European shares fall on China worries

Date Jan 26 2010 17:20:04 Source:Reuters

LONDON (Reuters) - European shares fell in early trade on Tuesday, extending their decline for a fifth day after China implemented a previously announced clampdown on lending, with banks and commodities the major fallers in Europe.


By 0810 GMT (3:10 a.m. EST), the pan-European FTSEurofirst 300 .FTEU3 index was down 0.7 percent at 1,011.34 points.

Sentiment was knocked after banking sources said China had implemented its latest rise in bank reserve ratios to curb excessive lending.

"Since China has started its banking proposals ... this has generally been seen as a concern," said Justin Urquhart Stewart, director at Seven Investment Management.

"How do you let the air out of balloon easily, the answer is with difficulty ... there is a level of Chinese uncertainty which hangs as a cloud over us."

Banks took the most points off the pan-European index. Banco Santander (SAN.MC), HSBC (HSBA.L), UniCredit (CRDI.MI) and BNP Paribas (BNPP.PA) lost 0.9 to 1.8 percent.

Commodities were under pressure as crude and metal prices retreated on concerns over weaker global demand.

Oil stocks BG Group (BG.L), BP (BP.L) and Total (TOTF.PA) lost 0.5 to 1.1 percent, while miners Anglo American (AAL.L), Antofagasta (ANTO.L), Rio Tinto (RIO.L) and Xstrata (XTA.L) fell 1.5 to 3 percent.

On the upside, German engineering conglomerate Siemens (SIEGn.DE) gained 2.2 percent after it posted first-quarter operating earnings that far exceeded expectations.

(Reporting by Joanne Frearson)

Yen up as China implements reserve hike for some banks

Date Jan 26 2010 17:18:58 Source:Reuters

TOKYO (Reuters) - The yen jumped broadly on Tuesday after China implemented a rise in some banks'' reserves ordered last week, touching off a fall in stock markets and a deeper unwinding of trades in the euro and higher-yielding currencies.


The euro fell to its lowest in nine months against the yen, the dollar dropped to a one-month low and the Australian dollar plunged more than 1 percent against the Japanese currency as selling in positions funded by the low-yielding yen snowballed.

China''s central bank has told the banks that need to raise their reserve ratios to implement that change on Tuesday, banking sources said, refocusing market attention on China''s efforts to rein in its surging economy.

It was China''s latest step to curb lending and head off inflation, something that has rattled investors around the world on worries the global economy is not ready for less stimulus.

"The mood in the market is bleak and the environment clearly seems to be shifting away from one of taking risks," said a trader for a major Japanese trading firm.

He said the yen''s rise and falls in equities were a resumption of moves toward risk reduction seen last week, that were triggered by factors such as jitters over a White House proposal to curb risk-taking by banks.

"There might be some short-covering needs, but I don''t think anyone wants to conduct fresh buying of risky assets, it''s too scary," the trader said.

The dollar fell as low as 89.53 yen before edging back to 89.75 yen, down 0.6 percent on the day, and the euro tumbled to 126.20 yen, its lowest since late May, to shed more than 1 percent on the day.

"News on China redirected the market back to fearing that China''s liquidity may decline. And the market refocused on fear that money may be withdrawn from risk-assets," said Jun Kato, senior chief analyst at Shinkin Central Bank Research Institute.

The yen had slipped broadly earlier, as market players braced for the possibility of yen-selling flows related to the launch of a new Japanese investment trust on Tuesday.

Traders who built long positions in the dollar and the euro against the yen on such expectations were later forced to trim their positions.

The Australian dollar shed 1.4 percent to 80.45 yen. Australian markets were closed for a one-day holiday. It also fell 0.8 percent to $0.8972.

The euro dropped 0.5 percent to $1.4082 and the dollar index rose 0.3 percent to 78.432 .DXY.

In a volatile day, U.S. officials said President Barack Obama would seek a three-year freeze on domestic spending in his 2011 budget.

"Reductions in fiscal spending would be positive for the dollar, since fiscal risk premiums would decline. You could also say that behind this is optimism that the U.S. economy will be OK even if spending is curbed," said Masafumi Yamamoto, chief fx strategist Japan for Barclays Capital in Tokyo.

While financial markets would welcome any attempts by the U.S. to gets its longer-term debt under control, others were concerned a spending freeze now could rob the U.S. economy of its new-found growth as its struggles to throw off recession.

This week has a series of event risks, including a U.S. GDP reading on Friday and Obama''s State of the Union address on Wednesday. The market is also waiting to hear what the Federal Reserve says at the end of its policy meeting on Wednesday.

The Bank of Japan kept interest rates unchanged at 0.1 percent as widely expected.

The central bank said it will maintain very easy monetary conditions and added that it was important to pull Japan out of deflation.

(Additional reporting by Kaori Kaneko; Editing by Joseph Radford)

Oil drops towards $74 on China banks

Date Jan 26 2010 17:17:34 Source:Reuters

SINGAPORE (Reuters) - Oil tumbled toward $74 a barrel on Tuesday, approaching one-month lows, after China enforced higher reserve ratios for selected banks, rekindling concern that tightening measures by the world''s second-largest oil consumer would restrain demand.


The Shanghai Composite Index fell more than 2 percent, after China''s central bank told the banks that needed to raise their reserve ratios to make the change on Tuesday, banking sources said.

U.S. oil fell as much as $1.12 a barrel to $74.14 and was down $1.08 at $74.19 by 0752 GMT (2:52 a.m. EST). On Friday, it touched a one-month intraday low of $74.01, retreating from a 15-month peak of $83.95 on January 11. ICE London Brent declined $1.04 to $72.65.

"I believe it will take time to be able to see any good recovery of the economy," said Ken Hasegawa, a commodity derivatives manager at brokerage Newedge in Japan.

"There is still a lot of uncertainty in the stock market," Hasegawa said. For oil prices, "it''s still possible to go down to $70."

South Korea reported weaker-than-expected growth in the fourth quarter, highlighting fears that a global recovery may be sputtering.

OPEC output

Qatar''s oil minister, Abdullah al-Attiyah, said on Tuesday he did not expect OPEC to change oil production targets at its next meeting in March if prices remained at current levels.

Adherence by the Organization of Petroleum Exporting Countries to cutbacks of 4.2 million bpd announced in 2008 has fallen to below 60 percent from above 80 percent in 2009, industry estimates show.

Crude oil inventories rose in the United States last week as imports increased and refinery activity continued to falter, a preliminary Reuters poll of analysts showed on Monday ahead of weekly inventory reports.

"From a fundamental point of view, the oil market is oversupplied," Hasegawa said. "I don''t think any supply fears will happen against the data because of high inventories. Downside is possible while upside in not."

U.S. crude stockpiles were projected to have risen by 1.7 million barrels in the week to January 22 after they posted an unexpected drawdown the week before, the poll of nine analysts showed.


The survey also showed gasoline stockpiles climbed 1.4 million barrels, even as refinery utilization rates probably declined to 78.3 percent of capacity, their lowest level outside a hurricane season in 25 years.

Industry group American Petroleum Institute will issue its weekly inventory report on Tuesday at 2130 GMT. Government data from the U.S. Energy Information Administration (EIA) will follow on Wednesday.

Distillate stocks, which include heating oil and diesel, were predicted down 1.4 million barrels, compared with a slump of 3.3 million barrels a weak earlier, as temperatures across the U.S. Northeast rebounded to unseasonably high levels.

Recent economic reports have raised doubts over the strength of the recovery in the U.S. housing and labor markets, and the Federal Reserves is not seen indicating that it will raise its benchmark rate any time soon when it meets this week.

The Federal Open Market Committee (FOMC), the Fed''s policy-setting group, will begin a two-day policy meeting on Tuesday.

Data on Monday showing a record drop in December used home sales cast doubt on the strength of a recent rebound in the housing sector.

"Participants want to see the decision of the FOMC tomorrow," Hasegawa said. Before then, oil "will be trading around this level of $75," he added.

About half of the crude oil spilled in a ship collision on Saturday on the Sabine-Neches Waterway leading to four refineries in Texas, was contained on Monday, and the key shipping waterway will likely reopen on Thursday, the U.S. Coast Guard said.

Those four refineries account for about 6.5 percent of U.S. refining capacity.

(Editing by Clarence Fernandez)

Asia shares slump on China loan curb fears

Date Jan 26 2010 17:15:43 Source:Reuters

HONG KONG (Reuters) - Asian stocks slid on Tuesday, with Taiwan suffering its worst one-day fall in six months, as fears mounted that China could impose further measures to curb soaring loan growth, potentially dampening a global recovery.

Highlighting fears that global growth may be sputtering, data showed South Korea''s fast recovering economy lost its momentum in the fourth quarter and faces more serious threats if Chinese demand slows.

Key stock indexes in Shanghai and Hong Kong both fell 2.4 percent, with the Hong Kong benchmark falling below its 200-day moving average, a key long term support level.

European stocks were set to follow Asia lower, with financial spreadbetters expecting Britain''s FTSE 100 to fall 37-44 points or as much as 0.7 percent, Germany''s DAX to slip 20-34 points or as much as 0.6 percent and France''s CAC to drop 20-34 points or as much as 0.9 percent.

The yen shed most of its earlier gains against the dollar and fell against the euro after Standard & Poor''s said it had cut its outlook on Japan''s AA long-term sovereign debt rating to negative from stable. By late afternoon dollar/yen was at 90.15 yen.

In Japan, the Nikkei average slumped 1.8 percent to a five-week closing low, as the yen''s broad rise in recent weeks battered exporters'' shares.

The S&P news came after the stock market had shut, but 10-year Japanese government bond futures slipped after the move to 139.26 while its 5-year credit default swaps widened by 3 basis points to as high as 88 bps.

Technology stocks felt the brunt of the selling in Asia in spite of strong results from iPod maker Apple Inc and an upbeat outlook unveiled by chipmaker Texas Instruments.

Tech shares have enjoyed a massive rally since early last year and signs are growing that investors are now taking some profits, fearing consumer demand for flat screen TVs and other gadgets may weaken if the global recovery stumbles.

The MSCI index of Asia Pacific stocks outside Japan fell 2 percent, with the index which tracks technology shares down over 3 percent.

Tech-heavy markets such as Taiwan and South Korea were especially hard hit by the sectoral rout and fears of ebbing Chinese demand.

Taiwan''s main index fell 3.5 percent to its lowest close since November 30, 2009, with UMC, the world''s No. 2 contract chipmaker, tumbling 5.2 percent. In Seoul, the KOSPI index fell nearly 2 percent as shares of memory chip maker Hynix slumped more than 9 percent.

Currencies which are more sensitive to global growth like the Australian dollar and the New Zealand dollar also fell after China implemented a previously ordered increase in reserve requirements for some banks.

"The market is beginning to pricing in rate hikes in the region and potential withdrawal of liquidity and accommodation," said Binay Chandgothia, chief investment officer at fund manager Principal Global Investors in Hong Kong.

"China has started taking small baby steps and so investments which were based on the low rates theme is now leaving the market now," he said.

Chandgothia added that it was likely macro hedge funds which are focused on monetary policy outlooks were selling on expectations of tightening in the region.

China implemented a planned increase in required reserves for some banks on Tuesday, sources told Reuters.

The punitive increase in the amount of reserves some banks have to set aside, which was ordered last week, came as a newspaper report said China''s efforts to curb bank lending were meeting with mixed success, fueling fears that policymakers may take more aggressive action soon to keep the economy from overheating.

No new banks have been slapped with fresh higher reserve requirement ratios, the sources said. However, unless loan growth moderates, analysts said further tightening and an eventual interest rate rise are inevitable after the long Chinese New Year holidays next month.

Moves by Chinese authorities in recent weeks to tighten liquidity and curb lending have rattled investors around the world on worries the global economy is not strong enough yet to wean it off massive government stimulus.

A planned spending freeze in the United States, where President Barack Obama is under pressure to rein in the deficit, added to worries about the global growth outlook.

"The budget freeze in the United States, along with the latest moves by China, will hurt the South Korean economy, if not cripple all the recent recovery momentum," said Park Sang-Hyun, chief economist at Hi Investment & Securities in Seeoul.

"The global economy still needs government spending to stay on the recovery path."

U.S. President Barack Obama, under pressure from deficit hawks, will seek a three-year freeze on domestic spending in his 2011 budget that would save $250 billion by 2020, administration officials said on Monday.

Financial markets are now focused on key economic indicators such as U.S. GDP due out later in the week.

"The overriding concern is still the tightening on China''s part," said John Mar, regional co-head, Asia equity sales at Daiwa Capital.

"This morning''s headlines about the loans of big banks exceeding 1.4 trillion is probably a signal to the market that the Chinese government will be still vigilant on tightening measures," said March

Oil fell below $75 a barrel on fears that global energy demand will cool if the recovery looses steam.

(Editing by Kim Coghill)

Obama to seek three-year freeze on domestic spending

Date Jan 26 2010 17:13:08 Source:Reuters

WASHINGTON (Reuters) - President Barack Obama, under pressure from deficit hawks, will seek a three-year freeze on domestic spending in his 2011 budget that would save $250 billion by 2020, administration officials said on Monday.

Obama will outline the spending hold-down in his State of the Union address on Wednesday and will spell it out in detail on February 1, when he unveils his second budget.

Obama is under fire for a record deficit and has called for a bipartisan congressional commission to consider spending cuts and tax increases to improve the country''s fiscal outlook.

Democrats are jittery after the Massachusetts election of a Republican for the Senate seat long held by the late Edward Kennedy, worried that it may be a warning sign for congressional elections in November.

That election dealt a blow to Obama''s top domestic priority, healthcare reform, and in his State of the Union address, the president is expected to focus on job creation and economic growth, which public opinion polls show to be at the top of the list of concerns for many Americans.

In proposing the spending freeze, Obama seeks to address some of those concerns, but some economists were skeptical that it would by itself have a major impact.

"We doubt it will make any visible dent in the deficit projections -- that requires spending cuts and tax raises, not just spending freezes," said Michael Katz, an economist at Forecast in Sydney.

"The news of a spending freeze, in our opinion, will have little impact on the U.S. dollar or economy in medium term."

Obama''s proposed budget savings will need congressional backing and would exclude Defense, Veterans Affairs, Homeland Security and spending on international affairs, the officials said.

"We are in the midst of fighting a war and have security needs. We''re going to fund those security needs as necessary," one of the officials told reporters, speaking on condition of anonymity.

The officials declined to detail which agencies or programs would be hit, but said the overall freeze in so-called discretionary non-security spending would not halt investment in some areas, and would be balanced by cuts elsewhere.

Adjusted for inflation, the freeze would mean effective budget cuts in those areas of spending, the officials said.

Republicans dismissed the move as window-dressing by Obama''s Democrats after an "unprecedented spending binge."

"This is like announcing you''re going on a diet after winning a pie-eating contest," said Michael Steel, spokesman for House of Representatives Republican leader John Boehner.

However, a White House official countered that discretionary non-security spending had risen sharply during the years when Republicans had controlled Congress under Obama''s predecessor, former President George W Bush.

The 2010 budget allocated $447 billion to non-security discretionary spending, or about one-eighth of the overall budget. Agencies that could feel the pinch include the Commerce, Interior, Justice and Labor departments, as well as the Environmental Protection Agency.

The United States ran a record $1.4 trillion budget deficit in fiscal year 2009.

Part of the problem, on top of a severe recession that hit government revenue, are entitlement programs like social security and Medicare, the huge public healthcare program for older Americans.

Obama wants to reduce soaring Medicare costs through an overhaul of the $2.5 trillion U.S. healthcare system, but his reforms are bogged down in Congress.

The officials said the proposed freeze would not affect entitlement programs but argued it could help set a tone of fiscal discipline.

"Imposing discipline here is one part of an overall picture and ... helping to create a new atmosphere of fiscal discipline ... can actually also feed into debates over other components of the budget," one of the officials said.

The freeze would cut the deficit by between $10 billion and $15 billion in fiscal 2011. A total of $250 billion would be wrung from the budget by 2020, they said.

But, the impact would not undermine the economy''s recovery after the most prolonged contraction in 70 years.

"From a macro-economic perspective, I don''t think there will be a huge affect in 2011," the official said.

(Reporting by Alister Bull; Editing by Anthony Boadle and Eric Walsh)