Fed's Lower Rates Pressure China to Strengthen Yuan

(Bloomberg) -- Like it or not, China has no choice other than to let the yuan appreciate against the dollar.

The combination of the world's fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in the yuan to accelerate, even as policy makers in Beijing resist calls from the West to let the currency appreciate at a faster pace, say Pacific Investment Management Co. and Pictet & Cie., Switzerland's largest closely held private bank.

Central bankers in Thailand, Malaysia, Singapore and the Philippines are in the same situation, making their currencies attractive, according to money managers at the firms and Merrill Lynch & Co. Nine of the 10 best-performing currencies against the dollar in 2008 will come from Asia, surveys of foreign exchange strategists by Bloomberg show.

``You're likely to see less intervention,'' said Ramin Toloui, who helps oversee more than $60 billion in emerging- market bonds and currencies at Newport Beach, California-based Pimco. ``Several Asian central banks see more rapid exchange- rate appreciation as an important tool to fight inflation.''

After rising 7 percent last year, the yuan has appreciated 1.9 percent to 7.1623 per dollar so far in 2008. New York-based JPMorgan Chase & Co., the world's ninth-biggest currency trader, predicts a further 14 percent increase, while Citigroup Inc. in New York, the third-largest, forecasts a 6 percent advance.

Thailand's baht has climbed 3.7 percent to 32.53 this year, while the Taiwan dollar is up 2.4 percent to NT$31.75. The yuan rose 0.3 percent today, the most in six weeks, and the Singapore dollar gained as much as 0.2 percent to S$1.4107, its highest in more than a decade.

Inflation Battle

While the International Monetary Fund expects growth in Asian emerging markets will slow to 8.6 percent in 2008 from 9.6 percent last year, that's still six times faster than the 1.5 percent expansion predicted for the U.S.

Consumer prices in the region's 10 largest economies outside Japan are rising at an average annual rate of 5.30 percent, compared with 4.10 percent in the U.S., data compiled by Bloomberg show. Faster inflation raises the odds that central banks in Asia will increase interest rates, bolstering the appeal of their currencies.

``We are long Asian currencies,'' said Donald Amstad, head of Asia-Pacific fixed-income at Aberdeen, Scotland-based Aberdeen Asset Management Plc, which oversees $205 billion. ``Asia is in relatively better shape than the rest of the world.'' A ``long'' position is a bet that a currency will gain.

Costly Option

To keep their currencies from appreciating too fast and hurting exporters, Asian central banks have bought U.S. dollars, accumulating $4 trillion in foreign-exchange reserves.

The downside to intervention is that it increases the supply of the local currency, which tends to fuel inflation. To prevent that from happening, Asian central banks typically sell bonds to remove those funds from the economy.

That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in dollar-denominated securities. The People's Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar-maturity Treasuries following the U.S. Federal Reserve's five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favor of U.S. debt.

 

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Stocks Rise in Europe, Latin America; Credit Suisse, Vale Climb

(Bloomberg) -- European stocks rose, led by banks and metal producers, on optimism this year's 12 percent drop in the region's benchmark index was too steep given the outlook for sales. Shares in Latin America gained, while Asian equities fell.

Credit Suisse Group rose the most in three weeks in Zurich after Qatar said it's buying shares in the second-biggest Swiss bank, while Barclays Plc and Lloyds TSB Group Plc climbed in London as traders speculated on higher dividends. BHP Billiton Ltd. followed metals prices higher in Europe, while Cia. Vale do Rio Doce rallied in Sao Paulo.

The Dow Jones Stoxx 600 Index added 1.7 percent as of 3:18 p.m. in London, and the MSCI World Index increased 0.4 percent, as gains from Europe and Latin America more than offset declines in Australian bank shares and Japanese insurers. Futures on the Standard & Poor's 500 Index rose 0.8 percent. The U.S. market is closed today for the Presidents' Day holiday.

Qatar's purchase ``gives the market a boost,'' said Salah Seddik, who helps oversee $5.9 billion at Richelieu Finance in Paris. ``There's been some good news in the financial industry. The strong declines we've seen have left some buying opportunities.''

Concern the subprime mortgage slump will lead to more losses sent Europe's Stoxx Banks Index down 17 percent this year. The gauge was valued at 7.5 times profit in the week ended Feb. 8, the lowest since at least 1998, data compiled by Bloomberg show.

The MSCI Latin America Index added 2.1 percent. Brazil's Bovespa index jumped the most in a week, advancing 2 percent, while Chile's Ipsa stock index rose 0.9 percent.

The MSCI Asia Pacific Index lost 0.6 percent today, reversing an earlier gain of 0.8 percent.

European Markets

National benchmarks advanced in all 18 western European markets except Greece. France's CAC 40 rose 1.5 percent, while the U.K.'s FTSE 100 climbed 2 percent. Germany's DAX increased 1.7 percent.

The Stoxx 50 jumped 1.6 percent, as did the Euro Stoxx 50, a measure for the euro region. All of the 18 industry groups in the Stoxx 600 gained, with five stocks rising for each one that fell.

Credit Suisse rose 3.1 percent to 56.7 francs. Qatar is accumulating shares in Credit Suisse and plans to spend as much as $15 billion on European and U.S. bank stocks over the next year, the Gulf state's prime minister said in an interview.

``We have a relation with Credit Suisse and we bought some of the stock from the market, actually, but I cannot say what percentage because still we are in the process,'' Sheikh Hamad bin Jasim bin Jaber al-Thani, who is also chief executive officer of the Qatar Investment Authority, said in an interview late yesterday in Doha.

Barclays, Lloyds TSB

Barclays, the U.K.'s third-biggest bank, jumped 6.8 percent to 456.5 pence. Lloyds TSB, the U.K.'s No. 1 provider of unsecured loans, increased 6.4 percent to 421 pence.

Barclays and Lloyds, which are seeking to quell concern about financial institutions, are expected to report ``robust'' results, the newspaper said. Barclays will lift its dividend by 10 percent on Feb. 19, the Times reported, without saying where it got the information.

Barclays spokesman Robin Tozer and a Lloyds TSB spokesman Leigh Calder declined to comment on the report.

HBOS Plc, the U.K.'s biggest mortgage lender, advanced 4.1 percent to 633.5 pence. Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank, added 2.9 percent to 360.75 pence.

UBS AG fell 1.2 percent to 35.58 francs after a Bear Stearns Cos. analyst downgraded the stock, forecasting more writedowns on debt holdings.

New disclosure of holdings affected by the subprime debacle ``revealed the full and frightening extent of UBS's potential problems,'' Christopher Wheeler wrote, cutting his stock recommendation to ``peer perform'' from ``outperform.''

Steel Price Accord

Vale do Rio Doce surged the most in three weeks, climbing 5.7 percent to 49.15 reais.

Asia's three largest steelmakers agreed to pay Rio de Janeiro- based Vale, the world's biggest iron-ore producer, 65 percent more than last year for the material. Vale said the price increase shows the market is going through ``very tight conditions.''

ArcelorMittal, the world's largest steelmaker, gained 1.4 percent to 48.22 euros. Nippon Steel Corp., the second-biggest, rose 3.2 percent to 575 yen, its highest close since Feb. 7.

``It's good that the price increases are being decided early,'' Alan Coats, an analyst at HSBC Holdings Plc in London, said today in a telephone interview. ``It means they can be passed on.''

BHP Billiton

BHP Billiton, the world's largest mining company, gained 3.9 percent to 1,612 pence. Vedanta Resources Plc, India's biggest copper producer, climbed 3.9 percent to 2,153 pence.

Copper advanced to the highest in almost four months in London after China, the world's largest user, said imports grew 6.6 percent in January from the previous month. The metal for delivery in three months rose 2.3 percent to $7,910 a metric ton, the highest intraday price since Oct. 29. Zinc and lead also climbed.

Australia & New Zealand Banking Group Ltd., Australia's third-largest bank, dropped 6.1 percent to A$22.46, the lowest since September 2005, after its chief executive said a ``bloodbath'' in debt markets will wipe out earnings growth.

Commonwealth Bank of Australia, the country's top mortgage lender, lost 5.1 percent to A$44.

Aioi Insurance Co., Japan's fourth-largest nonlife insurer, tumbled 6.8 percent to 439 yen, after a newspaper said it will have $740 million of subprime-related losses.

 

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Best Buy Cuts Forecast, Citing Fourth-Quarter Sales

(Bloomberg) -- Best Buy Co., the largest U.S. consumer electronics chain, cut its full-year earnings forecast to $3.05 to $3.10 a share, saying fourth-quarter revenue will fall short of targets.

The company had previously predicted earnings per share of $3.10 to $3.20 for the year ending March 1, Richfield, Minnesota- based Best Buy said in a statement today. Analysts surveyed by Bloomberg estimated $3.17 a share on average.

``Soft domestic customer traffic in January, coupled with our near-term outlook, now indicate that our fourth-quarter revenue will fall short of our planned targets,'' Chief Executive Officer Brad Anderson said in the statement. ``Our December revenue results were in line with our expectations.''

 

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UBS Won't Support Failing Auction-Rate Securities

(Bloomberg) -- UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.

The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed auctions to fail as mounting losses from the collapse of subprime mortgages causes capital markets to seize up.

Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst.

``We are kind of in uncharted territory right now,'' said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago.

Auctions are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, Kritzmire said.

Four-Fifths Fail

Rohini Pragasam, a spokeswoman for UBS, the second-biggest underwriter of municipal auction-rate debt after Citigroup in 2006 according to Thomson Financial, declined to comment. UBS, the dealer on the hospital corporation's auction, today posted the biggest-ever loss by a bank for the fourth quarter. The stock declined 2.34 francs ($2.12), or 5.7 percent, to 38.54 francs at 3:18 p.m. in Zurich.

Auction bonds have interest rates determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.

Investors have little opportunity to judge the risk that auctions will fail because of little public disclosure about interest rates set at the periodic bidding or other details such as how many bids were submitted or how many bonds were offered for sale.

Reporting System Changes

The Municipal Securities Rulemaking board is working on changes to its trade reporting system that would reveal at least the interest rate on auction bonds when they are traded. Currently, only the price is disclosed.

``I think you need to have more transparency in terms of the market so that investors can judge liquidity risks and so that people, both retail investors and corporate investors, can decide where they want to put their money,'' Joseph Fichera, chief executive officer of Saber Partners, a New York based financial adviser to local governments, said in an interview on Bloomberg Television.

Until recently, UBS and other banks that collect fees for running auctions have stepped in with their capital to prevent failures when bidding faltered. These firms have grown unwilling to commit their money to auction-rate securities after suffering at least $133 billion in credit losses and mortgage writedowns stemming from the subprime mortgage collapse.

 

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Retail sales rebound

(Reuters) - An unexpected rise in January retail sales, reported by the government on Wednesday, fired up hopes the U.S. economy might skirt recession despite the pressure on consumers from a weakening housing market.

The Commerce Department said sales at U.S. retailers rose 0.3 percent in January to a seasonally adjusted $382.91 billion on higher sales of new cars, gasoline and clothing.

That was sharply contrary to Wall Street analysts' forecasts for a 0.2 percent drop and helped drive stock prices higher in early trading while government bond prices fell.

"The report strengthens the case of those who think we'll skirt a recession," said Jim Awad, chairman of W.P. Stewart & Co. Ltd. in New York, but he cautioned the optimism might be short-lived.

"People will say this is subject to revision and it's inconsistent with other incoming data indicating softness and weakness in the economy," Awad said.

The dollar's value strengthened against other key currencies.

 

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MGIC Loses $1.47 Billion in Quarter, Seeking Capital

(Bloomberg) -- MGIC Investment Corp., the largest U.S. mortgage insurer, fell the most in a month after posting a record quarterly loss of $1.47 billion and said it hired an adviser to raise capital.

MGIC's fourth-quarter net loss was $18.17 a share, compared with a profit of $122 million, or $1.47, a year earlier, the Milwaukee-based company said in a statement today. Excluding investment losses, the insurer lost $18.09 a share, worse than the $8.13 average loss estimate of seven analysts compiled by Bloomberg.

Claims costs, including additions to reserves, surged sevenfold to $1.35 billion, compared with a Jan. 22 company forecast of as much as $1.3 billion. MGIC set aside money for losses on loans that served as collateral for Wall Street securitizations, whose performance ``deteriorated materially.''

``Higher loss severities and higher delinquencies had a material impact,'' Curt Culver, MGIC's chief executive officer, said in the statement. While the company expects to remain unprofitable this year, Culver said MGIC has adequate capital to meet its claim obligations.

MGIC fell $2.03, or 14 percent, to $12.15 at 10:10 a.m. in New York Stock Exchange composite trading. Earlier in the session the company fell as much as 16 percent.

Foreclosure Rates

U.S. foreclosure rates have risen to their highest since at least World War II, and defaults on privately insured U.S. mortgages rose 37 percent in December from the same month a year earlier, according to the Mortgage Insurance Companies of America trade group. Foreclosure rates rose 75 percent in 2007, according to Irvine, California-based RealtyTrac Inc. Mortgage insurers reimburse lenders when borrowers don't repay their debts.

Borrowers who couldn't make higher monthly payments after introductory rates expired propelled a jump in third-quarter claims, leading MGIC and smaller rivals PMI Group Inc. and Radian Group Inc. to report their first money-losing quarters as publicly traded companies.

Payments on about $460 billion of adjustable-rate mortgages are scheduled to be repriced this year, with an additional $420 billion expected for 2011, according to New York-based analysts at Citigroup Inc.

 

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Auction-Bond Failures Roil Munis, Pushing Rates Up

(Bloomberg) -- Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding wouldn't commit their own capital to the debt.

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also experienced failures, officials said.

What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state's Dormitory Authority. The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.

``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''

Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by banks to submit bids and risk ending up with too many of the bonds. Local governments that have borrowed in the $300 billion auction-rate market confront the prospect of higher borrowing costs as economic slowing trims tax revenue.

Auction-Rate Bidding

Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.

Other borrowers paid higher rates, even if their auctions didn't fail. Wisconsin's 28-day auction yesterday of taxable bonds was set at a 10 percent rate, up from 4.75 percent for identical securities Feb. 7.

Frank Hoadley, Wisconsin's director of capital finance, said he had no advance warning from bankers about the jump in rates. ``We are making decisions'' about converting the auction bonds to different kinds of debt, he said.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

Port Authority Bonds

The 20 percent rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week. Interest on the bonds is subject to federal income tax.

``We have seen widening spreads, reduced demand for certain auction-rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup, said in a statement.

A Citibank-run auction for the New York state's Dormitory Authority failed yesterday, resulting in an interest rate of 6.26 percent, up from 3.12 percent a week earlier, according to Bloomberg data. Following the auction miss, the interest rate was set at twice one-month Libor, the London interbank offered rate for wholesale bank deposits, according to the official statement for the bonds.

Michael DuVally, a spokesman at New York-based Goldman, declined to comment.

 

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