independent investment research, today reported estimated U.S. mutual fund and exchange-traded

CHICAGO, Jan. 14 -- Morningstar, Inc. , a leading provider of independent investment research, today reported estimated U.S. mutual fund and exchange-traded fund asset flows through December 2009. Net inflows for mutual funds amounted to $377.4 billion in 2009, with $356.6 billion of that total going to bond funds. The U.S. ETF industry closed out 2009 with $784.9 billion in assets under management, up from $744.7 billion at the end of November, and $533.4 billion at the end of 2008.

Additional highlights from the report on mutual funds:

* As bond funds raked in the cash, U.S. stock funds bled assets in 2009. They saw an additional $8.1 billion in outflows in December, taking the full-year total outflow to $25.7 billion.
* Although international-stock funds fared better than domestic-stock funds in 2009, taking in $25.5 billion in flows, they have not come close to making up for the $70.4 billion in outflows they experienced in 2008.
* In spite of the broad trend toward inflows, a handful of fund families didn't join the party. American Funds, Legg Mason/Western Asset, Putnam, Oppenheimer, Van Kampen, and Morgan Stanley were among the fund families that experienced net outflows in 2009.
* Investors largely preferred active strategies in 2009. Active funds gathered $304.2 billion in assets for the year, while passive long-term funds took in $69.7 billion. However, investors pulled $52.9 billion out of active U.S. stock funds, while passive domestic-equity funds saw inflows of $26.2 billion.


Additional highlights from the report on ETFs:

* Despite being the only broad asset class to show net outflows in 2009, U.S. stock ETFs closed out the year with $19.6 billion in net inflows in December.
* Taxable-bond ETFs were the most popular asset class of 2009, bolstered by continued interest in Treasury Inflation-Protected Securities and short-duration ETFs, which were once again the category's top asset gatherers in December.
* Following their explosive performance over the past year, investors continued to pile into emerging markets in December.
* SPDR Gold Shares, which saw $11.2 billion in total net inflows in 2009 and currently has more than $40.2 billion in assets under management, was easily the most popular ETF in 2009 in terms of total asset flows.


To view the complete report, please visit http://www.global.morningstar.com/decflows09.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 325,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 20 countries and minority ownership positions in companies based in two other countries.

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Gensler: CFTC Will Examine Trading Limits On Metals In March

WASHINGTON -(Dow Jones)- Speculative energy traders are not the only ones who may face new trading limits by the U.S. Commodity Futures Trading Commission.

On Thursday as the CFTC unveiled the proposed new limits for energy products, its chairman, Gary Gensler, said the agency intends to move on to looking at metals next.

"The commission is interested in hearing from the public as to issues related to the trading of futures and options in the precious metals markets, such as silver and gold, and to consider the appropriateness of position limits in those markets," Gensler said at an open meeting. "I hope to have a public meeting on this separate topic in the beginning of March."

The CFTC's energy proposal unveiled Thursday aims to limit the number of contracts that energy speculators who bet on prices can hold. The proposal would set trading caps across all exchanges that list four major energy products: crude oil, natural gas, heating oil and gasoline. It comes in response to criticism that the agency did not do enough when oil hit an all-time high in the summer of 2008.

The proposal does not propose limits for metals, but it seeks comments from the public on potentially imposing similar cumulative-type limits in other commodities including metals and agricultural products like coffee and sugar. CFTC Commissioner Bart Chilton said he supports position limits for metals, and he was disappointed the CFTC is not able to propose limits for them at the same time.

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FUNDVIEW-Gresham sees more money in commodities in 2010

Investors will allocate even more money to commodities this year as they seek to spread risk away from more established investments such as equities, New York-based fund manager Gresham argues.

Commodities such as gold, oil, copper, as well as softs like sugar, boomed in 2009, drawing in tens of billions of dollars in investments from pension funds and wealth managers hit by the financial crisis and global economic downturn.

Gresham Investment Management LLC saw its assets under management in commodities more than double last year to over $7.5 billion, its director of research, Douglas Hepworth told Reuters.

"There is going to be a very significant increase in the investment in commodities in 2010 -- at a similar rate to 2009," Hepworth said by telephone from New York. "We are seeing a lot of interest in commodities. Last year was a big inflow year and we have not seen interest abate. It seems to be increasing."

"We, for instance, had a more than a doubling of assets in commodities in 2009 and that kind of rate is not sustainable for a very long time," he said. "I would not be surprised to see similar growth to what we saw last year."

"Very strong momentum is intact," he added.

Figures from Barclays Capital show global assets under management in passive, long-only commodities funds increased by $93 billion last year to $255 billion.

"OUT OF SYNC"

Gresham is an institutional fund manager, investing in diversified commodity portfolios. It does not invest in either physical commodities or exchange-traded commodities, but buys long-only futures and is part of a group of investors that represent around 2 percent of the futures market.

Its investments offer diversification of risk away from stock markets, currencies and debt, the company says.

"If you look over the long-term -- 50 years -- commodities and equities do about the same in terms of returns, but out of sync with each other," said Hepworth. "Whatever excess returns you expect from equities long-term, commodities are not going to be far from it. They have the same driver."

Sharp falls in many financial markets over the last two years have led many to look favourably at commodities and increase exposure to investments that were once seen as exotic.

"Three years ago, people were thinking about 3 percent allocations for commodities," he said. "Now what I am seeing is people are starting at 5 (percent) in commodities," he said.

He said many investors in commodities tried to match well-known indices such as the S&P GSCI, the world's largest commodity index, or the Dow Jones-UBS Commodity Index.

But many investors were looking to focus their investments:

"You are now seeing more people wanting to make focused bets. Last year, you saw a lot of people looking at focused bets in precious metals. Two years ago and returning this year people are talking about focusing on ags (agricultural commodities)."

Hepworth said investors needed to be aware of some hazards when investing in futures, such as roll losses when a market was in contango with the front month at a discount to later months.

"When roll yield is very negative, investors have a tendency to avoid those commodities, but historically periods when roll yields are negative are usually followed by strong price performance, so if you rush out of the commodities with contangos into the backwardated commodities, they risk making exactly the wrong bet," Hepworth said.

"You want to be very thoughtful about how you implement this asset class. Being passive can be harmful to your health."

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CFTC's trading proposals might not be too tough

The top U.S. futures regulator will unveil long-awaited proposals on Thursday aimed at barring manipulators from high-flying energy markets, but the agency is expected to tread lightly with its new regulations, at least initially.

In a drawn-out process that has weighed over energy markets for the past several months, the Commodity Futures Trading Commission will hold an open meeting to decide whether to adopt a "proposed rule" to limit the number of contracts trading entities can hold in a particular market.

The proposal, which has been kept under wraps, would still be subject to public comment that also could last several more weeks.

The new rules, if adopted, are a strand of the Obama administration's efforts to impose a new regulatory regime on the financial industry, widely blamed for the meltdown caused by a series of global speculative bubbles.

The proposals will be closely watched by the U.S. Congress where some lawmakers, facing election races in 2010, are keen see action to dampen the excessive speculation they believe drove a range of commodity prices to punishing highs in 2008.

But a number of market watchers believe the CFTC, led by Chairman Gary Gensler and four other commissioners, might not be as tough on investors as originally thought.

Michael Wittner, global head of energy research at Societe Generale, believes the positions will be fairly liberal initially.

"They want to be careful not to rock the boat, not to cause any sudden market dislocations, not to cause any drop in market liquidity that will hurt commercial hedgers, and not to cause regulatory arbitrage," Michael Wittner told Reuters.

Wittner believes the regulator will be keen to set the limits to get them into law and to set precedents.

"But the limits will probably be set fairly high and will likely be set at levels that won't be much different from current actual positions," he said.

Brad Samples, an analyst at Summit Energy in Louisville, said he believes the CFTC's new limits will be more stringent than those now set by the New York Mercantile Exchange for the oil market.

But Samples doesn't expect the CFTC to be too vigorous enforcing any new regulations, saying, "the CFTC will look the other way except for the most egregious instances of violation."

Analysts also doubt the regulations will do much to dampen speculation in oil, which has risen above $80 per barrel after steadily rising through the latter months of 2009. Oil, however, is still well below its high of $147 set in 2008.

The CFTC must also decide which players are exempt from the limits, such as airlines, trucking companies and other companies that take delivery of the underlying commodity.

But there is much speculation on whether the big investment funds will be granted exemptions from the investment limits.

Some more traditional market players complain futures markets have been skewered by the entry of money from the so-called "massive passives." There is concern the 'buy and hold' strategy of index funds push up prices, upsetting long-standing supply and demand fundamentals that have moved commodity prices in the past.

Peter Beutel, president of Cameron Hanover in Stamford, Connecticut, hopes the big funds won't be given exemptions but believes some will be issued.

"What we really need is a bona fide speculator category that would be based on an entity having taken at least 80 percent of its peak long position on the short side at some point in the last six months, year or two years," Beutel said.

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CFTC's trading proposals might not be too tough

The top U.S. futures regulator will unveil long-awaited proposals on Thursday aimed at barring manipulators from high-flying energy markets, but the agency is expected to tread lightly with its new regulations, at least initially.

In a drawn-out process that has weighed over energy markets for the past several months, the Commodity Futures Trading Commission will hold an open meeting to decide whether to adopt a "proposed rule" to limit the number of contracts trading entities can hold in a particular market.

The proposal, which has been kept under wraps, would still be subject to public comment that also could last several more weeks.

The new rules, if adopted, are a strand of the Obama administration's efforts to impose a new regulatory regime on the financial industry, widely blamed for the meltdown caused by a series of global speculative bubbles.

The proposals will be closely watched by the U.S. Congress where some lawmakers, facing election races in 2010, are keen see action to dampen the excessive speculation they believe drove a range of commodity prices to punishing highs in 2008.

But a number of market watchers believe the CFTC, led by Chairman Gary Gensler and four other commissioners, might not be as tough on investors as originally thought.

Michael Wittner, global head of energy research at Societe Generale, believes the positions will be fairly liberal initially.

"They want to be careful not to rock the boat, not to cause any sudden market dislocations, not to cause any drop in market liquidity that will hurt commercial hedgers, and not to cause regulatory arbitrage," Michael Wittner told Reuters.

Wittner believes the regulator will be keen to set the limits to get them into law and to set precedents.

"But the limits will probably be set fairly high and will likely be set at levels that won't be much different from current actual positions," he said.

Brad Samples, an analyst at Summit Energy in Louisville, said he believes the CFTC's new limits will be more stringent than those now set by the New York Mercantile Exchange for the oil market.

But Samples doesn't expect the CFTC to be too vigorous enforcing any new regulations, saying, "the CFTC will look the other way except for the most egregious instances of violation."

Analysts also doubt the regulations will do much to dampen speculation in oil, which has risen above $80 per barrel after steadily rising through the latter months of 2009. Oil, however, is still well below its high of $147 set in 2008.

The CFTC must also decide which players are exempt from the limits, such as airlines, trucking companies and other companies that take delivery of the underlying commodity.

But there is much speculation on whether the big investment funds will be granted exemptions from the investment limits.

Some more traditional market players complain futures markets have been skewered by the entry of money from the so-called "massive passives." There is concern the 'buy and hold' strategy of index funds push up prices, upsetting long-standing supply and demand fundamentals that have moved commodity prices in the past.

Peter Beutel, president of Cameron Hanover in Stamford, Connecticut, hopes the big funds won't be given exemptions but believes some will be issued.

"What we really need is a bona fide speculator category that would be based on an entity having taken at least 80 percent of its peak long position on the short side at some point in the last six months, year or two years," Beutel said.

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Rio iron ore output soars, ups ante for prices

Rio Tinto , the world's second-biggest iron ore miner, beat its forecast for iron ore output, reflecting surging demand from Chinese steelmakers and setting the stage for tough contract price talks.

Iron ore output jumped 49 percent in the December quarter, mostly driven by China, leading analysts to suggest that miners such as Rio Tinto, BHP Billiton and Brazil's Vale could achieve big price rises in 2010 after recoiling in 2009.

Rio Tinto aims to boost production a further 6 percent to 230 million tons in 2010 and is strongly considering a leap to 330 million within five years, the company has already said, taking advantage of spot prices that are up about 120 percent since November 2008.

"The market consensus is calling for a price increase in excess of 30 percent," commodities analyst Lachlan Shaw, of Commsec Securities, said after Rio's production report on Thursday. Shaw added, however, that new mines opening this year could take some of the steam out of the market.

Fellow Australian miners BHP Billiton and Fortescue Metals are also due to mine millions more tons in 2010.

China's steel industry is the largest consumer of iron ore and refused in 2009 to sign off on 33-44 percent price cuts agreed by other Asian mills, saying it deserved deeper cuts.

Ties with China, Australia's biggest trade partner, have been strained by the Chinese detention of four Rio staff, including Australian citizen Stern Hu, since July over accusations of illegally obtaining commercial secrets.

Australia exported $15 billion worth of iron ore to China in 2008, or 41 percent of China's iron ore imports.

Rio Tinto's iron ore output for all of 2009 exceeded 217 million tons, including full output from mines not wholly owned by Rio, topping its own forecast of 210-215 million.

On an attributable basis Rio's share of production was 172 million tons.

"With the spot iron ore price rallying significantly, you can see the strategic sense in ramping up production," said Chris Weston, head of institutional dealing for IG Markets.

Rio shares in London had gained 2.4 percent to 3,625 pence by 1025 GMT, largely in line with a stronger UK mining index . They gained 175 percent last year, making them the sixth best performer in the FTSE 100 index .

CAUTIOUS ON OUTLOOK

Rio Tinto said it was witnessing improvements in a range of minerals produced worldwide, but was wary about the future.

"We are seeing recovery across most of our key commodities, although we continue to be cautious on the state of the global economy going into 2010, as stimulus packages start to wind down," Rio Chief Executive Tom Albanese said in a statement.

The boost in production marks a turnaround from a year ago, when Rio Tinto was struggling to pay off nearly $40 billion in debt tied to its ill-timed acquisition of Alcan just before the bottom fell out of commodities.

The divestment of $10.3 billion in assets and an on-then-off investment of $19.5 billion by its largest shareholder, China's state-owned Chinalco, was replaced with a rights issue and a merger in iron ore with BHP that is raising the ire of steelmakers from Beijing to Brussels.

The surge in iron ore production masked some weaker numbers for Rio Tinto, especially in aluminum, where output fell three percent in the quarter compared with a year earlier, as it continued to run some smelters below capacity.

"The decision to maintain aluminum cutbacks either indicates that costs are higher than we think or that Rio does not believe the current price can be supported by physical fundamentals. The latter is more likely, in our opinion," analyst Paul Galloway at Bernstein Research said.

Aluminum prices have recovered strongly from the depths of the global financial crisis, but inventories are estimated by analysts to be still running at around 44 days of global consumption, against a normal range of six to 20 days.

Aluminum prices have risen more than 50 percent, recovering from sharp declines in early 2009.

Mined copper output surged 36 percent in the quarter and total 2009 production jumped 28 percent from 2008.

"It is a big return to business for Rio Tinto in every aspect after the global financial crisis," said James Wilson, a mining analyst with DJ Carmichael & Co.

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U.S. stocks cope with disillusioning earnings reports Some analysts dismiss Alcoa, saying Intel, J.P. Morgan results more significant

As U.S. stock-market investors contended with disappointing results from Alcoa Inc., equities analysts said reports later in the week from Intel Corp. and J.P. Morgan Chase & Co. should prove more significant.

Chip manufacturer Intel's /quotes/comstock/15*!intc/quotes/nls/intc (INTC 20.68, +0.07, +0.35%) report on Thursday and J.P. Morgan Chase & Co.'s /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 43.56, +0.07, +0.16%) results Friday have greater implications for the economy and broad market, analysts said.

The reports may well provide positive fodder for a market that on Tuesday was hit by China's moves to stem expansion of the world's most rapidly growing economy.
Hot Stocks: Energy sector retreats

A lackluster midquarter update from Chevron and weaker crude-oil futures send energy stocks tumbling. MarketWatch's Steve Gelsi reports.

"I'm really looking forward to Intel and J.P. Morgan. My thoughts are that they will do better than expected. Both are good gauges of the economy -- Intel with their chips and J.P. Morgan, the bank everyone looks to for stability," said Andrew Fitzpatrick, director of investments at Hinsdale Associates. Hear more.

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said Intel's report will have ramifications for the technology sector at large and "its sales will have implications to the retailers and beyond."

Shares of Alcoa /quotes/comstock/13*!aa/quotes/nls/aa (AA 15.54, +0.02, +0.13%) fell 11% after the world's biggest aluminum maker reported earnings and revenue that fell short of expectations. Read more about Alcoa's fourth-quarter loss.

'The equities market has taken its cue from commodities.'

Art Hogan, Jefferies & Co.

Art Hogan, chief market strategist at Jefferies & Co., said Alcoa's slide has more to do with the decline that hit metals, crude and other commodities after China told banks to set aside additional reserves in an effort to keep its economy from overheating.

"The equities market has taken its cue from commodities," Hogan said.

"As far as I'm concerned, it's much ado about nothing with Alcoa's earnings. It is allotted so much attention only because it is the first of the Dow components to report, and that is all," said Tracey Ryniec, a Zacks.com analyst.

"Fundamentally the company is not a bellwether on the economy nor should its results be a market mover," said Ryniec, who views coming results from the financial sector to be of more significance to the market.

"Investors should not forget that deleveraging continues and the bad loans aren't yet a thing of the past," she added.

Also Tuesday, shares of another Dow component, Chevron Corp. /quotes/comstock/13*!cvx/quotes/nls/cvx (CVX 80.25, -0.10, -0.12%) , slipped 0.6% after the second biggest U.S. oil company said its fourth-quarter results would be sharply lower due to deteriorating oil refining margins. See more on Chevron's warning.

Electronic Arts Inc. /quotes/comstock/15*!erts/quotes/nls/erts (ERTS 16.92, +0.07, +0.42%) shares dropped 7.8% after the video-game publisher said earnings for the December quarter would be less than expected. Read full story on Electronic Arts and its ongoing restructuring efforts.

Snapping a four-day streak of gains, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,627, -37.48, -0.35%) was off 36.73 points at 10,627.26. The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,136, -10.76, -0.94%) declined 10.76 points to 1,136.22 and the Nasdaq Composite Index /quotes/comstock/10y!i:comp (COMP 2,282, -30.10, -1.30%) fell 30.1 points to 2,282.31.

Intel was among those weighing on the Dow, its shares off 1.6%, with analysts offering a diverse view of where Intel and competitors including Advanced Micro Devices Inc. /quotes/comstock/13*!amd/quotes/nls/amd (AMD 8.65, -0.01, -0.12%) and Texas Instruments Inc. /quotes/comstock/13*!txn/quotes/nls/txn (TXN 26.00, +1.09, +4.38%) might be headed. Read about Wall Street's divergent views

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UPDATE 3-Helmerich sees $20 mln loss as Venezuela devalues

Helmerich & Payne Inc (HP.N), the second-largest onshore oil-drilling contractor by market value, expects a $20 million loss from last week's devaluation of the Venezuelan currency.

President Hugo Chavez devalued the bolivar currency on Friday in a push to revive local production, and H&P's disclosure puts a figure on the impact of a move that will be felt by other companies owed money by PDVSA.

H&P, whose shares were down 5 percent over two days, said on Tuesday its 11 rigs in Venezuela would remain idle until more progress is made on pending collections from state oil company PDVSA and on conversion of local currency to dollars.

The state company had racked up $7.5 billion of debts with service providers at the end of 2008, before paying much of it last year. Companies -- including the two largest oilfield service providers, Schlumberger Ltd (SLB.N) and Halliburton Co (HAL.N) -- were owed $1.4 billion as of October, PDVSA said.

Halliburton, which has not revealed how much PVVSA owes and has a net investment in the country of $250 million, said in an October regulatory filing that PDVSA had still not paid up, and a Halliburton spokeswoman declined to comment on the devaluation's impact.

A Schlumberger spokesman was not immediately available.

With the devaluation, companies that had converted results from bolivars to dollars at the official exchange rate of 2.15 must now convert at the new rate of 4.3 for all goods apart from essential items like food and medicine. [ID:nN11158065]

MORE ONE-TIME HITS

Analysts at Simmons & Co said service providers' exposure to Venezuela varies widely and expect the companies to take one-time hits this quarter on the lower value of receivables.

"Venezuela will be lucky to keep the present level of oilfield activity from its international service companies, and current activity is relatively low," the analysts wrote.

Offshore drilling contractor Ensco International Plc (ESV.N) may now be relieved that it wrote off the value of a rig seized in Venezuela last year. [ID:nN15212290]

Howard Weil analyst David Wilson said people were well aware of the situation in Venezuela and had discounted the benefits there for H&P in the near term.

The company expects a foreign exchange loss of about $20 million in the current quarter from the devaluation.

H&P said preliminary estimates showed the value of future collections related to unrecorded invoices -- not included in the $20 million loss estimate and previously disclosed at about $61 million -- could decline by 25 percent to 35 percent.

But the Tulsa, Oklahoma-based company said the reduced value of uncollected invoices was not expected to generate more exchange losses as they were not in the consolidated accounts receivable.

H&P said it had not received any payments since November, when the invoiced amount pending from PDVSA was $73 million, down from $100 million earlier in the year. [ID:nBNG547697]

H&P shares fell 2.1 percent to $45.51 on Tuesday on the New York Stock Exchange, after dropping 3 percent on Monday.

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UPDATE 1-Nasdaq, Nord Pool launch new UK power market

Britain's new N2EX wholesale power exchange launched succesfully on Tuesday, with initial trade volumes higher than expected, the market operators said.

Nasdaq Commodities, a business arm of Nasdaq OMX (NDAQ.O), and Norway's Nord Pool Spot officially opened the long-awaited exchange for trading physical UK power contracts. "After an intensive year of development and preparations with the UK market participants, we are very pleased with the day-ahead auction results and the volumes currently being traded on the first day of the prompt market," Hans Randen, director trading in Nord Pool Spot, said.

"The total traded volume on the day-ahead auction which closed at 1030 CET (0930 GMT) was 6,987 MWh (megawatt hours). The prompt market is still open for trading and so far traded volumes have exceeded expectations."

Some UK power traders said they hoped it would succeed in providing a reliable reference price for trading derivative contracts.

Good volumes traded on the platform on its first day and there appeared to be enough participants to increase liquidity, they said.

"I think it's reasonably well supported," a trader at a utility said.

"I think it was pretty good, and we've had generally favourably reports on it."

Hopes are high that the N2EX, backed by a number of big utility firms including E.ON (EONGn.DE) and RWE (RWEG.DE), will increase liquidity in Britain's splintered power market. [ID:nLP350972]

"It has the scope to be the most successful exchange as several big utilities and players are backing it, however only time will tell how popular it is and therefore how much impact it has on the liquidity of UK power," Nick Campbell, Inenco energy market analyst, said.

The N2EX launch had been delayed by 24 hours to allow more people to participate in the first day of trade, following a month of market trials in December. [ID:nLDE60A1YZ]

With no single trading platform winning the backing of all the large power generators, liquidity has been low in Britain's power market in the past few years. Other exchanges and broker screens are provided by APX Group, Spectron, and Tullet Prebon. (

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China surprises with bank reserve hike, markets hit

China took its strongest step toward tightening monetary policy on Tuesday as the world's third-largest economy roars ahead, surprising investors with an increase in banks' required reserves that rocked global financial markets.

The move came just days after China reported robust trade figures and was the first time that the central bank had adjusted the ratio since a cut in December 2008, when it was loosening policy to cushion the economy from the global financial crisis.

The sudden move by the People's Bank of China to boost required reserves came earlier than investors had expected and appeared prompted by concerns that a renewed surge in bank lending was flooding the economy with too much cash, risking overheating and a surge in inflation.

"This is exactly what happens with Chinese policy. They say fine tuning. It never happens that way. It's always nothing or boom," Ken Peng, an analyst with Citigroup in Beijing said. "When they reach a consensus, it happens very quickly."

The PBOC said it will increase commercial lenders' reserve requirement ratios (RRR) by 50 basis points as of Jan 18, making China one of the largest economies to start rolling back the emergency policies used to combat the crisis fallout.

"It caught the market by surprise," Lin Songli, an economist with Guosen Securities in Beijing, said. "The action is primarily targeted at curbing bank lending."

China helped pull the global economy out of recession last year, with its double-digit growth giving a lift to Asia and countries that have been able to feed its voracious appetite for commodities from iron ore to metals and crude oil.

Fears that Chinese tightening could take some of the fizz out of the global economic recovery shook financial markets, denting stocks, higher-yielding currencies and commodities.

Britain's top share index shed 1.1 percent by midday as commodity issues and banks dropped sharply. Commodity-linked currencies, including the Australian, New Zealand and Canadian dollars, hit session lows against the U.S. dollar, following a sell-off in gold.

The PBOC announcement underlined the risk tied to those currencies which, along with commodities, rallied for much of 2009 on the view that the global economy was on a recovery path.

"The U.S. dollar was given a lift by developments in China," said Camilla Sutton, a currency strategist at ScotiaCapital in Toronto.

Chinese bonds and stocks were expected to take a hit when markets open on Wednesday.

Analysts said the central bank, still cautious about hitting the brakes on the economy too hard, may be hoping that the boost in required reserves will give it some breathing room to wait before raising policy rates.

China is expected to nudge up interest rates midway through 2010, and a Reuters poll last week forecast minimal yuan appreciation over the year.

MANAGING LIQUIDITY

A Chinese central bank official sought to downplay the significance of the bank reserve move, saying it was intended to manage liquidity and ensure stable bank lending.

"Our monetary policy stance is still reasonably accommodative and the move is aimed at using quantitative tools to fine-tune flexibly," the official, speaking on the condition of anonymity, told Reuters.

China has long used required reserves for mopping up excess cash in the economy generated by its yawning trade surplus and speculative inflows. As such, it is an important weapon in its arsenal for curbing inflation, which analysts expect to climb to more than 3 percent this year after the country spent much of last year in deflation.

Shi Lei, an analyst at Bank of China in Beijing, said there could be two or three more required reserve increases before June.

"The reserve ratio hike is a strong signal the central bank is stepping up efforts to absorb excessive liquidity," Shi said. "The hike may drain about 200-300 billion yuan ($29-$43 billion) from the market but it really needs to drain about 700-800 billion yuan."

The RRR increase also followed two other tightening steps taken by the central bank on Tuesday.

The central bank raised the yield on its regular sale of one-year bills by about 8 basis points, the first increase in 20 auctions and higher than forecasts for a rise of 4 basis points.

It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring it will draw net funds from the market this week.

NOTHING, THEN BOOM

Chinese leaders from Premier Wen Jiabao to central bank governor Zhou Xiaochuan have insisted in recent weeks that the country is sticking to its "active fiscal and appropriately loose monetary policies."

Few, however, believed that Beijing would allow a repeat of last year's credit boom, when banks answered the government's call to open the floodgates to boost the economy and issued a record of nearly 10 trillion yuan ($1.5 trillion) in new loans.

The RRR increase followed reports that loans surged in the first week of the year to 600 billion yuan, nearly double the monthly average in the second half of last year and standing in sharp contrast to the government's repeated pronouncements that banks need to better control lending.

"We have forecast that the government will exit from stimulus policies earlier than scheduled. But this move came much earlier," said Zhu Jianfang, chief economist of Citic Securities in Beijing.

With China's exports growing again and investment inflows also on the rise, he noted that the country was again starting to accumulate more foreign exchange, only adding to the pool of cash sloshing about the economy.

"It's hard to tell whether this is the beginning of more tightening steps. But one thing is sure. If forex reserves keep swelling, more will come," Zhu said.

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Street Swirls As Earnings Loom

Stocks swayed around the unchanged mark in New York Monday as investors braced for the start of earnings season.

Fourth-quarter results from Alcoa ( AA - news - people ) are due after the closing bell, marking the traditional start of the January reporting period. Analysts expect the aluminum producer to book a profit of 6 cents a share for the last three months of 2009.
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Relatively easy comparisons with year-ago figures are likely to make this earnings season a solid one, as companies look to flaunt just how strongly they are coming out of the recession. Richard Ross, head of global technical strategy at Auerbach Grayson, believes that even a handful of weak reports from the corporate sector won't be enough to derail Wall Street's grind higher. The positives will outweigh the negatives, he said, and "people will keep spinning straw into gold."

Stocks were mostly on hold ahead of Alcoa's report though, with the major indexes circling around the unchanged mark. The Dow Jones industrial average drew support from Alcoa's 1.1% advance to gain 20 points to 10,638, but the S&P 500 was off 1 point to 1,144 and the Nasdaq lost 7 points to 2,310.

In a morning note, Citigroup ( C - news - people )'s chief U.S. equity strategist Tobias Levkovich said a survey of the firm's institutional clients showed investors expect the earnings recovery to pick up steam in 2010. The survey showed expectations for earnings growth of 17% to 18% this year, slightly ahead of Citi's 16% estimate.

Earlier Monday commodities got a boost from a report on Chinese trade that offered the most bullish signal of economic recovery in months. Oil traded higher at the open, but fell back below $83 as the day wore on.

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ETF assets rose 45% in 2009

Inflows and higher markets added up to a 45% rise in ETF industry assets last year, according to research today from State Street.

ETF assets rose by $242 billion to end 2009 at $776 billion. The number of U.S.-listed funds increased by 10% to 819 ETFs, according to the report.

In particular, investors gobbled up commodity ETFs, which saw assets more than double. The amount of money in bond and international ETFs also surged — both categories grew by 78%, according to State Street.

Investors burned by the credit crunch hunkered down in the safety of bond ETFs despite the furious stock rally in 2009. The S&P 500 rose 26.5% and the MSCI EAFE, an index of developed markets, gained 32.5%.

The largest ETF managers are BlackRock (thanks to its acquisition of Barclays Global Investors), State Street and Vanguard. Together, they controlled about 84% of ETF assets, the report said.

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Treasurys gain for second day Rising inflation expectations help auction of TIPS

Treasury prices rose on Monday, pushing yields down moderately for a second day, as investors abroad got a chance to buy after Friday's surprisingly weak U.S. jobs report.

Bonds stayed higher after the Treasury Department received decent demand at its sale of inflation-indexed debt, the first of four big auctions this week that will bring $84 billion in new debt to the market.

Yields on 2-year notes /quotes/comstock/31*!ust2yr (UST2YR 0.93, -0.04, -3.82%) declined 2 basis points to 0.94%. Bond prices move inversely to their yields. A basis point equals 0.01 percentage point.

Yields on 10-year notes /quotes/comstock/31*!ust10y (UST10Y 3.82, -0.02, -0.42%) fell 2 basis points to 3.82%.

The Treasury sold $10 billion in 10-year Treasury Inflation Protected Securities at a yield of 1.430%, roughly in line with where traders expected the debt to sell, according to CRT Capital Group. See more on Treasury's auctions.

The amount is $2 billion more than the last TIPS sale. Bidders offered $2.65 for each $1 of debt being sold, compared to an average of $2.40 in the past six sales.
The Best ETF Bets for 2010

Short-term fixed-income, defensive stocks, high-yield bonds and commodities are among our advisors' favorite ETF groups in a weak economy featuring treacherous markets. Barron's Clare McKeen reports.

"Demand indeed rose to meet the supply," said bond strategists at RBS Securities. "These results were especially good in light of the 25% up-sizing of this issue."

Indirect bidders, a group that includes foreign central banks, purchased 40.7% of the sale, compared to an average of 41.9% of the past six sales. Ten-year TIPS are offered quarterly, so most of those recent sales predated a change in the way bids were tallied that has sent the proportion going to indirect bidders sharply higher.

Direct bidders -- investors buying for their own accounts -- bought 3.2%, versus an average of 3.5% of the past six sales.

That proportion has also risen in recent months -- a good sign for the Treasury market. When more of the auction goes to investors instead of primary dealers, it leaves less for the dealers to have to resell into the market and weighs on prices.

TIPS gain popularity when inflation expectations or risks increase, as they have in the last month as oil prices have climbed higher. The gap in yield between 10-year TIPS and regular notes has widened to 2.48% recently. That's the highest since July 2008, according to Marta on the Markets. The gap represents the expected rate of inflation over the life of the debt.

Additionally, Barclays Capital analysts expected the sale to go well as traders have a lot of short positions -- bets that TIPS will fall -- that they may reverse by buying at the auction.

Also, this auction may benefit from the longer time gap before the next TIPS auction. The government will resume selling 30-year TIPS in late February, replacing sales of 20-year TIPS, which usually occur in late January, Barclays said in a note. See Treasury statement about longer TIPS.

Regular Treasurys were also deemed attractive during the session as yields on long-term debt remain near the highest since August.

"Investors are still finding U.S. government debt attractive in the light of a slower than expected recovery that appears to also be absent of jobs," said Kevin Giddis, managing director of fixed income for Morgan Keegan & Co.

Treasury prices rose Friday, sending yields lower, after the Labor Department said the U.S. economy lost 85,000 jobs in December, while analysts had been hopeful that the economy added jobs during the month. See Friday's Bond Report.

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The comeback quarter The upcoming results season should show profit and sales growth returning

U.S. stock investors in the next week are likely to turn to earnings from Alcoa Inc., Intel Corp. and J.P. Morgan, bellwethers slated to usher in the fourth-quarter results season, for the corporate view on economic recovery.

They're expecting good tidings.

The large, U.S.-based companies that make up the S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,145, +3.29, +0.29%) are collectively expected to show profit increases for the first time since the second quarter of 2007, breaking a string of nine quarterly profit declines.
U.S. Week Ahead: Growth in Earnings

Alcoa and Intel kick off earnings season next week. Retail sales, CPI and the Fed's Beige Book are also on tap. MarketWatch's Stacey Delo reports.

It's an eye-popping growth rate analysts are anticipating: Profit likely expanded 184% from the last dismal quarter of 2008, largely thanks to financial institutions swinging to profits from deep losses.

Without financials, profit at Standard & Poor's 500 corporations would increase an estimated 8%, says Thomson Reuters.

Alcoa, the aluminum producer and member of the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,618, +11.33, +0.11%) whose results typically mark the launch of the quarterly reports season, should keep pace on the profit side.

When it releases results late Monday, Alcoa is expected by analysts to say it swung to a quarterly profit of 5 cents a share in its December quarter. Sales, however, likely dropped 14% to $4.9 billion, according to analysts polled by FactSet.

Even more importantly, to some, is the expected to return of sales growth. For much of last year, companies eked out profits by slashing costs. But revenue kept tumbling from year-ago periods, a sign customers were staying away or bargaining for lower prices.

Revenue among S&P 500 companies is forecast to climb 7%, which would mark the first sales growth since the third quarter of 2008.

A return to sales growth would signal consumer and business appetite is coming back -- a positive sign for the broader economy -- and should help fatten profits at companies that have already reduced the cost side of their corporate ledgers.

"This is the first quarter we'll take this newfound profit leverage out for a sales drive," said Jim Paulsen, chief investment strategist at Wells Capital Management. "A lot of companies without sales did well just by being lean and mean. Now, with sales, we'll be surprised as to the results."
Week ahead

Though the week may set the tone for the earnings season, it's actually light on reporting companies.

Seven S&P 500 companies and three Dow-30 companies are scheduled to report quarterly results.

Intel /quotes/comstock/15*!intc/quotes/nls/intc (INTC 20.83, +0.23, +1.12%) , which releases results Thursday, is expected to show profits surged from the year-ago quarter, when chip makers took a beating from the economic recession. Sales also gained, analysts estimate. Read Intel earnings preview.

J.P Morgan /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 44.68, -0.11, -0.25%) , on Friday, will likely show profits rebounding massively from the year-ago quarter, when the housing-related losses that brought down Lehman Brothers froze credit markets worldwide.

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Bank CEOs to answer for financial crisis

As lawmakers start trickling back to Washington next week, a panel tasked with investigating the financial crisis is set to make its first big splash.

The Financial Crisis Inquiry Commission, a 10-member panel appointed last summer by Congress, will hold public hearings on Wednesday and Thursday.

First up are four chiefs of some of the best-known and largest banks: Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).

The panel's chairman, Philip Angelides, said he's interested in hearing about the banks' role in creating the crisis as well as finding out how they became "too big to fail." The federal government stepped in to prop up the banks in fall 2008, creating the Troubled Asset Relief Program to help provide them with liquidity.

"We think it made sense to start by bringing up the four biggest investment banks that were involved in so many aspects of the crisis," said Angelides, former California State Treasurer, who warned about financial sector abuses back in 2002. "Many of them had arms that were involved in originating mortgages, some were packaging mortgage securities and some of them were betting against these mortgage securities."

Lawmakers say the commission was modeled after the Pecora Commission, a panel that was convened after the 1929 Wall Street crash and other events leading to the Great Depression.

The Pecora panel's findings led to an overhaul of federal banking laws, including the creation of the Glass-Steagall Act of 1933. Glass-Steagall divided investment banking from government-insured commercial banking; ending that separation in the 1990s was seen by some critics as contributing to the current crisis.
Slow start

The Financial Crisis Inquiry Commission has taken a while to get up on its feet.

The panel was appointed last July and held its first meeting in September. It has only started getting staffed up over the past few months.

It has new offices in downtown Washington, a few blocks northeast of the White House. Funded to the tune of $8 million, it aims to employ between 40 and 50 investigators and other staffers.

The crisis panel's one big goal is to complete a final report, sort of like the final 9/11 Commission report that found federal agencies missed signs of the impending terrorist attacks in 2001. The financial crisis report is due Dec. 15.

Critics have noted the panel's impact may be blunted by timing, as the House has already passed a bill to overhaul regulations and the Senate is deep in negotiations on similar proposals.

But panel members have consistently pledged their work will serve as more than window dressing for politicians worried about the appearance that they allowed the financial crisis to happen.

The panel, which has subpoena power, plans to issue interim reports as it collects data, Angelides has said.

The panel's second-in-command is Bill Thomas, a retired California Republican congressman described as strong-willed during his tenure running the powerful Ways and Means Committee.
0:00 /04:08How Mack managed the crisis

Other key panel members include: Keith Hennessey, an economic adviser under President George W. Bush; former Sen. Bob Graham, a Florida Democrat; and Brooksley Born, a past chairwoman of the Commodities Futures Trading Commission, who called for stronger regulation of complex financial products such as derivatives in the 1990s.

On Wednesday, the panel will swear in bank chiefs Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America.

The panel didn't invite Citigroup (C, Fortune 500) CEO Vikram Pandit this go round, said panel spokesman Tucker Warren. "That doesn't mean we won't be talking with Citigroup, either publicly or privately, in the course of our investigation," he added.

The chief executives are no strangers to Washington hearings. Blankfein, Dimon and Mack were seated together last February when a House Financial Services pelted them with questions about the TARP program.

This time around, Angelides said he expects the tone to be "professional" but also "tough, thorough and fair."

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