Wednesday, 19 November 2008

U.S. prices drop at record pace, China wary of unrest

LONDON (Reuters) - China has told police to ensure social stability as its economy slows, U.S. inflation tumbled at a record pace and markets fretted on Wednesday about whether America's stricken car industry would be rescued.

The 1.0 percent monthly fall in U.S. consumer prices reflected a sharply weakening economy and raised the prospect of deflation if consumer demands fails to pick up. Construction starts on new U.S. homes also hit a record low in October.

"It's a reflection of very weak demand," said Carl Lantz, interest rate strategist at Credit Suisse in New York. "The fourth quarter is probably going to be the most intense period of economic weakness."

European Central Bank President Jean-Claude Trichet said the financial crisis -- sparked by a U.S. housing crash and huge bank losses that followed -- marked the first time since World War Two that the finances of the industrial world have been at stake.

He said it could be solved by central banks and governments in concert, with a key role for the private sector, but told Sky Television late on Tuesday: "It will take time."

The Bank of England seemed to share his view.

Minutes of its last meeting, when it cut interest rates by a shock 1.5 percentage points, showed it considered an even bigger reduction to tackle a recession that has now been confirmed.

Rioting involving thousands of people exploded on Monday in China's Gansu province, the latest bout of popular unrest.

The China Daily quoted Public Security Minister Meng Jianzhu as saying police "should be fully aware of the challenge brought by the global financial crisis and try their best to maintain social stability".

Although the Gansu violence was triggered by a plan to resettle residents in an earthquake-torn region, it follows strikes by taxi drivers and labour protests in regions long-reliant on Western demand for Chinese exports.

IMA Asia, a business intelligence provider, said it had raised its political risk rating for China from low to medium.

"We are concerned about the potential for unrest within a massive pool of migrant workers who face lay-offs in the construction and export manufacturing sectors," it said.


Investors believe the global economy is now firmly in recession and is not going to come out of it for some time, a poll by Merrill Lynch showed on Wednesday.

As a result, fund managers are embracing defensive assets such as utility stocks, government bonds and cash.

Corporate damage was widespread.

BASF, the world's largest chemicals maker by revenue, cut its 2008 profit outlook and announced cutbacks in production, citing a "massive" decline in demand.

Japan's third-largest bank, Sumitomo Mitsui Financial Group, followed the lead of its larger peers by planning to raise at least $2.9 billion via preferred securities to beef up a capital base rocked by rising bad loans.

Once thought to be relatively unharmed by the global credit crisis, Japanese banks are now scrambling to raise cash as recession and plunging domestic stocks sap their capital.

OPEC's president said major oil producers were also worried by economic slowdown and an oil price that has more than halved.

"All members ... are very concerned about the economic situation which has worsened in the United States and Europe who have entered into a recession, followed by Japan," Chakib Khelil was quoted as saying in El Khabar newspaper.

Authorities worldwide have recapitalised banks, thrown funds into frozen money markets and acted to revive their economies, at a cost approaching $5 trillion -- a process that continues.

Russia's central bank said it had sold $57.5 billion of its reserves over the last two months to defend the rouble and contributed $14 billion to a bank bailout scheme.

The four Nordic countries agreed a $2.5 billion loan for Iceland, where three top banks failed.

Central banks have also weighed in with a slew of rate cuts.

The Federal Reserve is widely expected to cut rates to 0.5 percent in December, the lowest level since the 1950s. After the Bank of England minutes, analysts forecast more in the UK too.

"Monetary policy boring? Clearly not any more," said Marc Ostwald, bond analyst at Monument Securities in London.

"The fact that they considered 200 basis points at this month's meeting will surely trigger a shift in market expectations for December to a 100 basis points cut."


Shares slid as a plea from U.S. automakers for a bailout met political opposition. U.S. stock futures pointed to a weak start on Wall Street.

The "Big Three" U.S. carmakers warned the Senate Banking Committee on Tuesday of a "catastrophic collapse" in the U.S. economy if no help was forthcoming.

Auto firms in Japan and Europe are also under pressure.

European carmakers may need financial aid from the bloc and its governments, senior EU officials said on Wednesday, singling out GM unit Opel as a possible recipient.

Toyota said it would stop production at U.S. and Canadian factories for two extra days next month and Nissan warned of more tough times ahead.

"We have to recognise 2009 will be one of the most challenging years for our industry and the whole economy in the last 50 years"" CEO Carlos Ghosn told the Wall Street Journal.

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