Financial Page International

28 January 2012 - Global Markets Review
Good Morning Ladies & Gentlemen,

I mentioned three weeks ago that the World had gone mad - and gave you three classic examples to judge my reasoning.

 

This week, with China ostensibly fully 'closed', focus should have been in theory on Europe and the continuing problems there - 'should have been' being the operative statement.

 

However, another week passes where every man, woman and dog seems to have chipped in with their views on Europe and its problems and yet once again, another week passes with nothing to show for it in terms of resolving the issues.

 

Sure, we have seen more Bond sales and they all seem to be 'flying off the shelves' if figures can be believed - whilst at what cost .... Portugal set Euro-era records this week with their 3 year treasury yields sitting at 19.4%.

 

NINETEEN POINT FOUR PERCENT Ladies & Gentlemen; I said not even a month ago that Italy was 'bankrupt' when their yields reached a paltry 8% - what does that make Portugal? Super-Ultra-Degraded-Worthless-Junk?

 

Before the start of the week, Davos and its World Economic Forum was being heralded as the saviour of all things economically bad - but it seems the organisers did not figure on anyone checking who was fronting the show and the perception this appointment would give the wider global audience.

 

Here is another example of why I think the world is spinning on a very strange axis indeed.

 

Citigroup's Chief Executive Officer Vikram Pandit is a co-chairman of the World Economic Forum's annual meeting this week in Davos, Switzerland.

 

"Really?" I hear you say; "so what is important about that?"

 

Think about it Ladies & Gentlemen; surely this can't possibly be right.

 

Then it turns out, much to my amazement, that the story is accurate, confirming once again that our world is stark, raving mad. You really have to wonder why anyone outside of Citigroup would pick Pandit to lead anything.

 

It's one thing for Citigroup to blow itself up so spectacularly that it needs multiple taxpayer bailouts to stay afloat. What seems strange is that an organization like the World Economic Forum would honour the fellow who was Citigroup's CEO throughout most of the financial crisis, by selecting him as one of its six co-chairmen. If Sheila Bair had gotten her way when she was head of the Federal Deposit Insurance Corporation, Pandit would have been fired years ago as he's not competent enough to run a bath.

 

It's stunning when you think about it: How does Pandit, who owes much of his fortune to the American public's largess, wind up being showcased as a paragon of leadership and free enterprise, little more than a year after the US Treasury finally sold the last of its Citigroup common stock?

 

And what message is the rest of the world supposed to take away from this? That his example is to be celebrated?

 

Maybe the distinction bestowed on Pandit should be of no surprise at all. Founded in 1971, the World Economic Forum describes itself as an international organization of large corporations that is "committed to improving the state of the world" with "no political, partisan or national interests." But it's becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain.

 

Pandit joined Citigroup in 2007 after selling it his Old Lane Partners hedge fund, which the bank shut the following year. Pandit's take from his share of the sale was $165 million, the last $80 million of which he received in July.

 

In February 2008, two months into his job as CEO, Pandit certified in Citigroup's 2007 annual report that the company's internal controls were effective. Eight days before he did that, the US Office of the Comptroller of the Currency had sent him a seven-page letter detailing all sorts of ways in which Citigroup's controls were inadequate.

 

In November 2008, in spite of the company's insistent refrain that it had "very strong capital," Citigroup took a second federal-bailout package. That boosted its proceeds from the Troubled Asset Relief Program to $45 billion, plus $301 billion of asset guarantees. Another rescue came in 2009, when the Treasury Department let Citigroup repay $25 billion of its bailout money in common shares rather than cash.

 

Then in March 2010, appearing before a congressional oversight panel, Pandit said Citigroup was a healthy institution back in November 2008 when the government saved it from going under. Short sellers (of course!) were to blame for the bank's problems, he said.

 

Today Citigroup says it has returned to profitability, although investors remain sceptical. At a recent price of $30.25 a share, down 90% since Pandit was named CEO, Citigroup trades for about 50% of its common shareholder equity. In other words, the markets believe that about half of the $178 billion book value on Citigroup's balance sheet is imaginary. The company probably wouldn't be standing were it not for its implicit guarantee from the US government.

 

Is this the right man for the World Economic Forum to pick as one of its co-chairmen for this year's Davos extravaganza? Pandit's bromides at a press conference this week were the sort of filler any college advertising major could have written.

 

"Banks have to serve clients, not serve themselves," Pandit said. (Were they not serving clients before?) Or this: "It's important for the financial system to acknowledge that there's a great deal of anger that's directed at it for the crisis, and trust has been broken," he said. "We've got to start addressing that."

 

You didn't need to be Sherlock Holmes to work that one out Mr Pandit!

 

If billionaires, bankers and politicians extract one insight from this World Economic Forum, let it be this:

 

Western civilization is on the verge of a catastrophic failure to balance its short-term and long-term interests.

 

Market turmoil in Europe has eased a bit and the US economy is looking healthier than expected as the global elite converge on the Swiss ski resort of Davos for five days of speeches, meetings and cocktail parties. But as German Chancellor Angela Merkel rightly noted at the forum Thursday, world leaders have yet to act on the lessons of a financial crisis that began in 2008 and has yet to really end.

 

In the US, political leaders are focused almost exclusively on the short term, to the detriment of the long. The bank bailouts of 2009, together with various kinds of stimulus - insufficient as they may have been - helped fend off a full- blown depression and at least partly insulated millions of Americans from economic pain.

 

But the bill for such measures has to be paid. With a presidential election coming and the banking lobby fully recovered, the US isn't likely to make any progress toward a realistic plan to contain government debt or repair a financial system that remains highly vulnerable. Last year's budget deal will trim only $2.1 trillion over 10 years, just a fraction of what's needed.

 

In Europe, meanwhile, the region's most powerful leader - Angela Merkel - is focused on the long term to the detriment of the short. She and her ideological brethren at the European Central Bank are pushing for a fiscal compact that would rein in government debt in the 17-nation Euro area.

 

They are placing this laudable goal ahead of urgently needed measures such as a reckoning of how much strapped countries can actually afford to pay, a recapitalization of European banks and the construction of a credible financial firewall to protect solvent governments against contagion. As a result, uncertainty is paralyzing markets, weighing on the global economy and threatening a breakup of the Euro that could make Merkel's long-term plans irrelevant.

 

The challenges facing the US and Europe stem from the same phenomenon: The financial elite, investors and taxpayers alike have become too dependent on government to protect them from the consequences of their actions. At the same time, they haven't been willing to pay the full cost of the services government provides.

 

The most visible symptom is a build-up of sovereign debt larger than any the developed world has seen since the aftermath of World War II. This week, the International Monetary Fund projected that by 2013, the average gross debt burden of developed countries will exceed 110% of annual output, a level that represents a serious drag on future economic growth.

 

Reversing this process will be extremely difficult. It requires society to decide who will pay, a task complicated by growing inequality and political polarization visible in the standoffs between Democrats and Republicans in the US, and between Germans and Greeks in the Euro area.

 

No group can solve the problem alone. Future retirees will have to accept benefits less generous than what they've been promised. Bankers will have to give up the taxpayer subsidies that boost their profits and paycheques. Everyone will have to live with higher taxes, smaller government or both. Plans already on the table, including the $4 trillion Simpson-Bowles deficit-reduction package in the US and the creation of collectively backed sovereign bonds in the Euro area, would be steps in the right direction.

 

Davos and concrete action don't traditionally go hand-in- hand. But this time it has to be different.

 

The business and political elites gathered at high altitude have a host of reasons to set narrow interests aside and work to solve issues crucial to preserving the economic prosperity on which their positions depend.

 

If they opt for nothing more than talk, the disappointment will be deafening in the short term and economically catastrophic in the long term.

 

But Ladies & Gentlemen, I fear that this Davos will go the same way as each Davos before it - lots of people talking the talk but absolutely none of them resolute enough or confident enough in their own standing to walk that walk.

 

We need someone to stand up and be counted and when you look at the world not just commercially or economically, but importantly politically, you will see that 2012 holds too many political issues worldwide for anyone to be brave (or in their eyes, stupid) enough to rock the boat.

 

On to banking and another subject that has come to the fore this week and seen the Merkozy twins voice parallel concerns about Basel III.

 

All countries are equal in their desire to protect their banks, but some are more equal than others. In Europe, Paris and Berlin are again proving that they see no contradiction between railing against financiers while at the same time undermining hard-won global agreements on tighter regulation.

 

The German chancellery and the Elysée are now set on reaffirming efforts to lift limits on the double counting of capital in banks' insurance subsidiaries, which are particularly common in France. Not only does this go against the thrust of making banks safer; it unpicks the global compromise in which each major jurisdiction agreed that Basel III should punish its own particular sins, notably when counting as capital certain instruments that do not absorb losses well in a crisis.

 

Paris and Berlin are also dragging out Basel's new liquidity and leverage rules. The liquidity ratio is meant to protect banks against funding runs of the kind that killed Lehman Brothers.

 

The leverage ratio puts a floor under the amount of capital held against assets claimed to be very safe, which in turn carry low-risk weights in core capital calculations.

 

The need for a plain leverage ratio is obvious: Dexia, the French-Belgian lender, in 2011 had assets worth some 60-fold its equity, but risk-weighting gave it a solid-looking 10% core tier one ratio.

Like justice, regulation delayed is regulation denied.

 

There is only one valid argument for doing so: with Europe staring a new recession in the eye, forcing its banks to deleverage can precipitate a credit crunch if banks reduce lending instead of boosting capital.

 

This is an acute risk in Europe which, unlike the US, relies on the banking system for most financial intermediation.

 

But this is a weak argument. In the transition to Basel III's sounder regulatory regime - too long as it is - banks could be held not only to ratios but to absolute levels of capital.

 

This would remove the incentive to deleverage by shrinkage rather than safety.

 

It was interesting to see how Australian Banks reacted this week to a report from the IMF.

 

Economists at the International Monetary Fund have called on Australia's biggest banks to bolster their levels of capital even further, warning the sector may not be able to withstand the dual shock of a residential property downturn and losses on corporate lending.

 

The finding follows a stress test of Australia's banking system run by the IMF late last year which modelled the impact of an Irish-style economic crunch taking place locally.

 

The views, contained in an IMF research paper circulated by senior economists, come as Australian banks are already pushing ahead to meet tougher global banking rules known as Basel III.

 

While the paper's conclusions will have no direct impact on the running of Australia's banking sector, the conclusions will be taken seriously by regulators and politicians. However, they are expected to be strongly resisted by bank executives who have already been critical of Basel III.

 

They argued by putting aside more funds to protect the balance sheet would increase the cost and reduce the amount of funds available for lending.

 

"Stress tests calibrated on the Irish crisis experience show that the Australian banks could withstand sizeable shocks to their exposure to residential mortgages," the IMF said in its study titled Bank Capital Adequacy in Australia.

 

"However, combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks' capital," the paper said.

 

"Therefore, it would be useful to consider the merits of higher capital requirements for systemically important domestic banks," it said.

 

The notoriously conservative Australian Prudential Regulation Authority has previously said Australia's banks and credit unions will move to new tougher Basel III standards faster than the agreed global timetable for introduction.

 

The rules, due to be phased in from 2013, are intended to make banks better able to absorb economic and financial shocks by holding more liquid assets, as well as generating more lending from their own deposits.

 

The IMF noted the main vulnerabilities of the Australian banking sector was their exposure to ''highly indebted households'' through residential mortgage lending, together with their large levels of short-term offshore borrowing.

 

The IMF paper concluded that the four major Australian banks have capital well in excess of the regulatory requirements with high quality holdings. The sector was making good progress toward meeting the new Basel III rules, it added.

 

A spokesman for Treasurer Wayne Swan said the report confirmed that Australia's banks were strong and stable, and making very good progress on meeting new global banking standards.

 

"Our banks came through the biggest stress test in 75 years during the global financial crisis, having benefited from years of tough supervision by our world-class regulators," the spokesman said.

 

"This is evidenced in Australia's major banks being among only a handful in the world still wearing the AA-rating badge," the spokesman said.

 

I remember someone in the US Treasury saying a similar thing just prior to Lehman's and Bear Stearns meeting the Great Banker in the Sky .....

 

Finally, Spain's jobless rate shot to 22.85% at the end of 2011, the highest in the industrialised world, as more than half of young people were out of work, official data showed Friday.

 

The number of unemployed burst through the five-million mark, surging 295,300 to 5.27 million in the last quarter of 2011, the National Statistics Institute report showed.

 

As a result, the jobless rate at the end of 2011 surged to a near 17-year record, rising from 21.52% the previous quarter, the National Statistics Institute report showed.

 

Even more dramatic, the jobless rate among those aged 16-24 climbed to 51.4% at the end of the year from 45.8% on 30 September.

 

The figures are a grim portent for Spain, widely considered to be sliding in to a recession in 2012 with jobless numbers set to rise even further as the new right-leaning government slashes spending further.

 

As the official Spanish saying goes ..... La burocracia es un mecanismo gigante operado por pigmeos. Go figure!

 

On to those weekly numbers, in what has been here in Asia, a Lunar-New-Year holiday shortened trading week: 

US Markets 
How the US did this week .....

 US SummaryUS stocks fell, sending the Standard & Poor's 500 Index lower for a second day, after a report showed the world's largest economy expanded less than forecast in the fourth quarter as consumers curbed spending.

 

Ford slumped 4.2% as profit missed estimates on overseas challenges. Chevron, the second- largest US energy company, slid 2.5% after reporting its biggest earnings decline in two years. T. Rowe Price Group, the asset manager that has posted a profit every quarter since going public in 1986, dropped 2% as earnings fell. Banks in the S&P 500 rose 1.1% as optimism grew that Greece will reach an agreement with bondholders.

 

The S&P 500 decreased 0.2% to 1,316.33 as of 4 p.m. New York time. The benchmark gauge for American equities still capped a four-week gain. The Dow Jones Industrial Average retreated 74.17 points, or 0.6%, to 12,660.46 Friday.

 

Equities fell on data showing that gross domestic product, the value of all goods and services produced, climbed at a 2.8% annual rate following a 1.8% gain in the prior quarter. The median forecast of 79 economists surveyed called for a 3% increase. Growth excluding a jump in inventories was 0.8%. The Federal Reserve this week signaled low rates through at least late 2014 and didn't rule out bond purchases to bolster the economy.

 

The S&P 500 briefly rose as banks rallied after the Obama administration said it will relax rules on a loan-modification program and optimism grew that Greece will reach a debt- restructuring agreement with bondholders.

 

The KBW Bank Index of 24 stocks added 0.7%. Wells Fargo rallied 1.9% to $29.60. Regions Financial Corporation increased 2.7% to $5.31.

 

The S&P 500 Automobiles & Components Index dropped 2.5%, the most among 24 industries. Ford slumped 4.2% to $12.21. In the fourth quarter, the Dearborn, Michigan-based automaker was hamstrung by a weakening European market and flooding in Thailand that wiped out profits in its Asian operations, Chief Financial Officer Lewis Booth said Friday.

 

Chevron slid 2.5%, the biggest decline in the Dow, to $103.96. Chief Executive Officer John Watson has been selling oil refineries and filling stations in Europe and Africa to focus on higher-profit crude production and gas-liquefaction projects.

 

T. Rowe Price retreated 2% to $59.82. Net income decreased 1.7% to $188.4 million, or 73 cents a share, from $191.6 million, or 72 cents, a year earlier, the Baltimore- based company said Friday in a statement.

 

Juniper Networks slumped 3% to $21.69. The No. 2 maker of networking equipment declined after its first-quarter forecast missed estimates, a sign Internet providers are delaying network upgrades.

 

Solar shares gained as chief executive officers from Suntech Power Holdings and Trina Solar said China may double its installations of solar panels this year, absorbing excess production that depressed prices and margins in 2011. Suntech added 7.7% to $3.49. Trina rose 7.3% to $8.67. First Solar climbed 11% to $45.54 for the biggest gain in the S&P 500.

 

A gauge of homebuilders in S&P indexes advanced 0.7%. D.R. Horton rallied 1.9% to $14.39. The largest US homebuilder by volume reported a first-quarter profit that beat analyst estimates after a year-earlier loss as revenue from home sales rose.

 

Newell Rubbermaid gained 8% to $18.82. The maker of Sharpie pens and Graco car strollers reported fourth- quarter earnings of 40 cents a share, excluding some items, beating the average analyst estimate of 38 cents.

 

Eastman Chemical rallied 7% to $50.41 after agreeing to buy Solutia for about $4.7 billion, including debt, to drive expansion into higher-margin specialty plastics and chemicals. Solutia surged 41% to $27.52.

 

The S&P 500 is approaching the formation of a "golden cross" for the first time since 2010, historically a signal that more gains are likely to follow, Birinyi Associates said. Technical analysts, who study price charts to predict market moves, call it a "golden cross" when a 50-day average moves higher than a 200-day average while both are rising, and say it shows a pickup in momentum that may herald more gains.

 

The S&P 500 has produced 16 "golden crosses" since 1962, 75% of which were followed by positive returns in the next six months, with gains averaging 4.4%.

European Markets 
What has been happening in Europe this week .....

 Europe SummaryEuropean equities' "risk on" start to 2012 showed signs of petering out this week as a spate of poor corporate results tempered bullish sentiment.

The FTSE Eurofirst 300 ended the week down 0.2% at 1,040.69.

 

BP, Europe's second-biggest oil company, declined 2.6% after a judge ruled it can't collect part of the cleanup costs for its Gulf of Mexico spill from Transocean. BNP Paribas fell 3.3%, making the biggest contribution to the decline in a gauge of European banks, after JPMorgan Chase recommended selling the shares.

 

The Stoxx Europe 600 Index tumbled 1% to 255.4 at the close of trading, the biggest drop since 14 December. The benchmark index slipped 0.2% this week, snapping a five- week rally, as Greece's government continued to discuss a debt swap with its private bondholders. The gauge has still advanced 4.4% in 2012, entering a bull market yesterday for the second time in less than a year.

 

National benchmark indexes fell in every western European market except Iceland Friday. The UK's FTSE 100 Index slid 1.1%, France's CAC 40 Index declined 1.3% and Germany's DAX Index lost 0.4%.

 

GERMANY

 

German stocks dropped, with the benchmark DAX Index trimming its weekly advance.

 

Daimler and Volkswagen led declines among European carmakers. HeidelbergCement lost 2.4% after Natixis downgraded its recommendation on the shares.

 

The DAX Index lost 0.4% to 6,511.98 at the close in Frankfurt. The gauge still posted a 1.7% advance this week, its sixth straight gain for the longest winning streak since April 2010, as the US Federal Reserve signaled it may keep interest rates low through late 2014. The broader HDAX Index also lost 0.4% Friday.

 

Luxury carmaker Daimler slipped 1.6% to 42.70 Euros, while preferred shares of Volkswagen, Europe's largest automobile company, fell 2.4% to 136.45 Euros. Carmakers were the worst-performing industry group in the benchmark Stoxx Europe 600 Index Friday.

 

HeidelbergCement fell 2.4% to 38.40 Euros, trimming Thursday's 3.5% advance. Natixis cut its recommendation on the shares to "neutral" from "buy."

 

CTS Eventim jumped 2.3% to 25.85 Euros after Deutsche Bank AG recommended buying shares of the ticketing company.

 

German business confidence rose for a third month in a row and at a faster-than-expected rate in January, adding to evidence that the Eurozone's largest economy will continue to expand, while the Euro area as a whole is forecast to enter a mild recession in the first quarter of the year.

 

The business climate index rose to 108.3 in January from 107.3 in December, the Munich-based Ifo institute said Wednesday. Economists had expected the index to improve to 107.6.

 

The index for current conditions, meanwhile, dipped slightly to 116.3 from 116.7 in December. Economists were looking for a modest increase to 116.8.

 

The expectations index rose to 100.9 in January from December's 98.6. Economists had forecast the index to rise to 99.

 

The business climate improved in the factory sector. Manufacturers saw their current business situation as slightly improved and their business outlook as clearly more favorable than in the previous month.

 

Confidence among retailers and wholesalers fell during the month. On the other hand, the business climate in construction improved for the third month in succession.

 

Germany's fourth quarter gross domestic product is estimated to have contracted by around 0.25%, dragging down the rate of growth for 2011 to 3% compared to 3.7% in 2010, Destatis said this month.

 

Bundesbank said in its monthly report for January that the German economy is likely to log a near zero% growth in the first quarter of 2012. The growth is likely to have come to a standstill in the fourth quarter, according to the central bank.

 

Earlier this month, the German government trimmed its 2012 growth outlook to 0.7% as the sovereign debt crisis is expected to dampen demand from Eurozone economies.

 

Meanwhile, the Centre for European Economic Research (ZEW) said last week that German economic confidence improved strongly in January suggesting that economic activity is likely to stabilize within the next six months instead of deteriorating further.

 

Rating agency Standard and Poor's downgraded the ratings on nine Eurozone nations, including France and Austria, but spared Germany and affirmed its debt ratings at 'AAA'. The rating firm has said that the country would survive a possible recession this year without a rating downgrade.

 

In an update to its World Economic Outlook published Tuesday, the International Monetary Fund slashed the GDP outlook for German economy to 0.3% in 2012 from the September prediction of 1.3%. However, the fund sees no recession in Germany. Growth is expected to pick up 1.5% in 2013, according to the report.

 

Activity in Germany's private sector increased for the seventh consecutive month in January, driven by growth in both manufacturing and service sectors, data from a survey by Markit Economics and BME showed Tuesday.

 

The seasonally adjusted composite output index, designed to measure performance of the service sector and the manufacturing sector, rose to 54 in January from 51.3 in December. A reading above 50 indicates expansion in the sector, while one below suggests decline. The latest reading was the highest in the past seven months.

 

The survey, however, showed that underlying demand remained relatively weak in January, with new business volumes dropping for the sixth straight month, though at slower pace. At the same time, Jobs growth in the private sector dropped to the lowest since June 2010, reflecting the slower growth in service sector employment.

 

At the same time, the purchasing managers index (PMI) for the manufacturing sector increased to a five-month high of 50.9 in January from 48.4 in December, indicating moderate growth in activity. Economists were looking for a reading of 48.9.

 

The PMI for the service sector came in at 54.5 during the month, up from 52.4 recorded in the previous month. The latest reading was higher than 52.2 economists forecast.

 

FRANCE

 

In Paris the CAC40 closed the week at 3,318.76, down 1.32% for Friday.

 

Confidence among French households increased slightly in January, data released by statistical office Insee showed Thursday.

 

The consumer confidence index rose to 81 in January from 80 in December, which was lower than November's reading of 81. Economists expected the index to remain unchanged from the previous month.

 

Households' perception of their personal financial situation in the past was slightly less downbeat in January, with the relevant indicator edging up to -29 from -30 in December. Also, the indicator of consumers' expectations of their finances in the future rose to -28 from -29.

 

Consumers were more upbeat about their current ability to save, with the sub-index moving up to 19 in January from 17 in the previous month. Meanwhile, they were less optimistic about their ability to save in the future. The corresponding indicator dropped to -14 from -13 in December.

 

At the same time, the indicator that measures households' expectations of the unemployment situation in France dropped to 66 in January from 69 in December, the agency said.

 

The French private sector increased for the first time in four months in January, Markit Economics said Tuesday.

 

The flash composite output index rose to 50.9 in January, a five-month high, from 50 in December. A reading above 50 indicates growth in the private sector.

 

The expansion was driven by an improvement in services activity. The flash services Purchasing Managers' Index rose unexpectedly to 51.7 from 50.3 in December. Economists were expecting the index to fall to 50.

 

Meanwhile, the manufacturing PMI fell to 48.5 from 48.9 a month ago. The reading came in below the consensus forecast of 48.6.

 

France sold Eur 8.202 billion of treasury bills on Monday.

 

The Agence France Tresor placed Eur 4.505 billion of 13-week bills at an average yield of 0.174%, up from 0.167% in an auction of debt with similar maturity on January 9.

 

The agency also sold Eur 1.493 billion of 24-week bills at a yield of 0.267%, down from 0.281% in a sale on January 16. These debt will mature on July 12.

 

The country also raised Eur 2.204 billion by selling October 2013 bills at a yield of 0.448%, up from 0.406% in an auction on 16 January.

 

BELGIUM

 

The Bel 20 in Brussels ended the week at 2,237.59, 0.64% off the Friday pace.

 

Belgian business sentiment recovered for the second month in a row in January, bolstered mainly by a rebound in the financial services, while industry and construction morale improved slightly, the National Bank of Belgium said Tuesday.

 

After the 1.6-point upturn in December, the central bank's overall sentiment index gained another 1.1 points to a four-month high of -9.5, while still remaining well below the long-term average of -7.6.

 

Few analysts had expected such a marked recovery. The median forecast in the MNI survey was -10.2 in a range of -12.0 to -9.5.

 

However, in the manufacturing sector, which as a key supplier of intermediate goods is sensitive to shifts in demand from neighboring countries, the sentiment index edged up only 0.2 point after a 0.8-point upturn in December and was still 2.8 points below the long-term average.

 

Manufacturers said output trends were less negative. Sector capacity utilization in January stabilized at October's level of 78.4%.

 

Firms expected prices to pick up markedly. On the other hand, the trend in both domestic and export orders was viewed with greater pessimism.

 

Public and private sector workers in Belgium will go on a one-day strike designed to shut the country's railway network and close the main airport on the day of an EU summit in Brussels next week, unions said on Wednesday.

 

Belgians are striking because their government has made it harder for them to retire early and cut back on unemployment benefits as part of an austerity budget aimed at bringing its deficit within the EU limit of 3% this year.

 

European Union leaders are due to meet in Brussels on Jan. 30 to discuss budget rules for governments and ways to stimulate growth in the crisis-hit continent.

 

As part of the strike, planes will also likely to be grounded at Belgium's main airport, Brussels Airport, after pilots agreed to take part in the stoppages, trade unions said.

 

Belgium's business sentiment increased more-than-expected in January, following the improvement in December, data released by the National Bank of Belgium revealed Tuesday.

 

The business confidence index rose to -9.5 from December's 10.6. Economists had forecast the indicator to rise to -10.

 

An improvement in morale in the business services sector was the main driver for the increase in overall business sentiment. Boosted by expectations of higher activity, the relevant index jumped to 5.9 from -0.9.

 

The construction sector also showed an increase in sentiment for a second consecutive month, with the corresponding index rising to -5.6 from -6.2. Meanwhile, the index reading for the factory sector registered a modest gain, rising to -13.6 from -13.8.

 

In contrast, the trade sector revealed a deterioration in morale. The sentiment measure dropped to -13.4 from -10.8.

 

THE NETHERLANDS

 

In Amsterdam the AEX headed into the weekend on 319.36, down 1.07%.

 

Dutch telecommunications company Royal KPN on Tuesday reported a 63% fall in fourth quarter earnings, mostly due to a large charge on its IT consulting business, Getronics, which it is now selling.

 

The results also reflect the dramatic impact customers with smartphones using free services such as Skype and WhatsApp have had on KPN, with possible implications for larger rivals Vodafone and Deutsche Telekom.

 

KPN's net profit in the quarter was €176 million ($229 million), from €475 million in the same period a year ago, including the €298 million charge. Sales dipped 0.4% to €3.38 billion.

 

In a limp forecast for 2012, KPN chief executive Eelco Blok said it will be "a year of transition in the Netherlands as we aim to bottom-out our broadband market share and to stabilize our market share in consumer wireless."

 

He forecast lower earnings for the full year, and said the company will cease share buybacks, though he pledged to raise dividends by €0.05 cents per share to €0.90.

 

The company said it will cut up to 2,500 jobs at Getronics and sell off parts of the business employing 4,900 more. It will sell Getronics' European operations outside the Netherlands to Germany's Aurelius and its Latin American business to private equity firm OpenGate capital. KPN did not disclose terms but said the businesses disposed had combined sales of €665 million last year. KPN bought Getronics for €776 million in 2007.

 

While KPN remains the largest provider of mobile phone services in the Netherlands, that business has suffered from rapid change.

 

Producer confidence in the Netherlands weakened slightly in January, after improving in the previous month, data released by the Central Bureau of Statistics showed Wednesday.

 

The producer confidence index dropped to -1.4 in January from -1.3 in December. Economists were looking for a reading of -2. In November, the index reading was -4.8.

 

The sub-indicator that assesses firms' opinion about their order books increased to -2.6 in January from -4.1 in December, which was lower than November's reading of -3.8.

 

Meanwhile, the sub-indicator that measures entreprenEurs' views of the inventory position dropped to 0.8 during the month from 2.5 in the previous month. The expectations component, which gauges confidence in the expected production in the next three months, dropped to -2.5 from -2.2.

 

The Dutch State Treasury Agency has raised its 2012 borrowing requirement to 101.5 billion Euros, according to a presentation by the agency.

 

The 1.5 billion Euro increase will be funded via money market instruments, the DSTA said on Wednesday.

 

SWITZERLAND

 

Zurich's SMI drew a line under the trading week at 6,033.52, down 1.10%.

 

The Swiss National Bank's franc limit against the Euro may cause the country's economy to overheat if authorities aren't vigilant to its effects, according to a report by the Financial Stability Board.

 

"The combination of the floor with a protracted low interest rate environment could potentially result in excessive credit creation and contribute to the build-up of imbalances in the domestic real-estate and mortgage markets," the FSB said in an assessment of the nation.

 

It's "essential" that regulators "remain vigilant in monitoring trends," the FSB said. The currency floor is a "bold stance against an overvaluation" of the Swiss franc, it said in the report published Thursday.

 

Property prices have risen in Switzerland, fueled by zero interest rates and rising demand from foreigners seeking a job. While increasing the benchmark rate may prevent a property bubble from emerging, it would also put upward pressure on the Swiss franc and stand in the way of the limit of 1.20 francs versus the Euro introduced in September to fight deflation threats. SNB Vice President Thomas Jordan said last month that "monetary policy is currently unable to react to potential imbalances in the mortgage market."

 

Swiss regulators won FSB praise for imposing tough capital and supervisory rules on the country's two biggest lenders, UBS and Credit Suisse Group, in the wake of the crisis that followed Lehman Brothers Holdings Inc.'s 2008 collapse. These included a requirement that they hold core reserves equivalent to ten% of their assets, weighed for risk.

 

Swiss drug maker Novartis reported a 47% drop in its fourth-quarter net profit Wednesday, citing a slate of exceptional costs from the ending of clinical trials to manufacturing problems and layoffs.

 

The Basel-based company said its net profit reached $1.21 billion in the fourth quarter, compared with $2.32 billion in the same period in 2010. Sales rose four% to $14.78 billion in the Oct.-Dec. period.

"We experienced some disappointments in the fourth quarter, with Tekturna/Rasilez and with the need to improve our quality standards at some manufacturing sites," Chief Executive Joseph Jimenez said in a statement.

 

Novartis recently halted a clinical trial into wider uses of the hypertension drug Tekturna, which is known as Rasilez outside the United States, after it was found to cause increased complications in patients already taking other common hypertension drugs.

 

The company said it took an exceptional charge of $900 million in the fourth quarter as a result of the trial ending

 

Two other experimental drugs were also dropped, leading to one-off charges of $160 million in the fourth quarter.

Manufacturing problems led the company to recall several over-the-counter drugs from the US market earlier this month. The company closed the Lincoln, Nebraska, facility where the products were manufactured and took a charge of $115 million for the temporary production halt.

 

Novartis said it would also book charges of $288 million for over 2,000 job cuts announced last year. Many of those were in the United States, where the company expects to see a sharp dip in sales with the expiry of another hypertension drug, Diovan.

 

The Organization for Economic Co-operation and Development on Tuesday said that Switzerland should maintain an expansionary monetary policy as inflationary pressures remain extremely low.

 

At the same time, it warns of the need for stronger macro-prudential legislation to dampen increases in mortgage lending associated with low interest rates and avoid the buildup of a domestic housing bubble.

 

Also, the OECD advised the Swiss National Bank to enlarge its data collection for effective oversight of the mortgage market. Further, the Paris-based organization said the central bank should be vested with powers to trim mortgage lending growth when it becomes excessive.

 

OECD Secretary-General Angel Gurría said, "Switzerland is likely to suffer from decelerating activity in its trading partners, notably across Europe, as well as from the pressures for appreciation of the Swiss franc."

 

According to OECD, Switzerland can use tax reforms to increase potential growth, reduce incentives for households to borrow and limit unwanted tax competition within the country.

 

Switzerland's money supply growth accelerated in December after slowing in the previous month, data from the Swiss National Bank showed Monday.

 

M3, the broad measure of money supply, grew at a pace of 7.7% year-on-year after rising 7.3% a month ago.

 

The narrow money or M1 growth quickened to 11.9% from 10% in the prior month. The annual growth in M2 came in at 9.8%, up from 8.7% in November.

 

AUSTRIA

 

The ATX in Vienna rounded out the trading session Friday on 2,126.66, down 0.57%.

 

Standard & Poor's Ratings Services said Thursday that it had affirmed the 'A' long-term and 'A-1' short-term counterparty credit ratings on Erste Group Bank and its subsidiary Ceska Sporitelna, Raiffeisen Zentralbank Oesterreich and its subsidiary Raiffeisen Bank International, as well as on KA Finanz.

 

"We removed the ratings from CreditWatch with negative implications, where we had placed them on 8 December 2011. The outlooks on all entities are negative, apart from on KA Finanz AG, which is stable.

 

This follows our rating action on the Republic of Austria (AA+/Negative/A-1+) on 13 January 2012. As a result, we have reviewed our Austrian Banking Industry Country Risk Assessment (BICRA) and the individual banks' stand-alone credit profiles (SACPs). We are maintaining the BICRA on Austria at group '2'--on a scale from '1' (lowest-risk) to '10' (highest-risk)--under our BICRA methodology, which is designed to evaluate and compare global banking systems.

 

We will publish individual research updates on the three banks and their subsidiaries, as well as the ratings by debt type--senior, subordinated, junior subordinated, and preferred stock."

 

Austria's industrial production increased at a slower pace in November, data released by Statistics Austria showed Tuesday.

 

Industrial production increased a working-day adjusted 2.5% on an annual basis in November, slower than the 3% growth recorded in October. In September, production advanced 3.4% year-on-year.

 

Production of intermediate goods rose 2.4% annually, while production in the energy sector climbed 8.1%. There was a 6.3% annual growth in capital goods production, and a 3.1% increase in the production of durable consumer goods in November.

 

On a monthly basis, the seasonally adjusted industrial production remained unchanged in November.

 

Statistik Austria, the Austrian Central Bureau for Statistics, recently published figures about the foreign trade in 2011.

 

This shows that there is a rising line in the foreign trade of agrarian products, Austrian foods have conquered a permanent place in shelves abroad and that Austrian foods are especially loved by their German neighbours.

 

The figures are a prognosis based on the first three quarters of 2011.

 

The agrarian import and export in 2011 in Austria was very well balanced. Over 9 billion Euro's worth was export and 9.4 billion was imported. The value of the food export increased last year by 16.1%. In total 8.1 million tonnes of food passed the Austrian border, of which a third of the total exported amount went to Germany.

 

The export of vegetables increased by 31.1% and the export of fruit increased by 13.6%. Pre-prepared fruit and vegetables also made an important contribution to the export, with an export value of 225 million Euro. Their export value increased by 21.7% compared to 2010.

 

More and more Austrian fruit and vegetables are also being exported to the new EU countries. In 2011 80 million Euro's worth of fruit was exported to these countries and 72 million Euro's worth of vegetables. Besides this, 83 million Euro's worth of pre-prepared fruit and vegetables was exported to these countries.

 

Austria's financial watchdog softened its line on Tuesday and said lenders should be able to count non-voting capital raised from private investors during the 2008/09 financial crisis as core capital under European rules.

 

The co-heads of Austria's Financial Market Authority told reporters that talks with the European Banking Authority -- which has final say -- would settle the matter.

 

If European regulators agree, it could help lenders such as Erste Group Bank and the Raiffeisen group that so far could count so-called participation capital only from the state, not private investors, as core capital.

 

Austrian supervisors had taken a tougher line on this only a month ago despite domestic political pressure.

 

FMA officials on Tuesday showed more willingness to go to bat for local lenders, which like major European counterparts need to have core tier one capital equal to 9% of risk-weighted assets by the middle of this year.

 

SWEDEN

 

The OMX in Stockholm completed a hectic trading week on 1,041.40, down 0.44%.

 

Sweden's producer prices decreased less than economists expected in December, data released by Statistics Sweden showed Thursday.

 

The producer price index declined 2.1% on an annual basis in December, slower than the 2.3% decrease economists forecast.

 

The decline in prices reflected a 5% fall in energy prices, a 1.4% decrease in prices in the capital goods industry and a 0.6% decline in prices of intermediate goods, the agency said.

 

Output prices of goods sold in the domestic market fell by 3.1% annually. The export price index dropped 1% year-on-year, while the import price index moved up 0.9% during the month.

 

Month-on-month, overall output prices edged down 0.2% in December, while economists were looking for a 0.4% decrease.

 

Separately, the agency said Sweden's unemployment rate decreased slightly by 0.3 percentage points from last year to 7.1% in December. Economists expected the jobless rate to be 7%. The number of unemployed persons decreased 2.9% annually to around 353,000 during the month.

 

The employment rate was 65.1%, up by 0.5 percentage points compared to December 2010. The number of employed persons moved up by 1.5% to 4.62 million.

 

LM Ericsson, the world-leading wireless equipment maker in terms of market share, on Wednesday shocked the market by posting a much worse-than-expected fourth-quarterly result, mainly blaming operators for turning cautious due to the global financial turmoil.

 

Shares in the company took a severe beating in the opening minutes of the Stockholm stock exchange Wednesday, tumbling 13% to 8.95 Kronor ($1.33).

 

The company, headquartered in Stockholm in Sweden, said profits in the final quarter of 2011 fell by more than two-thirds compared with a year earlier, reaching only 1.15 billion kronor ($170 million) from a previous 4.32 billion kronor. Aside from the woes on the financial markets, it also said operator investment spending had slowed down due to a period of high investment in capacity as well as caution linked to political unrest in some countries.

 

Although sales were more or less flat in the October-December period, rising by 1% to 63.67 billion kronor, the tighter budgets for operators led to a severe squeeze of its gross margin, which fell to 30.2% from a previous 34.7%.

 

Losses in its Sony Ericsson joint venture also hurt the results, it said. Ericsson last year sold its share in Sony Ericsson to Sony, but the deal is being finalized in this quarter.

 

For the full year 2011, however, a 12% rise in sales led to a net profit of 12.19 billion kronor, also up 12% from the full year in 2010, the company said.

 

Swedish economic sentiment declined unexpectedly in January due to weak confidence among manufacturers, a survey by the National Institute of Economic Research (NIER) revealed Thursday.

 

The economic tendency indicator fell to 91.4 in January from a revised 92.9 in December. Economists were expecting an increase to 93 from the December's original reading of 92.8.

 

The index has now declined by a total of almost 24 points since its peak in February 2011, NIER said. In the total business sector, it was the manufacturing and the private service sectors that made negative contribution to the overall sentiment index.

 

Manufacturing confidence dropped to -14 from -11 in the previous month, while economists had forecast the index to stay unchanged at the December level. In industry, the indicator fell to zero from 1 in December.

 

Confidence among retailers improved slightly while optimism among private service providers weakened. Construction industry recorded a jump in the confidence level at the start of the year.

 

Meanwhile, consumer confidence improved to -1.3 from -7.4 compared to the expected score of -7. The Macro Index, which measures consumer confidence in the Swedish economy, rose by just over seven points in January, though households are still more pessimistic than usual about the Swedish economy.

 

The Micro Index, which reflects their confidence in personal finances, rose by almost six points in January.

 

DENMARK

 

Copenhagen's OMX closed out the Friday trading session on 404.96, down 0.96%.

 

In a bid to resolve their funding problems and survive the ongoing financial crisis, Danish banks Vestjysk Bank and Aarhus Lokalbank said Wednesday they intend to merge and to launch a recapitalization plan that would make the government a major owner in the combined business.

 

The banks, two small local lenders based in the Jutland region, said they are in talks with Danish authorities over the planned merger which, subject to regulatory and shareholder approval, would see Vestjysk Bank as the continuing entity.

 

"The merger is... intended to counter the funding challenges of Vestjysk Bank," the companies said.

 

Denmark's business and growth minister, Ole Sohn, said Wednesday he welcomed the merger plan as it aimed "to resolve Vestjysk Bank and Aarhus Lokalbank's challenges."

 

The country's banks have struggled in recent quarters against stagnating economic growth and bad loans to Denmark's ailing real-estate and agricultural sectors. Funding conditions deteriorated following the collapse last year of a number of smaller lenders, including Amagerbanken and Fjordbank Mors.

 

To encourage consolidation in the fragmented banking sector, where well over 100 banks serve a population of around 5.6 million, Denmark's government last autumn launched the new Bank Package 4 regime, which provides state guarantees to suitors and offers to remove bad loans from an acquired bank.

 

Vestjysk Bank and Aarhus Lokalbank have struggled for some time against bad loans in the farming sector, said Alm. Brand analyst Stig Nymann. He said the merger and recapitalization plan had possibly helped them avoid default.

 

Vestjysk Bank will convert 297 million Danish kroner ($52 million) of hybrid capital issued by the government in 2009 into share capital, making the Danish state a major shareholder in the new bank.

 

The new bank should also get new three-year state loan guarantees to replace older ones expiring this year and next, with a total principal amount of around DKK8.6 billion, the banks said.

 

Denmark's unemployment rate remained unchanged for the third month in a row in December, data released by Statistics Denmark showed Thursday.

 

The seasonally adjusted unemployment rate remained unchanged at 6.1% for the third consecutive month in December.

 

The unemployment rate among youth, aged between 16 and 24, dropped to 5.1% in December from 5.2% in November, while the jobless rate among persons in the 50-59 age group remained steady at 6.1%.

 

The number of jobless persons decreased to around 160,500 in December from around 161,600 in the previous month, the agency said.

 

Danish households were less downbeat about their personal finances and the country's economy in January, data released by Statistics Denmark showed Monday.

 

The consumer confidence index increased to -7 in January from -9.8 in December, which was lower than -9.2 recorded in October.

 

Consumers were less downbeat about their current personal finances in January, with the relevant indicator rising to -3 from -3.6 in December, while the gauge of households' expectations of their financial situation in the next year climbed to 7.1 from 4.5.

 

At the same time, the indicator of consumers' perceptions of Denmark's present economic condition compared to a year earlier increased to -26.2 in January from -27.2 in the previous month. Households were less pessimistic about their expectations for the country's economy in the next year, with the corresponding index rising to -4.9 in January from -11.5 in December.

 

FINLAND

 

In Helsinki the OMX finished the week at 5,833.69, down 1.53%.

 

Waertsilae, the world's largest maker of ship motors and power plants, fell 5.3% to 25.54 Euros after reporting fourth-quarter sales of 1.24 billion Euros, missing the average analyst estimate of 1.38 billion Euros. The company posted operating profit of 145 million Euros, falling short of the average projection of 151 million Euros.

 

Finland's retail sales increased at a slower pace in December, preliminary data released by Statistics Finland showed Wednesday.

 

Retail sales turnover, excluding automobiles, increased 4.3% year-on-year in December, slower than the 5.3% growth recorded in November. In October, retail sales rose 4.5%. In the whole of 2011, the value of retail sales advanced 5.3% from last year.

 

In volume terms, retail sales rose 1.8% during the month, after rising 1.9% in the previous month. In the twelve months ended December, the volume of sales rose 2.4% from the corresponding period a year earlier.

 

Finland's unemployment rate decreased from last year in December, data from a survey also by Statistics Finland showed Tuesday.

 

The unemployment rate declined to 7.4% in December from 7.9% a year earlier. Economists were looking for a jobless rate of 6.8%. Unemployment among youth, aged between 15 and 24, was 17.8% during the month.

 

The number of unemployed persons decreased to around 192,000 in December from around 204,000 in December 2010.

 

Meanwhile, the employment rate advanced to 67.1% in December from 66.6% in the same month last year. The number of employed rose to approximately 2.41 million from about 2.40 million a year earlier.

 

In the fourth quarter, the unemployment rate was 6.9%, lower than 7.5% recorded in the same quarter last year.

 

The final results of Finnish Presidential elections announced late on Sunday indicated that a run-off between the two leading candidates was required to determine the winner, as none of the contestants managed to secure the 50% majority required to avoid the second round.

 

Former Finance Minister Sauli Niinisto of the pro-Europe National Coalition Party emerged as the winner of Sunday's first round elections, securing 37% of the votes polled.

 

Pro-European Green League candidate Pekka Haavisto came in second with 18.8% of the vote, while Euro-skeptic Paavo Vayrynen was pushed to the third spot with 17.5%. Timo Soini of the anti-Euro "The Finns" party came in fourth with just 9.4%.

 

Niinisto and Haavisto will now fight it out in the run-off scheduled for February 5 to determine who will succeed Tarja Halonen, the Nordic country's first female President. Halonen had beaten Niinisto in the 2006 elections to take office for a second consecutive term.

 

Voter turnout for Sunday's election was estimated to 73% of the country's 4.4 million eligible voters. The winner of the run-off will now break the 30-year-old hold on the Presidency by Halonen's Social Democrats.

 

Halonen is barred by the country's Constitution from seeking re-election for a third six-year term. Although the Finnish President's role is largely ceremonial, it is considered as an important post in the Nordic nation.

 

Niinisto, belonging to Prime Minister Jyrki Katainen's National Coalition party, was Finland's Finance Minister for seven years until 2003 when it became one of the first States to adopt Euro as its currency.

 

Niinisto's NCP party had secured the most number of seats in last April's parliamentary election and currently heads a coalition government that includes the Social Democrats. He is a firm advocate of Finland remaining in the Eurozone despite the ongoing sovereign debt crisis threatening its very existence.

 

Soon after the results were announced, Niinisto noted that political parties that support the Euro and have pro-Europe policies had "received strong support from the people" in the election.

 

On the other hand, Haavisto has served as Finland's Environment & Development Minister. He also has international experience as he has already worked for the European Union and the United Nations and helped in resolving crises in Sudan and the Middle East.

 

NORWAY

 

Oslo's OBX pulled the curtains on the trading session Friday at 368.03, down 0.18%.

 

Norwegian Air Shuttle ordered 222 Boeing and Airbus SAS airliners valued at 127 billion Kroner ($21.5 billion) as Europe's fourth-biggest discount carrier steps up its competition with state-backed SAS.

 

Norwegian Air will buy the latest fuel-efficient models, ordering 100 Boeing 737 MAX8 single-aisle planes and the same number of Airbus A320neos, plus 22 of Boeing's existing 737- 800s, the Fornebu-based carrier said Thursday in a statement.

 

Thursday's order will add capacity and pare operating costs as the carrier seeks to strip traffic from SAS, the Stockholm-based owner of Scandinavian Airlines. Founded in 1993, Norwegian Air switched to a discount model in 2001, emulating Ryanair Holdings and EasyJet, before adding long-haul flights last year.

 

The order is Airbus's first from Norwegian Air, which operates an all-Boeing fleet of 48 737-800s and 14 737-300s, according to the carrier's website.

 

There's no issue with financing, which is supported by the Export-Import Bank of the US and European Export Credit Agencies, Chief Executive Officer Bjoern Kjos said Thursday.

 

Loans will comprise 85% of the order's value, requiring 15% equity, or about 10 billion kroner, according to Per Kristian Reppe, an analyst at Pareto Securities in Oslo, who said in a note that that's likely to be provided from operational cash flow and the sale of older aircraft.

 

Norway's Seadrill, the world's biggest offshore oil driller by market value, plans to raise up to 1.7 billion Reals ($971-million US) through the sale of shares in its Brazilian unit, as companies in the sector prepare to tap surging demand for equipment and services in the oil-rich nation.

 

Rio de Janeiro-based Seabras, as Seadrill's wholly owned subsidiary is known, will sell as many as 65.2 million common shares at a suggested price of 20 Reals to 26 Reals each, it said in a filing. The amount includes additional and supplementary stock lots that banks are allowed to subscribe.

 

The company expects to price its share offering on 9 February. Shares are scheduled to start trading on 13 February by the symbol "SEAB3.SA" according to the filing.

 

Brazil's oil sector will open a wealth of opportunities for equipment makers and service providers as it prepares to start extracting oil it found in a deep-sea offshore region known as the subsalt. That region could help Brazil more than triple output to 7 million barrels a day by 2020, putting the country within the world's top four oil producers.

 

Listing as a Brazilian company would give Seadrill access to a burgeoning capital market and subsidized state loans for the country's nascent oil services industry. Seadrill would also benefit from Brazil's local content rules meant to bolster local manufacturing and balance a natural resource boom.

 

The Norwegian company is seeking to clinch more long-term contracts with Brazilian state-controlled oil company Petrobras, the main operator of the subsalt, which is estimated to house more than 50 billion barrels of oil deep under a layer of salt rock.

 

Petrobras, which is undertaking the oil industry's biggest capital spending plan at $224.7-billion through 2015, is expected to become the world's biggest renter of ultra-deepwater floaters and rigs within the next three years, because of the technical challenges that imply extracting oil from the subsalt.

 

Seabras hired the investment-banking units of BTG Pactual to manage the offering, alongside Morgan Stanley and Citigroup.

 

Norway's Kommunalbanken will price its GBP200 million bond maturing December 2014 at 98 basis points over the corresponding government gilt, one of the banks on the deal said Wednesday.

Books were over GBP350 million.

 

Deutsche Bank, RBC Capital Markets and the Royal Bank of Scotland Group are the lead managers on the issue, which is expected to be launched in the near future and subject to market conditions.

 

The issuer is rated Aaa by Moody's Investors Service Inc., and AAA by Standard and Poor's Corp.

 

SPAIN

 

The IBEX in Madrid drew to a close Friday on 368.03, down 0.65%.

 

Embattled Spain may be fast approaching the tipping point where it needs to loosen its fiscal brake or allow the economy to be in contraction for two successive years, IHS Global Insight said Tuesday.

 

Given Spain's public debt ratios are still relatively low, the goal of reviving employment growth to bring down the high jobless rate could become the top priority, the economist pointed out. However, this will depend on the markets' willingness to buy Spanish debt despite the backdrop of missed fiscal goals, they added.

 

Debt auctions thus far this year have been successful despite the country missing its 2011 budget deficit goal, Badiani noted. On Tuesday, the Treasury raised Eur 2.51 billion from the sale of short-term debt versus the Eur 1.5-Eur 2.5 billion target set.

 

The agency sold Eur 1.4 billion of 3-month bills against Eur 6.053 billion bids received. The average yield on the paper fell to 1.285% from 1.735% in a sale on December 20. Demand was 4.32 times the offer, up from 2.86 in the previous auction.

 

The country also placed Eur 1.107 billion 6-month bills versus the bids totaling Eur 7.6 billion. The yield on the half-year debt dropped to 1.847% from 2.435% in the previous sale on December 20. The bid-to-cover ratio rose to 6.87 from 4.06.

 

"The calmer environment in early 2012 partly reflects the European Central Bank's (ECB's) decision to provide additional cheap financing to Eurozone banks, making them better placed to help Spain to navigate through its challenging debt redemptions throughout 2012," IHS said.

 

"The ECB, acting as a lender of last resort to Spanish banks, will help to prop up the critically important strong domestic investor base for Spanish sovereign debt."

 

IHS expect Spain to come under renewed pressure in next few quarters with bond markets taking renewed fright. The risks are deeper, he said. The country needs more austerity measures to achieve the fiscal deficit targets of 4.4% in 2012 and 3% next year.

 

Further, the falling housing indicators adds to the woes of the banking sector's poor quality real estate loans. Badiani warned that the final cost of bailing out the heavily exposed Spanish banking sector is the biggest risk to the country's sovereign debt sustainability.

 

Spain's producer price inflation slowed in December, data released by statistical office INE showed Wednesday.

 

The producer price index increased 5.2% on an annual basis in December, slower than the 6.3% growth seen in November. The rate of growth matched economists' forecast.

 

Output prices of durable consumer goods rose 1.8% year-on-year, while non-durable consumer goods prices moved up 2.4%. There was a 1.2% annual growth in prices in the capital goods industry, and a 3% increase in prices of intermediate goods prices. At the same time, output prices of energy products climbed 14.1% from last year in December.

 

Month-on-month, producer prices edged down 0.1% in December, in line with economists' expectations. In November, prices rose 0.2%.

 

Mortgage lending on houses in Spain decreased sharply from last year in November, data released by statistical office INE showed Tuesday.

 

The value of mortgage loans on houses fell 38.7% on an annual basis in November. The number of mortgages for residential properties decreased 35.8% annually during the month.

 

The average value of residential property mortgages dropped 4.5% year-on-year to Eur 109,662 in November.

 

The value of mortgage loans on all properties decreased 32.6% on an annual basis in November, while the number of mortgages decreased 32.2%. The average value of overall mortgages edged down 0.5% from last year to Eur122,255, the agency said.

 

PORTUGAL

 

Lisbon's PSI General concluded the week Friday at 2,153.22, down 0.87%.

 

The yield on Portuguese bonds in the secondary market climbed to Euro-era records Wednesday amid market fears that the bailed-out country won't be able to break free of its financial crisis in the near future.

 

The yield on 3-year bonds reached 19.4% Wednesday. The rate on 5-year bonds was 18.7% and on 10-year bonds was 14.6%.

 

Portugal needed a Euro78 billion ($101 billion) rescue package last year as its high debt load and feeble growth pushed it towards bankruptcy. A three-year program of austerity measures and economic reforms is aimed at restoring investor confidence in the Eurozone country, but a deepening recession, with a 3.1% contraction forecast for this year, is undermining market faith in Portugal.

 

Standard & Poor's recently joined the two other major ratings agencies Fitch and Moody's in downgrading Portuguese debt to junk status.

 

Officials have also expressed fears of contagion from Greece's ongoing debt woes.

 

Antonio Barroso, an analyst with Eurasia group, said in a note Wednesday that the recent downgrade and Greece's troubles "are increasing the perception that Portugal might not be able to avoid a default."

 

However, given Portugal's commitment to restoring fiscal health, he said, "it is likely that the government might have an easier time negotiating a new rescue package than Greece."

 

The prime ministers of Portugal and Spain have appealed for next week's European Union summit to takes steps that will help protect them against a knock-on effect from Athens, where a potential default would have repercussions across the entire 17-nation bloc and beyond.

 

Portugal won't ask to renegotiate its bailout plan, Prime Minister Pedro Passos Coelho said at a press conference in Lisbon Thursday.

 

Portugal will not fail its program and therefore market confidence will return, Passos Coelho said.

 

Protesters gathered outside Portugal's presidential palace to donate money and food to the head of state after he complained about a drop in his pension due to the government's austerity measures.

 

His remarks sparked a storm of protest.

 

Thousands have signed a petition calling for President Anibal Cavaco Silva to resign, bearing in mind the majority of Portugal's elderly exist only a fraction of their president's income.

 

The man who started the petition, Nuno Luís Marreiros, was pragmatic about what it might achieve: "If the petition has no other impact, maybe it will at least show to our politicians that the Portuguese are beginning to protest a bit more and to make their opinions known," he said.

 

Cavaco Silva's FaceBook page was also targeted. He has a declared income of 10,000 Euros a month as well as investments, whereas average Portuguese has to survive on only 900 Euros.

 

Cartoonists have had a field day over his remarks but the president has apologised admitting he expressed himself badly.

 

ITALY

 

The FTSE Mibtel in Milan closed the week on 15,946.90, down 1.02%.

 

Italian consumer confidence held at a 16-year low in January as Europe's debt crisis forced austerity measures that may help push the economy into a recession this year.

 

The confidence index remained at 91.6, matching the previous month, which was the lowest since January 1996, national statistics office Istat said in Rome Thursday. Economists had forecast a reading of 92, according to the median of 16 estimates in a survey.

 

Household confidence is slumping after the government implemented additional austerity measures that aim to eliminate the budget deficit in 2013 to shield Italy from the fallout from the debt crisis that sent the country's borrowing costs to Euro- era records.

 

The 20 billion-Euro ($26 billion) plan passed in December includes a cut in pension spending, a crack down on tax evasion and higher levies on fuel, leaving Italy with Europe's highest gasoline prices.

 

The measures have helped bring down Italian borrowing costs since Prime Minister Mario Monti came to power in November, while they are adding to the country's economic slowdown.

 

Italy may be in its fourth recession since 2001, after the country's growth averaged 0.2% annually in the decade to 2010, compared with 1.1% in the Euro area. The International Monetary Fund forecast on 24 January that the economy will shrink 2.2% this year, compared with a 0.5% contraction for the Euro area.

 

Monti said this week that his efforts have been "appreciated" by European colleagues. Still, many Italians have rejected his appeal to accept sacrifices. A wildcat strike by truck drivers this week has clogged traffic on Italian highways, disrupting Fiat's production and leaving some cities short of gasoline and food.

 

Italian retail sales declined more than expected in November, data from the statistical office Istat revealed Wednesday.

 

Retail sales were down 0.3% month-on-month in November, reversing a 0.2% rise in October. Economists had expected sales to fall 0.2% in November.

 

On an annual basis, sales dipped at a pace of 1.8%, following October's 1.4% decrease. The decline exceeded the 1.5% drop expected by economists. Food product sales slipped 0.1% and non-food product sales were down 2.6%.

 

During the first level months of 2011, sales dropped 1% from the corresponding period of last year.

 

The balance of Italy's trade with countries outside the European Union (EU) turned to a surplus in December, preliminary data released by statistical office Istat showed Tuesday.

 

The trade balance was a surplus of Eur1.999 billion in December, compared to a deficit of Eur1.451 billion in December 2010.

 

Export of goods to non-EU nations increased 11.2% year-on-year in December. Month-on-month, shipments advanced a seasonally adjusted 5.4% during the month.

 

The value of imports to countries outside the European Union decreased 12.4% annually. Compared to November, arrivals dropped a seasonally adjusted 3.1% in December.

 

In the three months ended December, exports edged up a seasonally adjusted 0.9% sequentially, while imports decreased 2.8%. In the whole of 2011, the trade balance was a deficit of Eur21.611 billion, compared to a deficit of Eur22.068 billion in 2010. Exports and imports increased 14.9% and 12.6% respectively during the year.

 

GREECE

 

In Athens, the Athex Composite ended both the session and the week on 745.67, down 2.68% on the session.

 

Hedge funds that loaded up on Greek bonds in the last month - betting on a quick gain - are now scrambling to sell those holdings, fearful that European policy makers will force them to take a deep and binding haircut on the debt.

 

But walking away from the trade may not be that easy. While the money managers had little problem snapping up the bonds from European banks eager to sell, the pool of potential buyers is drying up.

 

Hedge funds have few options. Although talks between Greece and its bondholders have stalled, European officials are pressing for a deal by the end of this month. Under the proposed debt restructuring plan, hedge funds and other private sector creditors would have to incur losses of 50% or more - whether or not the bondholders agreed.

 

"I think it's going to be take it or leave it. And if you do not participate you will get massively beaten up," said one hedge fund holder of Greek debt, alluding to the unpleasant prospect that if he did not take the deal - and the steep loss in value, or haircut - he would end up with nearly worthless Greek bonds and with virtually no legal protection.

 

The situation represents a significant shift in how Europe has approached the issue. Last year, when the idea of a Greek debt default seemed a remote possibility, the private sector agreed to a "voluntary" 21% loss on its bonds. The fear was that forcing mandatory losses would lead to a disorderly default and scare investors off European debt altogether.

 

But as Greece's economic problems have worsened and the need for debt relief has become more acute, Europe, particularly Germany, has come around to the realization that the private sector must take a deeper loss. In a sign of the new direction, the region's leaders have begun discussions with the European Central Bank on an arcane debt swap that would strip 55 billion Euros ($72 billion) of Greek bonds from the central bank's portfolio, thus removing the possibility that the central bank might share losses with the private sector in a debt restructuring deal.

 

Now, the smart money isn't looking so smart. Starting in December, the counterintuitive, go-long Greece bet was one of the more popular pitches made to hedge funds in New York and London. Investment banks - Merrill Lynch was particularly aggressive in recommending the trade, investors say - argued that even though Greece was nearly bankrupt, those who bought the paper maturing in March could double their money when Greece received the next installment of its bailout, due that same month.

 

The theory was that the bulk of that money would be paid to bondholders to keep Greece solvent, just as was the case with past payments from the European Union and the International Monetary Fund. Greece might well restructure its debt, the bankers said, but added it was likely to happen later and would not affect the March payout.

 

The pitch worked. In the last month or so, hedge funds purchased an estimated 4 billion Euros ($5.2 billion) of beaten-down Greek bonds that mature on March 20.

 

But the bonds have gone from bad to worse. "There was a lot of volume going in, but not a lot going out," said one broker, speaking on condition of anonymity. The broker said prices for March 2012 bonds had slipped to about 35 cents on the Dollar, from approximately 40 cents to 45 cents.

 

Brokers estimate that of the 14.5 billion Euros worth of these bonds outstanding, the largest holder is the European Central Bank, which bought the securities in 2010 at a price of about 70 cents in an early, ultimately futile, attempt to lift Greece's failing bond market. The brokers say that 4 billion to 5 billion Euros of bonds are owned by hedge funds at an average cost of about 40 cents to 45 cents on the Dollar, with some of the larger positions being held by funds in the United States that have large London offices.

 

"It was a very binary trade," said one hedge fund executive who listened to the pitch but passed. "If you got paid, you double your money in a month. But you may also look like an idiot."

 

 

The UK Market 
Did it follow the Global trend .....

 UK MarketsMisys outperformed a falling London market on Friday amid revived hopes of a bid or break up.

 

The banking software maker rebounded after Thursday's poorly received results as shareholders continued to speculate about potential takeover interest.

 

Fidelity National Information Service would be free to make another approach from early February, traders noted. Last year the US group had an offer in excess of 400p a share for Misys rejected as too low.

Misys might also consider splitting up, Barclays Capital speculated.

 

The purchase in 2011 of Irish rival Sophis had given Misys a "pretty complete" treasury and capital markets division run separately from the core banking business, the broker said. "Given that management is incentivised to maximise shareholder value we believe that it and main shareholder ValueAct are very open to any construction which may dislodge value."

 

But some analysts argued Sophis might be a poison pill to any potential acquirer given its poor performance since Misys's purchase nearly a year ago.

 

At 15 times 2012 expected earnings, Misys shares already trade in line with the software sector average in spite of a "lack of material operational progress", said Espirito Santo. Downgrading to "sell", it argued a discount to the sector was warranted. Misys closed 7% higher at 326¾p.

 

Commodity stocks pulled the wider market lower in response to weak US gross domestic product figures. The FTSE 100 closed with a loss of 61.75 points, or 1.1%, at 5,733.45, which left the index flat for the week.

 

BP lost 2.6% to 464½p in response to a US District Court ruling that it could not pursue Transocean for costs linked to the Gulf of Mexico oil spill. However, the court decided Transocean was not indemnified from punitive damages - a judgment analysts said might encourage the US group to reach a settlement.

 

Ahead of results on February 9, BG Group lost 2.7% to £14.31. Dealers have noted vague talk of a potential fundraising, though analysts have said a cash call looked unlikely.

 

Miners reversed recent gains in tandem with metals prices, with Antofagasta off 3% to £13.48 and Kazakhmys down by 2.9% to £11.60.

 

But African Barrick Gold gained 5.3% to 515½p after the miner said its main Tusker deposit in Tanzania contained 4.1m ounces of ore, about four times its previous estimate.

 

InterContinental Hotels fell 2.7% to £13.21 after UBS added the stock to its "sell" list on valuation grounds. It said the hotelier was valued at a widening premium to European peers, even though earnings growth was likely to be meek this year.

 

"A special dividend or share repurchase programme is a very realistic possibility in 2012 but this event is well recognised by the market and does not fully explain the valuation premium," UBS said. "Moreover, we believe the market is underestimating the group's need to significantly increase its level of investment in order to meet its current room-count growth targets."

 

GKN was off 2.2% to 209¾p after weaker than expected earnings from Ford, which were caused largely by a poor performance in Europe.

 

A downgrade to "underweight" from Morgan Stanley sent Cobham, the defence contractor, lower by 3.3% to 182¾p.

 

"Cobham has very strong long-term potential due to its technology, end-market positioning and strong cash generation. However, we see risk of further downgrades as top line and margins come under pressure due to ongoing budgetary issues," it said.

 

Sector peer BAE Systems edged higher by 0.3% to 315½p, helped by forecast-beating results from Lockheed Martin.

 

BT Group was down 2.1% to 203½p ahead of results next week. With gilt yields at decade lows, BT's pension deficit might have widened to £6.2bn, which would require annual top-up payments of £650m over 12 years, UBS said.

 

Capita eased 1.6% to 632½p after Goldman Sachs cut the stock off its "conviction buy" list.

 

Premier Oil faded 3.6% to 418¼p after BMO Capital Markets cut its rating to "market perform". Dealers were also expecting results imminently from Premier's Anoa Deep and East Fyne appraisal wells, off the coast of Indonesia and Scotland respectively.

 

London Stock Exchange slid 1.9% to 865p after a cautious outlook took the focus off quarterly results that beat consensus expectations. Management noted slower volumes in January for UK cash equities and Italian fixed income.

 

Policymakers of the Bank of England were unanimous on this month's decision to maintain the asset purchase level at GBP 275 billion and the key interest rate at a historic low, minutes of the rate-setting session revealed Wednesday.

 

The central bank decided to leave the key interest rate unchanged at 0.50% and to continue the quantitative easing at the current level of GBP 275 billion on January 12. The bank is widely expected to expand its asset purchases next month when the current expansion ends.

 

The Monetary Policy Committee led by Governor Mervyn King agreed that a policy change was not warranted in the January meeting, the minutes said. The balance of risks to inflation had changed little since November and there was no compelling need to increase the scale of the asset purchases before completing those already announced, it added.

 

However, some members were of the view that a further expansion of asset purchases was likely to be required given the risks of inflation undershooting the target. Other members said the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term.

 

Wednesday, King hinted at possibilities of more quantitative easing given the slowing inflation. He noted that monetary policy should be used to avoid the economy falling into a "renewed severe downturn". But there is no reason to despair as all crises will come to an end.

 

Another policymaker Adam Posen also this week signaled an increase in bond purchase target if outlook for growth and inflation justify it.

 

The MPC agreed that there had been some positive developments over the month that had moderated some of the most serious near-term downside risks. Policymakers were of the view that output was likely to be broadly flat in the fourth quarter of 2011 and the first three months of this year.

 

The UK economy contracted in the fourth quarter for the first time in a year and at a faster than expected pace, raising hopes of another round of quantitative easing from the central bank.

 

According to the preliminary estimates from the Office for National Statistics released Wednesday, gross domestic product dropped 0.2% sequentially, after expanding 0.6% in the third quarter. Economists had forecast GDP to fall 0.1%.

 

Meanwhile, Ernst & Young ITEM Club has blamed political uncertainty in the Eurozone as the factor behind the halt in the UK recovery. The think tank sees a mere 0.2% expansion this year, before accelerating to 1.8% in 2013.

 

Only the industry breakdown of the GDP data is available now. Output of the production industries fell 1.2% in the fourth quarter, reversing the 0.2% increase in the previous quarter. Likewise, the decline in construction output came in at 0.5%, in contrast to last quarter's 0.3% growth.

 

At the same time, output of the service industries remained unchanged, following a rise of 0.7% in the previous quarter.

 

On a yearly basis, gross domestic product increased by 0.8% in the fourth quarter, in line with economists' expectations. For the whole of 2011, growth eased to 0.9% from 2.1% in 2010.

 

In a separate communique, the ONS said services output grew 1.6% in November from the previous year as three of the four service sector components marked increases. Month-on-month, services output rose 0.6%.

 

The International Monetary Fund forecasts 0.6% growth this year in the UK before advancing to 2% next year.

 

UK public sector borrowing decreased more than expected in December, the Office for National Statistics said Tuesday.

 

Public sector net borrowing excluding financial interventions, fell to GBP 13.7 billion from GBP 17.94 billion in November. The borrowing totaled GBP 15.91 billion during December 2010. The expected borrowing for the month was GBP 14.9 billion.

 

The central government net cash requirement was GBP 25.2 billion, a GBP 2.7 billion lower net cash requirement than in December 2010, when there was a net cash requirement of GBP 27.9 billion.

 

Public sector net debt at the end of December came in at GBP 1003.9 billion, which was equivalent to 64.2% of GDP. This compares to GBP 883.0 billion debt at the end of December 2010.

 

Including interventions, public sector net borrowing was GBP 10.8 billion, down by GBP 3.1 billion from December 2010.

Asia Pacific Regional Markets 
Did they set the tone or follow the lead .....

Asiapac IndicesJAPAN
  
Japanese stocks fell for a second day as the Yen strengthened even after Prime Minister Yoshihiko Noda pressed the central bank for "bold" action to counter the currency's gain. Energy companies and trading houses gained as commodity prices climbed.

 

Sony, a consumer electronics maker that gets about 70% of its sales abroad, slid 1.4%. Nintendo sank 4.1% after the video-game console maker tripled its loss forecast. Mitsubishi UFJ Financial Group, Japan's top lender by market value, lost 1.4%, after US banking stocks dropped on the Federal Reserve's pledge to keep rates near zero through 2014.

 

Mitsui, which counts commodities as its biggest source of profit, rose 2.1% as crude and metals prices gained.

 

The Nikkei 225 Stock Average fell 0.1% to 8,841.22 at the 3 p.m. close in Tokyo, with a weekly gain of 0.9%. The broader Topix slipped 0.5% to 761.13, with about three shares dropping for every two that gained.

 

Mitsubishi UFJ Financial Group slipped 1.4% to 351 Yen. Mizuho Financial Group, Japan's third-biggest bank by market value, lost 1.7% to 115 Yen.

Japanese equities slumped after the Yen extended gains even after Noda called on the Bank of Japan to take more aggressive steps to stem the currency's increase and deflation.

 

Sony fell 1.4% to 1,414 Yen. Kyocera, an electronic equipment manufacturer that earns most of its revenue abroad, lost 2.1% to 6,500 Yen.

 

Nintendo sank 4.1% to 10,310 Yen after more than tripling its loss forecast to 65 billion Yen ($844 million) for the fiscal year ending March. Sales of its 3DS handheld player have been sapped by rising demand for Apple gadgets such as the iPhone and iPad.

 

Energy companies and trading houses advanced the most in the 33 Topix industry groups. Mitsui rose 2.1% to 1,299 Yen while Mitsubishi gained 2.3% to 1,757 Yen. Inpex, Japan's top oil explorer, added 2.9% to 528,000 Yen, while Japan Drilling, an offshore exploration contractor, increased 1.9% to 2,536 Yen.

 

The Topix tumbled 19% last year amid concern US growth is sputtering and Europe's debt crisis will damage the banking system, damping demand in two of Japan's biggest export markets. The decline has cut the price of shares on the index to 0.9 times book value. That compares with 2.2 times for the Standard & Poor's 500 Index in the US and 1.4 times for the Europe Stoxx 600 Index.

 

The Bank of Japan on Wednesday said that the country's exports are likely to increase moderately going forward as recovery in overseas economies gathers pace.

 

However, exports and production will remain more or less flat for the time being, the central bank said in its monthly report.

 

Exports and production have remained more or less flat, due to the slowdown in overseas economies and the Yen's appreciation as well as the remaining effects of the flooding in Thailand, BoJ said.

 

Japan posted its first annual trade deficit since 1980 with a shortfall of JPY 2.49 trillion in 2011, data from the Finance Ministry showed Wednesday. This largely reflected the fallout from Japan's worst earthquake on record in March.

 

According to the central bank report, business fixed investment is projected to continue a moderate increasing trend, partly due to efforts by firms to restore and reconstruct disaster-stricken facilities. However, investment is likely to be affected by the slowdown in overseas economies for the time being.

 

Private consumption is expected to remain firm, while housing investment and public investment are expected to increase gradually, mainly due to the materialization of reconstruction-related demand, the bank said.

 

SOUTH KOREA

 

South Korean stocks finished 0.39% higher on Friday, as overseas investors extended their buying spree despite the country's weak growth data, analysts said.

 

Extending a winning streak for a fifth consecutive session, the benchmark KOSPI rose 7.65 points to 1,964.83. Trading volume was moderate at 442 million shares worth 6.03 trillion won ($5.37 billion) with gainers leading losers 492 to 331.

 

Even though the KOSPI has posted gains for five straight sessions, it moved with a greater volatility on Friday, falling as much as 0.39% in the morning as retail investors locked in profit.

 

Foreign investors, however, shrugged off growth concerns and maintained their position as net buyers of Seoul shares for the 12th straight session.

 

Large-cap tech exporters were firm. Samsung Electronics rose 1.08% to 1,125,000 Won after reporting a record-high operating profit for the final quarter of last year.

 

Its rival LG Electronics surged 5.16% to 81,500 Won and LG Display added 1.96% to 28,550 Won on expectations that the worst has passed.

 

Despite stellar earnings reports by big-cap exporters such as Samsung Electronics, other exporters continued to struggle with some analysts warning that situations in Europe may spread and hamper exports.

 

Leading car maker Hyundai Motor slumped 3.49% to 221,000 Won and its smaller affiliate Kia Motors declined 2.75% to 67,100 Won.

 

South Korea's economy grew at its slowest pace for two years in the final quarter of 2011 as Europe's debt crisis took its toll on exports and consumer spending, the central bank said Thursday.

 

Gross domestic product in October-December rose 0.4% from the previous three months, compared with a 0.8% rise in the third quarter.

 

It was the lowest quarter-on-quarter increase since 0.2% in October-December 2009.

 

Year-on-year, Asia's fourth largest economy grew 3.4% in the fourth quarter of 2011 compared to 3.5% in July-September.

 

"Amid sluggish domestic demand, exports turned negative," senior central bank official Kim Young-Bae told reporters.

 

"The sovereign debt crisis in Europe had a larger than expected impact on facility investment and private consumption."

 

Exports, accounting for about half of GDP, declined 1.5% quarter-on-quarter in October-December after expanding 2.2% in the three months earlier.

 

Private spending fell 0.4% compared to a 0.4% rise in the previous quarter.

 

Facility investment dropped 5.2% after falling 0.8% in July-September, while construction investment fell 0.3% following a 1.8% rise in the third quarter.

 

The economy grew 3.6% last year compared with a 6.2% rise in 2010.

 

HONG KONG

 

Hong Kong shares ended higher for a sixth-straight session on Friday, though profit-taking capped gains after a January rally that has boosted the benchmark Hang Seng Index by more than 11%.

 

Gains in global supply chain manager Li & Fung and China's two biggest telecoms firms outweighed losses in recent outperformers, such as PetroChina and China Life Insurance.

 

The Hang Seng Index ended 0.3% higher at 20,501.7 points, roughly in the middle of its trading range for the day after failing to breach chart resistance at about 20,604, its 200-day moving average. The market was closed early in the week for Chinese New Year holidays, and reopened on Thursday.

 

The China Enterprises Index of the top Chinese listings in Hong Kong also rose 0.3%, taking its gains for the year to date to 15%. Financial markets in mainland China were closed all week and will reopen on Monday.

 

Before Friday, PetroChina and China Life Insurance had risen 19.3 and 20.3%, respectively, so far in January, key drivers of the New Year rally. On Friday, both were key drags on the Hang Seng Index, down 0.9% each.

 

Li & Fung rose 3.4% in more than thrice its 30-day average volume after the consumer goods exporter announced the first acquisition by its regional distribution arm LF Asia, fuelling hopes for accelerating expansion.

 

Li & Fung, a major supplier of merchandise to US retailers Target Corp and Wal-Mart Stores Inc, closed at its highest since May 20 last year. It has surged 28% in January to date, also partly on the back of an improving US economy.

 

China Mobile gained 1.9% and was the Hang Seng Index's top boost. Smaller peer, China Unicom, which was among the best performers in 2011 as investors sought the relative safety of its perceived steady earnings growth, climbed 2.2%.

 

In a note late on Thursday, Nomura analysts reaffirmed their buy ratings on both stocks, remaining optimistic on their 3G potential -- despite a divided consensus on Unicom.

 

The Hong Kong International Airport (HKIA) announced Wednesday that it welcomed 53.9 million passengers and handled 333,760 aircraft movements in 2011, up 5.9% and 8.9% respectively over 2010, a new record both for passenger trips and aircraft movements.

 

Meanwhile, its annual cargo performance decreased 4.6% to 3.9 million tonnes in 2011.

 

The HKIA also set a new monthly record for air traffic with 29,275 aircraft movements in December 2011, exceeding the previous record of 28,951 in August 2011 and representing 5.5% year-on-year growth.

 

According to the HKIA, the rise in passenger traffic in December was mainly driven by visitor traffic, which registered 8% growth over the same month in 2010. Passenger traffic to and from the Chinese mainland and Southeast Asia performed particularly well.

 

Stanley Hui Hon-chung, chief executive officer of the Hong Kong Airport Authority, said, it was a challenging yet exciting year overall for the HKIA in 2011, in terms of operational excellence as well as growth and development.

 

He told the media, "we received 10 Best Airport awards in 2011. Our commitment to quality service continues to be widely recognized by travelers and the industry."

 

In view of the further integration of economies of Hong Kong with the mainland and in particular, the Pearl River Delta, Hui said the HKIA would continue with its efforts to enhance multi-modal connections with the Pearl River Delta.

 

Recent data showed that cross-boundary passenger trips via limousines and the SkyPier ferry services registered yearly growth of 11% and 7%, to 1.9 million and 2.4 million respectively.

 

Looking ahead, Hui said, passenger volume and aircraft movements will likely continue their growth trend, though at a slower pace, and cargo tonnage may decline further due to the slowdown in global trade but the pace of decline will likely be less than 2011.

 

He added that, notwithstanding worldwide economic uncertainty in the near term, "we will continue to enhance services at the HKIA and strengthen Hong Kong's competitiveness as a leading international and regional aviation center."

 

CHINA

 

Markets in China were closed for the Lunar New year Holidays.

 

China on Thursday criticised the European Union for banning oil imports from Iran, Beijing's third biggest crude supplier and a major trading partner.

 

The European Union agreed on Monday to ban imports of oil from Iran and imposed a number of other economic sanctions, joining the United States in a new round of measures aimed at pushing Iran into reining in its nuclear activities that Tehran says are for peaceful purposes.

 

China, the world's second largest crude consumer, has long opposed unilateral sanctions that target Iran's energy sector and has tried to reduce tensions that could threaten its oil supply.

 

Last week, Beijing told a visiting Iranian delegation that returning to nuclear talks was a "top priority". During a tour to Arab states earlier this month, Chinese premier Wen Jiabao also made a strong statement opposing Iran developing and possessing nuclear weapons, but defended China's right to buy Iranian crude oil as normal trade activity.

 

Asked about the EU embargo, China's Foreign Ministry said in a faxed statement: "It is not a constructive approach to simply pile up the pressure and impose sanctions."

 

"China hopes relevant parties to resort to measures conducive to regional peace and stability," the statement added.

 

China is the largest buyer of Iranian crude oil, importing 30% more from Iran in 2011 compared to the previous year. But China halved its purchases from Iran in January and February, following a dispute over the terms of payment.

 

TAIWAN

 

Markets in Taiwan were closed for the Lunar New year Holidays.

 

Not to be outperformed by world information technology (IT) leaders in cloud computing, Taiwanese companies have started positioning themselves in readiness to join the racetrack.

 

Mobile devices with cloud computing capabilities that allow people to access large amounts of Internet data anywhere and at anytime are seen as being key to driving the IT sector in the future.

 

With cloud computing technology burgeoning, the need for servers, tablet PCs, power supply systems and notebook coolers continues to increase.

 

Quanta Computers, one of the leading PC makers in Taiwan, has been shifting its product research and development toward cloud computing over the past three years.

 

In addition, Delta Electronics, a world-class provider of power management solutions, established its cloud computing project group in 2010 and has since cooperated with local universities to nurture "cloud brains."

 

To date, Delta Electronics commands 50% of the world's market of power supply systems for servers.

 

THE PHILIPPINES

 

The Philippine Stock Exchange Index slid 1.3% to 4,611.68.

 

Energy Development: The largest Philippine geothermal energy company is yet to enter into a "definitive agreement" with Australia's Hot Rock Ltd., a stock exchange filing showed. The stock increased 0.2% to 6.20 Pesos.

 

Filinvest Development: East West Banking, a unit of the company that seeks to hold an initial share sale, posted a 1.74 billion peso ($41 million) unaudited net income in 2011, a stock exchange filing showed. The stock gained 1.1% to 3.74 Pesos.

 

Metro Pacific Investments, DMCI Holdings: Maynilad Water Services, a venture of Metro Pacific and DMCI, will spend 8.4 billion Pesos in capital expenditure this year, Philippine Daily Inquirer reported, citing the water utility. Metro Pacific decreased 0.8% to 3.53 Pesos. DMCI fell 2.5% to 43.10 Pesos.

 

Pepsi-Cola Products Philippines: Pepsi's Philippine bottler plans to spend $75 million this year for capital expenditure that would include expansion of its distribution network and upgrade of its plants, BusinessWorld reported, citing President Partha Chakrabarti. The stock gained 0.5% to 2.25 Pesos.

 

Security Bank: The bank won central bank approval to open 50 branches by 2014, Philippine Star reported, citing President Alberto Villarosa. Villarosa couldn't be reached in his office for comment. The stock lost 3.6% to 106 Pesos.

 

The Philippines' import growth weakened in November, data from the National Statistics Office revealed Wednesday.

 

Imports rose 0.6% year-on-year in November, slower than 2.3% expansion in October. On a monthly basis, imports declined 0.7%.

 

Purchases of electronic products, that accounted for 27.7% of the aggregate import bill in November, fell 14.9% annually. However, the rate of decline eased from 19.8% in October.

 

On a monthly basis, imports of electronic products grew 11.8% after a 14.3% slump in the previous month.

 

The balance of trade in goods registered a deficit of $1.643 billion, higher than the last year's deficit of $810 million.

 

SINGAPORE

 

Stocks in Singapore erased earlier losses to close 0.75% higher on Friday due to positive global sentiment.

 

The Straits Times Index rose 21.83 points to end at 2,916.26.

 

Volume was 1.56 billion shares.

 

Gainers led losers 286 to 110.

 

Noble Group gained 2.6% to S$1.375, Golden Agri-Resources climbed 1.4% to S$0.735, while Wilmar International rose 0.6% to S$5.45.

 

Among banks, United Overseas Bank ended 1.0% higher at S$17.40, DBS was up 0.9% at S$13.46, while Oversea-Chinese Banking Corp also rose 0.9% to S$8.59.

 

As for other stocks, Singapore Airlines gained 0.64% to S$11.10, Keppel Corp advanced 0.8% to S$10.85, while Sembcorp Marine fell 0.2% to S$4.88.

 

Singapore's consumer price inflation eased as expected in December largely due to a smaller increase in the cost of private road transport, data from the Ministry of Trade and Industry showed Wednesday.

 

Annual inflation came in at 5.5% in December, down from 5.7% a month ago. Month-on-month, consumer prices remained flat after rising 0.6% in November.

 

Meanwhile, core inflation in December was slightly higher at 2.6% annually compared to the rise of 2.4% in November, reflecting higher prices for food items and services due to the continued pass-through of earlier increases in global food commodity prices and business costs respectively.

 

For the whole of 2011, overall inflation averaged 5.2% and core inflation at 2.2%.

 

Inflation is forecast to remain elevated over the coming few months. Core inflation is likely to face some upward pressure over the months ahead due to the ongoing pass-through of earlier cost increases.

 

For the whole of 2012, consumer price inflation and MAS core inflation are forecast to be 2.5-3.5% and 1.5-2.0%, respectively.

 

MALAYSIA

 

Share prices on Bursa Malaysia closed lower Friday as investors reduced their holdings in selected finance counters ahead of the weekend, analysts said.

 

Losses were mostly seen in CIMB and Maybank which dragged the FTSE Bursa Malaysia KLCI 2.96 points lower to end the day at 1,520.90.

 

The Finance Index fell 75.84 points to 13,420.77, the Industrial Index lost 1.41 points to 2,718.75 but the Plantation Index rose 23.31 points to 8,750.52.

 

The FBM Emas Index added 3.72 points to 10,578.33, the FBM ACE earned 46.24 points to 4,496.64, the FBM70 Index jumped 87.34 points to 12,149.36 and the FBM Top 100 Index eased 0.14 of a point to 10,363.52.

 

Gainers led losers 459 to 370 while 292 counters were unchanged, 353 untraded and 26 others were suspended.

 

Total turnover rose to 2.278 billion shares, worth RM1.85 billion, from 1.96 billion shares, worth RM1.69 billion, transacted Thursday.

 

Volume on the main market declined to 1.15 billion shares, valued at RM1.68 billion, from 1.25 billion shares, valued at RM1.58 billion, registered Thursday.

 

Turnover on the ACE market improved to 568.98 million units, worth RM83.46 million, from 288.87 million units, worth RM34.77 million, recorded on Thursday.

 

Warrants advanced to 559.29 million shares, valued at RM88.10 million, from Thursday's 415.10 million shares valued at RM75.36 million.

 

Among actives, IJM Corp gained 25 sen to RM5.70 while Ahmad Zaki Resources earned 16 sen to 90 sen after the company secured a RM1.738 billion contract from MRT Corp.

 

DRB-Hicom also attracted investors following its recent substantial acquisition of Proton. The counter gained 21 sen to RM2.71.

 

As for heavyweights, Maybank lost three sen to RM8.19, Sime Darby eased one sen to RM9.07 and Petronas Chemicals shed two sen to RM6.65.

 

Consumer products accounted for 134.51 million shares traded on the main market, industrial products 212.12 million, construction 94.46 million, trade and services 378.35 million, technology 29.67 million, infrastructure 36.29 million, finance 72.89 million, hotels 714,900, properties 107.30 million, plantation 34.40 million, mining 367,900, REITs 7.17 million and closed/fund 49,000.

 

Malaysia's unemployment rate increased modestly in November, after falling in the previous month, data released by the Department of Statistics showed Wednesday.

 

The jobless Rate moved up to 3.1% in November from 3% in October. In September, the unemployment rate was 3.3%.

 

The number of unemployed persons increased by 1.9% to 384,100 in November from 376,800 in October. Compared to November 2010, the number of unemployed increased 4.8%.

 

Meanwhile, the number of employed persons declined 2% to 12.08 million in November from 12.33 million in the previous month. Year-on-year, the number of employed rose 3%.

 

The labour force participation rate was 63.4 in November, down from the previous month's rate of 64.5%.

 

THAILAND

 

The Stock Exchange of Thailand main index went up 7.75 points or 0.73% to close at 1,076.29 points at the end of trading session on Friday Afternoon. The trade value was 27.73 billion baht, with 3.87 billion shares traded.

 

The SET50 index ended at 752.18 points, up 6.37 points or 0.85 %, with a total trade value of 18.69 billion baht.

 

The SET100 index rose 13.22 points or 0.18% to stand at 1,636.06 points, with a total turnover of 22.70 billion baht.

 

The SETHD index went up 10.57 points or 1.02% to stand at 1,049.59 points, with total trade value of 8.22 billion baht.

 

The MAI index rose 4.24 points or 1.49% to close at 288.09 points, with total transaction value of 544.98 million baht.

 

Top five most active values were as follows; SCC closed at 341.00 baht, up 11.00 baht (3.33%). PTT closed at 337.00 baht, up 5.00 baht (1.51%).

 

PTTGC closed at 64.50 baht, up 1.25 baht (1.98%), BANPU closed at 596.00 baht, up 12.00 baht (2.05%) and INTUCH closed at 48.25 baht, down 0.25 baht (0.52%).

 

The Bank of Thailand decided to cut the key policy rate for a second consecutive rate-setting session on Wednesday to spur economic growth, hit hard by widespread flooding during October last year and a slowdown in global demand.

 

The central bank said that the monetary policy committee (MPC) voted unanimously to reduce the policy rate by 0.25%, from 3.25% to 3.00% per annum, effective immediately.

 

"With private sector confidence improving but still fragile, this policy accommodation should help accelerate the return of economic activity to normal levels," the bank said in a statement.

 

The impact of the floods on the Thai economy was greater than previously assessed and the restoration process is likely to be more drawn out, the policymakers noted.

 

Also, inflationary pressure remains contained, while headwinds from the global economy continue to pose risks to Thailand's economic growth, they said.

 

At the same time, MPC assessed that manufacturing production will return to normal levels by the third quarter of this year, supported by government measures, improved confidence, and accommodative monetary conditions. Furthermore, the positive momentum generated by these factors would help to limit downside risks to growth, especially the drag on exports from a slowdown in global demand, the bank said.

 

Though inflationary pressures declined, reflecting a more prolonged recovery in domestic demand and a slowdown in commodity prices, the boost to economic activity from reconstruction spending and various government stimulus measures could exert some upward pressure on inflation going forward, the MPC observed.

 

INDONESIA

 

The Jakarta Composite index rose 0.1% to 3,986.41. The gauge advanced for a fourth straight week, gaining 4.3% this year.

 

Metal producers: Vale Indonesia, the nation's largest nickel producer, jumped 6.7% to 4,000 Rupiah, the most since 28 October. Timah, Indonesia's biggest tin producer, rose 5% to 1,890 Rupiah, the steepest gain since 12 October.

 

Buana Listya Tama, a freight-transportation services company, sank 7.8% to 83 Rupiah, the lowest close since its May trading debut. The company's parent, Berlian Laju Tanker, said a covenant breach has been declared under a loan facility granted to one of its subsidiaries and of which Berlian is the guarantor. Berlian has temporarily ceased repayment on all of its bank loans, bonds and payments on ship leases of its other subsidiaries, save for Buana Listya, to enable the group to review its financial position and arrangements, it said.

 

Dian Swastatika Sentosa, a power producer, rose 6.8% to 11,800 Rupiah, the biggest gain since Jan. 13. United Fiber System Ltd. said it signed an agreement with Dian Swastatika to buy a 67% stake in coal mining company PT Golden Energy Mines, according to a statement to the Singapore stock exchange. The transaction is valued at S$1.5 billion, it said. Golden Energy added 1.9% to 2,650 Rupiah.

 

XL Axiata, a unit of Malaysia's Axiata Group, fell 3.5% to 4,775 Rupiah, the sharpest drop since 2 December. The company said it posted a 2011 net income of 2.8 trillion Rupiah ($312 million). That compares with a 2010 net income of 2.89 trillion Rupiah.

 

Indonesia, Finland and Estonia have agreed to foster economic cooperation, particularly in trade and investment, Indonesian Trade Minister Gita Wirjawan said.

 

The agreement was reached at a meeting between Gita Wirjawan and Finnish Minister for European Affairs and Foreign Trade Alexander Stubb and Estonian Foreign Minister Urmas Paet here on Wednesday to discuss a plan to enhance the economic cooperation, Antara news agency reported.

 

In their joint press statement, the three ministers discussed the regional and global economic issues which had now come under the spotlight and the progress achieved in bilateral cooperation between Indonesia and the two European Union member states.

 

The meeting was followed by a business forum aimed at tapping opportunities to enhance cooperation among business agents in the three countries, the statement said.

 

Minister Stubb came to Indonesia along with a 21-member business delegation and Minister Paet along with a nine-member business delegation.

 

The Finnish and Estonian businessmen are among others engaged in forestry, logistics, energy and environmental, manufacturing, and telecommunication and information sectors.

 

The businessmen of the two European countries visited Indonesia to see for themselves opportunities in the trade and investment fields.

 

The statement said the meeting and business forum were expected to promote business opportunities in the three countries and foster relations between the two European countries and Indonesia which is now enjoying high economic growth and has large market.

 

Data from the Trade Ministry show two-way trade between Indonesia and Finland in 2010 reached US$482 million. The figure increased to US$561 million in the January-October 2011 period.

 

Since 2006, Indonesia has recorded a deficit in its trade with Finland.

 

In 2010 the deficit reached US$235 million and in the January-October 2011 period US$211 million.

 

Indonesia's exports to Finland mainly consisted of natural rubber, printing machines, and bicycles, while its imports from the European country covered electronic appliances, and pulp, paper and cardboard manufacturing machines.

 

Meanwhile, trade between Indonesia and Estonia grew significantly by 26% in the past five years.

 

INDIA

 

Indian shares ended at their highest levels in more than 11 weeks Friday, driven by gains in heavyweight Reliance Industries and underpinned by positive Asian markets.

 

Shares gained for a third straight session with sentiment remaining upbeat as the Indian rupee strengthened to an 11-week high.

The Bombay Stock Exchange's Sensitive Index added 0.9% to end at 17,233.98, after trading between 17,106.57 and 17,258.97.

This was the index's highest close since 9 November, when it finished at 17,362.1. The Sensex has gained 11.5% so far this month.

 

On the National Stock Exchange, the 50-stock S&P CNX Nifty rose 0.9% to close at 5,204.70.

Trading volume in the BSE's cash segment fell a touch to 26.94 billion rupees from Wednesday's 27.29 billion rupees. Indian markets were closed Thursday for a national holiday.

 

Gainers outnumbered losers 1,781 to 1,106, while 110 stocks were unchanged.

 

Analysts say a favorable shift in investor sentiment coupled with stock valuations appearing reasonable fuelled the domestic share rally.

 

Energy major Reliance Industries, which has the highest weight on the index, climbed 3.5% to 817.60 rupees as the company's share buyback commencing 1 February inches closer.

 

Software bellwether Infosys rose 2.3% to 2,720.60 rupees while Bharti Airtel gained 3.7% to 372.55 rupees.

 

Larsen & Toubro advanced 3.8% to 1,381.60 rupees. The engineering giant's quarterly earnings earlier this week topped estimates.

 

Among laggards, ITC fell 2.0% to 202.05 rupees while mortgage lender Housing Development Finance Corp. lost 1.3% to 699.15 rupees.

 

Ranbaxy labouratories, not part of the Sensex, declined 6.6% to 443.75 rupees. The US Justice Department stipulated stringent provisions, while confirming a consent decree with the drug maker to resolve allegations of improper manufacturing practices.

 

The Reserve Bank of India on Tuesday decided to cut its cash reserve ratio by 50 basis point to inject liquidity into the banking system even as it opted to maintain its key interest rates for the second time amid persistent inflationary pressure.

 

The cash reserve ratio was reduced to 5.5% from 6%, effective January 28. The action is set to infuse INR 320 billion into the system. The CRR is the amount of deposits set aside by lenders as reserves with the central bank.

 

The central bank maintained the repo, the rate at which it lends to banks, at 8.50% and the reverse repo, the rate at which the central bank borrows from banks, at 7.50%. The decision matched economists' expectations.

 

The RBI has raised rates 13 times since March 2010. Based on the current inflation trajectory, including consideration of suppressed inflation, the central bank assessed in its third quarter review that it is premature to begin reducing the policy rate.

 

Moreover, the structural deficit in the system increased significantly despite open market purchase of government securities. The huge structural deficit provides a strong case for injecting liquidity permanently into the system.

 

The bank is of the view that the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them.

 

The RBI indicated that the timing and magnitude of future rate actions is contingent on a number of factors. In the absence of credible fiscal consolidation, the bank said it will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending.

 

The central bank governed by Duvvuri Subbarao expects the latest policy actions to ease liquidity conditions, mitigate downside risks to growth and continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

 

The baseline projection of GDP growth for 2011-12 was downgraded to 7% from 7.6%. The central bank observed that some of the downside risks to growth outlook such as an increase in global uncertainty, weak industrial growth and slowdown in investment activity indeed started materializing.

 

Meanwhile, the baseline projection for wholesale price inflation was retained at 7%. Inflation as measured by the wholesale price index, slowed to 7.47% in December, a two-year low level, on a sharp slowdown in food inflation.

 

AUSTRALIA

 

The Australian share market ended Friday at a seven-week high led by the resources and materials sector.

 

The benchmark S&P/ASX200 index closed up 17.1 points on Friday, or 0.4%, at 4,288.4 while the broader All Ordinaries index closed up 19.4 points, or 0.45%, firmer at 4,348.5 points.

 

It was a fourth successive week of gains, with the ASX200 adding one%. That's the longest winning streak since the week ending February 18 last year.

 

Among the major sectors, miners added 1.3%, energy stocks added 0.25% and financials were 0.1% higher for the day.

The world's biggest miner BHP Billiton closed up 24 cents, or 0.64%, at $37.66, Rio Tinto added $1.43, or 2.09%, to $69.78 and Fortescue Metals shot up 20 cents, or 4.12%, to $5.06.

 

Shares in Australia's biggest oil and gas company, Woodside Petroleum, closed up 51 cents, or 1.5%, at $34.48 after saying it was considering partially selling down its interest in the $US30 billion ($A28.3 billion) Browse liquefied natural gas project in Western Australia.

 

The major banks lost some of their earlier gains.

 

Westpac was down one cent at $21.29, Commonwealth Bank advanced 16 cents to $51.16, ANZ lifted eight cents to $21.50 and National Australia bank shed 12 cents at $24.08.

 

The only sectors to finish weaker were defensives including consumer discretionaries, consumer staples, info techs and telcoms, which closed between 0.3 and 0.6% softer.

 

Among other stocks, US-based sleep disorder specialist ResMed Inc was 19 cents richer at $2.73 after it reported a drop in profit for the first half of the financial year but record revenue and net income for the December quarter.

 

National turnover at 1630 AEDT was 1.7 million shares worth $4.5 billion, with 569 stocks up, 435 down and 381 unchanged.

On the ASX 24, the March share price index futures contract was up seven points at 4,258, with 28,400 contracts traded.

 

There is a new indication that Australia's economic growth is slowing.

 

The Leading Index for Australia, published Wednesday by Westpac Bank and the Melbourne Institute, showed annualized economic growth of 1.5% for November.

 

Growth in the October index was 2.3%.

 

The index measures projected economic growth in the coming three to nine months.

 

Consumer prices in Australia stagnated in the December quarter of 2011, after a three-year bout of steady increases, data from the Australian Bureau of Statistics showed Wednesday.

 

The consumer price index remained unchanged quarter-on-quarter in the December quarter compared to 0.6% increase in the three months to September. Economists were expecting the rate of inflation to ease to 0.2%.

 

The benign CPI outcome has widely triggered expectations for an interest rate cut by the central bank at its February meeting.

 

The most significant contributors to the weak CPI figure were fruits and vegetables. Fruit prices declined 13.4% from the previous quarter, mainly due to 46% decrease in price of bananas. Vegetable prices were 5% lower than a quarter earlier.

 

The price index for the food and non-alcoholic beverages group dropped 1.5% quarter-on-quarter. Transport costs recorded no change in the December quarter as a 0.7% increase in automotive fuel prices was largely offset by a 1.2% fall in motor vehicles prices.

 

On an annual basis, inflation eased to a one-year low of 3.1% from 3.5% in the September quarter. Economists were looking for a slowdown to 3.3%.

 

The trimmed mean gauge picked up 0.6% quarter-on-quarter compared to economists' forecast of 0.5% rise. Annually, the measure rose 2.6% compared to the expected 2.4% increase.

 

The weighted-median gauge of inflation advanced 0.5% in the fourth quarter as expected, rising 2.6% year-on-year. Economists had forecast an annual increase of 2.4%.

 

In December, the Reserve Bank of Australia slashed the key interest rate by a quarter point for the second consecutive month to support economic activity amid growing fears that the Eurozone economy may slide into recession.

 

Governor Glenn Stevens said that the inflation outlook afforded scope for a modest reduction in the cash rate. Commodity prices have declined further over recent months, taking pressure off CPI inflation rates, he noted.

 

According to data released by the RBA this month, Australia's commodity price index fell 2.5% in Australian Dollar terms on a monthly average basis. The price of gold as well as the estimated export prices of coking coal and iron ore declined during the month.

 

RBA expects inflation to be consistent with the 2-3% target in 2012 and 2013. In November, the central bank reduced its GDP and inflation projections, citing recent developments in both the domestic and global economies.

 

NEW ZEALAND

 

New Zealand shares gained for a third day as the prospect of globally low interest rates for an extended period stoked investors' appetite for riskier, or higher-yielding, assets such as stocks.

 

Fletcher Building paced gainers.

 

The NZX 50 Index rose 12.97 points, or 0.4%, to 3294.64. Within the index, 22 stocks gained, 13 fell and 15 were

 

Fletcher Building, the biggest company on the exchange, gained 2.2% to $6.54 as it continues to bounce back from last month's lows.

 

Sky Network Television rose 1.4% to $5.15, and was another stock that was bouncing back from being over sold.

 

Fellow index heavyweight Telecom fell 1.6% to $2.095.

 

The dual-listed Australian financial services firms gained on the day, with AMP up 1.5% to $5.55, and Australia & New Zealand Banking rising 1.8% to $28.

 

The prospect of the partial floats of the state-owned energy companies helped bolster confidence, and the Treasury Friday announced the joint lead managers running the first sale of Mighty River Power in the third quarter of the year. Stock exchange operator NZX was unchanged at $2.61 Friday.

 

Rival power company Contact Energy gained 0.4% to $4.77 Friday, as it continues to bounce back from an eight-and-a-half year low it touched earlier this week.

 

Components maker Rakon was the biggest gainer on the day, up 9.7% to 68 cents, the highest level since November 14, extending its weekly rally to 12%

 

Whiteware manufacturer Fisher & Paykel Appliances rose 4.4% to 35.5 cents, while gold miner OceanaGold advanced 3.3% to $3.10.

Carpet maker Cavalier Corporation was the biggest decliner, falling 6% to $2.35 on thin trading volumes, while tapmaker Methven declined 1.9% to $1.05.

 

Energy explorer NZ Oil & Gas extended its decline, falling 1.4% to 73 cents after it Thursday said it will fully impair its investment in Pike River Coal in the upcoming first-half financial statements.

 

The Reserve Bank of New Zealand on Thursday decided to retain the benchmark interest rate at record low for a seventh straight time, citing concerns over the ongoing uncertainty around global conditions and the moderate pace of domestic demand.

 

The central bank kept the Official Cash Rate (OCR) steady at 2.5% in line with economists' expectations. The last policy change was in March 2011, when the OCR was cut by 50 basis points with a view to lessen the economic impact of the Christchurch earthquake.

 

The global economy still remained fragile and risks to the outlook persisted though increased liquidity in European financial markets somewhat brightened sentiment since the December statement, Governor Alan Bollard said Thursday.

 

"Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5%," Bollard said.

 

He observed that the European debt crisis has also increased the cost of international funding, which will likely pressure funding costs for New Zealand banks over the coming year. Moreover, the recent appreciation of the New Zealand Dollar is reducing exporters' returns despite higher prices for New Zealand's export commodities.

 

New Zealand's economy continued to see a modest growth and over recent months, there have been signs of a limited recovery in household spending and the housing market. However, on a positive note, price pressures remained well contained and inflation has now declined to below 2%.

 

Meanwhile, in a speech in Auckland Thursday, Prime Minister John Key said the country is still on track to post a budget surplus in 2014/15. He said the Budget Policy Statement to be published on February 16 would show a forecast surplus in the range of NZ$300 to NZ$500 million in that year.

 

He admitted that the surplus is understandably smaller than was previously forecast, given the events in Europe. "But we remain on our tight fiscal track," Key said.

 

He also expressed confidence that New Zealand is in a relatively good position to deal with any fall-out from the European crisis in the near term.

 

Credit card spending in New Zealand picked up in December after weakening notably in November, data from the Reserve Bank of New Zealand showed Wednesday.

 

Spending through credit cards increased 5.9% year-on-year in December following a 3% increase in November and 8.1% rise in October.

 

On a seasonally adjusted monthly basis, credit card spending rose 0.9% following a 4.2% decline in the preceding month.

 

Domestic billings on New Zealand issued cards rose 0.1% from a month earlier. Overseas billings on New Zealand issued cards climbed 2.6%.   

Global Commodities 
'Food for thought' or 'a Grain of truth' .....

 CommoditiesCommodities and gold prices posted weekly increases, buoyed by expectations of further monetary easing in the US and a soft landing in China.

 

Gold, which jumped on the US Federal Reserve's comments on Wednesday that interest rates were to remain low until late in 2014, extended its gains to a seven-week high on Friday. In midday New York trading, bullion was at $1,733 a troy ounce, up 4% on the week.

 

While gold has risen almost 11% since the start of the year, silver, which was in the doldrums during the latter half of last year, has gained ground. It has rallied 22% since the beginning of 2012 and on Friday was at $33.75 a troy ounce, adding 5% on the week.

 

On the London Platinum and Palladium Market, platinum increased to $1,608 an ounce from $1,517.

 

Palladium climbed to $684 an ounce from $669.

 

Crude oil shrugged off concerns over weak European growth and prices were supported by anxiety over the effects of the Iran oil embargo. With Iran's parliament expected to pre-empt EU sanctions by voting on Sunday for a ban on oil exports to Europe, the market firmed, with ICE March Brent trading at $111.15 a barrel, up just over 1% on the week.

 

While 2012 has started on a positive note for commodities - the Reuters-Jefferies CRB index is up about 4% since the start of the year - the sector saw the weakest net funds inflow in nine years in 2011. Investors were deterred by volatility caused by European sovereign debt concerns and worries about monetary tightening in China.

 

Net fund flows into commodities totalled $15bn in 2011, the lowest since 2002, when the sector posted a small outflow. Last year's total is less than a quarter of the investment level in 2010, which saw inflows of $67bn, according to Barclays Capital.

 

Assets under management rose by 5%, or just $19bn, the smallest year-on-year increase since 2003. The asset number was partially lifted by the rise in some commodities prices such as cattle, gold and oil.

 

Copper futures eased on Friday, snapping a streak of four consecutive gains as the latest reading on the health of the US economy failed to draw more buyers to the growth-sensitive metal.

 

The most actively traded copper contract, for March delivery, fell 1.25 cents, or 0.3%, to settle at $3.8890 a pound on the Comex division of the New York Mercantile Exchange.

 

Copper prices had gained 14% this month through Thursday, as economic data in the US and China pointed to steady demand for raw materials. The industrial metal was one of the hardest-hit commodities in late-2011 as the global economic outlook was rattled by Europe's debt crisis and worries that China's growth engine was slowing.

 

But larger-than-expected Chinese copper imports and upbeat readings on the US housing and labor markets spurred investors to take a second look at the copper market this month, sending prices to four-month highs this week. The Federal Reserve's low-interest-rate outlook released this week also boosted growth hopes.

 

Copper is sensitive to the economic outlook because of its widespread uses in construction and manufacturing.

 

But the metal's momentum faded on Friday as investors saw an opportunity to lock in profits.

 

Three-month aluminium rose to $2,263 a tonne from $2,207. Three-month lead increased to $2,307 a tonne from $2,177. Three-month tin rallied to $24,500 a tonne from $21,800.

 

Three-month zinc gained to $2,162 a tonne from $2,014 and Three-month nickel advanced to $21,698 a tonne from $20,450.

 

The Cocoa market surged to the highest levels since mid-November on fears over dry weather in Ivory Coast, which is the world's biggest producer of the commodity that is mostly used to make chocolate.

 

By Friday on LIFFE, London's futures exchange, cocoa for delivery in March rose to £1,583 a tonne from £1,527 a week earlier.

 

Coffee prices fell in nervous trade, bucking the positive trend in most other markets.

 

By Friday on LIFFE, Robusta for delivery in March eased to $1,869 a tonne from $1,904 a week earlier.

Global Currencies 
In for a Penny, in for a Pound .....
UK Markets
 The Dollar lost ground against other major currencies again on Friday as investors continued to move into risky assets in the hopes a deal would be reached over the weekend between Greece and its creditors to avoid a full-scale default on its debt.
 

The Dollar index was down 0.6% as the US currency fell against the Euro, the pound, the yen and the Swiss franc.

 

European and Asian currencies continued to rally following news earlier in the week that the US did not plan to raise interest rates until the end of 2014, later than had been anticipated and increasing expectations the Federal Reserve would embark on a fresh round of quantitative easing.

 

News that US gross domestic product had grown slightly less than expected in the fourth quarter of last year led the Dollar to rise only briefly before giving up its gains. The Euro rose 0.7% to $1.3194.

 

The Japanese yen was one of the biggest risers against the Dollar on Friday, with the greenback down 1% to reach Y76.67, wiping out all its gains in a week that saw an unusual spike in the value of the US currency against the yen.

 

Sharp falls in the yen on Tuesday had sparked speculation by traders that Japanese investors were selling the currency to buy higher-yielding US debt. But the Fed's dovish stance on Wednesday helped to reverse those falls.

 

The yen was also stronger against the Euro, which fell 0.4% to Y101.10. Sterling dropped 0.8% to Y120.44.

 

Sterling rose 0.2% to $1.5713, while the Australian Dollar lost its earlier gains and was 0.1% higher against the US Dollar at $1.0636 at the close of London trading. The New Zealand Dollar fell from its highs to $0.8224 but still eked out a gain of 0.2%.

 

The Euro was flat against the Swiss franc at SFr1.2073 after trading in a tight range against the Swiss currency all week.

 

Asian currencies rose for a fourth week, spurred by demand for higher-yielding assets after the Federal Reserve pledged to keep interest rates near zero through late 2014.

 

The Ringgit appreciated 2.2% to 3.0388 per Dollar in Kuala Lumpur. The Rupee gained 2.1% to 49.315 and touched 49.295 yesterday, the highest level since 9 November. The Philippine Peso and South Korea's Won advanced 1% to 42.85 and 1,123.20, respectively. Thailand's Baht strengthened 0.7% to 31.31.

 

The Asia Dollar Index rose 1.8% this month, the most in a January since 2006, as central banks in India, Thailand, Indonesia and the Philippines eased credit conditions to bolster economic growth.

 

South Africa's Rand briefly touched new three-month highs versus the dollar on Friday, but may have limited scope for further gains as nagging fears about euro zone debt temper this week's wave of improved risk appetite for high-yield assets.

 

The Rand was at 7.7847 to the dollar, up 0.5% from Thursday's close. It touched a session high of 7.7490 earlier, its strongest level against the greenback since October 31 last year.

 

US Treasury Secretary Timothy Geithner complained Friday that China is still keeping the RMB below its fair value and insisted Beijing would have no choice but to let it rise.

 

"China does represent a really unique and formidable challenge to the global trading system," Geithner told the World Economic Forum.

 

He said Beijing had built its manufacturing sector at the expense of its trading partners through "systematically subsidising" costs of key imports as well as by keeping "its exchange rate below fundamentals for some time, though it is appreciating gradually."

 

Those policies are "very damaging to not just their commercial economic trading partners but also for the sustainable world trading system."

 

"That's why it's very important that we get China to move on, comprehensively, on that front, not just on the exchange rate but on subsidies and distortions," said the US Treasury chief.

 

He argued that China was not the only one guilty of manipulating its currency, as other currencies tied to the Dollar are also "still below fundamentals."

 

"Over time those currencies will have to rise very significantly further against major currencies -- the Dollar, Euro and the yen.

 

"It's not principally the Dollar thing it's about those currencies against major currencies. It's because of the strength of growth, productivity growth.

 

"That's going to happen no matter what," he said, without giving a target figure for appreciation.

 

In December, US Treasury said the RMB had risen 7.5% against the Dollar in the 18 months since Beijing began allowing a managed appreciation, and by 12% if China's high inflation rate is figured in.

 

Nevertheless, "it's got some ways to go," said the US Treasury chief.

 

Oops. When are Mr Geithner and the US going to learn?

 

Just because China is closed for Chinese New Year he thought he might get away with that one.

 

News for you Mr Geithner; China opens up again tomorrow and you may find those comments come crashing back at you rather quickly.

 

The RMB against the US Dollar is currently 6.33300.        

China 
Key news eminating from China this week .....
 China MarketsClosed completely for the whole week!  
Summary  
The coming week looks like .....
Commodities Indices
Not another Euro summit!

 

This one, on Monday, is intended to cultivate measures to boost growth in Europe, and also to endorse some of the actions taken to save the Euro in December at the meeting where a 'fiscal compact' was drawn up - and where British prime minister David Cameron wielded his controversial veto.

 

But it is what is not on the meeting agenda that is worrying economists. Negotiations for a debt restructuring between the Greek government and the country's creditors - with compromise needed between Greek's commitment to bring down its debt, investors' willingness to accept losses and aid from foreign governments - have continued to fray investors' nerves.

 

The big question remains whether Europe can deliver a credible plan to restore confidence and growth. I do not expect any clear-cut answers next week and, as with many of the previous EU Summits, markets are likely to be left disappointed and at the very least, unconcerned and will continue to chug upwards - rightly or wrongly.

 

Next week will also test the market's willingness to fund the Eurozone's more troubled members with Italy to auction up to €8 billion worth of bonds on Monday. Weaker European governments' ability to refinance their debts will be a continuing source of anxiety throughout 2012.

 

That said, economists note that there is little economic data due from the Eurozone this week to darken the relatively bright picture so far this year.

 

Negotiations are ongoing in Athens, but given there is now disagreement over both the interest rate involved and the ECB participation in the haircut, one suspects the battle will rage on into next week. As to what might ultimately bring the two sides together it is difficult to foresee at this point.

 

The Fed has moved to build more insurance into the US financial system, which has been stated as support to a still-weak US economy, but clearly also offers an element of further protection against Europe.

 

JP Morgan CEO Jamie Dimond suggested on business television last night that US banks would suffer no losses from a Greek default, however he was not pushed to contemplate the outcome of rolling contagion into the other distressed Eurozone members. Wall Street might be eyeing off a new 52-week high, but the crisis is far from over yet.

 

Next week is a busy one for economic data in some regions. Wednesday is the first of the month so that means the regular round of manufacturing PMI data from Australia, China, the Eurozone, UK and US. Friday sees the same for service sector PMIs

 

The US will also see personal income and spending, the Case-Shiller house price index, consumer confidence, vehicle sales and chain store sales. On Wednesday the ADP private sector jobs data will be released followed by non-farm payrolls on the Friday.

 

Australia will see the monthly NAB business confidence survey, private sector credit, house price indices for both December and the December quarter, and building approvals. The last of the resource sector quarterly production results will be released, and Energy Resources of Australia (ERA) and News Corp (NWS) will both provide early earnings results ahead of the flood of corporate results which will build up over the month of February.

 

After a week of new year celebrations, the Chinese will be back on board next week and it will be interesting to see what announcements they make - particularly with regard to manufacturing and property - both critical topics for Beijing to address upon their return.

 

In the UK, where recent data showed the economy has been contracting, this week should provide the first clues as to whether this really is a double dip recession. Updates are due on activity in the manufacturing, construction and services industries.

 

All told, another week to muddle through I think and as mentioned earlier, unless someone, somewhere is prepared to stick their neck on the line and set either firm benchmarks or demand 'action' as opposed to 'rhetoric', next week is going to be simply a case of more of the same, lots of talk but nothing of substance.

 

Meanwhile, markets will slowly edge upwards because of this.

 

Time for someone to make a stance I feel .... and I do not expect it from Davos, that's for sure.

As always, I will keep you posted with major developments as/when they occur in the week ahead.
 
In the meantime, I wish you all a very pleasant weekend.
 
Market Newsletter Written By 


Adrian Page

Managing Director
Financial Page International
 
In This Issue
US Markets
European Markets
The UK Market
Asia Pacific Markets
Global Commodities
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