Monday, January 30, 2017

Monday, January 30, Morning Global Market Roundup: Shares Fall, Dollar Dips Versus Yen After Trump Travels Curbs

By Nigel Stephenson
January 30, 2017

Shares fell in Europe and Asia on Monday and the dollar dipped against the yen after immigration curbs introduced by Donald Trump added an extra layer of uncertainty to the economic impact of the new U.S. president's policies.

Wall Street appeared headed for a weaker opening, with e-mini futures contracts on the S&P 500 stocks index down 0.2 percent.

Signs of accelerating inflation in Germany pushed yields on euro zone government bonds higher. French 10-year yields hit a 16-month high in early trade after an opinion poll showed conservative presidential election candidate Francois Fillon, the favorite to win the vote, losing ground.

Trump suspended travel to the United States from Syria, Iraq, Iran and four other countries on national security grounds. The executive order, signed on Friday, triggered huge protests in U.S. cities and raised concern among some in markets over the potential impact of other policy moves.

"Concerns on protectionism appear to be rising after President Trump's executive order to restrict immigration," said Adam Cole, head of G10 foreign exchange strategy with RBC in London.

The pan-European STOXX 600 index dropped 0.8 percent, led by a 1.6 percent fall in resources-related stocks as commodity prices fell.

Trade in Asian share markets was thinned by the Lunar New Year. MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.5 percent. Australian shares closed down 0.9 percent.

Japan's Nikkei fell 0.5 percent as demand for the safe-haven yen weighed on exporters.

"Trump always stated these were policies he would implement," said James Woods, global investment analyst at Rivkin Securities in Sydney. "This renews concerns about a trade war with China that would significantly affect both the Asian and the global economy."

The dollar gained marginally against a basket of currencies. The index was at 100.58, having fallen as low as 100.17 in Asian trade.

The euro was flat at about $1.0690 and the yen was up 0.3 percent at 114.77 per dollar.

In debt markets, German 10-year yields turned higher and were up 2.6 basis points at 0.49 percent after regional data lifted expectations of a pick-up in inflation in Germany as a whole.

Consumer prices rose 2.3 percent year-in-year in Saxony this month. National data due at 1300 GMT is expected to show German inflation rose to hit the ECB's 2 percent target.

The premium investors demand to hold French 10-year bonds rather than German hit its widest in three years after a poll on Sunday showed Fillon, embroiled in a scandal over allegations of misuse of public funds, losing ground to centrist candidate Emmanuel Macron.

Both candidates are ultimately expected to beat far-right candidate Marine Le Pen if either faced her in a run-off.

Rand Falls

A big mover among emerging markets currencies was the South African rand, which fell 0.8 percent to 13.59 per dollar after reports that President Jacob Zuma was considering a cabinet reshuffle in response to calls for his resignation in November. The rand earlier traded down 1.34 percent.

Oil prices fell 0.7 percent, weighed down by the reduced appetite for risk resulting from the immigration curbs and by signs of rising U.S. oil output. Data from Baker Hughes showed U.S. drillers added 15 oil rigs last week, taking the total to its highest since November 2015.

Brent crude, the international benchmark, fell 41 cents to $55.11 a barrel.

Copper fell 0.1 percent to $5,893 a tonne, with trade also thinned by the week-long new year holiday in China.

Article Link To Reuters:

Shares Fall, Dollar Dips Versus Yen After Trump Travels Curbs

Oil Slides As Strong U.S. Drilling Activity Weakens Deal To Cut Output

By Karolin Schaps
January 30, 2017

Oil prices fell on Monday as news of another increase in U.S. drilling activity spread concern over rising oil output just as many of the world's oil producers are trying to comply with a deal to pump less in an attempt to prop up prices.

The number of active U.S. oil rigs rose to the highest since November 2015 last week, according to Baker Hughes data, showing that drillers are taking advantage of oil prices above $50 a barrel.

Global benchmark Brent crude oil prices were down 25 cents at $55.26 a barrel at 1010 GMT, while U.S. crude futures slipped 8 cents to $53.09.

"Oil prices are down because of the rise in the U.S. rig count," said Tamas Varga, analyst at PVM Oil Associates in London.

He also added that Petro-Logistics' report that OPEC members had cut production by 900,000 barrels per day (bpd) in January was "not very encouraging" because it implied that only 75 percent of the OPEC production cut target was being met.

The Organization of the Petroleum Exporting Countries and other producers including Russia agreed to cut output by almost 1.8 million barrels per day (bpd) in the first half of 2017 to relieve a two-year supply overhang.

Oil prices have remained above $50 a barrel since producers agreed the deal in December, incentivizing drillers in low-cost U.S. shale producing regions to ramp up activity.

"In our view the strong rise in U.S. shale oil rigs is a good thing because it will be needed over the next three years as non-OPEC, non-U.S. crude production continues to be hurt by the deep capex cuts both past and present in that segment," said Bjarne Schieldrop, chief commodities analyst at SEB Markets in Oslo.

He estimates the U.S. rig count will continue rising at a rate of seven rigs per week over the first half of the year.

Article Link To Reuters:

Oil Slides As Strong U.S. Drilling Activity Weakens Deal To Cut Output

Back To Zero: Companies Use 1970s Budget Tool To Cut Costs As They Hunt For Growth

By Tim McLaughlin
January 30, 2017

The number of U.S. companies using a budgeting tool made famous in the 1970s by former U.S. President Jimmy Carter is surging as they turn their spending habits upside down to boost profits and to re-invest in their businesses.

The upswing in zero-based budgeting (ZBB) signals that a broader cross-section of U.S. companies anticipate turbulence in their revenue growth. They face more pressure on profits, too, as wages and interest rates increase, and a stronger dollar makes their products more expensive overseas.

In consumer staples, where sales growth is often capped in the low-to-mid single digits, Campbell Soup Co (CPB.N), Kellogg Co (K.N), and Oreo cookie maker Mondelez International Ltd (MDLZ.O) have already rolled out ZBB programs that promise billions of dollars in savings.

Other industries, including finance, energy and manufacturing, are now following suit. Use of ZBB in 2017 is expected to increase dramatically in the United States and around the globe, according to consulting experts. Bain & Company reported last year in a survey of 406 North American companies that 38 percent of that group would use ZBB, up from just 10 percent in 2014.

"ZBB has taken on a life of its own," said Greg Portell, a partner at consulting firm A.T. Kearney.

A ZBB approach requires corporate managers to justify each line item of spending in their budgets, or even build their budgets from scratch. That is a departure from the typical process of using the previous year's budget as a starting point and adjusting it based on revenue and inflation projections, for example.

It often cracks down on the size of a company's real estate footprint, corporate travel, terms of international assignments, redundant technology and outside consultants. Employees get cut, too.

But there are risks. One is that companies focus too keenly on restraining spending and not on reinvestment that promotes new products and revenue growth.

"You continuously have to ask what are strategic costs and how can we invest behind the things that drive the highest volume," said Jason Heinrich, a partner in Bain & Company's Chicago office.

Feeling Threatened

ZBB first gained widespread attention in the late 1970s, when Carter, as president, said he would apply the budgeting principles to federal spending. It never fully got off the ground, however, and Ronald Reagan abandoned it when he became president in 1981.

Its recent resurgence is due in part to Brazilian buyout firm 3G Capital, which used ZBB when it combined H.J. Heinz with Kraft Foods in 2015.

The combined Kraft Heinz (KHC.O) now has the best profit margins among its peers with an estimated year-over-year gross margin expansion of 258 basis points, better than twice the average among rivals, according to Morgan Stanley. Kraft Heinz's stock sports a 2.5-point price-to-earnings-multiple premium over its peers.

3G's success is one reason the highest adoption rate of ZBB is in the consumer staples sector, which has banked on cost cutting to offset weak sales growth. In the current fourth quarter reporting season, the consumer staples sector is on track to report profit of 6.3 percent off revenue growth of just 3.2 percent, according to Thomson Reuters data.

Contrast that with the consumer discretionary sector where sales are seen rising 5 percent but profit just 1.1 percent.

Greg Kuczynski, a consumer staples analyst at asset manager Janus Capital, said ZBB is also being used by some to head off agitation from activist shareholders or even takeovers, like the Kraft Heinz deal.

“So many of them feel threatened,” he said. “They're desperately implementing ZBB packages."

Now the approach is spreading to energy, finance, health care and manufacturing. Cheniere Energy Inc (LNG.A), Huntington Bancshares Inc (HBAN.O), Baxter International Inc (BAX.N) and Ford Motor Co (F.N) are some of the latest devotees.

"If a company uses zero-based budgeting, I have more confidence it can take out cost faster than peers who do not," said Marc Scott, who helps run the $1 billion American Century All-Cap Growth Fund (TWGTX.O).

Tougher Than It Looks

Not everyone is sold on it. It can be an uncomfortable adjustment for managers and companies have to be careful not to alienate customers and business partners, according to analysts.

The biggest risk is that companies concentrate only on cutting costs, and don’t put some of that money back to work behind businesses with the potential for growth. One unintended consequence is cutting a product's marketing budget only to see a rival boost spending for their product and grab market share.

"It's not so simple as some of our other competitors out there make you believe, which has been roughly translated into, 'Let's cut all the costs as long as we can get away with it to show you better margins for a short period of time. But I can't promise you any growth along the way,'" Unilever (ULVR.L) Chief Executive Paul Polman told investors in November.

Even Kraft Heinz has had trouble generating consistent growth. Its organic net sales, which excludes the impact of currency fluctuations and other items, declined by 1 percent in the three-month period that ended Oct 2.

Still, the cost cutting has caught the attention of investors, particularly when companies scrap product lines that add little value.

American Century's Scott said ZBB was a factor when he evaluated kidney dialysis provider Baxter International, which has used ZBB principles to cancel several programs that added little value.

He began building a position in late 2015 when Baxter traded below $35 a share, according to Thomson Reuters data. The fund now owns about 540,000 shares and the stock trades around $46.

"It was just another feather in their cap," Scott said about Baxter's use of ZBB. "It's not a huge growth play, but we expect their profit margins to nearly double in a couple of years."

Article Link To Reuters:

Back To Zero: Companies Use 1970s Budget Tool To Cut Costs As They Hunt For Growth

Starbucks CEO Schultz Plans To Hire 10,000 Refugees After Trump Ban

By Devika Krishna Kumar
January 30, 2017

Starbucks Corp Chief Executive Officer Howard Schultz said on Sunday that the company planned to hire 10,000 refugees over five years in 75 countries, two days after U.S. President Donald Trump's executive order banning refugees from certain countries.

Trump on Friday put a four-month hold on allowing refugees into the United States and temporarily barred travelers from Syria and six other Muslim-majority countries, saying the moves would help protect Americans from terrorist attacks.

The order sparked widespread international criticism, outrage from civil rights activists and legal challenges.

Starbucks in a letter from Schultz told employees it would do everything possible to support affected workers. (

The hiring efforts announced on Sunday would start in the United States by initially focusing on individuals who have served with U.S. troops as interpreters and support personnel in the various countries where the military has asked for such support, Schultz said.

Schultz has been outspoken on various issues and has put Starbucks in the national spotlight, asking customers not to bring guns into stores and urging conversations on race relations.

Schultz said on Sunday that if the Affordable Care Act is repealed and employees lose healthcare coverage, they would be able to return to health insurance through Starbucks.

Trump and a Republican-controlled legislature are seeking to undo much of the Affordable Care Act, better known as Obamacare.

Schultz will step down as CEO in a few months to focus on new high-end coffee shops, handing the top job to Chief Operating Officer Kevin Johnson, a long-time technology executive. He will become executive chairman in April.

Schultz also affirmed the company's commitment to trade with Mexico, another subject that has been front and center of Trump's campaign.

Article Link To Reuters:

Starbucks CEO Schultz Plans To Hire 10,000 Refugees After Trump Ban

Global Backlash Grows Against Trump's Immigration Order

By Maher Chmaytelli and Lin Noueihed
January 30, 2017

A global backlash against U.S. President Donald Trump's immigration curbs gathered strength on Sunday as several countries including long-standing American allies criticized the measures as discriminatory and divisive.

Governments from London and Berlin to Jakarta and Tehran spoke out against Trump's order to put a four-month hold on allowing refugees into the United States and temporarily ban travelers from Syria and six other Muslim-majority countries. He said the move would help protect Americans from terrorism.

In Germany - which has taken in large numbers of people fleeing the Syrian civil war - Chancellor Angela Merkel said the global fight against terrorism was no excuse for the measures and "does not justify putting people of a specific background or faith under general suspicion", her spokesman said.

She expressed her concerns to Trump during a phone call and reminded him that the Geneva Conventions require the international community to take in war refugees on humanitarian grounds, the spokesman added.

Merkel's sentiments were echoed in Paris and London; "Terrorism knows no nationality. Discrimination is no response," said French Foreign minister Jean-Marc Ayrault, while his British counterpart Boris Johnson tweeted: "Divisive and wrong to stigmatize because of nationality."

Along with Syria, the U.S. ban of at least 90 days affects travelers with passports from Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen, including those with dual nationality that includes one of those countries.

Trump said his order, which indefinitely bans refugees from Syria, was "not a Muslim ban", though he added he would seek to prioritize Christian refugees fleeing the country.

The Arab League - whose members include many of the countries included in the ban as well as allies of Washington such as Saudi Arabia, Egypt and Jordan - expressed deep concern and said the restrictions were unjustified.

The government in Iraq, which is allied with Washington in the battle against ultra-hardline Islamist group Islamic State and hosts over 5,000 U.S. troops, did not comment on the executive order.

But some members of its parliament said Baghdad should retaliate with similar measures against the United States.

Iran Vows To Respond

In Baghdad, influential Shi'ite cleric Moqtada al-Sadr said American nationals should leave Iraq, in retaliation for the travel curbs.

"It would be arrogance for you to enter freely Iraq and other countries while barring to them the entrance to your country ... and therefore you should get your nationals out," he said on his website.

There was no immediate reaction to the curbs from Islamic State, although in the past it has used U.S. monitoring of Muslim foreigners to stoke Muslim anger against Washington.

The Tehran government vowed to respond in kind to the U.S. ban on visitors from Iran, but on Sunday Foreign Minister Mohammad Javad Zarif said on Twitter that Americans who already hold Iranian visas can enter the country.

"Unlike the U.S., our decision is not retroactive. All with valid Iranian visa will be gladly welcomed," Zarif said.

Authorities in Sudan, which is also targeted by the ban, summoned the U.S. charge d'affaires in Khartoum. They said the order sent a "negative message", coming two weeks after Washington announced it would ease economic sanctions on the country.

Trump's executive order on Friday took effect immediately, wreaking havoc and confusion for would-be travelers with passports from the seven countries and plunging America's immigration system into chaos.

The Department of Homeland Security said about 375 travelers had been affected by the order, 109 of whom were in transit and were denied entry to the United States. Another 173 were stopped by airlines before boarding.

Fuad Sharef, his wife and three children were among the first victims. They had waited two years for a visa to settle in the United States, selling their home and quitting jobs and schools in Iraq before setting off for a new life they saw as a reward for working with U.S. organizations.

They were prevented from boarding their connecting flight to New York from Cairo airport on Saturday, detained overnight and forced to board a flight back to northern Iraq.

'I Am Totally Broken'

"We were treated like drug dealers, escorted by deportation officers," Sharef told Reuters, likening Trump's decision to the dictatorship of former Iraqi leader Saddam Hussein. "I am broken, I am totally broken."

A 32-year-old Syrian man, Nail Zain, was among dozens of people at Istanbul's Ataturk Airport prevented from flying to the United States on Sunday. He told Reuters he was supposed to fly to Los Angeles, but officials said his visa was canceled.

"My wife and my son are in the United States. My son has American nationality. And we have been waiting for this moment for two years. Finally when I got the chance, they prevented me as a Syrian passport holder from traveling," he said.

He was later taken out of the terminal by authorities.

Trump, a businessman who successfully tapped into American fears about militant attacks during his campaign, had promised what he called "extreme vetting" of immigrants and refugees from areas the White House said the U.S. Congress deemed high risk.

He said on Saturday of his order: "It's working out very nicely. You see it at the airports, you see it all over."

The travel curbs, however, also drew criticism from several other countries around the globe.

In Jakarta, Indonesian Foreign Minister Retno Marsudi said the Muslim-majority nation deeply regretted Trump's plans for "extreme vetting" of people from some Muslim countries.

Italian Prime Minister Paolo Gentiloni said "open society, plural identity, no discrimination" were the "pillars of Europe", while the Danish, Swedish and Norwegian governments also registered their opposition.

Danish foreign minister Anders Samuelsen tweeted: "The U.S. decision not to allow entry of people from certain countries is NOT fair."

Canadian Prime Minister Justin Trudeau said his country welcomed those fleeing war and persecution, even as Canadian airlines said they would turn back U.S.-bound passengers to comply with an immigration ban on people from seven Muslim-majority countries.

"To those fleeing persecution, terror & war, Canadians will welcome you, regardless of your faith. Diversity is our strength #WelcomeToCanada," he tweeted.

Article Link To Reuters:

Global Backlash Grows Against Trump's Immigration Order