Asian Currencies Advance for Third Week on ECB Bond-Buying Plan

By David Yong - Sep 7, 2012

Asian currencies strengthened for a third week after the European Central Bank unveiled a bond- buying plan to stem the region’s debt crisis, spurring a rally in global stocks.
ECB President Mario Draghi said on Sept. 6 that policy makers agreed to an unlimited debt-purchase program and reports this week showing improvements in U.S. jobs and the services industry tempered concern about a slowdown in the world’s biggest economy. The Philippine peso completed its best week in almost three months and Taiwan’s dollar reached a two-month high yesterday.
“The ECB taking action leads to optimism about stability in the euro-area financial markets,” said Kozo Hasegawa, a Bangkok-based currency trader at Sumitomo Mitsui Banking Corp. “That improved risk sentiment and encouraged fund inflows to risker assets, supporting emerging currencies.”
The peso rallied 1 percent this week to 41.67 per dollar in Manila, according to Tullett Prebon Plc, the most since the five days ended June 15. The Taiwan dollar strengthened 0.4 percent to NT$29.842, South Korea’s won climbed 0.4 percent to 1,130.40 and Thailand’s baht advanced 0.4 percent to 31.22.
The Bloomberg-JP Morgan Asia Dollar Index, which tracks the region’s currencies, rose 0.3 percent this week. Its 60-day historical volatility increased to 3.44 percent from 3.42 percent on Aug. 31. The MSCI Asia Pacific Index of shares advanced 2.2 percent yesterday, while the S&P 500 Index of U.S. equities surged 2 percent on Sept. 6 to the highest level since May 2008.

Korea Upgrade

U.S. jobless claims fell last week and companies added more workers than forecast in August, an ADP Employment survey showed Sept. 6. An index measuring U.S. non-manufacturing industries rose in August, beating economists’ estimates, the Institute for Supply Management reported the same day.
The won touched a three-week high after Fitch Ratings raised the nation’s creditworthiness to AA- on Sept. 6, one step above Japan and China, citing its “economic and financial stability in a volatile global environment.” Moody’s Investors Service lifted its rating on South Korea by one step to Aa3 on Aug. 27.
“The ECB’s announcement was more or less expected in the market, but combined with good U.S. economic data and Fitch’s rating upgrade, sentiment toward risk assets improved,” said Ryoo Hyun Jung, chief currency dealer at Citibank Korea Inc. in Seoul.

China Stimulus

China’s yuan completed a sixth weekly gain on speculation the government will step up spending on roads and railways to make up for a dwindling contribution from exports. Overseas sales rose 1 percent in July from a year earlier, the least since January, official data show.
“China is likely to step up fiscal stimulus soon if exports fail to rebound strongly,” said Tommy Ong, a Hong Kong- based senior vice-president of treasury and markets at DBS Bank (Hong Kong) Ltd.
The currency rose 0.09 percent this week to 6.3430 per dollar, according to the China Foreign Exchange Trading System. The central bank fixed its daily reference rate 0.04 percent stronger yesterday.
Elsewhere, Malaysia’s ringgit advanced 0.3 percent this week to 3.1070 per dollar, while India’s rupee climbed 0.2 percent to 55.3950. Indonesia’s rupiah lost 0.1 percent to 9,588, the fourth straight weekly drop. Vietnam’s dong was little changed at 20,848.
To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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Asian Stocks Post Weekly Advance on ECB, China Stimulus By Jonathan Burgos and Yoshiaki Nohara - Sep 7, 2012

Asia’s benchmark stock index posted its first advance in three weeks as shares rallied by the most in nine months on Sept. 7, after the European Central Bank unveiled a bond-buying program and China boosted stimulus measures.
HSBC Holdings Plc (5), Europe’s biggest lender, rose 2.7 percent in Hong Kong. China Railway Construction Corp. climbed 14 percent, leading the nation’s builders, after the government announced plans to build new railways and roads. Lynas Corp. surged 28 percent in Sydney after the developer of the world’s largest rare-earth refinery in Malaysia received a permit to start production in the Southeast Asian country.
The MSCI Asia Pacific Index rose 1.1 percent to 119.10 this week. The gauge declined in the previous two weeks as signs of a global economic slowdown outweighed expectations for further stimulus measures. The measure rallied by the most since Dec. 1 yesterday after ECB President Mario Draghi said policy makers agreed to an unlimited bond-purchase program as they try to regain control of interest rates in the euro area.
“The risk premium on Asia could be lifted for a little while,” saidDiane Lin, a fund manager with Sydney-based Pengana Capital Ltd., which oversees about $1.1 billion in global assets. “Whether the ECB’s action itself is going to be sustainable and fundamentally improve the outlook, we still need to see.”

Biggest Advance

China’s Shanghai Composite Index (SHCOMP) climbed 3.9 percent this week, the biggest weekly advance since the period ended Oct. 28 and the most among major Asia-Pacific indexes. The government yesterday announced plans to build 2,018 kilometers (1,254 miles) of roads, two days after unveiling plans to build subways in 18 cities. Required investments weren’t disclosed.
Hong Kong’s Hang Seng Index gained 1.6 percent. Japan’s Nikkei 225 Stock Average rose 0.4 percent. South Korea’s Kospi Index increased 1.3 percent. Australia’s S&P/ASX 200 Index added 0.2 percent.
The MSCI Asia Pacific Index has fallen more than 7 percent from this year’s high on Feb. 29, dragging the value of shares on the Asian benchmark index to 12.5 times estimated earnings. That compares with 13.9 times for the Standard & Poor’s 500 Index and 12 times for the Stoxx Europe 600 Index.

Europe Crisis

Companies that do business in Europe advanced. Draghi said policy makers agreed on Sept. 6 to reduce interest rates for struggling nations and fight speculation of a breakup of the euro.
HSBC rose 2.7 percent to HK$68.90 in Hong Kong. Esprit Holdings Ltd., the clothier that counts Europe as its biggest market, jumped 6.1 percent to HK$12.58. Hutchison Whampoa Ltd. (13), an owner of utilities, retail-chain and ports that gets about 55 percent of revenue from Europe, added 2.3 percent HK$69.40.
The bond plan “takes another European crisis episode off the table for at least the rest of this year,” said Andrew Pease, chief investment strategist at Russell Investment Group in Sydney, which manages about $150 billion. “It does minimize the tail risk in Europe. There’s no doubt about it.”

Jobless Benefits

Exporters to the U.S. advanced. Fewer Americans claimed jobless benefits in the week ended Sept. 1, while the services industry expanded at a faster pace in August, separate reports yesterday showed.
Toyota Motor Corp. (7203), the world’s biggest carmaker by market value, rose 3.6 percent to 3,205 yen in Tokyo. Honda Motor Co., which gets about 44 percent of sale from North America, climbed 5.2 percent to 2,600 yen. Sony Corp., Japan’s largest exporter of consumer electronics products, gained 3.1 percent to 908 yen.
China’s biggest construction companies rallied as the government stepped up investments in infrastructure projects. China Railway Construction, which builds more than half of the nation’s railways, climbed 14 percent to HK$6.66. China Railway Group Ltd. jumped 10 percent to HK$3.22. CSR Corp., the country’s biggest trainmaker, gained 2.5 percent to HK$5.39.
Information technology companies and raw material producers posted the biggest advance this week among the 10 industry groups in the MSCI Asia Pacific Index. (MXAP)

Japanese Utilities

Lynas Corp. surged 28 percent to 82 Australian cents in Sydney. The Malaysian Atomic Energy Licensing Board on Sept. 5 today granted a temporary operating license for the rare-earths miners’ refining plant, enabling Lynas start production next month following earlier delays.
Japanese electricity producers were among the stocks that fell this week as the government considers phasing out nuclear plants over the next two decades. Four of 10 nuclear plant operators, including Hokkaido Electric and Tokyo Electric (9501) Power Co., would become insolvent if Japan goes non-nuclear, the trade ministry’s Agency for Natural Resources and Energy said in June.
Tokyo Electric, owner of the Fukushima nuclear plant crippled by the March 2011 earthquake and tsunami, slipped 3.1 percent to 127 yen. Hokkaido Electric Power Co. decreased 13 percent to 523 yen. Shikoku Electric Power Co. sank 16 percent to 801 yen, the most on the MSCI Asia Pacific.
To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

Worst BRIC Inflation to Stay as Rains Revive Late: India Credit

By Tushar Dhara and Pratik Parija - Sep 7, 2012

India’s monsoon has revived too late to help Prime Minister Manmohan Singh curb the worst inflation among the largest emerging markets, dimming prospects of interest-rate cuts and threatening Asia’s best bond rally.

Standard Chartered Plc predicts the 10-year government bond yield will rise 33 basis points, or 0.33 percentage point, to 8.50 percent by Sept. 30, while Daiwa Asset Management Co. forecasts an 8.35 percent rate. Indian debt has returned 6.54 percent this year, beating South Korea’s 6.42 percent and Indonesia’s 5.86 percent, HSBC Holdings Plc indexes show.

“Inflation will remain at elevated levels and the revival in the monsoon won’t help to bring food prices down,” Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered, said in a Sept. 5 interview. “The Reserve Bank of India isn’t going to cut rates in a hurry.”

The RBI will keep borrowing costs at the highest level among major Asian economies at its Sept. 17 policy review, 10 of 13 analysts surveyed by Bloomberg say, while three expect a reduction. Governor Duvvuri Subbarao has pledged to contain inflation at the cost of sacrificing some growth. Government reports show a decline in crop planting even as downpours in recent weeks helped narrow the rainfall deficit to 10 percent below the 50-year average from 29 percent at the end of June.

“Rains have improved but were late,” M. Sitaramaswamy, 70, who grows rice on 13 acres in the southern state of Andhra Pradesh, said in a telephone interview yesterday. “This has delayed transplanting of rice paddy and will reduce harvests.”

‘Distinctly Hawkish’

India, the world’s second-biggest grower of rice and sugar cane, has seen the area under monsoon-sown crops drop 6 percent from a year earlier to 95.4 million hectares, the agriculture ministry said Aug. 31. Planting of rice, oilseeds and cotton declined from a year earlier, it said.

“The RBI has been distinctly hawkish in talking about the need for lower inflation,” said Killol Pandya, the Mumbai-based head of fixed-income investments at the local unit of Daiwa. “Appetite for bonds is subdued because the outlook for rate cuts is bleak,” he said in a Sept. 5 telephone interview.

The 10-year yield has dropped to 8.17 percent from this year’s high of 8.78 percent reached on April 5 as growth in Asia’s third-largest economy slumped to the slowest pace since 2009, data compiled by Bloomberg show. The notes offer an extra 647 basis points over comparable U.S. Treasuries compared with a 172 basis-point premium for Chinese debt.

Monsoon Season

The rupee has weakened 17 percent against the U.S. dollar in the past year, the worst performance among the 11 major Asian currencies tracked by Bloomberg. The currency rose 0.1 percent to 55.5850 today.

The June-September monsoon season accounts for more than 70 percent of India’s annual rainfall and is the main source of irrigation for the nation’s 235 million farmers. Rains revived last month, easing drought conditions in more than 50 percent of the country, according to the government’s weather office.

The country received 675.4 millimeters of rainfall from June 1 to Sept. 5, the India Meteorological Department said on its website. That’s less than the 748.5 millimeters average considered normal for the period.

Subbarao cut the RBI’s benchmark repurchase rate by 50 basis points in April after growth slowed for the fourth straight quarter. The rate at which the monetary authority lends to banks overnight was kept unchanged at the central bank’s reviews in June and July on concern inadequate rainfall will fuel the worst inflation rate among the so-called BRIC economies comprising Brazil, Russia, India and China.

BRIC Inflation

Consumer prices in India rose 9.86 percent in July, faster than the 1.8 percent in China, 5.2 percent in Brazil and 5.6 percent in Russia, data compiled by Bloomberg show. India’s benchmark Wholesale Price Index rose 6.87 percent and has remained above the RBI’s 5 percent comfort level since December 2009.

The central bank in July raised its inflation forecast for the year ending March 31 to 7 percent from 6.5 percent, and reduced its estimate for growth in gross domestic product to 6.5 percent from 7.3 percent. The revised prediction matched the previous year’s expansion.

Gains in wholesale prices have averaged 7.3 percent this year, data compiled by Bloomberg show, partly because food inflation accelerated to 10 percent in July compared with deflation of 0.7 percent in January, according to official data. Food costs may rise further as farmers want the government to increase prices at which it buys produce.

Minimum Price

“The government should increase the minimum-support price as production is going to fall this year,” said Sitaramaswamy from Andhra Pradesh.

India raised the minimum price of rice to a record 1,250 rupees ($22.4) per 100 kilograms, Finance Minister Palaniappan Chidambaram said June 14. The government is set to consider a 20 percent increase in the price of mustard seeds to boost output, two government officials who asked not to be named said Aug. 24.

Higher procurement prices will increase food costs and fuel inflation expectations, said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai.

“It complicates the RBI’s job,” she said by telephone yesterday. “Rising minimum prices also add to the fiscal burden of the government.”

Prime Minister Singh has pledged to reduce the government’s budget deficit to 5.1 percent of GDP this fiscal year from 5.8 percent in the previous 12 months.

Growth Slows

GDP rose 5.5 percent in the three months ended June 30, the government said Aug. 31. The $1.8 trillion economy expanded 5.3 percent in the previous quarter, the least in three years.

Weak growth and high inflation have increased India’s bond risk. The cost of insuring the debt of government-controlled State Bank of India (SBIN), which some investors consider a proxy for the sovereign, climbed 46 basis points in the past 12 months to 333, according to data provider CMA.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements. An increase signals worsening perceptions of creditworthiness. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“Food prices depend not only on the quantity of rainfall but its distribution, and that hasn’t been good,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda (BOB) in Mumbai, who predicts 7.5 percent to 8.5 percent inflation until March 2013. “I don’t expect an easing in interest rates for another three months. After that the RBI may cut rates depending on the inflation scenario.”

To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

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Margins at 8-Year Low Signal Earnings Bottom: Corporate

By Rajhkumar K Shaaw and Shikhar Balwani - Sep 5, 2012

Indian equities are attracting the highest foreign flows in the region as investors speculate that the worst may be over for the nation’s biggest companies after profitability slumped to an eight-year low.

Offshore funds plowed a net $12.3 billion into Indian shares this year, the most among 10 Asian markets outside China tracked by Bloomberg. The average profit margin before interest, taxes, depreciation and amortization of the 30 companies in the BSE India Sensitive Index, or Sensex, narrowed to 19.5 percent in the June quarter, the lowest since December 2003, data compiled by Bloomberg show.

Earnings forecasts this year are being cut at a faster pace in Brazil, China and Korea, while profit for companies in the MSCI India Index has stayed stable, Deutsche Bank AG said in a Aug. 24 report. Government data last week showed Asia’s third- largest economy unexpectedly rebounded from the slowest pace of expansion in three years after the Reserve Bank of India cut borrowing costs to support growth.

“With China’s growth slowing, India looks the best among BRIC countries year to date,” Taina Erajuuri, a fund manager in Helsinki at FIM Asset Management overseeing about $1.2 billion of emerging-market assets, said by phone on Aug. 31. “India’s economy is less dependent on exports to Europe than China and Russia.” Erajuuri said she’s been a buyer of Indian equities this year, without naming any stocks.

Slowest Pace

The last time profit margins for Sensex companies were this low, in 2003, the benchmark index soared 73 percent as economic expansion exceeding 8 percent lured foreign inflows of $6.7 billion into equities. This year, the gauge has climbed 12 percent, compared with the 0.9 percent drop in Brazil’s Bovespa (IBOV) Index. The Shanghai Composite Index (SHCOMP) has fallen 7.4 percent after China’s economy grew at the slowest pace in three years last quarter.

Overseas funds were buyers of local stocks for 23 straight days through Aug. 30, the longest stretch of net buying since a record 41-day streak through Oct. 27, 2010, according to data compiled by Bloomberg.

Funds have flowed into India even as Prime Minister Manmohan Singh struggles to revive his reform plan amid a logjam over attempts to open up the economy, corruption scandals and elevated inflation. The $1.8 trillion economy expanded 6.5 percent in the year ended March, the slowest pace since 2003, government data show.

India’s main opposition party has stalled parliament for 11 days, demanding Singh’s resignation after the chief auditor Aug. 17 said the government may have lost $33 billion awarding coal blocks without holding auctions. Singh was relying on the parliamentary session to pass legislation to allow foreign investments into retailing, aviation, pensions and insurance.

‘Terrible Macro’

“Foreign investors are decoupling macro from the micro,” Sam Mahtani, who oversees about $5 billion as director of emerging markets at F&C Asset Management Plc (FCAM) in London, said by phone on Sept. 3. “The macro has been terrible in terms of the GDP growth, but in the micro you can still find good quality, long-term stories. We are not banging the table but we think India will do well relative to the other emerging markets.”

F&C has been adding to its holdings in companies including cigarette-maker ITC Ltd. (ITC), HDFC Bank Ltd. (HDFCB), the largest lender by value, and Tata Consultancy Services Ltd. (TCS), Asia’s biggest software services company by value, Mahtani said.

‘Bottoming Out’

Earnings forecasts for the MSCI India Index have been cut by 2 percent this year, compared with a 15 percent reduction for MSCI Brazil and 5 percent for MSCI China indexes, according to Deutsche Bank. Sensex earnings grew 14.6 percent in the June quarter, exceeding Bank of America Corp.’s estimate of a 13.7 percent gain, Jyotivardhan Jaipuria, Mumbai-based head of India research, said in a Aug. 17 report.

“Falling margins have driven downgrades in the past 18 months, and we think margins may be close to bottoming out,” he said. “Earnings will be slow and there will be downgrades but lower than what we have seen in the past five quarters.”

The Sensex trades at 13.8 times estimated earnings. While that’s 30 percent more than the MSCI Emerging Markets Index’s valuation of 10.6 times, it’s still below the 15.8 multiple the gauge traded at in February, data compiled by Bloomberg show.

“India has always traded at a much higher multiple versus China or even some of the Asian or other BRIC markets,” Suresh Mahadevan, managing director at UBS Securities India Pvt., told Bloomberg TV India on Aug. 28. “Sitting in India, it feels like things are really deteriorating but on a relative basis versus other BRIC nations or global emerging markets we are not that worse off.”

Inflation Eased

Government data on Aug. 31 showed gross domestic product grew a faster-than-expected 5.5 percent in the June quarter as the Reserve Bank of India cut interest rates in April after raising them a record 13 times from March 2010 to October last year. Wholesale-price inflation eased for a second month in July to a 32-month low, spurring forecasts that the central bank may pare borrowing costs when it reviews policy on Sept. 17.

“A combination of slowing revenue growth, falling EBITDA margins and rising interest costs has caused” earnings growth to slow, Morgan Stanley analysts in Mumbai led by Ridham Desai wrote in a Aug. 27 report. “Macro indicators are showing positive change for these drivers and hence, incrementally, a better earnings picture.”

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Bullion Industry Says India May Raise Import Tax to Cut Deficit By Swansy Afonso - Sep 4, 2012

India, the largest gold buyer, may raise an import duty for a third time this year to curb purchases and reduce a record current-account deficit, according to industry executives, who said an increase would hurt demand.
“The government may look at increasing the duty to 7.5 percent,” Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview. D.S. Malik, a finance ministry spokesman in New Delhi, declined to comment.
The tax on bars and coins was doubled to 4 percent in March after imports jumped to a record 969 metric tons in 2011. A further increase may deter jewelry buyers and investors during India’s festival season, which starts this month, as a decline in the rupee against the dollar boosts domestic gold prices to an all-time high. Imports plunged 42 percent to 340 tons in the first half, according to the producer-funded World Gold Council.
“Any increase in duty will play havoc on the industry,” said Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation. “The industry is grappling with high gold prices and demand is slow.”
Gold priced in dollars has risen 8.2 percent this year, supported by investor demand as central banks may add stimulus to support the recovery. Immediate-delivery bullion, which reached a record $1,921.15 an ounce in September last year, traded at $1,691.65 an ounce at 8:20 a.m. in Singapore.

Record Deficit

Curbing shipments of gold will help the country to narrow the current-account deficit as the drop in rupee boosts the cost of crude-oil purchases, according to the finance ministry. The shortfall widened to a record 4.2 percent of the gross domestic product in the year ended March from 2.7 percent in 2010-2011.
The rise in the deficit, the broadest measure of trade, was due to slower exports and so-called relatively inelastic imports of petroleum products, gold and silver amid a rally in global prices, Finance Minister P. Chidambaram said on Aug. 23.
“A hike in duty is not the solution,” said Kothari at the bullion association. “Any such move will hit demand in a big way.” India first increased the import duty on gold to 2 percent on Jan. 17 from a fixed rate of 300 rupees per 10 grams.
Prime Minister Manmohan Singh is seeking to rein in the current-account deficit as the economy expanded 5.5 percent in the three months through June from a year earlier, close to the three-year low of 5.3 percent in the first quarter. Gold and silver, the second-largest import component after oil, accounted for 12.5 percent of imports last year, trade ministry data show.

‘Take Action’

“The basic fear is that gold will again become a very good investment option and physical demand may rise, putting pressure on the trade deficit,” said Madan Sabnavis, Mumbai-based chief economist at Credit Analysis and Research Ltd. “We need to take action since we don’t have any system of restricting the quantity of gold that can be imported.”
Bullion futures in Mumbai surged to a record of 31,487 rupees ($566) per 10 grams yesterday after the rupee fell about 17 percent against the dollar in the past 12 months. Gold for October delivery gained 0.5 percent to 31,449 rupees grams on the Multi Commodity Exchange of India Ltd. yesterday. Futures in India have gained 14.6 percent this year.
India’s imports may decline by 250 tons to 350 tons this year as record prices cut demand, Jeremy East, global head of metals trading at Standard Chartered Plc, said on Aug. 25. Consumption fell to 933.4 tons last year from a record 963.1 tons in 2010, according to the council.
To contact the reporter on this story: Swansy Afonso in Mumbai at safonso2@bloomberg.net
To contact the editor responsible for this story: Jake Lloyd-Smith at jlloydsmith@bloomberg.net

Cotton Glut Seen Extending Slump as Levi’s Costs Slide By Marvin G. Perez, Whitney McFerron and Phoebe Sedgman - Sep 3, 2012

Cotton warehouses from China to Australia are bulging with the biggest-ever glut, a year after record prices spurred farmers to expand output.
Harvests will exceed demand for a third year, swelling stockpiles by 10 percent to 74.67 million 480-pound bales by August, the U.S. Department of Agriculture estimates. Inventories in China, the biggest user, will triple over two years to a record as domestic demand slumps to the lowest since 2005, USDA data show. Cotton may drop 12 percent to 67.87 cents a pound by the end of the year, according to the average of 20 analyst and merchant estimates compiled by Bloomberg.
Slowing economic growth means the surplus will widen even as China, Australia, Brazil and India produce less this season, leading to the first global output decline in three years, the USDA predicts. Prices already plunged 65 percent from last year’s peak of $2.197 a pound, reducing costs for buyers from Hanesbrands Inc. (HBI), the maker of Champion apparel, to San Francisco-based Levi Strauss & Co.
“There’s an awful lot of cotton around,” said David Wookey, a managing director and trader at Isis Commodities Ltd., a cotton merchant in Boston, England, founded 17 years ago. “You’ve got a large stocks situation that’s been coupled with weaker global consumption.”

Surplus Widens

Prices tumbled 16 percent this year on ICE Futures U.S. in New York, exceeded only by arabica coffee’s 27 percent decline among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index. The gauge rose 5.6 percent. The MSCI All-Country World Index of equities gained 7.8 percent. Treasuries returned 2.6 percent, according to Bank of America Corp.
The world’s farmers will produce 114.1 million bales in the year that began Aug. 1, 7 percent less than the record 122.7 million a year earlier, the USDA predicts. Demand will be 108.2 million, the second-lowest level in nine years, the agency estimates. A bale provides enough material for 1,217 men’s T- shirts, according to the National Cotton Council of America.
China will import 46 percent less cotton in the 12 months through July 31, according to USDA. Consumption in the country may drop 11 percent this year, Zhang Hongxia, the chairman of Hong Kong-listed Weiqiao Textile Co. (2698), China’s largest cotton- textile maker, said in an interview Aug. 20. Cotlook Ltd., the Birkenhead, England-based research company, boosted its surplus estimate by 55 percent on Aug. 23, citing the deceleration in Chinese demand.

Crop Switching

Smaller harvests may bolster prices that reached a 31-month low of 64.61 cents on June 4, said Jon Devine, an economist for Cotton Inc., an industry group in Cary, North Carolina. Hedge funds on Aug. 28 were the most bullish since February, holding a net-long position of 13,047 futures and options contracts, Commodity Futures Trading Commission data show. The December- delivery contract traded at 77.23 cents a pound today.
U.S. farmers, the largest exporters, can earn more planting crops including corn or soybeans, which reached record prices this year after a drought that T-Storm Weather LLC estimates was the most-severe since 1936, based on temperature and rainfall in June and July. A USDA report on May 1 showed cotton growers lost $154.17 an acre in 2011 and corn earned $194.52. While the agency won’t estimate this year’s returns until Oct. 1, cotton prices are 20 percent lower and corn is up 40 percent.

Indian Monsoon

Matt Huie, a farmer in Beeville, Texas, who planted 3,600 acres of the fiber last year, said he “probably would consider not planting cotton at all.”
“I would expect massive reductions of cotton acreage,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “This should lead to a decline in supply and to rising cotton prices next year.”
The monsoon in India, the second-largest exporter, has been 12 percent below the 50-year average, the Meteorological Department said Aug. 30. The weather pattern accounts for about 70 percent of the country’s annual rainfall.
Plantings in Australia during the next three months may drop more than 12 percent, according to the government. Output in Brazil may tumble 26 percent as farmers shift to soybeans, the USDA’S Foreign Agricultural Service said in a report posted yesterday on its website.
Expectations for lower prices may spur traders to break $600 million of contracts this year, or 5 percent of global trade in the fiber, said Terry Townsend, the executive director of the International Cotton Advisory Committee in Washington. That’s down from about 20 percent in the past two years because prices are less volatile, he said.

Profit Margins

Hanesbrands, the Winston-Salem, North Carolina-based maker of the Wonderbra, saw cotton costs jump by $200 million in 2011, Chief Executive Officer Rich Noll told analysts on a July 31 conference call. Margins have since returned to “historical levels,” he said.
Levi Strauss expects lower cotton costs in the third and fourth quarters, former Chief Financial Officer Blake Jorgensen told analysts on a conference call July 10. The company cut prices in some markets in the second quarter to reduce inventories and products being sold in the spring were the “tail end of the peak cotton prices in the products we sourced last year,” he said.
Cheaper cotton will mean improved margins at American Eagle Outfitters Inc., a Pittsburgh-based clothing retailer, in the second half, Chief Financial Officer Mary M. Boland told analysts on an Aug. 22 call. J. Crew Group Inc., a clothing retailer based in Lynchburg, Virginia, told shareholders Aug. 30 that margins are benefiting from declining prices for the fiber.

Cheaper Polyester

While global demand is forecast by the USDA to rise 2.6 percent in the 12 months through July, after slumping 11 percent in the previous two years, more textile makers are turning to cheaper synthetic fibers. Polyester cost 77.6 cents a pound in China on Aug. 24, according to Cotlook. Cotton traded at $1.61, the Cotton China Index reported that same day.
China mills about one-third of the world’s cotton and is the top producer of polyester, according to the Washington-based International Cotton Advisory Committee, which has 41 member states. The group projects global synthetic-fiber consumption at 47.2 million tons in 2012, 3.9 percent more than last year.
Manufacturing in China unexpectedly shrank in August for the first time in nine months, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on Sept. 1 in Beijing.
“Cotton-market fundamentals are just awful,” said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago. “Demand is quite low, and the heavy supplies will contain any rally. We will probably see a downward correction from the recent rally as new crops start to come to market.”
To contact the reporters on this story: Marvin G. Perez in New York at mperez71@bloomberg.net; Whitney McFerron in London at wmcferron1@bloomberg.net; Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

India Signals ‘Natural Death’ to Tax Plan Amid Downgrade Threat By Tushar Dhara and V. Ramakrishnan - Sep 2, 2012

A panel set up by India’s prime minister recommended deferring a proposal to crack down on tax avoidance by three years, a move investors said may help boost capital inflows amid the threat of a rating downgrade to junk.
The General Anti-Avoidance Rule, or GAAR, outlined by former finance minister Pranab Mukherjee in his March 16 budget spooked foreign investors and raised concerns that the crackdown with retrospective effect would indiscriminately apply to their holdings of stocks and bonds. A draft report released on Sept. 1 by the four-member committee, suggested delaying its implementation to the assessment year 2017-18 on “administrative grounds.”
“It is definitely good news and a sentimental boost,” said Ananth Narayan G., managing director and co-head of wholesale banking at Standard Chartered Plc in Mumbai. “Essentially the proposal will be on hold for the next three years and hopefully will die a natural death, at least the retrospective clause.”
Global funds turned net sellers of Indian stocks in April and May after the proposals, pushing the rupee down to a record low as Prime Minister Manmohan Singh grappled with corruption allegations, a record current-account deficit, and missed budget targets. Singh set up the panel in July to help “reverse the climate of pessimism” after Standard & Poor’s and Fitch Ratings cut the sovereign credit outlook to negative, a step closer to non-investment grade rating.
The tax panel led by Parthasarthi Shome, a former adviser to the finance minister, also suggested abolishing taxes on proceeds from the transfer of listed securities, whether they are from capital gains or business income, for both Indians and non-residents.

Mitigation, Avoidance

The committee said tax mitigation using legal means should be distinguished from tax avoidance, and the GAAR rules must be invoked only in cases of “abusive, contrived and artificial arrangements.” The rule must not override an international tax treaty with provisions for anti-avoidance, the panel said.
The recommendations also included a monetary threshold of 30 million rupees ($539,268) per taxpayer in a year under the GAAR rule, according to the report. Singh set up the four member panel, consisting of tax experts and government officials, in July to seek suggestions and submit their final recommendations by the end of September.
Investor concerns that foreign investments will decline prompted Mukherjee to retreat in May and delay the implementation of the rule to April 2013. Standard & Poor’s cut its credit outlook to negative on April 25, citing diminishing growth prospects and slow progress on fiscal reforms. Fitch followed on June 18.

BlackRock’s iShares

Mukherjee resigned as finance minister on June 26 to become the president of India a month later, while Palaniappan Chidambaram took charge from Singh, who held the portfolio until July 31.
The rupee has declined 17 percent against the dollar in the past year, and touched an all-time low of 57.3275 on June 22. India attracted $10.1 billion worth of foreign direct investment in the six months to June 30 compared to $15.6 billion in the same period a year ago.
The proposed tax avoidance rules prompted BlackRock Inc., the world’s biggest money manager, to tell investors of its iShares BSE Sensex India Index ETF (2836) to “carefully consider their position and seek advice as necessary,” according to the exchange-traded fund’s 2012 semi-annual report on June 30.
Ishares BSE has gained 7.3 percent this year in Hong Kong, compared with a 13 percent increase in the Sensex index.
“The GAAR issue was hanging like a sword over foreign investors,” Kishor Ostwal, managing director of Mumbai-based equities research provider CNI Research (India) Ltd., said by phone on Sept. 2. “The announcement will clear a lot of doubts and accelerate foreign inflows into the stock market.”

Retrograde Steps

A rebound in purchases of stocks by overseas investors is crucial to reverse the slide in the rupee and fund the current account deficit that widened to a record 4.2 percent of gross domestic product in the financial year ended March 31. The $1.8 trillion economy expanded 5.3 percent in the first quarter of 2012, the slowest pace in three years, and 5.5 percent in the following three months. Growth averaged 7.5 percent in 2011.
Finance Minister Chidambaram on Aug. 7 said he will unveil a plan to contain India’s fiscal deficit and clarify tax laws to “regain” investor confidence.
“Our policy actions should match our long term economic objectives, although in the past year, certain retrograde measures reversed the economic reforms process,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Co. in a telephone interview. “The government should make more such efforts to attract foreign investments as we are starved of capital. We need policies that deepen our market and encourage overseas investments.”
The chances the panel’s recommendations won’t be implemented in the final report are “fairly” remote, Satya Poddar, a Gurgaon-based tax partner with Ernst & Young said on Sept. 1.
“Essentially what they’re saying is that India is not ready for GAAR and if it is applied, it should be severely constrained,” he said.
To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; James Regan at jregan19@bloomberg.net