Monday, December 5, 2016

Monday, December 5, Morning Global Market Roundup: Euro, Shares Skid As Italy Votes 'No' On Reform, PM Renzi To Resign

By Nichola Saminather and Wayne Cole 
December 5, 2016

The euro fell to a 20-month low on Monday and investors fled riskier assets after Italian Prime Minister Matteo Renzi said he would resign following a stinging defeat on constitutional reform that could destabilize the country's shaky banking system.

European stock markets are also set for a weak start, with Italy underperforming as investors brace for turbulence and political crisis in the euro zone's heavily indebted third-largest economy.

Financial spreadbetter IG Markets expects the EuroSTOXX 50 .STOXX50E to open down 0.6 percent, and Germany's DAX .GDAXI and Britain's FTSE .FTSE to start the day 0.4 percent lower.

Renzi's failure deals a body blow to a European Union already reeling under anti-establishment anger that led to the shock exit of the UK from the club in June.

"It’s not very hard to see a new election on the horizon, and it’s not very hard to see the (opposition) 5-Star Movement taking power with stated aims to either leave the EU, drop the euro, or both,” said Mark Wills, head of State Street Global Advisors' investment solutions group for the Asia Pacific.

"For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system."

The single currency slumped as much as 1.4 percent to $1.0505 EUR=, before recovering a bit to $1.0563.

The drop to its session low was the sharpest since June and opened the way to a retest of the March 2015 trough around $1.0457.

Analysts at RBCCM argued that, based on what happened in 2012 at the height of the Greek crisis, the risk of a euro zone crisis could see the euro trade as low as $0.8000.

"It may sound extreme, but if a second euro zone crisis were to hit, with the U.S. dollar at a much stronger starting point, EUR/USD could arguably trade lower still," they wrote.

The euro slid as much as 2.05 percent EURJPY= to 118.71 yen, but pared some of the losses to trade down 1.1 percent at 119.85 yen.

The dollar was supported by expectations of a U.S. rate increase this month and more to come next year. The dollar index, .DXY, which tracks the greenback against a basket of six global peers, jumped 0.6 percent to 101.37.

Against the yen, the U.S. currency, which rose earlier to as high as 113.85, pulled back 0.1 percent to 113.41 yen JPY=.

The New Zealand dollar NZD=, which earlier weakened almost 1 percent to $0.707 after Prime Minister John Key unexpectedly announced his resignation on Monday, recovered a little to trade at $0.7106.

New Zealand stocks ended the day 0.7 percent lower.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.6 percent, while E-mini futures for the S&P 500 ESc1 narrowed losses to 0.3 percent.

Japan's Nikkei .N225 closed down 0.8 percent.

Even as the long-awaited opening of a scheme to connect the Shenzhen and Hong Kong stock markets went live on Monday, China's blue-chip index slumped the most in six months after the nation's top securities regulator warned against "barbaric" share acquisitions, although small caps remained firm.

China's CSI 300 .CSI300 index tumbled 1.7 percent. Hong Kong's Hang Seng index .HSI retreated 0.7 percent.

The link between China's booming Shenzhen stock market and neighboring Hong Kong allows foreign investors access for the first time to some of the fastest growing technology companies in the world's second-biggest economy.

Back in Europe, dealers said Italian bonds were set to come under pressure as top-rated U.S. Treasuries and German bunds gained.

U.S. 10-year Treasury yields fell to 2.3435 percent from 2.39 percent at Friday's close.

Investors and European politicians fear the 'No' camp's victory in Italy could cause political instability and renewed turmoil for the nation's banking sector, which has been hit by concerns over its huge exposure to bad loans built up during years of economic downturn.

"Forming a stable government in Italy may be difficult, the resuscitation of (ailing lender) Monte Dei Pashci DMPS.MI may be impacted, there is some potential that this may create an opening for a secessionist political party," said Angus Gluskie, managing director of White Funds Management in Sydney.

The prime minister's resignation represents a fresh blow to the European Union, which is struggling to overcome a raft of crises, and was eager for Renzi to continue his reform push.

Markets had earlier taken some encouragement when Austria's far-right presidential candidate was soundly defeated by a pro-European contender, confounding forecasts of a tight election.

The European Central Bank meets Thursday amid much speculation it will announce a six-month extension of its asset buying program and widen the type of bonds it can purchase.

"There has been some speculation that the ECB would step and front load purchases of Italian bonds if markets became unsettled by a 'No' result, so perhaps it is the thoughts of a central bank liquidity sugar pill driving things again," said ANZ economist Jo Masters.

Oil Pulls Back

In the last trading session before the referendum, the Italian benchmark .FTITLMS posted a 0.2 percent decline.

The pan-European STOXX 50 .STOXX50 closed down 0.4 percent.

Wall Street ended Friday on a cautious note, with the Dow .DJI off 0.11 percent, while the S&P 500 .SPX rose 0.04 percent and the Nasdaq .IXIC gained 0.09 percent.

While the U.S. November payroll report on Friday was firm enough to cement expectations of a rate hike by the Federal Reserve this month, a surprise pullback in wages helped bonds pare a little of their recent losses.

In commodity markets, oil ran into risk aversion and some profit-taking after recording its best week in at least five years following OPEC's decision to cut crude output.

Markets are now focused on the implementation and impact of OPEC's first output cuts since 2008, to be joined by Russia and possibly other non-OPEC producers. [O/R]

Brent crude LCOc1 was down 58 cents at $53.92 a barrel, while U.S. crude CLc1 lost 53 cents to $51.15.

Article Link To Reuters:

Federal Judge Orders Election Recount In Michigan To Begin On Monday

By Chris Michaud
December 5, 2016

A federal judge has ordered a recount of Michigan's presidential ballots to begin at noon on Monday and directed that the state complete the process by the Dec. 13 federal deadline, according to media reports.

The Detroit Free Press reported on its website that U.S. District Judge Mark Goldsmith had issued the written order early on Monday after a Sunday night hearing in federal court.

Lawsuits have been filed in Michigan, Pennsylvania and Wisconsin, three "Rust Belt" states that bucked their history of supporting Democrats and handed Republican Donald Trump narrow wins in the Nov. 8 election that ultimately gave him victory over Democratic rival Hillary Clinton.

The Green Party and its candidate, Jill Stein, have said their requests for recounts in those states were focused on ensuring the integrity of the U.S. voting system and not on changing the result of the election.

Goldsmith ordered that, once started, the recount "must continue until further order of this court," the Free Press reported. The recount, which will begin at noon on Monday, was ordered two days ahead of the two-day waiting period the state had planned to observe from Wednesday.

Article Link To Reuters:

ECB's Villeroy: Can't Compare Italy 'No' Vote To Brexit

By Stanley White 
December 5, 2016

Italian voters' defeat of a referendum on constitutional reforms cannot be compared to Britain's vote to leave the European Union, European Central Bank policymaker Francois Villeroy de Galhau said on Monday.

Policymakers will still look closely at the consequences of Italy's decision, Villeroy, who is also governor of the Bank of France, said at a seminar in Japan.

Villeroy also warned Britain there will be no "cherry picking" on market access as it negotiates its divorce from the EU.

Italian Prime Minister Matteo Renzi has vowed to resign after suffering the crushing referendum defeat on Sunday, tipping the euro zone's third-largest economy into political uncertainty.

"The referendum in Italy yesterday may be deemed as another source of uncertainty," Villeroy said.

"However, it cannot be compared to the British referendum: Italian people have been called to the polls to vote on an internal constitutional matter, and not on Italy's long-standing EU membership."

The euro tumbled to a two-year low after the referendum as Renzi's resignation could give anti-euro zone parties a chance to gain power, further threatening European integration.

In contrast, Villeroy expressed confidence in the resilience of the euro zone, citing progress in merging banking regulations, improving economic growth and a tightening labor market.

The ECB meets Dec. 8 in Frankfurt. At that meeting the ECB will extend its bond purchases beyond March and consider sending a formal signal that the program will eventually end, senior sources with direct knowledge of discussions have told Reuters.

Before the referendum, central bank sources told Reuters the ECB is ready to temporarily step up purchases of Italian government bonds if the referendum sharply drives up borrowing costs for the euro zone's largest debtor.

Britons' vote to leave the euro zone has also become a source of concern for financial markets, but there is still a lot of uncertainty about its negotiating strategy six months after the vote.

Villeroy on Monday issued a harsh warning that Britain should not expect a special deal that curbs immigration while maintaining access to Europe's single market.

"If they want to keep full access to the European single market, they will have to apply all its rules," Villeroy said.

"There can be no free riding and no cherry picking. If Britain were to chose a 'hard Brexit' this would in particular mean the end of the European passport for the City of London."

Passporting allows the City of London financial center to do business with clients in the euro zone even though Britain never joined the common currency.

London banks handle trillions of euros in business, so a "hard" Brexit in which Britain loses its free access to the EU would have serious consequences.

Article Link To Reuters:

Oil Prices Fall As Production Creeps Up Ahead Of Announced 2017 Output Cut

By Henning Gloystein
December 5, 2016

Oil prices fell by one percent on Monday as a higher U.S. rig count unsettled markets amid nagging concern that output cuts, planned as part of concerted action between producer club OPEC and Russia, might not be as big as initially anticipated.

Brent crude futures were trading at $53.89 per barrel, down 57 cents, or over 1 percent, from their last close.

West Texas Intermediate (WTI) crude futures were at $51.49 a barrel, down 52 cents, or 1 percent.

Traders said price falls were triggered by rising production just after last week's accord between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC member Russia to cut output in 2017. The cuts aim to rein in a supply glut that has weighed on markets for over two years.

(For graphic on OPEC's market share struggle, click

Meanwhile U.S. energy firms extended drilling for new oil production into a seventh month last week, data from energy services firm Baker Hughes showed on Friday.

"The U.S. oil rig count continued its rally this week, up by 3 rigs...Since its trough on May 27, 2016, producers have added 161 oil rigs (+51 percent) in the U.S.," Goldman Sachs said.

Overall - accounting for the recent rise in oil drilling, but also for cutbacks earlier this year on low prices - Goldman said "year-on-year production will decline by 620,000 barrels per day (bpd) in 2016 and increase by 55,000 bpd in 2017".

With U.S. production set to edge up, there are also gnawing concerns that the cuts announced last week by OPEC and Russia might not be as deep as initially anticipated. The planned reductions brought the sharpest weekly crude price rises in years.

Russia on Friday reported average daily oil production of 11.21 million bpd for November - its highest in almost 30 years.

And while Moscow has agreed to cut its output by 300,000 bpd in early 2017, it said it would do so against November levels. That means that even after a reduction, its output would remain higher than it was at the peak of the oil glut in the first half of 2016.

Jeffrey Halley of brokerage OANDA in Singapore said oil traders were "nervous (as) Russia's output has hit record levels, meaning their part of the production cut takes them back to what they were producing only quite recently".

In the Middle East, where the deepest OPEC production cuts are expected, there are also signs that production will rise before it gets cut.

Saudi Arabia and Kuwait are expected to agree this month to resume oil production, with a potential of 300,000 barrels in daily output, from jointly operated oilfields which were shut down between 2014 and 2015 for environmental and technical difficulties.

Article Link To Reuters:

Big Oil Is In Decline, And The OPEC Deal Can’t Rescue It

Don’t bet that a recovery in oil prices signals a comeback for oil giants Chevron and Exxon Mobil.

By Jeff Reeves
December 5, 2016

The big news this past week was a massive OPEC deal that finally made good on talk about a worldwide cut in oil production. In case you missed it, the agreement resolves to remove about 2% of global oil production, with the Organization of Petroleum Exporting Countries’ member states cutting 1.2 million barrels of daily output and non-OPEC producers, including Russia, reducing 600,000 barrels daily.

That news had a big impact on the market, resulting in a roughly double-digit move for oil CLF7, -0.74% , putting prices above $50 again for the first time since June. And a number of smaller energy companies have exploded higher, including:

• Domestic explorer Whiting Petroleum Corp. WLL, +1.16% up 25%.

• Oil-field service company RPC Inc. RES, +2.90% up 16%.

• Deepwater driller Transocean Ltd. RIG, -0.15% up 15%.

• Refiner Sunoco L.P. SUN, +3.20% up 13%.

However, one interesting development of the past few days has been the rather tepid response from Big Oil stocks. Even as these smaller names rallied nicely, giants like Royal Dutch Shell RDS.A, +0.27% RDS.B, +0.36% and Chevron Corp. CVX, -0.26% were only up 3% or so — and Exxon Mobil Corp. XOM, -0.23% was barely in the green with a gain of less than 1%!

So what gives?

Well, the bottom line is still the bottom line for big oil companies — and unfortunately, even a few extra bucks tacked on to a barrel of oil is not going to undo the past 10 years of pain.

Big Oil is stuck in a secular decline. And that means all investors should be wary of thinking a recovery in oil prices is a sign that oil giants like Chevron and Exxon are back.
A story of supply and demand

It’s a bit reductive, but the story of Big Oil’s troubles are all about simple supply and demand trends.

On the supply side, a global glut of oil has continued steadily for some time. According to the International Energy Agency, world oil supply has expanded from 90.4 million barrels a day in the beginning of 2013 to 97.2 million barrels a day as of the end of the third quarter of 2016. That’s an 8% expansion in just three years, and occurring even as oil prices crashed from about $90 a barrel to current “highs” around $50.

It’s important to remember that a big reason for this surge in supply is the emergence of the United States as a global energy superpower, taking the top spot in global oil production in 2014 and only recently ceding it to Saudi Arabia. The surge in U.S. production over the last decade is simply amazing, from just under 5.1 million barrels a day in 2006 to 9.4 million in 2015 — a surge of 84%!

It’s not just the percentage increase that matters, either. As you’ll recall from the OPEC deal, oil-producing nations are agreeing to a collective cut of 1.8 million barrels per day. While that’s certainly substantive, it’s also about a fifth of U.S. oil output — which, if past is precedent, will only continue its upward trajectory.

That’s because shale-oil frackers have been resilient even in the face of falling oil prices, cutting costs and pumping frantically so they can sell enough crude to keep the lights on. As the Wall Street Journal noted in September, oil production dipped by only about 535,000 barrels a day compared with 2015 despite “a wave of bankruptcies” in the space. And furthermore, Goldman Sachs estimated at the time that firms would ratchet up production by year-end to bring overall output up year-over-year — and that was before this massive spike in prices driven by OPEC cuts.

Long story short is that the global oil supply remains massive, and even if OPEC tries to eat into the overhang with a modest cut, the U.S. is still pumping like mad.

That would be bad enough for supply-and-demand dynamics if we weren’t also in an era of weakening oil demand. According to the IEA, global oil-demand growth peaked at a five-year high of 1.8 million extra barrels a day in 2015 but has steadily slumped to a growth rate of just 1.2 million barrels a day in global demand for 2016.

A host of factors are keeping back oil consumption, from a focus on cleaner energy sources and electric cars to anemic industrial output around the world. And the general outlook is pretty grim going forward, too.

If these trends continue, we may see global oil demand flat-line or even decline even as overall global production continues to grow despite the OPEC deal.

That doesn’t bode well for the long-term hopes of oil.

Big Oil Is Less Equipped For This Market

Given all this as context, it’s no wonder small-cap drillers have run up even as majors like Chevron and Exxon Mobil have struggled.

These smaller companies are more agile, and have been able to cut back on costs reasonably quickly over the last two years. Conversely, they also will be much quicker in scaling up to respond to more favorable pricing.

Exxon, on the other hand, is a $360 billion behemoth that is naturally less responsive to short-term market conditions. Remember, this is a company that partnered with a Russian state-owned oil company in an expensive long-term drilling project in the icy waters north of Siberia, which includes $3.2 billion in exploration costs alone.

If oil ever gets back to $80 a barrel or higher, that project may turn out to be a smart one … but if it drops back under $40 a barrel for an extended period of time, there’s no way Exxon is breaking even on production there.

And sure, Exxon announced earlier this year it would be cutting capital expenditures by a quarter year-over-year, but it’s still on track to spend about $23 billion this year on developing new oil fields. That’s in large part because it needs to show shareholders constant growth, but also because it needs a continual flow of oil sales to support its massive operations.

After all, Exxon has $46 billion in total debt — and in fact lost its coveted AAA credit rating this year as the depth of its troubles in the era of cheap oil were revealed.

On top of that, Big Oil valuations are already stretched with Exxon stock trading at almost 21 times next year’s earnings and Chevron trading at roughly 25 times forecast earnings!

To be clear, I don’t believe that Big Oil is going bust anytime soon. However, it’s highly unlikely that we’ll see significant improvement in the share price of majors like Exxon or Chevron in 2017 even if oil prices stick at $50 a barrel or higher.

That’s because they simply aren’t built for an era of stagnant demand and comparatively low prices, while smaller players in the space can move quickly as conditions warrant.

To be clear, that doesn’t necessarily make the small-cap explorers a sure thing. If and when oil prices roll back, they will suffer a lot more than shares of Chevron or Exxon. But at least in times like this, swing traders can find opportunity and strike while the iron’s hot.

As for Big Oil, the story remains the same: a challenging long-term outlook, and little chance of outperformance.

Article Link To Marketwatch:

Trump’s Charm Of Not Being Obama

The new White House won’t fail to embrace the jobs that fracking and pipelines can bring.

By Holman W. Jenkins, Jr.
The Wall Street Journal
December 5, 2016

Barack Obama will retire a president personally popular with the American people yet who served them (and himself, and his party) badly.

He fretted in 2012 that he would lose the election just in time for Mitt Romney to get credit for an Obama recovery. That long-delayed recovery is finally coming in the last months of his administration—the economy finally broke 3% growth in the third quarter—and now Mr. Trump will get the credit.

He may even deserve a bit, witness the outbreak of Trumpian optimism in the stock market and small-business hiring plans.

Mr. Obama came in saying fossil fuels were running out and prices were destined to rise, and instead got the fracking revolution, whose related employment boost was arguably a factor in his re-election victories in Pennsylvania and Ohio. Yet he couldn’t stop looking this gift horse in the mouth.

Unshrewdly, in the name of satisfying his climate-change constituents, he needlessly launched a regulatory war against coal as cheap natural gas was already doing the job for him. Result: Democrats became the enemy in coal country.

He pandered to his green friends on the Keystone XL pipeline. Result: Mr. Trump is inheriting a rebound in natural gas fracking and an associated infrastructure boom that is just now heating up again in time for an incoming administration to get credit.

Natural gas fracking (far more than Trumpian trade policy or browbeating of companies like Carrier) is the force reawakening manufacturing opportunity in the Rust Belt, timed perfectly for Mr. Trump’s arrival.

Holding back development was not the depressed gas price—that’s what attracts manufacturers—but the lack of infrastructure, specifically pipelines, to get the gas to prospective plant sites. Blame Mr. Obama and his Keystone theatrics.

A Brazilian company, Braskem, just opted to build a $500 million plastics plant in Texas, not Philadelphia—home to 85% Obama voters—for one reason only: lack of pipeline infrastructure.

Mr. Obama, notice, pays this price for climate gestures that were purely symbolic, having no impact on climate, and especially purblind given gas’s role in reducing U.S. CO2 emissions.

His climate gestures were destined not to survive his presidency in any case. All he did was shoot himself, his party and American workers in the foot.

Mr. Obama paid lip service to tax reform, the giant dividend from which will now be collected, yes, by Mr. Trump.

His Iran deal was supposed to reveal Mr. Obama as a bold, creative, unblinkered foreign-policy innovator. Yet, for better or worse, Mr. Trump is already on a path to revise America’s relations with the world in far more daring fashion.

One dividend may already be coming in, judging by Saudi Arabia’s surprise decision this week to wave the white flag in its price war against fracking. America no longer is a country that benefits from low oil prices. All the indicators are turning up: rig count, “frac sand” prices, the share prices of domestic energy pioneers like Chesapeake and Oneok.

A Rust Belt renaissance that might have recaptured for Democrats the lost love of the American worker will become a halo for Team Trump instead. Shell is going ahead with a $6 billion petrochemical plant on the site of an old zinc smelter on the Ohio River in hard-hit Appalachia.

The plant, known as Shell Appalachia, will generate 6,000 construction jobs for several years, plus 600 full-time plant jobs, plus thousands more jobs indirectly for companies that make plastics, steel pipe, sound proofing for gas compressors, pickup trucks, housing etc., etc.

A Thai company is eyeing a second giant ethylene plant nearby in eastern Ohio. Guess who will get credit for lifting the fortunes of a region presidents have been promising to help since Kennedy?

Mr. Obama was too blinded by his shibboleths, his own brand of political correctness, to let good things happen in a way that would let him take credit for them.

He failed to lean in favor of things that were working—like fracking, like corporate America’s steady effort to encourage more consumer involvement in disciplining health-care costs, which ObamaCare might have borrowed from.

Mr. Trump can still screw things up. His trade-war talk, his eagerness to meddle in plant-siting decisions, could be poisonous to a gas-fueled manufacturing boom conspicuously linked to the world.

Fully 60% of the $170 billion in planned petrochemical investments tied to fracking now in the works are funded by overseas investors. These investors come because they think of America as a lawful, trustworthy place to do business.

But Mr. Trump, our new dealmaker-in-chief, also has a pragmatic streak as big as Manhattan’s Trump Tower. He will make mistakes but here’s betting they won’t be Mr. Obama’s mistakes of smug obliviousness.

Article Link To The Wall Street Journal:

Native Tribes Victorious In North Dakota -- For Now

By Ernest Scheyder and Valerie Volcovici 
December 5, 2016

The U.S. Army Corps of Engineers said on Sunday it turned down a permit for a controversial pipeline project running through North Dakota, in a victory for Native Americans and climate activists who have protested against the project for several months.

A celebration erupted at the main protest camp in Cannon Ball, North Dakota, where the Standing Rock Sioux tribe and others have been protesting the 1,172-mile (1,885-km) Dakota Access Pipeline for months.

It may prove to be a short-lived victory, however, because Republican President-elect Donald Trump has stated that he supports the project. Trump takes over from Democratic President Barack Obama on Jan. 20 and policy experts believe he could reverse the decision if he wanted to.

The line, owned by Texas-based Energy Transfer Partners LP, had been complete except for a segment planned to run under Lake Oahe, a reservoir formed by a dam on the Missouri River.

That stretch required an easement from federal authorities. The Obama administration delayed a decision on the permit twice in an effort to consult further with the tribe.

"The Army will not grant an easement to cross Lake Oahe at the proposed location based on the current record," a statement from the U.S. Army said.

Jo-Ellen Darcy, the Army's Assistant Secretary for Civil Works, said in a statement the decision was based on a need to explore alternate routes for the pipeline, although it remains unclear what those alternatives will be.

Protesters have said the $3.8 billion project could contaminate the water supply and damage sacred tribal lands.

"I hope they follow through here with this. They haven't been following the law all along. So we'll see - but this is a victory today for our people and our water," said Gerad Kipp, 44, an irrigation engineer from Missoula, Montana and a Native American.

In a statement, Standing Rock Chairman Dave Archambault II thanked activists for their support in the protest effort.

"The Standing Rock Sioux Tribe and all of Indian Country will be forever grateful to the Obama Administration for this historic decision," he said.

"We want to thank everyone who played a role in advocating for this cause. We thank the tribal youth who initiated this movement."

Protest organizers had for months argued that crossing the Missouri River adjacent to the Standing Rock Sioux Reservation presented a danger to their water source. Protests grew over the months, with hundreds of veterans flocking to the camp in recent days to stand against what they say are aggressive tactics from law enforcement.

Activists at the camp were seen hugging each other and letting out Native American war cries on Sunday, but many remained wary, knowing that Trump has voiced support for the line.

"It's not a 100 percent victory. But I think the people who've been here for almost eight months have earned the right to be excited today," said Eryn Wise, 26, an organizer with International Indigenous Youth Council, at the camp.

'Fails To Resolve Issue'

North Dakota Congressman Kevin Cramer and Senator John Hoeven, both Republicans who favor the line, blasted the decision, saying it "violates the rule of law and fails to resolve the issue." Cramer, an adviser to Trump under consideration for a cabinet post, said the president-elect would "restore law and order."

Trump has yet to react to Sunday's decision.

"He [Trump] could approve the pipeline within a matter of hours of taking office," said Brigham McCown, the former head of the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) under George W. Bush. "He can simply reinstate the previous decision or by executive order say that it’s part of national critical infrastructure and approve a permit."

Still, the pipeline route's opponents said they hope the line will be rerouted.

"We're hopeful that when the Trump administration takes office it will look at all of the priorities it has and that putting at risk the water supply of the Standing Rock Sioux isn't on their list," said Michael Brune, executive director of the Sierra Club.

Any alternative route would still likely need to cross the Missouri River, probably upstream of Lake Oahe and closer to the state capital of Bismarck. Many pipelines travel under U.S. waterways already, and pipe is considered a safer way to transport crude oil than rail.

North Dakota Senator Heidi Heitkamp, a Democrat, nodded to the fact that the next steps remain unclear, saying in a statement Sunday the pipeline "still remains in limbo."

Energy Transfer has said in the past they did not intend to reroute the line. Even if the easement had been granted, it would have been months before the line was completed.

Pipeline proponents are also looking to different policies from the incoming Trump administration, particularly after the Obama Administration's denial of the Keystone XL pipeline, which would have come down from Canada through Nebraska. A number of states and municipalities in the country have made it more difficult to build pipelines in recent years.

"With the federal environmental assessment finding the current route will have the least impact on the environment, we're looking forward to getting past this administration's politicization of Dakota Access and future decisions made on the merits of this project," said John Stoody, a spokesman for the Association of Oil Pipe Lines, in Washington.

A spokesperson for Energy Transfer Partners could not immediately be reached for comment.

Article Link To Reuters:

U.S. Health Spending In 2015 Rose At Fastest Rate Since 2007

By Toni Clarke
December 5, 2016

U.S. health spending in 2015 rose at its fastest rate since 2007, driven by expanded access to insurance under the Affordable Care Act and high-priced specialty drugs, according to government figures released on Friday.

Growth rose 5.8 percent to $3.2 trillion, or $9,990 per person, according to federal data published in the independent journal Health Affairs and compiled into a report by officials with the Centers for Medicare and Medicaid Services.

After five years of historically low growth between 2009 and 2013, spending picked up in 2014 and 2015 as the Affordable Care Act - sometimes referred to as Obamacare - expanded health insurance coverage through marketplace insurance plans and Medicaid, the report said.

Over the two-year period between 2013 and 2015 the number of people with private health insurance rose 2.5 percent on average to 9.7 million. The number of people who enrolled in Medicaid rose on average 8.4 percent to 10.3 million.

"The health sector experienced dramatic changes in 2014 and 2015, as the main coverage provisions of the ACA were implemented," according to the report. "Over those two years the insured share of the population increased 4.9 percentage points and reached 90.9 percent."

For the first time the federal government became the largest sponsor of healthcare, the report said. Its share of health spending rose to 29 percent in 2015 from 28 percent in 2014 and 26 percent in 2013.

"Federal health spending growth in 2015 remained high mainly because of the continuation of enrollment increases in Medicaid, as newly eligible adults are fully financed by the federal government," the report said. "Federal Medicaid payments, which accounted for 37 percent of total federal health spending, increased 12.6 percent in 2015."

Healthcare spending as a percentage of gross domestic product rose to 17.8 percent from 17.2 percent, driven by increases in the use of healthcare services and the high cost of prescription drugs such as Gilead Sciences Inc's (GILD.O) hepatitis C drugs Sovaldi and Harvoni which in 2015 generated combined sales of nearly $20 billion.

Spending for private health insurance rose 7.2 percent in 2015 to $1.1 trillion, accounting for a third of the total. Medicare spending rose 4.5 percent to $646.2 billion, or 20 percent of the total, and Medicaid spending rose 9.7 percent to $545.1 billion, or 17 percent of the total.

Article Link To Reuters:

Social Media Ads To Hit $50 Billion By 2019

By Adela Suliman
December 5, 2016

The amount of money spent on advertising on social media is set to catch up with newspaper ad revenues by 2020, a leading forecaster said on Monday.

The rapid expansion of social media platforms on mobile devices, as well as faster internet connectivity and more sophisticated technology, has triggered a huge shift in the way many people get their news.

Advertising agency Zenith Optimedia, owned by France's Publicis, predicts global advertising expenditure on social media will account for 20 percent of all internet advertising in 2019, hitting $50 billion and coming in just one percent smaller than newspaper ads. It expects social media to overtake newspapers comfortably by 2020.

"Social media and online video are driving continued growth in global ad spend, despite political threats to the economy," Jonathan Barnard, head of forecasting at Zenith, said.

The media industry has been convulsed by the rapid shift in advertising trends in recent years, with firms moving their ad budgets from traditional sources such as newspapers to websites found on computers and mobile phones.

Marketers are increasingly directing their spending to social media sites where ads blend into users' newsfeeds on platforms such as Facebook and Snapchat proving more effective than interruptive banner formats.

Zenith's report forecasts that global advertising expenditure will grow 4.4 percent in 2017, the same rate as in 2016, which it said would be a strong performance given that big events like the Olympic Games, Britain's EU referendum and the U.S. presidential election boosted advertising this year.

Online video advertising is also rapidly growing and set to total $35.4 billion across the world by 2019, fractionally ahead of the amount spent on radio advertising but still far less than television.

Global spending on advertising has been stable since 2010 the report showed, although growth has declined in the Middle East and North Africa. It was expected to continue to grow strongly in China and much of Asia.

Article Link To Reuters:

Greenspan’s Irrational Exuberance Looks Entrenched, 20 Years On

Stocks climbed to records, valuations reached 14-year highs; Bonds look to be in bigger bubble now, and they just slumped.

By Garfield Clinton Reynolds and Adam Haigh
December 5, 2016

Two decades after then-Federal Reserve Chairman Alan Greenspan fretted about asset prices reaching unsustainable levels -- a pronouncement that caused a brief interruption in the U.S. stock rally -- his successors might be tempted to warn again markets are getting ahead of themselves.

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets,” Greenspan said in a speech on Dec. 5, 1996. That comment alone has an eerie resemblance to the disinflationary climate and tumbling interest rates that have afflicted the world in recent years.

Greenspan went on: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The central banker once dubbed “the maestro” was speaking as the S&P 500 Index headed for its best two-year surge in four decades, up more than 60 percent. Yet his words did famously little to halt a five-year rally that saw the gauge triple in price by the end of 1999. Treasuries meanwhile had pulled back after a jump that had shrunk the extra compensation investors were getting for holding benchmark 10-year notes to a two-decade nadir.

Fast forward to the present, and all three key U.S. equity gauges popped to records in recent weeks. Prices relative to earnings expectations are the highest they’ve been since the dot-com bubble that peaked in 2000. Shares have surged and bonds tumbled over the past month after Donald Trump’s unexpected election win.

Even after the pullback, bonds look more like the real bubble today -- the 10-year term premium only climbed back above zero three weeks ago after hitting an unprecedented minus 0.75 percentage point in July.

Greenspan himself now says he’s more worried about debt than equity, speaking in an interview with the Wall Street Journal published Dec. 3. He also recognized his warning had had little impact; and repeated his view that bubbles are almost impossible to stop once they get going.

“The philosophical thinking behind Greenspan was that the central bank was there to pick up the pieces” rather than prejudge on bubbles, said Chris Green, a veteran of two central banks who now heads economics and strategy at First NZ Capital Group Ltd. in Auckland. “We’ve moved away from that. It’s a more holistic approach that central banks have adopted with the benefit of hindsight and looking at the problems that emerged” from the Greenspan era, he said.

Some Asia-Pacific policy makers appear to have succeeded in pricking bubbles -- read about that here.

When the central bank itself is a mammoth buyer, it makes it harder to argue against bubbles. That’s the position for Fed Chair Janet Yellen, whose institution holds more than $4.4 trillion in Treasuries, the end-result of purchases some blame for pushing valuations beyond rational measures of fundamentals.

In any event, monetary policy makers have been rather brushed aside lately, as the new kid on the block -- the U.S. president-elect and his reflationary spend-and-cut-taxes policies -- helped trigger a record bond rout, reinvigorating equities and sending the dollar to decade highs. Bill Gross and Jeff Gundlach are among investors musing that the so-called Trump rally may have gone as far as rationality might allow.

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Trump’s Risky Nationalism

By Robert J. Samuelson
The Washington Post
December 5, 2016

“For the first time since the end of the Second World War, the future relationship of America to the world is not fully settled.”

Henry Kissinger, in an interview with the Atlantic in its December issue.

Donald Trump is an avowed economic nationalist. He promises to put American interests “first” in fashioning trade policy and negotiations. If he fulfills these pledges — and the evidence so far suggests he will — he will redefine America’s global role in a fundamentally deceptive and destructive way.

There is a real issue here. It transcends Trump’s headline-grabbing success last week in pushing Carrier, a maker of air conditioners, to reverse its decision to move roughly 800 jobs to Mexico. History matters. Ever since World War II, with some lapses, American leaders have embraced the notion that trade could foster prosperity and promote democratic societies.

Trade was not just about economics; it was also about geopolitics. Disillusioned with the isolationism that followed World War I, Americans turned internationalist after World War II. The emphasis on trade was not simply to bolster prosperity; it also aimed to bind nations together so they would compete commercially and not resort to war.

By and large, the strategy succeeded. Shielded by massive numbers of U.S. troops, Western Europe and Japan staged strong economic recoveries that strengthened their wobbly democracies. So what we got for championing open trade — aside from the usual benefits of more consumer choice and greater economic efficiency — was a more stable postwar world.

Fine, say critics. But this pro-trade foreign policy subordinated America’s economic interests — the well-being of its workers and companies — to fuzzier geopolitical goals. World War II ended seven decades ago. Surely a few decades of aiding our competitors was sufficient, especially when U.S. companies were so dominant during those years. Now the pro-trade bias hurts U.S. firms and produces chronic American trade deficits.

Without citing the history, Trump buys into this critique. His stump speeches regularly denounced imports as destroying American jobs and creating trade deficits. For these sins, he blamed inept U.S. trade negotiators who gave away too much in access to the U.S. market and received too little in return.

Could he be right? Stripped of rhetorical excesses, this narrative sounds reasonable enough. But there are gaping omissions.

For starters, it vastly exaggerates the role of trade in destroying U.S. jobs. Of course, many American factories have shut, and their production has moved abroad (Mexico, China) or been replaced by the imports from foreign competitors. But these losses don’t explain the steep declines in manufacturing jobs, which dropped a third since 1990 (from almost 18 million to 12 million in 2015), even though factory output — of planes, earth-moving equipment, pharmaceuticals, computer chips — nearly doubled over the same years. Automation is the main cause.

The often-overlooked truth is that the U.S. economy, despite much rhetoric to the contrary, is less globalized than virtually all other advanced countries. We produce most of what we consume. True, we imported nearly $2.8 trillion of goods and services last year, but we also exported almost $2.3 trillion. As a share of the $18 trillion economy, the deficit was less than 3 percent and about half its 2006 level.

The danger of economic nationalism is that it deludes us into thinking that our problems mainly originate abroad and can be fixed by “tougher” trade policies. Not so. It’s worth recalling that the two largest economic setbacks since World War II were both domestic in origin: the high inflation of the late ‘70s, peaking at more than 13 percent (caused by easy money); and the 2008-2009 financial crisis (caused by reckless financial speculation).

Although the United States should pursue its economic interests, it’s doubtful that trade concessions will cure chronic trade deficits. These mainly reflect the dollar’s role as the major international money for trade and international investment. Demand for dollars by foreigners raises the currency’s value, putting U.S. producers at a competitive disadvantage in global markets. This is unfair to American factories and farms, but the alternative — ruining the dollar through high inflation or exchange controls — would be worse.

Trade remains foreign policy. It’s true that today’s circumstances are very different from those after World War II. But the basic reality endures: Who we trade with and how are expressions of national purpose and power. Trump is wrong to reject the Trans-Pacific Partnership, which would encourage trade between the United States and other Pacific-rim countries, creating an alternative to a China-dominated system.

Perhaps Trump’s economic nationalism is a rhetorical bluff, intended to improve his bargaining position in negotiations. Or perhaps not. Down that path lie protectionism, isolationism, more trade conflicts and threatened economic growth. It would redefine America’s relationship with the world.

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Merkel Is Next

By Noah Rothman
December 5, 2016

If Angela Merkel wins reelection to her post as German Chancellor next year, she will tie Helmut Kohl’s record as the longest-serving democratically elected German leader in the post-war period. If Vladimir Putin’s Russia can help it, she will fall short of her objective.

The 2013 revelations exposed by Edward Snowden regarding the National Security Administration’s efforts to listen in not just on America’s adversaries but its allies was particularly controversial in Germany. The discovery that American officials had accessed the diplomatic communications of Berlin officials forced Merkel to scale back cooperation with the United States. In 2015, revelations that the German intelligence services (BND) were also spying on Germany’s European allies and sharing that information with the United States compelled Merkel to sever some of Berlin’s intelligence sharing agreements with Washington entirely.

American intelligence-gathering activities are, to say the least, a touchy subject in Germany. That’s why a trove of recently released WikiLeaks documents pilfered from the German government is such a big deal.

“The collection contains early agreements between the BND and the NSA and internal processes at the BND, but also more recent details on the close collaboration between the two agencies,” WikiLeaks announced this week. The documents released relate to a German inquiry into the BND scandal and include information on which private American firms were operating in Germany’s intelligence sector.

WikiLeaks, a clearinghouse for Russian intelligence, is still basking in its successes in undermining the Democratic Party’s political prospects. Hackers with what the FBI believes are links to Russian military intelligence infiltrated the Democratic National Committee, the Clinton campaign, and a variety of other Democratic organs—information which conspicuously found its way into the public via Julian Assange’s hacktivist organization.

WikiLeaks isn’t the only group at arm’s length from Russia that is destabilizing the political situation in Germany. A refugee crisis emanating from the perpetual conflict in Syria (a conflict in which Russia is an active combatant) is also a source of internal political tensions. For reasons which may yet come to be seen by posterity as a historic blunder, albeit one embarked upon with the best of intentions, Merkel’s decision to welcome and attempt to integrate displaced Middle Easterners has discredited center-right governance among many center-right voters. While some of the anti-refugee backlash is genuine and organic, that may not be so for all of it.

As The Atlantic’s Mike Lofgren detailed the multifarious ways in which slick media efforts to mainstream and legitimize extremist and xenophobic political movements thought are popping up all over Germany. One such publication, which used to agitate from the far left has transformed itself into what he describes as the of Germany, even goes so far produce hagiographical profiles of Donald Trump. Since the crisis in Ukraine, German security officials believe Russia has been stoking existing tensions, supporting shadowy political organizations, and disseminating misinformation–all to destabilize Germany and bring down Merkel’s government.

According to Igor Eidman, a sociologist and cousin of the murdered Russian opposition politician Boris Nemtsov, Putin’s policy objective in Germany is clear,” Lofgren wrote. “The country is the keystone of Europe, and Chancellor Angela Merkel is by default the principal figure holding Europe together as a political entity.” Moscow’s objective is to shatter the European compact and to compel Western Europe to reject the consensus conceded to even by Soviet officials in the last days of the Cold War, that the United States is a European power. If that is the goal, Angel Merkel has to go.

The effect of Russian destabilization efforts in the United States has perhaps been overstated, particularly by those who are in the market for a scapegoat. The impact of Moscow’s provocations may never be quantifiable. It is, however, just as unsubstantiated to suggest that Donald Trump owes his presidency to Russia as it is to contend Moscow’s espionage and disinformation campaign had no impact whatsoever on American voters. Similarly, it would be folly to pretend as though Merkel, a longtime thorn in Vladimir Putin’s side, isn’t in his crosshairs.

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What To Know Now That Italy Has Voted ‘No’

J.P. Morgan strategist’s advice: Snatch up any beaten-down Italian shares

By Karen Friar
December 5, 2016

Italy’s Prime Minister Matteo Renzi has said he will officially resign Monday, after voters apparently rejected his proposals for constitutional reform. What should investors keep an eye out for after his defeat?

Although the referendum on Sunday was officially on Renzi’s plan for legislative overhaul, it was widely seen in Italy as a vote of confidence in the prime minister and his government. In voting “no” — projections suggest 59% of those in the ballot made that choice — the Italians have set the stage for an early election and perhaps given local populist parties the chance to deliver a Brexit- or Trump-style shake-up.

But if the political uncertainty lasts, the fallout from the vote could have an effect not only within Italy — on its already embattled banks, for instance — but also beyond the borders of the boot-shaped country. Read on for what to know now Renzi is about to step down.

Boost For Euroskeptics In Italy

The black eye for Renzi is seen as a victory for the 5 Star Movement, which opposed his political and economic reforms. The party, which has campaigned for Italy to abandon the euro and to reject EU budgetary restrictions, has as much popular support as Renzi’s own Democratic Party, polls show.

The vote may be a signal Italians are ready to put 5 Star in a position of more political power — something that could threaten the eurozone’s current makeup.

“Italian problems could theoretically spark a systemic crisis in the eurozone,” Holger Schmieding, chief economist at Berenberg, said last week.

Euro Slips

Europe’s common currency dropped slightly as exit polls indicated a lead for “no” in the ballot. The euro EURUSD, -1.0030% slid to $1.0564 against the dollar, down about 0.9% from its close on Friday. It fell 0.7% against the safe-haven EURJPY, -0.99% yen.

“The euro is taking a hit on the back of this news as expected, and we anticipate that this move could continue for some time,” said Naeem Aslam, chief market analyst at ThinkMarket, in emailed remarks late Sunday..

“Although, the selloff is not intense, as there is nothing new or any kind of surprise. The market was expecting this outcome and results have come in line with the expectations,” he said.

Stocks On Track To Open Lower

Futures on the S&P 500 ESZ6, -0.26% and the FTSE 100 pointed to losses of 0.4% and 0.6% at the open for the U.S. and U.K. stock markets respectively, Dow Jones Newswires reported.

How stocks in Europe perform when trading begins Monday will signal the depth of investors’ worry about the eurozone. The lackluster response in the euro may well be echoed by equities, in that the referendum result may already by priced in.

But if Italian shares drop when markets open Monday, investors should snatch them up, J.P. Morgan’s chief European equity strategist Mislav Matejka said ahead of the vote last week.

“There could be a knee-jerk 2-4% market weakness on Monday if there is a ‘no’ outcome. But unlike following the U.S. election and Brexit, this will not be a big surprise, as the polls were consistently in a ‘no’ camp. Investors have already reduced exposure to Italy significantly,” he told MarketWatch.

Italy’s FTSE MIB index I945, -0.07% has dropped by more than 20% this year.

More Pressure For Italian Banks

Italy’s banks have taken the biggest beating in that slide for stocks, as worries grew that the political upheaval would upset efforts to support the country’s struggling big lenders. The FTSE Italia All-Share Banks Sector Index IT8300, -0.64% has slumped 48% to become one of Europe’s worst-performing indexes.

But like all stocks in Italy, those bank stocks are now priced so low that any further drop would be unwarranted, Matejka said.

“So we think if there is any knee-jerk weakness, it’s great buying opportunity. We would buy into it, because at the end of the day, contagion would be contained by the [European Central Bank],” he said.

Even so, the referendum does put a big question mark over efforts by Banca Monte dei Paschi di Siena SpA BMPS, -5.39% to raise more than $5 billion in capital. If shares in the troubled bank, which fared badly in European stress tests in July, fall heavily on Monday, then that could upset that effort, as well as bruise confidence in other Italian lenders.

Bonds And ‘Systemic Risk’

The problems in Italy could — in theory — “spark a systemic crisis in the eurozone,” said Holger Schmieding, chief economist at Berenberg, in a recent note.

A “protracted period of political uncertainty after a ‘no’ vote could exacerbate the Italian banking issues, unsettle the Italian bond market and weigh on business and consumer confidence,” he said.

Over recent weeks, the spread between Italian and German 10-year government-bond yields has reached a two-year high, according to Dow Jones Newswires. That has been interpreted by some as a sign that the eurozone is at risk of a breakaway.

Even though markets have been anticipating a “no” vote in Italy, Italian sovereigns bond yields may continue to surge as investors will ask higher return for their risk, Aslam said.

“The ECB, which is going to meet later this week, will have to provide more details about their plan in order to address this issue. [The] Italian banking sector may become the direct causality of this outcome, and during the European session we could see some more selling,” he said.

The ECB And Italian Banks

To cope with any immediate market volatility following the referendum, the ECB could temporarily tilt its QE purchases toward more Italian government debt.

The referendum result is likely to crop up in the ECB’s monetary policy discussions when it meets on Thursday, officials and investors told The Wall Street Journal.

The eurozone’s monetary authority will decide on the future of its €1.7 trillion ($1.8 trillion) bond-purchase program, due to expire in March.

A “no” vote potentially heightens the perceived need to keep buying €80 billion a month of bonds, even as some policy makers press Draghi to send a clear signal on how and when the so-called quantitative-easing program will be wound down.

“The ECB might chew on the risk that a ‘no’ vote delays absolutely necessary repair work on Italy’s banks,” said Martin Lück, chief German investment strategist at BlackRock Inc. “It wants to make sure that doesn’t happen.”

To cope with any immediate market volatility following the referendum, the ECB could temporarily tilt its QE purchases toward more Italian government debt. Such action, which could be taken without a formal decision by the bank’s policy makers, would lend support to the Italian bond market going into next year. The central bank has pledged in any case to front-load its bond purchases before the holidays.

Early Election?

Whether anti-EU parties become more politically influential may depend on what happens after Renzi’s resignation.

One possibility is for the Italian president, Sergio Mattarella, to ask Renzi to put together a different cabinet and form a new government — but this is seen as unlikely after the referendum defeat.

Alternatively, Matterella could try to put together a “caretaker government,” with a new prime minister, who would work through next year’s budget.

But he could also call early elections, something that opposition parties such as 5 Star and Berlusconi-backed Forza Italia are reportedly pushing for, to happen as soon as possible.

However, mainstream Italian parties are seeking to change existing voting laws before any election. Those laws could help populist parties take more power, by giving them extra seats in Parliament if they win more than 40% of the vote.

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Italy's Banks On The Brink

By Lionel Laurent
December 5, 2016

For once, the pollsters were right -- and it's bad news for financial markets. Italians have rejected Prime Minister Matteo Renzi's make-or-break constitutional reform, and the 41-year-old leader is on his way out.

The prospect of political instability in the eurozone's third-largest economy whacked the euro and threatens to deal a serious blow to shares of struggling Italian banks such as Banca Monte dei Paschi di Siena SpA, which is scrambling to draw a line under a pile of bad loans and raise capital from private investors at the same time.

Yet as unwelcome as the result may be, it doesn't have to be fatal for efforts to clean up Italy's ailing banking industry.

The urgent problem facing the Italian authorities right now is Monte Paschi, which is part-way through its complex plan to raise 5 billion euros ($5.3 billion) of new equity, almost 10 times the bank's own market capitalization, before the end of December. A debt-to-equity swap has helped bring in about 1 billion euros; the bank still needs to find an anchor investor and outside funds to cover the rest.

A power vacuum in Italy and wobbly financial markets will make that task a lot harder -- Monte Paschi and its advisers are set to decide Monday whether or not to scrap the deal. The end result could be nationalization, which Renzi has spent most of this year trying to avoid, given the likely losses it would inflict on Italian retail bondholders. The ripple effects probably would spread to far bigger rivals like UniCredit SpA, which is expected to seek about 7 billion euros in capital soon to bolster its finances, analyst estimates suggest.

There are ways to contain the pain. A swift resolution to political instability in Italy -- for example by assembling a caretaker government under an establishment figure like Finance Minister Pier Carlo Padoan -- and financial-market intervention from the European Central Bank to offset any panicky selling of Italian sovereign debt might allow cooler heads to prevail.

Monte Paschi's Discount To Assets: 94%

This referendum result was widely expected, after all, and Monte Paschi's battered shares are already trading at an epically steep 94 percent discount to the value of its assets. Throwing a lifeline to this bank has always been a tough sell, but a deep-pocketed investor like Qatar's sovereign wealth fund may still be willing to take part, provided market jitters are short-lived and political stability is in sight. The ECB's expected announcement this week of an extension to its bond-buying program also would offer a show of support.

There's the possibility, too, that even if Monte Paschi fails to keep its recapitalization plan alive, Europe and Italy will hit upon a fudge or delay that avoids a messy or painful state bailout. A lot depends on the ECB bank regulator, which this year has cracked down on weak eurozone bank balance sheets and forced Italian banks to merge or raise fresh funds.

Much also depends on Europe's willingness to grant exemptions to state aid rules, which demand bondholders must share the burden of taxpayer-backed bank rescues. Still, Italy may find its negotiating hand is firmer at a time when populist parties are gaining ground and when France and Germany face elections next year.

Europe has bent its own rules in the past when faced with crisis situations such as Greece. More leniency today might be politically expedient if it avoids financial-market woes spreading from Italy to the rest of the euro region, or fueling the flames of voter ire against Brussels.

The referendum result is not the best outcome for Italy's banks -- but it shouldn't be a surprise, either. While the specter of a state bailout looms large, the worst of the pain can still be avoided.

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Italy's Renzi Vows To Resign After Crushing Referendum Defeat

By Crispian Balmer and Gavin Jones
December 5, 2016

Italian Prime Minister Matteo Renzi vowed to resign after suffering a crushing defeat on Sunday in a referendum on constitutional reform, tipping the euro zone's third-largest economy into political turmoil.

His decision to quit after just two and a half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year.

The euro fell to 20-month lows against the dollar, with markets worried that instability in the euro zone's third largest economy could reignite a dormant financial crisis and deal a hammer blow to Italy's fragile banking sector.

Renzi's resignation could open the door to early elections next year and to the possibility of an anti-euro party, the opposition 5-Star Movement, gaining power in the heart of the single currency. 5-Star campaigned hard for a 'No' vote.

"I take full responsibility for the defeat," Renzi said in a televised address to the nation, saying he would hand in his formal resignation to President Sergio Mattarella on Monday.

Mattarella will have to embark on a round of consultations with party leaders before naming a new prime minister -- Italy's fifth in as many years -- who will be tasked with drawing up a new electoral law.

Early projections said Renzi managed to win little more than 40 percent of the vote on Sunday following months of bitter campaigning that pitted him against all major opposition parties, including the anti-system 5-Star Movement.

Italy's parties will now have to work together on the new electoral law, with the 5-Star urging a swift deal to open the way for elections in early 2017, a year ahead of schedule.

Opinion polls show Renzi's Democratic Party (PD) is neck-and-neck with the 5-Star, which has called for a referendum on Italy's membership of the euro currency.

Demolition Man

Renzi, 41, took office in 2014 promising to shake up hidebound Italy and presenting himself as an anti-establishment "demolition man" determined to crash through a smothering bureaucracy and redraw the nation's creaking institutions.

Sunday's referendum, designed to hasten the legislative process by reducing the powers of the upper house Senate and regional authorities, was to have been his crowning achievement.

However, his reforms so far have made little impact, and the 5-Star Movement has claimed the anti-establishment banner, tapping into a populist mood that saw Britons vote to leave the European Union and Americans elect Donald Trump president.

In one relief for mainstream Europe, Austrian voters roundly rejected on Sunday a candidate vying to become the first freely elected far-right head of state in Europe since World War Two, choosing instead a Greens leader as president.

The biggest immediate loser from the 'No' triumph in Italy could be Italy's third-largest bank, Monte dei Paschi di Siena, which is bowed by bad loans and is looking to raise 5 billion euros ($5.3 billion) this month to stave off collapse.

Investors are likely to shun the operation if political chaos prevails, meaning a state intervention will be needed to save it. Several other lenders also need a cash injection to stay afloat, raising fears of a domino effect.

Economy Minister Pier Carlo Padoan, seen as a possible candidate to replace Renzi, sought to calm nervous markets on Friday, saying there was "no risk of a financial earthquake" if 'No' wins, though there may be "48 hours of turbulence".

A Nov. 25 Reuters poll suggested investors would expect to demand an extra 25 basis points in yield to hold Italian debt over its German equivalent if the reform is rejected, with the euro dipping 1.25 percent.

The risk to stability, meanwhile, is enough to have the European Central Bank preparing to step in if needed.

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