Business Blog Posts

An agreement from the EU and the IMF to lend Ireland cash to tackle its banking and budget crisis gave investors a reason to buy back some of the assets sold off earlier this month.

But gains were moderate suggesting investors remained cautious, in part because they did not want to risk year-to-date profits, with Europe still saddled with fiscal troublespots such as Portugal and Spain.

"There are still a lot of issues in Europe," said Alex Boggis, who heads fund manager Aberdeen's business in Hong Kong. Aberdeen manages around $15 billion in Hong Kong and China.

"The focus of attention will move around Europe until there are no problems left but that might be some time, so there's going to be volatility for sure."

At the heart of the euro zone's debt woes is investor anxiety about whether the bloc will continue to rescue its fiscally troubled members.

It has already spent 110 euros saving Greece, and Ireland's bail-out is expected to cost about 80-90 billion euros.

Still, the Irish bail-out brought some cheer and helped the euro to climb as far as $1.3766, from $1.3683 late in New York on Friday. It now faces resistance at $1.3770.

The softer U.S. dollar .DXY benefitted commodity and metal prices. Copper was firm and oil rose to above $82 a barrel <O/R>. Spot gold added $6.60 to $1,360.75 an ounce, up from $1,353.50 in New York on Friday.

Other riskier assets also got a boost at the margins.

The Asia-Pacific MSCI index of shares outside Japan added 0.7 percent. But it appeared stock investors were more keen to buy laggards rather than pile into the year's star performers.

Between sectors, the information technology sector .MIAPJIT00PUS led gains with a 2 percent rise. But on the year, it has fared the worse with just a 3.4 percent gain, way behind a 31 percent jump in consumer discretionary stocks.

It was the same between countries. Japan's Nikkei .N225, which has straggled other Asian stock markets this year, hit five-month highs and was up the most on the day with a 1.2 percent climb.

China's Shanghai stock index .SSEC, another laggard within Asia, managed to reverse an initial 0.9 percent loss to be up 0.5 percent by mid-day.

The excitement around Ireland seemed to have overshadowed for now China's policy tightening on Friday when it raised banks' required reserves ratio to a record high.

The EU and the IMF agreed on Sunday to help bail out Ireland with loans -- expected to total 80 to 90 billion euros -- to tackle its banking and budget crisis.

Officials hope the move will stabilize financial markets that have been selling Irish debt and prevent them losing confidence in other euro zone members, notably Portugal and Spain.

Ireland's government, facing public anger over its handling of the crisis, announced plans last month for a package of cuts and tax increases aimed at bringing down a record budget deficit. But its borrowing costs continued to soar, making a bailout almost inevitable.

A four-year fiscal austerity package is expected to contain plans for a new property tax, as well as cuts to benefits and services. Tax breaks for higher earners may also go.

Irish Tourism Minister Mary Hanafin told RTE television the four-year plan had been finalized but had to be cleared by Europe and the IMF and would be published on Wednesday.

A plan to restructure Ireland's banks is being devised as a central plank of the broader international aid package.

Finance Minister Brian Lenihan told a news conference on Sunday that Irish banks would become significantly smaller than they had been and that they may look at selling non-core assets.

The size of the rescue by the EU and the International Monetary Fund has yet to be negotiated but is likely to be smaller than Greece's 110 billion euro ($150 billion) bailout last May.

EU Economic and Monetary Affairs Commissioner Olli Rehn said experts from the European Commission, European Central Bank and IMF would prepare a three-year package of loans by the end of the month.

Britain, which is not part of the euro zone, said it would offer about 7 billion pounds ($11.19 billion) in bilateral aid.

EU policymakers have feared that Ireland's problems might spread to other euro zone members with large budget deficits such as Spain and Portugal, threatening a systemic crisis.

In Berlin, German Finance Minister Wolfgang Schaeuble played down this risk. "If we now find the right answer to the Irish problem, then the chances are great that there will be no contagion effects," he told ZDF television.

Some economists were less optimistic.

"I think it means Portugal is next (to request help). I don't know if it will happen before the end of the year or after, but it's almost inevitable now," said Filipe Garcia at Informacao de Mercados Financeiros in Porto.

The National Association for Business Economics (NABE) said its 51-member forecasting panel continued to rank inflation as a bigger worry than deflation. The survey was conducted between October 21 and November 4.

The Fed's November 3 decision to buy an additional $600 billion worth of government bonds to stimulate the economy and prevent prices for spiraling lower has been criticized both at home and abroad.

About a third of NABE panelists view the Fed's second asset purchasing program as somewhat lessening the risks of deflation, while another 33 percent saw the step as risking inflation.

Still, they forecast the Fed's preferred measure of consumer inflation -- the personal consumption expenditures price index excluding food and energy -- to rise to 1.5 percent by the end of 2011 from a projected 1.0 percent this year.

That is below the Fed's considered comfort zone between 1.7 percent and 2.0 percent. Inflation remains subdued as the economy slowly recovers from the worst recession since the 1930s. Core consumer prices rose 0.6 percent in October from a year ago, the smallest increase since records started in 1957.

NABE panelists tweaked the gross domestic product (GDP) growth forecast for 2010 and kept the estimate for 2011 unchanged at an annual rate of 2.6 percent.

The economy is now seen expanding at a 2.7 percent rate instead of 2.6 percent this year, still below the 3.5 percent many analysts say is needed to start lowering unemployment.

"Projections for real GDP growth remain sub-par through the first quarter of 2011, but accelerate gradually through the forecast period," said NABE President Richard Wobbekind, associate dean of the Leeds School of Business at the University of Colorado.

"For next year as a whole, GDP growth is expected to be moderate. Factors restraining growth going forward include ongoing balance-sheet restructuring by consumers and businesses, and a diminished contribution to GDP growth from inventory restocking and government stimulus."

The panelists predicted a gradual improvement in the labor market, with monthly payroll gains forecast to average less than 150,000 until the latter half of 2011. The unemployment rate was seen above 9.5 percent through the first quarter of 2011, dipping to 9.2 percent by year-end.

A tepid housing market recovery was forecast, with prices rising somewhat in 2011.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

The central bank will release updated economic forecasts on Tuesday as part of the minutes from its latest policy-setting meeting, including a first stab at estimating growth, inflation and unemployment levels for 2013.

At first blush, the forecasts would seem destined to take a back seat to the section detailing the Fed's discussions around launching its new $600 billion bond-buying program.

But this has been discussed, debated, denounced and defended so extensively in recent weeks that some investors have begun to tire of it.

The big questions now are whether the Fed will still buy the full $600 billion if the economy strengthens -- or extend the program if it does not. The forecasts provide the clearest insight into how Fed officials see the recovery playing out.

The figures are expected to show Fed officials have sharply downgraded their 2011 assessment since June, putting it more in line with private economists' predictions for sluggish growth. The most recent set of figures had 2011 GDP marching ahead at a 3.5 percent to 4.2 percent clip, while economists polled by Reuters predicted just a 2.3 percent rate.

"The question is how low will they go?" said Harm Bandholz, U.S. economist with UniCredit in New York.

The first digit will almost certainly be a 2, Bandholz said.

(Graphic on Fed forecasts: r.reuters.com/wah46q )

MONEY AND POLITICS

The forecasts for the following two years may be even more telling.

The longer the time horizon, the harder it is to predict with much accuracy. But if Fed officials take a sharp knife to 2012 estimates and predict a slow grind in 2013, it would suggest that at least some of them think the economy will need support well after this easing program expires in June 2011.

For President Barack Obama, gloomy forecasts through 2013 would be particularly unpleasant reading as the 2012 presidential election draws closer. His Democratic Party suffered heavy losses in congressional elections earlier this month, largely because of voter anger over the weak economy.

Fed Chairman Ben Bernanke made it clear he wouldn't mind a little more help from the fiscal side. He said in a speech in Frankfurt on Friday that "there are limits to what can be achieved by the central bank alone" and a fiscal program could complement the Fed's efforts.

Big Republican midterm election wins in Congress make it less likely that any substantial government spending program would be forthcoming.

The outcome of talks to shape a bailout for Ireland could also move stocks, analysts said, but they cautioned that other highly indebted euro zone countries could still be a source of worry.

Ireland will seek a bailout from international lenders, Finance Minister Brian Lenihan said on Sunday, ending weeks of speculation that it would need aid to prop up its banks and help it secure cheaper state funding.

Sources have told Reuters Ireland may need 45 billion to 90 billion euros ($63 billion to $126 billion), depending on whether it needs help only for its banks or to cover general government spending too.

Even though light volume will define trading during the holiday-shortened week of the U.S. Thanksgiving Day on Thursday, investors will watch to see if retail sales appear strong enough to give the market a Santa Claus rally.

The lighter-than-average volume expected this week could lead to exaggerated moves in the market after a week of sharp losses and advances.

Further gains would resume an up-trend that began at the end of the summer, with the Standard & Poor's 500 index up 14 percent since August 31. The market ended last week little changed and suffered losses the week before.

"Bullish sentiment toward holiday sales is the most likely catalyst for the cyclical bull market to resume, so a lot rests on that," said Chris Burba, a short-term market technician at Standard & Poor's in New York. If sales seem weak, "this dip could turn into something bigger."

Retailers have been optimistic in their forecasts for holiday sales, and investors will want to see evidence to support those forecasts as worries about consumer spending weigh on the economic outlook.

At a rate of 9.6 percent, unemployment is seen as one of the biggest drags on the U.S. economy,

Target Corp (TGT.N) last week was the latest retailer to give an upbeat forecast, saying it expects to post its best same-store sales in three years during the period.

The day after Thanksgiving traditionally marks the start of the holiday shopping season and is called Black Friday because retailers generally make enough sales to get their accounts into black ink.

Shoppers are expected to flood stores in search of bargains while retailers fight for their share of those sales. Target, for instance, is using a built-in discount for shoppers who use its store credit card.

"It's a very competitive retail environment ... a sign people are slugging it out" for every last sale, said Sasha Kostadinov, a portfolio manager at Shaker Investments in Cleveland.

With the recent market weakness, the S&P 500 has had trouble staying above 1,200 and ended just below that level on Friday.

Its comments came after the Sunday Times said the North Sea disposal was on the cards. An Exxon spokeswoman would not comment on the report but said the company intended to keep investing in the region.

"In terms of North Sea assets, Exxon Mobil is a long-term investor in the UK and plans to remain a major investor. We do not comment on speculation on commercial matters regarding our assets," a spokeswoman said.

Exxon and other oil companies including BP (BP.L) and Royal Dutch Shell (RDSa.L) have been selling assets in the area in recent years, to focus more on other locations such as Angola and the Gulf of Mexico.

In September Exxon and Shell said they planned to sell their interest in the Corvette field platform in the North Sea.

On the Scottish retail operations, the Exxon spokeswoman said the group was "testing a new business model" which would involve the group selling Esso-owned retail sites to wholesalers but keeping the Esso brand and continuing to supply fuel.

"Conversion to the branded wholesaler model would include the sale of Esso-owned retail sites to the wholesaler, along with an agreement for the wholesaler to supply the sites with Esso brand fuel," Exxon said in a statement.

"We are currently in the bidding process with a number of interested buyers," the company added.

In 2008 Exxon exited its retail gas business in the United States and in May this year it sold 295 of its service stations on Australia's east coast to convenience store chain 7-Eleven Australia Pty Ltd.

(Reporting by Golnar Motevalli; Editing by David Holmes)