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Manufacturing in U.S. Unexpectedly Contracted in June

Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment.

“Manufacturing is gearing down,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, whose 50.5 forecast was the lowest in the Bloomberg survey. “It’s consistent with the idea that the uncertainty is weighing on businesses. Europe is taking a bite out of the export sector.”

The yield on the benchmark 10-year Treasury note declined to 1.59 percent from 1.65 percent on June 29. The Standard & Poor’s 500 Index erased earlier losses after last week capping its best June rally since 1999. The S&P 500 climbed 0.3 percent to 1,365.51 at the close in New York.

The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.
No Recession

Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM.

“We are not yet in recession territory,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said in an e-mail to clients. “Recessions are usually accompanied by ISM readings in the low-40s. And the construction news is improving, while consumers are being helped by tumbling gasoline prices.”

A separate report today from the Commerce Department in Washington showed the improvement in the housing market helped boost construction spending in May to the highest level in two years. Housing demand has shown a gradual recovery. Purchases of new houses rose 7.6 percent in May to reach the highest level since April 2010, recent data showed.

Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.
Europe’s Economy

Euro-area unemployment reached the highest on record in May, other figures showed. The jobless rate in the 17-nation region rose to 11.1 percent, the highest since the data series began in 1995, from 11 percent a month earlier, the European Union’s statistics office in Luxembourg said.

A manufacturing purchasing managers’ index for China fell to 48.2 in June from 48.4 a month earlier, HSBC Holdings Plc and Markit said today.

The ISM’s U.S. production index decreased to 51, the lowest since May 2009. The new orders measure dropped to 47.8, the weakest since April 2009, from 60.1. The drop in demand from the previous month was biggest since October 2001, after the September 11 terrorist attacks.

The employment gauge decreased to a three-month low. The index of prices paid decreased to 37 from 47.5.

Manufacturing accounts for about 12 percent of the economy and has been at the forefront of the recovery that began June 2009.
Jobless Rate

Slower hiring and an unemployment rate exceeding 8 percent may keep restraining household spending, which accounts for about 70 percent of the economy. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

Executives at Wilmington, Delaware-based DuPont said while growth in North America is holding up, the third-largest U.S. chemical maker is concerned about a slowdown in China and Germany’s dependence on exports.

“My number one worry is what will happen in Europe over the next six to nine months,” Diane Gulyas, group vice president of DuPont’s performance-materials segment, said on a conference call with analysts on June 14.
Steelcase Sales

Steelcase, a Grand Rapids, Michigan-based maker of office furniture, said first-quarter sales fell in most major markets in the region that includes Europe, Middle East and Africa.

“Uncertainty in the global economy continues to take its toll on specific parts of our business,” Chief Financial Officer David Sylvester said on a conference call on June 21.

The U.S. economy expanded 1.9 percent in the first quarter, the same as previously estimated and following a 3 percent pace in the prior three months, revised data showed last week.

To combat flagging growth, Federal Reserve policy makers said they are ready to take more steps should the U.S. expansion slacken.

Fed officials said in a policy statement on June 20 that they expect “economic growth to remain moderate over coming quarters and then to pick up very gradually.”

From : Bloomberg

El-Erian: Will Europe Amplify or Lessen Investors' July 4th Celebrations?

Expect heated discussions around some July 4th barbeques in the US - not just on the economy, elections and last week's Supreme Court ruling, but also on the follow-through to Friday's impressive surge in equity markets around the world.

Some see the trigger - the European summit - as lifting the dark clouds that have dampened investor enthusiasm and pose an "existential risk" for the euro area. Others remain skeptical, welcoming the better-than-expected outcome but characterizing it as insufficient over time.

Where investors end up on this spectrum boils down to whether they believe that European policy incrementalism can accumulate quickly into a beneficial tipping point; and this week will provide important insights on this. Let me explain.

It is highly significant that government leaders have evolved to the explicit pursuit of three major strategic initiatives that would place the eurozone's architecture in a much better place: namely, supplementing monetary union with fiscal union, banking union and greater political integration.

It is also significant that, by modifying regional crisis management mechanisms (and the ESM in particular), they understand the urgent need to break the vicious feedback loop between weak banks and deteriorating sovereign creditworthiness.

Unfortunately, government leaders are still falling short of the required policy breakthrough.

The policy timetable is still too timid given conditions on the ground, and the operational procedures too cumbersome. Funding lines for the emergency facilities remain partial and divergent national political narratives can confuse things (including statements over the weekend out of Finland, Germany and the Netherlands).

So, for the risk-on phase to build adequate momentum, Europe needs to add to its policy progress and also minimize headwinds. Over the next few days, investors will receive three important indicators on this.

First, investors will learn on Thursday whether last week's summit provides sufficient air cover for the ECB [cnbc explains] not just to cut its 1% benchmark rate by 25 to 50 basis points but also to support peripheral bonds (through the reactivation of the bond purchase program (SMP), another LTRO , or a new mechanism). It is not clear whether the central bank's governing council is there yet.

Second, they will monitor the resumption of negotiations between the Greek government and the Troika (consisting of the ECB, EU and IMF) - a complicated affair, especially as the assumptions underpinning prior agreements have been overtaken by unfavorable economic and financial developments. It is not clear who would put up the money to compensate for both this and for the new government's electoral commitment to stretch out the pace of domestic economic adjustment.

Lastly, Friday's monthly employment report out of the US will have an impact, and especially so after Monday's disappointing (ISM) manufacturing numbers.

For Europe to minimize external headwinds, the US needs both to avoid another sub-100,000 job creation print and to deliver improving indicators of long-term unemployment and labor force anticipation. Absent that, joblessness will again become a substantial leading indicator (and not just a lagging one), dampening consumer confidence, spending and companies' investment in plant and equipment - all of which would worsen employment prospects.

This week's July 4th holiday in the US will feature the traditional and enjoyable mix of parades and picnics, culminating with fireworks across the country. Throughout, investors will anxiously hope for additional policy measures, particularly out of Europe, that enable them to breathe easier and perhaps even add to their celebrations.

From CNBC

Forecast EURUSD 02-07-2012 Trend Down

Barclays Chairman Said to Be Poised to Resign After Libor Fine

Barclays Plc (BARC) Chairman Marcus Agius plans to resign after the bank was fined a record 290 million pounds ($455 million) for trying to rig interest rates, sparking a political outcry, according to a person briefed on the matter.

An announcement may come as soon as today, said the person, who asked not to be identified because the move hasn’t been made public. Agius, 65, has been chairman of Britain’s second-largest bank by assets since January 2007.

He is the most senior executive to offer to step down following probes by global regulators into whether lenders colluded to manipulate Libor. Chief Executive Officer Robert Diamond remains under pressure from lawmakers after U.K. and U.S. regulators found the lender “systematically” attempted to rig the London and euro interbank offered rates for profit.

“Politicians will see this as him taking a bullet for Bob Diamond,” said Christopher Wheeler, a London-based banking analyst at Mediobanca SpA. “They realized they needed to do something, and Agius was chairman during the time they got fined for -- but will it be enough?”

Both Diamond and Agius have been called to appear this week before British lawmakers on the Treasury Select Committee. Separately, the U.K. government is preparing an inquiry into the future of Libor, including introducing criminal penalties for people who breach rules surrounding the rate, said a Treasury spokesman, who declined to be named citing government policy.
David Cameron

Prime Minister David Cameron on June 28 called for accountability to go “all the way to the top,” while opposition Labour Party leader Ed Miliband has called for a full inquiry into the industry’s practices.

Barclays has tumbled 17 percent since the fine was announced on June 27, making it this year’s worst performer in the five-member FTSE 350 banks index.

Diamond, who built up and ran the securities unit during the period being probed by regulators, may keep his job because he has no obvious successor, according to Chirantan Barua, an analyst at Sanford Bernstein Research in London. None of the bank’s largest shareholders have publicly called for Diamond’s resignation so far.

“Shareholders will be worried that if Bob goes, the stock may go down another 10 percent,” Wheeler said.

Diamond, 60, his three top lieutenants, Chief Operating Officer Jerry del Missier, Finance Director Chris Lucas and corporate and investment banking chief Rich Ricci have already forfeited their bonuses for this year following the fines.
Michael Rake

Agius is likely to be replaced by Michael Rake, Sky News reported yesterday. Rake, 64, is chairman of BT Group Plc and has been a director of Barclays since 2008. Officials at Barclays declined to comment.

Agius joined Barclays after a 34-year career at Lazard Ltd., where he had been chairman of the firm’s London unit. There, he advised on banking takeovers including Halifax Group Plc’s 2001 merger with Bank of Scotland to create HBOS Plc. As non-executive chairman of BAA Plc, Agius helped the owner of London’s Heathrow airport negotiate a higher takeover price from Grupo Ferrovial SA in 2006.

He had already faced investor pressure when the lender raised more than 5 billion pounds in 2008 from a group of funds from Abu Dhabi and Qatar without giving existing shareholders the opportunity to buy new stock. Shareholders including Legal & General Group Plc complained at the time their pre-emption rights had been ignored, and in protest about 16 percent of investors opposed Agius’s re-election as chairman in April 2009.
BBC, BBA

He also had to apologize to shareholders for failing to communicate the firm’s pay plans to investors clearly in April after 27 percent of shareholders voted against Diamond’s 12 million-pound compensation package.

Agius is also a board member of the British Broadcasting Corp. and chairman of the British Bankers’ Association, the industry lobby group that oversees Libor.

Libor is determined by about 18 banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Because banks’ submissions aren’t based on real trades, the potential exists for the benchmark to be manipulated by traders.

At least a dozen firms, including Citigroup Inc., Royal Bank of Scotland Group Plc and UBS AG, are being probed by regulators worldwide for colluding to rig the rate, the benchmark for more than $360 trillion of securities, including mortgages, student loans and swaps.
False Submissions

Barclays traders routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released on June 27 by the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and the U.K. Financial Services Authority.

Derivatives traders requested the false submissions in the Libor and Euribor setting process, as they were “motivated by profit and sought to benefit Barclays’ trading positions,” the U.K. Financial Services Authority said.

Andrew Tyrie, the chairman of Parliament’s Treasury committee, said Diamond will have to answer questions about who profited from the firm’s false submissions and who at Barclays knew about them, according to an interview with the Daily Mail.

“There appear to have been at least two motives for the rigging of Libor,” Tyrie was cited as saying in the interview. “The first was to enable traders to make a profit. The second was to support share prices at a crucial time -- and that is something that might reasonably be considered the responsibility of the relevant companies as a whole.”

SFO Probe?

The U.K. Serious Fraud Office is considering whether to open a formal investigation, its spokesman said last week. The U.S. Justice Department is conducting its own criminal probe into the attempted manipulation of interbank offered rates.

FSA Chairman Adair Turner said yesterday the Barclays fine shows regulator needs more powers to bring criminal charges.

“Further steps were made a few years ago to give us the ability to bring criminal charges in particular areas of market abuse, but they did not cover the Libor market,” Turner said in an interview on the British Broadcasting Corp.’s “Andrew Marr Show.” “We now have to look further and see whether we should strengthen these powers considerably.”

From Bloomberg

Linde to Buy Lincare Holdings for $3.8 Billion in Stock

Linde AG (LIN) agreed to acquire Lincare Holdings Inc. (LNCR) for about $3.8 billion to add U.S. oxygen and respiratory therapy services delivered to the home.

Linde will pay $41.50 a share for the company, the Munich, Germany-based producer of industrial and medical gases said in a statement yesterday. That’s 22 percent more than Clearwater, Florida-based Lincare’s closing price on June 29 and 64 percent more than the price on June 26, before the Financial Times’ FT Alphaville reported on talks between the companies.

Chief Executive Officer Wolfgang Reitzle has identified health care as a growth area for Linde and in January agreed to buy Air Products & Chemicals Inc. (APD)’s home-care business. The Lincare purchase will almost triple Linde’s home-care gas sales in the U.S. The medical-gas market will probably grow 50 percent to 16 billion euros ($20 billion) by 2020, according to Linde.

The total price is $4.6 billion including about $800 million in assumed debt, said Matthias Dachwald, a spokesman for Linde. The transaction will be paid for mainly with a $4.5 billion loan that will be refinanced through debt and equity issuances, Linde said. The company said it expects to complete the transaction in its fiscal third quarter.
Industry Consolidation

The Lincare purchase is Linde’s biggest since it bought BOC Group Ltd. in 2006 for 8.93 billion pounds ($13.9 billion). That acquisition trimmed to four the number of larger industrial gas companies, making further consolidation possible only in specialty areas.

Linde generated about 18 percent of its 300 million euros in home-care sales from the Americas last year. Analysts estimate Lincare sales will increase 10 percent this year to $2.04 billion, according to data compiled by Bloomberg.

The biggest competitors in the U.S. home respiratory market for Linde will be smaller, independent firms. Lincare was the biggest with 26 percent of the 2009 respiratory market, followed by Apria Healthcare Group Inc., Rotech Healthcare Inc. (ROHI), and American Homepatient Inc., according to a 2010 presentation by Rotech.

Apria is owned by the private-equity firm Blackstone Group LP, and Highland Capital Management LP owns American Homepatient.

The transaction reunites two distant corporate cousins after almost a century apart. Carl von Linde, who founded his German firm in 1879, created a related U.S. company known as Linde Air Products with partners in 1907, according to a history of Linde on the company’s website. Union Carbide Corp. acquired the U.S. operation in 1917. It later created a unit called Linde Homecare Medical Systems, subsequently shortened to Lincare.

Union Carbide sold Lincare to a group of investors in 1990, and they sold shares to the public in 1992.

From Bloomberg

Dell Said to Near Buying Quest to Gain Data-Center Software

Dell Inc. (DELL) is near an agreement to buy Quest Software Inc. (QSFT), a maker of programs to manage corporate computer systems, prevailing in a bidding contest with Insight Venture Partners, people with knowledge of the matter said.

The acquisition may be announced as soon as tomorrow, said the people, who spoke on condition of anonymity because the talks are private. Aliso Viejo, California-based Quest said last week that it received an offer for $27.50 a share, or about $2.32 billion, from a company that it didn’t identify. Dell is that company, the people said.

The purchase would cap a months-long bidding war for Quest and fits with Dell’s aim to add technology that helps customers outfit data centers for handling storage and cloud computing. Quest’s software lets companies administer databases and servers, as well as back up information and recover lost data.

Several companies made offers for Quest since it said on March 8 that it had agreed to be bought by Insight Venture Partners, a private equity firm, for about $2 billion, or $23 a share. Earlier talks between Dell and Quest about an acquisition broke down, a person with knowledge of the matter said June 1.

Quest shares rose less than 1 percent to $27.81 on June 29 and have surged 50 percent this year amid speculation that another company might top Insight’s earlier bid. Dell, the world’s third-largest PC maker, climbed 4.7 percent to $12.51 on June 29. The shares have declined 14 percent this year.

Kelly McGinnis, a spokeswoman for Dell, didn’t immediately respond to a request for comment. Quest spokesman Tom Johnson declined to comment.
Software Takeovers

There have been 530 takeovers of U.S. software companies announced so far this year, according to data compiled by Bloomberg, on pace to break the record 923 transactions set last year. The largest is SAP AG’s planned $4.3 billion acquisition of Sunnyvale, California-based Ariba Inc., announced in May.

Dell told analysts at a June 13 meeting that it plans to use deals to boost revenue from data-center hardware, software and services by 45 percent to $27.5 billion by fiscal 2016, reducing the company’s reliance on the slow-growing desktop and notebook computer businesses.

The last time Dell engaged in a public takeover fight was in 2010, when it lost storage company 3Par Inc. to Hewlett- Packard Co. (HPQ), which bought it for $2.35 billion. That 18-day bidding contest tripled 3Par’s market value.

Michael Dell, founder of the Round Rock, Texas-based company, told Bloomberg News last year that Hewlett-Packard overpaid for 3Par, and he made the right decision in dropping out of the process.

Insight first invested in Quest in 1999 and was the company’s largest institutional investor at the time of its IPO that year, according to a regulatory filing at the time. Insight co-founder Jerry Murdock also served on Quest’s board of directors.

From bloomberg

Bristol-Myers to Buy Diabetes Maker Amylin for $5.3 Billion

Bristol-Myers (BMY) Squibb Co., which failed to get U.S. approval for a new diabetes treatment in January, will pay $5.3 billion for Amylin Pharmaceuticals Inc. (AMLN), the maker of two drugs on the market for the disease.

The purchase comes a month after Bristol’s top seller, the blood-thinner Plavix with $7.1 billion in sales last year, began facing generic competition. In 2013, the New York-based company loses patent protection on its $1.6 billion HIV drug, Sustiva.

Under the agreement announced yesterday, Bristol-Myers will pay $31 a share in cash, a 10 percent premium to the June 29 closing price for San Diego-based Amylin. At the same time, AstraZeneca Plc (AZN), based in London, will pay Bristol $3.4 billion to help develop Amylin’s drug portfolio, the companies said.

It “looks a bit rich in terms of the price paid and it’s a trend in the sector, where biotech companies are commanding significant premiums, higher than they would have commanded in previous years because the pharmaceutical sector is being forced down this road,” said Navid Malik, an analyst with Cenkos Securities Plc (CNKS) in London.

The pharmaceutical industry lost patent protection on products valued at $34 billion in annual sales last year, and revenue at risk from generics will rise to $147 billion by 2015, according to data compiled by Bloomberg.

The diabetes market has become a key target for drugmakers as a result of rising obesity rates and the aging of the Baby Boom generation. About 346 million people globally have diabetes, and the number of deaths from the chronic disease may double from 2005 to 2030, according to the World Health Organization.
Other Offers

AstraZeneca, Paris-based Sanofi (SAN) and Merck & Co. (MRK), of Whitehouse Station, New Jersey, also made offers during a bidding process, people with knowledge of the process had said.

Amylin ended a marketing deal with Indianapolis-based Eli Lilly & Co. in November, and has been seeking a partner to sell Bydureon, a version of its diabetes drug Byetta, outside the U.S. The San Diego-based company began to seek acquisition suitors after rejecting a $22-a-share offer from Bristol in February, people familiar with the matter said earlier this year.

Revenue at Amylin surpassed $650 million last year and may rise about 5 percent in 2012, according to analysts’ estimates compiled by Bloomberg. The company may generate as much as $1.5 billion in annual sales from Byetta and Bydureon, Phil Nadeau, a Cowen & Co. analyst in New York, wrote earlier this year.

For Bristol, the purchase is the largest of 19 since 2007, when it began so-called string of pearls acquisition strategy designed to revitalize the company in the face of patent losses and produce a more diverse stable of products.
Forxiga

Bristol-Myers’s own experimental diabetes product, dapagliflozin, also called Forxiga, failed to win U.S. marketing approval in January, when the Food and Drug Administration asked for more data to assess risks and benefits for the treatment, being developed with AstraZeneca. It’s awaiting approval in Europe, and may be cleared later in the U.S.

The boards of Bristol-Myers and Amylin endorsed the deal, according to yesterday’s statement. Including Amylin’s debt and a payment owed to Eli Lilly & Co. (LLY) of about $1.7 billion, the deal is valued at about $7 billion.

“We are pleased to be able to strengthen the portfolio we have built to help patients with diabetes by building on the success Amylin has had with its GLP-1 franchise,” Bristol-Myers Chief Executive Officer Lamberto Andreotti said in the statement.

Bristol-Myers and AstraZeneca will equally share profits and losses in the venture to develop Amylin’s drug portfolio.
Diabetes Alliance

“There will be an expansion of a diabetes alliance we have had with AstraZeneca,” Jennifer Fron Mauer, a spokeswoman for Bristol, said in a telephone interview. “We’ve had that since 2007 to co-develop and co-commercialize two Type II diabetes medicines in our pipeline.”

AstraZeneca, whose CEO David Brennan retired June 1, was thought to make most sense as a potential acquirer of Amylin, according to Michael King, an analyst at Rodman & Renshaw in New York. The company’s Seroquel medicine lost patent protection in March, and analysts expect the antipsychotic drug’s sales to drop to $3.27 billion this year from $5.82 billion last year, according to data compiled by Bloomberg.

Carl Icahn, the billionaire investor who is Amylin’s third- largest shareholder with a stake of almost 9 percent as of April 4, threatened a proxy fight in April and urged a sale, calling the company’s board “dysfunctional” and “not operating in a manner that enhances shareholder value.”

Amylin rose less than 1 percent to $28.20 in New York trading on June 29. The San Diego-based company’s shares were at $15.88 on March 26, the day before it was reported Bristol-Myers had made an unsolicited offer of $22 a share. Bristol-Myers gained 2.5 percent on June 29 to close at $35.95.

Amylin was advised by Goldman Sachs & Co. and Credit Suisse Securities LLC. Citigroup Inc. and Evercore Partners Inc. (EVR) are serving as financial advisers to Bristol Myers. Bank of America Merrill Lynch advised AstraZeneca.

From Bloomberg

Hiring Probably Cooled in Second Quarter: U.S. Economy Preview

The jobs tally in June probably crowned the weakest quarter for employment in more than two years, evidence the U.S. recovery has lost momentum, economists said before reports this week.

Employers increased payrolls by 90,000 workers last month after a 69,000 gain in May, according to the median forecast of 59 economists surveyed by Bloomberg News ahead of Labor Department figures due July 6. Excluding government agencies, private hiring may have climbed by 100,000, concluding the smallest quarterly advance since the first three months of 2010.

The job slump has shaken confidence and stalled household spending, which accounts for about 70 percent of the economy, making the expansion more susceptible to any fallout from the European debt crisis. Slowing consumer and global demand is also leading to a cooling in manufacturing, a mainstay of the recovery, another report this week may show.

“We really need to see job creation pick up, which is the only thing that’s going to get households spending on a sustained basis,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in London. “The economy isn’t going to get exceptionally weak from here, but neither is it going to get much stronger.”

The unemployment rate, derived from a separate Labor Department survey of households, probably held at 8.2 percent, the economists predicted. Joblessness has exceeded 8 percent since February 2009, the longest stretch in monthly records dating to 1948.
Slower Growth

The expansion has lost luster. Gross domestic product rose at a 1.9 percent annual rate in the first quarter following a 3 percent rate in the prior three months, Commerce Department data showed last week. While household spending underpinned last quarter’s gain, incomes stretched by weak job creation will probably limit growth prospects.

Stronger economic growth and diminished joblessness would bolster President Barack Obama’s re-election prospects as November draws nearer. Obama attributed the weakness in job growth in May primarily to European governments’ inadequate response to the continent’s debt crisis, saying “our biggest challenge is not here in the U.S. but the economy overseas.” Republican candidate Mitt Romney said Obama “is always quick to find someone to blame” for the struggling economy.

Stocks surged on June 29, capping the biggest June gain since 1999, after European leaders reached an agreement that alleviated concern banks will fail. The Standard & Poor’s 500 Index climbed 4 percent last month.
Manufacturing Cools

Manufacturing may also offer less support to the economy as domestic and global demand fades. The Institute for Supply Management Inc.’s factory index fell to 52 in June, the lowest level in eight months, from 53.5 the prior month, according to the Bloomberg survey median ahead of a report tomorrow. A reading greater than 50 signals expansion.

The purchasing managers group’s services index, which covers almost 90 percent of the economy, fell to 53 last month from 53.7 in May, a report on July 5 may show according to economists surveyed.

To spur a faster expansion and lower unemployment, Federal Reserve policy makers announced on June 20 they would buy securities to extend the maturities of assets on the bank’s balance sheet, thereby lowering longer-term interest rates.

They also lifted forecasts for joblessness, anticipating the unemployment rate will average 8 percent to 8.2 percent in the fourth quarter of this year versus an April estimate of 7.8 percent to 8 percent.

“There is a lot of uncertainty in almost all markets today caused by low growth rates and high unemployment in the U.S. and slower or no growth globally,” Joseph Pyne, chairman and chief executive officer of Kirby Corp. (KEX), said during a June 25 call with analysts. Shares have slumped 7.9 percent since the shipping company cuts its earnings forecast that week.

                     Bloomberg Survey
==============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
ISM Manu Index            7/2       June      53.5      52.0
Construct Spending MOM%   7/2       May       0.3%      0.2%
Vehicle Sales Mlns        7/3       June      13.7      13.9
Domestic Vehicles Mlns    7/3       June      10.8      10.9
Initial Claims ,000’s     7/5      30-Jun     386       385
ISM NonManu Index         7/5       June      53.7      53.0
Nonfarm Payrolls ,000’s   7/6       June       69        90
Private Payrolls ,000’s   7/6       June       82       100
Manu Payrolls ,000’s      7/6       June       12        8
Unemploy Rate %           7/6       June      8.2%      8.2%
Hourly Earnings MOM%      7/6       June      0.1%      0.2%
Hourly Earnings YOY%      7/6       June      1.7%      1.7%
Avg Weekly Hours          7/6       June      34.4      34.4
=============================================================

U.S. Stocks Rally to Give Dow Best Month Since October

U.S. stocks rallied for the week, lifting the Dow Jones Industrial Average to the best monthly gain since October, amid optimism an agreement by European leaders on banks will help contain the region’s debt crisis.

All 10 industry groups in the Standard & Poor’s 500 Index rose. Energy companies jumped the most, climbing 4.8 percent, as oil rebounded. A gauge of homebuilders rallied 13 percent as housing data beat forecasts and Lennar Corp.’s profit surged. Hospital companies including Tenet (THC) Healthcare Corp. jumped after the Supreme Court upheld the core of President Barack Obama’s industry overhaul. Nike Inc. (NKE) sank 12 percent while Research In Motion Ltd. (RIM) plunged 25 percent amid disappointing earnings.

The S&P 500 advanced 2 percent to 1,362.16 during the week, extending its increase in June to 4 percent, the most since February. The Dow gained 239.31 points, or 1.9 percent, to 12,880.09 for the week, finishing the month up 3.9 percent.

“It looks like Europe is moving toward a resolution of keeping the euro together,” George Young, a partner at St. Denis J. Villere & Co. in New Orleans, said in a telephone interview. His firm oversees about $1.6 billion. “We are putting money into stocks. We believe that the U.S. is going to do well longer term.”

Global stocks rallied on the last day of the week, with the S&P 500 surging 2.5 percent for its biggest advance of the year, as euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy. In the U.S., economic reports during the week showed home sales and orders for durable goods rebounded while consumer spending stalled and confidence among Americans declined to the lowest level this year.
Worst Quarter

Concern that Spanish banks may fail and Greece would leave the 17-nation euro zone drove the S&P 500 down as much as 9.9 percent from this year’s high in April. Even after this month’s rebound, the benchmark gauge lost 3.3 percent since the end of March, the worst quarter since the three months ended September. The Dow slumped 2.5 percent for the quarter.

The S&P 500 Energy Index jumped 4.8 percent, the biggest weekly increase since December, as oil soared the most in more than three years on June 29. The gain in crude may accelerate after the European Union’s ban on the purchase, transport, financing and insurance of Iranian crude starts on July 1, a Bloomberg survey showed. Chevron Corp., the second-largest U.S. energy producer, advanced 5 percent to $105.50. Bigger rival Exxon Mobil Corp. rose 4.2 percent to $85.57.
Homebuilders Rally

An S&P gauge of homebuilders rallied 13 percent to the highest level since 2008 as reports showed sales of new homes increased to a two-year high and housing prices dropped at the slowest pace in more than a year. Lennar (LEN) climbed 17 percent to $30.91 after a tax benefit and improving demand fueled a surge in its fiscal second-quarter profit. KB Home (KBH) soared 20 percent to $9.80 after reporting a narrower quarterly loss.

Tenet, the third-biggest U.S. hospital chain, climbed 7.2 percent to $5.24. The Supreme Court, voting 5-4, largely left intact the Affordable Care Act’s transformation of the health system, saying Congress has the power to make Americans get insurance or pay a penalty. They also let stand a plan to expand Medicaid by about 16 million people, though the justices limited the power to punish states that don’t comply. The new regulations may arrest a rising tide of uninsured patients unable to pay their medical bills.

Commercial carriers fell in the face of the law’s new regulations. WellPoint Inc. (WLP), the second-largest U.S. health insurer, dropped 8.6 percent to $63.79.
Financial Shares

Optimism over Europe’s efforts to tame the debt crisis helped buoy financial shares, pushing the S&P 500 index (SPX) of banks, brokerages and insurers up 2.2 percent. Bank of America Corp. (BAC) increased 3 percent to $8.18 while Morgan Stanley rose 3.2 percent to $14.59.

Genworth Financial Inc. (GNW), the life insurer and mortgage guarantor, surged 9.5 percent to $5.66 as hedge fund Highfields Capital Management LP said it is in talks with management about increasing the value of its stake.

JPMorgan Chase & Co. (JPM) fell 0.7 percent to $35.73. The lender’s losses from credit derivatives may eventually total as much as $9 billion, exceeding the firm’s initial estimate, the New York Times reported.

Constellation Brands Inc. (STZ) had the biggest gain in the S&P 500, soaring 40 percent to $27.06. The company agreed to buy the other half of its Crown Imports joint venture with Grupo Modelo SAB for about $1.85 billion, becoming the sole U.S. importer of top-selling Corona beer.

News Corp. (NWSA)

News Corp. climbed 9.5 percent to $22.29. The company announced plans to split into two publicly traded entities focused on publishing and entertainment after shareholder pressure prompted the biggest reorganization since Rupert Murdoch built the media empire.

Europe’s debt crisis and a slowdown in global growth may have taken a toll on corporate earnings. Profits at S&P 500 companies are forecast to show a drop of 1.8 percent in the second quarter, according to analyst estimates compiled by Bloomberg.

Earnings pessimism reached levels last seen during the financial crisis. Ninety-four corporations issued profit projections that trailed analyst estimates during the 30 days through June 29, or 3.4 times the number of those that exceeded them. The ratio was the highest since March 2009, data compiled by Bloomberg show.

Research In Motion plunged 25 percent, the most since 2008, to $7.39 after posting a loss and delaying the next BlackBerry operating system. The smartphone maker also said it would cut 5,000 jobs.
Nike, Facebook

Nike, the world’s largest sporting-goods company, tumbled 12 percent to $87.78 after fourth-quarter profit unexpectedly declined for the first time since 2009, hurt by an increase in marketing and labor costs.

O’Reilly Automotive Inc. (ORLY) fell the most in the S&P 500, sinking 14 percent to $83.77. The retailer of auto parts, tools and accessories said sales growth was slower than expected and second-quarter profit will be on the lower end of the company’s forecast range.

Facebook Inc. (FB) slid 5.9 percent to $31.10 as analysts said the stock is worth no more than its debut price of $38. Analysts including those at lead underwriter Morgan Stanley (MS) have an average 12-month price estimate of $37.52 on the social-network operator, according to data compiled by Bloomberg. Facebook has lost 18 percent since its May initial public offering on concern the stock is overvalued and the company will struggle to attract users.

From Bloomberg

EU Banking Debate Shifts to Euro Area After Accord on Spain

The European Union’s push to unify bank oversight moved to the euro area after two days of talks in Brussels, putting the European Central Bank at the center of Spain’s efforts to extract its government from its banking- industry rescue.

Euro-area leaders asked for proposals this year to unify banking supervision and soup up the ECB’s powers. They referred to a clause in the EU treaty that allows them to give the ECB prudential oversight of banks and other non-insurance financial companies.

The move paves the way for the European Commission, the EU’s regulatory arm, to augment its proposals on deposit insurance, capital requirements and how to handle failing banks. It also acknowledges concerns from the U.K. and Sweden that countries outside the currency area be free from mandates to join the ECB umbrella.

Once Europe establishes a single banking supervisor, leaders said they may allow cash-strapped lenders to be recapitalized directly instead of through their home governments. This could break the link between banks and sovereigns that has plagued the euro area throughout the crisis and become a particular flash point for Spain’s bank rescue.

‘Held Hostage’

“The Spanish sovereign is effectively being held hostage to what is likely to be a tortuous political process in putting the ECB in charge of euro-zone banks,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He said direct recapitalization of Spanish banks is the summit’s most important achievement and hinges on creation of an independent supervisory authority.

French President Francois Hollande predicted that ECB supervision over euro-area banks wouldn’t be in place before year end. British Prime Minister David Cameron said “the euro- zone countries are well on the way to making the euro-zone bank, the ECB, the regulators of their banks. That will be a good outcome.”

ECB President Mario Draghi welcomed the summit’s overall conclusions and acknowledged the Brussels-based commission’s mandate to assess the ECB’s role as allowed in the treaty. Speaking to reporters today, he did not elaborate on how the commission’s proposals should take shape other than to say “all these things should be, to be credible, accompanied by strict conditionality.”
National Supervisors

The Frankfurt-based ECB might end up serving as an umbrella over national supervisors, rather than building a separate organization, EU officials said in the run-up to this week’s summit. EU members would need to decide how many banks to include and how the ECB would work with the European Banking Authority, which was created to help supervisors coordinate across the 27-nation bloc.

EU Financial Services Commissioner Michel Barnier called on all the bloc’s nations to broker deals on draft financial regulations in the coming weeks as a “cornerstone” of the banking union that EU leaders seek to secure the long-term future of the euro, in an interview in Brussels yesterday. He said decisions on whether the ECB or the London-based EBA gain enhanced powers depends on how all 27 nations agree to further pool their bank-oversight powers.

The EBA, which began work last year, was set up as part of the EU’s response to the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. It coordinates the work of national regulators and has some power to resolve disputes between them.
Banking Union

Where to place enhanced supervisory power becomes a trickier decision if individual countries opt out of a banking union, Barnier said, in part because the ECB decides monetary policy for the 17 countries of the euro area, and in part because of other aspects of the EBA’s mandate. Should all 27 EU countries sign up for the banking union plans, then the enhanced power for the EU to supervise lenders should “probably” be handed to the EBA, Barnier said.

“If you are fewer than 27 then there is an issue to resolve with the EBA, if you are more than 17 then there is an issue to resolve with the ECB,” he said. “This is why there are a range of possible models, and why we need some weeks or months to work on this.”

The adoption of proposals that the commissioner has made on bank capital requirements, coordination of deposit guarantee programs and the winding-down of failing banks is a “precondition” for the creation of a banking union, Barnier said yesterday in an interview with Bloomberg News in Brussels. The draft laws should be settled “in the weeks to come, or in the case of crisis resolution before the end of the year.”

Depending on the outcome of the summit, the commission will present plans for extra EU supervision of banks, as well as for “the mutualization of deposit guarantee funds and resolution funds” by year end, Barnier said.

From Bloomberg

BOE Seen Adding to Stimulus as Europe Crisis Undermines Recovery

The Bank of England will probably expand its so-called quantitative easing program next week as the debt crisis in Europe impedes the U.K.’s return to growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will raise its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds, according to 30 of 41 economists in a Bloomberg news survey. Eight predict an increase to 400 billion pounds, and the rest see a smaller increase or no change.

King told reporters yesterday that Europe’s debt turmoil has stoked uncertainty and tightened credit availability, creating headwinds to Britain’s recovery from recession. Policy makers may find it easier to act next month than they did at their June 7 decision after inflation slowed to 2.8 percent, the closest to their 2 percent target since November 2009.

“Growth is weak and inflation has come down, so that adds to the case for doing more quantitative easing,” said George Buckley, an economist at Deutsche Bank AG in London. “This could be the end of it, provided things pick up as we expect, though that’s still an open question.”

Officials voted 5-4 to keep their bond-purchase target at 325 billion pounds at this month’s policy decision. That defeated a push by King, Adam Posen and David Miles for a 50 billion-pound expansion, and Markets Director Paul Fisher’s bid for 25 billion pounds.
Awaiting News

The majority preferred to wait to assess the outcome of June 17 elections in Greece, the European Council summit that concluded yesterday and the results of the bank’s June 22 Financial Policy Committee meeting.

With no one party able to claim victory in Greece, the leading New Democracy party has been able to form a coalition on pledges to keep the country in the common currency while fighting for looser aid conditions from the euro area and the International Monetary Fund.

Euro-area leaders agreed early yesterday to ease terms on loans to Spanish banks and paved the way to a direct recapitalization of banks. The agreement sparked the biggest gain in the euro this year.

King yesterday presented FPC recommendations that financial institutions should dip into liquid buffers, a week after the central bank completed the first round of a new auction to give banks access to more cash. The move addresses concerns expressed by some officials this month that lenders were bolstering reserves with funds from their bond sales to the Bank of England.

Forty-nine of 50 economists in a separate Bloomberg survey see no change next week in the benchmark rate from the record low of 0.5 percent. One economist, Tom Vosa at National Australia Bank, forecast a cut to 0.25 percent.

From bloomberg

(Reuters) - A deputy German Finance Minister dismissed a magazine report saying Finance Minister Wolfgang Schaeuble had told conservative members of parliament on Friday to prepare for a looming Greek bankruptcy and euro zone exit.

"This report is nonsense," Deputy Finance Minister Steffen Kampeter told Reuters on Saturday on the sidelines of a regional meeting of Christian Democrats in the western town of Krefeld.

Kampeter said that Schaeuble had spoken to the conservative MPs on Friday about the need for the austerity and reform measures in Greece to be implemented.

German newsweekly Focus reported that Schaeuble had told MPs in Chancellor Angela Merkel's Christian Democrats (CDU) and the sister party, Christian Social Union (CSU), to get ready for Greece leaving the euro zone and a Greek state bankruptcy.

The magazine said in an advance of a report in its Monday edition that Schaeuble was talking to the MPs about the further development of the European Stability Mechanism (ESM), the euro zone's permanent bailout fund. He said that an aspect that would be necessary was to have a set-up for state bankruptcies.

Focus said that participants of the meeting heard Schaeuble say that in the view of many experts Greece would not make it "without an external devaluation."

From Reuters.

European Stocks Climb for a Fourth Week on EU Agreement

European stocks rose for a fourth week as the region’s leaders agreed to address flaws in their bailout programs to ease the sovereign-debt crisis.

CRH Plc rallied 12 percent, leading a gauge of construction companies to the biggest gain in six months. Colruyt NV (COLR) jumped 16 percent as Belgium’s biggest discount food retailer reported a surprise increase in profit. Barclays Plc (BARC) slumped 19 percent after paying a record fine to settle claims it sought to rig the London and euro interbank offered rates.

The Stoxx Europe 600 Index (SXXP) climbed 1.9 percent to 251.17 this past week, extending the longest stretch of gains since January, after policy makers eased repayment rules for Spanish banks, relaxed conditions for possible aid to Italy and unveiled a $149 billion economic growth plan. The advance pushed the measure to the highest level since May 11 and trimmed the second-quarter decline to 4.6 percent.

“The results were as good as we could have expected from the summit,” said Derry Pickford, who helps oversee $1.7 billion at Ashburton Ltd. in Jersey, the Channel Islands. “There are two important caveats: expectations were very low and the measures are short-term analgesics rather than fundamental cures.”

National benchmark indexes climbed in all 18 western European markets this week. The U.K.’s FTSE 100 increased 1 percent, France’s CAC 40 rose 3.4 percent and Germany’s DAX added 2.4 percent. Norway’s OBX (OBX) surged 5.9 percent for the biggest gain this year.
Monthly Rally

The Stoxx 600 rallied 4.8 percent this month, the most since October. The increase brought the index’s advance in the first half of 2012 to 2.7 percent.

After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels yesterday, leaders of the 17 euro nations dropped the requirement that governments get preferred-creditor status on crisis loans to Spain’s banks and opened the door to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. They also discussed reducing the market pressure on Italy and Spain by allowing them to access rescue loans without relinquishing control of their economies.

Attention will now turn to the European Central Bank, which holds its next policy meeting on July 5. The bank has acted following political progress before, buying bonds after the establishment of bailout programs in 2010 and giving banks unlimited three-year loans following last year’s pledge to deliver fiscal discipline.
Rate Cut

Officials will lower their benchmark interest rate by 25 basis points to a record low 0.75 percent, according to the median forecast in a Bloomberg survey of 57 economists. Five predict a cut of 50 basis points and 12 foresee no change.

“Equities have put on a good showing at the end of the first half of the year,” said Jeremy Batstone-Carr, head of research at Charles Stanley & Co. in London. “Investors are pinning their hopes on additional monetary easing. But we are still fading rallies and not yet looking to buy the dips.”

In the U.S., data released on June 27 showed durable-goods orders and pending home sales beat economists’ forecasts. The Institute for Supply Management-Chicago Inc. said yesterday its business activity barometer increased to 52.9 this month from 52.7 in May. A reading of 50 is the dividing line between growth and contraction. Economists in a Bloomberg survey had projected a decline.

Construction companies led gains in the Stoxx 600 this week, climbing 4.5 percent as a group. CRH, the world’s second- biggest maker of building materials, advanced 12 percent in London trading, the most since December. Lafarge SA, the largest cement maker, rose 6.1 percent.
Colruyt Climbs

Colruyt jumped 16 percent as the Belgian retailer reported a surprise increase in profit amid heightened price awareness among consumers. Earnings in the fiscal year that ended March 31 rose to 2.18 euros a share from 2.14 euros. Analysts had projected a decline to 2.09 euros, according to the average of 21 estimates compiled by Bloomberg.

Fertilizer makers rallied as corn prices surged after inventories tumbled the most in 16 years and hot, dry weather eroded prospects for crops in the U.S.

Yara International ASA, the world’s biggest publicly traded nitrogen-fertilizer maker, and K+S AG, Europe’s largest potash producer, each surged 12 percent. Syngenta AG, the biggest maker of crop chemicals, rose 5.2 percent.

Marine Harvest ASA (MHG), the world’s biggest salmon farmer, advanced 12 percent. Norway’s salmon-export prices increased 6.4 percent in a week, according to Statistics Norway in Oslo.
Banks Decline

Even after the measures announced at the European Union summit, bank shares posted the second-worst performance among the 19 industry groups in the Stoxx 600.

Barclays Plc, Britain’s second-largest bank by assets, slumped 19 percent for the biggest decline since August. The company will pay a record 290 million-pound ($455 million) fine after investigators found traders and senior managers “systematically” tried to manipulate Libor, the benchmark rate for $360 trillion of securities. Royal Bank of Scotland Group Plc declined 11 percent.

Infineon Technologies AG slid 14 percent after Europe’s second-largest semiconductor maker said sales in the current quarter would miss its prediction. The company will probably reduce its profit forecast again, according to JPMorgan Chase & Co., which downgraded the stock to neutral.

From Bloomberg

Barclays Big-Boy Breaches Mean Libor Fixes Not Enough

The blueprint regulators gave Barclays Plc (BARC) and other banks for correcting Libor-rate abuses may not be enough to salvage a benchmark so discredited it needs to be overhauled.

The U.S. Commodity Futures Trading Commission ordered Barclays on June 27 to keep thorough records on how it determines its London interbank offered rate submissions and to erect so-called Chinese walls between traders and rate-setters. It also said lenders should expect random checks from regulators on whether their submissions reflect actual borrowing costs. Investors say the plans are little more than window-dressing.

“As long as banks are allowed in the henhouse, then the system is ripe for abuse,” said Tim Price, who helps oversee more than $1.5 billion at PFP Group LLP, an asset-management firm based in London. A better system would be to take random samplings from all the transactions, he said. “If there is any message of the last few years, it’s that banks and bankers simply cannot be trusted.”

Barclays, the U.K.’s second-largest lender, was fined a record $451 million and its top executives agreed to forgo bonuses after investigators found traders and senior managers “systematically” tried to rig the Libor and Euribor, its equivalent in euros. With other lenders facing similar sanctions, the British Bankers Association, which oversees Libor, is under pressure to prove the rate is fit for purpose.
‘Actual Transactions’

“The idea that one can base the future calculation of Libor on the idea that ‘my word is my Libor’ is now dead,” Bank of England Governor Mervyn King said at a press conference to present the central bank’s Financial Stability Report in London today. “It will have to be based in the future, in my judgment, on actual transactions in order to bring back credibility to the system.”

Libor is determined by banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Because banks’ submissions aren’t based on real trades, the potential exists for manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for more than $360 trillion of securities, including mortgages, student loans and swaps.

Barclays employees overseeing Libor and Euribor submissions routinely accommodated requests that benefited traders at their own and other banks, the CFTC said.
‘Big Boy’

On Sept 13, 2006, a senior Barclays trader in New York e- mailed the person who submitted the rate, “Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help,” according to a CFTC document.

In another exchange, from April 7, 2006, a submitter responded to a request for low U.S. dollar Libor submissions from a swaps trader with “Done ... for you big boy,” the commission said.

Barclays fell 1.7 percent in London trading today after tumbling 16 percent yesterday as U.K. lawmakers put pressure on Chief Executive Officer Robert Diamond. Prime Minister David Cameron said that the bank has questions to answer, while Ed Miliband, leader of the opposition Labour Party, has demanded a criminal investigation. Shares in Royal Bank of Scotland Group Plc (RBS), which is also being investigated for suspected Libor manipulation, dropped 11 percent.

Chancellor of the Exchequer George Osborne gave the first indication that there could be a criminal investigation in the U.K. when he addressed lawmakers yesterday and said British fraud prosecutors are now involved in the probe. The Serious Fraud Office is in contact with the Financial Services Authority and is considering whether to open a formal investigation, SFO spokesman David Jones said in an interview.
‘Improper Communications’

As part of its settlement, the CFTC ordered Barclays to amend how it sets Libor. Submissions should be based on actual trades if possible. Where no trades have taken place, the rate- setter can consider factors including how much competitors paid to borrow and market conditions, the CFTC said.

Rate-setters should be prohibited from “improper communications” and not work within earshot of derivatives traders, according to the commission. Barclays must keep extensive records on all its Libor submissions, including details on who the rate-setter was and how the figure was derived. The bank must also undergo annual audits and be willing to provide data to regulators on demand.
‘Serious Implications’

The CFTC requirements will provide a blueprint for what might be required of other banks once the BBA completes its review, said Owen Watkins, a former regulator at the FSA.

“You’ve got to have everybody playing the game by the same rules,” said Watkins, now a lawyer at Lewis Silkin LLP in London. “It’s like playing baseball with some guys throwing proper baseballs, while some guys throw golf balls.”

The Barclays settlement has “extremely serious implications, which need to be carefully considered,” the BBA said June 27 in an e-mailed statement. “The investigation findings will be fully included in the current review of Libor.”

Joseph Eyre, a spokesman for the U.K.’s Financial Services Authority, which levied the fine against Barclays along with the CFTC and the U.S. Justice Department, said “the BBA’s review is continuing and we will consider any recommendations arising from that exercise.”

The proposals may not go far enough, said Rosa Abrantes- Metz, an economist with Global Economics Group, a New York-based consulting firm, and an associate professor at New York University’s Stern School of Business.
‘Trust Me’

“You will have some unease going forward if they do not impose some drastic changes,” said Abrantes-Metz, the co-author of a 2008 paper on Libor manipulation. “We need to have Libor reflect true borrowing costs and I just don’t see any more efficient way to do so but to base it on actual borrowing costs.”

The market isn’t going to settle for “the trust-me approach,” said Ron D’Vari, CEO of New York-based advisory firm NewOak Capital LLC and a former BlackRock Inc. (BLK) managing director. “Changing wheels while driving is tough, but it has to be done.”

Diamond has agreed to appear at a meeting of U.K. lawmakers to highlight “what we have done and are doing to put things right,” he said in a letter yesterday to Andrew Tyrie, chairman of Parliament’s cross-party Treasury Committee.
‘Many Questions’

“I appreciate that the nature of the settlements disclosed yesterday raises many questions, and I welcome the opportunity to provide answers,” Diamond wrote.

The BBA, which has overseen Libor for 26 years, created a steering group of bankers and regulators in March to consider reforms in light of the probes. The BBA was aware that banks including Barclays were low-balling their Libor submissions during the financial crisis to avoid the perception they were struggling to borrow cash, according to CFTC documents.

In an April 2008 phone call, a senior Barclays manager told a BBA representative, “We’re clean, but we’re dirty-clean, rather than clean-clean,” according to the CFTC report. The BBA employee responded, “No one’s clean-clean.”
Incremental Changes

Barclays is on the BBA steering committee reviewing Libor. The bank’s chairman, Marcus Agius, is also chairman of the BBA. Other lenders on the steering committee include Credit Suisse Group AG (CSGN), HSBC Holdings Plc (HSBA), Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland, all of which are being investigated as part of Libor probes. Spokesmen for the banks declined to comment.

Three members of the steering committee interviewed by Bloomberg News this month said changes to Libor would be incremental because structural modifications in how the rate is calculated could invalidate trillions of dollars of contracts and result in litigation. They ruled out stripping the BBA’s oversight and scrapping the survey system in favor of a rate based entirely on actual trades.

“You wouldn’t ask for someone’s opinion on the closing price of a share when there is an actual price available,” said Daniel Sheard, chief investment officer of GAM U.K. Ltd., which manages about $60 billion in assets. “What better way to restore credibility than having a transaction-based index?”
‘Significant Resources’

The British government will emphasize to the BBA at the steering group’s next meeting that only drastic changes will suffice, according to a person with knowledge of the matter, who asked not to be identified because the talks are private. Chancellor of the Exchequer George Osborne, speaking to lawmakers in London yesterday, said the FSA is “committing significant resources” to investigate “systemic failures” over the manipulation of Libor.

PFP Group’s Price said he’s skeptical that the BBA review or increased oversight by regulators will improve Libor.

“Whenever you’ve got a regulator battling against well- paid bankers, we know who’s likely to win,” Price said. “I would feel better if some completely independent body was just compiling data from the banks and just spitting out a number.”

From Bloomberg

Spanish, Italian Bonds Surge as EU Leaders Move to Stem Crisis

Spanish and Italian bonds jumped after euro-area leaders expanded steps to stem the debt crisis by easing repayment rules for emergency loans to Spain’s banks and relaxing conditions on potential help for Italy.

Spain’s 10-year yield fell the most since August after leaders of the euro nations also scrapped the requirement that governments get preferred-creditor status on crisis loans to the country’s banks. German 10-year yields rose the most since November as optimism the financial turmoil will be contained sapped demand for the region’s safest assets. Spanish and Italian bonds still made quarterly losses.

“The key positive thing here is that we see some traction despite Germany digging its heels in on using bailout funds to support the market,” said Richard McGuire, a senior fixed- income strategist at Rabobank International in London. “The solution will be fiscal unity and that’s a step in that direction. There is an implementation risk, but for now risk-on is the order of the day and that will underpin demand for peripheral bonds.”

Spain’s 10-year yield fell 61 basis points, or 0.61 percentage point, to 6.33 percent at 4:41 p.m. London time. The 5.85 percent bond due in January 2022 gained 4.09, or 40.90 euros per 1,000-euro ($1,258) face amount, to 96.59. The yield dropped as much as 62 basis points, the most since Aug. 8, when the European Central Bank started buying the securities to cap borrowing costs.

Spanish two-year yields tumbled as much as 116 basis points to 4.26 percent, the lowest since June 11. Italy’s 10-year yield fell 39 basis points to 5.81 percent, and two-year rates slid 81 basis points to 3.50 percent.
‘All Options’

After almost 14 hours of talks ending in Brussels early today, chiefs of the euro countries also agreed that banks can also be recapitalized directly with European bailout funds rather than being channeled through governments.

“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation. There is a whole array of possible interventions and measures.”

German Chancellor Angela Merkel said after the summit that she maintained her rejection of issuing joint bonds.

The euro strengthened 1.9 percent to $1.2681, and the Stoxx Europe 600 Index (SXXP) of shares climbed 2.8 percent.
Bunds Decline

Germany’s 10-year bund yield jumped seven basis points to 1.58 percent after climbing by 18 basis points, the most since Nov. 23. Europe’s benchmark yield has still declined 141 basis points over the past year and remained below its average of 3.53 percent for the past decade.

German bonds fell even after a government report showed retail sales in Europe’s biggest economy unexpectedly dropped for a second month in May.

Sales, adjusted for inflation and seasonal swings, slid 0.3 percent from April, when they declined 0.2 percent, the Federal Statistics Office said. Economists forecast a gain of 0.2 percent, a Bloomberg News survey showed.

Irish bonds rallied as Prime Minister Enda Kenny said the EU accord marked a seismic shift in policy that may ease the burden on the nation’s taxpayers. The yield on the country’s bond due in October 2020 fell 64 basis points to 6.47 percent.

Volatility on Irish government debt was the highest in developed markets today followed by Spain and Italy, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit-default swaps.
Quarterly Move

Spanish 10-year yields, which climbed to a euro-era record 7.29 percent on June 18, have still risen 98 basis points this quarter. They remain about two percentage points above the 4.30 percent average of the past decade. Similar-maturity Italian yields have increased 60 basis points since March 31.

“In the short term, risk assets especially those related to the financial sector will bounce,” David Roberts, joint head of fixed income at Kames Capital in Edinburgh, wrote in a note to clients. “Longer term, it remains to be seen if these baby steps are the first on the path to European politicians addressing the fundamental problems of a single currency and diverse fiscal policies.”

A Spanish Treasury report showed banks and foreign investors cut their holdings of Spanish debt in May. Banks’ holdings of government bonds fell to 28.7 percent of the total outstanding amount from 29.6 percent in April. The proportion of foreign ownership declined to 37.5 percent from 38.1 percent.

Spanish bonds have handed investors a loss of 7.4 percent this quarter as of yesterday, while Italian debt dropped 4.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 2.1 percent.

From bloomberg

Coty Seeks Up to $700 Million in IPO After Avon Bid Fails

Coty Inc. is seeking as much as $700 million in an initial public offering after the maker of perfumes by Beyonce Knowles and Heidi Klum pulled a takeover offer for Avon Products Inc. (AVP)

All the shares in the IPO will be offered by existing shareholders, the New York-based company said today in a filing. Coty withdrew its sweetened $10.7 billion bid for Avon on May 15, citing the cosmetics seller’s refusal to negotiate.

After failing to gain control of Avon’s global door-to-door sales network, Coty is working to spur revenue by entering new regions and expanding distribution of brands in emerging markets such as Rimmel and Adidas body-care products in China. The company said it also seeks to use additional distribution channels including direct television sales and e-commerce.

Coty projects net revenue of more than $4.5 billion in the fiscal year 2012 and anticipates to generate cash flow from operations of more than $550 million, an increase from $417.5 million in the previous year, according to the filing. In the 12 months ended March 31, the company had operating income of $304 million.

Coty, which holds perfume licenses for brands including Calvin Klein and Marc Jacobs, was founded in 1904 in Paris by Corsican-born Francois Coty. The company helped develop perfume into a mass product, with 36 million consumers two decades later. Coty’s previous purchases include $400 million for a majority stake in Chinese skin-care company TJoy Holdings Ltd. in December 2010.
Potential Acquisitions

The IPO is set to be the biggest in the U.S. so far this year in the consumer sector, according to data compiled by Bloomberg. Coty hired Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley (MS) to manage the offer.

Coty may also seek to make acquisitions, with potential targets including Natura Cosmeticos SA of Brazil, Oriflame Cosmetics SA, the beauty care unit of Japan’s Kao Corp. and France’s Yves Rocher Group, Vivienne Rudd, a personal-care industry analyst at Mintel International, said last month.

JAB Holdings II BV holds 80.5 percent of Coty, according to the filing. Entities affiliated with Berkshire Partners LLC, a private-equity firm based in Boston, owns 7.5 percent, as do entities affiliated with the Rhone Group LLC.

Coty Chairman Bart Becht had targeted Avon to add a door- to-door distribution channel for its cosmetics and more than double its annual sales from brands including Cerruti and Wolfgang Joop.
Global IPOs

After “continued delay and unwillingness” by Avon to engage in discussions, “it is time for Coty Inc. to move on and pursue other opportunities,” Becht said last month, as the company announced it was pulling its $24.75 a share offer for Avon.

IPOs globally raised $41.3 billion this quarter through yesterday, the worst April-June period since 2009, data compiled by Bloomberg show. At least 50 companies shelved sales as Europe’s debt crisis spread and growth prospects in China dimmed.

From Bloomberg

Stocks, Euro Jump While Oil Posts Best Gain Since 2009

Global stocks and the euro surged the most this year, oil had its biggest gain since 2009 and Spanish bonds rallied after European leaders reached an agreement that eased concern banks will fail.

The MSCI All-Country World Index climbed 3 percent, the most since November (MXWD), while the Standard & Poor’s 500 Index advanced 2.5 percent to cap its best June since 1999. The euro appreciated 1.7 percent against the dollar and rallied as much as 2 percent, the most since Oct. 27. Spain’s two-year yield plunged more than a full percentage point. The S&P GSCI gauge of 24 commodities rose 5.6 percent, its biggest gain since April 2009, as oil surged 9.4 percent to $84.96 a barrel.

After talks ended at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped requirements that taxpayers get preferred creditor status on aid to Spain’s banks and opened the way to recapitalize lenders directly, while relaxing conditions on potential help for Italy. Before today, more than $4.9 trillion had been erased from global equities this quarter amid concern a worsening debt crisis will stifle the global recovery.

“It’s a relief rally,” said Ann Miletti, fund manager for Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. Her firm manages $201 billion. “The agreement at least brings some clarity and stabilization in the short term. More positive news out of Europe is all you need in a market that’s been depressed given all the uncertainty out there.”

The gain in the S&P 500 today was its biggest since Dec. 20 and trimmed its retreat for the quarter to less than 3.3 percent. The index rose 4 percent in June and 2 percent for the week.
Constellation Rallies

Constellation Brands Inc. (STZ) rallied 24 percent, the most since at least 1986, after agreeing to buy the other half of its Crown Imports joint venture with Grupo Modelo SAB for about $1.85 billion, becoming the sole U.S. importer of top-selling Corona beer. Bank of America Corp., Cisco Systems Inc. and United Technologies Corp. surged more than 4 percent to lead gains in the Dow Jones Industrial Average, which rallied 277.83 points to 12,880.09.

Research In Motion Ltd. plunged after 19 percent in New York trading after posting a loss and delaying the next BlackBerry operating system.
Economic Data

Stocks rallied even as Commerce Department data showed U.S. consumer spending stalled in May, with household purchases, which account for about 70 percent of the economy, unchanged after a 0.1 percent increase the previous month. The median estimate of 75 economists surveyed by Bloomberg News called for no change in so-called nominal sales.

The Institute for Supply Management-Chicago Inc.’s business barometer showed business activity in the U.S. unexpectedly expanded in June at a faster pace as production and employment rebounded. The index increased to 52.9, topping the median estimate of 52.3. The Thomson Reuters/University of Michigan final index of sentiment fell to 73.2, trailing the median estimate of 74.1.

The yield on the 10-year U.S. Treasury note advanced seven basis points to 1.65 percent, leaving the rate 23 basis points lower this year.

The Stoxx 600 (SXXP) advanced the most since November and extended this month’s rally to 4.8 percent. The gauge still retreated 4.6 percent in the quarter. National Bank of Greece SA, Bank of Ireland Plc and UniCredit SpA surged at least 13 percent to lead gains in 45 of 46 lenders in the index.

After markets closed in Europe, Germany’s lower house of parliament approved the euro-area’s permanent bailout fund, the European Stability Mechanism. The measure won a two-thirds majority in the chamber.
Asia, Emerging

The MSCI Asia Pacific Index rose 2 percent, reversing a 0.4 percent drop after the agreement was announced. Stocks fell earlier as a report showed Japan’s factory output dropped the most since the March 2011 earthquake last month.

The MSCI Emerging Markets Index (MXEF) rose 3.6 percent, the biggest gain since September and trimming this quarter’s decline to 9.8 percent. Russia’s Micex Index climbed 3.3 percent. India’s Sensex and the Hang Seng China Enterprises Index (HSCEI) of Hong Kong-traded Chinese shares both jumped 2.6 percent. The yield on ruble-denominated government bonds due in 2018 fell 29 basis points to 8.02 percent after Russia’s Financial Markets Service said it will give foreign depositaries including Euroclear Bank SA direct access to domestic sovereign debt markets.
Euro, Dollar

The euro surged 2.2 percent against the yen. Its gain versus the dollar left it 5.2 percent weaker since the end of March. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, tumbled 1.4 percent for its biggest drop since October. The Australian and New Zealand dollars jumped at least 1.6 percent against the greenback. The yen weakened against all 16 of its most traded peers.

Spain’s two-year yield sank 114 basis points to 4.27 percent and 10-year rates slid 61 basis points to 6.33 percent, with the extra yield investors demanding to hold the securities instead of benchmark bunds narrowing 68 basis points to 475 basis points. The yield on the equivalent maturity Italian security dropped 38 basis points to 5.82 percent.

Volatility on Irish government debt was the highest in developed markets today followed by Spain and Italy, according to measures of 10-year bonds, the spread between two-and 10-year securities and credit-default swaps. Irish bonds rose as Prime Minister Enda Kenny said the EU accord marked a seismic shift in policy that may ease the burden on the nation’s taxpayers.

Crude in New York led gains in the S&P GSCI index before an embargo on Iran starts. The EU agreed to ban the purchase, transportation, financing and insurance of Iranian oil starting July l. The sanctions are being imposed because western nations say Iran is hiding a nuclear weapons program. All 24 commodities tracked by the S&P GSCI advanced as lead, zinc, silver and copper rallied more than 4 percent.

The S&P GSCI dropped 13 percent in the second quarter and oil tumbled 18 percent, the biggest plunge for both since 2008.

Gross Says Europe in Debt Trap After Relief Plan: Tom Keene

Pacific Investment Management Co.’s Bill Gross said a “debt trap” remains in place even after European leaders reached an agreement that alleviated concern the region’s banks will fail.

Pimco continues to avoid the debt of nations including Spain and Portugal in favor of U.S. Treasuries and mortgage securities, Gross, who runs the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

“The peripherals and even the core union nations have too much debt,” Gross said. “The marginal cost of that debt is far above nominal GDP growth in respective nations. That continues a debt trap unless the cost of debt can come down.”

Five-year notes of Spain, with $935 billion of debt and an 8.5 percent deficit, yield 5.5 percent. The nation’s gross domestic product is forecast to shrink 1.7 percent this year and 0.5 percent in 2013, according to the median estimate of economists surveyed by Bloomberg.

European policy makers eased repayment rules for Spanish banks, relaxed conditions for possible aid to Italy and unveiled a $149 billion growth plan for the region’s economy at a summit in Brussels. They dropped a requirement that their governments get preferred-creditor status on crisis loans to Spain’s lenders.
Fiscal Union

“We need some sense that the family can get along going forward,” Gross said. “That is a union of some sort. Not just a monetary union but a fiscal union that can have an actual impact going forward.”

Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund (PTTRX) to 35 percent in May, the first increase since January and up from 31 percent of its holdings in April. Mortgages remained the largest holding in the fund at 52 percent last month, according to data on the website.

“Mexico and Brazil, they’re all attractive markets with clean balance sheets,” Gross said. “They’re much more safe, so to speak, than some of those peripherals,”

Brazil has a deficit of 2.4 percent while Mexico’s is 0.92 percent. Bonds of Brazil have returned 2.1 percent this month, and Mexico’s have gained 3 percent, according to Bank of America Merrill Lynch index data.

Pimco’s Total Return Fund gained 7.2 percent over the past year, beating 74 percent of its peers, according to data compiled by Bloomberg.

Vivendi Said to Plan Sale of Stake in Activision Blizzard

Vivendi SA (VIV), the media and telecommunications company that ousted its chief executive this week, has decided to seek a buyer for its $8.1 billion stake in Activision Blizzard Inc. (ATVI), a person with knowledge of the situation said.

Should no buyer emerge for the 61 percent holding in the Santa Monica, California-based video-game publisher, Paris-based Vivendi plans to sell a partial holding on the open market, said the person, who declined to be named because the plans are private.

Vivendi Chairman Jean-Rene Fourtou is under pressure from investors to restructure his company and boost the stock price from a near nine-year low. The board had discussed a sale of part or all of its stake in publicly held Activision, maker of the “World of Warcraft” and “Call of Duty” titles, people with knowledge off the talks said earlier this month.

A Vivendi spokesman didn’t immediately respond to an e- mailed request for comment outside of business hours in France. Cassandra Bujarski, an outside spokeswoman for Activision, had no immediate comment.

Activision, the largest U.S. video-game publisher, rose 4.4 percent to $11.99 at the close in New York. The shares have declined 2.7 percent this year. Vivendi gained 3.1 percent to 14.63 euros in Paris, and is down 11 percent this year. The stock hit a nine-year low of 12.01 euros on April 19.
Vivendi Downgrades

Moody’s Investors Service and Fitch Ratings warned Vivendi this week that its debt ratings could be threatened if it doesn’t reduce liabilities. Fourtou this week ousted Chief Executive Officer Jean-Bernard Levy, who had resisted major changes in Vivendi’s structure.

A shifting market for video games may limit Activision’s attraction to buyers.

Activision trades at 14.4 times trailing earnings, according to data compiled by Bloomberg, below the 25.4 in fiscal 2010 and a five-year of high of 67.6 in 2007. Electronic Arts Inc. (EA), the second-largest game company, trades at 30 times trailing profit.

The multiples reflect investor concern over growth prospects during a transition phase for the video-game industry with the introduction of the first new consoles in seven years, said Edward Woo, an analyst with Ascendiant Capital Markets LLC in Irvine, California.
Online Growth

Industry growth is now taking place on social-media websites such as Facebook.com and away from traditional family room consoles from Microsoft Corp. (MSFT), Sony Corp. (6758) and Nintendo Co. U.S. sales of packaged games like those played on Xbox or PlayStation fell 6 percent to $8.83 billion last year, according to researcher NPD Group Inc.

“The problem is there are no readily apparent buyers for Activision,” Pachter said. “The only option left to Vivendi is to lever up Activision’s balance sheet and pay out all of its cash as a dividend, then spin the company off.”

Both Pachter and Woo recommend buying Activision stock.

Activision had $3.48 billion in cash and short-term investments as of March 31 and no debt, according to a quarterly filing. Last year, the company returned $886 million to shareholders in stock repurchases and dividends, the annual report shows.

From Bloomberg

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June consumer sentiment drops to six-month low

(Reuters) - Consumer sentiment dropped to a six-month low in June as Americans' view of the economy soured, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2 in June from 79.3 in May.

It was the lowest level since December and fell short of economists' expectations for the index to hold at the same level as June's preliminary reading of 74.1.

The deterioration in consumers' attitudes came mostly from households with incomes above $75,000; sentiment among lower-income households was little changed, according to the survey.

"While the overall level of consumer sentiment is substantially above last summer's low -- which would normally indicate a growth slowdown, not a downturn -- the buying plans of upper-income households have also sharply declined," survey director Richard Curtin said in a statement.

"Since these households account for a large share of total spending, if the declines continue in the months ahead, it could have a substantial impact on total spending."

Wealthier households were also less upbeat about their income prospects, with 24 percent expecting their finances to improve in the year ahead, down from 37 percent in May.

Just 9 percent of all households expected to see gains in their income once adjusted for inflation.

The overall measure of buying plans for durables and vehicles fell to 125 from 132.

The data was eclipsed in financial markets by an agreement from euro zone leaders to allow rescue funds to be used to stabilize the region's banks.

"It wasn't a huge miss, and the average investor should be able to look beyond this and see that we continue to recover," said Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Oklahoma.

News of economic developments heard by consumers was increasingly negative. When asked about their expectations for the unemployment rate, survey respondents were more likely to expect increases rather than declines.

Consumers were also more likely to report economic conditions had weakened recently and less likely to expect them to improve in the coming year.

The survey's barometer of current economic conditions fell to 81.5 from 87.2, and the gauge of consumer expectations slid to 67.8 from 74.3. Both indexes were at their lowest levels since December.

The survey's one-year inflation expectation rose for the first time since March to 3.1 percent from 3.0 percent, while the survey's five-to-10-year inflation outlook climbed to 2.8 percent from 2.7 percent.

From Reuters

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Stock Rise, Euro Gains Most This Year on EU; Bonds Climb

Stocks rose, the euro strengthened the most this year and Spanish bonds rallied after European leaders reached an agreement that alleviated concern banks will fail. Commodities jumped as the dollar sank.

The MSCI All-Country World Index (MXWD) climbed 1.1 percent at 9:25 a.m. in London and the Stoxx Europe 600 Index advanced 1.6 percent. Standard & Poor’s 500 Index futures increased 1.3 percent. The euro appreciated 1 percent after rising by the most since Nov. 30. Spain’s two-year yield plunged the most since Aug. 8, with the German 10-year bund yield jumping to the highest in more than eight weeks. The S&P GSCI gauge of 24 raw materials rose the most in three weeks.

After talks ended at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped requirements that taxpayers get preferred creditor status on aid to Spain’s banks and opened the way to recapitalize lenders directly without bailout funds. More than $4.9 trillion was erased from global equity values this quarter amid deepening concern the debt crisis will worsen and stifle the global recovery.

“It was a moment of high drama,” said Jonathan Garner, Hong Kong-based chief strategist at Morgan Stanley. “France sided with Spain and Italy and all three of those countries made it very clear they weren’t pursuing with the long-term goals around fiscal union and or growth measures unless one dealt with the short-term problem of stability in the bond markets and the Spanish banks problem.”

The Stoxx 600 (SXXP)’s advance extended this month’s rally to 3.8 percent. The gauge has still retreated 5.5 percent this quarter. Italy’s UniCredit SpA, Spain’s Banco Bilbao Vizcaya Argentaria SA and France’s BNP Paribas SA climbed more than 5 percent today as a gauge of banks in the Stoxx 600 increased the most in more than two weeks.
RIM Loss

The gain in U.S. index futures indicated the S&P 500 will pare this quarter’s retreat to 5.6 percent. Research In Motion Ltd. plunged 14 percent in German trading today after posting a loss and delaying the next BlackBerry operating system.

A report today may show U.S. consumer spending stalled in May as slowing job growth and subdued wage gains. Household purchases, which account for about 70 percent of the economy, were unchanged after a 0.3 percent gain in April, according to the median estimate of 75 economists surveyed by Bloomberg.

Other data are forecast to show that business activity in the U.S. expanded at a slower pace in June and consumer sentiment dropped to a six-month low.
Emerging Markets

The MSCI Emerging Markets Index (MXEF) rose 2 percent, the biggest gain since Jan. 17. The Hang Seng China Enterprises Index (HSCEI) of Hong Kong-traded Chinese shares jumped 2.6 percent and benchmark indexes in Russia, Hungary and India gained at least 2 percent. The yield on ruble-denominated government bonds due in 2018 fell 10 basis points to 8.23 percent, the biggest drop since June 15, after Russia’s Financial Markets Service said it will give foreign depositaries including Euroclear Bank SA direct access to domestic sovereign debt markets.

The euro surged as much as 1.7 percent against the yen to 100.52. Its gain versus the dollar left it 5.9 percent weaker since the end of March, on course for its worst quarterly performance since September. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, tumbled 0.8 percent. The Australian and New Zealand dollars both jumped 1.2 percent against the greenback. The yen weakened against all 16 of its most traded peers.

Crude in New York led gains in the GSCI index, rising 2.6 percent to $79.64 a barrel before an embargo on Iran starts. The EU agreed to ban the purchase, transportation, financing and insurance of Iranian oil starting July l.

Natural gas jumped 2.2 percent and copper gained 2 percent. The GSCI has dropped 16 percent in the second quarter, the most since the final three months of 2008. New York oil has declined 23 percent this quarter.

From : bloomberg

Monetary developments in the euro area

29 June 2012

PRESS RELEASE

MONETARY DEVELOPMENTS IN THE EURO AREA: MAY 2012

The annual growth rate of the broad monetary aggregate M3 increased to 2.9% in May 2012, from 2.5% in April 2012.1 The three-month average of the annual growth rates of M3 in the period from March 2012 to May 2012 stood at 2.8%, compared with 2.7% in the period from February 2012 to April 2012.

Twelve-month percentage changes; (adjusted for seasonal and end-of-month calendar effects)	MARCH 2012	APRIL 2012	MAY 2012	MARCH 2012 - MAY 2012 (AVERAGE)
M3	3.0	2.5	2.9	2.8
M1	2.8	1.8	3.3	2.6
Loans to the private sector	0.6	0.2	-0.1	0.3
Loans to the private sector, adjusted for sales and securitisation	1.2	0.8	0.4	0.8

M3 components

Regarding the main components of M3, the annual growth rate of M1 increased to 3.3% in May 2012, from

1.8% in April. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 2.3% in May, from 3.3% in the previous month. The annual growth rate of marketable instruments (M3-M2) increased to 3.4% in May, from 2.5% in April. Among the deposits included in M3, the annual growth rate of deposits placed by households stood at 2.4% in May, compared with 2.5% in the previous month, while the annual growth rate of deposits placed by non-financial corporations was less negative at -0.2% in May, from -0.8% in the previous month. Finally, the annual growth rate of deposits placed by non-monetary financial intermediaries (excluding insurance corporations and pension funds) increased to 0.4% in May, from -0.8% in the previous month.

Counterparts to M3: credit and loans

1 The annual growth rates presented in this press release refer to aggregates adjusted for seasonal and end-of-month calendar effects.

- 2 -

Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary

Financial Institutions (MFIs), the annual growth rate of total credit granted to euro area residents stood at

1.5% in May 2012, compared with 1.4% in the previous month. The annual growth rate of credit extended to general government increased to 9.0% in May, from 7.6% in April, while the annual growth rate of credit extended to the private sector decreased to -0.2% in May, from 0.0% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans decreased to -0.1% in May, from 0.2% in the previous month (adjusted for loan sales and securitisation2, the rate decreased to 0.4%, from 0.8% in the previous month). The annual growth rate of loans to households decreased to 0.3% in May, from 0.5% in April (adjusted for loan sales and securitisation, the rate decreased to 1.3%, from 1.5% in the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, decreased to 0.7% in May, from 1.0% in the previous month. The annual growth rate of loans to non-financial corporations decreased to 0.1% in May, from 0.4% in the previous month (adjusted for loan sales and securitisation, the rate decreased to 0.2% in May, from 0.6% in the previous month). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) was more negative at -2.1% in May, from -1.4% in the previous month.

Other counterparts

Over the 12 months up to May 2012, the net external asset position of the euro area MFI sector decreased by €36 billion, compared with a decrease of €39 billion over the 12 months up to April. The annual growth rate of longer-term financial liabilities of the MFI sector decreased to -0.1% in May, from

0.7% in April.

Notes

• Further predefined tables, statistical data and methodological notes, as well as the advance release calendar, are available on the ECB’s website at http://www.ecb.europa.eu/stats/money/aggregates/aggr/html/index.en.html.

European Central Bank

Directorate Communications, Press and Information Division

Kaiserstrasse 29, D-60311 Frankfurt am Main

Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404

Internet: http://www.ecb.europa.eu

Reproduction is permitted provided that the source is acknowledged.

2 Adjusted for the derecognition of loans from the MFIs’ statistical balance sheets due to their sale or securitisation.

TABLE 1

MONETARY DEVELOPMENTS IN THE EURO AREA: MAY 2012

DATA ADJUSTED FOR SEASONAL EFFECTS (EUR billions and annual percentage changesa))

	END-OF- MONTH LEVEL	MONTHLY FLOW b)			ANNUAL GROWTH RATE
	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012
COMPONENTS OF M3 c) (1) M3 (= items 1.3, 1.6 and 1.11) (1.1) Currency in circulation (1.2) Overnight deposits (1.3) M1 (items 1.1 and 1.2) (1.4) Deposits with an agreed maturity of up to two years (1.5) Deposits redeemable at notice of up to three months (1.6) Other short term deposits (items 1.4 and 1.5) (1.7) M2 (items 1.3 and 1.6) (1.8) Repurchase agreements (1.9) Money market fund shares/units (1.10) Debt securities issued with a maturity of up to two years (1.11) Marketable instruments (items 1.8, 1.9 and 1.10)	9911 857 4016 4872 1888 1997 3885 8757 422 513 219 1154	56 -48 86 -5 2 7 34 -58 65 29 -56 72 4 12 -34 7 7 14 11 19 -20 40 -37 52 -19 -9 35 10 4 11 25 -6 -12 16 -12 34			3.0 2.5 2.9 5.5 5.5 5.5 2.2 1.0 2.9 2.8 1.8 3.3 3.9 3.9 1.6 2.5 2.7 3.0 3.2 3.3 2.3 3.0 2.5 2.9 4.3 -0.7 -1.3 -3.1 -1.6 1.6 20.2 21.5 21.3 3.7 2.5 3.4
COUNTERPARTS OF M3 MFI liabilities: (2) Holdings against central government d) (3) *Longer-term financial liabilities vis-à-vis other euro area residents* (= items 3.1 to 3.4) (3.1) Deposits with an agreed maturity of over two years (3.2) Deposits redeemable at notice of over three months (3.3) Debt securities issued with a maturity of over two years (3.4) Capital and reserves MFI assets: (4) *Credit to euro area residents* (= items 4.1 and 4.2) (4.1) Credit to general government Loans Securities other than shares (4.2) Credit to other euro area residents Loans e) loans adjusted for sales and securitisation f) Securities other than shares Shares and other equities (5) *Net external assets* (6) *Other counterparts of M3 (residual)* (= M3 + items 2, 3 - items 4, 5)	312 7645 2483 113 2756 2293 16686 3263 1168 2095 13424 11166 ND 1521 737 941 240	-9 -30 22 -36 -4 -42 -29 -12 -32 -1 1 -1 -25 -9 -28 18 16 18 36 -57 33 31 -7 32 3 0 9 29 -6 22 4 -51 1 -6 -21 -11 -5 -22 -11 -4 -14 6 14 -16 7 -2 -13 12 -22 -12 21			11.1 -4.1 10.7 1.3 0.7 -0.1 1.2 0.2 -1.1 -5.2 -4.6 -5.1 -2.5 -3.5 -4.6 7.0 7.3 7.4 1.8 1.4 1.5 7.4 7.6 9.0 -4.3 -2.9 -0.9 15.3 14.4 15.4 0.5 0.0 -0.2 0.6 0.2 -0.1 1.2 0.8 0.4 1.1 0.3 0.6 -2.3 -4.5 -3.4 ND ND ND ND ND ND

a) Figures may not add up due to rounding. The information in this table is based on consolidated balance sheet statistics reported by monetary financial institutions

(MFIs). These include the Eurosystem, credit institutions and money market funds located in the euro area.

b) Monthly difference in levels adjusted for reclassifications, exchange rate variations, other revaluations and any other changes which do not arise from transactions. c) Liabilities of MFIs and specific units of the central government (post offices, treasury) vis-à-vis non-MFI euro area residents excluding central government.

d) Includes holdings of the central government of deposits with the MFI sector and of securities issued by the MFI sector.

e) For further breakdowns see Table 4.

f) Adjusted for the derecognition of loans from the MFI statistical balance sheet due to their sale or securitisation.

TABLE 2

BREAKDOWN OF DEPOSITS IN M3 BY HOLDING SECTOR AND TYPE: MAY 2012

DATA ADJUSTED FOR SEASONAL EFFECTS (EUR billions and annual percentage changesa))

	END-OF- MONTH LEVEL	MONTHLY FLOW b)			ANNUAL GROWTH RATE
	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012
BREAKDOWN OF DEPOSITS IN M3 Total deposits (=items 1, 2, 3, 4 and 5) (1) Deposits placed by householdsc) (1.1) Overnight deposits (1.2) Deposits with an agreed maturity of up to two years (1.3) Deposits redeemable at notice of up to three months (1.4) Repurchase agreements (2) Deposits placed by non-financial corporations (2.1) Overnight deposits (2.2) Deposits with an agreed maturity of up to two years (2.3) Deposits redeemable at notice of up to three months (2.4) Repurchase agreements (3) Deposits placed by non-monetary financial intermediaries excluding insurance corporations and pension funds (3.1) Overnight deposits (3.2) Deposits with an agreed maturity of up to two years (3.3) Deposits redeemable at notice of up to three months (3.4) Repurchase agreements of which: with central counterpartiesd) (4) Deposits placed by insurance corporations and pension funds (5) Deposits placed by other general government	8323 5166 2272 987 1891 16 1561 1036 433 78 15 1074 416 271 14 374 291 212 309	25 -48 81 20 15 3 -1 10 5 15 1 -10 6 6 11 -1 -2 -2 -2 -12 6 3 -3 14 -5 -8 -11 0 1 3 0 -1 0 -6 -49 56 29 -61 35 -14 17 -14 1 0 -1 -22 -4 36 -10 2 35 -6 5 5 20 -8 11			2.8 2.0 2.4 2.2 2.5 2.4 -0.4 0.2 0.4 9.6 9.5 8.2 2.5 2.8 2.9 -36.4 -45.1 -52.7 -0.2 -0.8 -0.2 1.1 1.0 3.3 -1.8 -3.3 -6.4 -6.7 -5.3 -1.6 -4.2 -19.0 -25.4 4.4 -0.8 0.4 16.9 2.2 12.3 -15.1 -12.0 -18.0 32.0 37.3 19.4 7.9 5.5 5.3 14.6 12.5 8.3 16.8 14.0 18.2 14.9 12.5 15.4

a) Figures may not add up due to rounding. The information in this table is based on consolidated balance sheet statistics reported by monetary financial institutions

(MFIs). These include the Eurosystem, credit institutions and money market funds located in the euro area.

b) Monthly difference in levels adjusted for reclassifications, exchange rate variations, other revaluations and any other changes which do not arise from transactions. c) Includes deposits by non-profit institutions serving households.

d) The series is not adjusted for seasonal effects.

TABLE 3

CONTRIBUTIONS OF M3 COMPONENTS TO THE M3 ANNUAL GROWTH RATE: MAY 2012

DATA ADJUSTED FOR SEASONAL EFFECTS (contributions in terms of the M3 annual percentage changea))

	MARCH 2012	APRIL 2012	MAY 2012
(1) M1 (1.1) of which : Currency (1.2) of which : Overnight deposits (2) M2 - M1 (= other short-term deposits) (3) M3 - M2 (= short-term marketable instruments)	1.4 0.5 0.9 1.2 0.4	0.9 0.5 0.4 1.3 0.3	1.6 0.5 1.2 0.9 0.4
(4) M3 (= items 1, 2 and 3)	3.0	2.5	2.9

a) Figures may not add up due to rounding.

TABLE 4

BREAKDOWN OF LOANS BY BORROWING SECTOR, TYPE AND ORIGINAL MATURITY: MAY 2012

DATA ADJUSTED FOR SEASONAL EFFECTS (EUR billions and annual percentage changesa))

	END-OF- MONTH LEVEL	MONTHLY FLOW b)			ANNUAL GROWTH RATE
	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012	MARCH 2012	APRIL 2012	MAY 2012
BREAKDOWN OF LOANS c) (1) Loans to households d) loans adjusted for sales and securitisation e) (1.1) Credit for consumption (1.2) Lending for house purchase (1.3) Other lending of which: sole proprietors f) (2) Loans to non-financial corporations loans adjusted for sales and securitisation e) (2.1) up to 1 year (2.2) over 1 year and up to 5 years (3.3) over 5 years (3) Loans to non-monetary financial intermediaries except insurance corporations and pension funds of which: reverse repos to central counterparties f) (4) Loans to insurance corporations and pension funds	5252 ND 621 3802 830 418 4698 ND 1150 845 2704 1133 181 82	7 7 2 6 6 1 -2 -2 1 10 7 1 -2 1 -1 -1 -1 -1 -8 7 -10 -7 7 -9 -5 18 -5 0 -1 -1 -2 -10 -4 -8 -28 -4 2 -11 6 4 -7 1			0.6 0.5 0.3 1.7 1.5 1.3 -2.1 -2.4 -1.9 1.1 1.0 0.7 0.7 0.7 0.1 2.0 1.7 1.0 0.3 0.4 0.1 0.5 0.6 0.2 -0.4 0.9 0.2 -2.9 -2.2 -2.5 1.6 1.1 0.8 2.3 -1.4 -2.1 34.4 18.4 10.3 -0.2 -6.5 -6.3

a) Figures may not add up due to rounding.

b) Monthly difference in levels adjusted for write-offs/write-downs, reclassifications, exchange rate variations and any other changes which do not arise from transactions. c) Loans granted by monetary financial institutions (MFIs) to non-MFI euro area residents excluding general government.

d) Includes loans to non-profit institutions serving households.

e) Adjusted for the derecognition of loans from the MFI statistical balance sheet due to their sale or securitisation. f) The series is not adjusted for seasonal effects.

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