Financial Page International

25 July 2009 - Global Markets Review
Dear Ladies & Gentlemen,
Let's start with the UK this week; just to appease US readers and get off of my 'anti-US' soap-box.
The UK economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in recession.

Gross domestic product contracted 0.8% from the first quarter, the Office for National Statistics said Friday in London. Economists predicted a 0.3% drop, according to the median of 32 forecasts in a survey. From a year earlier, the economy shrank 5.6%, the most since records began in 1955.
 
And what happened to the FTSE - it went UP of course. Elsewhere in the UK, efforts to capture and store carbon dioxide from power plants, reducing greenhouse gas emissions, have fallen behind Canada and other nations because of funding delays, the head of an industry lobby group said.

E.ON, RWE and Iberdrola are competing for UK government funding to build the country's first commercial-scale Carbon Capture and Storage project at a power station, by 2014. Britain, which gets 37% of its electricity from coal, is counting on the CCS technology to trap and bury greenhouse gases.

The UK has gone from a leading position in CCS to gradually slipping well behind other countries in the world. Some UK utilities are phasing out coal-fired power plants because it would be unprofitable to upgrade them to meet tightening environmental regulations.

Okay, enough about the UK, let's look at the US and what it has been up to this week.

Talk about irrational exuberance! The S&P 500 rallied 13% from the July lows, which coincidently were hit the day 2Q earnings season began on 8 July.

Now, earnings have beaten estimates broadly with about 75% of companies reported so far posting a positive outlook and earnings coming in about 11% better than estimates (those were 'zero' estimates by the way!).

That said, let's look at this all realistically (someone has to). The better bottom-line numbers are on the back of massive cost-cutting measure mainly at the expense of jobs - the unemployment rate in the US isn't at 9.5% by accident. If we look at what sales have done, they've actually come in about in line with the low-ball expectations.

Considering the state of the US consumer and the de-leveraging still needed before the US gets back to sustainable debt levels, driving that sales figure will become more and more challenging going forward. The consumer currently holds about 23% of annual disposable personal income in non-real estate debt and this number needs to creep closer to 18% to be sustainable.

All things being equal, this means an additional $525 billion in debt reduction, which will likely come at the expense of retail sales.

The just released University of Michigan consumer sentiment index posted its first decline since February and the expectations component remained depressed.

If the first half of 2009 is any indication, the consumer has clearly moved to a higher savings, lower debt and lower spending state of mind, which is something I have always said needed to happen. While this is good in terms of building a better economic foundation for the future, corporate earnings will bear the brunt of this shift in behavior obviously.

From a valuation standpoint, the rally looks extremely long in the tooth. The forward price-to-earnings ratio on the S&P 500, at just above 15 times, is the highest since October of last year. Historically the P/E ratio has been about 16.4 on average when excluding the credit boom - an environment the US will likely not revisit to anytime soon.

If investors were to pay up for the next twelve month earnings at that rate, the S&P would trade at about 1072.

The current economic landscape, however, is far from normal. Credit conditions remain extremely tight, the US consumer is in retrenchment mode and the employment situation is getting worse by the month. Not to mention another headwind from rising oil prices, which when translated to price increase at the petrol-pump will mean even less discretionary income.

Throughout the last decade, every penny change in petrol (gasoline to our US readers) prices has had about a $1.2 billion impact on annual household balance sheets - not trivial when you consider there is likely to be another 25 cents of upside from last week's $2.50 pump price.

For anyone looking for solace in the so-called improved initial jobless claims numbers, I would just say that the recent weeks have been skewed by seasonal adjustment difficulties surrounding the earlier than anticipated car plant shutdowns in June.

The potential for a snap back above 600K as the adjustment process normalizes is very real. And even if the shift in the reported numbers is for real, many continuing claims are merely shifting to extended federal programs that currently total a very non-trivial three million people.

The question has to be this Ladies and Gentlemen; How long can the upward momentum be sustained given cost-cutting rather than improved revenue streams flattered profit margins?

And of course, ponder this; after the end of earnings data, what's left to drive stocks higher? Rising unemployment? Stagnating consumer demand?

This week in the US has seen the Healthcare Plans come under the microscope - this is a massive bone of contention that is not going to go away anytime soon I feel. 

In California, lawmakers on Friday approved a complex package of spending cuts, local government raids and accounting maneuvers to fill California's gigantic budget deficit, providing hope that the state might begin a slow climb out of a deep financial hole.

This wasn't before we saw California's Governor Arnold Schwarzenegger waving a huge two-foot hunting-knife and talking about 'budget cuts' (I think he still believes he's in a movie, 'The Governator' maybe!)

It appears to me, maybe because I'm a realist, that global stockmarkets are suffering from a bad bout of 'amnesia' - people are forgetting what it felt like when their stock prices dropped 50% or more last year and they seem to be hell-bent on creating a 'v-shaped' return to those heady days of pre-October 2007.

I'm not going to say that this maybe 'shouldn't' be allowed to happen, I'm going to say that this categorically should not be allowed to happen otherwise we'll be back at square one within a year.

Basically, my message Friday - once again states what I consider to be obvious to me, but what global stockmarkets seem to be forgetting - is that this is a LIQUIDITY driven stockmarket rally that has fundamentally nowhere to run once we stop looking at earnings reports and focus on the basics.

In fact that's not correct, it does have somewhere to go ..... and that is back down again!

On to the numbers:  
US Markets 
How the US did this week .....
 US SummaryUS stocks rose, completing the Dow Jones Industrial Average's best two-week rally since 2000, as energy producers climbed on a gain in oil and Federal Reserve Chairman Ben S. Bernanke said the central bank is "winding down" emergency measures established to end the financial crisis.
Exxon Mobil Corp. and ConocoPhillips advanced as oil and natural gas prices extended their weekly gain. Chubb Corp. jumped 6.5%, leading insurers higher, after raising its 2009 forecast. Microsoft Corp. and Amazon.com Inc. retreated more than 7% after quarterly results missed estimates, breaking the Nasdaq Composite Index's 12-day winning streak that was the longest since 1992.

The Standard & Poor's 500 Index rose 0.3% to 979.26, reversing a 1.1% loss from Microsoft and Amazon.com's reports. The Dow average added 23.95 points, or 0.3%, to 9,093.24, one day after surpassing 9,000 for the first time since January. It's surged 12% since July 10.

Index futures fell after the close of regular stock trading Thursday following worse-than-forecast results from Microsoft, Amazon.com and American Express.

Stocks erased their losses as energy companies rebounded from their lows, and Bernanke's comments pushed the S&P 500 to its intraday peak. He told the House Financial Services Committee that the Fed's emergency lending programs are diminishing in size.

Investors are pouring money into shares on speculation the fastest rally since the Great Depression will reverse losses from last year, when the S&P 500 fell 38%. US mutual funds received $1.5 billion of net inflows this week, the second-highest amount since February 2008, according to AMG Data Services in Arcata, California. The S&P 500 has surged 45% since March 9.

Crude oil for September delivery added 1.3% to $68.05 in New York after falling 1%. Natural gas futures expiring next month climbed 4.1% to $3.695 per million British thermal units.

Chubb, the insurer of high-end homes and corporate boards, added 6.5% to $45.37. Its second-quarter profit beat analysts' estimates, and the company raised its 2009 forecast.

Among S&P 500 companies that have posted second-quarter results, 75% beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest rate for a full quarter, Bloomberg data going back to 1993 show. About 300 S&P 500 companies have yet to report for the period.

Microsoft fell 8.3%, the most since January, to $23.45. The biggest software maker reported a 29% drop in fiscal fourth-quarter earnings and posted sales that missed analysts' estimates, a sign that demand for Windows and Office software is still declining. Per-share profit excluding some items was 36 cents, missing the average forecast by 2.4%.

Technology shares in the S&P 500 fell 0.7%, the most among 10 industries, a day after rising to the highest level since September on EBay Inc.'s better-than-estimated earnings. MEMC Electronic Materials Inc., the maker of silicon wafers for solar modules, lost 10% to $18.72. Its second-quarter profit declined 96% on low prices and weak demand.

Amazon.com lost 7.9%, the most since November, to $86.49. The world's largest Internet retailer has sought to ward off competitors by cutting prices and adding products, such as laptops and outdoor equipment. Its low prices and free-shipping offers have started to eat into profit, said Aaron Kessler, an analyst at Kaufman Brothers LP. Sales of $4.65 billion were 1% less than analysts estimated on average.

Black & Decker Corp. rose 10% to $37.13. The largest maker of hand tools posted second-quarter profit of 63 cents a share, beating the average analyst estimate by 74%.

RadioShack Corp. rose 10% to $16.06. The second- largest US electronics chain was upgraded to "outperform" from "sector perform" at RBC Capital Markets, and to "outperform" from "market perform" at FBR Capital Markets Corp.

SunPower Corp. surged 29% to $32.04 after the second-biggest US solar-cell maker reported an unexpected quarterly profit and boosted its sales forecast for the year.
European Markets 
What has been happening in Europe this week .....
 Europe SummaryEuropean stocks declined, snapping the Dow Jones Stoxx 600 Index's longest rally since 2006, as Ericsson AB and Syngenta AG posted earnings that missed analysts' estimates.
The Stoxx 600 slipped 0.1% to 219.67, ending a nine- day winning streak. The benchmark index for European equities has climbed 4.3% this week, extending its rally since July 10 to 11% as results from US companies from Goldman Sachs Group Inc. to Johnson & Johnson and Apple Inc. topped estimates.

National benchmark indexes declined in 11 of the 18 western European markets. The UK's FTSE 100 advanced 0.4%. France's CAC 40 decreased 0.2% and Germany's DAX slipped 0.3%.

The pan-European FTSE Eurofirst 300 index gained 4.1% over the week to 907.39, rising every day except Thursday to string together nine straight sessions of gains.

Pharmaceuticals companies rose in step with less defensive sectors, with the FTSE Eurofirst pharma and biotech indices gaining 4.3% over the week.

GERMANY

German stocks declined, with the benchmark DAX Index snapping its longest stretch of gains since July 2005, as a slump in Merck KGaA helped offset an increase in business confidence.

Merck sank 15% after the European Union rejected its Erbitux drug for a form of lung cancer, denting growth prospects for the company's top-selling oncology treatment. ThyssenKrupp AG, Germany's biggest steelmaker, climbed 3.5% as metals prices rose in London. K+S AG, Europe's biggest producer of potash used in fertilizers, added 1.7%.

The DAX Index slipped 0.3% to 5,229.36 Friday in Frankfurt, after rising for nine consecutive days. The measure has still rallied 5% this week, extending the gain since July 10 to 14% as US companies from Goldman Sachs Group Inc. to Johnson & Johnson and Apple Inc. reported better-than- estimated earnings.

Merck sank 15% to 62.62 Euros Friday, the steepest decline since at least 1995.

Separately, the drug and chemical maker said second-quarter profit dropped 48% as sales of liquid crystals used in flat-panel electronics slumped and spending on drug research and development increased.

Bayer AG, Germany's largest drugmaker, declined for the first time in eight days, losing 1.9% to 40.18 Euros.

ThyssenKrupp gained 3.5% to 20.48 Euros as copper, lead and nickel climbed in London. K+S added 1.7% to 40.58 Euros. Adidas AG, the world's second-biggest maker of sporting goods, climbed 1.5% to 29.05 Euros.

Europe's economy moved closer to recovery as the manufacturing and service industries contracted at the slowest rate since August and German business confidence climbed to a nine-month high.

The Ifo Institute's index of business sentiment in Germany increased to 87.3 from 85.9, reaching the highest since October. According to a separate report, a composite index of manufacturing and service industries for the 16 Euro nations rose to 46.8 from 44.6 in June.

Fraport dropped 1% to 32.14 Euros, the second decline in the past three days. UniCredit SpA cut its recommendation on the operator of Frankfurt airport to "hold" from "buy."

MorphoSys tumbled 3.8% to 16.82 Euros, trimming Thursday's 9.3% advance. WestLB AG downgraded the German biotechnology company to "neutral" from "buy," saying the company "is currently an unlikely target for a takeover."

ProSiebenSat.1 Media climbed 6% to 4.44 Euros, a fourth straight advance. Germany's biggest private broadcaster was raised to "neutral" from "reduce" at Sal. Oppenheim Jr. & Cie. KGaA.

Q-Cells surged 5.4% to 12.92 Euros, a fifth day of gains. The German producer of cells used in solar panels and MEMC Electronic Materials Inc. formed a joint venture to construct large solar parks, with each partner having a 50% share.

Singulus Technologies sank 11% to 2.10 Euros, its steepest drop since November. The German maker of machines that replicate compact discs and DVDs said it sees clearly negative results for 2009 and will cut 190 jobs worldwide.

Solon SE jumped 4.3% to 10.66 Euros, snapping a two-day decline. Solon's Italian unit signed a contract with Interporto di Padova to erect what Solon said will be the world's largest roof-mounted photovoltaic system, in Padua, Italy, with a nominal capacity of 15 MWp.

FRANCE

France's CAC 40 Index slid 7.27, or 0.2%, to 3,366.45, snapping nine days of gains. The benchmark equities gauge has jumped 13% since July 10. The SBF 120 Index slid 0.2% Friday.

Air France-KLM Group lost 16 cents, or 1.8%, to 8.85 Euros. Europe's biggest airline said fiscal first- quarter sales fell 21% to 5.19 billion Euros ($7.36 billion) as the global recession reduced traffic and cargo handling.

Carbone Lorraine declined 63.5 cents, or 3.2%, to 19.01 Euros. The world's second-biggest maker of industrial fuses reported a 12% drop in second-quarter revenue on deteriorating markets in Europe and North America.

Cie Generale de Geophysique-Veritas added 62 cents, or 4.7%, to 13.73 Euros. The world's largest seismic surveyor was raised to "buy" at Bank of America Corp.

Cie. de Saint-Gobain, Europe's biggest supplier of building materials, gained 90.5 cents, or 3.4%, to 27.58 Euros. The company will increase cost-cutting measures, targeting savings of 1.1 billion Euros this year.

Groupe Danone retreated 86 cents, or 2.3%, to 36.78 Euros. The world's largest yogurt maker reported slowing sales growth in its two fastest growing divisions.

Lagardere added 82 cents, or 3.3%, to 25.54 Euros after France's largest publisher reiterated its targets for the full year.

PagesJaunes soared 7.1% to 7.20 Euros. The French yellow-pages company bought by Kohlberg Kravis Roberts & Co. said that first-half net income increased 25% to 128.4 million Euros.

BELGIUM

In Brussels, the Bel 20 finished a positive week at 2,135.43, down 0.25% on the day.

Belgian property investment group Befimmo forecast on Thursday that it would pay a final dividend of 1.04 Euros per shares this year in addition to the interim sum of 3.36 Euros it had already paid.

Befimmo, which secured a net 159.6 million Euros ($227 million) in a capital increase at the end of June, said that the fair value of its portfolio had slipped and that the occupancy rate was 94.11% at the end of June, against 97.3% at the end of September.

The capital increase reduced the company's leverage to around 45%, allowing it to take up new investment opportunities.

Its book value at the end of June was 58.65 Euros per share, from 74.03 Euros at the end of September, reflecting the capital increase and payment of the interim dividend.

Shares in Belgian investment company Quest for Growth jump 8.8% to a six-week high after it returns to profit in the second quarter.

Quest, which invests principally in technology companies, reported a 7.4 million Euro profit in the second-quarter after a 2.1 million Euro loss in the first and what it described as a "difficult" 2008.

KBC Securities said it valued Quest's portfolio at 6.11 Euros per share, implying an unjustifiably large discount of 36.8% although a long series of writedowns of the private equity portfolio prompted cautiousness.

THE NETHERLANDS

The AEX in Amsterdam ended the week at 276.15, Friday turning out to be absolutely flat with no gains or declines.

Dutch navigation-equipment maker TomTom NV on Wednesday posted a smaller-than-expected 61% fall in second-quarter net profit and raised its cost savings target, as the continued sharp fall in consumer spending continued to hit its business.

Shares in TomTom surged as margins beat forecasts, due to cost savings and a favorable product mix. Lower sales of personal-navigation devices, or PNDs, were partly offset by higher sales from other products. In addition to PNDs, TomTom supplies services such as traffic information, fleet management tools and in-car navigation. Shares gained 11.5% in midday trading on a broadly lower Amsterdam market.

Net profit fell to €19.8 million ($28.1 million) in the quarter ended June 30 from €52 million a year earlier. Sales declined 19% to €368 million from €453 million. Analysts had expected, on average, net profit of €18.9 million on sales of €353 million.

TomTom, along with rival Cayman Islands-based Garmin Ltd., has had to contend with a sharp drop in consumer spending on consumer-electronic goods caused by the economic slump, which has hit sales and margins, and the increasing prevalence of location-based services available on mobile phones.

As a result of these pressures, TomTom previously announced a €60 million cost-cutting program, which it increased Wednesday to €90 million in operating cost savings from last year. "In the first six months of 2009 we've realized €64 million in cost savings," Chief Financial Officer Marina Wyatt told reporters. Nearly half of those are from marketing, research and development costs.

Royal KPN, the largest Dutch phone company, cut its revenue forecast for this year and next as sales dropped at its iBasis business and in Germany.

KPN Friday said it expects 2009 sales between 13.6 billion Euros and 13.8 billion Euros ($19.7 billion). The company previously forecast revenue "in line" with 2008 sales of 14 billion Euros. Sales in Germany fell 1.4% to 797 million Euros, the first drop since at least 2005.

To boost margins, The Hague-based company is passing up less profitable new corporate business, leading to a 24% drop in sales at iBasis, a wholesaler of international calling minutes. Service-revenue growth at E-Plus, its German mobile- phone business, slowed as customers chose other providers.

Second-quarter profit rose 5.1% to 371 million Euros from a year earlier. Analysts had estimated net income of 348 million Euros. Revenue next year will be "in line with" 2009. In January, the company forecast revenue of more than 15 billion Euros in 2010. Second-quarter sales for the company declined 6.9% to 3.41 billion Euros, missing the 3.48 billion-Euro average estimate of 16 analysts.

AUSTRIA

Vienna's ATX closed out a largely positive week at 2,202.00, up 1.10% on Friday.

Austria's central bank said the economy would shrink 4% in the second and third quarters compared with the same periods last year.

Troubled Austrian developer Immoeast will be handed a company stake rather than 170 million Euros ($241 million) in cash in a settlement over a controversial bond, a source close to the deal said on Tuesday.

Cash-strapped Immoeast has come close to a deal with debtor Constantia BV in which it would get a 40% stake in Austrian aluminium producer AMAG as partial compensation for the roughly 520 million Euros outstanding on the bond, the source said.

The stake would be valued at about the same amount that Immoeast has been hoping to get in cash, according to the source.

It would still likely take some time in the current market environment to turn it into the much-needed cash dollop.

However, to finalise the settlement quickly, Immoeast is ready to seal the deal, the person said.

Immoeast Chief Executive Eduard Zehetner confirmed that he was closing in on a deal, but would not elaborate.

Immoeast, the emerging European arm of Immofinanz, is struggling to cope with writedowns on Eastern European assets, which have led to a 2.3 billion Euro pretax loss in the first nine months of its 2008/09 business year.

SWITZERLAND

The SMI in Zurich closed in line with Regional bourses, mildly negative on the US opening senitment, down 0.08% at 5,760.90.

Syngenta slid 6.7% to 239.3 Swiss Francs after first-half net income of $1.39 billion missed analysts' estimates for $1.48 billion.

Zurich Financial Services AG, Switzerland's largest insurer, narrowed its search for a new chief executive officer to four internal candidates, two people familiar with the matter said.

Chief Financial Officer Dieter Wemmer, Chief Investment Officer Martin Senn, Chief Risk Officer Axel Lehman and Mario Greco, the CEO of the global life business, remain in contention to succeed 63-year-old James Schiro, said the people, who declined to be identified because they aren't authorized to discuss the matter.

The US-born Schiro, who plans to retire at the end of the year, "transformed the fortunes of the group and the share price," since taking the helm in 2002, HSBC Holdings Plc analysts James Garner, Kailesh Mistry and Thomas Fossard said in a note on the insurer this month.

Schiro, formerly the head of PricewaterhouseCoopers LLP, bolstered profit at the Zurich-based insurer after taking over from Rolf Hueppi. Zurich Financial was the worst performer on the Bloomberg Europe 500 Insurance Index in 2001, the year before Schiro took over. The stock has almost doubled since the end of 2002.

Nobel Biocare Holding AG advanced 6.7% to 23.1 Swiss Francs. The maker of dental implants was raised to "buy" from "hold" at Deutsche Bank AG, which cited "material upgrades as the economy recovers."

Strong results from Credit Suisse helped lift the bank's shares as analysts and investors interpreted its performance as signalling that it would be one of the winners in the ravaged sector.

Credit Suisse rose 2% to SFr51.50 over the week, while its peer UBS rose 3.3% to SFr14.84.

SWEDEN

On Stockholm the OMX 30 Index closed out the week at 870.98, down just 0.10%.

Ericsson AB, the world's largest maker of wireless phone networks, posted a second-quarter profit that missed analysts' estimates because of losses at its mobile- phone and semiconductor joint ventures.

Net income plunged 56% to 831 million kronor ($111 million), or 0.26 Kronor a share, from 1.9 billion kronor, or 0.59 Kronor, a year earlier, Stockholm-based Ericsson said Friday in a statement. Analysts had anticipated profit of 2.1 billion kronor, the average of estimates compiled by Bloomberg.

The company's joint ventures, ST-Ericsson and Sony Ericsson Mobile Communications Ltd., posted quarterly losses, paring 2.1 billion kronor from pretax profit. Ericsson said sales slowed in Latin America, Bangladesh and Pakistan, and eastern Europe except for Russia as economic uncertainty increased.

Revenue rose 7.4% to 52.1 billion kronor, missing the 53.3 billion-Kronor average of analysts' estimates.

TeliaSonera AB, Sweden's largest telephone company, said second-quarter profit increased 8.2% as it cut costs to make up for lower customer spending.

Net income rose 8.2% to 4.47 billion kronor ($595 million), or 1 Kronor a share, from 4.13 billion kronor, or 0.92 Kronor, a year earlier, the Stockholm-based company said in a statement Friday. Sales increased 8.7% to 27.5 billion kronor. The stock rose as much as 7.5%.

Revenue was hurt by lower equipment sales, lower usage and less business travel, the company said. TeliaSonera raised its margin forecast for this year, citing measures that reduced its cost base by 5.8% in the second quarter from a year earlier. The company is cutting 2,900 jobs by the end of 2009.

Second-quarter profits at Swedish aerospace and defense group Saab AB dropped 14% due to weaker demand, project delays and order cancellations, the company said Friday. The figures were not as bad as expected, however, causing shares to rally.

Net profit in the April to June period fell to 294 million kronor ($39 million), down from 341 million kronor ($45 million) in the same three months last year. For the first half of the year, profits dropped 53% to 268 million kronor.

Despite the tougher market conditions, Stockholm-headquartered Saab said it expects sales for the full year 2009 to be higher than in 2008, although operating margins should fall.

DENMARK

The OMX Copenhagen 20 finished Friday at 305.70, a drop of 0.02% on the day but largely up on the week.

Nordea forecast that Danish biotech company Genmab would further gain ground after Thursday's advances triggered by the takeover bid for US sector firm Medarex by major Bristol-Myers Squibb.

Genmab jumped almost 6% to DKK202.75 on the OMX Nordic Exchange in Copenhagen Thursday.

"The bid includes a 90% premium on Medarex's current share price and shows its technologies are way worthier than the market has been ready to pay," Nordea said Friday, pointing out that Genmab gets technologies from the US player.

The broker therefore expects the recognition of Medarex's methods to push the Genmab share up in the coming days, reminding that while the two stocks normally move in accord, now there is a big gap between them.

The shares in Genmab had added 2.59% to DKK 208 on Friday.

Sydbank reaffirmed their "overweight" stance on Danish pharma company H Lundbeck, as sales of the antidepressant Lexapro by US partner Forest Laboratories were in line with expectations.

Lexapro sales added up to USD565.5m, according to Forest's report for the first quarter of fiscal 2009/10, ending 31 March, and Sydbank expects them to yield an income for Lundbeck of DKK640m in the second quarter of 2009, assuming the Danish firm is to get royalty payments of some 20% of the product's sales in US Dollars.

The Danish company is due to release its second-quarter report on 13 August 2009.

NORWAY

In Oslo the OBX managed to end the week on 268.01, down 0.45% on Friday's trading.

Norwegian telecom operator Telenor Thursday said second-quarter net profit fell on heavy impairment losses, but Ebitda improved, indicating a solid performance in core markets despite the economic downturn.

"The trends from the first quarter of 2009 continued into this quarter, with a challenging business environment also affecting the telecom sector," Chief Executive Jon Fredrik Baksaas said.

"In spite of pressure on the top line development our operations are improving their performance, resulting in a record high operating cash flow," he said.

Telenor posted a 1.38 billion Norwegian kroner ($220 million) net profit for the three months to June 30, down from NOK3.54 billion the year before and below analysts' expectations for NOK2.15 billion.

The result was hit by impairment losses of NOK1.97 billion on goodwill in Telenor Serbia.

However, the closely-watched earnings before interest, taxes, depreciation and amortization, or Ebitda, increased to NOK7.82 billion from NOK7.33 billion, ahead of expectations for NOK7.54 billion.

Petroleum Geo-Services Friday announced resilient Q2 earnings, with adjusted EBITDA of $161.2 million and cash and cash equivalents of $168.1 million at the end of Q2, up 65% compared to end Q1.

More importantly, the Company saw an increase in its Marine order book in June for the first month since August 2008, which is now at $559 million. Ramform-and GeoStreamer vessels still earn margins at acceptable levels and visibility for Q4 is now good with close to 85% of fleet capacity committed for the remainder of 2009.

The Company maintains its 2009 guidance. Earnings before interest and tax depreciation and amortization ("EBITDA") of $161.2 million, down 27% compared to Q2 2008, driven primarily by reduced Marine contract revenues and lower Onshore MultiClient activity.

FINLAND

Helsinki's OMX followed suit for Scandinavian bourses, marginally down by 0.04% to close the week at 5,659.88.

YIT Oyj surged 14% to 9.18 Euros. Finland's largest builder reported second-quarter net income of 15.7 million Euros, beating analysts' estimates of 15 million Euros.

Finnish engineering group Metso posted a sharper-than-expected drop in second-quarter earnings on Friday, hit by low sales volumes and high costs, and said its demand outlook remained grim.

"Based on the global economic recession and uncertain financial markets, we estimate that our business environment will continue to be demanding during the rest of the year," Metso said in a statement, adding visibility for 2010 was poor.

Metso shares fell on the results, trading down 5.8% at 14.15 Euros.

April-June earnings fell to 65.9 million Euros ($93.56 million) from 155.2 million in 2008, well below the average estimate of 81 million.

Forest products group Stora Enso Oyj on Thursday posted a second-quarter net loss of Euro368.3 million ($522.9 million), mainly due to a sharp decline in sales and hefty write-downs from its stake in troubled North American paper maker NewPage.

The result compares with a previous net profit of Euro28.6 million in the same three months last year.

Sales in the quarter fell to around Euro2.2 billion ($3.1 billion) in the April through June period, from Euro2.9 billion a year earlier.

Despite forecasting tough times also going forward, Chief Executive Jouko Karvinen insisted the company's numerous restructuring measures in the past two years, including heavy cost cutting programs and layoffs of hundreds of staff, have begun to payoff.

"We foresee that demand will continue to be weak during the third quarter of 2009. Our lower cost level will help us to defend our earnings against price pressure in certain paper grades," he said, adding that overall costs went down by Euro280 million (398 million) year-on-year.

Earlier this year, the papermaker issued a profit warning, saying it expected it would have to close some plants, cut down production and lay off more staff.

In Thursday's report, it unveiled plans for output cuts - particularly in its unprofitable Finnish operations - where "permanent capacity closures" were being prepared for operations where rapid recovery could not be envisioned for "clearly positive returns."

Karvinen said the measures would be announced by the end of September.

Stora Enso is one of the world's largest forest product companies making magazine paper, newsprint, fine paper, pulp and packaging boards. The group, which has 29,000 employees, was formed in a 1998 merger between Finland's Enso and Stora of Sweden. The Finnish government holds more than 10% of the stock.

Finnish mobile communications company Nokia declared on Thursday that 139,902 shares held by the company have been transferred to approximately 300 participants of its equity-based incentive plans as settlement in accordance with the plan rules.

The company said that the majority of the shares were delivered under the 2005 and 2006 Nokia Performance Share Plans.

SPAIN

The IBEX 35 in Madrid was one of a handful of European markets up on Friday, with gains of 0.66% on the day to bring the week to a close at 10,438.60.

Banco de Sabadell SA struck a deal to buy the Florida commercial-banking unit of Bank of New York Mellon Corp. for $142 million, as it posted a 20% drop in profit. Rival Bankinter SA, meanwhile, reported an 18% rise in profit.

The deal was announced as Sabadell posted second-quarter net of €169.9 million ($241.5 million), down from €211.2 million a year earlier, as loan-loss provisions and costs related to job cuts weighed on the bottom line.

Midsize peer Bankinter reported profit of €69.4 million, up from €58.7 million in the year-ago quarter, boosted by its recent acquisition of 50% of insurer Lmnea Directa Aseguradora.

Both banks' results were ahead of expectations, mainly thanks to growth in lending income. Sabadell reported a 15% increase in net interest income, to €418.6 million, while it rose 41%, to €220 million, at Bankinter.

Loan growth was largely flat at both banks, but the recent decline in interest rates for interbank lending allowed for wider margins and increased income.

Nonperforming loans at Sabadell jumped to 3.19% of total loans from 0.85% in the second quarter last year. At Bankinter, nonperforming loans rose to 2.09% from 0.70%.

Sabadell set aside €209.8 million to cover loan losses, roughly four times the amount it set aside a year earlier. At Bankinter, provisions doubled to €77.8 million.

Separately, Sabadell will take over all of Mellon United National Bank's deposits, some $1.6 billion, and $900 million in loans, or about 60% of the Miami bank's loan book. The deal, announced Thursday, to buy the 15-branch commercial bank will close as soon as it gets clearance from regulators, Sabadell said.

The Brazilian unit of Banco Santander SA, Spain's biggest bank, may sell as much as 6 billion reais ($3.2 billion) of shares in Brazil in the second half of the year, Valor Economico reported, without saying where it got the information.

Santander is seeking to boost lending in Brazil, the Sao Paulo-based newspaper said.

Shares in Spanish pharmaceutical company Zeltia plunged Thursday after a US Food and Drug Administration panel rejected a proposal to use its Yondelis drug, in combination with a Johnson & Johnson drug, to treat women with relapsed ovarian cancer.

Spanish power company Iberdrola SA Wednesday said that more positive demand figures could boost its results later this year but reported a 5.5% decline in second-quarter net profit amid falling electricity prices and output.

Iberdrola said its second-quarter net profit fell to Eur713.5 million, from Eur755 million in the year-earlier period. Lower electricity prices in Spain ate into earnings, as did lower output volumes in Spain, Britain and Latin America.

Yet a decline in Spanish energy demand has shown signs of slowing in the past six weeks, Chairman Ignacio Galan said during a conference call.

PORTUGAL

In Lisbon the PSI General closed down 0.62% at 2,500.88.

Banco BPI, Portugal's third-largest listed bank, on Thursday posted a first-half net profit of 89 million Euros ($126.6 million), in line with expectations, but its domestic net interest income fell.

The profit was almost 10 times higher than a year ago mostly due to losses booked last year on BPI's stake in rival Millennium bcp, which has since been sold. In the first half of 2008, BPI had a net profit of just 9.1 million Euros.

The bank said in a statement its total net interest income rose just over 2% to 329 million Euros from the same period last year, coming in below expectations. In Portugal, however, net interest income fell 6% to 236 million Euros.

But BPI's Angolan unit, BFA, had a 30% rise in net interest income to 93.6 million Euros, helping the overall result. Analysts polled by Reuters had predicted a net profit of 89 million Euros and net interest income of 359 million Euros.

The bank said commissions slipped about 4% to 145.1 million Euros. Net trading gains doubled to 70.9 million Euros, but excluding the sale of BCP stake, they would have fallen 35%, the bank said.

BPI's shares closed 3.39% higher at 1.98 Euros on Thursday before the release of the results.

ITALY

Italy's benchmark FTSE MIB Index slid 81.13, or 0.4%, to 20,161.18, ending a nine-day rally.

Ansaldo STS slid 20 cents, or 1.4%, to 14.06 Euros. Shares of Finmeccanica SpA's railway technology unit "suffered from some profit taking," said Andrea Trucchia, who works in global equity sales at Iccrea Banca in Milan. The shares ended Thursday at 14.26 Euros, the highest since Ansaldo's 2006 listing.

Banca Popolare di Milano added 7.75 cents, or 1.9%, to 4.1675 Euros after the government decided to remove regulation that would have enforced a limit of 5% for re-pricing bank rates applied to clients from the anti- crisis package.

Compagnie Industriali Riunite gained 4.3 cents, or 3.4%, to 1.298 Euros. UBS AG lifted its price estimate on the holding company of Italian financier Carlo De Benedetti to 1.5 Euros from 1.35 Euros and reiterated a "buy" rating.

Gemina, which owns the manager of Rome's airports, climbed 1.45 cents, or 2.8%, to 52.8 cents, a fourth straight gain. "Even though the Italian regulatory framework is still to be implemented, the approval of the anti- crisis decree could represent a positive trigger for the stock, speeding up the approval of the new tariff scheme," Banca Akros said in a note.

Risanamento added 0.12 cents, or 4.8%, to 26.2 cents. The real estate company may raise 250 million Euros selling shares to its creditors, la Repubblica reported, without saying where it got the information.

Intesa Sanpaolo, UniCredit SpA and Banco Popolare SC would convert 150 million Euros in credits into shares as part of the plan, Repubblica said. The banks would also buy 100 million Euros of new shares.

GREECE

In Athens the Athex brought the week to an end at

The National Bank of Greece, the country's largest lender by assets, said Thursday that its Eur1.25 billion rights issue was 2.25 times subscribed by existing rights and shareholders of the bank.

The total number of new shares sought by investors totaled 248.15 million, more than double the 110.37 available, the bank said.

In June, NBG announced the rights issue as part of a plan to boost its capital, pay-off outstanding hybrid bonds and cancel high-dividend paying special shares held by the Greek government.

To date, NBG is the first Greek bank to seek a capital increase following the peak of the global financial crisis last year, but other Greek banks are widely expected to follow.

The new common shares to be issued were priced at Eur11.30 each, with existing shareholders eligible to buy two new shares for every nine shares held. The subscription period for private investors, who covered 97.36% of the capital increase, ended Wednesday.

A separate subscription period for the Greek government, which holds the balance of the rights, begins Friday and the government has until the end of the week to declare whether it will also exercise its rights to the capital increase.

NBG said that a further announcement about the total coverage of the rights issue and the trading date for the news shares would follow.

MIG Real Estate on Thursday debuted in the Athens Stock Exchange, with its shares trading in the medium and small capitalization category of the market.

MIG Real Estate was founded in 1999 under the name "Attica Properties SA", until Marfin Investment Group bought 50 pct in the company and was transformed into a real estate investment company.

The company owns 32 real estate assets, leased to highly credibility customers, such as Marfin Egnatia Bank, Millennium Bank, Piraeus Bank, Citibank, Grant Thornton, Hygia Clinic, Wind Hellas, etc.

MIG offered to investors 2.5 million new common nominal shares at 4.0 Euros per share, raising 10 million Euros from the sale. A 35.65 pct of shares was offered to institutional investors, while the remaining 64.35 pct to private investors. The company's capitalization totaled 49.36 million Euros at the start of trading in the market.

The Balkans reported that Greece's Sidenor will take part in a share capital increase of Eur 1.86 million for Sideral Steel sales and distribution, a wholly owned Albanian subsidiary.

Management said to the Athens bourse in a statement that Sidenor is to make cash payment and issue 229,773 new shares at ALL 1,000 each.

The statement said that after the increase Tirana based Sideral's share capital will total ALL 229.87 million in the form of 229,873 shares at ALL 1,000 each.

Athens quoted Sidenor, which is Greece's largest steelmaker belongs to the Viohalco metals, cables and pipe works group. It operates in Greece, Bulgaria, Cyprus, FYR Macedonia and Albania.
The UK Market 
Did it follow the Global trend .....
 UK MarketsUK stocks climbed to a six-month high as Vodafone Group Plc, the world's largest mobile phone company, reported a jump in first-quarter sales.
Vodafone gained 2.9% as the company reiterated its full-year forecasts. BT Group Plc, Britain's biggest phone company, added 1.3%. Lonmin Plc advanced as Goldman Sachs Group Inc. raised its recommendation for the shares.

The FTSE 100 added 16.81, or 0.4%, to the highest since Jan. 6 at 4,576.61. The gauge advanced 4.3% in the week. The FTSE All-Share Index climbed 0.4% Friday, while Ireland's ISEQ Index dropped 0.9%.

The benchmark for UK equities has climbed for 10 days, the longest winning streak since January 2004, as a record number of US companies from Goldman Sachs Group Inc. to Caterpillar Inc. beat analysts' earnings estimates. The FTSE 100 has rebound 30% from March 3 amid speculation the worst global recession since World War II is easing.

Even so, a report Friday showed the UK economy shrank more than twice as much as economists had forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in recession.

Vodafone added 2.9% to 120.25 pence after the company said first-quarter sales jumped 9.3% to 10.7 billion Pounds ($17.7 billion), in line with analyst estimates.

Chief Executive Officer Vittorio Colao, who took charge a year ago, reiterated full-year forecasts given in May.

BT Group climbed 1.3% to 115.2 pence as TeliaSonera AB, Sweden's largest telephone company, reported higher profit and sales.

Lonmin increased 3.8% to 1,243 pence after Goldman Sachs upgraded the world's third-largest platinum producer, to "neutral" from "sell."

Compass Group dropped 13 pence, or 4%, to 313.25 as Natixis downgraded the world's largest catering company to "reduce" from "add." The company Thursday said it expect full-year organic revenue growth to be "broadly flat."

National Express rallied 21.75 pence, or 6.7%, to 354.75. CVC Capital Partners Ltd., which is investing about 16 billion Euros ($23 billion) of private equity funds, said its part of a group including the Cosmen family that's bidding for Britain's biggest long-distance coach operator.

Pennon Group dropped 24.25 pence, or 4.9%, to 466.25. HSBC Holdings Plc lowered its recommendation for the water utility company to "neutral." The shares declined 3.4% Thursday as UK regulator Ofwat proposed cutting the cost of customer bills of water companies by about 4% over the next five years.
Asia Pacific Regional Markets 
Did they set the tone or follow the lead .....
Asiapac IndicesJAPAN
Tokyo shares rose for the eighth straight session Friday on more Yen weakening and Wall Street's rally, with technology, auto and shipping stocks leading a broad-based rally.
Bellwether exporters like Toyota Motor and Canon gained as the recent Yen weakening continued, with the Dollar hitting an intraday high of Y95.17 early in the morning. The currency was changing hands at Y94.28 as of the close of trading on the Tokyo Stock Exchange Thursday.

But the broader market's gains were capped below 10,000 on concerns that Wall Street may fall in the next session on disappointing earnings from Microsoft, American Express and Amazon.com, analysts said. The market also awaits the rush of Japanese earnings next week.

The Nikkei 225 Stock Average rose 151.61 points, or 1.6%, to 9944.55, closing just off its intraday high.

The Topix index of all the Tokyo Stock Exchange First Section issues rose 11.79 points, or 1.3%, to 920.48.

Trade volume was relatively solid at about 2.6 billion shares.

The Nikkei's recent rally has produced a gain of 9.9% thus far, but the index is still down fractionally for July. Stocks are up 12% year-to-date.

Among technology and auto heavyweights, Toyota rose 2.5% to Y3,750, while Canon surged 4.4% to Y3,300.

Shippers were firmly higher despite the 1.5% overnight fall in the Baltic Dry Index industry benchmark. Retail investors bought on the view that the sector lags the broader market. Nippon Yusen rose 3.7% to Y418, compared with its 2009 intraday high of Y590.

Panasonic surged 8.3% to Y1,390 on triple normal volume. JPMorgan lifted its stock rating to Overweight and raised its target to Y2,000 from Y1,100, citing hopes that turning Sanyo Electric into a group unit will help solidify Panasonic's growth strategy.

On the other hand, Chugai Pharmaceutical lost 1.5% to Y1,804, ending a four-day rally. The drug maker said late Thursday its April-June net profit rose 2.5% on year on increased sales of cancer drugs. A market analyst at a Japanese brokerage said that profit-taking kicked in on the view that positive cues may be exhausted for now.

September Nikkei 225 futures ended up 160 points, or 1.6%, at 9940 on the Osaka Securities Exchange. Like the cash market, resistance for futures was also strong at 10,000.

Trading in Mizuho Financial Group was extremely heavy at over 640 million shares - record volume for a single issue, according to a Nikkei report - as new stock issued under the company's recent capital raising program was delivered Friday. The volume accounted for about a quarter of all shares traded on the TSE First Section. The issue ended down 0.5% at Y208.

Japan Tobacco, the No. 3 cigarette maker globally, fell 2.8% to 252,600 Yen. The opposition Democratic Party of Japan, which is favored in opinion polls to win next month's election, plans to set a tobacco tax that discourages people from smoking, according to a policy document released Thursday.

SOUTH KOREA

Seoul shares rose on Friday helped by positive earnings from Samsung Electronics and Hynix Semiconductor, while POSCO advanced on an improving sectoral outook.

The Kospi rose 0.41%  Friday to close out the week at 1,502.59, rising for a ninth consecutive session and gaining 9% since July 13.

South Korea's economy expanded at the fastest pace in almost six years last quarter as exports and household spending jumped.

Gross domestic product rose 2.3% from the first quarter, when the nation skirted a recession by growing 0.1%, the Bank of Korea said Friday in Seoul. That was better than the 2.2% growth estimated by economists.

Hyundai Motor shares lost 3% despite the company posting a 48% rise in second-quarter net profit. Investors seem to have taken such a good result as an excuse to lock in profits after the stock rose sharply in the short term on earnings expectations.

Samsung Electronics Co., the world's biggest maker of computer memory chips, said second-quarter net profit rose 5.2% while rival Hynix reported a narrower loss as the chip industry emerges from a deep slump.

Samsung, also the world's biggest manufacturer of flat screen televisions, earned 2.25 trillion Won ($1.81 billion) in the three months ended June 30, it said in a regulatory filing Friday. The company posted net profit of 2.14 trillion Won a year earlier.

Its results were underpinned by growth in sales of flat screen TVs and mobile phones as well as better prices for memory chips amid stronger demand for personal computers.

Separately, Hynix Semiconductor Inc., the world's second-largest manufacturer of memory chips after Samsung, said its second quarter net loss narrowed to 58 billion Won from red ink of 711 billion Won the year before. The result was its seventh straight net loss. Sales fell 13% to 1.68 trillion Won.

The results add to signs that the global chip industry is recovering from a lengthy downturn when a supply glut suppressed prices. For Samsung, the profit was its best since the fourth quarter of 2006 and comes after earnings stalled in recent quarters amid the global recession. Net profit fell sharply in the first quarter and the company reported its first ever quarterly loss in the final three months of last year.

Samsung's sales during the quarter rose 15.9% to 21.02 trillion Won from 18.14 trillion Won a year earlier.

The stronger Samsung result came as two other major South Korean companies - LG Electronics Inc. and Hyundai Motor Co. - announced record quarterly profits this week. And in a sign of improvement in South Korea's economy, the Bank of Korea said Friday that gross domestic product expanded 2.3% in the second quarter from the first, the biggest gain in 5 1/2 years amid sharp increases in manufacturing and exports.

Samsung, also the world's second-biggest producer of mobile phones after Nokia Corp. of Finland, said that it sold 52.3 million handsets in the second quarter and that prices increased.

SuWon, South Korea-based Samsung said it expects demand for mobile phones to increase in the third quarter and forecast it would exceed its full-year sales target of 200 million phones.

Shares in Samsung rose 0.7% to close at 683,000 Won. Hynix shares fell 0.3% to finish at 16,350 Won.

HONG KONG

Hong Kong's benchmark Hang Seng Index climbed above 20,000 Friday for the first time since the collapse of Lehman Brothers Holdings Inc., as a rebound in property prices helped push the index up 76% since March.

Developers such as Sun Hung Kai Properties Ltd., the world's largest by market value, helped spur the advance. Aluminum Corp. of China Ltd. and Bank of China Ltd. climbed as China became the first of the major economies to recover from the global recession. Citic Pacific Ltd. surged after the biggest currency derivative losses by any Chinese company prompted a government bailout.

Rallying stocks in Hong Kong reflect speculation global efforts to repair credit markets and revive economic growth will boost profits. The Hang Seng slumped 64% from its October 2007 record to its low this year in March. It fell as much as 43% following Lehman's failure on Sept. 15. China's pledge to spend 4 trillion RMB ($586 billion) to spur growth helped drive the advance.

Hong Kong has allocated HK$87.6 billion ($11.3 billion), or about 5.2% of gross domestic product, to stimulus and relief spending since 2008. The city, battling its worst recession in a decade, probably returned to growth in the second quarter of this year as the declines in exports moderated, Financial Secretary John Tsang said on July 6.

The rally drove the average valuation of companies in the Hang Seng to 17.5 times estimated earnings as of Thursday, up from 10.6 at the beginning of this year. The gauge's 14-day relative strength index, which measures how rapidly prices have risen or fallen in that period, closed at 68.5 Thursday, just below the 70 threshold some traders use as a signal to sell.

Sino Land Co. and New World Development Co. are the Hang Seng Index's best performers in the rally since March through Thursday, as confidence in the city's real-estate industry returned. Sino Land, controlled by the family of billionaire Ng Teng Fong, surged 164% in that time. Billionaire Cheng Yu-tung's New World soared 162%.

The value of residential units sold in June increased 26% from the previous month to the highest value in a year, figures from the Land Registry show.

Citic Pacific gained 161% in the March rally through Thursday for the Hang Seng's third-biggest advance. The stock fell to a record low on Oct. 27 as bets on the Australian Dollar incurred about $2 billion of losses, forcing former Chairman Larry Yung to seek a bailout from parent Citic Group, controlled by China's cabinet.

Citic Pacific shares are up 420% from its low as the bailout, the resignation of Yung and former Managing Director Henry Fan resigned in April, and a review of the company's assets by new Chairman Chang Zhenming lured investors back.

China-related companies have increased on optimism growth in the country's economy, the world's third largest, will boost company earnings. The Hang Seng China Enterprises Index, which tracks the so called H shares of 43 mainland companies, has jumped 82% from its low this year on March 2.

Chalco, as Aluminum Corp., is known, climbed 121% since the market's March trough. Bank of China, which reported better-than-expected first-quarter profit on April 28, climbed 75%.

The Hong Kong stock market may get a boost after the city's banks Thursday agreed with monetary authorities to buy back notes linked to the failed Lehman Brothers Holdings Inc. The repurchase of the notes "should remove a major overhang" for lenders, JPMorgan Chase & Co. analysts wrote in a July 23 note.

CHINA

China's benchmark stock index rose, capping its biggest weekly gain since May, as energy producers rallied on optimism recovery in the world's third-largest economy will boost demand for fuel.

China Shenhua Energy Co. and China Coal Energy Co. jumped more than 6% after China International Capital Corp. revised its 2010 price estimate for domestic coking coal to a gain from a loss. PetroChina Co., the most valuable company on the Shanghai Composite Index, surged 5.4%, its biggest advance in two months.

The Shanghai Composite Index gained 44.11, or 1.3%, to 3,372.6 at the close. The measure rose 5.7% this week, the most since the period to May 8, as the government signaled it will allow more money to pump into the financial system to cement economic growth. The CSI 300 Index, measuring Shanghai and Shenzhen exchanges, added 0.4% to 3,667.6.

Shenhua rose 6.2% to 40.07 RMB, the biggest advance since June 29. China Coal Energy Co., the nation's second- largest coal producer, gained 6.6% to 16.39 RMB.

China International Capital forecast the nation's coking coal price will increase 5% in 2010, compared with a previous estimate for a 5% decline, as demand for the fuel rises with a rebound in property sales, according to a report by the brokerage Friday.

Nationwide property sales in June rose 53% by value from a year earlier, the statistics bureau said this month. Chinese Premier Wen Jiabao said Thursday the government will continue a proactive fiscal policy. The economy is in a crucial phase and shows "positive signs," he said in a report by the state-owned Xinhua News Agency.

PetroChina climbed 5.4% to 16.18 RMB, while China Petroleum & Chemical Co., the nation's largest oil refiner and also known as Sinopec, added 3.5% to 14.27 RMB. Sinopec has gained 23% this week after China's refining industry swung to a profit in the first five months, according to the National Development and Reform Commission, and Nomura Holdings Inc. said the company's first-half profit may have tripled.

An index of 23 energy companies rose the most among the 10 industry groups on the CSI 300. The energy index is up 13% this week, its biggest gain since the five days to March 20, and leads the pack for the year with a 147% rally.

Gains by energy producers countered a broader decline on the Shanghai Composite Friday, with more than two stocks declining for each that rose on concern the government will increase the pace of initial public offerings to soak up liquidity in equities.

An 85% gain on the Shanghai gauge this year has made Chinese stocks the most expensive based on profit multiples since January 2008, Bloomberg data shows. Shares in the index trade at 36.4 times earnings, about triple November's low.

China State Construction Engineering Corp., the nation's largest housing contractor, said late Thursday it raised 50.16 billion RMB ($7.3 billion) in the world's biggest IPO in 16 months. The stock is expected to start trading on July 29.

Poly Real Estate Group Co., the nation's second-largest developer by market value, fell 2% to 29.68 RMB, trimming its annual advance to 168%. Shanghai Pudong Development Bank Co., the Chinese partner of Citigroup Inc., lost 1.1% to 25.26 RMB, paring a 2009 gain of 167%.

The 14-day relative strength measure for the Shanghai index, measuring how rapidly prices have advanced or dropped during a specified time period, was at 78.9 Friday, the ninth straight day above 70. Readings above 70 indicate a price may be poised to fall.

China CAMC Engineering jumped the 10% daily cap to 21.73 RMB as it resumed trading Friday after a one-month suspension. The company said it plans to swap as many as 36 million shares for a trading company owned by its parent.

Yunnan Wenshan Electric Power added 1.4% to 8.84 RMB. The stock was rated "outperform" in initial coverage by Citic Securities Co. in a report Friday.

TAIWAN

Taiwan stocks rose 0.56% on Friday to a near two-month intraday high on robust US and Taiwan corporate earnings, but investors used early gains to sell some technology shares such as AU Optronics.

The main TAIEX share index rose 39.21 points to 7,020.09 as of 0204 GMT.

Quanta, the world's biggest contract lap PC maker, jumped more than 3% on hopes of better sales and shipments in the third quarter, sending the computer and peripheral equipment sub-index 2.13% higher.

AU Optronics, the world's third-largest LCD maker, started off strong early in the session after the company posted a narrower second-quarter loss, but later gave up gains as investors locked in profits.

AU Optronics also projected on Thursday a strong third quarter outlook as demand for flat-screen TVs shot up in key markets such as China, where a massive government stimulus plan has helped in domestic spending.

Sector leader Samsung Electronics said on Friday its LCD business posted a 3% profit margin in April-June against a 8% loss margin in the first quarter.

The LCD sector has been one of the few bright spots in the broader technology sector amid a global economic recession, and some analysts believe the gain would continue as new applications such as touchscreen PCs spur fresh demand.

The optoelectronics sub-index had gained 91% since the beginning of January, outperforming the big board's rise of more than 50% during the same period.

After the strong run-up over the past few months, analysts said they expected the main index to trade between 6,850 and 7,200 next week before more quarterly earnings from local technology companies.

THE PHILIPPINES

The bellwether index hit a 10-month intraday high as investors cheered on the sovereign rating upgrade by Moody's Investors Service.

Trading was brisk as volume turnover reached 3.44 billion shares worth P4.53 billion changing hands, with the Philippine Stock Exchange index (PSEi) hovering between 2,635.07 and 2,676.98 before closing at 2,676.47. The last time the 30-company index hit higher than 2,676.98 was on Sept. 12 at 2,667.21.

The broader all-shares soared 2.02% or 33.59 points to 1,699.64.

Gainers swamped losers, 86 to 27, with 58 issues remained unchanged.

Market breadth was positive as gainers trampled losers at 86 to 27 while 58 issues were unchanged.

Stock portal 2tradeasia.com expected Friday's session to get a boost from Moody's credit rating upgrade, "receding" decline in import data and Wall Street's strong overnight finish due to upbeat retail spending data.

Nineteen out of the 20 actively traded stocks finished stronger led by Philippine Long Distance Telephone Co. and Energy Development Corp. but Ayala-led Manila Water Company Inc. was unchanged at P15.25.

Telecom giant PLDT and EDC closed higher at P2,395 and P4.55, respectively.

The property index posted highest gains of 3.65%, finishing 32.26 points to 915.13 followed by the industrial index, which added 3.08% or 120.22 points to 4,021.75. Holding firm index rose 2.58% or 36.87 points to 1,466.22.

The service index went up by 1.72% or 22.99 points to 1,360.10 while financial index ended 1.84% stronger at 579.39. The mining and oil index gained 0.54% or 37.14 points to 6,884.04.

SINGAPORE

The shares prices in Singapore rose 48.53 points or 1.95% on Friday with the benchmark Straits Times Index (STI) closed at 2,533.43 points, the highest in almost 10 months.

Local dealers said that the trading sentiment in the past week was improved by hopes that the economy was in recovery.

The overall volume stood at 2.44 billion shares worth 2.13 billion Singapore Dollars (about 1.48 billion US Dollars).

Gainers led losers by 435 to 131 with another 770 unchanged.

Singapore's industrial production fell for the first time in three months in June as electronics and chemicals output dropped and a surge in pharmaceuticals manufacturing eased.

Manufacturing, which accounts for about a quarter of Singapore's economy, declined 9.3% from a year earlier following a revised 2.1% gain in May, the Economic Development Board said Friday.

The government said this week the recent improvement in drugs and electronics output may falter, preventing a quick recovery from the country's deepest recession since independence 44 years ago. Singapore raised its 2009 economic forecast July 14, after the manufacturing industry posted its best performance in five quarters in the three months to June.

Singapore's manufacturing slid 2.4% in the second quarter, more than the 1.5% decline estimated by the government last week, Friday's report showed.

Industrial production fell a seasonally adjusted 9.2% in June from the previous month, when it slid a revised 1.8%.

Demand for goods from the world's biggest economies in the US, Europe and Japan is still weak, and any pick-up in trade will be "bumpy," Trade Minister Lim Hng Kiang said this week.

"We have to wait for a more general demand recovery, especially in the developed countries, for Singapore's economy to be on a sustained growth path," Lim said. "We should not expect a V-shaped sharp recovery. We're looking at a more gradual recovery."

Electronics production plunged 20.4% from a year earlier last month, following a revised 22.9% decline in May. Electronics make up about 26% of total manufacturing output, and shipments of such products have dropped every month for more than two years.

Pharmaceutical production, which accounts for about 20% of manufacturing, climbed 14% after surging a revised 139% in the previous month. Excluding biomedical manufacturing, production contracted 14.6% in June, after shrinking a revised 17.6% in May.

Singapore Air is forecast to post its worst annual profit in two decades, as travel dwindles amid the global recession.

MALAYSIA

Share prices on Bursa Malaysia ended on mixed note Friday, dealers said.

They said the FTSE Bursa Malaysia Kuala Lumpur Composite Index, however, remained in positive territory helped by the gains on Wall Street overnight.

A dealer said there was also mild profit-taking activities.

The FBM KLCI rose by 3.73 points to end at 1,155.88, helped by the gain in Maybank. It had opened 6.23 points higher at 1,158.38.

The Finance Index rose 57.11 points to 9,413.32, Plantation Index fell 47.68 points to 5,578.75 and Industrial Index was 21.67 points higher at 2,527.64.

The FBMEmas Index increased 29.37 points to 7,782.77, FBM Top 100 advanced 22.48 points to 7,576.71, FBMMesdaq Index gained 32.65 points to 4,097.99 and the FBM2BRD Index rose 31.24 points to 5,010.79.

Advancers led decliners by 399 to 247 while 247 counters were unchanged, 341 untraded and 31 others suspended.

Total volume increased to 1.039 billion shares valued at RM1.566 billion from Thursday's 1.035 billion shares valued at RM1.432 billion.

Of the active stocks, KNM rose one sen to 87 sen, Talam Corp increased half sen to 9.5 sen and UEM Land gained three sen to RM1.70.

Among heavyweights, Sime Darby increased five sen to RM7.95, Maybank gained 10 sen to RM6.50, Telekom rose six sen to RM3.04 and Tenaga fell five sen to RM8.15.

The Main Board volume declined to 885.973 million shares valued at RM1.514 billion from 888.607 million shares valued at RM1.391 billion on Thursday.

Turnover on the Second Board increased to 64.84 million units worth RM34.377 million from 57.126 million units worth RM25.394 million Thursday.

The Mesdaq volume eased to 32.404 million shares valued at RM5.508 million from 56.34 million shares valued at RM9.001 million previously.

Warrants increased to 50.427 million shares worth RM10.099 million from 29.608 million shares worth RM5.544 million on Thursday.

INDONESIA

Indonesia's main stock index, The Jakarta Composite, gained 1.2% to its highest since 8 August 2008, with telecoms firm PT Telekomunikasi Indonesia up 3.6% and PT Bank Rakyat Indonesia 3.0% higher.

Moody's Investors Service affirmed its positive outlook on Indonesia's Ba3 sovereign rating, saying last week's deadly blasts in Jakarta would have a "very fleeting and minimal impact" on its financial markets.

Indonesia's PT Semen Gresik said on Friday that cement sales fell 3.4% to 8 million tonnes in the first half of 2009, although the country's largest cement firm forecast sales would rebound in the second half.

Semen Gresik and its main rival PT Indocement Tunggal Prakarsa have both predicted weaker cement demand this year because of tougher economic conditions and slower growth.

A spokeswoman for the firm said national cement consumption fell 7% to 17.6 million tonnes in the first half.

Semen Gresik, which has a market capitalisation of $3.12 billion, had previously said it expected revenue to rise 5% this year despite the economic slowdown.

The firm also expected cement consumption to grow between zero and 3% this year, and estimated that production capacity would rise 5.6% to 19 million tonnes this year, from 18 million tonnes production in 2008.

Southeast Asia's biggest economy expanded 4.4% in the first quarter and is estimated to have grown 3.7% in the second quarter. The central bank has forecast full-year growth of 3-4%, slowing from a 6.18% expansion last year.

THAILAND

The SET in Bangkok gained 0.33% on Friday to close at 614.24.

PTT, the biggest energy firm, rose 0.4% and its energy subsidiary PTT Exploration and Production added 0.7%.

Olefins maker PTT Chemical climbed 5% due to hopes that the company would return to a net profit in the second quarter.

Thailand's central bank lowered its gross domestic product and inflation forecasts for 2009, a sign there is room to reduce the key interest rate further if an anticipated economic recovery falters.

The economy may shrink as much as 4.5% this year, more than an earlier forecast for a contraction of up to 3.5%, Deputy Governor Atchana Waiquamdee said in Bangkok Friday. Consumer prices may fall as much as 1.5%, she said, compared with an April prediction of as much as 1%.

Southeast Asia's second-largest economy is mired in its deepest recession since the Asian financial crisis, with exports falling for eight months amid a simmering political crisis that forced a change in government in December. The country is trailing South Korea and China in emerging from the global slump even as interest rates were cut to a five-year low.

The Bank of Thailand has left the benchmark interest rate unchanged at 1.25% after 2.5 percentage points of cuts from December to April. Central bankers must retain expansionary monetary policies even as the risks to an economic recovery dissipate, the Asian Development Bank said Thursday.

The baht held at 33.97 against the Dollar as of 3:37 p.m. in Bangkok. The benchmark stock index pared gains, rising 0.7% after climbing as much as 1% earlier.

Thailand slid into a recession in the first quarter when the economy contracted 7.1% from a year earlier, as the global slowdown hurt exports by Delta Electronics (Thailand) Pcl and other companies. Prime Minister Abhisit Vejjajiva has since said the country is past the worst of the slump.

Thailand's exports may tumble as much as 22.5% in 2009, less than an April forecast for a decline of as much as 27.5%, the central bank said. Exports fell every month from November to June, with the decline easing last month.

Consumer prices fell 4% in June and have dropped every month this year as oil costs eased from last year's record levels. Thailand imports almost all of the oil it uses.

It's not deflation, rest assured. When the government's measures to subsidize bus fares and utility costs for low-income earners expire, we will see inflation accelerate.

Thailand has had five prime ministers and a coup in the past three years as competing groups have battled for power. Demonstrators loyal to former leader Thaksin Shinawatra burned tires, blocked roads and attacked Abhisit's vehicle in April. Puea Thai, a political party backed by Thaksin, won a June by- election in the rural Northeast, signaling his support base remains strong.

INDIA

India's stocks rose, driving the benchmark to its highest in more than a month. Tata Motors paced gains among automakers after Maruti Suzuki reported earnings that beat analysts' forecasts Thursday.

Tata Motors advanced the most in two months on expectations earnings due on Monday will beat estimates. Sterlite Industries jumped to a one-month high as metal prices soared.

The Bombay Stock Exchange's Sensitive Index, or Sensex, added 147.92, or 1%, to 15,378.96, its highest since June 11. The S&P CNX Nifty Index on the National Stock Exchange added 1% to 4,568.55. The BSE 200 Index increased 1.1% to 1,874.43.

Overseas funds bought a net 1.46 billion Rupees ($30 million) of Indian stocks July 22, taking their total investments in equities this year to $6.43 billion, the Securities & Exchange Board of India said on its Web site.

The Indian stock market's value surpassed the $1 trillion mark this week for the first time since July 5, data compiled by Bloomberg show.

Tata Motors, India's biggest truckmaker and manufacturer of the world's smallest car, the Nano, jumped 9.6% to 372.85 Rupees.

Maruti Suzuki, the nation's biggest carmaker, surged for a second day following a 25% climb in first-quarter profit on higher exports and demand for its new hatchbacks. The maker of half the cars sold in the country rose 6.4% to 1,378.25 Rupees, the highest since its listing in July 2003.

Hero Honda, India's biggest motorcycle maker, advanced 4.1% to 1,735.1 Rupees. Mahindra & Mahindra Ltd., the nation's largest maker of sport-utility vehicles and tractors, gained 3.6% to 830.9 Rupees.

Twelve of the 30 Sensex companies have reported their results so far, with 10 beating analysts' expectations.

Dr. Reddy's Laboratories climbed 3.8% to 814.95 Rupees after BNP Paribas initiated coverage of the stock with a "buy" rating, saying that "the company's earnings trajectory will remain robust on the back of a strong product portfolio."

Idea Cellular, India's fifth-largest wireless carrier, gained the most in a week after profit jumped 14%. The stock rose 4.6% to 81.55 Rupees.

Jaiprakash Associates, the biggest maker of dams, climbed 5.2% to 241.65 Rupees ahead of its results tomorrow.

The Sensex has risen 59% this year, the sixth-best performer among 89 global benchmark measures tracked by Bloomberg. The gauge is valued at 17.6 times earnings following the gain, twice the 8.8 multiple it was trading at in March.

India's $1.2 trillion economy may expand 7% in the year to March 2010, Prime Minister Manmohan Singh said earlier this month. The nation should aim for growth of between 8% and 9% in the medium term, he said.

Sterlite Industries, the nation's biggest copper producer, led gains among metal producers after commodity prices climbed. Sterlite rose 3.3% to 654.1 Rupees. Tata Steel, the biggest producer of the alloy, advanced 6.4% to 442.5 Rupees. Hindalco Industries, the biggest aluminum producer, climbed 3.3% to 93.8 Rupees.

AUSTRALIA

Australian stocks rose 0.9% on Friday and touched a nine-month high as optimism on the global economic outlook was revived after corporate profits and economic data gave Wall Street a boost.

Australia's S&P/ASX 200 Index gained 0.6% to 4,089.80 at the close in Sydney.

Macquarie Airports slipped 4.6% to A$2.52, dropping after the group said it would buy its management rights from investment bank Macquarie Group. The stock rose 4.8% on Thursday before they were put on a trading halt. Macquarie Group was down 0.9% at A$41.41.

Biota Holdings rose 6% to A$1.865 and touched A$1.94, its highest level since March 2006. The gains built on an 8.6% rise on Thursday, which came after GlaxoSmithKline said it was going to triple its capacity for making the drug Relenza, which Biota receives royalties from.

Aquarius Platinum advanced 7.3% to A$4.88. The world's fourth-biggest producer of platinum was raised to "buy" from "hold" at Citigroup Inc.

Gindalbie Metals rose 9.1% to 84 Australian cents. The iron-ore company, planning a project with China's Anshan Iron & Steel Group, said the Western Australian Environment Minister upheld its appeal against an Environmental Protection Authority decision that blocked mining of the Terapod and Blue Hills North hematite deposits, part of the Karara iron- ore project.

Macquarie Airports fell 6.8% to A$2.46. The company is severing ties with Macquarie Group Ltd. to buoy its valuation and will issue shares to its former parent to compensate it for the loss of management fees. Macquarie Group (MQG AU) slipped 4.3% to A$40.

Metals X surged 14% to 12.5 Australian cents. The tin and nickel mining company said it signed an agreement with China's Yunnan Tin Group Ltd. to form a joint venture in the state of Tasmania.

Murchison Metals soared 17% to A$1.80. The iron-ore producer said a number of Chinese groups are interested in helping develop the A$4 billion ($3.3 billion) Oakajee iron ore port and rail project in Western Australia.

Nufarm rose 13% to A$11.12. Australia's biggest supplier of farm chemicals confirmed a takeover approach from Sinochem Corp., China's biggest chemicals trader.

Woolworths, Australia's biggest retailer sank 1.7% to A$26.11. after being cut to "neutral" from "overweight" at JPMorgan.

NEW ZEALAND

The New Zealand sharemarket leapt ahead Friday, following a surge by stocks in the United States on strong corporate profits and rebounding home sales.

The benchmark NZX-50 index closed up 42.54 points, or 1.458%, at 2961.173, which was around the level it surged to in opening trading. The market has risen 8.2% in two weeks.

Turnover was worth $127.3 million. There were 70 rises and 14 falls among the 114 stocks traded.

There was some profit-taking in SkyCity, which rose strongly this week in the wake of a profit upgrade. The casino operator closed down 10c at 310.

Profit-takers also contributed to a 2c fall in Fisher and Paykel Healthcare to 295.

Auckland International Airport Ltd shares were 4.9% higher at NZ$1.72, after touching a five month high of NZ$1.73.

Investors bet New Zealand's biggest airport might become a takeover target again as the centre-right National government said it plans to relax foreign investment rules. The previous Labour government blocked a NZ$1.8 billion partial bid by a Canadian state pension fund in April last year, citing national interest.

Shares in New Zealand Refining rose by 3.5% in Friday's trading, after reports that US refiner Valero Energy may be interested in a major stake in the company, but the company is keeping quiet about any potential bids.

The NZ Refining share price was up by 30c to $7.40.

But the spike represents renewed interest in the company, with Bloomberg reporting that San Antonio-based Valero may seek full ownership of, or a stake in, NZ Refining.

NZ Refining company secretary and chief financial officer Dennis Martin told NBR the company had heard the rumours, but had nothing to comment on the reports.

If Valero makes any offer of 20% or more, the offer must then be extended to all shareholders under local takeover rules.
 
NZ Refining owns the country's only oil refinery and supplies 70% of New Zealand's oil product requirements.

A 17% holding in the company has been on the market for several months, after Royal Dutch Shell, Europe's largest oil company, revealed in May that it was looking for a buyer for its NZ Refining stake.

Another 19% of the company could also be up for grabs, with Exxon Mobil reportedly looking to offload its 19% stake.

NZ Refining is controlled by the local units of Shell, Exxon, BP Chevron and Emerald Capital.

Valero is one of the likeliest buyers for the available stakes, as it looks to expand overseas to avoid US federal climate legislation may cut the profitability of domestic plants.

Earlier this year, New Zealand Refining saw its annual after-tax profit lift by 11% to $124.9 million, at the upper end of expectations, on the back of high refining margins and a favourable exchange rate.

Last year the refinery processed 39.2 million barrels of feedstock, up from 36.9 million a year earlier, and pumped 2.8 million cubic metres of petrol, diesel and jet fuel to Auckland, equal to 2007's total.
Global Commodities 
'Food for thought' or 'a Grain of truth' .....
 CommoditiesCommodity markets rallied strongly this week with European crude prices breaching the $70-a-barrel mark while copper hit a fresh 2009 peak and sugar prices reached multi-year highs on concerns about production in India. Risk appetite was bolstered by gains for stock markets and better-than-expected US earnings.
Crude oil prices rose on Friday, with ICE September Brent surpassing the $70 mark, rising $1.07 to $70.32 a barrel, up 7.5% this week. Nymex September West Texas Intermediate rose 89 cents to $68.05 a barrel on Friday, up 7% this week. Brent traded at a premium to WTI throughout the week because of weak US demand conditions.

Sugar prices rose amid expectations that India, the world's largest sugar consumer, will have to step up imports as poor monsoon rains have affected domestic production.

ICE October raw sugar futures rose 6.8% this week to a three-year high of 18.48 cents a Pound.

Unusually heavy rains have slowed the harvest in Brazil's largest producing region, adding to concerns about the outlook for supplies globally.

Liffe October white sugar rose 4.8% to $480 a tonne this week, while the March contract hit $500 a tonne mark.

Copper reached a 2009 high at $5,575 a tonne on Friday before easing back to $5,530, up 4.1% this week, helped by evidence of robust demand from China, which reported record imports of refined copper for a fifth successive month in June.

Ideal growing conditions in the US put pressure on grains prices this week, with CBOT September wheat down 3.5% to $5.23 a bushel, while CBOT September corn declined 1% at $3.19 a bushel.

CBOT August soyabeans rose 1.3% over the week to $10.23 a bushel, supported by strong export sales and the news that the Chinese government had failed to attract buyers to an auction after setting prices too high.

Gold pushed above the $950 level, rising 1.7% to $953 a troy ounce over the week, helped by Dollar weakness.
Global Currencies 
In for a Penny, in for a Pound .....
UK Markets
 The Yen and the Dollar suffered this week as global stocks broke higher from their recent ranges to resume the rally that started in March.
Analysts said the improvement in risk appetite weighed on haven demand for both currencies as investors searched for yield.

The Yen was also undermined by signs that yield-hungry Japanese investors were increasing demand for overseas assets.

An estimated Y700bn ($7.4bn) of Toshin funds, which allow Japanese retail investors to invest in higher-yielding currencies, were offered to the public. These funds were mainly targeted at the Australian Dollar, the Brazilian real, the South African rand and the Turkish lira.

Over the week the Yen lost 0.6% to Y94.80 against the Dollar, fell 1.2% to Y134.79 against the Euro and dropped 1.1% to Y155.69 against the Pound.

The Yen's losses were more acute against commodity-linked currencies. On the week, it fell 2.1% to Y77.28 against the Australian Dollar, dropped 2.2% to Y62.14 against the New Zealand Dollar and lost 3.5% to Y87.56 against the Canadian Dollar.

Increased investor optimism also boosted emerging market currencies.

The Turkish Lira rose to a fresh high for the year against the Dollar, climbing 2.6% over the week to TL1.48, while the South African Rand rose 4% to R7.72 and the Brazilian Real gained 1.6% to R$1.8949.

The Dollar also suffered elsewhere, falling 0.7% to $1.4217 against the Euro over the week, losing 0.6% to SF1.0699 against the Swiss Franc and dropping 0.5% to $1.6429 against the Pound.

To bring currencies to a close, the RMB here in China ended the week at 6.8323 to the US Dollar, 9.7052 to the Euro, 11.228 to the British Pound and 5.5851 to the Australian Dollar.
China 
Key news eminating from China this week .....
 China MarketsBeijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country's premier, said in comments published on Tuesday.
"We should hasten the implementation of our 'going out' strategy and combine the utilisation of foreign exchange reserves with the 'going out' of our enterprises," he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The "going out" strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

This is the first time we have heard an official articulation of this policy - to directly support corporations to buy offshore assets.

China's outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but it is guessed that this was part of a strategy to reduce its reliance on the US Dollar as a reserve currency.

This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.
 
State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1% stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

"Everyone is saying we should go to the western markets to scoop up [underpriced assets]," said Chen RMB. "I think we should not go to America's Wall Street, but should look more to places with natural and energy resources."

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

China has room to launch another stimulus aimed at increasing domestic consumption and swinging the economy away from its dependence on exports, the International Monetary Fund said on Wednesday.

The report came even as the World Trade Organisation said China was set to overtake Germany as the largest goods exporter this year, underlining what many economists see as the need for China to export less and consume more.

In a long-delayed assessment of China's economy, the IMF report praised the country's efforts to stimulate its economy. But it added that, given the low level of public debt, it saw "further room for a targeted, additional stimulus aimed at increasing private consumption through near-term fiscal measures to raise household income".

The IMF's executive directors suggested reforms to healthcare, education and pension systems which would make people feel better about saving less and spending more.

It also said unemployment would probably rise as China tried to rebalance the economy and jobs were lost in export sectors. However "over a longer horizon, the employment gains from rebalancing towards domestic consumption and an increase in service sector employment should outweigh short-term losses".

The economic assessment is meant to be issued annually but had been blocked by China until now over fears about how the IMF would label its currency, which some complain is kept unfairly low to make exports more competitive.

IMF directors were divided over that issue, according to the report. Some thought the renminbi remained "substantially undervalued" and should be strengthened as part of a "comprehensive strategy to rebalance the economy". Others said it was difficult to make exchange rate assessments and the currency would only play a "supplementary role".

The issue is a source of constant friction between the US and China, and is likely to be raised next week when top officials from the two countries meet in Washington for a "strategic and economic dialogue". Some US lawmakers want to put sanctions on Chinese goods because of its currency policy, but the Obama administration has backed away from confrontation (wisely, I'd say!).

International financial institutions expect China to reap quicker trade benefits from a global upturn later this year that will be led by emerging economies.

"Our figures showed that Asian countries may be leading a recovery in global trade," Pascal Lamy, WTO director-general, told reporters in Singapore at a meeting of trade ministers of the Asia-Pacific Economic Co-operation forum.

Last year, China's merchandise exports of $1,428bn (€1,004bn, #869bn) were only slightly behind Germany's $1,465bn, according to the WTO report.

Meanwhile, China, which notched up year-on-year growth of nearly 8% in the second quarter, remains the top destination for future foreign direct investment (FDI), according to a survey by the United Nations Conference on Trade and Development released on Wednesday. The 240 multinationals that responded to the questionnaire put the US in second place, followed by India, Brazil and Russia.

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

Beijing Automotive Industry Holding Co., the fastest-growing carmaker in China, may have its success to blame for the failure to buy General Motors Corp.'s Opel unit.

Beijing Auto is on the rise and GM has no interest in strengthening a rival in China it is felt. The center of gravity in the industry is shifting to China.

Beijing Auto's bid for Ruesselsheim, Germany-based Opel offered more cash and asked for less government aid than those of Magna International Inc. and RHJ International SA. Beijing Auto's bid failed because it could not come to an agreement with General Motors over intellectual property rights to car designs and technology, Chairman Xu Heyi said Friday in Beijing.

"GM was worried that if they gave us the intellectual property rights, it will impact their position in China and hurt their relationships with existing partners," Xu said.

China, where GM is the largest overseas automaker, is set to surpass the US as the world's largest auto market this year as government subsidies and tax cuts help companies avoid the worst of a global meltdown in vehicle sales.

Beijing Auto's venture with Hyundai Motor Co. sold 257,003 vehicles in the first half, a 56% jump. In contrast, GM's sales in the market rose 38% to 814,442 vehicles

The Chinese company's venture with Daimler AG, the world's second-largest luxury-car maker, broke even last year for the first time, helped by the country's rising demand for premium sedans.

GM, partnered with Chinese automaker SAIC Motor Corp., expects the Chinese car market to increase at least 5% and probably almost 10% a year for the next several years, Nick Reilly, GM's Asia-Pacific President, said in a TV interview on July 17. He will take over all of GM's operations outside of North America next month.

Beijing Auto offered 660 million Euros ($940 million) for a 51% stake of Opel. The bid required 2.64 billion Euros in government loan guarantees, 40% less than Magna's.

Under Magna's revised proposal, its partnership with OAO Sberbank would invest about 500 million Euros for a combined 55% stake in Opel. The proposal calls for 4.5 billion Euros in loan guarantees from European governments. RHJ offered about 275 million Euros investment and asked for state loan guarantees of about 3.8 billion Euros in exchange for a 50.1% stake. GM will continue talks with Magna and RHJ, it said in a statement Thursday. Beijing Auto was excluded, the German government said.

Beijing Auto had record sales, revenue and profit this year. The company's profit surged 78% in the first half from a year earlier to 2.48 billion RMB ($363 million). Sales rose 28% to 582,215 vehicles. The company aims to triple vehicles sales to 3 million and have revenue of 300 billion RMB by 2015.

Beijing Hyundai Motor Co.'s Elantra Yuedong car was the second best selling model in China in the first half, trailing GM's Excelle by 1,160 units, according to the China Association of Automobile Manufacturers. The Elantra was the 10th best selling car in the country last year.

The failure to buy Opel may end up helping Beijing Auto. Previous attempts by Chinese carmakers to expand abroad have not been successful. SAIC Motor Corp.'s South Korean unit, the biggest foreign acquisition by a Chinese carmaker, entered receivership in February, hurt by labor disputes and plunging sport-utility vehicle sales.

In truth though, Chinese automakers don't have the capability to run a European company and even if they got Opel, they would encounter a lot of difficulties due to the huge gap between Beijing Auto and Opel in both technology and management.

It would be more useful for them to take over other automakers inside of China to help with their expansion at the current stage.

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

China State Construction Engineering Corp., the nation's largest housing contractor, raised 50.16 billion RMB ($7.3 billion) in Shanghai in the world's biggest initial public offering in 16 months.

The 12 billion shares were sold to investors at 4.18 RMB each, top of the range, according to a filing to the Shanghai Stock Exchange Thursday. Institutional investors bid for 38.38 times the 6 billion shares in the "offline" tranche of the sale. Retail and other institutional buyers who bought "online" bid for 35.39 times the balance of 6 billion shares.

State Construction is taking advantage of a stock market rally to raise money for real-estate projects as a recovery in the world's third-largest economy boosts property prices. The IPO, the fifth since China ended a nine-month moratorium on sales in June, is the biggest worldwide since Visa Inc. collected more than $19 billion in March 2008.

This is the first major state-owned construction firm listed and with the push by Beijing for infrastructure and growth of other SOEs, it is not surprising that it would be a new darling of investors.

Investors' hopes for business abroad may be too optimistic. Governments overseas are starting to push back against China's efforts to have its state-owned companies dominate industries.

The IPO values State Construction at 51.3 times earnings, the company said. The benchmark Shanghai Composite Index of 896 companies trades at 36 times earnings after surging 83% this year. The sale of a 40% stake values the company at 125.5 billion RMB.

State Construction's sale is the biggest in China since PetroChina Co. raised 66.8 billion RMB in October 2007. The stock is expected to start trading on July 29, according to Chairman Sun Wenjie. China International Capital Corp. was the sole underwriter.

State construction plans to use the funds to speed up construction projects both in China and overseas, and to increase real estate investments.

Operations may recover this year and earnings will climb as the 4 trillion RMB stimulus package begins to revive China's economy, the company has said. State Construction's profit fell 44% in 2008 to 4.92 billion RMB because of the slowing property market, rising raw material prices and higher tax payments.

Fixed-asset investments by China's central and local governments may exceed 20 trillion RMB over the next three years, providing room to expand the company's building operations, State Construction President Yi Jun said on July 21.

New home prices in 36 medium-sized and large Chinese cities rose 6.3% in June from a year earlier, the National Development and Reform Commission said on July 20. Nationwide property sales jumped 53% by value last month from a year earlier, and investment in real estate development increased 9.9%, the statistics bureau said July 10.

State Construction owns about 34.3 million square meters of land reserves and plans to develop the properties, according to its prospectus. As much as 8 billion RMB of the IPO proceeds are earmarked for 24 commercial housing projects requiring a total investment of 15.8 billion RMB.
Summary  
The coming week looks like .....
Commodities Indices
 Monday next week will see Chinese and US officials sit down for the latest round of the Strategic Economic Dialogue (SED) talks; this will be very interesting to see what stance China takes and this could, for a very limited time, lift the US Dollar - although briefly and not long-term.
The US data calendar is relatively busy and kicks off with new home sales on Monday. The Case-Shiller home price index and consumer confidence reports are up Tuesday while Wednesday brings the all-important durable goods report and the Fed Beige Book.

Thursday sees the usual weekly initial jobless claims. Friday rounds out the week with the first cut of 2Q GDP and the Chicago purchasing managers index. The earnings season remains hot in the week ahead as well with about 150 S&P 500 companies slated to report.

The peak of second-quarter earnings season continues next week as I say, with one-sixth of the Dow Jones Industrial Average components and a quarter of the companies in the Standard & Poor's 500 Index are scheduled to report.

Economic reports will detail June new-home sales and May home prices, and the government will release its first calculation of the second-quarter gross domestic product, a figure used to measure the health of the economy.

European earnings flooding out in the coming weeks may paint a less rosy picture of the banking sector than seen on the other side of the Atlantic.

While investment and trading activities should be supportive, bad loan provisions will be particularly closely scrutinized, as will the central and eastern Europe exposure of the likes of Erste.

The supply/demand outlook for key commodities plans will also be in the limelight given the battery of oil and chemical firms reporting in Europe and the United States.

The interest in carry trades has grown once more (rightly or wrongly) as investors have become more willing to venture out of the most liquid markets in the quest for returns but the subsequent appreciation in currencies such as the Australian and New Zealand Dollar is provoking a push back from the central banks concerned.

This suggests that others could be, or have been, tempted by tactics deployed by the Swiss National Bank, whose latest reserves data shows how actively it has sought to keep the Swiss franc in check.

Australian reserve data suggest the Reserve Bank of Australia is already taking a leaf out of the SNB's books, which will keep the market on toes in the coming weeks, while the Reserve Bank of New Zealand meeting next week will offer another chance for central bank rhetoric to counter the prevailing market trend.

In the UK, the discussion as to whether or not the Bank of England will announce an extension of its asset buying plan will undoubtedly get further airplay over the coming week.

The minutes of the July MPC and comments from the BoE's Sentance have lowered the odds of further QE. Sentance noted that the Bank may pause if it were justified by forecasts while the minutes show that Bank in July saw not enough evidence to support an increase in QE.

However, the release last week of the much worse than expected 0.8% q/q contraction in Q2 GDP will keep some speculation of further stimulation at the 6 August BoE policy meeting alive.

It is a pretty typical week in the Eurozone. Monday starts things off with French jobseekers data, German import prices and the German GfK consumer confidence survey. The highlight on Wednesday is the release of the ECB's bank lending survey and we also see French producer prices and German consumer prices that day. Thursday has the Eurozone business climate survey, Eurozone consumer confidence and German employment lined up. Friday has Eurozone consumer prices and Eurozone employment.

The UK calendar is on the light side. The Hometrack housing survey starts things off early on Sunday. Wednesday has net consumer credit and mortgage approvals on tap while Thursday ends the week with the GfK consumer confidence survey.

Japan's week is just modestly busy. Retail trade kicks things off on Tuesday while small business confidence and industrial production are due Wednesday. The highlight on Thursday is the employment report and we also have household spending and consumer prices slated for that day. Friday rounds things out with housing starts.

Canada sees an extremely slow week and industrial product prices on Thursday and GDP on Friday are the only noteworthy events.

The calendar down under is on busy side. New Zealand trade numbers kick it off on Monday and this will be followed by New Zealand building permits, Australian leading index and Australian business confidence on Tuesday. Wednesday sees New Zealand business confidence and the RBNZ interest rate decision. Australian building approvals are due up Thursday while Australian private sector credit rounds out the week on Friday.

So all told, the week itself offers lots of opportunity to show 'real' fundamentals - and by 'real', I mean the underlying figures that should drive investment decision - as opposed to how much Company A has beaten its zero-sum estimates by.

I mentioned at the start, this rally is liquidity driven and at some point in the very near future, it is all going to end in tears I'm afraid and whilst I cannot knock people for getting carried away by global 'enthusiasm' whipped up by a 'good-news-starved' Media, caution is definitely the key word for the next 4-6 weeks I feel.
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
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