Thursday, January 26, 2017

Trump's Economic Approach Starts To Take Shape

By Mohamed A. El-Erian
The Bloomberg View
January 26, 2017

It is still early days, but a picture of the economic policy approach favored by President Donald Trump is gradually coming into focus. Here are some of its key features as signaled by the words and actions of the administration in its first week in office:

It is targeting higher growth and greater job creation using what can be called an “import- substitution-plus” approach to policy making, together with elements of an industrial policy:

In a manner reminiscent of traditional import-substitution strategies, the Trump administration is seeking to attract to the U.S. production facilities that serve the domestic market from abroad. Also, and this is where the “plus” comes in, it is seeking to bring to America foreign-based production facilities that serve non-U.S. markets. To amplify the desired impact on jobs and wages, the administration is adding elements of industrial policy in its interactions with certain sectors (automobiles, for example).

It operates both at the micro and macro levels:

This focus highlights the mix of macro and micro interventions being pursued by the administration. The macro level is dominated by four strains: deregulation, tax reform, infrastructure and changing incentives to favor domestic production and the consumption of U.S.-made goods and services. The micro combines sectoral emphasis with the selective application of moral suasion to individual companies and even specific projects.

It actively uses signals and narratives as economic policy tools:

Conventional economists will tend to dismiss the overall impact of such micro measures, but others will note that the signaling effect could be consequential -- through their impact in altering narratives, expectations and behaviors at the more general level. This effect is turbocharged by the president’s repeated emphasis on jobs and the active use of a range of communication tools, including more informal ones such as Twitter.

It is underpinned by a carrot and stick philosophy:

The message is amplified by an evolving implicit contract between the administration and the business sector that is underpinned by carrots and sticks -- notably the incentives of less onerous regulation and lower taxes and the threats of shaming and punishing businesses that aren't sufficiently responsive to the admonition to “put America first.”

When it comes to cross-border relationships, the administration isn't shy about upending multidecade constants in U.S. economic policy making:

This approach seemingly also extends to a willingness to depart from long-established rules and practices governing cross-border relationships -- from talking down the dollar and withdrawing from the Trans-Pacific Partnership to threatening to dismantle the North America Free Trade Agreement and to impose tariffs that would be inconsistent with commitments under the World Trade Organization. In the process, and as part of a negotiating strategy with other countries, the administration is signaling its willingness to question and upend, if necessary, deeply engrained principles of international economic management.

It remains to be seen how all this will come together, especially as many policy intentions haven't made the tricky transition from announcement to detailed design and sustained implementation. Also, Congress will have a say in this process. Despite that, some economists are already comparing the evolving U.S. economic policy approach to those that were pursued in Latin America by populist governments. Veterans of development economics, in particular, are being reminded of the import-substitution growth models that were pursued, on more than one occasion, by such countries as Argentina and Brazil.

But that comparison could be premature, and perhaps even misleading; and not just because of the very different initial economic and financial conditions prevailing in the U.S.

If sustained, the impact of Trump’s approach would extend well beyond changes to the internal workings and orientations of the U.S. economy, including how it picks and chooses the way it interacts with the global economy. Given that the U.S. is at the core of the international monetary system, what happens here would not stay here. It would most likely trigger reactions from other countries while potentially also shaking the conventional functioning of a rule-based global system.

If this is managed in a collaborative manner that balances countries’ domestic and global responsibilities, the result could be the type of generalized policy revamp that is critical for sustaining high and more inclusive growth and for delivering genuine financial stability. But if it is done in an internationally disjointed and uncoordinated fashion, the result would tend toward greater global economic fragmentation. This would reduce both current and future growth and prosperity while increasing the risk of unsettling financial instability down the road.

Article Link To The Bloomberg View:

Oil Rises On Dollar Weakness, But Ample Supplies Cap Gains

By Christopher Johnson
January 26, 2017

Oil prices rose on Thursday, driven up by a weakening dollar, though gains were capped by plentiful supplies and bulging inventories despite efforts by OPEC and other producers to cut output to prop up the market.

Benchmark Brent crude was up 50 cents a barrel at $55.58 by 0900 GMT. U.S. light crude was up 40 cents at $53.15.

Traders said the gains were largely because of a weakening dollar, which has lost 3.9 percent in value since peaking in January. Oil is traded in the U.S. currency and a weaker dollar makes fuel purchases less costly for countries using other currencies, potentially spurring demand.

However, oil prices were capped by data from the U.S. Energy Information Administration (EIA) showing an increase of 2.84 million barrels last week in U.S. crude inventories to 488.3 million barrels, pointing to ample supply in the world's biggest market.

U.S. oil production has risen by 6.3 percent since the middle of last year to 8.96 million barrels per day (bpd).

"Crude oil and other liquids inventories grew by 2 million bpd in the fourth quarter of 2016, driven by an increase in production and a significant, but seasonal, drop in consumption," the agency said.

Rising U.S. output and inventories are likely to limit the impact of the agreement by the Organization of the Petroleum Exporting Countries and other producers, including Russia, to cut supplies in an effort to reduce a global glut.

OPEC and other exporters have said they will reduce production by almost 1.8 million bpd during the first half of 2017. Industry figures suggest that many of those cuts have already been made.

Key customers in Asia are being spared any significant cuts because producers fear losing market share to competitors.

Crude supplies to Japan from its biggest supplier Saudi Arabia will not be affected by last year's agreement between OPEC and non-OPEC countries, the deputy minister for company affairs at Saudi Arabia's Ministry of Energy, Industry and Mineral Resources said in Tokyo on Thursday.

However, analysts say that Saudi Arabia is set to cut supplies, mainly of its medium-to-heavy grades, to some customers in Asia, which may give rival suppliers the opportunity to step in.

Article Link To Reuters:

Republicans Lay Out Plans For Obamacare Repeal

By Susan Cornwell and David Morgan 
January 26, 2017

U.S. Republican leaders on Wednesday laid out plans for repealing Obamacare by spring, followed by funding the building of a border wall and reforming the tax code by late summer, as lawmakers launched an effort to unify behind a legislative strategy.

But Republicans gathered in Philadelphia for a three-day retreat showed little fervor for President Donald Trump's calls to investigate what he believes was large-scale voter fraud in the Nov. 8 election.

On Wednesday night, several hundred protesters crammed into the street near the hotel where Trump is scheduled to speak to congressional Republicans on Thursday to demonstrate against his agenda.

"Philly hates Trump!" and "No hate, no fear, refugees are welcome here," were among the demonstrators' chants.

Police said they were expecting a larger turnout of protesters on Thursday when both Trump and Vice President Mike Pence address the Republican gathering.

Trump said on Wednesday he would seek a voter fraud probe, although there is overwhelming consensus among state officials, election experts and politicians that such fraud is rare in the United States.

At the closed-door retreat, House of Representatives Speaker Paul Ryan laid out a plan of legislative action including repeal of the Affordable Care Act, former President Barack Obama's signature healthcare law known as Obamacare, by March or April, followed by appropriations for a border wall with Mexico and overhauling the tax code by August, one Republican source said.

Republicans have majorities in both the House and Senate.

A senior House Republican, Representative Diane Black, said key House committees would take votes within the next two weeks on draft legislation to repeal the Affordable Care Act.

“Then we expect that probably toward the latter part of February, or the first part of March, that we should be ready to go with the final reconciliation bill” to repeal Obamacare, she told reporters.

Representative Chris Collins, a New York Republican who was an early Trump backer, said on MSNBC that lawmakers were told at the retreat that they would write legislation "in the next two months" to help pay for the border wall that Trump signed directives to build.

On the issue of tax reform, Ryan, speaking to MSNBC, said: “Our goal is to get this done by the end of summer, which is for Congress quite fast.”

While there is Republican enthusiasm about the idea of swift action against Obamacare and on taxes, the challenge for Trump and congressional Republicans will be getting lawmakers to coalesce around specific plans.

'The Elections Over With'

Trump won in November because he secured the most votes in the state-by-state Electoral College system, but he lost the popular vote to Democrat Hillary Clinton by nearly 3 million ballots. Irked by that large figure, he has blamed voter fraud, without citing evidence, and called for an investigation.

Senator John Thune of South Dakota, chair of the Senate Republican Conference, saw little need for a probe.

"I’ve not seen any evidence to that effect, but if they want to take that issue up, that’s a decision obviously that he can make," Thune told reporters.

"All I can say is what I’ve said before, and that is that we’ve moved on, the election’s over with, we had a decisive winner in our constitutional system, and we’re ready to go to work," he said.

U.S. Representative Cathy McMorris Rodgers of Washington state, chair of the Republican conference in the House of Representatives, took a wait-and-see attitude toward Trump's demand for a probe.

“It’s very important that people have confidence in the elections and the outcome of those elections. And I’ll wait until I see more of what he’s proposing before I comment on what his action is going to be," she said.

British Prime Minister Theresa May will also join lawmakers in Philadelphia on Thursday and is expected to discuss plans for a possible U.S.-U.K. trade deal.

Article Link To Reuters:

Follow The Money -- Sell Health-Care Stocks And Buy Dividend Shares

Sectors including utilities, real estate, home building and consumer staples are about to break out to the upside.

By Michael Kahn
January 26, 2017

Even if the stock market trades within a range over several weeks or even months, there is still money to be made. That is, if you know how to weight sectors the right way.

A market index is a mathematical blend of all its sectors. Some are going to rise and some will fall, so keeping track of the movements of each can result in profits, even over shorter periods.

The health-care sector warrants investors’ attention these days, given potential changes under the new Republican administration. It’s showing signs of cracking. The Health Care Select Sector SPDR ETF XLV, +0.94% appears to be breaking down from a technical formation it’s been in since the election, as you can see on this chart:

Not only that, but the sector has lagged behind the broader market since last summer. It looked to be on the mend in November, but its resurgence was short-lived. And, now, it’s moved below the trendline supporting its gains since the election.

This trailing sector is now moving from generating smaller gains than the broader market to producing actual losses. It’s likely a good time to move money from medical-supply, biotechnology and pharmaceutical companies and find another home.

Dividend Stocks On The Mend

Fortunately, dividend-paying sectors now look to be on the mend. The bond market topped out last summer, and as it fell, it took these bond-like stock groups down with it. The expectation that long-term interest rates would rise as the Federal Reserve boosted short-term interest rates was pervasive. It definitely hurt bonds, as prices and interest rates move inversely to each other.

Unfortunately for bond bears, interest rates have stabilized and now money seems to be moving into stocks with fat payouts. The bond market itself is not rallying, but such stock areas as utilities, real estate, home building and consumer staples are threatening upside breakouts.


Let’s start with the Utilities Select Sector SPDR ETF XLU, +0.00% It made a tentative move above the trendline guiding it lower since last summer and is now easing back to test that break. When a stock or ETF tests a breakout, it trades back down to touch the line or pattern. That gives late bulls a second chance to get in at low prices, and if they take it, we’ll see a nice pop back up. So far, no pop, but no aggressive selling, either.

Volume-based indicators such as the accumulation/distribution study held steady during the ETF’s price decline and now moved to new highs. That tells us bullish investors are a bit more aggressive even though it has not shown up in price movement just yet.

To be sure, the buy signal has to wait until prices break free from the two-month range they’ve been in. But with strong underpinnings, it pays to keep this one on the radar screen and even dig deeper for individual utility stocks that look even stronger. Otter Tail Corp. OTTR, +0.39% and Unitil Corp. UTL, +0.17% come to mind, although these two are thinly traded and therefore present a bit more risk.


Real estate investment trusts (REITs), via the iShares U.S. Real Estate ETF IYR, -0.54% look similar. However, here it pays to dig deeper, because shopping REITs, which hold brick-and-mortar retail stores, are hurting. Housing, mortgage and hotel REITs are in much better shape.

Chimera Investment Corp. CIM, -0.39% a mortgage REIT, and Pebblebrook Hotel Trust PEB, +2.15% a hotel REIT, both have broken out to the upside from short-term patterns. So have many interest-rate sensitive homebuilders such as Beazer Homes USA Inc. BZH, +2.60%following Jan. 24’s release of the Case-Shiller index indicating strong demand for homes.


Finally, the Consumer Staples Select Sector SPDR ETF XLP, -0.02% broke out to the upside last week (see the following chart). This sector is home to many stocks paying big dividends, and it also got hurt when bonds peaked last summer. However, since finding its low in late November, it has done quite well, coming back to beat its 50-day average and now test its 200-day average.

Procter & Gamble Co. PG, -0.80% was responsible for the ETF’s breakout as it is the most heavily weighted stock in the group. This stock jumped last week on earnings. But many other stocks are on the verge of individual breakouts, including Colgate-Palmolive Co. CL, +0.25% and Coca-Cola Co. KO, +0.53% Kimberly-Clark Corp. KMB, +0.17% exploded higher Jan. 24 on earnings to score a technical breakout of its own.

I am waiting for Archer-Daniels Midland Co. ADM, +1.21% to make its move from a triangle pattern. With volume-based indicators continuing to inch higher as prices pause, the indication is that the stock will eventually break out to the upside. There is no guarantee, of course, so we’ll have to wait for the actual breakout.

While pundits fret that interest rates are going to move higher and bond prices are going lower, so far stocks with bigger dividend yields seem resilient. Indeed, they may be benefitting as money moves from bonds to stocks, and settles into the next best thing — high-dividend-paying sectors.

Even if we forget the bond market and just compare the performances of sectors within the stock market, money seems to be moving from health care into income-producing areas. As they say, follow the money.

Article Link To MarketWatch:

Oil Supermajors' Debt From The Crude Collapse May Have Peaked

Top five producers can now make money at $50-a-barrel crude; Three likely to report their first profit growth since 2014

By Rakteem Katakey
January 26, 2017

Surging debt dogged the world’s largest oil companies during crude’s collapse. Now, sweeping cost cuts and rising prices have combined to lessen the need to borrow.

Since prices began to sink in 2014, the five “supermajors” more than doubled their combined net debt to $220 billion. That may be as bad as it gets. At $50 a barrel, they can balance their books and pay dividends without borrowing for the first time in five years, according to analysts at Jefferies International Ltd. All of the drillers will probably report profit growth in the next two weeks.

As the price of oil declined, producers saved billions of dollars by shedding jobs, renegotiating supplier contracts and canceling projects. BP Plc has said it plans to keep at least 75 percent of its cuts, and other companies have expressed similar sentiments. That strategy, combined with oil’s recovery, are allowing the majors to generate cash again, a key focus for investors heading into earnings season.

“As a group they are at peak debt levels now,” said Jason Gammel, a London-based analyst at Jefferies, citing operating and capital efficiency as well as rising oil prices. “Because quarterly earnings are backward-looking, the outlook is usually a bigger driver of the stock,” he said, with cash flow and dividends more important.

In 2014, when oil sold for $100 a barrel, the five supermajors generated a combined $180 billion in cash from operations. Last year, that figure fell to just $83 billion, Jefferies estimates. Cost cuts and higher oil prices will drive that up to $142 billion in 2017 and $176 billion the following year, according to the brokerage.

As the companies report for the fourth quarter, three of them -- Exxon Mobil Corp., Chevron Corp. and BP -- are likely to post the first year-on-year increase in profit since 2014, according to analyst estimates compiled by Bloomberg. Based on those expectations, here’s what we should see:

-- Chevron is expected to return to profit from a loss a year earlier when it reports on Jan. 27.
-- Exxon is likely to report a 5.8 percent income boost on Jan 31.
-- Royal Dutch Shell Plc on Feb. 2 will probably announce higher profit for the second quarter in a row.
-- BP’s adjusted earnings could end nine quarters of successive declines when the company releases results on Feb. 7.
-- Total SA is likely to report an increase in adjusted net income of 4.3 percent.

During the market rout, oil producers borrowed to maintain dividends they deemed sacrosanct. In the case of Shell, debt was also pushed higher by its $54 billion purchase of BG Group Plc. The Anglo-Dutch company, as well as Exxon, BP and Total, suffered credit-rating downgrades as debts spiraled higher.

Fitch Ratings Ltd. estimates Total will have a $1 billion cash surplus after paying dividends if oil stays at $55 a barrel this year compared with a deficit of $3.6 billion at $45 barrel. Shell’s shortfall would be $823 million at $55, compared with $7.5 billion at $45.

“A lot of fat has been cut,” said Maxim Edelson, a Moscow-based senior director at Fitch. “The companies will have to think about if they want to keep cutting spending or start investing for growth again.”

Repairing and strengthening the balance sheet will remain the principal use of surplus cash, Jefferies’ Gammel said. Shell, the world’s most indebted oil producer after Brazil’s Petroleo Brasileiro SA, said last year that tackling that burden was its top financial priority. Shell and some of its peers remain on credit-rating watch for further downgrades.

Benchmark Brent crude is still trading at half its level of mid-2014 but is expected to average $56 a barrel this year, up from $45 in 2016, according to analyst forecasts compiled by Bloomberg. It rose 0.9 percent to $55.57 at 1 p.m. Singapore time.

“We’ve had 2 1/2 years of doom and gloom and we are on the cusp of the upstream oil and gas sector entering a new recovery,” said Tom Ellacott, a senior vice president at consultants Wood Mackenzie Ltd. “We expect the mood music to be a bit more upbeat.”

Article Link To Bloomberg:

Millions Of Barrels Of Venezuelan Oil Stuck At Sea In Dirty Tankers

By Marianna Parraga and Mircely Guanipa
January 26, 2017

More than 4 million barrels of Venezuelan crude and fuels are sitting in tankers anchored in the Caribbean sea, unable to reach their final destination because state-run PDVSA cannot pay for hull cleaning, inspections, and other port services, according to internal documents and Reuters data.

About a dozen tankers are being held back because the hulls have been soiled by crude, stemming from several oil leaks in the last year at key ports of Bajo Grande and Jose, which has resulted in delayed operations for loading and discharging.

Since debt-laden PDVSA cannot afford to have the ships cleaned, they have to wait for weeks to navigate international waters, delaying shipments.

Dirty tankers are the latest of a litany of problems weighing on PDVSA, the source of most of Venezuela's export revenue and critical to the government's budget.

Oil production and exports are currently at lows not seen in more than two decades. PDVSA's difficulty with paying creditors and service providers makes pulling itself out of that hole more onerous. That has contributed to a deep, years-long recession in the OPEC country.

As of Jan. 25, vessels carrying some 1.4 million barrels of crude, diesel, gasoline, fuel oil and liquefied petroleum gas were anchored in Venezuelan and Caribbean waters waiting for cleaning, according to PDVSA's trade documents, verified by Reuters shipping data. The company did not respond to a request for comment.

"PDVSA almost solved this situation in Bajo Grande in early December because it needed to drain inventories, but it is now taking at least three weeks to complete the cleaning," said an inspector at Lake Maracaibo, who was not authorized to speak to the press.

The dozen or so tankers that have not been cleaned are mostly from PDVSA's fleet of owned and leased vessels, according to a series of PDVSA's internal operational reports confirmed by Reuters vessel tracking data.

In addition, another 11 tankers in early January are being held up for "financial retention," a classification used by PDVSA in its internal reports to identify loaded vessels that have been embargoed or temporarily retained by port authorities, inspection firms or maritime agencies due to unpaid bills.

Those tankers, along with several smaller ones retained for other operational delays, are holding a combined 2.9 million barrels, according to the data.

The list includes the Aframax Hero, loaded in September with 520,000 barrels of fuel oil bound for China. The cargo is moored in Curacao, delayed by more than 100 days, until a payment to inspection firm Saybolt (CLB.N) is made. [nL1N1CY00P]

PDVSA's crude exports fell to 1.59 million barrels per day (bpd) in the last quarter of 2016 from 1.82 million bpd in the first quarter, a 13 percent decline, according to Thomson Reuters trade flows data. []

Dirty Business

Vessels started to become soiled by crude in PDVSA's ports last year amid intermittent oil leaks at Bajo Grande terminal in Venezuela's Lake Maracaibo, according to sources close to that operation.

Maritime laws prohibit stained tankers from navigating international waters until hull cleaning is performed. While PDVSA's debts to cleaning firms grow, the leaks have not been repaired, so dozens of vessels have traveled within the country in recent months, spreading the problem to other terminals, including Puerto la Cruz, La Salina, Cardon and Amuay, the documents state.

Cleaning, which is performed at the Guaranao Port, located close to Venezuela's largest refinery, has taken as much as two months in some cases, an inspector said.

A crude spill at Jose in January stained more tankers, this time affecting vessels waiting to load crude for exports.

PDVSA last week said the affected dock at Jose resumed operations, but there is a logjam of ships needing cleaning, affecting regular foreign buyers of Venezuelan crude, the inspector and a trader from a firm buying Venezuelan oil said.

Some of PDVSA's joint venture partners in projects in the Orinoco belt have proposed picking up part of the bill, paying cleaning companies in dollars to amortize debts faster and ease the bottleneck, but the state-run firm has refused due to its cash flow constraints, the trader said.

Article Link To Reuters:

TransCanada Has Not Yet Broached Keystone XL With Shippers

By Jim Morris
January 26, 2017

TransCanada Corp has yet to discuss the Keystone XL oil pipeline with shippers and is not certain if all were still in support of it, the company's CEO said on Wednesday in his first public comments since President Donald Trump revived the project.

The new U.S. president signed an order on Tuesday that allowed TransCanada (TRP.TO) to reapply for a permit for Keystone XL, after it was rejected in 2015 by then-President Barack Obama on environmental concerns.

TransCanada Chief Executive Russ Girling said the firm was "diligently" preparing its application for the 1,179-mile (1,900 km) pipeline from Hardisty, Alberta, across the U.S. border to Steele City, Nebraska.

Girling said he believes the project remains attractive for shippers, given that it will supply the popular Gulf Coast market.

"But we haven't engaged in direct conversation on that issue," he said at an investors conference. "This wasn't in our planning horizon in the middle of last year, so we've only just re-engaged with our shippers again."

Analysts and traders said the C$8 billion ($6.1 billion) pipeline was far from being a certainty.

Since it has been proposed nearly a decade ago, TransCanada has lost some initial support from shippers during its arduous approval process, said a Canadian crude trader familiar with the pipeline contract who declined to be identified due to a lack of authorization to speak to the media.

The pipeline has faced fierce opposition over environmental concerns and still needs to get approval from the state of Nebraska.

TransCanada late Wednesday did not immediately respond to a request for comment about the shippers' commitment to the project.

If operational, Keystone XL would bring more than 800,000 barrels per day of heavy crude from Canada, which holds the world's third-largest crude reserves but lacks the infrastructure to move it easily.

The project has received regulatory approval and government backing in Canada.

Article Link To Reuters:

Trade Wars In The 21st Century: Faster, Bigger, Worse

By Nita Ghei
Real Clear Markets
January 26, 2017

With the announcement of withdrawal from the Trans Pacific Trade treaty, in one of President Trump’s first executive orders—following hard on a proposal for a 5 to 10 percent “border adjustable tax”—the new administration signaled that protectionism is the one campaign promise most likely to be kept. This resurgence of protectionist sentiment bears a marked resemblance to the United States at the turn of the 20th century; the federal government seems poised to repeat the same errors, despite the mountain of evidence on the gains accrued from lowering trade barriers following World War II. This is the first time since 1947 that the credible threat of a trade war is emerging.

If the major nations and trading blocs of the world choose to engage in “beggar my neighbor policies,” the poor in the United States and the rest of the world will bear a disproportionate share of the burden. Institutional changes, in the form of an array of regional trading arrangements and the World Trade Organization, could make a trade war swiftly much worse this time around.

The Smoot-Hawley Act of 1930 was the last legislation enacted in the United States to raise tariffs. It raised them from already punitive levels, set at an average of about 40 percent in 1922 by the Fordney-McCumber Act. European countries had already retaliated by imposing their own tariffs during the 1920s. In effect, the trade war was well on its way when Smoot-Hawley was enacted. That legislation both widened and deepened the trade war with its additional 20 percent tariff, as more and more countries put similar tariffs into place. International trade eventually fell by more than two-thirds between 1929 and 1932.

The trade war was certainly a contributing factor to the intensity of the Great Depression. With recognition of this fact, tariffs were cut in 1934. In further awareness of the dangers of trade wars, 23 countries signed the General Agreement on Tariffs and Trade in 1947. The GATT expanded in successive rounds, culminating the last successful Uruguay round in 1994, which created the World Trade Organization, and was signed by 123 countries. Tariffs and other trade barriers were lowered steadily across the globe between 1947 and 1994. Nations also signed a host of treaties creating regional trading blocs (for example, the European Union in western Europe, NAFTA in North America, and MERCOSUR in South America) and lowering trade barriers.

To the extent any proposed tax is now targeted at specific products or manufacturers, it could very well violate treaty obligations the United States assumed at the conclusion of the Uruguay round. The WTO, with its power to resolve disputes, was one of the most significant achievements of treaty. In the event the WTO finds that a member nation is in violation of treaty obligations, it could permit the other trading partner to impose a retaliatory tariff.

It’s fairly easy to imagine a scenario where several trading partners file a complaint against the United States in the WTO. It’s also easy to imagine where some other country or trading bloc decides to adopt a similar policy without going through the WTO, which could then trigger another complaint to the WTO. In effect, the combination of regional trading arrangements and the WTO could result in a more rapid escalation of a trade war than what happened in the last century and a consequent collapse of international trade flows.

The collapse in trade would hit the poorest countries, and the poor in the rich countries, harder. Poor countries have gained the most from lowering trade barriers and having access to markets. Poverty rates have plunged in countries that have opened their economies, including China, India, and Vietnam. Lower-income Americans also benefit from freer trade, with one large study estimating that access to goods from developing countries lowers prices of these largely basic consumer goods.

A collapse of trade would sharply limit, if not end, these gains. Higher tariffs benefit narrow industries and interest groups; the cost is borne by (often the poorest) consumers at large, many other producers, and by foreigners. All too often, these foreigners are poor and lack opportunities or resources to survive if their livelihood is lost in the event of a trade war.

The cost of raising tariffs is enormous. The purported benefits are illusory. American manufacturing is doing well. Both productivity and output are up. Raising tariffs is unlikely to result in more manufacturing jobs, because it is technological change, not trade, that has largely driven the changes in manufacturing. Increasing tariffs will not bring back those jobs. It might well cost many, many more.

Even without a trade war, simply withdrawing from ongoing regional trade negotiations with the hope of bilateral treaties is extremely inefficient. Regional arrangements, like the TPP are a poor third best alternative. In a perfect world there would be free trade without treaties. The second best option we have is a multilateral arrangement, such as the one achieved through the GATT. With the Doha round stalled, the world has fallen back to regional arrangements. Bilateral treaties are hopelessly expensive and inefficient, and far too vulnerable to being held by narrow special interests. TPP will go forward, but much of the expected benefits, particularly to the poorest country, Vietnam, will be lost. American consumers and businesses will also lose.

Protectionism benefits narrow special interest groups. Consumers everywhere lose. The worst case scenario is a trade war. Then, instead of continuing to seeing global poverty drop, the number of global poor may once again increase—a result that no one should wish.

Article Link To Real Clear Markets:

How Cisco Swooped In And Nabbed AppDynamics At The Last Minute

By Ari Levy
January 26, 2017

As the AppDynamics IPO roadshow hit its home stretch this week, top leaders of the software company were back home in California for final visits with prospective shareholders.

Facing a standing-room audience at the Loews Regency Hotel in downtown San Francisco on Monday, AppDynamics CEO David Wadhwani and CFO Randy Gottfried pitched their story to about 100 investors. Then they hopped on a flight to Los Angeles for morning investor meetings the following day, according to sources familiar with the matter.

Meanwhile, about 40 employees, including founder Jyoti Bansal and some board members, were getting ready to head to New York for the software developer's debut on the Nasdaq Stock Market, slated for Thursday, said the sources, who asked not to be named because details surrounding the IPO were confidential.

Investors were expressing enthusiasm. AppDynamics raised the price range for the IPO on Tuesday and the deal was oversubscribed, the sources said.

Little did the almost 1,200 employees know that the company's board was frantically negotiating a sale to Cisco, an AppDynamics customer and technology partner.

In an effort to beat the clock, Cisco CEO Chuck Robbins had quietly invited Wadwhani to his house to propose an acquisition, according to a blog post from Asheem Chandna, an AppDynamics board member and partner at venture firm Greylock Partners. Cisco lobbed in an acquisition bid, and the two companies came to a handshake agreement on Saturday, according to sources.

It wasn't definitive enough to keep AppDynamics from going forward with the IPO, so the companies agreed to a 72-hour negotiating period, giving Cisco just enough time to finalize an offer before the share sale.

After multiple bids, Cisco said in a press release on Tuesday afternoon that it had agreed to buy AppDynamics for $3.7 billion, marking its biggest acquisition since 2012, when the networking company spent $5 billion on video software maker NDS.

Cisco Shares

"Cisco has been a customer of AppDynamics for a number of years," said Rob Salvagno, head of corporate development at Cisco, in a conference call on Wednesday. As a client and partner, "that just helped bring us closer and ultimately give us the confidence to move towards making this deal happen," he said.

When Wadhwani and Gottfried returned to the AppDynamics office in San Francisco late Tuesday, they were greeted by Cisco's Robbins and Rowan Trollope, a senior vice president, to jointly address the staff, one source said.

For Cisco, AppDynamics represents the next big step in the company's transition from hardware — switches and routers — to the software that's now driving almost all advancements in technology.

AppDynamics' code is used by banks, retailers and airlines that have scores of apps and websites and need to be able to track bugs, slow load times and faulty transactions. The software provides visibility into everything that's happening across corporate networks, enabling quick fixes.

Until shortly before the announcement, Morgan Stanley and Goldman Sachs were plugging along as the lead underwriters preparing for the offering. And Silicon Valley venture capitalists and entrepreneurs were closely tracking the deal, which would've been the first venture-backed tech IPO in three months, following the slowest year for new tech offerings since 2009.

To handle negotiations with Cisco, AppDynamics hired Qatalyst Group, the investment advisory run by Frank Quattrone, sources said. TechCrunch previously reported Qatalyst's involvement.

Cisco was running its side of the process from San Francisco and Silicon Valley, under the leadership of Salvagno and Chief Strategy Officer Hilton Romanski, a source said. Cisco tends to avoid outside bankers for mergers and acquisitions, instead utilizing its internal corporate development group.

A Cisco spokesperson declined to comment beyond referring to the transcript of the call.

Sources familiar with AppDynamics insiders said the sale was described as "bittersweet" because of the company's expanding customer base, rapid revenue growth and general belief that it could thrive on its own. Also, it meant there'd be no ringing of the Nasdaq bell.

On the conference call, Wadhwani said the IPO process was "going very well and the interest was very, very high."

But the last-minute deal was a windfall for AppDynamics' backers and early employees. At a purchase price of $3.7 billion in cash, shareholders are exiting at about twice the valuation that the IPO would've likely established, and they don't have to wait for the six-month lockup period to expire to start selling stock.

Article Link To CNBC:

Johnson & Johnson To Buy Actelion For $30 Billion, Spin Off R&D Unit

By John Miller and John Revill
January 26, 2017

U.S. healthcare giant Johnson & Johnson (JNJ.N) will acquire Swiss biotech company Actelion (ATLN.S) in a $30 billion all-cash deal that includes spinning off Actelion's research and development pipeline, the companies said on Thursday.

The acquisition gives J&J access to the Swiss group's line-up of high-price, high-margin medicines for rare diseases, helping it diversify its drug portfolio as its biggest product, Remicade for arthritis, faces cheaper competition.

The offer to pay $280 per share, following weeks of exclusive talks, was unanimously approved by the boards of directors of both companies.

The deal represents a 23 percent premium to Actelion's closing price on Wednesday of 227.4 Swiss francs and is more than 80 percent above the Nov. 23 closing price before initial reports emerged that Europe's biggest biotech company had attracted takeover interest.

Actelion shares jumped 20.5 percent to 274 francs by 0830 GMT.

"The price is quite high at around 30 times price to estimated 2018 earnings. J&J is paying a lot and R&D is not even included, just a substantial minority stake," one Zurich-based trader said.

"But it represents only 10 percent of (J&J's) market capitalisation and they are finally investing the cash they hold in Europe."

Jefferies analysts said they did not expect any counterbids or competition concerns to derail the deal.

Actelion has been the subject of takeover speculation for weeks after J&J launched and then halted discussions with the Swiss company. French drugmaker Sanofi (SASY.PA) had also been interested, sources said, but was sidelined after J&J returned and began exclusive negotiations in December.

Sanofi's failure to come away with a big deal for a second time has added to pressure on its management.

R&D Business

J&J said it expected the transaction to be immediately accretive to its adjusted earnings per share and accelerate its revenue and earnings growth rates.

The U.S. group, which reported disappointing quarterly results this week, will fund the transaction with cash held outside the United States.

"We believe this transaction offers compelling value to both Johnson & Johnson and Actelion shareholders," Alex Gorsky, J&J chairman and chief executive, said in a statement.

Actelion will spin out its research and development unit into a standalone company based and listed in Switzerland, under the name of R&D NewCo and led by Actelion founder and CEO Jean-Paul Clozel. The break-up plan was first reported by Reuters last month.

The shares of R&D NewCo will be distributed to Actelion's shareholders as a stock dividend and the new unit will be launched with 1 billion francs in cash.

J&J will initially hold a 16 percent stake in R&D NewCo and will have rights to an additional 16 percent of the company's equity through a convertible note. It will also get an option on ACT-132577, a product within R&D NewCo being developed for resistant hypertension and now in phase 2 clinical development.

J&J said it expected to retain Actelion's presence in Switzerland.

Lazard acted as lead financial advisor to J&J, while Bank of America Merrill Lynch was Actelion's lead advisor.

The transaction is expected to close by the end of the second quarter, with J&J commencing the tender offer by mid-February.

It is conditioned upon winning at least 67 percent of all Actelion shares, regulatory approvals and Actelion shareholder approval of the distribution of shares of R&D NewCo.

Article Link To Reuters:

Dollar Touches Seven-Week Low On Worry Over U.S. Protectionism

By Yuzuha Oka 
January 26, 2017

The dollar slumped to seven-week lows on Thursday, pressured by investors' concerns about U.S. protectionism after President Donald Trump gave the go-ahead to construction of a U.S.-Mexican border wall and prepared to impose some immigration curbs.

The dollar index .DXY, which tracks the greenback against a basket of major currencies, was last down 0.1 percent at 99.886. It dipped to 99.793 earlier in the day, its lowest level since Dec. 8.

The dollar was generally weaker despite a rally on Wall Street, where the Dow Jones Industrial Average .DJI closed atop the 20,000 mark for the first time. [.N]

Trump has made several business-friendly decisions since taking office on Friday, including signing executive orders to reduce regulatory burdens on domestic manufacturers and clearing the way for the construction of two oil pipelines.

However, the president's broad but divisive plans to reshape U.S. immigration and national security policy rattled some investors, partly because the U.S. needs foreign capital to finance its large current account deficit.

Trump on Wednesday ordered construction of a U.S.-Mexican border wall and punishment for cities shielding illegal immigrants, and he also mulled restoring a CIA secret detention program.

"Amid concerns over Trump's protectionism, the correlation between U.S. Treasury yields and the dollar has gotten weaker," said Junya Tanase, chief currency strategist at JPMorgan Chase Bank.

The dollar last stood at 113.38 yen JPY= against the yen, nearly flat on the day and not far from a two-month low of 112.52 yen touched on Tuesday, even as U.S. Treasuries yields stayed near four-week highs.

The U.S. benchmark 10-year Treasury yield last stood at 2.523 percent US10YT=RR, close to a 4-week high of 2.538 percent hit on Wednesday.

"It's similar to the U.S.-Japan trade conflicts in 1990s. Back then, the dollar was weak despite the high U.S. interest rates. The dollar would remain weak if Trump pushes his protectionist rhetoric," said JPMorgan Chase's Tanase.

On immigration policy, Trump is expected to sign an executive order in the coming days to block the entry of refugees from war-torn Syria and suspend the entry of any immigrants from Muslim-majority Middle Eastern and African countries while permanent rules are studied.

However, some analysts are sceptical as to what extent Trump would back up his protectionist remarks with action.

"It is highly doubtful whether Trump would go ahead with a large-scale immigration ban to an extent that would affect the markets in a long term," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

"Trump would keep his strong rhetoric from his candidate days to assure his followers, but he has not detailed the actual action plans. His policy won't be a straight-forward protectionism, considering his positive comments on the strong Mexican economy," added Murata.

Mexico's peso MXN=D2 strengthened to a three-week high of 20.9300 peso on Wednesday as Trump said the country's economic future was important to the United States. The currency last stood at 21.0835 pesos per dollar.

Sterling was last up 0.1 percent at $1.2648 GBP=D4, its highest peak in six weeks. The pound was helped by expectations for a rapid trade deal between Britain and the United States, which Prime Minister Theresa May said on Wednesday would "put UK interests and UK values first."

May will be the first foreign leader to meet the new U.S. president, and trade is expected to dominate their first talks on Friday.

Hopes for a clarity over the Brexit plan also pushed the pound. Britain said it would publish draft legislation on Thursday seeking parliament's approval to begin formal divorce talks with the European Union as May agreed to lawmakers' demands to publish her Brexit plan.

The euro was last up 0.1 percent at $1.0762 EUR=EBS against the dollar, slightly below Tuesday's seven-week high of $1.0775.

Article Link To Reuters:

Sanctuary Cities Must Still Obey The Constitution

By Seth Lipsky
The New York Post
January 26, 2017

Is our country headed for a new nullification crisis? Are our cities and states gearing up to defy the federal laws that, together with our Constitution and treaties, make up the “supreme law of the land”?

It certainly looks that way, based on the confrontation brewing over so-called sanctuary cities. These are cities and other locales that have adopted policies against cooperating with the enforcement of our immigration laws.

President Trump announced on Wednesday plans to redeem his campaign pledges on immigration. At the Homeland Security Department, he signed orders to start the “barrier” on the Mexican border and to withhold federal funding to cities pledging to defy the law.

Watch out, New York, where Attorney General Eric Schneiderman has been cruising for a bruising. The day before Trump was sworn in, the left-wing lawman circulated to cities guidance on how to dodge federal immigration enforcement.

“Public safety relies on trust between law enforcement and the communities they serve,” Schneiderman said. “No local law enforcement agency should have to undercut that trust just to carry out Donald Trump’s draconian immigration policies.”

Schneiderman provided a whole rigmarole on how cities in our state don’t have to pitch in to help enforce these laws, except in the narrowest circumstances. What a cynical maneuver against our democracy — and in the middle of a war.

Nor is Schneiderman alone. It turns out that left-wing politicians across the land are maneuvering for a confrontation with the federal government over the tough new line on illegal immigration the voters asked for in November.

The 2016 Republican platform stated flatly that “‘sanctuary cities’ violate federal law and endanger their own citizens” and “should not be eligible for federal funding.” Yet the votes had barely been counted when sanctuary cities began fighting back.

Mayor Rahm Emanuel of the village of Chicago fetched up at Trump Tower in early December. He presented the then-president-elect with a petition on behalf of sanctuary cities, signed by, among others, Mayor de Blasio.

De Blasio, meantime, is being sued by two members of the state Assembly for his plan to destroy certain records from the city’s ID card program. Hizzoner wants to protect undocumented immigrants from America’s government.

New York’s drama is part of a movement that, some reports suggest, now involves more than 300 jurisdictions.

Which is what raises the question of whether we are going to end up in a new nullification crisis.

The original crisis erupted in the 1830s, when South Carolina tried to defy a federal tariff act. Vice President John Calhoun quit to run for Senate, the better to defend the Palmetto State. President Andrew Jackson prepared for war, before a compromise was reached.

It wasn’t the only nullification. Virginia and Kentucky once blocked enforcement of the Alien and Sedition Acts, passed in 1798 during the Quasi War with the French. Some states — heroically, in my view — refused to enforce the Fugitive Slave Act.

What is going to bring the current crisis to a head is hard to predict. Texas Gov. Greg Abbott has just warned the Travis County sheriff that her jail could become the first to lose taxpayer funds unless she reverses her plan to make Austin a “sanctuary.”

De Blasio has been fighting in court over his plan to destroy records to keep them from being used against illegal — or otherwise undocumented — immigrants. And my guess is that many, even most, New Yorkers get it.

Our city is the world’s premier metropolis precisely because of its immigration and diversity. If Trump delivers the growth he’s promised, America will need all the help it can get and will be begging immigrants to stay.

I like the way all this is put by Ravi Batra, the lawyer for the Assembly members suing de Blasio. He is as full of enthusiasm for immigration as any New Yorker. But he sees a public-safety issue and also gets the supremacy clause of the Constitution.

That clause says the Constitution, federal laws and treaties “shall be the supreme Law of the Land” and “the Judges in every State shall be bound thereby,” local laws to the contrary notwithstanding. So he’s a Democrat in court against the city.

“Before I’m a Democrat, I’m an American,” he explains.

Article Link To The New York Post:

Trump Summit With Mexico's Pena Nieto Still On, 'For Now'

By Anahi Rama
January 26, 2017

A summit between U.S. President Donald Trump and his Mexican counterpart Enrique Pena Nieto next week is still on "for now", Mexico's foreign minister said on Wednesday, despite pressure at home to scrap it over objections to a border wall.

Earlier in the day Trump signed new executive orders, including one authorizing a wall on the U.S. southern border, just as a Mexican delegation led by Foreign Minister Luis Videgaray arrived at the White House for talks.

The timing caused outrage in Mexico, with prominent politicians and many on social media seeing at as a deliberate snub to the government's efforts to engage with Trump, who has for months used Mexico as a political punching bag.

"The meeting between the two presidents in Washington next Tuesday is still confirmed," Videgaray said. "The meeting, for now, is going forward," he said.

President Enrique Pena Nieto said in a recorded message that he "disapproves" of Trump's order on the border wall and in response ordered Mexico's fifty U.S. consuls to extend legal help to citizens living in the United States.

"Wherever there is a Mexican migrant who needs our help, we should be there," he said.

One source with knowledge of the government's thinking said the measure was intended to clog U.S. immigration courts with legal objections to deportations. The courts already face a backlog of half a million cases.

"Positive Elements"

Videgaray said some "positive elements" resulted from the talks, including a blunt acknowledgment by Trump of the U.S. role in supplying illegal arms to Mexico. He also referred to Trump's public comments that he wanted to see a strong Mexican economy.

Videgaray said it had been "a day of contrasts," adding that his delegation's talks with senior White House aides lasted eight hours.

Speaking as Trump gave orders to start work on the wall along the 2,000-mile (3,200-km) border with Mexico, two-time presidential runner-up and leftist opposition leader Andres Manuel Lopez Obrador said the announcement was an insult to his country and called for international legal action.

"I respectfully suggest that the government of Mexico presents a lawsuit at the United Nations against the U.S. government for violation of human rights and racial discrimination," Lopez Obrador told a crowd of supporters north of Mexico City.

A former mayor of the capital, Lopez Obrador has led several early opinion polls ahead of the July 2018 election, and last week he announced plans for a tour of major U.S. cities in February to drum up support among Mexican-Americans.

Trump's broadsides against Mexico have put Pena Nieto under rising domestic pressure. His approval ratings are at the lowest level of any Mexican president in years.

The American's threats to tear up a joint trade deal and impose hefty border taxes on Mexican goods have also battered the peso. But his comments on Wednesday that he wanted to see a strong Mexican economy lifted the currency to a three-week high.

Article Link To Reuters:

The World's Most Populous Country Is Turning Gray

Shrinking labor force would create a drag on consumption; Lopsided population balance puts strain on economic growth.

January 26, 2017

The world’s most populous country is turning gray at an accelerating pace.

That aging has big implications for China’s economic growth, which could be undermined as the labor force declines sharply from 2021 to 2030. It also strains the nation’s expenditures for public services, insurance, and health care, and puts a dent in domestic consumption.

China’s latest population development plan, released by the State Council late Wednesday, projects that about a quarter of China’s population will be 60 or older by 2030. That’s up from 13.3 percent of the population in the country’s latest census in 2010.

The number of children 14 or younger will decline to 17 percent over the same period, the plan estimated. About 36 percent of the population in 2030 will be 45 to 59, it said. That age group accounted for about 20 percent of the total population in the 2010 census.

A shrinking labor force would further erode China’s competitive edge in manufacturing but would also be a drag on consumption, now a major pillar of the economy as it transitions away from old smokestack drivers of growth.

A year ago, authorities took a big step to try to add to the country’s population pipeline by scrapping the more than three-decade-old one-child policy. That didn’t result in the initial boost that demographers had projected.

Births in 2016 reached 17.86 million, the most since 2000, rising by 1.91 million from 2015, the National Health and Family Planning Commission said this month. That still falls short of the official projection. Last June, the ministry estimated there would be an increase of 4 million new births every year until 2020. China will continue to implement the two-child policy to promote a balanced population, the plan said.

Even so, the latest plan said birth rates could remain low. The total population is now expected to peak around 2030 and begin to decline after that. The plan set a population target of 1.42 billion by 2020, and 1.45 billion by 2030. It also supported more urbanization, with more than 13 million people projected to move to cities from rural areas every year between 2016 and 2020.

Article Link To Bloomberg:

After Stronger 2016, Greece Hopes Lenders Will Drop Austerity Demands

By Lefteris Papadimas 
January 26, 2017

Greece hopes stronger than expected public accounts in 2016 will convince its lenders to sign off on a bailout review without demanding more austerity, government officials said before a meeting of euro zone finance ministers.

The officials told Reuters that last year's primary surplus - which excludes debt servicing costs - reached 1-1.5 percent of gross domestic product, beating a target of 0.6 percent of GDP set in its bailout plan as the tax take improved.

"This performance will help us ... offset the IMF view that Greece would need extra measures to plug a projected fiscal gap in 2018 to reach a 3.5 percent surplus bailout target," one Greek official said.

Finance ministers are expected to discuss progress in Greece's bailout review in Brussels on Thursday.

A euro zone official said there was "a good chance" they could agree to send negotiators back to Athens so that a deal approving completion of the latest bailout reforms could be reached in February.

Greece's leftist-led government, which signed up to a new bailout program in 2015, wants to conclude the review to join the European Central Bank's bond buying program, which would cut its borrowing costs.

It also wants to return to bond markets by the end of 2017, one year before its rescue program ends.

The IMF, which has yet to decide whether it will participate in what is the country's third rescue program, says it cannot achieve its targets unless it adopts more austerity measures and is granted more debt relief.

The Greek government official said the latest primary surplus projection includes the impact of a one-off payout to pensioners of about 600 million euros. Greece has promised to achieve a primary surplus of 1.75 percent of GDP this year.

"Due to this (2016) performance, we are making a much better start in 2017," the official said, referring to state revenues.

Prime Minister Alexis Tsipras, who is sagging in opinion polls, said on Wednesday that Greece would not pass any more revenue-raising measures beyond what was agreed in its bailout package.

Although Athens does not face large repayments until the third quarter, the completion of the review is important to keep up reform momentum and projections of a strong return to growth.

"A further delay in the (review) negotiations ...beyond the first quarter, must be avoided since it could put the 2016 positive momentum at risk," National Bank economist Nikos Magginas said.

Article Link To Reuters:

'Show Me The Money': Divorce First, Then Trade Deal, EU Tells UK

By Alastair Macdonald and Jan Strupczewski 
January 26, 2017

Since Prime Minister Theresa May set out her Brexit goals last week, interest in Britain has focused on the future trade deals she may one day strike with the United States and other powers, as well as with the European Union.

In Brussels and European capitals, that looks like putting the cart before the horse. "They're talking about their future relationships," said one EU official preparing for talks with London. "But first we need to get divorced. This is not going to be easy. Frankly, it's going to be very, very messy."

In diplomatic language, the European Commission's spokesman Margaritis Schinas told a news conference this week: "First, one needs to agree on the terms for an orderly separation and then, on the basis of this, build a future new, good relationship."

As with other divorces, the bitterest battle may be over money. And there is no certainty that any settlement can be agreed at all.

"Britain’s payments to the EU budget and the issue of the EU quickly starting talks on an FTA (free trade agreement) with Britain will be linked," said a second senior EU official.

"There cannot be discussions of a future relationship without first regulating the issue of an orderly separation."

EU negotiators reckon Britain has a weak hand to play; May must accept a two-year guillotine on talks that she hopes will end with a deal to keep "maximum" British access to EU markets while pulling Britain out of the single market and its obligations.

Put simply, if May wants to draft an FTA in only two years as she says -- a goal that prompts head-shaking in Brussels -- continentals think they can hold her hostage with the threat of trade tariffs from 2019 unless she settles British debts.

Many discount as bluster May's warning that she would rather have no deal than a bad deal, walking away without free trade and daring continentals to take a hit to their own exports.

But some diplomats voice concern that London may be tempted to flounce out without paying EU bills worth tens of billions.

Your Bill: 60 Billion Euros

May insists Britain wants to remain a friend and constructive partner for the EU. It would hardly enhance Britain's reputation among future global trade partners to flee with bills unpaid.

The other EU member states want it to pay its share of the spending commitments that were agreed when it was a member, stretching out some years, as well as possibly funds to cover the pensions of British EU staff.

There will, however, be differences over the size of the bill, estimated informally by EU officials at very roughly 60 billion euros -- more than Britain spends on defense each year.

"I can see this turning very bloody over money," said a person who has had preliminary contact with negotiators on both sides.

EU officials have prepared arguments to counter suggestions that Britain should be credited with a share of EU assets -- buildings, say -- to offset what it will owe Brussels on leaving.

The bloc's negotiators will argue that Britain was not asked to pay extra for a share of existing EU assets when it joined in 1973, so it has no right to demand repayment of any share now.

Filling the hole left by the bloc's second biggest economy in the EU budget is already causing jitters as the remaining 27 brace for the seven-yearly blood ritual of financial planning.

German leaders see a grim prospect of picking up the biggest tab, while the ex-communist eastern states, who are the major net beneficiaries of EU spending, fear they will lose out.

British officials say they can use the money card to divide the 27. On the EU side, diplomats are saying that if London tries that, it will find its hopes of a quick free trade deal put on hold.

Other knotty issues to be settled in the withdrawal treaty include border arrangements, notably in Ireland, and the rights of EU and British expatriates. Brussels has accused May of underestimating the problem by calling for a deal on that right now.

Article Link To Reuters:

Fed To Increase Rates Every Quarter In 2018

BNP Paribas expects tighter U.S. policy to hurt bullion prices; Bank sees rate rises from Yellen in second half of this year.

By Ranjeetha Pakiam
January 26, 2017

The Federal Reserve is about to go rapid-fire on interest rates, boosting them in the second half of this year, and following that with a rise in every single quarter of 2018, according to BNP Paribas SA, which expects the tightening to strengthen the dollar and push gold down toward $1,000 an ounce.

The U.S. central bank is seen raising borrowing costs later this year given the fiscally expansive policies proposed by Donald Trump, and the new president’s agenda may help to lift wages in 2018, hoisting labor costs, the bank said in a Jan. 25 report. BNP was the top gold and precious metals forecaster in the fourth quarter, according to data compiled by Bloomberg.

“Gold may yet find support from higher inflation in the first half of 2017. But the Fed will pursue rates hikes in the second half of the year, keeping the dollar strong,” commodity strategists Harry Tchilinguirian and Gareth Lewis-Davies wrote. “In 2018, BNP Paribas expects the Fed will hike every quarter.”

The Fed raised rates in December for the first time in a year, and investors are seeking to determine the likely timing of further hikes as the world’s largest economy shows signs of recovery and Trump gets down to business with vows to accelerate growth, create jobs and boost spending on infrastructure. The precious metal dropped after Trump’s surprise win in November amid optimism about the outlook, then rebounded this month.

There’s scope for gold “to hold on to the January gains, even possibly add to them,” BNP said. “But as we near the end of 2017, expectations of Fed rate hikes will take over stewardship of gold prices. In turn, the path of least resistance for gold is likely to be downward again.”

Bullion Outlook

Bullion for immediate delivery traded at $1,196.68 an ounce on Thursday, up 4.3 percent this year, according to Bloomberg generic pricing. Last year, it rose 8.1 percent to snap three annual declines even after dropping in the final quarter. Prices may average $1,210 this year, $80 more than previously forecast, and $1,100 in 2018, BNP said.

Last month, policy makers lifted the target range for the benchmark federal funds rate to 0.5 percent to 0.75 percent, and penciled in three quarter-point increases for 2017, according to the median of their quarterly estimates. While the BNP note didn’t spell out in figures the size of the hikes it expects, a graph showed six quarter-point increases through to the end of 2018.

Fed Chair Janet Yellen has backed a strategy for gradually raising rates, arguing in remarks a day before Trump’s inauguration last week the bank wasn’t behind the curve in containing inflation pressures but nevertheless can’t afford to allow the economy to run too hot. Yellen said wages had risen “only modestly” and manufacturing was operating well below capacity.

“For now, Yellen indicates that the Fed is not ‘behind the curve’ and that resource/capacity utilization is yet to be strained,” the BNP analysts said. “This suggests rates hikes are more likely to come later, rather than earlier this year. In the interim, year-on-year inflation will pick up.”

The forecast period for hikes given by the bank through to the end of next year goes beyond the end of Yellen’s current term, which expires in February 2018. The rate-setting Federal Open Market Committee is set to meet next week for the first of its eight scheduled gatherings of 2017.

Article Link To Bloomberg:

Facebook Is Testing News Feed-Style Ads Inside Messenger

By Kurt Wagner
January 26, 2017

Facebook said last summer that it was running out of places to show users ads in News Feed, its moneymaking machine, meaning it would need to sell ads elsewhere to keep growing.

On Wednesday, Facebook announced that it has found a new place: Inside Messenger, its standalone messaging app.

Facebook will soon show some users News Feed-style carousel ads inside Messenger as part of a new test. The ad units, which will let users swipe through cards from five different advertisers, will only be live to a small number of users in Australia and Thailand, according to Stan Chudnovsky, head of product for Messenger.

The ads will appear "below the fold," meaning users will have to scroll, at least a little bit, to find them. Advertisers will be able to target users the same way they do on Facebook; that means they won't be able to target based on any information included in a user's private messages.

Facebook already offers one type of Messenger ad: Sponsored messages that a brand can send to a user once they've already exchanged messages.

But unlike sponsored messages, News Feed-style carousel ads are not "native" to messaging. That is, it's not the kind of ad format you're used to seeing inside your messaging inbox, which is usually a private place.

Chudnovsky says that Facebook is aware of that, and stressed on multiple occasions that this was just a test.

"We don't want to even risk [invading user privacy]," Chudnovsky said. "But until you try, you are never going to find out. That's why we are going to try on a very small scale and see how people react."

Chudnovsky added that the idea of ads in News Feed, and in Instagram's feed, also felt weird when Facebook first started testing them.

"Originally, people were also not very big believers in ads in News Feed because that felt very private, too," he said. "But the playbook that we had is the same. We are worried about [that], but we are also testing things even when we are worried about them."

Messenger's new test comes at an opportune time. Facebook reports earnings next week, and this will certainly provide company executives with something to point to when investors come asking about its News Feed ad inventory. (The company also started selling a new type of vertical video ad inside Instagram earlier this month.)

Facebook said on its last earnings call that growth was expected to slow "meaningfully" in 2017. Bringing some carousel ads to Messenger users in Thailand and Australia won't change that, of course, but it can certainly provide some air cover for Facebook execs during its upcoming earnings call. Messenger has more than a billion users, after all.

Facebook does not have immediate plans to expand the test to more countries. "We run long-term tests," Chudnovsky said, suggesting this test will run for "months." "It's not going to be expanding anywhere for a long time."

Article Link To Recode:

Trump Can't Kill The TPP

By Mihir Sharma
The Bloomberg View
January 26, 2017

When President Donald Trump withdrew U.S. support for the Trans-Pacific Partnership on Monday, he made it harder for American companies to compete. In the name of U.S. labor, he compromised the interests of the American worker, for the TPP would’ve forced labor standards onto the trade agenda for the first time in history. He turned his back on America’s allies and handed China a giant strategic victory. What he didn’t do was kill what the TPP stands for.

The TPP has two purposes. First, it recognizes that the barriers to trade now are significantly different from those decades ago. Paperwork, not tariffs, poses the biggest obstacle to the development of trade networks. Complex and contradictory regulatory regimes, sovereign risk, implicit backing to state-owned enterprises -- these are the problems traders face, and they’re what the TPP addressed.

By doing the hard work of beating out an agreement with 11 other countries on such issues, the Obama administration effectively laid the foundation for most future trade deals. Henceforth, negotiations involving any of the TPP countries will look at the concessions they’ve made already and attempt to build on them. Japan won’t be able to keep the question of opening its agriculture sector off the table. Vietnam will have to address the coddling of its state-owned enterprises.

Second, the TPP would’ve ensured that China didn’t set the rules of the road when it comes to international trade. While the Trump administration may not appreciate the importance of this goal, most Asian countries certainly do. The China-led Regional Comprehensive Economic Partnership, for example -- which includes India but not the U.S. – might streamline manufacturing supply chains but won’t force domestic reform and harmonization within its member countries.

That’s set up to benefit China much more than possible competitors. The People’s Republic is already the center of global manufacturing networks; it would like to see trade deals that entrench it in that position even as its domestic costs of producing inexorably increase. This isn’t exactly what Southeast Asian nations, say, want in the long run. They need access to other markets; they need a swifter and more efficient flow of services across borders; and they need a deal that opens up possibilities for newer trading networks instead of cementing the old.

It’s now up to the remaining 11 TPP countries, and those across Asia who aspired to join the pact, to ensure that its principles become the norm. India is a case in point. The country has long been doubtful about the TPP, its skepticism fueled by a desire to protect its pharmaceuticals sector and the tangle of regulations that prevent its manufacturing sector from becoming competitive. Indian policymakers may be tempted to celebrate the apparent death of the TPP and all it represents.

But that would be a mistake. India must ultimately reckon with the basic truth that domestic demand won’t be sufficient to employ the million or so people joining its workforce every month. Indian companies will need to export, too, and TPP-style deals are the only way to make them competitive enough to do so. Older business models, such as the generics-heavy approach of Indian pharmaceuticals, will have to give way to models that emphasize intellectual property rights and innovation. Otherwise productivity simply won’t rise. In other words, the old-fashioned “tariff-first” approach to trade negotiations, which India still prefers despite the fact that it’s proven inadequate, cannot survive.

Yes, a large part of what made the TPP so important was the symbolism surrounding the deal: It was a signal to Asia that the U.S. continued to be willing to play the role of a leader. Under Trump, that willingness has clearly eroded.

But the strategic usefulness of the TPP wasn’t what set it apart. What distinguished the pact was that it truly brought trade negotiations into the 21st century. It sought a delicate balance between the demands of multiple interest groups while simultaneously ensuring that new patterns of trade were given the opportunity to emerge. If trade in Asia isn’t to die, taking a continent’s hopes of growth along with it, then such a balance will have to be a feature of whatever arrangements come next. Trump’s pen can’t stop that.

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China's Shadow Banking Crusade Risks Bond Market Crash

By Samuel Shen and John Ruwitch 
January 26, 2017

China's campaign to cut high debt levels in its economy is aiming this year to shrink the $3 trillion shadow banking sector, which could drain a critical source of income for the country's banks and of funding for its fragile bond market.

Shadow banking, a term for financial agents that perform bank-like activity but are not regulated as banks, has boomed in China, the world's second-largest economy, as a way of circumventing government's tight controls on lending.

It has been a key driver of the breakneck growth in debt in the economy, which UBS says rose to 277 percent of GDP from 254 percent in 2016, and is now a target as Beijing tries to reduce that figure before it destabilizes the economy.

But with banks' shadow banking business accounting for about a fifth of total outstanding loans, analysts fear that the unintended consequences of government efforts could trigger the fate it seeks to avoid.

"We see a policy-induced drastic deleveraging in shadow banking as a policy miscalculation that could trigger unexpected tail risks for the banking sector," said Liao Qiang, credit analyst at S&P Global Ratings.

Investors' concerns stem from new rules this month that put lenders' wealth management products (WMPs), the biggest component of shadow banking, under the scrutiny of the People's Bank of China (PBOC) for the first time and into its calculations on prudence, capital adequacy and loan growth guidelines.

According to the latest official data, WMPs jumped 42 percent year-on-year to 26 trillion yuan ($3.8 trillion) at the end of June, doubling in just two years.

WMPs are typically kept off banks' balance sheets, making it difficult for regulators to assess the stability of a banking sector reliant upon them for growth.

And just as in the global financial crisis of 2008, banks' interconnectedness amplifies the risks. Banks are increasingly buying into each other's WMPs, such that interbank WMPs hit 4 trillion yuan in June, a doubling from two years ago.

Banking regulators are also seeking new rules that will require lenders to set aside adequate capital to absorb potential losses from WMPs.

The PBOC and China Banking Regulatory Commission have yet to respond to requests for comment.

Vicious Cycle

Banks lure investors to WMPs with the promise of much higher returns than on bank deposits, then channel the cash into high-yielding bonds or other forms of disguised lending to sectors such as property on which there are official lending limits.

The specter of tighter monetary policy has already halted a three-year long rally in China bonds, and investors worry that the new WMP regulations could tip the bond market into crisis.

"Financial institutions, via WMPs, have invested a lot of money into credit products," said Gu Weiyong, chief investment officer at Ucom Investment Co, a bond-focused fund house in Shanghai, and he said they don't necessarily have sufficient capital to support those investments.

"It's very possible that another scandal could erupt, maybe in the first half," he said.

It is barely a month since Beijing tightened the rules on WMPs as part of a broader policy thrust at preventing price bubbles and reducing industrial overcapacity.

Bond prices have since fallen, sales of WMPs have slowed and money market mutual funds, also used by WMPs, are losing cash.

At the end of June, 41 percent of China's 26 trillion yuan of WMPs was in bonds, with 16 percent in money market instruments.

Data from consultancy CNBenefit showed that Chinese banks sold 24,460 WMPs last quarter, compared with 25,980 the previous quarter, while money market funds shrank to 3.9 trillion yuan at end-November, the lowest in a year, from 4.2 trillion yuan in October, according to data from the Asset Management Association of China.

In addition, a year-end bond market rout wiped out all the gains this year in bond mutual funds, resulting in a combined loss of 21.6 billion yuan, according to the official Xinhua agency, raising the specter of losses in bond-linked WMPs.

"The big issue for financial stability in China is a combination of very high asset prices and also extremely high leverage," said David Cui, analyst at Bank of America Merrill Lynch.

"The problem of this combination is that any drop in asset prices can quickly develop into a vicious selling circle," Cui said, with falling bond prices leading to WMP losses, then to lower WMP sales, and back to more pressure on bonds.

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