Wednesday, February 8, 2017

Wednesday, February 8, Morning Global Market Roundup: Political Jitters Keep Euro, French Debt Under Pressure

By Nigel Stephenson
February 8, 2017

Political uncertainty ahead of European elections prompted nervous investors to sell the euro and kept lower-rated euro zone debt under pressure on Wednesday while the price of safe-haven gold hit three-month highs.

Stocks rose in Europe, led by miners after Rio Tinto unveiled forecast-beating profits and a bigger-than-expected dividend.

Three months before the final round of France's presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership. Several other front runners are in disarray.

French 10-year government bond yields FR10YT=TWEB, which move inversely to price, dipped 1 basis point to 1.1 percent but held close to 17-month highs touched on Monday. Low-risk German equivalents DE10YT=TWEB fell 2.3 bps to 0.34 percent.

This pushed the gap between the two yields to more than 78 bps, its widest since November 2012.

"With 2 1/2 months to go until the first round of voting, which means there is plenty of time for things to change, it is hard to see spread volatility subsiding for the time being,” UniCredit fixed income analysts wrote in a note.

The premium investors demand to hold low-rated Italian 10-year bonds rather than German Bunds hit its highest since 2014.

Apart from German debt, investors also bought gold, which is seen as a safe investment in uncertain times. Spot gold XAU= hit a three-month high of $1,237.90 an ounce

The euro currency weakened a further 0.2 percent to $1.0653 EUR= after a sharp fall on Tuesday.

Options markets show the biggest bias for euro weakness against the dollar since late June EUR3MRR=FN.

The dollar, whose predicted path higher has been interrupted lately by uncertainty over U.S. President Donald Trump's economic policies, rose 0.2 percent against a basket of other major currencies .DXY.

Investors are still waiting to see whether Trump makes good on his campaign pledges to cut taxes and boost spending.

Against the yen JPY=, the dollar fell 0.2 percent to 112.12 yen. Sterling was flat at around $1.25 GBP=D4 but up 0.2 percent versus the euro at 85.2 pence per euro EURGBP=.

"The French political noise has brought the euro down and that has given the dollar a reprieve," said Gavin Friend, a strategist with National Australia Bank in London.

"Markets know that if Trump was to come out and start talking about tax reform and infrastructure spending, the dollar would go up. The dollar rose a long way at the end of last year, it has come back, now we are sitting around waiting for the next steer."

In stock markets, the pan-European STOXX 600 index rose 0.3 percent while Britain's FTSE 100 .FTSE fell 0.2 percent.

The STOXX basic resources sector .SXPP rose nearly 2 percent. Rio Tinto (RIO.L)(RIO.AX) gained 2.1 percent while fellow miner Anglo American AAl.L added 2.3 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.2 percent in late trade, after spending most of the session in negative territory.

Japan's Nikkei .N225 rose 0.5 percent.

U.S. stock futures pointed to a flat start on Wall Street ESc1 1YMc1.

Oil prices fell after American Petroleum Institute data on Tuesday showed a larger-than-expected rise in U.S. crude inventories and after signs of slowing demand growth in China.

"The API delivered a Goliath crude inventory number ... The second highest on record. The reaction was predictable as the herd, already nervous from the previous day's price action, turned en masse and ran off the cliff," said Jeffrey Halley of futures brokerage OANDA in Singapore.

Copper prices rose 1.7 percent to just shy of $5,900 a tonne after the world's biggest mines said they planned to cut output due to strikes and other issues.

BHP Billiton said it would halt output at Chile's Escondida mines, the world's biggest, and Freeport-McMoRan warned it would scale back activities at its Indonesian mine.

Article Link To Reuters:

Trump Banking Review Raises Fears For Global Standards Talks

By Huw Jones 
February 8, 2017

President Donald Trump's review of post-crisis banking rules could sound the death knell for new global standards now being finalized and rip apart a common approach to regulating international lenders, bankers and regulators said.

Central banks and watchdogs around the world have spent the past eight years drawing up regulation aimed at preventing a repeat of the 2007-2009 financial crisis, but there are fears that project could unravel after Trump said he wants the U.S. to row back on capital rules.

Trump's order for a regulatory review to overcome what he sees as obstacles to lending came as banking watchdogs were trying to complete the final piece of global capital requirements, known as Basel III.

Given that the United States wants to shrink the banking rule book, there are doubts over whether the Basel rules can make it over the finishing line next month if they don't have backing from the United States.

Without support from the world's biggest capital market, other countries would be less willing to commit too.

The core aim of the outstanding part of Basel III that regulators are working on - dubbed Basel IV by critical banks who worry about more stringent capital requirements - is to impose more consistency into how banks calculate the amount of capital they hold against risky assets like loans.

JPMorgan chief executive Jamie Dimon said in the aftermath of the financial crisis that European rivals had been "a lot more aggressive" than American banks in calculating capital, meaning they were holding less.

European policymakers have rejected that criticism, but their region's banks have been lobbying against the remaining Basel rules, saying they would force them to increase significantly the amount of capital they need to hold.

If the United States fails to approve the completion of Basel III, the perceived problem that European banks get away with holding less capital than U.S. lenders may not be properly tackled, a source involved in the negotiations said.

"It's in the interests of American banks to get this done," the source said.

Others are less optimistic that a deal can now be done after Trump's intervention.

"It's going to delay completing Basel III, and perhaps lead to it not being concluded," an adviser to banks said on condition of anonymity.

"I do fear that Basel IV is doomed," a banking industry official added. There are headwinds from elsewhere, too.

Patrick McHenry, Republican vice chairman of the House financial services committee, fired a warning shot at Federal Reserve Governor Janet Yellen about the Basel talks in a letter dated Jan. 31, ahead of Trump's executive order.

The Fed must "cease" all attempts to negotiate binding standards "burdening American business" until the Trump Administration has had the opportunity to nominate officials that prioritize "America's best interests", McHenry said.

While lawmakers often call on regulators to ease pressure on firms, regulators said Trump's intervention in banking rules gives more clout to McHenry's warning.

The Basel Committee declined to comment.

Global Cooperation

Trump's decision to review existing, post-crisis banking rules has rung alarm bells among regulators outside the country.

Mario Draghi, president of the European Central Bank, which regulates the euro zone's main lenders, said on Monday that easing banking rules could threaten financial stability.

Draghi was chairman of the Group of 20 Economies' (G20) regulatory task force, the Financial Stability Board, which during the financial crisis was instrumental in building up a global approach to reinforcing banking standards.

A former regulator said the United States would be scoring an own goal by withdrawing from multilateral bodies like Basel as it would no longer be shaping rules that impinge on U.S. banking competitiveness globally. "It's early days, but what we have seen in language and rhetoric from Washington is worrying," said David Wright, a former top EU official who was part of crisis-era efforts to create the global regulatory consensus. "If you break international consensus, you are effectively opening up a regulatory race and heaven knows where it will end," said Wright, now at Flint Global, which advises companies on regulatory matters.

Wright was referring to what was seen in the run-up to the financial crisis, when countries like Britain resorted to a "light touch" approach to banks to make London a more attractive financial center.

Valdis Dombrovskis, the EU's financial services chief, said last week that international regulatory cooperation had been vital in tackling the financial crisis and must continue.

Much will hinge on how much regulatory change Trump can actually push through.

Former Democratic Congressman Barney Frank, who jointly sponsored the Dodd Frank Act that Trump wants to review, told the BBC last week he does not expect Congress to approve the wholesale rolling back of rules, but the Trump administration could pressure U.S. regulators to ease up on applying existing requirements. Anil Kashyap, a Bank of England policymaker, said last month that Trump's nomination for the powerful role of Fed Vice Chair in charge of banking supervision would shape the U.S. approach to international rule-making.

It will have a "huge impact", a regulatory source added. The fear among global regulators is that multilateral bodies like the Basel Committee and the Financial Stability Board could be abandoned by the United States under Trump.

Jose Ignacio Goirigolzarri, chairman of Spain's Bankia, told Spanish television on Tuesday he would be concerned if Trump was questioning the usefulness of international banking rules.

"It would worry me very much because I think it's very important, very relevant that there have been advances in the homogenization of regulation amongst developed countries," he said.

Article Link To Reuters:

GOP Boxed In Replacing Unpopular Obamacare Coverage Mandate

The internal discussions could yet descend into the kind of drawn-out fight that eroded support for Obamacare.

By Paul Demko
February 8, 2017

The most hated piece of Obamacare is the mandate requiring most Americans to get health insurance.

The Republican alternatives on the table may not prove any more popular.

As the GOP weighs elements of a repeal-replace plan, one of lawmakers' biggest headaches is finding another way to persuade insurers to cover people with pre-existing health care problems. And all of the options under discussion would either raise the uninsured population or run afoul of GOP principles.

Barring insurers from discriminating against people with medical problems as long as they remain enrolled is harder than it looks and likely to leave a large pool of people uncovered — an increasingly unpalatable prospect after top Republicans from President Donald Trump on down have vowed not to push people off their coverage. Levying penalties on those who enroll late looks suspiciously like Obamacare’s existing tax penalty. And automatically enrolling people, which is part of one GOP replacement plan, strikes some conservatives as an unacceptable big government intrusion on individual freedom.

The discussions could yet descend into the kind of drawn-out fight that eroded support for Obamacare if options that at first seem appealing wind up prompting long-term political backlash. That could ultimately doom a GOP replacement plan and deny Republicans' long-sought goal of moving the nation toward a more market-based, less regulated heath system. Republicans have already given up on a quick dismantlement of Obamacare and are preparing for a potentially long slog toward repeal and replace.

The way internal strife could upend the party's ideological goals is an all-too-familiar dilemma to Democrats with battle scars from the epic fight to pass the 2010 health care law.

The Democrats publicly groused about the individual mandate and fretted about public discontent. But they concluded it was a necessary cudgel to convince Americans — particularly younger and healthier individuals — to purchase coverage. Having a representative cross section of the population is essential in any system where insurers are barred from discriminating against people with expensive medical conditions.

That truth makes the individual mandate the symbolic heart of Obamacare. Opponents of the law waged an unsuccessful legal battle all the way to the Supreme Court seeking to strike it down.

But if Republicans kill it, most health care economists believe they’ll be hard-pressed to come up with an effective and politically tolerable replacement.

Paul Van de Water, a senior fellow at the left-leaning Center on Budget and Policy Priorities, said the choice is simple. “Carrots are expensive,” Van de Water said. “Sticks are unpopular.”

Here are the pros and cons behind some of the most talked-about GOP proposals:

Continuous coverage
: The most common idea floated by Republicans, including Speaker Paul Ryan, is to require that Americans be continuously enrolled in coverage. It’s part of the “Better Way” plan floated by House Republicans, as well as a replacement package put forth by Rep. Tom Price, President Donald Trump’s pick for secretary of HHS. While details vary, the basic idea is anyone who stays continuously enrolled won’t pay more or get dropped because of his or her health status.

However, even that limited enforcement is too invasive for some conservatives.

“It’s a mandate by another name,” said Dean Clancy, a former GOP health policy staffer in the House and the George W. Bush administration and an ex-vice president of the conservative advocacy group FreedomWorks. “It’s better than the individual mandate, but it still drives up premiums.”

Insurance experts also point out that there’s an inherent shortcoming with the concept: people who drop coverage because they lose their job and can’t afford to make premium payments, for example, would not be protected from discrimination in the market. Indeed, anyone with significant medical problems whose coverage lapses would potentially face sky-high premiums and coverage limitations. Anecdotes of poor, sick people who can no longer access coverage would surely dog Republicans on the campaign trail after their promises they would preserve some popular Obamacare protections.

“It’s more punitive than the individual mandate, certainly more punitive on lower-income families,” said Sabrina Corlette, an insurance expert at Georgetown University and former congressional Democratic staffer.

Premium surcharge:
Another option to keep people enrolled is levying a surcharge on those who fail to sign up during the initial open enrollment window. It’s an idea already used in Medicare, where beneficiaries face higher premiums for the rest of their lives if they don’t enroll in a timely manner. And it was discussed, though discarded, back when Democrats were debating health care in the early months of the Obama presidency.

Though many details would have to be fleshed out, America’s Health Insurance Plans has endorsed a version of this idea. It’s also part of a recent plan backed by researchers at the Urban Institute for fixing problems with the Affordable Care Act.

John Holahan, one of the researchers who wrote the report, said the Medicare surcharge model would likely need to be tweaked in order to work in the individual market. It might not be fair, for example, for individuals to face higher premiums throughout their working lives because they didn’t initially get coverage in the prescribed window.

But Van de Water questions whether premium surcharges would prove a strong enough enticement to get coverage in the individual market. He points out that subsidies are much more generous for Medicare, and that seniors are highly motivated to have health care coverage.

“There is a stick, but there is a huge carrot.” Van de Water said.

Automatic enrollment:
The health care plan floated by Sens. Bill Cassidy (R-La.) and Susan Collins (R-Maine) last month contains another possible approach for expanding the number of covered individuals: automatically enroll them in plans.

Under this scenario, individuals who are eligible for subsidized coverage but fail to sign up would be enrolled in a plan selected by the government. The twist is the default plan would be a bare-bones policy that would be paid for entirely through the available federal subsidy. Selecting which plan would get all of these individuals could also be a political tempest.

In introducing the plan earlier this month, Cassidy compared the concept to seniors becoming eligible for Medicare. “There’s no mandate,” he said. “I’m on Medicare. I may call up and say I don’t wish to be, but as a rule folks remain on Medicare.”

But automatic enrollment doesn't sit well with conservatives. Jeffrey Anderson, a senior fellow at the Hudson Institute, a right-of-center think tank, pilloried the idea in a recent piece for The Weekly Standard.

“In having the government sign people up for insurance, ‘auto-enrollment’ goes beyond even Obamacare's individual mandate — and hence is arguably even more of an affront to self-reliance, liberty and limited government,” Anderson wrote.

Corlette raises a more practical concern: implementing it in the turbulent individual market could prove an administrative nightmare. “You have people in and out of the system constantly,” she said.

Bigger subsidies:
The easiest way to eliminate the need for the individual mandate is also the least likely to happen under a Republican Congress: increase subsidies to the point that coverage would prove too attractive for individuals to pass up. That’s essentially how Medicare functions.

No Republican is proposing this approach. Conservatives believe it would prove unsustainable in the long run.

“The downside is running out of money,” said Miller of the American Enterprise Institute. “Every time you spend money, which people forget about, it comes from somewhere.”

Article Link To Politico:

Erdogan, Trump Agree To Act Jointly Against ISIS In Syria

By Tulay Karadeniz and Humeyra Pamuk
February 8, 2017

Turkish President Tayyip Erdogan and U.S. President Donald Trump agreed in a phone call overnight to act jointly against Islamic State in the Syrian towns of al-Bab and Raqqa, both controlled by the militants, Turkish presidency sources said on Wednesday.

The two leaders discussed issues including a safe zone in Syria, the refugee crisis and the fight against terror, the sources said. They also said Erdogan had urged the United States not to support the Syrian Kurdish YPG militia.

Trump spoke about the two countries' "shared commitment to combating terrorism in all its forms" and welcomed Turkey's contributions to the fight against Islamic State, the White House said in a statement, but it gave no further details.

The Syrian Democratic Forces (SDF), an alliance of U.S.-backed militias, started a new phase of its campaign against Islamic State in Raqqa on Saturday.

Turkey, a NATO ally and part of the U.S.-led coalition against Islamic State, has repeatedly said it wants to be part of the operation to liberate Raqqa but does not want the YPG, which is part of the SDF alliance, to be involved.

Erdogan's relations with former U.S. President Barack Obama were strained by U.S. support for the YPG militia, which Ankara regards as a terrorist organization and an extension of Kurdish militants waging an insurgency inside Turkey.

The Turkish army and Syrian rebel groups it supports are meanwhile fighting Islamic State in a separate campaign around al-Bab, northeast of the city of Aleppo. Ankara has complained in the past about a lack of U.S. support for that campaign.

The offices of both leaders said Trump had reiterated U.S. support for Turkey "as a strategic partner and NATO ally" during the phone call on Tuesday.

The Turkish sources said new CIA Director Mike Pompeo would visit Turkey on Thursday to discuss the YPG, and battling the network of U.S.-based Turkish cleric Fethullah Gulen, whom Turkey accuses of orchestrating a July coup attempt.

Turkey has been frustrated by what it sees as Washington's reluctance to hand over Gulen, who has lived in self-imposed exile in Pennsylvania since 1999.

There was no immediate confirmation from Washington of Pompeo's visit.

Article Link To Reuters:

Oil Prices Fall On Bloated U.S. Fuel Inventories, Stalling China Demand

By Henning Gloystein
February 8, 2017

Oil prices dropped on Wednesday to extend falls from the previous day, as a massive increase in U.S. fuel inventories and a slump in Chinese demand implied that global crude markets remain oversupplied despite OPEC-led efforts to cut output.

International Brent crude futures LCOc1 were trading at 54.70 per barrel, down 35 cents, or 0.64 percent, from their previous close.

U.S. West Texas Intermediate (WTI) crude CLc1 was at $51.68 a barrel, down 49 cents, or 0.94 percent.

These slumps came after over 1-percent falls the previous day.

The declines came on the back of unexpectedly big increases in U.S. fuel inventories, as reported by the American Petroleum Institute (API) on Tuesday. [API/S]

"The API delivered a Goliath crude inventory number... The second highest on record. The reaction was predictable as the herd, already nervous from the previous day's price action, turned en masse and ran off the cliff," said Jeffrey Halley of futures brokerage OANDA in Singapore.

Crude inventories rose by 14.2 million barrels in the week to February 3 to 503.6 million barrels, compared with analysts' expectations for a 2.5 million barrels increase.

Gasoline stocks rose by 2.9 million barrels, compared with expectations for a 1.1-million barrel gain.

Goldman Sachs said that the data pointed to "U.S. gasoline demand falling sharply by 460,000 barrels per day (bpd) year-on-year in January, with such declines only previously (seen) during recessions."

Despite this, the U.S. bank said "this data vastly overstates a likely modest year-on-year decline in gasoline demand," and that its "outlook for global strong demand growth (remains) unchanged".

Apart from rising stocks, U.S. oil production is also increasing.

The Energy Information Administration (EIA) expects U.S. crude output to rise 100,000 bpd to 8.98 million barrels in 2017, and then to jump by 550,000 bpd in 2018.

Outside the United States, there were other signs of market weakness.

China's 2016 oil demand grew at the slowest pace in at least three years, Reuters calculations based on official data showed.

China's implied oil demand growth eased to 2.5 percent in 2016, down from 3.1 percent in 2015 and 3.8 percent in 2014, led by a sharp drop in diesel consumption and as gasoline usage eased from double-digit growth.

The slowing occurred as the economy expanded by only 6.7 percent in 2016, the slowest pace in 26 years.

Slowing demand and ongoing high inventories undermine efforts by the Organization of the Petroleum Exporting Countries and other producers including Russia to cut output by almost 1.8 million bpd during the first half of this year in order to prop up prices and rebalance the market.

Despite this, both Brent and WTI are down over 6 percent since early January, when the cuts started to be implemented.

Article Link To Reuters:

Oil Benchmark Futures Play Back In Vogue As U.S. Debates Import Tax

By Dmitry Zhdannikov and Amanda Cooper
February 8, 2017

After several years of neglect, oil investors are again betting heavily on the price difference between two global benchmarks - Brent and U.S. crude futures - due to a push in Washington to impose a controversial import tax.

At the start of this decade, the play on the spread between North Sea Brent and U.S. West Texas Intermediate (WTI) contracts futures earned traders and banks hundreds of millions of dollars, provided they played the high-stakes game right.

This trade, nicknamed the "widowmaker" for its high level of risk, fell out of favor about four years ago when the two contracts resumed moving in tandem, sharply reducing the spread volatility on which it depended.

Then OPEC's decision in November to cut crude output, hoping to reverse more than a year of steep price declines, revived investors' interest in oil generally.

Now the WTI/Brent trade is back in fashion on expectations that the spread will again become highly changeable due to the possibility that under President Donald Trump the United States will slap an effective 20 percent tax on imports, including oil.

Commodity traders and investors are betting that WTI will strongly outperform Brent, at least initially, provided the U.S. corporate tax reform includes the border adjustment tax.

The renewed interest in crude spread trading is visible in record open interest for both Brent and WTI, which describes the number of open positions for each derivative, with WTI challenging the dominance of Brent for the first time since 2015.

Many Republicans in Congress want a border tax to help revive domestic industry, though whether it ever sees the light of day remains uncertain.

House Speaker Paul Ryan backs the measure although some fellow Republicans have suggested it might struggle to get through the Senate. Trump has sent mixed signals but criticized the plan as too complicated, while opposition is growing among industries likely to be affected.

On top of this, lawyers say it would almost certainly break World Trade Organization rules.

Still, the uncertainty has had an electric effect on oil markets. Exchange data shows money managers have racked up a record of nearly 900 million barrels' worth of combined WTI and Brent futures and options, almost doubling their holdings in the last two months alone.[O/ICE][CFTC/]

This build-up has been far more aggressive in the WTI market, where investors have doubled their holdings by nearly 225 million barrels, while in Brent, they have raised them by around 45 percent, or 137 million barrels.

Fund managers are putting their money on an initial rally in WTI versus Brent if the tax comes into force. The argument is that U.S. buyers would turn away from imported oil such as Brent in favor of domestic crudes exempt from the tax. Goldman Sachs, for instance, forecasts WTI would immediately appreciate by a quarter relative to Brent.

This would mark a contrast to the last few years, when swelling U.S. oil production from shale deposits has kept U.S. futures at a discount to the North Sea benchmark. WTI could even trade at a substantial premium over Brent.

Uncertainty over U.S. tax policy poses problems for the oil industry itself. Analysts at Goldman Sachs - one of the most active banks in physical commodity trading - advised crude producers last month to manage their price risk by selling long-dated Brent futures and consumers to buy WTI futures.

"We recommend shifting hedges to Brent as the basis risk is smaller than the policy risks ... In turn, consumers and refiners should consider hedging through WTI instead of Brent until the policy uncertainty is lifted," the bank said.

"Should the (tax) be implemented, we recommend that US producers aggressively take advantage of the 25-percent relative appreciation of WTI prices."

The analysts assigned only a 20 percent probability to the tax being implemented, noting that at the time of their Jan. 24 report futures prices implied only a 9 percent chance.

They also expected a rally in outright WTI prices would be short lived, as the initial jump would encourage U.S. producers to raise their output. Combined with the likelihood that OPEC members would resume their production growth, this would create a large oil surplus in 2018, they predicted.

Making WTI Great Again?

Futures prices already show the expectations that Brent's premium over WTI will dwindle.

Front-month Brent futures are currently trading around $55.50 a barrel, about $3.00 above WTI. However, this premium all but disappears further along the futures curve for dates when the effects of any import tax might be felt.

The December 2018 WTI contract is at a discount of just 45 cents to Brent - compared with around $2 in early January - while the December 2019 contract is only 10 cents below its Brent counterpart.

Hedge fund manager Pierre Andurand believes a much bigger change of relative fortunes is possible. "If the tax is adopted, WTI could move to a $10-premium to Brent, providing a substantial economic advantage to U.S. producers," he told investors in a monthly newsletter.

He expects OPEC, which let prices dive in 2014-15 in the hope of putting higher-cost U.S. shale producers out of business, to show greater discipline having agreed the output cuts. "While we believe there is a 30 percent chance for the tax adjustment to go through, it also reinforces our belief that OPEC will do anything that is necessary to push oil prices higher as soon as possible," Andurand said.

The U.S. shale oil producers themselves aren't yet buying into the idea of an initial tax-driven WTI surge.

Stuart Staley, head of commodities trading at Citi, said last week that he had yet to see interest materialize among industrial clients for playing the WTI/Brent game.

A senior executive at a major trading house added that shale producers have been conspicuous by their absence from the hedging market in the past few weeks, precisely because of their reservations over the border tax.

"Basically shale firms don't know what to do. You would look stupid if you hedge and the WTI price rallies afterwards," he said.

Article Link To Reuters:

White House Eying Executive Order Targeting 'Conflict Minerals' Rule

By Sarah N. Lynch and Emily Stephenson
February 8, 2017

President Donald Trump is planning to issue an executive order targeting a controversial Dodd-Frank rule that requires companies to disclose whether their products contain "conflict minerals" from a war-torn part of Africa, according to sources familiar with the administration's thinking.

Reuters could not learn the precise timing of when the order will be issued, or exactly what it will say.

However, the 2010 Dodd-Frank law explicitly gives the president authority to order the Securities and Exchange Commission to temporarily suspend or revise the rule for two years if it is in the national security interest of the United States.

The sources spoke anonymously because it is not public and they were not authorized to speak on the record.

The plan for the executive order comes on the heels of another order issued by the White House last week that takes aim more broadly at the Dodd-Frank rules put into place after the 2007-2009 financial crisis.

That order did not single out any one particular rule, but it called on the Treasury Secretary to consult with other regulators, including the SEC, and to come back with a report outlining possible regulatory changes and legislation.

The conflict minerals rule is one of several disclosure regulations that was tucked into Dodd-Frank that are unrelated to the financial crisis itself.

A second Dodd-Frank SEC disclosure rule that required oil, gas and mining companies to disclose payments to foreign governments, meanwhile, was repealed by the Republican-controlled Congress last week.

The conflict minerals rule was pushed by human rights groups who want companies to tell investors if their products contain tantalum, tin, gold or tungsten mined from the Democratic Republic of Congo, in the hopes it will help curb the funding of armed groups.

But business groups have staunchly opposed the measure, saying it forces companies to furnish politically-charged information that is irrelevant to making investment decisions.

They have also complained it costs too much money for companies to trace the source of the minerals through the supply chain.

In 2014, a U.S. appeals court struck down a part of the conflict minerals law after the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers sued the SEC over the rule.

The court found part of it violated the free speech rights of companies by forcing them to publicly state that their products are not conflict free.

The rest of the rule, however, remained intact and companies are still required to carry out due diligence and report the details of those inquiries in public reports filed with the SEC.

The SEC cannot permanently repeal the rule without a law passed by Congress. However, it can use its broad exemptive powers to scale back some of the requirements or stop enforcing the rule entirely.

Last week, Acting SEC Chair Michael Piwowar took steps toward doing just that, by announcing he has asked SEC staff to reconsider how companies should comply with it and whether "additional relief" is warranted.

Piwowar did not explicitly ask Trump to utilize his powers under Dodd-Frank to temporarily suspend the rule; however, in his statement, he spoke about how he had traveled to Africa to study the rule's impact and raised concerns about its effect on national security.

Article Link To Reuters:

Controversial Dakota Pipeline To Go Ahead After Army Approval

By Valerie Volcovici and Ernest Scheyder
February 8, 2017

The U.S. Army will grant the final permit for the controversial Dakota Access oil pipeline after an order from President Donald Trump to expedite the project despite opposition from Native American tribes and climate activists.

In a court filing on Tuesday, the Army said that it would allow the final section of the line to tunnel under North Dakota's Lake Oahe, part of the Missouri River system. This could enable the $3.8 billion pipeline to begin operation as soon as June.

Energy Transfer Partners is building the 1,170-mile (1,885 km) line to help move crude from the shale oilfields of North Dakota to Illinois en route to the Gulf of Mexico, where many U.S. refineries are located.

Protests against the project last year drew drew thousands of people to the North Dakota plains including Native American tribes and environmental activists, and protest camps sprung up. The movement attracted high-profile political and celebrity supporters.

The permit was the last bureaucratic hurdle to the pipeline's completion, and Tuesday's decision drew praise from supporters of the project and outrage from activists, including promises of a legal challenge from the Standing Rock Sioux tribe.

"It's great to see this new administration following through on their promises and letting projects go forward to the benefit of American consumers and workers," said John Stoody, spokesman for the Association of Oil Pipe Lines.

The Standing Rock Sioux, which contends the pipeline would desecrate sacred sites and potentially pollute its water source,

vowed to shut pipeline operations down if construction is completed, without elaborating how it would do so. The tribe called on its supporters to protest in Washington on March 10 rather than return to North Dakota.

"As Native peoples, we have been knocked down again, but we will get back up," the tribe said in the statement. "We will rise above the greed and corruption that has plagued our peoples since first contact. We call on the Native Nations of the United States to stand together, unite and fight back."

Former President Barack Obama's administration last year delayed completion of the pipeline pending a review of tribal concerns and in December ordered an environmental study.

Less than two weeks after Trump ordered a review of the permit request, the Army said in a filing in District Court in Washington D.C. it would cancel that study. The final permit, known as an easement, could come in as little as a day, according to the filing.

There was no need for the environmental study as there was already enough information on the potential impact of the pipeline to grant the permit, Robert Speer, acting secretary of the U.S. Army, said in a statement.

Trump issued an order on Jan. 24 to expedite both the Dakota Access Pipeline and to revive another controversial multibillion dollar oil artery: Keystone XL. Obama's administration blocked that project in 2015.

At the Dakota Access construction site, law enforcement and protesters clashed violently on several occasions throughout the fall. More than 600 people were arrested, and police were criticized for using water cannons in 25-degree Fahrenheit (minus 4-degree Celsius) weather against activists in late November.

"The granting of an easement, without any environmental review or tribal consultation, is not the end of this fight," said Tom Goldtooth, executive director of the Indigenous Environmental Network, one of the primary groups protesting the line.

"It is the new beginning. Expect mass resistance far beyond what Trump has seen so far."

Legal Challenge Tough

Any legal challenge is likely to be a difficult one for pipeline opponents as presidential authority to grant such permits is generally accepted in the courts. The tribe said in a statement the decision "wrongfully terminated" environmental study of the project.

Deborah Sivas, professor of environmental law at Stanford and director of Stanford's Environmental Law Clinic, said a challenge by the tribe would likely rely on the reasons the Army Corps itself gave for why more review was needed in December.

"The tribe will probably argue that an abrupt reversal without a sufficient explanation for why the additional analysis is not necessary is arbitrary and should, therefore, be set aside," she said in an email.

Supporters say the pipeline is safer than rail or trucks to transport the oil.

Shares of Energy Transfer Partners finished up 20 cents at $39.20, reversing earlier losses on the news.

Article Link To Reuters:

There’s A Simple Technical Factor Behind The Rally In Markets

No increase in global equity supply in 2017: JPMorgan Chase; Rise in maturing debt to buoy investor firepower, bond prices.

By Sid Verma
February 8, 2017

Rising political risks. A fading era of central-bank stimulus. The potential end of a multi-decade bull run in U.S. government debt.

Markets have so far this year shrugged off a laundry list of looming headwinds, with U.S. equities scaling new heights and sales of corporate bonds reaching record levels.

What gives?

While major economies have shown signs of improvement in recent months, helping to rekindle investors’ animal spirits, a key and typically over-looked technical indicator has helped juice the global rally in financial assets: supply.

Net supply of global equities, for example, may flatline this year after falling into negative territory in 2016 for the first time on record, according to JPMorgan Chase & Co. Meanwhile, bond investors in Europe, the U.S., and emerging markets are poised to become cash-rich in the coming months thanks to an avalanche of maturing debt -- a dynamic which should help them soak up fresh sales.

In both the equity and bond markets, the implications are the same. A benign supply outlook is a positive market technical for corporate financing conditions around the world that may lend support to asset valuations and provide a cushion against the slew of event risks looming this year, including elections in Europe and U.S.-fueled trade wars.

A First For Equities

Analysts at JPMorgan paint a stark illustration of this positive picture for market technicals. They calculate that global equity supply fell into negative territory last year for the first time ever, as share buybacks, mergers and leveraged buyouts offset public offerings and other corporate activities that tend to increase the amount of shares outstanding, such as rights issues and employee stock programs.

“The decline in equity supply last year created a support for equity markets, largely offsetting the decline in demand by retail investors,” Nikolaos Panigirtzoglou, who leads the U.S. bank’s flow-and liquidity team, wrote in a report published last week.

Even if retail investors continue to demonstrate limited appetite for stocks relative to bonds, a benign supply story may continue to lift equity markets this year, the strategists concluded.

“Into 2017, we expect global equity supply to remain close to zero. A projected increase in equity offerings is likely to be offset by stronger equity withdrawal as repatriation bolsters U.S. share buybacks,” they said.

Buoyant Bonds

The market for new corporate bonds denominated in euros and dollars has been on fire this year -- sales of U.S. investment-grade debt set an all-time monthly record in January after reaching $185 billion, according to Bloomberg Intelligence -- as companies seek to fund themselves ahead of expected U.S. interest rate hikes. But the glut is less fierce when taking into account ample investor firepower this year, a positive technical that may help to keep credit spreads in check.

Net supply of new U.S. investment-grade debt could decline by as much as 31 percent to $511 billion in 2017 thanks to a wave of maturing bonds and coupon payments, Bank of America Corp. analysts calculated in November. That would signal a sharp reduction in the supply of debt issued by companies with stronger balance sheets compared with the roughly $200 billion in new annual funding needs notched in the previous four years.

What’s more, corporate bond issuance in euros has been decidedly modest in recent months in both investment-grade and high-yield markets after taking into account a rise in maturing debt. Net supply of euro-denominated bonds issued by riskier firms has been flat over the past three months, according to Citigroup Inc., helping to drive yields to record lows.

Who Needs The ECB?

Meanwhile, the outstanding stock of euro-denominated investment-grade debt shrunk by 28 billion euros ($30 billion) between December and January -- all before the European Central Bank purchased a single bond -- thanks to a wave of redemptions, according to Citi.

It’s a similar story for bonds sold by companies in developing countries. Emerging market corporate bond redemptions in euros and dollars will increase to $165 billion from $97 billion in 2016, Barclays Plc analysts calculated in November. That suggests primary markets should be able to digest any year-on-year increase in gross corporate debt supply.

And then there’s the demand picture.

Resilient interest from buyers continues to buoy global debt markets, as the so-called great rotation -- a projected flood of capital migrating out of bond markets and into stocks -- has yet to materialize.

The four-week moving average of fund flows into U.S. equity funds has fallen to zero, while capital flowing into U.S. bond funds has surged to a six-month high, according to a Goldman Sachs Group Inc. report this week, citing EPFR Global data.

In short, a world with excess savings is still struggling to sate its appetite for investable assets in public markets, amid a net shortage of new stocks and corporate bonds.

Article Link To Bloomberg:

Trump’s Move To End Dodd-Frank Disaster All About Helping Small Biz

By Charles Gasparino
The New York Post
February 8, 2017

It shouldn’t take an outsider president to dismantle a largely ineffective law that was sold as a way to protect ordinary Americans from unscrupulous lenders and prevent another financial crisis.

But apparently it does.

Last week, President Trump took the first steps toward repealing one of the many economic disasters of the Obama years, the financial regulatory scheme known as Dodd-Frank. We can only hope Trump continues down this path.

Messing with bank and Wall Street regulation carries substantial political risk: Banks will always do stupid things, so a substantial portion of the left and its bank-hating supporters in the media will be happy to blame the next crisis on a lack of regulation, no matter how tenuous the relationship.

But the president is nothing if not a risk taker, and ditching Dodd-Frank is a risk worth taking. Recall, there were plenty of banking laws on the books before the financial collapse and the subsequent bank bailouts.

Signed into law by President Barack Obama in 2010, Dodd-Frank was a disaster from the start. The economy was struggling to regain its footing from the financial crisis when the feds threw at the banks a slew of new rules and regulations. They were forced to kill off profitable lines of business and hold huge amounts of capital all while the new rules effectively cut off financing to businesses that could grow the economy right when they needed it.

Perversely, Dodd-Frank negated the Federal Reserve’s massive monetary stimulus at the time and any positive benefit from Obama’s own spending. Then came years of tepid economic growth, low wages and an unemployment rate that fell in part because people dropped out of the workforce.

The reason Dodd-Frank failed is because it ignored the government’s actions that contributed to the financial crisis, instead blaming “predatory lending,” the idea that it was purely the banks’ fault that people took out loans they couldn’t afford.

This isn’t to absolve the banks of any role in the housing bubble, but consider: The left wants us to believe banks just wanted to lend money to people who couldn’t pay it back so they shoved money down people’s throats in order to foreclose on homes no one wanted to buy during the housing slump.

In reality, Dodd-Frank was named after two veteran lefty pols, former Connecticut Sen. Chris Dodd and Massachusetts Rep. Barney Frank, who enabled the feds’ failure. They sat by and allowed years of recklessness by Fannie Mae and Freddie Mac, the quasi-government agencies that were created to expand home ownership.

Through Fannie and Freddie’s financial engineering, banks gave out home loans like candy.

Housing prices then exploded until the market imploded. But instead of getting rid of Fanny and Freddie, Dodd-Frank kept both doing much of the same stuff that got them and the housing market in trouble to begin with.

Like Fanny and Freddie, much of the structure of the pre-crisis banking system remains. There are fewer banks, but they’re bigger and no less prone to risk taking. Banks are forced to keep more capital as a buffer for another crisis, but that’s also a double-edged sword: the more capital they sit on, the less they can lend to legitimate borrowers like small businesses.

Dodd-Frank didn’t even do away with the problem of banks being “too big to fail.” In fact, it’s nearly codified into law because taxpayer-funded bailouts of big banks aren’t ruled out. The feds can now step in “for an orderly liquidation” of troubled banks before they explode like Lehman Brothers, but as everyone on Wall Street knows an orderly liquidation of such large entities is nearly impossible, ensuring that “too big to fail” will remain banking policy.

Plus, the prospect of a bailout encourages risky behavior yet again. Lather, rinse, repeat.

At a press briefing with big business executives, including JP Morgan chief Jamie Dimon and Stephen Schwarzman of private equity powerhouse Blackstone Group, Trump said: “Frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.”

He wasn’t talking about the men and women in the room, but small-business owners and entrepreneurs who drive our economy and have been complaining for the past eight years they can’t get enough access to capital to expand and create decent high-paying jobs.

With that, the markets rose nearly 200 points. See what a little common sense in the White House can do?

Article Link To The New York Post:

Why The End Of The Post-Election Rally Might Finally Be At Hand

The risks are piling up, so I’m watching for a loss of momentum in stock prices.

By Thomas H. Kee Jr.
February 8, 2017

This is how I’m viewing the U.S. stock market:

• No one else cares about the inherent risks in the stock market today, so why should I?

• The price-to-earnings (P/E) multiple on the S&P 500 Index SPX, +0.02% is almost 26, much higher than the historic average of about 14.5. But no one else seems to care, so why should I?

• The stock market indices are pressing all-time highs, and they have not had a drawdown of any material magnitude since the election, which suggests a sustained decline could come at any time. But no one else cares, so why should I?

Which brings me to a truism: The market never cares until it has to care.

History has told us that the market does not care about risks during momentum moves like the ones we’ve had since the election. But when that momentum begins to lose steam, the market, which once saw no risk, can suddenly perceive massive amounts of risk without any real change to the environment.

The timing of such a transition in sentiment is difficult to pinpoint in advance, but there are tools at our disposal: technical, longer-term trading patterns and, specifically, the resistance levels in the Dow Jones industrial Average DJIA, +0.19%the S&P 500, Nasdaq 100 NDX, +0.35% and Russell 2000 RUT, -0.41% By watching those resistance levels, we can have a rough idea of when price adjustments might take place.

Ultimately, price adjustments are part of the process in which sentiment shifts.

As a result, the identification of these longer-term resistance levels is critical to understanding when momentum-driven increases will come to an end, and I offer, below, the longer-term chart pattern of the Dow that I provided to clients.


In the chart, you can see that longer-term resistance levels have been tested, and you can also see a long-legged Doji formation from last week’s trading activity. (A Doji formation signifies indecision between bulls and bears.) This combination sets up a potentially bearish, or higher-risk, environment that would be confirmed if the market drops from these early-week higher levels.

Downside confirmations do not immediately exist; we have only tests of longer-term resistance levels right now. But if downside confirmation comes, it will likely be a signal that the one-sided market moves will come to an end, if only for a short while.

We are monitoring for downside confirmation, but we have already acknowledged that the risks now are extremely high, much higher than they have been, and the end of the momentum that spurred the Dow higher by 12.3% since early November may be in sight and, with that, a healthy drawdown.

Article Link To MarketWatch:

Rio Tinto Swings To Profit, Plans Share Buyback

By Rhiannon Hoyle
February 8, 2017

Rio Tinto PLC RIO returned to profit in 2016 as prices for its commodities such as iron ore rebounded and the company continued a multiyear campaign to cut costs and improve the efficiency of its mines.

The Anglo-Australian miner said it would pay a full-year dividend of US $1.70 a share, down from US $2.15 a year ago but higher than expectations after Rio Tinto last year scrapped a policy intended to keep investor payouts stable or rising. It also said it would buy back shares worth up to US $500 million in 2017.

On Wednesday, Rio Tinto reported an annual net profit of US $4.62 billion, which compares to a loss of US $866 million a year earlier, when asset write-downs and foreign-exchange and derivatives losses weighed on its bottom line. That missed the US$5.18 billion median of eight analyst profit forecasts.

Underlying earnings, a measure tracked by analysts that strips out some one-off charges, rose by 12% to US $5.1 billion, it said.

"Today's results show we have kept our commitment to maximize cash and productivity from our world-class assets, delivering US$3.6 billion in shareholder returns while maintaining a robust balance sheet," said Chief Executive Jean-S├ębastien Jacques, who took over from Sam Walsh in July.

Stronger-than-expected commodity markets bolstered profits for the world's No. 2 mining company. The price of iron ore, which accounts for most of Rio Tinto's earnings, roughly doubled last year from a more-than decade low because of robust demand from China's steel industry and slowing growth in global mine output.

Other commodities including coal and copper rose in price as well.

In February last year, the miner abandoned its progressive dividend policy saying it could no longer justify the commitment when the outlook for the global economy was worsening. It said future dividends would be more closely linked to market conditions.

Expectations for a quick recovery in payouts, however, increased with the rebound in commodities. Analysts expected a dividend of US $1.395 a share for 2016.

The desire to reward investors is being balanced with an eagerness to further reduce debt and set aside cash for new projects.

The miner, like rivals including BHP Billiton Ltd., has worked to strengthen its balance sheet, triggered by what became a multiyear downturn in world commodity markets. Its net debt fell 30% to US $9.6 billion by the end of the year, reducing its gearing - a closely watched measure of debt to equity - to 17% from 24% a year ago.

Rio Tinto said this gearing level provides a stable foundation, given an uncertain economic outlook. It also provides management with flexibility to invest in new projects even if the recovery in commodity prices loses steam, the company said.

Rio Tinto has been doubling down on its push to cut costs in the business that has included increasing utilization of trucks and plant, reworking deals with suppliers and a freeze on wages. The company reduced annual operating costs by US $1.6 billion during the year, it said.

Rio Tinto also benefited from increased production of many commodities including iron ore, aluminum and copper. The miner last month said it produced 6% more iron ore from its Western Australia mining operations during the year.

Article Link To MarketWatch:

The IMF Staff Has It Right On Greece

By Mohamed A. El-Erian
The Bloomberg View
February 8, 2017

When the International Monetary Fund’s board met Monday to discuss Greece, it was heartening to read that “most Executive Directors” agreed with the staff’s view that the country’s debt, at 179 percent of gross domestic product at the end of 2015, was “unsustainable.” Yet “some directors had different views on the fiscal path and debt sustainability.” This division within the board also applied to what Greece still needs to do with its budget. With the medium-term primary fiscal surplus heading to 1.5 percent of GDP, “most Directors agreed that Greece does not require further fiscal consolidation at this time.” But, again, “some Directors favored a surplus of 3.5 of GDP by 2018.”

Despite the backing of a majority of the board for the staff’s technical assessment that Greece does not need to tighten its budget screws further but does require debt reduction, the institution is still unable to break a deadlock that harms the country, undermines the integrity of the euro zone, and puts the IMF’s own finances at some risk. Understanding why sheds light on the outdated governance that still plagues the IMF’s good functioning, dents its global standing and weakens its effectiveness.

Facing an acute debt problem, Greece embarked on a massive fiscal adjustment program that saw its budgetary imbalance, as measured by the primary balance, swing from a deficit of 15 percent in 2009 to a slight surplus last year -- one of the largest fiscal swings in the history of IMF programs. But because of a dreadful collapse in output, the country’s debt-to-GDP ratio continued to march relentlessly higher during the period.

The debt crisis, and what the IMF itself called an “impressive” fiscal adjustment that followed, came at a large cost to Greek citizens. From 7.8 percent in 2008, close to the euro-zone average of 7.4 percent at that time, the country’s unemployment rate soared to 27 percent in 2013, more than twice the average for the euro zone as a whole. It improved thereafter, but only marginally, amounting to around 23 percent at the end of 2016. Meanwhile, the poverty rate is at a worrisome 35.7 percent.

Youth unemployment is even more alarming: It peaked at almost 60 percent and now still stands at 46 percent. With many of the young lacking gainful employment for prolonged periods, they risk going from being unemployed to becoming unemployable, thereby threatening a lost generation with consequences that would extend to future generations.

What Greece has lacked, and still does, is high and inclusive growth. Delay in implementing pro-growth structural reforms was a contributor, but it is only part of the story.

Throughout the period, Greece has been laboring under a crushing weight of debt whose consequences go well beyond the diversion of funds for debt servicing. The resulting “debt overhang” serves to discourage the engagement of new capital, thereby withholding the fresh oxygen that the country’s economy desperately needs. The situation has been made worse by a change in the composition of liabilities that reduces the scope for debt operations -- that is a shift away from private creditors and in favor of official debt from “senior creditors.”

Some of us warned very early on about the excessive debt burden when Greece embarked on its adjustment program. And some steps were taken to reduce the burden, including an outright reduction of obligations to private creditors and securing better maturity and interest-rate terms on debt owed to European government. But, because of the steadfast opposition of official European creditors, Greece has been unable to achieve the needed critical mass reduction in its debt overhang.

Recognizing the significant headwinds to growth, the IMF staff has -- rightly -- become increasingly vocal about the need for Greece’s European partners to agree to reduction of official bilateral debt. What started out as private advocacy has, over the last couple of years, spilled onto the public domain. And in the last few months, the staff has weighed in, including via blog posts. Its assessment is particularly important as the IMF guidelines prohibit the institution from lending into a situation where medium-term debt sustainability is not within reach.

The staff’s policy position on the budget and debt is reinforced by the board’s implicit recognition of a series of analytical and operational slippages made on this sad country case. As a result, in their meeting on Monday, “Directors emphasized the importance of developing realistic forecasts and targets, securing adequate financing and debt relief, undertaking fiscal adjustment through high quality measures at a pace consistent with the country’s implementation capacity, and adopting well-sequenced structural reforms based on strong ownership and parsimonious conditionality.” In the Fund’s technical language, this is quite a mea culpa.

In an economically rational world, such a multifaceted assessment that is supported by the majority of the IMF’s 189 members should be sufficient to deliver a better outcome -- and particularly when the organization itself, together with European governments and institutions there, has been a major lender and an anchor for the adjustment programs. But this is not the case here, as staff and management find themselves in a Mexican standoff with their European political masters.

The longer European governments oppose debt reduction for Greece, the harder it will be for the country to recover from the devastating collapse in output and living standards. The longer this persists, the greater the fuel for anti-establishment parties that attack the euro zone’s ineffectiveness and spotty accomplishments. The more this goes on, the higher the probability of concerns about the integrity of this important and historical regional project whose implications extend well beyond economics and finance.

The IMF also is worse off. Having been pressured strongly by its European members to make loans it shouldn’t have made (and wouldn’t have made) had management at that time stuck to the institution’s own guidelines and practices, the IMF is now being frustrated from righting the wrong. With that comes renewed doubt about attributes that are key to its effectiveness and credibility -- from uniformity of treatment to its technocratic excellence and its ability to be an honest and trusted adviser to countries and the international community. And all this casts an even brighter spotlight on the costs and unintended consequences of outdated governance and uneven practices.

Article Link To The Bloomberg View:

Out Of Pocket, Italians Fall Out Of love With The Euro

By Gavin Jones
February 8, 2017

When the Italian central bank's deputy governor joined a radio phone-in show last week, many callers asked why Italy didn't ditch the euro and return to its old lira currency.

A few years ago such a scenario, that Salvatore Rossi said would lead to "catastrophe and disaster", would not have been up for public discussion.

Now, with the possibility of an election by June, politicians of all stripes are tapping into growing hostility towards the euro. Many Italians hold the single currency responsible for economic decline since its launch in 1999.

"We lived much better before the euro," says Luca Fioravanti, a 32-year-old real estate surveyor from Rome. "Prices have gone up but our salaries have stayed the same, we need to get out and go back to our own sovereign currency."

The central bank is concerned about the rise in anti-euro sentiment, and a Bank of Italy source told Reuters Rossi's appearance is part of a plan to reach out to ordinary Italians.

Few Italians want to leave the European Union, as Britain chose to do in its referendum last year. Italy was a founding EU member in 1957 and Italians think it has helped maintain peace and stability in Europe.

And the ruling Democratic Party (PD) is pro-euro and wants more European integration though it complains that the fiscal rules governing the euro are too rigid.

But the three other largest parties are hostile, in various degrees, to Italy's membership of the single currency in its current form.

The PD is due to govern until early 2018, unless elections are called sooner. The PD's prospects of victory have waned since its leader Matteo Renzi resigned as premier in December after losing a referendum on constitutional reform, and polls suggest that under the current electoral system no party or coalition is likely to win a majority.

Italians used to be among the euro's biggest supporters but a Eurobarometer survey published in December by the European Commission showed only 41 percent said the euro was "a good thing", while 47 percent called it "a bad thing."

In the Eurobarometer published in April 2002, a few months after the introduction of euro notes and coins, Italy was the second most pro-euro nation after Luxembourg, with 79 percent expressing a positive opinion.

Italy is the only country in the euro zone where per capita output has actually fallen since it joined the euro, according to Eurostat data. Its economy is still 7 percent smaller than it was before the 2008 financial crisis, and youth unemployment stands at 40 percent.

5-Star Threat

The right-wing Northern League, the third biggest party, is the most critical of the euro. Party leader Matteo Salvini calls it "one of the biggest economic and social crimes ever committed against humanity."

The party has promised to pull Italy out of the euro if elected but it only has about 13 percent of voter support.

The anti-system 5-Star Movement may pose a bigger threat to Italy's membership of the currency club. Polling roughly level with the PD at about 30 percent, 5-Star says it will hold a referendum on euro membership.

But Italy's constitution forbids referendums on matters that are governed by international treaties such as euro zone membership. 5-Star says it could organize a non-binding "consultative" ballot to gauge public opinion.

A post last week on its official mouthpiece, the blog of founder Beppe Grillo, was headlined "A referendum on the euro before it's too late".

"I would vote to leave the euro as it stands," lower house deputy Luigi Di Maio, who is widely expected to be 5-Star's candidate for prime minister at the election, told Reuters.

"We should return to a sovereign currency or, if there is an agreement with the other countries, form a new common currency with new rules."

Italy's other significant party, Silvio Berlusconi's center Forza Italia, is not pushing for outright euro exit, but he has argued that Germany should leave instead, or that Italy should use the euro and the lira at the same time, an idea that many economists say is unworkable.

Central Bank Warning

Economists in favor of leaving say a devalued currency would revive Italy's exports and that by throwing off the shackles of the EU's fiscal rules the country could ramp up public spending to boost growth and create jobs.

Those wanting to stay in the euro say an exit would trigger a surge in interest rates and inflation, capital flight, a banking crisis and possibly a default on Italy's public debt.

The central bank warns Italians that leaving the euro would sharply erode the value of their savings.

However, after repeated banking crises it is widely blamed for not preventing, and years of over-optimistic economic forecasts, the Bank of Italy no longer commands the respect among Italians that it used to.

Northern League and 5-Star politicians also point to the British vote in June to leave the European Union and Italy's ballot in December that threw out Renzi's constitutional reform. They say they did not lead to the chaos that some mainstream economists forecast.

Article Link To Reuters:

Asia Shares, Euro On Edge As Political Worries Mount In U.S., France

By Hideyuki Sano
February 8, 2017

Asian share markets hovered below four-month highs on Wednesday and the euro was pressured as doubts over the policies of U.S. President Donald Trump and a looming election in France sapped investors' confidence.

European shares were expected to open mixed, with spread-betters looking to a 0.3 percent fall in Britain's FTSE .FTSE, an almost flat opening in Germany's DAX .GDAXIand 0.1 percent rise in France's CAC .FCHI.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.1 percent in late trade, after spending most of the session in the negative territory.

Japan's Nikkei .N225 rose 0.5 percent.

"The markets are now paying attention to political risks in Europe and the United States, after a rally earlier this week following the strong U.S. payrolls data," said Kenta Tadaide, senior economist at Mizuho Research Institute.

On Wall Street, the S&P 500 .SPX ended barely higher while the Nasdaq .IXIC edged to a record high as gains in big tech names countered energy declines.

With more than half of the S&P 500 having reported results, fourth-quarter earnings are on track to have climbed 8.2 percent, which would be the best performance since the third quarter of 2014, according to Thomson Reuters I/B/E/S.

A raft of strong global economic data and hopes that Trump would quickly deliver on talk of stimulus measures had helped to support world share markets, and the dollar, since late last year.

But the lack of detail on Trump's spending plans and some other policy stances taken after he was sworn in on Jan. 20 have unsettled investors.

Trump's protectionist leanings on international trade and controversy over his move to temporarily ban the entry of immigrants from seven Muslim-majority countries have caused alarm.

"Corporate earnings have been pretty good so far. But without details of Trump's economic policies, it is hard to become bullish," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Uncertainty on the new administration's currency policy is also keeping foreign exchange markets on edge.

The dollar has been steadily declining against the yen since Trump signaled displeasure with Japan's currency stance on Jan. 31.

The U.S. currency traded at 112.35 yen JPY=, having fallen to 111.59 yen on Tuesday, its lowest since late November.

The pair may see limited moves for now as traders look to a meeting between Trump and Japanese Prime Minister Shinzo Abe on Friday for clues on how he will treat America's major trading partners.

The euro EUR=, on the other hand, has shed 1.1 percent so far this week and last stood at $1.0667.

The single currency has been hit by growing concerns that the far right could win France's presidential vote and take the country out of the euro and European Union.

The gap between French and German 10-year borrowing costs FR10YT=RR DE10YT=RR widened to 78 basis points, the biggest level since late 2012.

Support for conservative challenger Francois Fillon, who was seen as a frontrunner a few weeks ago, has tumbled in the wake of a financial scandal, losing ground to independent centrist Emmanuel Macron and the anti-EU National Front leader Marine Le Pen.

While most investors expect Le Pen to be defeated in the run-off by a more moderate candidate, markets are nervous after last year's experience of the Brexit referendum and Trump's victory. The election will take place in two rounds on April 23 and May 7,

In addition, wrangling over Greece's bailout are starting to haunt the market ahead of the euro group meeting on Feb. 20, with two-year Greek debt GR2YT=RR yield soaring to near 10 percent on Tuesday, compared to around six percent just about two weeks ago.

Elsewhere, the Chinese yuan dipped slightly following Tuesday's data that showed China's foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years.

Still, the market impact was limited as the fall in the reserves, of $12.3 billion to $2.998 trillion, was the smallest in seven months, indicating China's renewed crackdown on outflows appears to be working, at least for now.

The yuan was little changed after dipping to one-week low of 6.847 per dollar in offshore trade CNH=D4 and three-week low of 6.8916 in the onshore trade CNY=CFXS.

"The fall was relatively small and had limited impact on the mainland markets. It is not like we have seen massive capital outflows," said Naoki Tashiro, head of TS China Research.

Oil prices extended falls, as a massive increase in U.S. fuel inventories and a slump in Chinese demand implied that global crude markets remain oversupplied despite OPEC-led efforts to cut output.

International Brent crude futures LCOc1 fell 0.4 percent to $54.81 per barrel. They were down 3.5 percent so far this week.

Article Link To Reuters: