Wednesday, February 1, 2017

Funds Wary That Higher U.S. Stocks At Risk Of Trump Disappointment

By Claire Milhench
February 1, 2017

Global investors raised their U.S. equity holdings to an 18-month high in January, betting fiscal stimulus from U.S. President Donald Trump will spur growth, but doubts are growing whether he can deliver as much as markets have priced in.

A Reuters monthly asset allocation poll of 47 fund managers and chief investment officers in mainland Europe, the United States, Britain and Japan showed U.S. equity holdings at 41.8 percent of investors' global equity portfolios - the highest level since June 2015.

But Tuesday's survey, carried out Jan. 16-30, also suggested markets may have overcooked the "reflation" trade.

U.S. stock markets hit record highs in January .SPX .IXIC on expectations that Trump's promises to push through $1 trillion in tax cuts and public spending would boost corporate earnings and fuel economic growth.

"The U.S. equity market does look expensive, but a positive economic outlook and revenue-driven earnings growth are keeping investors' appetite ...buoyant," said Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum.

However, 55 percent of poll participants who answered a question on Trump's fiscal stimulus plans thought they would fail to meet existing market expectations, while protectionist measures were seen posing a threat to global trade.

"Financial markets have priced in a degree of good news about an upturn in the global economy," said Andrew Milligan, head of global strategy, Standard Life Investments. "A major risk therefore is that markets are surprised by how aggressive the Republicans are on trade and immigration matters."

Immigration curbs announced by Trump triggered an equity sell off on Monday, with world shares posting their biggest daily fall in 1-1/2 months .MIWD00000PUS.

Protectionist Rhetoric

Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), said Trump's unpredictability could create risks in markets if his protectionist rhetoric began to take precedence over the promise of stimulus.

"Recent pull-backs in the dollar and U.S. equities suggest some investors are unwinding their Trump trades," he added.

Mouhammed Choukeir, chief investment officer of Kleinwort Hambros, questioned whether Trump could deliver on a guarantee of annual economic growth of 3.5 percent.

"That level of growth has not been hit in the U.S. for over a decade, and wildly pumping fiscal stimulus into the economy will do nothing to address fundamentally poor demographics – made worse by immigration curbs – or slowing productivity," he said.

A Citi analysis of Trump's actions in his first few days in office concluded that while measures such as the entry restrictions against seven majority-Muslim countries were grabbing attention, not all had material relevance for markets or the U.S. economy.

Bonds Cut

Overall, equity holdings rose to 45.8 percent of global balanced portfolios, the highest since May 2016, the Reuters poll showed.

Bond allocations meanwhile fell to 39.9 percent, a four-month low. Cash holdings were steady at 5.4 percent.

Within their fixed income portfolios, investors rotated out of U.S. bonds into the euro zone, reflecting the fact that the U.S. Federal Reserve has signaled further interest rate hikes while the European Central Bank remains committed to its bond-buying program.

U.S. bonds fell to 36.3 percent of investors' fixed income portfolios, the lowest since October 2016, and euro zone bonds rose to 27.9 percent, a four-month high.

Some 60 percent of respondents who answered a question about the pace of Fed tightening expected to see one to two rate rises in 2017, while just over a third thought there could be three hikes. In mid-January, Fed chair Janet Yellen warned of the dangers of allowing the U.S. economy to run "hot".

Investor uncertainty over the pace of tightening largely stemmed from the difficulty in forecasting how successful Trump would be at getting his fiscal stimulus package through a fiscally conservative Republican-led Congress.

Matteo Germano, global head of multi-asset investments at Pioneer Investments, expects at least two rate hikes in 2017, but reckons more are possible if fiscal stimulus causes "overheating of an economy already running at full employment".

Patrick Moonen, principal strategist in the multi-asset team at NNIP, also plumped for two hikes in 2017, and four in 2018.

"If the U.S. were to engage in large-scale fiscal expansion this would very likely lead to strong dollar appreciation and a rise in the trade deficit," Moonen said.

"Both would increase the risk that the Trump administration will focus more on protectionism."

Article Link To Reuters:

Funds Wary That Higher U.S. Stocks At Risk Of Trump Disappointment

Oil Prices Stabilize As Russia Joins OPEC In Production Cut

By Henning Gloystein 
February 1, 2017

Oil steadied on Wednesday as Russia joined OPEC in cutting production to try to balance the market, although plentiful supply in places such as the United States dragged on prices.

Brent crude futures LCOc1, the international benchmark for oil prices, were trading at $55.63 per barrel, up 5 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 rose 5 cents to $52.86 a barrel.

Prices reversed earlier falls after reports that Russia cut its oil and gas condensate production by around 100,000 barrels per day (bpd) between December and January, down to 11.11 million bpd.

Russia's cuts are part of an effort led by the Organization of the Petroleum Exporting Countries (OPEC), of which Russia is not a member, to prop up the market and end a global fuel supply glut.

As part of this, OPEC has said it will cut production by around 1.2 million barrels per day (bpd) in the first half of 2017. Other producers, including Russia, have pledged to cut another 600,000 bpd in output.

A Reuters survey published on Tuesday showed that OPEC's output fell by over 1 million bpd in January to 32.27 million bpd between December and January.

"That's a good start ... to cut production to bring the market back toward balance," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

But McKenna added that there were still "some questions about whether or not OPEC will achieve its goals" to cut even deeper and for the full period of the first half of 2017.

Traders said a reported climb in U.S. crude inventories was also preventing oil prices from rising by much.

"The release of the American Petroleum Institute's crude inventories at a much higher than expected 5.8 million barrels saw both Brent and WTI quickly give back ... gains," said Jeffrey Halley, senior market analyst future brokerage OANDA in Singapore.

The API data showed that commercial U.S. crude inventories now stood at 488 million barrels.

Official U.S. storage data from the Energy Information Administration (EIA) is due later on Wednesday.

Article Link To Reuters:

As Oil Recovers, U.S. Firms Descend On The Permian Basin In West Texas

By Ernest Scheyder
February 1, 2017

In most U.S. shale oil regions, energy firms are making strategic but cautious bets as the price of oil holds above $50 a barrel.

Here in the Permian Basin of West Texas, the largest U.S. oil patch, the industry poured more than $28 billion into land acquisitions last year - more than triple what they spent in 2015.

Those deals set the stage for much larger investments needed to extract the oil from the ground - and they illustrate how the Permian Basin has become the epicenter for the U.S. shale resurgence after a historic oil price crash.

"We could easily see an extra 100 rigs out here in the Permian by June," said Josh Clawson of Gesco, a Midland, Texas, electrical contractor for oil drilling rigs.

That doesn't necessarily mean the investment blitz will extend to other U.S. oil regions. The industry's focus on the Permian reflects the simple math of profitability and a complex set of geographic advantages and technological advances that make it cheaper to drill here than in other major U.S. oil regions.

Permian Basin producers make money at the current crude price of about $53 per barrel because of the region's sprawling pipeline network, abundant labor and supplies, and warm winters that allow year-round work.

Most of America's shale industry needs prices above $60 a barrel to justify new projects and expansion. Oil has not hit that price since June 2015.

So at least for now, the Permian accounts for a disproportionate share of the industry's recovery. The amount spent on Permian land purchases and leases last year represented 39 percent of all deals nationally and tripled the activity seen in any other major U.S. oil region.

Acquisitions in North Dakota's Bakken shale fields, by comparison, accounted for 3 percent of all deals.

(For a graphic comparing the land acquisitions in the Permian to other oil regions, see: )

Judging by the confident flow of capital into West Texas - a swagger bred in part by aggressive cost-cutting and innovation through the downturn - U.S. oil companies have retained their appetite for risk.

What remains to be seen, should per-barrel prices rise further, is whether companies continue to expand operations in the Permian as projects start to make more economic sense in other oil states including North Dakota, Colorado and Wyoming.

Fast Start To 2017

Oil companies started the new year with announcements of about $9 billion more in Permian land deals, including a $6.6 billion Exxon Mobil Corp buy that doubled its acreage in the basin.

Occidental Petroleum Corp, WPX Energy, Noble Energy Inc and RSP Permian Inc have also made major commitments to the region.

The companies that have sold or leased their holdings have typically been smaller, privately-held firms aiming to take advantage of the high land prices rather than invest the millions of dollars needed to pump the oil.

The demand for West Texas acreage has sent land prices soaring in the last two years. One deal in December 2016 priced out at more than $63,000 an acre, double the price paid in similar deal earlier that year.

Double Eagle Energy Permian LLC and its predecessor companies have made a fortune buying and selling Permian acreage starting in 2009.

But Double Eagle's founders, who have snapped up 65,000 acres in the past two years, now plan to start drilling their holdings in addition to speculating on land values. The firm is preparing for an initial public offering with an expected valuation of $3 billion, according to a half dozen bankers who have examined its value.

"Activity breeds activity," said John Sellers, co-founder of Double Eagle, of the surge here. "The Permian is a really great basin to be in."

While land prices have risen fast, the cost of acreage still represents a small part of the profit equation. Most of the expense is tied to drilling and getting the oil to market.

Buyers of Permian acreage are moving quickly to tap their holdings. The number of rigs across the basin is up more than 28 percent in the past year; oil job postings here have more than doubled from lows of last March; and sales tax receipts for the region starting rising in November after falling for two years.

Oil firms are pumping 2.2 million barrels per day (bpd) of crude from the Permian, about a quarter of U.S. output of 8.9 million bpd.

Early Action

In Midland and nearby Odessa, centers for the West Texas industry, the buzz of economic growth has replaced the desolation of 2015 and early 2016.

Many storage yards are only half full - meaning more equipment is in the field.

Chevron Corp, which controls more than 1 million acres of Permian land, last year opened a new regional office in Midland. EOG Resources Inc and Occidental Petroleum Corp have office expansion plans of their own.

Concho Resources Inc, which is headquartered in Midland, has been renovating and expanding its downtown Midland offices and funding community projects, including a $400,000 makeover of a downtown park.

Permits for new home construction jumped 50 percent in November, the latest period for which data are available. And dinner at Midland's Texas Roadhouse Inc now requires a half-hour wait.

The job market has roared back.

"Everyone I know here is hiring," said J. Ross Lacy, a Midland councilman.

The resurgence gained momentum last summer when industry veteran Mark Papa's Silver Run Acquisition Corp bought Centennial Resource Development Inc, which controls premium acreage across the Permian.

Papa is considered one of the preeminent oil executives of his generation, and his move from retirement back into the oil patch was seen as a sign by many that the Permian was heating up again.

Two months later, Apache Corp said it had accumulated over 300,000 acres of Permian land over two years for less than $1,300 an acre.

"The Permian Basin represents the foundation of Apache's North American growth strategy," said Gary Clark, vice president of investor relations at Houston-based Apache.

Apache estimated the land had more than 3 billion barrels of oil, sparking speculation that the Permian holds far more oil than anyone had expected in a previously overlooked part of the basin.

Anadarko Petroleum Corp sold acreage in east Texas earlier this month for $2.3 billion as it looked to raise cash to develop the 600,000 acres of Permian land it controls.

The firm is relocating 200 employees and their families to Midland, a sign of faith in the region's long-term prospects.

Performance Anxiety

Many of recent Permian deals were paid for with cash from secondary stock offerings, an unusual step that investors typically dislike because it dilutes their stakes in companies. But in the Permian, it seems, investors see the payoff.

Companies turned to stock offerings for cash because debt markets were largely closed to oil producers during the two-year price downturn.

Diamondback Energy Inc paid more than $3 billion last year for Permian land in two separate transactions - deals financed through stock offerings. Diamondback executives said the deals were immediately profitable and should provide years of growth.

Executives at SM Energy Co and RSP Permian made similar comments in announcing their own deals late last year for $1.6 billion and $2.4 billion, respectively.

While shares of top Permian producers have risen in recent weeks, Wall Street's appetite for stock is unsated. Of the 44 analysts covering Pioneer Natural Resources Co - considered by many investors to be the top Permian producer - forty recommend buying it, according to Thomson Reuters data.

None recommend selling the stock.

Investors are seeing the same unique advantages that drew oil companies to wide-open spaces of West Texas.

"The industry is learning where the value really is," said Chuck Meloy, chief executive of Endeavor Energy Resources LP [EERL.UL], one of the largest private oil producers in the region. "And that's out here in the Permian."

Article Link To Reuters:

Volkswagen Agrees To Pay $1.6 Billion To Settle U.S. Diesel Claims

By David Shepardson
February 1, 2017

Volkswagen AG (VOWG_p.DE) has agreed to pay at least $1.26 billion to fix or buy back nearly 80,000 polluting 3.0 liter diesel-engined vehicles -- and could be forced to pay up to $4.04 billion if regulators don't approve fixes for all vehicles, court documents filed late Tuesday showed.

In December, VW said it had agreed to buy back 20,000 vehicles and expected to fix another 60,000. The settlement documents show that if regulators do not approve fixes, the German automaker's costs could jump dramatically.

Under the settlement that must be approved by a U.S. judge, owners of 3.0 liter vehicles who opt for fixes will get compensation of between $7,000 and $16,000 from Volkswagen if emissions fixes are approved in a timely fashion -- and the automaker will pay another $500 if the fix affects a vehicle's performance. Owners who opt for a buyback will get $7,500 on top of the value of the vehicle.

Volkswagen could be forced to pay as much as $4.04 billion -- and much more in individual owner compensation -- if regulators reject a fix entirely, according to the U.S. Federal Trade Commission, which had sued VW and voted unanimously to back the deal.

The settlement is the last major hurdle to Volkswagen moving beyond its emissions scandal, though it still faces suits from some U.S. states and investors.

Volkswagen Group of America chief executive Hinrich Woebcken said with the agreement all owners of polluting diesels "will have a resolution available to them. We will continue to work to earn back the trust of all our stakeholders."

VW has been barred from selling diesels in the United States since late 2015.

VW has agreed to repurchase the 2009-2012 Volkswagen and Audi 3.0 liter vehicles, but believes it will be able to fix the 2013-2016 Volkswagen, Audi, and Porsche 3.0 liter vehicles.

Bosch Agreement

Separately, German auto supplier Robert Bosch GmbH has agreed to pay $327.5 million to compensate owners of polluting U.S. vehicles.

VW previously agreed to spend up to $10.03 billion to buy back up to 475,000 polluting 2.0 liter vehicles after it admitted it installed secret software to evade emissions controls.

Diesel car owners sued Bosch in 2015 claiming the company helped design secret "defeat device" software that allowed VW to evade emissions rules and alleged Bosch was a "knowing and active participant" in Volkswagen's decade-long scheme.

Under the agreement, Bosch will pay $163.3 million to address 2.0 liter vehicle claims, with most owners getting $350 each, while 3.0 liter owners will split $113.3 million. Most 3.0 liter owners will receive $1,500 from Bosch.

A federal judge in San Francisco will hold a hearing to approve the settlements on Feb. 14.

The lead lawyer for the vehicle owners, Elizabeth Cabraser, said in statement the settlement provides "substantial benefits to both consumers and the environment."

VW earlier agreed to pay $225 million to offset the excess pollution from the 3.0 liter vehicles, on top of $2.7 billion it agreed to pay to offset 2.0 liter pollution.

The automaker is set to plead guilty on Feb. 24 in Detroit to three felony counts as part of a plea agreement with the U.S. Justice Department to resolve the government's excess diesel emissions investigation.

As part of a $4.3 billion settlement with U.S. regulators, the German automaker has agreed to sweeping reforms, new audits and oversight by an independent monitor for three years to resolve diesel emissions cheating investigations.

Under the settlement of charges, it admitted to installing secret software in U.S. vehicles to allow them to emit up to 40 times the amount of legally permitted pollution, Volkswagen agreed to change the way it operates in the United States and other countries.

The Justice Department charged VW with conspiring for nearly 10 years to cheat on diesel emissions tests. The German automaker agreed to pay $4.3 billion in U.S. civil and criminal fines. It has also charged seven current and former VW executives with wrongdoing.

In total, VW has now agreed to spend up to $25 billion in the United States to address claims from owners, environmental regulators, U.S. states and dealers, and offered to buy back about 500,000 polluting vehicles.

This week, Volkswagen topped Toyota Motor Corp as the world's largest automaker by sales.

Article Link To Reuters:

Dollar Struggles After Worst Start To Year In Three Decades

By Jemima Kelly
February 1, 2017

The dollar could recover only a little ground on Wednesday, after recording its worst start to the year in three decades on concerns the United States was poised to ditch a two-decade old "strong dollar" policy.

The greenback skidded 2.6 percent against a basket of major peers .DXY in January, its worst showing since 1987, falling first on worries over U.S. President Donald Trump's protectionism and then on mounting concerns that the new administration was set on talking down the currency.

Those fears escalated on Tuesday when a senior trade adviser to the president, Peter Navarro, said the euro was "grossly undervalued", sending the euro soaring above $1.08 for the first time since early December EUR= and knocking the dollar index down almost 1 percent to a seven-week low.

Navarro's comments were followed by Trump himself, who complained that "every other country lives on devaluation" while the United States "sit(s) there like a bunch of dummies".

"So far he's clearly following through with his politics -- there might be some nervousness about his taking decisions that nobody expected before that he would actually do," said Commerzbank currency strategist Esther Reichelt, in Frankfurt.

"So there might be some kind of fear that he might actually try to order interventions and to go into confrontation with the Fed on this issue."

Reichelt added that currency markets would be relatively calm on Wednesday ahead of the conclusion of the U.S. Federal Reserve's latest policy meeting, though with Trump grabbing much of the headlines, the meeting has been relegated to the sidelines.

The Fed is expected to keep interest rates unchanged in its first policy decision since Trump took office, as the central bank -- along with the market -- awaits greater clarity on his economic policies.

The lack of clarity over Trump's promised fiscal stimulus has been another factor that has weakened the dollar since the start of the year.

It had hit 14-year highs on the view that his policies would boost growth and inflation, leading to a faster pace of interest rate hikes, but it has fallen over 4 percent since then and is now trading less than 2 percent above its levels before Trump's election.

The dollar index inched up just 0.1 percent on Wednesday, staying below 100 and close to the previous day's lows, while the euro traded flat on the day just below $1.08.

Against the yen, though, the dollar was half a percent higher at 113.40 yen JPY=.

Despite Tuesday's comments, which increased the prospect of Washington reversing the "strong dollar" policy advocated by presidents dating back to the Clinton administration, the U.S. currency still attracted demand.

"Trump is providing an opportunity for bargain hunters. The dollar ends up being sold on his statements, but ultimately it finds downside support as Treasury yields do not fall that much," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

Article Link To Reuters:

Neil Gorsuch: A Worthy Heir To Scalia

Donald Trump will nominate a textualist and an originalist Supreme Court justice in the vein of Antonin Scalia.

By Ramesh Ponnuru 
The National Review
February 1, 2017

President Trump’s nominee to the Supreme Court will be Neil Gorsuch, a well-respected conservative whose legal philosophy is remarkably similar to that of Antonin Scalia, the justice he will replace if the Senate confirms him. He is, like Scalia, a textualist and an originalist: someone who interprets legal provisions as their words were originally understood.

Gorsuch is a Colorado native and the son of a Republican politician, the late Anne Gorsuch Burford, who was a state legislator and then director of the Environmental Protection Agency for President Reagan. He attended Columbia University and Harvard Law School, after which he clerked for D.C. Circuit Court judge David Sentelle. He then clerked for Supreme Court justices Byron White and Anthony Kennedy in 1993–94. The next year, he studied for a doctorate of philosophy at Oxford University under the legal philosopher John Finnis.

After spending ten years at a law firm in Washington, D.C., Gorsuch went to work for the Justice Department in 2005–06. President George W. Bush nominated him to the Tenth Circuit Court of Appeals, which covers Colorado, Kansas, Oklahoma, Utah, Wyoming, and New Mexico. His confirmation was quick and uncontroversial.

That Judge Gorsuch’s judicial philosophy is similar to Justice Scalia’s is evident from a tribute the former gave after the latter’s death. In that tribute, Gorsuch summarized and endorsed Scalia’s method of legal interpretation:

"Judges should instead strive (if humanly and so imperfectly) to apply the law as it is, focusing backward, not forward, and looking to text, structure, and history to decide what a reasonable reader at the time of the events in question would have understood the law to be — not to decide cases based on their own moral convictions or the policy consequences they believe might serve society best. As Justice Scalia put it, “if you’re going to be a good and faithful judge, you have to resign yourself to the fact that you’re not always going to like the conclusions you reach. If you like them all the time, you’re probably doing something wrong.”

A lawyer who clerked for both Justice Scalia and Judge Gorsuch sees parallels between the two men. Gorsuch is “a law-has-right-answers kind of guy, an originalist and a textualist,” he says. “He believes that the enterprise of law is real and worth doing and not just politics by other means.”

A low-profile 2012 case, U.S. v. Games-Perez, illustrates how Gorsuch has applied these views. At issue was a federal law that authorizes prison terms for anyone who “knowingly violates” a ban on the possession of firearms by a convicted felon. A precedent in the Tenth Circuit held that a defendant who knew that he had a firearm could be sentenced under that provision even if he did not know that he was a convicted felon. (In the case Gorsuch was deciding, Miguel Games-Perez had previously taken a plea deal that the presiding judge had misdescribed as an alternative to being “convicted of a felony.”)

Gorsuch participated in a panel of three of the circuit’s judges that affirmed the prison sentence. Gorsuch concurred in the result because he felt bound by precedent. At the same time, he made a powerful argument that the circuit’s precedent could not square with the text of the law. And when the case later came before the circuit, Gorsuch urged it to reconsider that precedent.

The case brought together several strands of Gorsuch’s thinking. It demonstrated his willingness, shared with Scalia, to overturn a criminal conviction when a proper reading of the law required it. He paid close attention to the text and grammar of the law while expressing skepticism about letting legislative history guide his decision. “Hidden intentions never trump expressed ones,” he wrote, adding an aside about “the difficulties of trying to say anything definitive about the intent of 535 legislators and the executive.” (Scalia was a foe of the judicial consideration of legislative intent for similar reasons.) And it showed, as well, his understanding that a judge must follow his duty even when it leads somewhere he dislikes. “He cared a lot about what the precedents are,” says the former clerk. “He was not interested in bending them or the usual tricks judges can use for getting around them if they don’t like them.”

Also like Scalia, Judge Gorsuch is skeptical of the “dormant commerce clause”: the longstanding legal doctrine that the Constitution’s grant of power over interstate commerce to Congress implies limits on the states’ power over it even when Congress has not spelled out those limits. And he shares Scalia’s preference for clear legal rules over vague “standards” that judges can manipulate to reach desired conclusions.

The former clerk sees similarities between Gorsuch and Scalia that go beyond legal issues. “Gorsuch took a lot of care with writing,” he says. “He has a pretty well-earned reputation as one of the best writers on the federal bench. He always cared a lot about an opinion having his voice.” The same was famously true of Scalia. But the voices are different: “Justice Scalia had a sharp pen for dissents. [Judge Gorsuch] is just temperamentally not inclined to do that.”

The difference may be related to another one: Gorsuch has expressed an optimism about the trajectory of American jurisprudence that Scalia did not. His tribute to the late justice argued that thanks in large part to Scalia, even liberals on the Supreme Court were more likely to look to the text and original public meaning of laws in making their decisions.

And it would be a mistake to assume that Gorsuch would always rule the same way as Scalia. He may be more willing than Scalia was to rein in administrative agencies. He has called into question Supreme Court precedents that command judicial deference to the legal interpretations of those agencies. He has been skeptical, as well, of agencies that purport to apply regulations retroactively.

As Trump and his advisers have deliberated about filling the vacancy on the Supreme Court, Gorsuch has not had the strong and prominent advocates that others did. Senator Jeff Sessions, Trump’s nominee for attorney general, favored Judge William Pryor, who like him comes from Alabama. Judge Thomas Hardiman enjoyed the support of the unlikely duo of staunch social conservative Rick Santorum, a fellow Pennsylvanian, and the socially liberal Maryanne Trump Barry, the president’s sister, who serves with Hardiman on the Third Circuit Court of Appeals.

What recommended Gorsuch was his reputation for legal excellence and his relative lack of controversy. Trump has said that he wants the Senate to change its rules so that Supreme Court nominees with the support of 51 senators are guaranteed confirmation, but it is not clear that the Senate and its leaders are willing to do that. While everyone involved in the process respects Pryor, they also think Gorsuch would be likely to get more votes.

Gorsuch’s tie to Justice Kennedy, frequently a swing vote on the Supreme Court, may also be an asset. If Gorsuch can persuade Kennedy to join an opinion, a narrow loss for the conservative position could become a narrow win. There is also the possibility that Gorsuch’s presence would reassure Kennedy about the direction of the Court and make him more willing to let Trump name his own replacement.

Everyone understands, however, that Gorsuch will draw more opposition now than he did when he was confirmed for his current job. Abortion will be a major point of contention, as it always is in confirmation debates. His record as a judge provides little direct evidence of his view of the Court’s abortion jurisprudence. Gorsuch was a dissenter last year in a case involving an attempt by the Republican governor of Utah to end state funding for Planned Parenthood. His colleagues blocked that policy. Gorsuch faulted their decision on procedural grounds, arguing that the appeals court was showing too little deference to the factual findings of a lower court that had ruled in the governor’s favor.

In two high-profile religious-liberty cases, Gorsuch voted to hold that the Obama administration had violated the Religious Freedom Restoration Act by refusing to exempt religious employers from a requirement to cover contraceptives in their insurance plans. In neither case, though, will it be easy for opponents to portray his decisions as evidence of social-conservative zealotry.

He concurred in a decision freeing the Hobby Lobby chain from the contraceptive mandate. Its Evangelical owners considered some of the contraceptives they were forced to cover to be abortifacients and objected to them for that reason. A narrow 5–4 majority of the Supreme Court affirmed that decision. Gorsuch joined a dissent arguing that the Little Sisters of the Poor, a group of Catholic nuns, had shown that the Obama administration’s fines for noncompliance with the mandate amounted to a substantial burden on the exercise of their faith — one of the preconditions for getting protection under the Religious Freedom Restoration Act. The Supreme Court unanimously vacated the decision from which Gorsuch had dissented.

Gorsuch’s solicitude for religious liberty has not been confined to cases involving abortion, contraception, or conservative Christians. In the less well-known Yellowbear v. Lampert, Gorsuch ruled that the Religious Land Use and Institutionalized Persons Act meant that a Native American prisoner had to have access to his prison’s sweat lodge.

In 2006, Princeton University Press published Gorsuch’s book The Future of Euthanasia and Assisted Suicide, which argued against their legalization while also maintaining that people have a right to refuse treatment even where such refusal may have the effect of causing their death. It has been described by liberals as “a serious book” with an “even-handed analysis,” but divisions over the issues it discusses will surely be aired during his confirmation hearings.

The book will also be mined for evidence of his views on abortion. Gorsuch writes that his argument is “premised on the idea that all human beings are intrinsically valuable.” It’s the kind of language that opponents of abortion frequently use. But on the core questions of whether the law should treat fetuses as “human beings,” and whether the Constitution allows them to be so treated, the book is silent.

Tonight, President Trump will nominate a careful and thoughtful judge whose jurisprudence is squarely in the mainstream of legal conservatism. Gorsuch shares Scalia’s philosophy and intelligence, if not his acerbity, and in selecting him, Trump has made good on a crucial campaign promise.

Article Link To The National Review:

The U.S. Dollar Gets An Injection Of Political Risk

‘Not sure serious analysis is possible’ at this point: Juckes; Fiscal outlook obscured with focus on migration, trade curbs

By Chris Anstey
February 1, 2017

Currency traders have long been used to analyzing political risk -- just not so much when it comes to the U.S. dollar.

The greenback has been rattled this week by political concerns, spurring debate over the long-term implications of Trump administration policies and their impact on demand for assets denominated in the world’s reserve currency. It’s a relatively unfamiliar dynamic for those accustomed to looking at bond-yield differentials when attempting to gauge the dollar’s outlook.

“I’m not sure serious analysis is possible, and I don’t trust my gut instincts on something as far from the usual state of affairs,” said Kit Juckes, a global strategist at Societe Generale SA in London and a veteran of more than three decades of market research. Juckes was referring, in a note Tuesday, to the dollar’s reaction to President Donald Trump’s selective travel ban.

While the dollar index is still higher than before the Nov. 8 election, it’s the foremost example of a “Trump trade’’ running out of steam in recent weeks. The S&P 500 Index of stocks remains near a record following an initial surge of optimism over Trump’s economic reflation program, and U.S. Treasuries are little changed over the same period.

The big question for traders now is to what extent political risk will drive the dollar’s prospects, given the specter of a rising sovereign risk premium and protectionist policies that may test the appetite of official-sector investors to finance the U.S. deficit.

Watch The Flows

Among gauges to monitor: the U.S. Treasury’s monthly report on international demand for U.S. assets, with the next one due Feb. 15, for December. The Federal Reserve reports weekly on its custodial holdings of Treasuries for foreign official and international accounts. Over a much longer time frame, the International Monetary Fund’s quarterly data on reserve assets would show any shifts in the dollar’s dominance.

Another x-factor: jawboning by Trump administration officials in favor of a weaker exchange rate. The greenback took a leg lower Tuesday after published remarks by a Trump adviser blasting a "grossly undervalued" euro.

"Policy uncertainty coming from a country that (1) is the biggest importer in the world and (2) the biggest external borrower in the world ought to be consequential," said Stephen Jen, London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. A focus on borrowing needs could send the dollar lower for a short period, he said.

‘Not Patriotic’

Even so, at the end of the day, "capital flows are not patriotic," and the U.S. yield premium will lure global investors, Jen said. Also: "If things turn sour, U.S. Treasuries remain the best safe haven in the world."

The dollar’s status as the main global reserve currency, and the appeal of Treasuries as the largest and most liquid government-bond market in the world, saw it climb during the throes of the global financial crisis. The scramble for dollars eventually prompted the Fed to open multiple swap lines with counterparts overseas.

American assets have withstood assaults before. The sovereign-rating downgrade of the U.S. by S&P Global Ratings in 2011 briefly roiled financial markets so much that the Group of Seven put out a statement to calm things. In the end, the impact was short lived.

The dollar had a more lasting down trend during the early years of former President Bill Clinton, on perceptions his administration was seeking a weaker domestic currency and amid a focus on the widening U.S. trade deficit. The scenario of protectionism crimping the greenback is one that’s already been making the rounds among traders.

Unanticipated political developments may make traders pine for the relative certainty of economic indicators and central bank policy statements -- Wednesday’s Fed decision and Friday’s nonfarm payroll report are at least scheduled events.

“My bias is still that we’ll get back to the Trump economic program, and the implications for Fed policy, before too long,” said Juckes at Societe Generale.

Article Link To Bloomberg:

We’re In Phase III Of The Trump Rally

By Mohamed A. El-Erian
The Bloomberg View
February 1, 2017

The post-election movements of U.S. stocks have been heavily influenced by policy. First they soared, then they traded in a narrow range. Now the markets have entered a period of greater volatility underpinned by a tug of war between the expectation of reflationary policies and the risk of stumbling into stagflation. Where we end up will be predominantly a political call.

Phase I: Euphoric Markets

The markets’ euphoric phase started in the early morning of Nov. 9, when President-elect Donald Trump delivered his acceptance speech. It lasted until mid-December.

Trump’s remarks at the Hilton Hotel were conciliatory in tone and notably pro-growth in content. They calmed markets that had been concerned about some of his campaign rhetoric, especially when it came to the imposition of prohibitive import taxes on China and Mexico, the dismantling of the North American Free Trade Agreement and the cancellation of bilateral trade agreements. Having sold off sharply in the run-up to the acceptance speech, Dow futures erased an 800-point drop and the S&P 500 Index climbed off its limit-down level, starting what turned out to be an impressive market surge that set records for the major indices.

This first phase was fueled by expectations that, after years of frustrating gridlock on Capitol Hill, the president and the Republican majorities in both houses of Congress would work constructively to unleash the significant potential of the U.S. economy. Markets internalized expectations for policy-induced improvements in growth and inflation, and their translation into higher corporate revenue and stronger pricing power. It was also hoped that stocks would get a boost from higher repurchase activity thanks to the policies that encouraged companies to repatriate cash held abroad. And all of this also fed a surge in both the dollar and yields on U.S. Treasuries.

Phase II: Consolidating Markets

Policy announcements can only take you so far in asset markets, especially when the president-elect hasn't been sworn in. That is why, from mid-December to Trump’s inauguration on Jan. 20, stocks traded in a remarkably narrow range as markets waited for information on the detailed design of policies and their implementation. The dollar gave back some gains and yields retraced part of their pronounced upward movement.

Phase III: Twitchier Markets

After the inauguration, markets became more fidgety, with sharper moves up or down depending on the latest policy indicators. On the one hand, for example, the deregulation signal provided by the executive order on pipelines took major averages to new records, including a move above the 20,000 milestone for the Dow. On the other hand, concerns about protectionism, fueled by talk of a 20 percent tariff on Mexico or the travel ban affecting seven countries, drove stocks lower. In both cases, the moves were larger than what had been seen in the second phase.

There is a bigger issue at play here, and its implications go well beyond financial markets. Now that the baseline of low and insufficiently inclusive growth has become less secure due to economic, financial, institutional and political factors (I have discussed this issue in previous articles), the policy-driven economy could be getting nearer to a tipping point: into beneficial reflation or damaging stagflation.

Specifically, the implementation of a well-designed set of policies built around the president’s three headline initiatives -- tax reform, deregulation and infrastructure -- would unleash reflationary forces that would validate existing asset valuation, and could take them a lot higher if the rest of the world were also to improve its policy mix. If, however, the U.S. stumbled into protectionism and trade wars, the markets would give up more of the recent gains, and possibly even overshoot on the way down.

Where markets go from here is therefor is a matter of politics more than anything else, with both U.S. and international dimensions. I leave you to make the call. I will limit myself to a simple observation: Having patiently waited for quite a while, markets are now a lot twitchier and point to a period of greater volatility for traders and investors.

Article Link To The Bloomberg View:

Fed Has Turned More Dovish Ahead Of Meeting

Data firm Prattle uses automated text analysis for clues on future policy decisions.

By Greg Robb
February 1, 2017

The Federal Reserve has grown more dovish in the run-up to this week’s interest-rate policy meeting, suggesting a hands-off policy on interest rates perhaps until June, according to a textual analysis of U.S. central bank communication by the data firm Prattle.

Prattle, started by a led by former Brown University economics professor Evan Schnidman, analyzes Fed speeches for clients using proprietary software that gives each Fed communication a score. The higher the score, the more hawkish it is.

Since the Fed met in mid-December, Prattle analyzed 14 speeches. The quantitative data show Fed communication has fallen ahead of this week’s meeting, Schnidman said in an interview, signaling a more dovish central bank.

Markets paid close attention to two speeches given earlier in January by Fed Chairwoman Yellen, one looking at the goals of monetary policy and the second looking at the economic outlook.

Yellen’s first speech dealt with the central bank’s strategy over the past few years and scored hawkish, according to Prattle’s analysis. But the next day’s speech, seen as more important as a signal for the future path of interest rates because it discussed the economic outlook, was dovish.

In addition to Yellen, several other Fed speakers were less hawkish than they had been in prior speeches, he added.

Based on an analysis of the data, Schnidman predicted the Fed’s policy statement might be less hawkish than December.

Schnidman said the Fed would have to “reverse course very quickly” if it wanted to prepare markets for a March rate increase.

Fed officials have penciled in three rate hikes this year. The market expects two moves, in June and December.

The Fed started their two two-day meeting on Tuesday. The central bank will release its policy statement at 2pm on Wednesday.

Sell The Data, Not The Forecasts On The Data

Schnidman said the idea for Prattle had its genesis while he was a graduate student at Harvard. There he studied Fed communication during the financial crisis using automated analysis.

That was a critical period, when the Fed moved away from the cryptic communication of Alan Greenspan to the press conferences of Ben Bernanke.

“The Fed has never been more verbose, never been more transparent,” Schnidman wrote in a book “How the Fed moves Markets” based on his thesis.

“Put plainly, the Fed’s words move markets and have, therefore become a vital source of economic influence for the institution,” he said.

Some on Wall Street — and now, even Bernanke himself — have even started to complain about too many speeches.

Schnidman saw that he might be able to cut through the clutter and sell forecasts based on the text analysis to investment firms.

Prattle now follows the communication of 20 central banks for its clients.

One big success for the company came in September 2015, when the Fed held interest rates steady even though many in the market were calling for a rate hike.

“We saw the actual trend was rising [getting more hawkish] but it could have to go up very, very fast” to signal a move, Schnidman said.

“As early as June, we said we don’t think they are going to hike in September.”

Another feather in their cap, he said, was a prediction that the Bank of England would not cut rates in the wake of last summer’s Brexit vote.

Prattle’s data is even being used by researchers at the San Francisco Fed to examine how communication moves financial markets.

Prattle’s success hasn’t gone unnoticed. The firm announced last week it has received $3.3 million in financing from a group led by GCM Grosvenor.

Schnidman said the company will use the funding to develop software to cover the communication of public companies.

Article Link To MarketWatch:

Fed's Message On Portfolio Trimming: Prepare, Don't Fret

By Ann Saphir and Richard Leong 
February 1, 2017

Federal Reserve policymakers are putting markets on notice that the central bank's $4.5 trillion balance sheet is back on the agenda in an apparent effort to give investors time to prepare for changes rather than to signal any action is imminent.

Policymakers want to minimize any volatility that slimming the Fed's massive balance sheet might cause, and have said they will only do so after interest rate increases are "well underway."

The central bank is expected to keep that line in its statement on Wednesday following this year's initial policy meeting and the first one under Donald Trump's administration.

The Fed amassed the bonds during and after the financial crisis to inject cash into the economy and put downward pressure on long-term rates, and has been keeping its portfolio steady since December 2013.

While the Fed has only raised rates twice since the crisis, a number of Fed policymakers are already voicing support for allowing the debt holdings to shrink by letting bonds mature without reinvesting the proceeds.

Some have argued the process, or at least the debate over how to proceed, should begin later this year. Only a few months ago, several voices from within the Fed suggested the balance sheet could remain big for many years to come.

But with labor markets continuing to tighten and Trump promising tax cuts and more spending, inflation and rates may rise faster than last year. Trimming the balance sheet would be the Fed's next step in normalizing monetary policy.

Most Wall Street investors do not expect it until mid-2018, policymakers are playing it safe, keen to avoid a repeat of the 2013 "taper tantrum", when bond yields surged after then-Fed Chair Ben Bernanke hinted at cutting the pace of bond buying.

"They don't want to shock the market," said Robert Tipp, chief investment strategist at Prudential Fixed Income. "They want to prepare the market," he said, commenting on a slew of comments from Dallas Fed's Robert Kaplan, San Francisco Fed's John Williams and Philadelphia Fed's Patrick Harker.

Weaker Anchor

The Fed is also putting investors on notice in case the slimming "could come up faster if the rate hikes were faster," said Tim Duy, a professor at the University of Oregon.

While giving markets plenty of time, the Fed is also laying out evidence why they do not need to be unduly concerned.

As Fed Chair Janet Yellen pointed out in a speech in January, one reason is that the average maturity of the securities in the Fed's portfolio has declined, while that of the overall Treasury market has increased. (

Essentially, that means the Fed's portfolio has become less influential as an anchor for long-term rates than in the past.

In addition, the overall bond market has grown, reducing the relative size and impact of the Fed's holdings.

Bernanke, for one, argues the economy is "growing into" the Fed's expanded portfolio and there is no need to bring it back to pre-crisis levels of around $800 billion. In fact, several Wall Street banks suggest the Fed only needs to cut its bond holdings by $1 billion to $1.5 billion.

One tricky question the Fed will face is what to cut first.

The Fed's $1.76 trillion mortgage-backed securities holdings account for about a quarter of that market, compared to the Fed's 12 percent share of the Treasury market. Any marked change in the Fed's MBS ownership could have a greater impact on that market and consequently housing borrowing costs.

On top of that, in contrast to the Fed's $2.46 trillion of Treasuries which mature according to a set calendar, the pace at which mortgage bonds mature can vary substantially.

It slows down when rates rise and homeowners stick with current loans and accelerates when rates fall and borrowers rush to refinance debt, which increases the technical challenge for the Fed in engineering a wind-down.

Some analyst argue that shrinking the Treasury portfolio would be the least disruptive, given its diminished share of the overall market.

Others, like Morgan Stanley, say the Fed should trim MBS because it wants to return to a Treasuries-only portfolio anyway and its size would cease to be an issue over time.

"The economy should grow into the Fed's Treasury portfolio within about a decade," the bank's analysts wrote in a note on Friday.

Article Link To Reuters: