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Commodities Fall as China Fights Inflation; U.S. Stocks Rise

U.S. Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Hannelore Foerster/Bloomberg

Commodities sank after China told banks to set aside more reserves in an effort to curb inflation, while the euro gained amid prospects for a financial rescue for Ireland. U.S. stocks advanced after Nike Inc. increased its dividend and earnings at technology companies topped estimates.

The S&P GSCI Index of commodities tumbled 0.9 percent at 4 p.m. in New York to extend a weekly slump to 2.8 percent, its biggest slide since August. The euro climbed against 14 of 16 major peers. The Standard & Poor’s 500 Index rose 0.3 percent to 1,199.73, erasing an earlier 0.6 percent slide. Irish bonds reversed a rally as Allied Irish Banks Plc said its reliance on funding from central banks tripled, underscoring the nation’s need for a financial rescue.

Earlier declines in U.S. stocks followed a drop in European equities after the People’s Bank of China announced plans to increase banks’ reserve ratio requirements by 50 basis points. Optimism that an international bailout for Ireland will limit contagion across Europe’s larger debt markets helped drive the euro higher against the dollar for three straight days.

“It’s the fifth time China is doing this tightening and every time it happens, the world freaks out,” said Kevin Rendino, a money manager at New York-based BlackRock Inc., which oversees $3.45 trillion. “People think it’s going to be the beginning of the end.”

The Dollar Index, which measures the currency against six major trading partners, slipped 0.3 percent to 78.413.

‘Robust Growth’

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Federal Reserve Chairman Ben S. Bernanke said in a speech in Frankfurt today. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The yield on 30-year U.S. bonds fell five basis points to 4.24 percent after the Fed bought $2.2 billion of government debt maturing from August 2028 to November 2040, the first purchases of longer-dated Treasuries in the round of its so-called quantitative-easing plan that began Nov. 12.

The 10-year U.S. Treasury yield decreased three basis points to 2.87 percent. The yield on the two-year Treasury note rose less than one basis point to 0.51 percent.

Commodities Slide

Sugar, cotton and corn slumped at least 3.8 percent to lead the retreat in commodities. Crude oil lost 0.4 percent to $81.51 a barrel in New York and slid 4 percent since November 12, capping its biggest weekly decline since August. Cotton futures tumbled the exchange limit 6 cents to $1.2315 a pound in New York, extending the biggest weekly loss in 20 months, amid India’s plan to boost output and China’s steps to curb inflation.

The S&P 500 added to yesterday’s 1.5 percent rally, the biggest gain in two weeks, and closed less than 0.1 percent higher for the week. Nike surged 4.1 percent after boosting its quarterly payout to 31 cents from 27 cents. Inc., the biggest seller of online customer-relationship software, surged 18 percent for the best gain in the index after its third-quarter earnings and fourth-quarter sales forecast topped analysts’ estimates.

Dell Inc., the world’s third-largest supplier of personal computers, rose 1.7 percent after reporting earnings that beat analysts’ estimates. General Motors Co., which went bankrupt last year, rose 0.2 percent in its second day of trading after raising more than $20 billion in an initial public offering.

About three stocks fell for every two that rose on the Stoxx 600. Banco Santander SA lost 1.8 percent and Rio Tinto Group slid 1.2 percent. Zodiac Aerospace SA slumped 6.1 percent after Safran SA said it has decided not to bid for the company.

‘Tackling Its Problem’

China’s Shanghai Composite Index advanced 0.8 percent before the announcement about bank reserve ratios. The gauge retreated 3.2 percent this week as concern deepened that the government will tighten monetary policy to curb the fastest inflation in two years. China’s central bank will raise its benchmark lending rate by the end of December, according to analysts at nine banks surveyed this week by Bloomberg News.

“There’s heightened awareness of inflationary pressures within emerging markets,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, which oversees about $50.6 billion. “The worry is that any kind of tightening may have unintended consequences. Any piece of data in the mosaic of inflation in emerging markets is going to be scrutinized heavily. It’s still a risk-on, risk-off story.”

The euro appreciated against all of its most-traded counterparts except the Swiss franc and Danish krone, gaining at last 0.6 percent versus the Australian dollar, Brazilian real and British pound.

Irish Debt

The extra yield that investors demand to hold Irish 10-year debt instead of benchmark German bunds was little changed at 541 basis points, down from an all-time high of 652 basis points last week. The gap between Portuguese bonds and bunds slipped one basis point to 404 basis points, after soaring to a euro-era record of 484 basis points on Nov. 11.

Allied Irish Banks, Ireland’s second-biggest bank, said it has tripled its reliance on funding from central banks since the end of June. The bank’s dependence on “monetary authorities” rose to 27 billion euros ($37 billion) from a “high single-digit” billion-euro amount on June 30, Alan Kelly, general manager of group corporate services at Allied Irish, said in a telephone interview today. The bank also said customer deposits shrank 17 percent this year amid the debt crisis.

Irish Bailout Talks

Irish lenders have become more reliant on European Central Bank funding after being frozen out of wholesale markets and Prime Minister Brian Cowen is edging toward accepting an international rescue package that may threaten the country’s low-tax policies and put voters on the hook to repay loans the central bank says may be worth “tens of billions” of euros.

Cowen told reporters today that talks with the European Union and the International Monetary Fund are “going well” and his government is seeking the “best possible” package.

“There is no doubt that a deal on a financial aid package for Ireland will be reached, possibly at some stage over the next week, and this has helped turn euro sentiment more favorable,” Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report today.

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