Asian stocks slide as global market rally fades

TOKYO (AFP) - Asian share prices were hammered Monday as a global stock market rally fizzled out amid renewed pessimism about the US economic outlook and a plunge in Chinese stocks, dealers said.

They said that investors fled to safe havens such as bonds and gold as markets around the region slumped deep into the red in the wake of losses on Wall Street, with Shanghai plunging by about 7.2 percent.

 

Hong Kong was down almost 6.0 percent in afternoon trade and Singapore tumbled by about 5.0 percent. Tokyo ended down nearly 4.0 percent as Seoul lost 3.85 percent. Indian share prices slid about 4.6 percent in morning deals.

In Europe, investors were bracing for another wild ride when trading resumed.

Sentiment remained fragile in the wake of last week's rollercoaster performance that saw global shares slump on fears of a US recession before rebounding sharply following a hefty US interest rate cut and an economic stimulus plan.

"The market is fluctuating wildly," said Francis Lun, general manager at Fulbright Securities in Hong Kong.

"Investors don't have the appetite to buy stocks now."

Chinese share prices were hit by worries about the US economy and severe winter weather at home.

After last week's emergency US interest rate cut, many investors are hoping that the Federal Reserve will deliver another dose of monetary medicine at the end of a two-day meeting on Wednesday.

The fear is that stocks could resume their decline if the Fed fails to deliver the quarter-point reduction many traders are betting on.

Market views are also mixed about whether the central bank's efforts will be enough to prevent the US economy from slipping into recession.

"If the Fed makes another rate cut, the market will be likely to take the decision positively," said Mizuho Research Institute senior analyst Koji Takeuchi.

"But the market may turn cautious, as there are expectations that the forthcoming data may revive concerns about the US economy," said Takeuchi.

US President George W. Bush was scheduled to deliver his annual State of the Union address later Monday, while key US jobs data due Friday will be keenly awaited for fresh clues on the health of the world's largest economy.

"Many investors are taking a wait-and-see attitude ahead of a series of events this week," said Won Jong-Hyuck, an analyst at SK Securities in Seoul.

"All eyes will be on whether the upcoming US job market data will meet the consensus or not, given that the December data were a key culprit in the heightened volatility in global financial markets."

US figures due this week will provide snapshots on existing home sales, consumer confidence, auto sales and the job market, among other surveys.

"The volatile market is expected to persist until the big economic events are played out. But the market may now be in the process of establishing a near term bottom," said Mitsushige Akino, chief fund manager at Ichiyoshi Management in Tokyo.

In New York, the blue-chip Dow Jones Industrial Average slipped 1.38 percent Friday to close at 12,207.17, capping a tumultuous week.

World oil prices fell in Asian trade Monday as market players remained wary about prospects for the global economy, with New York's light sweet crude for delivery in March down 90 cents at 89.81 dollars per barrel.

On the foreign exchange market, the dollar was mixed as investors waited for the Fed meeting and Bush's State of the Union address, dealers said.

Asian markets drop, tracking Wall Street

HONG KONG - Global market turmoil continued into a second week as Asian markets tumbled Monday in the wake of Wall Street's sell-off Friday amid persistent worries about a possible U.S. — and worldwide — economic slowdown.

China's benchmark index plummeted 7.2 percent to its lowest point in six months on concerns that a recession in the U.S. would mean less demand for Chinese-made products. Hong Kong's market sank 4.3 percent while India's Sensex dropped 3.5 percent in afternoon trading.

U.S. stock index futures also were down, suggesting that Wall Street was poised to drop again when markets open.

Investors around the world have been jittery for weeks about a U.S. slump, which would likely weaken demand for exports and drag on global growth. There is also concern about a worldwide credit crunch triggered by rising defaults in risky U.S. mortgages, which has led to mountains of bad assets at major American and European banks.

"There's a lot of uncertainty out there: uncertainty over the U.S. economy, uncertainty over China's economy," said Rob Hart, an analyst with Morgan Stanley in Hong Kong.

China's Shanghai Composite index plunged 342.39 points to 4,419.29 amid worries about weaker demand from American consumers. Concerns over the potential impact of a prolonged bout of severe winter weather also took a toll.

"Investors, especially institutional investors, are very cautious," said Chen Huiqin, an analyst at Nanjing-based Huatai Securities. She said investors were waiting for possible "market rescuing" signals from the Chinese government.

"That could have a strong impact on the market," Chen said.

Japan's benchmark Nikkei 225 index fell 3.97 percent to close at 13,087.91, erasing its jump on Friday. Markets in South Korea and Taiwan also dropped.

Last week was a tumultuous one for global markets, and it appeared that the volatility would continue.

Asian and European stocks had plunged early last week on worries about slower U.S. growth. They rebounded after a hefty three-quarters cut in U.S. interest rates by the Federal Reserve last Tuesday, as well as news of a U.S. stimulus package. By Friday, markets in Hong Kong and Tokyo had nearly recovered their early week losses.

But investors in Asia dumped shares again Monday after Wall Street sank Friday, when the Dow Jones industrials slid 1.38 percent and the technology-heavy Nasdaq composite index declined 1.47 percent.

Some traders said Asian markets were dropping on concern that the Fed may not slash interest rates again — or as much as expected — when its policy planners meet Tuesday and Wednesday.

"The possibility for a 50 basis points cut is looking less likely," said Castor Pang, a strategist at Sun Hung Kai Financial in Hong Kong, pointing to future prices in New York.

Dow futures were down 141 points, or 1.15 percent, to 12,095, while Nasdaq futures were down 24 points, or 1.34 percent, to 1,769.5.

Japan's economy may already be contracting, said Tetsufumi Yamakawa, chief economist at Goldman Sachs Japan.

He pointed out that five of the 11 components of Japan's business condition diffusion index have already hit highs and begun deteriorating. Declines in six of the 11 components often indicates a recession is coming.

"A recession, which was nothing more than a risk scenario six months ago, is now turning into our main scenario," Yamakawa said in a report released Friday.

Japanese traders also were cautious ahead of a slew of corporate quarterly earnings this week, including Honda Motor Co. on Wednesday and Sony Corp. on Thursday.

Oil falls to $90, stock markets weigh

SINGAPORE (Reuters) - Oil fell to $90 a barrel on Monday, as weaker global stock markets spurred profit taking, although expectations that OPEC will resist pressure to raise output this week limited deeper losses.

U.S. light, sweet crude for March delivery slid 71 cents to $90.00 a barrel by 0746 GMT, after falling to as low as $89.77. Prices gained 14 cents last week after clawing back from a six-week low of $86.11 a barrel.

Brent crude in London traded down 60 cents at $90.30 a barrel.

"Traders are squaring their positions before the OPEC meeting, hence there is some profit-taking," said Tetsu Emori of Japan's Astmax Futures Co Ltd.

After falling sharply early last week, as growing despair over the U.S. economy toppled global equity markets, oil bounced back from Thursday as U.S. legislators and the White House hammered out a $150 billion stimulus plan.

But with prices lately moving in sync with stock markets, traders began to fear that Friday's $1.30 surge might have been overdone after Wall Street ended the week on a down note following two days of sharp gains. (.N)

Worries over the health of the U.S. economy also hit shares in Asia on Monday, with Japan down almost 4 percent, Hong Kong lost more than 4 percent and China stocks slid over 7 percent.

While many analysts say the risk of an economic slowdown could still take some steam out of oil prices that are not far off their record high of $100.09, a thirst for alternative investments and OPEC's resolve have limited the downside so far.

"Geopolitical risks, generally tight fundamental market conditions, and investor preferences for commodity assets are likely to continue to expose the markets to upside risk," Deutsche Bank analyst Adam Sieminski said in a report.

Attention this week will shift to Vienna, where OPEC ministers will meet on February 1 to discussion production rates.

Many officials have said they do not see the need to pump extra oil, despite the growing threat of recession and seasonally weak second-quarter demand, as crude inventories are comfortable.

For OPEC minister comments click on:

The International Energy Agency's executive director expressed concern about the strength of the world economy and said oil producers could help the situation by pumping more.

Prices may remain hostage to the fortunes of global stock markets, which gyrated wildly last week, forcing some oil speculators to shed positions to cover margin calls.

U.S. regulator data on Friday showed that speculators in the NYMEX crude oil market slashed their bets on rising prices in the week to January 22 to their lowest since mid-December, cutting net length by nearly 50,000 lots to 37,000.

Global stocks fall, haunted by economy fears

SINGAPORE (Reuters) - Shares in Asia fell 3 percent on Monday as concerns over the health of the global economy returned to haunt stock markets, sending investors to seek safe haven government bonds.

The yen rose against other currencies as investors shunned riskier bets and unwound currency carry trades, while oil drifted back down below $90 a barrel with traders saying Friday's $1.30 surge might have been overdone after Wall Street ended the week on a down note following two days of sharp gains.

Europe's stock markets were tipped to fall, with financial bookmakers predicting Britain's FTSE 100, Germany's Dax and France's CAC-40 to open around 2 percent lower.

Investors resumed selling after last week's nerve-wracking rollercoaster, which saw global equity markets toppled by growing despair over the U.S. economy earlier in the week and then lifted by a $150 billion stimulus plan agreed by U.S. legislators and the White House.

"The sell-off is hitting all sectors regardless of each company's earnings and outlook," said Kim Joong-hyun, an analyst at Goodmorning Shinhan Securities. "Although last week's U.S. rate cut has calmed down panic selling, a recovery from the economic woes and the financial sector's debt problems should take a long time."

Seoul's KOSPI index shed almost 4 percent. Foreign investors continued their selling spree for the 18th straight session, dumping 268 billion won ($283 million) in net value on the main board.

Japan's Nikkei benchmark ended down 4 percent. Goldman Sachs said Japan's economy may be already in recession, due partly to weaker exports and sluggish consumption.

Australia's market was shut for a public holiday. Hong Kong's Hang Seng slid 3 percent, while MSCI's index of Asia-Pacific stocks excluding Japan fell 3.4 percent by 0700 GMT, taking year to date losses back above 12 percent.

Shanghai suffered the worst losses, falling 7 percent, dented by heavy snow across central and eastern China, which is seriously disrupting food and energy supplies.

DAVOS DOWNER

Traders were eyeing this week's Federal Reserve meeting, at which the bank is set to cut U.S. interest rates again, having slashed them in an emergency move last week.

World business leaders gathered in Davos for last week's meeting said on Saturday the worst might yet be to come in a financial crisis driven by continuing fears of bank losses and uncertainty over U.S. emergency stimulus measures.

Banks said there were few cures for a financial system faced with hundreds of billions of dollars in investments which have turned bad.

"It will be a while before you see a return of normalcy in banking and markets," Merrill Lynch CEO John Thain said.

French bank Societe Generale's trading scandal remained in focus.

On Sunday, the bank defended its handling of the world's biggest trading scandal, but admitted its risk systems had failed to detect a 50-billion-euro market bet by a lone trader. For a list of stories, click on

For now, some investors sought safety in government bonds.

Japan's March 10-year futures rose 0.72 of a point to 138.08, while the benchmark 10-year bond yield fell to 1.405 percent.

In the currency markets investors were looking to equity markets, seeking clues on whether to tiptoe back to risky carry trades, in which the low-yielding yen is used as a source of cheap funds to buy higher-yielding currencies.

The dollar fell to 106.12 yen while the high-yielding Australian dollar fell 0.8 percent against the yen

Sterling fell against the yen and the dollar after a senior Bank of England official said interest rates need to be cut to prevent a sharp slowdown in British growth

U.S. crude fell 87 cents to $89.83 a barrel.

Gold and platinum traded near record highs supply fears lingered after South Africa's mines halted production due to a power crisis.

Spot gold rose to $917 an ounce from $918.00/919.00 an ounce late in New York on Friday, when the metal rallied to record high of $923.40 an ounce.

Tullow Oil: Lucky strikes in unlikely places

When Tullow Oil was born in 1985, some of its main founders would have been hard pressed to imagine that the company could ever make it into the FTSE 100 index. It would have been almost as difficult for some investors to imagine that the company's reputation would ultimately be based on finding oil in Africa, particularly in countries that are not traditionally seen as significant hydrocarbons plays.

But that is exactly what Aidan Heavey, a former chartered accountant and the Irish chief executive of the London-listed company has succeeded in doing, building up a strong portfolio in a continent that has come to the fore as a global exploration hot spot in the last decade.

In the past two years Tullow has struck it big in Ghana and Uganda, drilling in newly acquired assets and confirming the discovery of hundreds of millions of barrels of oil in the two countries which, until then, were not even considered as oil-rich countries.

The company began its Africa foray in 1986 in Senegal, after drilling a dry well in Ireland, but only began a period of accelerated activity when it acquired £200m ($395m) of gas assets in the North Sea from BP in 2000.

It then decided to move back into Africa in a big way with the acquisition of South African-listed Energy Africa for $570m in 2004 and the £595m acquisition of Australia's Hardman Resources in January last year. Each company had African assets. The deals boosted Tullow's production profile and gave the company exploration rights where its most important discoveries are located.

Tom Hickey, Tullow's finance director, says the key to the company's success has been in "picking up assets ignored or not appraised by major companies and using those as the levers to grow the business".

The company's production stands at roughly 75,000 barrels of oil equivalent a day with more than half of that production coming from producing assets spread across five African countries. The rest of Tullow's production is in the UK section of the North Sea, now overshadowed by the company's ambitions in Africa.

Tullow is the only UK listed exploration and production company to have a big name in Africa, says Mr Hickey.

With a presence in roughly a dozen African countries, the company strategy has been to diversify its risk. It has shrugged off the disappointments of its exploration campaign in Namibia, while eyeing a new drilling campaign off the coast of Ivory Coast, adjacent to its Ghanaian play.

"Yes, you can say that we have been lucky, but the luck is in having a portfolio that can absorb disappointment," says Mr Hickey.

A strong cash position has also allowed Tullow to sink a high number of wells in areas that have showed a good track record. In Uganda, the company has struck oil in all eight of its wells drilled, an unheard of strike rate, and has discovered 250m barrels of recoverable reserves with ambitions to add on hundreds more in new drilling campaigns.

Last year's discovery of a large field off the coast of Ghana, in which Tullow holds a 37 per cent interest, could hold anywhere between 480m to over 1.3bn barrels of oil, the company says, although only two wells have been drilled there.

The company expects its production profile to eventually rise to 200,000 b/d over the coming years, largely as a result of the the Ugandan and Ghanaian discoveries. But before investors swallow this figure, they will eagerly await news of an export pipeline from landlocked Uganda, which otherwise would not be able to absorb all of Tullow's production on its own, as well as news of further appraisal drilling in the Ghanaian find.

As the company intensifies its search for more African oil, it expects to deepen the proportion of funds earmarked for exploration and development on the continent. In 2006, more than 60 per cent of Tullow's £400m of capital expenditure was earmarked for African projects. This year, that figure is expected to rise to 70 per cent, says Mr Hickey, with Ghana and Uganda taking the largest share.

That will mean toning down emphasis on the North Sea. "We have not turned the North Sea off, we are just turning it down," he says.

Wall Street braces for more volatility

NEW YORK - Investors are exhausted after their whipsaw week, but they're not ruling out another one. All the assumptions Wall Street made when it recovered from steep losses last week — that the Federal Reserve will cut rates again, that President Bush's stimulus plan will proceed, and that any recession that occurs might actually be shallow and quick — are going to be tested.

On Monday night, Bush will make his State of the Union address. If it looks like the proposed $150 billion tax rebate for Americans could hit a snag in Congress, the markets' fears about consumer spending could balloon again.

Then on Wednesday, the Fed — which helped put a floor under the market last week by making an emergency, three-quarter-point rate cut — will finish its two-day meeting and release its rate decision. A failure to deliver the quarter-point reduction traders are betting on, or signs that the Fed is hesitant to loosen its policy further, could send stocks sliding.

And Friday, two snapshots of U.S. manufacturing and employment will tell investors how the economy fared in January. Economists expect jobs to increase but manufacturing activity to contract.

Wall Street, which lived up to its fickle reputation last week, could even be disappointed if it gets exactly what it wants but little else.

"If their expectations are met, they quickly ask, what's next?" said Alan Gayle, senior investment strategist and director of asset allocation for Trusco Capital Management.

Last week, after plunging, posting its biggest one-day upswing in five years and then capping the week with a loss, the Dow Jones industrial average finished the week up 0.89 percent. The blue chip index, down 8 percent since the beginning of the year, is on pace to log its worst January since 1960.

The Standard & Poor's 500 index finished the week 0.41 percent higher, while the Nasdaq composite index closed down 0.59 percent.

"If we're not at a bottom, we're probably very close," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. But, he added, the market is mercurial because there are many questions still unanswered — a big one being, how risky is the debt on banks' books right now following their bad bets on subprime mortgages?

"Volatility won't be over for a while," Conroy said. "These credit issues don't go away overnight."

And neither do worries of a recession without hard evidence that the United States is not headed for one.

According to Michael Sheldon, Spencer Clarke LLC's chief market strategist, the dramatic lows reached in the stock market last week could make for a multi-week rally, but that more ground may be lost in the coming months. He noted that in the 11 recessions since World War II, on average, stocks fell 26 percent, the recessions lasted 10 months and Wall Street bottomed out six months into them.

One can only determine a recession in hindsight, but investors will try to use what data they can to piece together an accurate picture.

The Commerce Department releases on Monday a report on December new home sales, on Tuesday a report on December durable goods orders, on Wednesday, its first estimate of fourth-quarter gross domestic product, and on Thursday, a report on December's personal spending.

Meanwhile, Dow companies such as American Express Co., McDonald's Corp., Verizon and ExxonMobil Corp. report earnings this week, as well as other major names including the recently acquired Countrywide Financial Corp., Starbucks Coffee Co., homebuilders Centex Corp. and Pulte Homes Inc., and Internet companies Google Inc. and Yahoo Inc.

Emergency rate cut revives talk of "Bernanke put"

WASHINGTON (Reuters) - An emergency U.S. interest rate cut last week rekindled perceptions the Federal Reserve has a bias to protect the stock market, and a French bank trading scandal has made matters worse.

Deep losses in stock markets around the world last Monday spurred the U.S. central bank into making its biggest rate cut in more than 23 years on Tuesday, but the stocks drop came as 144-year-old Societe Generale (SOGN.PA) unwound positions taken by a rogue trader.

"Disclosures that unwinding of rogue trades also contributed to the weekend meltdown have nurtured perceptions that a new 'Bernanke put' has appeared," Morgan Stanley economists Richard Berner and David Greenlaw wrote on Friday, referring to Ben Bernanke, the chairman of the central bank.

The idea of a put reflects concerns that the rate cut shielded investors from a stock sell-off in the same way traders use a "put" option to limit losses on a security.

Former Fed Chairman Alan Greenspan faced long-standing criticism that he pursued a policy of protecting markets, a view that became popular after the central bank cut interest rates sharply in the wake of the collapse of Long Term Capital Management in 1998.

Critics fear that a similar impression of the Bernanke-led Fed could be a costly one to correct, and might mean higher interest rates in the future than would otherwise be required.

BEST PRACTICES

The Fed slashed benchmark interest rates by three-quarters of a percentage point to 3.5 percent on Tuesday before the open of U.S. stock markets, which had been closed for a holiday on Monday. At that time, U.S. stock futures were indicating Wall Street would follow overseas markets in a steep plunge.

The emergency rate cut came just a week ahead of a regularly scheduled Fed policy meeting.

Thursday's disclosure that SocGen dumped stock positions on Monday after discovering that a rogue trader had taken on huge positions has intensified criticism of the Fed for using the equity market as a barometer of the wider economy.

"It is good monetary policy to put some distance between interest rate policy actions and market re-pricing," said Marvin Goodfriend, a former senior adviser at the Federal Reserve Bank of Richmond and now an economics professor at Carnegie Mellon University's Tepper Business School.

Bernanke had taken firm steps at the onset of the current market turmoil in August to bury any idea he would bail out investors, and had labored to separate actions to help markets function smoothly from rate moves aimed at the economy.

"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," he told a central bank gathering in Jackson Hole, Wyoming.

"But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," he added.

DO NO HARM

Four months later, and 10 percent lower on the Dow, the sentiment in the second part of that statement seems to be guiding the Fed, relegating concerns that policy-makers are bailing out investors to the back-seat.

"They are getting themselves deeper into a hole," warned Robert Eisenbeis, former research boss at the Federal Reserve Bank of Atlanta, who argued that the cumulative 1-3/4 points of Fed easing since August posed a clear moral hazard.

"It makes people believe that there will never be a downside. That housing will never go down," he said.

Other observers saw no ground for claiming that the Fed was saving the stock market, but did see scope for problems down the road if the idea of a Bernanke put took hold and it led markets to expect an easy monetary policy and higher future inflation.

"The Fed really does not want to bail out investors. There is lots of money to be lost, there will be lots more blood on the floor before this is done," said James Hamilton, professor of economics at the University of California at San Diego.

"But if the 'Bernanke put' story becomes widespread and people get the idea that we're going back to five percent inflation, then, one, it's not true, and two, it will require a higher interest rate than otherwise required," he said.

Trader with the right expression becomes media stock market poster boy

FRANKFURT (AFP) - Dirk Mueller is a stockbroker, and thanks to recent market turbulence, also a star, not because of dubious trades or massive losses but because his face was just right for the job.

"Mister Dax," the poster boy of the Frankfurt stock index, cropped up last week on the front page of the International Herald Tribune, The Times of London, the conservative German Handelsblatt and the left of center French Liberation.

Filmed by television crews, used in a Warhol-like pop montage in the daily Sueddeutsche Zeitung, Mueller, 39, incarnated the volatile stock exchange throughout the week.

On Friday, however, the frowning face of a man identified as Jerome Kerviel, a former Societe Generale trader who allegedly lost billions for the French bank, finally pushed Mueller off the front page.

But for many, especially in Germany, the market is Mueller, his kind and particularly expressive face, salt and pepper beard, neatly combed hair and white shirts attracting camera lenses like honey attracts flies.

When the Dax plunged, Mueller had his head in his hands, or lifted his eyes towards heaven. When the index of leading German shares bounced higher, he perked up, and graced the front page of the Financial Times Deutschland.

With television crews he spoke simply and got straight to the point.

Mueller was amused by his sudden rise, especially when he was compared by an Austrian newspaper to Knut, a cute young polar bear who has visitors flocking to the Berlin zoo.

"For most people, the stock market is still abstract, a place packed with computers where very large sums of money are moved about, where strange things happen," he told AFP.

"I try to put things into simple words."

With the Societe Generale scandal putting his profession into disrepute, Mueller also finds words to defend the man that many, maybe even he, have already tried and convicted.

"He was young, took on a lot of responsibility and had a chance to earn lots of money with financial products that have nothing to do with serious investing," Mueller said.

"He is not the one to blame for what happened, but the financial system. Which sometimes resembles a casino and no longer has much in common with the real economy!"

If Mueller says so, one is inclined to believe it. He was bitten by the stock bug at an early age and has worked for the ICF brokerage for 10 years.

That put him in a prime position, just below the graphic chart that shows the day's trading and right in line with the cameras.

Good will and a readiness to be interviewed did the rest.

Like his colleagues, Mueller had a trying week, he said.

But he had also expected a sharp correction on the market for some time.

"A large share of the losses came from speculation by a single trader at Societe Generale. Without him, it might not have been as strong or as long.

"But at any rate there is a structural crisis in the United States," Mueller said.

Expounding on his philosophy of the market, he said: "It is first and foremost the place where a good idea meets the money to finance it."

But, he added, "today it has been invaded by financial products that the market itself does not understand."

On top of a good presentation, he has an endearing touch of nostalgia and his feet firmly on the ground. Just what journalists were looking for.

Investors hope Fed will deliver more rate relief

NEW YORK (AFP) - US stocks regained some stability in the past week with investors hoping the Federal Reserve will deliver fresh interest rate cuts in days, but analysts warned that markets would remain volatile.

Global markets have slumped and rebounded sharply in the past week amid fears that the world's biggest economy could slip into US recession.

A surprise Fed rate cut of historic proportions on Tuesday helped calm the markets, and analysts said the central bank is poised to cut rates again at a looming January 29-30 policy meeting.

In the week to Friday, the benchmark blue-chip Dow Jones Industrial Average climbed 0.8 percent to close at 12,207.17. The Dow is down around almost eight percent for the year to date, however.

The tech-rich Nasdaq composite lost 0.6 percent to 2,326.20 while the Standard & Poor's 500 index managed an increase of 0.4 percent to 1,330.61. Both indexes have also endured hefty losses sine the start of 2008.

"Market sentiment whipsawed between near panic and a more hopeful view. We still believe that investors should stay close to home going into the Fed meeting," analysts at Lehman Brothers wrote in a briefing note, referring to the past week's trading.

Analysts cautioned that the rollercoaster ride of recent weeks is probably not over just yet. News that a "rogue trader" at French banking giant Societe Generale lost around seven billion dollars stoked renewed unease at week's end.

Wall Street has struggled to make headway so far this year amid a worsening US housing slump and a related credit squeeze.

The large rate cut unleashed by the Fed on Tuesday appeared to soothe some investors, the central bank slashed its key federal funds rate by three quarters of a percentage point to 3.50 percent, but market participants believe fresh cuts are in store.

"We expect another 50 basis point cut to a 3.00 percent federal funds rate target on Wednesday," said Peter Kretzmer, a senior economist at Bank of America.

The Fed embarked on a rate-cutting mission in September as large banks began divulging hefty losses from ailing mortgage investments, triggering a credit crunch.

"Stresses in the financial markets remain high. The Fed will want to take further insurance against significant downside risks, especially in the next four months, as the fiscal stimulus is not expected to have an impact on growth until the end of the second quarter, at the earliest," said Patrick Newport, an economist at Global Insight.

The administration of US President George W. Bush and congressional lawmakers are rushing to approve an economic stimulus plan worth around 150 billion dollars which is likely to contain tax rebates and business incentives.

The pace of economic news will pick up significantly in the coming week.

The government is due to release its initial estimate for fourth-quarter economic growth with most economists predicting growth slowed to an annualized 1.2 percent compared with a robust 4.9 percent pace in the third quarter of last year.

Although some analysts are ringing recession alarm bells, it's not yet clear that the US economy will have to endure a recession and some analysts believe the economy will not pitch into a recession.

The coming week will also reveal fresh snapshots on existing home sales, consumer confidence, auto sales and the job market among other surveys.

Most analysts expect nonfarm payroll hiring to have rebounded to around 50,000 jobs in January after hiring slowed to just 18,000 positions during December.

Bond prices rose over the week as investors sought a safe haven from stocks.

The yield on the 10-year Treasury bond declined to 3.584 percent from 3.648 percent a week earlier, while that on the 30-year bond fell to 4.282 percent from 4.297 percent. Bond yields and prices move in opposite directions.

Wall Street's tumultuous week ends down

NEW YORK - Wall Street ended a tumultuous week with a sharp decline Friday, backtracking following two days of stunning gains as investors turned cautious and cashed in some of their winnings. The Dow Jones industrial average still managed to record its first weekly advance of 2008, even as it fell more than 170 points on the day.

The week, which started with a 465-point drop in the Dow soon after the market opened Tuesday, showed that the stock market is still fractious but may be going through healthy process of trying to establish a bottom following weeks of sharp declines.

Investors had an initial burst of enthusiasm Friday, sending each of the major indexes up more than 1 percent, after upbeat profit reports from big names like Microsoft Corp. and word of a possible buyout of a trouble bond insurer. But the advance proved short-lived and the eventual decline wasn't surprising given that investors putting down bets ahead of the weekend were coming off two days of big gains — including 400 points in the Dow.

"People may be looking to take some profits off the table in this volatile market. And there's a lot of activity that's coming up next week," Scott Fullman, director of investment strategy for I. A. Englander & Co., said during the day's back-and-forth trading.

President Bush is scheduled to deliver his State of the Union address Monday. Meanwhile, the Federal Reserve is expected to hold its first regularly scheduled meeting of the year on Tuesday and Wednesday, and then the Labor Department will weigh in on the state of the job market on Friday.

Despite the pullback, Wall Street's tone Friday stood in sharp contrast to the intensely dour mood that hung over the market when the week began. While U.S. markets were closed Monday for Martin Luther King Jr. Day, stocks in Asia and Europe plunged amid fears of a precipitous slowdown in the U.S. economy. To stave off a similar sell-off in the U.S. over recession fears, the Fed stepped in before the opening bell Tuesday with an emergency interest rate cut.

The central bank's move to lower rates by a big 0.75 percentage point to 3.5 percent helped shore up investors' confidence and led stocks to end the day well off their lows, although they still closed down. A day later, on Tuesday, Wall Street had an astonishing about-face, with the Dow swinging more than 630 points and turning a sharp sell-off into huge gains. Stocks then extended their advance Thursday.

The Fed is widely expected to cut rates again at next week's meeting; many analysts expect a half-point cut.

With Friday's decline, the market might well be following the pattern of past corrections, when huge gains were often followed by some retrenchment. Many market watchers consider such backing and filling a sign of health. However, with much economic uncertainty ahead, investors may need months before they can decide whether to take the market solidly higher.

The Dow fell 171.44, or 1.38 percent, to 12,207.17. The Dow had been up more than 100 points in the early going.

Broader stock indicators also fell. The Standard & Poor's 500 index fell 21.46, or 1.59 percent, to 1,330.61. The technology-heavy Nasdaq composite index fell 34.72, or 1.47 percent, to 2,326.20.

Despite the huge moves seen during the week, stocks finished not far beyond where they began, with the Dow adding 108 points, or 0.89 percent. The S&P 500 ended the week up 0.41 percent and the Nasdaq lost 0.59 percent.

Declining issues outpaced advancers by about 3 to 2 Friday on the New York Stock Exchange. Consolidated volume came to 4.78 billion shares, down from 5.48 billion shares traded Thursday.

Government bond prices jumped as stocks declined. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.56 percent from 3.71 percent late Thursday.

The dollar was mixed against other major currencies, while gold prices rose. Light, sweet crude oil advanced $1.30 to settle at $90.71 a barrel on the New York Mercantile Exchange.

Investors are looking for clues about whether the market is due to add to its gains after a brief hiatus or whether another pullback is in the offing. Despite the increases logged this week, stocks are still down sharply in the new year.

"The market is extremely sensitive to any news that's out there. A year ago, it brushed off a lot of stuff. Now, it's just the opposite, and we're seeing reactions nearly immediately when things come out," Fullman said.

Despite giving up the early gains, Wall Street still appeared pleased by reports from U.K. newspapers that billionaire Wilbur Ross was in talks to acquire bond insurer Ambac Financial Group Inc. Financial woes at many U.S. bond insurers have caused headaches in recent weeks for investors worldwide who have worried that tightness in the credit markets could worsen should one of the companies buckle under an inability to draw new business.

Ambac rose 21 cents to $11.54.

Word of Ross' interest follows comments this week by New York State regulators that indicated they would consider lending support to shore up the struggling bond insurance industry. While uncertainty remains over what role regulators might play, the comments initially helped reassure Wall Street and made room for stocks to rally.

Other corporate news appeared to offer investors mixed readings on the economy.

Microsoft finished down 31 cents at $32.94 after spending much of the session higher. The company raised its forecast for the rest of its fiscal year, which ends in June, and said its quarterly earnings jumped 79 percent. Microsoft cited the growing importance of its sales outside the U.S.

The Russell 2000 index of smaller companies fell 4.12, or 0.59 percent, to 688.60.

Overseas, Britain's FTSE 100 closed down 0.12 percent, Germany's DAX index finished off 0.06 percent, and France's CAC-40 fell 0.76 percent. Japan's Nikkei stock average jumped 4.10 percent after falling sharply earlier in the week. Hong Kong's Hang Seng index likewise surged 6.73 percent by the close.

___

The Dow Jones industrial average ended the week up 107.87, or 0.89 percent, at 12,207.17. The Standard & Poor's 500 index finished up 5.42, or 0.41 percent, at 1,330.61. The Nasdaq composite index ended down 13.82, or 0.59 percent, at 2,326.20.

The Russell 2000 index finished the week up 15.42, or 2.29 percent, at 688.60.

The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 U.S. based companies — ended Friday at 13,423.62, up 115.17 points, or 0.87 percent, for the week. A year ago, the index was at 14,358.67.

GSK leads way in Sipp plan offering

GlaxoSmithKline has become the first FTSE 100 company to offer employees a group option for self invested personal pensions (Sipps) - a move likely to be followed by many other big blue-chips.

The pharmaceutical giant's decision gives workers the chance to invest their pension pot in a wide variety of assets ranging from commercial property and overseas shares to more exotic classes such as listed hedge funds.

Following the pensions simplification changes in 2006, those already in employer-sponsored pension schemes can now also contribute to a Sipp.

The GSK scheme, offered through Legal & General, is designed to sit alongside existing pension plans but offer a tax advantage for share scheme members, who can transfer their maturing shares into a registered pension. L&G says 19,000 employees will be able to take advantage in 2008.

Scheme members will be given access to a wider variety of investment options and will be able to decide for themselves how actively they wish to be involved in the investment decisions for their retirement pot.

A poll by the National Association of Pension Funds released on Friday found the majority of workers still look to their employers for advice on how much to save and where to invest their pensions. Concerns have been raised that allowing employees access to non-insured assets through a Sipp could cause problems. The details of what advice would be given to staff and how this was funded was likely to differ between schemes, said John Moret at Suffolk Life.

Sipp providers such as Hargreaves Lansdown and Standard Life say group Sipps are the future for pension savings. Both are in discussions with FTSE 100 companies about providing schemes. The director of L&G has said that by 2012, half of all FTSE 100 companies could have a group Sipp option in place.

Toronto stocks little changed after choppy day

TORONTO (Reuters) - Early gains on the Toronto Stock Exchange fizzled out on Friday, leaving the composite index little changed at the end of the day as investors opted to lock in profits after a week of wild swings.

A retreat by banking shares helped offset advances in the materials sector and robust gains for Potash Corp of Saskatchewan.

Potash, the world's biggest fertilizer producer, climbed C$4.05, or 3.1 percent, to C$133.98 a day after it doubled its fourth-quarter profit and offered a positive forecast for the year. The materials sector, home to resource shares, rose 1.4 percent.

The financial sector, the largest on the index, was off 0.7 percent. Toronto-Dominion Bank fell C$1.02, or 1.5 percent, to C$66.28 after its U.S.-based takeover target, Commerce Bancorp Inc, said its fourth-quarter profit fell, while its credit losses quintupled. Commerce is being bought by TD for $8.5 billion in cash and stock.

Analysts said that, given the turbulence the market has seen, it wasn't surprising that investors were wary of making big bets at the end of the week.

"I think the essence here is that we seem to have found a little traction in the last couple days ... and hopefully we can build on that and find a way to work our way higher," said Rick Hutcheon, president and chief operating officer at RKH Investments.

"It shouldn't be much of a surprise to see the market take a step back after some of the gains we've (had this week)."

The S&P/TSX composite index closed down 12.44 points, or 0.1 percent, at 12,894.83 after racing up by more than 200 points in the morning. Six of the TSX's 10 main groups were lower.

The tech sector gave up 1.6 percent, with BlackBerry maker Research In Motion down C$3.40, or 3.6 percent, at C$91.91. The consumer staples sector shed 0.8 percent, as cheese producer Saputo Inc fell C$1.20, or 4.3 percent, to C$46.31.

The index has traversed a range of about 1,200 points this week, amid continuing uncertainty over the health of the U.S. economy and the impact a slowdown south of the border could have on global growth.

"In that environment, with that much certainty, with that many variables, nobody is doing anything with a great deal of conviction," said Peter Chandler, senior vice-president at Canaccord Capital in Waterloo, Ontario..

"So, you're seeing a lot of short-term moves as people perceive on a short-term basis that something's become overbought (or) something's become oversold and they'll take advantage of those short-term swings to jump in - but just jump in and jump out."

Investors also remain uncertain as to how effective a U.S. economic stimulus package of $150 billion in tax rebates and corporate incentives will be at staving off a recession, said Chandler.

The TSX index surged 500 points on Tuesday, pulling out of a five-day nosedive that culminated in a 600-point freefall on Monday. The composite managed to end the week 1.2 percent higher, after closing up in three of five sessions.

Next week, all eyes will be on the U.S. Federal Reserve, amid expectations of a further interest rate cut. An emergency 75 basis point cut from the Fed, and a smaller 25 basis point cut from the Bank of Canada, helped the Toronto benchmark index push higher earlier in the week.

Market volume on Friday was 478 million shares worth C$8.4 billion. Advancers outpaced decliners 916 to 674. The blue chip S&P/TSX 60 index closed down 2.00 points, or 0.26 percent, at 755.64.

In New York, stocks ended a two-day rally, as economic uncertainty also took hold south of the border. The Dow Jones industrial average ended down 171.44 points, or 1.38 percent, at 12,207.17 and the Nasdaq composite index fell 34.72 points, or 1.47 percent, to 2,326.20.

($1=$1.01 Canadian)

Wealthy College Endowments Beat the Stock Market

The nation's 76 richest colleges earned a market-beating 21.3 percent on their billions of dollars in tax-free endowment funds in the fiscal year ending last June 30, according to a report issued today by the National Association of College and University Business Officers.

That continued a remarkable run of at least a decade in which the wealthiest colleges have racked up outsize profits. But the large endowments' secret weapons--increasingly exotic alternative investments such as overseas companies, hedge funds, oil well leases, and timberlands--are drawing growing criticism and calls for regulation:

-- Even endowment insiders are worried that the generous rewards of the past are tied to big risks that may drain colleges' funds during today's tumultuous markets. Many are especially fearful for the financial stability of small colleges that have been trying to mimic the hedge-fund strategies of Harvard and Yale, without the Ivies' troops of investment gurus.

-- A growing number of students and others charge that colleges are pushing ethical and, possibly, even legal boundaries to earn such large profits. Some student groups say the colleges are reporting big returns in part because they've invested, for example, in highly profitable Chinese oil companies exploiting Sudanese oil fields. And in a lawsuit in Massachusetts, a real-estate developer charged that a fund backed by Harvard, Yale, Princeton, and other schools charged him an interest rate that added up to about 40 percent a year--and violated the state's usury law.

-- There are calls in Congress to regulate this $411 billion pool of college savings. Proposals want the often secretive funds to reveal more about how they are investing the money and spend more of the money they earn on students' education and financial aid.

These controversies do not appear to be reversing the flow of school funds to alternative investments, however. And no wonder. The NACUBO report showed that the funds holding more than $1 billion outearned the market. This was partly because they are bigger and thus got better deals offered to them. But the profits also result from the fact that the schools put about 40 percent of their money in alternative investments such as hedge funds, real estate, private equity, and natural resources.

Carlene Miller, who as treasurer of Pomona College oversees a $1.8 billion endowment, says that the Southern California school's diversification into alternative investments such as timberlands, gold, and commercial real estate has buffered the effects of recent market declines. In the year ending December 31, Pomona earned 17 percent, she noted. But the recent declines in the values of all types of foreign and domestic investments may signal an end to the years of double-digit growth for endowments, she predicts. "We wouldn't be surprised or unhappy" with future annual returns in the 7-to-10 percent range, she says.

Less wealthy schools, however, do not have such great returns of the past to protect them against future troubles. The 411 colleges with endowments below $100 million, for example, put only 5 to 25 percent of their funds in alternatives and reported subpar returns for the year ending June 30, according to the survey. On average, they earned 15.6 percent, less than the 20 percent the U.S. stock market returned at that time and less than the 17.8 percent a standard diversified portfolio of stocks and bonds would have earned. Smaller schools have underperformed the stock market and a standard diversified portfolio for the past five years.

No wonder then, that other surveys have found that endowment managers plan to keep moving out of plain-vanilla American stocks and bonds. That trend is worrying some of the most knowledgeable endowment insiders. John Griswold, executive director of the Commonfund, a nonprofit that manages many college endowments, says that the double-digit profits reported by the Ivies have lured lots of colleges into similar alternatives "later in the game" when there is less opportunity for growth--and more risk of a drop. In addition, he notes, while the Ivies have large staffs of researchers to keep eagle eyes on their exotic investments, endowments with less than $1 billion have, on average, just two employees, which may not be enough. Even Mohamed A. El-Erian, who led Harvard's endowment to a 23 percent investment return in fiscal 2007--in part, thanks to booming emerging and commodities markets--tells U.S. News he worries about those who are trying to copy his methods. In an E-mail sent before he left Harvard to take a co-CEO job at bond giant PIMCO, he says that smaller colleges face a "risk that they will go too far" afield with alternatives that they don't have the staff to manage.

Others worry that the pressure to keep reporting such record-breaking profits is pushing many endowment managers to take questionable risks. Fred Fahey, a Massachusetts-based real-estate developer, says he is a victim of universities' drive for higher profits. In a lawsuit filed in a Massachusetts state court, he alleges that a partnership funded by Harvard, Yale, Princeton, and other nonprofits charged him the equivalent of about 40 percent annual interest for a loan to fund a golf-course housing project. Fahey couldn't repay the loan at that high rate and ended up losing the project to the partnership. "I can see how they get those returns," he says.

The colleges have replied that since they were limited partners, they are not responsible for the partnership's actions. Endowment officials say they adhere to ethical standards for their investments and that a portion of the alternative investment profits has gone to good causes, such as increasing financial aid.

Whatever the merits of Fahey's case, many students are concerned that it reveals a larger, long-hidden problem with endowments. Morgan Simon, executive director of the Responsible Endowments Coalition, says that many colleges refuse to reveal how they invest their funds, making students worry that the profits may be coming from, for example, companies like PetroChina. That company, which has operations in Sudan, returned almost 80 percent in 2006 and an additional 30 percent in 2007. What's more, if colleges stake too much money on oil wells and oil companies, "they aren't dealing with global warming, and that, in the long term, is a bad investment," Simon says.

And bad endowment investments, after all, are bad for students, too, because colleges typically pull out about 4.6 percent of their endowments to spend on better dorms, better professors, and bigger scholarships.

UK company pension schemes in £15bn reversal

Falling stock markets and interest rates have wiped £15bn off the value of UK company pension schemes so far this year, calling into question their investment strategies and reviving concerns about underfunding.

By the close of markets on Friday, there was an aggregate £5bn shortfall in the plans of the FTSE 350 largest companies, compared with a £10bn surplus at the end of December, according to data from PwC.

At one point the size of the hit to the schemes was £25bn. The gyrations highlight the fact that pension finances remain firmly tied to the fortunes of stock markets, in spite of companies' efforts to diversify.

"What we have had over the past year was a lot of complacency," said John Ralfe, an independent pensions consultant. "The risk of offering a defined benefit pension scheme is considerable. You cannot invest your way out of the problem."

Earlier this week, analysts at Morgan Stanley slashed the earnings forecast for BT Group - whose pension scheme is roughly 60 per cent invested in equities - in part because of the deterioration in the finances of the scheme.

The National Association of Pension Funds said that the average scheme was now 55 per cent invested in equities, down from 60 per cent in 2006 and 61 per cent in 2005. Rentokil Initial has in the last year raised bonds to 80 per cent of its portfolio from 38 per cent. But Tesco and BAE Systems, meanwhile, each have just a 21 per cent allocation to bonds and Morrison Supermarkets, BG and International Power have bond weightings in their schemes of 17, 16 and 14 per cent respectively.

Analysts said the sharp market movements had highlighted the shortcomings in the way companies are required to disclose their pension liabilities, a method that many criticise for hiding the true cost of wiping out their retirement obligations altogether. Current accounting rules allow companies to reduce the size of their liabilities by taking account of future investment income that may never be earned.

In spite of the enormous volatility, The FTSE 100 closed on Friday at 5,869, down 7 points on the day and only 32 points on the week.

Wall St. sags after 2-day rally

NEW YORK (Reuters) - Stocks dropped on Friday as investors tempered their optimism that the economy could avoid recession, and locked in profits on banking and pharmaceutical shares after two days of sharp gains.

Bank shares, among this week's biggest gainers, declined as talk of more write-downs related to the sinking housing sector circulated through the market. The S&P financial index (.GSPF) dropped 2.5 percent.

Drug companies, which generally prosper in good times and bad, took a hit on Friday after helping lead the market higher earlier in the week.

Schering-Plough (SGP.N) and Merck & Co (MRK.N) set the pace, sinking 5.7 percent and 3.6 percent, respectively, after regulators said it would take more time to evaluate a key drug co-marketed by the companies.

Despite the day's declines, the Dow and S&P ended the week higher for the first time in five weeks. The Nasdaq was down for the fifth straight week.

"The economic backdrop hasn't changed, and there is still a high level of nervousness about any headlines that reinforce there is still reason to be concerned about the market's direction," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

The Dow Jones industrial average (.DJI) slid 171.44 points, or 1.38 percent, to end at 12,207.17. The Standard & Poor's 500 Index (.SPX) dropped 21.46 points, or 1.59 percent, to 1,330.61. The Nasdaq Composite Index (.IXIC) lost 34.72 points, or 1.47 percent, to 2,326.20.

Volatility was high, as it has been all week, with the VIX (.VIX), an index of market fear, ending up 5.1 percent.

For the week, the Dow gained 0.9 percent and the S&P 500 advanced 0.4 percent, while the Nasdaq slipped 0.6 percent.

An index of retail shares (.RLX), also big gainers this week, reversed course and ended down 2.8 percent on Friday.

The rumors involving the financial sector centered around Europe's ING (ING.AS) and Fortis (FOR.BR). Traders said there was talk of possible profit warnings. ING and Fortis said they never comment on market speculation.

In the pharmaceutical sector, Merck shares fell $1.77 to $47.79, while Schering-Plough shares dropped $1.15 to $19.02.

Stocks started the day higher, boosted by strong earnings from companies including diversified manufacturer and Dow component Honeywell International Inc (HON.N), which gained 3.7 percent to $58.25.

An agreement between congressional leaders and the White House on the outlines of an economic stimulus package on Thursday and a hefty interest-rate cut by the Federal Reserve on Tuesday helped fuel a sharp two-day rebound in U.S. stocks after a global equity rout earlier in the week.

Trading was active on the New York Stock Exchange, with about 1.88 billion shares changing hands, about in line with last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.63 billion shares traded, ahead of last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 9 to 7 on the NYSE and by 15 to 13 on Nasdaq.

Regulators may force banks into greater disclosure

Banks that produce complex and illiquid derivative products that have been at the heart of the credit squeeze might be forced to provide more information about their products on public stock exchanges.

Leaders of NYSE Euronext, the US-European exchange group, said yesterday that global regulators were considering telling banks they must disclose basic data about such contracts, many of which have fallen sharply after the US subprime housing crisis.

The move would be a first step towards increasing disclosure on one of the most illiquid and little-understood areas of modern financial markets. The rapid growth of the credit derivative markets, and the lack of information about many contracts, has exacerbated the loss of investor confidence in debt markets.

Duncan Niederauer, chief executive of NYSE Euronext, told a media briefing in Davos that the exchange had been approached by global regulators asking whether it and other stock exchanges could become clearing houses for information on over-the-counter contracts such as collateralised debt obligations and credit default swaps.

"There is a severe lack of transparency in some of these instruments. You cannot punch a screen and say: 'What is the quote for this exotic piece of paper?' I would think a natural first step might be to, say, turn us into a quoting and reporting facility," he said.

European securities regulators and the Securities and Exchange Commission in the US are reviewing the steps needed to prevent a recurrence of the credit crisis of the past few months. One of the biggest shocks was the rapid loss of confidence in complex instruments that were sold by banks to handfuls of investors.

Jean-François Théodore, NYSE Euronext deputy chief executive, said banks might initially be asked to provide some data about securities and disclose the price of transactions.

"They [regulators] want to oblige the person who creates the piece of paper to do a little more than absolutely nothing," he said.

Even if regulators tell banks that they must disclose data on OTC contracts, they may prefer to do so through their own trade reporting platforms rather than public stock exchanges, with which they compete for equity trades.

An investment banking consortium in Europe recently created a trade reporting platform in Europe for OTC equity trades.

The start of the great unwinding

This is hyperfinance. In the space of five frenetic days, stock markets have plunged and recovered; the US Federal Reserve has cut interest rates to 3.5 per cent; so-called "monoline" insurers, revealed as a small but vital valve in the financial machinery, have wobbled; and one Jérôme Kerviel has lost EU5bn for a venerable French bank.

If the US suffers a recession in 2008 or 2009 it will not be due to an industrial decline or an oil price shock. It will be a recession that began in the financial system. The response of the general public is confusion, tinged with horror, at how intangible finance can impinge on their daily lives. Even some bankers and traders must be struck by the chaos their business can unleash, and feel awe at just how powerful they have become.

A fundamental question therefore arises: is the financial system broken, corrupt and in need of reform; or is the system sound, yet subject to external pressures, notably heavy monetary stimulation, with which it could not easily cope? On that diagnosis rests the future of our highly liberalised financial markets.

Analysis One would begin with the actions of the Federal Reserve in 2001-02. In the wake of the internet bubble the Fed, under then chairman Alan Greenspan, cut interest rates to 1 per cent in order to stave off the threat of deflation. One result, arguably, was to create a new asset price bubble in the housing market, fuelled by the sudden affordability of mortgage loans to subprime borrowers who previously could not afford them.

At the same time, to protect against a repetition of 1997's Asian financial crisis, China and others pegged their currencies to the dollar at undervalued rates. The only way to keep their currencies down was to buy ever more US bonds. A supply of cheap credit met its demand.

The final part of this view would be a resulting explosion in the depth, liquidity and inventiveness of financial markets that went too far, too fast. The acronyms - CDS, ABS, CDO - swarmed faster than the markets' institutional capacity to price and manage them. Even the losses at Société Générale can be explained in this way. Twenty years ago a whole floor of traders would struggle to lose EU5bn even if they were trying. Today, thanks to the deep liquidity of futures markets and the anonymity of electronic trading, one man can do so in days.

Analysis One is benign for the financial markets: they are the acted upon, not the actors. Analysis Two would put markets' own failings at the centre of current events.

The core of this second analysis is the vastly increased complexity of hyperfinance. Once upon a time, banks lent depositors' money to their customers. Now, money market funds buy asset-backed securities from conduits filled by banks originating loans from brokers. The advantage of this system is that no one entity need be overexposed to any one borrower. The disadvantage is that the seller at each step has the ability and incentive to offload bad loans to the buyer.

Complexity also adds to the danger that any one part of the hyper-financial system can bring down the whole. Monoline insurers exemplify this kind of reef under the water. Their capitalisation is tiny - a few tens of billion dollars in equity - yet because they act as guarantors to hundreds of billion dollars in bonds, their failure would cause losses at almost every bank and insurance company in the world. Given the risks, and their small size, every effort should be made to co-ordinate a private rescue of these feckless but now vital institutions.

Another conflict of interest that has become pronounced is between banks' shareholders and their employees. This is the more cynical interpretation of Société Générale. If employees make profits they are paid bonuses; if they make losses, they are sacked. Their incentive, from graduate trainee up to chief executive, is to take more risk and so increase the potential profits. All too often, shareholders are not only blind to this conflict, but connive in it. Fund managers measured on their profits demand an increase in short-term returns - which are best achieved by taking on more risk.

If this second view is right then regulators have failed. They will have to change the rules to try to eliminate the conflicts that imperil the financial system. Before they do so, however, they need to consider exactly how far the woes of the markets are due to their own faults, and how far they are due to a stimulus administered from outside.

After the excesses of recent years, a great unwinding has begun. That is necessary and good. But if the ultimate result is markets that are even bigger and better, banks and their like need to do more to show they can be trusted, and that the public's gain from hyperfinance is at least as great as their own.

Oil prices shoot above 90 dollars

LONDON (AFP) - The price of oil jumped back above 90 dollars on Friday, helped by a recovery in global stock markets on the back of plans for a stimulus package to prevent the US economy falling into recession, traders said.

New York's main contract, light sweet crude for delivery in March, rose 1.54 dollars to 90.95 dollars per barrel.

Brent North Sea crude for March gained 1.76 dollars to 90.83 dollars.

"Crude futures were firmer, extending last night's rally," said Sucden analyst Andrey Kryuchenkov.

"Oil prices are continuing to follow gains on the broader market and especially on equity markets," he added.

Global stock markets continued their rebound Friday after a quick agreement by US leaders on a stimulus package for the troubled American economy.

Equities had spiked on Thursday after the US Federal Reserve earlier in the week slashed US borrowing costs by a huge 75 basis points to 3.50 percent, in an emergency and unprecedented move amid recession concerns.

"The commodities market will continue to look for signs of health in the US economy from equities and that will affect prices," said Tony Nunan from Mitsubishi Corp.

Despite recent gains, oil prices are still well off their early January historic highs of 100.09 dollars for New York's light sweet crude and 98.50 dollars for Brent.

"Oil will get support from stocks if they stay strong but may also get some support from China's GDP," said Phil Flynn at Alaron Trading.

China's economy grew 11.4 percent in 2007, reaching the highest level in 13 years and marking the fifth straight year of double-digit growth, the Chinese government said on Thursday. China demands vast amounts of oil to help power its economy, being second only to the United States as a consumer.

Nunan said the real focus remained on the United States economy.

"If the US economy goes down, the demand (for oil) from China will go down as well," he said.

Oil prices have slid from their record heights owing to fears that a US recession would severely dampen demand for crude.

Supply concerns meanwhile eased as the US Department of Energy announced Thursday that US crude inventories had risen by 2.3 million barrels in the week to January 18. Analysts had forecast a gain of 1.5 million barrels.

Elsewhere the oil market was looking ahead to next Friday's meeting of the OPEC oil-producing cartel in Vienna. Analysts expect the Organisation of Petroleum Exporting Countries to resist calls from oil consumers to increase output to help to bring down prices.

Analysts are even suggesting that OPEC may soon decide to cut output because its members are unhappy about earnings being reduced by oil price drops.

Investors urged not to panic but to buy on falls

Investors are being urged to look to the long term - and to buy on weakness rather than panic sell - after a week of high drama in stock markets.

A 5.5 per cent fall in the FTSE 100 index on Monday - the biggest drop for the UK since the 9/11 terrorist attacks - was followed by the US's emergency interest rate cut of 0.75 per cent.

Extreme share price swings continued, with the UK market on Thursday recording its best daily performance since March 2003.

Markets are likely to stay volatile and further big falls should not be ruled out. But for investors who can put away funds for the longer term, the recent slump is an opportunity to pick up relatively lowly-priced holdings, experts say.

The uncertainty should also favour regular investing arrangements, such as monthly pensions saving, which reduce timing risk, they add.

With the FTSE 100 having recorded its worst start to the year for a quarter of a century, few believe the turmoil is over just yet.

"It's a little bit early to say we're out of the woods yet," said Jeremy Batstone-Carr, head of private client research at Charles Stanley Stockbrokers. After the past month's price falls, there is no point in selling, he said. And with interest rate cuts potentially paving the way for recovery, "long-term investors can feel somewhat insouciant."

Industry sectors such as mining, oil and tobacco that previously appeared relatively resilient to the credit squeeze fall-out have joined in the New Year rout, and there is bargain-hunting across a range of UK blue chips.

"Private investors are seeing opportunities to buy good quality and value," said Stephen Barber, head of research at online broker Selftrade, adding that trading volumes were up 50 per cent.

Batstone-Carr said some banks, housebuilders and retailers were offering higher prospective dividend yields than their p/e ratios. However, this "nominal cheapness" of stocks including Lloyds TSB, Barclays, Barratt Developments and Taylor Wimpey did not make such shares automatic buys and in some cases dividends could be cut.

Disappointments in the upcoming company results season as well as further price volatility could provide more opportunities to buy.

Large-cap shares look safer going into a downturn, he said. Some have significant earnings in the US, and so stand to benefit from the pound potentially weakening against the dollar, while others offer exposure to higher-growth emerging markets.

Internationally, he said the US offers the best recovery potential, reflecting the extent of falls in economic activity as well as possible currency benefits for UK investors.

Japan, which has seen some of the biggest declines of any market in recent months, is also seen as offering value by some experts.

Mark Dampier, investment director of advisers Hargreaves Lansdown, said that for monthly investors, steep market falls early in the savings term actually help longer-term returns. The ideal market profile for regular investing is "U shaped", he said, allowing more of a holding to be bought at low levels, so giving greater profits when prices recover.

Halifax Share Dealing's ShareBuilder plan allows monthly investments of as little as £20 into any UK listed share. Commission is normally a flat £1.50, but is waived until June. Rival online broker Selftrade is launching a similar plan.

But for investors who are coming up to retirement and are still exposed to shares, recent price falls are bad news. For some, it may be worth delaying drawing a pension right now.

Bourses end flat as US equities lose gains

European equities were little changed on Friday, coming off intraday gains as Wall Street indices lost momentum.

Banking stocks fell as investors continued to mull over the implications of the fraudulent activities of Société Générale trader Jérôme Kerviel, who lost the French bank EU4.9bn.

The FTSE Eurofirst 300 closed flat at 1,329.8. Frankfurt's Xetra Dax was 0.1 per cent lower at 6,816.7, losing intraday gains of almost 2 per cent. London's FTSE 100 slipped 0.2 per cent to 5,869.0.

The CAC 40 in Paris was hit harder, with the biggest bruises inflicted on its banks. The French benchmark finished 0.8 per cent weaker at 4,878.1.

Société Générale ended the day with its reputation in tatters and its shares down 2.6 per cent at EU73.9. Traders said its stock was saved from more of a battering only because it was thought to be vulnerable to a takeover.

The rest of the French banking sector continued to suffer. BNP Paribas fell 3.6 per cent to EU65.50 and Natixis lost 2.5 per cent to EU11.40. Fortis was the biggest loser, off by 10.9 per cent at EU13.21.

There was better news for French retailers after Casino Guichard gained 6 per cent to EU74.96 after announcing like-for-like sales rose 6.5 per cent in the fourth-quarter.

Dutch rival Ahold beat forecasts with a 6.6 per cent increase in fourth-quarter sales, boosting its shares by 2 per cent to EU8.67.

News of success for Carlsberg and Heineken in their pursuit of UK brewer Scottish & Newcastle generated a mixed response. Their recommended offer was priced at 800p per share and valued S&N at £7.8bn. Carlsberg lost 4.1 per cent to DKr535 as traders considered the relative cost of the deal to each company, whilst Heineken slipped 0.6 per cent to EU40.03. Scottish & Newcastle rose 2.2 per cent to 785.7p.

FTSE loses gains as Wall St stalls

London equities closed with small losses on Friday, after a lacklustre morning on Wall Street took the shine off the market.

Housebuilders were drawn into the late sell-off on renewed concern about the prospects for UK home sales and the recovery in the financial services sector faltered.

The FTSE 100 ended the session 0.1 per cent weaker, a loss of 7 points.

The index had made headway for most of the day, after sentiment received a boost after the US House of Representatives and the Bush administration reached agreement on a $150bn fiscal stimulus package aimed at staving off a US recession.

But US markets failed to sustain their positive response to the developments. As European traders closed their positions for the day, the Dow Jones Industrial Average was stuck in neutral gear, flat at 12,379.3.

After the turbulence of the last few sessions - in part sparked by the fraudulent activities of Société Générale trader Jérôme Kerviel, who lost the French bank EU4.9bn the London banking sector could not end the week on a firmer footing.

Banking stocks failed to extend their recovery into a second successive session, as investors moved out of the sector after its strong showing the day before. Barclays fell 0.7 per cent to 500p and Alliance & Leicester lost 5.9 per cent to 736p. Royal Bank of Scotland was 2.3 per cent weaker at 391p.

The biggest drag on the underperforming FTSE 250, which finished ½ per cent lower at 9,738.5, came from the housebuilding sector. Analysis from Cazenove predicting gloomy mortgage approvals data, due on January 30 and discussed on FT Alphaville's Markets Live ,weighed on sentiment.

Berkeley Group fell 7.9 per cent to £10.00, Barratt Development lost 4.3 per cent to 460.9p and Bovis Homes was 3.6 per cent weaker at 634p.

Back on the FTSE 100, blue-chip housebuilders joined the trend. Persimmon was the biggest single faller on the blue-chip benchmark, down 6.9 per cent to 826p. Its peer Taylor Wimpey lost 5.5 per cent to 193.4p.

Friends Provident ticked 0.5 per cent higher at 164.9p on news it was moving closer to announcing a break-up and will unveil the results of a strategic review next week. Friends is also expected to sell or demerge its 53 per cent stake in F&C, the fund management group.

Miners remained a bright spot, benefiting from strong metals prices. Gold hit a new record high on Friday as expectations of further US rate cuts hit the dollar. Platinum was also pushed to record levels on strong demand for the metal, used in catalytic converters.

Antofagasta rose 3.1 per cent to 652p, Vedanta Resources climbed 7.2 per cent to £18.29 and Kazakhmys added 5.2 per cent to £11.64.

Carlsberg, the Danish brewer, and Heineken, its Dutch peer, announced an agreed joint cash bid for Scottish & Newcastle of 800p a share, valuing Britain's biggest brewer at £7.8bn. S&N shares gained 2.2per cent to 783p.

Wall Street extends rebound

US stocks were trading higher for the third consecutive session on Friday, repairing more of the damage inflicted in January, and were on course for their first weekly rise this year.

A bullish outlook from Microsoft and other upbeat earnings from Caterpillar (NYSE:CAT) and Honeywell (NYSE:HON) helped sentiment.

Investors were also digesting a proposed stimulus plan from Washington and expecting more rate cuts next week when the Federal Reserve meets.

Less than an hour after the opening bell, the S&P 500 was up 0.75 per cent at 1,362.20 and had traded between a high of 1,368.56 (up 1.2 per cent) and a low of 1,357.32 (up 0.4 per cent on the day). For the week, the S&P is up 2.8 per cent, clipping its overall loss this month to 7.2 per cent.

The Nasdaq Composite was up 0.9 per cent at 2,383.22, a gain of 1.8 per cent this week and trimming its loss this month to 10 per cent.

The mood in technology was boosted late on Thursday, when Microsoft beat fiscal second quarter earnings estimates and raised guidance. The stock was up 2.6 per cent at $34.12, after a rise of 4.1 per cent to $33.25 in regular trade on Thursday.

The Dow Jones Industrial Average was 0.5 per cent higher at 12,445.35. The Dow has risen 2.9 per cent this week, paring its loss since the start of the year to a fall of 6.2 per cent.

In earnings news, Caterpillar said fourth-quarter net income rose 11 per cent, buoyed by international growth. However, the heavy equipment maker said it expects "recessionary conditions" in parts of the US will persist. The stock was up 1.6 per cent at $66.32 as Caterpillar reiterated its 2008 outlook.

Meanwhile, Honeywell reported 18 per cent growth quarterly net income, boosted by its aerospace division. The industrial blue chip, however warned that the global economy would soften in 2008, and the stock was up 3.7 per cent at $58.30.

Shares in Harley-Davidson (NYSE:HDI) has slipped 0.2 per cent to $40.06, after its fourth quarter profit fell 26.3 per cent amid weakening US motorcycle sales.

Also making news was the debut of RiskMetrics Group. The provider of risk management and corporate governance products priced at $17.50 and was trading at $20.23, having risen as high as $23.10.

As stocks have extended their recovery this week, the mood in government bonds has also sharply reversed.

The yield on the two-year note was trading at 2.32 per cent early on Friday, up from 1.84 per cent on Wednesday.

"The recent rise in yields and flattening of the curve has merely partially undone the panic price action early in the week and does not change our fundamental view of the situation that economic slowing and mounting financial market losses will allow yields to test lower and the curve steeper," said TJ Marta, fixed income strategist at RBC Capital Markets.

Interest rate futures priced in a Federal funds rate of 3.12 per cent by the end of the month, after being below 2.90 per cent earlier this week.

The dollar was firmer against major currencies in New York, up 0.4 per cent at Y107.64 versus the Japanese yen and higher by 0.4 per cent at $1.47 against the euro.

In commodities, gold jumped on Friday to a new all-time high above $920 a troy ounce as mining companies in South Africa, the world's second largest producer, halted their operations because acute power shortages.

Wall Street's bets of further US interest rates cut, the weakness of the US dollar and rising oil prices above $90 a barrel also are contributing to the precious metal rally, traders in London said.

Spot bullion in London rose to a record of $921.30 an ounce, well above the peak of $914 an ounce set earlier this month.

US crude oil was trading up $1.45 cents at $90.66 a barrel.

Over in Europe, stocks were firmer after the open on Wall Street, but down from their earlier highs. The FTSE Eurofirst 300 index was 1.5 per cent higher. In London the FTSE 100 was trading up 0.8 per cent, the Cac-40 was higher by 1 per cent, while in Germany the Dax was up 2 per cent.

In overnight trading, Asian equity markets closed sharply higher, led by a 6.7 per cent rally in Hong Kong. Australia's bourse rallied 5 per cent and Japan's Nikkei 225 index jumped 4.1 per cent.

Auto stocks send bourses higher

European equities rose on Friday, with recently battered carmakers and technology stocks leading the advance after the US passed measures to stimulate the world's biggest economy.

The FTSE Eurofirst 300 was up 1.5 per cent to 1,349.88, Frankfurt's Xetra Dax added 1.9 per cent to 6,950.38, the CAC 40 in Paris added 1.3 per cent to 4,980.10 and London's FTSE 100 added 1.2 per cent to 5,944.0.

Volkswagen rose 4.1 per cent to EU159.40 after the head of its commercial vehicles division said he expected further progress in 2008 after posting double-digit growth in operating profit for 2007.

Porsche, meanwhile, rose 4.4 per cent to EU1,225 after it reported unit sales growth of 19 per cent in its first half, thanks to strong demand for its Cayenne model.

The news gave the rest of the car making sector a lift. Peugeot was 3.8 per cent hogher at EU49.89 and Renault rose 2.7 per cent to EU80. Tyre maker Michelin was 2.4 per cent firmer at EU66.45.

Casino Guichard, the French retailer, gained 5.1 per cent to EU74.31 after announcing like-for-like sales rose 6.5 per cent in the fourth-quarter.

Dutch rival Ahold beat forecasts with a 6.6 per cent increase in fourth-quarter sales, boosting its shares 2.7 per cent to EU8.73.

As investors continued to mull over the details of the EU4.9bn fraud at Société Générale, shares in the French bank rallied 1.6 per cent to EU77. However, BNP Paribas fell 1.6 per cent to EU66.84 and Natixis lost 0.7 per cent to EU11.59 as sentiment toward the wider sector was undermined.

News of success for Carlsberg and Heineken in their pursuit of UK brewer Scottish & Newcastle generated a mixed response. Their recommended offer was priced at 800p per share and valued S&N at £7.8bn. Carlsberg lost 3.9 per cent to DKr536 as traders considered the relative cost of the deal to each company, whilst Heineken rose 1 per cent to EU40.70. Scottish & Newcastle rose 2.4 per cent to 784½p.

Wall Street set to extend rebound

US stocks were expected to rise for the third consecutive session on Friday, repairing more of the damage inflicted in January.

A bullish outlook from Microsoft and other upbeat earnings from Caterpillar (NYSE:CAT) and Honeywell (NYSE:HON) helped sentiment.

Investors were also digesting a proposed stimulus plan from Washington and expecting more rate cuts next week when the Federal Reserve meets.

Less than an hour before the opening bell, S&P 500 futures were up 11.6 points at 1,363.80. The contract has traded between a high of 1,366.80 (up 1.1 per cent) and a low of 1,353.60 (up 0.1 per cent om the day).

The S&P 500 index closed up 1 per cent at 1,352.07 on Thursday, down 7.9 per cent in 2008.

Nasdaq futures were up 26 points at 1,863 in the pre-market on Friday.

The Nasdaq 100 rose 2.1 per cent on Thursday, clipping its loss this month to 11 per cent. The Composite rose 1.9 per cent to 2,360.92.

The mood in technology was boosted late on Thursday, when Microsoft beat fiscal second quarter earnings estimates and raised guidance. In pre-market trade, the stock was up 5.1 per cent after a rise of 4.1 per cent to $33.25 in regular trade on Thursday.

Futures for the Dow Jones Industrial Average were up 65 points at 12,430. The Dow gained 0.5 per cent to close at 12,378.61 on Thursday, paring its loss since the start of the year to a fall of 6.7 per cent.

In earnings news, Caterpillar said fourth-quarter net income rose 11 per cent, buoyed by international growth. However, the heavy equipment maker said it expects "recessionary conditions" in parts of the US will persist. The stock was up 2.9 per cent as Caterpillar reiterated its 2008 outlook.

Meanwhile, Honeywell reported 18 per cent growth quarterly net income, boosted by its aerospace division. The industrial blue chip, however warned that the global economy would soften in 2008.

As stocks have extended their recovery this week, the mood in government bonds has also sharply reversed.

The yield on the two-year note was trading at 2.32 per cent early on Friday, up from 1.84 per cent on Wednesday.

"The recent rise in yields and flattening of the curve has merely partially undone the panic price action early in the week and does not change our fundamental view of the situation that economic slowing and mounting financial market losses will allow yields to test lower and the curve steeper," said TJ Marta, fixed income strategist at RBC Capital Markets.

Interest rate futures priced in a Federal funds rate of 3.12 per cent by the end of the month, after being below 2.90 per cent earlier this week.

The dollar was firmer against major currencies early in New York, up 0.5 per cent at Y107.68 versus the Japanese yen and higher by 0.4 per cent at $1.47 against the euro.

In commodities, gold jumped on Friday to a new all-time high above $920 a troy ounce as mining companies in South Africa, the world's second largest producer, halted their operations because acute power shortages.

Wall Street's bets of further US interest rates cut, the weakness of the US dollar and rising oil prices above $90 a barrel also are contributing to the precious metal rally, traders in London said.

Spot bullion in London rose to a record of $921.30 an ounce, well above the peak of $914 an ounce set earlier this month.

US crude oil was trading up 87 cents at $90.28 a barrel.

Over in Europe, stocks were firm ahead of the open on Wall Street. The FTSE Eurofirst 300 index was 1.6 per cent higher. In London the FTSE 100 was trading up 1.1 per cent, the Cac-40 was also higher by 1.1 per cent, while in Germany the Dax was up 2.1 per cent.

In overnight trading, Asian equity markets closed sharply higher, led by a 6.7 per cent rally in Hong Kong. Australia's bourse rallied 5 per cent and Japan's Nikkei 225 index jumped 4.1 per cent.

Nikkei stock index jumps 4.1 percent

TOKYO - Japan's benchmark stock index jumped more than 4 percent Friday as traders bought exporter issues on a stronger dollar following reports of a U.S. economic stimulus plan.

The benchmark Nikkei rose 536.38 points, or 4.10 percent, to close at 13,629.16 on the Tokyo Stock Exchange.

Shares plunged earlier this week amid fears of a U.S. recession and a possible global slowdown. But a rally — now in its third day — began Wednesday after an emergency cut in interest rates by the U.S. Federal Reserve. The Nikkei, though, is still about 230 points down for the week.

Exporters were among the gainers Friday as the dollar rose against the yen. The dollar bought 107.46 yen Friday, up from 106.79 yen late Thursday in New York.

Toyota Motor added 6.3 percent to 5,570 yen. Honda Motor rose 6.5 percent to 3,270 yen. Sony Corp. rose 2.4 percent to 5,110.

A weaker yen makes goods exported from Japan more competitive abroad and increases the repatriated earnings of the exporting companies.

"The direct impact of the U.S. subprime loan problem on Japan has been limited," Hiroko Ota, the economy minister, told a parliamentary committee Friday. But she added weak share prices could dampen consumer appetite.

"We will closely monitor the course of the U.S. economy and consumption and their possible impact on Japan," she said.

Japan's broader Topix index, which includes all shares on the Tokyo exchange's first section, rose 60.32 points, or 4.70 percent, to 1,344.77 points Friday. It climbed 2.76 percent Thursday.

On Thursday, U.S. lawmakers passed an economic package including tax rebates of up to $1,200 to tax payers. Investors reacted positively to the news, pushing the dollar higher against the yen.

The Dow Jones industrials gained 108 points, or 0.9 percent, to 12,379 overnight.

European shares extend rally at open

LONDON (AFP) - Europe's main stock markets continued their recovery in early trading on Friday following steep losses earlier in the week caused by fears of a US recession.

London's FTSE 100 index of leading shares jumped 1.35 percent to reach 5,955.20 points shortly after the market opened. Frankfurt's DAX 30 climbed by 2.30 percent to 6,978.28 points and in Paris the CAC 40 rose rallied 1.39 percent to 4,983.53.

Europe's main stock markets had closed sharply higher on Thursday -- with gains of between 4.75 and 6.04 percent -- despite a stunning near five-billion-euro (7.15 billion dollar) fraud at Societe Generale stinging investor sentiment.

Japanese share prices closed up 4.10 percent on Friday, with a three-day rebound picking up steam after US political leaders reached a deal aimed at warding off recession, dealers said.

The White House and leaders in the House of Representatives, led by the rival Democratic party, reached a surprisingly quick deal Thursday aimed at shoring up the US economy wracked by housing sector turmoil.

Earlier this week the Federal Reserve had responded to severe market unrest by carrying out an emergency cut to US interest rates. The US central bank took the unprecedented step of slashing its benchmark rate by 75 basis points to leave borrowing costs at 3.50 percent.

The Fed is expected to cut rates again at its regular two-day meeting starting Tuesday. US President George W. Bush is also sure to address economic issues in his annual State of the Union address on Monday.

Gold, platinum hit record peaks

LONDON (AFP) - Gold and platinum prices struck fresh record highs on Friday as investors rushed once more to invest in commodities amid a recovery on global stock markets, analysts said.

On the London Bullion Market, gold surged to an historic 919.80 dollars per ounce.

Platinum reached an all-time peak of 1,634.50 dollars an ounce on the London Platinum and Palladium Market.

The precious metals beat their previous record highs, of more than 900 dollars for gold and just under 1,600 dollars for platinum, achieved earlier this month.

"Gold and platinum surged to fresh all-time highs during early trade on Friday on the back of buoyant investment demand and in the case of platinum, of supply disruptions in top producer South Africa," said Perrine Faye of thebulliondesk.com.

"Gold should continue to rise in the near term as investors, who exited positions in gold in recent days to cover losses in equity markets, look to re-enter" the market, she added.

Societe Generale uncovers massive fraud

PARIS - In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Societe Generale is accused of making unauthorized bets on stock markets that cost the bank nearly $7.2 billion but may not have netted him a cent.

The bank called the fraud "exceptional in its size and nature," and said it apparently went undetected for more than a year by its own multilayered security systems.

It would place the young trader, identified as 31-year-old Jerome Kerviel, atop the pantheon of rogue traders for a scheme from which bank executives said he apparently did not make a personal profit.

 

Societe Generale Chief Executive Daniel Bouton said Kerviel's motivations were "totally irrational" but gave no further clues to his motive.

The bank, France's second-largest, said Thursday it had learned of the fraud last weekend. And the timing could not have been worse: The bank was forced to sell Kerviel's contracts just as stock markets were plunging worldwide. It took the bank three days to unload them.

Societe Generale said the losses amounted to 4.9 billion euros, or about $7.18 billion — one of history's biggest banking frauds. It led to immediate calls for tighter regulation.

The fraud also raised comparisons to Nick Leeson, the trader who bankrupted British bank Barings in 1995 after he lost 860 million pounds — then worth $1.38 billion — on Asian futures markets, wiping out the bank's cash reserves.

Leeson himself told the British Broadcasting Corp. on Thursday that he was not shocked such a fraud had happened again, but "the thing that really shocked me was the size of it."

Bouton insisted Societe Generale is still financially sound. But the bank said it would need to raise about $8 billion in new capital, partly by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley.

The company said it expects to post a net profit of 600 million to 800 million euros ($874 million to $1.16 billion) for all of 2007 — even after the fraud and another 2.05 billion euros ($2.99 billion) lost in the subprime mortgage crisis.

Moody's Investors Service late Thursday downgraded Societe Generale's bank financial strength rating to "B-" from "B" and assigned a "negative" outlook to the rating, which means the rating could be cut later. Moody's also downgraded the bank's long-term debt and deposit ratings to "Aa2" from "Aa1" but kept those ratings' outlooks "stable."

The downgrade was primarily driven by the fraud losses but also follows Societe Generale's announcement of the credit-related write-downs, Moody's said.

Kerviel, employed by the bank since 2000, had worked his way up from a supporting role in an office that monitors trades to a job on the more glamorous futures desk, where he invested the bank's own money by hedging on European equity market indices — making bets on the future performance of the markets.

Described as a "brilliant" student by one of his former university teachers, he shocked executives with the complexity and scale of his trades. Bouton called the fraud "extraordinarily sophisticated."

Kerviel was involved in what the bank calls "plain vanilla," or the more basic forms of hedging, with limited authority. He took home a salary and bonus of less than 100,000 euros, or about $145,700 — relatively modest in the financial world.

The bank said he went far beyond his role — taking "massive fraudulent directional positions" in various futures contracts, betting at the start of this year that stock markets would rise.

He apparently escaped detection by using knowledge of the bank's control systems gleaned in his earlier monitoring job.

Most of his positions went unnoticed by colleagues and superiors as Kerviel covered his tracks with what the bank described as a "scheme of elaborate fictitious transactions."

He got caught when markets dropped, exposing him in contracts where he had bet on a rise.

Jean-Pierre Mustier, chief executive of the bank's corporate and investment banking, said he is convinced Kerviel acted alone. Three union officials representing Societe Generale employees said managers at the bank told them Kerviel was having "family problems."

Analysts were stunned that such a huge fraud could have occurred more than a decade after the one at Barings.

It shows banks "are still under the threat that an employee with a good understanding of the risk management processes can (get around) them to hide his losses," said Axel Pierron, a senior analyst with Celent.

Societe Generale said Kerviel had admitted to the fraud and had been dismissed along with some of his bosses. Bouton offered to resign, but the board rejected his offer.

The bank also filed a legal complaint Thursday accusing Kerviel of fraudulent falsification of banking records, use of such records and computer fraud.

Elisabeth Meyer, Kerviel's lawyer, said on French television network BFM that her client "is not fleeing" and is "available for judicial authorities," but did not specify where he was.

The lawyer said Kerviel had been suspended on Sunday, and was awaiting formal written notification of the suspension.

The Bank of France, the country's central bank, said it was immediately informed of the fraud and was investigating. Its governor, Christian Noyer, said the trader had an abnormal knowledge of Societe Generale's trading systems, and measures would have to be taken to prevent this happening again.

Traders are usually kept to tight spending limits, told "you may trade this much and no more," said Robert Kolb, a professor of finance at Loyola University Chicago. Those controls apparently failed in this case.

Kolb said he expected "a lot of soul searching" in the industry, and predicted that one upshot might be new measures to prevent people who have previously monitored traders later becoming traders themselves.

"It shows that we are in a very troubled period for banks, and I think that it's in such troubled periods that difficult things happen," said Gilles Glicenstein, president of asset management at France's largest bank, BNP Paribas.

Societe Generale's shares, which have lost nearly half their value over the past six months, were suspended in Paris on Thursday morning, then dropped 4.1 percent to close at 75.81 euros ($111.16) after they resumed trading.

Founded in 1864 after a decree signed by Napoleon III, Societe Generale employs 120,000 people in 77 countries.