India Holds Rates, Cash Reserve Ratio Up

The Reserve Bank of India Tuesday kept its short-term rates unchanged as expected but raised the amount of cash that banks must hold in an attempt to contain the surging liquidity that has pushed overnight rates to near zero.

The Cash Reserve Ratio, the share of deposits that banks must keep with the central bank, will rise 50 basis points to 7% from Saturday. It is the third CRR hike this year. The central bank also unveiled a series of measures to more closely manage liquidity through its daily reverse repo and repo auctions in its quarterly review of monetary policy. "Recent developments in financial markets in India and potential uncertainties in global markets warrant a higher priority for managing appropriate liquidity conditions," the RBI said. Bond prices fell sharply as banks, the largest buyers of sovereign bonds, will now have less cash to buy securities. The benchmark 7.49% 2017 bond fell to INR97.45 as against INR98.20 before the policy was released at 0630 GMT. The central bank left the repo rate, or its key lending rate, unchanged at 7.75% and the reverse repo, or the borrowing rate, at 6%. It also kept the bank rate steady at 6%. Latest official data showed inflation for the week ended July 14 at 4.41%, down from a two-year high of 6.7% at the end of January. Keeping inflation within 5% in the current fiscal year will be a priority, the bank said.

Investors Eye Taiwan, Korea For Bargains

International fund managers are giving Taiwanese and Korean stocks a closer look as they hunt for bargains in an increasingly expensive Asia.

Managers bumped South Korea up to a solid overweight in July - its highest weighting in months, according to Dow Jones Newswires' monthly poll of fund houses active in the region. Similarly, they turned neutral on Taiwan after being underweight on that market for several months. "Both of these economies are very well geared into the manufacturing cycle," said Nicholas Brooks of Henderson Global Investors which has about $120 billion worth of assets under management. And now both are "benefitting from a pickup in the global industrial cycle." Taiwan's technology sector, which has lagged, is likely to attract more interest in next few quarters, Brooks said. On Tuesday, Taiwan's Ministry of Economic affairs said that June export orders increased 15.19% to US$28.70 billion from a year earlier. The rise was faster than expected and the government said orders may accelerate further in July. Further enhancing the outlook: political concerns have eased as both main political partiesselected their presidential candidates ahead of elections next year, helping clear up some political uncertainty, fund managers say. Taiwan's stock market rose 10.1% in June, becoming one of the best performing markets in the region. Despite that, prices in Taiwan are still cheap compared to other Asian markets and more growth is expected. Citigroup raised its target on the Taiwan index by 25% Friday to 12,000 from 9,550, citing the improved political situation, inflows, and earnings momentum. "After being in the underperformer category for seeming perpetuity, Taiwan catapulted itself to being one of the best performing markets," said ING's head of Asian equity investments, Bratin Sanyal. But while foreign investors are pouring into Taiwan, local investors are selling amid continued political unease. "Politics are always a bit of an issue there and with elections coming up, it could be that domestic investors are being more conservative," said Brooks. JF Asset Management, which is underweight on Taiwan because of political concerns, is nonetheless overweight on some Taiwanese technology firms. With Korea, valuations are also an important part of the story. "Despite year-to-date outperformance relative to the region, the market is still trading at about a 15% discount on a price to earnings basis, said Halbis, part of the HSBC Group. HSBC manages about $327 billion in assets globally. Korean companies are also benefitting from the global resource boom because they make a lot of the machinery involved in resource extraction as well as ships used for transport of resources. Fund flows into funds focused on Taiwan and Korea, as well as China, have been taking in most of the fresh money out of all country funds, according to Citigroup. Korea equity funds saw 11 straight weeks of net inflows, according to EPFR Global, with about $1 billion moving into the funds between early May and mid-July. Asian markets are relatively insulated from the U.S. subprime fallout, market watchers say. Companies in the region tend to have little in the way of debt, which means servicing debt won't be as much of a problem as subprime concerns pressure credit markets. There's less risk of a crash in the housing prices than in the U.S. and Europe, where cheap credit has driven housing prices to new highs. There's also more internal growth in the emerging markets. The biggest risk to the region is if subprime fallout pushes the U.S. into recession, which would put a cap on demand for exports from Asia, funds note.

Europe Still A Favorite

Flows continued into Asian funds in July, but Europe remained the favorite worldwide. Fund managers, on average, had a solid overweight weighting on Europe, compared to a slight overweight on Asia, excluding Japan. Markets in Asia excluding Japan have been trading around 14 times expected 2007 earnings, compared with Europe, which trades at about 13.2 times. Earnings growth in Asia is also lagging behind that of Europe, at 17% annually compared with 20% in Europe. Despite the figures, fund managers stay in Asia for the anticipated long-term growth. Each month, Dow Jones Newswires surveys fund managers on portfolio weighting recommendations for the succeeding months, with most looking at a 12-month horizon. This latest survey was taken over the past 10 days. The respondents for this month's survey were Aberdeen Asset Management Asia, Allianz Global Investors, Credit Agricole Asset Management, Henderson Global Investors, Halbis, ING Investment Management, JF Asset Management, New Star Global Investment Funds, Schroder Investment Management and Standard Life Investments.

IMF Rato: China Should Let Market Set Yuan's Value

China should allow the market to determine the value of its currency, giving policymakers greater scope to use interest rates to cool its economy, International Monetary Fund chief Rodrigo Rato said.

With overheating a clear risk for China, and an increase in inflation also a serious concern, the country's monetary policy needs to concentrate on keeping prices stable rather than the value of the yuan, Rato told a press conference. "We believe that right now one of the most important elements of Chinese economic policy would be to let monetary policy play a bigger role in both the problem of overheating and inflationary pressures," he said. "That requires that the currency's value move more freely in relationship to market forces." China's economy expanded 11.9% in the second quarter from a year earlier, putting it on pace for its fastest annual growth in more than a decade. Consumer price inflation rose 4.4% in June, well above the government's 3% target.

Economists Fret Over Financial Market Tribulations

Unlike some of the other recent hiccups in financial markets, the latest round of investor tumult is leaving economists a bit more apprehensive about the outlook for growth.

Forecasters say the credit-related problems that flared up in earnest this week, driving big price gains for safe harbor investments like government bonds and splattering stock prices, have some room to run before presenting a true threat to what is now a growing economy. That said, unlike the year's other worry spots, namely longstanding problems in the housing sector and in lending to low quality mortgage borrowers, the latest troubles are more deeply rooted and possess greater potency to threaten the overall course of economic events. Should problems in financial markets persist and worsen further, the Federal Reserve will likely decide it has to act by cutting rates, economists said. A seizure of credit markets and a sustained rout in stock prices could cause the Fed to both cut its current overnight target rate of 5.25%, and to pump markets with liquidity, mirroring responses to past financial crises. Such a move would not be a bailout and would be aimed at protecting economic output. It would fall well within the Fed's long-established responses to dysfunctional markets. At the same time, it would upend the long-held view the central bank would keep rates steady through the remainder of the year. For now, caution reigns among forecasters. "It's hard to draw any firm conclusions until the dust clears," said Stephen Stanley, chief economist with RBS Greenwich in Greenwich, Conn. He noted that "we've had a lot of false alarms" over the year when it comes to markets, although what's happened this week "doesn't' feel like a blip" that can be easily written off. Indeed, on Thursday the stock market suffered big losses while government bonds enjoyed one of their biggest rally in years, sending yields, which move inversely to prices, screaming down to levels last seen in the spring. Various measures of credit-related markets flashed red, amid a string of news signaling a number of high profile borrowers were running into major issues securing the funds they wanted. Friday's market developments were more sedate, although stocks remain under pressure, with Treasury securities enjoying the related benefits of unnerved investors seeking a safe place to park cash.

Time Will Tell

Reflecting their caution, economists argue the need for Fed intervention will only become clear over time. The signal won't come from the economic data that usually drive monetary policy. Indeed, even as markets face next week some of the most important economic reports they get in any given month - next week brings jobs and factory activity data - most upcoming numbers will be viewed as belonging to a time now past. Instead, the most important barometer of financial markets' health may prove to be the major stock market indexes. Rather than obscure market gauges pertaining to credit conditions or bond yields, several of the economists argued an index like the Dow Jones Industrial Average is particularly valuable. It aggregates information about financial market liquidity, and it is an important signal for the general public. "I wouldn't tie a specific level of the Dow to a Fed move," said Jonathan Basile, economist with Credit Suisse. "I think it would have to be a pretty significant move in financial markets that would really put into question the viability of and confidence in the Fed's outlook," he said. Ethan Harris, chief U.S. economist with Lehman Brothers, said thus far the type of borrowing that's been scuttled or complicated by the markets' troubles isn't that important a contributor to overall growth. But if what's happening now persists over the next several weeks, the story could change. "The main thing to worry about is confidence," Harris said. "Does the sell off in capital markets start to affect business and consumer confidence?" To know, "the stock market is the key," because it is "the most important linkage into the economy," he said. "At this stage, you have to be worried we are in the early stages of a major financial event," even as it is far from certain that is actually what's happening, Harris said. What economists have in mind are the dark days following the collapse of hedge fund leviathan Long Term Capital Markets in 1998. Its size, coupled with a series of adverse global financial developments, begat a seizure of bond markets and prompted the Fed to cut interest rates, in an ultimately successful attempt to contain the damage. No one is saying they are expecting a replay of that situation, but few saw the 1998 storm advancing, either. While Fed officials have not commented on recent days' troubles, they have by and large been upbeat about the economy and the state of financial markets in comments given over recent weeks. Matters related to subprime lending have been downplayed by Fed officials for a long time now. A speech last week by Federal Reserve Bank of Chicago President Michael Moskow noted that markets have effectively dealt with recent problems. "A number of large hedge funds have collapsed recently," the soon-to-retire official said, adding "the financial markets absorbed these failures with negligible consequences for the broader economy." The Fed remarks, joined with the economic outlook, suggest policy makers will be reluctant to respond to market trouble, especially since they are still struggling with what the consider to be problematic inflationary levels.

A Silver Lining?

If the damage ultimately remains relatively contained, the markets tribulation may prove a welcome development in the view of Fed policy makers. After all, some of the Fed's leading lights, Vice Chairman Donald Kohn, New York Fed President Timothy Geithner, along with Moskow, have for some time expressed puzzlement that markets had been priced for such a low level of risk. "On one level, the Fed is probably not at all upset at what they are seeing" given their apprehension about risk levels, Stanley said. "As long as this (sell off) is rational and orderly, I think the Fed is happy," he said. Whether things stay that way remains to be seen, and is the key to what the Fed's next step is.

U.S. Treasury Secretary Visits China

U.S. Treasury Secretary Henry Paulson Visits China Amid Rising Congressional Frustration.

For months, U.S. lawmakers have warned Treasury Secretary Henry Paulson that patience was wearing thin as his economic dialogue with China failed to produce breakthroughs on currency and other disputes.

Now, as he meets this week with Chinese leaders, Paulson faces new pressure in Congress, where legislators have proposed measures that would punish Beijing for manipulating its currency.

"The problem is, there is very little they can do in the immediate future that will make Congress happy," said Andy Rothman, a China strategist for investment bank CLSA.

Paulson is due to hold talks with President Hu Jintao and other officials on the "strategic economic dialogue" launched by the two governments last year to deal with tensions over China's swollen trade surplus and other issues. The secretary also is to meet with Vice Premier Wu Yi, who leads the Chinese side of the dialogue.

But Paulson's real target audience is as much Congress as Beijing.

"Paulson is going to be hoping to come back from the current trip with private whisperings and confidences that he can share with members of Congress so as to discourage drastic action," said Sherman Katz, a former trade lawyer and researcher at the Carnegie Endowment for International Peace in Washington.

Paulson has appealed for patience, saying the dialogue launched last December needs time to produce results on complaints about China's currency controls, product piracy, barriers to foreign entry into its financial industries and other issues.

Beijing has begun easing currency controls and taken steps to rein in its surging trade surplus. But Washington and other governments that have seen trade deficits with China soar want faster action.

Critics say Beijing keeps its currency, the yuan, undervalued by up to 40 percent, giving its exporters an unfair price advantage and adding to China's swollen trade surplus.

Last week, over Paulson's objections, a Senate panel approved a bill to require Treasury to identify and punish currency manipulators. Another measure proposed earlier would tighten the legal definition of currency manipulation to make China more likely to be cited.

Beijing says the yuan will eventually be allowed to trade freely on world markets. But it says abrupt changes would hurt its underdeveloped banking industry and cause financial turmoil.

China revalued the yuan by 2.1 percent against the U.S. dollar in July 2005 and has allowed it to rise by about 7.2 percent since then. Last week, it was trading at about 7.6 yuan to $1. Financial analysts expect Beijing to let the yuan rise by an average of about 5 percent annually over the next few years -- far less than critics want.

On Sunday, Paulson began his latest China visit with a stop at Qinghai Lake in the country's far west to highlight environmental challenges amid the country's breakneck growth.

Paulson's stature as a former Goldman Sachs chief executive and personal lobbying of Congress have bought him time, analysts say. But China's supercharged economic performance is fueling arguments that it can afford to move faster.

The economy expanded by 11.9 percent last quarter -- the fastest quarterly growth in 12 years -- and the trade surplus jumped by 85 percent in June to $26.9 billion.

Beijing's standing with critics of its trade record has been hurt by its disastrous string of safety complaints about products ranging from toxic toothpaste to faulty tires, Katz said.

"It contributes to a sense that this may be a government that has a lot to learn about acting as a responsible citizen in the global economy," he said.

The last formal meeting of the economic dialogue in May ended with no progress on currency or other major issues.

Since then, China has announced measures to rein in surging export growth. It repealed rebates of value-added taxes on more than 2,000 types of goods ranging from cement to plastic products in June. Last week, the government said it would limit the growth of its "processing trade," a big but low-profit segment of the economy that imports components and exports finished goods.

"It will have a small impact but not enough that members of Congress will say they are satisfied," Rothman said.

American companies are split over how to treat China. Small and midsize manufacturers are demanding an end to what they say are unfair advantages for their Chinese competitors. But companies that do business with China are urging caution, warning against any steps that might disrupt growing commercial ties.

American exports to China soared by 240 percent in 2000-06, far ahead of the 10 percent to 40 percent rate for other key markets, according to the U.S.-China Business Council. The group represents some 250 companies, including major American exporters.

"Companies feel like, we want to make sure that we don't do anything legislatively that will do more harm than good," said John Frisbie, the council's president.

Weekend's Business Lifestyle: Flamingo Hotel and Casino Las Vegas

Bugsy Siegel's desert dream, The Flamingo, has anchored the Las Vegas Strip since they started rolling dice in 1946. This self-contained casino and resort offers everything an adventurous vacationer could want; including a Wildlife Habitat and a 15-acre Caribbean-style water playground.

Set on the famous four corners of Las Vegas Boulevard and Flamingo Road, this hotel combines heart-pounding Las Vegas excitement with hospitality and service that's second to none.

Gaming / Casino

Bursting with brand-new games and slots, our freshly remodeled, bright and inviting 77,000-square-foot Caribbean-style casino offers ways to win beyond your wildest dreams. All your traditional favorites are here! From the latest games to the best casino classics, there's no shortage of action on the Flamingo's vibrant floor.

Entertainment

From the beginning, Flamingo Las Vegas has been hosting show business legends. Entertainers like Jerry Lewis, Nat "King" Cole, Dean Martin, Richard Pryor and Mr. Las Vegas himself, Wayne Newton, have all graced our stage. Today this tradition continues. From superstar Toni Braxton to George Wallace, guests of Flamingo Las Vegas always have a full house when it comes to entertainment.

Dining

Satisfy your taste for the exotic. Or settle in for a relaxing meal in a casual setting. Flamingo Las Vegas offers a range of delightful culinary experiences, from entertaining and romantic to extraordinary.

Our outstanding signature restaurants will please your palate and satisfy your craving for delicious food; from authentic Japanese dishes and an exceptional sushi bar at Hamada of Japan to modern Italian cuisine featuring the freshest ingredients and homemade pasta at Ventuno. Or savor the finest aged beef and seafood at our classic steakhouse, Steakhouse46.

If you're looking for casual dining, the Flamingo has something for everyone at our buffets, grills and coffee shops.

We invite you to enjoy the most memorable dining adventure in Las Vegas.

Spa & Fitness Centre

The Spa at the Flamingo accommodates those who want a good workout as well as those who seek a relaxing reward. The workout room features the most advanced exercise machines available today. Free weights and resistance machines. Treadmills and free climbers. It's all available in this comfortable environment.

After your workout (or instead of it!) we invite you to enjoy our Men's and Women's Spas, equipped with multi-temperature whirlpool tubs, wet and dry saunas, Eucalyptus steam rooms, showers and lockers. Because our spa is staffed with the most attentive servers, you'll always have an endless supply of fresh towels, robes and refreshments. While inside, treat yourself to a professional massage or relax with an aroma therapy session. Whichever service you choose, our spa provides a soothing retreat after a day in the desert sun.

Cascata Golf

Guests of Harrah’s six Las Vegas resorts can enjoy top-rated golf at two of the nation’s most beautiful golf courses - Cascata Golf and Rio Secco.

Cascata Golf, located just 30 minutes from the Las Vegas Strip, was created exclusively for customers of Harrah’s six resorts in Las Vegas. Mountains, breathtaking waterfalls, rivers and incredible views combine with challenging holes and felt-like greens to produce a golfing experience unparalleled anywhere else in the world. No detail has been overlooked, from an opulent clubhouse and pro shop to the personal and attentive service extended to every guest of Cascata.

Nightlife

Even Bugsy Siegel liked to take a break from the action from time to time, and the bars of the Flamingo proudly honor this tradition. From a laid-back lounge that looks out to our Wildlife Habitat to a bar where gamers gather in the middle of the excitement on the casino floor, the Flamingo Las Vegas is packed with refreshing options.

You won't miss a beat in Bugsy's Bar, open 24 hours and located in the center of the casino at the heart of the action.

The Garden Bar is the perfect rendezvous for afternoon and evening cocktails and views of the Flamingo lagoon and waterfalls.

The Island Bar is located on the promenade and offers tropical drinks. Plus, the Island Bar's indoor and outdoor seating looks out over the tranquil Flamingo Gardens.

Pool

Our four pools are housed within a 15-acre tropical retreat, where our waters are accented by brightly colored flowers and countless shady palms. From Bugsy's traditional oval shaped pool to a sprawling lagoon with grottos, we have a pool for every personality. And live gaming action will come back in mid April at the Flamingo Pool! You don't have to leave the fun and sun to try "lady luck." It's right here!

The Lagoon Pool deck has waterfalls and seasonal waterslides that provide fun for guests of all ages, while our two hot tubs deliver relaxation in a hurry.

Weekend's Business Lifestyle: Phuket Country Club

PHUKET COUNTRY CLUB established in 1989, is the first and one of the finest golf courses built in Phuket, over a reclaimed tin mine site. The stunning beauty and elegance of the course, together with the typical Thai charm and hospitality will make your golfing here a joyful & memorable occasion.

The Club has hosted LADIES KOSAIDO THAILAND OPEN 1992, PRINCE BERNARD CUP, THAI SENIOR PGA CHALLENGE 2002, PHUKET THAILAND LADIES MASTERS 2005 & PHUKET ASIAN SENIOR MASTERS 2006.

PCC is also very conveniently located - 10 minutes out of Phuket town and 15 minutes to Patong Beach.

OLD COURSE provides a strenuous resort 18-hole, 6483 yards, par 72 golf game.

Hole #10, 557 yards par 5, is one of the most unusual hole you will find anywhere; a dog-leg right that snakes around an enormous lake and reachable in one!

To achieve it, you must aim 90 degree right of the fairway - and be able to carry you drive 240 yards over the water. See layout hole #10 diagram. The course is fun and friendly. Set in a valley, the fairways meandering through the hills and limestone cliffs.

You will traverse 3 distinct environments:- six holes in undulating hills, six holes on the level and six holes through landscape forest.

It is generally not humiliating or intimidating (depending on your temperament, of course!). Wayward shots are not too severely penalized; just stay away from the 'vertical-cliff' wall bunkers guarding strategic Greens.

Although high handicappers have the best round of their lives and keep coming back for more, the low handicap golfers still find the course quite a challenge.

COUNTRY CLUB COURSE is a challenging 3575 yards (championship tee) par 37, 9-hole course, particularly suitable for the low handicap golfer. The picturesque beauty of the scenery and layout, somewhat softens the difficulty of the course. Watch out for those wayward shots; all are penalized either landing in water or out-of-bounds. However, with five tee-off boxes at each hole, you have a choice of making it less of an ordeal.

The distinct feature is water- water comes into play 90% of the time. Black swans glide amongst the water lilies taking very little heed of your slices! (Hint: high handicap golfers, remember to purchase a few dozen second hand balls from the Pro Shop before tee off! You just might need a few!)

US Stock Markets Fall On Credit And Energy Concerns

Stocks rallied from their session lows, but still had their worst showing since February, as anxiety continued over the credit markets, housing and rising energy prices. Akamai Technologies and Exxon Mobil recorded notable losses.

The Dow Jones Industrial Average fell 311.50 points, or 2.3%, to 13473.57, in its largest one-day point and percentage decline since Feb. 27. The index was down as much as 449.77 points, or 3.3%, earlier Thursday and has lost 526.84 points, or 3.8%, from its record closing high just above 14000 on July 19. The Nasdaq Composite Index dropped 48.83 points, or 1.8%, to 2599.34, and is off 48.5% from its all-time high of 5048.62, hit on March 10, 2000. Year-to-date, it is up 7.6%. The Standard & Poor's 500 fell 35.43 points, or 2.3%, to 1482.66 - its lowest close since April 30 and largest one-day point and percentage decline since Feb. 27. The index is off 69.92 points, or 4.5%, from its record close of 1553.08 on July 19, though year-to-date, it is up 4.6%. The New York Stock Exchange Composite Index lost 275.93 points, or 2.8%, to 9654.43. Treasury yields fell as money poured in from the stock market. At 4 p.m. EDT, the 10-year note was at 4.79%. "When you have people trying to exit through the same door, this is the situation that you get," said Art Hogan, chief market strategist at Jefferies & Co. He said the selloff was rooted in macro themes like the worries raised by spreading credit issues and the market's reawakening to the price of oil. Nymex crude oil for September delivery settled down 93 cents, or 1.2%, at $74.95 per barrel after trading above $77 earlier in the session. "I think you are seeing negative factors compounding on each other, and managers are trying to deal with anticipated future risks in the market," said Scott Fullman, director of investment strategy at I.A. Englander & Co. "They are trying to reallocate their holdings - (trying) to determine where the risk factors are in the market for the next couple of months." Akamai (Nasdaq) fell $8.91, or 19%, to $38.27 after reporting second-quarter results in line with the its guidance, but its outlook failed to impress Wall Street analysts who say concerns remain about gross margins. Dow Industrial Exxon Mobil fell 4.56, or 4.9%, to 88.23 - the second largest percentage decliner on the index. Second-quarter net income fell slightly to $10.26 billion, or $1.83 a share, from $10.36 billion, or $1.72 a share, a year earlier. Revenue fell to $98.3 billion from $99.03 billion. Apple (Nasdaq) rose 8.74, or 6.4%, to 146, hitting an all-time high, and was the biggest percentage gainer on the S&P 500 after the company reported fiscal third-quarter earnings rose more than 73%. The computer maker said record sales of iPods and Macs helped fuel profit growth and a 24% rise in revenue. Apple also said it sold 270,000 iPhones in the period and reiterated its goal of selling 10 million of the cellphones by the end of next year.

Tremendous Downside Pressure

Volume on the New York Stock Exchange was 2.778 billion shares. Down volume dwarfed up volume by 2.6 billion to 167.6 million, and stocks that fell in value massively outweighed those that rose, 3,042 to 314. "That is tremendous downside pressure in the marketplace," said Fullman. "These are not the type of ratios you see on a normal day." Ford Motor rose 12 cents, or 1.5%, to 8.09 after reporting its first profit in two years as North American losses substantially narrowed amid its ongoing restructuring. The auto maker also said it's "exploring in greater detail" the potential sale of the combined Jaguar and Land Rover business with parties who have expressed interest.

Financial Stocks Among Those That Fell

Dow Chemical fell 2.22, or 4.9%, to 43.45 despite second-quarter earnings rising 1.6%, as volume increases in the Asia Pacific region, Latin America and Europe offset weakness in the North American housing and automotive sectors. Baidu.com (Nasdaq) leapt 25.83, or 14%, to 209.06. Second-quarter net income more than doubled at the Chinese Internet search provider due to an increase in online marketing customers. The company also forecast strong revenue growth for the current quarter. Hanesbrands rose 3.42, or 13%, to 30.07, setting an all-time high. Second-quarter earnings fell 57% but beat Wall Street analyst expectations despite flat sales, with cost-cutting driving most of the upside, says Morgan Stanley. Financial stocks dropped Thursday, on continued fears over tightening credit and a weak housing market. Dow Industrial JPMorgan Chase fell 1.19, or 2.6%, to 44.08, reaching its lowest level since last August. Merrill Lynch lost 2.22, or 2.8%, to 75.88. Lehman Brothers fell 3.16, or 4.7%, to 64.50, and Citigroup dropped 1.40, or 2.8%, to 47.81, setting a 52-week low. Wells Fargo fell 92 cents, or 2.7%, to 33.65. The home lender will stop making subprime mortgages through brokers, in a move aimed at reducing late payments and defaults that have been plaguing the entire mortgage industry. E*Trade Financial fell 1.41, or 6.9%, to 19.05, its lowest level since Nov. 16, 2005, after reporting second-quarter earnings rose from a year before as the discount broker continued to add customer accounts. However, E*Trade was hit by legal and regulatory costs. Goodyear Tire & Rubber rose 2.87, or 9%, to 29.18 after reporting a jump in second-quarter earnings as its focused on high-margin products, cost cuts and sales in emerging markets. Kraft Foods fell 1.40, or 4%, to 33.44. Berkshire Hathaway, run by billionaire Warren Buffett, has acquired a small stake in the company, joining veteran Wall Street raiders Carl Icahn and Nelson Peltz, The Wall Street Journal reported. Kraft has been in a confrontation with activist investors who want faster change, though it is unclear whether Buffett sides with the activists or with the management. Level 3 Communications (Nasdaq) fell 69 cents, or 12%, to 5.03 after reporting a second-quarter loss of $202 million, or 13 cents a share, compared with a loss of $201 million, or 23 cents a share, a year ago. The Internet company's operating loss for the period widened to $79 million from $18 million. Cummins rose 6.34, or 5.8%, to 116.15 after reporting second-quarter earnings per share of $2.13, well above Wall Street projections of $1.59. The engine maker increased its 2007 earnings view as sales rose to $3.34 billion from $2.84 billion, boosted by growth in its non-heavy-duty truck engines market. Sonus Networks fell 1.37, or 17%, to 6.91. The maker of Internet phone equipment said shifts in capital spending patterns of some operators will damp its revenue growth. Owens-Illinois rose 5.01, or 14%, to 40.04, reaching its highest level since Aug. 20, 1998, as second-quarter net income jumped to $149.7 million, or 89 cents a share, from $42.6 million, or 24 cents a share, a year earlier on glass factory operating performance and existing contractual sales price adjustments. All 15 components of the Dow Jones Utility Average fell, with Public Service Enterprise leading the way down 4.41, or 5.1%, to 82.52. Selling also took hold of the Dow Jones Transportation Average, which saw 19 of its 20 components fall Thursday. Shares of American Airlines parent AMR marked the biggest drop on a percentage basis, with a decline of 1.74, or 6.2%, to 26.38.

Subprime Fallout May Hit Asia Buyouts As Credit Cost Rises

While the U.S. subprime fallout is expected to have limited impact on Asian hedge funds, which mostly focus on equities, the region is vulnerable in other ways.

Banks and insurance companies, particularly in Japan, have significant holdings of collaterized debt obligations, or CDOs, which are now getting hit by subprime woes amid a liquidity crunch for structured credit. Meanwhile, the rising cost of debt could put a dent in leveraged buyouts by private equity. The subprime woes are "drying up investments into debt...which in turn could continue to affect funding for takeovers," said Shane Oliver, strategist at AMP Capital in Australia. "You're seeing this a bit in Australia with firms finding it a little harder to find finance than they used to have access to," he added. The diminishing private equity interest in Australian retailer Coles Group, which is up for sale to Perth-based conglomerate Wesfarmers Ltd., is an example of how tightening credit is affecting deals. Several private equity players, including TPG Capital L.P. and Wesfarmers' original bid partner Permira Advisers, abandoned the sale process, citing fears of a global credit squeeze. Private equity firms have gotten a huge lift in recent years by the low costs of debt worldwide. But with central banks trying to keep a lid on inflation, long-term interest rates are rising. Credit spreads are rising as well in the U.S. after two hedge funds run by Bear Stearns were forced to sell off about $4 billion of assets to meet margin calls, due to bets on the wrong side of subprime mortgages. "The extent to which borrowing costs have increased so far hasn't hit hard in Asia," said James Dubow, senior director at Alvarez & Marsal Asia, a turnaround consulting firm that works with many private equity firms. "The cost of debt in Asia is going up, but it's getting hit less hard than other places," he said. "There aren't that many things to invest in debt-wide in Asia. If anything comes in with a good business story," it gets snapped right up, he said. Moreover, there has been a widening of the spread between bond and bank debt, so firms in Asia always have the option of taking on bank debt if bond debt is not available, he noted. But it's unclear how long that can last. "The bigger question is whether there are (private equity) funds that are going to have issues because of the amount of leverage they have internally," Dubow said.

Effects Felt In More Sophisticated Financial Centers

Slowing in the leveraged buyout market could eventually hurt Asian share markets. "Lots of support for equity markets globally has come from the private equity world," said Peter Douglas of GFIA, a Singapore-based hedge fund consultant and head of the Singapore chapter of the Alternative Investment Management Association. If it becomes more difficult for private equity to go ahead "there goes one leg of support for equity markets." So far, the effects of a rise in defaults in the U.S. subprime mortgage market have been felt particularly in sophisticated financial centers, such as Australia, where a number of funds have focused on structured credit investments that until this year had offered solid returns. Australia's Absolute Capital Ltd. suspended withdrawals from two of its funds Wednesday due to a lack of liquidity in the local markets. The move came soon after another Australian fund manager, Basis Capital, also suspended withdrawals from two of its funds and follows a string of similar measures taken by funds globally as the U.S. subprime woes ripple out to credit markets, widening yield spreads on riskier debt and reducing the value of debt investments. "It's not that there is huge Australian appetite for CDOs, but it's more open and sophisticated" than the rest of Asia, said Douglas. That said, "my instinct is that two datapoints don't make a trend." Hedge fund managers say Asia, where some markets - China, for instance - even forbid short-selling, has relatively little exposure to the U.S. subprime blowup compared to the U.S. and Europe. The majority of funds in the region are focused purely on equities with anywhere from 51% to 75% of them being equity long-short funds, according to industry watchers. "Even when they are credit focused, they are Asian focused, said Christophe Lee, chairman of the Hong Kong chapter of the Alternative Investment Management Association. According to Eurekahedge, about 4% of Asian hedge funds focus on fixed income or credit. Multi-strategy funds, which make up about 14% of hedge funds in the region, could also have some exposure, though it's hard to say how many multi-strategy hedge funds have exposure. Hedge funds, unlike mutual funds, are not required by regulators to disclose their holdings publicly.

Japan Could Be Impacted

Still, as investors start looking at the lower-ranking portions of other non-mortgage-linked collateralized debt obligations, some of Asia's more sophisticated markets such as Japan could see some impact. With CDOs showing both a "fairly sensible yield" and investment grade ratings, the holdings "would have been irresistible" to Japanese banks and insurance companies, said Douglas. Japanese casualty insurers' shares have been dropping on concerns over their CDO holdings as many life and non-life insurers invest in securitized debt, traders say. Japan's casualty insurer industry is large, with combined annual revenue totaling around Y7 trillion, and foreign investors have big stakes in the major players. Although Japanese insurers say their exposure to U.S. subprime debt is small, the extent of their exposure to related products remains unclear, keeping investors on edge. Last week, Japanese investment banking giant, Nomura, wrote down $260 million of its exposure to U.S. subprime loans and jitters over the firm's involvement in that market helped push its shares to their lowest level in eight months. Nomura Holdings Inc. (8604.TO), said Wednesday it posted losses in residential mortgage-backed securities (RMBS) of Y31.2 billion for the April to June quarter after booking losses of Y41.4 billion in the previous January to March quarter and is considering to exit the RMBS business. Many of the subprime loans have been sold to investors as RMBS. Major Japanese banks are also thought to hold a large amount of securities backed by U.S. subprime mortgages. A recent UBS report said as of June 30, Japan's nine largest banks held slightly more than Y1 trillion in subprime loans-related securities. Banks with exposure include Mitsubishi UFJ Financial Group Inc. (8306.TO), with an estimated Y100 billion in subprime loans-related securities; Mizuho Financial Group Inc. (8411.TO) with an estimated Y50 billion; Sumitomo Mitsui Financial Group Inc. (8316.TO); Sumitomo Trust & Banking (8403.TO) and Shinsei Bank Ltd. (8303.TO).

EU Debates Response To Power Of Sovereign Funds

European policy makers are beginning to wrestle with how to guard against unwanted attempts by foreign state-run investors to buy stakes in European companies without inviting accusations of protectionism.

Sovereign wealth funds have been active buyers of stakes in European companies for many years, but on a relatively small scale. But with their coffers boosted by oil revenues and large trade surpluses, these funds are now estimated to control between $2 trillion and $2.5 trillion, and their behavior is coming under closer scrutiny. So far, European governments have yet to agree on how to respond. They have identified three options: do nothing and leave it to the market; make case-by-case decisions on a national basis using "golden shares" in strategically important companies; or establish a central, European Union body that would review such takeovers based on an agreed set of guidelines. Each government is likely to voice its own preferences during the next several regular meetings of E.U. economic and finance minister in Brussels. The U.K. government has long been an advocate of relatively free flows of investment across national boundaries and avoided interfering in takeovers. Institutions owned by foreign governments have this month taken or attempted to take large stakes in one of the U.K.'s largest banks - Barclays Bank - and one of its largest retailers - Sainsburys. U.K. Chancellor of the Exchequer Alistair Darling Wednesday reaffirmed that position in his first speech since starting the job late last month. "I think it would be wrong for any government to say in respect of any investment proposal ..... 'you can't do this'," he said. "What I do say is that for countries across the world who want to take advantage of our open markets, they have to realize in the long-term this is not sustainable unless this is a two-way process," Darling said. Darling indicated his government won't support efforts to negotiate common rules that would govern investment flows in the same way that the World Trade Organization regulates trade. "I think if you did that you'd get very quickly to where we've gotten to with the world trade talks which are stalled at the moment," he said.

'Golden Shares' To Protect Against Unwanted Takeovers

Speaking Tuesday, Italian Minister for European Affairs Emma Bonino showed little enthusiasm for new measures to regulate foreign investment, saying that the idea that governments should hold 'golden shares' in strategic companies that would allow them to veto takeovers was "not useful - and also very difficult to implement." She added that she was indifferent to the national origin of a buyer for troubled state-owned airline Alitalia, saying anyone is "welcome to buy it if they manage to make it work." The idea of using "golden shares" to protect against unwanted takeovers of companies deemed strategically important was proposed Sunday by European Commissioner for Trade Peter Mandelson. Among other proponents for action, German Chancellor Angela Merkel has proposed that the E.U. establish an equivalent to the U.S.'s interagency Committee on Foreign Investment, which reviews the national-security aspects of overseas deals. And French President Nicolas Sarkozy has made it clear that the protection of a broadly defined national interest, rather than a commitment to free competition, will drive his government's attitudes to a range of international economic policy issues, including takeovers. Central bankers, who are not involved in domestic politics, have become increasingly concerned about feeding opposition to globalization. "The switch of reserve rich countries from lenders to owners of financial or real assets is also likely to lead to political tensions and pressures for protectionism," Bank of England Deputy Governor John Gieve said Tuesday. European Central Bank President Jean-Claude Trichet said in an interview published Wednesday in Germany's Die Zeit, said sovereign wealth funds "have to be studied and carefully observed." Both the International Monetary Fund and the Organization for Economic Cooperation and Development have been asked by their member states to review the operations of sovereign wealth funds. The IMF report may come as early as October.

Fed Geithner: 'US Fiscal Position Is Unsustainable'

Federal Reserve Bank of New York President Timothy Geithner again warned the U.S. needs to get its financial house in order to remain competitive in the global economy.

In a speech Wednesday in Washington, the Fed's point man with financial markets said "the United States faces very substantial gaps between our fiscal resources and our expenditure commitments." He warned "these gaps remain substantial and the U.S. fiscal position is unsustainable," adding that a response must be implemented "if we are to preserve confidence in our market and our long-term economic prospects." Geithner, who is the vice-chairman and a permanent voting member of the interest-rate-setting Federal Open Market Committee, refrained from commenting on monetary policy in his prepared remarks, although he did say "one of the most important roles for public policy is the maintenance of a stable macroeconomic framework that enables firms to make long-term investment decisions." The official dedicated much of his speech to the importance of the U.S. increasing its integration with the global economy. But he also noted there are downsides to doing so, and that efforts must be made to smooth the transition, lest the public lose support for the endeavor. Calling the current state of the economy "a remarkably favorable picture, he explained that "the American economy and American business are performing well" and "corporate balance sheets are healthy." But Geithner added "there is growing concern about the long-term challenges for the U.S. economy and their implications for future prosperity." At the same time, globalization-related pressures "have led many to suggest that we should become less open as a country," and many want to slow integration and offer more protection for domestic industries, Geithner said. "Moving in this direction would, I believe, be a fundamental mistake," the policy maker said, explaining "more than ever before, our fortunes are linked to those of the global economy." Geithner said "if anything, we need to become more open, not less; more open to trade in goods and services, but also to investment, to people and to ideas." The official said there are steps the U.S. can take to increase the public's confidence in allowing a more globally integrated economy. One concerns health insurance. Given a need for greater flexibility in employment, "we probably need to move to a system in which a change in employer or profession does not carry the substantial uncertainty it does today about how one will provide for one's health and that of one's family," Geithner said. He added, "we need to be more attentive to the risk that specific aspects of our system, regulations or other constraints, create a greater disincentive to locate a financial business here, or to invest here, or to raise capital here, than would have been the case five or 10 years ago." Meanwhile, Geithner said "we need to get used to a world in which we will see, in many areas, less willingness to adopt a U.S. model or to defer to a U.S. view on the appropriate global standard."

Strong Korea GDP Data Boost Chance Of Rate Hike Soon

South Korea's economy expanded at its fastest rate for more than a year in the second quarter, surpassing both market expectations and central bank estimates, the Bank of Korea said.

Economists said the strong data will keep the central bank on high alert for signs of excess liquidity and high inflation and increase the chances of another hike in interest rates sooner rather than later. The central bank's preliminary second-quarter report showed gross domestic product increased a seasonally-adjusted 1.7% versus the January-to-March quarter, above the market's forecast for a 1.3% increase and the central bank's previous forecast - unveiled earlier this month - for a 1.4% rise. In the first quarter, growth was up 0.9%. On the year, GDP grew 4.9, again outpacing economists' average estimate for a 4.5% increase, and the on-year growth rate of 4.0% posted in the first quarter. An official at the Bank of Korea's Economic Statistics Department said annualized growth was around 6.8%. The central bank attributed the strong second-quarter growth to robust exports and a solid recovery in domestic demand, particularly in capital investment and domestic consumption. Following the report, a senior central bank official said the economy will sustain its modest recovery going forward, but said growth in the third quarter likely won't be as strong as it was in the second quarter. "The (quarterly) growth won't be as high as the 1.7% growth (recorded in the second quarter)," said Lee Kwang-June, a director-general at the central bank's Economic Statistics Department. Korean financial markets hardly responded to the data with market watchers widely expecting strong growth numbers and already betting on an additional rate hike this year. "The market has already priced in the strong economy recovery of late," said Daewoo Securities' analyst Yoon Yeo-Sam. "Players will still trade cautiously until the next monetary policy meeting, where they will find clear answers about the additional BOK rate hike," he said.

Central Bank Expected To Retain Hawkish Bias

The central bank hiked its call-rate target to 4.75% from 4.50% earlier this month, the first increase since August 2006, taking the call rate to its highest level in six years. It will next review its monetary policy on 9 August. At 0256 GMT, the dollar was trading at KRW913.50, lower than Tuesday's close of KRW914.10. The benchmark five-year bond yield was down 2 basis points at 5.45%, unsettled by losses on the local stock market. Many economists and market observers expect the central bank to retain its hawkish bias throughout the rest of the year, forecasting the call rate target will be increased by 25 basis points sometime within the next three months. "Since the economy will continue to show a higher growth trend into the second half, the full-year (BOK official) target of 4.5% could be surpassed," said Park Jong-Youn, an analyst at Woori Investment & Securities. Park, who expects another monetary tightening in September or October, said: "The second quarter economic growth was a surprise, and it is likely to strengthen the excuse for a (further) monetary tightening." In the second quarter, exports rose a seasonally-adjusted 5.2% versus the previous three months, faster than the 2.7% quarterly rise in the first quarter. On year, exports were up 10.7%. Capital investment, meanwhile, rose 3.5% on the quarter, compared with a 4.4% on-quarter increase in the first quarter, the central bank said. The index gained 12.1% on the year, up from a 10.8% increase in the preceding quarter. However, the construction sector remained sluggish, falling 1.4% in the second quarter from a quarterly rise of 0.8% in January through March. On-year growth was also lower at 3.2%. Private consumption was up 0.8% on the quarter, slightly slower than the 1.5% on-quarter growth printed in the January-March period, but on the year, it gained 4.1%, the same rate as in the first quarter. The Bank of Korea will issue revised second-quarter GDP numbers in early September.

MAS Sees Tame Inflation, Faster Growth

Singapore's central bank expects the economy to weather external risks in coming months, with healthy growth and minimal inflation likely to extend into 2008.

The Monetary Authority of Singapore said Wednesday it will keep a close watch on the U.S. economy and geopolitical tensions, but the outlook for robust growth and low inflation suggests it will stick to its current monetary policy in the months ahead. "If external conditions remain positive, we expect the momentum that has been generated so far to continue," Heng Swee Keat, managing director at the MAS, told a news conference announcing the central bank's annual report. Economic growth may nudge above the official forecast, but the city-state's stable growth trajectory highlights the potential for small, open economies with managed exchange-rate regimes to participate in booming global growth while controlling import-price inflation. The central bank kept its forecast for economic expansion between 5% and 7% in 2007, but Heng's remarks suggest growth may top the official target and keep pace with last year's 7.9% growth. Economists say Prime Minister Lee Hsien Loong may raise the official forecast Aug. 8 in his National Day speech - a venue for forecast revisions in the past. Heng reiterated the central bank's target for inflation between 0.5% and 1.5% in 2007 but said the final figure may fall in the "upper half" of the range. In 2008, inflation is expected to remain subdued, he said, likely within a range of 1%-2%. His remarks bolster expectations that the MAS will stick to its current policy at it October review and through the end of the year, said HSBC economist Prakriti Sofat. "I really don't think they're going to change policy," she said. "With the current outlook there's no reason to try to suppress import-price inflation." The central bank uses the exchange rate rather than interest rates as its chief policy tool because Singapore's trade flows dwarf the island's tiny domestic economy. Since April 2004 the MAS has advocated a modest and gradual appreciation of the Singapore dollar in trade-weighted terms. Citigroup economist Chua Hak Bin, also predicting the MAS will keep its policy stance in October, said much of the inflation in 2008 would be linked to the one-time impact from a recent increase in Singapore's sales tax. In its annual report, the central bank said the July 1 rise in the goods and services tax to 7% from 5% would add 0.4 to 0.6 percentage point to the inflation rate in both 2007 and 2008. The forecasts for mild inflation come despite a surge in the island-state's property market. Heng said the rising housing costs haven't filtered through to consumer prices, but the central bank will keep close watch for a possible spillover, which could affect Singapore's growing banking sector. Although broadly upbeat, the MAS addressed external risks that the open economy can't safely ignore. Heng cautioned that "a more severe unraveling" of the U.S. subprime-mortgage market and geopolitical tensions could prompt higher risk aversion across world markets. "These risks concern central bankers and regulators," he said. "If they materialize, the Singapore economy and domestic financial markets will not be immune from the spillover effects of such developments." The government's advance estimate indicates the economy grew 7.3% in the first half from the same period last year, while consumer prices rose 0.8%. Heng said Singapore's electronics sector, which foundered in early 2007, will post modest growth "in the single digits" in the second half. In the first five months of the year, electronics manufacturing grew just 3.2% from a year earlier.

China's Coal Use Soaring

China Says Coal Use Surging Despite Environmental Worries

Coal consumption by China's power companies soared nearly 18 percent in the first half of this year from a year ago, a state news agency said Wednesday, despite rising concern about pollution and efforts to promote cleaner energy sources.

Chinese utilities burned a total of 591 million tons of coal in the January-June period, the Xinhua News Agency said, citing figures from the official power industry association, the China Electricity Council.

China's coal consumption has soared in recent years to meet surging power demand amid an economic boom. The country is building dozens of new coal-fired power plants every year, despite government warnings about environmental damage from pollution.

The government has been pushing power companies to switch to cleaner power sources such as natural gas. But demand is rising so fast that China is expected to rely on its dirty, but abundant, coal reserves for most of its power in coming years.

EU: China To File Report On Product-Safety Steps

The European Union's top product safety official said Tuesday China has agreed to submit to the E.U. Commission by October a report on actions taken against Chinese makers of unsafe goods.

Meglena Kuneva, the E.U.'s commissioner for consumer affairs, said China also reaffirmed its commitment to submit such reports quarterly, a schedule that the E.U. and China had previously agreed upon. "The political context, in which this (October) report is put, is very important, because in November we expect a high-level meeting between European Commission President Jose Manuel Barroso and China's Premier (Wen Jiabao)," she said during a press conference in Beijing. She said getting a commitment from China to make regular reports on actions taken against makers of unsafe goods has been one of the main results of her visit to the country. She arrived in China Sunday and leaves Thursday. Kuneva said the E.U. has only received two such reports from China, which detailed the steps taken after the E.U. notified the country about unsafe goods. She said the first report was poor, and the second was better but still not sufficient. The E.U. and China signed a memorandum of understanding in January last year to work more closely on product safety. Starting May 2006, the E.U. made information about dangerous Chinese goods available to China to help it take steps against manufacturers of unsafe goods. The information is on Rapex, the E.U.'s alert system on dangerous consumer goods. Possible Chinese steps include export bans on makers of unsafe goods, said Annukka Ojala, policy coordinator for product and service safety at the E.U.'s consumer affairs commission. Ojala said the first report for the September-November period was scarce on action taken, but the second report, for the January-early July period, included ten times the amount of action taken by Chinese authorities. Kuneva said: "I have received political commitments at the highest levels. And I will watch how these political commitments will be translated into practice." During her visit in Beijing, Kuneva has met Li Changjiang, head of the General Administration of Quality Supervision, Inspection and Quarantine, and State Administration of Industry & Commerce Minister Zhou Bohua. Her visit to China comes as concerns over the safety of Chinese exports grow, particularly in the U.S. For instance, the U.S. Consumer Product Safety Commission has issued 18 recall notices this year for more than 6.7 million pieces of jewelry designed for children and teenagers because of dangerous levels of lead, with almost all of the items made in China. In 2006, there were 10 lead-related recall notices.

Investors Eye Opportunities In Carbon Market

The growing carbon trading market is piquing the interest of private equity funds and hedge funds, which see opportunity to profit from increased demand for carbon credits next year when the Kyoto Protocol kicks into its second phase.

The nascent market has been in a test phase thus far but will enter formal trading next year. Already growing by leaps and bounds, trading will increase even more as compliance toughens up and more products come online. What's more, the growing carbon trade is expected to be geared in favor of credits from China, India and other developing Asian countries. Credits from Asia, called "Certified Emissions Reduction" credits or CERs, will start trading on the European exchange next year. Currently swapped only on an over-the-counter basis, or between companies, the credits should be well-received because they are cheaper than credits from Europe, called "European Union Allowance" or EUAs. Increased demand for CERs is, in turn, expected to drive more private equity investment into Asian companies with carbon reduction projects. "At present, CERs are not issued or sold, they're not available (to most investors)," said Emmanuel Fages, analyst at Societe Generale in Paris. The start of CER trading in Europe "will dampen the price of the EUA for sure." Since the Kyoto Protocol came into force in 2005, companies in France, Germany and other countries that signed the agreement have had to meet greenhouse gas emissions targets by implementing certain measures and funding "Clean Development Mechanism," or CDM, projects in developing nations such as China. Companies get carbon "credits" in return that help them meet emissions targets. From this mandate sprang a fast-growing cottage industry. The carbon trading market tripled last year to $30 billion, according to the World Bank. Trading volume is expected to double this year and double again in 2008. Market participants expect the worldwide market to grow to $250 billion by 2010. Carbon credits, which represent one ton of carbon that's been saved from emission, can come from companies in any part of the world. But it is cheaper for companies in developing countries to come up with credits because they're dealing with less efficient technologies. That's why EUAs, from Europe, are generally more expensive than CERs from Asia. EUAs have been trading at about 20 euros, while CERs generally trade at about a 20% to 30% discount to EUAs. Market watchers say the prices of carbon credits in general could rise next year amid increased demand, and some see CER prices poised to grow faster. Miles Austin, senior carbon analyst at EcoSecurities, sees the price gap between the two credits narrowing to 10% to 20% next year. Fages, who is bullish on CERs, sees their price reaching EUR21 to EUR22 next year. Low liquidity and high political risk have kept carbon credit prices volatile but liquidity is expected to improve. Hedge funds and some large financial institutions are already starting to trade carbon credits, seeing opportunity to profit from pricing inefficiencies.

Hedge Funds Move In

Most carbon trading is still done by electricity groups or cement producers - companies with a stake in carbon-reduction plans - but that's changing. Morgan Stanley (MS), Societe Generale and Fortis Bank all recently added carbon trading desks, while funds focused on carbon trading are popping up. Global investment in carbon-focused funds jumped 66% to $11.8 billion between November and April, according to New Carbon Finance, a carbon research firm. Hedge fund Man Group PLC is also looking to jump in. "We think that soon it will be at a stage where we have some actual money invested in these sectors," said Thomas Della Casa, Man's head of research. Carbon credits trade much like commodities. Firms can hold carbon certificates long or hedge against price changes by shorting. Many funds are seeing opportunity to ride the expected increase in credit prices, said Societe Generale's Fages. Hedge funds have seen opportunity in this pricing gap with some selling EUAs to buy CERs at a low price directly from the source, generally between EUR8 and EUR12, said Dinesh Babu, director of carbon trading at Asia Carbon Exchange in Singapore. "Funds can play around with credits and comply with the European carbon emissions targets at the same time," he said. Despite the rewards, carbon trading is not for the faint hearted. Hedge funds will hold positions for a month at most, whereas they'll hold other commodities, such as oil, for several months. In addition to political risks, carbon prices are subject to weather and energy prices. Just last week, the price of EUA futures dropped to the lowest level in two months because cool weather in Europe led to less energy consumption and thus, less emissions by power producers. "We've already seen the price of CERs go up and down like nobody's business," said Babu. Hedge fund participation has also added volatility. In February, the price of EUAs shot up to EUR25 from EUR11 before inching back to EUR22. Government decisions about credit allotments drove most of the movement, but hedge funds amplified the move, said Fages.

Private Equity Bets On Asia

The focus on CERs is encouraging private investment in carbon reduction projects, particularly in China, which sold 61% of the world's carbon credits last year. Private investment now outpaces public sector investments, says New Carbon Finance, with Asia the primary beneficiary of the investment. Chemical companies have been among the first to catch on to the opportunity because many needed relatively little investment and yielded lots of credits. Selling carbon credits can be quite lucrative and sometimes companies may make more money selling carbon credits than from their core business, said Le Chen, head of China operations at EcoSecurities. Baring Private Equity Asia made a $47.2 million investment for a 27.3% stake in Dongyue Group, a Chinese chemical company that makes refrigerants. A leading refrigerants producer, the company also has a side business selling credits for capture and incineration of HFC 23, one of the six different greenhouse gases targeted by the Kyoto Protocol. Still, selling carbon credits is more of an additional bonus, said Gordon Shaw, a managing director at Baring. "Baring will not be comfortable investing on the basis of CDM alone." That'll continue to be the case as industry observers say that early investors have already picked off the low-hanging fruit. Easy projects that yield a large amount of carbon credits are getting harder to come by. "The size of the projects is getting smaller compared to earlier days," said Seng Heng Yap, director for energy services in Asia Pacific for Rhodia, a chemical company in a joint venture with Societe Generale. More industries are now looking into projects that yield fewer credits. New projects tend to involve landfills as well as renewable energy sources such as hydrowind and biomass that are beckoning to a wider variety of investors.

ECB: Dollar Reflects Weakness of US Economy

European Central Bank Executive Board Member Lorenzo Bini Smaghi signaled he wasn't concerned about the high value of the euro, saying it reflects the strength of the euro-zone economy just as the dollar reflects weakness in the U.S. economy.

"The weakness of the dollar reflects the weakness of the American economy," Bini Smaghi told state television Rai 1, when asked about the implications of the value of the currency. The dollar hit a record low versus the euro and a six-week low against the yen in Asia Monday, hurt by lingering speculation that problems in the U.S. subprime loan market could damage the broader economy. During the Asian session, selling by U.S. investment banks and Singapore and Hong Kong players pushed the euro to a fresh all-time high of $1.3846. Friday, buoyed by weaker-than-expected U.S. retail sales, the euro surged to $1.3815, the highest it has been since the 13-nation currency began trading in 1999. Some euro-zone policymakers worry that the single currency's strength could curb the area's economic recovery. French President Nicolas Sarkozy has frequently complained about the strength of the euro, arguing that it puts European exporters at a disadvantage against their competitors in the U.S., China and Japan. Sarkozy has argued that euro-zone finance ministers should define a common exchange-rate policy, a move that would constrain the independence of the European Central Bank. But the ECB has brushed aside the euro's recent appreciation, saying it's focused on inflation pressures while signaling that interest rates could go higher still.

German 2Q Economic Growth Slowed From 1Q

German economic growth eased further in the second quarter of 2007 on lower building investment and a decline in inventories, the German central bank said Monday in its July monthly bulletin.

"Economic growth may not have proved as high as at the start of the year," the Bundesbank said. Real gross domestic product rose 0.5% in the first three month of the year, after gaining 1.0% in the fourth quarter of 2006, official data shows. The Federal Statistics Office is due to publish second- quarter GDP data Aug. 14. Growth forecasts vary widely, but many private sector economists predict a quarterly growth rate of 0.5%. Net trade likely contributed positively to growth in April-June, and private consumption - the Achilles heel of Germany's economic upswing - has "noticeably recovered," the Bundesbank said. Household spending plummeted in the first three months of 2007 on a value-added tax hike in January, to 19% from 16%. There has also been an expected, "technical" reaction in building investment, following the mild winter months, Bundesbank said. And "the previously positive influence of inventories should have significantly diminished," it added. In the first quarter, stocks contributed a massive 2.2 percentage points to GDP growth. Germany's economic showing is important for the euro zone, as the country accounts for about 30% of the area's GDP.

Don't Blame OPEC For Oil Prices

With the price of oil back above $75 a barrel, it'd be tempting to blame OPEC for squeezing prices.

Don't, argued James Hamilton, an economics professor at the University of California, San Diego, on his Econbrowser blog. The OPEC at fault argument rests on the fact that the cartel of oil producing countries cut member quotas last October and then again in December by a total of 1.7 million barrels a day. The actual decline in production achieved between October and April was just under 800,000 barrels a day. Hamilton's key argument, though, is that producing countries are looking to cut output, whatever the OPEC quotas. Normally, the incentive is always for cartel members to cheat. By and large, they haven't been. Why? Because producing countries see strong demand - take a look at how thirsty China's become with year on year GDP growth running at near 12% - not just now but well into the future. Recent reports from the International Energy Agency and the National Petroleum Council have driven up demand expectations for the coming years. Accompanying this rise in demand, however, are signs that major producers like Saudi Arabia and Kuwait are starting to worry about oil stocks. Trying to stretch out reserves for the next century or so means that they're cutting back production anyway, says Hamilton. So does self-restraint by producers against a backdrop of rising demand from consuming countries explain the dynamics of the oil market and support talk of prices hitting $100 a barrel over the near term? No, argues Simon Hayley, at Capital Economics, an independent consultancy. A considerable amount of the latest uptrend in crude prices has been driven by momentum trading. Speculative long positions on crude futures hit a new peak last week, Hayley noted in a research note out earlier this week. The move isn't only coming on the back of speculators - U.S. gasoline stocks are low and there are fears of another bad hurricane season. But with speculators holding such large positions, the risk of a sudden price move must be on the downside. Longer term, though, if Hamilton is right and OPEC members are less responsive to changes in quotas, the cartel's ability to curtail any fundamentally-driven changes to prices is likely to be curtailed. If, for instance, oil hits $90 a barrel and OPEC decides to raise its quotas, it could be that big producers like Kuwait and Saudi Arabia won't pump any more crude.

ABN Amro CEO Prefers Barclays Bid

ABN Amro CEO Prefers Barclays Bid, but Concedes RBS Is Poised to Win.

The chief executive officer of ABN Amro still prefers a takeover offer from Barclays PLC that is worth at least 10 percent less than a euro71.1 billion ($97.8 billion) bid from a banking consortium led by Royal Bank of Scotland PLC, he said in an interview published Saturday.

But Rijkman Groenink also conceded that the RBS group appears set to win the fight for ABN Amro Holding NV, the largest takeover battle in the history of the financial industry.

"I'm still convinced that the merger with Barclays is the best," Groenink told the respected financial daily NRC Handelsblad in his first detailed public remarks since a shareholders' meeting in April. "It's better in terms of its content, but it's not good enough in terms of amount."

RBS and its partners said Friday they will launch a euro38.40 ($53.01) -per-share offer for ABN Amro Monday, mostly in cash, that will last until Oct. 5, becoming unconditional if more than 80 percent of ABN shareholders tender their shares.

Meanwhile Groenink and ABN's board have agreed to an all-share bid worth euro33.86 ($46.74) per ABN share based on Barclays' closing price Friday -- which shareholders are likely to spurn, he conceded.

"The difference is too large for many investors even to look at the Barclays offer," Groenink told the paper.

"Hedge funds and speculators" likely hold 30 to 40 percent of ABN's shares, he said. "They have only one interest and that's in the highest offer, in cash, and today, please."

Many institutional investors also hold ABN Amro shares, and they are legally obliged to chose the highest offer in such situations.

In light of RBS's higher bid, Barclays has said it may sweeten its offer or add a cash component in order to remain competitive.

Analysts say that, based on offer price alone, Barclays cannot hope to win a battle with RBS and its partners, Fortis NV of Belgium and Banco Santander Central Hispano SA.

However, ABN shares closed down 1.1 percent at euro36.63 ($50.58) in Amsterdam, somewhere between the two offers, suggesting investors were not fully convinced the RBS group will win.

Barclays CEO John Varley has said that, while his bank's bid may be lower, it would offer a better long-term return to shareholders and avoid what he called the planned "carve up" of the company by the consortium.

Fortis wants ABN's Dutch operations, Santander wants its Brazilian and Italian arms, and RBS wants the rest, including its investment banking arm.

In the interview, Groenink repeated that, under Dutch law, he has a duty to consider more than just the interests of shareholders, who he said "can look after themselves."

But he remained mostly vague about the reasons he believes a takeover by the consortium is less desirable than a merger with Barclays. Barclays has said its merger will lead to more than 20,000 jobs lost or outsourced, mostly in England, while the consortium has said its offer will lead to fewer job losses overall.

Groenink said there was no proof of that.

"ABN Amro has still not had any answers to questions we've had since the beginning of May, about the risks of splitting up the company for customers, employees and society at large," he said.

He also added there was a danger that if the RBS consortium wins "the chance is bigger that there's an exodus from the head office because people don't have any desire to work on breaking apart the bank for one, two or three years. They'd rather go somewhere else to build something."

Barclays has until Aug. 6 to file its offer.