World financial news

The Federal Reserve seems likely to stop short of lowering interest rates on Tuesday, but could signal a willingness to do so soon as it seeks to settle financial markets jolted by the bankruptcy of Lehman Brothers Holdings Inc.

Through last week, markets had seen almost no chance of a rate cut at Tuesday’s policy-setting meeting. However, Lehman’s downfall further roiled already unsettled markets, and futures prices on Monday implied as much as a 92 percent chance of a cut before settling down to around 60 percent by midday.

“While we would not rule out an emergency Fed cut entirely, we think it is more likely that the Fed will use other policy tools — as it is doing — to contain the situation unless events take another turn for the worse,” analysts at Goldman Sachs wrote in a research note on Monday.

The central bank will announce its decision on interest rates at around 2:15 p.m. EDT on Tuesday.

The Fed has brought down benchmark lending costs to a low 2 percent in seven moves since mid-September 2007 through the end of April to buffer the economy from the impact of the severe housing downturn and a freezing of credit markets.

It has held rates steady at that level since then as worries grew over high inflation and a view took hold that financial markets needed extended opportunities for borrowing, not lower rates, to regain balance payday loans. If anything, the Fed had signaled until recently that its next move would likely be rate increases as markets resumed normal functioning.

SCRAMBLE FOR CASH

But after a whirlwind weekend that brought Lehman’s bankruptcy filing, news that Bank of America was taking over investment bank Merrill Lynch and a scramble by insurance giant American International Group to come up with more cash, the Fed may give a fresh look to its bluntest policy weapon to give the economy a lift. 

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Oil prices zig-zagged Friday, briefly dipping below $100 a barrel for the first time in 5 months, as the the fury of a massive hurricane blowing toward refineries on the Texas coast countered .concerns about a global economic slowdown.

U.S. crude for October delivery briefly traded at $99.99 a barrel on the floor of the New York Mercantile Exchange, the first time oil has fallen below the $100 a barrel mark in more than five months.

The last time oil traded below $100 during a session was April 2, when it hit $99.84.

Oil recovered to settle up 31 cents at $101.18 a barrel. Earlier, prices rose as high as $102.89. Oil prices were volatile as traders gauged what Hurricane Ike’s impact would be.

Ike: Hurricane Ike was 295 miles east of Corpus Christi, Texas, and 195 miles southeast of Galveston, Texas. The National Hurricane Center warned the public that "preparations to protect life and property in the hurricane warning area should be rushed to completion."

The Category 2 hurricane continues on its path across the Gulf Coast "but could reach the coast as a category three," according the National Hurricane Center.

"The reality is hitting the market in the face here," said Andrew Lebow, a broker at MF Global in New York. The storm veered toward the Houston refineries and by Friday, "the market is looking at how dangerous this storm really is," said Lebow.

"The market is really trying to determine how bad this storm is going to be," said Phil Flynn, senior market analyst at Alaron Trading.

Refineries in danger: Texas is home to 26 refineries, which can process almost 4.8 million barrels of crude per day, or more than 25% of the nation’s total refining capacity, according to the Department of Energy. Most of Texas’ refineries are the Gulf Coast ports of Houston, Port Arthur, and Corpus Christi. The entire Gulf Coast region houses 42% of total U.S. refinery capacity.

The refineries along the Texas Coast are more vulnerable to the strong winds and rain that Ike brings than the oil rigs in the Gulf. "It is not the oil rigs. They are pretty well reinforced," said Ray Carbone, president of Paramount Options, an oil trading company.

While Ike has not posed significant damage to crude rigs, if the refineries are shut down, the crude market will suffer repercussions eventually. Gas is a main product of crude oil. "If your end product is rallying, it has to have an effect on the raw material," said Lebow.

"It is going to be about flooding and power outages in the region," said Carbone. "Without power, no refineries will be working and the flooding could complicate how long it takes them to come back online."

Tom Kloza, chief oil analyst for Oil Price Information Service, an independent publisher that follows fuel prices in North America echoed those comments. After Katrina, some refineries were shut down for 6 to 9 months, said Kloza.

"Close to 20% of the U.S. refining capability could be lost for a long period of time," wrote Jim Rouiller, Senior Energy Meteorologist at Planalytics in an email. "Major and long term damage likely at the major refining cities from Galveston and Texas City northward to Baytown," he wrote.

"If the storm does damage to the refineries then we could see price increases in gas and heating oil," said Flynn. The decrease in supply of gas and heating oil due to Ike could be magnified by the fact that refineries had already been limiting their output because of slackening demand.

With Ike headed toward the Texas Gulf Coast refinery row, wholesale gas prices spiked Thursday and remained elevated Friday even as crude prices retreated http://paydayloans-on.com. Late morning on Friday, wholesale gas prices were at $4.90 per gallon in the Gulf region, according to Kloza.

That price hike for dealers will push prices up at the pump, but not as drastically as wholesale gas prices have spiked. "No one wants to take the lead" in raising prices, said Kloza, so oil companies might try to cover as much of the price hike as they can for consumers.

Rigs shut: For the second time in two weeks, offshore platforms were being evacuated to avoid a major storm, according to the Minerals Management Service (MMS).

The government agency, which tracks offshore operations, estimated that 596 of the 717 manned production platforms - about 83.1% - remained evacuated in the wake of Hurricane Gustav earlier this month and in advance of Hurricane Ike.

As of Friday at noon ET, 96.9% of crude oil production and 93.3% of natural gas production in the Gulf of Mexico was shuttered, according to the Department of Energy.

The Department of Energy announced Thursday that it loaned 130,000 barrels of oil from the Strategic Petroleum Reserve (SPR) to Placid Oil’s Port Allen refinery along a Shell pipeline in Louisiana and an additional 250,000 barrels of oil from the SPR to Marathon Petroleum Company’s Midwest refineries along the Capline pipeline system. The companies had requested the oil due to disruptions from Hurricane Gustav.

The SPR is a 700-million barrel government-controlled reserve of crude oil.

The government released a preliminary Gustav damage report that said approximately 677 of 3,800 production platforms in the Gulf were exposed to hurricane conditions. One small platform off the coast of Louisiana was destroyed, according to MMS, and five platforms "received moderate damage," the statement said.

Demand, dollar: Even as Ike threatened the Gulf Coast region, oil prices remained near five-month lows, because the oil market has been fixated on the global economic slowdown chipping away at demand for pricey energy. Crude prices have fallen more than $46 from the record-high of $147.27 a barrel, set July 11.

People "were buying oil because they thought that the rest of the world would continue to demand oil," said Flynn. "Now, with the rest of the world’s economy slowing down, we are seeing that global demand for energy is falling."

The International Energy Agency on Wednesday lowered its demand forecast for the next two years. IEA said world demand for oil will average 86.8 million barrels per day in 2008, 100,000 barrels per day lower than it had originally forecast. In 2009, demand will be 87.6 million barrels per day, 140,000 barrels per day lower than it had announced in its previous report.

"Oil should probably already be below $100," said Flynn. "The impact of Ike so far is basically stopping the free fall."

"If Ike does not do was much damage as people fear, I think we could see the sell off accelerate and we could get back to the $80s," said Flynn. "Ike can be a game changer for this market."

In addition, the stronger dollar has weakened oil prices. Crude oil is traded in U.S. currency around the globe, and so when the dollar strengthens, crude prices move lower.

Special trading session: With Ike heading toward the Gulf Coast, the Chicago Mercantile Exchange announced that it would hold a special, additional electronic trading session.

Globex trading for oil will begin on Sunday at 10 a.m. ET with a 9:30 a.m. pre-open. Typically, electronic trading on Sunday begins at 6 p.m. in time for early trading in Asia.  

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Record oil prices sent the trade deficit to a 16-month high in July, according to a government report released Thursday that also showed signs of economic weakness.

The Commerce Department reported that imports exceeded exports by $62.2 billion, up from an upwardly revised $58.8 billion in June. Economists had expected a $58 billion gap, according to a consensus estimate compiled by Briefing.com.

The gap was the widest since the $62.3 billion deficit posted in March 2007.

The report was strongly colored by oil prices, thanks to the $147.27-a- barrel record set July 11. Because the report is lagging, it doesn’t reflect the more than 30% drop in oil prices over the past two months.

Excluding petroleum, the trade gap actually shrank to $29.6 billion from $32.5 billion in June, according to Bob Brusca, an economist with FAO Economics.

"If you strip oil out of the report, you see that imports are weak, exports are strong, and the deficit is shrinking," said Brusca. "Oil is a big misdirection as far as understanding the direction of trade."

Petroleum imports - which made up just under a quarter of the total - increased 13.7% from the month before, and were up nearly 31% from January. Oil helped raise overall imports to $230.3 billion from $221.6 billion, aided by the record $124.66 average price in July for a barrel of crude payday loan.

The month’s imports of 342 million barrels of crude oil were the highest in four years, with total crude oil July imports reaching a record $42.6 billion.

The record $24.2 billion July deficit with OPEC marked a 33.7% increase from June, and a 124.1% increase from July 2007.

Although there was a small increase in inflation-adjusted, non-petroleum imports, they remained below levels reached earlier this year - a signal to Brusca that the economy is in decline.

"Declining imports are a harbinger of bad GDP results and bad domestic demand," Brusca said.

The increases in imports, aside from petroleum, came from capital goods, and the foods, feeds and beverages category.

Exports rose to $168.1 billion from $162.8 billion in June. Export categories with the strongest growth included industrial supplies, capital goods, autos and consumer goods. There were slight declines in the feeds, food and beverages category.

The trade gap with China increased 16.4% in July, to $24.9 billion from $21.4 billion. On a year-to-year basis, the gap has widened by 4.6%. 

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China's property market could be headed for a “meltdown'' as home prices and sales slump, hurting profits at developers and banks, Morgan Stanley analysts said.

“Property prices are already cracking in China in major cities,'' the investment bank's analysts, led by Jerry Lou, wrote in a note today. “We believe the likelihood of a property sector meltdown is high. The impact on banks' earnings may be substantial.''

Property demand in Chinese cities has dropped by as much as half since the government last year raised minimum down payment requirements and increased rates on some mortgages to cool home prices, according to CSC Securities HK Ltd. analyst Liu Bin. A 60 percent drop in the stock market this year and concerns that economic growth in the world's fourth-largest economy is slowing have contributed to the slump in demand.

“None of the developers we look at are free from potential solvency issues,'' the Morgan Stanley report said, referring to five companies traded in Hong Kong. “Needless to say, they also have serious earnings risks.''

Agile Properties Holdings Ltd. “seems to be the best positioned when it comes to earnings impact and solvency risk,'' said the report. Guangzhou R&F Properties Co., the biggest developer in the Southern Chinese province, faces the worst solvency risks, while Shimao Property Holdings Ltd fast cash now. and KWG Property Holding Ltd. are the worst in terms of earnings risks, the report said.

No Compensation

Agile, which this week said first-half sales fell 28 percent, declined for a fourth day in Hong Kong, dropping 0.7 percent to HK$4.07 at 10:43 a.m. The stock has lost 72 percent of its value this year. Guangzhou R&F fell 1.7 percent to HK$9.20. Shimao slid 4 percent to HK$5.81, while KWG declined 3.3 percent to HK$2.37.

Developers including China Vanke Co. and Poly Real Estate Group Co. have reported falling sales as government lending curbs deterred home buyers. China Vanke, the nation's biggest publicly traded real-estate developer, said this week sales in August fell 35 percent from a year earlier, the third monthly drop.

Vanke said in a statement today it has rejected demands from buyers for compensation on homes bought before the company cut prices to boost sales. The Shanghai Morning Post had earlier reported Vanke may compensate the buyers, according to the statement.

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Lehman Brothers Holdings Inc has made a tough call by deciding to auction a big piece of its investment management unit, seen as one of its crown jewels. Now, it could face an even harder task — getting a good price for it.

The fourth-largest U.S. investment bank has struggled to raise capital to offset write-downs due to the credit crisis, and some bankers said Lehman’s plan to sell a majority stake in its valuable business, including asset manager Neuberger Berman, is a sign of the desperate straits it is in.

“Neuberger Berman is a first-class property that people will be interested in. You certainly have a stressed seller who needs capital. That presents interest plus opportunity,” said Eric Weber, chief operating officer of Freeman & Co, a merger advisory firm focused on financial services. “People smell blood in the water.”

Lehman released its quarterly results and plans for raising capital about a week earlier than planned, after investors sent its stock reeling on concerns it won’t be able to raise enough funds and its survival might even be in question.

It posted a quarterly loss of $3.93 billion on Wednesday and said it plans to shed some assets, including selling about 55 percent of a portion of the investment management division payday loans in 1 hour. That includes Neuberger and the private equity and wealth management businesses. Experts say the unit overall could be worth around $8 billion.

The division, which is headed globally by George Walker, a former Goldman Sachs partner and second cousin of U.S. President George W. Bush, is a steady source of income for Lehman and the decision to sell a stake is not a happy choice.

The company had $273 billion in assets under management as of August 31, with $98 billion in equity, $93 billion in fixed income, $44 billion in money markets and $38 billion in alternative investments.

That makes it roughly the same size as Wachovia Corp’s Evergreen Investments, with about $245 billion in assets under management, but it is far smaller than BlackRock Inc’s $1.428 trillion, both as of June 30. 

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New Zealand's central bank cut its benchmark interest rate by a half point to 7.5 percent, more than forecast by most economists, saying the economy is in a recession and inflation will slow.

The nation's currency dropped to a 22-month low, and bond yields fell after the decision. “`We've got room to move,'' Reserve Bank Governor Alan Bollard said in an interview from Wellington today “We're in a loosening mode.''

Bollard, 57, said the economy is in its first recession since 1998 as the jobless rate rises, housing slumps, retail sales drop and a drought cuts farm exports. The New Zealand dollar, a favorite of the so-called carry trade, has dived 13 percent since July 24, when Bollard cut the benchmark for the first time in five years from a record.

“There are real reasons for the Reserve Bank of New Zealand to be quite worried about the economy,'' said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It's clear conditions are far too tight.''

Ong was the only one of 15 economists surveyed by Bloomberg to predict the half-point cut. The rest forecast a quarter-point reduction.

New Zealand's dollar fell to as low as 64.95 U.S. cents from 66.26 cents immediately before the decision. That's the lowest since Oct. 2, 2006. It traded at 65.15 cents at 5:10 p.m. in Wellington. The three-year bond yield fell 19 basis points to 5.72 percent.

Economic Risk

Today's reduction is the largest since 2001 when the Reserve Bank cut by a half point twice in the months following the U.S. terrorist attacks.

Traders expect Bollard will cut rates a quarter point at his next meeting on Oct. 23, according to a Credit Suisse index based on swaps trading. Bollard said the timing and size of future reductions depends on the outlook for inflation and the currency.

New Zealand's economy contracted in the first quarter and Bollard today joined the Treasury Department and economists in forecasting the recession.

The central bank said the economy probably shrank 0.2 percent in the second quarter, after forecasting 0.2 percent growth in its June policy statement. The economy will also contract 0.3 percent in the third quarter, it said.

Growth in the year ending March 31, 2009, will be 0.3 percent, the weakest in 10 years, the bank forecast. The economy expanded 3.1 percent in 2007.

Fuel Prices

Drought, the increasing cost of credit, higher fuel prices and a housing slump combined to stall the economy, Bollard said. The outlook for the global economy has deteriorated in the wake of financial-market turmoil, he said.

Exports fell for a second straight quarter in the three months to June 30 as dry weather curbed dairy production and shipments of milk powder and cheese slumped, according to a government report yesterday.

Dairy products are the nation's largest export. Total overseas sales make up 30 percent of the economy.

Retail sales fell by the most in at least 13 years in the second quarter as consumer confidence slumped and record-high gasoline prices left households with little to spend on discretionary goods.

“Consumers are watching what they spend very carefully,'' said Rod Duke, managing director of retailer Briscoe Group Ltd. “The downturn in consumer confidence affected by steep increases in basic cost of living, petrol and bank interest rates, has hit retailers hard.''

House Sales

Auckland-based Briscoe said on Sept. 5 that first-half profits at its sporting goods and home-ware stores slumped 71 percent amid declining sales.

House sales fell to a 16-year low in June and residential construction dropped for three consecutive quarters. The jobless rate rose to a two-year high in the second quarter.

Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation.

The Reserve Bank of Australia this month lowered its benchmark interest rate for the first time in seven years as economic growth weakens. Governor Glenn Stevens said this week it may be six months before inflation eases.

The European Central Bank last week kept interest rates unchanged at a seven-year high, citing inflation concerns. Yesterday, it lowered its forecast for euro-region growth and said Germany faces a recession. The Bank of England kept its rate steady after economic growth stalled in the three months ended June 30.

Inflation Forecast

New Zealand's inflation rate will probably accelerate to 4.9 percent in the year ending Sept. 30, the fastest pace since 1990, the Reserve Bank said today.

Annual inflation will be 4.5 percent by March 2009 before slowing to 2.8 percent a year later, Bollard said in a statement today. In June, the central bank expected inflation would stay above 3 percent until mid-2010.

“We remain mindful of the risks to inflation,'' said Bollard. The extent of the decline will depend on the responses of wage inflation and inflation expectations, he said. A weaker exchange rate will underpin the price of imports.

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The meltdown of Fannie Mae’s stock has hit one local bank’s portfolio.

Pulaski Financial Corp. announced that it sold its holdings in the mortgage-finance firm for an after-tax loss of $5.2 million, or 51 cents per diluted share.

In its most-recent quarterly report, Pulaski disclosed that it held 350,000 shares of Fannie Mae preferred stock. At that time, the bank valued the shares at $8 million. The bank was already reporting a loss on the investment, as it listed the total amortized cost of the stock at $8.9 million.

Pulaski said that management determined that the decline in value was not other than temporary, but since since the end of its last fiscal quarter on June 30, the market value of the securities had declined significantly.

The Treasury Department announcement on Sunday that it was placing Fannie Mae into conservatorship and eliminating dividends on its common and preferred securities caused Fannie Mae shares to plummet on Monday cash advances. Pulaski said the shares no longer met its investment criteria.

Despite the loss on the investment, Pulaski said the capitol ratios of its bank are expected to remain above the amounts necessary to be categorized as "well-capitalized" under current regulatory requirements.

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A judge ruled Monday in favor of "Harry Potter" author J.K. Rowling in her copyright infringement lawsuit against a fan and Web site operator who was set to publish a Potter encyclopedia.

U.S. District Judge Robert P. Patterson said Rowling had proven that Steven Vander Ark’s "Harry Potter Lexicon" would cause her irreparable harm as a writer. He permanently blocked publication of the reference guide and awarded Rowling and Warner Bros. Entertainment Inc. (TWX, Fortune 500) $6,750 in statutory damages.

Rowling and Warner Bros., maker of the Harry Potter films and owner of intellectual property rights to the Potter books and movies, sued Michigan-based RDR Books last year to stop publication of material from the Harry Potter Lexicon Web site.

Vander Ark, a former school librarian, runs the site, which is a guide to the seven Potter books and includes detailed descriptions of characters, creatures, spells and potions.

The small publisher was not contesting that the lexicon infringes upon Rowling’s copyright but argued that it was a fair use allowable by law for reference books. In his ruling, Patterson noted that reference materials are generally useful to the public but that, in this case, Vander Ark went too far.

"While the lexicon, in its current state, is not a fair use of the Harry Potter works, reference works that share the lexicon’s purpose of aiding readers of literature generally should be encouraged rather than stifled," he said.

He added that he ruled in Rowling’s favor because the "Lexicon appropriates too much of Rowling’s creative work for its purposes as a reference guide."

Anthony Falzone, who argued the case for RDR Books, said he had not yet seen the ruling and could not immediately comment quick payday loan. RDR publisher Roger Rapoport did not immediately return a telephone message for comment.

A spokeswoman for Rowling and Warner Bros. did not immediately return a telephone message for comment.

Though Rowling had once praised the Web site, she testified earlier this year that the lexicon was nothing more than a rearrangement of her material.

She said she was so distressed at the prospect that it would be published that she had stopped work on a new novel. "It’s really decimated my creative work over the last month," she said during the trial in April.

If the lexicon is published, she went on, "I firmly believe that carte blanche will be given to anyone who wants to make a quick bit of money, to divert some Harry Potter profits into their own pockets."

Vander Ark, a devoted fan of Rowling, began work on his Web site in 1999 and launched it in 2000.

The seven Potter books, which ended last year with the final book in the series "Harry Potter and the Deathly Hallows," have been published in 64 languages, sold more than 400 million copies and produced a film franchise that has pulled in $4.5 billion at the worldwide box office. 

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The Spanish economy, which may deteriorate in the coming quarters, will ultimately benefit from two decades of structural transformation, Pedro Solbes, the nation's finance minister, said.

The Spanish economy will remain weak until next year with high unemployment and high inflation, he said, writing in the Financial Times. The rate of domestic growth will then improve in 2010 as the government maintains investment in infrastructure and education, Solbes said.

The government and Spanish companies have invested in domestic infrastructure, which, together with a stable savings rate, has led to a considerable current account deficit, he said.

Spanish banks are solvent and well-placed to withstand the deterioration in the economy, Solbes said credit report. Financial institutions have been hit by tighter credit conditions and the deterioration in the domestic housing market. Yet other Spanish companies have proven to be competitive in international markets, the finance minister said.

The Spanish government also delivered a surplus of more than 2 percent of gross domestic product in 2007 and cut its public debt to 36 percent of GDP. This allowed the government to implement measures to mitigate an economic slump, Solbes said.

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The Treasury Department is close to finalizing plans to effectively take over beleaguered mortgage buyers Fannie Mae and Freddie Mac, according to a report published Friday.

Citing sources close to the matter, The Wall Street Journal reported that an announcement could come as early as this weekend. Shares of both companies plunged in after-hours trading.

The government may put the companies in conservatorship and take control of them at least in the short-term, the Journal reported. The plan also may include a capital injection in the government-sponsored entities by the Treasury and changes to senior management at both firms, according to the report.

In a statement, the Treasury Department said it would not "comment on rumors." Representatives for both Fannie Mae and Freddie Mac declined to comment on the report.

The two firms, which were set up by the government, own or back about $5 trillion worth of home debt - half the mortgage debt in the country. Since last summer, they have suffered about $12 billion in losses.

Concerns over whether Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) will have enough money to weather future losses in the housing market sent shares sharply spiraling lower earlier this summer.

By mid-July, the Treasury Department and Federal Reserve announced steps in mid-July to make funds available to the firms if necessary and Congress approved the sweeping proposals later that month.

The Treasury Department retained Wall Street’s Morgan Stanley in early August to advise it on its new authority to prop up the two firms. Morgan will provide advice on capital markets, capital structure, strategy and mortgage-related matters through January 17. It will not be paid for the work, beyond accepting $95,000 for expenses. Morgan Stanley had no comment about the report.

Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.

The two firms buy loans, attach a guarantee, then sell securities backed by the loans’ income stream free credit report.com. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures.

Both companies have been losing money for the past few quarters due to the subprime mortgage meltdown and steep declines in housing prices.

Bert Ely, an independent banking analyst, told CNN that Freddie Mac CEO Richard Syron could be forced to step down as part of Treasury’s plan. Fannie, meanwhile, recently announced that its chief financial officer and chief risk officer were leaving the company.

Ely added that it is a surprise that Treasury may be acting now though because there has not been a lot of pressure on the companies from Wall Street in the past few days. Freddie’s stock rose 13% during the holiday-shortened week while Fannie’s stock gained 3%.

Shares of both companies are still down more than 80% so far this year, however.

The ultimate cost to the taxpayer of any Treasury intervention remains unknown.

In any rescue, Treasury would likely have to borrow billions of dollars. Exactly how much it would cost taxpayers is impossible to gauge because of several unknowns. Among them: extreme volatility in the companies’ stock prices coupled with falling home values and rising mortgage default rates, which affect the value of the GSEs’ assets and debt.

Long-term, the potential downside of a Fannie-Freddie intervention could increase taxpayer costs in other ways. One of them: It could in a slow-growth environment help drag down the government’s top-notch credit rating. And that could make it more expensive for the government to borrow, putting pressure on future administrations to raise taxes or cut spending.

CNNMoney.com’s David Ellis, Tami Luhby and Jeanne Sahadi and CNN’s Gerri Willis and Allan Chernoff contributed to this report. 

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