Exports from the 16-nation euro region jumped 4.4 percent from the first quarter, the biggest gain since data were first compiled in 1995, while corporate spending rose 1.8 percent, ending eight quarters of contraction, the European Union’s statistics office in Luxembourg said today. Gross-domestic- product growth accelerated to 1 percent, in line with an Aug. 13 estimate, from a revised 0.3 percent in the previous quarter.

The economy may struggle to maintain its momentum as governments from Spain to Ireland trim budget deficits just as the global recovery shows signs of weakening. European Central Bank policy makers meeting today in Frankfurt extended emergency lending measures for banks into 2011 and kept their benchmark interest rate at a record low of 1 percent.

“We’re at the peak in terms of quarterly rates with a broadly balanced recovery,” said Carsten Brzeski, an economist at ING Group in Brussels. “It mirrors German GDP with strong exports. The big question is to what extent we’ll be able to carry the dynamic into the current quarter.”

The euro was little changed against the dollar after the report and was at $1.2818 as of 2:38 p.m. in London, up 0.1 percent since yesterday.

Prices Rising

In the year, GDP rose a revised 1.9 percent after increasing 0.8 percent in the first quarter. The statistics office had previously reported a gain of 1.7 percent. Consumer spending rose 0.5 percent from the first quarter, when it advanced 0.2 percent. Imports jumped 4.4 percent while changes in inventories added 0.2 percentage point to growth.

The German economy, Europe’s largest, expanded 2.2 percent in the second quarter, the fastest growth in two decades. French GDP rose 0.6 percent and the Italian economy grew 0.4 percent. In Greece, GDP dropped 1.5 percent.

Companies are already using faster growth to push through higher prices. Producer-price inflation accelerated to 4 percent in July from 3 percent in the previous month, led by higher costs for energy and intermediate goods, the statistics office said in a separate report. That’s the fastest since October 2008. In the month, prices rose 0.2 percent.

‘Temporary’ Factors’

An export-led recovery has helped boost earnings at some of the region’s largest companies. Paris-based L’Oreal SA said on Aug. 25 that first-half profit increased 21 percent, helped by Asia and Latin America. Hochtief AG, Germany’s largest builder, last month raised its orders outlook.

The pace of growth may not be maintained, according to European Central Bank President Jean-Claude Trichet, who said today that recent “stronger than expected” data was partly boosted by “temporary” factors.

“There’s a clear slowdown in the pipeline,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The starting point is very strong but if you focus on the engine of growth, which is exports, it peaked in May and has slowed since. It’s a bit of a warning signal that central banks should be very cautious.”

New Forecasts

The ECB today raised its forecasts for 2010 and 2011 economic growth to about 1.6 percent and 1.4 percent, respectively. In June, it projected expansion of around 1 percent and 1.2 percent for those years.

Data yesterday showed a mixed picture of the global economy. In the U.K., manufacturing grew the least in nine months in August. China’s purchasing managers’ index rose, a government-backed report showed, while a gauge of U.S. factory activity unexpectedly increased.

Pernod Ricard SA, the maker of Chivas Regal whiskey, today reported full-year profit that missed analysts’ estimates as sales declined in Western Europe and the U.S. Chief Executive Officer Pierre Pringuet said that the U.S. recovery is “slow.”

European governments’ spending cuts and tax increases may limit the pace of economic growth. French consumer confidence remained at the lowest in more than a year in July and retail sales in Germany unexpectedly fell for a second month.

Unilever, the world’s second-largest consumer-goods maker, on Aug. 5 reported revenue growth that missed analysts’ estimates as sales slumped in Western Europe. Unilever CEO Paul Polman said on that day that there will be a “long, slow, protracted” recovery in Europe.

“There is a debate on not just a loss in momentum but some likelihood of renewed recession in the global economy and in some of the major industrialized countries,” ECB’s Weber said last month. “I view that as a bit exaggerated to be honest. The recovery is going to stay on track.”

By Simone Meier

Despite encouraging signs of stabilization in a pair of business surveys released on Wednesday, analysts cautioned that the robust domestic economy would have to battle the headwinds of soft external demand, especially from the United States.

“This reconfirms our long-held view that China is moderating rather than melting down,” said Qu Hongbin, chief economist for China at HSBC.

He was commenting on a rise in the bank’s purchasing managers’ index (PMI) to a three-month high of 51.9 in August from 49.4 in July. A PMI produced by the China Federation of Logistics and Purchasing (CFLP) also rose, to 51.7 from 51.2.

Investors cheered the news. MSCI’s index of Asia Pacific stocks outside Japan rose 1.9 percent .MIAPJ0000PUS, while metals prices got a lift in anticipation of stronger Chinese demand.

“After the run of weak data from the United States through August, the Chinese numbers were a breath of life for the start of the new month,” a metals dealer in Perth said. <MET/L>

The increase in the official PMI was close to the median forecast of 51.8 in a Reuters poll.

A figure above 50 denotes expansion; a reading below 50 indicates that business has contracted from the month before.

Both gauges had been trending lower — since January in the case of HSBC’s and since April for the CLFP’s. This had fanned concern that Beijing was overdoing its tightening and throttling an economy that has become a major driver of global growth.

But Zhang Liqun, a government researcher, said the official survey of 820 firms across China showed that market concerns of an abrupt slowdown were unfounded.

“The modest rise in August’s PMI shows that there will not be a deep correction in the Chinese economy,” Zhang said in a comment on behalf of the logistics federation, which compiles the index for the National Bureau of Statistics.

In a sign that Beijing may increase investment to ensure the recovery stays on track, the National Development and Reform Commission (NDRC) urged speedy implementation of the country’s 4 trillion yuan ($585 billion) stimulus package that was announced nearly two years ago.

“We must accelerate the construction of projects as long as they are of sufficient quality, and put them in use as soon as possible,” the NDRC, a powerful agency, said.

ORDERS, INVENTORIES BODE WELL

Both surveys showed a decline in the stocks of finished goods even as orders improved, an indication that manufacturers will have to ramp up production to meet demand.

“The new orders to finished goods inventory PMI has been a good indicator of turning points in the cycle over the past two years,” Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said.

“It suggests the current correction began in the middle of the first quarter and was tentatively signaling stabilization even before today’s sharp rise in the ratio,” he said in a reaction to the official PMI.

Bank of America Merrill Lynch agreed that the inventory and orders data boded well for a recovery in output in coming months.

With the government mounting a big push to build public housing, the bank reaffirmed its full-year GDP growth forecast of 10.1 percent, up from 9.1 percent in 2009.

But it said weakening growth in the United States and Japan would act as a drag on the economy and could prompt Beijing to slow the pace of the yuan’s rise.

According to HSBC’s survey, new export orders fell outright in August for the third month in a row.

Brian Jackson with Royal Bank of Canada in Hong Kong said it was too soon to celebrate the signs of stabilization.

“We expect China will have a relatively moderate slowdown over the second half of 2010, but weaker external demand from the United States and Europe still represent a significant downside risk in coming months,” he said in a note.

Several economists also expressed concern at a sharp rise in input prices in both surveys.

But He Yifeng, an economist with Hongyuan Securities in Beijing, said it was also evidence of stronger economic activity.

“As businesses see economic growth picking up, they will want to step up investment and this will increase demand for upstream products and push up prices of inputs such as iron ore,” he said.

By Zhou Xin and Alan Wheatley

* Dwindling U.S.-Japan yield gap seen hurting dollar

* Euro hits record low against Swiss franc on risk aversion (Adds detail, updates prices, changes byline, changes dateline, previous LONDON)

The yen rose toward a 15-year high against the dollar on Tuesday as investors shrugged off the Bank of Japan’s latest easing move, betting on yen gains that would again test official readiness to intervene.

Mounting U.S. economic concerns are likely to keep investors away from riskier assets and push up the safe-haven yen. That could eventually prompt Japan to sell its currency in the markets for the first time in more than six years.

“The policy action by the BoJ isn’t going to change the market’s mood. It would probably take intervention to shake things up a bit,” said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

“But we’re not even sure that would cause a sustained reversal of yen strength. If you go back to 2004, intervention by itself did not cause an immediate turnaround in the yen,” he added.

Japanese Finance Minister Yoshihiko Noda repeated on Tuesday that the government would take decisive action on currencies — usually seen as code for intervention — when necessary. But the reaction in the market was limited.

On Monday, the BOJ expanded cheap loans to banks, a move seen as a symbolic gesture that will do little to halt the currency’s climb.

Traders said the policy response to the yen’s strength has been insufficient given the current sentiment and lack of appetite for a coordinated policy response from other Group of 8 rich nations, who are grappling with their own problems.

“These measures seem more suited to dealing with the negative economic effects of yen strength, rather than directly addressing the currency, suggesting more than a little hesitation in meeting the issue head-on at current dollar/yen valuations,” said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto.

In early New York trading, the dollar was down 0.3 percent at 84.39 yen JPY=. It had earlier fallen to 84.06, according to Reuters data, not far from its 15-year low of 83.58 set on electronic trading platform EBS last week.

The dollar has fallen about 2.5 percent against the yen this month and is down more than 9 percent this year.

Traders say Japanese authorities are expected to buy the dollar against the yen if the dollar slides 3-4 yen in one day. For Q+A on will Japan intervene to curb the yen’s rise,

CARRY TRADE UNWINDING

The dollar/yen rate has had a strong correlation in recent months with the yield gap between the United States and Japan. So a fall in Treasury yields also weighed on the dollar.

A raft of U.S. economic releases this week could push the yen higher. On top of jobs data on Friday, there is consumer confidence data on Tuesday and manufacturing data on Wednesday.

Minutes from the Federal Reserve’s last board meeting will be released on Tuesday and investors will get insight into divisions within the Federal Open Market Committee and its August 10 decision to buy longer-term Treasury securities.

The yen could also face potential buyback pressure in cross trades such as euro/yen and Aussie/yen, which have attracted some interest because of their larger yield differentials.

Simon Derrick at Bank of New York Mellon said the collapse of one of New Zealand’s largest finance companies was leading to some carry trade unwinding and was hurting high-yielding currencies like the Australian dollar against the yen.

By Wanfeng Zhou

Speculation that Japan may intervene in the foreign- exchange market rose after Prime Minister Naoto Kan said Aug. 27 the government is ready to take “bold” action. Following his comments, Barclays Capital economists said in a report that “intervention appears imminent.”

Japan would need coordinated help to depreciate the yen, and that’s unlikely because the U.S. and Europe want their currencies to stay relatively weak to help bolster exports and keep their own economic recoveries afloat. Intervention by the Swiss National Bank couldn’t prevent the franc from appreciating to a record high against the euro this year.

“Actions by the Bank of Japan unilaterally probably wouldn’t change sentiment over the medium term,” said John McCarthy, director of currency trading at ING Groep NV in New York. “If they somehow manage to get the European Central Bank and the U.S. Treasury to concur and to assist in their efforts, that certainly would make a difference. But I don’t see that happening at all.”

The yen closed the week at 85.22 per dollar, after reaching 83.60 on Aug. 24. It’s up 9 percent this year against the greenback and 22 percent versus the euro, closing at 108.72. It rallied to an all-time high of 79.75 to the dollar in April 1995, before weakening to 124.13 in June 2007.

‘Bold Measures’

“Volatile movements in the currency market have a negative impact on economic and financial stability,” Kan told reporters after speaking to business executives in Tokyo. “We are ready when necessary to take bold measures.”

Forty percent of Japanese manufacturers would relocate factories and development sites abroad if the yen continues to trade at 85 to the dollar, a survey conducted from Aug. 11 to Aug. 24 by the Ministry of Economy, Trade and Industry found.

The number of companies saying profits will decline because of the yen’s strength rose to 65 percent from 16 percent in a May survey, when the currency was trading at 90 yen to the dollar. More than 50 percent said they would see a drop in earnings from the yen’s strength against the euro.

“I want Tokyo to hear our wailing,” Suzuki Motor Corp.’s Chairman Osamu Suzuki told reporters on Aug. 26. “Something needs to be done to prevent Japan from sinking. Frankly speaking, that’s how I feel. All we can do is to keep asking for help. I spend every day feeling anxious about this.”

Last Intervention

Japan hasn’t intervened in the currency market since March 2004, when the yen traded at about 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen ($175 billion) in the first three months of 2004 following record sales of 20.4 trillion yen in 2003.

The action failed to keep the currency from rising to 102.63 to the dollar by the end of that year.

Yen has strengthened in recent months as concern that the global economic recovery is faltering undermined the carry trade in which investors borrow in the Japanese currency and then take the proceeds out of the country to invest in nations with higher interest rates. Investors using the carry trade lost 4.4 percent this year, according to indexes compiled by Royal Bank of Scotland Group Plc.

The Bank of Japan may be deterred from intervening alone after the Swiss National Bank failed to prevent the franc from appreciating almost 12 percent to a record high against the euro this year, according to Bilal Hafeez, managing director and head of currency strategy at Deutsche Bank AG in London.

Raising Forecast

“It’s very unlikely the U.S. would be on board because the Americans have been pressuring the Chinese to stop intervening in the yuan on the one hand, so they can’t allow the Japanese to intervene on the other,” he said. Last week, Deutsche Bank raised its yen forecast, predicting the currency would reach 80 per dollar by year-end and 78 during the first quarter of 2011.

U.S. lawmakers have accused China of keeping the yuan’s exchange rate artificially low to gain an unfair trade advantage. Treasury Secretary Timothy F. Geithner said Aug. 4 he will “watch closely” how much the yuan is allowed to gain after saying the previous month the currency was undervalued.

The pressure on Bank of Japan Governor Masaaki Shirakawa to intervene comes as Kan faces intra-party competition from his most powerful rival. Ichiro Ozawa, who was forced him to step down in June as the Democratic Party of Japan’s No. 2 official because of a campaign funding scandal, said he will run against Kan in the Sept. 14 election for party president. The party’s majority in the lower house of parliament ensures that its leader becomes prime minister.

Futures Bets

Two government reports this week showed that Japan’s economic recovery is in jeopardy of derailing. Consumer prices fell for a 17th month and household spending rose less than forecast. The benchmark Nikkei 225 Stock Average is down more than 20 percent from this year’s high, a drop that some investors say constitutes a bear market.

“Just because it isn’t a sensible policy, doesn’t mean it’s not going to be used,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London, regarding the potential for intervention. “You have to remember the pressure that they’re under, which is intense at the moment.”

Futures traders have boosted bets that the yen will rise. The number of contracts hedge funds and other large speculators hold at the Chicago Mercantile Exchange betting on a gain rose to 51,069 as of Aug. 24 from a net short position of 65,612 contracts in May, according to Washington-based Commodity Futures Trading Commission data.

By Matthew Brown and Stephen Morris

To help sustain the economy, Mr. Bernanke gave his strongest indication yet that the Fed was ready to resume its large purchases of longer-term debt if the economy worsened, a move that would add to the Fed’s already substantial holdings.

“We have come a long way, but there is still some way to travel,” Mr. Bernanke said.

“I believe that additional purchases of longer-term securities, should the F.O.M.C. choose to take them, would be effective in further easing financial conditions,” Mr. Bernanke told a Fed policy symposium here. He was referring to the Federal Open Market Committee, the panel that sets interest rates, which Mr. Bernanke leads; some members have expressed unease over the prospect of the Fed pursuing any further monetary accommodation.

“Central bankers alone cannot solve the world’s economic problems,” he said.

While Mr. Bernanke emphasized that deflation was “not a significant risk for the United States at this time,” he said “the F.O.M.C. will strongly resist deviations from price stability in the downward direction.”

It was his most robust statement to date that the Fed would do its part to avoid a Japanese-style deflation from taking hold.

And he said the “preconditions for a pickup of growth in 2011 appear to remain in place,” as banks increase lending, worries over the European sovereign debt crisis abate and consumers increase their savings.

“Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year,” Mr. Bernanke said.

Indeed, the new report finding that the gross domestic product grew 1.6 percent in the second quarter nearly seemed to draw a collective sigh of relief from Mr. Bernanke and others gathered here — including the head of the European Central Bank, top officials from the International Monetary Fund and the World Bank, and most of the Fed’s top leaders.

The figure, which was revised down from 2.4 percent, came in higher than estimates by government and market economists.

Mr. Bernanke acknowledged that inflation had recently fallen “slightly below” the level that policy makers believe is consistent with a healthy economy. But he added, “At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low.”

In his 19-page speech, Mr. Bernanke outlined his views of the economy and explained the Fed’s recent action to prevent monetary policy from tightening by reinvesting the proceeds from mortgage bonds in longer-term Treasury securities.

Strikingly, Mr. Bernanke acknowledged that the traditional trade-off between inflation and employment had become all but obsolete, at least for now.

“Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally,” Mr. Bernanke said. “Because a significant further weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.”

Mr. Bernanke outlined in detail four approaches the Fed might use to further ward off the threat of deflation.

First, he said, the Fed’s purchases of longer-term securities had helped bring down long-term interest rates and lower the cost of borrowing, contributing to the economic stabilization and recovery that began in the spring of 2009.

However, such purchases seemed to be most effective in time of financial stress, he said. It was an oblique acknowledgment that the Fed might have to purchase trillions of dollars’ worth of additional assets if it decides that additional quantitative easing — the strategy of buying financial assets to put downward pressure on long-term interest rates — is needed.

Second, Mr. Bernanke opened the door to lowering inflation expectations beyond its current stances that “exceptionally low” short-term rates would be warranted for “an extended period.”

In Canada, the central bank committed to keeping a low policy rate until a specific time; in Japan, the central bank promised to keep low rates until consumer prices stabilized or rose. Mr. Bernanke said that in the United States, it might be “difficult to convey the committee’s policy intentions with sufficient precision and conditionality.”

Third, the Fed could lower the rate it pays on excess reserves — the $1 trillion that banks have been keeping at the Fed. But Mr. Bernanke said that cutting the rate even to zero would be unlikely to lower the federal funds rate — the benchmark short-term rate — by more than 0.10 to 0.15 percentage points. And doing so risked making short-term money markets “much less liquid.”

Fourth, Mr. Bernanke discussed a controversial proposal, advanced by some economists, for the Fed to set a medium-term inflation target “above levels consistent with price stability.” But he dismissed that strategy as “inappropriate for the United States in current circumstances.”

Inflation would likely be higher and more volatile under such a policy, he said, while inflation expectations would become less stable.

Mr. Bernanke acknowledged that the recovery had “slowed somewhat in recent months” because consumer spending had grown at a slower pace than expected and because of continuing weakness in housing and nonresidential construction.

“Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years,” Mr. Bernanke said, while cautioning that “the economy remains vulnerable to unexpected developments.”

By SEWELL CHAN

Chinese banks, which are trying to become more commercial and move away from their policy-based lending past, have benefited over the past year from a jump in interest income and improving margins after a government-backed lending boom in 2009.

But many fear they may soon have to pay the piper as China tightens liquidity to cool a racing economy, and as regulators require them to prepare for an increase in bad loans if the real estate market starts to decline.

“Banks’ profit growth may have peaked as lending is likely to slow in the second half, while there’s little room for interest margins to rise further,” said Qiu Peng, analyst at Western Securities.

“There’s also lingering concern over banks’ asset quality in the event of a drastic slowdown in the economy, but so far, there are no signs of deterioration. But such fears will continue to weigh on banking stocks.”

Industrial and Commercial Bank of China (ICBC) (601398.SS) and Bank of China, the country’s No. 1 and No. 4 lenders, posted second-quarter profit growth of 38 percent and 15 percent, respectively, on Thursday on the back of the lending boom.

The results capped a season of strong quarterly earnings by Chinese banks, reflecting an economy that grew by 10.3 percent during the second quarter.

BANKS BRACE FOR HANGOVER

China’s banking industry has evolved in the last decade from its roots as a policy-oriented lending machine to one that tries to be more market-focused, with most of the nation’s top banks going public to highlight their new commercial bent.

The conflict between policy- and market-oriented lending continues to hound many, which count the government as their major shareholder.

Chinese banks made a record 9.6 trillion yuan in new loans during last year’s lending boom, nearly double the volume of 2008. The government is aiming to slow the pace somewhat this year, with a target of 7.5 trillion in new loans for 2010.

Now the banks are bracing for a hangover that many observers see as all but inevitable, with bad loans likely to rise sharply from current low levels as questionable loans made in 2009 comes home to roost.

The magnitude of any looming hangover will largely depend on Beijing’s skill at cooling the economy: if it applies the brakes too quickly, tumbling markets could cause bad loans to balloon, whereas a softer landing could lessen the blow.

“Risks for China’s banking sector are seen as manageable, barring a serious macroeconomic downturn,” said Nan Sheng, an analyst at UOB Kay Hian.

STRESS TESTS

Responding to Beijing’s shift toward monetary tightening, China’s banking regulator conducted stress tests on banks this month, asking them to evaluate the impact on their balance sheets in the event of a 60 percent slump in home prices.

The regulator is also diagnosing the health of an estimated $1 trillion worth of loans to local government infrastructure, though results of both tests have not been made public.

To ward off risks, regulators have urged banks to strengthen their books weakened by last year’s lending binge, triggering a fundraising rush among lenders to raise more than $80 billion dollars in total to buffer potential losses.

All the tightening signs bode poorly for earnings growth in the near term.

“Profit growth in the second half is set to be lower than that of the first half,” said UOB’s Nan.

The HSI-Finance Index .HSNF which tracks major Hong Kong-listed Chinese banks, is down 10.4 percent this year, nearly double the 5.7 percent drop in the main Hang Seng Index .HSI, as investors worry about the sector’s health as well as massive planned capital-raisings to replenish their balance sheets.

ICBC, in which Goldman Sachs (GS.N), Allianz Group (ALVG.DE) and American Express (AXP.N) hold stakes, and BOC are raising funds through shares and bonds issues, following on from Agricultural Bank of China’s (601288.SS) (1288.HK) record IPO in July.

Three of China’s “Big Four” state banks — ICBC, Bank of China and China Construction Bank (0939.HK)(601939.SS) — have so far reported second-quarter profit growth ranging from 15-38 percent, while smaller rivals such as China Merchants Bank (600036.SS) and Everbright Bank posted even faster growth.

Banks also benefited from a rapid increase in non-interest incomes as they collected more fees and commissions from selling insurance and mutual fund products.

Shares of ICBC, which has a market value of more than $210 billion, closed down 0.2 percent on Thursday in Hong Kong ahead of the results. The shares have fallen 13 percent so far this year, underperforming the benchmark Hang Seng Index .HSI, which has declined 4 percent.

Bank of China’s Hong Kong-listed shares were unchanged on Thursday, having fallen 5.7 percent so far this year.

($1=6.80 Yuan)

By Samuel Shen and Doug Young

Manulife Financial Corp., North America’s third-largest insurer, dropped 2.9 percent as U.S. new-home sales slumped to their lowest level on record. Canadian Imperial Bank of Commerce, the country’s fifth-biggest bank, rose 1 percent after reporting third-quarter earnings that beat analyst estimates. Suncor Energy Inc., Canada’s largest oil and gas producer, lost 2.5 percent as natural gas fell for a sixth day.

The Standard & Poor’s/TSX Composite Index decreased 61.02 points, or 0.5 percent, to 11,496.33 at 10:25 a.m. in Toronto after touching a five-week low of 11,478.74.

The S&P/TSX has slipped 1.9 percent this month even with a 45 percent surge in Potash Corp. of Saskatchewan Inc., the target of a takeover bid from BHP Billiton Ltd. Canadian stocks have dropped as data on U.S. unemployment, housing and manufacturing have indicated a slowdown in the recovery in Canada’s largest trading partner.

Stocks extended losses after the Commerce Department reported new-home sales plunged 12 percent from June to an annual pace of 276,000, the lowest since data began in 1963. Economists forecast sales would remain steady at an annual rate of 330,000, the median estimate in a Bloomberg survey.

Natural gas futures dropped below $4 per million British thermal units for the first time in three months on speculation the faltering recovery will reduce demand.

Energy Shares

Suncor declined for a sixth day, losing 2.5 percent to C$31.32. Canadian Natural Resources Ltd., the country’s second- largest energy company by market value, decreased 2.1 percent to C$32.21. EnCana Corp., Canada’s biggest natural gas producer, retreated 1.4 percent to C$27.78.

CIBC said it earned C$1.66 a share in the third quarter, excluding certain items, topping the average of 13 analyst estimates by 8.3 percent. Profit rose 47 percent from a year earlier as the Toronto-based bank set aside less money for bad loans. CIBC rallied 1 percent to C$67.45.

Most other banks and insurance companies slipped. Manulife, which gets most of its revenue from the U.S., fell 2.9 percent from a 17-month low to C$11.37.

Insurer Sun Life Financial Inc., which derived 47 percent of its revenue from the U.S. last year, dropped 2.2 percent to C$23.65. Toronto-Dominion Bank, which has 1,043 U.S. branches, declined 1.6 percent to C$68.32.

Bid Unlikely

Potash Corp., which rallied 35 percent through Aug. 23 after BHP’s unsolicited offer became public on Aug. 17, fell 1 percent to C$156.28. Rio Tinto Group is unlikely to try to outbid BHP, which has offered $39 billion, UBS AG analysts said in a report after meeting with Rio Tinto Chief Executive Officer Tom Albanese.

Agrium Inc., Canada’s second-largest fertilizer producer, decreased 1.6 percent to C$69.51.

BlackBerry maker Research In Motion Ltd. rebounded 2.2 percent from a five-month low to C$51.06. Bank of Montreal analyst Tim Long wrote to clients that RIM’s new Torch smartphone is selling well, according to BMO’s contacts among carriers and distributors.

An index of S&P/TSX telecommunications companies slumped the most intraday since July 28 after Toronto-Dominion Bank analyst Vince Valentini reduced his rating on Rogers Communications Inc. two notches to “hold” from “action list buy.”

Rogers, Canada’s largest wireless carrier, retreated 2.7 percent from a 23-month high to C$37. BCE Inc., the country’s biggest telephone company, fell 1.7 percent to C$32,73.

By Matt Walcoff

U.S. traders braced for another disappointing report on the housing market later in the day. Overseas markets tumbled.

The Dow Jones industrial average fell more than 100 points in morning trading. Broader indexes also fell more than 1 percent. Investors jumped back into the Treasury bond market as they shunned stocks for the safety of government debt. That sent interest rates lower.

Stocks extended a slide that continued Monday when investors focused more on signs that economic growth is slowing than strength in individual companies and a fresh round of corporate dealmaking. Economic reports in recent weeks have shown the pace of the recovery is waning, which has sparked concerns the economy could fall back into recession.

Japanese stocks led the way lower Tuesday, falling more than 1 percent as the yen hit a fresh 15-year high against the dollar. Japan’s economy relies heavily on exports, so a stronger yen hurts profitability. European markets were also sharply lower.

The National Association of Realtors is expected to report that sales of previously occupied homes plunged in July. Sales totaled a seasonal adjusted annual rate of 5.37 million houses in June.

Home sales have tumbled since a home buyer tax credit expired at the end of April, despite mortgage rates falling to record lows. Banks have also been selective in giving loans, which could be freezing out many potential buyers.

Home buyers also remain skittish about the value of homes and job concerns remain pervasive adding to the caution. The unemployment rate remains at 9.5 percent and weekly claims for unemployment benefits have consistently risen in recent weeks.

In early morning trading, the Dow Jones industrial average fell 103.83, or 1 percent, to 10,074.06. The Standard & Poor’s 500 index fell 11.60, or 1.1 percent, to 1,055.76, while Nasdaq composite index fell 25.54, or 1.2 percent, to 1,786.79.
About 10 stocks fell for every one that rose on the New York Stock Exchange where volume came to 94.8 million shares.

Japan’s Nikkei stock average fell 1.3 percent. Britain’s FTSE 100 fell 1.7 percent, Germany’s DAX index dropped 1.4 percent, and France’s CAC-40 fell 1.8 percent.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.52 percent from 2.60 percent late Monday. Its yield is often used as a gauge to set interest rates on mortgages and other consumer loans.

The 10-year note’s yield continues to hover around levels not reached since March 2009 when the stock market hit a 12-year low and investors were concerned about the deepening recession.

Reports due out later in the week will also provide insight into the health of the economy. Data on new home sales, durable goods orders, weekly jobless claims and consumer sentiment are scheduled for release later in the week.

Also, the government will release a revised report on second-quarter gross domestic product. The broadest measure of the country’s total economic output is expected to be lower than initially thought, adding to concerns about the pace of the domestic recovery.

Federal Reserve Chairman Ben Bernanke is expected to give a speech at the end of the week that could also provide further clues about what the Fed might do to help stimulate growth. At a meeting earlier this month, the Fed decided to reinvest money it received from selling mortgage-backed securities into Treasury bonds. The move was aimed at keeping interest rates low to try and bolster lending.

By STEPHEN BERNARD

Over 6,500 U.S. community banks may continue to face “higher costs of capital” than their big bank rivals even after a sweeping bank reform law has sought to end the ‘too-big-to-fail’ perception, Federal Reserve Bank of Kansas City President Thomas Hoenig said Monday.

“Because the market perceived the largest banks as being too big to fail, they have had the advantage of running their business with a much greater level of leverage and a consistently lower cost of capital and debt,” Hoenig told a group gathering at a House Oversight and Investigations subcommittee field hearing in Overland Park, Kan.

“Despite the provisions of the Dodd-Frank Act to end too-big-to-fail, community banks will continue to face higher costs of capital and deposits until investors are convinced it has ended,” Hoenig said.

Hoenig said that the most lasting threat to the survival of community banks is whether they will continue to be placed at a competitive disadvantage to their larger rivals.

At issue is a provision in the Dodd-Frank Act — the name of the historic bank reform legislation that became law in July — that seeks to dismantle a failing Lehman-like mega-bank so its collapse wouldn’t damage the markets.

The statute requires that taxpayer funds are employed, in part, to make payouts to counterparts of a failing big bank so that they don’t fail as well and create a credit contagion. Afterwards, the statute requires that the government recoup the costs to taxpayers by assessing a fee on big financial institutions.

However, at a town hall meeting in Lincoln, Neb. on Aug. 13, Hoenig argued that the process for government regulators to decide that a mega-bank needs to be resolved is complex, challenging and could be time-consuming for regulators that likely will be required to act quickly to avoid an expanding crisis.

“The process for taking this action is complex, requiring multiple regulatory parties to agree, the Treasury Secretary making the final determination with the President’s concurrence, and a court ruling that the action isn’t arbitrary and capricious,” Hoenig said at the Nebraska meeting.

He continued: “This will be an incredible challenge for the regulatory agencies. Recent experience tells us that time is of the essence in a national liquidity crisis. It will be extremely difficult in practice to designate the largest institutions as insolvent, take them over and liquidate. The simple truth is “too-big-to-fail” will not go away easily.”

At Monday’s speech in Overland park, Hoenig also argued that community banks will survive the crisis and recession and continue to play a key role as the economy recovers. “They [community banks] have survived and prospered,” Hoenig said. “If allowed to compete on a fair and level playing field, the community bank model is a winner.”

By Ronald D. Orol

Six of the eight failed banks were included in TheStreet’sBank Watch List of undercapitalized institutions, based on second-quarter regulatory data provided by SNL Financial.
The Federal Deposit Insurance Corp. found buyers for the deposits and branches for all of the failed institutions and estimated the combined cost to its deposit insurance fund would be $473.5 million.

The largest failure on Friday was ShoreBank of Chicago, which had $2.16 billion in total assets. ShoreBank received wide media coverage after Bloomberg reported Aug. 5 that the institution had been denied federal bailout funds that would have been required to complete an earlier deal to raise $145 million in capital from an investor group that included Citigroup(C), Bank of America(BAC), JPMorgan Chase(JPM), Wells Fargo(WFC), Morgan Stanley(MS), Goldman Sachs(GS) and Northern Trust(NTRS).

Early Friday, the Wall Street Journal reported that the same investor group had agreed to back ShoreBank’s new management team in a new bid to buy ShoreBank’s assets from the FDIC were it to fail.

This is indeed what happened. After Illinois regulators shuttered ShoreBank, the FDIC sold the failed institution’s deposits for a 0.50% premium to the newly formed Urban Partnership Bank of Chicago, which also acquired ShoreBank’s assets, with the FDIC agreeing to share in 80% of losses on $1.41 billion of the acquired assets.

Because of the unusual nature of the failed bank’s resolution and the wide media coverage before ShoreBank’s failure, the FDIC released additional details about its marketing efforts for the failed bank, saying that the Urban Partnership Bank bid was the only one received and emphasizing that the senior managers retained form ShoreBank were the new management team that had joined the bank in June.

FDIC spokesman David Barr told TheStreet that if the agency hadn’t received the offer from the Urban Partnership group, liquidating ShoreBank could have cost the deposit insurance fund “close to $700 million.” He also emphasized that ShoreBank was a designated community development bank with a business strategy of serving “underserved low-to-moderate income communities,” and that Urban Partnership Bank’s management would follow the same strategy and eventually seek the same designation from the Treasury.

The 15 branches of ShoreBank in Chicago, Detroit and Cleveland were set to reopen during normal business hours as branches of Urban Partnership Bank. The FDIC estimated the cost to the deposit insurance fund would be $367.7 million.

Four California Failures

The California Department of Financial Institutions took over Butte Community Bank of Chico, Calif., which had $499 million in total assets, and Pacific State Bank of Stockton, which had total assets of $312 million. The FDIC was appointed receiver and sold the deposits and assets of both failed banks to Rabobank, NA of El Centro, Calif. Rabobank paid the FDIC a 4.05% premium for Butte Community’s deposits, but it paid no premium for Pacific State Bank’s deposits

By Philip van Doorn