Monday, December 12, 2016

Monday, December 12, Morning Global Market Roundup: Oil Surges After Output Cuts, Strong Dollar Weighs

By Saikat Chatterjee
December 12, 2016

Oil prices jumped to their highest levels in a year and a half on Monday after OPEC and non-OPEC producers agreed to cut oil output to ease a global glut, while the U.S. dollar extended gains before a Federal Reserve meeting this week, at which a rate hike is widely expected.

The agreement between OPEC and a number of other oil producing nations was the first joint action since 2001, following more than two years of low prices that strained many government's budgets and spurred unrest in countries from the Middle East to Latin America.

Brent futures for February delivery rose 5 percent to $56.94 per barrel, with U.S. crude spiking a similar amount to $54.07 per barrel in early Asian trade before trimming gains. [O/R]

The spike in oil prices comes in the wake of a renewed focus on inflation after data on Friday showed a rare spike in producer prices in China, prompting investors to worry that inflationary pressures are making a come back globally.

"We have seen OPEC and non-OPEC producers agreeing, which is also boosting reflation expectation around the world," said Chris Weston, an institutional dealer with IG Markets.

In another sign of the reflation trade, breakeven rates - the gap between yields of five-year U.S. debt and a matching tenor in inflation-protected securities was at two-month highs, indicating markets are expecting inflation to accelerate.

"Traders want to be hedged against this situation, so people are buying financials globally. Everyone wants to benefit from a reflation trade, and financials are generally your natural hedge against that."

Though MSCI's broadest index of Asia-Pacific shares outside Japan was broadly flat after posting its biggest weekly rise in nearly three months last week, energy plays in Hong Kong and Shanghai such as CNOOC and PetroChina were among the top gainers.

Despite the bounce in some Asian stocks, broad investor sentiment remained cautious from a flows perspective with data showing a pick up in outflows from emerging markets and inflows toward U.S. markets, according to Jefferies analysts.

A preliminary survey from the University of Michigan on Friday showed U.S. consumer sentiment index at its highest since January 2015, which may see the Fed strike a more confident tone on the U.S. economic outlook at its final policy meeting of 2016 on Tuesday.

Futures have virtually priced in a rate increase this week while the greenback gained fresh legs from the data, posting a 10-month high against the Japanese yen and standing tall against a trade-weighted basket of peers.

The euro was trading near a one-year low against the dollar with the common currency changing hands at 1.055 per dollar. Analysts at BBH expect a rebound to 1.07 per dollar if the 1.05 level is not broken.

Morgan Stanley economists expect six rate increases between now and end-2018 and say that any dollar pause is an opportunity to add to long positions though some analysts adopted a more cautious stance.

"The markets are expecting too much from the Fed and that is what latecomers to the dollar rally will be thinking," said Cliff Tan, a markets strategist at Bank of Tokyo-Mitsubishi UFJ.

In the bond markets, the U.S. Treasury yield curve steepened further with the spread between 10-year and two-year bond yields reaching a one-year high of 135 basis points. It has gained 35 basis points over the last month.

Gold prices edged lower amid a broad rise in risk appetite with spot gold hitting its lowest since Feb. 5 at $1,153.93 an ounce and was down 0.3 percent.

Article Link To Reuters:

What 1980 And 2016 Have In Common

Like the Reagan and Thatcher revolutions, Trump and Brexit are reactions to stagnation.

By Michael Solon
The Wall Street Journal
December 12, 2016

Just as Margaret Thatcher’s ascendance in 1979 foreshadowed Ronald Reagan’s in 1980, so the British vote to exit from the European Union earlier this year presaged Donald Trump’s triumph. The two nations with the longest traditions of liberty—the United Kingdom and the United States—both have a renewed chance to reclaim their freedom from overzealous regulators and international institutions, which have served government interests but let down average citizens.

Since 2008, the largest developed economies, in an effort to build financial stability and economic prosperity, have engaged in unprecedented coordination of financial regulation, monetary policy and business taxation. What the G-7 nations got instead was the weakest economic growth, the largest surge in government debt, the riskiest monetary expansion and the gravest deflationary pressures of the postwar era.

Yet Brexit and the Trump administration could help cast off these international entanglements and reverse the Europeanization of the two economies. If they do, the U.K. and U.S. may demonstrate how greater freedom and limited government can restore domestic prosperity and stability—as Thatcher and Reagan did a generation ago.

After the 2008 financial crisis, the G-7 massively expanded international coordination. The Financial Stability Forum was expanded into the Financial Stability Board, charged with integrating the monetary policy of central banks and supervising financial institutions such as banks, insurers and asset managers. The G-20 worked to protect government revenues through the Base Erosion and Profit Shifting project.

The result? Since 2007 the public debt of the G-7 nations, excluding sober Canada and Germany, has leapt to 130% of gross domestic product from 52%, according to each nation’s own reports. The EU’s monetary base has doubled, the U.K.’s is up 350%, and America’s and Japan’s have increased nearly fourfold since 2008. Real GDP growth in the full G-7 has averaged 0.8% from 2008-15—one-fourth the average in the prior quarter-century.

Massive debt and monetary excess have delivered stagnation and deflation. The G-7 guardians have failed by their own metrics of safety and soundness and their stated goals of prosperity and fiscal responsibility. Despite unsuccessful rescue plans and drained emergency measures, they never asked what went wrong.

The rescue failed because growth wasn’t the ultimate goal. In late 2008, President Obama’s new chief of staff Rahm Emanuel said that “you never want a serious crisis to go to waste.” He was signaling that the White House saw an opening to use the crisis to expand the role of government. Where America led, others followed. Long after the crisis had passed, G-7 authorities pursued debt and monetary expansion along with command-and-control powers. The governments won but their economies, currencies, investors, savers and workers lost.

The U.S. government has helped itself in debt financing, paying almost the same interest costs today as it did in 2007, despite almost tripling the publicly held debt. At the same time, bureaucrats won arbitrary and self-serving power over financial services. International regulators now override national and state laws without authority or input, turning domestic “independent regulators” into puppets. Political commissars embedded in banks own no shares yet veto board decisions. Money-market rules burden equities and public-purpose bonds, but favor federal debt. So do swap collateral rules and Basel rules on liquidity and capital.

The list goes on: Dodd-Frank’s Volcker rule threatens liquidity in market-making operations but exempts U.S. government securities. Housing regulators again proclaim that the government-sponsored enterprises Fannie Mae and Freddie Mac have a “duty to serve” low-income buyers by underwriting higher risk mortgages. International regulators direct insurers to invest in public infrastructure, proclaiming the profitability of these projects when experience demonstrates otherwise. Ubiquitous capital requirements force financial institutions to buy highly leveraged government debt that pays ultralow returns.

Meanwhile, America’s punitive 35% corporate tax rate—the highest in the developed world—has discouraged U.S. firms from investing at home and sets a global tax floor to stabilize government revenues and foster government growth. The result is average U.S. GDP growth of only 2.1% since 2010—40% less than the administration’s projected 3.6%. According to my firm’s analysis of Congressional Budget Office projections, that dismal growth rate has taken a $9.5 trillion bite out of U.S. GDP since 2010—$29,400 on average for every American.

With President Obama making the world safe for governments to overtax, overregulate and overstimulate, money has lost its freedom to flee from government excess. As a natural result, such excesses have surged.

Because they feared that centrally coordinating taxes, regulations and monetary policy would lead to abuse, America’s Founding Fathers limited federal power. They intended a union where most regulation and taxation was done by the states, with a hard currency backed by gold. Competition between regulatory and tax systems forced government to serve people’s needs or risk triggering a shoe-leather response. Where federal laws did apply, they were specific prohibitions, not broad grants of arbitrary power.

President Obama and his partners in Brussels have attempted to impose at the international level the same centralized, arbitrary power that now exists in Washington. The results have been weak growth and electoral rebellion. But this wave of overreach may have crested. As government controls and excesses recede under Brexit and President Trump, prosperity and stability should return the way they did under Thatcher and Reagan.

Article Link To The Wall Street Journal:

Can We Prevent The Next ISIS?

We learned with Al Qaeda and ISIS that localized jihadist movements are not local.

By Seth J. Frantzman
The National Interest
December 12, 2016

When Islamic State overran Mosul more than two years ago media and observers mistook it for an “insurgent” force fighting the Iraqi army. Amnesty International, on June 11, 2014 described it as an “armed opposition group” and called on it to protect civilians. Although its actions were “deeply concerning,” many commentators didn’t see it as particularly different than the abusive and problematic policies of Nouri Al-Maliki’s central government. It took more than two months for most of the world to finally understand that what was happening in northern Iraq and Syria at the hands of ISIS was much more than just some bearded insurgents. It sunk in that this is not a legitimate organization only after more than 1,500 mostly Shia cadets were executed at Camp Speicher, Yazidi men and elderly women were machine-gunned and thrown into mass graves and young Yazidi women were sold as slaves.

Why did it take so long to connect the dots between ISIS and all the jihadist groups that had come before in Iraq, such as Ansar al-Sunnah and Al-Qaida? ISIS built not only on existing extremist networks but its members had often served in other groups or been influenced by them and their waves of terror that swept Iraq in 2004 and again in 2007. It borrowed its Manichean vision from them as well. Major General Simon Mayall, who played a key role in the surge in Iraq, had noted at a speech in Edinburgh in 2008 that the Syrian-Iraq border was porous and jihadists were moving back and forth. Four years later it used that open border to create the Islamic State that is now being battled in Raqqa and Mosul. In November 2014, Erin Marie Saltman and Charlie Winter wrote in Islamic State: The Changing Face of Modern Jihadism, that “some people persist in claiming IS has a distinctly local focus. Whilst its rampages, thus far, have been localized, it has never shied away from declaring its globalist ambitions.” Those global ambitions became clear in a series of attacks in Europe in 2016 and the numerous groups and individuals throughout the world who swore allegiance to ISIS.

Warnings about the global ambitions of ISIS were similar to those heard before 9/11 in the United States. On August 6 of that year the Presidential Daily Brief included an item titled “Bin Laden determined to strike in the US.” According to the 9/11 Commission Report it was the thirty-sixth mention of Bin Laden in briefs that year to the president. By that time Al Qaeda had already been attacking Americans for years. In 1993 Bin Laden had encouraged his followers to strike at U.S. interests and the Commission concluded that his trainers played a role in the Black Hawk Down incident in October 1993 in Somalia.

Al Qaeda was built on the global attraction of volunteers and veterans from wars in Algeria, Bosnia, Chechnya and elsewhere. It attracted not only volunteers but allegiance from other groups that were fighting their own conflicts from the Philippines to North Africa. The Taliban’s Afghanistan provided the base it initially needed to nurture and grow. But after the Taliban were defeated its offshoots continued to expand in Africa, Yemen, Iraq and Syria. Often policymakers only understood their threat to regional stability, and even to whole states such as Yemen, when it was too late.

It’s relatively easy to map all these extremist Islamist movements. For instance Stanford University has a research project supported by the National Science Foundation and Department of Defense devoted to “mapping militant organizations.” A map shows the history and extent of these organizations, from Al Jama’a al-Islamiya (Egypt) to the Haqqani Network (Pakistan) to Al-Shabab. Seeing what is coming next is the real challenge.

What gave Al Qaeda and ISIS their global reach were several key factors. First they were able to set down roots in a host country. Islamist movements that are constantly on the run, by necessity small and on the move, cannot grow beyond their local environment. Both ISIS and Al Qaeda had global aspirations and welcomed foreign volunteers. More than twenty thousand foreign fighters trained in Bin-Laden supported camps, concluded Daniel Byman, author of Al-Qaeda, The Islamic State and the Global Jihadist Movement (2015). Add to that the numbers trained, many of them locals, in Yemen by AQAP, North Africa by AQIM, Syria by Nusra and Al Qaeda in Iraq through 2009 and the numbers reach up to forty thousand.

Since 2014, ISIS has been able to mobilize similar numbers, including an estimated five thousand foreign fighters from Europe. One of its top leaders was the Chechen Umar al-Shishani and Chechens made up a core of its best fighters in Kobani in Syria and operations around Makhmur in Iraq in 2014. The danger of the foreign volunteers is a key problem for western intelligence sources. In “When Jihadis Come Marching Home,” by Brian M. Jenkins at the Rand Corporation, he concluded that, “US intelligence sources indicate that 100 or more Americans have been identified,” as travelling to Syria to fight. The backbone of the terror operations in Europe were a combination of men who had been to Syria and Iraq and returned home, and local recruits, some of whom claimed allegiance to ISIS only when they began to carry out their lone-wolf attacks.

So what we see with Al Qaeda and ISIS is not only the ability to attract volunteers from throughout the world, but the ability to send them back home or abroad, and to inspire attacks by local cells owing allegiance to the global “base” or “caliphate.” The volunteers themselves have contradictory profiles for joining. They may be from Muslim majority countries, such as Chechnya or Bangladesh, or from an Islamic minority in a Western state. They may be rebelling against state secularism, or inspired by existing institutions of political Islam. Evidence is lacking that either scenario makes them more or less zealous; the French and Belgian ISIS volunteers were just as committed as the Saudis and Chechens, each with differing religious and cultural backgrounds. Global recruitment for ISIS, which thrived on Twitter and social media, brought more members to it faster than Al Qaeda’s system that had to rely on the technology of the 1990s. But they were equally effective at inspiring and penetrating communities straddling the globe from Mauritania to the living room of Adam Pearlman (Adam Yahiye Gadahn), who moved to Pakistan in 1998.

Countries that are fighting terrorism, which now include the 62 nations that have signed up for the Combined Joint Task Force fighting ISIS in Iraq, as well as almost every country in the world today, often are constrained by looking to the past for examples of how to confront the future’s threats. Marc Sageman, in testimony to the US Senate Foreign Relations Committee, concluded in 2009 that “the decrease of global neo-jihadi terrorism in the last five years is testimony to the effectiveness of international domestic intelligence as well as good police work.” His focus was on Al Qaeda. Few would have predicted that just as the U.S. surge in Iraq had destroyed the terror networks there and the Sunni “Awakening groups,” seemed to be doing well there, that a new wave of terror was about to begin. In 2012 Jean Herskovits, writing about Nigeria, claimed in a New York Timespiece that “there is no proof that a well-organized, ideologically coherent terrorist group called Boko Haram even exists today.” Two years later, after killing thousands in attacks on numerous communities, including mosques, Boko Haram rolled into Chibok and kidnapped 276 women. Along with other groups, it has destabilized a swath of Africa bordering the Sahara. The same blinders led European governments to not prevent thousands of their citizens from joining ISIS in 2014. For instance, it was Turkey that had deported Adel Kermiche, the attacker who beheaded a French priest in July of this year. There are reports that dozens of foreign fighters and women who journeyed to ISIS in Syria are now trying to get home. They should never have been there in the first place. This is a lesson for the future.

In 2016 policymakers should be looking for the next ISIS as much as they focus on destroying the remnant of ISIS in Syria and Iraq. We know the conditions that led to Al Qaeda and ISIS. We also know that the number of jihadist groups has not decreased. The chaos that led to these groups putting down roots in places like Yemen or Mali still exist. In fact, the weakness of nation-states in Africa and Asia has increased since the 1990s, leaving more fertile ground. The Taliban and ISIS in Afghanistan are gaining in strength, as illustrated by recent attacks on Bagram airbase and a Shia mosque in Kabul. The ominous killing of three Americans in Jordan can only lead to suspicions that worse is to come.

We learned with Al Qaeda and ISIS that localized jihadist movements are not local. Boko Haram is not a “Nigerian problem” and a jihadist cell in Kosovo is not a Kosovar issue only. These networks are either connected with outsiders, or they have the potential to rapidly grow. They supply foreign volunteers to other organizations. They have the potential to give allegiance to whatever new “caliphate” comes along.

States should increase laws against citizens that seek to leave with the intention of joining foreign jihadist groups. This should target jihadism specifically, because broad laws against participating in foreign militaries trip up innocent people rather than targeting extremists. That around five thousand EU citizens joined ISIS almost without interdiction in 2014-2015, sometimes going back and forth numerous times, is testimony to a security system focus that needs updating.

Focus should be put on groups that appear to have cross-border, regional or global intentions in their language. In this sense, the decision of Jabhat al-Nusra, which was Al Qaeda in Syria, to change its name to Jabhat Fatah al-Sham, is interesting because it went from a global or regional focus to a local one. However the Syrian civil war and its multiplicity of groups, many of which increasingly lean on Islamist extremism as an ideology, will produce blowback. If Assad is successful at retaking Aleppo, refugees in camps in Jordan, Lebanon and Turkey may find themselves exposed to recruitment for extremist operations. Some have military training, which was a key component in ISIS and Al Qaeda success.

ISIS and Al Qaeda emerged quickly to be a global threat, even though both organizations had existed for years before their threat became clear. This is a lesson that what looks tranquil and quiet today, whether it is the Balkans or Southeast Asia, can become radicalized quickly into an insurgency with regional threats. Learning the lessons of the past, rather than assuming ISIS is defeated or pretending that various extremist groups are less genuine than they claim to be, will help combat the next ISIS before it sets down roots and threatens the world.

Article Link To The National Interest:

Syrian Rebels Get Proposal To Quit Aleppo, Jihadists Retake Palmyra

By Laila Bassam and Tom Perry
December 12, 2016

Syrian rebels have received a U.S.-backed proposal to leave Aleppo along with civilians under safe passage guaranteed by Russia, rebel officials said as government forces closed in on Sunday, but Moscow denied a deal had been reached.

If the proposal were to be taken up by all sides, it would end four years of fighting in the city, and months of siege and intense bombardment that have created a humanitarian crisis - particularly in rebel territory that has now shrunk to a small pocket crammed with civilians.

Three officials with insurgent groups in Aleppo told Reuters that a letter outlining the proposal had been received, offering an "honorable" departure for the rebels to a place of their choice.

Rebel groups have yet to respond. But if fully accepted, the proposal would give Syrian President Bashar al-Assad and his military coalition of Russia, Iran and Shi'ite militias their greatest triumph in the civil war against the rebels who have fought for nearly six years to unseat him.

However, the sudden recapture by the Islamic State of the ancient desert city of Palmyra on Sunday after a much-trumpeted army victory there in March has shown how difficult Assad may find it even after Aleppo to restore his rule across Syria.

Asked whether they had been contacted by the United States and Russia over talks between the two powers in Geneva to find a way out of the crisis, one of the officials with rebel groups that are present in Aleppo said:

"They sent us a letter, they are saying to safeguard the civilians ... you can leave in an honorable way to any place you choose and the Russians will pledge publicly that nobody will be harmed or stopped," said one of the officials. "We have yet to give a response."

A second official said a document "is being proposed to the factions, the fundamental thing in it is the departure of the all the fighters in an honorable way".

However, Russia swiftly said it had not reached any agreement with the United States on a proposal to withdraw fighters from Aleppo and added that the Geneva talks were continuing.

Moscow was working to create the necessary conditions for the safe extraction of people from Aleppo, said Russian Deputy Foreign Minister Sergei Ryabkov.

"The issue of withdrawing militants is the subject of separate agreements. This agreement has not yet been reached, largely because the United States insists on unacceptable terms," he said in comments reported by RIA news agency.

United Nations special Syria envoy Staffan de Mistura had no comment on the report, but some were skeptical that the proposal could succeed. "With all previous commitments reneged on by (the Syrian) regime/Russia it is difficult to see how rebels are to trust this offer of safe exit," one former Western envoy in Syria told Reuters in Geneva.

As the army swept through east Aleppo in the past two weeks, taking three quarters of rebel ground, tens of thousands fled the fighting, some to government-held areas and others deeper into the insurgent pocket.

New army gains on Sunday south of Aleppo's historic citadel appeared to bring victory closer for Assad, with a rebel official saying world powers seemed to be presenting his side with a choice of "death or surrender".


The Islamic State attack on Palmyra, 200 km (120 miles) to the southeast, threatens to inflict a serious blow on both Damascus and Moscow.

Syrian state radio reported the army had evacuated its positions inside Palmyra, whose Roman-era ruins have become an emblem of the conflict. They were redeploying around the city.

Analysts have warned that even if Assad defeats the main rebellion, he may still face years of guerrilla insurgency and bombing attacks as he tries to reassert his authority.

Islamic State seized Palmyra in May 2015, one of its last major conquests after nearly a year of advances in Syria and neighboring Iraq that took advantage of the region's chaos.

Its destruction of some of the best-known ruins and killing of the leading archaeologist in the city provoked global outrage and the army's recapture of Palmyra was presented by Damascus and Moscow as vindicating Russia's entry into the war.

Islamic State has suffered a string of setbacks since late last year, losing its once long stretch of territory on the border with Turkey, an important source of supplies and recruits, as well as the city of Manbij.

The group is fighting an assault on its most important possession in Iraq, the city of Mosul. It is also under attack north of Raqqa, its Syrian capital, following a series of air strikes that have killed some of its most important leaders.

Russian news agencies reported that air strikes had killed 300 militants overnight near Palmyra but that more than 4,000 fighters had still managed to launch the attack on the city.


Under the terms of the proposed deal, rebels could leave Aleppo with light weapons. It would be implemented over a 48-hour period and oversight would be sought from the U.N..

Fighters from the hardline jihadist group Jabhat Fateh al-Sham, formerly known as the Nusra Front until it broke allegiance to al Qaeda in July, would have to go to Idlib. Other fighters could choose separate destinations, including near the Turkish border northeast of Aleppo.

There was no immediate comment from Damascus on the proposal.

Heavy shelling and air raids pounded Aleppo's rebel enclave from midnight on Saturday and throughout Sunday morning, a Reuters reporter in the city said, with explosions at a rate of more than one a minute. Gunfire was also heard.

Thousands of refugees are still pouring from Aleppo's areas of fighting. The Syrian Observatory for Human Rights, a war monitoring group, said more than 120,000 civilians had left the eastern part of the city as the government advance closed in, but that tens of thousands remained.

The mostly Sunni rebels include groups supported by the United States, Turkey and Gulf monarchies, but also some jihadist factions that receive no assistance from the West.

The army seized the al-Maadi district on Sunday morning before rebels were able to return and continue fighting there, said the Jabha Shamiya official.

A Syrian military source said the army and its allies had captured the al-Asila and Aaajam districts, southeast of Aleppo's ancient citadel, as well as the southern portion of the Karam al-Daadaa neighborhood.

The Observatory also said the army had advanced in those areas.

Reuters reporters on a tour of Old City districts captured by the army saw how its historic covered market had been pounded, with ancient quarters reduced to a warren of defensive positions daubed with rebel slogans.

"Embrace death for Aleppo" was one.

State television showed footage of the east Aleppo fighting: a tank moving slowly along a street as soldiers ran alongside it, smoke and dust billowing around them.

Article Link To Reuters:

Oil Prices Soar On Global Producer Deal To Cut Crude Output

By Henning Gloystein
December 12, 2016

Oil prices shot up by 4 percent to their highest level since 2015 early on Monday after OPEC and other producers over the weekend reached their first deal since 2001 to jointly reduce output in order to rein in oversupply and prop up the market.

Brent crude futures, the international benchmark for oil prices, soared to $57.89 per barrel in overnight trading between Sunday and Monday, the highest level since July 2015.

U.S. West Texas Intermediate (WTI) crude futures also hit a July 2015 high of $54.51 a barrel.

Brent and WTI prices eased to $56.62 and $53.95 respectively, but were both still up more than 4 percent from their last settlement.

With the deal finally signed after almost a year of arguing within the Organization of the Petroleum Exporting Countries and mistrust in the willingness of non-OPEC Russia to play ball, the market's focus will now switch to compliance of the agreement.

"Going forward, we believe that the observation of the OPEC-11 and Non-OPEC 11 production cuts is required to sustainably support spot oil prices to our 1H17 WTI price forecast of $55 a barrel," Goldman Sachs analysts wrote in a note.

"This forecast reflects an effective 1.0 mb/d cut vs. the 1.6 mb/d announced cut and greater compliance to the announced cuts is therefore an upside risk to our forecasts."

AB Bernstein said the agreed deal "amounts to an aggregate supply cut of 1.76 million barrels per day (bpd) from 24 countries which currently produce 52.6 million bpd or 54 percent of world oil supply."

Bernstein said that "some of the non-OPEC supply cuts will come from natural decline, but most will come from self-imposed cuts.

State oil giant Saudi Aramco told its U.S. and European customers it will reduce oil deliveries from January.

OPEC has said it will slash output by 1.2 million bpd from Jan. 1, with top exporter Saudi Arabia cutting around 486,000 bpd in a bid to end overproduction that has dogged markets for two years.

On Saturday, producers from outside OPEC agreed to reduce output by 558,000 bpd, short of the initial target of 600,000 bpd but still the largest contribution by non-OPEC ever.

Of that, Russia said it would gradually cut 300,000 bpd.

"Once cuts are implemented at the start of 2017, oil markets will shift from surplus into deficit. Given the cuts in production announced by OPEC, we expect that markets will move into a 0.8 million bpd deficit in 1H17," AB Bernstein said.

Still, some analysts and traders expect producers, drawn by higher oil prices, to increase output again.

"While better compliance than we expect would initially lead to higher prices – with full compliance worth an additional $6/bbl to our price forecast – we expect that a greater producer response, especially in the US, would eventually bring prices back to $55/bbl," Goldman Sachs analysts said.

Article Link To Reuters:

Fed Turns To Trump Agenda With Rate Hike Nearly In The Bag

By Howard Schneider
December 12, 2016

The Federal Reserve inaugurates the Trump era this week with a near-certain interest rate increase and new economic forecasts providing a first glimpse into whether the U.S. election has reshaped the central bank's growth and inflation outlook.

Fed fund futures show a 97 percent probability that the Fed will lift rates by a quarter of a percentage point at the end of its two-day policy meeting on Wednesday, according to the CME Group.

All 120 economists in a Reuters poll expect a rate hike in the wake of a string of solid U.S. economic reports.

More telling will be whether the stock market rally and jump in bond yields triggered by Trump's Nov. 8 victory will push the Fed to an inflection point of its own and a higher projected pace of rate increases for 2017 and beyond.

The Republican businessman is inheriting a good economy, one that grew by 3.2 percent in the third quarter, the fastest pace in two years. There are, however, concerns that his plan to reduce taxes, cut regulation and increase infrastructure spending could not just boost the economy but also fuel higher inflation.

Since first published in 2012, the Fed's quarterly "dot plot" of projected interest rates has generally moved in one direction – down – and any post-election change will show whether policymakers expect Trump's policies to shake things up.

As of September, Fed officials' median projection was for two rate increases next year and a long run "neutral" level of 2.6 percent. A rate increase this week would be the first since last December and only the second since the 2007-2009 financial crisis.

"Their path is going to move up faster and a little sooner," said Steve Rick, chief economist for CUNA Mutual Group. He said the economy was running at its potential, and that was the Fed's cue to "exit stage right" and steadily move rates to normal.

Fed officials have long hoped that other government policies would take the place of monetary engineering, which some believe may have lost its effectiveness in lifting economic growth.

They have warned in recent weeks that any new government spending should specifically be designed to boost productivity in an economy that is already near full employment and facing a high public debt burden.

The Fed's new forecasts will indicate if policymakers feel that the monetary-to-fiscal handover is on the horizon, or need more time for the Trump administration's plans to become more detailed and move through Congress.

Fed Chair Janet Yellen is scheduled to hold a press conference at 2:30 p.m. (1930 GMT) on Wednesday to elaborate on the economic outlook and policy statement.

She'll have a broad set of issues to cover since her last press conference in September - from the Federal Open Market Committee meeting itself, to the likelihood she will be replaced in early 2018 and the risks she foresees from the Trump agenda.

Trump repeatedly attacked Yellen during the election campaign, accusing her of holding down rates to help his Democratic rival. Since the election, he has expressed his disapproval of corporate America, criticizing Boeing (BA.N), and took credit for a deal to keep hundreds of jobs at an Indiana plant from being moved to Mexico.

The president-elect also will be under scrutiny after this week's Fed meeting for clues about how he plans to handle his relationship with the central bank.

"There is a real risk that he could be openly critical of the decision to raise rates next week," Paul Ashworth, an economist with Capital Economics, said in a note last week.

That could upset markets and raise serious issues about whether Trump intends to leave the Fed alone or try to influence its decisions. Top U.S. elected officials, in particular the president, typically avoid criticizing the Fed's short-term rate decisions, emphasizing instead the need for monetary policy to be set independently.

"If he remains silent after the announcement to raise interest rates next Wednesday, then we can begin to assume that it will be business as usual for the Fed," Ashworth wrote.

Watching The Markets

Trump's plan to cut taxes and regulation and funnel fresh billions into capital projects must pass Congress, and it may be well after that before any new programs meaningfully effect economic forecasts.

But policymakers also watch the markets closely. It may be hard for the Fed to stick with its ultra-slow pace of rate hikes if a major tax overhaul and fiscal spending plan are unleashed.

TD Securities analysts said that fiscal policy at this point in the economic recovery could prompt "an inflationary demand shock" that adds nearly a percentage point to economic growth, but spurs the Fed to raise rates much quicker than expected - by nearly an extra percentage point per year.

That scenario of a central bank caught behind the curve and forced to act faster is one that Yellen and other policymakers have said they hope to avoid out of fear it could prompt a recession.

Fed officials in recent days have acknowledged the Trump agenda may cause them to switch gears, though it is not clear how soon.

"At this juncture, it is premature to reach firm conclusions," New York Fed President William Dudley said last week.

But, since Trump won the election, Dudley added, "the stock market has firmed, bond yields have risen and the dollar has appreciated ... Market participants now anticipate that fiscal policy will turn more expansionary and that the (FOMC) will likely respond by tightening monetary policy a bit more quickly than previously anticipated."

Article Link To Reuters:

Goldman Sachs Says Non-OPEC Output Cut Deal Aimed At Inventory Glut

By Apeksha Nair
December 12, 2016

Goldman Sachs said the formal agreement by non-OPEC oil producers this weekend in Vienna to help curb output was reached with a goal of "normalization" of inventories and not necessarily just at raising oil prices.

The Organization of the Petroleum Exporting Countries (OPEC) had previously agreed to cut output by 1.2 million barrels per day (bpd), and on Saturday, 11 non-OPEC producers agreed to join the effort and reduce output by 558,000 bpd.

The cut was short of an initial target of 600,000 bpd but still the first OPEC/non-OPEC output deal since 2001 and the largest contribution by non-OPEC producers ever.

"Despite the smaller-than-preannounced cut, the agreement is nonetheless noteworthy as it lifts the uncertainty on the potential participation of non-OPEC producers to the OPEC cut," the bank said in a note on Sunday.

The agreement was followed by comments from top exporter Saudi Arabia's energy minister Khalid Al-Falih saying that the kingdom may be willing to cut output to below 10 million bpd.

The world's top oil exporter told OPEC it pumped a record 10.72 million bpd last month, an OPEC source said, up from 10.625 million bpd in October.

Goldman said an announced production cut from Russia was likely to remain short of the 300,000 bpd promised, noting that Russia's participation was important.

Goldman said implementation of the co-ordinated OPEC and non-OPEC production cuts was required to sustainably support spot oil prices at its H1 2017 price forecast of $55/bbl for West Texas Intermediate crude. [O/R]

A better-than-expected compliance would initially lead to higher prices, "with full compliance worth an additional $6/bbl to our price forecast," it said.

The bank warned, however, that as WTI prices neared $55 a barrel, that producers, especially in the United States, might begin to raise their output.

"Ultimately, this remains a short duration cut in our view, targeting excess inventories and not high oil prices," Goldman said.

Article Link To Reuters:

Oil Slump Prompts Gulf States To Take Shine Off Cushy Government Jobs

By Tom Finn
December 12, 2016

Ahmed, a Qatari civil servant, used to arrive at his office at a government ministry in Doha late in the morning and leave for home after lunch, collecting a monthly salary of 40,000 rial ($11,000) and a generous housing and travel allowance.

But last month a government official made a surprise spot check on the ministry's offices and found dozens of employees absent.

"Punctuality is a duty," said a letter Ahmed received from the minister's office. "Qatar expects the best of its citizens."

For a country whose tiny population is the world's wealthiest per capita and which sits upon its largest natural gas reserves, increasing the productivity of its 90,000 public employees might seem like a needless task.

But it is part of a trend across the Gulf as economies there try to lessen the burden of costly public sectors.

Gulf states have for decades used their energy wealth to provide millions of citizens with cushy government jobs, part of a social contract by rulers that rewards political acquiescence and educational attainment with employment for life.

But high-paying public sector jobs that demand little of workers have led to bureaucratic inertia and an absenteeism culture that governments turned a blind eye to during the Gulf's boom years.

In 2011 a Kuwait government report found that half the country's state employees were absent from work between January and March, costing the country's treasury more than 10.5 million dinars ($35 million).

Since oil prices plunged in 2014, however, Arab monarchies have curbed subsidies and laid off staff as they try to trim budget deficits and build economies less reliant on hydrocarbons.

In the wealthier Gulf Cooperation Council (GCC) countries of Kuwait, Qatar, and the United Arab Emirates, where populations are small, more than 75 percent of employed nationals work in the public sector, according to the IMF.

The ratio is also high in oil-giant Saudi Arabia - which racked up a record budget deficit of nearly $100 billion last year - while in Oman, about 50 percent of employed nationals work in the public sector.

Bahrain has the lowest proportion of nationals working in the public sector, at 35 percent.

In one of the most dramatic efforts to shake government agencies out of their slumber, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, carried out an early morning spot check on the city state's management in August, found empty desks, and sacked nine senior officials.

Pictures of Sheikh Mohammed wandering the sparsely populated offices of the Land Department were widely published in local newspapers.

Qatar, in an apparent effort to codify the responsibilities of government employees and get them working harder, last month passed a law that raised pay for workers who have achieved higher levels of education and enforced a merit-based promotion scheme.

The nation's young emir has warned citizens that the state "can no longer provide for everything" and local newspaper editorials mock lazy civil servants referred to jokingly by Qataris as "people of the couch".

Neighboring Saudi Arabia in September scaled back financial perks for public sector employees in one of the most drastic measures yet by the oil-rich kingdom to save money at a time of low oil prices.


Lured by a generous salary and his own office overlooking the Arabian Gulf, 26-year-old Ahmed, who declined to give his second name, joined Qatar's ministry of transport last year after graduating from Qatar University.

On his first day, Ahmed said, he was surprised to find colleagues without clear responsibilities carrying documents from one office to another. "Many workers, even managers, were engaged in watching television or sleeping," he said.

One colleague advised him to get to know the "tea boys" - Nepali waiters who deliver tea to offices - so he could find out when his boss had left and do the same.

Other skiving tactics included leaving a jacket on the back of his chair so a casual observer would assume he was first to arrive at the office and programming e-mails to send themselves in the afternoon so managers thought he was still at work.

But superiors started to clamp down on those evading work, Ahmed said, after Sheikh Tamim bin Hamad al-Thani, Qatar's emir, called on Nov 1 for Qataris to move off social welfare and "into action" in the face of low energy prices.

Public Anger

After Arab spring protests in 2011, rich Gulf states spent billions of dollars raising salaries and investing in subsidies and infrastructure in part to ensure quiet at home.

Wars and social turmoil spurred efforts in countries like Saudi Arabia to boost employment of their citizens and crack down on illegal hiring of foreign workers.

But today austerity is unnerving citizens for whom affluence and stellar growth are the norm.

Reforms are proving sensitive - politically consequential even - and there are fears that further cuts to sumptuous welfare states could heighten public anger.

In May oil workers in Kuwait went on strike against a proposed overhaul of the public sector payroll system. An election last month filled the country's parliament with opposition lawmakers opposed to wage cuts and taxes.

Omani medics from state-funded colleges in November held a two-week strike after their salaries were cut.

Ending the legacy of public sectors being an engine of job creation, analysts say, is vital to avoid rising unemployment in years ahead if oil revenues decline again and nationals are still not working in the private sector.

But Gulf youth may still expect to be entitled to a share of the national wealth whether in the form of public sector jobs with high wages or breaks from future taxes.

Article Link To Reuters:

Don’t Short America Inc; It’s Just Warming Up

By Dr. Michael Ivanovitch
December 12, 2016

The soaring Wall Street is a tough short. In the course of November, the Fed put back in $58 billion of high-powered money, after a huge liquidity withdrawal of $245 billion in the previous two months.

And don't even think that the President-elect Donald Trump will offer easy puts and a coddling forward guidance.

If that's not enough of a hint, the brave souls contemplating a stab at markets' collective wisdom could also think of this.

Mr. Trump's America First policy is a corollary to Tip O'Neill's (the late, long-serving House speaker and a venerated Boston politician) maxim that "all politics is local."

That should be clear enough. A much more disconcerting is the habit of America's new chief executive of holding cards close to his vest. During his long election campaign, Mr. Trump always refused to give detailed accounts of his policy designs. As he put it, he was not going to tell his adversaries what he intended to do.

Both strategic principles served him well all the way to a convincing election victory.

They still work. Mr. Trump is still hard to read. To see that, the would-be short artists just have to look at some overseas reactions of people America used to spoon-feed with forward guidance.

Our European lecturers are utterly confused and dismayed. They are profoundly aggrieved by the demise of "America's 911 global military service" – an expression coined by Leon Panetta, the former defense secretary, during his Congressional testimony in February 2013. Germans are adding an angry rejoinder that Mr. Trump is a godsend to despots and tyrants around the world, but they refuse to buy spare parts for their grounded Luftwaffe (air force). They would rather use their riches to fund Germany's outstanding public services while America bleeds to defend them.

The Chinese are not so surefooted either. During a recent visit to Beijing of America's oldest and most famous sinologist, President Xi Jinping was quoted by Chinese media as saying: "Please tell me what is going on. I am all ears." And he apparently was for more than an hour-and-a-half. It seems that Mr. Trump has turned tables on those famously inscrutable Oriental sages.

Short On Superior Knowledge, Not Instincts

Shorts are hard work. During a presentation I gave some years ago to a group of Hong Kong investment managers, a youthful Chinese participant asked me a very pointed question about dissensions within the then governing Spanish Socialist Party (PSOE). Since he seemed satisfied with my answer, I asked him why he was so deeply interested in Spanish politics. And this is what he said: "I want to know everything about my shorts."

The Wall Street bull-run is a tempting contrarian play, especially for people who made a mint on Germany's failed attempts to throw Greece out of the euro area, and on similar "sure thing" sovereign defaults in a number of highly indebted EU countries.

And then they seem to think that there are some easy sitting-ducks: America's mature bull market, "excessive" valuations and, allegedly, a host of long-overdue, revert-to-mean, "imperatives."

That may be fair targets, but the massive bets are placed elsewhere. Indeed, people are betting on heroic assumptions that Mr. Trump's team will succeed in propping up the sagging U.S. economy.

Hopefully, these investors realize a tough slog that lies ahead. America's current growth dynamics (1.5 percent in the first nine months of this year) are not good. They are held back by tight physical limits to potential growth, estimated at about 1.6 percent, and the fact that the monetary policy, acting alone, cannot remove the cyclical and structural obstacles clogging up the way to faster and broader output gains.

It will take time to change that. A stronger consumer confidence and a traditionally buoyant retail business during the fourth quarter could have revved up demand in the past few months, but that would probably be a flash in the pan because jobs and incomes are still a problem.

Investments Hop Over Trade Barriers

The growth of the real disposable household income has slowed to 2.9 percent in the first three quarters of this year from 3.6 percent a year before. The jobless rate is down to 4.6 percent, but the actual number of people out of work – 15 million – is more than double the officially reported 7.4 million, and the long-term unemployed still account for a quarter of the total number of job seekers.

And here is how big a drag on growth that could be: In addition to credit costs, jobs and incomes are the key variables driving about 80 percent of U.S. economy.

The monetary policy has done a great deal in reversing the damage done by its serious mistakes in the run-up to the 2008 financial crisis and the ensuing Great Recession. But, from now on, the Fed's solo play should be over; the new role should be to work in concert with more active fiscal, trade and structural policies to gradually lift the economy to the 3-4 percent growth path.

A growth-oriented fiscal policy could get a significant room to operate, without compromising public finances, by rearranging national priorities and maintaining an iron-clad discipline on how public money is managed and spent. You can call that a waste control. Think of how many roads could be repaved, bridges reinforced, airports modernized, school lunches served and healthcare services provided for those $125 billion that were unforgivably wasted by just one segment of the public sector administration. Reassuringly, the uproar about the $4 billion Air Force One plane is a signal that Mr. Trump is likely to keep an eye on where the taxpayers' money is going.

The bond market would like that. A commitment to keep public finances in good order is particularly important at a time when a discretionary fiscal policy is expected to play a bigger role in demand management. A good housekeeping rule would be to hold budget deficits below 3 percent of GDP, and to aim for rising primary budget surpluses to stop and reverse the increase in the $19 trillion of public debt.

Fiscal, trade and structural policies are closely intertwined. Their proper coordination is essential for efficient resource allocation, reaching particular growth objectives and expanding the economy's noninflationary growth potential.

Bilateral and multilateral (G20) forums must be used to reduce unsustainable global trade imbalances by insisting on policy changes in countries pushing large and systematic trade surpluses instead of growing on their own savings. Mr. Trump should ignore the squeals about trade wars. So far, his folksy "they-are-eating-our-lunch" scream is eliciting exactly what the trade theory says: If you (threaten to) limit trade, factors of production (i.e., investments) will come in.

The hugs and beaming photo-ops last week at the Trump Tower with Japan's Masayoshi Son (the SoftBank CEO) are a case in point. The pledge of a $50 billion investment had nothing to do with the European put-down nonsense about the Donald and Masa "billionaires' show." The Japanese simply saw a new writing on the wall, and rushed in to get a good slot at the ground floor of the emerging trade policy. The Chinese won't be far behind.

Investment Thoughts

The U.S. economy needs a lot of support to expand its productive potential, and to get back to a sustainable noninflationary growth path of 3 percent (from 1.6 percent at the moment). Such a growth objective requires a properly calibrated mix of monetary, fiscal, trade and structural policies.

Mr. Trump and the Congressional leadership have an opportunity to redesign a supportive fiscal policy, without destabilizing cyclically and structurally fragile public finances. The payoff for that would be stable bond markets to benchmark attractive prices for consumer credit and mortgage finance, which drive three-quarters of the U.S. economy.

The Fed seems ready to cooperate. The management of money market operations and of its own balance sheet since early November shows that the Fed may be prepared to play an appropriate role in maintaining price stability and a sound dollar within a broader, growth-oriented policy mix.

The jawboning of American businesses to pause their off-shoring activities is apparently just an interim step until a new policy package emerges that should keep jobs at home in a sustainably profitable operational environment.

Investors are facing a swift transition to an activist and all-business American government. The new markers are set with a firm focus on jobs, incomes, infrastructure, and an apparent determination to put an end to humiliating declines of our education and healthcare to third-world levels.

These are the things that markets are betting on. Rest assured that Mr. Trump and his Wall Street appointees fully understand the conditionality of that welcome mat.

Article Link To CNBC:

Chinese Media Hit Out At Trump Over 'One China' Comments

December 12, 2016

Donald Trump attracted stinging criticism from China's state media after the President-elect stated that the U.S. did not necessarily have to stick to the "One China" policy.

Communist Party-owned paper, Global Times, published in an opinion piece with the headline: "Trump, please listen clearly, the One China policy cannot be traded" as it warned Trump that China cannot "cannot be easily bullied".

"If Trump abandons the one-China principle, why should China need to be U.S.' partner in most international affairs?" said the paper, which is known for its extreme nationalistic views.

Most would think Trump is "ignorant like a child" in handling diplomacy, the paper added.

Its English language editor was less strident, with the paper citing a foreign affairs analyst chalking up Trump comments to "inexperience" in a piece entitled "Prevent 'immature' Trump being manipulated by conservative forces: analyst".

"As a businessman, he thinks it's quite normal to do business, but he hasn't realized that the Taiwan question is not a business to China. The Taiwan question is not negotiable," China Foreign Affairs University professor Li Haidong was quoted as saying.

Li also said Trump didn't have a plan to challenge the "One China" policy.

China and Taiwan parted ways in 1949, when the Nationalist Party (KMT) was forced to retreat to Taiwan by the Chinese Communist Party and China views the territory as a renegade province that can be re-taken by force if necessary. Washington embraced the "One China" policy in 1979 under which Beijing views Taiwan, Hong Kong and Macau as part of China.

China's foreign ministry and other state media have not yet responded to Trump's comments. The ministry will hold its regular press briefing at 3pm local time.

China has been generally tempered in its official response to Trump's comments, attributing much of it to inexperience. Chinese foreign Minister Wang Yi also blamed Taipei instead for Trump's call with Taiwan president Tsai Ing-wen that attracted global headlines.

"China is trying to play the long game with Trump, not trying to rise to the bait (and) not trying to be provoked into a war of words in this unusual pre-inauguration period," Control Risks' CEO Richard Fenning told CNBC's Squawk Box.

Taiwan was also trying to downplay any significance from Trump's call with Tsai.

Tsai herself said recently that "one phone call does not mean a policy shift," in a meeting with reporters from U.S.outlets that included USA Today an Washington Post.

"I do not foresee major policy shifts in the near future because we all see the value of stability in the region," she added, according to the reports.

Even though Tsai belongs to an independence-leaning party, Tsai has been careful in her comments on China-Taiwan relations since her campaign, pledging to keep the "status quo" in cross straits relationship. However, she has not acknowledged the "One China" policy, irritating Beijing.

On Friday, Taiwan's Foreign Affairs Minister David Lee put paid to rumors that Tsai may meet Trump in the U.S. en route to Guatemala next month. New York—where Trump lives—was never considered for a transit stop, he said.

China's Foreign Ministry had lodged a diplomatic complaint with the U.S. about Trump's call with Tsai, which broke nearly four decades of U.S. foreign policy. The 10-minute call was the first by a U.S. head of state with a Taiwanese leader since 1979.

Article Link To CNBC:

Oil Seen Headed To $60 As Saudis Signal Deeper Output Cuts

OPEC, non-OPEC nations cuts reach 1.8 million barrels a day; Saudi oil minister says kingdom will reduce supply further.

By Mark Shenk and Ryan Sachetta
December 12, 2016

Oil may climb to $60 a barrel for the first time in almost a year and a half after Russia and other unaffiliated nations joined an OPEC pledge to reduce production and Saudi Arabia surprised the market by saying it will cut more than previously agreed.

Non-OPEC nations said Saturday they will reduce output by 558,000 barrels a day, adding to a Nov. 30 OPEC commitment to cut 1.2 million starting in January. Brent crude has surged more than 20 percent since OPEC announced its first cut in eight years. Prices jumped as much as 6.6 percent to $57.89 a barrel in early Monday trading.

The agreement is the first between OPEC and non-OPEC producers since 2001. It underscores the resolve to end a market-share war that exacerbated a global oversupply and caused prices to slump by 75 percent. The OPEC and non-OPEC plan encompasses countries that pump 60 percent of the world’s oil but excludes producers such as the U.S. and Canada, which have benefited from the boom in shale output, as well as China, Norway and Brazil.

“This is an unprecedented event,” said Thomas Finlon, director of Energy Analytics Group in Wellington, Florida. “The 558,000 barrel decline from non-OPEC together with the OPEC agreement will total 1.8 million barrels a day of cuts, which is about 2 percent of global production. This is enough to have an impact.”

Russia had already announced it plans to trim output by 300,000 barrels a day next year, down from a 30-year high last month of 11.2 million barrels a day. At the meeting, Mexico pledged to cut 100,000 barrels, Azerbaijan by 35,000 barrels and Oman by 40,000 barrels, a delegate said.

The non-OPEC reduction is equal to the anticipated demand growth next year in China and India, according to data from the International Energy Agency. Oil officials said Mexico’s contributions would be made through “managed natural decline” meaning the Latin American nation will not cut output deliberately, but will let production fall as its aging fields yield less. Other countries such as Azerbaijan are likely to follow the same route for their cuts.

The joint commitment “marks a turning point for oil markets,” said Francisco Blanch, head of commodity markets research at Bank of America Merrill Lynch, in a telephone interview. “Shale producers may increase activity, but it will take at least 12 months for those barrels to come into the market. Meanwhile, OPEC barrels will exit global markets on Jan. 1.”

“I can tell you with absolute certainty that effective Jan. 1, we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30,” Saudi Energy Minister Khalid al-Falih said after Saturday’s meeting.

10 Million Barrels

Riyadh’s portion of the OPEC agreement last month was a production cut to 10.06 million barrels a day, down from a record high of nearly 10.7 million barrels in July. The Saudi minister said he was ready to cut below the psychologically significant level of 10 millions barrels a day -- a level it has sustained since March 2015 -- depending on market conditions.

“The Saudis’ latest deal with non-OPEC countries could potentially boost Brent crude price toward $60 this week,” said Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Kong.

Bank of America’s Blanch forecast $70 by mid-2017.

Some analysts questioned if some of the producers would adhere to the promised cuts, particularly Russia, which accounted for more than half of the non-OPEC commitment.

‘Playing Wall Street’

“OPEC is playing Wall Street very well,” Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania, said by phone. “The Russians have a completely horrible track record of abiding by these type of agreements. OPEC will be lucky if you see two-thirds of this agreement honored. I’m highly skeptical that the Saudis are going to play nice and cede further market control to the Iranians. ”

Brent sank near $27 a barrel in January as surging output from OPEC and other sources, notably U.S. shale, pushed inventories up faster than demand.

“Strong compliance” rather than “full compliance” could still have “a meaningful impact on price,” Jason Schenker, president of Prestige Economics LLC in Austin, Texas, said in an interview.

Russia and Oman will join OPEC members Algeria, Kuwait and Venezuela on the committee to oversee implementation on the accord, a delegate said.

“Assuming reasonable compliance levels, these cuts will be enough to push the market into deficit, allowing inventories to draw and oil prices to recover towards marginal cost,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said by phone.

'Limited by Leakage’

Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, also said the collaboration with countries outside OPEC would “pull the global market into balance, if not in deficit, by the second quarter of 2017” rather than in the third quarter.

The agreement will trigger “strong prices, for sure, but the upside is limited by leakage, which may be substantial as the price climbs toward $60,” she said in a telephone interview.

West Texas Intermediate, the U.S. benchmark, added as much as 5.8 percent to $54.51 a barrel on the New York Mercantile Exchange. Front-month prices have added about 20 percent since OPEC announced its plans to curb supply last month.

“The market should respond very favorably to what we saw here, could push us up to new highs,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said in a phone interview. “It’s a sign that the production war that was really started two years ago is over and that OPEC and non-OPEC countries feel that they can work to raise prices and not worry about market share.”

Article Link To Bloomberg:

OPEC Has A Deal, But Will Its Members Cheat?

Cartel has history of failing to enforce output limits.

By Alison Sider and Benoit Faucon 
The Wall Street Journal
December 12, 2016

In reaching November’s landmark agreement to reduce oil production, OPEC members labored for months to overcome their mutual suspicions and frequent mistrust.

But reaching the deal could turn out to be the easy part—enforcing it could be another matter.

The Organization for the Petroleum Exporting Countries has a history of failing to enforce its own production limits, according to numerous energy analysts and former OPEC officials. The cartel’s agreements usually spell out exactly how many barrels a day each member must cut. But ensuring that everyone abides by these quotas has been supported only by a fragile honor system, with OPEC having no official mechanism for punishing members that stray from their pledges.

In 17 production cuts since 1982, OPEC members have reduced output by an average of just 60% of their commitments, according to Goldman Sachs. OPEC exceeded its quota by an average of 883,000 barrels a day on average from 2000 to 2008, according to Morgan Stanley.

“The unfortunate part is we tend to cheat,” Ali al-Naimi, Saudi Arabia’s former oil minister, said of OPEC members at a Washington, D.C., event this month.

“There is still more supply than demand. And I believe if they make a concerted effort to reduce—everybody—there will be a balance. But that remains to be seen,” he said.

The emphasis on compliance was heightened Saturday, when 11 countries outside of OPEC gathered at the cartel’s Vienna headquarters and agreed to cut 558,000 barrels a day together. OPEC and the non-OPEC members didn’t release details about who would cut how much, when or how the pact would be enforced.

OPEC members routinely game production figures in efforts to protect their own market share during negotiations or to mask production beyond their allotted quotas, oil traders and analysts say. Even the production data are often in dispute. OPEC publishes two sets of numbers: production estimates it gathers from independent sources; and figures reported directly by the members themselves.

This lack of transparency has helped spawn a group of industry watchers that monitor oil tanker loadings and pipeline volumes in an effort to determine how much OPEC members actually are pumping. These groups supply their data to traders and oil companies—as well as to OPEC members themselves trying to keep tabs on each other.

One such firm, Petro-Logistics SA in Geneva, collects intelligence through a network of sources stationed around the world, the company has said.

“If I told you who they were, they might get their heads chopped off,”Conrad Gerber, the firm’s late founder, told The Wall Street Journal in 2000. “I can’t call them in their offices because their phones are tapped.”

An OPEC spokesman didn’t respond to requests to comment about compliance with production quotas.

Now, seeming to address the issue after decades of grousing about it, OPEC is setting up a committee to oversee compliance with the new pact. It is being led by Kuwait, Algeria and Venezuela, Russia and a still-unnamed producer from outside the cartel.

OPEC Secretary-General Mohammad Barkindo told The Wall Street Journal the group had taken unprecedented steps to monitor the implementation of the Nov. 30 deal negotiated in Vienna.

“The establishment of the joint Ministerial Committee to oversee compliance, makes the Vienna Agreement measurable and verifiable,” he said last week.

Oil prices rose more than 14% in the days after the group announced its plan to reduce output by 1.2 million barrels a day for six months. Part of the gains, some say, reflected optimism that OPEC members have less incentive to cheat than in the past.

“They’re fully aware they need to rein in inventories. I think the adherence will be better than the market anticipates,” said Doug King, chief investment officer at RCMA Asset Management.

The stakes are high. Abdallah Salem el-Badri, a former secretary-general of OPEC, said full compliance with the announced production cuts is “a must” if producers want to lift prices. Two years of pain from low prices improves the odds of compliance, he told reporters at a Platts conference in New York on Thursday.

“When the situation is very difficult, everybody is adhering,” he added.

Still, not all are convinced. Oil prices drifted lower last week as doubts crept back in, with skeptics pointing to data showing that OPEC’s output kept growing in November, even as members were publicly pledging to cut back.

“If the price of oil goes up, everybody will be tempted to cheat a bit,” said Geoffrey Heal, a professor at Columbia Business School who served as an economic adviser to OPEC during the 1990s. “The odds on success are probably 50-50.”

Cheating sometimes has had dire consequences for cartel members. In 1985, Saudi Arabia officials said they grew so tired of fellow members ignoring their agreed-upon quotas that they abruptly raised production in retaliation, sending crude prices into a tailspin.

Some unresolved disputes turned violent. In July 1990, Iraqi President Saddam Hussein threatened an attack if Kuwait didn’t comply with its production limit, according to press reports at the time. Kuwait eventually slashed production, but Mr. Hussein invaded anyway. A few months later the Gulf War broke out to drive out Iraqi troops.

During the financial crisis, OPEC’s lack of public credibility surrounding production cuts backfired badly. In 2008, the cartel agreed to a record output cut of 4.2 million barrels a day in response to plunging prices.

OPEC’s quota enforcement rose to as high as 81% after that agreement, according to data from independent sources. But oil prices kept falling at first —in part because investors didn’t believe the cartel’s members would keep their promises, analysts say.

OPEC members know each other well enough to anticipate some deception, said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

Even with the new oversight, if cheating is discovered a few months from now, “It will be like finding out there was gambling at Rick’s CafĂ©,” he said.

Article Link To The Wall Street Journal:

British Chambers Of Commerce Nudges Up 2017 Growth Forecast, Cuts 2018

By Adela Suliman
December 12, 2016

The British Chambers of Commerce nudged up its forecast for economic growth next year but downgraded the outlook for 2018 due to inflation pressures and ongoing uncertainty as Britain prepares to leave the European Union, it said on Monday.

The BCC modestly revised up its expectations for gross domestic product growth to 1.1 percent for 2017 from 1.0 percent after a stronger-than-expected economic performance following June's vote to quit the EU which means the economy is likely to grow 2.1 percent this year, roughly its long-run average.

However, the business group said it expected the current economic momentum to slow over the next two years and downgraded its GDP forecast for 2018 to 1.4 percent from 1.8 percent, as Britain continues its divorce from the EU.

The BCC's forecast is exactly in line with the consensus among private-sector economists polled by Reuters last week, and their economic analysis is similar.

Weaker economic activity and an erosion of real wage growth triggered by sterling's post-referendum slide is expected to curb household consumption and business investment, the BCC said.

Inflation is expected to breach the Bank of England's 2 percent target next year, with a forecast of 2.1 percent in 2017 and 2.4 percent in 2018, the BCC said.

"In the absence of a clear road ahead, many companies have been adopting a 'business as usual' approach in the months since the referendum, which has kept conditions buoyant this year and prevented a sharp slowdown in growth," BCC economist Suren Thiru said.

"While some firms see significant opportunities over the coming months, many others now see increasing uncertainty, which is weighing on their investment expectations and forward confidence."

The BCC also said it expects business investment to fall by 0.8 percent in 2016, 2.1 percent in 2017 and 0.3 percent in 2018. This represented a less steep decline for 2016 and 2017, but a sharper fall for 2018.

The business group also expects export growth to slow as it believed the benefits of a weaker pound had been overstated.

Article Link To Reuters:

Inflation-Hit Venezuela To Pull Largest Bill From Circulation

By Girish Gupta
December 12, 2016

Venezuela, mired in an economic crisis and facing the world's highest inflation, will pull its largest bill, worth two U.S. cents on the black market, from circulation this week ahead of introducing new higher-value notes, President Nicolas Maduro said on Sunday.

The surprise move, announced by Maduro during an hours-long speech, is likely to worsen a cash crunch in Venezuela. Maduro said the 100-bolivar bill will be taken out of circulation on Wednesday and Venezuelans will have 10 days after that to exchange those notes at the central bank.

Critics slammed the move, which Maduro said was needed to combat contraband of the bills at the volatile Colombia-Venezuela border, as economically nonsensical, adding there would be no way to swap all the 100-bolivar bills in circulation in the time the president has allotted.

Central bank data showed that in November, there were more than six billion 100-bolivar bills in circulation, 48 percent of all bills and coins. Authorities on Thursday are due to start releasing six new notes and three new coins, the largest of which will be worth 20,000 bolivars, less than $5 on the streets.

No official inflation data is available for 2016 though many economists see it in triple digits. Economic consultancy Ecoanalitica estimates annual inflation this year at more than 500 percent.

The oil-producing nation's bolivar currency has fallen 55 percent against the U.S. dollar on the black market in the last month.

"When ineptitude governs! Who would possibly think of doing something like this in December amid all our problems?" two-time opposition presidential candidate Henrique Capriles wrote on Twitter, referring to the upcoming Christmas holiday.

Maduro previously has said that organized crime networks at the Colombia-Venezuela border buy up Venezuelan notes to in turn buy subsidized Venezuelan goods and sell them for vast profits in Colombia.

While smuggling of this sort is an issue at the border, it cannot account for nationwide shortages of the most basic goods from food to medicine, which have left millions hungry and doctors crying out for help.

"I have decided to take out of circulation bills of 100 bolivars in the next 72 hours," Maduro said. "We must keep beating the mafias."

Paying a restaurant or supermarket bill without a debit or credit card can often require a backpack full of cash. However, getting cash in recent months has proven difficult, and the country's credit-card machines have recently suffered problems, leaving many businesses asking customers to pay by bank transfer

Strict currency controls introduced in 2003 that pegged the bolivar to the dollar, coupled with heavy reliance on oil, are seen as the root of the crisis by most economists. Maduro has blamed an "economic war" being waged against his government by the opposition and the United States.

Money supply, the sum of cash and checking deposits as well as savings and other "near money" deposits, was up a staggering 19 percent in the three weeks to Dec. 2 and the curve has been exponential since Maduro's predecessor Hugo Chavez came to power in 1999.

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Dollar Wavers Near Highs As Investors Await Fed This Week

December 12, 2016

The dollar inched lower on Monday but didn't stray far from recent highs ahead of a U.S. Federal Reserve meeting that's expected to deliver an interest rate hike as well as clues to future monetary policy.

The euro remained under pressure after the European Central Bank's dovish moves last week, while rallying oil prices helped lift the Canadian dollar to a nearly 8-week high against its U.S. counterpart.

The U.S. central bank is widely expected to hike interest rates for the first time in 2016 at a two-day meeting that begins on Tuesday, even as investors wait to see if policymakers take a more cautious tone on the economy.

Markets were pricing in a nearly 100 percent chance for a quarter percentage point increase to the Fed's target range of 0.25 to 0.50 percent.

Investors will be scrutinizing the Fed's economic projections for signs of any change following Donald Trump's surprise victory in the Nov. 8 U.S. presidential election.

"It's not so much about what the Fed does, but more about what they say," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

Investors have continued to build up long dollar positions on expectations of higher inflation with increased infrastructure spending under the Trump administration.

"Part of the positioning is also seasonal, as some players try to accumulate long dollar positions ahead of the Christmas holiday," Murata added.

Speculators increased positive bets on the U.S. dollar for a third straight week through Dec. 6, pushing net longs to their highest since early January, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday. [IMM/FX]

"The speed of the dollar's rise has been quite faster than anyone had expected, and we don't know much about what Trump's administration will actually do," Harumi Taguchi, principal economist at IHS Markit in Tokyo.

"So there might be a correction, but we don't know when it will actually be," she said.

The dollar edged down 0.1 percent to 115.25 yen JPY= after earlier touching 115.62 yen, its loftiest peak since February.

Also underpinning the yen, data released early in the session showed Japan's October core machinery orders rose for the first time in three months to beat expectations, in a tentative sign of a pickup in capital expenditure.

The euro was flat on the day at $1.0560 EUR=. It remained under pressure after the European Central Bank announced on Thursday that it will extend its bond-buying program longer than many investors had anticipated, although it trimmed the size of its monthly purchases.

The ECB's move also put more upward pressure on already rising U.S. Treasury yields, which also bolstered the dollar's appeal.

The benchmark 10-year Treasury note yield US10YT=RR was last at 2.491 percent, above its U.S. close of 2.464 percent on Friday.

The dollar index, which tracks the greenback against a basket of six major rivals, was 0.1 percent lower at 101.52 .DXY.

The commodity-linked Canadian dollar, meanwhile, gained as oil prices shot up by 4 percent to their highest level since 2015 early on Monday, after OPEC and other producers over the weekend reached their first deal since 2001 to jointly reduce output in order to rein in oversupply and prop up the market. [O/R]

The dollar was down 0.4 percent at C$1.3121 CAD= after earlier dropping to C$1.3115, its lowest since late October.

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China's Investors Aren't Afraid Of Trump

By Matthew A. Winkler
The Bloomberg View
December 12, 2016

The world can only wonder whether President-elect Donald Trump will fulfill his campaign promise to impose a 45 percent tariff on Chinese-made goods bought in the U.S.

What's already clear, though, is that investors inside the No. 2 economy, unlike their American counterparts, are undaunted. Even after Trump's upset victory last month, their appetite for the country's favorite companies is growing, as long as they can trade shares of them in U.S. dollars. That's a big bet that the financial glue sealing a decades-old symbiotic relationship isn't dissolving just yet.

No nation does as much business with the U.S. as China, accounting for almost 17 percent of total American trade, according to data compiled by Bloomberg. The stock market benefiting most from this booming commerce is the Guangzhou-based E Fund Hang Seng China Enterprises Index, one of 265 global exchange-traded funds focused on China and holding the shares of 40 major companies also trading in Hong Kong dollars, which track U.S. dollars. For Chinese investors, the E Fund HSCEI ETF is the closest thing to owning American currency. They poured $549 million into the fund this year, or 67 percent of its total assets, the most of any Sino ETF. Their investment is paying off with a return of 10 percent, rivaling the performance of the Standard & Poor's 500 Index.

As China's economic growth rate slowed from 10.6 percent in 2010 to 6.7 percent this year, money flowed out of the country. The renminbi depreciated 6 percent to an eight-year low through 11 months of 2016. That helps explain the Chinese preference for publicly-traded equity in dollars amid forecasts that the renminbi will weaken almost another 3 percent in 2017.

Trump's election on Nov. 8 accelerated the trend. A day later, the flow of money into the E Fund HSCEI ETF was the most since June 24, when Trump toured his Turnberry golf course in Scotland and celebrated the British vote to leave the European Union as "a great thing." Brexit caused the pound to plummet as much as 19 percent by the middle of October while the euro lost almost 5 percent of its value between May and late July. Such volatility increased demand for dollars as a refuge for investors.

Across the Pacific, American investors are showing nothing but disdain for Chinese shares. Slowing growth, a relatively opaque economy and Trump's threat to declare China a currency manipulator helped make the San Francisco-based iShares China Large-Cap ETF, which holds 50 companies also traded in Hong Kong dollars, the least popular among the 265 China-focused ETFs. So far this year, more than $1.7 billion, or 32 percent of its total assets, have fled the fund. On Nov. 9, the same day the Chinese rushed into the Guangzou ETF, the iShares China suffered its biggest withdrawal since June 13.

Where Americans see peril, Chinese see opportunity in the nation's bellwether companies. Consumer staples, the best-performing industry with a yuan-based total return (income plus appreciation) of 15 percent this year, remain the favorite measured in dollars. They returned 8 percent compared to a 0.03 percent gain for the MSCI World/Consumer Staples Index. These Chinese companies are a bargain because investors still are paying a 10 percent discount on a price to earnings basis in 2016 compared to their global peers. During the past five years ending in 2015, the same companies sold at an average premium of 20 percent, Bloomberg data show.

The outlook brightens for the 20 Chinese firms that make up the consumer staples industry amid forecasts for world-beating average revenue growth of 3.3 percent in 2016 and 13.3 percent next year. The 123 companies in the MSCI World Staples Index, by comparison, will see sales increases of 2.2 percent this year and 5.1 percent in 2017, according to Bloomberg data.

Energy companies, which returned 0.4 percent as China's top-performing industry this year, have a similar relative value. Since June 2014, when the price of oil declined 50 percent, China energy firms and their global competitors became less profitable, measured by their ebitda margin, or how much a company can turn revenue into earnings before interest, taxes, depreciation and amortization expenses. Chinese profitability held at 13 percent while the rest of the world's ebitda margin declined to less than 7 percent. When measured on a price-to-cash flow basis, an indicator of value commonly used by the energy industry, Chinese firms are trading at a 45 percent discount to their peers -- meaning they're likely to go up reasonably soon.

To be sure, many analysts say Chinese energy is owned by the government and therefore more resistant to oil's falling value and less likely to profit when the oil price increases. But energy companies outside China already are expensive based on their cash flow ratios, so China remains cheap by comparison.

Chinese investors can rest assured that even during the country's slowdown, China's growth will remain at the top of the Group of 20 nations this year and will be No. 2 during the next two years, according to data compiled by Bloomberg. The estimated 6.7 percent gross domestic product growth in 2016 is about $730 billion, or equivalent to the Netherlands economy. If China grows 6.4 percent in 2017, the average of forecasts compiled by Bloomberg, it will be $670 billion larger next year, an amount greater than the economy of Switzerland.

For all the anxiety outside China about what a President Trump may do during the next four years to alter the relationship between the No. 1 and No. 2 economies, there is the confidence inside China that comes with a 5,000-year-old civilization.

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Trump Says U.S. Not Necessarily Bound By 'One China' Policy

By Caren Bohan and David Brunnstrom
December 12, 2016

U.S. President-elect Donald Trump said the United States did not necessarily have to stick to its long-standing position that Taiwan is part of "one China," questioning nearly four decades of policy in a move likely to antagonize Beijing.

Trump's comments on "Fox News Sunday" came after he prompted a diplomatic protest from China over his decision to accept a telephone call from Taiwan's president on Dec. 2.

"I fully understand the 'one China' policy, but I don't know why we have to be bound by a 'one China' policy unless we make a deal with China having to do with other things, including trade," Trump told Fox.

Trump's call with President Tsai Ing-wen was the first such contact with Taiwan by a U.S. president-elect or president since President Jimmy Carter switched diplomatic recognition from Taiwan to China in 1979, acknowledging Taiwan as part of "one China."

Beijing considers Taiwan a renegade province and the subject is a sensitive one for China.

Chinese officials had no immediate reaction to Trump's remarks.

After Trump's phone conversation with Taiwan's president, the Obama administration said senior White House aides had spoken with Chinese officials to insist that Washington’s “one China” policy remained intact. The administration also warned that progress made in the U.S. relationship with China could be undermined by a "flaring up" of the Taiwan issue.

Following Trump's latest comments, a White House aide said the Obama administration had no reaction beyond its previously stated policy positions.

In the Fox interview, Trump criticized China over its currency policies, its activities in the South China Sea and its stance toward North Korea. He said it was not up to Beijing to decide whether he should take a call from Taiwan's leader.

"I don't want China dictating to me and this was a call put in to me," Trump said. "It was a very nice call. Short. And why should some other nation be able to say I can't take a call?"

"I think it actually would've been very disrespectful, to be honest with you, not taking it," Trump added.

Trump plans to nominate a long-standing friend of Beijing, Iowa Governor Terry Branstad, as the next U.S. ambassador to China.

But Trump is considering John Bolton, a former Bush administration official who has urged a tougher line on Beijing, for the No. 2 job at the U.S. State Department, according to a source familiar with the matter.

In a Wall Street Journal article last January, Bolton said the next U.S. president should take bolder steps to halt China' military aggressiveness in the South and East China seas.

Bolton said Washington should consider using a "diplomatic ladder of escalation" that could start with receiving Taiwanese diplomats officially at the State Department and lead to restoring full diplomatic recognition.

In the Fox interview, Trump brought up a litany of complaints about China that he emphasized during his presidential campaign.

"We're being hurt very badly by China with devaluation, with taxing us heavy at the borders when we don't tax them, with building a massive fortress in the middle of the South China Sea, which they shouldn't be doing, and frankly with not helping us at all with North Korea," Trump said. "You have North Korea. You have nuclear weapons and China could solve that problem and they're not helping us at all."

Economists, including those at the International Monetary Fund, have widely viewed China's efforts to prop up the yuan's value over the past year as evidence that Beijing is no longer keeping its currency artificially low to make Chinese exports cheap.

Raising 'Likelihood of Misunderstanding'

The Global Times, an influential tabloid published by the ruling Communist Party's official People's Daily, said in an editorial that Trump was "naive like a child on diplomacy" and that the 'one China' policy "could not be bought or sold".

When the time comes, the Chinese mainland will launch a series of "decisive new policies toward Taiwan", the paper said.

"We will prove that all along the United States has been unable to dominate the Taiwan Strait and Trump's desire to sell the 'one China' policy for commercial interests is a childish urge," it said.

Wang Yiwei, an international relations professor at Beijing's elite Renmin University, said Trump was possibly using the Taiwan issue to try and strike a bargain with the United States over trade.

"He wants to get the best possible trade deal with China he can so that he can boost the U.S. economy," Wang said.

Some U.S. analysts warned that Trump could provoke a military confrontation if he presses the Taiwan issue too far.

"China is more likely to let the whole relationship with the United States deteriorate in order to show its resolve on the Taiwan issue," said Jessica Chen Weiss, an associate professor of government at Cornell University and an expert in Chinese nationalism.

"When the decision to end a decades-long practice is made with so little warning and clear communication, it raises the likelihood of misunderstanding and miscalculation and sets the stage for a crisis between the United States and China over Taiwan," Chen Weiss said.

Mike Green, a former top adviser on Asia to former President George W. Bush, said ending the "one China" policy would be a mistake because it would throw the U.S.-China relationship into turmoil and jeopardize Beijing's cooperation on issues such as North Korea.

But Green, who is now with the CSIS think tank, said he did not believe that Trump intended to go that far and there was "logic to serving Beijing notice that he will not be dictated to on issues like Taiwan."

"President Obama was too accommodating to Beijing early on and it reduced his leverage as China asserted itself on issues like the East and South China Seas later," Green said.

On Sunday, China's top diplomat, State Councilor Yang Jiechi was traveling to U.S. neighbor Mexico, according to the official news agency Xinhua, but Mexican officials could not offer details.

Mexico has been deepening ties with China, which is partly funding a multi-billion dollar wholesale mobile network while China Offshore Oil Corporation took two of the eight blocks of deep water oil fields offered in a historic auction this month.

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