1 August 2009 - Global Markets Review

Dear Ladies & Gentlemen,

Okay, I've not been known to mince my words but by my own admission, I am having to hold my tongue this week.

"Bull Market" screamed CNBC; "Bulls Return" cried Bloomberg; "Bull-sh*t" says me!!!

I am absolutely astonished that markets are flying into the face of adversity so soon after the massive drops of late 2007 and 2008.

Headlines this week have been rampant; the world has 'gotten over' the credit-crisis and is now 'back to normal'.

Normal? Normal? Are the rest of the financial world taking banned substances a little stronger than Guinness?

Ladies and Gentlemen, I give you 'Market Madness' and 'Forgetting the Fundamentals' - why do I say this?

European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade.

Prices in the Euro region dropped 0.6% from a year earlier, the most since the data were first compiled in 1996, the European Union statistics office in Luxembourg said Friday. That exceeded the 0.4% decrease forecast by economists in a Bloomberg News survey. Unemployment rose to 9.4% in June, the highest since 1999, a separate report showed.

More than 3 million people have joined the Euro region's jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12% in 2010. As consumers and companies reduce spending to weather the worst recession in more than 60 years, inflation is also being pushed lower by a 50% decline in the price of crude oil over the last year.

German consumer prices fell in July from a year earlier for the first time in 22 years, data showed this week. Spain and Ireland have experienced annual price declines since March.

Unemployment in the Euro region increased by 3.17 million people in the year through June and the highest jobless rate was in Spain, at 18.1%, according to Friday's report. Most Europeans think the worst of the crisis is still to come and a third of workers are "very concerned" about losing their jobs, a survey published on July 24 by the European Commission showed.

German unemployment rose in July as companies cut jobs to protect profits even as signs mount that the worst of the recession may be passed.

The number of people out of work increased 52,000 to 3.46 million on an unadjusted basis, the Nuremberg-based Federal labour Agency said Friday. The seasonally adjusted total fell by 6,000 due to statistical changes. Without the impact of the changes, the office estimates unemployment rose by 30,000.

Denmark's jobless rate edged closer to 4% in June as the number of unemployed exceeded 100,000 for the first time in three years, the national statistics agency said Thursday.

There were 105,100 unemployed people in June, representing about 3.8% of the work force, Statistics Denmark said.

That was up from 3.5% in May and a record low of 1.7% in June last year.

The last time the nation of 5.4 million had more than 100,000 jobless people was in August 2006, the agency said.

Danish companies have announced thousands of layoffs because of declining demand in the wake of the financial crisis.

In neighboring Norway, the labour and Welfare Administration said the unemployment rate hit 3.0% in July, compared with 2.7% in June and 1.8% a year ago.

In the US, first-time claims for state jobless benefits crept up in the latest week, the Labour Department reported Thursday

Forty-one of the 'Greatest Nation on Earth's' 100 major labour markets, including Dayton at 12.1%, are now saddled with double-digit unemployment rates, according to newly released figures from the US Bureau of labour Statistics.

That contrasts sharply with a year ago, when all 100 markets were in single digits. The highest jobless rate as of mid-2008 was 9.6% in Fresno, Calif.

Fresno is now up to 15.2% unemployment, and one market is even higher. Detroit's current rate is 17.1%.

The same year-to-year disparity exists at the other end of the list.

Twenty-five markets had unemployment rates below 5% a year ago. But the lowest rate Friday is 5.4% in Omaha.

No area - not even Omaha - has been immune to the recession. Unemployment rates rose in all 100 markets during the past year. The sharpest increases were 8.1 percentage points in Detroit (from 9.0% a year ago to 17.1% Friday), 6.8 points in Youngstown, Ohio (from 7.3% to 14.1%), and 6.6 points in Toledo (from 7.6% to 14.2%).

Consumer spending, which accounts for about 70% of the economy, fell at a 1.2% pace following a 0.6% increase in the prior quarter. It was forecast to drop 0.5%, according to the survey median. Purchases slid 2% since the peak at the end of 2007 - the most since a 2.4% decline in the 1980 recession.

The Labour Department reported separately Friday that employment costs - a measure that includes wages, salaries and benefits - rose 1.8% in the second quarter from a year before, the smallest gain in figures dating to 1982.

GDP contracted a revised 1.9% in the fourth quarter of 2008 from the same time the prior year, compared with the 0.8% drop previously on the books.

The GDP report is the first for the quarter and will be revised in August and September as more information becomes available.

Unemployment in Chile (of all places) was 10.7% in the April through June period, up from 10.2% in the previous three-month measuring period of March through May, government statistics agency INE reported in its monthly survey released Thursday.

And it is not just Europe, the US and Latin America that is suffering.

In Japan, unemployment rose to almost an all-time high.

The Japan jobless rate rose to 5.4% in June, its highest level since June 2003, and just shy of its post-war record-high of 5.5%. The result was worse than the 5.3% expected by economists, and suggests even greater employment woes to come, economists said.

Meanwhile, the jobs-to-applicants ratio fell to a record-low of 0.43, meaning there are only 43 job openings for every 100 applicants.

Singapore, that 'bastion' of everything good, is not immune either. Singapore's overall unemployment rate stood at 3.3% in the second quarter, unchanged from the previous period, government preliminary data showed on Friday.

But the number of people employed fell by 12,400 in April-June, twice as much as in the first quarter, as many foreign workers who had lost jobs returned home, shrinking the workforce pool.

Whilst the world has unemployment increasing week-by-week, 50% gains in stockmarkets are not going to tell me that the worst is over - not a chance of it. The longer these ridiculous rallies continue, the heavier the fall when it comes I feel.

The recent huge gains have been driven ostensibly by three sectors alone; mining, oil and banks.

The strong performance of the mining sector in particular has been driven by increasing confidence in the economic outlook and in particular China's ability to keep sucking in raw materials.

But here in China there are concerns the government are about to rein in the very loose monetary policy it has used to support the recovery. Although such talk has been quickly quashed, it is difficult not to be worried about China.

A macro economic strategy that exacerbates worrying imbalances was ultimately a recipe for failure I feel. Of course, a slowdown in Chinese economic growth would be also bad news for oil as well as mining.

And there are also reasons to be cautious about the banking sector. While an increasing number of analysts and investors are now prepared to value banks on "normalised earnings," this overlooks many of the problems facing the sector, such as the future cost of funding that will impact profits.

All told Ladies and Gentlemen, global markets have not contracted 'swine flu', they have contracted something far worse; it is called 'greed-in-the-face-of-adversity' and it will categorically end in tears!

This will put the real global recovery back years and the reason for this is very simple; the longer this 'mirage' of huge stockmarket growth continues, the more difficult it will become for the basics of a global recovery to be laid.

Those Bulls among you may well point out that stockmarkets rise 6-9 months before a recession ends - that is correct.

But rising by 40-50% whilst still in the midst of a recession is not 'Bullish', it remains in my view, 'Bull-sh*t'!

My eldest Son has just asked why I haven't finished my Newsletter yet and why I am typing away like a madman, red-faced and steam coming out of my ears - off of my soap-box and on to the numbers for the week that was ....

US Markets

How the US did this week .....

US stocks rose, extending the Dow Jones Industrial Average's best monthly gain since 2002, as better-than-estimated gross domestic product spurred speculation the economy is recovering from the recession.

General Electric, Bank of America and Alcoa helped lead the Dow higher as the Commerce Department said the economy shrank at a 1% annual rate last quarter, better than the 1.5% slump forecast by economists. Ford Motor Co. jumped 8.3% on speculation the government's "cash for clunkers" program is boosting demand for cars. The Dollar declined to the lowest level this year against six major trading partners, while metals, oil and Treasuries advanced.

The Standard & Poor's 500 Index gained 0.1% to 987.48 at 4:06 p.m. in New York, the highest since Nov. 4. It rose 7.4% in July for a fifth straight monthly advance, the longest streak since 2007. The Dow rose 17.15 points, or 0.2%, to 9,171.61 and added 8.6% in July.

Equities also gained after the International Monetary Fund predicted a "gradual" recovery in the US economy and the House approved a measure to add $2 billion to the "cash for clunkers" car-purchase incentive program. The advance extended the S&P 500's rally since July 10 to more than 12%, spurred by the most companies beating analysts' second-quarter profit estimates since records began in 1993.

More than three out of four companies in the S&P 500 that released results since June 17 exceeded earnings projections for the second quarter, data compiled by Bloomberg show. They've beaten forecasts by an average 10%, even as per-share earnings tumbled 32% and sales slid 16%.

Washington Post surged 7.7%, the most since March, to $451.50. The newspaper owner posted a second-quarter profit, after a loss a year earlier, as increased demand for higher-education programs boosted revenue at its Kaplan education division.

Walt Disney had the biggest drop in the Dow, losing 4.2% to $25.12. The world's biggest media company reported third-quarter revenue of $8.6 billion, missing the average analyst estimate, as the recession cut advertising and theme- park sales. JPMorgan Chase & Co. downgraded the shares to "underweight" from "neutral."

A measure of US business activity from the Institute for Supply Management-Chicago Inc showed a slower pace of contraction in July, a sign the economic outlook is improving entering the second half of the year.

GE, which makes everything from medical-imaging machines to jet engines, rose 2.2% to $13.40. Bank of America increased for a fifth straight day, adding 5.9% to $14.79. Alcoa climbed 2.6% to $11.76.

Ford, the only major US automaker to forgo federal aid, rallied 8.3% to $8 for the biggest gain in the S&P 500. Goodyear Tire & Rubber Co. surged 7.3% to $17.02. US auto sales may reach a 2009 high in July after the government's "cash-for-clunkers" program lured shoppers back to showrooms.

European Markets

What has been happening in Europe this week .....

European stocks slipped Friday, trimming the Dow Jones Stoxx 600 Index's steepest monthly gain since April, as results from Air France-KLM Group and Eni SpA that trailed analysts' predictions overshadowed a smaller-than- forecast contraction in the US economy.

Air France, Europe's biggest airline, slid 4.1% after reporting a first-quarter loss. Eni, Italy's largest oil company, dropped 7.7% after second-quarter profit slumped 76%. JCDecaux SA, the world's second-biggest seller of outdoor ads, surged 14% after earnings exceeded estimates and Credit Suisse Group AG recommended European media stocks.

The Stoxx 600 fell 0.2% to 224.91, trimming this month's advance to 9.3%. The measure has risen for three straight weeks.

National benchmark indexes slid in 10 of the 18 western European markets. The UK's FTSE 100 and Germany's DAX retreated 0.5%. France's CAC 40 slipped 0.3% as Total SA sank.

GERMANY

German stocks fell, with the DAX Index trimming its third straight weekly advance, after a report showed personal consumption in the US last quarter dropped more than economists estimated.

Deutsche Bank AG retreated 2.8% after Chief Executive Officer Josef Ackermann said delinquencies among consumer and corporate borrowers may affect banks that have avoided losses so far. K&S AG slid 3.8% as Equinet AG cut its recommendation on the stock. Daimler AG and Fresenius SE paced rising shares.

The benchmark DAX Index slipped 0.5% to 5,332.14, trimming the weekly gain to 2%. The measure has still rallied 11% in July after companies worldwide from Goldman Sachs Group Inc. to Apple Inc. and Bayer AG reported better-than-projected earnings. The broader HDAX Index decreased 0.5% Friday.

Consumer spending, which accounts for more than two-thirds of the US economy, fell at a 1.2% pace, more than forecast, following a 0.6% increase in the prior quarter. Purchases were forecast to drop 0.5%, according to the survey median. The world's largest economy shrank 1.9% from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8% drop previously on the books, the Commerce Department said Friday in Washington.

Deutsche Bank dropped 2.8% to 45.39 Euros. The country's biggest bank said this week it set aside 1 billion Euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below-forecast revenue from trading sent the Frankfurt-based bank's shares to the biggest decline in four months on July 28.

Commerzbank, the second-largest German bank, retreated 1.2% to 5.50 Euros.

K+S lost 3.8% to 39.38 Euros as Equinet lowered its recommendation for Europe's biggest producer of potash used in fertilizers to "hold" from "accumulate."

Deutsche Lufthansa lost 1.3% to 9.48 Euros. Europe's second-biggest airline was downgraded to cut "hold" from "accumulate" at Equinet, and Air France-KLM Group, Europe's largest, reported a wider-than-anticipated first- quarter loss.

Siemens, Europe's largest engineering company, fell 2.2% to 56 Euros, the biggest drop in almost a month.

Daimler, the world's second-largest maker of luxury cars, rose 1.7% to 32.47 Euros as Cheuvreux added the shares to its "selected list," saying in a report that "earnings show recovery momentum." Separately, Daimler had its price estimate raised 20% to 36 Euros at UBS AG.

Fresenius, parent of the world's biggest provider of kidney dialysis, jumped 3.8% to 39.78 Euros, while Beiersdorf AG, the maker of Nivea skin creams, added 1.8% to 35.33 Euros. Both companies are scheduled to report earnings Aug. 4.

Aixtron gained for a third day, adding 4.9% to 11.50 Euros. The German company, whose machines help make high-intensity lights, had its share-price estimates raised 20% to 12 Euros at UniCredit Markets & Investment Banking and 18% to 13 Euros at DZ Bank AG.

Continental slid 11% to 24.15 Euros, the steepest drop since February. Chief Executive Officer Karl- Thomas Neumann is set to step down after pushing through a share sale of as much as 1.5 billion Euros against majority owner Schaeffler Group. Schaeffler's lenders have lost confidence in the CEO, who will likely be removed, said Werner Bischoff, deputy chief of Continental's supervisory board. Representatives of Schaeffler couldn't win the two-thirds majority needed to oust Neumann at a meeting in Hanover, Germany, Thursday that went into the night.

Hugo Boss dropped for the first time in three days, losing 2.4% to 19.23 Euros. UBS AG lowered its recommendation to "neutral" from "buy" for the preferred shares of Germany's largest clothing maker.

FRANCE

France's CAC 40 Index retreated 9.22, or 0.3%, to 3,416.27 after swinging between gains and losses during the day. The gauge advanced 9.1% this month. The SBF 120 Index dropped less than 0.1%.

Air France-KLM tumbled 37.6 cents, or 4.1%, to 8.831 Euros, reversing Thursday's 2.8% advance. Europe's biggest airline posted a first-quarter loss of 431 million Euros ($606 million) as the recession cut demand for air travel and cargo transport. Analysts expected a loss of 194 million Euros, according to the median of five estimates compiled by Bloomberg.

Cap Gemini added 1.22 Euros, or 3.9%, to 32.395, extending Thursday's 8.1% surge. Bank of America Corp. raised its recommendation on Europe's largest computer- services company to "buy" from "underperform" while Morgan Stanley upgraded Cap Gemini to "overweight" from "equal- weight."

JCDecaux surged 1.81 Euros, or 14%, to 14.395, the highest level since October. The world's second- largest seller of outdoor ads reported earnings before interest and taxes slipped 70% to 49.5 million Euros. That beat the average estimate of 37.2 million Euros in a Bloomberg survey.

L'Oreal surged 2.56 Euros, or 4.4%, to 60.81, a third gain this week. The world's largest cosmetics maker said second-quarter sales rose 2.6% to 4.4 billion Euros as increased demand in Asia and Latin America offset inventory cuts by European distributors.

Michelin soared 3.155 Euros, or 6.6%, to 50.66, the steepest climb since May. The world's second- largest tiremaker reported a first-half net loss of 119 million Euros, narrower than the average analyst forecast for a loss of 270 million Euros. A decline in raw material costs will help margins in the second half, the company said.

PPR SA climbed 7.14 Euros, or 10%, to 78.19, the fourth advance this week. The French retailer that owns Gucci said first-half earnings before interest, tax, depreciation and amortization slipped 1.8% to 925 million Euros. That beat the 791 million-Euro average estimate of five analysts in a Bloomberg survey.

Rhodia soared 9.4% to 7.649 Euros. The French chemical earlier rose as much as 27% on speculation that a large investor is taking a stake and comments by JPMorgan Chase & Co. that the company is among those to benefit most from any demand recovery.

Safran rose 88.5 cents, or 8.9%, to 10.85 Euros, the highest level in more than eight months. Europe's second-biggest aircraft-engine maker reported an 80% surge in first-half profit and raised its full-year margin target.

Schneider Electric advanced 3.52 Euros, or 5.9%, to 63.74, the highest level since September. The world's biggest maker of circuit breakers stuck to its goal of an operating profit margin of 12% in 2009. The company said first-half net income fell 59% to 346 million Euros.

JPMorgan Chase & Co. raised its recommendation on the shares to "overweight" from "neutral."

Total slipped 1.08 Euros, or 2.7%, to 38.91, paring two days of gains. France's largest oil company said second-quarter earnings declined 54% and said output fell after the global recession eroded energy demand, offsetting gains from new projects.

Vallourec climbed 7.50 Euros, or 8.8%, to 92.30 Euros, the biggest gain since January. The tube maker was raised to "buy" at Societe Generale SA and Cheuvreux. The company said net income dropped to 123.9 million Euros in the second quarter from 255.1 million Euros a year earlier. That beat the 104 million-Euro average of six analysts' estimates compiled by Bloomberg.

BELGIUM

In Brussels the Bel 20 advanced 0.65% to close out the week at 2,169.14.

Belgian pharmaceutical group UCB's cost savings plan helped it post a better-than-expected 1% rise in first-half core profit on Friday despite a 10% drop in drug sales.

Generic competition against its blockbuster epilepsy drug Keppra reduced revenue -- Keppra sales fell 22% -- while reduced expenses and divestment gains boosted the bottom line.

The central nervous system and immunology specialist said recurring earnings before interest, tax, depreciation and amortisation (EBITDA) totalled 363 million Euros ($511.6 million). The average forecast in a Reuters poll of nine analysts was 295 million Euros.

UCB shares hit a seven-week high of 23.51 Euros in morning trading, a gain of 5.4%. The DJ Stoxx European health care index was down 0.5%.

ArcelorMittal, the world's largest steelmaker, posted its third consecutive quarterly loss in the second quarter, but said there were moderate signs of improving demand in certain parts of the world and that it had increased prices and production accordingly.

The Luxembourg-based steelmaker swung into a second quarter net loss of $792 million. This was due in part to $1.2 billion in inventory write-downs and costs related to temporary unemployment as it kept its global operations running at half capacity due to a slump in steel demand from key customers in the automotive and construction sectors.

The loss compared to a net profit of $5.84 billion in the second quarter of 2008 and was larger than analysts' expectations of a net loss of $385 million. Second quarter revenues meanwhile fell 60% year-on-year to $15.2 billion.

A 6% quarterly rise in shipments due to dwindling inventories and higher demand from emerging markets helped boost the company's keenly watched second quarter earnings before interest, taxes, depreciation and amortization, or Ebitda, by 38% to $1.22 billion compared to $883 million the previous quarter. But the figure was still at the lower end of the company's guidance of $1.2 billion to $1.5 billion.

ArcelorMittal now expects to generate Ebitda of $1.4 billion to $1.8 billion in the third quarter, lower than analysts' expectations of about $1.98 million. Ebitda is expected to rise due to increased steel output, but average sale prices are expected to remain stable or fall slightly despite rising spot prices. This is because long-term automotive contracts have been revised downwards due to lower raw material costs and indexed quarterly contracts are only adjusted in the following quarter.

The Belgian families that share a 46% stake in Anheuser-Busch InBev have no plans to reduce their interest beyond certain sales to cover loans, Belgian magazine Trends said on Wednesday.

Trends said a "leading" member of one of the families had told it that the families did not wish to reduce their stakes. It did not identify the person.

The person wished to counter media speculation earlier this month that the families were planning a fundamental change, the magazine said.

The Belgian and Brazilian families controlling AB InBev had sought to avoid any dilution of their interests at the time of its $9.8 billion capital increase in November, and taken out loans to cover the required payments.

They had this month sold shares to cover the loans.

The Brazilian holding BRC sold 253 million Euros ($358 million) of shares in June and Belgian vehicle Patrinvest 54.3 million Euros worth of shares in July, according to the market regulator CBFA's website.

After November's capital increase, the controlling vehicle Stichting AK, combining Belgian and Brazilian interests, had a 46% stake in AB InBev, from 52% before. The free float rose to 43% from 30% before.

InBev bought its US rival Anheuser-Bush last year for $52 billion.

THE NETHERLANDS

The AEX in Amsterdam shed almost a quarter of a percentage point Friday, down 0.23% at 283.17.

The board of long-distance call carrier iBasis rejected Dutch telecoms group KPN's (KPN.AS) offer to buy out the remaining 44% of iBasis for $48.2 million, calling it "grossly inadequate".

KPN announced its cash tender offer for iBasis on July 13.

A special committee of directors convened to evaluate the offer recommended that minority shareholders reject the offer and not tender their shares.

"We believe the offer was timed to exploit the company's depressed stock price," the committee's chairman said in a statement.

IBasis provides wholesale access for telecoms companies for international and long distance calls, as well as prepaid calling services.

Shares in iBasis, which were trading up 2.7% at $1.89 on Nasdaq after the announcement, are down 57% from highs nearly a year ago. Shares in KPN, which is offering $1.55 for each iBasis share, were up 0.1% in Amsterdam at 10.45 Euros.

Royal Dutch Shell PLC said Thursday its net profit fell 67% in the second quarter to $3.82 billion, reflecting a sharp decline in oil prices and smaller profit margins in its refining business.

The company's new CEO Peter Voser promised to cut jobs and reduce capital spending next year, but still increase production by 2-3% per year through 2012, reversing 7 years of declines.

Shell had net profit of $11.6 billion in the second quarter last year. Sales at Europe's largest oil company were $63.9 billion, well down from $131.4 billion.

Oil prices fell at the start of this year to below $40 per barrel from their 2008 peak of $147 amid the world recession. They have since recovered to around $63 but Voser said demand remains in its deepest slump since 1980, even as the oil industry is set to boost global production by 10% this year.

At Shell's exploration and production arm, earnings fell 77% to $1.33 billion. Production was down 6% to 2.9 million barrels of oil and equivalents per day, while prices realized by the company were $52.62 per barrel, down from $111.92 a year ago.

At its refining arm, earnings were down 74% to $1.16 billion, due to lower refinery intake, worse margins and a $611 million charge to write down asset values.

Akzo Nobel NV, the world's largest maker of paint, reported Wednesday a 13% fall in second-quarter profit, citing weak demand amid the economic downturn, but shares jumped on news that cost-cutting and lower raw materials costs had preserved margins.

Net profit was Euro155 million ($220 million), down from Euro201 million in the same period a year ago but still better than analyst expectations. Sales were down 10% to Euro3.67 billion.

The company said volumes had fallen by 16%, partially offset by a 5% increase in prices.

Meanwhile, raw materials costs remained low and the company said it has cut 3,500 jobs in the past year. Its work force at the end of the quarter was 58,810.

Profit margins - as measured by earnings before interest, taxes, depreciation and amortization as a% of sales - dipped less than expected to 13.1% from 14.1% a year ago.

Dutch food group Nutreco said on Thursday its first-half operating profit fell by half on weak demand for animal feeds, but a projected second-half improvement pushed its shares higher.

Half-year earnings before interest, tax and amortisation (EBITA) fell to 41.6 million Euros ($58.9 million) from 82 million a year ago, compared with the average forecast of 41 million Euros from six analysts polled by Reuters.

Sales at Nutreco, which produces animal and fish feed and is a major poultry processor, fell 8.5% to 2.13 billion Euros, compared with analysts' forecast for 2.12 billion Euros.

Nutreco, which had warned investors in April that it was facing half-year declines in sales and profit, blamed the drop on its European ComPound feed unit due to a one-off charge of about 20 million Euros, which resulted in a 13 million Euro loss for the unit.

AUSTRIA

The ATX in Vienna managed to close out Friday at 2,250.19, gains of just 0.09% on the day.

Austrian power generator and grid operator Verbund Tuesday said net profit fell 26% in the second quarter of 2009, underperforming analysts' expectations, mainly due to higher-than-expected special charges.

Yet Verbund, Austria's largest electricity producer, said it still expects earnings for the full year will come in on par with, or slightly below, 2008 results.

Net profit for the second quarter was Eur161.9 million, down from Eur218.7 million in the year-earlier period, and below the Eur195 million average estimate of seven analysts polled by Dow Jones Newswires.

First-half net profit fell 16% to Eur359.9 million, from Eur429 million in the same period of last year, and below analysts' consensus forecast of Eur392 million.

Austrian lender Erste Group Bank Thursday said second-quarter net profit fell 19%, mainly due to higher risk provisions for bad loans, but still comfortably beat analyst forecasts with positive surprises in its trading result and net interest income.

Erste didn't provide a guidance for 2009, but said it's confident it will remain profitable despite a rise in non-performing loans in its main East European markets. "In the first six months we saw a strong rise in non-performing loans, therefore our risk costs increased. But at the same time we see that the strength of our business model is putting us into a situation that will allow us and our clients to get through the crisis," Erste Chief Executive Andreas Treichl said in a statement.

In addition to home market Austria, Erste is active in Ukraine, Romania, Hungary, the Czech Republic, Slovakia, Serbia and Croatia; it has a total of 17 million customers, making it the third-largest lender in the Eastern European union.

Erste Bank's large exposure to the central and east Europe region has caused investors to worry and the stock price to drop from an all-time high of Eur59 in late 2007, to a low of Eur6.84 in February this year. On Wednesday, the shares closed up 4.3%, at Eur21.5.

Net profit for the three months ended June 31 came to Eur260 million, down from Eur321 million a year earlier, but way above the Eur164 million average estimate of five analysts polled by Dow Jones Newswires.

SWITZERLAND

The SMI in Zurich managed gains of 0.30% Friday, to end the week on 5,950.69.

Specialty chemicals group Clariant AG Thursday reported earnings on another dismal quarter, but the numbers also gave cause for optimism by showing the Swiss company's restructuring efforts are finally bearing fruit, and analysts say the company seems on the mend and could prosper once demand recovers.

The Muttenz, Switzerland, company surprised with an operating profit that turned out to be higher than expected, managed to use capacity at its plants better than earlier in the year, and surprised with an improvement in profitability since the first quarter.

While it still expects demand to suffer from the weak economy over the next 18 months and sales should be 16% to 20% in 2009, some businesses are stabilizing, Clariant said.

And although the prices that Clariant charges for its specialty chemicals will remain under pressure due to sluggish demand, input commodity prices are also weakening, offsetting part of the negative impact on its profitability.

Investors welcomed the news and at 1450 GMT, shares in Clariant traded up CHF0.35, or 5%, at CHF7.31 outperforming an overall higher Swiss market.

Senior executives at Credit Suisse Group sold more than 20 million Swiss francs ($18.5 million) of shares earlier this week, according to Swiss securities trading notices.

The shares were sold Monday in a total of five transactions at prices varying between CHF50.49 and CHF51.20, shortly after the Swiss bank posted a 29% rise in second-quarter net profit Thursday.

Though the executives behind the share sales aren't publicly disclosed, the amount of two of the five sales - transactions of 150,000 shares each - would indicate that Chief Executive Brady Dougan and investment banking head Paul Calello were behind them.

Dougan and Calello owned 296,727 and 411,826 fully-vested shares, respectively, at year-end. Since then, a portion of their share-based compensation is likely to have vested, adding to their shares which can be sold.

Switzerland and the US are set to hammer out the details of an agreement in principle reached between Swiss bank UBS AG and the Internal Revenue Service, meaning the end to a messy legal spat is drawing near.

After lawyers for UBS and the IRS said a deal had been reached, the Swiss justice department said the two governments would spend the next week ironing out the details to settle the matter definitively out of court.

The outline of a deal, lauded by Switzerland's regulator, caused a surge in UBS shares, even if an end to the litigation isn't yet final.

The Zurich-based bank was up CHF0.61, or 4.1%, at CHF15.63 in heavy trading. The Stoxx Europe 600 bank index was up 1%.

The US is seeking UBS client names as part of a stepped-up IRS campaign against wealthy tax scofflaws (great word) who hide their money offshore.

Even before the details are made public, the settlement represents a badly needed boost for UBS, which has struggled for months with massive outflows of funds as the US pursued alleged tax dodgers with Swiss accounts.

SWEDEN

Up 0.32%, that was how the OMX Stockholm 30 closed out the week, ending at 882.05.

Shares in Assa Abloy surged in early trading Wednesday after the world's largest lock maker by sales said its sweeping cost-cutting program had taken effect quicker than expected, which generated forecast-beating second-quarter earnings.

Assa Abloy's recent efforts to trim its workforce and move most production to lower-cost countries "have surpassed the expected cost savings" and "contributed to good earnings and produced a very strong cash flow" in the quarter, the Swedish company said.

Investors welcomed the news. Assa Abloy's shares traded up 8.25 Swedish Kronor, or 7.5%, at SEK118.50, while the broader Nordic market traded down 0.4%.

Since the end of 2007, 7,462 workers have left the company as part of two restructuring programs, including more than 3,000 staff this year. It now has about 29,900 employees.

But the Stockholm-based maker of Yale locks and various high-tech door-security products said coming quarters are likely to be tougher as demand continued to weaken due to less construction of new buildings in most of its markets.

This year will be "challenging ... since the financial crisis has had a strongly negative effect on investments in construction," Assa Abloy said, adding it expects negative organic growth in 2009.

Anglo-Swedish drug giant AstraZeneca said Thursday that its second-quarter net profit rose to $1.7 billion, or $1.18 a share, from $1.6 billion, or $1.11 a share last year.

Sales edged up to $15.7 billion, from $15.6 billion last year. Adjusted earnings per share at constant exchange rates rose 37% to $1.64. Business performance in the context of tough global economic conditions has been better than anticipated, the firm said.

On Wednesday, Ericsson said its workforce would increase 11% due to its business with Nortel and Sprint in July, Dagens Industri reported. At the same time, Swedish employees would take up a smaller share of the company, falling from 24.1% at the turn of the year to 21.7% once the deal to buy the wireless assets of Nortel is complete.

FINLAND

The OMX Helsinki was the only Scandinavian Bourse that declined Friday, down 0.35% on the day, finishing up at 5,751.47.

Finnish crane maker Konecranes reported a sharp drop in second-quarter operating profit on Wednesday and its gloomy outlook and share issue plans drove its shares lower.

Konecranes said it would hold an extraordinary shareholders meeting on Aug 31 to seek approval to issue upto 12 million shares, around 19% of the current total, as the market could offer "new interesting M&A activities".

April-June earnings before interest and tax tumbled 47% year-on-year to 30.8 million Euros ($43.6 million), below the average forecast of 32 million in a Reuters poll of analysts. Net sales skidded 12% to 432 million Euros, a touch below expectations.

Konecranes, which has been slammed as ports and companies delay or cancel orders, said full-year sales would fall 17 to 20% and its operating margin would drop to 6.5 to 7.5% versus a year-ago figure of 11.8%.

Finnish refiner Neste Oil said Thursday demand for oil products continued to suffer from lower consumer and industrial usage in the second quarter and it sees no improvement in the market in the rest of the year.

"Refining margins continue to be weak, dampened by depressed demand, and no rapid recovery seems to be in sight," said Chief Executive Matti Lievonen.

Espoo-based Neste, which refines gasoline, diesel and other oil products in Northern Europe, the US and Canada, reported a lower-than-expected 58% drop in second-quarter net profit to Eur88 million from Eur212 million in the same period a year earlier. Sales fell 41% to Eur2.59 billion from Eur4.42 billion because of lower prices and a drop in fuel demand from consumers and industrial users.

Operating profit fell to Eur118 million from Eur290 million as gains in oil inventory values halved but the figure still beat an average estimate of Eur60.43 million.

Neste's second-quarter refining margin was $7.87 a barrel compared with $12.38 a year earlier and $9.44 in the first quarter.

The company refined 3.6 million metric tons of crude oil and other products in the second quarter, down slightly from 3.7 miilion tons in the first quarter but said it expects refinery performance to improve in the second half of the year.

Production Line 4 at Neste's Porvoo refinery, which was shut down for two months' maintenance during the second quarter, is expected to operate normally, Neste said.

DENMARK

The OMX Copenhagen 20 eke'd out 0.36% of gains Friday, ending the week at 311.23.

DSV A/S fell the most in four months in Copenhagen trading after the Nordic region's biggest trucking company reported an unexpected second-quarter loss and scaled back forecasts for the full year.

DSV fell as much as 9.5%, the biggest intraday decline since March 24, after the Broendby, Denmark-based company posted a net loss of 8 million kroner ($1.5 million) compared with year-earlier net income of 329 million kroner. Analysts estimated DSV would report profit of 62 million kroner.

Global trade will plunge 16% this year as consumers in western Europe and the US curb spending amid the recession, the Paris-based Organization for Economic Cooperation and Development said on June 24. DSV scaled back its sales forecast for 2009 by 14% and the outlook for net income by 20%, saying it was "especially affected" by a weak market from late May to the end of June.

DSV fell as much as 7 kroner to 67 Kroner and was down 5.7% - that pared the stock's gain this year to 23%.

Full-year revenue will total 38 billion Kroner, compared with an April estimate of 44 billion Kroner, DSV said. The company cut its net-income forecast to 400 million Kroner from 500 million Kroner previously.

The company, Denmark's sixth-biggest by sales, also widened job-cut plans, saying it will reduce the workforce by 15% to 20% from the level of last October, when it employed 26,000 people. DSV outlined a goal in March to scale back jobs by 12% to 15% and raised the target to 15% in April.

Sales in the second quarter fell 1.5% to 8.82 billion Kroner. Revenue in the first six months of the year contracted 21% when adjusted for acquisitions and currency shifts, DSV said.

Novo Nordisk announced Monday that it has reached a settlement with the Danish Public Prosecutor for Serious Economic Crime regarding the company's sales to Iraq during 2000 to 2003 under the United Nations Oil-for-Food programme. Under the terms of the settlement, Novo Nordisk will pay back past profits of 30 million Danish kroner.

Novo Nordisk cooperated fully with the Public Prosecutor in his investigations of the company, which are now concluded.

In May, Novo Nordisk reached settlements on the same issue with the US Securities and Exchange Commission and Department of Justice.

NORWAY

The Oslo OBX finished Friday up 0.64% at 269.39.

Norwegian oilfield engineering group Subsea 7 posted a smaller than expected drop in second quarter operating profit and painted an upbeat picture for future demand, boosting its shares on Tuesday.

The oil services sector has been hit hard by the global crisis and lower oil prices, which have forced oil and gas producers to slash spending, but after a tough patch some companies are seeing new orders coming in.

Subsea 7's operating profit fell 10% year-on-year to $118 million in April-June, topping all 16 forecasts in a Reuters poll of analysts, whose top prediction was $101 million.

Telenor ASA said a Moscow court rejected its motion to halt a bailiff's order that its stake in OAO VimpelCom be sold.

Telenor filed a motion with the Moscow Arbitration court on July 2 contesting an order by Russian bailiffs to sell its stake in VimpelCom to pay a $1.7 billion fine. The motion had asked for the nullification of the bailiffs' order from last month to transfer Telenor's VimpelCom shares to Russia's Federal Property Agency for a sale, Fornebu, Norway-based Telenor said in a statement Friday.

Farimex Products Inc., the Russian owner of a 0.002% VimpelCom stake, brought a case against Telenor in Siberia that found the Norwegian company liable for damages for delaying VimpelCom's expansion in Ukraine, leading to the fine. Telenor has said Farimex is a front for billionaire Mikhail Fridman's Alfa Group, which owns 44% of VimpelCom. Altimo, Alfa's telecommunications unit, has denied any link to Farimex.

"Telenor will continue to use all the means available to it to defend its shareholding in VimpelCom," the company said in the statement.

Telenor fell as much as 2.9% in Oslo, the biggest intraday drop since June 19. The shares closed down 2% at 52.99 Kroner.

SPAIN

In Madrid, the Ibex closed at 10,855.10, down 0.18% on the day.

Grupo Ferrovial, Spain's second-biggest construction company, fell 7% to 24.10 Euros after announcing it will absorb highway unit Cintra Concesiones de Infraestructuras de Transporte SA via a reverse takeover. Cintra surged 13% to 5.75 Euros, the biggest jump since September.

Spanish TV broadcaster Gestevision Telecinco SA Thursday said first-half net profit fell 69% as its audience share declined and the country's advertising market contracted.

The Spanish unit of Italy's Mediaset reported net profit of Eur62.2 million for the period, down from Eur198.9 million a year earlier.

Commercial broadcasters across Europe have been hurt by the sharp slowdown in advertising, but Telecinco's woes also include a decrease in audience share brought on by a weak programming grid and more players in the TV sector.

Telecinco has been introducing cost cutting measures to compensate for some of the drop in revenue. Telecinco said total first half costs fell 18% to Eur from a year earlier.

This year, Telecinco lost its top spot as audience share leader to public television channel TVE-1 after it rearranged its programming grid to cut costs and reduce sports programming.

Antena 3 de Television SA, traditionally the third-ranked Spanish station, is Telecinco's key competitor.

At the end of June, Telecinco had an average audience share of 15.9%, down from 18.7% a year earlier.

Stock exchange operator Bolsas y Mercados Espanoles Friday said its second-quarter net profit was flat on the year, as weaker trading profits were offset by a tax refund.

Madrid-based BME, Europe's fourth-largest exchange by equity trading volume, said net profit edged up to Eur47.8 million from Eur47.7 million a year earlier. The figure was inflated by a Eur15.2 million tax refund and Eur2.6 million in exceptional interest income, but was hit by a Eur4.9 million charge for severance packages as BME laid off staff when Spain's economy went into recession at the beginning of the year.

The profit figure was lower than the Eur50.3 million expected by the market, according to a survey of 18 analyst estimates compiled by BME ahead of the results.

Equity trading volumes, BME's top source of revenue, fell 26% on the year in the second quarter. Still, the sharp rally that equity markets have seen since touching multi-year lows in March resulted in a 28% rise in volumes compared to the first quarter. The Spanish benchmark index, the IBEX-35, hit a low of 6817.4 March 9, but has since risen by 59%.

Telefonica SA, Europe's second- largest phone company, said second-quarter profit fell 6.1% as recessions in Spain and the UK eroded sales.

Net income dropped to 1.93 billion Euros ($2.7 billion) from 2.06 billion Euros a year earlier, Madrid-based Telefonica said Friday in a statement. Sales fell 2.6% to 13.89 billion Euros. Analysts had predicted profit of 1.88 billion Euros on sales of 13.96 billion Euros, the average estimates compiled by Bloomberg.

Chairman Cesar Alierta is cutting costs and increasing dividends to attract investors discouraged by the recession in Spain, the worst in six decades. In the UK, Telefonica's second-largest European market, the economy contracted the most since 1958 in the first quarter.

PORTUGAL

The PSI General in Lisbon declined 0.49% Friday, ending the week at 2,507.36.

Portugal's leading motorway operator, Brisa, on Wednesday posted a 9% rise in first-half net profit, exceeding market expectations as a drop in operating costs more than offset a revenue dip.

Brisa said in a statement it expected traffic to return to normal levels in the medium-term. A recovery in toll revenues started in the second quarter, it said.

It expected "new concession openings and the ramp-up of recently opened ones to offset short-term economic pressure".

Brisa, which operates more than half of Portugal's paid highways, said toll revenues were stable at 278 million Euros, thanks to the second-quarter rebound, which followed a 5.4% drop in the first three months of the year.

The recovery was based on some organic growth and the impact of Easter falling in the second quarter and not in March as in 2008, Brisa said.

The company will also benefit from the recent introduction of tolls on roads which had been subsidised by the state, it said.

Net profit rose to 56.9 million Euros, above 48.1 million Euros forecast by analysts on average.

Brisa said that total revenues slipped 1% to 315.7 million Euros. Earnings before interest, taxes, depreciation and amortization (EBITDA) grew 3.2% to 224.3 million Euros.

Portugal's Banco Comercial Portugues said Wednesday its first-half net profit rose 45.5%, as a gain from the sale of part of its Angolan unit and improved trading income offset higher loan-loss provisions and a drop in lending profits.

Portugal's second-largest bank by market capitalization said first-half net profit rose to Eur147.5 million from Eur101.4 million a year earlier. The bank booked a Eur21.2 million gain from the sale of a stake in Banco Millennium Angola.

BCP continued to suffer in the first half from lower lending margins in Portugal and at the bank's international operations. First-half net interest income decreased 19.8% on year to Eur675.6 million, it said.

Results were also skewed by a sharp turnaround in trading income. BCP in the first half booked Eur214.1 million in trading profits, recovering from a Eur114.2 million loss a year earlier due to the sale of a large stake in rival Banco BPI SA (BPI.LB). BCP sold the BPI shares last year with a loss after the two banks called off merger talks.

The non-performing loan ratio, or credit overdue for more than 90 days, increased to 2.6% at end-June from 1.1% a year earlier.

The bank set aside Eur279.1 million in the period to cover past-due loans, up from Eur205.9 million the previous year.

The bank said its tier 1 capital ratio stood at 8%, up from 7.5% a year earlier.

ITALY

Italy's benchmark FTSE MIB Index fell for a second day this week, losing 243.08, or 1.2%, to 20,575.52 in Milan.

Assicurazioni Generali declined 27 cents, or 1.7%, to 15.99 Euros, falling from the highest in about two months. Italy's biggest insurer posted first-half net income of 504 million Euros, compared with 1.46 billion Euros a year earlier. The company said it expects "a difficult six months." The results were "weaker than expected,".

Bulgari climbed 30 cents, or 7.5%, to 4.33 Euros, the highest since May 8. Intermonte Sim SpA lifted its recommendation to "outperform" from "underperform" and Deutsche Bank upgraded the world's third-largest jeweler to "buy" from "hold." Intermonte cited a "more proactive" approach "on costs after another poor quarter." Deutsche Bank said that "despite awful results the market would start factoring in that the worst is over and look beyond 2009."

Bulgari was also upgraded to "buy" from "sell" at Cassa Lombarda, while Equita Sim SpA added the stock to its "recommended portfolio."

Cementir Holding, the cement maker owned by Italy's Caltagirone family, rose 8.5 cents, or 3%, to 2.89 Euros, the highest in almost eight weeks. Equita Sim SpA increased its price estimate to 3.3 Euros from 3.25 Euros and kept a "buy" rating. Banca Leonardo lifted its price projection to 2.3 Euros from 2.2 Euros and reiterated a "sell" rating. Both brokerages cited "better cash generation."

Enel rose for a third day, adding 6.5 cents, or 1.7%, to 3.81 Euros. Italy's largest utility posted a 29% increase in first-half profit and approved a program to sell as much as 10 billion Euros of bonds. Gruppo Banca Leonardo said the results were "better than expected."

UBS upgraded Enel to "buy" from "neutral."

Eni sank 1.37 Euros, or 7.7%, to 16.33 Euros, the largest loss since December. Italy's biggest oil company said second-quarter earnings dropped 76% as the global recession sapped demand for crude and fuel. Cheuvreux said in a note that the second-quarter results and dividend were "disappointing."

Bank of America downgraded the stock to "neutral" from "buy." Nomura International Plc cut its price estimate to 18.6 Euros from 19.4 Euros and reiterated a "reduce" rating.

Finmeccanica, Italy's biggest defense company, rose 13 cents, or 1.2%, to 10.64 Euros. The UK, Italy, Spain and Germany signed a contract to produce 112 Eurofighters, with an order volume of about 9 billion Euros, Germany's Defense Ministry said Friday in an e-mailed statement.

Fondiaria-Sai dropped 55 cents, or 4.5%, to 11.75 Euros, the steepest decline in almost six weeks. The insurer will post a drop in second-quarter profit, MF reported, without saying where it got the information. A Fondiaria official in Milan declined to comment.

Indesit retreated for a third day this week, losing 12.5 cents, or 2.7%, to 4.48 Euros. Mediobanca Securities cut its recommendation on Italy's biggest maker of household appliances to "underperform" from "neutral."

Italcementi, Italy's largest cement maker, rose 21.5 cents, or 2.4%, to 9.18 Euros after saying in a statement that second-quarter revenue rose to 1.38 billion Euros from 1.2 billion Euros in the first three months of the year.

Mediaset fell for the first time in 10 sessions, losing 8.25 cents, or 1.9%, to 4.24 Euros. Italian Prime Minister Silvio Berlusconi's broadcaster said in a statement after the closing of the market Thursday that first- half profit fell 48 as the economic slump hurt advertising sales in its domestic market and Spain. Sanford C. Bernstein & Co. kept an "underperform" rating on Mediaset, noting that "the Italian TV advertising market continues to be very weak."

Parmalat fell the most since April 17, losing 6.6 cents, or 3.6%, to 1.75 Euros. Banca Akros downgraded Italy's biggest food company to "hold" from "accumulate" after the stock's recent increase. The brokerage lifted its price estimate to 1.9 Euros from 1.72 Euros.

Piaggio, Europe's largest motor-scooter maker, gained 2.6 cents, or 1.8%, to 1.46 Euros. Intermonte Sim SpA increased its price estimate to 1.6 Euros from 1.55 Euros, leaving a "neutral" rating unchanged. The brokerage cited a "strong" second quarter.

Banca Leonardo increased its price estimate to 1.1 Euros from 0.7 Euros, keeping a "sell" rating, while Equita Sim lifted its price projection by 4% to 1.83 Euros and reiterated a "buy" recommendation.

Tenaris, the world's biggest maker of seamless steel tubes for pipelines, gained 24 cents, or 2.6%, to 10.64 Euros. France's Vallourec SA climbed in Paris trading after the tube maker was raised to "buy" at Societe Generale SA and Cheuvreux.

GREECE

In Athens, the Composite Index closed at 2,362.35, up 0.39% for the day.

Hellenic Exchanges, the operator of the Athens stock and futures markets, said on Wednesday first-half net profit fell 53% year-on-year to 16.9 million Euros ($23.8 million) as stock prices slumped.

The operator said group revenues fell 49% to 32 million Euros.

The exchange said the drop in earnings was mainly due to a sharp fall in share prices in the cash market as the volume of shares traded remained broadly the same as last year.

As a result, the value of the trades in the first half fell to 20.5 billion Euros from 49.2 billion in the same period a year earlier.

Hellenic Exchanges said there was a 4.6% volume drop in its futures market. Its shares closed 1.29% higher at 8.61 Euros on Thursday. They are up 51.8% year to date, outperforming a 27.9% advance in the benchmark stock index as the Greek stock market's recovery since March has seen trading volumes improve.

Greek refrigerator maker Frigoglass said on Friday its first-half net profit fell 85.3% as the global economic downturn hit demand for the company's products in key European markets.

The world's largest maker of drink refrigeration equipment said net profit fell to 6.25 million Euros ($8.8 million), with sales down 47.8% at 176.7 million Euros.

"Since the end of last year we have continued to witness the most challenging macroeconomic conditions seen in decades," Managing Director Petros Diamantides said in a statement.

"While conditions remained difficult in the second quarter, we were pleased with the sequential improvement in sales, profits and cash flow compared to the first quarter."

Last year the firm shut two of its 11 production units and cut about 475 jobs in a bid to cut costs.

Frigoglass, which supplies Greek bottler Coca-Cola Hellenic and brewers such as Heineken, said business in western and eastern Europe declined 52.2 and 76.8% respectively in the first half, mainly due to significant reductions in Russia, Ukraine, Poland and Germany.

Sales to Coca Cola Hellenic, the world's second-biggest bottler of Coke drinks, fell 76.3% in the first half, accounting for 17.4% of cooler sales from 33.7% in the same period in 2008.

The UK Market

Did it follow the Global trend .....

The UK's FTSE 100 Index dropped from the highest level in almost seven months, led by a sell-off in energy companies as European rivals reported lower profit.

Royal Dutch Shell Plc and BP Plc both lost more than 1.5% after Total SA and Eni SpA reported a drop in second- quarter earnings. Shares of British Airways Plc limited declines, rallying 6% as Europe's third-largest airline said passenger numbers and seat occupancy were showing signs of a recovery.

The benchmark FTSE 100 fell 23.25, or 0.5%, to 4,608.36 in London after swinging between gains and losses more than 10 times. The gauge has still gained 0.7% this week. The FTSE All-Share Index lost 0.3% Friday, as did Ireland's ISEQ Index.

The benchmark for UK equities has surged 12% since July 10 after companies from Goldman Sachs Group Inc. to Roche Holding AG reported earnings that exceeded estimates. Next week, U.K banks including Barclays Plc, HSBC Holdings Group Plc and Lloyds Banking Group Plc are scheduled to post results.

Shell, Europe's largest oil company, fell 1.8% to 1,572 pence after France's Total and Italy's Eni both Friday reported earnings that fell by more than 50% in the second-quarter.

Rival BP fell 1.8% to 497.2 pence, while BG Group declined 4.5% to 999 pence. Cairn Energy Plc slipped 1.8% to 2,396 pence.

British Airways, which Friday posted a 106 million-Pound net loss in the three-months through June, rallied 6% to 142.4 pence, the best performer on the FTSE 100 Friday.

Chief Executive Officer Willie Walsh said that while yields or ticket prices may fall further, volumes and occupancy at the carrier were likely to improve in the next few months. Quarterly sales fell 12% to 1.98 billion Pounds. That compares with Paris-based rival Air France-KLM Group which reported a 19% drop in revenue.

Logica rallied 7.75 pence, or 8.3%, to 101.25 pence, rising for a fourth day. Bank of America Corp. raised its recommendation on the Anglo-Dutch computer-services provider to "buy," while Morgan Stanley upgraded the shares to "overweight."

Man Group dropped 10.5 pence, or 3.7%, to 276.75 after UBS AG downgraded the largest traded hedge fund manager to "sell" from "neutral."

Rank Group rallied 8 pence, or 11%, to 77.75 after the UK's second-largest casino owner reported a profit of 19.5 million Pounds in the six months ended June 30. That compares with a loss of 50.8 million Pounds in the same period a year earlier.

Rentokil Initial increased 6.5 pence, or 7.2%, to 97 after the world's biggest pest-control company said its City Link parcel-delivery unit will have a smaller- than-expected loss this year of 12 million Pounds.

United Business Media surged 53 pence, or 14%, to 424.25 after the publisher of Information Week and owner of PR Newswire increased its dividend by 7.1% to 6 pence per share, more than analysts expected.

Market spirits have been lifted by recent corporate results, with steady trading from the likes of BT, Rolls-Royce and BSkyB. Telecoms group BT held on to most of the 13% improvement seen Thursday after it posted better-than-expected first quarter figures and said there were signs of progress at its troubled IT services division. Shares were down 0.25p at 126.65p.

Rolls-Royce meanwhile built on Thursday's advance with a 6.25p gain to 414.25p as it followed up well-received interims with news of a #300 million contract. Banking giant HSBC joined the leaders board with with a 9.75p gain to 605.75p ahead of Monday's half-year results. The bank is likely to be one of the better performers in a difficult six months for the sector.

The biggest Footsie risers were BA up 8.1p at 142.4p, Xstrata up 37.1p at 808.2p, Kazakhmys up 23p to 856.5p and Rexam up 6p to 236p.

The biggest Footsie fallers were Standard Life down 9.7p at 197.8p, BG Group down 47p at 999p, Man Group off 10.5p.

Asia Pacific Regional Markets

Did they set the tone or follow the lead .....

JAPAN

Tokyo stocks rose Friday, setting a fresh year-high along the way, as the market gained support from encouraging quarterly earnings reports that helped shares overpower worsening economic data.

Relatively good April-June business results from blue-chip companies such as Sony, Fujitsu, and NEC released after Thursday's market close triggered fresh buying and short-covering, with futures buying adding to the momentum.

The Nikkei 225 Stock Average rose 191.62 points, or 1.9%, to 10,356.83, closing just off a new 2009 intraday high.

The Topix index of all the Tokyo Stock Exchange First Section issues also rose 13.32 points, or 1.4%, to 950.26. Volume was more robust than in recent sessions, totaling almost 2.4 billion shares.

For the week, the Nikkei 225 added 4.1%, closing July with a gain of 4.0%. Since the start of 2009, stocks are up 17%.

Economic data released before the market open showed Japan's June core consumer price index falling a record 1.7% on year, surpassing the previous 1.1% record on-year drop in May.

Japan's jobless rate also posted a six-year high of 5.4% in June. Shinko Research Institute economist Norio Miyagawa said it is "inevitable" that the jobless rate will keep rising this year, possibly above 6% towards year end.

However, none of the figures dented sentiment for equities.

After the Thursday market close, Sony announced a Y37.1 billion quarterly loss many hailed as being much narrower than expected. Analysts noted a sizable contribution from a better-than-feared foreign exchange market, but also cost improvements in Sony's electronic segment and heightened expectations for upside to its full-year guidance.

Sony shares closed up 6.8% at Y2,675 on almost triple normal volume. Nomura Securities raised Sony's rating to Buy from Neutral.

Fujitsu reported a Y29.20 billion net loss for the April-June period, compared with a profit of Y344 million a year ago. But analysts noted that the loss was smaller than consensus estimates, with several business areas showing signs of bottoming out. Fujitsu also raised its guidance.

NEC chalked up a net loss of Y33.84 billion during its fiscal first quarter, much worse than the Y483 million profit it posted in the same period a year earlier. Analysts nevertheless praised the firm for getting off to a smooth start toward achieving its full year outlook, which it left unrevised. NEC closed up 1.5% at Y332.

On the other hand, Mazda and Nintendo saw their stocks fall sharply. While Mazda's results delivered late Thursday showed on-quarter improvements, shares lost 6.1% to Y248 on profit-taking after running up nearly 9% the day before. Nintendo shares lost 4.6% to Y25,590 after reporting a steep fall in quarterly profits that fell below expectations. Analysts were mixed on its outlook.

Mitsui Fudosan rose 5.0% to Y1,740 as investors cheered strong April-June earnings that doubled on year thanks to increased sales of newly built condominiums. Big banks also benefited from Sumitomo Mitsui Financial Group's 25.3% rise in April-June net profit. SMFG's stock rose 0.5% to Y4,050, while Mitsubishi UFJ Financial Group rose 4.4% to Y566, and Mizuho Financial Group added 1.4% to Y215.

September Nikkei 225 futures closed up 170 points, or 1.7% at 10,370 on the Osaka Securities Exchange.

SOUTH KOREA

South Korean shares closed higher Friday as the country's industrial output data topped market expectations, adding further confidence about the fast recovery of the country's economy.

After opening a tad higher on a rebound in US markets and eased concerns about the China markers, the Korea Composite Stock Price Index, or Kospi, rose as high as 1559.07 after the release of the stronger-than-expected June industrial output data.

The Kospi added 22.55 points, or 1.5%, to end at 1557.29, the highest closing since Aug. 18 when the index finished at 1567.71. The Kospi also gained 12% on month.

Foreigners extended their buying spree into a 13th consecutive session by picking up a net KRW508.1 billion worth of stocks Friday.

They bought a net KRW5.9 trillion worth of stocks in July, their biggest monthly net purchase ever, according to Korea Exchange.

Growing confidence about economic recovery boosted most economy-sensitive steelmakers, energy and material stocks.

The world's fourth-largest steelmaker by output, Posco, rose 4% to KRW502,000, and Hyundai Steel gained 4.4% to KRW71,800.

SK Energy climbed 4% to KRW104,000, while LG Chem jumped 10.1% to KRW152,000.

S-Oil ended flat at KRW58,500 after posting a 81% decline in net profit to KRW72.0 billion in the second quarter from year ago.

Bellwether Samsung Electronics advanced 1.4% to KRW724,000, hitting a fresh high for the year amid growing growth momentum after the company reported strong earnings for the second quarter, said analysts.

The Kospi's resilient uptrend also lifted brokerage stocks, said analysts.

Samsung Securities rose 4.5% to KRW76,800, and Daewoo Securities added 3.7% to KRW23,600.

Most banks also did well. Shinhan Financial Group added 3.2% to KRW41,600, and Hana Financial Group rose 1.3% to KRW35,000 on expectations for earnings improvement in coming months.

HONG KONG

The Hang Seng Index climbed 1.7% to 20573.33, paced by market heavyweight HSBC Holdings ahead of its results next week. HSBC ended up 4.6%.

Independent power producers advanced, playing catch-up after having lagged the broader market recently. Datang International Power's upbeat first half profit guidance also lifted the power sector. The stock gained 5.4%, while China Resources Power jumped 5.5%.

Other than that, there is nothing to add apart from saying that Hong Kong has been over-hyped, over-bought and where is much of the money coming from .... over here (China)!

CHINA

China stocks rose, helping the benchmark index to its best month in two years, as Datang International Power Generation Co. jumped on higher profit and increased metals prices drove raw-material producers higher.

Datang Power, a unit of China's second-biggest electricity producer, surged by the daily 10% limit after saying first-half income likely gained more than 50%. Jiangxi Copper Co., the nation's biggest producer of the metal, also jumped 10%, and PetroChina Co., the country's largest oil company, added 2.9%.

The Shanghai Composite Index rose 90.50, or 2.7%, to 3,412.06 at the close. The gauge capped a 15% in July, its biggest advance since August 2007 and its seven straight month of gains, as government spending and record bank lending spur a rebound in the world's third-largest economy.

The gauge is bouncing back from the 5% plunge on July 29, its biggest drop in eight months, on speculation the government will curb inflows into a market that had doubled from last year's low.

Transactions on Chinese stock exchanges surged to $63 billion that day, exceeding the $58 billion that changed hands on markets in New York, London and Tokyo, according to data going back to January 2008.

The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, added 2.8% to 3,734.62 Friday.

Datang Power climbed 0.95 RMB to 10.47 RMB. The company said in a Hong Kong exchange statement increased revenue from changes to tariffs and prices boosted profit.

Other power suppliers also rose. Huaneng Power International Inc., the listed unit of China's largest power group, climbed 4.6% to 9.11 RMB. China Yangtze Power Co., owner of the world's biggest hydropower project, advanced 6.4% to 15.74 RMB.

Jiangxi Copper gained 4.37 RMB to 48.04. PetroChina 0.44 RMB to 15.73. Aluminum Corp. of China Ltd., the nation's biggest maker of the lightweight metal and also called Chalco, added 8.2% to 19.64 RMB.

A gauge of six metals including copper and gold in London jumped 4%, the most since Oct. 7. Crude oil soared 5.7% in New York Thursday, the biggest gain since April 9.

Stocks on the Shanghai index trade at 37 times reported earnings, near an 18-month high and twice the average of emerging markets. The gauge is up 87% this year as banks tripled new loans to 7.37 trillion RMB in the first half from a year earlier to support a 4 trillion-RMB government stimulus package.

The banking regulator said Thursday it plans to tighten rules on working capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion RMB, the Shanghai Securities News reported Friday, without saying where it got its information.

Shanghai Construction Co. rose 4.8% to 17.60 RMB. The company said it plans to swap about 358 million shares for 5.2 billion RMB of assets from its parent. Shanghai Construction get stakes in 12 of its parent's units and property in 9 locations, it said.

TAIWAN

Taiwan stocks ended 0.72% higher on Friday, with the world's top contract chipmaker, TSMC , leading gains after the company posted better-than-expected quarterly earnings and gave an upbeat outlook.

The main TAIEX share index rose 50.60 points to 7,077.71, closing the week with a 1.5% gain and marking its sixth straight weekly rise.

Taiwan Semiconductor Manufacturing (TSMC) surged 5.18%, helping to push the semiconductor sub-index to a 2.38% gain.

TSMC posted on Thursday a net profit of T$24.44 billion ($743 million) in April-June, its biggest profit in three quarters.

TSMC's second-quarter results saw a sharp rebound as demand for semiconductors across all applications increased. The company expected its sale and profit margins to rise in the third quarter sequentially.

The TAIEX index had outperformed most Asian markets, ranking the world's third-best performer among the 30 global indexes tracked by Reuters by a 54% rally.

Advanced Semiconductor Engineering Group shot up by its 7% daily limit. Minutes after the market close, the world's top chip packaging and testing firm posted a quarterly profit that topped market expectations.

Chi Mei Optoelectronics Corp, Taiwan's second-largest LCD maker, fell 1.6% after the company reported a quarterly loss but gave upbeat guidance for the third quarter.

THE PHILIPPINES

Philippine share prices on Friday closed higher, reflecting the substantial gains that the market registered for the entire month of July.

Bouyed by positive turnouts of Wall Street and regional bourses, the benchmark Philippine Stock Exchange index rose 33.35 points or 1.2062% to 2,798.33 while the broader all shares jumped 12.47 points or 0.7103% to 1,768.16.

Analysts said the end of the month meant that portfolio managers needed to buy stocks to "window-dress" their reports.

Since June 30, when the main index closed at 2,437.99, the bourse has logged in gains of about 14.8% for the entire month of July.

Market breadth was positive. Gainers dominated losers, 89 to 33, while 45 stocks were unchanged.

Except for Industrial, which dipped 1.3885%, all other sectors closed in the green led by Financials' 2.7517-percent expansion and Property's 2.1086-percent climb.

Volume improved with 2.553-billion shares worth about P4.640 billion changing hands.

Andrew Tan-led developer Megaworld Corp., the day's top traded, leaped P0.12 or 9.5238% to P1.38.

Metropolitan Bank & Trust Co., one of the country's largest lenders in terms of assets, soared P2.50 or 6.8493% to P39.

Telecommunications giant Philippine Long Distance Telephone Co. surged P45 or 1.8% to P2,545.

Ayala Corp., the Philippines' largest business group, leaped P2.50 or 0.8403% to P300.

MALAYSIA

At Bursa Malaysia, 485 counters were up, 207 were down and 243 others were traded unchanged. There were 1.26 billion shares done at a total value of RM1.94 billion.

The local bourse's benchmark FBM KLCI rose 1.23% to close at a one-year high of 1,174.90.

BCHB advanced 50 sen to RM10.80, Hong Leong Bank declined 20 sen to RM5.80 and Public Bank dropped 10 sen to RM10.20.

PPB rose 50 sen to RM14.70 and Sime gained 25 sen to RM8.25.

BAT jumped 50 sen to RM46.50 and Tanjong climbed 40 sen to RM15.20.

NST fell 9 sen to RM1.48 while Star lost 8 sen to RM3.16.

Oriental Holdings declined 15 sen to RM5.20 and Cycle & Carriage hit limit up at RM3.70 after its share price advanced RM1.04.

Crude palm oil third-month futures rose RM67 to RM2,212 per tonne after cargo surveyor Intertek said palm oil exports for July gained 14%.

SINGAPORE

Singapore shares closed 0.87% higher Friday but were off highs after banking stocks trimmed gains following a recent rally, dealers said.

Quarterly net losses for Singapore Airlines and property developer CapitaLand also weighed on the Straits Times Index, which rose 23.01 points to 2,659.20.

Volume was 2.84 billion shares worth 2.48 billion Singapore Dollars (1.72 billion US). There were 350 rising stocks, 233 decliners and 759 even.

Bank shares finished higher but the gains were smaller amid concerns over earnings to be reported next week.

DBS Group climbed 10 cents to 13.88, United Overseas Bank added eight cents to 17.68 and Oversea-Chinese Banking Corp advanced seven cents to 7.82.

Singapore Airlines, which posted its first quarterly loss in six years in the three months to June, dipped two cents to 13.50. The carrier has been hit by slower travel and cargo demand due to the global downturn.

CapitaLand, which also reported a net loss in the June quarter, was down 17 cents to 3.82. Keppel Land dropped four cents to 2.66 and City Developments was steady at 10.14.

Singapore Telecom rose 10 cents to 3.50 and Chartered Semiconductor added four cents to 2.24.

INDONESIA

Up 1.09%. The Jakarta Composite Index gained 25.10 points to 2,323.23.

Coal miner Bumi rose 15% to 2,800 rupiah, Bank Mandiri added 6.4% to 4,175 and car distributor Astra gained 4.3% to 29,300.

THAILAND

In Bangkok, Thailand's SET index gained 0.3%, erasing some of its early gain to its highest since June 15.

Among gainers, Siam Cement rose 5.1% amid expectations that a delay in new capacity from India and the Middle East would help boost its petrochemical spread in the second half. It posted a better-than-expected result on Thursday.

Cal-Comp Electronics climbed 4.2% on optimism the company would benefit from a recovery in global demand. Analysts expected it to report a surge in second-quarter net profit thanks to rising orders.

INDIA

Strong global cues and heavy institutional buying at the start of a new derivatives contract propelled Indian shares to their highest close in more than a year Friday.

The Bombay Stock Exchange's benchmark Sensitive Index closed up 1.8% at 15,670.31, after trading between 15,449.47 and 15,732.81.

Friday's surge helped the 30-stock index, which had risen 0.05% in the week till Thursday, end the week with a 1.9% gain. It is now up 62.4% so far in 2009.

On the National Stock Exchange, the 50-stock S&P CNX Nifty index rose 1.4% to 4,636.45.

Total traded volume on the Bombay Stock Exchange was 62.70 billion rupees ($1.29 billion), compared with Thursday's 60.49 billion rupees. Gainers beat decliners 1,401 to 1,299, while 101 stocks were unchanged.

Hindalco Industries soared 6.7% to 100.20 rupees after its first-quarter results. Net profit for India's largest aluminum producer by output, though down 31% from a year earlier at 4.81 billion rupees, was ahead of analysts' estimates.

Other metal stocks also rose, tracking a rally in base metal prices on the London Metal Exchange. Copper producer Sterlite Industries jumped 2.9% to 644.95 rupees, while Tata Steel added 2.1% to 462.70 rupees.

Reliance Industries, which has underperformed the markets recently, appreciated 3.0% to 1,957.10 rupees, as a large state-run insurance firm bought into the counter, two dealers said.

Institutional buying and a rise in crude prices pushed Oil & Natural Gas, up 5.9% to 1,164.50 rupees, while Tata Motors gained 6.6% to 421.55 rupees on bargain buying, after it lost 4.5% in the last two sessions.

Buying continued in State Bank of India, the nation's largest lender by assets, after its better-than-expected quarterly results Thursday. It rose 5.3% to 1,814 rupees, adding to its 4% jump in the previous session, driving other banks higher.

Hindustan Unilever rose 3.3% to 291.20 rupees, adding to its 5.2% gain Thursday. ITC, India's largest cigarette maker by sales, jumped 3.0% to 250.05 rupees. Infosys Technologies also rose 2.7% to 2,063.90 rupees.

However, Bharti Airtel ended down 3.1% at 410.55 rupees as speculation increased that its exclusive merger talks with South Africa's MTN Group may be extended Friday.

AUSTRALIA

Investors appeared unconcerned about the upcoming corporate earnings period as they boosted the Australian share market to an eight month high Friday, on the back of strong gains in global equities and commodities.

The benchmark S&P/ASX 200 index closed up 53.6 points or 1.3% at 4244.0 after rising steadily to 4247.9. The index rose 7.3% for the month, making it the strongest monthly gain since June 2000.

The broader All Ordinaries index rose 7.6%, making it the strongest July since 1989.

Share trading volume was light before the weekend, with US GDP data for the second quarter due later Friday.

But the mood was upbeat, as cyclical stocks in the financials, materials, energy, industrials, consumer discretionary and information technology sectors surged.

Overnight, the S&P 500 rose 1.2% on better-than-expected US earnings reports and a fall in existing jobless claims.

Commodity prices also surged, with London Metal Exchange copper up 3.4% and Nymex crude oil up 5.7% after Bank of China said monetary policy would continue to be appropriately loose.

Materials and energy stocks responded positively to offshore strength, with BHP Billiton up 1.9% to A$37.85, Rio Tinto up 4.0% to A$60.40 and Woodside Petroleum up 2.7% to A$45.70.

Bluescope Steel surged 7.3% to A$3.37. RBS' Trude said there was still "massive headroom" on cyclicals such as Bluescope.

The financial sector also continued to drive the market higher, with ANZ Bank rising 4.5% to A$18.53 and National Australia Bank up 2.4% to A$24.33.

Sources told Dow Jones Newswires that RBS was likely to announce the sale of its Taiwan banking assets to ANZ as early as next week.

Among industrials, Leighton surged 4.5% to A$30.18 as brokers raised their price targets after Thursday's Melbourne desalination contract win by Leighton's Theiss unit. However, UBS downgraded Leighton to Sell after recent share price strength.

In the information technology space, Computershare jumped 5.8% to A$9.83, while in the consumer discretionary area, News Corp., owner of this news wire, rose 3.8% to A$14.75 and Fairfax rose 5.4% to A$1.475.

Defensives took a breather, with Telstra down 2.5% to A$3.53, Wesfarmers down 1.4% to A$25.85 and Foster's down 1.6% at A$5.39.

Aristocrat fell 2.3% to A$4.30 after flagging a A$33.2 million loss for the first half, on the back of an A$80 million impairment charge.

Underlying the positive outlook for the market, Goldman Sachs JBWere upgraded its S&P/ASX 200 target to 4765 for December 2009 from 4370 previously. The broker also raised its June 2010 forecast to 5025 from 4560 and raised its December 2010 target to 5650 from 4700.

The upgrades followed upward revisions to key macroeconomic forecasts, including commodity prices and GDP.

"As the macro risks continue to diminish, we expect investment horizons will broaden, with an increasing focus on FY11 forecasts," said the broker.

However, Goldman Sachs JBWere traders Thursday warned that a short-term pullback in the equity market of between 4% and 8% loomed because the market has run too far too quickly.

NEW ZEALAND

New Zealand shares ended higher Friday, touching a new nine-month high during the session, bolstered by strong offshore markets and a more positive corporate outlook on the domestic front.

The NZX-50 Index ended up 0.7%, or 22.20 points, at 3,016.20, but eased off an intraday high of 3043.55, its highest level since Oct. 6. For the month, the index gained 7.9%, including 11 straight sessions of gains.

Gains in the US and other offshore markets supported local shares, but two local announcements also helped boost sentiment.

Firstly, pension home operator Ryman Healthcare told shareholders at its annual meeting that fiscal first-quarter results were ahead of a year earlier, and that the company was comfortable with consensus forecasts for the full year to March 31. The stock rose 3.6% to an 11-month high of NZ$1.75.

Secondly, homeware and sports goods retailer Briscoe Group said second-quarter sales rose 3.7% from a year earlier, adding that first-half net profit is expected to nearly double thanks to cost-cutting measures.

Briscoe jumped 9.3% to NZ$1.18, its highest level since May 2008. The stock's gains also boosted other retailers. Hallenstein Glasson was up 5.8% at NZ$2.75, The Warehouse was up 2.3% at NZ$3.99 and Pumpkin Patch was up 3.9% at NZ$1.60.

Heavyweight Telecom Corp. held back the market, dropping 2.1% to NZ$2.78 on profit-taking following a strong run during the month.

New Zealand Refining, which is "in play" after significant shareholders Exxon Mobil and Royal Dutch Shell appointed advisers to help find buyers for their stakes, fell 2.1% to NZ$7.10. Earlier in the month, the stock was up steeply on takeover talk, but that market speculation is now cooling, according to fund managers.

Global Commodities

'Food for thought' or 'a Grain of truth' .....

The sugar market reached a three-year high this week as weather-related production problems in India and Brazil, the world's two largest producers, pushed prices higher.

India announced on Friday an extension to a scheme that allows duty-free raw sugar imports until March and white sugar imports until November.

Tightening the market further are problems in Brazil, where heavy rains in the center-south region have hampered the harvest and will affect yields.

ICE October raw sugar rose 0.8% this week to 18.57 cents a Pound while Liffe October white sugar hit $495 a tonne on Friday, up 3.1% this week.

Sugar inventories are extremely low and white sugar is expected to break through $500 a tonne after the March contract reached $512.9 on Thursday.

Hedge funds have been accumulating March 2011 call options providing the right to buy raw sugar at 30 cents a Pound.

Some traders have been looking back to 1980 and 1973 when raw sugar prices neared 45 cents a Pound and almost 60 cents a Pound respectively.

Crude oil prices were volatile this week amid worries about weak US demand and concerns that China might rein in bank lending.

ICE September Brent rose $1.59 to close at $71.70 a barrel on Friday, up 2% for the week. Nymex September West Texas Intermediate advanced $2.51 to $69.45 a barrel, up 2.1% this week.

Gold regained the $950 level on Friday, rising 2% to $952 a troy ounce as the Dollar weakened.

The metal was 0.2% firmer over the week but investor interest in bullion appeared to subside in July with outflows of more than 40 tonnes from exchange traded funds acting as a drag on the market.

Global Currencies

In for a Penny, in for a Pound .....

The Dollar remained under pressure on Friday after second-quarter growth data revealed that the recession in the US had eased more than expected, leading investors to continue seeking yield on riskier assets.

Government data showed that gross domestic product in the second quarter fell 1%, better than the expected 1.5%.

But gains against the Dollar were hard fought as investors digested downward revisions to the GDP of previous quarters - particularly the first quarter, cut back to minus 6.4% from minus 5.5%.

The Euro climbed 0.8% against the Dollar to $1.4174 and the Yen added 0.3% to Y95.29 while Sterling was up 0.4% to $1.6553. The higher-risk commodity currencies and emerging markets units presented a mixed picture of the appetite for risk after the US data.

Sweden's Krona responded positively to its own GDP data, which showed flat quarter-on-quarter growth. This left annual GDP at minus 6.2%, beating expectations of minus 6.6%. The Krona rose 1.8% against the Dollar to SKr7.2805 and 1.1% versus the Euro to SKr10.3186.

New Zealand's Dollar rose 0.9% against its US namesake to $0.6574.

The Kiwi is one of the most popular destinations for carry trade activity, where low-yielding assets such as the Dollar are sold to fund higher-yielding purchases.

On Thursday the Reserve Bank of New Zealand left interest rates at 2.5%. This compares with the US target rate of between zero and 0.25%.

Over a volatile week, the Kiwi was up 0.3% against the Dollar while the Krona added 2.9%, hitting its highest level against the Dollar since October.

Sterling was up 0.8% over the week against the Dollar, helped by encouraging housing data and better-than-expected results from leading UK corporations, including BT and Cadbury. The Pound was up 1% over the week against the Euro to #0.8561.

There was focus on China this week as the Shanghai Composite equity market fell 5% on Wednesday on fears that the authorities would try to rein in lending. A resulting Dollar rally was short-lived after the People's Bank of China moved quickly in the following session to say it would keep its monetary policy loose for as long as necessary.

On Tuesday the Dollar index, an important measure of the US currency's value against a basket of currencies, fell to its lowest level of the year but ended the week flat as both the Euro and the Yen lost ground over the week.

The Australian Dollar climbed 1.6% over the week to $0.8299, hitting its highest level since the fall of Lehman Brothers after the country's central bank suggested that it was prepared to raise interest rates once economic growth returned.

After ticking down in morning deals, the South African rand edged up against the US Dollar during New York afternoon trading on Friday. The Rand climbed to a 3-day high of 7.7150 versus the greenback from early low of 7.8573. Presently, the pair is worth 7.7638. On the upside, 7.68 is seen as the next target level for the South African currency.

Friday, the South African Revenue Service or SARS said in a report that the trade surplus stood at ZAR 3.2 billion in June, widening from ZAR 2 billion in May.

And as always, rounding out currencies for this week we look at the RMB here in China. On the over-the-counter market, the Dollar was at CNY6.8318, down from Thursday's close of CNY6.8323. It traded between CNY6.8316 and CNY6.8322.

China

Key news eminating from China this week .....

Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.

The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend Rmb7,370bn in new loans, more than twice the amount lent in the same period a year earlier.

Beijing's concerns are echoed in other countries across the region, most notably South Korea, where the government says it is taking steps to cool a real estate bubble, and Vietnam, where the government has ordered state banks to cap new lending to head off inflation.

The situation in much of Asia is very different from most Western economies, where governments have flooded the financial system with liquidity to encourage unwilling banks to lend more.

In China, regulators are now concerned that too much money is being lent by the state-controlled banks and the country's tentative economic rebound could come at the cost of a stable financial system.

In statements published last week, Wu Xiaoling, who recently retired as deputy governor of the central bank, warned new lending this year would probably reach as high as Rmb12,000bn, a staggering increase of 40% of the entire stock of outstanding loans in just one year.

She called this sort of growth excessive and said it would lead to bubbles in the property and stock markets.

The flood of new lending also has implications for the quality of bank loans and the country's overall growth.

China's economic recovery is being constructed on the back of a savaged banking system. Tens of billions - and perhaps hundreds of billions - of Dollars of loans will not be repaid.

In recent years total loan growth of around 15% has supported gross domestic product growth of higher than 10% but in the first half of this year total loan growth of around 33% supported GDP expansion of only 7%.

China's economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year potentially.

China's benchmark stock index has already more than doubled from the low it reached last November and property prices have also rebounded strongly with state media reporting long queues and scuffles at sales promotions for some new real estate projects.

Ms Wu hinted Beijing may soon raise the amount of money banks must hold on deposit with the central bank, marking a change of policy from last year when it aggressively slashed the reserve requirement ratio and interest rates.

The central bank has also ordered 10 banks, including Bank of China, to buy Rmb100bn worth of central bank notes with a maturity of one year and a return of just 1.5%, according to Chinese media reports.

This move is interpreted as a warning to banks that have been the most active lenders that they should now start to rein in their excessive behaviour.

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The US and China sought to present a common front on Tuesday on economic co-operation but remained at odds over climate change at the end of two days of top-level consultations that highlighted Beijing's growing confidence and assertiveness.

While both sides hailed the importance of consulting with each other - and confirmed that President Barack Obama would visit China later this year - the meeting failed to produce any extensive new agreements.

"Laying the groundwork [for closer ties] may not deliver a lot of concrete achievements immediately," acknowledged Hillary Clinton, secretary of state. But she added the level of co-operation had been unprecedented.

The US and China are perhaps the world's main champions of fiscal stimulus and Beijing is broadly sympathetic to Washington's call, reiterated on Tuesday by Tim Geithner, Treasury secretary, for China to increase its domestic consumption and decrease its reliance on exports.

"Co-operation between China and the US will remain vital not only to the well being of our two nations but also the health of the global economy," said Mr Geithner, stressing the two countries' agreement "to undertake policies to bring about sustainable, balanced global growth once economic recovery is firmly in place."

While the US reiterated a promise to lower its burgeoning deficit by 2013, China agreed to rebalance towards domestic demand-led growth, as it has in the past. And while the US emphasised its plans for tougher financial sector regulation, China signalled its intention to liberalise its own financial sector.

In a series of commitments that echoed other pledges made in the past, Beijing also promised to raise the Dollar threshold of foreign investments requiring central government review and to treat companies with foreign investment the same as domestic producers when granting government contracts.

But as the world's biggest holder of US Treasury bonds, China remains very uneasy about the safety of its investment in hundreds of billions of Dollars - although its exposure to the US currency constrains Beijing's ability to criticise US monetary policy.

"As a major reserve currency-issuing country, the US should properly balance and properly handle the impact of the Dollar supply on the domestic economy and the world economy as a whole," said Chinese vice-premier Wang Qishan at an event with Mr Geithner earlier in the day.

He later pronounced himself content with Washington's assurances that the US would meet its financial commitments.

The two sides also signed a memoRandum of understanding on climate change that committed them to intensified bilateral discussions of the issue and highlighted the importance of success in international negotiations in a United Nations meeting in Copenhagen later this year.

But Xie Zhenhua, vice-minister of China's national development and reform commission, said developed countries had to take the lead in substantially reducing emissions and in committing to technology transfer and financing for industrialising countries to control their own carbon emissions.

******************************

Dongguan, the south China city whose factories alone outpace those of Vietnam in exports, has recorded a 10% decline in employment since the onset of the global economic downturn, its mayor said on Wednesday.

The city, about 90km north of Hong Kong, was hit by a fall in exports of 24% over the first six months of 2009 compared with the previous year's first half as consumers cut their spending. As a result, gross domestic product grew 0.6% in the first half, compared with the national figure of 7.1% and a 30-year average in Dongguan of 18%.

"Manufacturing is Dongguan's pillar industry," Li Yuquan said. "The global financial crisis has had a strong impact on Dongguan." Mr Li said registered employment had fallen to 5.7m, an implied loss of 630,000 jobs.

In January, the government estimated that 20m of the country's 130m migrant workers had lost their jobs. Most of Dongguan's 10m residents are migrants.

In spite of the grim data, the mayor was confident that Dongguan could reach its official annual GDP growth target of 10%. "We are under great pressure to meet our GDP goal because Dongguan is an export-oriented economy," Mr Li said. "But we have every confidence we will achieve it."

The Dongguan government, whose revenues are also under pressure, has allocated Rmb1bn ($146m, €104m, #89m) in emergency financing for smaller enterprises, with Rmb4bn more earmarked to support technological upgrades research and development and training.

According to Mr Li, some 1,200 companies have taken advantage of the funds. He also said the local government had helped enterprises to secure an additional Rmb20bn in bank loans.

The crisis has primarily affected smaller factories, with 342 closing in the first six months of this year. Some 865 closed in 2008. "I can assure you that these figures are accurate," Mr Li said. "The main impact of the financial crisis has not been factory closures but shrinking orders and manufacturing capacity."

******************************

General Motors Co., the largest overseas automaker in China, expects to report a 70%-plus increase in local sales this month on the back of government stimulus measures and a rebounding economy.

July sales will be about 140,000 vehicles, GM China President Kevin Wale said in an interview in Shanghai Thursday. The automaker, which sells bRands including Buick, Wuling and Chevrolet in China, will announce the final figure next week.

GM's China sales have jumped this year as rural drivers snap up low-cost minivans with the help of government subsidies. Along with tax cuts, the handouts have allowed the country to avoid a slump in global vehicle sales and put it on course to surpass the US as the world's largest auto market this year.

The automaker's first-half China vehicle sales surged 38% to 814,442. Sales at SAIC-GM-Wuling Automobile Co., its minivan venture, accounted for about 64% of total sales in the period. Minivans cost as little as $4,000.

Volkswagen AG, the biggest overseas maker of passenger cars excluding minivans in China, boosted first-half sales in the country 23% to 652,222.

GM has introduced at least six new or revamped models so far this year in China. The carmaker intends to roll out as many as 30 models in the next five years in the country, Wale reiterated. At least one model will be tailor-made for the local market.

For the rest of this year, "we expect some slowdown, but not a dramatic slowdown," Wale said. The government is also likely to extend stimulus measures in some form into next year to avoid a collapse in demand, he added.

China's industrywide passenger-vehicle sales soared 48% in June to 872,900, the biggest jump since February 2006.

SAIC Motor Corp., GM's partner in China, rose 2% to 19.20 RMB at the closing trade in Shanghai. The benchmark Shanghai Composite Index climbed 1.7%.

China has assumed a central role in GM's strategy after the automaker's predecessor collapsed into bankruptcy amid plunging US auto sales. The Detroit-based company gets about 20% of global sales in the country and it plans to oversee all of its international businesses from Shanghai, Wale said. Nick Reilly, the automaker's Asia-Pacific head, has been promoted to manage GM's operations outside of North America.

The automaker's operations in China were unaffected by the US bankruptcy because of their local funding, Wale said. The company has closed US plants and drawn up plans to sell off its European operations to become a leaner and profitable company.

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FirstRand Ltd., South Africa's second-biggest financial services company, and China Construction Bank Corp. agreed to cooperate on growth opportunities in Africa.

"It will allow FirstRand Bank and CCB to participate in the large transactions and investment opportunities we expect to emerge in the continent," Sizwe Nxasana, chief executive designate of FirstRand, said Friday in an e-mailed statement in Johannesburg, where the bank is based.

Hong Kong-based CCB, the world's second-largest bank by market value, will use its balance sheet to support FirstRand subsidiary Rand Merchant Bank Ltd.'s corporate finance, mergers and acquisitions and project finance teams, he added.

FirstRand's Johannesburg-based rival, Standard Bank Group Ltd., last year sold a 20% stake to the world's biggest bank, the Industrial & Commercial Bank of China Ltd., as investors sought to finance more projects on the resource-rich continent. The International Monetary Fund says Africa's economy may expand 4% in 2010, outstripping growth in developed nations.

FirstRand rose 55 cents, or 3.7%, to close at 15.25 Rand in Johannesburg trading, giving the company a market value of 86 billion Rand ($11 billion). The shares have declined 5.3% this year.

Summary

The coming week looks like .....

Next week, among companies expected to release results are Dow components Procter & Gamble, Kraft and Cisco.

More companies will release their quarterly scorecards, though the bulk of the earnings season is out of the way with 67% of S&P companies having reported. The better-than-expected results have driven the most recent leg of the rally.

But with a 46% gain from March's 12-year low, the S&P 500 could be ripe for a pullback, especially if the week's data is less encouraging (yet somehow, I see it coming out "better than expected").

Investors will be watching the S&P to see if it can breach 1,000, a key technical and psychological mark. The market will face resistance getting to that point, but piercing 1,000 could also be perceived as a buy signal, causing the market to rally even ridiculously higher.

The market tested the level earlier in the week, coming within about 4 points but was unable to get any further.

P&G, the maker of Gillette razors and Tide laundry detergent, will be of particular interest to investors looking for signs of life in consumer spending. P&G has already seen some of its brands lose market share as recession-weary shoppers trade down to cheaper brands.

In the same vein, a report on personal income for June will be watched for what it says about the savings rate. Personal income is forecast to fall by 1%, according to Reuters data, compared to a gain of 1.4% in May.

The May report also saw the savings rate jump to its highest level since records began in 1959. Consumer spending accounts for about two-thirds of the US economy and will need to regain strength for any economic recovery to be sustainable.

Reports on private sector employment and weekly initial jobless claims to be released on Wednesday and Thursday, respectively, will be watched for any signs about what they might project about Friday's jobs reported.

Other data for the week include manufacturing and non-manufacturing ISM for July, factory orders for June and pending home sales for June.

After having to swallow a record $200 billion in new debt in just three days, the Treasury's market is anxiously awaiting news next week on how much more is coming its way.

On Monday, the Treasury Department is scheduled to issue a quarterly update on its forthcoming borrowing needs. And then Wednesday, it will announce a series of auctions to be held in the following week - this time for three-, 10- and 30-year notes and bonds.

Few doubt the numbers will again be big, as the US government seeks to finance a record budget deficit and to fund an ongoing effort to stimulate the recession-bound US economy.

Both the two-year and the five-year auction saw big declines in their bid-to-cover ratios and a drop in indirect bidders, which stoked fears that foreign central banks are losing interest in buying Treasurys.

Such concerns could be heightened by a weaker Dollar, which dropped sharply Friday, although Vogel argued the sell-off was more of a symptom of a Treasurys-positive development than an indicator of waning demand for US government debt because it tracked a rally in two-year notes that drove down their yield to 1.11% in light Friday trade. Lower returns on short-dated securities make the Dollar less attractive relative to other currencies.

Month-end buying seemed to be the motivating factor behind the end-of-week rally in Treasurys, seen also in 10-year and 30-year Treasurys, and which ran against a usual negative correlation with the equities market.

While the restoration of risk appetite has mostly tended to weaken Treasurys, other news within the second-quarter data that showed the continued risks to growth - primarily weak consumer spending and soft wages - should anchor short-end yields. That's because they should strengthen the Federal Reserve's resolve to maintain highly accommodative rates for the foreseeable future.

Although Treasurys continue to price in the likelihood of Fed rate hikes early next year, Fed officials themselves have mostly shown themselves in no hurry to unwind the massive monetary stimulus they've left in the system. Although Federal Reserve Bank of Philadelphia President Charles Plosser expressed concerns about inflation risks last week, a far more dovish line - seemingly the party line - was heard from Janet Yellen and William Dudley, Plosser's counterparts at the San Francisco Fed and New York Fed, respectively.

Nonetheless, bets on future Fed policy will ultimately hinge on the data. So next Friday's July payrolls report looms as a key data point to watch.

Stockmarkets have managed to extend their rally but potential hurdles, such as next week's US non-farm payrolls, could prove increasingly hard to leap given valuations - European stocks are trading at their highest multiples of earnings since May 2008 while the multiple for the S&P is the highest since mid-September 2008. If investors are to boost equity holdings -- which Reuters polls show already back to pre-Lehman levels -- it may require more concrete evidence of economic expansion, rather than just economic stabilization, and signs that profit margins will be supported by revenue growth, rather than cost cutting.

The Bank of England will have to decide next week whether to end its asset-buying programme or extend it. Concern about potential longer-term inflation implications will have to be weighed against the signs of economic weakness still manifest in the Q2 GDP data.

With economists split on the outcome, markets look set for volatility, not least as the MPC's decision is likely to be viewed as a indication of when other central banks could start to halt/unwind their credit easing strategy.

Detailed PMI data and UK, Italy industrial output reports will be scanned for signs of whether the inventory decline that accompanied a rise in Japanese industrial output is being seen elsewhere, with the inventory-shipments, inventory-orders ratios remaining firmly in focus as key signals for the outlook for production.

The extent to which Asian economic activity is helping trade flows will also be flagged by German and French June trade data (all the more interesting given May exports rose in both countries, despite their differing export specialisations).

The dexterity with which China can manage surging lending and potential price pressures without unsettling markets with any rapid reversal of stimulative policy is increasingly in focus and will have financial market and macroeconomic repercussions well beyond its borders and Asia, as this week showed.

Australia, which felt the spillover effect of this week's China jitters, has its own policy dilemma as the RBA is trying to push back against its currency's appreciation while giving markets another reason to buy A$ by its more upbeat view on the domestic economic outlook. The RBA policy meeting next week will give the central bank a chance to show how it squares this circle.

European banks reporting next week (HSBC, UBS, BNP Paribas, Societe Generale, Barclays, RBS, Commerzbank, Lloyds and UniCredit) will be closely watched for the extent to which they follow in Deutsche Bank's footsteps by making higher loan loss provisions.

The ECB's latest lending survey shows Euro zone banks' expect to continue to tighten credit conditions in the coming months, albeit at a slower pace; heftier loan provisions will make this all but guaranteed.

All told, lots to drive the market in either direction next week and so it's yet another case of watching and separating the wheat from the chaff - then drawing your own conclusions as to whether this is a massive, massive 'global illusion' that everything in the world appears to be well - or indeed, everything IS well.

I have my own opinions, as expressed at the start!

As always, I will keep you posted with major developments as/when they occur in the week ahead. In the meantime, I wish you all a very pleasant weekend.

Market Newsletter Written By

Adrian Page

Managing Director

Financial Page International