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A Trillion Bucks Package, Euro Goes To?

2010-05-13T19:03:00.004+08:00

If the package really kicks in with the Greek bailout their first target, the Euro might still be going down as it has been doing for past half a year. There is a longterm target at 1.15 for EUR/USD pair anyway. So which way will the Euro choose to go?

The Pound might follow the path of Euro and the GBP/USD pair has also a target at 1.2s. Maybe in next few months.

Hence in this matter the USD might still be getting stronger and stronger. Even USD/JPY pair might be going up instead of down, targetting around 110. The stock markets might still be bullish for next few months as well, after a short but quite sharp correction that happened few days ago.

US PPI is already up and soon CPI might follow as producers pass the increase to consumers. Employment is getting better again, inflation might start to go up in next few months. No more recession for the time being. The Fed might start hiking the interest rate again after so long at the bottom, maybe from Q4 this year or early next year.

New Hopes in WTO Meeting on New Global Trade Pact

2008-07-26T19:41:00.002+08:00

A new sense of optimism surrounded WTO negotiations on a new global trade pact Saturday amid hopes of a breakthrough after seven years of deadlock.

Ministers from 35 leading nations headed for meetings hoping to finally bridge their differences, with pressure piling on emerging market countries India and Argentina which have signalled opposition to a proposed deal.

"This afternoon's session will be important. India will be looking to see what it can get out of the session to decide whether to ditch discussions," a diplomatic source told AFP on condition of anonymity.

Ministers from 35 leading economies have been meeting at the World Trade Organization since Monday to discuss cuts in subsidies and import tariffs with the aim of mapping out a new deal under the so-called Doha Round of WTO talks.

The Doha Round was launched in the Qatari capital seven years ago but has stalled because of disputes between the rich developed world and poorer developing nations on trade in farm and industrial products.

The talks this week looked doomed -- like so many others since Doha began in 2001 -- until a breakthrough late Friday saw the biggest powers find common ground on a draft agreement. "I think the situation looks strong. I think we can be very hopeful now," said European Trade Commissioner Peter Mandelson as he left talks late on Friday.

The United States warned that a handful of countries could still torpedo the exercise and Argentina said the draft agreement was unacceptable. "There are a handful of large emerging markets that quite frankly risk unravelling the entire package," said United States Trade Representative Susan Schwab. She added, however, that while there was "more work to do, it is a path forward."

Indian Commerce Minister Kamal Nath has insisted all week that he will protect his country's millions of subsistence farmers and nascent industry, which are shielded from imports by tariffs levied on foreign goods. "We're not very happy with the package, primarily on agricultural issues," said Indian ambassador to the WTO, Ujal Singh Bhatia, on Saturday.

Indian newspaper Business Standard reported Saturday that Nath had threatened to walk out of negotiations on Friday. "We have come with many goodies. We expect to return with many goodies. If not, we'll return with the same goodies we brought," said Bhatia, underlining that India was still ready to walk away.

Mandelson said Friday that he thought the Asian giant would eventually come on board, telling reporters: "I don't think India will be the one to break a world trade round. I really don't." The talks Friday focused on trade in farm and industrial products -- the two main sticking points of a deal -- but attention is set to turn Saturday to the services sector.

The gathering is due to over-run its original programme, which foresaw an end on Saturday, and continue throughout the weekend and early next week, sources said. "My opinion is that the chances of reaching an accord have risen to 65 percent from 50 percent," said Brazil's trade negotiator, Foreign Minister Celso Amorim, who said he had accepted the draft agreement.

The marked turnaround Friday emerged after meetings between seven key trading powers -- the United States, the European Union, Australia, Brazil, China, India and Japan. The talks then widened to a ministerial conference of all 35 key nations invited to Geneva to broker the pact. Anything approved by the 35 parties would still have to be cleared by all 153 WTO member states. A new pact can only be adopted with unanimity.

WTO Director-General Pascal Lamy had warned earlier on Friday that the talks faced failure unless countries showed flexibility and determination. Among new proposals he put forward Friday was a further cut in the US annual farm subsidies to 14.5 billion dollars (9.2 billion euros) and a clause to prevent developing countries from shielding entire sectors from tariff cuts. Diplomats and negotiators had said that Friday would be make-or-break at the end of gruelling week of bargaining that had produced scant evidence of progress.

US Housing Aid Bill Expected to Be Cleared

2008-07-26T19:39:00.001+08:00

Senate expected to pass foreclosure rescue, mortgage giant backstop to revive housing market.

Homeowners struggling to make their house payments could get government mortgage relief under a rescue plan that seeks to revive the chaotic housing market and help reverse the economic downturn.

The Senate is expected Saturday to clear the wide-ranging legislation -- considered the most significant housing measure in decades -- for President Bush's signature, and the White House says he'll sign it quickly.

The bill gives the government power to throw troubled mortgage giants Fannie Mae and Freddie Mac a financial lifeline, in efforts to prevent the two pillars of the home loan market from going under and causing broader market turmoil. It is designed to help an estimated 400,000 homeowners escape foreclosure by letting them refinance into more affordable loans backed by the Federal Housing Administration.

The Senate on Friday cleared the last hurdle to its passage on a 80-13 test vote that showed broad support for the election-year package. Bush, who initially called it a burdensome bailout for irresponsible borrowers and lenders, dropped a threat to veto it this week after his Treasury Secretary, Henry M. Paulson, argued the backstop for Fannie and Freddie was vital to calming markets in the U.S. and abroad.

That was despite his opposition to $3.9 billion the bill sends to neighborhoods devastated by the housing crisis to buy and fix up foreclosed properties. The administration argues that would hurt homeowners by giving lenders an incentive to foreclose rather than help people stay in their homes.

Supporters called the bill a crucial and long-overdue response to the mortgage meltdown that would be a key ingredient to boosting the sagging economy. "Unless we provide some type of footing for housing in the United States, I do not think that the economy will begin to recover. It is perhaps the most significant economic issue that we face," said Sen. Jack Reed, D-R.I. "This legislation is going to be the linchpin that helps millions of families have decent, safe and affordable housing."

Paulson's request for the emergency power to rescue Fannie and Freddie helped forge a bipartisan deal on the legislation, which also creates a new regulator with tighter controls on the government-sponsored mortgage firms -- something Republicans have long sought.

Democrats also won key concessions as part of the compromise, including a permanent affordable housing program to be financed by Fannie and Freddie profits and the $3.9 billion in grants.

Many conservative Republicans are vehemently opposed to the foreclosure rescue, which they call a bailout of reckless homeowners and unscrupulous lenders. They are equally furious about the help for Fannie Mae and Freddie Mac, companies they say enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

Sen. Jim DeMint, R-S.C., slowed the measure's final passage because Democrats refused to allow a vote on his proposal barring the two mortgage companies from lobbying and making political contributions.

Wall Street Braces for Tough Earnings Season

2008-07-12T18:41:00.001+08:00

Financial stocks set to lower S&P 500 earnings 13.5 percent during second quarter.

Investors already disheartened about the growing problems of the financial sector and the soaring price of oil are facing more depressing news with the release of second-quarter earnings reports.

The coming week will bring the first big wave of results from America's largest companies, including seven Dow Jones industrial average components and 53 members of the Standard & Poor's 500 index. Investors shouldn't expect much: Earnings for all the companies in the S&P 500 index are forecast by the rating agency to be down 10 percent from a year earlier.

Thomson Financial, which compiles forecasts from analysts at banks and brokerages, estimates the decline at 13.5 percent. Either way, Wall Street is well past the nearly five years of double-digit growth that ended as the subprime mortgage crisis spilled into the credit markets last summer.

The credit crisis is responsible for the earnings plight; financial companies that have written down an aggregate of $300 billion in soured mortage-related assets remain the biggest drag on S&P 500 earnings. Results are expected this coming week from Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc.

But profits and outlooks for the future are expected to be sobering for U.S. companies as a whole. "The feeling is that this will be a sloppy earnings season, the tone of the which is going to be very much like the previous three quarters," said Phil Orlando, chief equity market strategist at Federated Investors. "The banks and the housing sector, on through autos and retailers, are the problem children."

Financial company earnings are forecast to fall by 69 percent year-over-year, according to Thomson. Meanwhile, consumer discretionary companies -- which includes auto manufacturers and home builders -- are expected to see their profits fall by 19 percent.

There are some bright points, with energy companies expected to turn soaring oil prices into a 28 percent jump in profits. Crude oil is up nearly 50 percent this year, and hit a record on Friday over $147 a barrel.

With both oil and financial earnings certainly at extremes, analysts like Orlando find it useful to strip out their performance to get a better idea of how the broader market performed. If you remove the financials, Thomson forecasts the companies in the index would post an average earnings growth rate of about 9 percent; and if you remove financials and oil, the rest of the S&P 500 would have a 4 percent profit growth rate.

"There's some growth there, but nothing like we've seen in past years," said John Butters, director of U.S. earnings research for Thomson Financial. "You also have to take into consideration that the forecasts have come down during the quarter."

He said that at the start of the quarter, analysts expected the financial sector to tumble 31 percent year-over-year. The barrage of bad news during the quarter forced analysts' to rethink their forecasts, causing both expectations and stock prices to fall.

Concerns about financials didn't let up on Friday, when the Dow Jones tumbled nearly 130 points on concerns about the viability of Fannie Mae and Freddie Mac. Fannie Mae lost 22.35 percent of its value, while Freddie Mac lost 3.13 percent.

Investment banks -- many of which carry significant investments in mortgage-backed securities -- also fell. Lehman Brothers Holdings Inc., the weakest of Wall Street's firms, tumbled 16.59 percent by the end of the session.

And amid this uncertainty, analysts don't expect companies to be very optimistic about the future. By most accounts, lackluster second-quarter results are already factored into stock prices. That makes it even more important for corporate executives to manage expectations going forward.

For instance, the CEOs of both General Electric Co. and aluminum maker Alcoa Inc. -- the first of the Dow's 30 components to report -- issued lukewarm guidance. GE matched forecasts on Friday, while Alcoa surpassed them on Tuesday.

"Any guidance that management provides, from a self-serving standpoint, will be downbeat and cautious," Orlando said. "They will try to set the bar as low as possible to engineer an upside surprise in the third quarter."

Debates Over Helping Fannie and Freddie Awaiting Action

2008-07-12T18:34:00.004+08:00

Fretting over Fannie and Freddie: Investors nervously await action to help mortgage giants.

Wall Street and Washington wrestled Friday with how to shore up mortgage giants Fannie Mae and Freddie Mac, two troubled pillars of the economy whose failure would deal a devastating blow to the already crippled housing market.

As investors grew more convinced that only some type of government bailout could rescue the firms, Treasury Secretary Henry Paulson said the focus was to support the pair "in their current form" without a takeover.

The government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.

A Fed spokeswoman said the central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.

Both companies issued statements late Friday calling their financial positions solid. Freddie Mac said it did not see an immediate need to raise fresh money, and said other options included cutting its annual shareholder dividend, which costs $650 million a year.

Investors drove Fannie and Freddie shares to 17-year lows before the stocks recovered somewhat. The turmoil, combined with a new high for oil prices, helped send the Dow Jones industrials briefly below 11,000 for the first time in nearly two years. The Dow finished down about 1 percent at 11,100.54.

Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers. Shares of both companies are publicly owned.

Their importance to the housing market and overall economy is hard to overstate: Fannie and Freddie either hold or back $5.3 trillion of mortgage debt, or about half the outstanding mortgages in the United States. "Without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.

In the mortgage industry, the prospect of doing business without Fannie and Freddie is truly frightening. "The cost of borrowing would go up dramatically," said Steve Habetz, president of Threshold Mortgage Co. in Westport, Conn. "We would be going back to dark ages where a homebuyer would be hoping that a local bank would (have enough resources) to make the loan that it will keep on its books."

Published reports suggested the government was considering taking over one or both of the companies and running them itself. President Bush met with senior economic advisers and said Paulson had assured him that Paulson and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard."

Wall Street sent the companies' stocks lower nonetheless. Freddie Mac shares were down 25 cents, or 3.1 percent, to $7.75. Fannie Mae shares were down $2.95, or 22.4 percent, to 10.25. "I think everybody's just holding their breath in expectation that something substantive from the government will happen today or over the weekend," said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics.

Analysts also suggested the problems had as much to do with market perceptions than any fundamental change in the two companies' finances. One report from Citigroup titled "Fear Begets Fear" called the sell-off "overdone."

The government has several options that stop short of a dramatic takeover. The Federal Reserve could provide emergency loans, or take on either company's mortgage-backed securities in an effort to reassure the market.

Under a government takeover, operations would continue at Fannie or Freddie, but shareholders would probably see their investments erased, and the companies' ability to support the mortgage market could be reduced.

"Typically when this happens the business is a shell of its former self," said Louisiana State University banking professor Joseph Mason. "Shareholders aren't going to like it, managers and directors aren't going to like it, but it's not about whether they like it."

The mortgage giants could face a replay of the near-collapse in March of investment bank Bear Stearns Cos. A crisis of market confidence can make it difficult to raise day-to-day operating cash through routine debt sales. The chief regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, said on Thursday that the two companies were "adequately capitalized."

Congress created Fannie, the Federal National Mortgage Association in 1938 and Freddie, the Federal Home Loan Mortgage Corp., in 1970. They were designed to buy mortgages and bundle them into securities for sale to investors worldwide, making home ownership affordable for more Americans. Under a 1992 law, they have less strict standards than commercial banks for the financial cushions they must hold to protect against risk.

Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., said neither company is in as dire a financial position as Bear Stearns was in the spring -- making investors nervous no action will be taken over the weekend to shore them up. He said Fannie and Freddie could soothe market fears by selling more shares of stock to investors and raising cash. "I hope that they raise capital and they raise a lot of it," he said.

Congress is moving closer to completing a housing rescue package that would create a new regulator for Fannie and Freddie and tighten controls over them. The bills would also permanently raise the limit on the loans they can buy.

Oil Breaks Yet Another Record $147

2008-07-12T18:31:00.001+08:00

Crude briefly jumps past $147 on Middle East tensions; heating oil, gasoline also hit records.

It's only July, but it might be time to start loading up on blankets and sweaters. Oil spiked to a new trading record as hostilities rise between the West and Iran -- raising the likelihood that this winter's heating bills will be the priciest yet.

Crude oil's brief jump past $147 a barrel Friday arrived not only as the United States and Israel view Iran as a growing threat, but also as the U.S. dollar fell and worries erupted over possible supply disruptions in two other major oil-producing nations: Nigeria and Brazil.

Those factors contributed to new all-time trading highs in crude, gasoline and heating oil. It looks like $4-a-gallon gasoline might be here to stay, and that heating oil costs might cause further problems for consumers as the weather gets colder. Futures prices for natural gas turned lower Friday, but are still about twice as high as a year ago. "If you think your gasoline bills are expensive now, wait till you get your home heating bill this winter," said Stephen Schork, an analyst and trader in Villanova, Pa.

Heating oil is used mostly in the Northeast United States; homes in most other parts of the country use natural gas. It's possible for people to cut back on heating as they do on driving, but it's not easy to slash the bill significantly.

"We've been building these ridiculous McMansions over the past few years. It's harder to trade in a McMansion than it is an SUV," Schork said. "But you can turn your thermostat down and throw on a sweater."

Political unrest in oil-producing regions -- along with production cutbacks by refineries and fairly resilient demand for diesel fuel -- have been keeping energy costs high. Iran, which has long been under U.N. scrutiny for its uranium enrichment program, has been testing missiles this week, including a new missile capable of reaching Israel.

On Thursday, Secretary of State Condoleezza Rice warned the oil-producing nation that the United States will defend its allies, and Iran responded with another missile launch. Neither the United States nor Israel has ruled out a military strike on Iran. Then on Friday, there were rumors of Israeli military exercises taking place in Iraqi air space. The rumors were reportedly denied by Israeli officials.

"The war of words is quite heated," said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, Mass. "And it raises the possibility of some serious problems in the area -- either the cutoff of Iranian exports, or Iranian strikes on tankers in the Strait of Hormuz." About 40 percent of the world's tanker traffic passes through the Strait of Hormuz.

Meanwhile, Brazilian oil workers were threatening to go on a five-day strike next week unless the state-run oil firm Petrobras gives them an extra day off at the end of their 14-day shift. Those supply worries added to those sparked Thursday when Nigeria's main militant group said it would resume attacks in the oil-rich region.

Light, sweet crude for August delivery soared to an all-time high of $147.27 a barrel before settling at $145.08, up $3.43. That's slightly below last Thursday's settlement record of $145.29 a barrel.

Meanwhile, the dollar weakened against other major currencies Friday. Because oil is bought and sold in dollars, oil's rise has not been as severe for countries with stronger currencies; meanwhile, traders have been using commodities as a hedge against the tumbling dollar.

Weekend's Featured: Worsening Food Crisis Because of Climate Change

2008-07-06T07:59:00.002+08:00

Climate Change Will Worsen World Food Crisis: UN Climate Chief.

The global food crisis will only worsen because of climate change, the U.N. climate chief said Friday, urging leaders of the world's richest countries meeting in Japan next week to set goals to reduce carbon emissions within the next dozen years.

Food security and soaring oil prices are likely to overtake climate change in the priorities of the G-8 meeting starting Monday, though global warming was the theme set by the host, Japanese Prime Minister Yasuo Fukuda.

Food and global warming are interconnected, said Yvo de Boer, executive secretary of the U.N. Framework Convention on Climate Change. "They are not competing with each other on the international agenda."

"It is absolutely right that the food issue is receiving a lot of attention. That is a human crisis that's out there right now," De Boer said in a telephone interview from his office in Bonn, Germany. But in the long term, climate change will bring still higher food prices, worsening water problems and more drought. Ignoring the issue "will get you into deeper trouble down the road," he said.

De Boer said it was uncertain whether the industrialized countries would firm up the goal adopted a year ago to "consider seriously" halving greenhouse gas emissions by 2050. But he said it was important to discuss more immediate goals. Knowing what the world's biggest economies intend to do by 2020 is critical for developing countries and business investors, he said.

"If you look at the signs of investment direction that the private sector is crying out for, that is the issue that is most critical," he said. He acknowledged, however, he expected no conclusions on emissions goals for 2020.

A Nobel prize-winning panel of U.N. scientists has said emissions must level off within the next 10-15 years and then start to dramatically decline to avoid a rise in average temperatures that could have catastrophic consequences.

Since the last G-8 meeting in Germany, oil prices have doubled to surpass $140 a barrel, and de Boer said soaring prices were already having an effect on climate issues. On the plus side, people were driving less, and renewable energy was winning more attention. For the first time, the International Energy Agency lowered its forecast for oil demand, he said.

At the same time, "very poor people who spend the bulk of their income on survival are not happy to see energy prices go up," he said. De Boer welcomed the move by the board of the World Bank on Tuesday formally launching two special investment funds for climate change that could raise up to US$10 billion.

The funds have been sharply criticized by some environmentalists who distrust the bank's environmental record and say the money should be put in the hands of de Boer's U.N. organization. "The Bank's new climate funds will undermine U.N. climate talks, increase debt and pay polluters," said the Friends of the Earth in a statement Friday.

De Boer said, however, the bank's funds had a clause that will phase them out when a new financial structure is adopted in a climate change treaty. That accord should be negotiated by the end of next year.

More than $200 billion will be needed annually by 2030 to bring the world's emissions down to 1990 levels — and still more will be needed to reduce that by half over the next 20 years, he said. "We will have to mobilize every possible financial channel to meet that challenge," he said.

Weekend's Featured: EU Needs to End Its Energy Dependence on Russia

2008-07-06T07:54:00.003+08:00

European Union Needs to End Its Energy Dependence on Russian Gas.

The European Union should free itself from its dependence on Russian gas by developing renewable and nuclear energy, the former head of the International Energy Agency told EU ministers Saturday.

"We need to give ourselves a flexibility that we are missing," Claude Mandil told the European bloc's 27 energy ministers at an informal meeting on the outskirts of Paris. "We need more energy efficiency, more liquefied natural gas, more renewable energy, more nuclear energy," he told the ministers, who are wrapping up a three-day gathering that also included environmental ministers.

Mandil, a French official who headed the IEA from 2003 to 2007, also said European nations had got themselves into an "awkward position" politically vis-a-vis their eastern neighbour. "We are horrified at the thought that there might be lack of Russian gas, that we won't be able to get it, and at the same time we are being very aggressive verbally to Russia. Let's stop provoking Russian sovereignty, claiming that we can dictate Russian behaviour on energy on their own territory," he said.

Against the backdrop of record energy prices, reducing the EU's dependence on Russian gas has become an major focal point in the bloc's foreign policy. Russia has on several occasions reduced or cut altogether gas supplies to its neighbour Ukraine, raising concerns in the EU countries about Moscow's reliability as an energy supplier.

The bloc has been busy since November 2006 working on an energy partnership with Azerbaijan, inking an accord with Kazakhstan, reviving relations with Libya and working on a deal with Algeria.

To date, however, most of these discussions remained stalled, according to energy analysts. Under current estimates, by 2030 the EU will not be able to avoid becoming more dependent on Russian gas, which already in 2005 accounted for 46 percent of their imports.

Mandil spoke at the invitation of French environment and energy minister Jean-Louis Borloo, who is chairing discussions Saturday on biofuels and energy efficiency. France took over the rotating, six-month presidency of the European Union on July 1. "Energy security cannot be separated from the combat against climate change and the demands for economic growth," Mandil said.

The European ministers have placed energy efficiency at the heart of plans to ease the soaring cost of fossil fuels and help meet the EU's goals on climate change. Mandil also pointed to sharply divergent energy portfolios among the bloc's 27 nations, and highlighted the need for a cohesive policy and "solidarity" within the EU.

"Any attack on the security of one of the members should give rise to a reaction from the Union as a whole," he said. "But solidarity does not mean that member states should not be responsible for their actions. You can't expect your neighbour to sort things out for you -- you have to do it yourself."

No Serious Downturn for Asian Economies

2008-07-05T08:39:00.001+08:00

High inflation pressuring Asian economies, but ADB president said region remains robust.

Soaring inflation is battering Asian economies and threatens to stifle growth, but the still-robust region isn't at risk of a serious downturn, said Asian Development Bank President Haruhiko Kuroda Friday.

Energy and food prices are hitting record highs and pushing up inflation -- 7.7 percent in China, 7.8 percent in India, 6.2 percent in Thailand and more than 20 percent in Vietnam. And rising food prices have set off riots and protests worldwide and raised fears about a global crisis that could drive millions into poverty and malnutrition.

The problem is particularly acute in Asia, which is home to one billion people who spend at least 60 percent of their income on food, Kuroda said at the Foreign Correspondents' Club of Japan.

Still, the ADB remains bullish on the region. It estimates 7.6 percent aggregate GDP growth this year for the region, though that figure may be cut by 1-2 percentage points when revised figures are released in September, Kuroda said on his way to the Group of Eight leaders' summit this weekend in northern Japan.

Food and energy prices are expected to figure prominently in discussions at the meeting. "For now, Asia and the Pacific -- the world's largest and fastest growing geographic region -- remains a stabilizing force," Kuroda said. "But it is tremendously important to respond to these new circumstances in a timely and appropriate manner to keep regional growth on track."

The Asian Development Bank, which was founded four decades ago to fight poverty in Asia, recently announced $500 million in emergency aid for poor countries struggling with soaring food prices. It will also double its lending to the agricultural sector in 2009 to $2 billion.

For Asian central banks, the issue presents a tricky monetary policy dilemma of controlling inflation without excessively sapping economic growth, Kuroda said. Central banks so far have been "successfully tightening monetary conditions in order to contain inflationary pressures" -- a trend that is likely to continue for awhile, Kuroda said.

"I'm reasonably confident that emerging economies in the region would be able to overcome current inflation and go back to more stable and sustainable growth," he said.

G-8 Battles With Worst Economic Outlook in Decade

2008-07-04T19:49:00.002+08:00

G-8 leaders face worst economic outlook in at least a decade with surging prices, global slump.

Between surging oil prices, food inflation and a credit crunch that's depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.

The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost $70 a barrel -- which seemed high at the time.

Since then, the U.S. subprime mortgage crisis has erupted, roiling markets and battering financial firms. Oil has doubled to above $140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability. "Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets. "Now you have a financial disorder where the epicenter is the U.S.," he said. And fuel and food inflation "are serious matters that affect large numbers of people."

Host Japan put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight. Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.

On oil, analysts are skeptical that the G-8 leaders -- representing the U.S., Japan, Britain, France, Germany, Russia, Italy and Canada -- will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.

Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the U.S. and Britain said the focus needed to be on boosting production capacity that has barely kept up with growing global demand.

Soaring crude prices have already forced India, Malaysia, and Indonesia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China hiked fuel prices as much as 18 percent.

At the same time, prices of corn, wheat, rice, soybeans and other farm goods have surged due to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.

Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.4 percent. On the food front, the G-8 leaders may announce an aid package or pledging agricultural investment in poorer countries, experts say.

The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent the leaders will most likely avoid saying anything specific about interest rates and currencies. The European Central Bank raised its benchmark interest rate a quarter point Thursday, suggesting it saw inflation as a greater threat than slower growth.

Overall, the summit's main goal will be demonstrating confidence that they can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.

Given the meeting's emphasis on climate change, the leaders could highlight the links between energy issues and global warming by stressing the importance of energy efficiency and alternative forms of energy, said Hormats of Goldman Sachs. "The key thing is not what they do at these meetings but what they do at home," he said.

Oil and energy have remained recurring themes at the annual summits, said Hormats, who participated in several of the first meetings, which started in 1975. The initial gathering came after the 1973-74 oil embargo, when fuel prices surged after Middle East oil producers cut off the U.S. and other countries supporting Israel. "We now have another oil crisis," Hormats said.

The summits were originally meant to focus on economic issues, but the agenda has expanded to include terrorism, Africa's development and the environment. The group's membership also has grown from six to eight, adding Canada in 1976 and more recently Russia in 1997.

But many argue that it should be expanded to include China, the world's fourth-largest economy, and other emerging powerhouses like India and Brazil -- especially to tackle global issues like energy and climate change.

"At what point will the G-8 realize we're no longer the steering committee for the world economy?" said Lael Brainard, a former deputy national economic adviser in the Clinton administration who attended several summits in the 1990s and now is a director at the Brookings Institution, a Washington think tank.

Already, the G-8 has been reaching out. It plans meetings with African leaders on the summit's first day, and later with leaders from China, India, Mexico, Brazil and South Africa -- countries that someday might be a part of the Group of 13. "These countries are critical to the solution of any of these problems," said Brainard. "I believe it's only a matter of time" until the club expands.

Oil Spikes to Another Record Above $145

2008-07-03T20:22:00.002+08:00

Oil closes in on $146 per barrel after drop in US stockpiles and potential Iran conflict.

Oil prices neared $146 a barrel Thursday for the first time ever on reports of declining U.S. stockpiles and the threat of conflict with Iran. Comments by Saudi Arabia's oil minister suggesting his country had no immediate plans to boost production also lifted prices.

Expectations that the European Central Bank will raise interest rates later Thursday could further weaken the U.S. dollar and drive oil prices even higher, as investors turn to commodities as a hedge against a falling greenback, traders said.

By midday in Europe, light, sweet crude for August delivery rose $2.28 to a record $145.85 a barrel in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract set a new closing record for floor trade at $143.57 -- a full $2.60 above the previous close.

The latest spike means a barrel of crude has gone up by more than 50 percent since the end of last year, when oil was going for $96 a barrel. In London, Brent crude futures rose to a trading record of $146.69 a barrel on the ICE Futures exchange before retreating to $146.07, up $1.81.

"Even though the rise of European interest rates has been priced into oil, an official announcement by the ECB will still add momentum to oil prices," said Victor Shum, an analyst with Purvin & Gertz in Singapore.

The push above $145 a barrel was seen as a last technical barrier to prices hitting $150, in what analyst Olivier Jakob of Petromatrix in Switzerland called "the Morgan Stanley self fulfilling prophecy." In early June, a prediction by Morgan Stanley analyst Ole Slorer that oil prices could reach $150 by the July 4 weekend caused the Nymex contract to jump nearly $11 in a single day.

Speaking Thursday in Madrid, Saudi Arabia's oil minister, Ali Naimi, left the door open for increased output, but said the kingdom's oil customers were satisfied and that no production growth was planned for now.

The Energy Department's Energy Information Administration said Wednesday crude oil supplies fell by 2 million barrels last week, or about 800,000 barrels more than analysts surveyed by the energy research firm Platts had predicted.

However, the report offered a mixed picture of energy use by the world's thirstiest oil consumer. Gasoline supplies unexpectedly grew by a considerable amount, and demand continued to slide -- suggesting record fuel prices are prompting a shift in American driving habits.

Ongoing rhetoric about possible attacks on Iran, the world's fourth-largest oil producer and OPEC's second-largest exporter, also left the market jittery. Traders are worried Tehran could try to halt shipments and seize control of the strategically important Strait of Hormuz if attacked by Israel or the United States. About 40 percent of the world's tanker traffic passes through the Middle Eastern choke-point.

Iran's foreign minister did not rule the possibility that Iran could try to restrict oil traffic in the strait if the country was attacked. "In Iran we must defend our national security, our country and our revolutionary system and we will continue to do so," Foreign Minister Manouchehr Mottaki said. Mottaki said he does not believe Israel or the United States will attack, however, calling the prospect of another war in the Middle East "craziness."

A senior U.S. military commander vowed to ensure that the strait remains open. "We will not allow Iran to close it," said Vice Adm. Kevin Cosgriff, commander of the 5th Fleet based in Bahrain, after talks with naval commanders of Persian Gulf countries in the United Arab Emirates. The saber-rattling has left energy traders on edge as they try to ascertain the likelihood of a Middle East flare-up and the effect it could have on the world's already tight supply of oil.

ECB Hikes Rate to 4.25%

2008-07-03T20:21:00.003+08:00

European Central Bank raises benchmark interest rate to 4.25 pct amid inflation pressure.

The European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25 percent in an effort to reign in escalating inflation in the 15-nation euro zone.

The move comes despite worries in some quarters that it could dampen growth. Bank president Jean-Claude Trichet was expected to explain the decision at a news conference, with attention focusing on whether more increases are coming.

Trichet has stressed that his main objective is to keep prices stable, and all but promised an increase this month at last month's meeting. But he has also suggested that repeated interest rate hikes are probably not likely.

Inflation has been troubling central banks around the world as commodity prices including oil and food have spiked in a surge of new global demand. While higher interest rates slow inflation, they can also slow economic growth as money becomes more expensive to borrow; Trichet appears to have targeted inflation as the bigger threat.

At the ECB's June meeting, Trichet said members of the bank's governing council stated a case for raising rates to combat inflation even then. On Monday, the EU statistics agency Eurostat said inflation in euro nations hit a record 4 percent in June, double the ECB's inflation target of below or around 2 percent.

The Bank for International Settlements -- a sort of central bank for central banks -- also said Monday that world headline inflation has risen significantly to 4.75 percent. Higher euro zone interest rates tend to send its currency higher against the dollar as investors park money where it earns more interest. Meanwhile a sinking dollar generally boosts the price of oil, which is denominated in the U.S. currency, as more buyers move in.

Earlier Thursday, oil reached another record high. Light sweet crude oil for August delivery on the New York Mercantile Exchange.rose $2.28 to a record $145.85 a barrel in electronic trading by midday in Europe.

"The fact that a hawkish note from the ECB today could hit the dollar hard and in turn push oil prices to fresh record highs and on toward that massive $150 a barrel level also needs to be taken into account," said James Hughes, a currency analyst with CMC Markets in London. "Couple this with the likes of the euro zone retail sales data and there's going to be an awful lot to digest in the near term," Hughes said.

Bush Attends His Final G-8 Summit

2008-07-03T20:18:00.001+08:00

Final Bush G-8 summit may be harmonious amid shared economic woes and eased Iraq tensions.

The issues are as difficult as ever, but the conditions are likely to be more conducive to agreement as President Bush attends his eighth and final economic summit of industrial democracies.

The annual Group of Eight meeting, which begins Monday on the northern Japanese island of Hokkaido, comes amid economic turmoil in most of the member nations, as well as political uncertainty for many of the leaders. Oil prices are hitting new record highs and worries about inflation are mounting. Like the United States, most of the nation's major trading partners are experiencing slow growth and market declines.

And Bush isn't the only one suffering low approval ratings. In fact, the president may have more clout at the gathering than his own low approval number -- 29 percent in an AP-Ipsos poll conducted in mid-June -- and the vast unpopularity of the Iraq war would suggest.

For one thing, the just-below-the-surface animosity toward him -- based on his Iraq moves and perceived hostility toward what then-Defense Secretary Donald H. Rumsfeld derisively described as "old Europe" -- is now mostly gone.

His two biggest detractors on Iraq -- Germany's Gerhard Schroeder and France's Jacques Chirac -- are gone from power, replaced by leaders who are much more U.S.-friendly: French President Nicolas Sarkozy and German Chancellor Angela Merkel.

One old partner in the Iraq war, Tony Blair, is gone, replaced as British prime minister by Gordon Brown. Brown, who is having political problems at home of his own, so far has generally had good relations with Bush. And another Iraq war ally from the past, Silvio Berlusconi, who was thrown out of office in part because of that support, is back once more as Italian prime minister and G-8 member.

"It's a G-8 with a lot of political leaders who are pretty weak," said Michael Green, a former Bush assistant on Asian affairs and now an Asia specialist at the Center for Strategic and International Studies.

Still, Green said, "I don't think that the president's potential leadership role or stature is as diminished as you might think in this forum, in part because he knows them all quite well. They have a working relationship. They have a common interest in demonstrating that this forum can do something."

The gathering includes the heads of states of the U.S., Japan, Britain, Germany, France, Italy, Canada and Russia. Vladimir Putin, whose relationship with Bush was at times contentious, is no longer a head of state and is not expected to attend the session, even though his influence and authority remain in Russia in his new post as prime minister. Bush has said he looks forward to meeting Putin's hand-picked successor, President Dmitry Medvedev, on the sidelines of the summit.

For his part, Bush, now a lame-duck leader, says a top priority is urging summit partners to make good on prior pledges to help poor and developing nations address challenges from health care to education to corruption. "We need people who not only make promises but write checks," Bush said at a Rose Garden news conference on Wednesday previewing the summit.

The host, Japanese Prime Minister Yasuo Fukuda, faces his own domestic problems. His government has suffered from support ratings as low as 20 percent amid constant brinkmanship between ruling and opposition parties, including an unprecedented no-confidence vote for him in the upper house in June.

For Fukuda, who got to set most of the agenda for the gathering, the overriding issue is climate change. He would like to come out of the meeting with an agreement on 50 percent reductions in so-called greenhouse gases by 2050.

Bush said he supports efforts for the group to agree on long and short-term goals, with national plans to achieve them. But he also told reporters, "Look, we can't have an effective agreement unless China and India are a part of it. It's as simple as that. I'm going to remind our partners that's the case."

China and India are playing increasingly important roles in the world economy, raising fresh questions about the Group of Eight's relevancy as now constituted. In 2001 at Bush's first meeting of the exclusive club, the members pretty much lived up to their billing as the world's leading industrial democracies.

No more. India, the world's most populous democracy, now has the world's fourth biggest economy, according to a World Bank rundown of the gross domestic product of countries based on purchasing power.

The U.S. remains the world's biggest economy, with Japan still at No. 2. But in third place now is China. Also, Brazil's economy is bigger than that of G-8 members Italy and Canada. In fact, the economies of Spain, Mexico and South Korea are bigger than that of G-8 laggard Canada, according to the World Bank report.

Bush spearheaded an effort to bring these and other fast-growing economies into the process, with a "major economies meeting" now scheduled for next Wednesday at the summit's conclusion.

Some want to see the group itself expanded to include China, India, Brazil and other major economies. "If we don't take this step, G-8 risks becoming increasingly irrelevant," said Richard Burt, a former U.S. ambassador to Germany. Instead of being able to deal with sensitive economic problems, "you get feel-good declarations," Burt said.

US Paulson Expects No Quick Fix to Calm Oil Prices

2008-07-03T20:16:00.001+08:00

US Treasury chief says there will be no quick fix to calm record oil price.

U.S. Treasury Secretary Henry Paulson warned Thursday that rising oil prices are likely to prolong the world economic slowdown. Speaking at a London news conference, he said there will be no quick fixes to calm soaring oil prices which hit a trading record, above $145 a barrel on Thursday.

"I think that the oil prices are a strong head wind and at this level, they have got a high risk that they are going to prolong the slowdown," Paulson said, winding up a European tour. Paulson was holding talks on Thursday with British Treasury chief Alistair Darling and banking executives following meetings in Russia, Germany and others in Britain.

British Prime Minister Gordon Brown, who met Paulson on Wednesday, told a parliamentary committee that he agreed that oil prices are likely to continue rising. "If demand exceeds supply and is likely to exceed supply for years to come, people will expect the price to rise," Brown told the House of Commons liaison committee.

Paulson and Darling told reporters that the United States and Britain urgently need to end their addiction to oil, reduce dependence on foreign energy imports and promote investment in renewable alternatives. However, Paulson also conceded there is unlikely to be any short term impact to lower prices.

Saudi Arabia's oil minister, Ali Naimi, said Thursday that his country has no immediate plans to boost production, despite the new price record. "I don't believe this situation avails itself of quick fixes," Paulson said. "But that doesn't mean we shouldn't be focused on this intensely right now, in terms of taking measures that will lead to changes."

Paulson and Darling called for more transparency from oil producers about their reserves and urged the Group of Eight industrialized nations to consider how to increase oil production at a summit in Japan next week. "There are questions in the short term about the ability to meet the demand," Paulson said.

Darling said action to lower dependence on foreign oil must take place faster than previously anticipated. Nations need to "move far more quickly than many people thought was necessary," he said.

Attack on Iran Would Provoke a Fierce Reaction

2008-07-02T20:03:00.001+08:00

Iranian minister says any attack would provoke a fierce reaction.

An attack on Iran would provoke a fierce response, the country's oil minister warned Wednesday at the World Petroleum Congress in Madrid. Minister Gholam Hossein Nozari, however, said Tehran would not cut oil deliveries and would continue supplying the market even if struck by Israel or the United States.

Tehran "is not going to be quiet," if attacked, Nozari told reporters. It's "going to react fiercely, and nobody can imagine what would be the reaction of Iran," he added. Nozari spoke outside the 19th World Petroleum Congress after a presentation on Iran's oil and gas industry to a packed audience, including representatives of European and U.S. energy companies.

Tehran is under U.N., U.S. and European sanctions because it has defied U.N. Security Council demands to suspend its uranium enrichment program. But with oil supplies tight and prices at unprecedented levels, the energy industry remains tempted by the possibilities of investing in Iran, OPEC's second largest oil producer and No. 2 in terms of the world's natural gas reserves.

President Bush has repeatedly said that a military strike on Tehran is possible as a last-resort if Iran continues to pursues uranium enrichment and fails to heed other Security Council demands. Israel too has warned that it is ready to hit the Islamic Republic's nuclear installations.

ABC News quoted an unnamed senior Pentagon official warning of an "increasing likelihood" that Israel will strike Iran's nuclear facilities before the end of the year. Such an attack could prompt Iran to retaliate, potentially disrupting oil shipments from the strategically vital Persian Gulf.

Nozari said such any attack would send oil prices further into uncharted territory. "We don't think the wise people in the world even think about any action like that," he said. "Can you imagine ... what would be the result in the oil market?" Oil prices hit a record high above $143 this week.

But Nozari indicated Iran would not withhold its crude from the market even if attacked, although other officials have indicated otherwise. "Iran has always been a reliable source of supply to the market, and Iran remains a (reliable) source of supply," he said.

He dismissed suggestions that the standoff over Iran's nuclear program has diminished Iran's oil and gas exports, despite U.S. sanctions that prohibit American companies from doing business with Tehran and growing pressure from Washington on other countries to follow suit. "We have increased our production in the past two years by 250,000 barrels a day and we have added to the production of our gas," he said.

Weak Dollar Pushes Oil to Record Above $143

2008-06-30T20:12:00.002+08:00

Oil rises above $143 a barrel on falling dollar, tensions in the Middle East.

Oil prices surged above $143 a barrel for the first time ever Monday, as a weaker dollar spurred investors to seek refuge in dollar-denominated oil futures to hedge against inflation.

"The main factors behind the rise today are the U.S. dollar remains fragile and geopolitical tensions, particularly surrounding Iran," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney. "That's unsettling for the oil market." The European Central Bank may raise interest rates at its next meeting on Thursday, a move that would help strengthen the euro against the dollar, Moore said.

Light, sweet crude for August delivery rose $3.46 to $143.67 a barrel in electronic trading on the New York Mercantile Exchange, by midday in Europe. On Friday, crude futures spiked to a record $142.99 a barrel in New York before closing at $140.21. In London, Brent crude futures rose $2.87 to $143.18 a barrel on the ICE Futures exchange in London.

Analysts said daily trading volumes for Nymex oil would probably continue last week's trend and stay on the light side, leading to higher volatility during the trading sessions. "We would not expect liquidity to be much better this week, as it will be a short trading week due to the July 4 weekend," Olivier Jakob of Petromatrix in Switzerland said in a research note.

Worries about tight oil supplies and growing global demand are also major factors in the doubling of oil prices since last year, Moore said. Traders were digesting reported comments from the commander of Iran's Revolutionary Guards, who warned that if his country is attacked, Tehran would strike back by barraging Israel with missiles. In a report published Saturday in the conservative Jam-e-Jam newspaper, Gen. Mohammad Ali Jafari said that if Iran were provoked, it would also move to control a key oil passageway in the Gulf.

Iran is the world's fourth-largest oil exporter and about 60 percent of the world's oil passes through the strategic Strait of Hormuz. The report comes after the disclosure of a recent Israeli military exercise over the Mediterranean Sea that was seen as sending a message to Iran to curb its nuclear ambitions.

The dollar has weakened on expectations the Federal Reserve Board won't soon raise interest rates as the U.S. economy struggles with low growth. The Fed left its benchmark rate unchanged last week. The dollar dipped to 105.15 yen on Monday from 106.12 late Friday, while the euro was slightly higher at $1.5813.

"ECB President Jean-Claude Trichet's hawkish stance (on) inflation" could mean the dollar may be headed for further weakness against the euro "and that's not bearish for oil," said The Schork Report edited by U.S. analyst and trader Stephen Schork.

A falling U.S. stock market has also led investors to seek higher-yielding investments such as oil and other commodities. The Dow Jones industrial average has fallen to its lowest level in nearly two years -- and is down nearly 20 percent since its peak in October.

Bank for International Settlements Expects Deeper Economic Downturn

2008-06-30T20:10:00.001+08:00

Central banks' banker says world economy could see deeper, longer downturn than most expect.

The global economy could face a deeper downturn than many currently expect amid rising inflation and the turmoil on financial markets, the Bank for International Settlements said at its annual meeting Monday.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation," the BIS said in its annual report. "While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

The Basel-based bank added that the current "consensus view is still that the global economy will slow only modestly further in 2008" and that growth continued to be strong in the euro zone, Japan, and major emerging market economies.

Often called the central bank of central banks, the BIS said during its last fiscal year central banks worldwide reacted to the financial and monetary policy situation differently, and that given their countries' different economic situations, a "one size fits all" monetary policy can't necessarily be predicted or suggested.

The bank said that with inflation rising, a global bias toward higher interest rates was probably appropriate. Higher interest rates can cool inflation, but run the risk of lower growth. The bank warned against a cookie-cutter approach to interest rates from country to country, and warned than an excessive tightening exacerbated by the credit contraction caused by the crisis over mortgage-backed securities in the United States could worsen any downturn.

"Unfolding developments at the core of the global financial system have, however also created great uncertainty about the future economic prospects," the bank said. "Banks in several advanced industrial economies have been tightening lending standards, and thus a generalized squeeze in the availability of credit remains a distinct possibility."

The European Central Bank has indicated it could raise its key interest rate from the current 4 percent "by a small amount" as soon as this week, in an effort to combat rising inflation in the 15-nation euro zone, which is well above its preferred level of at or near 2 percent.

The BIS said it would have been best to avoid the large buildup of loose credit in the first place and urged new regulatory frameworks to prevent a recurrence. The BIS is a center for economic and monetary research, and coordinates regulations in the fields of financial services to promote international financial stability. All of BIS' capital is held by central banks BIS' customers include international central banks, as well as international organizations..

The BIS board of directors has 20 members and is currently chaired by Jean-Pierre Roth of the Swiss National Bank. Six non official directors are the central bank governors of Belgium, France, Germany, Italy and the United Kingdom as well as the chairman of the Board of Governors of the U.S. Federal Reserve System.

EU Inflation Hits 4% Record

2008-06-30T20:08:00.001+08:00

Euro inflation hits new record high of 4 percent as consumers dodge big purchases.

Yearly inflation in euro nations hit a record 4 percent in June, the EU statistics agency Eurostat said Monday. Soaring prices for fuel and food are raising pressure on the European Central Bank to raise interest rates for the first time in a year when it meets this week.

Inflation is Europe's biggest economic headache as consumers pay far more at the gas pump and food, and steer clear of major purchases. ECB officials have signaled they may hike borrowing costs from 4 percent to 4.25 percent to try to cool prices.

This would be the first time they have shifted the rate since June 2007 despite major cuts from the U.S. Federal Reserve and the Bank of England, who moved to encourage reluctant banks to lend in the wake of a credit market crisis.

The inflation figure for June tops the previous record of 3.7 percent in May, far above the ECB's recommended guideline of just under 2 percent. Eurostat says inflation has not been higher since it started keeping records for each euro nation in 1996.

The European economy appears to be slowing sharply after a brief boom -- triggered by exports to a swelling global economy -- cut jobless rates to record lows. Confidence in the 15 nations that share the euro dropped to a near three-year low in June and inflation is now a major worry.

Oil prices have quadrupled in the last seven years, hitting Europeans hard because they also pay heavy taxes on fuel that can cost them some 80 euros ($126) to fill up a tank of a passenger car. Fishermen and truck drivers say that surging fuel prices are threatening their livelihoods, and have protested, sometimes violently, in recent weeks.

Weekend's Featured: Oil Twists Determine Market Jittery This Time

2008-06-29T20:24:00.002+08:00

Record crude prices biggest difference from last market downturn in 2002.

Investors who remember the stock market's steep and prolonged decline earlier this decade may be wondering if the recovery from Wall Street's current morass will also take several years to accomplish.

The dot-com bust, terrorist attacks, recession and corporate wrongdoing combined to send stocks plunging in 2002. Today's market has some similar problems, in particular the troubled economy and a devastated industry -- this time, it's the financial sector. But there's one variable that may be impossible to resolve: oil prices that have more than doubled in a year and show no signs of abating.

"The economic gloom is far greater today then it was in 2002 because we have concern about worldwide inflation and what oil is going to do to the economy," said Alfred E. Goldman, chief market strategist at Wachovia Securities. "The problem for investors is when all of this is going to end, and the bottom line is nobody knows. Nostradamus wouldn't have known, neither would Albert Einstein."

Crude oil has risen nearly 44 percent in the past five months, and OPEC's president said this week he believes oil could rise to between $150 and $170 a barrel this summer; it closed at a record high past $142 a barrel on Friday. That's still lower then the $200 peak recently forecast by economists at investment bank Goldman Sachs.

The uncertainty about where energy prices are going makes it harder for economists to make forecasts. Many believe the high price of energy will eventually reverse after oil goes so high that demand shrivels and supplies increase -- but calculating a timeline is difficult. That leaves investors "just along for the ride," Wachovia's Goldman said.

Wall Street saw a return this past week of the volatility that had pummeled stocks since last summer but disappeared for a while during the spring. Investors were rattled not only by the uncertainty about oil's impact, but discouraging outlooks for the financial, high-tech and automotive industries.

This past week, the Dow Jones industrials plunged 4.2 percent, the Standard & Poor's 500 shed 3 percent and the Nasdaq composite index fell 3.8 percent. The market is worried about the direct correlation between the cost of energy, especially gasoline, and consumers' spending habits. Higher pump prices mean Americans might think twice about discretionary items like going out to dinner, buying new clothes, or paying for a new big screen television. Or buying a new car.

Consumer spending accounts for more than two-thirds of U.S. economic growth. Though there are no signs that spending has dried up entirely, many market observers fear it could happen -- especially as gasoline hovers near a national average of $4.08 per gallon.

Wall Street's low point in 2002 was attributed to a host of problems such as the accounting fraud at corporate names like Enron, Adelphia Communications and WorldCom. Global tensions after the Sept. 11, 2001, terror attacks also hung over the market. There was still fallout from the near-collapse of the high-tech industry, and the country's collective problems had also sent the economy into recession.

But, with oil at about $30 a barrel, inflation was under control. The market's troubles were not seen as a systemic risk, as they are today. "I knew we'd get through all the problems in 2002 because it was your plain vanilla, fairly shallow recession," said Stephen Leeb, president of New York-based Leeb Capital Management and author of "The Oil Factor."

"Right now, I think we're in one of the most threatening crisis of our history, and it is going to take a Manhattan Project to figure out what to do and it will take billions of dollars to implement it," he said, referring to the program during World War II to build the atomic bomb. "It can't immediately be cured because we need long-term answers."

The Federal Reserve, which kept interest rates on hold this past week, is well aware of the problem of expensive oil. The Fed statement released after its rate decision said "the rise in energy prices are likely to weigh on economic growth over the next few quarters."

But, Leeb and others believe this isn't something the Fed can solve on its own. The central bank's weapon against inflation is raising interest rates, which runs the risk of slowing down an already fragile economy. The higher oil goes, the more important of an issue it will become during the election cycle: "Washington needs to actively take charge if we want to turn this situation around," he said. "People are recognizing that the Fed is now in a total box."

Fed Helps Big Firms to Prevent Financial 'Contagion'

2008-06-28T17:01:00.002+08:00

Fed: Emergency help for Wall Street was necessary to avert "contagion" of financial system.

The Federal Reserve was scrambling to prevent a "contagion" from infecting the nation's financial system when it took unprecedented actions to back a Bear Stearns rescue package and provide emergency loans to big Wall Street firms.

The Federal Reserve released documents Friday providing insights into its private deliberations in March that led to those controversial decisions. The Fed's actions came when credit and financial problems were intensifying, threatening to paralyze the entire financial system and plunge the economy into a recession.

Given the financial markets' fragile condition at that time, the Fed said it felt compelled to intervene because an "immediate failure" of Bear Stearns would bring about an "expected contagion."

Fed Chairman Ben Bernanke and his colleagues initially moved on March 14 to provide temporary emergency financing to investment bank Bear Stearns Cos. through an arrangement with JPMorgan Chase & Co. Two days later, as the nation's then-fifth-largest investment bank teetered on the brink of bankruptcy, the Fed agreed to provide backing for up to $30 billion for a deal in which JPMorgan would take over the troubled company.

That same day -- March 16 -- the Fed said it would let big Wall Street firms go directly to the Fed for emergency loans, a privilege only commercial banks had previously enjoyed. It was the broadest use of the Fed's lending powers since the 1930s.

The Fed's decision to take this action was "based on recent, rapidly changing developments," the documents said. "These developments demonstrated that there had been impairment of a broad range of financial markets" that Wall Street firms rely on for financing.

There was fear that other Wall Street firms could fall into jeopardy, sending problems cascading through the financial system. Democrats in Congress and other critics contend the Fed's actions are akin to a government bailout and are putting billions of taxpayer dollars at risk.

However, Bernanke has defended the actions, and in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses. The Fed's financial lifeline in JPMorgan's takeover of Bear Stearns was subsequently changed to $29 billion and -- most recently -- to $28.82 billion.

The documents said the Fed, in discussions on March 16, believed the takeover -- and the Fed's involvement in helping to bring it about -- were "necessary to avoid serious disruptions to financial markets." The Fed said "many potential investors" had been invited to back Bear Stearns but the investment firm determined that JPMorgan was "the most suitable bidder."

Bear Stearns began to unravel last year when two hedge funds it managed collapsed because of heavy bets on subprime mortgage securities, which soured when the housing market fell into a deep slump. Along with other big investment banks, it was forced to take multibillion-dollar writedowns on the bad investments. Then rumors in mid-March about the company's cash position triggered a run on the investment bank that left it close to bankruptcy. Earlier this month, JPMorgan closed its acquisition of Bear Stearns, bringing to an end an 85-year-old institution.

Everybody May Be the Oil Speculators

2008-06-28T16:57:00.002+08:00

Retirement funds plowing cash into oil, riding its remarkable rise -- but there are risks.

All those speculators getting the blame for driving up the price of oil these days -- just who are they? For part of the answer, look in the mirror. The retirement savings of workers across the country, entrusted to pension fund managers, are being plowed into one of the few investments that has delivered phenomenal returns in recent years.

For decades, futures contracts were mostly traded by commodity producers and the people who used the actual products, such as crude oil, corn and soybeans. Agreeing to a price today for a commodity to be delivered in, say, two months is a way to smooth out price fluctuations for those supplies.

But large investors faced with the threat of inflation have increasingly used them as protection against the falling dollar. That includes pension funds, along with investment banks, mutual funds and private hedge funds.

Research firm Ennis Knupp and Associates says $139 billion had been funneled into energy commodites, primarily crude oil, by the end of March -- and it estimates more than half of that is from retirement money.

The investments have paid off. The Standard & Poor's GSCI index, which tracks a basket of commodities, is up 19 percent in the past five years, compared with just 9 percent for the S&P 500 stock index. The risk is that if the remarkable run in oil and other futures markets reverses course, billions of dollars of retirement benefits could be wiped out.

"A pension fund is supposed to be investing money in secure, stable investments for the benefit of the people whose money they are investing," said Dan Lippe, an energy analyst at Houston-based Petral Consulting Inc. "When we hit that wall and things start falling," he said, "they will fall very fast, and the pension funds that invested in commodities will see a tremendous loss of value."

The retirement system for public employees in California, the largest in the nation, has $1.3 billion invested in commodities. Most of it tracks the S&P commodity index. That's still just one-half of 1 percent of the fund's total $240 billion in assets, said Michael Schlachter, who advises the California pension fund. He said a collapse in oil or other commodity prices would have little effect on retirees.

Still, a growing chorus of experts is convinced retirement investments are enough to distort prices. Billionaire George Soros, the airline industry and the International Monetary Fund are all pressuring Congress to curb speculation by large investors. Democrats in Congress say they hope to vote on restrictions by August.

"Your pension fund manager may be using your retirement money to drive up the price of oil," said Rep. Bart Stupak, D-Mich., at a hearing earlier this week on speculation in commodities. "What would happen if pension fund managers decided to increase their commodity investment by another 20-fold?" he asked.

Speculators put money into commodity markets simply to make money on their investments -- unlike commercial investors, who are actually buying or selling orders for physical goods. Energy analysts say it's unclear what effect speculators have had on oil prices, which climbed briefly to a new record above $142 on Friday before falling back.

But Stupak and other lawmakers have already dashed off more than a dozen proposals to rein in commodity trading, including limiting how many contracts speculators can hold and closing loopholes that allow them to skirt regulations.

Sen. Joe Lieberman, I-Conn., proposed banning pension funds and other large investors from commodities altogether. He dropped the idea after vigorous opposition by an association of public and private pension funds.

Schlachter, who is also managing director for investment consulting firm Wilshire Associates, called the idea "horrendously bad." He said pension funds should not be compared to Wall Street speculators, who assume huge risks every day to maximize returns. "The pension plans we work with are using commodities only as a long-term hedge against inflation," he said.

Unlike the stock market, where there are a limited number of shares for each company, futures markets have no limits on contracts available. As long as a buyer can find a seller for each contract, investment opportunities are virtually unlimited.

Critics say retirement funds that accumulate contracts are artificially driving up commodity prices. In the case of oil, that means higher gas prices and more expensive food and other goods. "If they're going to be in the futures market they need to trade rather than take this buy and hold strategy," said Michael Masters, portfolio manager of hedge fund Masters Capital Management. "That is the worst possible thing for the futures market."

Masters and other experts told members of Congress this week that eliminating excessive speculation could drive oil prices down to about $65 a barrel, less than half the current price. Retirement funds have suffered at the hands of the market before. In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement assets dropped $7 billion, losing 8 percent of their value.

Oil Breaks New Record Near $143

2008-06-28T16:54:00.002+08:00

Oil prices set new record near $143 a barrel as investors flock to commodities.

Oil futures climbed to a new record near $143 a barrel Friday as the dollar weakened against the euro, confirming expectations that the falling greenback, a major factor in crude's stratospheric rise, will extend its decline and add to oil's appeal.

Retail gas prices inched lower overnight, but are likely to resume their own trek into record territory now that oil futures have broken out of the trading range where they had been for nearly 3 weeks.

Light, sweet crude for August delivery rose as high as $142.99 a barrel on the New York Mercantile Exchange before pulling back sharply in a spate of late-day profit-taking to settle up 57 cents at a record $140.21. On Thursday, the contract shot past $140 and rose more than $5 to a new settlement record.

The latest record came as the dollar fell against the euro in afternoon trading, having traded roughly unchanged for much of the day. "The dollar was slightly stronger, and when it gave up its gains, that gave oil the green light," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

The market now believes the Federal Reserve is unlikely to raise interest rates in the near future; since higher rates tend to strengthen the dollar, traders are anticipating that it will continue to fall and, consequently, that investors will keep turning to commodities including oil as a hedge against inflation. "Oil's back in favor, especially with people bailing out of the stock market," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

The stock market's recent swoon is also sending investors in search of higher-yielding investments. On Thursday, the Dow Jones industrial average fell nearly 360 points, and in afternoon trading Friday was down more than 100 points.

"When money has nowhere to go, it is parked in commodities as it is one of the few investment instruments that actually rises the more money you pour into it," said Oliver Jakob, an analyst at Petromatrix Gmbh, in Switzerland in a note. With oil over $140 a barrel, traders are now expecting to see $145 and even $150, analysts say.

At the pump, meanwhile, gas prices slipped 0.1 cent overnight to a national average of $4.066 a gallon, according to a survey of stations by AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen slightly from their June 16 record of $4.08 a gallon, but will likely resume their record breaking rise if oil futures keep trending higher.

That seems likely. Oil has more than doubled in the past year due to the dollar's decline, but also because of rising global demand, particularly in fast-growing economies such as China and India. Supply outages in the Middle East and Nigeria have also contributed, as has falling production in Mexico.

The sharp increase in oil prices has driven a similar rise in fuel prices. Gas prices are $1.09 higher than a year ago, and diesel prices were up $1.85 over the past year at a national average of $4.763 a gallon on Friday. Diesel is used to fuel most industrial vehicles, trucks, trains and ships, and its increase is a large part of the reason food and consumer goods prices are rising, putting additional pressure on consumers already paying $4 and more for gas. Diesel prices peaked at $4.797, also on June 16, but are likely to push past that record if oil futures keep rising.

NASA Scientist Gives 'Last Chance' Warning on Global Warming

2008-06-24T20:38:00.002+08:00

NASA global warming scientist: Dump coal power and clean up emissions or 'we're toast'

Exactly 20 years after warning America about global warming, a top NASA scientist said the situation has gotten so bad that the world's only hope is drastic action.

James Hansen told Congress on Monday that the world has long passed the "dangerous level" for greenhouse gases in the atmosphere and needs to get back to 1988 levels. He said Earth's atmosphere can only stay this loaded with man-made carbon dioxide for a couple more decades without changes such as mass extinction, ecosystem collapse and dramatic sea level rises.

"We're toast if we don't get on a very different path," Hansen, director of the Goddard Institute of Space Sciences who is sometimes called the godfather of global warming science, said. "This is the last chance."

Hansen brought global warming home to the public in June 1988 during a Washington heat wave, telling a Senate hearing that global warming was already here. To mark the anniversary, he testified before the House Select Committee on Energy Independence and Global Warming where he was called a prophet, and addressed a luncheon at the National Press Club where he was called a hero by former Sen. Tim Wirth, D-Colo., who headed the 1988 hearing.

To cut emissions, Hansen said coal-fired power plants that don't capture carbon dioxide emissions shouldn't be used in the United States after 2025, and should be eliminated in the rest of the world by 2030. That carbon capture technology is still being developed and not yet cost efficient for power plants.

Burning fossil fuels like coal is the chief cause of man-made greenhouse gases. Hansen said the Earth's atmosphere has got to get back to a level of 350 parts of carbon dioxide per million. Last month, it was 10 percent higher: 386.7 parts per million.

Hansen said he'll testify on behalf of British protesters against new coal-fired power plants. Protesters have chained themselves to gates and equipment at sites of several proposed coal plants in England. "The thing that I think is most important is to block coal-fired power plants," Hansen told the luncheon. "I'm not yet at the point of chaining myself but we somehow have to draw attention to this."

Frank Maisano, a spokesman for many U.S. utilities, including those trying to build new coal plants, said while Hansen has shown foresight as a scientist, his "stop them all approach is very simplistic" and shows that he is beyond his level of expertise.

The year of Hansen's original testimony was the world's hottest year on record. Since then, 14 years have been hotter, according to the National Oceanic and Atmospheric Administration. Two decades later, Hansen spent his time on the question of whether it's too late to do anything about it. His answer: There's still time to stop the worst, but not much time.

"We see a tipping point occurring right before our eyes," Hansen told the AP before the luncheon. "The Arctic is the first tipping point and it's occurring exactly the way we said it would." Hansen, echoing work by other scientists, said that in five to 10 years, the Arctic will be free of sea ice in the summer.

Longtime global warming skeptic Sen. James Inhofe, R-Okla., citing a recent poll, said in a statement, "Hansen, (former Vice President) Gore and the media have been trumpeting man-made climate doom since the 1980s. But Americans are not buying it." But Rep. Ed Markey, D-Mass., committee chairman, said, "Dr. Hansen was right. Twenty years later, we recognize him as a climate prophet."

Weekend's Featured: Fed Unlikely to Raise Interest Rates Despite Hawkish Stance

2008-06-22T14:59:00.002+08:00

The tough talk on inflation from Federal Reserve chairman Ben Bernanke and his colleagues is unlikely to lead to a boost in interest rates for now.

Even as central bank officials step up hawkish rhetoric, base rates will likely be held steady at 2.0 percent at a two-day meeting opening Tuesday of the Federal Open Market Committee, most analysts predict.

The Fed appears to be in a box with inflation pressures heating up even as the economy teeters on the brink of recession. The central bank has slashed rates since last September by 3.25 percentage points in an effort to fire up growth, but officials appear to be signaling that cycle of cuts is over, and that inflation is now the biggest threat.

"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level. Moreover, the rise in inflation expectations is clearly due to surging commodity prices, not an economic overheating."

David Kotok, chairman of Cumberland Advisors, said the Fed "will not raise interest rates this year, at least not until after the (November presidential) election." Kotok said the US economy is facing a commodity-driven inflation surge rather than a wage-driven push, and that monetary policy would do little to check these prices.

"The energy price shock is not something that the Fed can control," he said. Moreover, he said that because more consumer income is going to pay fuel bills, the effect of high oil prices is "deflationary, not inflationary." Similarly, Kotok said higher food prices would see little impact from rate hikes.

The analyst also said the Fed does not want to risk being seen as injecting itself in politics during a presidential campaign and will most likely refrain from any major actions until the election is over.

"The Fed normally does not raise interest rates preceding a national election," he said. "This time they are a beleaguered body and threatened by politics unlike in any recent period of history. Politics has injected a wild card into the Fed decision making. We expect that the Fed will stay on hold until after the election and keep its profile low in September and October."

From a purely economic perspective, many analysts argue that conditions are too fragile for higher interest rates. The housing crisis remains in full swing and credit markets are still vulnerable to a shock, some argue.

"If the Fed now regrets having lowered the federal funds rate while providing so much liquidity, might raising the federal funds rate now exacerbate the credit crisis and the recession? I think so," said Ed Yardeni at Yardeni Research.

Still, Bernanke and other Fed officials have been signaling they will take steps to keep inflation expectations from getting out of control. Bernanke said earlier this month that any shift in public expectations in inflation could be self-fulfilling by prompting workers to demand higher wages and businesses to pass on price increases.

"It's 'high noon' and Sheriff Bernanke is waiting with gun holstered, waiting for rapid inflation," said Scott Anderson, senior economist at Wells Fargo. "The problem is he may actually have to do battle if oil prices do not recede or stabilize soon. I call this a problem, because I'm not sure if the town is ready for this event, so soon after Sheriff Bernanke had to chase off the financial market crisis gang from taking over the town."

Some say the Fed is trying to "jawbone" public expectations in what amounts to a bluff on hiking rates. "The Fed is now battling inflation expectations, not inflation itself," said Joel Naroff at Naroff Economic Advisors.

"The first step in that war is jawboning, which is going on like crazy. We will not likely see the next action, rate hikes, until late in this year at the earliest." Naroff said the latest economic data "do not tell us the economy has stabilized to the point where the Fed would have any cover to raise rates."

Weekend's Featured: Oil Summit Looks for Oil Prices Solution

2008-06-22T14:55:00.002+08:00

Oil Powers and Consumer Nations Meet on Sunday to Tackle Rising Oil Prices.

Leaders of global oil powers and consumer nations gathered in Jeddah on Sunday seeking ways to control spiralling oil prices seen as a mounting threat to the world economy. Saudi Arabia vowed on the eve of the meeting to release more crude as the price of a barrel hurtles toward 140 dollars, compounding inflation fears of countries reeling from record prices for staple foods.

Oil markets have lurched by up to 10 dollars a day in recent weeks, falling last week after China increased fuel prices, but many analysts expect new attacks in Nigeria to add to tensions this week.

While governments have highlighted refining shortages and increased demand, producer nations say action has also got to be taken to rein in "speculators" who they say have played a key role in the doubling of a price of a barrel over the past year.

"What is bringing us together is a sincere wish to be responsible," Saudi Arabia's Deputy Petroleum Minister Prince Abdulaziz bin Salman told a press conference late Saturday. Saudi Arabia has already announced it will increase output by 200,000 barrels a day to 9.65 million a day. "We will meet demand," the prince vowed. "If demand requires more crude, we shall sell it."

But Saudi Arabia is one of the nations that wants action against "speculators" and its gesture in increasing production has not been matched by other members of the Organization of Petroleum Exporting Countries (OPEC) which accounts for about 40 percent of world output.

OPEC president Chakib Khelil said even that increased production was "irrational and illogical". A Saudi source said there is scope for other countries to follow however. "Some people believe there is one million barrels of spare capacity within OPEC outside Saudi Arabia," the source told reporters. "Saudi Arabia has two million so all together that is three million." World production is currently just over 80 million barrels a day.

But more pressure for increased supplies is expected at the summit. German Economy Minister Michael Glos has called for a speedy increase in supplies. "We need more oil in the world market quickly in order to stop the spiralling prices at the gas pumps" which have passed a "limit" acceptable to consumers, the minister wrote in an article in the Sunday newspaper Bild am Sonntag.

British Prime Minister Gordon Brown, the senior western leader at the summit, has called for a "new deal" between consumers and producers. He wants producer nations to "invest in countries like ours, and oil consumers like us with good companies, with good technology and skills can invest in the oil-producing countries."

Brown said in an interview with The Guardian newspaper that the world was going through "the biggest of all three oil shocks" and called it "the downside of globalisation." He predicted that "the world is going to have to build 1,000 nuclear power stations."

US Energy Secretary Samuel Bodman insisted meanwhile that there is nothing to back accusations that "speculators" had pushed oil prices to their record levels. "There is no evidence that we can find that speculators are driving futures prices," Bodman told a press briefing in Jeddah.

"It is clear that financial markets have seen unprecedented movement of capital into commodities in recent years. Our view is that this capital is following the market upward, it is not leading that movement."

OPEC has argued that speculation and the weak dollar are behind the record prices. Bodman said: "Fundamentally tight market conditions in our view are the major driver of the dramatic price increases that we have seen over the last five years, and particularly in recent months."

Weekend's Featured: Wall Street Awaits Hawkish Fed Message

2008-06-22T14:51:00.002+08:00

Struggling Wall Street Is Bracing for Hawkish Fed Message.

Whipsawed by fresh worries on the financial sector, Wall Street enters the summer season with investors in a sour mood ahead of a meeting of increasingly hawkish Federal Reserve policymakers.

Market jitters have risen amid high oil prices, troubles in the banking sector and the prospect of higher interest rates despite soft economic conditions. Auto sector troubles also have intensified. In the week to Friday, the blue-chip Dow Jones Industrial Average skidded 3.77 percent to end at 11,842.69, closing below 12,000 for the first time since March. The Standard & Poor's 500 broad-market slumped 3.10 percent to 1,317.93 and the tech-heavy Nasdaq composite fell 1.97 percent on the week to 2,406.09.

Sentiment faces yet another test in the coming week, when the Federal Open Market Committee headed by Fed chief Ben Bernanke is expected to signal a tougher position on inflation that could eventually mean higher interest rates.

"All eyes will be on the FOMC which is slated to announce its latest policy decision on Wednesday," said Meny Grauman, economist at CIBC World Markets. "The markets seem convinced that the Fed will hold rates at 2.00 percent, but there is considerably more uncertainty about whether the Fed will signal a tightening bias."

The Fed's shift in tone has been closely watched by analysts. After slashing rates by 3.25 points over the past few months in an effort reignite growth, the Fed has signaled that it is unlikely to cut rates further and may boost rates if inflation gets out of hand.

"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level."

Market troubles over the past week were fueled by growing worries about the banking sector. Citigroup's warning of more writedowns from real-estate losses and a need for fresh capital from regional bank Fifth Third fueled fears about the sector.

"Each day the Street is seeing similar news -- such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps. The bleak news is keeping investors from stepping into the market," said Colleen King at Schaeffer's Investment Research.

Gerard Cassidy at RBC Capital Markets said bank stocks are headed for a "dead cat bounce" or a brief rebound from their troubles as they recognize losses from real-estate investments. "Though we expect the bank stocks to rally as much as 20 percent into second-quarter earnings announcements, we believe the fundamental trend is still bearish for banks stocks," he said. "Credit problems are expected to deteriorate over the next 12 months, which should drive stock prices lower in the second half of 2008, in our opinion."

Fred Dickson at DA Davidson & Co. said the troubles for banks are being watched because credit needs to flow to help any economic rebound. "Wall Street is growing more concerned over deteriorating profits and weakening balance sheets at not only the regional banks but also at global banks as more institutions 'fess up and state their need for additional capital or their view that the current credit market crisis hasn't materially begun to wind down," he said. Bank stocks, he added "need to bottom out before the broader stock market can begin a meaningful sustainable rally."

To make matters worse, the auto sector is facing its own troubles as Ford and General Motors slash output of profitable but fuel-hungry trucks to adapt to changes in demand in light of record fuel costs. Standard and Poor's cut its credit rating on the two along with privately held Chrysler. "We have renewed concerns about all three automakers' future cash outflows in light of the prospects for US sales for the rest of 2008 and into 2009," said S&P analyst Robert Schulz.

Bonds rallied as investors set aside inflation concerns and looked for safety. The yield on the 10-year Treasury bond fell to 4.137 percent against 4.261 percent a week earlier and that on the 30-year bond eased to 4.702 percent against 4.802 percent. Yields and prices move in opposite directions.

In the coming week, the Fed meeting is the main attraction but markets will also see data on new and existing home sales, durable goods orders and the final estimate of US economic growth in the first quarter.

Banks Raise Capitals at the Expense of Investors

2008-06-21T15:47:00.001+08:00

Banks cutting dividends, diluting shares to raise badly needed capital.

America's banks and brokerages are scrambling to raise badly needed cash, but it may be at the expense of shareholders. Since the subprime mortgage market imploded, financial companies caught in the fallout have been raising capital in two major ways -- cutting dividends and issuing more shares. Both methods erode shareholder value; analysts believe the industry is poised for more.

"The market is now seeing a substantial increase in financial companies issuing common and convertible instruments in an effort to shore up liquidity," said Standard & Poor's senior index analyst Howard Silverblatt. "The additional financing gives them immediate breathing room, with the payback being longer term dilution."

Put plainly, their gain is your pain. Just this past week, Fifth Third Bancorp Chief Executive Kevin Kabat needed a cash infusion of $2 billion to bail out his struggling regional bank, while KeyCorp CEO Henry Meyer needed $1.5 billion. Both will issue stock to boost their balance sheets.

Banks have raised more than $60 billion this year by selling common and preferred shares. The issuance of new stock acts to dilute the value of current shareholders because profit gets split among more shares. It's like having the family over for a turkey dinner and at the last minute grandpa invites the neighbors, too. There'll be less for everybody.

Meanwhile, the regular stock dividends investors have counted on from banks are shrinking. Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. banks that slashed dividends during the first six months of 2008 -- that's more dividend trimming in the sector than the past five years combined.

The entire S&P 500 doled out $61.72 billion worth of dividends during the first quarter -- down from $67.09 billion during the fourth quarter of 2007. Financial companies accounted for 12.35 percent of the first quarter dividends, a sharp decline from 22.3 percent during the fourth quarter and 28.68 percent during the third quarter.

And, with major banks set to report second-quarter earnings next month, investors will likely suffer through more write-downs. Already Citigroup Inc. Chief Financial Officer Gary Crittenden warned investors that the bank will take substantial charges in the second quarter, though they won't exceed the $6 billion that Citi recorded in the first quarter.

Since last summer, global banks and brokerages have written down nearly $300 billion from wrong-way bets in mortgage-backed securities and other risky investments. Some analysts say that amount could climb much higher.

Fitch Ratings estimates that the mortgage crisis has cost banks $400 billion in losses so far, and the International Monetary Fund said in a report that the amount may rise to nearly $1 trillion before the credit crisis is over.

Analysts at JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG all said this week that banks may have to cut dividends further and raise more capital to cover losses. Not all of the banks are feeling the same pain. Huntington Bancshares Inc. said this week that its credit quality is not on the verge of buckling, while SunTrust Banks Inc. announced Friday it does not foresee having to cut its dividend or issue new stock to raise capital.

But the rest of the sector might need to raise $65 billion more as losses and write-downs extend into 2009's first quarter, according to Goldman Sachs analyst Richard Ramsden. He lowered the price targets on 14 banking companies, and slashed earnings per share forecasts for 11 of them.

All of this comes amid one of the most brutal years for financial stocks since they plunged in 1998 after Russia defaulted on its government bonds and caused investors to unwind positions in emerging market debt. The KBW Bank Index, which includes 24 financial companies, has slid about 19 percent in June. And major institutions from Lehman Brothers Holdings Inc. to regional banks like Wachovia Corp. are all hovering near record lows. "Banks will not turn until a peak in credit costs is in sight," Ramsden said.

China Pledges Economic Openness, Wants US to Avoid Protectionism

2008-06-20T22:17:00.002+08:00

China vice premier pledges economic openness, urges US to avoid protectionism.

China's vice premier said Thursday his country will continue to open its economy, but he urged the United States to avoid protectionism and share technology on energy and climate change.

"A trend of protectionism has emerged in the United States, a country based on free trade," Wang Qishan said at a reception in New York. "The United States should not close its doors or practice protectionism. The U.S. should continue to be an open country."

Wang's comments followed high-level economic talks this week in which China and the United States pledged greater cooperation to boost bilateral investment and deal with energy shortages and climate change.

The two countries agreed to launch talks on a treaty that could allow more U.S. investment in China's booming economy -- a major initiative of the Bush administration. The agreements on energy, the environment and investment followed two days of talks aimed at diffusing simmering economic tensions.

Critics contend the soaring U.S. trade deficit with China, which last year reached an all-time high of $256 billion, is the result of unfair trade practices, including currency manipulation, and has contributed to the loss of 3 million manufacturing jobs since 2001.

Wang said his country would continue down the path of economic reform, noting recent efforts to strengthen intellectual property rights, boost food and product safety, and protect foreign investors. But he urged patience as the developing Asian country of 1.3 billion people seeks to modernize its economy, poised to surpass Germany to become the world's third largest after the U.S. and Japan.

"We are making efforts to build institutions and a sound legal framework," said Wang, a former mayor of the Chinese capital, Beijing. "There is still much room for improvement," he added. "We need to improve transparency, but (the U.S.) should recognize how much progress China has made. We have done in 30 years what it took America 100 years to do.

Wang spoke at a dinner reception at a posh New York hotel. Guests included former U.S. Secretary of State Henry Kissinger, former U.S. ambassador to the United Nations, Richard Holbrooke, and Morgan Stanley Chief Executive John Mack.

Calling U.S.-Chinese relations of "paramount importance," Wang urged the United States to share more technology to prevent climate change and boost energy efficiency. He noted China could use U.S. expertise to capture carbon emissions from coal-fired power plants -- a chief source of global pollution. "This area of capturing carbon emissions enjoys broad prospects and wonderful business opportunities," Wang said.

He noted that U.S. firms have been reluctant to share technology with China because of lax intellectual property laws, but he said he pledged to work on the problem in talks with Treasury Secretary Henry Paulson. The talks were the fourth round of a series of negotiations known as the Strategic Economic Dialogue.

Wang also hit out at U.S. critics who have blamed China for steep increases in world food prices, saying the complaints contradict U.S. trade policy to boost American food sales to China. "Some people say China and India are beginning to eat too much beef and are straining supplies. But India doesn't eat as much beef so it must be all China," Wang said jokingly. "Does that mean the Chinese and Indians are destined to eat rice and vegetables? Some of these problems contradict one another."

The decision to pursue an investment treaty with China offers the prospect of wiping away a multitude of barriers that U.S. companies now face in their efforts to do business with China. But critics of the U.S. trade policy say the process could become bogged down and fail to produce the market-opening that U.S. companies are seeking. Some also complain the measures fail to push the Chinese to stop manipulating its currency.

China Petrol Hike Not to Reduce Oil Demand

2008-06-20T22:15:00.001+08:00

China's fuel price hike may not dent booming economy's hunger for oil, analysts say.

The jump in China's state-controlled fuel prices will inevitably squeeze consumers at both filling stations and grocery stores. But analysts say the hike is unlikely to make an immediate or huge dent in the country's hunger for oil.

China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent up consumer demand in a country of 1.3 bilion where per capita energy consumption is still far below wealthier countries.

Also, the price hike of up to 18 percent is likely to prompt refiners to boost production of crude oil, gasoline and other refined products. Previously, they had held back because they were losing money on the wide gap between global crude oil prices and state-set retail prices, which had created widespread fuel shortages.

"Do not expect an immediate fall in China's oil imports -- the price effect on demand will work in China as well, but it will take some time to work through," Wang Tao, an economist for UBS Securities, said in a report issued Friday.

Crude oil prices edged higher Friday in Asian trading -- approaching $133 a barrel on the New York Mercantile Exchange -- after tumbling the day before on news the National Development and Reform Commission would raise prices for gasoline and diesel fuel by 16 percent and 18 percent respectively.

Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue. "Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on-line to satisfy China's voracious appetite, remains to be seen," said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.

Chinese drivers shrugged off the price hike as inevitable. "Maybe I might drive a bit less. But if it's for business, then if I have to drive, I will," said He Ping, a trading company employee who was refilling is VW Jetta at a Beijing gas station. "It's not that big a deal," he said.

In an explanatory note accompanying its announcement, the commission said that soaring oil prices had created "contradictions in the purchasing price of oil being higher than the selling price of refined products that were becoming more glaring by the day."

The government has been paying billions of dollars in subsidies to the country's two big state-owned refiners to make up for the losses. Many smaller loss-making refiners had shut down or cut back their operations.

The government hiked fuel prices by about 11 percent in November but had kept them frozen at that level, seeking to avoid adding to inflation, which has touched 12-year highs since the beginning of the year.

News of the price hikes lifted Chinese stocks Friday. The benchmark Shanghai index rose 3 percent, driven by a 4.6 percent gain in PetroChina and a 2.1 percent advance in Sinopec -- the country's two big refiners.

The hike raised the price of gasoline by 1,000 yuan ($145) per ton to 6,980 yuan ($1,015) -- more than 16 percent -- and diesel by the same amount per ton to 6,520 yuan ($949) per ton -- an 18 percent hike. Aviation kerosene rose by 1,500 yuan ($218) per ton to 7,450 yuan ($1,084), the commission, known as the NDRC, said on its Web site.

To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.

Residential housing and farming and fertilizer industries will be exempt from a 0.025 yuan (0.0036 U.S. cents) per kilowatt increase in electricity rates for most businesses, the planning agency said.

The state-run newspaper China Daily said Friday that areas in Sichuan province, hit by a massive earthquake last month, were exempt from the increases. Still, the move is widely expected to boost inflation -- a major concern for Beijing. The hikes "will be quickly passed on to consumers through other channels, especially food prices in urban areas," said Vivian Chiu, an analyst at Merrill Lynch, said in a report.

China's inflation rate fell in May to 7.7 percent from 8.5 percent the month before, mainly reflecting lower food prices. But economists warn that higher costs for crude oil and other commodities pose a long-term threat.

Chinese officials bristle at suggestions that their country is a main factor behind the recent surge in global oil prices. Despite surging oil costs, the country's imports of both crude oil and oil products have surged to unprecedented levels as it builds up national stockpiles, while exports have plunged. Crude oil imports rose to 59.8 million barrels in January-April, up 10 percent from a year earlier.

Gasoline imports skyrocketed by nearly 20 times to 554,000 tons in January-May while imports of diesel jumped by more than nine times, to 2.9 million tons. "The government has to build up reserves for the sake of the domestic energy supply," said Han Xiaoping, chief executive officer of the China energy Web site http://www.china5e.com, an independent research organization. "After all, China is not the only country with such reserves," Han said.

Despite the surge in overall demand, China still consumes far less energy per each of its 1.3 billion people than the U.S. or other wealthy countries. Streets are dimly lit, apartment buildings often are illuminated by lights triggered only by movement or sound and ownership of private cars, though growing quickly, remains relatively low.

Pinched by surging costs for labor, land and materials -- as well as energy -- Chinese industries are finally beginning to cut back on the waste that has made them far more extravagant energy consumers than private citizens.

China Ocean Shipping (Group) Co., a huge state-owned shipping company, announced earlier this week that it was cutting the speed of its ships by 10 percent to help reduce fuel consumption and conserve energy.

US-India Nuclear Talks Going Haywire

2008-06-18T21:37:00.001+08:00

India puts off talks, unable to clinch nuclear deal with the United States.

The future of a landmark nuclear energy accord between India and the United States looked deeply uncertain Wednesday after India's government put off talks with powerful communist opponents of the pact.

The meeting is now scheduled to take place next week. But even if it goes ahead, it's unclear what difference it will make with the communist parties steadfast in their opposition, reinforcing doubts over whether the deal can be clinched before President Bush leaves office. "We have several times made our position clear -- we are opposed to it," said Nilotpal Basu, a top official of the Communist Party of India (Marxist)

The deal would "undermine the independent foreign policy of India," he said, citing U.S. pressure on New Delhi to aid Washington's efforts to halt Iran's nuclear program. "We do not think this deal gives us any advantages."

U.S. policymakers see India as a counterweight to an ever-more powerful China, and the deal reverses three decades of American policy by allowing the shipment of nuclear fuel and technology to India, which has never signed international nonproliferation accords and yet has tested atomic weapons. India, in exchange, would allow international inspections of its civilian nuclear reactors.

For Bush, the deal -- the result of two years of painstaking negotiations -- would be a major foreign policy success amid the wars in Iraq and Afghanistan and other crises. For India, the benefits are arguably greater. Its booming but energy-starved economy would gain access to much-needed nuclear fuel and technologies that it has long been denied because of its refusal to sign nonproliferation accords.

And even though the deal only covers civilian nuclear power, it tacitly acknowledges India as a nuclear-weapons state, giving its weapons program a degree of international legitimacy -- and adding to India's growing clout. But a wave of opposition from India's communist parties, which provide the governing coalition with its parliamentary majority, appears to have scuttled the pact for now.

U.S. officials said earlier this year that with American elections coming up -- and no guarantee the next U.S. administration will keep the deal on the table -- India needed to complete its end of the pact by May to give the U.S. Congress enough time to pass it. Congress breaks for the summer in early July, and many lawmakers will be busy campaigning in the fall.

It's now mid-June, and New Delhi has made no progress in reaching a separate deal with the U.N.'s International Atomic Energy Agency that's needed before Congress can approve the pact. Wednesday's meeting was intended to persuade the communists to allow the government to secure a deal with the IAEA. It was canceled because of scheduling conflicts, Basu said.

Following the postponement, an Indian Foreign Ministry official said the deal was in "meltdown," although he held out hope for a last minute communist reversal. The official insisted on anonymity because of the sensitivity of the situation.

A day earlier in Washington, U.S. State Department spokesman Tom Casey stressed that the Bush administration would "make every effort to move it through Congress" before leaving office in January. But he, too, suggested that is unlikely to happen. "We would certainly hope that the next administration, whoever comes to office in January, would also see this agreement as something fundamentally in America's interest," he told reporters on Tuesday.

Both Barack Obama and John McCain have endorsed the deal. But it is not clear if either would make it a priority. The nuclear deal faces opposition in the U.S., too. Critics there, including some in Congress, say providing U.S. fuel to India would free up India's limited domestic supplies of nuclear material for use in atomic weapons, which they argue could spark a nuclear arms race in Asia.

Chinese Yuan Hits New Record Against Dollar

2008-06-18T21:33:00.001+08:00

Chinese currency hits fresh high against US dollar as strategic economic talks resume.

The Chinese yuan gained against the U.S. dollar on Wednesday, hitting a fresh high as American and Chinese officials resumed talks centering on trade and other strategic issues.

Washington wants Beijing to loosen controls on currency trading and allow the yuan's rate to set by market forces. U.S. manufacturers contend that the restrictions keep the yuan's value artificially low, giving Chinese exporters an unfair advantage and boosting China's trade surplus.

The yuan has gained about 20 percent against the U.S. dollar since Beijing revamped its foreign exchange trading system in July 2005, revaluing the currency by 2.1 percent to 8.11 yuan to one dollar.

On Wednesday, the yuan began trading at a 6.8823 to the dollar, continuing a steady advance against the dollar that has taken it to record highs in recent weeks. It was trading at 6.8827 by Wednesday afternoon on the over-the-counter market, stronger than Tuesday's close of 6.8914.

China has pledged to loosen currency controls, but has not given any timetable, saying that sudden change would expose the country's shaky financial system to excessive risks from outside speculators.

During the talks in Annapolis, Md., China's central bank governor, Zhou Xiaochuan, alluded to such risks by asking about the regulatory mistakes that may have helped precipitate recent U.S. financial troubles.

"China always hopes to draw lessons from the U.S. experience in macroeconomic management and market development," the official Xinhua News Agency quoted Zhou as saying. "However, during this time of discussion, we are also interested in drawing lessons from the U.S. financial turbulence." Among the questions Zhou said raised was the role exchange rates can play "in maintaining the world's financial stability." The yuan has gained about 6 percent so far this year, compared with a 6.9 percent gain in 2007.

Top finance officials from the United States and China pledged greater cooperation Tuesday on a range of economic issues. But it was clear that the fourth round of high-level economic talks would leave both nations far apart on a number of contentious subjects from U.S. unhappiness over the slow pace of China's economic reforms to Chinese concerns about increasing protectionist sentiments in the United States.

Treasury Secretary Henry Paulson hoped that the two days of talks in Annapolis will produce enough results to persuade the next administration to continue the meetings. It was Paulson's brainchild to start the twice-a-year discussions in 2006.

The U.S. trade deficit with China grew to a record $256.3 billion last year, although the gap has begun to moderate as U.S. demand for Chinese-made exports has slackened. "We now believe that the (Chinese) trade surplus should plateau in 2008," Stephen Green, China economist at Standard Chartered Bank in Shanghai, wrote in a report issued this week.

The People's Bank of China, the central bank, announces the yuan's parity rate -- a weighted average of prices given by market makers, excluding the highest and lowest offers, early each trading morning.

US Needs to Stop Nuclear Black Market

2008-06-17T21:24:00.003+08:00

US needs to be nuclear black market's biggest customer in order to stop it.

The U.S. government is not doing enough to buy uranium and plutonium on the black market and keep it out of the hands of terrorists, criminals and rogue states, the Energy Department's top intelligence official said Monday.

"We must take urgent action to scoop up any nuclear material outside state control before terrorists do," Rolf Mowatt-Larssen, Energy's intelligence director, said at a speech at the Washington Institute.

Since 1993 there have been 1,300 nuclear-smuggling related incidents, according to the International Atomic Energy Agency. About 19 have involved the transfer of weapons grade uranium or plutonium, which could be used to fuel either a traditional nuclear warhead or turn a conventional explosive into a bomb that disperses radiation.

"The continuing instances of trafficking in nuclear materials means we collectively have not done enough to keep material out of the hands of terrorists," he said. "We must urgently intensify efforts to acquire any materials that may be for sale on the illicit nuclear market."

There are nuclear weapons materials in more than 40 countries, with significant amounts in some former Soviet states. Only a few kilograms of plutonium would be needed to make a primitive nuclear weapon, and such material is hard to detect in transit because it emits low levels of radiation, according to the Nuclear Threat Initiative in Washington.

The amount of nuclear material U.S. agents buy on the black market is classified. The new revelation that the A.Q. Khan nuclear network sold a digital blueprint for a small nuclear warhead highlighted the danger.

That information was contained in a report by David Albright, the president of the Institute for Science and International Security and a former U.N. arms inspector. The report was issued Monday. The Washington Post first reported on it June 15.

Khan, who headed Pakistan's nuclear program for about 25 years, headed a network that secretly sold nuclear technology to Iran and Libya on the black market. The network was discovered and largely dismantled in 2004.

In that investigation, Swiss officials seized computers and files from three brothers accused of smuggling for the network. By 2006 the files had been deciphered and among them was a detailed design for an advanced but small nuclear warhead.

Albright told The Associated Press on Monday that the design goes far beyond the schematics and information about nuclear weapons available on the Internet. "It's a very different category of information, and it's very dangerous," he said. "There are no other designs out there. There is very little information of this quality out there outside of the nuclear weapons states."

Mowatt-Larssen said the U.S. government assumes terrorists or developing countries can obtain or develop a warhead on their own. Preventing them from acquiring the nuclear materials needed to make a bomb is vital.

The possibility that a terrorist group or country that does not now have a nuclear weapon may build or buy one seems to be frightening enough to do what years of legislation and presidential directives haven't quite achieved: knitting together disparate American intelligence agencies into one well-meshed, functional brain.

Different agencies and offices within those agencies have traditionally worked on separate pieces of the nuclear question -- what the status of a given nation's nuclear energy program is, whether it has or is developing a warhead, if it is sharing or selling weapons information or parts, or the intent of a terrorist group to acquire a nuclear weapon.

Mowatt-Larssen said those analysts are now being tied together into a separate unit that can look at all those questions together and update their assessment of the nuclear threat based on changes in any piece of it. His office declined to provide further details, saying the effort is classified.

UK CPI Hits 3.3%, an 11-Year High

2008-06-17T21:23:00.003+08:00

UK consumer price inflation climbs to 3.3 percent, as food and fuel send rate to 11-yr high.

Inflation in Britain hit 3.3 percent in May, the highest annual rate in 11 years, the government said Tuesday, putting more pressure on the Bank of England to keep prices under control. The price of meat, vegetables and fuel were key factors in pushing the index up from 3 percent in April, a full point above the government's inflation target.

The governor of the Bank of England, Mervyn King, is now obliged to write a letter to Treasury chief Alistair Darling explaining why the rate has shot above 3 percent. Concern about rising inflation has led the Bank of England to hold base interest rates at 5 percent, and many analysts now expect the bank to raise the interest rate further in coming months despite the general slowing of the British economy. Cutting rates can boost growth but also risk worsening inflation.

"The initial market reaction to the announcement was relatively stolid, with the majority of the inflationary increase having been priced in," said Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers. "(Darling's) response to the letter and the next set of economic numbers will now take on more significance."

The consumer index is now at the highest level since the statistics agency began tracking it in 1997. A different measure, the Retail Prices Index rose to 4.4 percent in May from 4 percent in April, the Office for National Statistics (ONS) said.

The headline rate of RPI inflation, which includes mortgage interest payments, rose to 4.3 percent in May from 4.2 percent in April, the ONS said. "The one thing that can be said with a fair degree of confidence at the moment is that interest rates will not be coming down further any time soon and that if the Bank of England does act in the near term, it will be to raise interest rates," said Howard Archer, chief European economist at Global Insight.

"Inflation concerns are likely to intensify in the coming months," said Malcolm Barr, economist at JP Morgan. "In the absence of a marked fall in global commodity prices, the period of high inflation and letter-writing from the (Bank of England) is likely to extend into the second quarter of 2009," Barr said.

Weekend's Featured: UN and Saudi to Tackle Oil and Food Prices

2008-06-15T10:19:00.004+08:00

UN Chief and Saudi King reach agreement to tackle rising oil and food prices.

UN chief Ban Ki-moon and Saudi King Abdullah reached common ground here Saturday on the need to tackle rising prices of oil and food, and the problem of climate change, a UN spokesman said. The UN secretary general flew into this Red Sea city earlier Saturday for a 24-hour visit and met with the king for one hour after being welcomed by Saudi Foreign Minister Saud al-Faisal.

Farhan Haq, a member of Ban's delegation, described the discussions as "very positive." One one of the main issues raised was "the related crisis involving rising food costs, rising fuel costs and climate change," he said. The two leaders agreed that the three issues "should be dealt with comprehensively," he added.

He restated Ban's view that "rising fuels costs can contribute also further to rising food costs." He added: "What you want to avoid is a cascade of these sort of challenges that affect a wide range of social and economic sectors and then start also creating political problems."

There was no word from the Saudi side on what was discussed. Haq could not confirm press reports that Riyadh was planning to hike its crude production next month by about a half a million barrels per day (bpd) to calm market jitters.

But Ban, on his second visit to Saudi Arabia since March 2007, expressed hope that a Saudi-hosted meeting of oil producers and consumers here on June 22 would yield a productive outcome. The king invited Ban in an apparent bid by the kingdom to burnish its international image as a responsible oil power at a time when it is facing criticism, particularly in the United States, over skyrocketing crude prices.

Saudi Arabia, by far OPEC's biggest oil producer and exporter, decided to convene the June 22 meeting talks after crude struck a record high of nearly 140 dollars last week, stoking fears of surging global inflation and weaker economic growth.

Reports on Friday suggested that the oil giant -- which currently produces 9.45 million bpd -- could decide to raise its crude production to 10 million bpd when it hosts the meeting next week. The New York Times linked the expected plan to what it said were fears by Saudi Arabia that soaring oil prices might trigger a worldwide economic slump and lead to lower oil demand.

Last month, Saudi Arabia announced an increase of 300,000 bpd after a visit by US President George W. Bush, but the kingdom has been under pressure to step up its output further. After Riyadh announced the June 22 meeting, US Senator Charles Schumer, the lead sponsor of a resolution in Congress to block four pending arms deals with the Saudis, said: "We don't need a meeting. We need to pump more oil."

Ban's visit to Saudi Arabia also comes as Group of Eight finance ministers warned in Japan that high oil and food prices posed "a serious challenge to stable growth worldwide" and may worsen poverty and stoke global inflation.

Haq also noted that the UN boss expressed gratitude for Saudi Arabia's contribution of 500 million dollars to the UN World Food Programme appeal to battle the global food price crisis. Other topics that came up during the meeting include regional issues such as the Middle East peace process, Lebanon and the recent peace deal initiated by Somalis's transitional government and its rebel foes, Haq said..

The recent Saudi initiative to foster dialogue among Christians, Jews and Muslims was also raised. In March, Abdullah proposed inter-faith talks among the three religions in a first for the ultra-conservative kingdom, which is home to two of the three holiest shrines in Islam.

A dinner with the Saudi foreign minister was cancelled and instead Ban met with Organization of the Islamic Conference Secretary General Ekmeleddin Ihsanoglu. The UN chief was to wrap up his visit on Sunday with meetings with the Saudi foreign minister and Crown Prince Sultan Abdul Aziz al-Saud.

Weekend's Featured: Google Looks Stronger Than Ever Amid Collapsed Microsoft-Yahoo Talks

2008-06-15T10:14:00.004+08:00

Google emerges from rubble of collapsed Microsoft-Yahoo talks looking stronger than ever.

Microsoft Corp.'s abandoned takeover bid for Yahoo Inc. appears to have culminated with a disheartening thud for those two companies but amounted to yet another coup for online search leader Google Inc.

What began in January as Microsoft's most audacious attack yet on Google instead paved the way for the Internet's most powerful company to gain even more clout through a deal that gives Google access to a large chunk of Yahoo's advertising space.

By submitting to a partnership that endorses Google's search advertising technology as a better choice than its own, Yahoo is giving online marketers even more incentive to spend most of their money with its biggest rival, according to industry analysts.

It looks like such a sweet deal for Google that the U.S. Justice Department and lawmakers are expected to take a hard look at the arrangement to make sure it doesn't give Google too much control over the Internet's search advertising market.

Google currently has about 75 percent of the U.S. search advertising market followed by Yahoo at 9 percent, according to the research firm eMarketer Inc. Although they contend their alliance won't lessen competition, Google and Yahoo have agreed to wait until late September to begin working together so the U.S. government has more time to assess the potential impact.

Even more importantly to Google, the Yahoo partnership keeps a potentially valuable weapon out of Microsoft's control. Without Yahoo's renowned franchise, Microsoft once again is scrambling to find a way to fix its unprofitable online operations and narrow Google's commanding lead in the Internet's rapidly growing ad market.

Google shares gained $18.56 to close Friday at $571.51 while Microsoft shares added 83 cents to close at $29.07 -- an indication that some investors were relieved the world's largest software maker concluded it would be too expensive and troublesome to buy Yahoo.

On the other side of the fence, Yahoo shareholders had been clinging to the possibility that Microsoft would revive its last offer of $47.5 billion, or $33 per share, to buy the Internet pioneer. But those hopes evaporated late Thursday after Yahoo disclosed Microsoft had "unequivocally" rebuffed an attempt to renew the negotiations.

In a sign of investors' frustration, Yahoo shares dropped as much as $1.77, or 7.5 percent, Friday before rallying late in the session to finish at $23.47, down five cents. The downturn marked Yahoo's lowest stock price since it closed at $19.18 at the end of January, just before Microsoft launched its takeover attempt.

That leaves Yahoo's market value 29 percent below Microsoft's last offer, which was withdrawn May 3 after Yahoo asked for $37 per share. Yahoo's stock hasn't reached that price since January 2006. At least Microsoft still has a strong, highly profitable backbone -- a suite of software products that run most computers around the world.

Yahoo, though, may have made a Faustian bargain by hiring Google to show ad links next to a significant portion of the ad links appearing alongside search results on its Web site in the United States and Canada. The Sunnyvale-based company also will pluck Google ads to show on other Web sites in its marketing network.

Yahoo expects its annual revenue to get an $800 million lift from the arrangement with Google while still showing show the majority of its own ads alongside its own search results. But most analysts viewed it as an act of desperation, asserting it's only a matter of time before advertisers shift all their business to Google because they know their messages will show up on Yahoo either way. Deutsche Bank analyst Jeetil Patel described Yahoo's decision to farm out advertising to Google as "one of the worst strategic maneuvers seen in the Internet industry."

Google will get such great access to Yahoo's highly trafficked Web site that it should be able to gather more insights about the correlation between search requests and advertising, ThinkPanmure analyst William Morrison wrote in a Friday research note titled "Giving Away The Store (To Google)."

And that additional data could help Google further improve its advertising formula to become an even more compelling marketing magnet. The partnership also cast doubt on a turnaround plan Yahoo co-founder Jerry Yang began drawing up year ago after he replaced Terry Semel as the Sunnyvale-based company's chief executive.

A big part of that strategy hinged on Yahoo becoming a "must-buy" for advertisers -- a strategy that the Google deal appears to contradict. "This raises very important questions about the long-term vision for (Yahoo) and its place in the industry," said Cantor Fitzgerald analyst Derek Brown.

Yahoo shareholders will get a chance to vent their frustration at the company's annual meeting Aug. 1 when activist investor Carl Icahn will seek to replace the board with nine alternate candidates. Icahn was primarily interested in selling Yahoo to Microsoft, so his campaign to replace the board may be hurt if he can't persuade shareholders he has other viable ideas on how to boost Yahoo's stock price. He didn't return a call seeking comment Friday.

Yang and his top lieutenant, Susan Decker, defended the Google deal as a profitable move that will better position the company to capitalize on the Internet advertising market's growth from roughly $40 billion worldwide this year to a projected $75 billion to $80 billion market in 2011.

Microsoft contends it offered Yahoo a better alternative even after losing interest in buying the entire company. When the latest talks broke off June 8, Microsoft was prepared to buy Yahoo's search operations for $1 billion and pay $35 per share to accumulate $8 billion worth of Yahoo's stock, according to an internal note sent Friday by Kevin Johnson, who oversees Microsoft's online operations.

Microsoft also would have offered guarantees that could have boosted Yahoo's operating cash flow by an estimated $1 billion annually, Johnson wrote. Yahoo estimates the Google partnership will increase its operating cash flow by $250 million to $450 million annually. "Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising," Johnson assured Microsoft employees.

Microsoft left the door open to renewing talks about buying Yahoo's search operations. Yahoo also gave itself some wiggle room by including a clause in the Google partnership that would end the alliance for a termination fee of up to $250 million.

Some analysts and investors still think Microsoft eventually might try to buy Yahoo in its entirety, although at a price well below $47.5 billion. "Yahoo seems to have backed itself into a corner pretty effectively here so it would appear Microsoft has a lot of leverage," said Dan Davidowitz, a portfolio manager for Polen Capital Management, which owns about 750,000 shares of Microsoft and 37,000 shares of Google. Davidowitz said he isn't interested in owning Yahoo's stock.

G-8 Express Strong Concerns on Oil and Food Prices

2008-06-14T16:55:00.002+08:00

G-8 finance ministers express strong concerns about sharp rise in food, oil prices.

Soaring oil and food prices are emerging as serious threats to global economic growth, finance ministers from the world's top industrialized nations said Saturday, while vowing to work together to address the problem.

The world economy faces uncertainty and inflationary pressures because of the recent rise in prices, the Group of Eight nations said in a joint statement as they wrapped up two days of talks in western Japan.

The finance ministers from the Group of Eight nations -- Britain, Canada, France, Germany, Italy, Japan, Russia and the U.S. -- were also mapping out an agenda for a summit of their leaders next month in northern Japan.

They urged oil-producing nations to increase production to help stabilize the spike in oil prices, and called for aid to address a looming food crisis in developing nations. "Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide," the statement said.

U.S. Treasury Secretary Henry Paulson said the spike in oil prices to new heights was a problem of supply and demand, and not caused by speculators. "This is not something that lends itself to short-term solutions," he told reporters after the meeting ended.

But British Chancellor Alistair Darling said the ministers asked the International Monetary Fund and the International Energy Agency to analyze the financial factors behind the surging oil and commodity prices, and their effects on the global economy. "There are differences of views as to what effects speculation has had on prices," Darling told reporters.

Noting oil prices jumped five-fold since 2002, Paulson urged countries to let markets work, not rely on subsidies, and pressed oil-producing countries to allow more investment in oil exploration and production. "Producers need to increase output and capacity," he said.

Oil spiked to nearly $140 a barrel last week, and several Asian countries, including India, Indonesia and Malaysia, have slashed fuel subsidies, raising prices for millions of consumers. The world is also facing a potential food emergency as prices of corn, wheat, rice, soybeans and other agriculture products rise. The price hikes have set off riots and protests from Africa to Asia and elevated fears of a global food crisis that could cause millions of people to suffer malnutrition.

The jump in oil and food prices was the main issue addressed during the sessions. The ministers also discussed troubled financial markets and how to help developing nations fight global warming.

Japanese Finance Minister Fukushiro Nukaga, the host of the meeting, said currency exchange was not taken up during the talks, although it was a topic in discussions on the sidelines. He had said earlier the topic did come up in his talks with U.S. Treasury Secretary Paulson, although he refused to give details.

The ministers asked the International Monetary Fund and the International Energy Agency to analyze the financial factors behind the surging oil and commodity prices and their effects on the global economy.

The weak U.S. currency is considered a key culprit in the surge in oil prices because some traders invest in oil as a hedge against inflation and a slumping dollar. It also hurts major exporters like Japan by eroding their repatriated earnings.

The dollar has strengthened in recent days after Paulson warned earlier this week that he isn't ruling out intervening in currency markets to stabilize the currency. U.S. Federal Reserve Chairman Ben Bernanke also helped lift the dollar by suggesting the Fed is prepared to raise interest rates to fight inflation.

The ministers noted some improvement lately in financial markets, but said there are still risks. "The world economy continues to face uncertainty," the statement said. "We will remain vigilant and will continue to take appropriate actions, individually and collectively."

Oil prices pulled back overnight, with benchmark light sweet crude for July delivery falling $1.88 to settle at $134.86 on the New York Mercantile Exchange, after OPEC questioned whether crude can remain so high.

Soaring energy costs pushed inflation up in May at the fastest pace in six months, according to data released Friday by the U.S. Labor Department. Food prices, which had taken the biggest one-month leap in 18 years in April, rose by a more moderate 0.3 percent in May, but were still on the rise.

Wall Street Puzzles Over Whether the Worst Is Over

2008-06-14T16:46:00.004+08:00

Wall Street puzzles over whether market has hit bottom and what catalyst might trigger rebound.

Not long ago, it seemed like the worst was over. As the first quarter wound down, the credit crisis appeared to be easing, the housing market seemed like it might get some footing and Wall Street was growing confident that it had finally found a bottom after months of volatility.

No one expected oil would shoot up 30 percent in just three months. With new record crude prices almost daily and more negative news for the financial sector combining to generate a new round of volatility, Wall Street is left in disagreement over whether there will be any kind of market recovery soon.

"Frankly, my concern is that some folks may be wanting it too badly," said Gregory Miller, chief economist at SunTrust Banks. "There is a bottom out there, we are going to get through this, but I'm in the camp that thinks this is very long process."

Although the major indexes have gone through some wild swings in recent weeks, they have hovered above the low points seen in mid-March. Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, thinks the market will stay there for a while. "Until we get more positive catalysts, we will likely meander within the mid-March through mid-May range," he said, referring to a swing of between 8 percent and 9 percent for the Dow Jones industrial average during those months.

"Because sentiment was so bad at the March bottom, that was one of the reasons our technician thought that the worst was likely over," Stovall said. "It did improve from then." But while the sentiment on Wall Street gained some momentum, consumer sentiment went in the opposite direction as gas prices climbed.

"Consumer confidence ... has gotten dramatically worse," Stovall said. And with gas prices remaining at record levels, he doesn't expect that measure to improve any time soon. But Stovall notes that investors tend to be more flexible that pinched consumers. "The confidence of Wall Street, I believe, fluctuates more rapidly than the confidence of Main Street," he said. "You can't really compare one to another."

Barring some new shock, Stovall thinks the market has likely touched, or at least come close, to its bottom. "If we haven't gone any lower as a result of all these worries," he said, "it would have to be some new worries that have yet to be anticipated."

Wall Street is about to get a host of new information that will help it decide what direction to head in. Investment banks start reporting second-quarter results Monday. May producer price and industrial production data, along with new housing figures will come in starting Tuesday, and the Federal Reserve's next decision on interest rates comes the following week.

If that combines to even a modest positive, Stovall said, investors might start to take some chances that could boost the market. "Investors, in my opinion, are like hyperactive first graders playing musical chairs," he said. "They're always trying to out-anticipate everybody else."

That means they won't wait until they're 100 percent sure that the economy is on solid footing again before jumping back into the market, he said, for fear they would miss out on opportunities.

Adolfo Laurenti, senior economist at Mesirow Financial, is among those who think second-quarter results will help. "The current quarter will begin to come in and it won't look too bad," he said. While the oil spike has somewhat derailed the intended impact of the government stimulus checks, Laurenti said, he thinks positive earnings will help boost investor confidence.

"That should create some sentiment on the upside, especially for the blue chips," he said. Laurenti thinks the third quarter might look a little weak because of the fading impact of the stimulus checks, and politics may produce some added uncertainty in the fall and going into the new year as a new president takes office.

And it will take some time for the financial industry to right itself. Miller said if large financial firms find they need to raise more capital, that could be a new shock. But in the end, it all comes back to oil.

"I think the balance between supply and demand is real, and if the supplies are not keeping up with demand, that's basic Economics 101, prices go up," Laurenti said. "And that's exactly what we're seeing."

Miller, however, said people are already changing their behavior because of high prices, which will likely loosen demand and help reduce oil prices. "Once this domestic economy changes its spending patterns and it appears to be permanent, then fundamentals for petroleum based fuels don't support oil at $125 a barrel," Miller said. "Will they come back down to $30 a barrel for oil? I doubt it. But is there something magic about $125? No. Could we easily come down below $100? We could."

US Inflation Rises to 0.6% in May

2008-06-13T21:32:00.001+08:00

Inflation jumps 0.6 percent in May, reflecting higher energy prices.

Inflation shot up in May at the fastest pace in six months, pushed higher by soaring costs for gasoline and other types of energy. The Labor Department reported Friday that consumer prices rose by 0.6 percent last month, the biggest one-month increase since last November, as gasoline costs surged by 5.7 percent. Food prices, which have also been rising sharply, were up 0.3 percent as the cost of beef and bakery products showed big gains.

Core inflation, however, which excludes energy and food, edged up a more moderate 0.2 percent in May. That increase was right in line with expectations and should help relieve worries that the big increases in food and energy could be breaking through to more widespread inflation.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the moderate gain in core prices showed price pressures are remaining contained despite fears at the Federal Reserve.

The Fed, which from September through April was aggressively cutting interest rates to fight a mounting economic slowdown, is now indicating that its biggest concern has changed from the threat of a recession to worries about inflation.

In a speech Monday, Fed Chairman Ben Bernanke said that the Fed will "strongly resist an erosion of longer-term inflation expectations." Those comments have raised expectations that the Fed's next move later this year will be to start raising interest rates.

The 0.6 percent rise in overall prices was slightly higher than the 0.5 percent gain that economists had been expecting while the 0.2 percent rise in core prices matched expectations. So far this year, consumer prices are rising at an annual rate of 4 percent, compared with a 4.1 percent increase for all of 2007.

Energy prices are rising at a 16.5 percent annual rate, compared with a gain of 17.4 percent for all of 2007, while food prices are rising at a 6.3 percent annual rate, up from a 4.9 percent increase for all of last year.

Analysts said the pressure in both the energy and food areas is likely to continue as global food shortages and rising demand push food prices up and energy costs continue to soar, reflecting a relentless surge in crude oil prices. The energy increases have pushed the nationwide average for gasoline up to a record of $4.06 and private economists believe that price will keep climbing through the summer driving season.

The combination of rising inflation and weak wage gains contributed to another drop in weekly earnings. After adjusting for inflation, weekly earnings for nonsupervisory workers were down 1.2 percent in May, compared to a year ago, the Labor Department said in a separate report.

Energy prices were up 4.4 percent in May after being unchanged in April. The increase was led by a 5.7 percent jump in gasoline, the biggest one-month increase since last November, and gains of 0.9 percent for electricity, 10.4 percent for home heating oil and 5.6 percent for natural gas.

The 0.3 percent rise in food costs reflected a 1.5 percent jump in beef costs, the biggest rise in 13 months, and another steep increase in cereal and bakery products, which were up 1.6 percent. Outside of food and energy, clothing costs fell by 0.3 percent and the cost of prescription drugs dropped by 0.7 percent, but airline tickets jumped 3.2 percent, the biggest gain in more than six years, reflecting the surge in fuel costs.

US Wants Support for Global Warming Fund at G-8

2008-06-13T21:30:00.002+08:00

US urges support for global warming fund at G-8 meeting in Japan.

U.S. Treasury Secretary Henry Paulson urged other Group of Eight industrialized nations Friday to back a special fund of up to $10 billion to help developing countries fight global warming. Paulson appeared with his counterparts from Japan and Britain, and World Bank Group President Robert Zoellick, to encourage G-8 nations to back the Climate Investment Funds.

"None of us in the world are going to solve this problem unless we deal with it here," Paulson told reporters at the two-day finance ministers' meeting, which opened Friday and will also address soaring oil and food prices.

Paulson said the U.S. will host a pledging event prior to the first meeting of the trust fund committee later this year. The fund, administered by the World Bank, will go partly for help with developing technology to boost energy efficiency and reduce greenhouse gas emissions, he said.

The G-8 session -- bringing together finance ministers from the U.S., Japan, Russia, Germany, France, Britain, Italy and Canada -- is one of several ministerial meetings leading up to the July 7-9 leaders' summit on the northern island of Hokkaido.

Zoellick said the developing world is being hit by climate change, including droughts, floods, poverty and hunger. "These funds offer an opportunity to take action on change now," he said. "The Climate Investment Funds are a concrete step forward toward meeting the challenge of global climate change."

G-8 finance ministers are having dinner with their counterparts and other officials from Australia, Brazil, China, South Korea, South Africa and Thailand to weigh the impact of surging oil and food prices on the global economy, the Japanese Ministry of Finance said. Oil spiked to nearly $140 a barrel last week, and several Asian countries, including India, Indonesia and Malaysia, have cut fuel subsidies, raising retail prices for millions of consumers.

Speaking on the sidelines of the gathering, International Monetary Fund Managing Director Dominique Strauss-Kahn said a slowdown in the global economy over the next few quarters will likely tame the price of oil.

G-8 ministers are expected to push the IMF to study how much speculative money is behind soaring oil prices. At the February gathering of the Group of Seven leading industrialized nations, which excludes Russia, ministers asked the Washington-based organization to check on such speculative flows.

The world is also grappling with an emerging food crisis as prices of corn, wheat, rice, soybeans and other agriculture products have been spiraling higher. The gains are due to a mixture of factors including high oil prices, changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation. The food price hikes have set off riots and protests from Africa to Asia and raised fears about a global food crisis that could cause millions more people to suffer malnutrition.

Japanese Finance Minister Fukushiro Nukaga, playing G-8 host, vowed to work closely with the U.S., Japan's most important ally, to tackle the threat of rising oil and food prices and other economic woes. "We need to coordinate our actions closely because of the many risk factors," he told reporters after a bilateral meeting with Paulson.

But Nukaga declined to comment on what he discussed with Paulson regarding currency rates -- another worrisome topic for the G-8. Nukaga said the issue came up in his talks with Paulson but said it was unclear whether the fuller G-8 will address it.

The dollar has recently staged a modest recovery to about 108 yen. But that came only after Paulson warned this week that he isn't ruling out intervention to stabilize the currency, and U.S. Federal Reserve Chairman Ben Bernanke suggested the Fed is prepared to raise rates to fight inflation.

Dollar weakness has in part pushed up oil prices as some traders invest in oil as a hedge against inflation and a slumping greenback. Nukaga also expressed concern over the U.S. economy, where a credit crunch has hit since the emergence of the subprime mortgage crisis last year.

Yahoo Turns to Google After Microsoft's Withdrawal

2008-06-13T21:23:00.001+08:00

Yahoo hoping Google's superior technology will make shareholders forget Microsoft's bid.

Yahoo Inc. became Microsoft Corp.'s takeover prey largely because Google Inc. established such a commanding lead in the Internet's lucrative search advertising market. But after eluding Microsoft's grasp, Yahoo is now turning to Google to help squelch a rebellion among its shareholders who believe it should have accepted Microsoft's $47.5 billion buyout offer while it was still available last month.

Yahoo announced its decision to let Google handle some of its advertising sales late Thursday, just a few hours after revealing it unsuccessfully tried to persuade Microsoft to renew its previous offer of $33 per share. The snub caused Yahoo to conclude that there is no hope for any kind of deal with Microsoft.

Although Yahoo believes Google could help boost its annual revenue by $800 million, the advertising partnership wasn't enough to ease the disappointment of investors who had been holding out hope for a Microsoft deal.

Yahoo shares plunged $2.63, or 10.1 percent, to finish Thursday at $23.52 and was down 58 cents at $22.94 in premarket trading Friday. Google shares rose $2.80 to $555.75 in premarket dealings and Microsoft shares slipped 4 cents to $28.20.

Part of the problem for Yahoo is that antitrust concerns might prevent an alliance with Google. Google already holds about 75 percent of the $11 billion search advertising market in the United States with Yahoo a distant second at 9 percent, according to the research firm eMarketer Inc.

Microsoft and a variety of consumer-interest groups already have signaled they will turn up the political heat in an attempt to prevent Google from working with Yahoo. The outcry already has drawn the attention of U.S. Sen. Herb Kohl, chairman of the Senate subcommittee on antitrust, competition policy and consumer rights.

"The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further," said Kohl, a Wisconsin Democrat.

Yahoo and Google have voluntarily agreed to wait until late September to begin working together to give the government adequate time to review the arrangement. If it isn't blocked, the partnership could last for the next decade.

The antitrust scrutiny appears to be the least of Yahoo's worries for now. The Sunnyvale-based company also is trying to fend off a shareholder mutiny led by activist investor Carl Icahn, who has vowed to replace the company's board because of the way the directors handled the Microsoft negotiations during the past 4 1/2 months.

But Icahn has been hoping to engineer a sale to Microsoft, so his campaign could be hurt by the perception that the software maker has lost all interest in buying Yahoo. Shareholders may be reluctant to support Icahn's attempted coup unless he can demonstrate his slate of directors has a better turnaround plan than the current board. Icahn did not return phone calls seeking comment Thursday.

The fate of Yahoo's board is scheduled to be determined at the company's Aug. 1 annual meeting. "If you are a Yahoo shareholder, you just have to be scratching your head right now," said Standard and Poor's equity analyst Scott Kessler.

If Wall Street's backlash becomes severe enough, Kessler said he believes Yahoo might have to consider replacing co-founder Jerry Yang as its chief executive -- something Icahn has already promised he will do if he wins control of the board.

After Yang took over the reins from Terry Semel a year ago, Yahoo's stock price fell from $28.12 to $19.18 at the time Microsoft launched its unsolicited takeover attempt in January. Yang "has been slow to move, slow to act and it has cost shareholders as a result," Kessler said. Many Yahoo shareholders blame Yang for letting his emotional attachment blur his judgment during the Microsoft negotiations.

Yahoo's board sent Yang and fellow co-founder David Filo to a pivotal May 3 meeting in Seattle to discuss Microsoft's oral offer to buy the company for $33 per share, up from its initial bid of $31 per share. After Yang demanded $37 per share, Microsoft CEO Steve Ballmer withdrew the offer. In recent weeks, Ballmer has been trying to buy Yahoo's search engine instead. Yahoo concluded that its search engine was too important to sell piecemeal.

Without explaining its logic, Microsoft said it believed a deal involving Yahoo's search engine would have been more valuable to Yahoo than if it had bought the entire company at $33 per share. The Redmond, Wash.-based software maker said it remains open to buying Yahoo's search operations.

Yahoo's deal with Google includes an escape hatch should Microsoft or another suitor buy the company. If Yahoo is sold, Google would receive a termination fee of up to $250 million. That clause could still raise hope that Icahn might be able to renew the Microsoft talks if he can win control of Yahoo's board.

The deal shapes up as a major victory for Mountain View-based Google, which didn't want Yahoo to fall into Microsoft's clutches. "I am happy to be helping them to stay independent," Google co-founder Sergey Brin said in a Thursday interview.

With a Yahoo deal off the table, Microsoft could set its sights on a smaller acquisition that still might help its unprofitable Internet operations. Analysts have cited Time Warner Inc.'s AOL, Internet software service provider Salesforce.com Inc. and leading online social networks, News Corp.'s MySpace and Facebook Inc. as possible targets.

The Google partnership expands upon a two-week trial conducted in April while Yahoo was trying to pressure Microsoft into raising its bid. The tests confirmed Google's technology would generate more revenue for Yahoo than its own system, which cost more than $2 billion to acquire and improve.

Nevertheless, Yahoo still intends to use its own search engine to distribute some ads and process all search requests. Working with Google will give Yahoo "the best of both worlds," Yahoo President Sue Decker said a Thursday conference call.

Fed Blames Energy and Food Prices for Weak Economy

2008-06-12T21:21:00.002+08:00

Federal Reserve blames high energy, food prices for a weak economy heading into summer.

The economy remained "generally weak" heading into summer as rising costs for energy and food pounded consumers and forced some companies to push their own prices higher.

The Federal Reserve's new snapshot of business conditions, released Wednesday, underscored two big sore spots for the country: listless economic activity coupled with high energy and food prices. Those rising prices carry the risk of both spreading inflation and putting another drag on overall economic growth.

Chafing under price hikes, "consumer spending slowed ... as incomes were pinched by rising energy and food prices," the Fed said. Manufacturing activity, meanwhile, was "generally soft" and the housing market remained stuck in a rut.

Businesses also were hit by higher costs, especially for energy, metals, plastics, chemicals and food. Such reports were "widespread," the Fed said. To cope, manufacturers in several areas "noted some ability to pass along higher costs to customers" the Fed said. Retailers, however, reported "mixed results with respect to raising final goods prices," the Fed said.

Over the past week, Fed Ben Bernanke and his colleagues have been sounding an ever-louder alarm against inflation. Given those concerns, Bernanke has signaled the Fed's rate-cutting campaign, started last September to bolster the weak economy, is probably over. Many economists predict the Fed will leave its key rate at 2 percent, a four-year low, when it meets next, on June 24-25.

For now, "policymakers won't raise rates because of concerns about the economy, but they can't lower them because of concerns about worsening inflation. So it's basically a stalemate. The right thing for the Fed to do is to leave rates alone," said Stuart Hoffman, chief economist at PNC Financial Services Group.

However, with inflation moving up on the Fed's list of concerns, Wall Street investors and others are now thinking the Fed might be forced to start boosting rates later this year to curb inflation. On Wall Street, stocks tumbled as soaring oil prices fanned inflation concerns. The Dow Jones industrials plunged 205.99 points. Oil prices closed at $136.38 a barrel. Gasoline prices reached another record -- a national average of $4.052 a gallon.

One of the things the Fed will be paying close attention to is the extent to which people think prices will keep going up, something that can make them act in ways that would worsen the inflation climate. If such "inflation expectations" were to "drift higher or even to fail to reverse" that would have "troublesome implications," Donald Kohn, the Fed's vice chairman, said in a speech Wednesday.

James Bullard, president of the Federal Reserve Bank of St. Louis, echoed that point. "It is rule No. 1 in modern central banking that inflation and inflation expectations be kept under control," he said. Raising rates too soon, though, could deal a set back to the already fragile economy.

It's a dicey situation for Fed policymakers. The housing, credit and financial crises have badly bruised the economy and sharply slowed its growth. Consumers and businesses alike have hunkered down. Employers have cut jobs every month so far this year and the unemployment rate zoomed to 5.5 percent in May, from 5 percent in April -- the largest one-month increase since 1986.

Bernanke, in a speech earlier this week, downplayed the big jump in the jobless rate, saying the danger that the economy has fallen into a "substantial downturn" appears to have waned over the past month or so.

The Fed's powerful doses of interest rate cuts, the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, Bernanke predicted.

At the same time, Bernanke sent a fresh warning that the Fed will be on heightened alert against inflation dangers, especially any signs that investors, consumers and businesses are thinking inflation will get worse.

The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," the Fed chief said Monday evening.

With hiring slowing, the Fed's report on Wednesday suggested there's little danger of wage inflation taking off. Wage pressures were reported as "moderate or limited for all but a few skilled-labor positions," the Fed said. That's consistent with Bernanke's recent assessment that he doesn't see a repeat of the 1970s-style situation where workers demanded -- and received -- higher wages to keep up with ever-rising prices. The Fed's survey is based on information supplied by the Fed's 12 regional banks. The information was collected before June 2.

In the short term, it may be that some rise in both inflation and unemployment will have to be tolerated, Kohn suggested. Setting interest rates "in a manner that balances the undesirable effects of a shock to the system on both inflation and employment will tend to be more efficient than setting policy so as to deliver more extreme outcomes in either inflation or unemployment," he said.

G-7 Finance Meeting to Talk About Oil and Food

2008-06-12T21:18:00.002+08:00

G-8 finance ministers meeting in Japan to face soaring oil prices, other global woes.

Runaway oil prices will be a focus of finance ministers from the Group of Eight industrialized nations meeting this week in Japan who are hoping to calm global jitters about a series of looming economic problems. Soaring crude oil costs and rising food prices have created inflationary risks not seen in years.

Add to that the credit crunch still dragging on global growth and rattling international markets as well as persistent worries about a U.S. economic slump, and finance ministers have a long list of worries to address when they gather Friday for the two-day meeting in Osaka, hosted by a nation that imports nearly all its oil.

Japanese Finance Minister Fukushiro Nukaga recently told reporters he wanted a "serious discussion" of global economic development, environmental changes, African development, crude oil problems and rising food and commodities prices.

Nukaga also expressed concern about Japan's economy, the world's second-biggest, which he acknowledged was in a lull, with business investment and consumer spending stagnant and exports slowing because of a slump in the U.S., a key export market.

"I'm hoping for serious debates about what the G-8 will do, both individually and collectively, to solve those problems," he said about the meeting that will bring together finance ministers from the U.S., Japan, Russia, Germany, France, Britain, Italy and Canada.

The session is one of several ministerial meetings leading up to the G-8 leaders' summit to be held July 7-9 in Hokkaido, the northern island of Japan. Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo, said the finance ministers have many serious problems to tackle but said they can't overreact in regulating financial markets because that could have the opposite effect -- making for jumpy markets.

"They must try to solve the problem in moderation and take a mild, calm approach," he said. Instead of concerted action, they are more apt to exchange views, share their concerns and agree to work together, he said.

Concerns that the American economy -- by far the world's largest -- is sliding into a recession worsened after figures last week showed the jobless rate shot from 5 percent to 5.5 percent in May, the biggest jump in two decades.

U.S. Federal Reserve Chairman Ben Bernanke -- who will not be at the G-8 meeting -- has tried to allay such fears by saying the risk of a "substantial downturn" had waned in recent weeks. The Fed's interest rate cuts, the government's $168 billion stimulus package and progress in fixing the financial and credit market problems are helping prop up the American economy, and solid U.S. exports for the rest of the year should also help, he said.

But Bernanke also said recent energy price gains have raised inflation risks and the Fed "will strongly resist" any erosion in long-term expectations for prices -- raising speculation that the Fed is prepared to raise rates.

Oil spiked to nearly $140 a barrel last week, and several Asian countries, including India, Indonesia and Malaysia, have cut fuel subsidies, raising retail prices for millions of consumers.

Meanwhile, the world is grappling with an emerging food crisis as prices of corn, wheat, rice, soybeans and other agriculture products have been spiraling higher. The gains are due to a mixture of factors including high oil prices, changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation. The food price hikes have set off riots and protests from Africa to Asia and raised fears about a global food crisis that could cause millions more people to suffer malnutrition.

G-8 finance ministers plan to meet with officials from Australia, Brazil, China, South Korea, South Africa and Thailand to weigh the impact of surging oil and food prices on the global economy, the Ministry of Finance said Thursday. Related to the fears about oil prices are concerns about global warming and other ecological initiatives to boost nations' fuel efficiency and reduce greenhouse gas emissions.

The weakness of the dollar is also likely to be discussed by the finance ministers, although so far this week the dollar has staged a modest recovery, rising above 107 yen. The euro, trading above $1.57 last Friday, has fallen below $1.55.

The dollar's recent gains came after U.S. Treasury Secretary Henry Paulson warned this week that he isn't ruling out intervention to stabilize the currency, as well as Bernanke's suggestion that the Fed is prepared to raise rates to fight inflation.

Dollar weakness has been a contributing factor in oil's surge as some traders invest in oil as a hedge against inflation and a slumping greenback. A declining dollar can also erode the value of exports from Japan and Europe to the U.S. when earnings are repatriated.

China CPI Eases to 7.7%

2008-06-12T21:16:00.001+08:00

Chinese consumer price index growth eases to 7.7 pct in May, but inflation remains threat.

China's inflation rate dipped to a still high 7.7 percent in May, thanks to easing food prices, though pressures for further price increases remain a threat and few saw reason to celebrate.

The rise in the consumer price index for May was lower than the 8.5 percent rise in April. Slower growth was widely anticipated thanks to state media reports suggesting the figure would be below 8 percent for the first time in four months.

But restaurant owner Ding Yuyi was unimpressed. "Yes, I know the May CPI fell below 8 percent, but sorry, I just don't feel it," Ding said, noting he is paying 50 percent more for rice than a year ago, and double last year's prices for many vegetables and other cooking staples. "I've had to give up cooking some dishes because my customers are very sensitive about prices and I can't make a profit," he said.

Investors dumped stocks on persistent worries over further credit tightening. The benchmark Shanghai Composite Index sank for a seventh straight session, falling 2.2 percent to 2,957.53, a 15-month low.

Food prices, a key component in the consumer price index, climbed 19.9 percent in May from a year earlier, down slightly from a 22.1 percent increase in April. Fresh vegetable prices, which have soared recently, fell 15.7 percent from a year ago, the National Bureau of Statistics said.

Nonfood prices rose 1.7 percent, compared with 1.8 percent in April, it said. Economists warn that surging prices for crude oil and other commodities pose a continued threat, even as food price increases have abated with the arrival of summer.

Inflation is a politically sensitive issue in a country where many families spend about half their incomes on food. Spells of high inflation in the 1980s and 1990s helped trigger protests, a scenario that Chinese leaders are keen to avoid as the country comes under intense foreign scrutiny ahead of this summer's Beijing Olympics.

"While agriculture seems now to be responding ... there are other price pressures out there that are being severely repressed," Stephen Green, China economist for Standard Chartered Bank in Shanghai, said in a report Thursday. "There is a lot more bottled up inflation in this economy than meets the eye," Green said.

Chinese retail gasoline and diesel fuel prices were hiked about 11 percent in November but have remained frozen since, despite surging crude oil prices. In January, food processors were ordered to get approval for any price hikes, and fertilizer prices have been frozen to protect farmers.

On Wednesday, authorities said China's producer price index for May -- an indicator of wholesale and raw material prices -- rose to 8.2 percent from April's 8.1 percent, boosted by double-digit increases in prices of oil, coal, steel and other industrial materials.

Signaling continued concern over inflation, the central bank recently raised the amount of deposits banks are required to keep in reserve by 1 percent, to a record high 17.5 percent. The move is aimed at curbing excess bank lending that is seen as contributing to price increases.

May's inflation rate was the lowest since a 7.1 percent increase reported in January and the first significant decline since prices began climbing more than a year ago. "Increased supply has continued to contribute to stabilizing farm product prices," Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co., said in a written commentary Thursday.

The decline might have been faster, she noted, if not for the disastrous earthquake that struck central China on May 12, devastating cities and towns across much of heavily populated Sichuan province and killing about 70,000 people.

China has raised interest rates and ordered other credit tightening measures to try to ease inflationary pressures without unduly compromising the strong economic growth needed to create jobs.

But unusually severe winter storms in January and February derailed those efforts, wrecking crops, killing livestock and paralyzing transport. Food prices soared amid meat and vegetable shortages in some areas. The government has raised subsidies to encourage farmers to raise more pigs. It also has imposed curbs on grain exports to increase supplies available on domestic markets.

Weekend's Featured: Russia Blames US for Current Crisis

2008-06-08T16:39:00.003+08:00

Russian President Medvedev Blames US Policies for Current World Economic Woes.

Russian President Dmitry Medvedev on Saturday blamed "aggressive" US policies for the world's current economic woes and put forward Russia's growing energy power as a possible solution. "It is precisely the gap between the United States' formal role in the world economy and its real capabilities that was one of the key reasons for the current crisis," Medvedev told top business executives in Saint Petersburg.

The current downturn happened in part because the "aggressive financial policies of the world's biggest economy led not only to the failure of corporations. The majority of people on the planet have grown poorer," he said. He went on to tout Russia as a zone of stability able to help the world economy and took a swipe at the US enthusiasm for biofuels, blamed by some analysts for a global rise in food prices.

"Russia is a global player. We understand our responsibility for the fate of the world and want to participate in forming the rules of the game, not because of so-called imperial ambitions, but because ... we have the resources." While Russia offered global energy security, others "emphasised the production of biofuels -- and we've seen the results of that," he added.

But US Secretary of Commerce Carlos Gutierrez rejected the criticism, telling reporters at the forum that while Medvedev had made "some very powerful statements," the world was experiencing a "downturn" rather than a crisis.

This was Medvedev's first major economic speech since taking over as Kremlin chief last month after Vladimir Putin's eight-year presidency during which Russia became an increasingly strident critic of US foreign policy. The conference venue of Saint Petersburg -- a port in northern Russia often referred to as the country's "window on Europe" -- allowed this top global energy power to present itself as a pillar of stability.

Speaking at a meeting of the chief executives of top companies, Medvedev bragged that Russia had a legal system comparable to that of Europe and a better foreign investment law than the United States. "I think the predictability and readiness of our legal system is quite high," Medvedev told investors following criticism of a new law adopted last month that restricts foreign investment in economic sectors including energy. "I think that our oil and gas sector has become more civilized," he added.

"There seems to be a very open dialogue with the new leadership of Russia," said Muhtar Kent, the head of the Coca-Cola Company and one of the participants at the meeting, adding that the talks had been "business-like."

The president also said on Saturday he would turn Moscow into a major world financial centre and told investors not to be afraid of growing investment by Russian companies abroad, saying it was not "speculative or aggressive." Under his predecessor Putin, Russia's economy expanded steadily on the back of soaring energy export revenues. But international experts say it has recently shown signs of overheating.

There is also growing concern about foreign investment risk because of the fate of TNK-BP, a Russian-British oil company riven by infighting between BP and its Russian partners, and also facing tax probes from the authorities.

The dispute is seen as a test case of Russia's approach to foreign investment under Medvedev after several high-profile rows between his predecessor and major foreign investors in the energy sphere. "The resolution of this dispute... will send a very strong signal, positive or negative, about the environment for investment in Russia," Andrew Somers, head of the American Chamber of Commerce in Moscow, said at the forum.

Gutierrez said: "What interests companies and what the world is looking at is how the problem will be dealt with.... What the international community would like to see is that it is dealt with in a manner that is transparent."

Robert Dudley, the chief executive of TNK-BP, was due to address the forum on Sunday as part of a line-up of energy leaders, including the heads of BP, Chevron, ConocoPhillips, ExxonMobil and Shell. Dudley said that he had "no indication" that there could be a change of ownership at the company amid speculation that state gas monopoly Gazprom was planning to buy a major stake.

Weekend's Featured: G-8 Energy Leaders Meet Amid Soaring Oil

2008-06-08T16:30:00.002+08:00

G-8 energy chiefs meet amid doubts about efforts to stop oil prices from surging higher.

Japan's energy chief launched a meeting of ministers from the world's top industrialized nations Sunday by warning that soaring oil prices could trigger a global recession if they're not checked.

The Group of Eight rich nations met in northern Japan with representatives from China, India and South Korea to discuss oil and gas markets, energy investment, energy security and climate change amid deepening concerns about the world economy.

Oil prices made their biggest single-day surge on Friday, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. On the same day, the United States announced a rise in unemployment.

"The situation regarding energy prices is becoming extremely challenging," Akira Amari, Japan's trade and energy minister, warned his colleagues Sunday. "If left unaddressed, it may well cause a recession in the global economy."

Five top energy consumers -- the United States, China, Japan, South Korea and India -- urged oil producers on Saturday to boost output to meet growing demand, while pledging to develop clean energy alternatives and increase efficiency.

World oil production has stalled at about 85 million barrels a day since 2005, while global economic growth -- boosted by spectacular surges in China and India -- has pushed demand to unprecedented levels.

Amari called for a strong message ahead of the G-8 leaders summit in Toyako, Japan, in July. The 11 nations gathered in Aomori account for 65 percent of the world's energy consumption and emissions of greenhouse gases. "What actions we take to address the challenges that we face will have an extremely important effect in solving the global energy issue," he said.

It was unclear, however, what impact consumers will have without action by producers. The current president of the Organization of Petroleum Exporting Countries, Chakib Khelil, has said that the cartel will make no new decision on production levels until its Sept. 9 meeting in Vienna.

The five nations meeting in Japan on Saturday agreed that the sharp surge in oil prices was a menace to the world economy and more petroleum should be produced to meet rising demand. They argued that the unprecedented prices were against the interests of both producers and consumers, and imposed a "heavy burden" on developing countries.

The ministers also vowed to diversify their sources of energy, invest in alternative and renewable fuels, ramp up cooperation in strategic oil stocks in case of a supply shortage, and improve the quality of data on production and inventories available to markets.

The group, however, diverged over oil subsidies. The International Energy Agency has estimated that oil subsidies in China, India and the Middle East totaled about $55 billion in 2007. The United States, which has its own energy subsidies, urged countries such as China to lower its oil supports, which enable domestic consumers to enjoy cheaper gasoline. Subsidies shield consumers from higher prices, meaning consumption does not decline despite rising expenses.

But China and India, while signing on to a statement recognizing the need to eventually phase out such subsidies, argued that removing such supports quickly could trigger political and economic instability. India is already facing such effects. The government on Wednesday hiked gasoline and diesel prices, triggering protests by angry consumers who blocked rail tracks and roads and shut down businesses.

Weekend's Featured: US-China to Meet for Economic Talks

2008-06-08T16:26:00.002+08:00

US and China set for another round of high-level economic talks, but expectations are low.

A global credit crisis and record oil prices will be competing with traditional trade and currency issues when top officials from the United States and China gather in Annapolis, Md., later this month.

However, there is little expectation the fourth round of these high-level discussions will produce any major breakthroughs. The discussions, given the weighty title of the "Strategic Economic Dialogue" when they were launched in 2006, could in fact be on life support, waiting to be put out of their misery by the next administration.

That is not the outcome envisioned by Treasury Secretary Henry Paulson, who had big plans when he came up with the idea to gather a large contingent of President Bush's Cabinet with their counterparts from the Chinese government twice a year, alternating between the two countries.

The next meeting was scheduled for June 17-18 at the U.S. Naval Academy with Paulson giving a speech in Washington on Tuesday outlining the administration's hopes for the gathering. Considering the daunting challenges he faces, he may well use his talk to try to lower expectations.

The two sides will certainly have a lot of concerns about the global economy to keep them occupied: soaring oil prices, a severe credit crunch, worries about a recession in the United States.

Oil prices took their biggest single-day leap ever on Friday, jumping by nearly $11 to $138.54 per barrel, an increase that helped drag down the Dow Jones industrial average by nearly 400 points as investors grew more worried about the fate of the U.S. economy. Those fears were heightened by a report earlier in the day that the U.S. unemployment rate jumped one-half percentage point in May to 5.5 percent, the biggest increase in 22 years.

The administration would like to ease worries about employment in the United States by getting China to allow its currency, the yuan, to rise more quickly in value against the dollar. U.S. manufacturers contend that the Chinese have gained unfair trade advantages by keeping the yuan undervalued, making Chinese goods cheaper for American consumers and American products more expensive in China.

The yuan has risen almost 20 percent against the dollar since the Chinese revamped their currency system in July 2005. Critics say that is less than half of the distance it needs to go to erase an unfair trade advantage they contend has contributed to the loss of more than 3 million U.S. manufacturing jobs since 2001.

As part of the effort to encourage a swifter revaluation of the yuan, Paulson has been urging the Chinese to open their financial system to foreign banks and investment houses including major U.S. institutions. They have the expertise, he maintains, to help guide the Chinese to a more modern financial system with a currency whose value is not controlled by the government but set by free-market trading.

However, Paulson is likely to meet strong resistance from the Chinese in this area, given the billions of dollars in losses suffered by U.S. financial giants in the credit crisis that erupted last August. The Chinese are likely to say they don't need the financial innovation that has brought so much grief to U.S. firms.

Likewise, a U.S. effort to get China to promote greater energy efficiency as a way of reducing strains on global supplies will also face strong resistance. In fact, the Chinese have been moving in the opposite direction, providing ever greater subsidies to keep energy prices low as global prices have surged.

"Over the past year, China has really fallen off the energy conservation wagon," said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington. "This will make it very difficult for China to cut energy use relative to their gross domestic product."

And the Chinese are signaling that they do not intend to speed up the pace at which they are allowing their currency to rise in value against the dollar. They are going as fast as is prudent, they argue, despite demands in Congress to pass legislation that would impose economic sanctions on China if they do not move faster.

For one thing, if the dollar fell in value more quickly against the yuan it could trigger bigger dollar declines against other currencies such as the euro, where it has already touched record lows. Just this week, Federal Reserve Chairman Ben Bernanke said that the dollar's decline had contributed to an "unwelcome rise in import prices and consumer-price inflation," remarks which were seen as a signal that the Fed doesn't plan to cut interest rates further because of heightened inflation concerns.

"Right now, we are interested in getting some dollar stability and if China allowed the yuan to appreciate more quickly it could create more turmoil and a possible run on the dollar that would exacerbate our current plight," said Mark Zandi, chief economist at Moody's Economy.com.

Analysts are not expecting any breakthroughs on a host of other trade tensions between the two countries even though the U.S. deficit with China rose last year to $256 billion, the highest ever recorded with a single country and one-third of the total U.S. deficit with the world.

China has announced that it will bring a trade delegation along in conjunction with the upcoming talks with the expectation that the Chinese will embark on a buying spree to purchase U.S. products as a way of easing unhappiness over the trade gap. The Chinese delegation will have a new leader, Vice Premier Wang Qishan, who took over in March from the long-serving Wu Yi.

Wang and Paulson are expected to have a closer working relationship given their similar backgrounds. Wang headed one of China's largest banks for many years and Paulson was the head of investment banking giant Goldman Sachs before joining the Bush Cabinet.

With expectations for results low, it is unclear what Paulson will be able to produce, especially given the fact that the administration has only a few months left in office. The Chinese may well conclude that they would rather negotiate with the next administration come January.

However, the Chinese might be wise to give Paulson's team some victories or face the prospect that a new administration will decide to junk the whole exercise, which in the view of supporters would be a mistake.

"These talks have prodded China to make some changes over the past two years. It has not achieved everything we had hoped for but it has been a positive force," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers.

Oil Punches to Near $140, Dragging Stocks and Dollar

2008-06-07T08:36:00.004+08:00

Oil prices make biggest single-day leap; Dow Jones tumbles nearly 400 points.

Oil prices made their biggest single-day leap ever Friday, dragging the Dow Jones industrials down nearly 400 points and raising the once-unthinkable prospect of $150 oil and more record gas prices by the Fourth of July.

The meteoric rise of nearly $11 for the day piled atop an increase of almost $5.50 the day before, taking oil futures more than 13 percent higher in just two days, easily a record on the New York Mercantile Exchange.

And those weren't the only stunning numbers of the day: The government also reported the nation's unemployment rate zoomed to 5.5 percent in May, a monthly rise of half a percentage point, the biggest in 22 years.

Oil settled at $138.54, a rise of more than 8 percent. The surged came after Morgan Stanley analyst Ole Slorer predicted strong demand in Asia and tight supplies in the Western Hemisphere could drive prices to $150 by Independence Day, when millions of Americans take to the roads.

That means no end in sight for spiraling gas prices, already above $4 per gallon in much of the country. Even longtime market observers were shocked by the magnitude and speed of oil's rally. "We're into unchartered territory, and somewhat off the map as far as historical precedents are concerned," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Besides the jump in the unemployment rate, the Labor Department said employers had cut 49,000 jobs in May, the fifth straight month of nationwide losses. Job losses for the year reached 324,000.

The White House said President Bush was considering further plans to help energize the economy, already teetering on the edge of recession and crippled by a tumbling housing market and other factors.

On Wall Street, the Dow plunged 394.64 points, more than 3 percent, to close at 12,209.81, the biggest drop in more than 15 months in both percentage and points terms. Wall Street had managed to shrug off oil's advance on Thursday but succumbed to extreme anxiety Friday.

The stock market's great concern of late has been whether consumers would curb their spending on non-essentials as they were forced to pay more for gas and other staples. The previously unthinkable idea of $150 oil, and gasoline that will keep climbing above $4, made it clear to investors that consumers would be forced to be even more conservative than they have been in recent months.

Before Thursday, oil had receded nearly $13 a barrel from its highs, a respite from its nearly record-every-day march. But the end of the week sent it right back up again. The burst in oil prices also raised the prospect of accelerating inflation by adding to already strained transportation costs -- which will send prices higher throughout the economy.

Light, sweet crude for July delivery officially finished the day at $138.54, up $10.75 on the Nymex. But after the settlement, the contract jumped as high as $139.12. Prices hit a previous record of $135.09 a barrel on May 22, and settled Thursday at $127.79.

Traders also zeroed in on remarks by an Israeli Cabinet minister who was quoted as saying his country will attack Iran if it doesn't abandon its nuclear program. Transportation Minister Shaul Mofaz added that Iranian President Mahmoud Ahmadinejad "will disappear before Israel does," the Yediot Ahronot daily reported. Iran is the second-biggest oil producer in the Organization of Petroleum Exporting Countries, and traders worry that any conflict with Israel could disrupt global supplies.

A further weakening of the dollar also helped send oil prices higher by enticing overseas buyers armed with stronger currencies and others looking for a hedge against the greenback. But it also represented a stampede by bullish traders and optimistic computer models betting that prices still have further to rise. "The bulls ... refuse to go away," said Stephen Schork, an analyst and trader in Villanova, Pa.

Meanwhile, U.S. gas prices at the pump continued to hover just shy of an average $4 a gallon, easing only 0.3 cent from Thursday's record. Drivers are now paying an average of $3.99 for a gallon of regular gas nationwide, according to AAA and the Oil Price Information Service; in many parts of the country, consumers are already paying well over $4. Retail diesel slipped a penny overnight to $4.76.

Pump prices are bound to rise even further if oil sustains its advance. James Cordier, president of Tampa, Fla.-based trading firm Liberty Trading Group, predicted prices could rise to $4.25 as early as the end of the month. "Unfortunately, drivers cutting back isn't going to lower the price of gasoline anytime soon," he said.

The dramatic reversal in what had been a weakening oil market began Thursday after ECB President Jean-Claude Trichet suggested the bank could raise interest rates and the euro climbed against the dollar. When interest rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro.

Many traders buy commodities such as oil as a hedge against inflation when the dollar is falling, and a weaker dollar makes oil cheaper for investors dealing in other currencies. Analysts believe the dollar's protracted decline has been a major reason why oil prices have nearly doubled in the past year.

The euro strengthened further against the greenback Friday. A Labor Department report showing the U.S. unemployment rate jumped half a percentage point to 5.5 percent last month -- its biggest monthly increase since 1986 -- could drag the dollar even lower in the days ahead. "Unemployment jumping as it did today will be in the market for a long time and will continue to pressure the U.S. dollar," Cordier said.

The influx of so much fresh money into the energy markets has caught the attention of federal watchdogs. The U.S. Commodity Futures Trading Commission recently said it was six months into a probe of U.S. oil markets focused on possible price manipulation. Asked about Friday's surge, CFTC spokesman R. David Gary said: "People are aware of what's happening and are monitoring the markets closely, but beyond that there is no comment."

Renewed Credit Crisis Fears Strike Market

2008-06-07T08:34:00.001+08:00

Fresh credit crisis fears weighs on market, investors reassess the bottom for financials.

The chief executives at the world's biggest financial institutions might have been a bit too optimistic by declaring we may be nearing the end of the global credit crisis.

Morgan Stanley's John Mack said in April it had reached its eighth inning or "maybe top of the ninth" of a baseball game. Goldman Sachs' Lloyd Blankfein compared it to football's "third or fourth quarter." Richard Fuld at Lehman Brothers and Merrill Lynch's John Thain were also more upbeat about the future.

Just as Wall Street started to look safer for investors, another wave of anxiety about the financial industry, inflation and the economy dragged down stocks this past week. Investors continue to worry that the pain might not be over for financial companies -- and that the market as a whole will suffer until investment banks release quarterly results later this month.

"Financials have become the kid that brings home a bad report card," said Chris Johnson, president of Johnson Research Group in Cincinnati. "Once they bring home C's and D's, you watch that kid closely week to week. If they bring home A's, you only really care once a quarter."

Johnson was among many investors who thought the sector appeared to have bottomed in March when JPMorgan Chase & Co. rescued Bear Stearns from the brink of collapse. Now there are worries that Lehman Brothers Holdings Inc. is facing a serious cash shortage. The investment bank has denied it's short of money, though said a spokesman said it continues to examine options to increase capital through an outside investor or stock issuance.

Analysts say they are scrutinizing every move the financial sector makes to determine when the elusive rebound will happen. And, after five days of more bad news for banks and brokerages, they are still no closer to answers.

The Philadelphia Stock Exchange/KBW Bank Index gave up more than 5 percent of its value in the past week, hitting a 52-week low. Though many thought the credit crisis was in the rearview mirror, the market has felt some pretty strong reverberations.

Wall Street began the week with high-level shake-ups at Washington Mutual Inc. and Wachovia Corp. Standard & Poor's downgraded the two biggest bond insurer, MBIA Inc. and Ambac Financial Group Inc., and also cut its ratings on Lehman, Merrill Lynch & Co. and Morgan Stanley.

The ratings agency has been most critical of Lehman Brothers, saying its balance sheet was the closest of all the Wall Street firms to Bear Stearns. And, Lehman Brothers itself had to deal with everything from reports it is seeking an outside investor to trading-floor rumors of borrowing money from the Federal Reserve.

So, has the financial sector sunk low enough that it's closing in on hitting bottom? "I think we're a little early to call a bottom yet, and at this point nobody is in a big rush to add massively to their exposure to financials," said Brian Gendreau, investment strategist for ING Investment Management. "But, that said, they've been battered down so badly that at this point there's little to be lost in investing in them, and that's about as optimistic as I can get."

Gendreau said for long-term investors, the historic lows seen across the entire financial sector does make some big banking companies such as JPMorgan or Merrill Lynch look attractive. He and other institutional investors are keeping an eye on the sector, which historically leads the broader stock market higher.

That puts even more importance on what might come out of three of the nation's biggest investment banks when they report fiscal second-quarter results later this month. Lehman Brothers, Morgan Stanley and Goldman Sachs Group Inc. are all expected to have another tough quarter dealing with the fallout from the credit crisis, and investors will be paying close attention to what their CEOs say this time around.

In particular, there are reports that Lehman might move their quarterly announcement up a week to dispel rumors of a liquidity problem. The nation's fourth-largest investment bank is set to release results the week of June 16. A spokesman would not comment.

Most people on Wall Street feel the market feel investment banks can't really fall that much more, and a rebound will help the stock market ratchet higher. Those who snapped up financial stocks in March are still waiting for a big payday. "There's a fine line between being early and being wrong," said Johnson. "Its always the darkest before the dawn when it comes to value investing."

Corn Futures Hit New Record While Other Grains Also Rise

2008-06-07T08:29:00.002+08:00

Corn futures hit record for second day on Midwest rains, weak dollar; crude soars above $139.

Corn futures shot up to a record for a second day Friday, driven higher by heavy rain in Midwestern states, a slumping dollar and skyrocketing crude oil prices. Other commodities traded broadly higher, with crude oil soaring more than $11 and gold, silver, copper and other agriculture futures also rising sharply.

Heavy rains have flooded corn crops in Indiana, Ohio, Nebraska and other states, giving farmers their wettest spring since 1993 and severely delaying planting. Forecasts show the bad weather moving toward the western corn belt states of Minnesota and Wisconsin over the next several days. "It's all about the weather. People have had to replant fields a third time and it's completely unknown how the flooding is going to affect yields," said Elaine Kub, analyst with DTN in Omaha.

Corn for July delivery surged to an all-time high of $6.6325 a bushel on the Chicago Board of Trade before easing back to settle at $6.5075, up 7.5 cents. It was corn's highest settlement price ever. Prices have jumped nearly 40 percent since the start of the year.

U.S. farmers were expected to plant 86 million acres of corn this year, but wet weather in Midwestern states has left 4 million acres unplanted. If the remaining fields aren't planted by June 10, farmers will either leave them empty and take insurance payments or switch the acres over to soybeans, which have a later growing cycle.

That would likely lift corn prices further, forcing consumers to pay higher grocery bills for meat and pork, as livestock producers would be forced to pass on higher animal feed costs and thin their herd size.

Other agriculture futures also rose. Wheat for July delivery rose 25.5 cents to settle at $8.11 a bushel on the CBOT, while July soybeans added 5.5 cents to settle at $14.575 a bushel. Meanwhile, rough rice futures for July delivery added 60 cents to settle at $19.96 per 100 pounds.

Another US Job Cuts Leave Unemployment at 5.5%

2008-06-06T22:59:00.002+08:00

Unemployment rate jumps to 5.5 percent in May, biggest rise since 1986; payrolls cut again.

The nation's unemployment rate jumped to 5.5 percent in May -- the biggest monthly rise since 1986 -- as nervous employers cut 49,000 jobs. The latest snapshot of business conditions showed a deeply troubled economy, with dwindling job opportunities in a time of continuing hardship in the housing, credit and financial sectors. "It was ugly," said Richard Yamarone, economist at Argus Research.

With employers worried about a sharp slowdown and their own prospects, they clamped down on hiring in May, said Friday's report from the Labor Department. The unemployment rate soared from 5 percent in April to 5.5 percent in May. That was the biggest one-month jump in the rate since February 1986. The increase left the jobless rate at its highest since October 2004. On Wall Street, stocks slid. The Dow Jones industrials tumbled more than 200 points in morning trading.

The big jump in the unemployment rate surprised economists who were forecasting a tick-up to 5.1 percent. Payroll losses, however, weren't as deep as the 60,000 that analysts were bracing for. Still, job losses in both March and April turned out to be larger than the government previously reported. Employers now have cut payrolls for five straight months.

The White House expressed disappointment, too. "Certainly this isn't a report that we wanted to see today," White House deputy press secretary Scott Stanzel said. He acknowledged that the increase was higher than experts expected. "It is a number that is too high in our view but it is lower than the average of the last three decades."

The 5.5 percent rate is relatively moderate judged by historical standards. Yet, there was no question that employers last month sharply cut jobs in manufacturing, construction, retailing and professional and businesses services. Those losses swamped gains elsewhere, including in the education and health fields, government and leisure and hospitality.

The government said the number of unemployed people grew by 861,000 in May -- rising to 8.5 million. The over-the-month jump in unemployment reflected more workers losing their jobs as well as an increase in those coming into the job market -- especially younger people -- to look for work, the Bureau of Labor Statistics said. A year ago, the number of unemployed stood at 6.9 million and the jobless rate was 4.5 percent.

A trio of crises -- housing, credit and financial -- have rocked the economy. That's caused economic growth to slow to a crawl as businesses and consumers have tightened their belts. Spiraling energy costs are another negative force.

The country's economic problems are a top concern for voters -- and thus for President Bush, lawmakers on Capitol Hill and those vying to win the White House this fall. And, there's been a lot of talk about whether the economy is on the brink of, or fallen into, its first recession since 2001. That determination, made by a panel of academics, is usually made well after the fact.

"For the average American there is not debate that the eocnomy is in a recession," said Mark Zandi, chief economist at Moody's Economy.com. "That's because their net worth is lower, their purchasing power is lower and it is tough to find a job. If you lose a job, it is tough to get back in," he said.

So far this year, the government said, job losses have totaled 324,000. Workers with jobs, however, saw modest gains. Average hourly earnings for jobholders rose to $17.94 in May, up 0.3 percent from the previous month. Economists were forecasting a 0.2 percent gain. Over the last 12 months, wages have grown by 3.5 percent..

With food and energy prices marching upward, paychecks aren't stretching as far. Although tax rebates helped to energize shoppers and give major retailers better sales in May, analysts still believe that anxious consumers will be keeping a close watch on their purchases and their budgets in the months ahead. A weakening job market could make people feel less inclined to spend.

Worried about inflation, Federal Reserve Chairman Ben Bernanke has signaled that the central bank's rate-cutting campaign, which commenced last September to help bolster the economy, is probably over for now.

Fed officials and the Bush administration are hoping that the Fed's powerful doses of rate reductions and the government's $168 billion stimulus package, including tax rebates for people and tax breaks for businesses, will pull the economy out of its deep funk in the second half of this year.

Even if that happens, the unemployment rate is expected to climb to 6 percent or higher early next year. Employers won't want to ramp up hiring until they feel more sure that an economic recovery has strong legs.

$45 Trillion Investment Needed to Fight Warming

2008-06-06T22:37:00.001+08:00

New study calls for $45 trillion to cut greenhouse gases in half by 2050.

The world needs to invest $45 trillion in energy in coming decades, build some 1,400 nuclear power plants and vastly expand wind power in order to halve greenhouse gas emissions by 2050, according to an energy study released Friday.

The report by the Paris-based International Energy Agency envisions a "energy revolution" that would greatly reduce the world's dependence on fossil fuels while maintaining steady economic growth. "Meeting this target of 50 percent cut in emissions represents a formidable challenge, and we would require immediate policy action and technological transition on an unprecedented scale," IEA Executive Director Nobuo Tanaka said.

A U.N.-network of scientists concluded last year that emissions have to be cut by at least half by 2050 to avoid an increase in world temperatures of between 3.6 and 4.2 degrees above pre-18th century levels.

Scientists say temperature increases beyond that could trigger devastating effects, such as widespread loss of species, famines and droughts, and swamping of heavily populated coastal areas by rising oceans.

Environment ministers from the Group of Eight industrialized countries and Russia backed the 50 percent target in a meeting in Japan last month and called for it to be officially endorsed at the G-8 summit in July.

The IEA report mapped out two main scenarios: one in which emissions are reduced to 2005 levels by 2050, and a second that would bring them to half of 2005 levels by mid-century. The scenario for deeper cuts would require massive investment in energy technology development and deployment, a wide-ranging campaign to dramatically increase energy efficiency, and a wholesale shift to renewable sources of energy.

Assuming an average 3.3 percent global economic growth over the 2010-2050 period, governments and the private sector would have to make additional investments of $45 trillion in energy, or 1.1 percent of the world's gross domestic product, the report said.

That would be an investment more than three times the current size of the entire U.S. economy. The second scenario also calls for an accelerated ramping up of development of so-called "carbon capture and storage" technology allowing coal-powered power plants to catch emissions and inject them underground.

The study said that an average of 35 coal-powered plants and 20 gas-powered power plants would have to be fitted with carbon capture and storage equipment each year between 2010 and 2050.

In addition, the world would have to construct 32 new nuclear power plants each year, and wind-power turbines would have to be increased by 17,000 units annually. Nations would have to achieve an eight-fold reduction in carbon intensity -- the amount of carbon needed to produce a unit of energy -- in the transport sector.

Such action would drastically reduce oil demand to 27 percent of 2005 demand. Failure to act would lead to a doubling of energy demand and a 130 percent increase in carbon dioxide emissions by 2050, IEA officials said.

"This development is clearly not sustainable," said Dolf Gielen, an IEA energy analyst and leader for the project. Gielen said most of the $45 trillion forecast investment -- about $27 trillion -- would be borne by developing countries, which will be responsible for two-thirds of greenhouse gas emissions by 2050.

Most of the money would be in the commercialization of energy technologies developed by governments and the private sector. "If industry is convinced there will be policy for serious, deep CO2 emission cuts, then these investments will be made by the private sector," Gielen said.

Biofuels Debated on UN Food Summit

2008-06-04T21:40:00.002+08:00

US, Brazil and other countries battle it out on biofuels at UN food summit.

Leaders gathered at a summit on the world's food crisis quickly laid out their disagreements on a key issue: how much the rush for environmentally friendly biofuels is contributing to soaring prices that are causing hunger and unrest worldwide.

Most countries and international organizations meeting at the Rome-based United Nations Food and Agriculture Organization cite multiple causes for the crisis. These include rising energy costs, more demand for meat and dairy products from some booming developing countries, trade restrictions and speculation, as well as the demand for biofuels.

But views on how much each factor contributes varied widely as the three-day summit opened Tuesday. Discussion of whether to scale back or push ahead with the introduction of biofuels -- fuels made from sugar cane, corn and other crops -- is likely to weigh heavily on attempts to come up with a global strategy to solve the crisis.

Proponents say the fuels are a way to combat climate change and rising oil prices, while others argue they accelerate global warming by encouraging deforestation and heavily contribute to the commodities price hike by diverting production from food crops to biofuel crops.

The president of Brazil, whose country's sugar cane has long been used to produce ethanol that fuels cars and trucks, delivered an impassioned defense of biofuels. "It is frightening to see attempts to draw a cause-and-effect relationship between biofuels and the rise of food prices," said Luiz Inacio Lula da Silva. "It offends me to see fingers pointed against clean energy from biofuels, fingers soiled with oil and coal."

The United States, which also tried to exonerate biofuels from the charge of rising prices, has been heavily subsidizing corn-based ethanol production. Last year the 27-nation European Union endorsed a plan calling for a 10-percent share of biofuels for road vehicles by 2020.

But studies by international organizations, including the International Monetary Fund, show the increased demand for biofuels is contributing by 15-30 percent to food price increases, said Frederic Mousseau, a policy adviser at Oxfam, a British aid group.

"Food stocks are at their lowest in 25 years, so the market is very vulnerable to any policy changes" such as U.S. subsidies and the EU's mandate on greater use of this energy source, Mousseau said.

"In some cases, biofuel production is in competition with food supply," Japanese Prime Minister Yasuo Fukuda told the Rome summit on Tuesday. "We need to ensure that biofuel production is sustainable." Fukuda said countries must speed up the research and introduction of second generation biofuels, which can make fuel out of various plants and not just food crops.

While agreeing that sustainability and innovation are needed, U.S. Agriculture Secretary Ed Schafer insisted that biofuels contribute only 2 or 3 percent to a predicted 43 percent rise in prices this year. "The use of sustainable biofuels can increase energy security, foster economic development especially in rural areas, and reduce greenhouse gas emissions without weighing heavily on food prices," Schafer said in his address.

Last month, the U.S. Congress enacted a farm bill which reduced a tax credit for refiners by about 10 percent per gallon. The credit supports the blending of fuel with the corn-based additive. More money would go to cellulosic ethanol, made from plant matter.

But even among countries like the U.S. and Brazil, there was little agreement on the best way to tap the energy source. Brazil's president lashed out at the U.S. approach, saying corn-based ethanol is less efficient than the fuel produced with sugar cane and that the former can only compete "when it is shored up with subsidies and shielded behind tariffs."

Ron Litterer, an Iowa corn farmer and president of the U.S. National Corn Growers Association said that as technology develops, the gap in efficiency between corn and sugar cane will narrow and that subsidies are slowly being reduced as the industry grows.

"Brazil also had subsidies when it was developing its ethanol industry," Litterer told The Associated Press by telephone. "Over time our subsidies will be further reduced and could eventually even disappear."

OECD Reduces World Economic Growth Forecasts

2008-06-04T21:38:00.002+08:00

OECD cuts growth forecasts in US and euro zone; uncertainty making it harder to set policy.

The Organization for Economic Cooperation and Development foresees several quarters of weak growth for most of its 30 members, which include the U.S., Japan, and several European countries, and on Wednesday cut its economic growth outlook through next year. While the "odds have improved" that the financial crisis has passed its peak, the effects on growth are likely to linger, the OECD said.

The combination of market turmoil, sharply higher oil and commodity prices and cooling housing markets has made it more difficult for policy makers to gauge the correct response, the Paris-based think tank said.

Economic growth in the OECD's 30 members will slow to 1.8 percent this year and 1.7 percent next year, it said in its twice-yearly outlook. That compares with its previous forecast of 2.3 percent in 2008 and 2.4 percent in 2009.

Weak economic growth in the U.S. is dragging down the overall forecast. The U.S. economy will grow just 1.2 percent this year and 1.1 percent in 2009, the OECD predicted. Economic growth in the euro area and Japan will slow to 1.7 percent this year.

"OECD economies have been hit by strong gales over the recent past and it will take time and well judged policies to get back on course," said Jorgen Elmeskov, acting head of the OECD's economic department, in the report.

But the impact of the oil price shock combined with the market turmoil is "difficult to estimate." This, combined with weakening growth and inflation compounds "the risk of policy errors." Central banks could err "in both directions," the OECD said.

Policy makers may have to get used to the sharply higher commodity prices, driven by demand from China and India, and should resist calls for tax cuts to counter the rising cost of food and energy, it said. They should be especially mindful of the stagflation seen in the 1970s and 1980s, when loosening interest rates fueled inflation. At the same time, overly tight monetary conditions could hurt major economies at a time when they need support.

In the U.S., the current "stance should be maintained until the recovery takes hold," the OECD said. The Federal Reserve started cutting interest rates aggressively in September to keep the housing slump and a severe credit crisis from triggering a recession. Rates in late April were cut to 2 percent, a nearly four-year low.

Fed Chairman Ben Bernanke signaled Tuesday that interest-rate cuts are on hold for now, with the threat of inflation becoming more of a concern. Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year. That scenario could change should inflation flare up.

The European Central Bank should "maintain interest rates at their current level" of 4 percent for the 15-nation euro region, the OECD said. The ECB has not moved rates since last June. Economic growth in the euro area will drop to 1.4 percent in 2009 after 1.7 percent this year, the OECD said. In December, the OECD forecast growth of 1.9 percent this year and 2 percent in 2009.

In Japan, weakening growth and deflation risks "argue for keeping monetary policy on hold." The OECD raised its expectation for Japanese growth to 1.7 percent this year, from 1.6 percent and reduced its forecast for 2009 to 1.5 percent from 1.8 percent.

In Britain and Canada "large policy rate cuts are warranted" as the economies are "likely to experience sharper falls in output" than other OECD countries. Britain is "more vulnerable" to the current crisis because of the importance of banking and financial markets to its economy, while Canada is being dragged down by its close links to the U.S. economy.

The OECD also produced reports on non-members China and India. It said the Chinese economy will slow to 10 percent this year and 9.5 percent in 2009 as exports decline. India's economy will fall to a 7.8 percent pace this year before picking up to 8 percent in 2009, the OECD said.

Oil and Food Prices to Be G8 Key Topics

2008-06-04T21:36:00.002+08:00

Soaring oil, food prices to be key topics at G8 meeting, Japan finance minister says.

Soaring energy and food prices have exacerbated global economic uncertainties, Japan's finance minister said Wednesday, and will be among the key topics discussed at the Group of Eight finance ministers meeting later this month.

Food prices have risen worldwide in recent months due to a combination of high oil prices, growing demand, extreme weather, higher biofuel production and speculation. That's triggered protests in parts of Africa and Asia and has raised fears of widespread malnutrition and economic instability.

G8 officials will need to hammer out ideas to encourage consumer countries to curb demand as well as enhance agricultural and energy productivity, Fukushiro Nukaga said in a speech at the Foreign Correspondents' Club of Japan.

"At the G8 meeting in Osaka, we may not see results overnight, but we hope to discuss measures to tackle the issues," he said. If expecations for inflation rise, that could make it hard to steer macroeconomic policy, he said.

In Japan, Ministry of Finance data released earlier Wednesday showed that higher raw materials prices are sapping corporate earnings. In the January-March period, Japanese companies' pretax profit fell an average of 17.5 percent from the previous year -- the biggest drop in six years.

Nukaga also warned that higher oil prices could dampen consumer spending in the world's second-largest economy. He said the world's short-term economic outlook is murky, and it's still too early to tell whether financial market instability arising from U.S. subprime-related problems has passed. "But if we don't make any mistakes in managing policy, I think in the mid to long term, the fundamentals of the global economy remain strong," he said.

The G8 includes the U.S., Japan, Germany, Britain, France, Russia, Italy and Canada. The finance ministers meeting will take place June 13-14 in Osaka, western Japan. Also high on the G8's agenda, he said, will be climate change and in particular, finding ways to help developing countries cut carbon emissions. Nukaga noted progress in Japan's proposal for a new multilateral climate change fund with the U.S. and U.K., and said he expects further details to emerge from G8 discussions.

"Regardless of whether they're for developed countries or undeveloped countries, measures to tackle climate change require massive funding," he said. Climate change also will be a key topic at the leaders' summit in early July in Hokkaido, the northern island of Japan.

Regarding the long-term outlook for Japan, Nukaga stressed the importance of grappling with the double demography whammy facing the country -- a rapidly aging society and declining birth rates. By 2030, the number of seniors over 65 years old will account for more than a third of Japan's overall population, according to government projections.

Nukaga said Japan will need to reform social security, adjust taxes and expand the labor force. He suggested raising the retirement age to 70 from 65, and said Japan should "seriously consider" accepting more foreign laborers -- a politically volatile move that authorities have long avoided. Aside from certain exceptions, unskilled laborers are not allowed to enter Japan under current immigration policy. "We've reached a point where we must consider this," he said.

Bernanke Signals Interest Rate Cuts to Stop

2008-06-03T21:34:00.001+08:00

Bernanke signals rates probably will hold steady as Fed copes with risks to inflation.

Federal Reserve Chairman Ben Bernanke signaled Tuesday that further interest rate cuts are unlikely because of concerns about inflation. High oil prices are a double-edged sword that can both put a damper on already weak growth and spread inflation, he said.

Bernanke, in prepared remarks delivered via satellite to an international monetary conference in Spain, said that the Fed's powerful doses of rate reductions that started last September along with the government's $168 billion stimulus package, including rebates for people and tax breaks for businesses, should bring about "somewhat better economic conditions" in the second half of this year.

To help brace the economy, the Fed last month dropped its key rate to 2 percent, a nearly four-year low, but hinted that could be the last reduction for a while. Bernanke drove that point home again on Tuesday. "For now policy seems well positioned to promote moderate growth and price stability over time," he said.

The Fed's juggling act has gotten harder. It is trying to right a wobbly economy without aggravating inflation. Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year. A few believe that inflation could flare up and force the Fed to begin boosting rates near the end of this year.

Bernanke, however, suggested that leaving rates at their current levels should be sufficient to accomplish the Fed's twin goals of nurturing economic growth while preventing inflation from taking off.

Economic growth in the current quarter, he acknowledged, is "likely to be relatively weak." Even as he reiterated the Fed's hope for a pickup in growth in the second half of this year and into 2009, Bernanke said the economy continues to battle against a trio of negative forces -- a housing slump, credit problems and fragile financial markets.

Until the slumping housing market and falling home prices show "clearer signs of stabilization," there will continue to be threats to the economic growth getting back to full throttle, he said. Moreover, recent increases in oil prices pose "additional downside risks to growth," he said. At the same time, if already lofty oil prices, now hovering past $127 a barrel, continue to rise, that could worsen inflation, Bernanke warned.

The Fed's aggressive rate-cutting campaign has contributed to a lower value of the U.S. dollar. That, in turn, has helped to push up the prices for imported goods flowing into the United States and fuel a rise in consumer prices. Bernanke called that development "unwelcome." He said the Fed is "attentive to the implications of changes in the value of the dollar for inflation and inflation expectations."

UN Wants Food Production Rise 50% By 2030

2008-06-03T21:29:00.002+08:00

UN chief says food production must rise 50 percent by 2030 to meet increasing demand.

World food production must rise by 50 percent by 2030 to meet increasing demand, U.N. chief Ban Ki-moon told world leaders Tuesday at a summit grappling with hunger and civil unrest caused by food price hikes.

The secretary-general told the Rome summit that nations must minimize export restrictions and import tariffs during the food price crisis and quickly resolve world trade talks. "The world needs to produce more food," Ban said.

The Rome-based U.N. Food and Agriculture Organization is hosting the three-day summit to try to solve the short-term emergency of increased hunger caused by soaring prices and to help poor countries grow enough food to feed their own.

In a message read to the delegates, Pope Benedict XVI said "hunger and malnutrition are unacceptable in a world which, in reality, has sufficient production levels, the resources, and the know-how to put an end to these tragedies and their consequences." The Pope told the world leaders that millions of people at threat in countries with security concerns were looking to them for solutions.

Ban said a U.N. task force he set up to deal with the crisis is recommending the nations "improve vulnerable people's access to food and take immediate steps to increase food availability in their communities."

That means increasing food aid, supplying small farmers with seed and fertilizer in time for this year's planting seasons, and reducing trade restrictions to help the free flow of agricultural goods. "Some countries have taken action by limiting exports or by imposing price controls," Ban said. "They only distort markets and force prices even higher."

The increasing diversion of food and animal feed to produce biofuel, and sharply higher fuel costs have also helped to shoot prices upward, experts say. The United Nations is encouraging summit participants to start undoing a decades-long legacy of agricultural and trade policies that many blame for the failure of small farmers in poor countries to feed their own people.

Wealthy nations' subsidizing their own farmers makes it harder for small farmers in poor countries to compete in global markets, critics of such subsidies say. Jim Butler, the FAO's deputy director-general, said in an interview ahead of the gathering that a draft document that could be the basis for a final summit declaration doesn't promise to overhaul subsidy policy.

Congress last month passed a five-year farm bill heavy on subsidies, bucking White House objections that such aid in the middle of a global food crisis wasn't warranted. The head of the summit's U.S. delegation, Agriculture Secretary Ed Schafer, insisted on Monday that biofuels will contribute only 2 or 3 percent to a predicted 43 percent rise in prices this year.

Figures by other international organizations, including the International Monetary Fund, show that the increased demand for biofuels is contributing by 15-30 percent to food price increases, said Frederic Mousseau, a policy adviser at Oxfam, a British aid group. "Food stocks are at their lowest in 25 years, so the market is very vulnerable to any policy changes" such as U.S. or European Union subsidizing biofuels or mandating greater use of this energy source, Mousseau said.

Brazil is another large exporter of biofuels, and President Luiz Ignacio Lula da Silva was expected to defend biofuels at the summit. Several participants won't even be talking to each other at the summit.

Australia's foreign minister decried as "obscene" Zimbabwean President Robert Mugabe's participation in the summit. The longtime African leader has presided over the virtual transformation of his country from former breadbasket to agricultural basket case. Zimbabweans increasingly are unable to afford food and other essentials with agriculture paralyzed by land reform and the world's highest rate of inflation.

The Dutch ministry for overseas development pledged to "ignore" Mugabe during the summit. EU sanctions against Mugabe because of Zimbabwe's poor human rights record forbid him from setting foot in the bloc's 27 nations, but those restrictions don't apply to U.N. forums.

Jewish leaders and some Italian politicians were among those denouncing Iranian President Mahmoud Ahmadinejad's attendance at the meeting. On Monday, Ahmadinejad repeated his call for the destruction of Israel, which is also participating in the summit. Ahmadinejad was scheduled to give a summit news conference Tuesday afternoon.

Schafer, asked about the presence of the Zimbabwean and Iranian leaders, told reporters in Rome that the two were welcome to attend the summit, but that U.S. delegates would not be meeting with them.

World Hunger Lingers Regardless of Food Aid

2008-06-02T22:24:00.002+08:00

Chronic world hunger reflects neglect of smaller farming in poor countries.

Ferried in by helicopters and boats or loaded on the backs of yaks and elephants, massive amounts of food aid have reached millions of homeless or hungry people after disasters in the last few years.

But while the world rises to the challenge of saving those survivors from starvation, hundreds of millions go hungry from a catastrophe that has stubbornly lasted for decades: the failure of agriculture in much of Africa and some parts of Asia and Latin America to ensure enough food for their own.

World leaders convening in Rome on Tuesday to grapple with skyrocketing food prices will have to make progress on this problem if they want to eradicate chronic hunger, say U.N. experts, nonprofit aid groups and economists.

As the recent outpouring of nearly $1 billion to help the U.N. purchase emergency aid during the current food price crisis might show, the world can be more willing to take on dramatic emergencies than to invest in helping poor countries to feed themselves. "What we've seen is we're getting better at emergencies, but getting worse at tackling chronic hunger," said Duncan Green, director of research at Oxfam, a British aid group.

"Even in 2006, which was a good food (harvest) year, 850 million people were hungry," said Raj Patel, a political economist who testified earlier this month before Congress about the food crisis. "It's part of a chronic crisis which has recently become acute" because of soaring prices.

Agricultural development has been "horrendously neglected," Oxfam's Green said in a telephone interview from Britain ahead of the June 3-5 U.N. summit in Rome. "I'd say it's three decades of neglect," said Jim Butler, deputy director-general of the U.N. Food and Agricultural Organization, which is hosting the summit. He said his agency will encourage aid to small farmers in the form of seed, feed, supplies, fertilizer and technology.

An internal report by the World Bank, which wealthy countries finance to help poor ones, concluded last year that the institution had long neglected farming in sub-Saharan Africa. Congressional investigators said last week that African-bound food aid, particularly from the United States, has increasingly been sent for short-term emergencies rather than to help long-term agricultural development.

"We tend to deal with what is happening now, today, tomorrow or next week, and insufficient attention is given to more fundamental processes such as population growth, or the need to invest in agriculture research for people living in difficult environments," said Timothy Dyson, an expert in agriculture and famine issues at the London School of Economics.

Agricultural development aid dropped by one-half between 1980 and 2005, said another Oxfam official, Tricia O'Rourke. In 2006, $4 billion was spent on agricultural development, a pittance compared to the $25 billion worldwide on subsidies to farmers by governments of developed countries eager to keep home products competitive, said O'Rourke.

Many argue that subsidiaries hurt small farmers abroad, since imported subsidized products compete for homegrown products in their countries, while proponents argue that subsidies will encourage more food for mouths worldwide. Last week, the World Bank pledged to boost support for both agriculture and food aid. It calculates that food prices have increased by 83 percent over the last three years.

The dizzying escalation has been blamed on fuel hikes, changing diets, urbanization, expanding populations, climate change, bad weather, growth in biofuel production and speculation, as well as the legacy of flawed food policies. The previous two decades saw pressures from international banks and governments in the developed world to get the state out of poor countries' economies.

"The argument was that the state institutions were inefficient, and the private sector would do it better," said Oxfam's Green. But "the private sector goes where it can make a decent profit" leaving out those "farmers in the middle of nowhere with no access to markets or roads."

Patel criticized U.S. policies of purchasing U.S.-produced food for disaster emergencies halfway around the globe instead of providing funds so poor nations can buy the aid food from their own struggling farmers. "When the ship comes in loaded with grain from Kansas, that wipes out domestic agricultural production," said Patel in a phone interview from San Francisco.

U.S. lawmakers recently ignored an administration request to allow 25 percent of U.S. food aid funds to be used to purchase foreign supplies near crisis areas. Instead, congressional negotiators set up a small pilot program to allow for limited local foreign purchases using U.S. aid money. "We are hoping that we can move to greater amounts of local purchase," Henrietta Fore of the U.S. Agency for International Development told reporters Sunday.

EU Inflation Likely to Stay High

2008-06-02T22:21:00.001+08:00

IMF says euro inflation is uncomfortably high, will likely stay high.

The International Monetary Fund said Monday that inflation in the 15 countries that use the euro is "uncomfortably high" and will likely stay above 3 percent in the near future. Inflation close to record highs and well above the European Central Bank's guideline of close to 2 percent -- meaning the bank will likely avoid interest rate cuts until inflation cools.

The IMF does not see the risk of inflation spiraling out of control at present, saying second-round effects -- such as a wage-price spiral that pushes prices up across the economy -- "have essentially been kept in check." Outside of volatile food and fuel prices, so-called core inflation is still moderate at below 2 percent it said, and the overall rate may gradually return to less than 2 percent in late 2009.

In May, yearly inflation again hit 3.6 percent, according to an initial estimate from the European Union's statistical agency Eurostat, the fastest pace of price increases in 12 years. It first rose to 3.6 percent in March before cooling slightly in April.

IMF official Alessandro Leipold told reporters at a Frankfurt news conference that high prices for basic goods would hurt economic growth this year. The euro economy should bounce back from the current "mild slowdown" in late 2009, the fund says, predicting growth of 1.75 percent this year and 1.25 percent next year if financial turmoil does not deepen.

The IMF recommended the ECB keep borrowing costs on hold -- as it has done since last June despite a credit crisis that saw the U.S. Federal Reserve and others slash rates to encourage banks to lend. The fund also warned that the euro zone will see weaker exports as the global economy slows and the euro currency remains high against the U.S. dollar.

The strong euro cushioned Europe from high oil prices last year because oil is priced in dollars, cutting the cost of Europe's import bill. But that effect is fading, Leipold said. "Euro exports have been resilient but not immune and the euro has been a good shock absorber but not impenetrable," Leipold said.

The IMF hinted that the euro may be overvalued, saying the exchange rate is "now on the strong side ... having borne a disproportionate burden of the depreciation of the U.S. dollar."

Weekend's Featured: High Petrol Prices Strike Global Consumers

2008-06-01T07:58:00.001+08:00

$11.29 a gallon in Turkey? Consumers worldwide wrestle with rising gasoline prices.

Feeling woozy about the fortune you've just pumped into your gas tank? Drivers around the world share the sensation.

Consumers, gas retailers and governments are wrestling with a new energy order, where rising oil prices play a larger role than ever in the daily lives of increasingly mobile people. But as the cost of crude mounts, the effect on the price at the pump varies startlingly -- from Venezuela, where gas is cheaper than water, to Turkey, where a full tank can cost more than a domestic plane ticket.

Taxes and subsidies are the main reasons for the differences, along with lesser factors such as limited oil refining capacity and hard-to-reach geography that push up prices. "I don't know why it is but... it hurts," says Marie Penucci, a violinist filling up her Volkswagen at an Esso station on the bypass that rings Paris.

As she pumped gas worth $9.66 a gallon she looked wistfully at a commuter climbing onto one of the city's cheap rent-a-bikes, an option not open to her since she travels long distances to perform.

High taxes in Europe and Japan have long accustomed consumers to staggering pump prices, which now are testing new pain thresholds -- and it could have been even worse, if a strong euro hadn't cushioned some of the blow. As a result, plenty of European adults never even bother to learn to drive, preferring cheap mass transit to cumbersome cars.

Subsidies in emerging economies such as China and India, meanwhile, shield consumers but hurt governments, which must find a way to afford rising market prices for oil. Increasingly, they can't. Indonesians are staging protests against shrinking gasoline subsidies in a nation where nearly half the population of 235 million lives on less than $2 a day. And there are now 887 million vehicles in the world, up from 553 million vehicles just 15 years ago, and on track to nearly double to a billion by 2012, according to London-based consultancy Global Insight.

In Europe, taxes are often the focus, since the high tax burden means crude itself is a smaller part of the burden. "The pain of a rise in prices is much less in Europe, because we may be paying a lot more here, but the rise in a percentage sense is a lot smaller," said Julius Walker, oil analyst at the Paris-based International Energy Agency.

The United States, with its relatively low taxes, is considered to have retail prices closer to what energy data charts call the "real cost" of gasoline -- which is closely linked to the price of oil. So as oil prices have soared, average U.S. prices have gone up 144 percent in the past five years -- from $1.67 in May 2003 to $4.02 a gallon this month, according to the U.S. Energy Information Administration. Over the same period, gas prices in France went up 117 percent to $9.66 a gallon.

Proposals by U.S. presidential candidates John McCain and Hillary Clinton to suspend federal gas taxes this summer would lower the price tag -- but have little effect on the underlying oil price. French President Nicholas Sarkozy has urged the EU to cut value-added tax on fuel.

French fishermen and farmers, who need fuel for their trawlers and tractors, say their livelihoods are threatened by soaring prices and have blocked oil terminals around France and shipping traffic on the English Channel to demand government help. Italian, Portuguese and Spanish fisherman joined them and went on strike Friday. British and Bulgarian truckers are staging fuel protests, too.

Russia is proof that big oil-producing nations are not in any better shape when it comes to gasoline prices. Gas in the world's No. 2 oil producer runs about $3.68 a gallon -- nearly that in the United States, where the average wage is about six times higher.

Much of the Russian cost comes from taxes, which run between 60 and 70 percent. Limited refining capacity and the costs of transporting gasoline across the country's vast expanse also push up prices. Turkey faces similar problems -- and even higher prices -- $11.29 a gallon, which for a full tank in a midsize car can reach nearly $200, enough for a domestic plane ticket.

In China, government-mandated low retail gasoline prices have helped farmers and China's urban poor but also have hurt conservation. In the first four months of 2008, gasoline consumption was up 5.5 percent from the same period last year.

Venezuela, too, is a gas-guzzler's wonderland. A gallon costs just 12 cents and consumers are snapping up SUVs even as Americans are shunning them. Thanks to long-held government subsidies and plenty of oil, Venezuelans see cheap fuel as a birthright.

Some policymakers in less oil-flush nations look to Brazil's use of ethanol as a potential solution. Ethanol from sugarcane is widely available in the world's No. 1 sugar producer and its 190 million people. Eight out of every 10 new cars sold are flex-fuel models that run on pure ethanol, gas or any combination of the two. The price for ethanol in Sao Paulo is currently running about half the price of gas, which runs $5.67 per gallon.

In Japan, gas station owners say some customers aren't filling up their tanks all the way. "It's been tough. I had to switch to regular gasoline from premium class," said Hiroyuki Kashiwabara, a company employee in his 50s whose monthly spending on gasoline has increased by nearly 10,000 yen ($96) over the last couple of months. "My salary doesn't change and I can't cut back on my spending on food or anything else."

Americans, too, are beginning to trim their hearty gas appetites. "We're beginning to see a slowdown in the U.S. in gasoline demand in particular. That's not so visible in other parts of the world," the IEA's Walker said.

Jean-Marc Jancovici, a French engineer and co-author of a philosophical treatise called "Fill It Up, Please!" despairs rising thirst in the developing world for shrinking oil resources. "The real question is ... how to save peace and democracy in this context," he asks. His answer? To rich-country consumers, at least, he says: Pick up your bike and "stop being petroleum slaves."

Weekend's Featured: Speculators Blamed for High Oil Prices

2008-06-01T07:55:00.002+08:00

OPEC President Insists That Speculators Cause Steep Rise in Oil Prices, Not Supply.

OPEC president Chakib Khelil again blamed speculators for the steep rise in oil prices Saturday, insisting that supply was not a problem. "There is no problem of supply, the problem is much more linked to speculation," he told a press conference with visiting French ecology and energy minister Jean-Louis Borloo.

He also said the price of oil was closely linked to the exchange rate of the US dollar, which has fallen steeply against other major currencies. "The consensus is that the crisis is not over and there is going to be a continuing impact on the prices of oil because of speculation," he added.

Khelil, who is also the Algerian energy minister, had made similar remarks on Monday in an interview with Spanish national radio. "If OPEC decides to raise production ... these hikes will not really lower the price," he said then. He said Saturday that the cartel of producer nations would not review the situation again until it meets in Vienna on September 9.

Oil prices are still extremely volatile, closing in New York at 127.35 dollars a barrel Friday for light sweet crude for July delivery, up 73 cents on the day but well short of earlier in the week, when crude surged beyond 135 dollars on concerns about tightening energy supplies.

Khelil also linked the diesel fuel market to the rise in oil prices. "This crisis originates from the introduction of ethanol onto the market, which contributed to reduced diesel production," said Khelil. Less diesel fuel production in turn increased oil prices across the board, said Khelil, highlighting the impact of biofuels on oil markets.

OPEC, which pumps 40 percent of the world's oil, is reluctant to bend to demands that it produce more to dampen the red-hot market. Analysts said recent speculative oil trading had been driven by tight global supplies, the weak dollar, unrest in key crude producers like Nigeria, and OPEC's unwillingness to boost output.

Big Funds Are Culprit for High Commodity Prices

2008-05-31T15:42:00.002+08:00

Big pension and other institutional money help drive up commodities prices.

Next time you face sticker shock at the gas pump over a $4 gallon of gas, check out your pension fund's investments. They may explain much about the surge in oil prices. Institutional investors such as pension funds, university endowments and sovereign wealth funds have ramped up investing in commodities as a hedge against inflation and to seek out higher returns versus stocks and bonds.

The strategy has worked -- if you gauge success solely by the rising returns that come from a market where oil prices have doubled in the last year to levels above $130 a barrel and other commodities are also sharply higher.

But this story has an ironic twist: The money put into commodities is boosting the inflation investors have been trying to offset. This isn't meant to lay blame for the rise in oil prices entirely on these investors' shoulders. They are part of the problem, along with soaring demand for oil in developing nations like China and India while global supply remains tight.

In recent weeks, however, more attention has been drawn to the big money these investors are putting into commodity-index funds. They don't actually own any of the commodities. Instead, they trade futures contracts, which are agreements that oblige the investor to buy or sell an asset at a predetermined price. Futures are considered a benchmark for prices in the market.

Critics allege that the continual inflow of institutional money is hijacking the market because the indices are permitted to bypass traditional speculative position limits imposed by the Commodity Futures Trading Commission.

"The rise in price of oil has weakened demand for the physical commodity, but it has boosted demand for the financial commodity since more investors are chasing returns," said Jeffrey Kleintop, chief market strategist at LPL Financial.

In the last five years, investment in index funds tied to commodities has grown from $13 billion to $260 billion, and the price of the 25 commodities that compose those indices have jumped 183 percent, according to congressional testimony from Michael Masters, managing member of the Virgin Islands-based hedge fund Masters Capital Management.

Masters dubs the pension and other investors as "index speculators." He estimates that in the first 52 trading days of this year, they flooded the market with $55 billion -- in a self-fulfilling prophecy of sorts since the more money they put in, the more prices rise.

Research from Lehman Brothers supports that view. Performance of commodity indices can strongly predict inflows to those indices, which suggests there is a "significant amount of momentum chasing" going on, Lehman's chief energy economist Edward Morse said. Inflows are also higher when traditional asset classes like equities underperform or the dollar is weak.

Masters cites data showing annual Chinese demand for petroleum, based on government figures, has increased over the last five years by 920 million barrels; over the same time frame, the increase in demand for petroleum futures almost equals that at 848 million barrels.

"Individually, these participants are not acting with malicious intent," Masters said in his May 20 testimony. "Collectively, however, their impact reaches into the wallets of every American consumer."

Not everyone sees things Masters' way. Jeffrey Harris, chief economist at the CFTC, which regulates commodity markets, countered Masters' attack by telling lawmakers that "fundamental economic forces and the laws of supply and demand" are pushing prices higher, not fund positions.

Yet on Thursday, the CFTC announced it was six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation. It also announced a push to increase transparency of U.S. and international energy futures markets.

For instance, the CFTC said it will immediately require monthly reports from institutional investors who manage funds, which will help regulators identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process."

The California Public Employees' Retirement System, the nation's largest public pension fund, is among those investors moving into commodities. It increased exposure to commodities beginning early last year as a way to diversify its portfolio. Such investments are now valued at $1.1 billion of its nearly $247 billion in total investments.

"In our book, it is not what we call speculation," said CalPERS spokesman Clark McKinley. "We took a long time to get into this market and we have a long time frame in our investment window left," which McKinley says runs 10 to 12 years.

There are, however, some unintended consequences from this investment strategy; it's driving prices up. That puts further strain on an already weak economy, as consumers and businesses face higher costs for gas and food.

The effect is already being felt by corporate America and that's bad for the stock market -- where most of these investors put most of their money. Drives up prices. Weakens the economy. Puts pressure on stocks. Not much of a hedge, is it?

FAO and OECD Expect High Food Prices to Sustain

2008-05-31T08:59:00.002+08:00

High Global Food Prices Are Expected to Sustain: Report.

High global food prices are a new fact of life, a major report warned on Thursday as 22 countries, mostly in Africa, were listed as being at severe risk from record food and fuel costs. At the same time, there were calls for an end to restrictions on the export of food, with open trade said to be vital in any solution to the record prices which have sparked protests in many countries.

The cost of feeding the family will remain far higher than in the past decade, even though prices should ease in coming years, the Organisation for Economic Cooperation and Development and the UN Food and Agriculture Organisation said in a report on the global agriculture outlook for the next 10 years.

The study was published against a background of protests in countries in Asia, Africa and the Caribbean in response to soaring food prices. The jump in prices has added to the number of people in extreme hunger and some humanitarian aid is "urgently required," said the OECD and FAO joint report. "Current high prices will hit the poor and hungry people hardest," it said.

OECD chief economist Angel Gurria added: "The way to address rising food prices is not through protectionism but to open up agricultural markets." The director general of the FAO, Jacques Diouf, told a press conference that "coherent action is urgently needed by the international community to deal with the impact of higher prices on the hungry and poor."

And in Yokohama, Japan, the head of the UN World Food Progamme, Josette Sheeran, urged "all nations to allow us to purchase food, even if they have controls for humanitarian purposes. This is very critical." "Many nations have imposed export controls. Today we buy 80 percent of our humanitarian food in the developing world," Sheeran noted. In Rome, the FAO listed 22 countries, most of them in Africa, which had high levels of "chronic hunger" and were "especially vulnerable" to rising food and fuel prices.

The OECD-FAO report said hundreds of millions of people were already going hungry before the price increases but that "the numbers of people suffering from extreme hunger have (now) increased even further. "In the short term, humanitarian aid for the populations in countries most severely affected is urgently required," the report said.

Several factors had coincided to drive the "exceptional increases in prices" and some of the pressure would ease in the next few years. But the two bodies warned that food subsidies and trade protection were not the answer, saying that high prices might even be part of the solution by stimulating neglected investment in agriculture in poor countries.

Raising food supplies in poor countries also depended on improved government, infrastructure and property rights, the OECD and the FAO said. The report warned that rising prices had endangered the UN Millennium Development Goal of eradicating hunger and it was strongly sceptical about the benefits of agriculture-based biofuels, which have contributed to higher costs.

However, the "transitory nature" of some of the factors behind the recent trend meant that prices would fall in due course from record peaks. The report pointed to "adverse weather conditions in major grain-producing regions of the world, with spillover effects on crops and livestock that compete for the same land.

"These conditions are not new. They have happened in the past and prices have come down once more normal conditions prevail and supply responds over time." There was "no reason to believe that this will not recur over the next few years," it said, while adding that commodity prices will continue "substantially above" the levels of the past 10 years.

Comparing average prices for 2008 to 2017 with 1998 to 2007, it said beef and pork could be 20 percent higher; wheat, maize and skim milk powder 40-60 percent; butter and oilseeds more than 60 percent, and vegetable oils more than 80 percent.

The report cited changing diets, urbanisation, rising populations and economic growth as underpinning demand in developing countries. The most-threatened countries listed by the FAO are Eritrea, Niger, the Comoros, Botswana, Haiti and Liberia.

They are followed in order of severity by Burundi, Tajikistan, Sierra Leone, Zimbabwe, Ethiopia, Zambia, the Central African Republic, Mozambique, Tanzania, Guinea-Bissau, Madagascar, Malawi, Cambodia, North Korea, Rwanda and Kenya.

British PM Brown Warned of World Oil 'Shock'

2008-05-31T08:55:00.003+08:00

British PM Brown Warned Wednesday of World Oil 'Shock' Amid Rising Protests Over Soaring Fuel Prices.

British Prime Minister Gordon Brown warned Wednesday that the world faced an era-defining oil "shock" that required urgent action, as European leaders argued how best to contain protests over soaring fuel prices. "It is now understood that a global shock on this scale requires global solutions," Brown wrote in The Guardian newspaper.

Record oil prices of around 135 dollars a barrel have contributed to protests worldwide over the rise in fuel and food costs, with fishermen and truck drivers taking the lead in Europe, blocking ports and road access to oil depots.

"However much we might wish otherwise, there is no easy answer to the global oil problem without a comprehensive international strategy," Brown said, adding that the problem should be made a "top priority" at the EU summit next month and the gathering of G8 leaders in July. "The way we confront these issues will define our era," he said.

Brown's warning came a day after French President Nicolas Sarkozy urged a Europe-wide cut in consumer taxes on fuel. French consumers pay about 19.6 percent VAT on the price of fuel and Sarkozy renewed his reduction proposal on Wednesday during a visit to Warsaw.

"Should we really apply the same tax rate when the price of a barrel of oil has doubled in one year and tripled in three years? I don't think this is a crazy question to be asking," Sarkozy told reporters in the Polish capital.

But Austrian Finance Minister Wilhelm Molterer gave the idea short shrift. "What will you do when prices fall again, reintroduce the tax? I'd like to hear the political discussions then," said Molterer.

Portugal's economy minister Manuel Pinho called on Slovenia, as current head of the European Union, to hold an emergency debate on the crisis, but Slovenian Prime Minister Janez Jansa said it would have to wait for the scheduled EU summit next month. "There's no sense in calling an urgent meeting since we'll discuss the issue at our regular June session," Jansa said, while adding that the issue would be placed high on the agenda.

While fishermen called off strikes in key French ports on Wednesday, lifting a week-long blockade of the country's largest oil refinery, truckers and farmers stepped up their own protests over soaring fuel prices.

A group of 300 farmers used their cars to block the entry to a Total fuel depot near Toulouse, while around 40 protesting truck drivers slowed traffic to a near-halt on Bordeaux's main ring road. And a policeman and a protestor were slightly injured when riot police using tear gas battled farmers blocking an oil depot near Sete on France's Mediterranean coast.

In Bulgaria, where annual monthly salaries are among the lowest in the EU and inflation rates among the highest, around 150 trucks drove slowly along capital Sofia's ring road, disrupting traffic. Bulgarian bus companies were preparing to launch a nationwide one-hour strike on Friday. In Spain, the main trucking union has called for an indefinite strike beginning June 8.

At a meeting Tuesday of EU agriculture ministers in Slovenia, France and Spain led the call for direct EU economic assistance to the fishing industry. EU member states can currently give their fishermen a subsidy of up to 30,000 euros (47,167 dollars) over a three-year period without seeking the European Commission's approval.

But French and Spanish fishermen consider this too low and have demanded additional help from their governments to be able to cope with the sharp increase of diesel prices. Italian, Greek and Portuguese fishermen have threatened to strike later this week.

The Netherlands and Portugal however expressed scepticism, arguing for a long-term solution for the fishermen, including modernising their fleets and increasing competitiveness. "Short-term solutions are the most popular in political terms, but they have no lasting effect," said Portuguese Agriculture Minister Jaime Silva.

ECB Celebrates Its 10th Anniversary

2008-05-30T23:24:00.001+08:00

After 10 years, ECB stands vigilant over world's second largest economic area.

Ten years into the job, the European Central Bank can celebrate its success at making the euro zone's economy and currency one of the strongest in the world. The fiercely independent bank opened a decade ago Sunday and will mark the anniversary with celebrations Monday.

The ECB has slowly become a global heavyweight, not least by keeping a cool head during the recent financial market crisis when it steered a different course from the U.S. Federal Reserve and the Bank of England by refusing to slash interest rates.

It has also skirted political rows between major euro nations Germany and France, insisting that it must make decisions without kowtowing to national finance ministries -- a radical change for many European economies where central banks were traditionally under the thumb of politicians.

But the ECB now faces some of its biggest challenges as the euro economy faces an uncertain outlook this year. A recent boom is trickling away and inflation has surged recently, to 3.6 percent in March and again in May -- well above the stated goal of 2 percent.

Keeping inflation low is the ECB's main priority. "Stable prices are essential," ECB President Jean-Claude Trichet wrote in the foreword of a special 10th anniversary edition of the ECB's monthly bulletin, released this week.

The goal, he added, was to "protect the value of the incomes of all, and particularly of the most vulnerable and the poorest of our fellow citizens." And, he said, price stability would stimulate sustainable economic growth and job creation.

The launch of euro cash in 2002 has seen the slow rollout of a euro economy that now stretches across 15 nations, with several others lining up to join. Once euro-sceptic Denmark is now hinting it may change its mind and join up, although Britain and Sweden -- which voted against the euro in a 2003 referendum -- are still holding out. All other EU newcomers in eastern Europe plan to switch to the euro in the future.

Although EU officials criticize persisting differences across the bloc, trade and travel across the region has become far easier, helping to add 15 million new jobs in the last six years. The euro is used by 323 million people with a gross domestic product of more than 4 trillion euros ($6.2 trillion).

The ECB was founded with 11 members: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Since then, Greece, Slovenia, Cyprus and Malta have joined, with Slovakia expected to enter next year.

"After 500 years of fighting (wars), the creation of the euro and the ECB was a remarkable political achievement, requiring these fiercely independent and proud countries to surrender a huge amount of political autonomy," said William Dunkelberg, the chair of the Global Interdependence Center and a professor of economics, at Temple University in Philadelphia.

He said the trade-off was clear to European nations because doing business without changing currencies at the border or risking exchange rate fluctuations would boost growth and incomes. Still, the ECB -- as all central banks -- has its work cut out for it.

A slew of economic reports pointing to a recession in the U.S. have seen the dollar slump against the euro, making European exports more costly for American customers. But the strong euro cannot keep back the full brunt of soaring oil prices. Energy and food prices are starting to hurt consumers' wallets.

EU Inflation Hits 3.6% Again

2008-05-30T23:21:00.001+08:00

Euro inflation bounces back to 3.6 percent in May on surging food and energy prices.

Euro-zone inflation bounced back to a peak of 3.6 percent in May, the EU statistical agency Eurostat said Friday in its first estimate for the month. Surging energy and food prices saw the yearly inflation rate accelerate at the same pace in March, reaching a record high before it cooled to 3.3 percent in April.

High inflation in the 15 nations that use the euro currency is now Europe's biggest economic challenge as the European Central Bank stays away from pushing the main lever of economic growth -- changing interest rates -- and urges governments and employers to prevent an inflation spiral.

The ECB faces a dilemma because slashing interest rates -- as the U.S. Federal Reserve and Bank of England have done -- would likely fuel inflation. Inflation is now far above the ECB's recommended guideline of just under 2 percent.

But an ECB move to hike borrowing costs in order to cool high prices could hurt a slowing economy as the European Commission warns that countries using the euro face an "unusually uncertain" economic outlook this year in the wake of a global financial crisis, a possible U.S. recession and increasing energy costs.

The EU executive says the euro economy may only grow by 1.7 percent this year, well below last year's strong 2.6 percent as Europe reaped export orders from a booming world economy and saw sluggish household spending start to pick up.

ECB President Jean-Claude Trichet says keeping prices stable is his priority and this would not risk growth or jobs. So far unemployment in the euro-zone isn't budging from an all-time low. It was 7.1 percent in April, the same level it has stayed at since December 2007.

But economic confidence in the region is at its lowest level in nearly three years as consumers and businesses are downbeat about future prospects. People are paying more at the grocery store and at the gas pump -- while Trichet and euro governments urge employers not to grant large pay hikes that could drive prices higher.

French President Nicolas Sarkozy this week urged euro governments to consider slashing sales tax on fuel to ease the burden on consumers -- something EU officials were cool on, warning this risked distorting competition across the economy. Inflation in the euro-zone is now running at the highest since Eurostat started keeping records for each nation in 1996.

Buffett and Soros Talk About Recession and Oil Boom

2008-05-27T21:06:00.002+08:00

Warren Buffett sees US already in recession, says it will last long. George Soros: Oil boom is increasingly speculative

Warren Buffett, whose business and investment acumen has made him one of the world's wealthiest men, was quoted in an interview published Sunday as saying the U.S. economy is already in a recession.

Asked by Germany's Der Spiegel weekly whether he thinks the U.S. could still avoid a recession, he said that as far as the average person is concerned, it is already here. "I believe that we are already in a recession," Buffet was quoted as saying. "Perhaps not in the sense as defined by economists. ... But people are already feeling the effects of a recession. It will be deeper and longer than what many think," he added.

The 77-year-old chairman and chief executive of Berkshire Hathaway Inc. gave the interview while he was in Europe for what he called a "deferred shopping tour," looking for possible acquisitions.

Omaha-based Berkshire has about $35 billion in cash and is looking to invest. Berkshire's subsidiaries include insurance, clothing, furniture, natural gas, corporate jet and candy companies. Berkshire also has major investments in such companies as Coca-Cola Co. and Anheuser-Busch Cos.

In the meanwhile, soaring oil prices are increasingly the result of speculation, financier George Soros said in an interview published Monday.

The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession. "Speculation ... is increasingly affecting the price," Soros was quoted as saying by The Daily Telegraph. "The price has this parabolic shape that is characteristic of bubbles."

But the cost of oil -- which briefly reached new record highs of more than $135 a barrel in trading Thursday -- was unlikely to fall dramatically until the U.S. and Britain economies began contracting, the paper quoted Soros as saying.

Soros has frequently been a voice of gloom and doom as the U.S. economy slows amid a wrenching housing crisis and tightening credit. But the pessimism hasn't stopped his fund from making money. According to Institutional Investor's Alpha Magazine, the Quantum Endowment Fund -- which Soros no longer manages -- made $2.9 billion last year with returns of over 30 percent.

Soros has been promoting a new book, "The New Paradigm for Financial Markets: The Credit Crisis and What It Means." He has urged regulators to move more aggressively to improve market oversight to curb risks from excessive reliance on debt for financial speculation.

Fed Signals a Break of Interest Rate Cuts

2008-05-26T21:34:00.001+08:00

Fed officials abandon Fedspeak to make clear interest rate unlikely to move lower.

Sounding a gong couldn't have made it clearer. Federal Reserve officials are putting out the word that further interest rate cuts are unlikely.

Fed Governor Kevin Warsh ditched the central bank's cryptic word tangles and actually waxed poetic. "Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again," Warsh said, referring to the Fed's key interest rate.

Speaking more central-bankerly, the Fed's No. 2 official, Vice Chairman Donald Kohn, said the current stance of interest-rate policy "appears to be appropriately calibrated for now." Janet Yellen, president of the Federal Reserve Bank of San Francisco, called the current level of rates "appropriate."

They are amplifying a signal sent by Chairman Ben Bernanke and his colleagues last month that the Fed's most aggressive rate-cutting campaign in two decades may be winding down -- finally. The cuts started in September and take months to work their way through the economy.

That does not mean the economy, badly bruised by housing, credit and financial woes, is out of the woods. The Fed, though, is hoping its powerful doses of cuts, along with the government's relief plan of tax rebates and breaks will help lift the economy in the second half of this year.

Zooming prices for energy and food and other commodity prices are raising some concerns that inflation could take off and spread through the economy. Further reductions in interest rates would aggravate the situation.

In fact, the Fed's last rate reduction in late April was "a close call," according to recently released documents of those private deliberations. At that time, two Fed members favored no cut at all, given the concerns about inflation.

Many economists believe the Fed will hold its key rate steady at 2 percent, a four-year-low, at its next meeting on June 24-25 and probably through much, if not all, of 2008. Holding rates at this level should help foster better economic and employment conditions and moderate inflation, Kohn said. "The Fed's advertised reluctance to cut again is a wise one," said Terry Connelly, dean of Golden Gate University's Ageno School of Business.

Here's what Fed policymakers are up against: Cut rates and bolster a weak economy where employers are eliminating jobs and consumers are pulling back; raise rates and fend off inflation. With the housing market still flailing and foreclosures at record highs, policymakers probably would shy from pushing up rates -- even with the specter of inflation -- as the country prepares to vote for a new president, some analysts said.

"The Fed has spent the last eight months ushering homeowners with adjustable-rate mortgages to safety by repeatedly cutting interest rates. They won't want to throw them back under the bus by raising interest rates too much, too soon," said Greg McBride, senior financial analyst at Bankrate.com. "Candidates would have a field day," he said.

Bernanke has said the election would not color the Fed's decisions. "Political considerations will play no role. We will be objective. We will be analytical, and we will do what is right for the economy," he said.

The Fed's political independence is crucial to its ability to maintain credibility with investors on Wall Street and around the globe. The combination of slow growth and rising inflation has raised fears the country may be headed for a bout of stagflation for the first time since the 1970s. Bernanke and other Fed officials, however, say that is not the case.

Oil prices are marching past $130 a barrel, gasoline prices are closing in on $4 a gallon nationally and food prices are skyrocketing. Given all that, Fed officials cannot afford to let inflation take hold. Once that happens, it can be difficult and painful to break inflation. It could force the Fed to raise rates, which would puts the brakes on spending. Inflation eats into paychecks, whittles away the value of investments and cuts into corporate profits.

"Inflation has been elevated for some time and prices of commodities are surging," Warsh said. "I find these trends particularly vexing at a time when global demand growth, most likely, has slowed," he said.

The Fed's rate reductions since last year have contributed to the drop in value of the dollar. The diminished greenback has been a factor pushing up prices for oil and other commodities. Kohn, however, believed the sagging dollar's role in rising commodity prices "probably has been a small one."

For now, the Fed is forecasting slower economic growth, higher unemployment and a bigger pickup in inflation for this year than it thought just a few months ago. But Fed officials acknowledge the uncertain environment makes them less confident in their projections.

And conditions can change quickly. In October the Fed signaled it was going to hit the pause button on rate-cutting campaign. At the time, Fed officials believed additional cuts might not be needed to help the economy survive housing and credit stresses. Then conditions deteriorated, forcing the Fed to do an about-face and lower rates again in December.

Wall Street Returns Still With Fears

2008-05-26T21:32:00.001+08:00

Amid oil price anxiety, investors parse housing, spending, manufacturing data this week.

The three-day weekend probably didn't bring much relaxation to investors if they stopped at a gas station on the way to the beach or a barbeque. With the average roadside price of gasoline pushing $3.88 a gallon -- and going for well over $4 at filling stations in some parts of the country -- energy prices have become a prime worry in the stock market.

That's not to say other concerns have dissipated. As Wall Street heads into this shortened week, it remains anxious about the still-slumping housing market, not to mention the ailing financial services sector. But so much of the economy's performance later in the year will depend on energy costs, so the focus will be on crude until investors see a substantial price retreat.

What's particularly troubling about oil's rise is that everyone knows it will affect the economy, but no one is sure exactly how. Experts are split over whether it will cause broad-based inflation, further economic weakness, or both at the same time.

None of these scenarios are good ones. And the fact that the Federal Reserve says its monetary policy will likely remain on hold until it's clear which situation plays out was a big reason the stock market did so poorly last week. The Dow Jones industrial average dropped 3.91 percent, while the Standard & Poor's 500 index fell 3.47 percent and the Nasdaq composite index declined 3.33 percent.

To be sure, expensive oil isn't necessarily destructive in the long term. If the economy holds up, U.S. consumers may be able to gradually adapt their behavior and spending -- a trend that could end up actually controlling inflation.

"There are definitely signs that the high price of crude is destroying demand bit by bit," said Craig Peckham, market strategist at Jefferies & Co. "At this point, we're seeing an economy that is experiencing a headwind from the high price of crude, which at the end of the day could act as a natural regulator of the economy."

But among stock investors right now, "inflation fears have been trumping relatively benign growth numbers," he said. This four-day week will bring a variety of economic readings on the housing market, consumer spending, business spending, and manufacturing.

On Tuesday, the Commerce Department releases its April data on new home sales, expected to show a decline from March sales, according to economists surveyed Friday by Thomson Financial/IFR. Also Tuesday, the Conference Board's consumer confidence index for May is anticipated to edge lower, too.

Wednesday, the Commerce Department reports on orders for durable goods, which are essentially big-ticket items ranging from cars to refrigerators to computers. April's durable goods orders are expected to have dipped by 1.1 percent after rising by 0.1 percent in March.

Then Friday, on top of data from Chicago purchasing managers on manufacturing and from the University of Michigan on consumer sentiment, the Commerce Department will report on personal spending. Economists predict spending rose 0.2 percent in April, compared with a 0.4 percent increase the previous month.

That report will include the closely watched personal consumption expenditures deflator, which is a measure of inflation at the personal level. Economists, on average, expect that it was steady in April at an annual rate of 2.2 percent.

Investors should get an additional sense of how consumers are spending their money in earnings reports this week from Borders Group Inc., Costco Wholesale Corp., Dell Inc., Sears Holdings Corp. and Tiffany & Co.

US and Japan Called to Commit Deep Emission Cuts

2008-05-26T21:29:00.002+08:00

European, developing nations call on US, Japan to commit to deep emission cuts for 2020.

European and developing countries urged the United States and Japan on Sunday to commit to deep cuts in greenhouse gas emissions by 2020 -- a step they say is needed to defuse a coming ecological disaster caused by global warming.

The calls at a meeting of environment ministers from the Group of Eight industrialized nations in Japan coincided with rising concern that momentum is draining from U.N.-led efforts to force a new climate change agreement by a December 2009 deadline.

The G8 nations -- the United States, Britain, Japan, Germany, Italy, Canada, Russia and France -- are largely on board with a proposal to attempt to reduce emissions of carbon dioxide and other gases responsible for global warming by 50 percent by 2050.

But a major focus of the meeting in Kobe is midterm targets for 2020, which scientists say are needed to avoid a potentially disastrous rise in world temperatures of more than 3.6 degrees Fahrenheit over levels prior to the industrial age. "A long-term goal is not a substitute for midterm, mandatory targets," said Matthias Machnig, Germany's environment minister.

The European Union has pledged a 20 percent emissions reduction by 2020, and has offered to raise it to 30 percent if other nations sign on. A U.N.-brokered agreement last December included a footnote referencing the need for cuts of between 25 percent and 40 percent.

The United States, however, has not committed to a midterm goal, demanding that top developing countries like China also commit to reductions. Japan has called for emissions by industrialized countries to begin to fall in the next one or two decades, but it too has stopped short of setting a 2020 target.

U.N.-led talks are racing to meet a 2009 deadline to strike an accord to take over from the Kyoto Protocol, whose first phase will expire in 2012. The head of those talks, U.N. climate chief Yvo de Boer, has said he fears enthusiasm for the effort was waning, and he called for G8 countries to send a stronger signal they were serious.

Japanese Environment Minister Ichiro Kamoshita, the host of the Kobe meeting, called for the world's richest countries Sunday to take the first steps in battling climate change, urging them to together reduce their emissions by more than 50 percent by mid-century.

"Developed countries should take the lead in emissions reductions and identify fair and equitable quantified national targets so that the global greenhouse gas emissions peak within the next 10-20 years," he said in an address, without specifying a reduction target.

Proponents say deep midterm cuts would force governments to take action quickly, spurring progress against warming. Goals for 2050 are important, they say, but give the world too much time to take steps that ought to be taken more urgently.

"Otherwise we are going to have a very nice long-term goal but no policy implication, (which is) what we really need, given the urgency of climate change," said Jos Delbeke, head delegate from European Commission.

Developing nations also have been pushing richer countries to make reduction commitments, arguing that global warming is a problem caused by industrialization that fueled the rise to affluence in North America, Europe and Japan.

Masnellyarti Hilman, Indonesia's head delegate, said her country aims to reduce emissions by 17 percent by 2020 and 22 percent by 2025. Indonesia is one of the leading carbon dioxide emitters in the world because of widespread deforestation. But she said Indonesia and other developing countries were looking for strong signals from G8 countries that they are serious about reducing their own emissions quickly.

"For the long-term, I think the majority (have) already stated their target, but for the midterm target, they need to discuss," she said. "I think Japan (has) also not set a midterm target. We hope that they will take the lead."

Weekend's Featured: Renewed Manipulation in Commodities

2008-05-25T09:15:00.002+08:00

Commodities Are Being Manipulated Again Like in the Past?

In 1980, the Hunt brothers cornered the silver market, causing an epic price spike and then a bust. Crude oil is close to $130 a barrel. Is something similar at work? The US Congress suspects as much and held a hearing on market manipulation in Washington on Tuesday.

Long-term investors in the sector believe that the big institutions that have entered in recent years are "accidental Hunt brothers". Investment in indices based on commodity futures have risen from $13bn five years ago to $260bn now, according to Michael Masters, an investor who testified. The rise in investors' demand for oil futures is almost equal to the increase in demand from China.

Historically, futures markets are naturally short (betting on a fall) as producers tend to buy futures to guard against falls in prices. In 1990, only 13 per cent of open interest in crude oil futures was long. That is now up to 58 per cent - probably thanks to new investors.

Changes to indices have dramatic effects on prices. Crude oil briefly dipped below $50 early last year after a cut in the weighting towards energy in the GSCI index. And there is no shortage of commodities in the US - although many fear there are constraints elsewhere in the supply chain.

There are arguments against this. Big economic factors are at work, notably the weakness of the dollar. Federal Reserve officials note that there is no sign of big increases in inventories of commodities. This would be expected if speculators were betting on prices to rise. Thinly traded metals such as cobalt have also enjoyed sharp run-ups.

These cannot be attributed to speculators. Speculation appears to be changing the way commodity markets work. A debate is needed and changes to regulations may be justified. But speculators cannot take all the blame for the price spike.

Weekend's Featured: Carbon Trading Could Reach 2 Trillion Euros by 2020

2008-05-25T09:11:00.003+08:00

Global Market in CO2 Emission Rights Could Be Worth 2 Trillion Euros by 2020.

The global market in CO2 emission rights could be worth two trillion euros (3.14 trillion dollars) by 2020 if the United States joins the scheme, analysis group Point Carbon said on Thursday.

The United States, which has not ratified the Kyoto Protocol that calls for the mechanism, could in 2020 account for 67 percent, or 1.25 trillion euros, of emissions rights if it decided to introduce a US emissions trading system, the Point Carbon study said.

Carbon dioxide (CO2) is one of the main greenhouse gases blamed for climate change. The carbon market is aimed at encouraging industries to invest in clean technology and buy emissions rights from others that have a surplus.

The second-biggest market would be the European Union -- so far the only one in existence -- and would account for 23 percent of emissions rights, the study showed. The total transaction volume forecast would be 38 billion tonnes of carbon dioxide equivalent for the United States and nine billion tonnes for the EU.

The calculations are based on an assumed carbon price in 2020 of 50 euros per tonne, twice the current price in Europe. They also assume that a so-called cap-and-trade scheme will have been introduced in the United States by 2020 and that the EU will have introduced a 25 percent reduction target for emissions, including those from aviation.

The calculations assume that trading schemes will have become operational in Australia, New Zealand, Canada, Japan, Korea, Mexico and Turkey.

Weekend's Featured: Tech Stocks Overtake Financials in S&P 500

2008-05-25T09:07:00.003+08:00

Tech overtakes financials as largest sector in S&P 500; energy gaining as oil prices rise.

For the first time since the bubble burst earlier this decade, information technology stocks have overtaken financials as the largest sector by market value in the Standard & Poor's 500 index. But that alignment might not last for long -- soaring oil prices have helped lift the energy sector to a close third.

For the last 10 years, tech and financials have gone back and forth as the leading sector in the index. Tech grabbed about 32 percent of the S&P by early 2000, but quickly gave up that lead as the sector lost its luster amid the dot-com crash.

A little over a year later, financial stocks had become Wall Street's favorites, and kept the top spot in the S&P until this past Tuesday. While they never reached the heights tech did during the boom years, financials did account for more than 22 percent of the S&P by late 2006.

Now, both sectors hover just above 16 percent, with tech ahead marginally. And energy companies, led by oil producers like Exxon Mobil Corp. and Chevron Corp., could be in position to soon take the lead.

Much of the switch can be attributed to the devastation of the financial sector in the last six months, as the credit crisis and housing recession took their toll. Melissa Roberts, senior vice president of quantitative research at Keefe, Bruyette & Woods, noted that 16 of the 92 financial stocks in the S&P have fallen 30 percent or more since the index peaked in October, with diversified financial companies like Citigroup Inc. and JPMorgan & Co. among the hardest hit.

Some tech stalwarts like IBM Corp. have gained in recent months. But Howard Silverblatt, S&P's senior index analyst, noted that while IT performed slightly better than the S&P overall, most of the sector didn't "earn" its way to the top. "It's not that tech did so much better, it's that the financials did so bad," he said. "The financials gave it to them."

That might reflect some lingering wounds from tech's downfall. "There's still a specter of the bubble that is hovering over tech, even though the sector is much different from it was eight years ago, let alone four years ago," said Brian Belski, an analyst with Merrill Lynch. "People learned their lesson in tech because they got burned, and it's taken them years to want to invest in them again."

He suggests tech could gain more strength and more firmly establish itself as the leading sector again. "We haven't seen the big shift in leadership, but fundamentally we think it can very much happen," Belski said. "Not because tech looks attractive on a valuation basis, but fundamentally it is a much different sector than it was four years ago."

For instance, in 1999, players like Cisco Systems Inc. or Hewlett-Packard Co. would see their shares routinely rise or dive by 10 percent. These companies now trade much more conservatively, while the financials are the ones with the big swings.

Still, the dark horse may turn out to be energy, which has leaped in the past year as oil prices have doubled. "You see a lot of what's leaving the financials going into energy," Roberts said. "That's the No. 1 performer."

And the sector is gaining momentum. Silverblatt said that when the S&P hit its all-time high in October, energy made up about 11.6 percent of the index. It reached 14.9 percent on Thursday, the highest percentage the sector has occupied since the index's current configuration was developed in 1989. "That's an enormous gain in a short period of time," he said. "Their stocks during that time period were up 13.2 percent."

One factor that's hard to gauge is whether politics will enter the picture. Big oil executives were called to testify this past week before both houses of Congress, and oil's march past $135 a gallon may prompt politicians to try to apply new taxes that could limit energy company profits, or take other measures which could potentially hurt energy stocks.

Also, energy's rise has hit other sectors of the S&P, like consumer discretionary stocks, as companies have tried to pass on higher costs to customers, Silverblatt noted. If oil reaches the $150 a barrel some predict, those additional costs will spread throughout the economy, he said, and could hurt both corporate spending for things like IT and consumer spending for both staples and discretionary items. "The race right now between milk and gas -- which hits $4 a gallon first -- is neck and neck," he said.

Market Forces Can Cause Tough Times

2008-05-24T16:31:00.002+08:00

When the going gets tough, politicians very quickly lose faith in markets.

This is especially true when the cost of basic necessities for the people who keep politicians in power, things such as food and energy, keep going up and up in price with no end in sight.

This is especially true when there is more than a notion that market participants themselves have something significant to do with that price spiral that goes beyond real-world fundamentals.

This is when the worst word in the politician's lexicon becomes speculation, usually used alongside the word rampant. This is especially true now. So witness the talk among government types in various parts of the world about restricting or ending trading in various commodities.

Witness the spectacle in the U.S. of energy company chief executives hauled up to Capitol Hill to take a public flogging about high gasoline prices at the pump and their sizable compensation packages. It's easy to be cynical about this often reprised drama. Now these elected officials can go to their home districts and say we're as angry as you are and didn't you see us hold those executives accountable.

Everyone loves markets when values are going up and inflation is staying down. Then there are plenty of political speeches about the wisdom of the marketplace to best allocate capital to where it's most productive. There's even then some faint praise for speculators for their ability to add liquidity to markets, greasing the wheels of buying and selling, and for their willingness to take on risk that producing entities would like to fob off.

No one in government loves a speculator now and that is a dangerous thing. As imperfect and as in need of smart regulation as markets always are, they also, to paraphrase the line about democracy, represent the least bad system yet devised. And political decisions made in these circumstances stick around to retard the ability of markets to do the things officials like to crow about in good times.

Even in oil, where major producers work together to alter the pure give and take of supply and demand, one can see basic benefits in leaving prices to find their own level. Without minimizing the pain skyrocketing energy costs mean for individual families and whole nations, it is also worth recognizing that people won't in large numbers give up comfortable lifestyles without a compelling economic kick in the pants.

Given that fossil fuels are a finite entity and the general rise in incomes for a larger percentage of the world will inexorably increase demand for those finite supplies, something at some point has to give. The rocketing up of energy prices, even if not justified by today's fundamentals, will accelerate that necessary shift. The impetus to find, invent and use alternative fuels, alternative means of transportation, even alternative societal structures, has been kicked into high gear.

The decision announced Thursday by Ford Motor Co. to cut back on pickup truck and sports utility vehicle production because of increased demand for smaller, more fuel-efficient vehicles is just one small example. There will be so much more, especially if the perception globally sticks that high energy prices are here to stay.

Markets will help push along the "creative destruction" that will cripple some industries, and launch new ones. There will be real pain, but also real change. Markets can make that happen. Governments can try by fiat to change people's behavior, but it never has the same hold as decisions made en masse by people confronting new market realities.

US Must Fight to Retain Competitive Edge

2008-05-23T21:07:00.002+08:00

Business leaders at Chicago summit say US must fight to maintain global competitive edge.

As the nation's economy flirts with a recession, corporate executives, politicians and academics meeting in Chicago on Thursday said America's businesses must be prepared for a fight if they're to retain their global competitive edge.

"We're very competitive today in most industries," said Jim McNerney, chairman and chief executive of Chicago-based Boeing Co. "But there is a huge threat to that position in the next five to 10 years. And we better respond."

The U.S. Department of Commerce sponsored Thursday's meeting, which is part of a series of summits sponsored by the Bush Administration being held around the country. Commerce Secretary Carlos Gutierrez said he hopes business owners at the meeting get a better understanding of free trade agreements -- which have grown in number under Bush's tenure -- that may allow companies to enter overseas markets.

And he said U.S. companies need to become more agile so they can quickly respond to economic shifts. "We know today that every major country in the world is getting in the game," he said. "It's harder to compete ... and we are no longer on our own."

A report released last week in Switzerland shows the U.S. topped a global competitiveness ranking for the 15th consecutive year. But some officials worry the faltering economy means America could soon lose its top spot to other nations. "I think we should be very worried," said Louis Gerstner, the retired chairman and chief executive of IBM Corp.

Panel members said a focus on education -- particularly in skilled technical areas as well as math and science instruction -- will be vital to competitive growth growing forward, especially as the U.S. tries to expand its track record of fostering entrepreneurialism.

"The competition needs to be looked at as something to be embraced," said Jim Owens, the chairman and chief executive of Peoria-based Caterpillar Inc. "Competition can be fun. It doesn't mean it's easy, but we need to take it on."

Oil Pushes Past $135 While Dollar Weakens

2008-05-22T21:07:00.003+08:00

Oil climbs to record above $135 a barrel on supply worries, weak dollar.

Oil prices rose above $135 a barrel for the first time Thursday, with supply worries, global demand and an ever weakening U.S dollar driving crude futures up. The world's top energy watchdog is preparing a sharp downward revision of its oil-supply forecast, according to a report in The Wall Street Journal.

Light, sweet crude for July delivery rose as high as $135.09 before falling back slightly. By midday in Europe, the contract stood at $134.37 a barrel in electronic trade on the New York Mercantile Exchange, up $1.20 on Wednesday's close of $133.17. That settlement price, up $4.19 on Tuesday's close, marked NYMEX crude's largest one-day price advance since March 26. "Simply put, this is a market you cannot afford to be short in," said U.S. analyst and trader Stephen Schork about Brent futures in his Schork Report.

With gas and oil prices setting new records nearly every day, analysts have begun to wonder what might stop prices from rising. There are technical signals in the futures market, including price differences between near-term and longer-term contracts, that crude may soon fall. But with demand for oil growing in the developing world, and little end in sight to supply problems in producing countries such as Nigeria, few analysts are willing to call an end to crude's rally.

"The sentiment in the market is very bullish at the moment," said David Moore, commodity strategist with the Commonwealth Bank of Australia in Sydney. "The U.S. dollar was weaker last night, and also the U.S. EIA report showed an unexpected decline in U.S. commercial crude oil inventories, so there's a combination of factors pushing the oil prices higher."

Crude prices breezed past $130 early Wednesday, then accelerated when the U.S. Energy Department's Energy Information Administration said U.S. crude inventories fell by more than 5 million barrels last week. Analysts had expected a modest increase.

Investment bank Goldman Sachs last week revised its oil price forecast for the second half of 2008 from $107 to $141 a barrel. But some analysts saw the new target becoming a reality much sooner. "Futures are moving so fast that under the current volatility that goal could already be reached within the end of the week," said a report by Olivier Jakob of Petromatrix in Switzerland.

Some analysts say crude has been boosted in recent days by especially strong demand for diesel in China, where power plants in some areas are running desperately short of coal. The Wall Street Journal reported Thursday that the Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields.

For years the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently.

The agency is now concerned that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day in production over the next two decades, the paper reported.

That view has been echoed by many analysts. "The market is really structurally tight ... oil demand is not growing that fast but supply is constrained," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

In the U.S. Energy Information Administration report, gasoline inventories also fell, which took the market by surprise. Inventories of distillates, which include heating oil and diesel fuel, rose less than analysts surveyed by Platts had expected.

While the dollar gained slightly against the euro and the Japanese yen from overnight levels, it fell against the British pound and showed a new downward momentum. The 15-nation euro bought $1.5750 in morning New York trading, down from $1.5780 in late New York trading Wednesday.

Investors see hard commodities such as oil as a hedge against inflation and a weak dollar and pour into the crude futures market when the greenback falls. A weak dollar also makes oil less expensive to buyers dealing in other currencies. Many investors believe the dollar's protracted decline over the past year has been the most significant factor behind oil's rise from about $66 a barrel a year ago.

China Thanks Foreign Companies for Quake Help

2008-05-22T21:04:00.002+08:00

China tries to dispel criticism of foreign companies, issues public thank you for quake help.

China's commerce minister took the unusual step of thanking foreign companies on national television Thursday for donating earthquake aid, dismissing accusations spread on Chinese Web sites that they were doing too little.

"We have seen the greatest amount of donations from the international community ever in history," Chen Deming said at a news conference. He rejected as "totally unfounded" complaints posted on Chinese Web sites that foreign companies were "international misers."

As of Thursday, foreign companies had given 1.7 billion yuan ($245 million) in cash and 200 million yuan ($29 million) in supplies, including food, tents and bottled water, Chen said. "I would like to take this opportunity to thank relevant international agencies, multinational companies and foreign-invested enterprises for the support they have given," Chen said.

Companies including Nokia Corp., McDonald's Corp., Wal-Mart Stores Inc. and Samsung Electronics Corp. began pledging money and supplies less than 24 hours after the May 12 quake hit Sichuan province.

Still, nationalistic Chinese Web surfers accused foreign companies of failing to provide enough help. Some postings called for boycotts of individual companies or a broader rejection of American or South Korean brands.

"Wake up, everyone. Support Chinese companies instead," said a posting on myspace.com's Chinese service, myspace.cn. "Money should stay in Chinese hands!" Chen, the commerce minister, said his ministry might be to blame for the criticism. "Maybe we haven't done sufficient publicity for these entities to thank them for their contributions," he said.

Companies say they have felt no effect from boycott calls. "We feel very proud of what we've done. We've done a lot," said Thomas Jonsson, a spokesman for Nokia, which gave food, tents and mobile phones for rescuers. On Wednesday, it added a 35 million yuan ($5 million) pledge for reconstruction.

McDonald's Corp. said it has served more than 40,000 meals to quake survivors and rescue workers and pledged 10 million yuan ($1.5 million) on Wednesday to build new schools in quake areas. "We've been involved in helping and responding since day one," said McDonald's spokeswoman Lisa Howard. Comments posted on online bulletin boards also criticized Coca-Cola Cos., Yum Brands Inc.'s KFC restaurants, Toyota Motor Corp. and French retailer Carrefour SA.

Last week, McDonald's initially pledged 1 million yuan ($145,000) after the quake. Samsung said it was giving 30 million yuan ($4.3 million) in cash, plus 5,000 emergency aid kits and 15,000 blankets. Coca-Cola gave 10,000 cases of bottled water and promised another 5 million yuan ($720,000) in cash and supplies. Carrefour pledged 2 million yuan ($150,000) and sent truckloads of food, water and tents to the disaster area.

Chinese nationalists often have conflicted feelings toward foreign companies, which have helped to fuel the country's economic boom but are seen as rivals to local companies. Carrefour stores in several Chinese cities were the target of small protests on May 1 as critics vented anger public efforts in Paris to disrupt the Olympic torch relay.

Among other companies, Wal-Mart said it has given food, some 3,000 tents and other aid worth 3 million yuan ($430,000) and used its distribution network to move supplies to survivors. "We are reacting very quickly in support," said Wal-Mart spokesman Jonathan Dong. Dong noted that after China's devastating winter snowstorms, Wal-Mart also donated $1 million to the Chinese Red Cross for food and other aid in disaster areas.

Last week, Nokia gave 5,000 mobile phones to quake rescuers and sent employees into the disaster area to maintain them, Jonsson said. "For us initially the most important thing was to get our relief effort going and once we had it going we could communicate about it, but some people were quick to think we weren't doing anything," he said. "We've seen these criticisms going away and our efforts being better understood as the days go along."

Oil Tops $130 Amid Supply Concerns

2008-05-21T20:44:00.002+08:00

Oil prices rise to record above $130 a barrel on supply concerns, weaker dollar.

Oil prices rose above $130 a barrel Wednesday for the first time, as supply concerns mounted and the dollar weakened. Light, sweet crude for July delivery hit a record $130.47 a barrel in electronic trade on the New York Mercantile Exchange after closing at $128.98 in the floor session. By afternoon in Europe, it had retreated to $129.77 a barrel, up 79 cents.

The dollar had become less of a factor as attention turned to supply and demand concerns, but that seems to have changed this week. "We've seen an about-face turn on the dollar in the last couple of days," said Mark Pervan, senior commodity strategist at Australia & New Zealand Bank in Melbourne. "It looked like it was starting to recover, but I think there's a less certain outlook at the minute and ... enough reason to be buying commodities as a currency hedge again."

On Wednesday, the dollar was trading at 103.26 yen, down from the 104-105 range last week, and the euro has started to climb again against the dollar, rising to $1.5755 by the early afternoon in Europe, up from $1.5669 late Tuesday in New York.

Investors see hard commodities such as oil as a hedge against inflation and a weak dollar and pour into the crude futures market when the greenback falls. A weak dollar also makes oil less expensive to buyers dealing in other currencies. The performance Wednesday was the 11th time in the last 13 sessions that crude prices have hit trading or closing records, if not both.

Oil futures are now selling for about twice what they were just a year ago. Prices have been propelled by a number of factors, including worries about insufficient supply, soaring global demand and a sliding dollar that has made oil cheaper for some buyers overseas. Speculative buying has also helped push prices higher, analysts say.

Industry observers in recent days have also pointed to especially strong demand for diesel in China, where power plants in some areas are running desperately short of coal and certain earthquake-hit regions are relying on diesel generators for power. The country is also ramping up diesel imports ahead of the Olympics, analysts say, driving up prices.

Besides that, "major Chinese petrochemical companies are really struggling to keep up with demand. The trend is that we're going to continue to see pretty strong crude imports (from China) going forward," Pervan said. "That's what the market is really getting on board."

For the second time this week, a high-ranking official in the Organization of Petroleum Exporting Countries suggested oil output would not increase any time soon. Venezuela's state-run news agency quoted OPEC chief Abdalla Salem el-Badri as saying Tuesday that "there's no scarcity of oil in the market" because international oil supplies were very high.

The statement from El-Badri, who met in Caracas with Venezuelan President Hugo Chavez, echoed a comment by Algerian Energy Minister Chakib Khelil, OPEC's current president, who said Monday that the group would not boost output before the September meeting.

That added to worries about gasoline and diesel supplies at the start of the summer driving season in the U.S., where retail prices for the motor fuels are already at record levels. Many analysts expect prices for both fuels will continue to rise.

US Urges China to Join IEA

2008-05-20T21:06:00.001+08:00

US calls on China to join global energy group, help stabilize oil markets.

A U.S. official urged China on Tuesday to join the International Energy Agency -- a group of major oil consumers that includes the United States and European governments -- and aid its efforts to keep petroleum markets stable in times of crisis.

"China's participation in the IEA's collective emergency response system would make the system stronger," Daniel S. Sullivan, an assistant U.S. secretary of state, said in a speech at a business conference.

China is the world's second-largest oil consumer after the United States. Its surging demand for energy to fuel its booming economy has stirred unease abroad about the possible impact on global prices, as well as over China's intentions as state-owned companies pursue access to supplies in Africa, Central Asia and elsewhere.

A key function of the 27-nation IEA is to coordinate the release of petroleum from national stockpiles to stabilize prices if crises threaten to disrupt supplies, Sullivan said. He said that was last done in 2005 in response to Hurricane Katrina in the United States.

"This helped calm oil markets, which clearly benefited the United States but also other major oil consumers like China," he said. "I believe it is important for China and other key economies in the world, such as India, to prepare to eventually join the IEA as full members." The conference was organized by the Institute for 21st Century Energy, a Washington think tank created by the U.S. Chamber of Commerce.

Sullivan, who is the American envoy to the Paris-based IEA, said the group has invited Beijing to take part in an exercise next month to practice responding to a possible emergency, and he urged the Chinese government to accept.

"China's involvement would benefit China and it would benefit the IEA," he said. "China might also consider a declaration that it plans to pursue membership in the IEA. This could help the anxiety expressed in some quarters over China's intentions as it pursues greater energy security."

The Chinese Foreign Ministry referred questions about whether Beijing might join the IEA to the Cabinet's National Development and Reform Commission, which oversees energy policy. The NDRC did not immediately respond to requests by phone and fax for comment.

China long met its energy needs from domestic oil fields but became a net importer in the 1990s. China is building a strategic oil reserve meant to help insulate it from possible disruption in foreign supplies. The United States maintains a similar stockpile. Beijing and Washington agreed in December as part of their long-range Strategic Economic Dialogue to cooperate in constructing and managing oil stockpiles.

Sullivan noted that a precondition for joining the IEA is membership in the Organization of Economic Cooperation and Development, a group of major economies, a status that China lacks. But he said the United States doesn't think that has to be mandatory for Beijing, given its importance in global energy issues. The IEA also includes Japan, Australia and South Korea.

Sovereign Wealth Funds Support US Economy

2008-05-20T21:02:00.001+08:00

Backers say sovereign wealth funds have supported US financial system, critics remain wary.

Mideast bankers say sovereign wealth funds -- the vast government-directed pools of investment money that have raised controversy in the West -- have helped save the U.S. financial system from collapse.

But World Bank President Robert Zoellick cautioned that the funds will continue to raise international concern as countries question whether their investments are driven by the search for profit or by political interests that could threaten national security.

The United States and the European Union have pushed sovereign funds to provide greater disclosure about their investment strategies and are backing an initiative by the International Monetary Fund and the Paris-based Organization for Economic Cooperation and Development to develop a voluntary set of best practices for the investment vehicles.

But many bankers and investment managers say the concerns are overblown and point out that the funds swooped in to provide much-needed capital to the U.S. financial system when it was recently reeling from the mortgage crisis. They maintain the funds are passive investors with no political agenda.

"There is no need to be alarmed," former Pakistani Prime Minister and Citigroup Inc. executive Shaukat Aziz said Monday at the World Economic Forum on the Middle East, an offshoot of the annual gathering of political and business leaders in Davos, Switzerland.

"In fact, I should say we should give a vote of thanks to all the sovereign funds ... who came in and saved the global financial system," added Aziz on the second day of the three-day summit held in the Egyptian Red Sea resort town of Sharm el-Sheik.

Sovereign funds from China, Singapore and the Middle East have invested more than $40 billion in Citigroup Inc., Merrill Lynch & Co. Inc., and Swiss bank UBS since late last year. Analysts estimate that approximately 40 sovereign funds worldwide control about $2.5 trillion in assets, a total that could reach $12 trillion by 2015. Sovereign funds in the Mideast and Russia have surged in recent years from soaring oil prices, while China has benefited from a growing trade surplus with the rest of the world.

Cyrus Ardalan, vice-chairman of London-based Barclays Capital and Board member of the Dubai International Financial Centre, said the size of sovereign wealth funds should be kept in perspective relative to other financial assets. He said the top 300 pension funds in the world have $10 trillion in assets, and U.S. consumers have $45 trillion. "Even if they (sovereign funds) were to grow by a factor of two to three times, they are modest in comparison to the total pool of assets managed by institutional investors," said Ardalan.

Many finance professionals say sovereign funds should be treated no differently than private pools of capital. Otherwise, countries risk losing out on a key source of investment. "I think yes, more disclosure is important, but I would say that even on this point I think we have to be cautious not to ask from the sovereign wealth funds something that we don't ask from other large institutional investors," said Ardalan.

But Zoellick pointed out that Western concerns about sovereign funds could not be dismissed given the history of governments using investment for political purposes. "I do think however we need to be fair in analyzing one of the reasons for the concern here is that the history of government allocation of capital has not been such a good one over time," said Zoellick. "So people are legitimately asking ... what are the purposes, what are the return objectives?"

Many Europeans have been wary of Russian energy investment in recent years in eastern Europe and the leverage over oil and gas supplies it gives the Russian government.

Ibrahim Dabdoub, head of the National Bank of Kuwait, said sovereign funds managed by U.S. allies in the Middle East should not be analyzed in the same light as those run by much larger countries with more international influence. "And the problem that we have here is they bundle us with China and Russia," said Dabdoub. "Most of these sovereign wealth funds are owned by countries that are so small."

The size of tiny oil-rich Gulf countries has not stopped the U.S. government from worrying about the impact of their investments. Lawmakers effectively torpedoed an effort by an Emirati company to manage six of the largest ports in the U.S. in 2006, contending the Bush administration and the agency responsible for reviewing security issues had not fully considered all of the security concerns that had been raised.

Earlier this year, officials from the Emirati capital of Abu Dhabi, home to the world's largest wealth fund, sent a letter to the Bush administration and other Western governments spelling out the principles that guide its investment procedures. The White House later announced that it had reached agreements with both Abu Dhabi and Singapore that they would not use their sovereign wealth funds to further their political goals.

Zoellick said he disagreed with the Congressional response to the Dubai ports deal, but added that politicians in a democracy could not ignore public concerns about national security. "It may turn out that government ownership is fine," said Zoellick. "But it could be a problem if you have a certain country that wants to buy a certain company to get the technology or something else."

Japan Leaves Interest Rates Unchanged

2008-05-20T20:59:00.001+08:00

Bank of Japan keeps interest rates steady amid worries about global slowdown.

Japan's central bank kept interest rates steady Tuesday as widely expected amid lingering worries about a global slowdown. The seven-member policy board was unanimous in keeping the benchmark overnight call rate unchanged at 0.5 percent at the end of a two-day meeting, according to the Bank of Japan.

Soaring gas prices, rising material costs and signs of slower global growth are weighing on the world's second-largest economy, which depends heavily on exports. Economists predict that the Bank of Japan is likely to do nothing for about a year unless economic signs change dramatically.

Much of last year, market watchers had expected the BOJ would raise its key interest rate as Japan's economy gained steam. But the global economic turmoil set off at midyear by the U.S. subprime mortgage crisis scotched that view, and a jittery market began to expect a move in the opposite direction -- a rate cut.

The Japanese economy has proved remarkably solid recently. Last week, the government said the economy grew at a stronger-than-expected 3.3 percent annual pace in the first quarter, racking up its third consecutive quarter of growth. Still, economists warn that export growth could stumble if overseas economies falter, and domestic spending will probably stay weak if paychecks aren't growing.

Bank of Japan Gov. Masaaki Shirakawa, who took office last month, acknowledged energy and raw material costs are expected to stay high for some time. "We are looking closely at downside risks to the economy," Shirakawa told reporters, indicating that a rate hike was unlikely for some time.

The Bank of Japan echoed such sentiments in its economic report issued Tuesday, warning that the pace of the nation's growth was slowing because of the high prices of energy and raw materials. The language was similar to what the bank said the previous month.

Since 1999, Japan had kept interest rates generally at about zero to jump start a lagging economy. It ended its zero interest policy in July 2006 when it raised its key rate to 0.25 percent, the first hike in six years.

In a recent report, Lehman Brothers said expectations for an interest rate cut had also dwindled. The global economy was unlikely to worsen so much that pressure for a rate cut would rise, the investment bank said. A rate increase was unlikely until the latter half of next year, it said.

Japanese Finance Minister Fukushiro Nukaga said higher material and oil costs remain a challenge for the world economy. "The worst appears to be over for the global financial market, but recently rising oil and food prices are making economic policy management difficult," he said at a symposium in Tokyo.

Wall Street Watches Higher Oil And Housing

2008-05-19T07:34:00.001+08:00

This week, Wall Street faces more readings on inflation and housing market.

The rising price of oil isn't just swelling Americans' energy bills -- it's also holding back their stock portfolios. Wall Street got some seemingly auspicious signs last week about home construction and consumer level inflation. But with oil climbing to new records, and more reports expected this week on rising prices and the housing market, investors are holding on to a conservative stance.

Oil's stubborn trek to record highs is a major reason why investors have yet to push the major indexes into positive territory for the year. Just this month, crude has so far tacked on about $13 to breach $127 a barrel, while the price of a gallon of gasoline for the average U.S. driver has soared 17 cents to nearly $3.79.

Those price surges cast an air of skepticism over last week's report from the Labor Department showing a modest 0.2 percent uptick in consumer prices in April. Meanwhile, the Commerce Department's upbeat report on housing starts also met with some doubt among investors, particularly because the huge rise was due mostly to apartment construction, which can vary widely from month to month.

"So are we at an inflection point in housing right now? Very possibly. But let's be clear here. Nothing in the data suggests we're about to see a sharp rebound," wrote Bernard Baumohl of the Economic Outlook Group LLC in a research note.

Still the market, betting that better times are not that far off, finished the week with a solid advance. The Dow Jones industrial average rose 1.89 percent, while the Standard & Poor's 500 index gained 2.67 percent and the Nasdaq composite index picked up 3.41 percent.

The existing home sales report will be key this week. The National Association of Realtors is expected to report on Friday that sales of existing home fell again in April, according to the median estimate of economists polled by Thomson/IFR. Another important piece of data will be the Labor Department's Tuesday report on producer prices, is expected to show a 0.5 percent rise.

The information could help Wall Street determine whether it is consumers or businesses who are paying more of the rising costs of energy, food and other commodities. Neither prospect is positive for Wall Street; businesses need to hold down costs to pull in healthy profits, while consumer spending accounts for more than two-thirds of gross domestic product.

"There may be some factors that are helping to control inflation," Strauss said, noting that many businesses are holding back wage increases. "That's a shock absorber to inflation." But he added, "consumers are feeling the pinch here. What they have to spend on nondiscretionary items is going up. At the same time, real income growth is being challenged."

Investors will get more information on how strapped consumers are in earnings reports next week from retailers including Home Depot Inc., Hewlett-Packard Co., Staples Inc., Target Corp., BJ's Wholesale Club Inc., Barnes and Noble Inc. and Gap Inc.

As data pile up, they will give not only investors but also the Federal Reserve a better idea of where the economy is headed in the second half of the year. On Wednesday, the Fed releases minutes from its April 29-30 meeting, when it lowered key interest rates by a quarter percentage point and flagged inflation as a growing concern. Many investors expect the central bank to keep rates on hold at its next meeting in late June to keep inflationary pressures in check.

Inflation Threatens Ex-Soviet Countries

2008-05-19T07:32:00.001+08:00

European reconstruction bank says inflation most pressing problem in post-Soviet countries.

Rising inflation is severely hurting Ukraine and other Eastern European nations, while the global credit crunch will slow growth in those countries dramatically in coming months, the European Bank for Reconstruction and Development said Sunday.

"Inflation, now in double digits in many countries, is the region's most pressing current problem. If left unaddressed, inflation could risk price-wage spirals, exchange rate realignments, or could force a belated and sharp response by monetary policy," the bank said in a statement.

Gathering in Kiev for their two-day annual meeting, bank officials were scheduled to discuss the impact of global economic turmoil and soaring food prices, among other topics. The worldwide credit crunch could sharply pinch markets in ex-Soviet bloc nations, and as a result, the bank said it had downgraded gross domestic product growth projections for Ukraine and other countries.

Overall growth of 6 percent is expected in Eastern Europe this year, compared with 7.3 percent in 2007, the bank said. Real GDP growth in Ukraine is expected to slow to 5.5 percent in 2008, the bank said. The government had earlier projected a 6.8 percent pace.

The bank also attributed the slowdown to rapid increases in consumer prices, which will affect household incomes and consumption. Neighboring Russia, meanwhile, will continue its rapid oil- and gas-fueled economic expansion, with growth expected to reach 7 percent this year, the bank said.

The EBRD is the largest financial investor in Ukraine, investing up to $1.6 billion annually into projects ranging from banking to infrastructure. Governors of the EBRD -- which is meeting in Kiev for only the second time -- were also expected to appoint German Deputy Finance Minister Thomas Mirow as a successor to President Jean Lemierre.

Weekend's Featured: Biofuels Must Not Threaten World Supply of Food

2008-05-18T08:55:00.003+08:00

EU Official: Biofuels Must Not Deprive the World's Poor of Food, More Environmentally Friendly Biofuels Are Needed.

Biofuels must not deprive the world's poor of food, a senior European official said, as he proposed a greater focus on second-generation biofuels that would be more environmentally friendly.

Guenter Verheugen, a vice president of the European Commission, was speaking against a background of growing doubts about whether the European Union should continue a policy of elevating biofuels to an environmental priority.

"It makes no sense to make car fuel from plants that ought to provide human and animal food," said Verheugen in the Bild am Sonntag newspaper, extracts of which were made available Saturday.

The accent should be instead on research into second-generation biofuels, "for example technology using hydrogen," added Verheugen, who is the EU commissioner responsible for enterprise and industry.

The biofuel industry fears the controversy could inhibit research into second-generation biofuels which are environmentally more friendly since they would be made from non-edible agricultural waste such as straw. "What matters to the commission is sustainable development," Verheugen said. "It will not work if production of basic foodstaffs is hindered or tropical forest is cut down" for biofuels.

The 27-nation European Union wants biofuels to make up 10 percent of all EU vehicle fuel by 2020, but the target has come under fire in the face of soaring global food prices that have hit poor countries particularly hard. Biofuel development is part of a wider package to reduced EU greenhouse gas emissions by 20 percent by 2020 and to reduce dependence on fossil fuels.

Japan Giving Loans Up to $4.8 Billion

Japan plans to extend up to 500 billion yen (4.8 billion dollars) worth of low-interest loans to developing countries over the next five years to help them fight global warming, a report said Thursday.

The first batch of the new loans would go to Indonesia and total some 20-30 billion yen, the Nikkei economic daily said, adding Nigeria and Guyana are also candidates of aid recipients in the future.

Japan's government plans to provide the loans for alternative energy projects such as wind and solar power generation, the installation of energy-saving equipment at power plants and forestation projects, it said.

The new yen loans would carry annual interest rates of 0.4-0.5 percent, substantially lower than the already low interest rates of some 1.0-1.2 percent now charged on 40-year loans provided by Japan, the Nikkei said.

Japan is hoping to shape the course of negotiations on a new climate treaty, which would cover the period after the Kyoto Protocol's obligations expire in 2012, when it hosts July's summit of the Group of Eight rich nations.

The Nikkei said Tokyo hoped to win support for its plan from nations receiving the yen loans. In talks on a post-Kyoto treaty, Japan has pushed hard for a "sectoral" approach to global warming, in which each industry would have its own efficiency targets.

Weekend's Featured: Biodiversity Loss Wipes Out 6% World GNP, Reducing Wildlife Populations

2008-05-18T08:49:00.004+08:00

Biodiversity Loss is Costing the World $3.1 Trillion a Year or 6% of Its GNP.

The destruction of flora and fauna is costing the world two trillion euros (3.1 trillion dollars) a year, or six percent of its overall gross national product, according to a report trailed by German news weekly Der Spiegel.

The European Union and German environment ministry-led research, entitled "The Economics of Ecosystems and Biodiversity," will be presented on Monday at the ninth conference of the UN Convention on Biological Diversity in Bonn.

In its edition out Monday, Der Spiegel will present extracts from the paper, with the study's lead author, Pavan Sukhdev, a senior figure with Deutsche Bank in India, writing that "the world's poor bear the brunt of the cost."

Der Spiegel also says that German Chancellor Angela Merkel will announce a sharp increase in German funding to combat deforestation in line with Norway, which ploughs 500 million dollars annually into forest retention.

Deforestation -- a huge factor in species loss and global carbon emissions contributing to climate change -- is a central theme of this year's conference in Bonn, formerly the capital of West German.

One in four mammal species, one in eight among birds, a third of amphibian creatures and 70 percent of all plant life made the most recent endangered list issued by another UN agency, the World Conservation Union (WCU).

Wildlife Populations Fall Globally

In the meanwhile, the world's wildlife populations have reduced by around a quarter since the 1970s, according to a major report published Friday by the WWF conservation organization. Marine species have been particularly hard hit as the human population booms, while numbers of birds and, fish and animals have also gone down, said the WWF in a report.

The study comes ahead of next week's UN convention on biological diversity in the former West German capital Bonn, which will discuss aims to achieve a "significant reduction" in the current rate of biodiversity loss by 2010.

The WWF, the world's largest independent conservation body, said it was "very unlikely" that the UN would meet its targets, despite the decline appearing to flatten off in recent years. The WWF's Living Planet Index, which tracks the fortunes of nearly 4,000 populations of 1,477 vertebrate species from 1970 to 2005, showed an overall decline of 27 percent.

Over-fishing and hunting, along with farming, pollution and urban expansion, were blamed. WWF director general James Leape warned: "Reduced biodiversity means millions of people face a future where food supplies are more vulnerable to pests and disease and where water is in irregular or short supply.

"No one can escape the impact of biodiversity loss because reduced global diversity translates quite clearly into fewer new medicines, greater vulnerability to natural disasters and greater effects from global warming."

The marine LPI showed a 28-percent decline with a dramatic drop between 1995 and 2005. The overall freshwater LPI fell by 29 percent between 1970 and 2003. Swordfish numbers plummeted by 28 percent in the decade from 1995, while ocean birds suffered a 30 percent decline since the mid 1990s.

"Biodiversity underpins the health of the planet and has a direct impact on all our lives so it is alarming that despite an increased awareness of environmental issues we continue to see a downward trend," said Colin Butfield, head of campaigns at WWF-UK.

The British-based conservation charity also warned that a failure to halt biodiversity loss would have negative impacts for humans. In the next 30 years, climate change is expected to become a significant threat to species, said the WWF. The declines come at a time when humans are consuming ever more natural resources, and are now using 25 percent more than the planet can replace, it said.

The WWF urged governments to take urgent action to reduce the rate of biodiversity loss by 2010, calling for cross-ministry protection plans. They should also set up financial incentives to support the establishment and maintenance of protection zones, it said.

"The fact that human activities have caused more rapid changes in biodiversity in the last 50 years than at any other time in human history should concern us all," said Britain's Biodiversity Minister Joan Ruddock.

"Supporting wildlife is critical to all our futures and the UK will continue to give strong support to international action. The rate of wildlife loss needs to be slowed both in the UK and internationally. International action is needed to tackle the worldwide decline in wildlife, with all countries working together," he said.

Wall Street Appears to Be Recovering This Summer

2008-05-17T17:42:00.001+08:00

Wall Street may get best indicators yet about recession or economic recovery as summer begins.

After nine months of turmoil that started with the collapse of the subprime mortgage market, Wall Street appears to be at a turning point of sorts.

The data of the past few weeks have given investors some hope that the worst of the credit crisis has passed, that the economy isn't losing jobs at a dangerous rate and that inflation isn't out of control. The result has been relative calm in the financial markets, enabling the major indexes to reach levels they hadn't seen since early in the year -- including the Dow Jones industrials' brief return earlier this month to the 13,000 mark.

Analysts say data to be released in June and July will determine whether Wall Street extends its recovery or backtracks. If it moves higher, it will break an old habit of pulling back during the summer doldrums -- and some analysts believe this may indeed come to pass. "There's a bullish momentum that overrides the typical seasonal factors that would tell you to sell stocks in the summer," said David Kotok, chairman and chief investment officer of New Jersey-based Cumberland Advisors.

The market will also have its eye on the rising price of oil as it reviews each report. And if oil continues to press higher, it could temper the market's enthusiasm should the economic numbers are upbeat. For now, the big bet is that economic reports and other key data will show the U.S. was in a mild recession, and that a recovery is already in play. If investors get the confirmation they are looking for, cash could stream into the stock market.

The next two weeks have important numbers including April wholesale inflation and existing home sales, as well as another reading on first-quarter gross domestic product. And two critical reports on consumer confidence and spending -- which may show whether increasingly expensive gasoline is making households cut back on discretionary purchases.

When reports start coming out in early June, they should be able to show among other things whether the string of interest rate cuts since last summer have had the desired effect of getting a hobbled economy growing again. In the first week of June, the Institute for Supply Management issues its assessments of the manufacturing and service economies during May and the government releases its report on whether jobs were created or lost during the month.

"We're going to find out if the stock market is right, and that this will be one of the shallowest recessions on record," said Dan Seiver, a finance professor at San Diego State University. "Or, that the economy is going to be sicker longer, and when the market realizes that it will have a nasty down-leg."

In the second week of June, one of the key reports will be the Fed's own evaluation of the economy, its Beige Book survey of how the regions of the U.S. are faring in the current economic climate. Nine of the 12 Fed districts surveyed in March said that economic growth slowed because of anemic real estate markets and a slowdown in consumer spending. It showed the economy was certainly troubled, but not plunging.

Of course, Wall Street always pays close attention to economic reports, and was doing so long before the credit crisis. But the data takes on greater significance when many investors have put their cash on the sidelines and are deciding to put it back into the market -- or to leave it there and take even more money out of stocks if the numbers point to a continuing slump or if they're inconclusive.

Along with Wall Street, the Fed will be parsing the data. But the central bank itself will be one of the most crucial economic indicators when it meets again June 24-25 -- Wall Street wants the Fed to provide a stronger sign that it feels April's quarter-point cut of the fed funds rate will be the last, and that the economy is back on track for growth.

And analysts like Kotok are betting that the Fed's efforts to energize the economy have worked -- and that will give the market permission to charge ahead. "Our view is the Fed will succeed because it has the power to do so, and it has now caught on to the fact that this is serious," he said. "The stock market is anticipating it, and confirmation of this might not be that far off."

US Treasury Paulson Sees Calmer Markets

2008-05-17T08:31:00.001+08:00

Treasury secretary describes financial markets as 'considerably calmer' than in March.

Treasury Secretary Henry Paulson said Friday that financial markets are "considerably calmer" now than they were two months ago. He predicted the economy will be rebounding by the second half of this year.

In a speech to business executives in Washington, Paulson said the drag from housing, which he characterized as still the biggest risk to the economy, will soon be lessened by nearly $100 billion in economic stimulus payments to U.S. households.

"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," Paulson said in his prepared remarks.

The economy has been pushed to the brink of a recession by a prolonged housing slump, a credit crisis, soaring energy prices and more than a quarter-million job layoffs over the past four months. In his remarks, Paulson never used the word recession, although many private economists believe the country is in one.

But he did forecast that the stimulus checks going to 130 million households would help spur growth in the second half of the year. He said that those checks along with business tax breaks in the $168 billion stimulus package would add 500,000 jobs by the end of the year over what would have been created without the stimulus boost.

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Paulson said that both the ability to obtain loans and investor confidence are gradually improving, raising hopes that the financial market crisis which hit last August was beginning to recede. "We are seeing signs of progress as capital markets and credit markets stabilize," Paulson said. "The markets are considerably calmer now than they were in March."

In March, the credit crisis claimed its biggest victim with the near-collapse of Bear Stearns, the country's fifth largest investment bank. Paulson said "some bumps in the road ahead" are to be expected, but that he believes significant progress in dealing with the credit crisis has been made.

"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."

UN Expects World Economy to Grow by 1.8%

2008-05-16T21:15:00.001+08:00

UN: World economy on brink of severe downturn; will only grow by 1.8 percent this year.

The world economy is "teetering on the brink" of a severe downturn and is expected to grow only 1.8 percent in 2008, the United Nations said in its mid-year economic projections Thursday. That's down from a global growth rate of 3.8 percent in 2007, and the downturn is expected to continue with only a slightly higher growth of 2.1 percent in 2009, the U.N. report said.

The mid-year update of the U.N. World Economic Situation and Prospects 2008 blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter, which is expected to "continue to be a major drag for the world economy extending into 2009." But the U.N. said developing countries will suffer as badly: They should grow by 5 percent this year and 4.8 percent next year, compared to a robust 7.3 percent in 2007, the report said.

The U.N. economists said the deepening credit crisis in major market economies triggered by the U.S.-led slump in housing prices, the declining value of the U.S. dollar, persistent global imbalances and soaring oil and commodity prices pose considerable risks to economic growth in both developed and developing countries. "The baseline forecast projects a pace for world economic growth of 1.8 percent in 2008," the U.N. report said.

However, it said the final figure will largely depend on developments in the United States. Global growth this year could fall to 0.8 percent if the U.S. sub-prime mortgage market turmoil has a more serious impact on developing countries and countries in transition, the U.N. report said.

But if the monetary and fiscal measures the U.S. government has taken to stimulate the economy -- including tax refunds and lower interest rates -- boost consumer spending and restore confidence in the business and banking sector, the world economy could only slow to 2.8 percent growth this year and 2.9 percent in 2009, it said.

The report, prepared by the U.N. Department of Economic and Social Affairs, forecast that U.S. economic growth will decline from 2.2 percent in 2007 to -0.2 percent this year, with only slight recovery in 2009 to 0.2 percent growth.

"At issue is how deep and long this contraction will be," the report said. "As the housing slump continues and the credit crisis deepens, a broad array of ... indicators are already hinting at a recession."

It cited a decline in U.S. employment, consumer confidence at its lowest level in a decade, household spending growth slowing sharply and business equipment spending slowing alongside large inventories of housing and a 30 percent decline in residential investment. This strongly suggests "that the implosion of housing activity will not stabilize until 2009," the report said.

As for other developed countries, the U.N. forecast that Japan's economic growth will decline from 2.1 percent in 2007 to 0.9 percent in 2008 and that Western Europe's growth rate will drop from 2.6 percent last year to 1.1 percent this year. Despite the slowdown in global economic growth in 2008, the U.N. said global inflation is expected to accelerate this year to 3.7 percent.

The report said the recent sharp rise in commodity prices and the continued rise in oil prices are key factors spurring inflation along with higher wages. The growth of world trade also slowed from 7.2 percent in 2007 to 4.7 percent in early 2008, largely due to weak U.S. demand for imported goods, it said.

Oil Rises Again to New Record $127

2008-05-16T21:11:00.001+08:00

Oil prices have risen above $127 a barrel for the first time.

Light, sweet crude for June delivery rose as much as $3.31 to $127.43 a barrel in electronic trading Friday on the New York Mercantile Exchange by afternoon in Europe. That tops the previous high of $126.98 a barrel set Tuesday. The contract closed at $124.12 on Thursday.

U.S. energy risk management firm Cameron Hanover says "everything the market looks at is bullish" and predicts greater volatility. Oil prices continued to rise Friday after a whipsaw overnight session that paired the expiration of options with a bevy of news that swung the price of oil per barrel in a $6 range.

"It was one of those volatile days that we fully expect to see more of in the days and weeks ahead," said a research note from U.S. energy risk management firm Cameron Hanover, predicting greater volatility as May ends.

"Unless there is a confluence of substantive bearish news, when there is a pullback of something like $5, it's unlikely to stay down because enough participants will see that as a buying opportunity," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Besides the expiration of options contracts, a temporary shutdown of ICE Futures trading in crude oil and other futures products due to a power outage also contributed to the previous session's volatility. "So there was a lot of confusion yesterday, and not surprisingly, there was this wild, seesaw session," Shum said.

But oil has again consolidated near the $125 a barrel mark, Shum noted, because the commodity is still seen as a better bet than investors' other options. "Oil as a class has performed better this year than equities and bonds, and continues to encourage investors to pile money into oil and stay in oil," Shum said.

On Thursday, oil initially climbed in the floor session as U.S. diesel fuel prices jumped 3.6 cents at the pump to a new national average of $4.455 a gallon ($1.178 a liter). Diesel is used to fuel most truck, trains and ships, and is a large part of the reason prices of food and consumer goods are rising so fast.

There has also been some concern that extra Chinese demand for diesel to run emergency power generators after this week's deadly earthquake may further tighten the distillates market. But as oil reached for new records above $126 a barrel, the U.S. Energy Department reported that natural gas inventories rose 93 billion cubic feet last week, more than analysts had expected, and that pulled the whole petroleum energy complex lower.

Fluctuations in the dollar have contributed as well to oil's volatility. The dollar has generally been stronger than earlier in the year, but it is waffling between 104 and 105 against the yen, while the euro seems to be range-bound between $1.54 and $1.55.

Investors have been viewing oil and other commodities as a hedge against inflation and a weaker dollar since the middle of last year, and that link has meant that oil has been tending to rise and fall inversely with the dollar.