76 a share in 2012, the highest level ever, according to data compiled by Bloomberg. The benchmark index is trading at 12.5 times forecast earnings. That compares with 13.4 at the beginning of 2011. The S&P 500’s average ratio in 2011 was 14.1 based on reported earnings. The five-decade mean is 16.4.

Unprecedented Stimulus

Central banks around the world have taken unprecedented measures to prevent the European debt crisis from triggering a global recession. European Central Bank President Mario Draghi last month unveiled plans to offer banks 36-month, 1 percent loans through two so-called longer-term refinancing operations, known as LTROs.

That combined with investor speculation of a third round of stimulus by the Fed and bets China’s central bank will ease monetary policy has fueled stock prices, according to Doug Noland, the money manager for Pittsburgh-based Federated Investors Inc.’s Prudent Bear Fund, which oversees $1.3 billion. It won’t last, he said.

“Markets over the years have become programmed to focus a lot on monetary stimulus,” Noland said in a Jan. 17 phone interview. “It’s a very dangerous reason to be buying equities. We saw in 2011 how QE2 didn’t have much fire power. We’ve seen European policy making repeatedly disappoint the markets.”

Target Rate Unchanged

Fed policy makers have left their target rate unchanged since the end of 2008, data compiled by Bloomberg show. The S&P 500 more than doubled from its low in March 2009 after Bernanke signaled in August 2010 the central bank would embark on a second round of asset purchases, known as quantitative easing, to boost the economy.

The index declined as much as 19 percent from its 2011 high in April through October last year as the program ended and concerns European leaders would fail to tame the region’s debt crisis escalated. It has since rebounded 19 percent.

Gross domestic product in the euro region will shrink by 0.2 percent this year, the median estimate in a survey of 21 economists surveyed by Bloomberg. The diverging outlooks are reducing lockstep price moves. The so-called 30-day correlation coefficient between the euro and S&P 500 fell 27 percent to 0.66 after reaching a record 0.91 in November.

Correlation Weakens

Speculation about whether European leaders would succeed in containing the credit crisis sent equity, currency and commodity markets up and down in unison last year. The relationship between U.S. stocks and the euro weakened after American unemployment fell to 8.5 percent from 9 percent and business activity as measured by the Chicago Purchasing Managers Index expanded at the fastest pace in seven months.

“A lot of people dismissed the original data in the fall as being backward looking,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “But when you started seeing jobless claims going down, it looked more and more like the U.S. had shrugged off a lot of the European contagion.”

Rallying stocks have done little to entice investors. Mutual funds that invest in U.S. equities posted $753 million in inflows for the week ending Jan. 11 after $7.1 billion in outflows during the first week of the year, Investment Company Institute data show. Customers pulled about $63 billion for the final three months of 2011, the data show.

The S&P 500 has gained an average 6.1 percent during presidential election years, compared with 4.4 percent in the years that follow, according to Bloomberg data going back to 1952. The index has posted a positive return for the last seven months of those years 87 percent of the time, data from the Stock Trader’s Almanac show.

“Committed bears have to pull in their claws a little,” according to Brian Barish, who helps oversee about $7 billion as Denver-based president of Cambiar Investors LLC. “On the more bullish side, corporate earnings continue to be very good and stocks in a lot of areas are quite undemanding in terms of their valuations,” Barish said in a Jan. 17 phone interview. “We could have a good year.”

--With assistance from Lu Wang in New York. Editors: Chris Nagi, Jeff Sutherland

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

View the original article here

Asian Stocks Swing Between Gains, Losses on U.S., Europe Concern

January 11, 2012, 1:32 AM EST By Jonathan Burgos and Yoshiaki Nohara

Jan. 11 (Bloomberg) -- Asian stocks swung between gains and losses as optimism about the U.S. economy tempered concern Europe’s debt crisis is worsening ahead of a German bond sale.

James Hardie Industries SE, a supplier of building materials that gets most of its sales in the U.S., climbed 3 percent in Sydney. AU Optronics Corp., a supplier of liquid crystal displays to companies including Nokia Oyj and Dell Inc., gained 4.4 percent in Taipei. China Unicom (Hong Kong) Ltd. fell 3.3 percent amid concern competition will increase among mainland carriers.

“There are more positive signs particularly on employment and consumer,” spending in the U.S., said Stephen Halmarick, Sydney-based head of investment markets research at Colonial First State Global Asset Management, which oversees about $150 billion. “The outlook in the U.S. is for modest growth this year, and that’s better than Europe. Expectations are Europe will be in a recession.”

The MSCI Asia Pacific Index slid 0.1 percent to 115.98 as of 2:30 p.m. in Tokyo, with five shares rising for every four that fell. The gauge advanced 0.9 percent last week as manufacturing growth from China to the U.S. bolstered confidence in the global economy.

Australia’s S&P/ASX 200 Index increased 0.9 percent. Hong Kong’s Hang Seng Index was little changed. Japan’s Nikkei 225 Stock Average rose 0.2 percent. South Korea’s Kospi Index lost 0.5 percent.

China Inflation

China’s Shanghai Composite Index decreased 0.6 percent, heading for its first decline in four days, on concern inflation will hamper the government’s ability to ease lending curbs. A report due to be released tomorrow will probably show consumer prices rose 4 percent in December.

Futures on the Standard & Poor’s 500 Index fell 0.2 percent today. The gauge rose 0.9 percent in New York yesterday as global equities rallied amid bets that China will ease monetary policy to spur growth in the world’s second-largest economy.

Exporters advanced as U.S. employers hired 4.15 million workers in November, 107,000 more than in the prior month, the Labor Department said yesterday. A survey by Chief Executive magazine showed confidence among American CEOs rose last month to the highest level since May.

--Editors: Nick Gentle, John McCluskey

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

View the original article here

Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash

January 11, 2012, 1:55 AM EST By Anne-Sylvaine Chassany and Gabi Thesing

Jan. 11 (Bloomberg) -- Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

ECB Deposits

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have climbed by 219 billion euros since the loans to a record 482 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Refinancing Needs

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

Merkel, Sarkozy

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

‘Double Punch’

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Draghi’s Priority

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

‘Kick the Can’

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing, according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

--With assistance from Christine Harper in New York, Patricia Kuo in London and John Martens in Brussels. Editors: Keith Campbell, Edward Evans, Robert Friedman.

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

View the original article here

U.S. May Grow in 2012 as Europe Shrinks

January 02, 2012, 7:32 PM EST By Bob Willis and Timothy R. Homan

(Updates with closing market prices in fifth paragraph.)

Dec. 30 (Bloomberg) -- Rising confidence, fewer firings and gains in holiday sales show the U.S. economy is picking up, defying a slowdown in Europe and much of the rest of the world.

The divergence will become even starker in 2012 as the world’s largest economy accelerates, the 17-member euro area sinks into a recession and growth in emerging markets cools, according to economists like Maury Harris of UBS Securities LLC and Barclays Capital Inc.’s Dean Maki.

“There is a sense of decoupling,” said Harris, chief economist at UBS Securities in New York, whose team was the most accurate in forecasting the U.S. economy in the two years through September. “We can still have a decent year here in the U.S. even with the rest of the world slowing down.”

An improving job market and freer credit may underpin American household sentiment and spending just as the debt crisis in Europe prompts additional belt-tightening overseas. Stabilization in housing will erase a source of weakness at the same time vehicle replacement demand benefits companies like General Motors Co.

Stocks fell on concern over Spain’s budget deficit. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,257.6 at the close in New York. The benchmark equity gauge was little changed this year.

Investors have been less kind to European equities. The Stoxx Europe 600 Index dropped almost 12 percent in 2011 as the debt crisis spread across the major economies of the euro area.

China and U.K.

Among reports today, manufacturing in China contracted in December for a second month as Europe’s debt crisis slowed export demand. The euro area’s crisis is crimping housing and growth in the U.K. as well, with the average cost of a home dropping 0.2 percent in December, the first monthly decline since August, the Swindon, England-based Nationwide Building Society said in an e-mail.

The extension of a tax cut through February is one reason economists are turning more optimistic on U.S. prospects. The economy will grow 2.5 percent in 2012, up from a prior estimate of 1.9 percent, according to a revised forecast issued on Dec. 23 by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The new estimate was based on the assumption that lawmakers will agree to retain the tax break for all of next year, he said in a research note.

JPMorgan projects the combined economies of the countries in the euro area will shrink 0.7 percent next year.

Fewer Jobless Claims

Another reason for optimism is a decrease in firings by U.S. companies that may portend a pickup in hiring in early 2012. Fewer Americans filed applications for jobless benefits in the four weeks through Dec. 24 than at any time since June 2008, according to figures yesterday from the Labor Department.

Less joblessness, rebounding stocks and falling gasoline prices are helping boost confidence. The Bloomberg Consumer Comfort Index reached a five-month high in December.

“We can tell that something is clicking if jobless claims are down and confidence is up,” said UBS’s Harris, who projects the U.S. economy will grow 2.1 percent in 2012.

Maki, chief U.S. economist at Barclays Capital in New York, forecasts 2.5 percent growth next year, up from 1.7 percent in 2011. The euro region will contract 0.2 percent after expanding 1.5 percent, he said.

Europe a ‘Headwind’

“We are diverging significantly as we move into 2012,” Maki said. “Europe is a headwind for the U.S., but we don’t think a European recession necessarily drags the U.S. into a recession.”

One reason is that consumer spending, which accounts for about 70 percent of the economy, has held up this year even as confidence slumped amid growing concern about Europe, the threat of a government shutdown during the mid-year debate on the U.S. debt limit and the downgrade of U.S. Treasury securities by S&P, Maki said.

Housing and auto sales, two areas which slumped during the recession, will probably improve.

Economists at Toronto-based BMO Capital Markets, led by Sherry Cooper, forecasts U.S. home construction will add to gross domestic product in 2012, led by the building of apartments and townhouses. Residential construction detracted from growth from 2006 through 2010 and was little changed this year.

The auto industry will strengthen as Americans replace aging and scrapped vehicles after delaying purchases since the recession, according to economists at Nomura Securities International Inc. in New York. For the number of cars per adult to hold at current levels, sales will need to climb to about a 16 million annual rate in coming years, the group led by Lewis Alexander wrote in a Dec. 5 report.

Auto Sales

Vehicle sales ran at a seasonally adjusted annual rate of 13.6 million in November, according to Autodata Corp.

“We’re encouraged by the industry’s recent performance and the developments that we’ve seen in the economy,” Don Johnson, GM’s vice president for U.S. sales, said on a conference call this month.

The U.S. economy’s ability to weather the mid-year slump in equities and confidence means it will overcome a European slowdown next year, said Vincent Reinhart, chief U.S. economist at Morgan Stanley in New York.

“The most important source of contagion is through financial markets, and we have already felt that,” said Reinhart. Morgan Stanley projects the U.S. will grow 2.2 percent in 2012 while the euro countries shrink 0.2 percent.

“There is a recession in Europe right now, but we aren’t forecasting a full-blown crisis and the euro hangs together,” Reinhart said. “Conditional on that, then the U.S. gets by.”

--With assistance from Chris Middleton in Washington. Editors: Carlos Torres, Vince Golle

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

View the original article here

Treasuries Rise on Europe Crisis

January 02, 2012, 2:12 AM EST By Daniel Kruger

Dec. 30 (Bloomberg) -- Treasuries advanced for a fourth day, capping their biggest annual return since 2008, as investors sought the refuge of U.S. government securities on concern Europe’s sovereign-debt crisis will worsen.

Bonds extended gains as Spain’s new government moved to increase taxes and reduce spending to tackle a larger-than- forecast budget deficit that’s twice the fiscal shortfall in Italy. Treasuries are set to beat stocks, commodities and the dollar for the year, even as reports signal the U.S. economy is recovering.

“On its own, rates would be significantly higher in the U.S., but we are not an island unto ourselves,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The exogenous impact from Europe is clearly keeping our rates much lower than they would be otherwise.”

The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.88 percent as of 2:43 p.m. New York time, according to Bloomberg Bond Trader prices. It declined 15 basis points this week and lost 19 basis points in December. The 2 percent securities due in November 2021 rose 6/32 today, or $1.88 per $1,000 face amount, to 101 3/32. Their last four-day winning streak ended Nov. 17.

Thirty-year bond yields decreased one basis point to 2.89 percent today, and five-year note yields dropped five basis points to 0.83 percent.

Lower Volumes

Treasury market volumes have slid amid the Christmas and New Year’s holiday season. About $103 billion of Treasuries changed hands today as of 2:01 p.m. through ICAP Plc, the world’s largest interdealer broker. About $109 billion changed hands yesterday. The 2011 daily average is $285 billion.

The Securities Industry and Financial Markets Association recommended that trading in Treasuries close at 2 p.m. in New York and remain shut on Jan. 2 in observance of New Year’s Eve and New Year’s Day.

The Federal Reserve said today it will purchase about $45 billion of Treasuries in January and sell about $44 billion in its program to lower borrowing costs by replacing $400 billion of shorter-term assets in its holdings with longer-term debt.

U.S. government debt returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after Standard & Poor’s cut the nation’s AAA rating on Aug. 5. German bunds also gained 9.6 percent, while Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 7.3 percent.

Record Low

Benchmark 10-year yields dropped to a record 1.67 percent on Sept. 23 amid the European debt turmoil. Two years of summits have failed to contain a crisis that has led to bailouts of Greece, Ireland and Portugal and now threatens Spain and Italy.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said economic growth in the 17- nation region “isn’t good.” He spoke on RTL Luxembourg radio.

Spain’s deficit this year will reach 8 percent of gross domestic product, requiring tax boosts of 6 billion euros and spending cuts of 8.9 billion euros, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid.

“A year ago there was probably a greater expectation that rates would start to creep higher,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, one of 21 primary dealers that trade with the Fed. “The economy, although it seems better and we’ve had some decent growth, is not growing strong enough that there’s no fear that it dips back down, especially with something like the European issue affecting it.”

A four-week bill sale on Dec. 20 drew bids for a record 9.07 times the amount offered even though rates on the securities were below zero in New York trading.

Foreign Central Banks

U.S. government securities rose in December even as Treasuries held in custody at the Fed for foreign central banks and other official investors fell by $68.9 billion, the biggest four-week drop on record, according to Fed data. The reduction came as the dollar strengthened, with the Dollar Index increasing 2.3 percent in December.

“It’s not unlikely they are repatriating assets to shore up their own economies,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

S&P Downgrade

S&P downgraded the U.S. rating this year for the first time, criticizing lawmakers for failing to cut spending enough to reduce budget deficits that exceed $1 trillion a year.

Treasuries still were some of the best assets to own in 2011. U.S. 30-year bonds returned 35 percent, the most since 2008, and Treasury Inflation Protected Securities gained 14 percent, the most since 2002, the Bank of America indexes show.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.95 percentage points today. The average over the past decade is 2.13 percentage points.

Stocks have lost 6.8 percent this year after accounting for reinvested dividends, based on the MSCI All Country World Index. The Dollar Index tracking the U.S. currency against six major counterparts rose 1.5 percent in 2011. The Standard & Poor’s GSCI Total Return Index of commodities slipped 1 percent.

Growth in the world’s biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent in 2011, a Bloomberg survey of banks and securities companies shows. U.S. jobless-benefit applications over the past month fell to a three-year low, data showed yesterday. The Institute for Supply Management-Chicago Inc. said its business barometer was at 62.5 this month, compared with a Bloomberg poll forecast of 61. Readings above 50 signal growth.

U.S. payrolls added 150,000 workers in December, after gaining 120,000 in November, according to another Bloomberg survey before the government reports the data on Jan. 6.

Treasury 10-year yields will advance to 2.66 percent by the end of 2012, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

--With assistance from Anchalee Worrachate in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

View the original article here

Asian Stocks Decline as Euro Weakens on Growth, Europe Concern

January 02, 2012, 2:42 AM EST By Shiyin Chen and Saeromi Shin

Jan. 2 (Bloomberg) -- Asian stocks declined on the first trading day of 2012, while the South Korean won and the euro weakened on concern that the global economic recovery will be hampered as Europe’s debt crisis enters a new year.

The MSCI Asia Pacific excluding Japan Index slipped 0.4 percent as of 3:08 p.m. in Singapore. Euro Stoxx 50 Index futures retreated 0.4 percent. Financial markets from Japan to the U.K. and the U.S. are closed for a holiday. The won fell 0.3 percent to 1,155.86 per dollar and the euro decreased 0.1 percent to $1.2941. Silver advanced as much as 0.2 percent to $27.8875 per ounce, set for a third day of gains.

Indexes of stocks and commodities had the worst yearly returns since the financial crisis in 2008. South Korea said yesterday export growth will slow this year and Singapore’s government said its economy grew less than previously forecast in 2011. Data today may confirm European manufacturing shrank for a fifth straight month, as regional leaders return to work from the Christmas holidays seeking to buy time to rescue the single currency from fragmentation.

“With many markets closed, it’s hard to make one-way bets especially in the absence of strong leads,” said Lim Chang Gue, a fund manager in Seoul at Samsung Asset Management Co., which oversees about $28 billion. “There’s the ongoing crisis in Europe, and global demand will continue to be generally weak this year. The thing is how much China could provide buffers, but it’s still unclear.”

More than three shares retreated for every one that rose on MSCI’s Asia Pacific ex-Japan Index. Taiwan’s Taiex Index sank 1.7 percent, Indonesia’s Jakarta Composite index dipped 0.3 percent and the BSE India Sensitive Index slid 0.5 percent, a fifth day of losses.

Korea, Singapore

South Korea’s export growth will probably slow to 6.7 percent this year from 19.6 percent in 2011, the Ministry of Knowledge Economy said yesterday. Finance Minister Bahk Jae Wan said the economic outlook will be more uncertain and difficult in 2012 and called for a strengthening of contingency plans to prevent contagion from Europe’s debt crisis.

Separately, Singapore’s Prime Minister Lee Hsien Loong said the island’s gross domestic product rose 4.8 percent in 2011, compared with the government’s earlier forecast of a 5 percent increase, and said the economy will expand 1 percent to 3 percent in 2012. Indonesia said exports grew 8.3 percent in November from a year earlier, slowing from an increase of 16.7 percent the previous month.

Data yesterday showed China’s purchasing managers’ index climbed to 50.3 in December from 49 in November, beating all forecasts in a Bloomberg News survey of 15 economists. A gauge of euro-region manufacturing was 46.9 in December from 46.4 the previous month, according to economists surveyed by Bloomberg News before Markit Economics releases the data today. A reading below 50 indicates contraction.

Europe’s Debt

The euro weakened against 11 of its 16 most actively traded peers. The currency weakened for a second year in 2011 and fell on Dec. 30 below 100 yen for the first time since June 2001. Some 157 billion euros ($203 billion) in debt will mature in the 17-member euro area in the first three months of 2012, according to UBS AG. By the end of that period, leaders have pledged to draft a stricter rulebook for controlling government spending. German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Berlin Jan. 9 to work out details.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, rose 0.1 percent, the first increase in three days. It climbed 1.5 percent in 2011. Treasuries gained 9.78 percent last year, the most since 2008, as investors sought the relative safety of U.S. debt.

‘Wary’ Investors

“Investors are demanding dollars as they are wary of the ongoing European debt crisis,” said Ha Jun Woo, a Seoul-based currency dealer at Daegu Bank in Seoul.

The Institute for Supply Management’s factory index climbed to a six-month high of 53.4 in December, while spending on construction projects advanced 0.4 percent in November, the fourth straight monthly gain, economists surveyed by Bloomberg projected ahead of U.S. reports tomorrow. Payrolls climbed by 150,000 workers after rising 120,000 in November, according to the median forecast of 62 economists in a Bloomberg News survey before Labor Department data on Jan. 6.

--With assistance from Jiyeun Lee in Seoul. Editors: Richard Dobson, Ovais Subhani

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

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

View the original article here

Asian Stocks Edge Higher on Signs U.S. Weathering Europe Crisis

December 30, 2011, 12:37 AM EST By Yoshiaki Nohara and Norie Kuboyama

Dec. 30 (Bloomberg) -- Asian stocks edged higher on the last trading day of 2011, with the region’s benchmark index set for its first yearly drop since 2008, as rising U.S. home sales signaled the world’s largest economy is weathering Europe’s debt crisis.

Sony Corp., Japan’s biggest exporter of consumer electronics, gained 1.6 percent. Techtronic Industries Company Ltd., a maker of industrial products that gets about 73 percent of its revenue in North America, added 1.5 percent in Hong Kong. Cnooc Ltd., China’s largest offshore energy explorer, rose 0.9 percent after oil gained. Chiyoda Corp. gained 2.7 percent after a report operating profit may top the Japanese engineering company’s forecast.

The MSCI Asia Pacific Index added 0.2 percent to 113.02 as of 11:23 a.m. in Tokyo. The measure has lost 0.5 percent this month and is set for an 18 percent drop this year. For the week, the gauge is down 0.6 percent.

“Investors increasingly feel the U.S. economy is firmer than they had expected,” said Toshiyuki Kanayama, a market analyst at Tokyo-based Monex Inc. “The economic data is looking good and that will boost stock markets, especially when concern about Europe’s debt issues aren’t in the forefront.”

The Asia Pacific gauge has lost about $1.78 trillion this year amid concern Europe’s three-year debt crisis will drag the global economy into recession. Stocks on Asia’s benchmark are valued at 12.6 times estimated earnings on average, compared with 12.6 times for Standard & Poor’s 500 Index and 10.5 times for the Stoxx Europe 600 Index.

Fukushima Dai-Ichi

Utilities have fallen 27 percent this year, dropping the most among the 10 industry groups on the Asian gauge. Japanese power producers tumbled amid a nuclear crisis at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. The utility has lost 91 percent this year, the biggest drop on the MSCI All Country World Index.

Japan’s Nikkei 225 Stock Average gained 0.3 percent today. Trading volume was about half the 100-day average ahead of a four-day weekend. Hong Kong’s Hang Seng Index rose 0.4 percent. Australia’s S&P/ASX 200 lost 0.3 percent. South Korea’s market is closed today for a holiday.

Futures on the S&P 500 Index slid 0.1 percent The gauge advanced 1.1 percent yesterday in New York after a report showed a jump in pending sales of existing homes that exceeded economist estimates by almost five times.

Sony, James Hardie

Exporters to the U.S rose. Sony added 1.6 percent to 1,376 yen in Tokyo, Techtronic Industries rose 1.5 percent to HK$8.04.

Gains in stocks may be limited after Italy yesterday fell short of its target in a debt auction. Prime Minister Mario Monti said his government won’t “rule out” more aggressive efforts to reduce debt.

“Markets will continue to be unstable for the first quarter of next year,” said Masaru Hamasaki, Tokyo-based chief strategist at Toyota Asset Management Co., which oversees the equivalent of $24 billion. “European nations will need to unite as they debate how to rehabilitate the region’s finances. The leadership will be tested.”

Cnooc rose 0.9 percent to HK$13.70. Crude oil for February delivery gained as much 0.2 percent on the New York Mercantile Exchange amid potential supply disruptions by Iran around the Strait of Hormuz and on optimism about the U.S. economy.

--Editors: Jason Clenfield, Jim Powell.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

View the original article here

Asian Stocks Rise as U.S. Data Overshadow Europe Debt Concern

December 22, 2011, 9:33 PM EST By Jonathan Burgos

Dec. 23 (Bloomberg) -- Asian stocks rose, with a regional index heading for its first gain in three weeks, as a drop in U.S. jobless claims and an increase in consumer confidence added to signs the world’s biggest economy is weathering Europe’s debt crisis.

Samsung Electronics Co., South Korea’s biggest exporter of consumer electronics, advanced 1.8 percent in Seoul. James Hardie Industries SE, a supplier of building materials the counts the U.S. as its largest market, climbed 3.9 percent in Sydney. Gloucester Coal Ltd. surged 23 percent after Yanzhou Coal Mining Co. offered to buy the Sydney-based company for A$700 million ($709 million) and merge it with Yanzhou’s Australian unit.

“Its encouraging that the U.S. economy is improving,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. Melbourne. “Asset prices can probably go further despite this fairly benign economic environment. There’s probably a need for further policy response in Europe but at least we’re seeing that the liquidity mechanism put in place are starting to impact positively in terms of bond yields paring their gains.”

The MSCI Asia Pacific Excluding Japan Index climbed 1.2 percent to 397.22 as 10:02 a.m. in Hong Kong, heading for a 2.1 percent advance this week. Almost seven shares gained for each that fell in the gauge.

The regional index had fallen in the past two weeks as signs of slowing growth in China and concern that Europe’s debt crisis is worsening overshadowed improving U.S. data. Greece’s creditors are resisting pressure from the International Monetary Fund to accept bigger losses on holdings of the indebted nation’s government bonds, three people with direct knowledge of the discussions said.

New Zealand Quake

South Korea’s Kospi Index and Hong Kong Hang Seng Index both gained 1.1 percent. Australia’s S&P/ASX 200 Index advanced 1 percent. China’s Shanghai Composite Index was little changed. Japanese markets are closed today for a holiday.

New Zealand’s NZX 50 Index added 0.4 percent, paring gains of as much as 0.7 percent after a magnitude 5.8 earthquake struck the country’s South Island.

Futures on the Standard & Poor’s 500 Index rose 0.6 percent today. The gauge rose 0.8 percent in New York yesterday amid better-than-estimated economic reports.

Asian exporters gained as the number of Americans applying for unemployment benefits unexpectedly dropped last week to the lowest since April 2008 and consumer confidence rose more than forecast in December to a six-month high.

The MSCI Asia Pacific Index, which includes Japan, slumped 18 percent this year through yesterday, heading for its worst performance since 2008. Utilities posted the biggest decline among the 10 industry groups in the gauge as Japanese utilities tumbled after meltdowns at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. It was the worst nuclear accident in 25 years.

The regional benchmark index’s drop this year compared with a 0.3 percent decline by the S&P 500 and a 13 percent slide by the Stoxx Europe 600 Index. Stocks in the Asian gauge were valued at 12.6 times estimated earnings on average, compared with 12.7 times for the S&P 500 and 10.4 times for the Stoxx 600, according to data compiled by Bloomberg.

--Editor: Nick Gentle

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

View the original article here

DJIA 14,000 Depends on U.S. Saying We’re in This With Europe

December 08, 2011, 6:59 AM EST By Whitney Kisling, Nikolaj Gammeltoft and Inyoung Hwang

(Updates with today’s trading in seventh paragraph.)

Dec. 7 (Bloomberg) -- Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow Jones Industrial Average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

Speculation about whether Greece, Ireland and Portugal will avoid default is drowning out results from companies such as Akron, Ohio-based Goodyear Tire & Rubber Co. and Target Corp. in Minneapolis. While record earnings and an improving economy should be pushing the Dow toward its October 2007 record of 14,164.53, they’re not because Europe is overshadowing the good news, said Kevin Rendino, a money manager at New York-based BlackRock Inc.

“What’s getting in the way is a bunch of politicians and a bunch of budget deficits,” Rendino, whose firm oversees $3.3 trillion, said in a telephone interview yesterday. “It’s all we think about. It’s all we talk about. It’s incredibly frustrating because in the U.S., we have a bunch of highly profitable businesses, an OK economy, companies sitting on a bunch of cash and earning as much as they ever have,” he said.

“And everyone is sitting on their hands because they’re waiting to see what happens in Europe.”

Biggest Rally

Signs of cooperation among governments pushed the Dow average to its biggest daily gain since March 2009 last week. The announcement on Nov. 30 that the Federal Reserve would join five central banks in a program to make it easier for lenders to obtain dollars helped the Dow rally 7 percent in the five days ending Dec. 2, following the largest drop for a Thanksgiving week since 1932. The euro increased 1.2 percent against the dollar during the period, data compiled by Bloomberg show.

Dow futures advanced 82 points, or 0.7 percent, to 12,194 at 5:43 a.m. in New York today amid speculation European leaders will agree to enhance funding for the region’s most-indebted nations at a summit in Brussels this week. The euro slipped 0.1 percent to $1.3388.

Recession Concern

Concern Europe’s debt crisis would trigger a global recession sent investors to the relative safety of the U.S. currency and Treasuries in the third quarter, dragging equity markets in 37 of the 45 countries in the MSCI All-Country World Index into bear markets, or declines of 20 percent from a peak. The Standard & Poor’s 500 Index dropped 19 percent between April 29 and Oct. 3 before paring the decrease to 7.7 percent. It’s up 0.1 percent for 2011.

“Money managers are getting whipped around,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., said in a telephone interview. Selkin, a 35- year Wall Street veteran, helps manage about $3 billion. “We’re not going to set new stock highs even with these strong corporate profits, so obviously something is holding us back and that’s the crisis in Europe.”

Correlation between U.S. stocks and Europe’s currency has increased along with concern about the bailout championed by German Chancellor Angela Merkel and French President Nicolas Sarkozy. The Dow and euro have moved in the same direction 72 percent of the time in 2011, compared with 49 percent for the 11 previous years, data compiled by Bloomberg show.

Investor Toll

The swings have taken a toll on professional investors. Less than 24 percent of 542 categories of funds tracked by Morningstar Inc. have topped their benchmark indexes this year, the fewest since at least 1999. A Hedge Fund Research Inc. index of industrywide performance has fallen 3.4 percent in 2011. It’s only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to data from the Chicago-based firm.

Improving economic reports from the U.S. government haven’t always translated into higher stocks. October industrial production rose 0.7 percent, beating the median estimate of 0.4 percent in a survey of economists by Bloomberg, the Fed said on Nov. 16. The S&P 500 dropped 3.3 percent in the two days before a Nov. 18 confidence vote on Italian Prime Minister Mario Monti.

‘Schizoid’ Markets

“The last four months, it’s just schizoid,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $39 billion, said in a telephone interview. “How do you position your portfolios in this thing? For a lot of stock pickers, they throw up their hands because they say, ‘I’m trying to find good stocks within the market and the key driver is, is the euro-zone going to hang together or fall apart?’”

Corporate profits that topped analyst estimates for a record 11th straight quarter have done little to quell investor fears about Europe. While quarterly earnings for S&P 500 companies from Goodyear to Target and Motorola Mobility Holdings Inc. have been 4.6 percent higher than analysts projected, shares tumbled on days when European headlines dominated.

Goodyear said Oct. 28 that third-quarter income topped analysts’ estimates as higher prices helped sales rise the most of any quarter. While the largest U.S. tiremaker advanced 4.9 percent that day, it lost 8.4 percent over the next two after then-Greek Prime Minister George Papandreou said he would put a European Union agreement on financing for Greece to a referendum. The S&P 500 lost 5.2 percent during the stretch.

Target Profit

Target, the second-largest U.S. discount retailer, climbed as much as 3.4 percent on Nov. 16 after posting third-quarter profit that topped analysts’ estimates. It ended that day down 0.5 percent. The S&P 500 slumped 1.7 percent after Fitch Ratings said that further turmoil in Italy, Portugal and Spain poses a “serious risk.”

“Picking stocks is very tricky now,” Ned Gray, chief investment officer for global and international value equity at Delaware Investments, said in a Dec. 6 telephone interview. His firm manages more than $160 billion in assets. “The policy- making in the euro-zone is leading everything,” he said. “The macro risk-on, risk-off decision is the only one that seems to matter.”

Unprecedented Swings

Equity markets have seen unprecedented swings this year, exacerbated by global economic concerns. The S&P 500 has moved an average 1.7 percent each day since July 2011, compared with 0.8 percent daily in the nine years before September 2008, when Lehman Brothers Holdings Inc. collapsed, according to data compiled by Bloomberg. The Dow alternated between gains and losses of more than 400 points on four days in August this year, the longest streak ever.

Because heightened volatility leads to correlated markets, investors should focus on finding stocks that have smaller swings and improving fundamental criteria, according to Birinyi Associates Inc. While Europe’s debt crisis is overshadowing profit reports today, those stocks will be more likely to outperform their benchmarks, according to Birinyi.

“Correlation is a function of volatility, significant volatility,” Laszlo Birinyi, president of the stock market research and money management firm, said in a Dec. 6 phone interview. “Ultimately it’s another handicap that you have to overcome, so investors will have to do what they always do but do more of it. You have to recognize that the market’s not at your back, so to outperform, you want to pick a stock that’s not as much a function of the market as other stocks are.”

Default Speculation

Eight of the Dow’s 10 biggest daily drops this year were driven by speculation about Greece defaulting or Europe’s debt crisis leading to another global recession, according to Bloomberg closing market stories.

“Whether it’s risk on or risk off today, correlations today to things that wouldn’t have even been on our radar screen five years ago are much higher,” John Canally, who helps oversee about $340 billion as an economist and investment strategist at LPL Financial Corp. in Boston, said in a telephone interview. “That’s something that the individual investor’s got to keep in mind,” he said. “It’s all a proxy for risk in Europe, which in turn is a proxy for whether or not we’re going to have another Lehman.”

--With assistance from Jeff Kearns and Michael P. Regan in New York. Editors: Chris Nagi, Jeff Sutherland

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

View the original article here

BRIC Divisions Contrast With Europe Solidarity in IMF Quest

May 21, 2011, 3:56 AM EDT By Shamim Adam and Simon Kennedy

(Updates with Brazil comment in Wall Street Journal in 13th paragraph. For more news on IMF succession, visit EXT2 .)

May 21 (Bloomberg) -- The failure of emerging-market nations to rally behind a single candidate to head the International Monetary Fund shows the effort still needed to link diplomatic might with growing economic strength.

As the IMF begins its search for a successor to Dominique Strauss-Kahn, Russia is endorsing Grigori Marchenko, the head of Kazakhstan’s central bank, while the Philippines and Thailand speak favorably of Singapore Finance Minister Tharman Shanmugaratnam. India, China, Brazil and South Africa have yet to throw their support behind anyone even as they urge selection be driven by merit rather than nationality.

By contrast, European Union nations have given overwhelming support to French Finance Minister Christine Lagarde to head the Washington-based IMF, the institution that approved a record $91.7 billion in emergency loans last year and provides a third of the euro-area’s bailouts. That left Asians, South Americans and Russia talking principles without agreeing on one person.

“The Europeans have the great advantage that they have institutional mechanisms to agree on a candidate upfront,” said Ousmene Mandeng, head of public-sector investment at Ashmore Group Plc in London and a former IMF economist. “The emerging markets may find it more difficult to identify a common candidate and then lobby to ensure that he or she obtains sufficient support from the U.S.”

As recently as last month the leaders of Brazil, Russia, India and China, known as the BRIC countries, were urging the U.S. and Europe to end their 65-year monopoly on leadership positions at the IMF and World Bank, which has always been headed by an American.

June 30 Goal

The IMF said it aims to complete the selection of a successor to Strauss-Kahn by June 30. Countries will be able to nominate candidates for the managing director’s position from May 23 to June 10, the IMF said in a statement.

“The governing structure of the international financial institutions should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries,” the BRIC leaders said in a statement after meeting in Hainan, China, on April 14.

Those positions were echoed by finance chiefs this week following the arrest and subsequent resignation of Strauss-Kahn. The new leadership should reflect changes in the world economy, People’s Bank of China Governor Zhou Xiaochuan said May 19.

‘Increasingly Strong’

Their failure to follow such calls with action probably highlights the political immaturity of the BRIC complex even when “the case for the new IMF head to come from the BRIC countries is increasingly strong,” said Jim O’Neill, who created the BRIC term and chairs Goldman Sachs Asset Management in London, said by e-mail on May 19.

Former Brazilian central bank chief Arminio Fraga, onetime South African Finance Minister Trevor Manuel and Indian policy maker Montek Singh Ahluwalia are among the emerging market representatives capable of leading the IMF, according to the fund’s former chief economist, Simon Johnson. He also suggests the possibility of Bank of Mexico Governor Agustin Carstens and Zhu Min, a former Chinese central banker now working at the IMF.

“The big political question is whether the largest emerging markets -- Brazil, China, India, South Africa, Turkey and perhaps Saudi Arabia, South Korea, Russia, Indonesia and Mexico -- can unify behind one candidate,” Johnson wrote in a May 18 Bloomberg News column. “That would be a breakthrough but it’s still not clear who will provide the diplomatic initiative to organize them into a coalition that speaks with a single voice.”

Chile, U.S.

The Chilean government said yesterday it has a “good opinion” of former Finance Minister Alejandro Foxley as a possible candidate and will consider nominating him.

Brazil Finance Minister Guido Mantega told the Wall Street Journal that his nation is open to backing a European and that “there should be no vetting based on nationality.”

U.S. Treasury Secretary Timothy F. Geithner has refrained from mentioning any names, insisting in a statement he wants a quick decision on a candidate who can command broad support.

“We are consulting broadly with the fund’s shareholders from emerging markets as well as advanced economies,” Geithner said. “It is important that this be an open process and one that moves quickly to select new leadership for the IMF.”

Shen Jianguang, a former IMF economist and now at Mizuho Securites Asia Ltd., said in a Bloomberg Television interview that one option is to name Zhu Min the first deputy managing director, the IMF’s No. 2 position.

“Zhu Min definitely can be a deputy CEO of the IMF” given the growing importance of China in the world economy, he said. “Emerging markets are not very happy with the situation that the head of the IMF has to be from Europe.”

Lipsky’s Term

John Lipsky, 64, is acting managing director after Strauss- Kahn’s resignation four days after his May 14 arrest in New York on charges of attempted rape and sexual assault. Lipsky’s term in the IMF’s No. 2 post, which has traditionally been filled by an American, ends in August.

The biggest emerging economies have focused on increasing trade and financial links among their nations. The state development banks of the BRIC countries agreed to help boost the use of local currencies when making loans within the five nations, Indian Prime Minister Manmohan Singh said last month.

While early signs point to Lagarde, the mood could swing in the weeks to come.

“The U.S. and Europe should take it upon themselves to really open this up to all candidates that are qualified, not necessarily just Europeans,” Philippine Finance Secretary Cesar Purisima said in a Bloomberg Television interview.

--With assistance from Simon Kennedy in Paris. Editors: Kevin Costelloe, Christopher Wellisz, Randall Hackley

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

View the original article here

U.S. Stocks Fall a Third Week on Europe Concern, Forecast Cuts

May 21, 2011, 12:45 AM EDT By Whitney Kisling

May 21 (Bloomberg) -- U.S. stocks declined for a third straight week, the longest slump since August, as investors grew more concerned that Greece will default on its debt and reduced earnings forecasts undermined confidence in the economy.

Staples Inc. and Gap Inc. led losses in the Standard & Poor’s 500 Index after cutting their profit projections, while Hewlett-Packard Co. plunged 11 percent as it reduced its sales forecast. NYSE Euronext sank 13 percent after Nasdaq OMX Group Inc. said it was dropping a takeover bid for the operator of the New York Stock Exchange. Newfield Exploration Co. and El Paso Corp. led energy stocks to the biggest gain among 10 groups.

The S&P 500 lost 0.3 percent to 1,333.27 this week. The index has fallen every week in May after reaching an almost three-year high at the end of April. The Dow Jones Industrial Average fell 83.71 points, or 0.7 percent, to 12,512.04.

“People are realizing that not only the U.S. but the global economy still faces some issues,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “You’ve still got problems particularly in Greece that aren’t going to go away soon. The market had gotten a little ahead of itself.”

While the S&P 500 is up 6 percent so far in 2011, the benchmark index for U.S. equities has lost 2.2 percent this month. The S&P 500 has only fallen one month so far this year, slipping 0.1 percent in March amid concern that Japan’s earthquake and tsunami would curb global demand.

Staples Plunges

Staples slipped the most in the S&P 500, losing 19 percent $16.37. The office-supply retailer forecast 2011 earnings wouldn’t exceed analysts’ average estimate, according to data compiled by Bloomberg.

Gap, the largest U.S. apparel chain, dropped 17 percent to $19.22 and had the worst daily decline in almost a decade yesterday. The company cut its full-year profit forecast by 22 percent as costs to make clothes rose faster than expected.

NYSE Euronext plunged as smaller competitors Nasdaq OMX and IntercontinentalExchange Inc. withdrew their bid for the New York-based company after the U.S. Department of Justice threatened a lawsuit. The shares lost 13 percent to $35.76.

S&P 500 technology companies slid the most among 10 groups this week, dropping 1.5 percent for the third straight week of losses. Hewlett-Packard, the biggest personal-computer maker, fell the most among technology shares after it cut a billion dollars from its sales forecast for 2011 and missed analysts’ profit projections. The shares slid 11 percent to $35.98.

Chip-Share Downgrade

KLA-Tencor Corp. lost 7.3 percent to $41.20. The semiconductor company, along with Intel Corp. and Applied Materials Inc., was downgraded by Goldman Sachs Group Inc., which cited increased competition from tablet computers and excess supply.

Energy shares in the S&P 500 rose 0.9 percent as a group this week, after losing 8.3 percent in the first two weeks of May. Oil climbed above $100 a barrel on May 18 after an Energy Department report showed an unexpected drop in U.S. inventories as refineries bolstered operating rates and imports declined.

Crude gained again on May 20 after the American Petroleum Institute said fuel consumption increased in April.

Newfield Exploration, an oil and gas producer which operates in the Gulf of Mexico, onshore U.S., Malaysia and China, advanced 6.9 percent. El Paso, which operates natural-gas pipelines, rose 6.4 percent.

Salesforce Rallies

Salesforce.com Inc., the largest supplier of customer- management software, advanced 8.7 percent to $146.61 for the best weekly gain since November. The company, which sells cloud- computing applications that companies rent over the Web rather than install on their computers, forecast fiscal second-quarter sales and profit that topped estimates as the company added 5,400 customers in last quarter.

The S&P 500 started the week lower on May 16 as concern about Europe’s debt crisis was heightened after Greece sought additional bailout funds. European finance chiefs endorsed a 78 billion-euro ($111 billion) bailout for Portugal. Authorities stepped up the pressure on Greece to sell assets and deepen spending cuts to win an increase of its 110 billion-euro aid package and more time to repay the loans.

“Some degree of caution might be in order in the near- term, while we wait for greater clarity on a series of risks in the weeks ahead,” said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., which oversees $693 billion in assets. “Recent evidence suggests a bit of softness in the U.S. economy.”

Economic Signals

While a government report showed that fewer Americans than estimated filed applications for unemployment benefits during the previous week, other data showed manufacturing in the New York and Philadelphia regions expanded at a slower-than-forecast pace. Housing starts and existing home sales also unexpectedly decreased.

The S&P 500 was poised to gain for the week after the Federal Reserve signaled continued low interest rates on May 18. Talks about an exit strategy from the record stimulus measures don’t mean monetary tightening “would necessarily begin soon,” according to the Fed’s April policy meeting records, released last week. Gap’s forecast and Fitch’s downgrade of Greece brought the index lower for the week yesterday.

The S&P 500 has climbed 27 percent since Fed Chairman Ben S. Bernanke signaled in August that he would buy more bonds to stimulate the economy. The Fed’s second program of quantitative easing, or QE2, which was officially announced in November, ends in June.

Joy said the approaching end of the Fed’s quantitative easing “raises uncertainty” about its role in the S&P 500’s direction.

--With assistance from Nikolaj Gammeltoft in New York. Editors: Michael Regan, Stephen Kleege

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

View the original article here