Dollar Weakens to Year Low as U.S. Economic Contraction Slows

The dollar declined to the lowest level this year against six major U.S. trading partners after a report showed the U.S. economy shrank less than economists forecast, reducing the demand for the greenback as a refuge.
The Swedish krona advanced against the euro to the strongest level since December after a government report showed the economic contraction in the Scandinavian country slowed in the second quarter. The U.S. currency headed for a fifth month of declines against the pound, its longest run in five years, after a U.K. survey showed consumer confidence held at the highest level since April 2008.
“The typical pattern is that good economic news is bad for the dollar,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. “Equities are marching up. We had a better than expected GDP, which set the stage for all this.”
The dollar fell 1.4 percent 1.4271 per euro as of 12:29 p.m. in New York, from $1.4075 yesterday, and was at 94.58 yen from 95.56 yen. The Japanese currency weakened 0.3 percent to 134.95 per euro.
The Dollar Index, which the ICE futures exchange uses to track the currency against counterparts including the yen, pound and Swedish krona, touched 78.22, the lowest since Dec. 18.
The dollar’s decline versus the yen accelerated after running into stops, or pre-set orders, to sell the greenback, above 95 yen, according to Shaun Osborne, a currency strategist at TD Securities Inc. in Toronto.
‘Some Restraint’
U.S. gross domestic product contracted at a less-than- projected 1 percent annual rate after shrinking 6.4 percent in the prior three months, the most in 27 years, Commerce Department figures showed. Inventories dropped at a record $141.1 billion annual pace, after a $113.9 billion decline.
“The inventories data shows stunning drawdowns in both Q1 and Q2,” wrote Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. “This bodes very well for H2 GDP data since the change in the change of inventories should be very positive. Obviously there will be some restraint to this trade because of month-end flows, but I expect players will buy risk trades again early next week.”
The Swedish krona touched 10.3 per euro, the strongest since Dec. 1 after Statistics Sweden said the country’s gross domestic product contracted an annual, work-day adjusted 6.2 percent, from a decline of 6.5 percent in the previous quarter.
The krona has gained 4.8 percent against the euro this month and 5.6 percent against the dollar. It is the second best performer among the 16 major currencies after the Canadian dollar, which rose 7.6 percent against the dollar in July.
‘Ahead of Fundamentals’
Canada’s dollar traded at C$1.081 against the greenback, near the strongest since October, even after a government report showed the nation’s economy shrank a more-than-forecast 0.5 percent in May. The currency, known as loonie, touched C$1.075 on July 28, the strongest level since Oct. 3.
“There’s disconnection between market optimism and numbers on the ground,” said Steven Englander, chief U.S. currency strategist at Barclays Plc in New York. “The Canadian dollars running ahead of fundamentals. We had some pretty nasty number out of Canada recently.”
The Canadian currency will decline to C$1.13 in a month, according to Barclays.
Sterling gained 0.4 percent to $1.6557 after GfK NOP said that an index of consumer sentiment in the U.K. was unchanged in July at minus 25. The reading is up from minus 39 a year earlier, adding to signs that the U.K.’s worst slump in a generation is easing. The currency was up 0.5 percent in July.
Implied Volatility
The Polish zloty advanced a record 8 percent this month to 2.93 per euro, as the country posted the only positive first- quarter growth rate among European Union’s 10 eastern members. The currency was the biggest gainer among 26 emerging-market counterparts tracked.
The dollar dropped against 14 of 16 most actively traded currencies this month, losing 1 percent against the euro. The yen gained 1.2 percent versus the dollar and 0.2 percent against the European currency.
The euro-dollar exchange rate swung less than 3 cents above and below $1.40 this month. Implied volatility on seven major currencies against the dollar dropped to 12.73 today, the lowest since October, indicating traders expect less price frustration in the foreign-exchange market in coming months.
Moving Sideways
“We are moving to sideways until September when gradual improvement in macro data adds to fresh momentum for dollar shorts,” said Mike Moran, a senior currency strategist at Standard Chartered in New York. A short position is a bet a currency will decline.
Investors should buy the U.S. currency against the yen, with a target above 105 per dollar, as Japan’s trade and investment flows deteriorates, Goldman Sachs Group Inc. said today in an e-mailed note.
The yen is the most overvalued currencies in the Group of 10 major currencies, and “neutral” market positioning allows investors to add more bets against the Japanese currency, according to Goldman. Trade and investment flows to Japan have turned from a surplus of 6 percent of its GDP, to a deficit of 5 percent of the economy, according to Goldman.

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India Leaves Rates Unchanged on Inflation Concerns

India’s central bank kept borrowing costs unchanged, signaling an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October.
The Reserve Bank of India held its reverse repurchase rate at 3.25 percent, according to a statement in Mumbai today. The central bank raised its inflation forecast for the year to March 31 to “around 5 percent” from an April estimate of 4 percent, citing “elevated” food and commodity prices.
Inflation risks increased after Finance Minister Pranab Mukherjee this month unveiled plans to raise spending and widen the budget deficit to a 16-year high to bolster growth. Policy makers from Tokyo to London, who in some cases cut interest rates to close to zero, have started to discuss when they will exit from the emergency measures put in place to ease a global credit freeze.
“Central banks need to put in place now a timely, smooth and systematic exit from the monetary easing,” said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. “For India, it would be difficult to continue pursuing the current low-rate regime beyond six to nine months.”
Stocks narrowed losses after the central bank decision, which was expected by 20 of 23 economists in a survey. The Sensitive stock index fell 0.4 percent to 15,312.63 on the Bombay Stock Exchange at 11:20 a.m. The benchmark 10-year government bond yields rose 1 basis point to 6.96 percent while the rupee was little changed at 48.225 against the dollar.
Consumer Prices
India, which releases final inflation numbers after a two- month lag, raised its estimate for the benchmark wholesale price index in the week ended May 16 to 1.65 percent from 0.61 percent, indicating that price gains are gathering pace.
Consumer price indexes that measure the cost of living for industrial and farm workers were running at between 7 percent and 10 percent in May, driven by high food costs.
“The continuation of the monetary-fiscal stimuli is now hitting the danger zone,” S. S. Tarapore, a former deputy governor of the central bank, said in Mumbai on July 16. “Given the budget is strongly expansionary, the RBI has little option but to gradually withdraw the monetary accommodation.”
Mukherjee on July 6 announced plans to borrow a record 4.51 trillion rupees ($94 billion) to fund spending on roads, power and aid for the poor. The budget shortfall is forecast at 6.8 percent of GDP in the year to March 2010.
‘Immediate Challenge’
The central bank today estimated its policy measures since September including lower interest rates and a reduced cash reserve ratio were worth 6 trillion rupees. It said a prolonged budget deficit can “crowd out” private investments and trigger inflation, and urged the government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets.
The “immediate challenge” before the central bank is to provide ample cash in the banking system for companies and government borrowings to support growth, while at the same time control the “potential build-up of inflationary pressures on the way forward,” Subbarao said in today’s statement.
“In the din created in the name of growth, the RBI has to realize that if inflation accelerates, the blame will rest squarely on it,” Tarapore said.
The Organization for Economic Cooperation and Development said June 24 that GDP in its 30 industrialized member countries will increase 0.7 percent next year after shrinking 4.1 percent in 2009. The U.K. inflation rate will be the highest in the G-7 next year, OECD said.
Growth Forecast
Subbarao today also raised the central bank’s growth forecast for India in the year to March 2010 to 6 percent “with an upward bias” from the 6 percent estimated in April because of favorable funding conditions for companies and a revival in industrial production.
He said an “uptrend in growth momentum” is unlikely before September and that less-than-adequate monsoonal rainfall could reduce farm output. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
India’s $1.2 trillion economy, Asia’s third-largest, expanded 6.7 percent in the year ended March 31, the weakest since 2003.
Subbarao also backed Mukherjee’s goal to boost growth to a 9 percent pace each year and sustain that momentum to cut poverty in the South Asian nation.
Fiscal Stimulus
The finance minister said July 14 that the monetary and fiscal stimulus measures have shown positive results, though the economy is still “not out of the woods.”
Reliance Industries Ltd., India’s most valuable company, on July 24 reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand.
Saumitra Chaudhuri, a member of the planning agency that sets India’s development agenda, said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when rates should be increased to check inflation.
“Demand isn’t so strong. Inflation has picked up a head of steam -- though it’s not alarming, it certainly can’t be ignored,” said Chaudhuri, a former adviser to Prime Minister Manmohan Singh. “At this point to try and switch to a tighter policy may not be prudent.”
Subbarao said the central bank will maintain an “accommodative monetary stance” until there are “definite and robust” signs of recovery.
“This accommodative monetary stance is, however, not the steady state stance,” Subbarao said. “On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum.”

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Dollar Falls Toward Seven-Week Low Against Euro on Stock Rally

July 28 -- The dollar fell toward its lowest level in seven weeks against the euro as Asian stocks extended a global rally, adding to evidence investors are shifting to higher-yielding assets.
The Australian dollar rose for a third day against the greenback after the Reserve Bank of Australia said the South Pacific nation’s economy may rebound faster than it forecast six months ago. The euro approached a three-week high against the yen after Deutsche Bank AG said second-quarter profit rose 68 percent, beating analysts’ estimates, on increased revenue from trading bonds and stocks.
“Rising share prices will make it easier for investors to take more risks,” said Toshiya Yamauchi, manager of the foreign-exchange margin trading department in Tokyo at Ueda Harlow Ltd. “Under such circumstances, the dollar and the yen will weaken, especially against the currencies of resource-rich nations and emerging markets.”
The dollar declined to $1.4275 per euro as of 7:05 a.m. in London from $1.4232 in New York yesterday, when it touched $1.4298, the lowest level since June 3. The U.S. currency was at 95.13 yen from 95.18 yen.
The euro rose to 135.80 yen from 135.48 yen yesterday, when it reached 136.10 yen, the strongest since July 2. The U.S. dollar fell to as low as C$1.0761 today, its weakest versus Canada’s dollar since Oct. 3.
MSCI’s Asia Pacific index of regional shares rose for an 11th day, the longest winning streak since January 2004, adding to evidence investor risk-appetite is increasing. The index climbed 0.9 percent today.
Dollar Index
The Dollar Index was near the lowest level this year before a report that economists said will show U.S. home prices fell at a slower pace in May, indicating that the American economy is recovering and demand for safe haven currencies will fall.
The S&P/Case Shiller index of 20 major metropolitan areas, scheduled for release today, will show property values fell 17.9 percent in May from a year earlier, according to a Bloomberg News survey of economists. The measure was down 18.1 percent in the 12 months ended April.
The Dollar Index, which the ICE uses to track the greenback against currencies including the yen, pound and Swedish krona, was at 78.476 from 78.626 yesterday, near this year’s low of 78.334 on June 2
The Australian dollar climbed after RBA Governor Glenn Stevens said it appears “that the downturn we are having may turn out not to be one of the more serious ones of the postwar era, in contrast to the experiences of so many other countries.”
Upside Risks
“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago,” the Reserve Bank chief said in Sydney today.
Stevens left the benchmark lending rate at 3 percent on July 7 for a third month amid signs the lowest borrowing costs in half a century and government spending helped the nation skirt a recession.
“With Australia’s economy apparently doing well, there may be no more scope for interest-rate cuts,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “Higher-yielding currencies such as Australia’s dollar will likely be popular, with demand from people in countries with low yields such as Japan.”
Benchmark interest rates of 8.75 percent in Brazil and 0.25 percent in Sweden compare with 0.1 percent in Japan and as low as zero in the U.S.
The Australian dollar rose to 83.02 U.S. cents from 82.27 cents yesterday, and advanced to 78.97 yen from 78.31 yen.
Deutsche Earnings
The euro gained for a fourth day against the yen after Germany’s largest bank said in a statement today net income rose to 1.09 billion euros ($1.55 billion), or 1.64 euros a share, from 649 million euros, or 1.27 euros, a year earlier. Deutsche Bank’s earnings exceeded the 944 million-euro median estimate of 13 analysts surveyed.
“The bank’s results were better than expected,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The latest upmove in the euro could be due to this.”
Deutsche Bank’s Chief Executive Officer Josef Ackermann said the banking industry and financial markets stabilized in the quarter, propelling a fourfold gain in income from debt sales and an improvement in equity trading.
Losses in the yen against the dollar were tempered on speculation Japanese exporters are taking advantage of the currency’s drop in the past week to repatriate earnings from overseas assets before the month-end.
Japanese Exporters
“Exporters are prone to buy the yen, given that the end of the month is near,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale, France’s third- largest bank.
Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.
Adding to pressure on the dollar, China’s Assistant Finance Minister Zhu Guangyao said on the first day of bilateral talks with U.S. officials that his government remains “concerned” about the value of its U.S. assets.
Zhu’s remarks come after repeated public assurances by Treasury Secretary Timothy Geithner that the U.S. is committed to reining in a record budget deficit once an economic recovery is secured. China is the biggest foreign investor in U.S. government debt, and any decline in demand could push up borrowing costs.
“China has massive holdings of Treasuries, so it is obviously worried,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Any diversification away from the dollar could be gradual, and the greenback may weaken a bit.”

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British Pound Extends Gains Against U.S. Dollar, Japanese Yen

July 28 -- The pound extended gains against the dollar and the yen.
The British currency rose 0.3 percent to $1.6540 as of 7:09 a.m. in London. Against the yen, the pound advanced 0.3 percent to 157.33.

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Colombia Peso Set to Drop as Rally Prompts Central Bank Concern

july 28 Colombia’s peso, the world’s best- performing currency in the past four months, will weaken by year-end as the central bank’s commitment to “carefully monitor” the rally discourages investors from betting on further gains, Barclays Plc and RBC Capital Markets said.
The peso has surged 25 percent against the dollar since March 27, the biggest gain among the 176 currencies tracked by Bloomberg, as a jump in oil, the country’s top export, and rising demand for higher-yielding assets lured international investment to Latin America’s fifth-largest economy.
Policy makers said July 24 they were “aware of the risks associated with the peso’s appreciation” after it strengthened more than they expected. Agriculture Minister Andres Fernandez and exporters such as coffee growers are urging Banco de la Republica to buy dollars to weaken the peso.
The central bank’s “verbal intervention will put an end to the peso’s appreciating trend,” said Jimena Zuniga, a Latin America economist at Barclays in New York. The comments “will cause some concern with investors,” she said.
Zuniga forecasts the peso will slide 5 percent to 2,100 per U.S. dollar by yearend, from 1,994.52 yesterday. Paul Biszko, an emerging-markets strategist with RBC Capital Markets in Toronto, predicts the peso will drop to as low as 2,250 in the third quarter and end the year at 2,150.
The central bank’s attempt to reverse the peso’s gains may fail as rising crude oil prices propel the currency further, said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. He forecasts the peso may rise to 1,850 by yearend.
Peso to Extend Rally
“Oil is higher, commodities are higher, risk appetite is coming back and people like emerging markets, so the Colombian peso and other emerging market currencies can see values go up toward the end of the year,” Thin said.
Crude oil has jumped 53 percent this year to $68.02 a barrel on the New York Mercantile Exchange. The peso fell 0.5 percent to 1,994.52 yesterday.
Rising political tension with neighboring Venezuela and Ecuador may also derail the Colombian’s peso rally, said Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York.
Venezuelan President Hugo Chavez said July 23 his government may curb commercial ties with Colombia after President Alvaro Uribe announced plans to allow the U.S. to use its air bases for anti-narcotics combat missions. Venezuela is Colombia’s second-biggest trading partner.
‘Commercial War’
Ecuadorean President Rafael Correa this month imposed tariffs on Colombian goods including meat, clothing and machinery, saying the depreciation of the peso earlier this year hurt his country’s economy. Ecuador, Colombia’s third-largest trade partner, uses the U.S. dollar as its currency. Venezuela and Ecuador account for about 20 percent of Colombia’s exports, according to Deutsche Bank.
“The commercial war between Colombia and Ecuador has already started,” Losada said in comments sent by e-mail. If Chavez follows through on a threat to replace Colombian imports with those from other countries, “the impact on the peso could be important,” he said.
Deutsche Bank estimates the peso will weaken to 2,200 in six months, according to a report yesterday.

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Asian stock rise for 11th day

July 28 Asian stocks climbed, lifting the MSCI Asia Pacific Index for an 11th day, as brokerages upgraded banks and steelmakers ahead of earnings announcements.
Sumitomo Mitsui Financial Group Inc., Japan’s third-largest lender, rose 3.9 percent as Nomura Holdings Inc. recommended investors buy the shares. JFE Holdings Inc., Japan’s No. 2 steelmaker, jumped 7.3 percent after Goldman Sachs Group Inc. said earnings are set to improve from this quarter. James Hardie Industries NV, the biggest seller of home siding in the U.S., added 2.2 percent in Sydney after new-home purchases in America surged the most in eight years.
“Investors have been taking comfort that the reporting season hasn’t been horrific,” said Chris Hall, who helps manage $2.6 billion at Argo Investments Ltd. in Adelaide. “The market’s looking like fair value right now, but definitely not what I’d call cheap.”
The MSCI Asia Pacific Index rose 0.9 percent to 110 as of 3:47 p.m. in Tokyo. An acceleration in China’s economic growth and better-than-expected U.S. earnings have helped drive a 12 percent climb in the past 11 days. That’s the longest winning streak since January 2004.
Hong Kong’s Hang Seng Index gained 0.6 percent, while Taiwan’s Taiex Index rose 1.6 percent. Compal Electronics Inc., the world’s No.2 maker of notebook computers, climbed 3.2 percent in Taipei after the Commercial Times said the company will supply laptops to Acer Inc. India’s Tata Motors Ltd. jumped 5.7 percent after the company reported a jump in profit.
Fluctuating Stocks
Japan’s Nikkei 225 Stock Average swung between gains and losses closed little changed. China’s Shanghai Composite Index fell 0.4 percent, its first drop in a week. Sichuan Expressway Co. slumped 10 percent after tripling in value in its trading debut yesterday.
Futures on the Standard & Poor’s 500 Index slipped 0.2 percent today. The gauge climbed 0.3 percent yesterday as a government report showed sales of new homes jumped 11 percent last month from May, the most in eight years and higher than every economist forecast in a survey.
Sumitomo Mitsui, Japan’s No. 3 listed bank, climbed 3.9 percent to 3,990 yen. The company had its investment rating lifted to “buy” from “neutral” at Nomura with a price estimate of 4,500 yen. Improved capital ratios boost the bank’s growth prospects, Nomura analyst Keisuke Moriyama wrote in a Japanese-language report yesterday.
Mitsubishi UFJ Financial Group Inc., the country’s biggest lender by value, rose 0.4 percent to 555 yen, while smaller rival Mizuho Financial Group Inc. added 0.5 percent to 212 yen. The three banks all report first-quarter earnings this week.
Stimulus Policies
Analysts have boosted estimates since the beginning of April for companies in Asia outside Japan, according to data compiled by Bloomberg. Profit forecasts have actually declined within Japan, the data show.
“Earnings season is kicking into high gear this week, so investors are focusing on the individual winners and losers,” said Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo.
JFE climbed 7.3 percent to 3,550 yen, while Sanyo Special Steel Co. surged 13 percent to 395 yen after Goldman lifted shares of both companies to “buy.” JFE reported a first- quarter net loss of 41.6 billion yen ($437 million) an hour before the close of trading.
“We believe that the outlook for 2010-11 is beginning to improve markedly from our previous assumptions, based on the coordinated policy response from governments around the globe,” analysts led by Rajeev Das wrote in a report. “We also believe the end of the June quarter marks a trough for the current cycle.”
U.S. Economy
James Hardie climbed 2.2 percent to A$5.12 following the U.S. home sales report. Nissan Motor Co., which gets 34 percent of its sales in North America, gained 1.6 percent to 626 yen.
The MSCI Asia Pacific Index has climbed 56 percent from a more than five-year low on March 9 on speculation stimulus policies worldwide will revive the global economy. Stocks on the gauge are valued at an average 24.5 times estimated net income, the most expensive level since March 31.
U.S. companies including Intel Corp. and Apple Inc. this month reported better-then-expected results. Government figures due July 31 may show that the contraction in the U.S. economy narrowed to a 1.5 percent pace in the second quarter, following a 5.5 percent drop in the first three months of 2009, economists surveyed by Bloomberg News predicted.
Compal, which gets 31 percent of its sales in America, rose 3.2 percent to NT$33.50. Acer will contract out the production of 20 million laptops in the first phase of contracts, and Compal will be the largest supplier, the Commercial Times reported today.
Beating Estimates
Sapporo Holdings Ltd. rose 5.5 percent to 600 yen in Tokyo after the brewer said it will post a smaller-than-expected net loss for the six months ended in June.
Tata Motors climbed 5.7 percent to 395.55 rupees. The company posted a 58 percent increase in net income for the quarter ended in June as a change in accounting rules and lower commodity prices helped mask a fall in demand.
In Shanghai, Sichuan Expressway, which operates toll roads, sank 10 percent to 9.81 yuan. The stock soared 203 percent in its first day of trading yesterday.
China’s Shanghai Composite Index has climbed 88 percent this year, as government stimulus, record bank lending and an economic rebound spurs demand for equities. Companies in the benchmark are valued at 26 times estimated earnings, up from 13 times on Nov. 4, when the gauge fell to a two-year low.
“While it’s obvious that the market is in a bubble, the rally could still go on as the government hasn’t stopped the liquidity,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which manages about $285 million. “If a correction starts, that will be powerful.”

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Bank of Israel May Hold Interest Rate at Record Low

The Bank of Israel will probably hold its benchmark interest rate at a record low tomorrow as the economy contracts and unemployment climbs, a survey showed.
The rate will remain at 0.5 percent for a fifth month, according to eight of the nine economists surveyed. One economist predicted it would rise to 0.75 percent. The Jerusalem-based central bank will announce its decision at 5:30 p.m. tomorrow.
Governor Stanley Fischer has lowered the base rate by 3.75 percentage points since October to mitigate the effects of the global financial crisis. The economy contracted an annualized 3.7 percent in the first quarter and unemployment rose to 8.4 percent in May, its highest in almost three years.
“The Bank of Israel won’t rush to raise the interest rate due to the uncertainty regarding the degree of recovery in the global market and the worsening in the labor market,” Rafael Gozlan, chief economist at Leader Capital Markets, said by phone from Tel Aviv.
While inflation accelerated to an annual 3.6 percent in June from 2.8 percent the previous month it is likely to moderate beginning in September, Gozlan said. The government’s target range for inflation is 1 percent to 3 percent.
“We believe that the restrained global inflationary environment, together with the weakening of the domestic labor market, will support inflation of about 1 percent or 1.5 percent in the coming year,” Gozlan said.
Inflation Outlook
Inflation will reach 2.5 percent over the next year, according to a Bank of Israel poll of economists released on July 16, up from the 2.4 percent expected in the previous survey.
The shekel traded at 3.8678 late on July 23, compared with 3.8882 on July 17.
Last week, Israel’s benchmark 5.5 percent Mimshal Shiklit bond due in 2017 rose 0.2 shekel to 105.55, with the yield falling 1 basis point to 4.97 percent. The Tel Aviv Stock Exchange’s benchmark TA-25 Index rose 4.7 percent to 915.44
The following is a list of important events in Israel next week

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Oil Climbs

Crude oil climbed to a three-week high on optimism that the U.S. economy is strengthening and that fuel consumption will rebound later this year.
Oil increased 7.1 percent this week, the biggest gain since May, as companies such as EBay Inc. and Ford Motor Co. posted better-than-expected earnings. Yesterday, the Standard & Poor’s 500 Index rose to the highest level since President Barack Obama was elected on Nov. 4. Stocks fluctuated today.
“We continue to look to the S&P 500 to interpret any economic data,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “It doesn’t matter if it’s earnings, employment or consumer sentiment, oil seems to follow what the S&P does these days.”
Crude oil for September delivery rose 89 cents, or 1.3 percent, to $68.05 a barrel at 2:50 p.m. on the New York Mercantile Exchange, the highest settlement since July 1. Futures are up 53 percent this year and down 54 percent from a record $147.27 reached on July 11, 2008.
Gasoline for August delivery increased 0.27 cent to end the session at $1.9159 a gallon in New York, the highest settlement since June 29. Heating oil for August delivery climbed 1.69 cents, or 1 percent, to $1.7813 a gallon, the highest close since June 29.
Federal Reserve Chairman Ben S. Bernanke said at a House Financial Services Committee hearing today that the central bank is “winding down” emergency measures established to end the financial crisis.
Correlation With Equities
“There’s a belief that any signs of economic growth are good for both fuel demand and equities,” said Bill O’Grady, the chief market strategist for Confluence Investment Management in St. Louis. “We are seeing a correlation between oil and equities, which is not the norm historically.”
Oil has increasingly moved in tandem with benchmark stock indexes. The Dow Jones Industrial Average and U.S. crude futures showed a correlation of 0.7 the past month, up from 0.06 in December, according to data compiled by Bloomberg. A correlation of 1 means the two moved in lockstep.
“We will probably see a decoupling of the oil and equity markets, with oil moving lower,” said Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois, energy consultant. “We don’t usually see a strong correlation between the stock market, oil and the dollar, but that’s been the case this year.”
U.S. Stockpiles
Crude-oil supplies dropped 1.8 million barrels to 342.7 million last week, an Energy Department report on July 22 showed. The reduction left nationwide crude stockpiles 7.3 percent higher than the five-year average for the period.
Gasoline inventories climbed 813,000 barrels to 215.4 million last week, the sixth-straight gain, according to the report. Stockpiles of distillate fuel rose 1.22 million barrels to 160.5 million, the highest since January 1985.
“This week’s rally has been primarily based on bubbling sentiment that the economy will recover,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Some of the earnings this week point to a recovery. The oil-market fundamental picture, though, isn’t looking supportive.”
Brent crude for September settlement on London’s ICE Futures Europe exchange rose $1.07, or 1.5 percent, to end the session at $70.32 a barrel. It was the highest settlement price since June 29.
OPEC Shipments
The Organization of Petroleum Exporting Countries will trim shipments by 1.7 percent in the four weeks ending Aug. 8 as refinery maintenance and faltering demand encourage members to implement supply cuts, consultant Oil Movements said yesterday.
OPEC will reduce exports in the period to 22.39 million barrels a day from 22.78 million a day in the month ended July 11, the tanker-tracker said. It’s the sixth consecutive drop reported in Oil Movements’ weekly reports.
Oil may decline next week because of fuel-supply increases and demand that trails earlier years. Twenty-two of 42 analysts surveyed by Bloomberg News, or 52 percent, said futures will fall through July 31. Nine respondents, or 21 percent, forecast that prices will be little changed, and 11 expected a gain.
Total U.S. daily fuel demand averaged 18.6 million barrels in the past four weeks, down 4.8 percent from a year earlier, the July 22 Energy Department report showed.
Crude oil volume in electronic trading on the Nymex was 350,396 contracts as of 2:58 p.m. in New York. Volume totaled 608,957 contracts yesterday, 20 percent higher than the average over the past three months. Open interest was 1.18 million contracts yesterday. The exchange has a one-business-day delay in reporting open interest and full volume data.

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Dollar Drops to Seven-Week Low as Earnings Pare Safety Demand

The dollar declined to a seven-week low versus the euro and the yen dropped as U.S. company results beat analysts’ estimates, reducing demand for safety.
The euro advanced for a second week after reports showed yesterday that the contraction in European manufacturing and services slowed more than forecast and German business confidence rose. The Canadian dollar reached the highest level since June 2 as oil prices gained and the central bank said the nation’s recession is ending.
“There’s slightly more economic optimism,” said Warren Naphtal, who overseas $870 million in assets as chief investment officer at P/E Investments in Waltham, Massachusetts. “What we are seeing is commodity-sensitive currencies, such as the Canadian dollar, are attracting capital. The main backdrop is improvement in outlook in general and the increase of the negative dollar view.”
The dollar declined 0.7 percent to $1.4202 per euro yesterday from $1.4102 on July 17. It touched $1.4291 on July 23, the weakest level since June 3. The yen slid 1.3 percent to 134.63 against the euro from 132.85. Japan’s currency depreciated 0.6 percent to 94.79 versus the dollar from 94.19.
Brazil’s real added 1.6 percent this week to 1.8957 per dollar and touched 1.8824 on July 23, the strongest level since Sept. 29. Brazil’s policy makers signaled a day earlier that they may stop lowering the target lending rate after cutting it by a half-percentage point to a record low of 8.75 percent.
The yen declined against all of its 16 most-traded counterparts tracked by Bloomberg, dropping 5.2 percent to 12.716 versus Sweden’s krona and declining 4.5 percent to 12.251 against the South African rand.
Rising Stocks
The Dow Jones Industrial Average rose above 9,000 for the first time since January on better-than-expected results from companies including Apple Inc. and Intel Corp., encouraging investors to borrow in Japan and buy higher-yielding assets elsewhere. Japan’s 0.1 percent target lending rate is among the lowest in the developed world.
Among Standard & Poor’s 500 Index companies that have posted second-quarter results, 75 percent beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest rate for a full quarter, Bloomberg data going back to 1993 show. About 300 S&P 500 companies have yet to report for the period.
The Norwegian krone and Canadian dollar were two of the best performers against the dollar among major currencies as crude oil prices rallied 5.4 percent this week to more than $68 a barrel. Oil is the biggest export for both countries.
Krone Versus Dollar
The krone advanced 2.5 percent to 6.2361 per dollar and reached 6.2190 yesterday, the strongest since June 3.
Canada’s currency, known as the loonie, appreciated 2.8 percent this week to C$1.0826 and touched C$1.0795 yesterday, the strongest level since early June.
The Bank of Canada said in a report this week that output will expand at a 1.3 percent annualized pace July through September, replacing a forecast of a 1 percent contraction.
The loonie’s 12 percent rally this year is an “important brake” on growth, and the central bank is watching it “very closely,” Bank of Canada Governor Mark Carney told reporters in Ottawa after releasing the economic outlook.
The euro advanced versus the dollar as Markit Economics said yesterday a composite index of the region’s manufacturing and services industries increased in July more than economists forecast to 46.8, representing the slowest pace of contraction in almost a year. A reading below 50 indicates a decline. The Ifo Institute in Munich said its German business climate index rose to 87.3 this month, a nine-month high.
U.S. Economy
The U.S. economy probably contracted at a 1.5 percent annual rate in the second quarter, after shrinking 5.5 percent in the previous three months, according to the median forecast of 66 economists surveyed by Bloomberg News. The report from the Commerce Department is due on July 31.
Citigroup Inc. recommended its clients “take profit” on a bet that the Canadian dollar will gain further against the yen yesterday. The Canadian currency gained 10 percent to 87.85 yen in the past two weeks.
“It’s difficult to sustain the risk rally in light of the lack of pickup in economic data,” said Todd Elmer, a currency strategist at Citigroup in New York, in an interview.
Investors should look to re-enter the Canadian dollar-yen trade at “better levels” on renewed capital outflow from Japanese investors, strategists including Elmer wrote in a note to clients yesterday.
Polish Zloty
Eastern European currencies such as the Polish zloty will advance in the next two weeks as “hot money” flows into the region on signs of global economic recovery, according to David Woo, global head of foreign-exchange strategy at Barclays Capital in London. The zloty gained 3.1 percent this week to 4.1966 per euro in one of the best performances among emerging- market currencies.
“A lot of investors still sit on a lot of cash on the sideline,” said Woo in an interview on Bloomberg Television this week. “What you are seeing is basically people being forced to essentially put money to work.”
Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee this week that while the U.S. economy is showing “tentative signs of stabilization,” the central bank intends to maintain a “highly accommodative” monetary policy for an extended period.

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Everbright Bank Said to Plan $1.7 Billion Stock Sale

China Everbright Bank Co., the Chinese lender preparing for an initial public offering, plans to raise 11.4 billion yuan ($1.7 billion) in a private placement of shares, a person familiar with the matter said.
Everbright Bank will sell 5.2 billion shares at 2.20 yuan each to institutional investors including Shanghai Chengtou Holding Co. and Guangdong Provincial Expressway Development Co., the person said, declining to be identified. The company said in a statement today it reached agreements with a number of major state-owned companies to raise more than 11 billion yuan.
Beijing-based Everbright Bank, the nation’s 11th-largest by assets, said the sale will boost its capital adequacy ratio to above the 10 percent regulatory minimum. The lender, whose public offering in Shanghai has been delayed for more than a year, said last month its capital ratio may have dropped below 9 percent after paying its first dividend in six years.
“The sale will remove the capital bottleneck that has constrained our expansion for a long period of time,” the bank said in the statement, adding that it plans to increase holdings of riskier assets to bolster profit. The release didn’t give details on pricing.
Shanghai Chengtou, the city’s water supplier, said in an exchange filing late yesterday that it will pay 792 million yuan for 360 million new shares in Everbright Bank. Guangdong Expressway said in a separate statement it will buy 240 million shares for 528 million yuan.
Shareholders
Everbright Bank aims to grow assets by 11.5 percent this year to 950 billion yuan, according to its 2008 annual report. The bank forecast 2009 profit would be little changed at 7.3 billion yuan and targeted a 10.5 percent capital adequacy ratio by the end of the year.
Central Huijin Investment Co., a unit of China’s $200 billion sovereign wealth fund, controls 71 percent of Everbright Bank. Everbright Group and its affiliate own 13.8 percent, and other corporate investors hold the balance.
Everbright Bank, which received a 20 billion yuan cash injection in November 2007, last month paid a 2.2 billion yuan dividend to investors after boosting profit by 45 percent in 2008. The company is still awaiting approval for a plan to sell between 10 percent and 20 percent of its equity to the public after submitting a sale document to regulators on June 6, 2008.
China’s securities regulator resumed approvals of IPOs last month after halting sales last September following a stock market rout. The benchmark Shanghai Composite Index has rallied 79 percent this year, making it the second-best performer among the world’s primary indices.
Everbright Securities Co., another affiliate of parent China Everbright Group, is also awaiting final approval for its IPO from the China Securities Regulatory Commission.

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Oil Falls After Industry Report Shows Gain in Crude Inventories

Oil for September delivery in New York fell for the first time in six days after a report showed crude supplies rose in the U.S., the largest energy user.
U.S. stockpiles rose last week for the first time since April, the industry-funded American Petroleum Institute reported late yesterday. A Bloomberg News survey of analysts is expecting a government report today to show crude inventories dropped 2.1 million barrels. Oil imports by China, the world’s second- largest consumer, fell 2.8 percent in June from May, customs data showed.
“Inventories should be going down because this is the demand season for the U.S.,” said Tetsu Emori, a commodity fund manager at Astmax Ltd. in Tokyo. “Instead, the inventories are up. This implies that the demand isn’t as strong as expected.”
Crude oil for September delivery dropped as much as 86 cents, or 1.3 percent, to $64.75 a barrel on the New York Mercantile Exchange, and was at $65.22 at 1:05 p.m. Singapore time. Yesterday, it rose 32 cents to end the session at $65.61. The August contract expired at $64.72 a barrel yesterday.
Crude prices climbed 8.7 percent from July 14 to July 21 as investors bought futures on expectations of higher fuel demand. Optimism that the worst of the global recession is over followed gains in U.S. leading economic indicators and as financial service companies said earnings climbed.
China’s crude imports in June fell to 16.6 million tons, or about 4.1 million barrels a day, from 17.1 million tons in May, the customs data showed.
‘Weak Fundamentals’
U.S. crude supplies climbed 3.1 million barrels to 349.9 million barrels in the week ending July 17, the API said. The group also reported that refinery utilization fell to 84 percent of capacity from 86 percent.
Oil-supply figures from the institute and the energy department moved in the same direction for the past six weeks and 76 percent of the time in the past four years, according to data compiled by Bloomberg.
“It is going to be difficult for oil to forge higher if we continue to get indications of weak fundamentals,” said Toby Hassall, a research analyst at Commodity Warrants Australia Pty in Sydney. If the API report is “any indication of how the DOE numbers are going to come in tonight, it’s a pretty bearish picture,” he said.
Inventories of gasoline rose 1.3 million barrels to 213.6 million, the API report said. The Energy Department is expected to say supplies increased by 650,000 barrels in the week ended July 17, according to the analyst survey.
Gasoline Prices
“Rising product inventories don’t bode well for demand for crude,” Hassall said. “Sixty dollars to $65 is a probable range for the short term.”
The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the energy Department for its weekly survey.
Gasoline for August delivery dropped as much as 2.19 cents, or 1.2 percent, to $1.7901 a gallon. Yesterday, it climbed 2.26 cents, or 1.3 percent, to $1.812, the highest settlement since July 1.
U.S. stockpiles of distillate fuel, a category that includes diesel and heating oil, probably rose 1.5 million barrels, according to the analyst survey.
The department is scheduled to release its Weekly Petroleum Status Report today at 10:30 a.m. in Washington.
Brent crude for September settlement fell as much as 61 cents, or 0.9 percent, to $66.26 a barrel, on London’s ICE Futures Europe Exchange. It was at $66.60 a barrel at 12:46 p.m. Singapore time.

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Yen, Dollar Rise as CIT Bankruptcy Concern Spurs Safety Demand

The yen and the dollar strengthened for a second day against the euro on renewed concern U.S. commercial lender CIT Group Inc. will file for bankruptcy, boosting demand for safer assets.
The yen rose against 15 out of 16 major currencies after CIT said it expected to post a loss of more than $1.5 billion and its “existing liquidity” is not enough to repay maturing notes. The pound weakened after an industry group said the U.K. house-price slump will persist, backing the case for the central bank to keep borrowing costs low. The Australian and New Zealand dollars declined after Federal Reserve Chairman Ben S. Bernanke said dangers to the U.S. economy remain.
“Worries over a possible insolvency of CIT appear to be returning,” said Akifumi Uchida, a Tokyo-based deputy general manager of the marketing unit at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank. “This is a minus for sentiment and may cause buying of the yen versus the dollar and the dollar against European currencies.”
The yen strengthened to 133.01 per euro as of 1:14 p.m. in Tokyo from 133.36 in New York yesterday, when it gained 0.5 percent. Japan’s currency climbed to 93.68 versus the dollar from 93.73. The dollar rose to $1.4197 per euro from $1.4226.
The pound dropped to $1.6407 from $1.6459. Australia’s dollar fell 0.3 percent to 76.48 yen and slipped 0.3 percent to 81.61 U.S. cents. New Zealand’s dollar lost 0.3 percent to 65.57 cents and slid 0.4 percent to 61.44 yen.
Bernanke Comments
The Australian and New Zealand dollars dropped for the first time in three days against the greenback after Bernanke said yesterday financial markets remained “stressed,” encouraging demand for safer assets.
Household spending is an “important” risk to the outlook because of continued job losses and declines in home values, Bernanke said on the first day of a two-day congressional testimony in Washington.
“A bit of risk aversion is creeping back into the market,” said Thomas Harr, a currency strategist at Standard Chartered Plc in Singapore. Bernanke “was more dovish on the economy and on the economic recovery and a little bit of risk has been taken off the table which is weakening the Aussie.”
The pound dropped against 13 of the 16 major currencies after the National Institute of Economic and Social Research said today that home values will resume their decline because recent gains were driven by a lack of available homes.
The institute also predicted gross domestic product will keep falling until the final quarter of this year. It forecast GDP will shrink 0.4 percent in the second quarter. The median estimate of 32 economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24.
‘Not Good News’
“All of this is not good news for Britain,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “This is leading to selling of the pound.”
The pound also fell after the Telegraph reported that Barclays Plc will need another 12.8 billion pounds ($21 billion) and Royal Bank of Scotland Group Plc will require an additional 8.5 billion pounds to expand under new regulatory rules. The U.K. newspaper cited Carla Antunes da Silva, a banking analyst at JPMorgan Securities Ltd., as saying. She said HSBC Holdings Plc had a 3 billion pound shortfall.
“The Telegraph story came as a reminder that the financial crisis is not fully over,” said Shuzo Kakuta, senior foreign exchange advisor at Tokyo Tomin Bank Ltd. “This kind of topic is positive for the yen both against the dollar and cross- currencies” such as the Australian dollar.
Equities Gain
Gains in the Japanese and U.S. currencies were tempered on speculation an advance in Asian stocks will spur investors to increase holdings of higher-yielding assets. The Nikkei 225 Stock Average rose 1 percent and the MSCI Asia-Pacific Index of regional shares climbed 0.5 percent.
“Rising equities are likely to lead to selling of the yen,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The stock markets are considered to be a barometer of risk appetite.”
Australia’s dollar may advance toward a 10-month high after the currency climbed above a “pivotal resistance” point at 81.55 U.S. cents, BNP Paribas SA said, citing trading patterns.
The so-called Aussie dollar has slipped 1.2 percent from this year’s high of 82.63 U.S. cents on June 3 as investors sold higher-yielding assets on concern that the second-quarter corporate earnings season would disappoint. The break above 81.55 cents suggests the recent “corrective pullback” is over, Andrew Chaveriat, a technical strategist at BNP Paribas in New York, wrote in a note to clients yesterday.
“Aussie should make a new cycle high,” Chaveriat wrote. Weekly momentum is expected to turn bullish, which “would increase the odds of hitting 83.80-85.20 cents.”

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U.S. Stocks Advance on Caterpillar Earnings, Bernanke Remarks

U.S. stocks rose, extending the Dow Jones Industrial Average’s longest rally in two years, as Caterpillar Inc.’s earnings tripled analyst estimates and Federal Reserve Chairman Ben S. Bernanke said there are signs the economy is stabilizing.
Caterpillar, the biggest maker of bulldozers, jumped 7.7 percent to lead the Dow to a seventh straight gain. Merck & Co. added 6.1 percent as job cuts helped it post better-than- estimated earnings. Banks slid, limiting the market’s advance, after CIT Group Inc. said it may need to file for bankruptcy if a plan to repurchase debt fails and Regions Financial Corp. and Zions Bancorporation posted quarterly losses on bad loans.
The Standard & Poor’s 500 Index added 0.4 percent to 954.58 at 4:05 p.m. in New York, maintaining its highest level in more than eight months. The Dow Jones Industrial Average rallied 67.79 points, or 0.8 percent, to 8,915.94 to extend its gain since July 10 to 9.4 percent. The MSCI World Index increased 0.9 percent to the highest level since Nov. 4.
“Beating expectations shows they are in slightly better shape than most investors thought,” said Eric Thorne, who helps oversee $2.5 billion at Bryn Mawr Trust Co. in Bryn Mawr, Pa. “The fact that numbers are slightly above estimates is a sign to us that we are in the beginning stages of an economic recovery.”
Earnings Top Estimates
Per-share earnings beat analysts’ projections by an average of 14 percent for the 70 companies in the S&P 500 that reported quarterly results since July 8, according to data compiled by Bloomberg. Analysts forecast profits fell an average 33 percent in the second quarter and will decrease 20 percent from July through September, according to Bloomberg data.
The S&P 500 rallied 1.1 percent yesterday as a gauge of future economic growth topped projections. The benchmark for U.S. equities advanced 7 percent last week as companies from Goldman Sachs Group Inc. to Intel Corp. reported results that topped estimates.
Treasuries climbed the most in almost two weeks today, sending the 10-year note yield down 13 basis points to 3.48 percent, as Bernanke said “limited inflation pressures” will allow policy makers to keep interest rates near zero for an “extended period.” Bernanke, in his semi-annual testimony before the House Financial Services Committee, also said the economy is showing “tentative signs of stabilization.”
Caterpillar Rallies
Caterpillar, the world’s largest maker of bulldozers and excavators, rallied 7.7 percent to $39.46 after government stimulus programs and improved credit markets helped stabilize demand for the world’s largest maker of bulldozers and excavators. Profit excluding some costs was 72 cents a share, surpassing the 22-cent average estimate of 20 analysts surveyed by Bloomberg. The company also raised its full-year forecast. Merck rose 6.1 percent to $29.65 after the drugmaker that is buying rival Schering-Plough Corp. said second-quarter earnings were 83 cents a share, surpassing the 77-cent average estimate of analysts.
Exxon Mobil Corp., the largest U.S. oil company, added 2.2 percent to $70.47 as oil futures erased an earlier loss and gained 1.2 percent to $64.72 a barrel in New York. Chevron Corp., the second-largest U.S. oil producer, added 61 cents $66.25.
International Paper Co. gained 6.4 percent to $17.55, the highest price since Oct. 29, after the largest U.S. maker of cardboard shipping boxes was raised to “buy” from “hold” at Deutsche Bank AG, which said containerboard pricing was stable in June.
New York Times Co. advanced 5.6 percent to $6.42 after the Boston Globe’s largest union approved a contract for $10 million in annual cuts in a decision that may reduce losses at the newspaper and help its owner negotiate a sale.
Credit Suisse Says to Buy
Credit Suisse Group AG today advised investors to buy equities and trim their holdings of government bonds, reversing a recommendation from June. The bank raised its estimate for the S&P 500 by 14 percent to 1,050 by the end of the year, citing improving economic indicators and earnings. Goldman Sachs yesterday boosted its year-end estimate for the measure to 1,060, implying a 15 percent surge between June 30 and Dec. 31. That would be the steepest second-half rally since 1982.
The S&P 500 has rallied 41 percent from a 12-year low on March 9 amid speculation the economy and companies are recovering from the worst recession in more than half a century and the longest slump in quarterly earnings on record.
More Gains Predicted
U.S. stocks will likely continue to advance, according to John Murphy, chief technical analyst at StockCharts.com. The S&P 500 rose to a new high for the year today on an intraday basis, touching 956.53. Since the index exceeded 956, it’s likely to advance to about 1,000, for a gain of 50 percent from the 12- year intraday low of 666.79 on March 6, Murphy said.
Indications that the S&P 500’s run is likely to continue include the performance of the cumulative advance-decline line for securities listed on the New York Stock Exchange, Murphy said. The index, which tallies the number of daily gains for individual securities minus the number of declines since its August 1996 inception, rose 4.2 percent to a 10-month high of 39,961 yesterday.
“Most people missed the lows and continue to treat this as a rally in a bear market,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, which manages $222 billion. “Hey folks, every bull market that I’ve seen began being called a short-term rally in a bear market.”
CIT Slumps
CIT, the 101-year-old commercial lender, fell 22 percent to 98 cents after saying its “existing liquidity” isn’t enough to repay $1 billion of floating-rate notes maturing on Aug. 17. The lender, which announced a $3 billion rescue financing from its bondholders yesterday, has asked holders of the August notes to swap their claims for 82.5 cents on the dollar.
A gauge of financial shares was the largest drag on the S&P 500 among 10 industry groups as Regions dropped 15 percent to $3.42, Zions declined 13 percent to $10.68 and Comerica Inc. lost 10 percent $20.51.
Lexmark International Inc. had the second-biggest drop in the S&P 500 after CIT, losing 20 percent to $15.08, after the second-largest U.S. printer maker said third-quarter profit may be as low as 40 cents a share, below the 52-cent average of analyst estimates compiled by news.
Lockheed Martin Corp., the world’s largest defense company, lost 8.5 percent to $75.13 after the company posted its largest profit drop in more than five years and the U.S. Senate voted to end funds for its F-22 jet.

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RBA Says Australian Rate Cuts Helping Stoke Demand

Australia’s benchmark interest rate at a half-century low of 3 percent is helping drive economic growth amid signs domestic demand is more resilient than expected, the central bank said.
“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.
The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, research company Access Economics said today.
“The Reserve Bank seems to be tentatively saying the worst is over,” said Annette Beacher, senior fixed-income strategist at TD Securities Ltd. in Singapore. “I got the impression that if they are going to ease, that would be at a later stage.”
The Australian dollar traded at 81.33 U.S. cents at 2:50 p.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield was unchanged at 4.02 percent.
Rate Unchanged
Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.
“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.
Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending, car sales and demand for homes, the minutes said.
The number of cars sold in June rose 5.7 percent, the third month of gains, to the highest level since August 2008, a government report showed today.
Global Economy
There are “further signs of stabilization in the world economy,” the central bank said today. “In Japan, recent data had been more encouraging than they had been for some time.”
The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”
China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.
For Australia, “the outlook remained for a gradual recovery to begin later in the year,” the Reserve Bank said.
While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.
“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.
Consumer Prices
Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.
“Australia made it through the most dangerous phase of the global recession with only collateral damage,” Richardson said.
Investors have increased bets Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.
Traders forecast the key rate will be 76 basis points higher in a year, the index showed at 2:43 p.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.
“We appear to be getting to the bottom end of the interest rate cycle,” Westpac Banking Corp. Chief Executive Officer Gail Kelly said at a business lunch in Sydney today.

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Dollar May Weaken Against Euro, Yen, Citigroup Says

July 21 The U.S. dollar may weaken against the euro, the yen and the Australian dollar as global sentiment turns against the greenback, according to Citigroup Inc.
The euro may extend this month’s gains versus the dollar as buying by sovereign wealth managers and central banks bolsters the 16-nation currency, Citigroup said in a monthly note on its foreign-exchange forecasts. The yen may strengthen against the dollar as Japan’s economy begins to rebound, attracting investors to the Asian nation’s assets, the bank said.
“We detect evidence that underlying sentiment remains U.S. dollar negative,” Citigroup analysts including Jeremy Hale, London-based head of macro strategy, wrote in the note to clients yesterday.
The euro will climb to $1.43 in three months and reach $1.45 in six to 12 months, Citigroup said in the note. The yen will rise to 93 per dollar in three months and strengthen to 90 in six to 12 months, the company said.
The dollar traded at $1.4200 per euro and 93.94 yen as of 8:28 a.m. in London.
The Australian dollar is likely to lead gains among so- called commodity currencies, the analysts wrote.
Australia’s currency will advance to 83 U.S. cents in six to 12 months and New Zealand’s currency will rise to 66 cents, the company said. The so-called Aussie traded at 81.21 U.S. cents and New Zealand’s dollar was at 65.30 cents.

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U.S. Stocks Gain, S&P 500 Jumps to Highest Level Since November

U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level since November, as a gauge of future economic growth topped projections and speculation grew that CIT Group Inc. will avoid bankruptcy.
Caterpillar Inc. and Alcoa Inc. rallied at least 3.7 percent as the Conference Board’s gauge of the economic outlook increased for a third straight month. CIT Group jumped 79 percent as a person briefed on the board’s deliberations said the lender has reached a financing agreement with bondholders. Hasbro Inc. and Eaton Corp. gained at least 4.2 percent on earnings that beat analysts’ estimates.
The S&P 500 added 1.1 percent to 951.13 at 4:05 p.m. in New York, its best close since Nov. 5. The Dow Jones Industrial Average rallied 104.21 points, or 1.2 percent, to 8,848.15, erasing its loss for the year and closing at a six-month high. Europe’s Dow Jones Stoxx 600 Index climbed 1.2 percent and the MSCI Asia-Pacific Index increased 1.4 percent.
“Given the general weakness of the economy and concerns over corporate profitability going into the second quarter, reports to date have been a pleasant surprise,” said Dean Gulis, part of a group that manages $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “This week it’s going to continue to rally. The worm has turned a little bit. People are feeling better about the economy.”
Forecast Raised
All 10 industry groups in the S&P 500 rose today, led by consumer, commodity and industrial shares. Goldman Sachs boosted its forecast for the index, saying improving earnings will spur the steepest second-half rally since 1982. The bank raised its year-end target for the S&P 500 to 1,060, a 15 percent increase from strategist David Kostin’s projection of 940 on June 30.
Earnings topped analysts’ estimates by an average of 15 percent for S&P 500 companies that reported quarterly results since July 8, according to data compiled by Bloomberg, with 35 out of 43, or 81 percent, beating estimates. Analysts forecast profits fell an average 33 percent in the second quarter and will decrease 20 percent from July through September, according to data.
The S&P 500 jumped 7 percent last week as companies from Goldman Sachs Group Inc. to Intel Corp. and Johnson & Johnson reported results that topped analysts’ estimates. The benchmark index has rebounded 41 percent from its 12-year low on March 9 amid speculation the economy is recovering.
Stocks rallied today after the index of leading U.S. indicators reinforced signs the economy may be emerging from the worst recession in five decades. The Conference Board’s gauge of the outlook for the next three to six months increased 0.7 percent, more than forecast, and climbed three straight months for the first time since 2004.
Anticipating Cash Return
U.S. equities are rallying as the market anticipates cash coming back into equities, Laszlo Birinyi president of Birinyi Associates Inc., wrote in a note to clients today.
“We would argue that the most critical element was simply that we are in a bull market,” wrote Birinyi, who helps oversee $200 million for the Westport, Connecticut firm. “When one has an oversold market with liquidity, negative investors, and obvious and articulated concerns, the market will rally.”
Alcoa, the largest U.S. aluminum producer, rose 3.7 percent to $10.60, while Freeport-McMoRan Copper & Gold Inc., the biggest publicly traded copper producer, added 2.7 percent to $57.
Metals Rally
Copper prices rose to a nine-month high in New York on speculation that metals consumption will gain as the global economy recovers. Gold, silver, zinc and tin also led a rally in metals.
CIT Group surged 55 cents to $1.25. The 101-year-old commercial-finance company seeking to ward off bankruptcy agreed to a $3 billion loan for 2.5 years from a group of its bondholders, according to people who declined to be identified because the negotiations are private. The New York-based lender needed to strike a deal with bondholders to reduce debt after the U.S. declined to give the firm a second bailout.
“Its importance for the small-business sector is dramatic,” Kevin Shacknofsky, who manages $2 billion for Alpine Mutual Funds in Purchase, New York, said of CIT. “The rest of the financial industry sees the importance of CIT and they didn’t’ let it fail. That gives the market confidence.”
Caterpillar, the world’s largest maker of construction equipment, surged 7.8 percent to $36.65 after being upgraded to “buy” from “hold” by Bank of America Corp., which cited a bottom in the construction market.
Hasbro, Eaton Jump
Hasbro Inc., the world’s second-largest toymaker, gained 4.2 percent to $26.45 after second-quarter profit rose from sales of toys based on “Transformers” and “G.I. Joe.” Net income increased to $39.3 million, or 26 cents a share, from $37.5 million, or 25 cents, a year earlier. Analysts projected profit of 23 cents a share on average.
Eaton Corp., the maker of circuit breakers and fuel pumps, jumped 8.9 percent to $48.94 after posting second-quarter earnings, excluding some items, of 23 cents a share that beat the average analyst estimate in a Bloomberg survey by 50 percent.
Human Genome Sciences Inc., the producer of gene-based therapies, more than tripled to $12.51. GlaxoSmithKline Plc and Human Genome said their experimental lupus drug reduced patients’ symptoms in a yearlong study. U.S. shares of Glaxo, the U.K.’s largest drugmaker, gained 4 percent to $37.81. CBS Corp. jumped 10 percent to $7.43 after the owner of the most-watched TV network was raised to “overweight” at Morgan Stanley, which said investors may be drawn to its local advertising business in 2010.
Wynn, Halliburton
Wynn Resorts Ltd., the casino company founded by Stephen Wynn, surged 10 percent to $39.83 for the second-best advance in the S&P 500 after CIT. Las Vegas Sands Corp. said it plans to apply for an initial public offering of shares in its Macau casinos. Wynn reported 61 percent of its revenue from Macau in the most-recent quarter, according to Bloomberg data. Las Vegas Sands jumped 15 percent to $9.86.
Halliburton Co. the world’s second-largest oilfield- services provider, gained 4.4 percent to $22.33 after posting second-quarter earnings, excluding some items, of 30 cents a share to surpass the average analyst estimate in a Bloomberg survey by 13 percent.
The cheapest valuations in at least 14 years are making energy companies too alluring to pass up for UBS AG and Guggenheim Partners LLC, even though earnings in the industry may fall 48 percent this year. Oil and gas producers in the MSCI World Index traded at $7.84 per dollar of profit this month, less than half the average of $17.10 in the gauge of developed markets and the widest gap since at least 1995, data compiled by Bloomberg show.
Bank of America, Tyson Slump
Bank of America lost 5 percent to $12.24 after FBR Capital Markets said the largest U.S. lender by assets may post further losses in the second half as the job market deteriorates. The lender was also downgraded to “in-line” from “outperform” at Fox-Pitt Kelton Cochran Caronia Waller. Tyson Foods Inc. sank 9.3 percent to $11.47. The largest meat producer was downgraded to “hold” from “buy” at Deutsche Bank and cut to “market perform” from “outperform” by BMO Capital Markets.

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Yen, Dollar Advance on CIT Bankruptcy Concern, Jakarta Blasts

July 17 The yen and the dollar rose as speculation CIT Group Inc. will file for bankruptcy and blasts in Indonesia spurred demand for the currencies as a refuge.
The yen climbed more than 1 percent against the South African rand and the Swedish krona after New-York based CIT, the lender facing insolvency because it failed to obtain guarantees for its bonds, said it’s trying to secure financing. Indonesia’s rupiah fell the most in more than three weeks against the dollar after explosions tore through two hotels in Jakarta.
“In the short term, the Indonesian and CIT concerns will cause some knee-jerk risk aversion,” said Derek Halpenny, European head of global currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “It’s an obvious first reaction.”
The yen strengthened to 131.99 per euro as of 9:07 a.m. in London, from 132.89 yesterday in New York, and appreciated to 93.70 per dollar, from 93.93. The U.S. currency rose to $1.4086 per euro, from $1.4148. The Indonesian rupiah weakened 0.5 percent to 10,175 per dollar, after dropping as much as 1 percent, the most since June 23.
Japan’s new top currency official said today the government would consider stepping into the foreign-exchange market only if abrupt yen moves hurt the economy.
“We’ll make judgments based on whether excessive movements in the currency market will adversely affect the economy,” Rintaro Tamaki, vice finance minister for international affairs, said in a group interview in Tokyo today.
The yen appreciated against all 16 most-actively traded currencies in the past month, while it’s weaker against the same group this year.
CIT Funds
Futures on the Standard & Poor’s 500 Index declined 0.2 percent, signaling U.S. stocks may open lower today. The Dollar Index, which the ICE uses to track the currency against those of six major U.S. trading partners such as the euro and the yen, rose 0.4 percent to 79.528.
CIT may need as much as $6 billion to avoid bankruptcy, CreditSights Inc. analysts said yesterday. CIT executives are seeking $2 billion to $3 billion in financing from the private sector, the Wall Street Journal reported, citing unidentified people familiar with the situation.
The yen gained for a second day against the euro and the British pound as bombs tore through the Ritz Carlton and the JW Marriott hotels in the Jakarta, killing at least nine people and injuring 42 others, police said.
Jakarta Explosions
The blasts in the two hotels were caused by “high explosives,” said Crisnanda, a spokesman for the police. A New Zealander was among those killed, the government in Wellington said.
“The explosions in Indonesia added to the buying of the yen on risk aversion,” said Takao Yahata, senior manager of foreign exchange and financial-products trading in Tokyo at Mitsubishi UFJ Trust and Banking Corp., a unit of Japan’s largest publicly traded lender by assets.
The yen also gained against the dollar on speculation Japanese exporters bought the currency to convert their foreign- exchange earnings before the three-day holiday. Monday is a national holiday in Japan.
“Yen buying by Japanese investors, including exporters, picked up as the yen fell back toward 94 per dollar and beyond,” said Kosei Fujita, a foreign currency dealer in Tokyo at SBI Liquidity Markets Co., a unit of SBI Holdings Inc.
Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey on corporate sentiment and business plans released on July 1.
Dollar Index
The Dollar Index also rose for the first time in three days after U.S. Treasury Secretary Timothy Geithner repeated that the Obama administration is committed to a “strong” dollar and curbing record budget deficits to achieve that objective.
Geithner said the dollar’s role in international finance places “special responsibilities” on the U.S. to sustain confidence in its financial system, according to an Internet chat with Les Echos newspaper yesterday.
“This was similar to well-timed comments by top U.S. officials to hold up confidence whenever U.S. stocks looked fragile,” Philip Wee, senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “If so, U.S. officials may find further dollar weakness from here a threat to their efforts to dig the economy out of recession.”
The dollar and the yen still headed for their biggest weekly loss in two months against the euro as stocks advanced worldwide, reducing demand for the U.S. and Japanese currencies as a haven from the global recession.
Emerging Markets
“The currencies of emerging markets and resource-rich nations fare well against the dollar and the yen when stocks are on the rising trend, reflecting optimism about the economy,” said Yuji Kameoka, a strategist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-largest brokerage group. “The recent retreat in optimism and the re-emergence of risk- aversion may be a blip.”
The Nikkei 225 Stock Average rose 0.6 percent and the MSCI World Index climbed 0.3 percent, having gained 6.7 percent this week, the most since March.
The Canadian dollar appreciated the most of the 16 major currencies against the yen this week, climbing 5.4 percent to 83.80 yen. The Australian dollar advanced 4.1 percent over the past five days to 75 yen.

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Canadian Dollar Drops for First Time in 4 Days on Risk Aversion

Canada’s dollar depreciated after outperforming all other Group of 10 currencies this week as investors shied away from riskier assets such as commodity- linked currencies.
The loonie, as Canada’s dollar is known, weakened for the first time in four days amid speculation New York-based CIT Group Inc., once the biggest independent commercial lender, may go bankrupt. The currency rose 4.6 percent versus the U.S. dollar from July 10 through yesterday as corporate earnings and commodity price gains whetted investor risk appetite. Raw materials account for more than half of Canada’s export revenue.
“The CIT situation is helping a subtext of risk aversion make itself felt even during what has been a rather positive earnings season,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “This is putting some pressure on” the loonie.
The currency weakened 0.5 percent to C$1.1181 per U.S. dollar at 4:05 p.m. in Toronto, from C$1.1126 yesterday, when it reached C$1.1118, the strongest since June 12. One Canadian dollar buys 89.43 U.S. cents.
Investors should buy the Canadian dollar against the yen because risk appetite is improving and Japan’s currency may suffer from political uncertainty, according to Citigroup Inc.
The New York-based bank entered a long Canadian-dollar position against the yen and expects the cross trade will reach 90 yen per loonie, a team of strategists wrote in a research note today. The Canadian currency traded at 83.90 yen. Going long a currency is betting it will rise. That would be a 7.3 percent gain.
‘On the Mend’
“Risk appetite remains clearly on the mend,” the Citigroup analysts wrote. “Since equities, yields and commodities are all tracking higher in the wake of this improvement in sentiment, we suspect that the Canadian dollar may be among the biggest beneficiaries.”
The loonie outperformed all of the 16 most-traded currencies tracked by Bloomberg so far this month, gaining 4 percent. It was the worst performer in June amid concern an economic recovery would be delayed. Australia’s and New Zealand’s currencies, the loonie’s commodity-linked peers, are down 0.1 percent and up 0.3 percent this month, respectively.
“The prospects for the Canadian economy are improving, but if you look at some of the incoming contemporaneous numbers, they’re still pretty weak,” Steve Englander, chief currency strategist at Barclays Capital Inc., said today in a Bloomberg Television interview. “I don’t think the bank of Canada really feels given the current state of the economy that the Canadian dollar should appreciate anywhere close to parity.”
Consumer Prices
Canadian consumer prices fell 0.3 percent last month from a year ago, according to the median forecast of 22 economists surveyed by Bloomberg. The nation’s statistics agency is due to release the data tomorrow at 7 a.m. in Ottawa. Gross domestic product contracted in April for a ninth month, declining 0.1 percent, Statistics Canada reported June 30.
The Bank of Canada is scheduled to meet July 21 on interest rates. The key rate has been at a record low of 0.25 percent since April. Bank Governor Mark Carney halved the key rate to a record low of 0.25 percent in April. In June he said at least twice the “rapid rise” of the nation’s currency, which gained the most in May since 1950, could threaten the economy.
CIT Group said yesterday the U.S. government wouldn’t rescue the company. Talks with regulators broke off and “there is no appreciable likelihood of additional government support being provided over the near term,” CIT said in a statement.
Bonds Rise
Canada’s dollar will weaken to C$1.13 by the end of the third quarter and C$1.14 by year-end, according to the median forecast of 35 economists surveyed by Bloomberg News. Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, predicted the currency will weaken to C$1.15 by October before bouncing back to C$1.10 by January.
Government debt rose, with the 10-year Canadian bond’s yield falling eight basis points, or 0.08 percentage point, to 3.41 percent. The price of the 3.75 percent security due in June 2019 gained 71 cents to C$102.85. Canada’s government bonds have lost investors 2.5 percent this year, according to a Merrill Lynch & Co. index.
The nation may need to run budget deficits for a decade if Prime Minister Stephen Harper chooses not to raise taxes or cut spending to erase fiscal shortfalls, Dale Orr, an Economic Insight economist, said today.
Harper told reporters July 10 his government would post budget deficits as long as needed to spur growth, pledging not to adhere to a five-year timetable to balance the budget if that required tax increases or reducing spending.
“There has been quite a roller coaster ride in foreign exchange markets over the course of the last several weeks, and today was no different,” Bank of New York Mellon’s Woolfolk said in an interview. “Even though Canada has a fiscal deficit right now because they’re struggling with a recession, by comparison it’s far smaller than any other of the Group of Seven countries.”

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Oil Falls From Highest in a Week Before Unemployment Report

Crude oil fell from its highest in a week before a report forecast to show the U.S. shed more jobs, spurring concern that a recovery in fuel demand will be delayed.
The Labor Department is likely to say later today that 553,000 people made initial claims for unemployment benefits in the week ended July 11, according to a survey. U.S. gasoline and heating oil supplies increased last week, the government said yesterday. Prices will fall to $20 a barrel this year, former government adviser Philip Verleger predicted.
“The OECD economies are still deep in recession,” said Andy Sommer, an analyst at Elektrizitaets-Gesellschaft Laufenburg in Dietikon, Switzerland. “The Asian countries are coming out of the worst, but warning voices persist that growth is not stable yet.”
Crude oil for August delivery fell as much as 79 cents, or 1.3 percent, to $60.75 a barrel on the New York Mercantile Exchange, trading for $60.96 at 12:14 p.m. in London. Prices have increased 37 percent this year and jumped 3.4 percent yesterday to $61.54, the highest close since July 7.
China’s gross domestic product grew 7.9 percent in the second quarter. The nation overtook Japan as the world’s second- largest stock market by value for the first time in 18 months, as government spending and record bank lending boosted share prices. China’s industrial production increased 10.7 percent in June from a year earlier, the largest gain in nine months excluding seasonal distortions. Retail sales climbed 15 percent.
Lower Refinery Runs
“The economic situation is not getting better,” said Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”
A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.
U.S. crude inventories fell 2.81 million barrels to 344.5 million last week, the Energy Department said yesterday.
“The huge rally across the board in equities helped boost crude oil,” said Mike Sander, an investment adviser with Sander Capital in Seattle. “The weekly EIA report showed a drop in crude oil inventories by 2.8 million barrels, which lent support to higher crude prices as well.”
Growing Gasoline Stockpiles
Crude stockpiles were forecast to decline 2.1 million barrels, according to analysts surveyed by Bloomberg News. Refineries operated at 87.9 percent of capacity, the highest since August.
Gasoline inventories climbed 1.44 million barrels to 214.6 million, the highest since April, the Energy Department report showed. Supplies were forecast to increase 875,000 barrels.
Supplies of distillate fuel increased 553,000 barrels to 159.3 million in the week ended July 10, the highest since January 1985, the report showed.
Brent crude for August settlement was at $62.22 a barrel, down 87 cents, on London’s ICE Futures Europe Exchange at 12:15 p.m. in London. The more-actively traded contract for September, which becomes the front month tomorrow, slipped 50 cents to $62.08.

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China's Economic Growth Quickens to 7.9% on Record Loan Volume, Investment

July 16 China’s gross domestic product grew 7.9 percent in the second quarter as the nation became the first of the major economies to rebound from the global recession.
The figure, announced by the statistics bureau in Beijing today, exceeded the 7.8 percent median forecast of 20 economists in a survey and a 6.1 percent gain in the first quarter that was the slowest in almost a decade.
China, the biggest contributor to global growth, overtook Japan as the world’s second-largest stock market by value yesterday after a 4 trillion yuan ($585 billion) stimulus package spurred record lending and boosted share prices. The first-half expansion laid the foundation for meeting the year’s 8 percent growth target for creating jobs and maintaining social stability, the statistics bureau said today.
“The pace of the recovery is even quicker and stronger than we initially expected,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, who raised his growth forecast after today’s report. “There’s clear evidence that this infrastructure-led recovery is going to be more sustainable than many people expected.”
The yuan traded at 6.8312 against the dollar as of 5:30 p.m. in Shanghai, from 6.8315 before the data were released. The Shanghai Composite Index closed 0.2 percent lower.
‘Not Yet Firm’
The foundation of China’s recovery is “not yet firm” and the government will stick to its “moderately loose” monetary policy and “proactive” fiscal stance, statistics bureau spokesman Li Xiaochao said.
China accounted for a third of global expansion last year, according to International Monetary Fund data using purchasing- power-parity calculations to account for exchange-rate differences.
The global economy will shrink 1.4 percent this year, including a 2.6 percent contraction in the U.S. and a 6 percent decline in Japan, the IMF said in a July 8 report. Emerging economies, led by China, are set to regain growth momentum in the remainder of this year, helping the world to recover from the worst slump since World War II, the IMF said.
“China’s growth is getting back on track after being pulled down by the global export slump,” said David Cohen, an economist with Action Economics in Singapore. “It’s leading the turnaround in the global economy.”
Urban Spending
Urban fixed-asset investment surged 35.3 percent in June from a year earlier, the statistics bureau said. The 33.6 percent gain for the first half was the biggest in five years. Industrial production increased 10.7 percent in June from a year earlier, the largest gain in nine months excluding seasonal distortions. Retail sales climbed 15 percent.
An infrastructure spending boom is helping companies from China Southern Power Grid Co. to China Merchants Property Development Co.
“China still faces difficulties including shrinking external demand, falling corporate profits and declining fiscal revenue,” Li said. “We’re still facing great pressure in generating jobs.”
China’s economy is the only one of the world’s 10 biggest still expanding. The People’s Bank of China sold today one-year and three-month bills at the highest yields this year, guiding money-market rates higher to slow record growth in money supply.
$2 Trillion Reserves
The nation’s foreign-exchange reserves, the world’s biggest, rose to a record $2.132 trillion last quarter as the central bank sold yuan to prevent an appreciation that would make the country’s exports more expensive.
Tim Condon, chief Asia economist at ING Groep NV, said the central bank may raise the one-year lending rate as early as the first quarter of next year.
“Growth may accelerate to near 9 percent in the third quarter and 10 percent in the fourth quarter,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “The government won’t tighten policies too early but it should tell banks not to lend without limit.”
The government must prevent abnormal growth in loans as they could trigger inflation and financial risks, the financial and economic affairs committee of the National People’s Congress said, the official Xinhua news agency reported.
Morgan Stanley, JPMorgan Chase & Co., Royal Bank of Scotland and UBS AG raised growth forecasts for China today. The economy will expand 9 percent in 2009 and 10 percent in 2010, Morgan Stanley said in an e-mailed note.
Social Stability
China is targeting faster growth to maintain stability after the loss of millions of migrant workers’ jobs and ahead of the 60th anniversary of Communist Party rule in October. Ethnic riots in Urumqi in the northwestern Xinjiang province on July 5 left at least 192 people dead.
The GDP rebound snaps a two-year run of progressively slower growth. Shanghai’s benchmark stock index has climbed almost 90 percent from last year’s low, led by PetroChina Co. and Industrial & Commercial Bank of China Ltd.
The economy grew 7.1 percent in the first half from a year earlier. Consumption contributed 3.8 percentage points and investment accounted for 6.2 percentage points, with a decline in the trade surplus shaving off 2.9 percentage points.
Consumer prices fell 1.7 percent in June from a year earlier, the fifth monthly decline and the biggest drop since 1999, today’s data showed. Producer prices slid a record 7.8 percent.

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China Overtakes Japan as World's Second-Biggest Stock Market on Stimulus

July 16 China overtook Japan as the world’s second-largest stock market by value for the first time in 18 months, after government stimulus spending and record bank lending boosted share prices this year.
The Shanghai Composite Index rose 1.4 percent yesterday, sending the value of China’s domestic stock market to $3.21 trillion, compared with Japan’s $3.20 trillion, according to data compiled by Bloomberg. The Shanghai index has gained 75 percent this year, the best-performing major market, against a 5.5 percent advance in the Nikkei 225 Stock Average. The U.S. has the biggest equities market worth $10.8 trillion.
“China is just entering its stride and is still very much in a growth phase, while Japan is already a developed economy,” said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $14 billion.
China last surpassed Japan in stock-market capitalization from Jan. 4 to Jan. 24, 2008, data compiled by Bloomberg show. The Shanghai Composite tripled in the two years leading to its record on Oct. 16, 2007, before tumbling 72 percent to its trough the following November.
The Shanghai Composite fell 0.2 to 3,183.74 at the close, while the Nikkei 225 advanced 0.8 percent to 9,344.16.
Government Stimulus
A government-led 4 trillion yuan ($585 billion) stimulus package and record bank lending has shielded the Chinese economy against a plunge in exports. Foreign-exchange reserves topped $2 trillion for the first time, while money supply rose a record 28.5 percent in June, the central bank said July 15. The economy expanded 7.9 percent in the second quarter, the statistics bureau said in Beijing today, more than the 7.8 percent median estimate of 20 economists surveyed by News.
New loans rose fivefold in June from a year earlier to 1.53 trillion yuan, increasing concern that attempts to revive the world’s third-largest economy will lead to bad debts and asset bubbles. Rapid credit growth poses risks for lenders and the financial system, Wang Huaqing, the disciplinary secretary of the China Banking Regulatory Commission, said on July 7.
BNP Paribas Securities (Asia) Ltd. last month cut its rating on China to “neutral” from “overweight,” citing valuations. Stocks on the benchmark index are trading at 33.2 times earnings, almost triple the 12.9 multiple on Nov. 4, when the measure dropped to its lowest since the financial crisis. Earnings per share declined 7 percent last year and will probably remain “flat” this year, the brokerage said.
Overvalued
“We share concerns that the corporate earnings recovery is not going to be very strong,” Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas said in an interview with Bloomberg Television today. Some Chinese shares have soared by “1,000 percent from the bottom, so they’re pricing in a very strong rebound in earnings,” he said.
In Japan, nagging deflation and an aging population have sapped strength from what was once the world’s largest market by capitalization. During the 1990s, Japan spent 135 trillion yen on 10 economic stimulus plans and lowered interest rates to zero, none of which succeeded in promoting sustainable growth.
Japan’s economy shrank at a 14.2 percent annual rate in the first quarter, the most since data began in 1955. The country’s gross domestic output will shrink 3.4 percent in the year ending March 2010, the central bank predicted. The contraction coincided with a drop to a more-than 25-year low by the Topix index.
Japan’s Problems
“Japan has two main problems; the enormous public debt handicaps the government’s ability to spend additional money to boost the economy and we are too reliant on exports,” said Takashi Kamiya, chief economist at T&D Asset Management Co. in Tokyo, which helps oversee some $16 billion. “There’s no way to expect the emergence of a domestic growth driver that can propel us out of this funk.”
Chinese companies account for four of the 10 biggest companies when measured by market value, according to Bloomberg data. Toyota Motor Corp. is the top-ranked Japanese company, at 25th, worth about one third the capitalization of PetroChina Co., the world No. 1

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Thai Central Bank May Keep Rate as Stimulus Kicks In

July 15 -- Thailand’s central bank will probably keep its benchmark interest rate unchanged at a second straight meeting amid signs government spending has helped moderate the pace of the nation’s economic contraction.
The Bank of Thailand will hold the one-day bond repurchase rate at 1.25 percent, according to 17 of 18 economists surveyed by ___ News. One economist expects a 25 basis-point cut. The central bank decision is due today at 2:30 p.m. in Bangkok.
“Government stimulus measures have picked up the slack so the pressure to respond with monetary support has eased,” said Radhika Rao, an economist at IDEAglobal Ltd. in Singapore. “We expect the rate to be left unchanged for the rest of the year.”
Thailand’s consumer confidence rose for the first time in five months in June after the seven-month-old government said it would spend more than 1.4 trillion baht ($41 billion) by the end of 2012. Policy makers in the Southeast Asian nation have begun saying the economy may be past the worst after declines in exports and manufacturing stabilized.
Thailand’s benchmark SET Index rose 0.7 percent as of 10:42 a.m. local time. The gauge has climbed 42 percent from this year’s lowest level on March 9. The baht, the second-biggest gainer among Asia’s 10 most-traded currencies outside Japan in the past three months, added 0.1 percent to 34.13 per dollar.
Sri Lanka
The Central Bank of Sri Lanka this week kept its key rate unchanged as it waits to see if three reductions this year are enough to stoke an economic revival. South Korea’s central bank held borrowing costs at a record low for a fifth month on July 9 as the economy recovers, and Malaysia refrained from lowering its overnight policy rate for a second meeting on May 26.
The Bank of Thailand’s interest rate of 1.25 percent is at its lowest since July 2004 after being cut by a total of 2.50 percentage points over four meetings between December and April. Consumer prices have been falling since January.
“The central bank may decide to refrain from cutting rates further for political reasons,” said Jotika Savanananda, president of Bangkok-based SCB Asset Management Co., which manages about 420 billion baht of assets. “Too low a rate will hurt pensioners and savers.”
Thailand’s government last month won parliamentary approval to borrow 800 billion baht locally to fund its three-year investment plans involving transportation, water distribution, health and education projects. That’s in addition to a 116.7 billion-baht stimulus package of training programs, cash handouts and public works.
Industrial Production
The central bank on June 30 said economic conditions stabilized in April and May. Industrial production fell 10 percent in May, compared with a 9.7 percent decline a month earlier. Exports, which are equivalent to about 60 percent of the Thai economy, slid 26.5 percent in May, after a 25.2 percent drop in April.
Southeast Asia’s second-largest economy shrank 7.1 percent in the first quarter, a second consecutive quarterly decline that pushed the nation into recession. The contraction will lessen in subsequent quarters and growth will resume in the last three months of the year, the government predicts

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