China, India, Brazil and two other emerging economies said they need to work together to face challenges stemming from globalization, such as demands to cut emissions to protect the environment that may impede growth.

Dow soars nearly 158 in big relief rally

Stocks jump after three days of big losses. Chips, steel and lower crude oil power the rally. U.S. Steel jumps on takeover talk. Next week could be volatile. Pimco`s Bill Gross says a booming global economy, not inflation, will boost interest rates.

Stocks staged a powerful afternoon rally Friday, recovering more than a third of the losses the market saw from Tuesday through Thursday.

Call it a relief rally or a bounce, the rebound reignites the debate over whether the put-punching sell-off that staggered investors this week was the start of something big or a mere blip.

At the close, the Dow was up nearly 158 points, 1.2%, to 13,424.39. The Standard & Poor`s 500 Index rose nearly 17 points to 1,507.67, and the Nasdaq Composite Index added 32 points to 2,573.54.

Some recovery was to be expected as traders hoped to recover from this week`s declines, and stocks that did the worst in the selling rebounded sharply. In fact, over the past 10 years, a rally after three days of selling is fairly normal. (Five straight days of pure selling is rare.) The Dow`s gain was its 12th consecutive gain on a Friday, CNBC`s Bob Pisani noted.

But one can`t infer from Friday`s buying that the pullback from highs the Dow and the S&P 500 saw as late as Monday is done. It`s too early to say. Last year`s sell-off started on May 10 and didn`t fully hit a bottom until mid-July.

For the week, the Dow lost 1.8% but is still up 7.7% on the year. The S&P 500 fell nearly 1.9% but remains up 6.3% in 2007. The Nasdaq`s loss for the week was 1.5%; the tech-heavy index is up nearly 6.6% for the year.

The stock market`s volatility could continue next week, and then the market moves into summer, typically its weakest time of the year.

Next week has options expirations that can push stocks higher or lower as investors decide whether to leave options alone or exercise them.

Plus, the government will report wholesale price inflation on June 14 and issue its monthly Consumer Price Index report on June 15. It will also report on retail sales on Wednesday.
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BOE May Need to Move Faster on `Sticky` Inflation

The Bank of England, which left interest rates unchanged yesterday, may have to move faster to curb the U.K.`s worst bout of inflation in a decade.

Manufacturers` optimism about their pricing power rose to a 12-year high in May, retailers are confident they can push through their biggest price increases since 1998 and gains in consumer prices have exceeded the bank`s 2 percent target for the past year. That`s fanning concern that inflation is becoming entrenched in the economy even after four rate increases in the past year.

"Inflation is high and sticky," said Alan Clarke, an economist at BNP Paribas in London. "Underlying prices will continue to accelerate throughout this year. The bank is behind the curve."

The bank, led by Governor Mervyn King, faces the biggest test to its record on inflation since winning independence from the government 10 years ago. While it forecasts one more quarter-point rate increase from the current six-year high of 5.5 percent will be enough to push inflation back to target, investors disagree.

The implied rate on the March interest-rate futures contract has risen 29 basis points in the past month to 6.20 percent at 8:30 a.m. in London, suggesting traders expect the Bank of England will have to raise its rate to 6 percent to curb inflation.

The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade. A basis point is 0.01 percentage point.

Wealth Erosion

U.K. consumers are already feeling their wealth eroded by inflation.

"Prices just look like they`re going to keep going up," said Deepak Patel, 29, who sells gym memberships in the London borough of Islington. "You used to be able to get a decent lunch for three pounds and now it looks more like six or seven. It`s all getting so much more expensive."

The U.K.`s longest stretch of economic growth in 200 years and global inflationary pressures are pushing prices higher across the board. The cost of food rose the most in six years in April and inflation accelerated to 3.1 percent in March, the fastest in a decade, after an increase in energy prices.

"The longer the Bank of England takes to get this burst of inflation under control, the worse the news will get," said Tim Congdon, a professor at Cardiff Business School and a former adviser to the U.K. government on monetary policy. The bank`s benchmark rate may have to exceed 6 percent, he said.

Inflation Battle

Economists forecast the inflation held above target again in May, at 2.5 percent, according to the median of 15 estimates in a Bloomberg News survey. That report will be released by the statistics office on June 12.

The Bank of England is under pressure to clamp down on inflation in line with other central banks. The European Central Bank, the Reserve Bank of New Zealand and South Africa`s central bank raised interest rates this week and investors have abandoned bets the Federal Reserve will cut borrowing costs this year.

The 10-year U.S. Treasury note yield, the benchmark for global bond markets, rose the most in more than three years yesterday after the surprise New Zealand increase stoked concern other central banks will raise borrowing costs to respond to faster growth. Treasures extended losses in Asian trading, pushing the yield to as high as 5.17 percent.

Investors are concerned that inflation expectations will become difficult to dislodge once they take hold. The oil crises of the early 1970s fueled a jump in wages and inflation that U.K. policy makers spent the next two decades trying to quell.

Housing Slowdown?

Inflation expectations among consumers, measured in a quarterly survey published by the Bank of England in March, rose to an eight-year high.

King has so far rejected suggestions that inflation is slipping out of the bank`s control. The central bank`s forecasts show one more rate move will be enough to take inflation to 1.95 percent in the first quarter of 2008.

Some reports suggest that rate increases to date are starting to cool the economy. House prices, which have surged more than 10 percent in the past 12 months, rose at the slowest pace in a year in May, HBOS Plc, the nation`s biggest mortgage lender, said yesterday.

Wage inflation, which King has cited as a risk to the economy, held at 3.5 percent in the quarter through May, matching the reading for the three months through April, Incomes Data Services Ltd. said in a report today.

Price Perceptions

"What stops interest rates from having to go up forever is that housing-led spending will give way, and this is starting to happen now," said Michael Saunders, chief western European economist at Citigroup Inc.

The Bank of England is nevertheless struggling to shake households` perception that the cost of living is rising too much.

Almost 50 percent of retailers reported higher selling prices in May from a year earlier, a survey published by the Confederation of British Industry last month showed. An index of manufacturers` pricing intentions for the next three months rose to 25 in May, the highest since 1995, from 16 in April, the CBI said May 24.

"Prices have been going up," said Anna Cameron, 71, a retired social worker who lives in London. "The Bank of England has been doing a bad job of controlling inflation."

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U.S. Stocks Advance After Bond Yields Retreat, Oil Price Falls

The U.S. stock market rebounded, ending a three-day slump, after bond yields retreated from the highest in five years and oil prices fell.

U.S. Steel Corp., the largest U.S. steelmaker, jumped to a record on speculation the company is a takeover target. National Semiconductor Corp. rose the most since 2000 after the maker of chips for electronic devices posted profit that beat analysts` estimates.

The recovery pared the weekly loss for the Standard & Poor`s 500 Index to 1.9 percent and the decline in the Dow Jones Industrial Average to 1.8 percent. Both were the steepest since February. Ten-year Treasury bonds gained after the biggest slide in three years increased bets among options traders that the Federal Reserve may raise rates this year.

"Reality has come back to the market," said Andy Brooks, head equity trader at T. Rowe Price in Baltimore, which has $350 billion in assets. "The drop and then the bounce back are healthy over the long term. It`s three steps forward and two steps back."

The S&P 500 gained 16.95, or 1.1 percent, to 1507.67 for its best one-day gain since March 21. The Dow average increased 157.66, or 1.2 percent, to 13,424.39. The Nasdaq Composite Index added 32.16, or 1.3 percent, to 2573.54, bringing its loss for the week to 1.5 percent.

National Semiconductor jumped $3.79, or 15 percent, to $29.58. The company, whose chips manage power in electronic devices, reported fourth-quarter net income fell less than analysts estimated and said sales rose from the preceding three months, a sign that an industry glut may be abating.

Technology Shares Rally

Technology shares climbed 1.5 percent as a group and contributed the most to the S&P 500`s advance.

Texas Instruments Inc., the world`s largest maker of mobile- phone chips, rose $1.58 to $35.97. Intel Corp., the world`s biggest chipmaker, added 52 cents to $21.83.

U.S. Steel jumped $9.25, or 8 percent, to $125.05 for the second-best gain in the S&P 500. ThyssenKrupp AG is interested in buying either U.S. Steel or Russia`s OAO Severstal to expand, Interfax said, citing an unidentified banker. U.S. Steel is the more likely target, the news agency said.

Spokesmen from ThyssenKrupp, U.S. Steel and Severstal declined to comment.

Nucor Corp., the second-largest U.S. steel producer, added $1.81 to $66.61.

Crude oil slid 3.2 percent to $64.76 a barrel in New York after cyclone Gonu weakened. The storm is dissipating after sweeping across coastal Oman and Iran. Oman`s ports opened today for partial operations, Gulf Agency Co. reported.

Weekly Declines

Shares plunged yesterday after 10-year bond yields breached 5 percent for the first time since August, fueling speculation the Federal Reserve will raise interest rates. The yield today declined almost 2 basis points, or 0.02 percent, after earlier rising to as high as 5.25 percent, its highest level since 2002.

The odds of an increase in the Fed`s benchmark interest rate to 5.5 percent rose to as high as 40 percent this week, options on the fed funds rate showed, up from zero a month earlier.

Citigroup Inc., the biggest U.S. bank, and Goldman Sachs Group Inc., the world`s largest securities firm by market value, today led a rally among companies that are the most dependent on debt financing. Citigroup climbed 81 cents to $53.33. Goldman added $5.01 to $225.06.

Citigroup, Goldman

Citigroup`s debt equaled 88 percent of total capital at the end of last year. The ratio is more than twice the 34 percent average for members of the S&P 500, according to data compiled by Bloomberg. Goldman`s debt amounted to 93 percent of total capital. Lower bond yields reduce companies` borrowing costs.

A gauge of homebuilders in S&P indexes rallied 2.3 percent as lower interest rates may boost demand for mortgage loans.

Lennar Corp., the largest U.S. builder by sales, jumped 74 cents to $43.16. D.R. Horton Inc., the second biggest, climbed 43 cents to $21.96.

In economic reports today, the U.S. trade deficit fell 6.2 percent to $58.5 billion in April, the steepest drop in six months, the Commerce Department said. The gap declined even as the shortfall with China widened.

Exports rose 0.2 percent to a record $129.5 billion as sales of foods, plastics and consumer goods such as jewelry improved. Imports slipped 1.9 percent.

Export Share

Non-U.S. sales accounted for 48.6 percent of total revenue for S&P 500 companies last year, based on estimates compiled by S&P.

"A strong global economy is clearly good for earnings," said George Hoguet, who helps manage more than $6 billion as global investment strategist at State Street Global Advisors in Boston. "Stocks continue to be attractive relative to bonds despite the increase in yields."

McDonald`s Corp. gained $1.20 to $51.41 after the world`s largest restaurant chain said sales at U.S. stores open at least 13 months increased 7.4 percent in May, helped by a "Shrek the Third"movie promotion and chicken salads and sandwiches. The growth topped an estimate of 5 percent from RBC Capital Markets Corp. analyst Larry Miller.

Tyco International Ltd. climbed $1.17 to $33.80. The manufacturer said it will spin off its health-care and electronics units to shareholders at the end of the month after winning approval from its board and the U.S. Securities and Exchange Commission.

Utilities Rebound

Utilities in the S&P 500 rebounded 1 percent as a group, snapping a five-day slide that was the steepest since February 2003. The stocks declined this week as rising bond yields made their dividends less attractive. Collectively, the shares have a dividend yield of 3.1 percent, the highest among 10 industries.

Exelon Corp., owner of the largest U.S. fleet of nuclear power plants, added 74 cents to $70.66. Southern Co., the biggest electricity generator, gained 29 cents to $34.60.

Nike Inc. lost $1.14 to $52.96. The world`s biggest athletic-shoe maker was downgraded to "neutral" from "buy" at Banc of America Securities, which cited a slowdown in the U.S. athletic shoe market.

The Russell 2000 Index, a benchmark for companies with a median market value of $664 million, climbed 1.2 percent to 835.31. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rallied 1.1 percent to 15,233.07. Based on its advance, the value of stocks increased by $203.7 billion.
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DGCX launches Indian Rupee Futures

DGCX creates history by becoming the first exchange in the world to launch Indian Rupee Futures - contracts worth 1.29 bn. Rupees traded !

DGCX added another chapter to the history of financial markets with its launch of Indian Rupee futures contract on Thursday, thus becoming the first and the only futures exchange in the world to trade the Indian currency on an organised exchange platform. Market participants responded enthusiastically trading contracts worth 1.29 billion rupees on the very first day of the launch. Precious metal prices ended sharply lower as higher Treasury yields helped spark a rally in the US dollar, depressing the metal`s investment appeal. The August ’07 delivery gold futures contract on DGCX pared a huge loss of $10.50/troy oz or 1.56% while silver future prices, followed suit, witnessing a decline of 19 cents/troy oz or 1.38%. In the currency markets, the greenback edged higher against the Euro and the Sterling pound, boosted by higher Treasury yields and reports that North Korea might have fired several short-range missiles off its west coast. Treasuries saw a sharp sell off on Thursday, thrusting the benchmark yield above 5% for the first time since August, on the heels of a global sell-off of government bonds triggered by foreign rate hikes.
Thursday’s session began on a subdued note as the DGCX August 2007 delivery gold futures contract opened at its previous closing level of $675.20/troy oz. Prices, then, rose to an intraday high of $677.90 before declining to a session low of $663.30. The contract finally concluded the day at $664.70, churning in a loss of $10.50/troy oz or 1.56%. Open positions in the August futures edged higher by 650 contracts and ended the session at 2861. DGCX Gold futures for October delivery pared a loss of $9.30/troy oz or 1.37% and settled for the day at $671.50. Mirroring the slump in the yellow metal, the DGCX July 2007 silver futures contract ended the day at $13.60/troy oz, logging in a loss of 19 cents/troy oz or 1.38%.
In the Forex market segment, the DGCX Euro contract for June started trading for the session at $1.3515/Euro, which incidentally remained its highest traded level for the day. The contract declined to an intraday low of $1.3429 before finally ending the session at $1.3433/Euro, registering a loss of 0.51%. June ’07 dated DGCX GBP contract opened at $1.9933/GBP and jumped to an intraday high of $1.9940 before plummeting to a session low of $1.9750. Prices finally settled at $1.9770/GBP, logging in a huge loss of 0.78%. DGCX Yen futures maturing in June edged higher by 0.01% and settled for the day at a rate of $0.8276 for 100 Yen.
In the options market, DGO July 2007 – 670, 680, 690 & 710 strike call along with 660 & 670 strike put options witnessed active trading.
DGCX Fujairah Fuel Oil contract for July 2007 delivery shed 50 cents from its previous close and closed for the day at of $345.90/metric ton.
In the US energy markets, crude oil rose to its highest level in more than a month, due to reports of a delay in oil tanker loadings at Oman, as well as a possible slowdown at US refineries. July crude oil futures closed up 97 cents at $66.93 a barrel.

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Morgan Stanley puts triple sell on Europe

Sell signals are flashing in Europe following Wednesday’s interest rate hike by the European Central Bank (ECB). Top brokerage house Morgan Stanley has advised clients to slash exposures to European stocks after three key warning indicators began flashing a “Full House” sell signal for the first time since the dotcom bust.

Europe’s Dow Jones Stoxx 600 Index fell for a fourth day, the longest rout since the first week of March. The measure slid the most in two months on Wednesday on speculation the ECB will keep raising borrowing costs, says a Bloomberg report. But while investors may be packing their bags from Europe, not many of them are likely to land on the Konkan coast anytime soon. This much was evident from the second consecutive day of decline in the Indian market, with the Sensex losing 69 points to end at 14,186. Foreign institutional investors (FIIs) continued to be net sellers in Indian equities, selling Rs 287 crore on Thursday, according to provisional figures.

The BSE benchmark saw a high degree of volatility, swinging 200 points before settling with what appeared to be a marginal loss. Weakness was also attributed to the BoE’s meeting today on interest rates. Selling pressure was seen in auto, banking and FMCG stocks while shares from the IT sector saw buying as the rupee stabilised against the dollar.

“Money may move out of European equities into emerging markets. But this need not necessarily come into Indian equities,”said R Rajagopal, head, equities, DBS Chola Asset Management.

“It may go to Brazil or Argentina as they understand these markets better. I don’t read too much into it,” Rajagopal said about the likely impact of investors pulling out of Europe.

Teun Draaisma, chief European equities strategist for Morgan Stanley, was quoted as saying the triple sell warning was a “very powerful” signal that had been triggered just five times since 1980. “Interest rates are rising and reaching critical levels. This matters more than growth for equities, so we think the mid-cycle rally is over. Our model is forecasting a 14% correction over the next six months, but it could be more serious,” he said. Draaisma said the MSCI index of 600 European and British equities had dropped by an average of 15.2% over six months after each “Full House” signal, with falls of 25.2% after September, 1987, and /R 26.2% after April, 2002. “We prefer to be on the right side of these odds,” he said.

In India, strong hands stayed away from the markets, especially since there is some uncertainty about what the Reserve Bank will do on rates. While some bankers have been predicting a cash reserve ratio hike, others say that won’t happen now as June is anyway a month of tight liquidity due to advance tax outflows.

“The market volatility was more due to the absence of buyers rather than any selling pressure. Buyers simply stayed away from the market, refusing to take positions due to uncertainties on the interest rate front,” said Ajay Pandey, equity analyst at Mehta Equities.

There are concerns that investors may pull out funds from the secondary market to invest in IPOs, which are scheduled to hit the market in the near term. Realty major DLF is mopping up between Rs 8,750 crore and Rs 9,625 crore at the proposed price band of Rs 500-550 per share. DLF’s IPO opens for subscription on June 11, 2007, and ends on June 14, 2007. ICICI Bank is also planning a jumbo IPO to raise around Rs 5,000 crore from the domestic market.

The market is now waiting for Friday’s inflation numbers and further cues from the central bank to decide on its future course of action. “People may be wary about taking positions in a volatile market. But I expect a sideways to flat opening on Friday. Once the inflation numbers are out, and if we don’t see any nasty surprises from the RBI, we should consolidate around 4,100 on the Nifty or 14,050-14,100 on the Sensex,” says Gaurang Shah, chief manager, client servicing, Geojit Securities.

Vijay Bhambwani, CEO of BSPLIndia.com, said not much should be read into the follow-on market fall on Thursday. He said 4,150 still remained a critical support level for the Nifty and any upward move will come only if the market crosses 4,300. It is likely to take one or two weeks, as corrections of this magnitude take time to pullback.”