Wednesday, January 18, 2017

Wall Street Eyes CPI, Yellen Comments

January 18, 2017

U.S. stock index futures pointed to a higher open on Wednesday as traders eyed a host of data and earnings, as well as comments from Federal Reserve Chair Janet Yellen.

On the data front, Consumer Price Index is set to come out at 8:30 a.m. ET, with industrial production and capacity utilization following on at 9:15 a.m. The NAHB housing index is due at 10:00 a.m., with the Fed's Beige Book expected at 2:00 p.m.

Later on in the day, Yellen is due to give a speech at the Commonwealth Club in San Francisco, at 3:00 p.m. ET.

On the earnings front Wednesday, Citigroup, Goldman Sachs and US Bancorp are among companies set to report before the bell. Netflix is among companies set to report after the bell.

In Europe, the pan European Stoxx 600 Index was around 0.02 percent lower on Wednesday morning.

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Gold Has A Lot Going For It This Year -- And It’s Not Only Because Of Trump

Concern over weak earnings and a stock market correction sets up a gold trade.

By Jeff Reeves
January 18, 2017

Gold had a ho-hum 2016 on paper, as the precious metal rose 9%, in line with the S&P 500 index and the Nasdaq 100 Index.

That said, the details on gold’s recent performance are anything but boring.

A year ago, gold prices briefly traded under $1,050 an ounce for the first time in six years, thanks to a strong dollar holding back commodity prices and investor demand for stocks over safe-haven assets. Gold GCG7, -0.03% then steadily rose up to almost $1,400 an ounce by July, as the uncertainty of the Brexit vote and the U.S. presidential election weighed on global markets. But after Election Day in the U.S. sparked a “risk-on” rally in stocks, gold fell out of favor in a hurry and bottomed out in the low-$1,100s in December.

In other words, if you bought gold at the bottom a year or so ago, and sold at the top in the summer, you made a nearly 35% gain in a few months. But if you bought the mid-year top and sold the bottom recently, you lost almost 20% in equally short order.

This kind of volatility has been commonplace for commodities over the past few years, and has been particularly true for gold. And while plenty of wing nuts and conspiracy theorists like to label all big moves like this “manipulation” in the gold market, investors who have been around the block know that precious metals almost always give you a bumpy ride.

Still, the outlook for gold seems to be brightening. Here are some reasons why:

Trump vs. The World

Love him or hate him, President-elect Donald Trump sure knows how to spark controversy with a single sound bite. And a lot of his comments lately — most recently those about China and Taiwan, but dozens of others I don’t have room to list — seem to be creating more geopolitical destabilization and political feuds. In the absence of a clear and steady worldview, uncertainty rules — and gold thrives.

The ‘Trump Trade’ Wanes

It’s also worth noting that as the transition to a new administration culminates in Trump’s inauguration this week, we have seen markets perform in their typical “buy the rumor, sell the news” style. The dramatic run-up in November and early December priced in many of the policies that investors were expecting from a Republican Congress and White House, and now that those expectations are becoming reality, the trade has run its course. As the risk-on rally stalls, gold is returning to favor and has added about 6% since Jan. 1.

Brexit Plans

As much as some would like to blame Trump alone for uncertainty, the rest of the world is hardly less murky. British Prime Minister Theresa May recently said the U.K. has no interest in partial membership of the European Union, which means it will leave the market altogether in a so-called “clean break.” Of course, a Brexit will be anything but clean no matter how it goes down, and that is roiling currency and stock markets. It’s also boosting gold.

Dollar Softening

The U.S. Dollar Index, a measure of the greenback against major currencies, hit its highest level since 2002 around the turn of the year. However, much of the negativity for other currencies is now priced in. And thanks, in part, to concerns about big spending plans out of Washington and to Trump recently saying the dollar was “too strong,” America’s currency has softened to its lowest levels since early December.

Weak Earnings

While bank stocks offered an upbeat start to fourth-quarter earnings season, guidance for 2017 from other sectors isn’t encouraging. The latest Earnings Insight report from FactSet shows that of the 112 S&P 500 stocks that have provided guidance for the fourth quarter, 78 have issued negative guidance — roughly seven in 10 corporations. And already this earnings season, we’ve seen weak guidance from a wide array of companies including luxury giant Tiffany & Co.TIF, -2.47% retailer L Brands Inc. LB, +0.74% oil producer Hess Corp. HES, +0.70% and cereal giant General Mills Inc. GIS, +1.47% to name a few.

Correction Fears

Even if the economy powers higher in 2017, and even if the worries about Brexit and Trump’s presence on the world stage are overblown, there has been a steady chorus of bears who worry that we are overdue for a correction.

For some, it’s a valuation concern. The S&P 500 SPX, -0.30% trades for almost 18 times forward earnings, and the Nasdaq 100 Index NDX, -0.29% trades for almost 19. CAPE, or Shiller P/E ratios, are now above their pre-crisis levels and in territory not seen since the dot-com days.

For others, it’s a growth concern as stocks are struggling to eke out low-single-digit earnings improvements and U.S. GDP remains stuck in a rut. Even if the worst of investors’ fears aren’t realized, there are still plenty of reasons for the market to soften up soon — and, similarly, for gold to return to favor.

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Stock Rally In Recent Months Driven By Global Economy, Not Trump

By Tomo Uetake
January 18, 2017

A rally in global stock markets in the past few months is being driven more by improving economic fundamentals than by expectations of more U.S. fiscal stimulus under President-elect Donald Trump, a chief investment officer of Dutch asset management firm Robeco said.

To the contrary, uncertainty over Trump's economic policies is the biggest risk for markets this year, Lukas Daalder, CIO in charge of multi-asset strategies, told Reuters in Tokyo.

Ahead of Trump's inauguration on Friday, Daalder said Robeco has brought its positions to almost completely neutral, and will look to build fresh investment strategies after the new administration takes shape.

"Normally we have quite big exposures. But currently, if you look at the currencies, we are sort of hands off. Basically since the election, the only trade that we currently still have outstanding is a short position in the yen versus the dollar JPY=," he said in an interview late on Tuesday.

The U.S. S&P 500 Index .SPX has risen 5.3 percent since the Nov. 8 presidential election, while the MSCI ACWI .MIWD00000PUS, a gauge of the world's share markets, has gained 3.4 percent.

Many market players have attributed the strong performance to expectations that Trump will swiftly follow through on campaign pledges to cut taxes, spend more on infrastructure and push for deregulation.

While Daalder does not deny that such expectations have played a role, he thinks improving economic fundamentals have been the real driver of share prices worldwide.

"Most people call it the 'Trump rally'. Partly, it is but if you look at the underlining macro data, they have been on the up since September already," he said.

"If Clinton would have won, we would be talking about the 'Clinton rally' - and that would be wrong as well."

Daalder noted that Citi's index which measures economic data surprises has been positive not just in the United States but also in the euro zone, emerging markets and Japan.

"(Having positive surprises in all those regions) doesn't happen that often. And they have been surprising for four, five months already," he added.

GRAPHIC - Citi's Economic Surprises Indices:

While the Rotterdam-based investment firm has reset almost all its positions to neutral for now, it still believes in the underlying trend of higher bond yields and strength in the dollar.

The asset manager needs to see more details on how Trump's economic plans will pan out, including his plan to cut taxes by $10 trillion in 10 years.

"If you are in the stock market, tax cuts are good news. The problem is, is he going to? And how is he going to finance that? I'm not saying that's impossible. But you don't know until you see the details," he said.

He added that he plans to stake out new positions within a month.

Robeco Group, bought by Japan's Orix Corp (8591.T) in 2013, had 276 billion euro in assets under management as of Sept. 30.

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Higher Oil Prices To Aid Gulf External Balances But Growth Outlook Still Low

By Andrew Torchia
January 18, 2017

A rebound in oil prices over the past few months looks set to improve the external balances of rich Gulf Arab countries but economic growth will stay low, a quarterly Reuters poll of analysts found.

Brent crude is now trading around $55 a barrel, up from last year's average of about $45. If current prices hold, that will boost Gulf states' export revenues and ease pressure on their currency pegs to the U.S. dollar.

The poll of 17 private sector analysts expect the current account balances - which capture trade in goods and services - of Saudi Arabia, the United Arab Emirates and Qatar to improve in both 2017 and 2018 even more than forecast in the last poll conducted three months ago.

Saudi Arabia's current account deficit, for example, is forecast to shrink to a median 3.3 percent of gross domestic product this year from 8.0 percent in 2016. In the last poll, this year's deficit was projected at 3.9 percent.

For 2018, the Saudi current account deficit is now projected at 2.5 percent instead of 3.1 percent. In addition to higher oil prices, Riyadh's efforts to reduce its state budget shortfall are expected to improve its external balance.

"Ongoing fiscal reforms and higher oil prices could bring the current account deficit nearer to balance over the coming years as the external break-even oil price hovers around US$60 per barrel," Bank of America analysts said in a note to clients.

However, the Reuters poll found little improvement in the current account outlook for the least wealthy economies of the six-nation Gulf Cooperation Council, Oman and Bahrain. Oman is now expected to run a bigger deficit this year than was forecast in the last poll; Bahrain's forecast has deteriorated for both 2017 and 2018.

That is partly because both countries have less scope to cut big state budget deficits, which are expected to be equivalent to at least 8 percent of GDP this year and next.

Higher oil prices will give little or no boost to economic growth in the Gulf as governments keep a tight rein on their spending, the poll found. Furthermore, the GCC countries plan to introduce a 5 percent value-added tax in 2018, which will weigh on private consumption.

GDP growth in all of the GCC countries is forecast to languish around 3 percent or below in 2017 and 2018, lower than average levels of about 4 percent or above during the boom years of the past decade, the poll showed.

Saudi Arabia's GDP growth is expected to slow to just 0.8 percent this year from an estimated 1.3 percent last year, before picking up to 1.5 percent next year.

However, that reflects changes in oil output under an agreement sealed last month among global producers to prop up prices, which commits Saudi Arabia to cutting its oil production by about 5 percent for six months.

Growth in Saudi Arabia's non-oil sector may actually accelerate slightly in 2017 as the government delays fresh austerity measures and launches a program to compensate poorer Saudi citizens for higher energy and water prices.

"Saudi Arabia's economy is likely to grow at its slowest pace since the global financial crisis this year. However, this will largely reflect weakness in the oil sector," London-based Capital Economics analysts said in a note to clients.

"In contrast, with austerity taking a breather, the non-oil sector should embark on a recovery."

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Five Economic Lessons From Obama's Presidency

By Mohamed A. El-Erian
The Bloomberg View
January 18, 2017

I remember vividly the economic and financial mess President Barack Obama inherited when he was sworn in as the 44th U.S. president eight years ago. Growth and trade were imploding, millions of Americans were losing their jobs and the stock market was in free fall. This frightful combination was also playing out in many other countries, fueling a sense of deep economic and financial insecurity that had not been felt for more than 70 years.

As his time in office comes to an end, Obama presides over an economy that has done more than help the world avert what would have been a very painful multiyear global depression, both for current and future generations. The U.S. has been a star outperformer in the advanced world, delivering record job creation, boasting an unemployment rate that is the envy of many other countries and remaining the best facilitator of innovation and entrepreneurship. Meanwhile, all major U.S. stock indexes are trading close to record highs, having delivered enormous returns to investors during the president’s tenure.

Yet this list of considerable accomplishments, which once would have been deemed unlikely if not unthinkable given the turmoil the president inherited in 2008, is tempered by a feeling that more could have been achieved, especially when it comes to ensuring more inclusive growth, unleashing the animal spirits of businesses, delivering better wage growth, anchoring genuine financial stability and spearheading better global policy coordination. Indeed, this feeling of lost opportunities offers five important insights for economic management going forward.

1. The U.S. economy no longer lives just in cyclical space. 

As the immediacy of the global financial crisis receded, it was tempting (and comforting) to assume that the economic damage was due to nothing more than a cyclical downturn, albeit a severe one. Therefore, too much of the policy effort was influenced by the notion of a classical “V-shaped” recovery. In the process, policy makers paid too little attention to the secular and structural headwinds impeding the return of high and inclusive growth. Precious time was wasted, not only in terms of economic steps, but also in terms of a political window to ensure sustained policy implementation. Indeed, to adapt former White House Chief of Staff Rahm Emanuel's famous phrase, the administration inadvertently allowed a “good crisis to go to waste.” As a result, the growth challenge became more deeply embedded in the structure of the economy.

2. A credible medium-term economic vision is crucial for maintaining economic traction.

A well-articulated and broadly communicated medium-term economic vision became a victim of the excessive focus on cyclical policy responses. Once the worse of the crisis was overcome, the economy lacked a sufficiently strong multiyear framework to serve as a common catalyst for policy formulation and business plans. Individual policy initiatives submitted to Congress, including well-crafted pro-jobs and pro-investment bills, became even more vulnerable to the vagaries of political polarization. And, especially after the 2010 elections, insufficient economic buy-in by some segments of the population meant there was even less pushback against a Congress that was failing to step up to its economic governance responsibilities.

3. Reliance on monetary policy, while tempting, is ultimately unsustainable.

The lost opportunities associated with partial policy responses did not become clear to Washington quickly enough as -- understandably -- the Federal Reserve stepped in to fill the void as best as it could. In doing so, the central bank enabled short-term growth to be higher than it would have been otherwise, and financial volatility to be a lot less than what was warranted by fundamentals. But using tools that were inevitably ill-suited for the task at hand, it couldn’t fix the structural ailments that hamper stronger longer-term prosperity. In effect, the economy replaced an inherently flawed growth model with another one: that is, it transitioned from a paradigm based on private sector debt, leverage and financial engineering to one relying on central bank financing and artificially repressed interest rates. And the longer the Fed was de facto forced to act as the “only game in town” in terms of policy, the greater the concerns about the collateral damage and unintended consequences of a heavily unbalanced policy response.

4. Structure is critical for ensuring that episodes of effective global policy coordination are not just rare and surprising.

Domestic shortfalls were compounded by a notable decline in global policy coordination after the surprising success of the U.S. and U.K.-led Group of 20 Summit in April 2009 in London. Rather than building on inspirational cross-border policy unity regarding the shared risks and responsibilities facing the global economy, coordination dissipated and further watered down the fuel for what already was a sluggish engine for world growth. Part of this failure reflected a G-20 construct that lacks sufficient continuity and suffers from the absence of a proper secretariat -- issues that the U.S., as the world’s natural economic leader, could have helped resolve.

5. Look to shape new global realities change rather than fight old battles.

The administration also was slow in recognizing global economic realignments, including the emergence of China as a more assertive power that is being engaged by a growing number of other countries pursuing their own self-interest. This was the case when, confronted with the Chinese initiative to create an “Asian Infrastructure Investment Bank,” the administration resisted. Rather than engage and seek to significantly shape the investment bank at its creation, the U.S. adopted a similar approach to that used at the end of the 1990s in response to the proposal for an Asian Monetary Fund: It sought to derail an institutional effort that could compete with the post-World War II regional and multilateral architecture that the U.S. had spearheaded and dominated. This time, however, the U.S. was not able to unite the vast majority of its allies given their interest in joining an initiative led by what is now the second-largest economy and the world's largest creditor. The U.S. was left on the outside looking in.

As he leaves office, Obama’s enormous economic accomplishments are tempered with the recognition of foregone opportunities. Disappointment among certain segments of the population has fueled the politics of anger and social divisions that go well beyond what would be expected and warranted based on actual economic performance. With time, however, historians will give a lot more credit to the favorable aspects of Obama’s economic legacy. His legacy could be even greater if the insights of the shortfalls are internalized by the next administration and acted upon.

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U.S. Lobby Says China Protectionism Fueling Foreign Business Pessimism

By Michael Martina
January 18, 2017

More than 80 percent of members of a U.S. business lobby in China say foreign companies are less welcome than in the past, a survey released on Wednesday showed, with most saying they have little confidence in China's vows to open its markets.

The American Chamber of Commerce in China's annual survey reinforces growing pessimism in the foreign business community, as it grapples with a slowing Chinese economy and complains of increasing protectionism.

The chamber's report comes a day after China's President Xi Jinping gave a speech at the World Economic Forum championing open markets, and Beijing unveiled proposals to reduce restrictions on foreign investment in China.

Business circles are particularly concerned over the future of U.S.-China commercial ties as President-elect Donald Trump prepares to take office, having pledged to brand China a currency manipulator and threatened to impose tariffs on its goods.

"More companies are slowing investments and de-prioritising China as an investment destination due to slowing growth and increased concerns over barriers to market entry, the regulatory environment, and rising costs," the chamber said.

If China took action, including removing "discriminatory barriers" to foreign-invested companies and investment restrictions, the chamber's members would "significantly increase investment", it said.

Asked about the report, Chinese Foreign Ministry spokeswoman Hua Chunying said investment figures showed China remained an attractive place for U.S. businesses and China was committed to opening up.

"At the same time, we hope that the doors of all countries are fairly opened to Chinese investors," Hua told a daily news briefing.

Lack Of Confidence

The chamber said the share of companies that identified China as a top three global investment priority dropped to 56 percent this year, compared with a peak of 78 percent in 2012, a record low.

Eighty-one percent of the 462 companies included in the survey, among them U.S. and multinational firms, said foreign business was less welcome in China than in the past, up from 77 percent in 2016.

Foreign businesses in China, as well as foreign governments, have long complained about a lack of market access in China and restrictive policies that run counter to its pledges to free up markets.

Though President Xi's speech at the World Economic Forum in Davos painted a picture of China as a "wide open" economy, more than 60 percent of the chamber's members had "little or no confidence that the government is committed to opening China's markets further in the next three years".

Respondents estimated on average that China's economic growth for 2017 would be 6.1 percent, below what sources have told Reuters would be a government target of around 6.5 percent.

The survey, with responses compiled both during and after Trump's November election victory, showed 72 percent of members felt that positive U.S.-China relations were "critical" to business, but only 17 percent thought they would improve in 2017.

Chamber chairman William Zarit said some of its members would go to Washington in February, months ahead of an annual lobbying trip, to engage with the Trump administration.

"We certainly are not going there to lecture the administration, but we are there to share our ideas on ... a more constructive path forward," Zarit said at a briefing on the survey.

China has warned that it will be tough for its foreign trade to improve this year, especially if a Trump administration and other political changes limit export growth.

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Pound Rescued By May Faces Choppy Waters As Political Risks Loom

Investors await Europe’s reply to May’s Brexit plan for U.K.; Citigroup, Deutsche Bank retain bearish calls on sterling.

By Stefania Spezzati
January 18, 2017

The pound may have rallied the most since the 1990s after Prime Minister Theresa May promised a parliamentary vote on taking the U.K. out of the European Union, but the currency isn’t out of the woods yet.

Sterling strengthened against all major counterparts on Tuesday after May pledged to quit the single market and instead seek a customs agreement with the bloc to deliver “a smooth and orderly Brexit.”

While the currency’s 17 percent slump since the nation voted to leave the European Union has ensured that much of the bad news is priced in, political risks still loom large, strategists and fund managers say. Though sterling may be undervalued based on some measures, the U.K.’s widening current-account deficit adds to its vulnerability. Deutsche Bank AG predicts the currency could still weaken more than 10 percent.

“The bulk of the sterling adjustment has occurred now,” said James Athey, a portfolio manager at Aberdeen Asset Management Plc. “We are flat on sterling as it’s still very difficult to invest in the pound as it’s heavily influenced by sentiment and headlines.”

-- The worst for sterling is most likely over for now, according to Athanasios Vamvakidis, strategist at Bank of America Merrill Lynch. There will probably be one more leg lower when the U.K. triggers Article 50 to start the process of exiting the EU, and then it will depend on the headlines when the negotiations start.

-- Hard Brexit concerns may have just peaked in the near term, with the bulk of the adjustment lower for the pound having already taken place and leaving the pound undervalued, Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ, said in a note to clients.

-- “We remain bearish on sterling for the coming months,” Josh O’Byrne, a London-based strategist at Citigroup Inc, said in a note to clients, adding “counter comments” from the European Union were likely to damp expectations.

-- “We see the speech as a moderately positive outcome relative to weekend headlines signaling a hawkish stance on immigration and relaxed attitude towards EU tariffs,” Oliver Harvey, a strategist at Deutsche Bank, said in a note to clients. The bank expects sterling to break through 1.10 against the dollar, according to a client note dated Jan. 12. The decision to seek a deal combined with an interim agreement is a “high risk strategy”, Harvey said, given the difficulty of reconciling the multiple competing interests of EU member states. “This is particularly the case over a very busy European political calendar during the first half of this year,” he said.

-- “We have a forecast for GBP to still depreciate based on ongoing political uncertainty and a wide external imbalance, which is not disappearing quickly enough. It doesn’t seem much has shifted there,” Dominic Bunning, strategist at HSBC Holdings Plc, said in e-mailed comments.

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The Risks Of ‘Brexit Means Brexit’

By Editorial Board
The Bloomberg View
January 18, 2017

On Tuesday, U.K. Prime Minister Theresa May set out her fullest account yet of her aims in the forthcoming Brexit negotiations. Greater clarity was overdue, and welcome -- but with it comes a clearer understanding of the enormous hazards Britain faces as this process moves forward.

May said, “What I am proposing cannot mean membership of the single market.” That shouldn’t have been surprising, because the European Union (regrettably) won’t budge on the idea that single-market membership requires free movement of people within the EU, and May (rightly) won’t budge on the idea that Brexit requires the U.K. to control its own immigration policy. But understanding this doesn’t make May’s choice any less wrenching.

May emphasized that she wants this clean break to be on the friendliest terms -- meaning close cooperation on trade, smooth transitional arrangements, and an end to “vast” (but notably not all) budget contributions to the EU. She also said Parliament would get a vote on the eventual deal. Financial markets reacted favorably, and sterling moved sharply higher after the talk.

So far, the post-Brexit economic slump predicted by the Bank of England and others hasn’t materialized. The International Monetary Fund on Monday raised its forecast for U.K. growth this year to 1.5 percent from 1.1 percent. But Britain is still in the EU. The question is what will happen when it isn’t.

Britain’s close trading relationship with the EU has served the country well for more than 40 years. Weakening those links is a momentous step. According to Bloomberg Intelligence, membership in the world’s biggest single market has boosted trade between the U.K. and the rest of the EU by 10 percent; if it lost all those trading privileges post-Brexit, Britain’s national income might be 2 percent lower in the longer term.

London’s finance industry, which contributes about $55 billion annually to the economy, looks particularly vulnerable. The single market provides “passporting,” which allows financial firms to sell products and services across the bloc no matter which member state they’re based in. Quitting the single market may force the U.K. to instead rely on “equivalence,” where cross-border selling is allowed so long as a non-EU country’s rules are judged to be as stringent as the EU’s. This is a complicated and much less secure arrangement. And as Bank of England Governor Mark Carney has explained, it could make the U.K. a “rule-taker,” forced to accept regulations it has no say in framing.

Put it this way: May’s speech gave no reassurance to the decision-makers wondering whether to move jobs in banking and finance to Paris or Luxembourg or Dublin -- all of which are maneuvering to stake their claim.

May echoed the veiled threat issued recently by Chancellor of the Exchequer Philip Hammond: If the EU shuts the U.K. out, Britain might reinvent itself as an offshore tax and regulatory haven, intent on luring business away from Europe. Though it makes sense for Britain to avoid cowering and to encourage the EU to be friendly, this tough posture isn’t all that credible. Selling rock-bottom corporate taxes and light-touch regulation to British voters wouldn’t be easy. Europe’s leaders know this, and they’re unlikely to alter their main goal: Discourage other countries from following the U.K.’s example.

Months ago, May said “Brexit means Brexit”; all that remained was to work out what that meant. What she intends it to mean is finally clearer: Britain quits the single market, but otherwise negotiates the closest possible trading relationship with the European Union. It’s what a narrow majority of Britons voted for, but the odds are still against May and the U.K. making a success of the mandate.

Article Link To The Bloomberg View:

German Finance Minister Preparing For Greek Aid Without IMF

By Michelle Martin
January 18, 2017

German Finance Minister Wolfgang Schaeuble is preparing for a continuation of aid for Greece without the involvement of the International Monetary Fund (IMF), Germany's Bild newspaper reported on Wednesday.

Talks between Athens and foreign lenders on its bailout progress have dragged on for months due to differences on labor and energy reforms as well as on fiscal targets and debt relief measures. The IMF has said it will only be involved if it is the last bailout for Athens and includes debt relief for Greece.

The German government would like the IMF to participate in the bailout program to boost its credibility but Berlin is against granting Athens significant debt relief.

The Finance Ministry is preparing for a vote in the Bundestag lower house of parliament in case the IMF refuses to take part, after Schaeuble previously promised the Bundestag the rescue package would only be approved if the IMF was involved and keeping tabs on Greek reforms, Bild said.

The newspaper, which did not name its sources, said Schaeuble thinks the hole left by the IMF should be filled by the European Stability Mechanism (ESM) - the euro zone's bailout fund, Bild said.

The German Finance Ministry was not immediately available for comment.

Bild said the Bundestag would vote on the modified program for Greece before a federal election due to take place in September.

Last week Schaeuble proposed turning the ESM into a European monetary fund to improve the management of crises in Europe.

Article Link To Reuters:

China Economic Growth To Slow Slightly This Year As Policymakers Focus On Risks

By Elias Glenn
January 18, 2017

China's economy will likely expand 6.5 percent this year as authorities tolerate a further slowdown so they can focus on containing increasing financial risks, but a weakening yuan will complicate their policy choices, a Reuters poll showed.

The forecast would represent only a mild cooling from 2016's expected growth of 6.7 percent, but would likely mark the seventh straight year of slower growth as China looks to reign in excessive debt and increasingly unproductive investment while boosting the consumer sector.

The forecast for 6.5 percent growth this year was unchanged from an October poll.

China's economy picked up towards the end of last year, supported by higher government spending and record bank lending, putting it on track to meet the government's target of 6.5-7 percent growth.

Economists expect China's economy likely grew by a steady 6.7 percent in the fourth quarter of 2016, the same pace as in the previous three quarters, according to a Reuters poll.

China will announce Q4 and 2016 GDP growth on Friday.

But Beijing's decision to double down on spending may have come at a high price, as policymakers will have their hands full this year trying to defuse financial risks created by the explosive growth in debt.

China will lower its 2017 economic growth target to around 6.5 percent, policy sources said, reinforcing a policy shift from supporting growth to pushing reforms to contain debt and housing risks.

Growth will likely weaken further to 6.2 percent in 2018, the Reuters poll of 57 economists showed, as China deals with a debt ratio that will likely surpass 285 percent of GDP this year, Gene Frieda, global emerging markets strategist at asset management giant PIMCO, said in a note this week.

On a quarterly basis, China's economy is expected to slow from 6.6 percent growth in the first quarter of 2017 to 6.5 percent in the second and third quarters, and then hit 6.4 percent in the fourth quarter, the poll showed.

Analysts also expect annual inflation to average 2.2 percent in 2017 and 2018, picking up slightly from an expected 2 percent in 2016. Sluggish demand is expected to keep consumer prices largely in check despite a big bump in producer prices in late 2016.

Policy Outlook

With the economy stabilizing, economists have dropped calls for fresh monetary easing amid concerns that it could aggravate rising debt levels and speculative activities and as the policy focus shifts to supporting the yuan, the poll showed.

Lower interest rates in China could put further pressure on the yuan to depreciate amid expectations of rising rates in the United States, which are boosting the dollar.

The yuan fell 6.6 percent against the dollar in 2016, and currency strategists in a separate Reuters poll predicted it would weaken by over 4 percent this year.

China's central bank has been fighting a weakening yuan and capital outflows by spending down the country's foreign exchange reserves and tightening controls on money leaving the country.

The country's forex reserves fell to about $3 trillion at the end of 2016, a decline of almost $1 trillion since mid-2014, while outbound investment in December fell by almost 40 percent.

Analysts believe the PBOC will keep benchmark interest rates unchanged at 4.35 percent through at least the second quarter of 2018, the Reuters poll showed, with policymakers vowing monetary policy will be neutral.

That compares with previous expectations of a 25 basis point interest rate cut in the fourth quarter of 2017, according to a Reuters poll in October, as economic activity remains robust and risks of asset bubbles in housing and commodities have grown.

The central bank will cut the amount of cash that banks are required to hold as reserves by 50 basis points (bps) in the third quarter this year to 16.50 percent, according to the poll.

Banks' reserve requirement ratios (RRR) will then likely fall to 16 percent by the second quarter of 2018.

Economists polled in October had expected a 50 bps cut in RRR in the first quarter of this year.

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Pearson Cuts Forecast On Textbook Slump; To Sell Penguin

German partner Bertelsmann open to buying Pearson’s stake; U.K. company withdraws 2018 profit target amid headwinds.

By Ville Heiskanen
January 18, 2017

Pearson Plc cut its profit forecast for this year, signaled it will lower the dividend and announced plans to sell its stake in publisher Penguin Random House as the U.K. company struggles with plunging sales of textbooks in the U.S. The shares sank as much as 24 percent.

Operating profit in 2017 will be 570 million pounds ($704 million) to 630 million pounds, the London-based company said in a statement Wednesday, below the average analyst estimate compiled by Bloomberg of 681.9 million pounds. The world’s largest education company withdrew its profit goal for 2018 after sales of materials for U.S. higher education dropped 30 percent in the fourth quarter.

“Whereas we had previously anticipated a broadly stable North American higher education courseware market in 2017, we now assume that many of these downward pressures will continue,” the company said in the statement.

The planned sale of the Penguin Random House stake signals Chief Executive Officer John Fallon is doubling down on the education business, seeking to resurrect sales even amid sluggish demand for textbooks, dwindling U.S. college enrollments and declines in its testing business. Fewer older students are enrolling, community college admissions also are dropping, and more students are renting textbooks, Pearson said.

Selling the stake gives an opportunity to German media giant Bertelsmann SE, Pearson’s partner in the venture, to acquire full control of the world’s largest book publisher. Pearson plans to use the proceeds from its 47 percent stake to invest in its business, strengthen its balance sheet and return excess capital to shareholders, the company said. The stake may fetch 1.2 billion pounds in a sale, according to Ian Whittaker, an analyst at Liberum in London.

Pearson sank 22 percent to 633.50 pence at 8:10 a.m. in London, cutting the company’s market value to 5.2 billion pounds.

Pearson combined Penguin with Bertelsmann’s Random House in 2013, leaving the British company owning just under half of the venture, which publishes books from writers including John Grisham, Ken Follett and George R. R. Martin. In 2015, it generated revenue of 3.7 billion euros ($3.95 billion) and operating earnings before interest, taxes, depreciation and amortization of 557 million euros.

Bertelsmann is open to increasing its stake in the venture “provided the terms are fair,” CEO Thomas Rabe said in a statement. “Strategically this would not only strengthen one of our most important content businesses, it would also once further strengthen our presence in the United States, our second largest market,” Rabe said.

Pearson gets almost all its profit from education after already selling the Financial Times and its half of the Economist Group. The company announced a reorganization last year as it seeks to address sluggish demand in its main business.

Pearson also indicated that its dividend, which amounted to 52 pence a share for 2016, will be cut beginning this year to reflect the lower earnings guidance. The current dividend equals 6.4 percent of Pearson’s share price, the highest yield among companies in the U.K.’s benchmark FTSE-100 Index.

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Global Shipping Prices Are Staging A Major Comeback And Here's Why

By Matt Clinch
January 18, 2017

The CEO of the world's largest shipping firm by capacity has given his unique insight into the rebound seen in global shipping prices in the last few months.

Speaking to CNBC Wednesday the World Economic Forum in Davos, Søren Skou, the chief executive officer of Maersk Group, told CNBC on Wednesday the global freight index for container shipping had more than doubled in the last nine months months.

"It's simply driven by the fact that the carriers have taken a lot of capacity out of the market," he said.

"They are losing significant sums of money every day, and continuing to do that and continuing to do that is simply not sustainable. Today, about 5 percent of the global container fleet is actually idle ... That has helped to support prices."

"We and others were surprised by the fact global trade not growing nearly as much as one would have expected five years ago."

The Baltic Dry Index - traditionally used as a barometer of global shipping - is up around 150 percent in the last year. Some have speculated that proposed infrastructure spend with the incoming Donald Trump presidency could have buoyed the sector while others suggest traders have weighed into a marker that had seen extreme weakness in recent years.

Skou said that he wasn't focused on any potential dampening of global trade under a Trump presidency - who has touted protectionist policies on the campaign trail - but highlighted that plans for lower taxes in the U.S. could aid his industry.

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Oil Rises On Weaker Dollar, U.S. Production Outlook Caps Gains

By Naveen Thukral 
January 18, 2017

Oil prices rose on Wednesday with a weaker dollar underpinning the market, although gains were limited by expectations that U.S. producers would boost output.

U.S. West Texas Intermediate (WTI) crude oil futures were trading up 22 cents at $52.70 per barrel.

Brent crude futures, the international benchmark for oil prices, were up 23 cents $55.70 a barrel.

The dollar was trading near its lowest in six weeks against a basket of currencies after U.S. President-elect Donald Trump said that the strong greenback was hurting U.S. competitiveness.

A weaker greenback makes dollar-denominated crude less expensive for users of other currencies, potentially spurring fuel demand.

"U.S. oil has been supported by considerable weakening in the U.S. dollar over the last 24 hours," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

"There are two or three key things to watch, U.S. production numbers are important, given the sharp rise we have seen in output. Another issue on the supply side is any news on OPEC countries unwinding their production."

Oil has drawn support from top crude exporter Saudi Arabia, which said it would adhere strictly to its commitment to cut output under the agreement between the Organization of the Petroleum Exporting Countries (OPEC) and other producers.

Under the agreement, OPEC, Russia and other non-OPEC producers have pledged to cut oil output by nearly 1.8 million bpd, initially for six months, to bring supplies back in line with consumption.

The output cuts agreed by OPEC and others are likely to come largely from field and refinery maintenance, BMI Research said in a note. It said oil producers are expected to use lower volumes needed for domestic power generation in a bid to maintain export volumes.

"Sticking to output targets is important but export volumes from the participating countries are a much better indicator of how the cuts will affect the market," it said.

"Participating members are keen not to sacrifice vital export revenue so are trying to find ways to limit domestic crude usage in order to prioritize filling their contracts to foreign refiners."

At the same time, U.S. oil production is set to rise towards 9 million barrels per day, the U.S. government said on Tuesday, providing headwinds to oil futures.

Representative Ryan Zinke of Montana, President-elect Donald Trump's nominee for interior secretary, on Tuesday said he would consider an expansion of energy drilling and mining on federal lands but would ensure sensitive areas remain protected.

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Rising U.S. Shale-Oil Output Threatens OPEC’s Production Pact

Output in Permian Basin poised to lead jump.

By Myra P. Saefong
January 18, 2017

The oil market got a stark reminder Tuesday that rising oil production in the U.S. could upend efforts by major producers to bring global supply and demand for crude back in to balance.

Just ahead of the settlement for oil futures prices CLG7, +0.34% on the New York Mercantile Exchange on Tuesday, the Energy Information Administration released a report on drilling productivity—forecasting a monthly rise of 41,000 barrels a day in February oil production to 4.748 million barrels a day.

“That is bearish for oil and a concern for [the Organization of the Petroleum Exporting Countries,” said James Williams, energy economist at WTRG Economics, pointing out that the volume of new oil per rig has climbed because of gains in efficiency.

“If maintained, the expected February production gain means production from the shale plays will be up at least a half million barrels per day by the end of the year,” said Williams.

Prices for February West Texas Intermediate crude lost the bulk of the day’s gain on Tuesday to settle with a modest 11-cent climb at $52.48 a barrel.

“Since rigs are higher now than in December and should continue to increase, that means a half million [barrel-per-day] gain in production by year-end is a conservative estimate,” Williams said.

“Most OPEC members expected this, but U.S. shale production will be the closest monitored data after OPEC’s own compliance with quotas,” he said.

OPEC reached an agreement back in late November to cut output by 1.2 million barrels a day to no more than 32.5 million barrels a day and other non-OPEC countries pledged cut production by nearly 600,000 barrels more.

Meanwhile, recent data from Baker Hughes BHI, +1.61% revealed that the number of active U.S. rigs drilling for oil, a proxy for oil activity, rose for 10 weeks in a row before edging down for the week ended Jan. 13.

Shale’s Road To Recovery

There have been concerns that the resulting rise in oil prices would provide incentive for U.S. producers to boost oil output.

But on Tuesday, speaking at the World Economic Forum in Davos, Switzerland, Saudi Oil Minister Khalid al-Falih played down those worries.

He said it would take time for U.S. producers to regain lost ground and that U.S. oil shale players “will find they need higher prices,” in part, because of higher production costs.

“Many of the folks at Davos think shale will kill the rally, but that really cannot replace all of the oil production that was wiped out” by cuts in capital expenditures in the oil market, said Phil Flynn, senior market analyst at Price Futures Group.

Al-Falih has also said he believes that the oil market will rebalance by the middle of the year, suggesting that the glut of oil will be gone in six months—so the market may need the shale oil, said Flynn.

All told, “shale is on the road [to recovery], but it will be a long road,” he said.
Permian Basin output growth

Still, the EIA report Tuesday showed that oil output from the Permian Basin, which covers parts of western Texas and southeastern New Mexico, is expected to see the largest climb among the big shale plays—53,000 barrels per day in February.

The Permian is the only shale play expected to see a year-on-year oil-output rise in February, according to the EIA report.

Given that, it’s no wonder that Exxon Mobil Corp. XOM, +1.17% also on Tuesday, announced plans to more than double its Permian Basin resources to six billion barrels of oil equivalent through the acquisition of companies owned by the Bass family. As part of the deal, Exxon Mobil will make an upfront payment of $5.6 billion worth of shares, and a series of contingent cash payments of up to $1 billion, starting in 2020.

U.S. shale production is “a real threat” to OPEC, said Williams.

“At the current level, it is manageable for OPEC, but if price rises another $5-$10, the corresponding increase in U.S. drilling and production would counter most of their cut,” he said. “OPEC is walking a tightrope.”

Article Link To MarketWatch:

Bad Behavior Database Aims To Stop Rogue Traders Before They Act

Goatherd who made it at Goldman uses AI as surveillance tool; Behavox challenge is getting banks to share information.

By Gavin Finch and Edward Robinson
January 18, 2017

You’re young and want to get ahead. First in and last out of your Wall Street office. You work weekends and message colleagues with inspired trading ideas at all hours. Guess what? You’ve just marked yourself as a potential rogue trader.

Welcome to the brave new world of trader surveillance, where former Goldman Sachs Group Inc. research analyst Erkin Adylov is building a library of banking villainy based on the behaviors of hundreds of past miscreants such as UBS Group AG’s Tom Hayes and Societe Generale SA’s Jerome Kerviel. Using thousands of inputs, from stress levels in voice recordings to the frequency of visits to the staff canteen, Adylov and his team at startup Behavox grade employees on how likely they are to go bad before they do anything wrong.

While that may sound like something out of a Philip K. Dick science-fiction novel, hedge fund Marshall Wace and interdealer broker TP ICAP Plc are already using the software to monitor employees, and some of the biggest investment banks and commodities dealers in the world have begun testing it. After paying fines of more than $200 billion in the past eight years for a catalog of failings from money laundering to market manipulation and terrorist financing, banks are looking to companies like Behavox to keep them out of regulators’ crosshairs.

“If you don’t know what your employees are doing, then you’re vulnerable,” Adylov, a 33-year-old rail-thin native of Kyrgyzstan, says in the rapid staccato typical of traders for whom a wasted second is a lost opportunity. “Some banks don’t seem to want to know how exposed they are, and they are the ones who are going to get fined next.”

Artificial Intelligence

Under scrutiny like never before, finance firms are spending as much as one-fifth of their revenue on compliance, hiring tens of thousands of investigators, out-of-work traders and former intelligence officers to sift through employee communications. It’s not just the threat of fines that’s motivating them: Under new rules that came into effect in March, senior managers in the U.K. can be held accountable for the actions of their underlings and even face jail sentences.

Behavox uses machine learning, also known as artificial intelligence, to scrutinize every aspect of an employee’s working life. The technology enables computers to teach themselves how to collate and analyze huge volumes of data. Behavox scans petabytes of data, flagging anything that deviates from the norm for further investigation. That could be something as seemingly innocuous as shouting on a phone call, accessing a work computer in the middle of the night, or visiting the restroom more than colleagues. The system checks these behaviors against case studies of past traders who have strayed from the straight and narrow and looks for a match.

While other companies use similar technology to watchdog trading floors, Behavox takes it one step further, compiling a central repository of behavioral patterns accessible to all clients. Adylov calls it the Conduct Risk Exchange. His challenge is to persuade firms to share potentially embarrassing details about their inner workings. If he can build a network big enough -- more than the three companies that have signed up so far -- it could change the way banks police themselves.

“With this system, users benefit from eyes and ears across the industry and the behaviors that are being spotted and fed into it,” says Conor Kiernan, chief technology officer at Marshall Wace, a $28.5 billion alternative asset-management company based in London. “It really doesn’t pay to be insular when it comes to compliance.”

Trump Effect

There are signs larger lenders are loosening up. Barclays Plc, HSBC Holdings Plc and other major European banks last year formed the Cyber Defence Alliance to pool information about hacking attacks. Still, it may not be easy for an untested entrepreneur to sell Goldman Sachs on the idea of trusting him with something as critical as compliance.

That’s not the only hurdle Adylov faces. The regulatory crackdown that has reshaped finance since the crash may ease with the election of Donald Trump as U.S. president. The billionaire has pledged to roll back the 2010 Dodd-Frank Act. If scrutiny of banks relaxes that could curtail spending on compliance.

“Six years of legislation would take time to unwind, but the tone at the top in the U.S. has changed dramatically,” says John Harvie, a director at consulting firm Protiviti Inc. “This could change the way regulators are able to operate, and not just in the U.S. Under Brexit, the U.K. could also end up with less regulatory pressure as London tries to compete with other markets.”

Kyrgyzstan Goatherd

None of that daunts Adylov, who’s no stranger to adversity. Born to farmers in a small town in what was then part of the Soviet Union, he was a goatherd until he won a George Soros grant at the age of 16 to study in the U.S. for a year. Later his parents, who earned $120 a month, sold their home for $2,300 to pay for a one-way plane ticket to Hawaii for their son, who had secured a scholarship at Hawai’i Pacific University.

Adylov worked four jobs to fund his studies, including one selling U.S. flags and another as a gardener for money manager Clinton Bidwell, who paid him $100 a month with free room and board. Impressed with Adylov’s intelligence and charm, Bidwell took him on as a research assistant. The complexity and technical nature of the job appealed to his analytical mind, and soon the only thing he wanted to talk about was company stocks.

“It was almost like I discovered a new world that I didn’t know existed,” Adylov says from his office in the scruffy Vauxhall district of London, across the train tracks from the imposing headquarters of British intelligence agency MI6.

Despite working 60 hours a week and sleeping as little as three hours a night to squeeze in some studying, Adylov graduated with a 4.0 grade-point average. That landed him a scholarship at the London School of Economics, after which he joined Goldman Sachs in 2007 in London as an equity research analyst. Fast-forward seven years and Adylov was a top portfolio manager at hedge fund GLG Partners earning $1 million a year.

‘Perennial Progression’

Married and with a child on the way, his future looked secure. That’s when he quit.

“I realized that if I scrolled my life forward 20-30 years it was highly predictable,” Adylov says. “My life has always been a chase, a perennial progression toward something better. For me, it’s all about the struggle.”

Adylov set up Behavox in June 2014 from his apartment in south London. His vision was simple: Bring open-source collaboration and machine learning to the world of bank compliance.

Over Skype, he recruited his chief technology officer and co-founder Roman Zelov from Oracle Corp., where he was principal software engineer in St. Petersburg, Russia. Adylov moved Zelov into his cramped apartment, where he spent five weeks sleeping on his sofa.

Adylov only hires people from similar backgrounds, so the two had a lot in common. Both are overachievers with humble origins. They hit it off, and that December started to assemble a team. It took another 15 months before they had a finished product.

Anomalous Conduct

The software works by analyzing employee behavior based on historical observations of individuals and their peer group. It detects anomalous conduct and gives it a risk score, derived from that person’s past compliance record. The system also maps relationships between employees and flags potential problems.

Behavox has built algorithms based on 16 years of publicly available enforcement cases against traders and banks all over the world. Clients use these scenarios to analyze behavior in their own shops. When one of them discovers an employee has done something wrong, Behavox encourages the firm to share details on an anonymous basis.

“The more firms that get involved the faster the community will be able to adapt to changes in the marketplace,” says Marshall Wace’s Kiernan. “Using tools like Behavox we can work as a community to identify behavior and share insights.”

Hussein Kanji, a partner at London-based Hoxton Ventures, met Adylov in late 2015 and heard his pitch. Kanji was confident Behavox could become a fast-growing vendor of surveillance tools, but he was more intrigued by the idea that the Conduct Risk Exchange could become an industry standard. Something else about Adylov impressed him.

“He never wants to spend money,” says Kanji, whose fund led a debut investment round in Behavox in July.

Lamb Chops

When Behavox held an open house in October, Adylov and his team did the catering themselves, serving up homemade lamb chops and chicken salad. There were no foosball tables or other staples of a startup workplace. As clients mingled with members of the Behavox team, Adylov pointed out a pair of developers hunched over their computers. “They have a deadline,” he said, half-jokingly.

Behavox promises to save money for financial firms that have spent hundreds of millions of dollars hiring lawyers, accountants and back-office personnel to comply with rules around risk, capitalization and money laundering. It and other new tech firms can automate many of the same functions for a fraction of the cost.

“Even if regulations are relaxed, the business case for reducing the expenses of compliance will remain very compelling,” says Mike Baxter, a partner in Bain & Co.’s financial-services practice in New York.

But Adylov’s ambitions go beyond saving banks money. He aims to do nothing less than change how the global financial industry ensures it’s playing by the rules.

“These firms are all over the place, all doing compliance differently, with no way to collaborate,” Adylov says. “These guys just can’t solve the problem on their own.”

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