Wednesday, February 22, 2017

Wednesday, February 22, Morning Global Market Roundup: Global Stocks Top 2016 Gains, Dollar Up Before Fed Minutes

By Nigel Stephenson
February 22, 2017

Global stocks hit record highs on Wednesday, pushing gains for the year above those for all of 2016, while the dollar rose before Federal Reserve minutes that will be scoured for clues on the timing of the next U.S. interest rate rise.

European shares followed Asian bourses higher, buoyed by all main indexes on Wall Street touching record closing highs on Tuesday.

Relatively strong earnings seasons in Europe and the United States, forecast-beating economic data and U.S. President Donald Trump's promises of tax reform, less regulation and more infrastructure spending have all helped lift stock markets.

MSCI's main index of global stocks , which tracks share prices across 46 countries, hit a second successive record high. It has risen some 5.7 percent so far this year, beating the 5.6 percent gains of 2016.

The pan-European STOXX 600 index rose 0.1 percent on Wednesday. Britain's Lloyds Banking Group was up 3 percent after reporting its highest full-year profit in a decade.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6 percent. Hong Kong's Hang Seng rose 0.9 percent but Japan's Nikkei <.N225. bucked the trend, closing marginally lower as the yen strengthened.

The day's most anticipated event for markets will be the release of the minutes of the Fed's last policy meeting.

Fed Chair Janet Yellen said last week it was likely the central bank would need to raise rates at an upcoming meeting. Markets have priced in only a slim chance of a rise next month but a much greater likelihood in May or June.

The dollar rose 0.2 percent against a basket of major currencies and 0.3 percent versus the euro.

The single European currency has suffered recently on investor worries about European politics, particularly the performance in opinion polls of French anti-euro, far-right party leader Marine Le Pen before presidential elections in April and May.

"This is politics as well as markets increasingly betting on an imminent rate hike by the Fed," said Commerzbank strategist Thu Lan Nguyen. "Volatility is rising as investors start to prepare for the elections."

Sterling dipped 0.1 percent to $1.2448 after revised data showed the UK economy grew at its fastest pace in a year in the last three months of 2016 but by less than previously estimated for the whole of 2016.

The pound rose 0.1 percent to 84.4 pence per euro. Euro/sterling closed below its 200-day moving average, a long-term gauge watched closely by fund managers, on Tuesday for the first time since December 2015.

The yen rose 0.4 percent to 113.30 per dollar.

Gap Widens

European politics and the prospect of higher U.S. rates pushed the gap between short-dated U.S. and German benchmark government bond yields to its widest in nearly 17 years.

German two-year yields hit a record low of minus 0.9 percent while U.S. equivalents touched 1.24 percent.

Analysts said jitters over the French elections have stoked demand for top-quality German debt. Bottlenecks caused by the European Central Bank's bond-buying program and upcoming regulatory changes have amplified the decline the yields.

"There are a host of special factors driving two-year German bond yields lower and on the other side of the Atlantic we have the Fed contemplating another hike, which is driving up U.S. equivalents," ING strategist Martin van Vliet said.

Oil prices dipped. Brent crude, the international benchmark, traded at $56.50 a barrel, down 17 cents.

Copper also fell, as traders reduced their positions before the Fed minutes, though supply disruptions supported prices. The metal last traded at $6,030 a tonne, down 0.5 percent on the day.

Gold edged up 0.1 percent to $1,236 an ounce.

Article Link To Reuters:

OPEC Cuts, Weak Freight Rates Help Traders Profit On Asia Crude Routes

By Henning Gloystein 
February 22, 2017

Oil traders from around the world, including the United States, Britain and Brazil, have tripled their sales to Asia as they take advantage of an emerging supply gap following OPEC-led production cuts announced late last year.

Around 30 supertankers have this month made long-haul trips to ship crude oil from the Americas, the North Sea and the Mediterranean to refineries across Asia, the world's biggest and fastest growing consumer, data extracted from Thomson Reuters Oil Research and Forecasts shows.

The unusual movements follow the decision late last year by the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut production by almost 1.8 million barrels per day (bpd) during the first half of this year in a bid to rein in global oversupply and prop up prices.

Companies most involved in the long-haul deals include major oil producers such as BP and Royal Dutch Shell, private commodity traders Trafigura, Vitol and Mercuria, and Chinese refiner Unipec, trading sources say. Energy and mining giant Glencore, Azerbaijan's state-oil firm Socar and Brazil's Petrobras have also been involved.

Taking advantage of relatively low freight costs and regional crude oil price differentials - known as arbitrage, or arb - traders can profit from supply shortages in one region and oversupply in another.

West Texas Intermediate (WTI) crude futures, for example, currently trade at around $54.50 per barrel, while international benchmark Brent crude costs $56.90 - a Brent premium over WTI of $2.40 a barrel, compared with near parity in late November, just before OPEC announced its cuts.

"The OPEC cuts have ... led to an open arb for long-haul cargoes, leading to a rise in long-haul crude imports (which) make up for the decline in OPEC (supplies)," said Tushar Bansal, director of Ivy Global Energy, a Singapore-based consultancy.

The cuts are an OPEC policy reversal after two years of pumping out oil and keeping prices low as the cartel sought to squeeze rival exporters.

"OPEC production cuts... created distortions in the Asian crude market, changing global trade patterns," BMI Research said in a note to clients.

OPEC Cedes Market Share

Helping fill the OPEC gap, crude shipments to Asia from the United States, Britain, Brazil, and even war-torn Libya jumped to over 35 million barrels in February, or 1.26 million bpd, from 10.4 million barrels in October, or 336,000 bpd, the data shows.

For OPEC, which typically meets around 70 percent of Asia's oil demand, that means a 5 percent loss of market share since October.

"Under current oil market conditions, OPEC risks losing market share with further production cuts," said Carole Nakhle, director of advisory firm Crystol Energy in London.

Although OPEC's relationship with customers in Asia tends to be good, refiners in North Asia's consumer hubs of Japan, China, and South Korea say they will readily turn to other suppliers in order to meet their needs.

Loading schedules show U.S. crude exports to Asia increased to more than 3.5 million barrels this month - including a first U.S. oil cargo delivery to India - from below 1 million in October. UK shipments have jumped to more than 10.5 million barrels from just 1.6 million.

Shipments to Asia from Brazil have hit a record 16.7 million barrels in February, up from 6.9 million in October, and Libya, an OPEC-member exempted from the cuts, doubled its Asia shipments to 2 million barrels last month.

Shipping schedules show the trend continuing into March.

BMI said the OPEC cuts, especially of medium and sour crude grades, were "providing opportunities for (similar)... Mediterranean crudes to flow into the Asian market," which include Libyan oil.

Will The Arb Last?

One of the first major long-haul shipments to Asia in this round of arbitrage trading was by BP, which late last year used more than half a dozen tankers to ship almost 3 million barrels of U.S. crude as far as 30,000 km (18,641 miles) to Australia, Thailand and Japan.

In similar deals, Unipec and Trafigura have shipped U.S. oil from the Gulf of Mexico to China. Shippers of North Sea crude to Asia have included Vitol, Mercuria, Trafigura, Glencore, Shell, Unipec and Socar. The main exporter from Brazil has been state-owned Petrobras, shipping data shows, with traders saying its crude has replaced oil from OPEC-member Angola.

Oystein Berentsen, managing director for crude oil trader Strong Petroleum in Singapore, said arbitrage for North Sea and U.S. oil to Asia has been possible due to the OPEC-led cuts, and these routes "may continue depending on freight and price spreads."

Benchmark Middle-East to Japan freight rates for supertankers (VLCC) are at 71 points on a so-called Worldscale rate based on 100, compared to a long-term average rate of around 76 over the last 10 years.

"The whole reason arb opportunities are there is because of weak freight," said Matt Stanley, a fuel broker at Freight Investor Services in Dubai.

It's not clear how long this arb window will remain open.

Strong Petroleum's Berentsen said that despite the OPEC cuts "there is still oversupply, but the market will probably balance in the third quarter. Then we'll see if the arb still works."

For a graphic on oil exports to Asia, click here.

Article Link To Reuters:

Amazon Lowers Free Shipping Minimum To Match Walmart

By Lisa Fickenscher
The New York Post
February 22, 2017

Jeff Bezos isn’t usually a follower.

But over Presidents Day weekend, the founder and chief executive of Amazon quietly lowered to $35 from $49 the minimum spend required to get free shipping.

The discounted price just happened to match Walmart’s minimum.

And while Amazon in the past has revved its marketing machine to high to get the word out on such a move, there wasn’t a press release or announcement to let the world know of the most recent price cut.

“This is one of the first times we’ve seen a real reactionary response by Amazon,” said Sarah Engel, senior vice president of DynamicAction, a retail analytics firm.

“Amazon did this without fanfare, and when they have a change that impacts the customer positively, they are very vocal about it.”

Bezos’ move comes as Walmart begins to reignite its e-commerce growth, five months after acquiring online delivery service for $3 billion.

On Tuesday, Walmart reported a 29 percent spike in its e-commerce sales in the three months ended Jan. 31.

While Amazon’s 2016 revenues of $136 billion are 10 times Walmart’s e-commerce sales, estimated to be about $13 billion, the discount chain seems to have recent gotten its online mojo.

“We’re moving with speed to become more of a digital enterprise,” Walmart Chief Executive Doug McMillon said in a statement. “We had a very solid fourth quarter.”

Walmart’s US same-store sales rose 1.8 percent in the quarter; total sales were up 1 percent, to $130.9 billion.

Still, “Walmart is a much more formidable competitor to Amazon than it was just two years ago,” said Edward D. Jones & Co. analyst Brian Yarbrough.

While Amazon went toe-to-toe with Walmart on its free shipping price, it did not match the discounter’s delivery speed.

Amazon customers will get their purchases in five to eight business days, while Walmart customers are promised two-day delivery.

Amazon Prime customers, who pay a $99 annual fee, get two-day free shipping.

“Amazon has been leading this race for some time,” Engel said, pointing out that the shipping tweak “doesn’t really one-up Walmart.”

Article Link To The New York Post:

Why Team Trump Needs To Fix US-Mexico Relations -- Fast

By Benny Avni
The New York Post
February 22, 2017

Send in the clean-up crews.

Secretary of State Rex Tillerson and Secretary of Homeland Security John Kelly will land in Mexico City Wednesday. Like “the Wolf,” Harvey Keitel’s character in “Pulp Fiction,” their task is to mop up the mess.

It’s a recurring theme for the Trump administration.

Vice President Mike Pence was sent last week to massage wounded European Union egos hurt during the election campaign. Defense Secretary James Mattis was dispatched to reassure NATO leaders they’re not “obsolete,” promise Iraqis we won’t “take their oil” and calm South Korean and Japanese nerves.

Mexico is more complex. In rousing anti-Mexican sentiments during the campaign, President Trump damaged relations with one of America’s most important partners. And it ain’t over: On Tuesday, Kelly ordered more deportations of illegal immigrants, many of them of Mexican origin.

The new deportation orders are “unfriendly, hostile and needlessly aggressive acts,” said Jorge Castaneda, a former Mexican foreign minister who, like his former boss, ex-President Vicente Fox, has been advocating that Mexican officials push back on Trump ever since the president started calling Mexicans “criminals” and “rapists.”

And those are the pro-US centrists.

Then there’s Andres Manuel Lopez Obrador, a far-left Mexican politician who joined anti-Trump protests in California last week. AMLO, as he’s known, has been running for president for decades, encouraging street riots and claims of being the victim of election fraud.

He’s been a marginal figure in Mexican politics for years, but now, riding a wave of anti-Gringo sentiments, this anti-American Chavista is suddenly running ahead of all other potential candidates in early presidential polls. The election is scheduled for next year, and a Lopez Obrador victory would spell trouble for Mexico. And for us.

But even if he loses (again), Trump’s hostility toward Mexico has costs.

Trade wars set off by tariffs or fights over who will pay for the border wall mean your guacamole, a favorite American snack, may become more of a luxury as avocado prices double at the supermarket. Same goes for other vegetables.

Speaking of which: Once considered the country’s vegetable-growing bread basket, Mexico’s Sinaloa state is now widely known for its most famous homeboy, Joaquin “El Chapo” Guzman, the drug lord currently residing in a downtown New York jail cell.

The war on drugs made growing narcotics in Sinaloa and elsewhere much more lucrative than growing vegetables. Can that be reversed?

For years, Mexicans wondered why they should spill blood on behalf of their drug-addicted northern neighbor. That question will only grow louder as we threaten to build a wall, demand they pay for it and talk about starving the country’s economy.

Can Kelly convince them, a day after ordering more deportations, to stick by the Merida Initiative, a drug-fighting security-cooperation pact? And without Mexico’s cooperation, will Trump be able to fulfill a campaign promise to end the drug epidemic in American suburbs?

Away from the suburbs, how about America’s corn growers? More than 60 percent of their exports are to Mexico. Fearing new tariffs, Mexicans are starting to negotiate importing corn from other growers around the world. Trump won Iowa in November, but the state’s voters won’t take kindly to paying the price for his bluster.

And true, forcing companies to relocate from Mexico back to the United States would create good jobs for Americans. Even if symbolic, that’s a good thing. But what does it do to Mexico?

For half a decade, more Mexican nationals have returned home from America than came up here. If jobs become scarce at home, that trend could reverse. With each closing factory, more Mexicans will risk jumping over the wall (or tunnel underneath it) to look for jobs in el-Norte.

But we can then deport them, right? Well, not necessarily all of them, if US-Mexico relations sour. Castaneda proposes opening Mexico’s border only to deportees that can prove Mexican citizenship. That could prompt a pileup in US internment camps — and political problems for Trump.

Mexico’s business community and political class would prefer to be a “long-standing neighbor and friend,” as Tillerson defined their country in his confirmation hearing. The alternative could end a century of calm at the southern border.

All of which is to say: The Wolf and his cleanup crew can’t arrive soon enough.

Article Link To The New York Post:

Missing The Meaning Of Trump

Liberals desperately pretend his rise is a message from Russia, not voters.

By Holman W. Jenkins, Jr.
The Wall Street Journal
February 22, 2017

Donald Trump comes to the presidency, it’s safe to say, with a steeper learning curve than just about anyone who has ever held the position. He’s working hard at a job he likely didn’t believe he’d have until late in the campaign. Give him credit. At least he appears upbeat and game for the challenge, abating one realistic fear. Calling him a failure at this point is ridiculously premature.

Even more ridiculous is to compare his troubles to Nixon’s Watergate, for there is no president he resemble less. Nixon was a deeply rooted, connected part of the ruling establishment. He had been a congressman, senator and vice president. His Watergate sins were committed on his way to a landslide re-election. If Mr. Trump screws up his presidency, it will not be the way Nixon did—by presuming too much on his ability to control institutions and bend them to his will. More likely the opposite.

Mr. Trump is an unusual president in that, unlike any we can think of, he speaks only for himself. There is no army of Trump interest groups and loyalists and activists to respond to his command or suggestion. He does not have deep knowledge of policy, government or politics. He does not have longtime organizational ties.

Results do not flow: Nordstrom’s stock is up since being bashed by Mr. Trump. If he tweeted tomorrow that the IRS ought to investigate Amazon—a threat he made during the campaign—nobody at the IRS would likely change a thing they were doing. Barack Obama would not have had to tweet a word.

What of the innuendo of Russian influence? Mr. Trump ran an unorthodox, idiosyncratic campaign. He also ran, unavoidably, an uneducated one—uneducated about whom not to take a call from, whom not to meet with, whom not to retweet. In this context, talk of “contacts” between his campaign and Russian intelligence probably means very little. Your columnist, he’s pretty sure, also had contacts with Russian intelligence during the campaign, judging by the tone and curious diction of certain pro-Trump emails in his inbox.

The idea of Mr. Trump as Russian agent is one more failure of imagination by the media—a striving to believe that some hidden, sinister logic explains his rise (and also excuses Robby Mook).

Whether his presidency is a success or failure, the Donald Trump show is likely to remain, to an amazing degree, separate from the Trump administration show. Perhaps the latter will become the Jared Kushner show. It might become the Bob Corker show if Mr. Trump wisely reaches out (as another Republican president, Reagan, did) to a Tennessee senator to put a disordered White House on the straight and narrow.

A Trump administration need not devolve into chaos—its real challenge is how to make use of a unique asset, Mr. Trump himself, to power the coalitions that get things done in Washington. This possibility still exists.

The saddest part, though, is how quickly Democrats, following their loudest, ninniest voters, have decided to turn Mr. Trump into the Antichrist. One example: In 17 years of Howard Stern interviews, Mr. Trump appears never to have uttered a sentiment unfriendly to gays. He is a lifelong New Yorker. He was a regular at Studio 54. His mentor was a powerful gay attorney. In his convention speech, Mr. Trump offered himself as the defender of “LGBTQ citizens.” Yet many gay activists now join a parade of those pronouncing themselves oppressed by a Trump presidency. Why? Pure cognitive dissonance: Democrats have been busy twisting his admittedly rococo image beyond reason to fit their partisan needs.

Mr. Trump’s fundamental independence from party might have been, and still might be, an opportunity for the country. It perhaps merits eye rolling more than paranoia, but another obstacle is the deranged meddling of the bureaucracy. Recall that it began with FBI chief James Comey’s fatuous intervention in the election, clearing Hillary Clinton in the email controversy, unclearing her, and then clearing her again.

And now the so-called intelligence community shows itself unhealthily eager to traffic in claims about Kremlin influence in the election, to leak intercepts of Mike Flynn’s phone chats, to fill the press with vague insinuations of ties between the Trump campaign and Russian intelligence.

All this smacks too much of the little Walter Mittys of our overfunded, under-delivering intelligence bureaucracy trying to punish Americans for how they voted.

They are fools to do so. The election represents serious data from the world. Sixty-three million Americans were trying to get Washington’s attention. We still hope for real achievements. At worst, Trumpian gridlock is probably better than Obama gridlock (look at the stock market). In the meantime, the body politic will listen to itself. In four years, thanks to Mr. Trump, it will have been drilled into both parties’ heads just how badly things have gone wrong in our country by the lights of millions of our fellow citizens.

Article Link To The Wall Street Journal:

Taxing Robots Is Bill Gates’s Dumbest Idea Yet

Automation always brings more prosperity, and there’s no reason to think this time is different.

By Matthew Lynn
February 22, 2017

The blue screen of death. That little paper clip that used to pop up with irritating suggestions every time you used Word. Pre-loading Internet Explorer on every personal computer. Four decades into a career that has made him one of the richest men in the world, Bill Gates has come up with some genuinely terrible stuff over the years.

But he has just had his worst idea yet — taxing robots.

The founder of Microsoft MSFT, -0.20% argues that with robots increasingly likely to replace many human workers, the only way to make up for all the lost tax revenue, and to civilize the spread of automation, is to charge the machines directly. It is increasingly popular theme. The European Parliament has taken it up, and it is a flagship policy for the Socialist candidate in France’s presidential election.

Yet is it also completely crazy. Why? Because robots won’t pay any taxes, their owners will. Because it will slow down the one thing that is likely to lift productivity. And because it encourages the fallacy that somehow there is somebody else who can pay for the state — rather than ordinary workers.

Whether the robotic revolution is everything it is cracked up to be remains to be seen. There is certainly a huge amount of hype around drones, driverless cars, artificial intelligence, and automated factory work. Advances in computing are making lots of tasks like delivery susceptible to automation, and white-collar jobs in fields such as medicine, law and accountancy may soon come under pressure as well.

As that gathers pace, governments around the world are becoming increasingly worried about the impact on the tax base — after all, payroll charges are one of the largest sources of their income, and every time a carbon-based worker is replaced with a silicon-based one, that money disappears. You don’t need to be penning a dystopian novel to start imagining a world in which mass unemployment is widespread, bankrupt governments have no money to alleviate their suffering with welfare, and pretty much all the world’s wealth is in the hands of a few AI billionaires.

To his credit, and unlike many of his high-tech peer group, Gates is at least worried about that.

In an interview this week, he made the case for taxing robots as they replace workers. “Right now if a human worker does $50,000 worth of work in a factory, that income is taxed,” he told Quartz. “If a robot comes in to do the same thing, you’d think we would tax the robot at a similar level.”

He is far from alone. Last year, a draft report from the European Parliament made the case for making robots pay the same kind of payroll taxes as their human counterparts.

In France, Benoit Hamon came from nowhere to win the governing Socialist Party nomination for president on the strength of a plan for taxing machines to help pay for an ambitious universal basic income. In his ideal world, it appears, we’d all relax all day, while the robots did all the work, and we’d be paid from their taxes.

In fairness, you can see what they are all getting at. Robotics, like any innovative technology, will create a wave of disruption. There will be losers as well as winners, and there is no reason why the people whose jobs are taken should not be compensated. Payroll taxes make up a huge percentage of government revenues, especially in countries such as France. Lose that, and society may cease to function.

The trouble is, taxing robots is a terrible idea, and one that will only damage the economy. Here’s why.

First, there is no evidence to suggest that robots will destroy jobs — rather than simply change the type of work people do. We have a couple of hundred years of scare-mongering about new technology to tell us that every time a new type of machine comes along, everyone worries about what people will do instead. And then lots of new jobs get created that we never imagined before.

Gates, who destroyed the typing pool with his word-processing software, should know that better than anyone.

Next, robots won’t be paying the taxes — people will. It might seem obvious, but every automated machine will be owned by somebody, usually a person or a corporation. The tax will simply be paid by them. The robot itself won’t have a salary, and wouldn’t need one — they don’t eat, go out on dates, buy books or clothes, or do any of the things that people need money for. The tax will simply be paid by the owner. If we want them to pay higher taxes, we might as well charge them directly — rather than do it via the robot.

Finally, and perhaps most importantly, when you tax something you get less of it. That’s why we tax cigarettes or gas-guzzling cars at high rates — because we’d like people to give up smoking, or drive more fuel-efficient vehicles.

If we tax robots, at the margin, companies will use them a bit less often. Sure, that means we will keep a few low-paying jobs for a bit longer. But it will also slow down the rate of productivity growth, and in the medium term that will make everyone poorer.

If anything, we should offer business a tax break for installing robots — not a penalty.

And that’s before we even get into the issue of whether we want to pointlessly antagonize the robots by slapping taxes on them — you have to assume that all the people making that case have never watched any sci-fi.

In truth, AI and robotics promises to fuel a new wave of growth, which the world could certainly use. Even if it doesn’t, it will certainly replace lots of dull tasks, and remove a lot of daily drudgery. The last thing we want to do is tax that out of existence — no matter how many software billionaires tell us we should.

Article Link To MarketWatch:

Why Apple Should Buy Netflix

By Anita Balakrishnan
February 22, 2017

Netflix is fueling a surge of revenue growth for Apple's App Store, according to data released by analytics firm Sensor Tower on Tuesday.

Spending rose 130 percent year-over-year in 2016 in the "entertainment" category of the App Store, which includes HBO Now, Hulu and Netflix, according to data from Sensor Tower. Netflix in particular saw revenue hit $58 million in the fourth quarter, up from just $7.9 million a year earlier, Sensor Tower said, in a report released on Tuesday.

The data comes as investors are increasingly asking if Apple should buy an entertainment technology company, like Netflix, to draw down its enormous pile of cash and boost ambitious plans for the App Store.

Apple has said it wants to double its "services" revenue, including the App Store, by 2020. But despite having more than $240 billion in cash, Apple has resisted making a major acquisition, and Netflix hasn't given any hints, either.

"[I]f we wanted to do what everybody else is doing, then you're right, we might be better off buying somebody or doing that," Eddy Cue, Apple's head of content, said at Recode's Code Media conference earlier this month. "But that's not what we're trying to do. We are trying to do something that's unique."

Entertainment apps only account for about $2.30 of the $40 that U.S. iPhone owners spent on apps in 2016, Sensor Tower said, behind games and music. Still, Sensor Tower's data shows why industry watchers, like technology investor Eric Jackson, have said Apple "clearly should have bought Netflix."

Apple does not break out App Store spending separately from its $7.17 billion quarterly services revenue. But CNBC has reached out to Apple and Netflix for comment.

Article Link To CNBC:

The New Vision Of How Brexit Will Hit Britain

Forecasters are anticipating a drawn-out impact on output; Economy faces multitude of potential outcomes with the EU.

By Jill Ward and Scott Hamilton
February 22, 2017

The U.K. economy may be paying for Brexit for a long time to come.

The strength of the expansion since the vote to leave the European Union hasn’t allayed concern about how the decision will filter through the economy over the coming years. It won’t mean Armageddon, but the broad consensus among economists -- whose predictions about the initial fallout were largely too pessimistic -- is for a prolonged effect that will ultimately diminish output, jobs and wealth to some degree.

For analysts gauging likely outcomes, issues in the mix range from the fallout on trade, investment and London’s financial district to knock-on effects on hiring, inflation and demand. There may also be offsetting factors to take into account, including if any of the lost benefits of EU membership can be replicated or replaced via other deals.

With Prime Minister Theresa May indicating she’s pursuing a hard Brexit -- cutting the U.K. from the bloc’s single market for greater control over migration -- scenarios with higher economic costs have become more likely. Among the most pessimistic is one from MIT forecasting a loss of as much as 9.5 percent of income.

“Trade, openness and migration are the big issues,” said Andrew Goodwin, an economist at Oxford Economics. “We’d expect the sort of deal the U.K. is going for to result in some degree of trade destruction. And if we’re talking about reducing the level of migration, that’s likely to result in growth prospects being weaker.”

Even with the drag from Brexit, Bloomberg Intelligence and PricewaterhouseCoopers note the U.K. will still outperform most other major euro-zone economies. Others are even more optimistic, with the Economists for Free Trade group seeing a boost from an “optimal” policy of scrapping import tariffs.

How it all plays out will also influence Bank of England policy, with Governor Mark Carney saying on Tuesday that the various Brexit scenarios will help determine when interest rates rise and how fast.

Rounding up some of the assessments shows the variety of potential outcomes from leaving the EU and losing free access to the world’s largest open trading bloc. The U.K.’s potential growth -- how fast it could grow using all resources most efficiently -- could also be undermined. The selection of forecasts here are all based on different assumptions, reflecting the multiple Brexit options.

Output loss of as much as 9.5% per person

Bank of America Merrill Lynch:
Losses in the order of 5-10% of GDP over 15 years

Morgan Stanley:
Potential growth cut by about 0.5 percentage point per annum if no trade deal and U.K. reverts to WTO rules

If 10% of financial sector activity operated by foreign institutions transfers, GDP declines by 0.2%

Berenberg Bank: Potential growth to slip to 1.8% from 2.2%

Oxford Economics:
Potential growth to fall to 1.6% from pre-crisis norm of 2.5%

Economists for Free Trade: Tariff-free trade with the bloc, alongside the rest of the world, and removal of EU regulation, could boost growth by up to 6%

While the more negative views may be in the majority, they’re unlikely to derail May’s government from its current path.

If the pre-referendum warnings of recession and economic apocalypse -- since proved unfounded -- weren’t enough to give “Remain” victory last June, then long-term, somewhat nebulous, projections a decade or more out are unlikely to shake the resolve of those who want to press on with leaving.

Once the exit process known as Article 50 is triggered -- May aims to do it by the end of March -- there are still many unknowns, with vastly different options covering everything from trade tariffs and migration to financial services.

An agreement similar to, for example, that between the bloc and Norway, versus falling under World Trade Organisation rules, would mean different outcomes. There’s also the question of a transitional deal, and how long that could last.

Weak Link

The U.K. may try to protect certain industries in its negotiations. A deal that hurts services -- the biggest part of the economy -- would be particularly painful, and the relocation of financial institutions from London to other European locations could also widen the near-record current-account deficit.

The prime minister spelled out her vision for a “global Britain” in a speech in January. Most European leaders insist the single market’s free movement of goods and services is indivisible from the free movement of people, so a deal that gives the U.K. close to free access without immigration could be unlikely.

Austria’s Chancellor Christian Kern even said this month that the EU should ensure the U.K. ends up in a worse situation, and German Chancellor Angela Merkel has indicated she will take a tough stance in the talks.

In the meantime, uncertainty remains the default.

“We formed a view in the immediate aftermath of the referendum about the range of possible long-run impacts -- quite a broad range of possibilities,” BOE Chief Economist Andy Haldane said this week. “We haven’t fundamentally changed that view, not least because we don’t have very much extra information on how that might look.”

Article Link To Bloomberg:

The Opening For Investors In Europe's Political Turmoil

By Komal Sri-Kumar
The Bloomberg View
February 22, 2017

After a period of relative calm, volatility and investor fear have returned to Europe. Investors took in stride the Brexit vote last June, along with the decision by Italian voters in December to reject Prime Minister Matteo Renzi’s referendum, which led to his resignation. But three national elections this year -- in the Netherlands next month, in France in April and May, and in Germany in September -- have fed uncertainty in currency, bond and equity markets. Italy may also move up the national elections set for early 2018, contributing to political risk on the continent.

Investor fear is centered on the possibility that an anti-Europe party could form the next government in one or more of these countries, leading to measures that could eventually take that country out of the euro zone. With the euro no longer the nation’s currency, assets would be redenominated in the new currency. Market concerns are focused on France and Italy, where debt has surged since the global financial crisis to 97 percent and 132 percent of gross domestic product, respectively.

The risk of a debt default or redenomination has created wider bond spreads in France and Italy with respect to Germany. With the anti-Europe candidate Marine Le Pen rising in the polls before the first round of the French presidential elections on April 23, the spread of the French 10-year sovereign over the German 10-year bund rose to 79 basis points at the close of European markets on Feb. 21, up from 48 basis points at the end of 2016.

Over the same period, the Italian spread increased from 155 basis points to 195 basis points over fears that the nationalistic Five Star Movement could form the next government. The spread surged this week after Renzi’s resignation from the ruling party on Sunday. If mainstream candidates continue to lose support in coming weeks, expect the French and Italian spreads to rocket upward from current levels.

How can investors in Europe incorporate political risk? One pointer comes from the way bond markets performed after risk of Greece’s exit from the single-currency area first surfaced in late-2009. Growing fears of “Grexit” caused the yield on 10-year Greek sovereign debt to go from 6 percent at beginning of March 2010 to 12.5 percent just two months later.

After a bailout arranged by the International Monetary Fund, the European Central Bank and the European Union, the yield dropped to 7.2 percent by mid-May. Investors who banked on Europe’s penchant for last-minute solutions benefited handsomely by buying Greek paper at its worst moment, and exiting when the bailout was announced. Even though Greece is a relatively small country, the euro zone could not afford setting the precedent of an exit in what is supposed to be a marriage without divorce.

Another example of bond investors dealing with euro zone financial crises is the surge in Italian sovereign yields in 2011 because of fear that the government might not comply with EU restrictions on its fiscal deficit under then-Prime Minister Silvio Berlusconi. The yield on the 10-year sovereign paper topped out at more than 7 percent in November 2011, about 500 basis points over the German bund. However, after a pledge in July 2012 by Mario Draghi, the president of the ECB, to “do whatever it takes” to save the euro, the situation stabilized. Italian debt ended the year yielding less than 4.5 percent. Again, if you bet on European officials muddling through at the final minute, you won.

The past is not always a perfect guide to the future, of course. Investors are currently faced with not one, but four, countries with rising anti-Europe forces. And France and Germany are significantly larger countries than Italy or Greece. What if Le Pen wins the presidency in May, and sets the stage for the country to exit the euro zone after a referendum?

In that case, French assets could be redenominated in “New French Francs,” which would promptly depreciate against the euro and the dollar. But remember that France runs a deficit in the current account of the balance of payments, and needs to encourage capital inflows to finance the shortfalls. The new government might have to implement policies that are investor-friendly to have foreigners provide the necessary capital.

While redenominated French debt may never regain its par value in euro- or dollar-terms to make holders whole, investors with a medium-term horizon should find ample opportunities in “distress” investments. Real estate, new currency-denominated debt at high yields, and well-managed export-oriented French companies taking advantage of the depreciated currency, would all be candidates for attractive returns under a new currency regime.

The bottom line is that 2017 looks like a year of huge investment opportunities in Europe. Another one-off problem similar to those of Greece and Italy in the past may make the bond markets attractive. An “Italexit” or “Frexit” would require investors to wait longer, but they should find returns in a variety of asset classes.

Article Link To The Bloomberg View:

Market Timing Is Out Of Favor -- So Is A Stock-Market Top Near?

What the Market Timing Popularity Cycle says about the current market.

February 22, 2017

Market timers are struggling. And that means a market top could be imminent.

That’s because of a decidedly unscientific indicator that I created two decades ago called the Market Timing Popularity Cycle. It’s based on the distinct tendency for market timing to reach the point of greatest popularity at stock-market bottoms (when advisers confidently pronounce that “buy and hold is dead”) and to become least popular at market tops (when buy and hold makes a big comeback).

And market timers are indeed struggling. In fact, in my four decades of tracking the industry I have hardly ever witnessed market timing to be more out of favor than it is now.

To illustrate, consider perhaps the most widely used technical indicator that market timers use to determine that we’re in a major bear market: the stock market breaking its 200-day moving average. When this happened to the S&P 500 SPX, +0.60% last June, however, the break marked the end of the market’s decline, not the beginning. The market immediately shot back up, as the chart above shows.

The same thing happened last November in the hours after it became clear that Donald Trump would win the election.

Of course, many market timers focus on a myriad of different indicators besides the 200-day moving average, and not all of them have struggled. But the vast majority have. One of the advisory industry’s most successful timers recently told me that “2016 was the worst year of my 35-year career!”

To be sure, the Market Timing Popularity Indicator can’t be used as a precise market-timing indicator, since measuring market timing’s popularity is not an exact science. However, I did get lucky on two prior occasions of using the Indicator to pinpoint changes in the market’s major trend:

•On March 2, 2009, one week before the bottom of the 2007-2009 bear market, I wrote a column on market timing’s new-found popularity in which I concluded that “the final low may be closer than we think.”

•In March 2003, I devoted a column to the conversion of a prominent believer in buy-and-hold into a market timer. I wrote that “we’re closer than ever to the final low of the 2000-2003 bear market.” That column appeared on March 11, 2003, the day the market retested the bear-market low that had been hit the prior October and then turned higher.

Undoubtedly I will not always be so lucky. So you should take with a healthy grain of salt my current interpretation of the Market Timing Popularity Cycle.

Still, it should give us all pause that past major market tops were accompanied by market timing being as unpopular as it is today.

Article Link To MarketWatch:

Airbus Takes $2.3 Billion A400M Hit, Sees Profit Gain This Year

Jet programs set to improve but troop carrier still a headache; Planemaker predicts mid-single-digit earnings advance in 2017.

By Andrea Rothman
February 23, 2017

Airbus Group SE said profit will increase this year as it regains control over costs and production challenges from a switch to the latest A320 narrow-body aircraft and increased output of the A350 twin-aisle model.

The company still major faces issues with the delayed A400M military transport, which it said Wednesday “remains a concern” following charges of 2.2 billion euros ($2.3 billion) last year that weighed on net figures.

What should be boom times at Airbus given a record order book have been frustrated by holdups including a shortage of interior fittings for the A350 and engine glitches with a revamped version of the A320 that caused it to make more lower-margin older planes. Chief Executive Officer Tom Enders is betting that the problem models will get back on track this year, allowing the Toulouse, France-based company to reap the benefits of higher build rates.

“The progress we made last year gives us confidence that we have the building blocks in place to achieve our earnings and cash-flow growth potential,” Enders said in a statement.

De-risking and strengthening the A400M program will also be a top priority for 2017, he said. While a “crisis” concerning the model’s propeller gearbox was addressed with an interim fix, further challenges have emerged concerning the plane’s military capabilities, so that cash retention by customers will weigh on the program into 2018, causing Airbus to seek talks to cap its exposure.

Airbus shares traded 0.7 percent lower at 66.77 euros as of 9:07 a.m. in Paris after earlier falling as much as 0.9 percent. The stock has advanced 6.3 percent this year.

Cash-Flow Boost

While group earnings before interest and tax fell 3.6 percent to 3.96 billion euros last year, held back by the stuttering jetliner projects and a weaker performance at defense and helicopter divisions, the figure was marginally ahead of the 3.80 billion euros estimated by analysts.

Airbus also met its goal of achieving positive free cash flow, which totaled 1.4 billion euros, recovering from a negative 4.73 billion euros after the first nine months as the company delivered a mammoth 266 planes in the final quarter, or two-fifths of the annual total. This year’s figure should be similar, before takeovers, disposals and customer financing.

About 85 percent of the A320 delivered in 2016 were older variants following cooling issues with a Pratt & Whitney turbine that’s one of two power-plant choices on the higher-priced Neo or New Engine Option model.

The company also sold some of its defense activities last year, curbing earnings, and spent more on funding airline orders after European agencies suspended export-credit assistance amid a bribery probe begun by the U.K. Serious Fraud Office.

Enders has broken down barriers between Airbus’s group structure and the commercial jetliner arm, making the division’s chief Fabrice Bregier his effective No. 2 as chief operating officer for the whole company. That’s also meant job losses among the company’s white-collar staff, as well as at a helicopter unit hurt by lower demand.

Article Link To Bloomberg:

Lloyds Swings To Fourth-Quarter Profit As It Boosts Dividend

Lender reports a surprise climb in adjusted pretax profit; Lloyds says net interest margin will be above 2.7% this year.

By Richard Partington
February 22, 2017

Lloyds Banking Group Plc, Britain’s largest mortgage lender, boosted its dividend and said lending margins would hold up this year amid record-low U.K. interest rates as the bank swung to a fourth-quarter profit.

Pretax profit was 973 million pounds ($1.22 billion), compared to a loss of 507 million pounds a year earlier, the London-based bank said in a statement Wednesday. Excluding one-time charges, profit rose 2 percent to 1.79 billion pounds, topping the 1.71 billion-pound average of seven analyst estimates compiled by Bloomberg News.

Chief Executive Officer Antonio Horta-Osorio, 53, is looking to protect Britain’s largest consumer bank from the pressure of record-low interest rates by eliminating jobs and expanding in higher-margin lending with the acquisition of Bank of America Corp.’s MBNA U.K. credit card business. Lloyds said its net interest margin would be more than 2.7 percent in 2017 before the MBNA purchase, higher than many analysts had forecast.

“We have delivered strong financial performance in 2016 as we continue to make good progress against our strategic priorities,” Horta-Osorio said in the statement. “Strong capital generation, which is a consequence of our business model, has enabled us to fully cover the expected capital impact of the MBNA acquisition, increase our ordinary dividend by 13 percent and pay a special dividend.”
Dividend Boost

Lloyds shares climbed 4.1 percent to 69.49 pence at 8:01 a.m. in London trading, the biggest jump since December. Although Lloyds shares have climbed this year, the bank is still below where it traded before Britain voted to leave the European Union in June. BlackRock Inc. replaced the U.K. government as the largest shareholder last month as the state continues to gradually shed its stake.

Lloyds said it would pay an ordinary dividend of 2.55 pence per share and a special dividend of 0.5 pence per share, up from total payouts of 2.75 pence a year earlier. The firm’s core Tier 1 capital ratio, a measure of financial strength, rose to 13.8 percent from 13.4 percent at the end of September.

The net interest margin, the difference between income from lending and the cost of funding, fell to 2.68 percent from 2.69 percent in the third quarter. Impairments fell 16 percent from a year earlier to 196 million pounds. Revenue fell 2 percent to 4.35 billion pounds.

The bank had more than 800 million pounds of one-time items, including 475 million pounds of conduct charges and 232 million pounds of restructuring costs. Chief Financial Officer George Culmer said the conduct provisions, which related to issues including claims over packaged bank accounts, were “disappointing,” and the bank expects them to fall in future periods.

Lloyds didn’t take any provisions for the payment protection insurance scandal in the quarter, after a 2.1 billion-pound charge in the year-earlier quarter drove that period’s loss. The lender has taken more than 17 billion pounds in provisions since 2011.

Article Link To Bloomberg:

U.S. Oil Holds Near Seven-Week High; OPEC Upbeat On Output Curbs

By Aaron Sheldrick
February 22, 2017

Oil prices held near multi-week highs on Wednesday after OPEC signaled optimism over its deal with other producers to curb output to clear a glut that has weighed on markets since 2014.

The U.S. West Texas Intermediate April crude contract, the new front-month future, was up 17 cents, or 0.3 percent, at $54.50 a barrel. On Tuesday, the March contract expired up 1.2 percent after reaching its highest since Jan. 3.

Brent crude was up 17 cents, or 0.3 percent, at $56.83, having touched its highest since Feb. 2 at $57.31 in the previous session.

"We are nearing the top of the trading range for West Texas and Brent and so the next couple of sessions will be crucial from a technical point of view, at least in determining which way we break," said Michael McCarthy, chief market strategist at CMC Markets in Sydney.

"The DoE data tomorrow will be where we get our next impetus," he said, referring to the U.S. Department of Energy's official weekly numbers on crude and petroleum product stockpiles.

The data is set to be released on Thursday, a day later than normal, following a U.S. public holiday on Monday.

Last week's numbers showed U.S. output helped boost crude and gasoline inventories to record highs, amid faltering demand growth for the motor fuel. [EIA/S]

That has kept a lid on prices after they climbed following an agreement by the Organization of the Petroleum Exporting Countries and other producers to cut output by about 1.8 million barrels per day (bpd).

Mohammad Barkindo, OPEC secretary general, told an industry conference in London on Tuesday that January data showed conformity from member countries participating in the output cut had been above 90 percent. Oil inventories would decline further this year, he added.

Goldman Sachs, however, noted that a rebound in U.S. drilling activity had exceeded even its own above-consensus expectations.

"While the reduction in supplies out of core OPEC in the Gulf and Russia has exceeded our and consensus expectations, the market is starting to doubt that this will be sufficient to translate into large oil inventory draws by 2Q17," it said in a research note.

Article Link To Reuters:

Goldman Sachs Says Global Crude Stocks Likely To Keep Falling

By Arpan Varghese
February 22, 2017

Goldman Sachs expects global crude oil inventories to keep falling due to production cuts and strong growth in demand, although stocks are likely to rise in the United States.

"We do not view the recent U.S. builds as derailing our forecast for a gradual draw in inventories, with in fact the rest of the world already showing signs of tightness," analysts at the bank said in a note dated Feb. 21.

"Given our unchanged 1.5 million barrels per day growth forecast for 2017, this higher base demand level should fully offset higher U.S. output."

The Wall Street bank reiterated its forecast for Brent and U.S. crude prices to rise to $59 and $57.50 per barrel respectively in the second quarter, before dropping to $57 and $55 for the rest of 2017.

Oil prices held near multi-week highs on Wednesday, with the U.S. West Texas Intermediate April crude contract up 18 cents at $54.51 a barrel at 0228 GMT (5:28 a.m. ET), while Brent crude was up 24 cents at $56.90.

Surging U.S. output has pushed crude and gasoline inventories to record highs, keeping a lid on prices after they climbed following an agreement by the Organization of the Petroleum Exporting Countries (OPEC) and other producers to cut output by about 1.8 million barrels per day (bpd).

"While the production cuts have so far reached a historically high level of compliance at 90 percent, the rebound in U.S. drilling activity has exceeded even our above consensus expectations," Goldman said.

However, the increase in U.S. drilling points to factors including further improvement in shale productivity and funding for the industry, rather than expectations of an increase in prices, the bank said.

Article Link To Reuters:

Pipeline Fights Move From Dakota Prairie To Louisiana Bayous

By Liz Hampton
February 22, 2017

When Hope Rosinski's father gave her a six-acre plot in Louisiana more than a decade ago, she was surprised to find oil and gas pipelines crisscrossing the property.

Pipeline companies later secured her permission for two more lines, one of which has since caused flooding and consistently leaves her land saturated.

Now she's had enough. Rosinski is fighting the latest request for a right-of-way, this time from Energy Transfer Partners - the company behind the controversial Dakota Access Pipeline. She said ETP declined to make contract changes she wanted or to properly compensate her for lost property value.

Opposition to the company's planned extension of the Bayou Bridge pipeline has made Louisiana bayous the latest battleground in a nationwide war against new pipeline construction.

The pushback here is one example of the increasingly broad and diverse base of opposition nationally, which now extends beyond traditional environmental activists. In Louisiana, opponents include flood protection advocates, commercial fishermen and property owners such as Rosinski.

Their fight follows high-profile protests in North Dakota that were led by Native Americans and joined by military veterans, who together succeeded in convincing the Obama administration to delay construction.

Although the new administration of President Donald Trump has since cleared that project's completion, pipeline companies are nonetheless taking the rising political opposition seriously. Alan Armstrong, chief executive at pipeline firm Williams Companies, told a conference in Pittsburgh that Trump's action would not hamper the protest movement.

“It may even enhance it,” he said the day after Trump cleared the Dakota pipeline in January.

Pipeline supporters argue that more infrastructure is essential for the oil and gas industry to provide affordable energy and reduce dependence on foreign imports and dirtier energy sources such as coal.

Opponents counter that pipeline companies can't be trusted to prevent leaks. Technology designed to detect spills only accomplished that goal in 20 percent of known pipeline leaks between 2010 and 2016, according to a Reuters analysis of data from the U.S. Pipeline and Hazardous Materials Safety Administration.

Energy Transfer and its affiliates had among the most spills of any pipeline company, with nearly 260 leaks from lines carrying hazardous liquids since 2010, according to the Reuters analysis. An ETP spokesperson said most of those spills were small and occurred on company property.

The company said in a statement that it seeks to work with landowners and communities to “build the pipeline in the safest, most environmentally friendly manner possible."

ETP's relations with Rosinski, however, have apparently broken down. She told Reuters that the firm has threatened to take her to court for the right of way, citing legal rights of pipeline companies to build infrastructure for broader public benefit.

Rosinski wants to resist, but knows a court battle could be costly and lengthy.

“I’m a single mom," she said. "I don’t have the finances."

ETP declined to comment specifically on Rosinski's case but said it typically gets voluntary agreements on easements from owners in about 9 out of 10 cases, without legal action.

Not In My Backyard

Some pipeline protesters are driven by opposition to any expansion of fossil fuel development, but many have more local and specific concerns.

Many protests so far - including the encampment in North Dakota, led by the Standing Rock Sioux tribe - have focused largely on fear of water contamination.

Similar objections have cropped up in West Texas from protesters of Energy Transfer's Trans-Pecos gas line, and in Arkansas and Tennessee over the Diamond Pipeline operated by Plains All American Pipeline.

Activists in Pennsylvania have been fighting a Williams Companies pipeline plan for three years. The company is looking to add 185 miles of new pipeline to its Atlantic Sunrise line, connecting the northeastern Marcellus natural gas shale region with the southeast part of the state. Opponents have argued the expansion could cause an explosion or taint the local water that supplies farms.

They're borrowing tactics from Standing Rock tribe's standoff. Malinda Clatterbuck, 46, of Lancaster, Pennsylvania, who leads the group Lancaster Against Pipelines, said residents are setting up a camp in Conestoga, where a right-of-way has been granted, and plans to live on and off at the camp with her family.

“I’m exhausted and angry about this," she said. "Why do we have to upend our lives just to try to get justice for our community?"

Williams said it has operated 60 miles of pipeline safely in Lancaster County and that the company plans to exceed federal safety standards for the extension.

“We’ve also heard from thousands of people who support the project - individuals, chambers and business groups - who recognize the economic benefit,” the company said in a statement.

Dead Crawfish In The Bayous

In Louisiana - home to massive oil refineries and about 50,000 miles of pipelines - ETP's planned Bayou Bridge extension would run across southern Louisiana for about 160 miles, between Lake Charles and St. James.

The state has a mutually beneficial but testy relationship with the oil industry, which is widely blamed for cutting through wetlands and contributing to coastal erosion that has left Louisiana more vulnerable to hurricanes and flooding.

Some opponents of the Bayou Bridge are concerned that its construction will pollute drinking water and constrict drainage systems during heavy rains. Others want to see pipeline companies take better care of the environment during and after construction.

Jody Meche, 47, of Henderson, fears economic damage. He has fished in the Atchafalaya Basin for a quarter century. For years, he has been pushing companies to remove spoil banks caused by pipeline construction and oil exploration because they hurt the commercial fishing industry.

The spoil banks act as dams inside the basin, damaging the local ecosystem by stopping water flow.

Meche can sees the impact in the crawfish traps he pulls up from the bayou daily during the season, from February to early summer. The critters resemble tiny lobsters and are in high demand at bars and backyard boils from New Orleans to Houston.

“The stagnant water is not good for them at all," Meche said. "They don’t grow as well, they don’t eat as much, they are very lethargic."

Meche can sell large, healthy crawfish for about $1.50 a pound. But the smaller ones he often catches these days fetch half that, and many in his traps these days are dead and worthless.

Contract Dispute

Rosinski, meanwhile, is still fighting with Enterprise Products Partners, the pipeline company she said damaged her property during construction of an ethane line a few years ago. She said she has spent the last year trying to get Enterprise to restore her land and stop the flooding.

The cost to fix it could be as little as $1,200, she said.

Enterprise told Reuters it hopes to resolve the issue amicably, but that it has not gotten clear guidance from an attorney hired by Rosinski.

Rosinski received the right-of-way request from Energy Transfer Partners as she was squabbling with Enterprise. She suggested 30 changes to the contract and requested more compensation. ETP refused, she said, and told her it may take up the dispute in court.

"I've done my part," she said of her previous agreements to allow pipelines through her property. "They’re consuming my land."

Article Link To Reuters:

Dollar Slips As Market Awaits Fed Minutes

February 22, 2017

The dollar lost ground in Asian trading on Wednesday as investors awaited the minutes of the Federal Reserve's latest meeting for clues as to the pace of interest rate hikes, while Europe's political woes kept a bruised euro under pressure.

The Fed minutes due to be released later on Wednesday could either reinforce or undermine recent hawkish comments from central bank policy makers.

Cleveland Fed President Loretta Mester said late on Monday in a speech in Singapore that she would be comfortable raising rates at this point if the economy maintained its current performance.

Philadelphia Fed President Patrick Harker also told reporters on Monday that he would support an interest rate increase at a mid-March policy meeting as long as inflation, output and other data until then continue to show the U.S. economy is growing.

The dollar was 0.2 percent lower at 113.45 yen, edging away from its peak of 114.955 yen touched a week ago, which was its highest since late January.

"The dollar was pushed up by the Fed talk, but its upside is heavy in the Asian session, due to factors including Japanese companies' seasonal repatriation," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo.

"We're all waiting for the minutes, to see if members talked about reducing the Fed's balance sheet," he said.

Money market futures continued to price in approximately a one-in-five chance of a rate hike at the Fed's next meeting in March.

The dollar index, which tracks the greenback against a basket of six major currencies, was last down slightly at 101.33 after hitting a six-day high of 101.600 overnight.

Bank of Japan Governor Haruhiko Kuroda said the chance of the central bank lowering interest rates deeper into negative territory was low for now, backing market expectations that no additional monetary easing would be forthcoming in the near future.

Japanese Finance Minister Taro Aso said that Japan was not thinking now of issuing negative rate Japanese government bonds.

The euro was up 0.1 percent at $1.0545 after slipping to a low of $1.0526 overnight. A break of the Feb. 15 low of $1.05215 would put it in its deepest trough since Jan. 11.

The euro remained pressured by market concerns about the anti-European Union rhetoric from French presidential candidate Marine Le Pen ahead of the first round of French elections on April 23.

An Elabe poll showed the lead of centrist Emmanuel Macron and conservative rival Francois Fillon over Le Pen falling to 18 and 12 points respectively, suggesting Le Pen may have more chance of springing a surprise if she can make it through to the second round of the elections in May.

Sterling got a lift from the euro's woes, rising 0.3 percent against the dollar to $1.2504. The euro gave up 0.2 percent against the pound to 84.34 pence, after earlier falling as low 84.29, its lowest since Dec. 22.

"There's some sterling shortcovering, fuelled by euro/sterling falling to a two-month low," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong.

"We've got fourth-quarter GDP out later, which will be the key focus there, particularly as any upward revision is likely to propel euro/sterling further downward," she said, referring to the second estimate of UK gross domestic product.

But underpinning the single currency, purchasing manager index (PMI) reports showed the euro zone economy expanded much faster and more smoothly than expected.

Eurozone private sector and manufacturing growth unexpectedly accelerated to near a six-year high in February and job creation reached its fastest since August 2007.

Article Link To Reuters:

Automakers Urge New EPA Chief To Withdraw Obama Car Fuel-Efficiency Rules

By David Shepardson
February 22, 2017

A trade association representing General Motors Co (GM.N), Toyota Motor Corp (7203.T), Volkswagen AG (VOWG_p.DE) and nine other automakers on Tuesday asked new Environmental Protection Agency chief Scott Pruitt to withdraw an Obama administration decision to lock in vehicle emission rules through 2025.

On Jan. 13, then-EPA Administrator Gina McCarthy finalized a determination that landmark fuel efficiency rules instituted by President Barack Obama should be finalized through 2025, a bid to maintain a key part of his administration's climate legacy.

Mitch Bainwol, president and chief executive of the Alliance of Automobile Manufacturers, said in a letter to Pruitt the decision was "the product of egregious procedural and substantive defects" and is "riddled with indefensible assumptions, inadequate analysis and a failure to engage with contrary evidence."

Automakers have argued that the rules could result in the loss of up to 1 million jobs because consumers could be less willing to buy the more fuel efficient vehicles since their engineering will result in higher price tags.

The EPA had until April 2018 to decide whether the 2025 standards were feasible but in November moved up its decision to Jan. 13, just before Obama left office.

Separately, the Association of Global Automakers, a trade group representing Honda Motor Co (7267.T), Nissan Motor Co Ltd (7201.T), Hyundai Motor Co (005380.KS) and others, said late Tuesday it had formally petitioned the EPA to withdraw the determination. The group argued in a separate letter to Pruitt Tuesday reviewed by Reuters that "EPA opted for political expediency" and "jammed through a final determination in the waning days of the lame-duck administration."

EPA spokeswoman Julia Valentine said the agency is reviewing the letter and declined to comment further. Pruitt told a Senate panel earlier he will review the Obama administration's decision.

The auto group requests follow a separate letter to President Donald Trump earlier this month from the chief executives of GM, Ford Motor Co and Fiat Chrysler Automobiles NV, along with the top North American executives at Toyota, VW, Honda, Hyundai, Nissan and others urging Trump to revisit the decision.

Automakers say the rules impose significant costs and are out of step with consumer preferences. Environmentalists say the rules are working, saving drivers thousands in fuel costs and should not be changed.

In 2011, Obama announced an agreement with automakers to raise fuel efficiency standards to 54.5 miles per gallon. This, the administration said, would save motorists $1.7 trillion in fuel costs over the life of the vehicles but cost the auto industry about $200 billion over 13 years.

The EPA said in July that because Americans were buying fewer cars and more SUVs and trucks, it estimated the fleet will average 50.8 mpg to 52.6 mpg in 2025.

McCarthy could not be reached Tuesday but said in her determination in January the rules are "feasible, practical and appropriate" and in "the best interests of the auto industry."

Article Link To Reuters:

Saudi Aramco Taps JPMorgan, Morgan Stanley For IPO, HSBC A Contender

By Mike Stone and Sumeet Chatterjee
February 22, 2017

Oil giant Saudi Aramco [IPO-ARMO.SE] has asked JPMorgan Chase & Co and Morgan Stanley to assist with its upcoming mammoth IPO and could call on another bank with access to Chinese investors, a source with direct knowledge of the matter said.

The U.S. banks have joined boutique investment bank Moelis & Co in being tapped for coveted roles in what is expected to be the world's biggest initial public offering worth some $100 billion.

HSBC Holdings Plc has emerged as the leading contender for a role among a list of five banks that could provide a pipeline to Chinese investors - an important part of the offering, the source said, adding that the other four are Chinese banks.

The final lineup for banks could still be adjusted, the source said, declining to be identified due to the sensitivity of the matter.

The IPO is the centerpiece of the Saudi government's ambitious plan, known as Vision 2030, to diversify the economy beyond oil. Up to 5 percent of the world's largest oil producer is likely to be listed on both the Saudi stock exchange in Riyadh and on one or more international markets.

Aramco, formally known as Saudi Arabian Oil Co, declined to comment, as did JPMorgan, Morgan Stanley and HSBC.

The Wall Street Journal reported earlier that JPMorgan, Morgan Stanley and HSBC had been selected as lead underwriters.

Citigroup Inc was also among those asked to pitch for an advisory position with Aramco, Saudi-based industry sources said last month.

The IPO plan has been championed by Deputy Crown Prince Mohammed bin Salman, who oversees the country's energy and economic policies. Last year, he said he expected the IPO would value Aramco at a minimum of $2 trillion, and that the figure might end up being higher.

Saudi Arabia is considering two options for the shape of Aramco when it sells shares in the national oil giant next year: either a global industrial conglomerate or a specialized international oil company, industry and banking sources have told Reuters.

Saudi Aramco has also appointed international law firm White & Case, which has a long-established relationship with the state oil giant, as legal adviser for its IPO, sources familiar with the matter told Reuters this month.

Saudi Arabia is favoring New York to list Saudi Aramco, while also considering London and Toronto, the Wall Street Journal reported on Monday.

The oil giant also held discussions with the Singapore Exchange regarding a potential secondary listing, sources have said.

Article Link To Reuters:

Italian Banks Struggle To Break Free From Soured Debt Cycle

By Valentina Za 
February 22, 2017

Italian banks are stuck in what stressed-debt experts call purgatory, still forced to pay a heavy price for their past sins despite loan data that suggests they are turning a corner.

The rate at which loans are souring hit an eight-year low last year, but banks still face some 8 billion euros ($8.5 billion) a year in fresh writedowns, based on past rates at which already-soured loans have gone into outright default.

Italy has 130 billion euros in unlikely-to-pay loans, where borrowers are in trouble but remain in business. As borrowers become insolvent, their loans are added to an existing mountain of debt known aptly as "sofferenze" or "suffering."

Each time that happens, banks make heavy writedowns, wiping out profits, undermining their balance sheets and adding to the instability within the euro zone's fourth-largest banking industry, which now has 200 billion euros in sofferenze.

The only way to stop loans from ending up there is for banks to get borrowers back on track.

"Unlikely-to-pay loans are like purgatory: to avoid plunging into the hell of bad loans you need to wash off your sins," said Katia Mariotti, associate partner of consultancy PwC, which calculated in an unpublished study that some 26 billion euros in unlikely-to-pay (UTP) loans turned into sofferenze in 2015.

"UTP loans don't go back to performing on their own. They must be actively managed, otherwise a very large share of them is bound to turn into bad debts."

In the port city of Genoa, bankers have taken the hint.

Guido Bastianini, chief executive of Genoa-based lender Banca Carige (CRGI.MI), has set to work to recover UTP loans as part of his pledge to cut the bank's overall problem loans, which make up a third of its loan book.

"It's an absolutely exceptional and excessive number," he told analysts on Feb. 10.

One of Carige's unlikely-to-pay debts is a $420 million loan to family-owned shipper Gruppo Messina, which used the money to renew its fleet and order eight of the world's largest container ships from South Korea's Daewoo Shipbuilding from 2009 to 2012.

The last of the bright-red vessels was delivered in 2015, in the middle of the shipping industry's worst slump on record as international trade slows and freight rates fall.

Messina is restructuring its debts and hopes the world's second-largest container line, Mediterranean Shipping Company, will become a shareholder. This is also Carige's best chance of getting its money back.

MSC said it and Messina were pursuing an agreement with the help of the bank. All three declined further comment.

Going Sour

When UTP loans cannot be nursed back to health they can be extinguished in two ways: sale or foreclosure.

If sold, the bank incurs a huge loss because the loans are currently valued well above their market price. For example, Italy's largest lender, UniCredit (CRDI.MI), is selling bad loans in the country's biggest such deal at just 13 cents to the euro.

That compares with an average net book value for UTP loans of around 72 cents to the euro -- and 41 cents to the euro for defaulted loans.

Foreclosure, or seizing collateral, is a long process that would "kill" the borrower and also not recover the entire loan.

The best cure normally entails both a debt and a corporate restructuring, a complex process that becomes a big challenge if the borrower is a small company, like most Italian firms, and its counterpart a loan official at a local bank branch.

Timely action is key.

Prelios Credit Servicing CEO Riccardo Serrini, a stressed debt specialist, said most UTP loans were corporate with property pledged as collateral.

"As time passes things only get worse. Think of a half finished property development: it's not like Barolo (wine), aging doesn't do it any good," Serrini said.

The PwC study, based on 2015 data, found that 56 percent of UTP loans at Italy's top 20 banks were still such after a year, while 22 percent became insolvent and 18 percent was either collected or returned to be performing.

Migration Hurts Profits

The migration of UTP loans into sofferenze is the main driver of fresh loan writedowns, said Victor Massiah, chief executive of Italy's fifth-largest lender, UBI Banca.

UBI said its inflows of problematic loans were down 70 percent from a 2012 high, but the rate at which UTP loans turned into sofferenze was still at a peak and would start declining only from this year.

"This is true for the whole system from what I see," Massiah said after UBI posted a 2016 loss of 830 million euros due to loan writedowns.

Broker Equita expects UBI's UTP migration rate to fall only slightly to 22 percent this year from an average of 24 percent in 2013-2015.

European Central Bank supervisors wants Italian lenders to cut overall problem loans, which make up nearly 18 percent of their total lending, and have unlikely-to-pay debt firmly in their sights, in some cases pushing for higher coverage ratios, banks say.

Italian banks booked 107 billion euros in loan writedowns in 2012-2015. The top six banks alone booked another 24 billion euros just last year.

For a graphic on Italian banks and their debt burden, click here.

Article Link To Reuters:

Confident Snap Brushes Off Concerns On Second Day Of IPO Roadshow

By Lauren Hirsch and Liana B. Baker
February 22, 2017

Snap Inc, owner of popular messaging app Snapchat, fended off investor skepticism on the second day of its IPO roadshow on Tuesday, betting on the charisma of CEO Evan Spiegel, 26, whom it introduced as a "once in a generation founder."

Snap is targeting a valuation of between $19.5 billion and $22.3 billion from listing on the New York Stock Exchange in two weeks. It cut its initial target of $20 billion-$25 billion last week following negative investor feedback.

In a room of more than 400 investors on the 36th floor of New York's Mandarin Oriental Hotel, Spiegel brushed aside concerns of slowing user growth and stressed Snap's potential to change "the way people live and communicate," according to sources who asked not to be identified because the meeting was closed to the press.

Many investors remained unconvinced by Snap's claim that it is more valuable than Facebook Inc (FB.O) based on revenue at the time of its IPO in 2012. Still, they acknowledged that Snap has built momentum as this year's biggest technology IPO and the darling of millennials.

"They could have been in their underwear up there and no one would have cared," said one investor who attended the roadshow on Tuesday.

In the Q&A with management that took up the entire session, not one attendee asked about the company's first-of-its kind share structure that offers IPO investors no voting rights. Investors were wary that being too critical might prompt the company to limit their allocation in the offering, an investor said.

Spiegel and co-founder Bobby Murphy will have the right to 10 votes for every share, and existing investors such as venture capital backers will get one vote for each share.

Investors seeking clear answers to concerns around metrics, particularly the company's long-touted new user growth, were disappointed. New user growth slowed in the second half of 2016, and just this week Facebook's WhatsApp introduced a disappearing photo-messaging service similar to Snapchat's. Last year, Facebook introduced disappearing videos to its Instagram platform that resemble Snapchat's.

Spiegel said the company's growth is "lumpy," due to new launches that have varying degrees of success. In a recent update of its IPO registration document, the company also pointed to technical issues facing Android devices that have hindered new user growth outside the United States.

Chief Strategy Officer Imran Khan asked investors to gauge how much users engaged by looking at Snap's cost of revenue. Traditionally, investors focus on metrics such as daily active users or minutes spent on the app.

Snap's cost of revenue is primarily driven by how much the company has to pay to partners such as Alphabet Inc's (GOOGL.O) Google and Inc (AMZN.O) to support data and bandwidth. This is based on how often users engage with the app and the types of features they use.

One investor saw a "huge red flag" when Snap's leaders did not answer the question of where they see the company in five years.

"There was so much hubris there it scared me away... This felt like the late technology bubble roadshows," one of the investors said, referring to the IPO bonanza of the dot-com boom in 2000.

Article Link To Reuters: