Monday, February 6, 2017

Monday, February 6, Morning Global Market Roundup: Clarity On Fed Policy Sought - Stocks, Dollar Up In Meantime

By Nigel Stephenson 
February 6, 2017

Investors sought clarity on Monday in the face of a host of economic and political uncertainties but gave the benefit of the doubt to shares and the dollar, lifting both.

A heavy week of corporate earnings was a major driver on stocks markets.

In the currency market, the question was how Friday's U.S. labor market data will affect the pace of Federal Reserve interest rate rises. Far more jobs were added last month than expected, though hourly wages barely budged.

Oil prices rose on news that new U.S. sanctions on Iran could be extended to affect crude supplies.

French government bonds, meanwhile, underperformed German benchmarks with a gap not seen in four years after French far-right party leader Marine Le Pen launched her bid for the presidency with a vow to fight deregulated globalization.

But there was no overarching theme to Monday's market moves, highlighting how correlations between financial market assets have broken down in recent months as investors sense the era of ultra-loose monetary policy may be winding up.

The pan-European STOXX 600 index rose 0.2 percent, led higher by basics resources shares .SXPP and after some positive company results.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.6 percent, with Taiwan .TWII leading the pack by adding 0.9 percent.

Japan's Nikkei .N225 rose 0.2 percent, with banks rising after U.S. President Donald Trump signed an executive order to scale back regulations in the financial industry that were implemented after the financial crisis.

Trump meets Japanese Prime Minister Shinzo Abe on Feb. 10 and 11, with trade and currencies likely to be on the agenda.

China's CSI 300 stocks index .CSI300 rose 0.3 percent, though investors were caution after the central bank unexpectedly raised short-term interest rates on Friday.

In debt markets, French 10-year government bond yields FR10YT=TWEB rose 1.6 basis points to 1.1 percent. German equivalents, the euro zone benchmark, dipped 2 bps to a two-week low of about 0.4 percent, pushing the gap between the two to its widest in four years.

"The likelihood of Le Pen winning is unlikely, but the situation in France is certainly raising fears among investors," said DZ Bank rates strategist Christian Lenk. "French bonds will continue to underperform even though a lot is priced into the market."

Dollar Inches Up

The dollar inched up 0.1 percent against a basket of major currencies .DXY. Data on Friday showed average hourly earnings rose just 0.1 percent, suggesting any pick-up in inflation would be slight.

This led some analysts to conclude the Fed would be in no hurry to raise interest rates.

Currency investors are also awaiting details on expected pro-dollar tax and spending initiatives pledged by Trump..

However, San Francisco Fed President John Williams said later in the day that the central bank can prepare to raise rates this year without knowing the details of any new U.S. fiscal policies.

On Monday, the euro weakened 0.3 percent to $1.0747 EUR= while the yen gained 0.1 percent to 112.60 per dollar JPY= and sterling dipped 0.2 percent to $1.2450 GBP=D4.

Oil prices rose, partly due to the dollar's relative weakness, but also on concern about any extension of new U.S. sanctions imposed on major oil producer Iran over that country's missile program.

"The move by the U.S. to impose new restrictions on Iran ... does raise the risk of further tensions disrupting (oil) supply," ANZ bank said.

Brent crude, the international benchmark, rose 9 cents a barrel to $56.92.

Gold XAU= rose 0.2 percent to $1,222 an ounce.

Article Link To Reuters:

Nice Start To The Year. Pity About The Rest Of It

By Jeremy Gaunt 
February 6, 2017

The world economy has begun the year in fine form. America is cruising along, China is growing faster than expected, Britain is muffling the Brexit downdraft. Even the usually lagging euro zone is perky.

Pity about what lies ahead.

Almost every major economy's data releases these days seem to follow a similar pattern.

First, they are generally positive - either better than previously or only a little weaker. Then, policymakers and economists come out and say there are too many uncertainties ahead to know whether it will continue or crumble.

"Geopolitical risks are mounting and increasingly catching market attention in such fashion as to risk overshadowing most other developments," Canada's Scotiabank told its clients.

The risks are primarily political. How will U.S. President Donald Trump's "America First" protectionist talk translate into policy? Will Brexit finally come back to bite Britain by cutting off commercial growth and breeding inflation?

For the euro zone, meanwhile, the risks are existential. Elections in France, Italy, Germany and the Netherlands could result in anti-euro political parties gaining significant ground or even taking office. And Greece's hold on its place in the currency union remains flimsy.

In the past week the extra money investors demand to buy French bonds rather than German ones jumped - much of it because of a comment to Reuters by an official of the far-right National Front that it would put leaving the euro at the heart of its economic platform.

Polls suggest National Front candidate Marine Le Pen will not win the presidency - but after the Trump and Brexit surprises last year nothing can be ruled out.

Other risks are more Keynesian, revolving around whether years of stimulus from central banks in the form of asset-buying and negligible interest rates are finally producing inflation, which in turn will stop consumers from buying, slowing economic growth.

Economics can be very much a game of whack-a-mole.

Up Next

The coming week may well be dominated by China, which returns from a holiday with a large slate of data, including the services purchasing managers index - which implied steady if slightly slower growth - foreign reserves data and possibly trade figures.

China grew a faster-than-expected 6.8 percent in the fourth quarter, boosted by higher government spending and record bank lending.

But the economy still faces headwinds from a cooling housing market and possible protectionist measures from the United States.

The foreign exchange reserves, meanwhile, are on the verge of falling below $3 trillion, although the pace of declines could be slowed by capital controls and the dollar's retreat.

China is being cautious. It raised a number of policy rates on Friday against what Deutsche Bank described as a dilemma.

"Policy needs to be tightened for financial stability considerations, but (the central bank) wants to control the pace and magnitude so that ... the tightening does not trigger disruptive adjustments (bubble burst), and ... does not jeopardize the stabilizing growth outlook," it said.

In the euro zone, there will be German, French, Spanish and Italian industrial production data. All are expected to show growth.

Germany's volatile factory orders may be under particular scrutiny. They fell 2.5 percent month-on-month in November, a plunge from a 5 percent rise the month before.

Economists polled by Reuters expect a bounce back.

Meanwhile, a wish-you-were-a-fly-on-the wall moment occurs on Thursday when European Central Bank President Mario Draghi goes to Berlin for talks on the euro zone economy with German Chancellor Angela Merkel.

For the United States, the weekly outlook is thin, with monthly trade figures a highlight with a little changed $45 billion deficit expected.

Any significant policy moves, however, are likely to be found on Twitter feed @realDonaldTrump.

Article Link To Reuters:

Gold Favored On Risk Of Trump ‘Mistakes’

Metal seen advancing to $1,300/ounce by the end of the year; Roche is more likely to increase than decrease gold holdings.

By Ranjeetha Pakiam
February 6, 2017

Gold will climb about 6 percent through the end of the year as investors seek a shelter from the rising political risk surrounding President Donald Trump, according to Independent Strategy Ltd.’s David Roche, who has about 45 years of experience covering markets.

Bullion is set to rise to $1,300 an ounce, while most assets, such as bonds, will post negative returns, the president and global strategist at the London-based economic and financial consulting firm, said in an interview on Feb. 3.

“The amount of political risk being created by this new U.S. president and administration is going to create an enormous amount of international tension and uncertainty, and will probably result in a trade war at least with China and possibly other areas,” Roche said by phone from Hong Kong. “I want to see what this administration, what sort of mistakes they’re going to make.”

Trump’s first two weeks in office have fired up investor concerns with his withdrawal from the Trans-Pacific Partnership, commitment to build a wall on the Mexican border, and a storm over immigration curbs on seven Muslim-majority countries. While the Federal Reserve may raise interest rates three times this year, increasing risk will lure investors to gold, Roche said.

Prices have already risen to the highest in more than two months and posted an advance of 6.7 percent this year, reversing a 13 percent slump in the fourth quarter. Bullion was at $1,224.09 on Monday by 8:24 a.m. in London.

UBS View

“I probably would be more inclined to increase than decrease at the present time,” Roche said, referring to gold’s recommended weighting in a diversified portfolio. “I might do that if the gold prices are a bit weak, if it drops back below let’s say $1,160.” The prospect for accelerating inflation is another reason to own gold, even with the outlook for rising interest rates, he said.

Some banks are bearish. The metal will drop to $1,140 by December and to $1,060 by the end of next year as the Federal Reserve tightens policy, according to National Australia Bank Ltd. BNP Paribas SA expects rising interest rates to strengthen the dollar and push gold down toward $1,000.

Roche said in April he’d increased gold holdings on the back of concern over central bank policy after being short a long time. He worked at Morgan Stanley before starting Independent Strategy in 1994. The firm offers institutional investors research on worldwide strategy and asset allocation.

UBS Wealth Management’s view on prices is similar to Roche. Bullion will rise to $1,300 as real rates turn increasingly negative and the dollar weakens, Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at the unit of UBS Group AG, said in a Bloomberg TV interview on Monday.

Article Link To Bloomberg:

Oil Prices Rise As Investors Pour Fresh Cash Into Crude Futures

By Henning Gloystein
February 6, 2017

Oil prices rose on Monday, with traders shifting money into crude futures as the dollar weakened, and as concerns rose that new U.S. sanctions against Iran could be extended to affect crude supplies.

However, markets were held back by more signs of growing U.S. production as well as worries that import demand in China could slow.

International Brent crude futures were trading at $56.96 per barrel, up 15 cents from their last close.

U.S. West Texas Intermediate (WTI) futures were up 18 cents at $54.01 a barrel.

Traders said the rising prices were a result of cash being poured into crude futures due to a weakening dollar and because of a generally firm outlook thanks to producer efforts to cut output.

Investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots, the U.S. Commodity Futures Trading Commission said on Friday.

"A weaker U.S.-dollar and OPEC news are supporting the base," said Jeffrey Halley of futures brokerage OANDA.

The dollar has lost almost 4 percent in value against a basket of other currencies since early January, making investments into other products like crude futures more attractive.

Traders said that tensions between Tehran and Washington were also supporting oil. A recent Iranian ballistic missile test prompted U.S. President Donald Trump to impose sanctions on individuals and entities linked to Iran's elite Revolutionary Guards military unit.

"The move by the U.S. to impose new restrictions on Iran ... does raise the risk of further tensions disrupting (oil) supply," ANZ bank said.

On the supply-side, the Organization of the Petroleum Exporting Countries (OPEC) and other producers like Russia are trying to reduce a global fuel supply overhang by cutting their output by an average of almost 1.8 million barrels per day (bpd) during the first half of 2017.

Despite this, crude was held back by rising U.S. drilling activity, where 17 oil rigs were added in the week to Feb. 3, bringing the total up to 583, the most since October 2015, according to Baker Hughes on Friday.

Further downward pressure could come from a slowdown in Chinese imports.

BMI Research said that around 6 percent of Chinese refining capacity would shut down at some point during the first half of the year, equivalent to around 900,000 bpd of capacity.

A 6.7-percent reduction to 68.81 million tonnes between 2016 and 2017 crude import quotas for China's independent refiners will also weigh on the overall import demand, said BMI.

Article Link To Reuters:

Iran Says U.S. Sanctions Stop American Oil Firms Taking Part In Projects

By Bozorgmehr Sharafedin
February 6, 2017

Iran has imposed no restrictions on U.S. oil firms willing to participate in energy projects in the country but American sanctions make such cooperation impossible, Iran's deputy oil minister said on Monday.

"Iran has not imposed any restrictions on the U.S. companies, but they cannot participate in our (oil and gas) tenders due to the U.S. laws," Amir Hossein Zamaninia, deputy oil minister for trade and international affairs, was quoted as saying by state news agency IRNA.

"Based on the U.S. Congress sanctions, the American oil companies cannot work in Iran," he added.

Iran said on Saturday that it will hold the country's first tender in mid-February since the lifting of international sanctions to develop oil and natural gas fields.

OPEC's No. 3 oil producer hopes to draw foreign companies to invest in Iran and boost output after years of under-investment. However, foreign firms have so far made little inroads into the country despite the lifting of sanctions.

President Donald Trump's new U.S. administration on Friday imposed fresh sanctions on Iran, which it said were just initial steps. It said Washington would no longer turn a "blind eye" to Iran's hostile actions.

Dismissing the new sanctions, Zamaninia said "such actions have had no effect, and international companies are still keen to do business with Iran."

Anglo-Dutch oil firm Royal Dutch Shell (RDSa.L) signed a provisional deal in December to develop Iranian oil and gas fields South Azadegan, Yadavaran and Kish.

Article Link To Reuters:

Investors Have Never Loved OPEC So Much As It Sticks To Cuts

Money managers increase WTI net-long positions for 4th week; OPEC cut production by 840,000 barrels a day last month.

By Jessica Summers
February 6, 2017

Investors are betting big that OPEC’s cuts are real.

Money managers are the most bullish ever on West Texas Intermediate crude for a second week as signs show OPEC and other nations are slashing production. The group cut supply by 840,000 barrels a day last month, according to a Bloomberg survey, and Russia, the largest of the non-members taking part in the deal, reduced output by 117,000 barrels a day. WTI has traded above $50 a barrel for the past seven weeks, encouraging Wall Street investors to fund more drilling in U.S. shale fields.

“The smart money is starting to realize that the OPEC production cuts are real,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said by telephone on Friday. “The oil story is beginning to look like the bust-end of the cycle is over.”

Crude has risen 19 percent since the Organization of Petroleum Exporting Countries agreed in late November to cut output in an effort to reduce a global glut. With global demand growth outstripping supply gains elsewhere in the world, OPEC’s cuts may reduce stockpiles by as much as 2 million barrels a day this year, Andrew Hall, founder of hedge fund Astenbeck Capital Management LLC, said in an investor letter.

Hedge funds increased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 2.4 percent to 379,927 in the week ended Jan. 31, the highest level in data going back to 2006, U.S. Commodity Futures Trading Commission data show. WTI slipped 0.7 percent to $52.81 a barrel during the report week. On Monday, prices were trading 0.3 percent higher at $54.01 a barrel as of 1:03 p.m. in Singapore.

January output reductions were led by Saudi Arabia, OPEC’s largest producer, which trimmed output by half a million barrels a day. Russia’s reduction was “more than twice as high as the initial plans of the companies,” Energy Minister Alexander Novak said.

A possible U.S. border tax in some form may also provide a boost to prices and drilling. The potential tax may lead to WTI rising 25 percent, said Ebele Kemery, portfolio manager and head of energy investing at JPMorgan Asset Management.

U.S. Inventories

Still, OPEC’s total output remains 550,000 barrels a day above the target set out in their deal. U.S. crude inventories keep growing, as Energy Information Administration data showed stockpiles rose to the highest level since August. Hall said that the OPEC cuts won’t be reflected in U.S. inventories until this month, because of a surge of Middle East supply before the deal, and the time it takes for tankers to reach the U.S.

The rally has encouraged U.S. shale producers to grow faster, which may help keep prices capped around $55 a barrel as companies hedge their output. Producers and merchants increased their short positions, or bets on falling prices, to 703,259 contracts, CFTC data show. Diamondback Energy Inc. plans to double its capital spending this year and Continental Resources Inc. will spend 77 percent more.

Wall Street is eager to join in. Energy companies in the U.S. raised $6.64 billion from equity sales in January, the biggest haul for the beginning of a year since at least 2000, data compiled by Bloomberg show. Drillers have increased the number of rigs seeking oil by 84 percent since May, according to Baker Hughes Inc.

The market is “closely monitoring the compliance of the countries involved with the OPEC, non-OPEC production deal,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone on Friday. “Early signs have been somewhat decent, so the market continues to reward their efforts. The positioning is a bit extreme. It could be a cautionary tale that the run may be nearing its end at the same time.”

Article Link To Bloomberg:

Brexit Already Having Negative Impact On UK Business

By Kate Holton
February 6, 2017

More than half of British business leaders believe the vote to leave the European Union has had a negative impact on their companies but most firms are confident they can survive the change, according to a survey on Monday.

Britain's economy has performed more strongly than expected since the Brexit vote last June, but an Ipsos Mori survey of more than 100 of the country's top 500 firms found that 58 percent felt the vote to leave had taken a toll.

According to the survey, more than two thirds of those questioned said they had already taken action to respond to the vote, including putting contingency plans in place and analyzing the impact the different relationships Britain could have with the EU following its renegotiation.

Of those taking action, 10 percent said they were moving business outside of Britain.

"Our annual survey of FTSE 500 business leaders provides a unique insight into what the business world is thinking ahead of Brexit," Ipsos Mori Chief Executive Ben Page said.

"Unfortunately, it looks like business in this country is already feeling the pain of the economic upheaval of leaving the EU."

Britain's business leaders were some of the most vocal supporters of EU membership in the run up to the vote, arguing that access to a single market of 500 million people would enable them to grow their companies, and the economy, in the future.

However the survey found a more positive response when asking about the longer term impact on business, with nearly all confident they could adapt to Brexit.

"Thirty two percent of respondents said they think their business will start to feel the positive effects of leaving the EU in five years' time," Page said. "And the number of (business) captains that think it will remain a negative impact reduces to 45 percent when looking at long range forecast."

Article Link To Reuters:

U.S. Tech Firms File Legal Brief Opposing Trump's Immigration Ban

By Chris Michaud
February 6, 2017

Several technology giants, including Apple, Google and Microsoft, banded together on Sunday to file a legal brief opposing President Donald Trump's temporary immigration ban, arguing that it "inflicts significant harm on American business."

The brief, filed in the U.S. Court of Appeals for the 9th Circuit, included other top tech firms including Facebook, Twitter and Intel, as well as non-tech companies such as Levi Strauss and Chobani. In all nearly 100 firms, including eBay, Netflix and Uber signed onto the brief.

Trump's temporary immigration ban, the most contentious policy move of his first two weeks in offices, faces crucial legal hurdles.

His administration has a deadline on Monday to justify the executive order temporarily barring immigrants from seven mostly Muslim countries and the entry of refugees, after a federal judge in Seattle blocked it with a temporary restraining order on Friday.

"The Order represents a significant departure from the principles of fairness and predictability that have governed the immigration system of the United States for more than fifty years," the brief stated.

"The Order inflicts significant harm on American business, innovation, and growth as a result," it added.

"Immigrants or their children founded more than 200 of the companies on the Fortune 500 list."

U.S. tech firms have been among the more vocal sectors speaking out against the policy, with many of its staff made up of foreign-born nationals.

The 9th U.S. Circuit Court of Appeals in San Francisco over the weekend denied the Trump administration's request for an immediate stay of the federal judge's temporary restraining order that blocked nationwide the implementation of key parts of the travel ban.

But the court said it would reconsider the government's request after receiving more information.

Article Link To Reuters:

U.S. Republicans Ax Disclosure, Emissions Rules On Energy

By Lisa Lambert and Timothy Gardner
February 6, 2017

U.S. Republicans on Friday repealed a securities disclosure rule aimed at curbing corruption at energy and mining companies and voted to ax emissions limits on drilling operations, part of a push to remove Obama-era regulations on extractive industries.

In a 52-47 vote, the Republican-controlled Senate approved a resolution to eradicate a rule requiring companies such as Exxon Mobil and Chevron Corp to publicly state taxes and other fees paid to foreign governments like Russia.

The House of Representatives already passed the measure. President Donald Trump is expected to sign it within days. On Thursday, the Senate repealed a rule that would have limited coal companies from dumping waste into streams.

After a number of legal battles, the U.S. Securities and Exchange Commission in June 2016 completed the regulation, which supporters said could help expose questionable financial ties U.S. companies may have with foreign governments.

Senate Democrats raised concerns that Exxon's chief executive during those legal fights was Rex Tillerson, who was recently confirmed as U.S. secretary of state and has worked extensively in Russia.

"It should be lost on no one that in less than 48 hours, the Republican-controlled Senate has confirmed the former head of ExxonMobil to serve as our secretary of state, and repealed a key anti-corruption rule that Exxon Mobil and the American Petroleum Institute have erroneously fought for years," Senator Ben Cardin of Maryland said, referring to the oil industry's trade group.

Exxon and other major energy corporations fought for years to block the rule, required by the 2010 Dodd-Frank Wall Street reform law.

Cardin, the senior Democrat on the foreign relations committee, wrote the Dodd-Frank section on the payments to foreign governments with Richard Lugar, a former Republican senator.

Critics of the rule said it duplicated existing regulations, was too costly and burdensome for companies to implement and that it put U.S. companies at a competitive disadvantage with state-owned companies in other countries that do not have to divulge such information.

The change could give American companies an edge over Canadian and European companies that face some of the toughest transparency rules in the world.

Rarely Used Law Prevents Opposition

Republicans have taken advantage of a seldom-used law known as the Congressional Review Act to overturn recently enacted rules with simple majorities in both chambers, denying senators the opportunity to filibuster and stall a vote.

Democrats said Republicans were using the review act to help companies not the public.

"When it comes to giving public resources to private interests and gutting our nation's health, environmental and financial standards, the Republicans can’t seem to act fast enough," said Representative Raul Grijalva. "Whoever they’re doing this for, it isn't the American public."

The Congressional Review Act also bars agencies from revisiting overturned rules, which could pose a legal conundrum for the SEC, which is required by law to enact a payments regulation.

The Senate will next consider repealing a rule limiting venting and leaking of the powerful greenhouse gas methane by oil and gas drillers on federal and tribal lands, mostly in the U.S. West. The repeal was passed by the Republican-controlled House on Friday.

The Interior Department finalized the methane rule in November. The oil industry has argued that it would add to costs for new and existing wells. Environmentalists have said the rule would protect human health and return more than $800 million in royalties to taxpayers over 10 years.

Article Link To Reuters:

Goldman Sachs Economists Are Starting To Worry About President Trump

Get ready for a wild ride.

By Julie Verhage
February 6, 2017

A rethink, if not an outright reversal?

Just a few weeks ago, Wall Street analysts were busy boosting their economic forecasts on the expectation that President Trump would implement sweeping corporate-tax reform, a rollback of regulations, and new fiscal stimulus. Two weeks into his term and the president has been focused primarily on immigration and trade, causing a reevaluation among analysts at some banks that harks back to pre-election concerns about Trump's uncertain effect on markets and U.S. economic growth.

"Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration," Goldman Sachs Group Inc. economists led by Alec Phillips wrote in note published late last week. "One month into the year, the balance of risks is somewhat less positive in our view."

Goldman's Phillips cites three key reasons for the more cautious tone. 

1. Obamacare struggle is a sign of things to come

Republicans' uphill efforts when it comes to replacing the Affordable Care Act may prove to be the norm rather than an exception. For investors expecting that the Republican-controlled Congress would be able to push through a sweeping agenda including tax reform and fiscal stimulus, this may prove disappointing.

"The recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story," said Phillips. 

2. Polarization of political parties is getting worse

Trump's executive order barring nationals from seven predominately Muslim countries sparked a backlash in Washington and has done little to heal the rift between Republicans and Democrats, making the prospect of cross-party cooperation even more remote.

"While bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that many issues that require bipartisan support are likely to face substantial obstacles," Phillips said. "While we have not expected a sweeping overhaul of regulation in any of these areas to become law, recent developments lower the probability somewhat that even incremental changes could pass in the Senate."

3. There's a real possibility of market disruption

Trump's focus on immigration and trade may prove more than disappointing for Wall Street and Corporate America; it could prove downright disruptive.

"Some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises on trade and immigration, some of which could be disruptive for financial markets and the real economy," Phillips concluded.

Article Link To Bloomberg: