German Bonds Rise as Signs of Slowdown Boost Demand for Refuge

June 29 (Bloomberg) — German government bonds rose, pushing the yield on benchmark 10-year securities to the lowest in almost three weeks, as signs the global economy is slowing stoked demand for the safest fixed-income assets.

Bunds rose for the fifth time in six days as a decline in stocks, prompted by speculation that China’s expansion may be slowing, added to the allure of government bonds. A draft European Union document said bank stress tests should assess the effect of sovereign-debt shocks, reigniting concern that regulators consider defaults to be a possibility for nations such as Greece. Euro-region central banks stepped up purchases of Greek, Portuguese and Irish debt, traders said.

“People are again looking for refuge in bunds,” said Michael Leister, a fixed-income strategist at WestLB AG in Dusseldorf. “We are seeing some support from the data side, and there are risks ahead. It’s the classic safe-haven scenario.”

The yield on the German bund fell three basis points to 2.55 percent as of 4:50 p.m. in London, after reaching 2.52 percent, the lowest since June 9. The 3 percent security maturing in July 2020 gained 0.18, or 1.8 euros per 1,000-euro ($1,220) face amount, to 103.8.

The MSCI Asia Pacific Index of shares fell 1.6 percent to a two-week low and the Stoxx Europe 600 Index dropped 2.6 percent after the Conference Board said its leading economic index for China had the smallest gain in five months in April.

The gauge of the economy’s outlook compiled by the New York-based Conference Board rose 0.3 percent, less than the 1.7 percent gain it reported June 15.

Yield Spread

The difference in yield between two-year and 10-year German government securities narrowed to less than 200 basis points for the first time this year as the signs of economic slowdown spurred demand for longer-dated securities.

Germany’s government debt returned 4.1 percent this quarter, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts’ Societies, driven by investors seeking refuge as the crisis that started in Greece threatened to derail the economic recovery. Spanish bonds lost 4.5 percent, while Greece’s debt handed investors an 18 percent loss, the indexes showed. U.S. Treasuries gained 4.5 percent.

Purchases by the ECB of so-called peripheral bonds focused on maturities of five years and below, with some buying interest also shown for longer-maturity Greek bonds, said the traders, who declined to be identified because the transactions are confidential.

Greek Bonds

Greek two-year notes rose, sending the yield down 42 basis points to 10.18 percent. The yield on 10-year Greek bonds fell 39 basis points to 10.58 percent.

The Irish two-year note yield fell 18 basis points to 2.8 percent and the yield on the Portuguese securities fell 18 basis points to 3.51 percent.

Seeking to demonstrate that Europe’s financial system can withstand shocks, EU leaders on June 17 agreed to disclose how banks perform in the stress tests run by the Committee of European Banking Supervisors in the second half of July.

“The question everybody’s asking is: Are you going to include scenarios that involve the restructuring of Greek or another countries’ debt?” Bill Winters, the former co-chief executive officer of JPMorgan Chase & Co.’s investment bank, said on Bloomberg Television on June 25. “If you do include it, we already know the answer: There are real issues.”

Cash Needs

Spanish Finance Minister Elena Salgado said she “hopes” the European Central Bank is aware of lenders’ cash needs as the ECB’s first 12-month loan expires this week.

Spanish banks are asking the ECB to ease the effects of the end of a 442 billion-euro funding program, which terminates this week, the Financial Times reported, citing bank executives. Spain’s Salgado said on Cadena Ser radio in Madrid today that she hopes “that on this occasion, as on others, the ECB is aware of the needs of our financial system.”

German bonds may rise, and debt from peripheral euro-area nations may drop, should bank demand for ECB funding hold steady as the one-year loans come due this week, UniCredit SpA said.

“A large rollover would benefit bunds and put pressure on yields of countries that, in recent months, have relied more on ECB funding, Spain and Portugal in the first place,” Luca Cazzulani, senior fixed-income strategist in Milan, said today in a research report.

A low level of rollover would reduce “safe-haven demand” for the German securities, he said.

German bonds stayed higher even after a report showed European confidence in the economic recovery unexpectedly improved in June.

An index of executive and consumer sentiment in the 16 euro nations rose to 98.7 from 98.4 in May, the European Commission in Brussels said today, beating the median estimate of 25 economists in a Bloomberg survey for a reading of 98.1.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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Mexico Eases IPO Rules With New Equity Class to Spur Offerings

June 29 (Bloomberg) — Mexico’s stock exchange is easing regulations to let smaller companies list shares after attracting only two initial public offerings since 2008.

Bolsa Mexicana de Valores SAB will allow companies with estimated market values of less than $250 million to offer shares before meeting corporate governance standards required for larger IPOs in Mexico, said Jose Manuel Allende, director of issuing companies and securities for the exchange.

The exchange estimates 200 to 300 companies are eligible to use the program, Allende said. Real estate developer Corporativo Tres Marias SAPIB and forestry company Proteak Uno SAPIB each plan to raise about 1 billion pesos ($79 million) this week in the first offerings under the plan. Mexico’s $406 billion market capitalization is less than Argentina’s $538 billion and 34 percent of Brazil’s $1.19 trillion.

“This is something very interesting for companies, a different way of getting financing that they didn’t have access to before,” Ruben Macias, who helps manage 131 billion pesos of assets for Grupo Profuturo GNP SAB, Mexico’s fifth largest pension fund, said in a telephone interview from Mexico City.

Mexico’s economy, the second-largest in Latin America after Brazil’s, is forecast to grow 4.4 percent this year, the fastest pace since 2006, recovering from its worst recession since 1932, according to the median estimate in a Bloomberg survey of 11 analysts.

Trailing Brazil

The bourse had two IPOs this quarter after a 22-month drought and 25 since 2000, compared with 120 for Brazil’s Bovespa, data compiled by Bloomberg show.

Allende said many Mexican companies forego IPOs because they don’t comply with the exchange’s requirements for share offerings such as ensuring that at least a quarter of board members are independent and holding periodic shareholder meetings.

Companies selling shares under the new rules will have SAPIB affixed to their names, rather than the SAB designation used for larger stocks, Allende said. Their shares can only be bought and sold by institutional investors, including banks, brokerages and pension funds, or certified professional investors who sign a waiver acknowledging an assumption of higher risk. SAPIBs have three years to adopt the standards of SABs and will be delisted if they don’t, Allende said.

The SAPIB program follows Brazil’s Bovespa Mais initiative that began in 2008. The Brazilian plan is directed at small and medium-sized companies and allows them to gradually implement corporate governance and disclosure requirements, according to the Bovespa’s website.

Market Growth

The new equity class may help Mexico’s market catch up to Brazil, said Juan Carlos Sotomayor, head of analysis at Corporacion Actinver SAB, a Mexico City-based brokerage and financial services firm that held Mexico’s last IPO in May. The Bolsa, based in Mexico City, had net income of $41.2 million in 2009 after a loss of $9.7 million in 2008. BM&F Bovespa SA, the Brazilian exchange operator based in Sao Paulo, earned $447 million in 2009, a 25 percent increase from the previous year.

“This is going to help in two ways: One, it will help the Mexican market develop and reach the levels of the Brazilian market, which has been a great success,” Sotomayor said. “Two, this new product will help Bolsa Mexicana de Valores improve its own revenue.”

‘Strange Beasts’

The creation of SAPIBs may leave investors with losses because buyers are likely to underestimate the risks of owning them, said Rafael Escobar, an analyst with Mexico City-based brokerage Vector Casa de Bolsa SA.

“May God help those of us who have our savings invested in the Afores, because now they are authorized to invest in these strange beasts,” Escobar said, referring to Mexican pension funds. The companies are dangerous investments because they “aren’t interested in the crucial topic of corporate governance,” he said.

Trading in SAPIBs also will be less liquid than in SAB stocks because they are closed to most individual investors, said Sergio Mendez, who helps manage 80.5 billion pesos in assets as chief investment officer at Mexico City-based pension fund Afore XXI.

Tres Marias, based in Morelia, Mexico, plans to sell shares as soon as today and ProTeak Uno, based in Mexico City, will sell shares tomorrow, according to filings with the Bolsa. Restaurant operator Arrachera House SAPIB, based in Mexico City, will sell as much as 460 million pesos of shares under the same plan, according to regulatory filings with the Bolsa. The company hasn’t specified a date for its offer, according to the filings.

Buyback Funds

Allende said the Bolsa may push to amend the law to allow companies to remain as SAPIBs for a longer period, and perhaps permanently.

Alberto Herrejon, chief executive officer of Morelia, Mexico-based Tres Marias, said his company would like to remain a SAPIB and plans to pay a dividend every six months to attract investors. Tres Marias plans to create a share buyback fund from profits to ensure trading and repurchase stock from investors who wish to sell, Herrejon said. That’s a step that the Bolsa is recommending for all SAPIB companies, according to Allende.

“Being a SAPIB gives us a lot more flexibility, and it would allow us a lot of financial opportunities if we could remain one,” Herrejon said.

To contact the reporter on this story: Jonathan Roeder in Mexico City at jroeder@bloomberg.net

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Deutsche Bank, Commerzbank Said to Pass Stress Tests

June 29 (Bloomberg) — Deutsche Bank AG, Commerzbank AG and Bayerische Landesbank passed a stress test that evaluated how about 25 European lenders would weather an economic downturn, said three people familiar with the results.

The three German lenders’ tier 1 capital ratio, a key measure of financial strength, exceeded a threshold of 6 percent under the economic scenario, said the people, who declined to discuss the performance of banks outside Germany. The tests didn’t include sovereign debt, two people said.

The results are based on information from April that was passed on to financial regulator BaFin and the Committee of European Banking Supervisors, the people said. European Union leaders pledged on June 17 to disclose the results of stress tests by the end of July, after doubts about Greece’s ability to repay its debts undermined confidence in the region’s banks.

“This is definitely good news, even if I’m not surprised they passed,” said Philipp Haessler, a Frankfurt-based analyst at Equinet AG. “The idea of publishing the stress tests is good because it can help calm the market.”

Spokesmen for Frankfurt-based Deutsche Bank and Commerzbank, Germany’s two biggest lenders, and state-owned BayernLB of Munich declined to comment.

Bundesbank President Axel Weber told German lawmakers last week that tests on European banks may be extended to 100 lenders, said Hans Michelbach, the deputy finance spokesman in parliament for Chancellor Angela Merkel’s Christian Democratic bloc.

Expanding Tests

The Bundesbank, Germany’s central bank, and financial regulator BaFin plan to meet with officials from the country’s largest lenders tomorrow, people with knowledge of the matter said. They will discuss expanding the stress tests to more participants, including additional criteria and whether Germany’s state-owned banks, the Landesbanken, will agree to publication.

Deutsche Bank, Commerzbank and BayernLB conducted internal stress tests based on criteria such as stalling economic growth and rising unemployment, the people said, and gave the results to the national and European regulators.

The next test, which is called Euro System Stress Tests, may combine the first test with expanded criteria that includes sovereign-debt risk, the people said.

Without including sovereign risks “the meaningfulness of the tests is limited, and the market will shelve them quickly,” said Konrad Becker, an analyst at Merck Finck & Co. in Munich.

Injecting Capital

If any of the German lenders fail future stress tests, the aim is to announce simultaneous plans to inject capital, two of the people said. Germany’s bank-rescue fund, Soffin, may be used to boost capital if needed, they said.

Stress tests on EU banks should assess sovereign-debt risks when calculating how lenders would perform against shocks to the banking system, according to a draft EU document.

Finance ministers from the 27 EU countries, who will discuss the stress tests at a meeting in two weeks, also will ask the Committee of European Banking Supervisors to extend them to include a “significant market share of institutions” in each nation, according to the draft, which was obtained by Bloomberg News. The paper, dated June 25, was prepared for a July 12-13 meeting of EU ministers in Brussels.

The EU leaders pledged to publish the stress test results after an announcement by the Bank of Spain that it would make its findings public.

Tough and Realistic

Stress tests on European banks should be “realistic” about potential risks, and the results will be disclosed similarly to the way the U.S. released assessments of its banks last year, the No. 2 official at the International Monetary Fund said.

European regulators’ tests need to be “tough enough and realistic enough,” John Lipsky, the IMF’s first deputy managing director, said in an interview today on Bloomberg Television. “The level of transparency will be broadly equivalent to what we saw here in the U.S.”

In May last year, U.S. regulators released results of stress tests on 19 banks that concluded losses at those institutions could reach $599.2 billion through 2010 if unemployment rose and home prices tumbled. The government gave 10 of the banks, including Bank of America Corp, Wells Fargo & Co. and Citigroup Inc., six months to raise a combined $75 billion.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net To contact the reporters on this story: Jann Bettinga in Frankfurt at jbettinga@bloomberg.net . Karin Matussek in Berlin at kmatussek@bloomberg.net

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High Court Backs U.S. Ban on ‘Soft Money’ Donations

June 29 (Bloomberg) — The U.S. Supreme Court rejected a Republican challenge to the centerpiece of the 2002 campaign finance overhaul, upholding the law’s ban on unregulated “soft money” contributions to political parties.

Five months after striking down federal limits on corporate campaign spending, the justices rejected free-speech arguments against separate contribution restrictions that apply to businesses, unions and individuals. The court issued no opinion, instead summarily upholding a lower court ruling.

The decision marks a rare Supreme Court victory for supporters of campaign spending regulations. Although Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy said they would have scheduled arguments, they were unable to persuade the two swing justices on campaign finance questions — Chief Justice John Roberts and Justice Samuel Alito — to join them.

“The soft money ban lives for another election,” said Rick Hasen, an election-law professor at Loyola Law School in Los Angeles.

The Republican National Committee argued in its appeal that the law “imposes onerous restrictions on the First Amendment rights of political parties and their members and places political parties at a profound disadvantage to other participants in the political process.”

In rejecting the RNC appeal and upholding the law, the court avoided another collision with President Barack Obama, who has used the corporate spending decision in January to portray the court as too beholden to business interests. The administration defended the soft-money rules, saying they are justified to prevent corruption.

Changing Court

The Supreme Court agreed with that reasoning in 2003, upholding the ban on a 5-4 vote. The majority said then that national parties had been “peddling access to federal candidates and officeholders in exchange for large soft-money donations.”

Since that time, the high court’s membership has changed. Most notably, Justice Sandra Day O’Connor, who voted to uphold the 2002 law, was replaced in 2006 by Alito, a skeptic of campaign-finance regulations.

The January ruling, known as Citizens United v. Federal Election Commission, said the government could restrict political speech only to guard against either the possibility or appearance that officials were exchanging political favors for money, known as “quid pro quo” corruption.

Republican Position

The RNC said that interest doesn’t apply to soft money, at least as the party was intending to use it. The Republicans said they wanted to use donations for party-building activities, rather than for support of particular federal candidates, eliminating any risk of quid pro quo corruption.

Soft money isn’t subject to the contribution limits or disclosure requirements that apply to regulated “hard money” donations.

The Obama administration said the Citizens United reasoning should be limited to the independent spending that was at issue in that case and shouldn’t be applied to contributions. The government pointed to earlier Supreme Court decisions giving the government more power to police contributions.

“This court has consistently held that Congress has greater latitude to limit contributions to candidates or political committees than to limit independent expenditures,” the administration argued.

Appellate Ruling

A three-judge panel ruled against the RNC in March, saying it wouldn’t “get ahead of the Supreme Court” by striking down the soft-money ban.

Hasen said the victory for campaign-finance supporters on soft money might be only a temporary one, saying the RNC appeal was “a very weak case” for overturning the ban because it challenged it only indirectly.

“The order today indicates that you already have three justices willing to at least consider seriously undermining the soft-money ban,” Hasen said in an e-mail. “If the RNC or someone else files a new case straightforwardly seeking to overturn the soft-money ban, Justice Alito, and probably the chief, will be quite receptive to considering the question.”

The case is Republican National Committee v. Federal Election Commission, 09-1287.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net .

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Obama Discovers One More Crisis for a Toxic Tax: Kevin Hassett

June 28 (Bloomberg) — Last week, while oil was still gushing into the Gulf of Mexico at a rate that may be as high as 60,000 barrels a day, President Barack Obama proposed that Congress reinstate taxes for the Superfund, the federal program that finances the cleanup of toxic sites.

While the step might seem like a logical one, in fact, the Superfund has almost nothing to do with the oil spill. Obama has once again decided not to let a crisis go to waste, making this move a defining example of how partisan and petty his administration has become.

The Superfund was set up in 1980 by Jimmy Carter in a lame- duck session, and was designed to provide the Environmental Protection Agency with the authority to remediate toxic sites. The law requires polluters to pay for cleaning up their own messes if they could be identified. In orphan cases, where the polluter couldn’t be identified or no longer exists, the law set up a trust fund to finance the cleanup, paid for by taxes on oil and chemical companies.

While nobody disputes that hazardous sites exist and should be addressed, there has been significant disagreement concerning the performance of the Superfund and the advisability of the targeted Superfund taxes.

Flawed Assumptions

Independent analysis of the activities of the EPA authorized by the Superfund found that the fund used public safety concerns as justification for excessively expensive risk reductions. For example, a study by the free-market think tank National Center for Policy Analysis found that, “To establish risk at one abandoned site, the EPA relied on the following scenario: A child was assumed to eat 200 milligrams of dirt per day, 350 days a year for 70 years, while playing in the soil. More than 90 percent of all estimated cancer risks at Superfund sites are dependent upon such outlandish scenarios or highly speculative land use changes.”

Such assumptions may have been common in the early years of the fund precisely because the targeted taxes gave the EPA so much money to play with. There is no limit to the amount of mischief that bureaucrats with unlimited funds can do.

Because of cost-benefit analyses like this and others, Congress allowed the taxes to expire in 1995, and the trust fund ran out of money in 2003. Ever since, Superfund activities at orphan sites have been funded with general revenue, something critics of the early approach prefer, since it requires EPA funding requests to meet a higher standard in order to gain approval. Some Democrats, though, still think wistfully of the days when the EPA had so much money to play with.

Policy Misdirection

Looking through the arguments on all sides, it seems clear that the Superfund may well have shrunk too much, and that funding for cleanups generally should be increased. But it is also clear that the Superfund has nothing whatsoever to do with the oil spill in the Gulf of Mexico.

After all, the fault for the Deepwater Horizon oil spill mainly lies with its owner, BP Plc. As such, BP will be held to account for the damages. Since BP is flush with cash, it seems likely that it will be able to fund the massive environmental cleanup that is necessary.

President Obama even says this, promising from the Oval Office earlier this month, “We will make BP pay for the damage their company has caused.”

That raises the question Obama doesn’t want Americans to ask. If you are going to make BP pay for everything, why do we need the new Superfund taxes? (The cleanup costs are separate from the many lawsuits BP might face, which could put it at risk of bankruptcy.)

The answer is, of course, that apart from some moralizing green-power Democrats we don’t want such a tax. Aside from the political climate being an opportune one, the issues are unrelated.

But the answer doesn’t dismiss the problem. The Superfund proposal has kicked off a predictable partisan squabble, the legislative equivalent of scraping off a scab.

Same Calculus

The calculus that argues for such a move is identical to the calculus that suggests that it is sensible to radically change the U.S. health-care system at a time when joblessness is close to its highest level in decades. Obama’s team seems to believe that even though doubts over new regulations and higher taxes may undercut job creation, the sacrifice is worth it because Democrats get a legislative win.

Precisely at the time when policy makers should be focusing on the spill and marshalling all of our resources in a bipartisan effort to devise effective ways to limit the environmental damage associated with it, Obama decides to settle an old score and try to revive a long-dead tax that was neither prudent or necessary.

Sadly, citizens of the Gulf states are about to learn what economists following Obama’s policies already know. The more the Obama administration attends to not letting a crisis go to waste, the worse the crisis gets.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@bloomberg.net

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Euro Meltdown Won’t Be Avoided by German Makeover: Matthew Lynn

June 29 (Bloomberg) — Who is to blame for the state of the world economy? To listen to a range of presidents, investors, pundits and finance ministers, just one country: Germany.

U.S. President Barack Obama suggests the Germans are sending the world back into recession. George Soros says they are destroying the euro. French Finance Minister Christine Lagarde thinks they are pushing the euro area into deflation.

It is all crazy.

Germany’s huge trade surplus isn’t part of the problem. Handicapping the strongest link won’t help the European economy. And Germany couldn’t change direction now even if it wanted to. Instead of criticizing the Germans, other nations should be learning from the world’s second-biggest exporter. German brands such as Siemens AG, Bayerische Motoren Werke AG and Bayer AG didn’t just appear for no reason.

It’s not hard to find people blaming the Germans for everything going wrong in the world. The country hasn’t been getting this much flak since World War II.

Before the Group of 20 summit in Canada, Obama scolded countries cutting government debt as another recession threatened. U.S. Treasury Secretary Timothy F. Geithner this month called for “stronger domestic demand growth” in European countries that have trade surpluses, such as Germany.

In response, German Chancellor Angela Merkel said in a speech last week she had told Obama that cutting spending is “absolutely important for us.”

‘Main Protagonist’

Billionaire investor George Soros said in a lecture last week that Germany “is the main protagonist” in the euro crisis, and the austerity plans of Europe’s biggest economy may inflict deflation on the region.

That echoed a theme pushed by Lagarde in March, when she argued that Germany should cut its trade surplus to help out the nations running deficits.

The consensus seems pretty clear. If the world does slip back into recession, and if the euro collapses, it’s all the fault of the Germans. Their insistence on saving money, living within their means, and getting debt under control is the greatest threat the world faces.

There’s just one snag with this analysis: It’s upside down.

Germany does have a big trade surplus: It was 13.4 billion euros in April. And it’s cutting the budget deficit: Merkel aims to slice 80 billion euros from state spending, starting in 2011.

Three Reasons

But that doesn’t threaten anyone. Here’s why.

First, the German trade surplus isn’t what created the massive trade gaps in Greece, Spain and elsewhere in the euro area. While it is true that every surplus has to be matched by a deficit somewhere else, it doesn’t follow that Germany created the black hole in Greek or Spanish finances. You could just as well argue that the Greeks and the Spanish created the German trade surplus by over-consuming, rather than saying Germany created deficits in other countries by not consuming enough.

In reality, the Spanish chose to base their economy on a construction boom, and the Greeks based theirs on lavish government spending. They could have created competitive, export-oriented economies. They didn’t and there is no point in complaining about the countries that did.

Second, reducing the German trade surplus is the wrong solution. You might as well tell the Brazilian soccer team that it is allowed to play in the World Cup with only nine men on the field because otherwise it wouldn’t be fair on everyone else. It’s stupid. You can’t improve the euro area’s economy by telling its strongest member to weaken itself. You have to concentrate on the structural problems in the big-deficit countries. That’s the only way to solve the crisis.

Frugal Germans

Third, rebalancing trade in the euro area won’t work. There is about as much point in telling the Germans to embrace consumption as there is in asking Tiger Woods to take up celibacy. It isn’t going to happen, so what is the point of asking? The only way the German government can engineer trade deficits — as Obama, Soros and Lagarde seem to think it should — is by offering even bigger stimulus packages.

That would just make German households save more, fearing inflation and tax increases would follow. Frugality is in the national character. You can no more get the Germans to squander money than you can get the French to stop eating cheese.

The crisis of the euro won’t be fixed by making Germany the scapegoat. The country runs a trade surplus because it makes lots of things that people want to buy: cars, machinery, pharmaceuticals and technical goods. The reason Germany doesn’t consume as much as some economists and politicians say it should is because the people are averse to debt. Maxing out the credit card, which is part of daily life in the U.S. and U.K., just never caught on in Germany.

Working hard? Making great products? Living within your means? Those aren’t bad principles on which to base an economy.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

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Cyclical Stocks Show ‘Positive Divergence’: Technical Analysis

June 29 (Bloomberg) — Transportation shares, semiconductor makers and small companies kept above a key level in last week’s slump while broader indexes sank below it, a sign U.S. stocks may resist further losses, Strategas Research Partners LLC said.

The Dow Jones Transportation Average stayed higher than its 200-day moving average, even as the Dow Jones Industrial Average sank below the barrier for a second time since May. The Philadelphia Semiconductor Index and the Russell 2000 Index, benchmarks for chipmakers and small companies, also ended the week above their 200-day averages after the four-day decline, which pushed the Standard & Poor’s 500 Index below the threshold.

The three groups provide a “cyclical barometer of the market strength” and the “positive divergence” suggested any loss will be limited, Chris Verrone, lead technical analyst at Strategas, said in an interview.

“It’s pretty significant divergence,” said Verrone, who studies charts of prices to predict changes in securities at Strategas in New York. “The leadership profile is not consistent with the bearish trend.”

The S&P 500 fell 3.7 percent last week, the most since May, after new-home sales sank to a record low and the Federal Reserve said European indebtedness may harm American growth. Since its 2010 high in April, the benchmark has lost 12 percent.

The last divergence of the three groups with the overall market preceded a recovery, according to Verrone. On May 25, when the Industrial Average and the S&P 500 broke their Feb. 5 intraday lows, the three groups, which are more tied to economic swings, did not. The market then bottomed on June 7, followed by the biggest two-week rally since November.

Crossover

While Verrone says the bull market that began in March 2009 remains intact, others predict the trend is in danger after the S&P 500 posted a negative crossover for the first time since 2007 while its weekly chart sent out another bearish signal.

The benchmark’s 50-day average yesterday crossed below its 150-day average, suggesting more losses may be in store, according to Concept Capital. The S&P 500’s 50-day average crossed above the 150-day average in May 2009, and the index rallied 33 percent in the following 11 months.

The index last week exceeded the intraday highs and lows it reached the previous week, a “negative reversal” that indicates “overhanging selling pressure,” Raymond James Financial Inc.’s Art Huprich said.

“Trends continue to deteriorate for U.S. equities,” John Kolovos and Craig S. Peskin, co-heads of technical analysis research at Concept Capital, wrote in a note yesterday. “Whether or not equities are or will be in a bear market, the change that is underway is an important development.”

Mary Ann Bartels, an analyst with Bank of America Corp., said the market will be in a “tug-o-war’ between 1,044.50 and 1,150, where the S&P 500 has been trading in the past six weeks.

“Below 1044.50, the bears win. Above 1150, the bulls win,” Bartels wrote in a note yesterday. “In our view, the risks are weighted in favor of a test and a likely break of 1044.50 in coming weeks.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net .

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Global Markets Face More ‘Turbulence,’ Aberdeen Says

June 29 (Bloomberg) — Global financial markets will face “renewed turbulence” as structural deficits and public debt in Europe and the U.S. hamper economic growth, Aberdeen Asset Management said.

Rising asset prices, driven by liquidity, could create instability, said Aberdeen, which manages more than $243.1 billion of global assets. Emerging market officials need to normalize their monetary policies, which may mean interest-rate increases later this year or in 2011 as inflation accelerates, according to a statement by Aberdeen.

“The emerging markets and, in particular, Asia remain bright spots,” Donald Amstad, director at Aberdeen Asset Management Asia, said in the statement. “We see the larger Asian economies with their expanding internal markets continuing to decouple and this will support currency appreciation.”

The MSCI World Index has dropped 7.6 percent this year, following a 27 percent rally in 2009. That compares with a 4.8 percent drop in the MSCI AC Asia Pacific Index this year. U.K. Chancellor of the Exchequer George Osborne on June 22 detailed what the government called the biggest deficit cuts in peacetime, spurring concern among equity investors that slower economic growth may hurt returns.

‘Buy’ Korea, Indonesia

The Standard & Poor’s 500 Index has declined 3.6 percent this year after data last week shows new-home sales sank to a record low and the Federal Reserve signaled that European indebtedness may lead to a weaker U.S. economy.

Stephen Docherty, Aberdeen Asset Management’s head of global equities, forecast returns for equity to be “in the single digits” this year, without being more specific, according to the statement.

China’s yuan will rise 3 percent to 5 percent per year in the next “couple of years,” Amstad said at a media briefing in Hong Kong today.

The People’s Bank of China pledged June 19 to make its currency more flexible. The yuan had been held at 6.83 per dollar since July 2008 after a 21 percent gain the three prior years, in an effort to shield exporters from the global crisis.

Investors should buy stocks in other Asian countries including Korea, Singapore and Indonesia, on expectations that Asian currencies are generally going to appreciate, Amstad said.

Buying Hong Kong stocks, given the city’s currency is linked to the U.S. dollar, probably isn’t a good idea, he said.

“Patchy” economic data from the U.S. suggest that monetary policy will stay “accommodative for longer than previously envisaged,” Aberdeen said. Europe’s sovereign-debt crisis has forced nations to take drastic austerity measures to retain confidence in stocks and bond markets, it said.

Deflation, or a general decline in prices, is possible within the next few years, Nobel Prize-winning economist Paul Krugman said June 22.

To contact the reporter on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net

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Oil Drops Most in Three Weeks on China Growth, U.S. Confidence

June 29 (Bloomberg) — Crude oil fell the most in more than three weeks following reports that China’s economy grew at the slowest pace in five months in April and confidence among U.S. consumers declined more than forecast in June.

Oil lost as much as 3.8 percent after the Conference Board said China’s economy expanded more slowly than previously estimated. The group’s U.S. confidence index was lower than all 71 economists’ forecasts in a Bloomberg News survey, pushing the Standard & Poor’s 500 Index to its lowest level this year on a closing basis.

“The world economy appears to be crumbling again,” said Tom Bentz, a broker at BNP Paribas Commodity Futures Inc. in New York. “Stocks and oil are down, and the dollar’s up. It’s a return of the flight to quality.”

Oil for August delivery fell $2.66, or 3.4 percent, to $75.59 a barrel at 11:38 a.m. on the New York Mercantile Exchange. Earlier, crude touched $75.28 a barrel in the biggest one-day drop since June 4. Crude is heading for its first quarterly decline since 2008, having lost 9.8 percent since the end of March. Futures have fallen 4.8 percent this year.

The measure of China’s economy compiled by the New York- based Conference Board rose 0.3 percent in April, less than the 1.7 percent gain it reported June 15. The research group corrected the outlook, saying in an e-mailed statement that the previous reading contained a “calculation error” for total floor space on which construction began.

Consumer Confidence

The Conference Board also reported its U.S. confidence index slumped to 52.9 in June from a revised 62.7 in May, as Americans became pessimistic about the outlook for the labor market and the economy. The median forecast in the Bloomberg survey called for a decline to 62.5.

The U.S. and China are the largest energy consuming countries. Economic growth affects the countries’ appetite for oil and other fuels.

The S&P 500 fell 2.5 percent to 1,047.43, and the Dow Jones Industrial Average lost 2.3 percent to 9,905.30. It was the first time the Dow dropped below 10,000 since June 10.

The dollar gained 0.7 percent against the euro, curbing the appeal of commodities as an alternative investment. The European currency traded at $1.2189 at 11:40 a.m. in New York from $1.2277 yesterday.

President Barack Obama said after meeting with Federal Reserve Chairman Ben S. Bernanke today that the U.S. economy is strengthening and recovering from the worst recession since the 1930s. Still, job losses remain a “great concern” and the economy faces “headwinds” because of nervousness in the U.S. about Europe’s debt crisis.

Saudi King

The president is set to meet at the White House today with King Abdullah of Saudi Arabia, the largest oil producer in the Organization of Petroleum Exporting Countries. The kingdom was also the fourth-largest oil exporter to the U.S. in March, according to the latest figures from the American Petroleum Institute, an industry-funded group.

The Saudis “are quite comfortable with oil in the $80 range,” Robert Jordan, a former U.S. ambassador to the kingdom and a partner with law firm Baker Botts LLP in Dallas, said in an interview today. “They are, I think, willing to use their spare production capacity to keep prices from getting out of control.”

Oil also fell on predictions that Tropical Storm Alex, moving northwest across the southern Gulf of Mexico, will miss oil-producing areas. It’s forecast to make landfall in Mexico, just south of the U.S. border, late tomorrow as a hurricane, according to the U.S. National Hurricane Center in Miami.

Petroleos Mexicanos, Mexico’s state-owned oil company, closed oil-export terminals Cayo Arcas and Dos Bocas as the storm barreled across the Gulf. Pemex, Latin America’s largest oil producer, is operating all its rigs and said they will remain open as the storm passes.

Storm Forecast

BP Plc and Royal Dutch Shell Plc, the biggest oil producers in the Gulf, are evacuating hundreds of workers from platforms in the western and central Gulf as a safety precaution.

“It appears the storm is a non-event in terms of damage to the Gulf of Mexico,” said Addison Armstrong, director of market research at Tradition Energy, a Stamford, Connecticut-based procurement adviser. “A temporary decrease in output either through imports or offshore production really isn’t that critical to the market right now.”

U.S. oil supplies were the highest in 20 years for the middle of June in the week ended June 18, according to an Energy Department report last week.

Inventories probably fell 1.05 million barrels in the week ended June 25 from 365.1 million the prior week, according to the median estimate of 14 analysts surveyed by Bloomberg News before a government report tomorrow. It would be the first decline in three weeks.

Brent crude for August delivery fell $2.46, or 3.2 percent, to $75.13 a barrel on the ICE Futures Europe exchange in London.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net .

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Emerging-Market Stocks Drop Most in Three Weeks on China, India

June 29 (Bloomberg) — Emerging-market stocks declined, driving the benchmark index toward its biggest drop in four weeks, on concern central bank efforts in China and India to tame inflation are slowing the global economic recovery.

The MSCI Emerging Markets Index fell 2.8 percent to 925.63 at 11:28 a.m. in New York, set for the biggest retreat since May 25. The Shanghai Composite Index slumped 4.3 percent, the most since May 17, to a 14-month low, while benchmark gauges for Russia, Brazil, Poland and South Africa dropped by more than 2 percent. Developing-nation currencies slumped, led by the South Korean won and the Brazilian real, while the ruble headed to a two-week low against the dollar.

The New York-based Conference Board today revised down its April gauge for the outlook of China’s economy to reflect a slower pace of expansion, while Citigroup Inc. said exports face “strong headwinds” in the second half of the year, reducing prospects of a rebound in Chinese equities. Shares fell in India after the central bank’s Deputy Governor K.C. Chakrabarty said yesterday borrowing costs may be increased.

“The Chinese report is raising concern again about the sustainability of the global economic recovery,” Gaelle Blanchard, an emerging-market strategist at Societe Generale SA, said by telephone from London.

The MSCI gauge has dropped 8.4 percent since March, heading for its first quarterly decline since the three months ended Dec. 31, 2008, as prospects for tighter monetary policy in the world’s largest developing nations and Europe’s sovereign-debt crisis weigh on the outlook for growth. The measure is now valued at 11.1 times this year’s earnings estimates, down from 16.6 on Jan. 1, according to daily data compiled by Bloomberg.

China Life

In Europe, Poland’s benchmark WIG20 Index was poised for its biggest decline in more than a month, losing 2.6 percent, while Hungary’s BUX Index dropped 1.7 percent. Russia’s 30-stock Micex Index retreated 3.4 percent, a monthly intraday low, as oil fell below $78 a barrel on concern demand from China may slow.

Industrial & Commercial Bank of China Ltd., the country’s biggest lender, slipped 3.3 percent for its biggest slump in a month on the Shanghai gauge. OAO Lukoil and Korea Zinc Co. tracked a decline in energy and metal prices. The Bombay Stock Exchange’s benchmark Sensitive Index fell 1.4 percent, while Russia’s Micex index slumped 3.2 percent, the most in more than month. China Life Insurance Co., the nation’s largest insurer, dropped 4.2 percent.

The Bovespa stock index dropped for a second day, heading for the steepest retreat in five weeks. Vale SA, the world’s largest iron-ore producer, retreated 4.3 percent, and Petroleo Brasileiro SA, Brazil’s state-controlled oil company, dropped 1.8 percent.

Profit Outlook

The leading economic indicator for China rose 0.3 percent in April, less than the 1.7 percent gain reported June 15, the Conference Board said. The previous release contained a “calculation error” for total floor space on which construction began, the research group said in a statement.

“Pessimism is growing about slowing economic and profit growth,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co.

Analysts are split on whether the People’s Bank of China will raise interest rates this year from crisis levels after having increased bank reserve requirements, set a lower target for lending and eased the currency’s peg to the dollar, according to a Bloomberg News survey last week.

Concern that economic growth may slow in China, the world’s fastest growing major economy, sent both copper and nickel prices down by more than 3 percent. Crude oil declined 2.6 percent to $76.24 a barrel in electronic trading in New York.

Lukoil, Russia’s biggest non-state oil company, retreated 2.3 percent while PetroChina Co., the nation’s largest oil explorer, fell 2.1 percent in Hong Kong. Korea Zinc, the world’s second-biggest zinc smelter, lost 2 percent and PT International Nickel Indonesia slid 2.6 percent.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net ; Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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