Monday, February 27, 2017

Monday, February 27, Night Wall Street Roundup: Stocks Close Higher, Dollar Steady Before Trump Speech

By Sinead Carew
February 27, 2017

Wall Street closed slightly higher on Monday and U.S. Treasury yields rose on hopes for rising rates and expectations for an infrastructure spending announcement in U.S. President Donald Trump's speech Tuesday night.

Oil futures were a mixed bag as the prospect of rising U.S. production offset reports of compliance with an OPEC production cut agreement.

While many investors were hoping Trump would unveil details of pro-business policies including tax reform, cash repatriation or infrastructure spending during his address to Congress Tuesday night, others were not ready to make new bets as they worried that the speech would disappoint.

Trump said earlier in the day that he would issue a big statement on infrastructure during his speech on Tuesday, but also said tax reform details would not be revealed until after the administration's proposal on healthcare.

"Investors want something concrete on corporate taxes or repatriation. They're more focused on that than the affordable care act, but the first focus of the administration is ACA," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

The Dow Jones Industrial Average .DJI rose 15.68 points, or 0.08 percent, to 20,837.44, the S&P 500 .SPX gained 2.39 points, or 0.10 percent, to 2,369.73 and the Nasdaq Composite .IXIC added 16.59 points, or 0.28 percent, to 5,861.90.

The Dow Jones Industrial Average scaled its 12th consecutive record high, its longest such run since 1987.

Benchmark 10-year notes US10YT=RR were last down 13/32 in price to yield 2.363 percent, from a yield of 2.317 percent late Friday. Dallas Fed President Robert Kaplan said the U.S. central bank might need to raise interest rates in the near future to avoid falling behind the curve on inflation.

“What the market reacted to was a combination of (Kaplan’s comments) with the fact that we might be getting signs that legislation may be sooner rather than later on things like tax reform and infrastructure, and that’s all very growth-positive," said Priya Misra, head of global rates strategy at TD Securities in New York.

The dollar .DXY was up 0.05 percent against a basket of major currencies ahead of Trump's speech and comments from Federal Reserve officials also expected this week.

The greenback reversed earlier weakness and the Japanese yen weakened, indicating a perception that a rate hike is more likely in coming months.

"I’d say the fundamental driver is interest rate differentials,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

MSCI's benchmark world stock index was unchanged .MIWD00000PUS after it hit a record high Thursday. Europe's benchmark index of leading 300 shares .FTEU3 fell 0.2 percent.

In commodities, Brent crude LCOc1 settled down 0.1 percent at $55.93 per barrel while U.S. West Texas Intermediate CLc1 settled up 0.1 percent at $54.05 per barrel as a global supply glut appeared to ease.

Spot gold XAU= turned down 0.4 percent to $1,251.3 an ounce, as its inability to hold above the 200-day moving average was a source of technical weakness. The precious metal had risen to $1,263.80 earlier in the day, its highest since Nov. 11.

Article Link To Reuters:

Wal-Mart Launches New Front In U.S. Price War, Targets Aldi In Grocery Aisle

By Nandita Bose
February 27, 2017

Wal-Mart Stores Inc (WMT.N) is running a new price-comparison test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi ALDIEI.UL and other U.S. rivals like Kroger Co (KR.N), according to four sources familiar with the moves.

Wal-Mart launched the price test across 11 Midwest and Southeastern states such as Iowa, Illinois and Florida, focusing on price competition in the grocery business that accounts for 56 percent of the company's revenue, said vendor sources with direct knowledge of the matter who did not wish to be identified for fear of disrupting business relations with Wal-Mart.

Wal-Mart's tests are aimed at finding the right price point across a range of products that will attract more shoppers, and then adjusting prices as needed.

Spot checks by Reuters on a basket of grocery items sold by competing Aldi and Wal-Mart stores in five Iowa and Illinois cities showed Wal-Mart's bid to lower prices is already taking hold. Wal-Mart consistently offered lower prices versus Aldi, an improvement over recent analyst estimates that Wal-Mart's prices have been as much as 20 percent higher than Aldi on many grocery staples.

The competition at these stores is intense, with both competitors selling a dozen large eggs for less than a dollar. A gallon of milk at some stores was priced at around $1. For a graphic, click:

The big box retailer also held meetings last week in Bentonville, Arkansas with food and consumer products vendors, including Procter & Gamble (PG.N), Unilever PLC (ULVR.L), Conagra Brands Inc (CAG.N), and demanded they reduce the cost they charge the retailer by 15 percent, sources said.

Wal-Mart also said it expects suppliers to help the company beat rivals on head-to-head pricing 80 percent of the time, these vendor sources said. The wide-ranging meeting with suppliers - where Wal-Mart discussed other topics - was also attended by Johnson & Johnson (JNJ.N) and Kraft Heinz Co (KHC.O), among others, sources told Reuters. The consumer goods companies did not respond to Reuters requests seeking comment.

These Wal-Mart moves signal a new front in the price war for U.S. shoppers, as the pioneer of everyday low pricing seeks to regain its competitive pricing advantage in traditional retailing.

For more than a year, Wal-Mart said it is investing in price while not sharing specifics. When asked by Reuters about the test and demands on grocery suppliers, Wal-Mart spokesman Lorenzo Lopez said the company is "not in a position to share our strategy for competitive reasons."

Germany-based discount grocer Aldi is one of the relatively new rivals quickly gaining market share in the hotly competitive grocery sector, which already boasts Kroger, Albertsons Cos Inc and Publix Super Markets as stiff competitors on price. A second Germany-based discount grocer, Lidl, is planning to enter the U.S. market this year, and together the German discounters pose a serious threat to Wal-Mart's U.S. grocery business.

The stakes are high for Wal-Mart. According to Scott Mushkin, managing director of Wolfe Research and a leading pricing analyst, the retailer would need to spend about $6 billion to regain market share from all of its grocery rivals.

Wal-Mart also needs to find ways to cut prices without further damaging its bottom line. In its latest quarter, gross margins slipped 8 basis points, while net income dropped 18 percent compared to the year-ago quarter. The company attributed the decline to factors such as price investments, which is essentially the cost of cutting prices.Vendors said Wal-Mart has told them it intends to maintain margins on average and lose money on some goods as part of its pricing plan. Wal-Mart told vendors it will absorb some of the losses so suppliers can adjust to the new pricing demand.

A supplier of consumer goods said Wal-Mart cut prices on some of his company's products by as much as 30 percent in some stores over the past few months.

"It helped them figure out the sweet spot that drives traffic," the person said.

Wal-Mart also said it wants vendors to make logistics improvements that would help vendors get $1 billion more in sales, though it did not specify the time period. The retailer asked vendors to work harder on shipping orders in full and on-time, which would trim delivery costs, reduce re-orders, and reduce out-of-stock problems that have vexed the retailer and hurt sales in recent years, vendor sources who attended the meeting told Reuters.

"Wal-Mart is trying to go back to where they were 10 years ago when they were absolutely the low price leader," a large packaged food supplier told Reuters on condition of anonymity. "We understand they are willing to give up profits to a large extent in some cases, so they can invest in their own brand."

Aldi and Kroger declined to comment on the story. Lidl and Publix did not respond to Reuters' requests seeking comment. Albertsons said running its stores means delivering price competitiveness every day, but did not comment specifically on the tests.

Heated Competition

Wal-Mart is eyeing both German chains based on its recent experience in the United Kingdom. Aldi and Lidl, with their no-frills stores, limited product assortment and low-cost model, have successfully upended the grocery market there, cutting into the sales of larger players like Tesco Plc (TSCO.L) and Asda, Wal-Mart's UK arm.

A Reuters spot check of markets where Wal-Mart is running its new U.S. pricing program indicates the retailer has already taken the price battle to Aldi. The Reuters check of Wal-Mart and Aldi stores in five Midwestern cities where Wal-Mart is running its test found Wal-Mart's prices for a basket of 15 staples averaged 8 percent less than Aldi's products.

Reuters conducted the price comparisons in Dubuque and Davenport, Iowa, and Moline, Dixon and Galesburg, Illinois. At each, Reuters collected prices for a basket of 15 similar-sized products including private-label packages of butter and milk, along with branded items like Crest toothpaste and 2 liter-bottle of Coca-Cola.

In some cases, Wal-Mart's prices were as much as 10 percent cheaper than at Aldi. Reuters found Wal-Mart's prices were lower on at least eight and as many as 12 items in each of the five locations.

Wal-Mart is also conducting the price comparisons in Georgia, Indiana, Kansas, Kentucky, Michigan, North Carolina, South Carolina and Virginia, according to sources.

In the United States, Aldi is starting from a small base and Lidl has not yet opened its first store. Aldi, with roughly 1,600 U.S. stores, accounts for only about 1.5 percent of the U.S. grocery market - but it is growing at 15 percent a year. Mushkin of Wolfe Research estimated Aldi and Lidl together could grab as much as seven percent of the U.S. market over five years.

Wal-Mart currently controls about 22 percent of the U.S. grocery market, and its U.S. sales are estimated to grow about 2 percent this year, according to analysts.

Over the past few years, Aldi's prices have been about 20 percent lower than Wal-Mart's, said Mushkin of Wolfe Research. When Mushkin in December compared Wal-Mart and Aldi prices in Connecticut for private label goods - the retailers' own brands, typically the lowest-priced goods in each category - he found the German chain's prices were 24 percent lower.

Article Link To Reuters:

'Made in China' Isn't So Cheap Anymore

By Sophia Yan
February 27, 2017

Turns out that "made in China" is not so cheap anymore as labor costs have risen rapidly in the country's vast manufacturing sector.

Chinese factory workers are now getting paid more than ever: Average hourly wages hit $3.60 last year, spiking 64 percent from 2011, according to market research firm Euromonitor. That's more than five times hourly manufacturing wages in India, and is more on par with countries such as Portugal and South Africa.

As China's economy expanded at breakneck speed, so has pay for employees. But the wage increase has translated to higher costs for companies with assembly lines in China. Some firms are now taking their business elsewhere, which also means China could start losing jobs to other developing countries like Sri Lanka, where hourly factory wages are $0.50.

Apparel manufacturing has been hit "extremely hard," said Ben Cavender, a principal at Shanghai-based China Market Research. "The result has been that factory owners have gone on a massive investment spree outside of China."

Companies are also investing in robots in efforts to automate as much as possible to offset labor costs, according to Jefferies analysts Sean Darby and Kenneth Chan. China's industrial robotics market became the world's largest in 2013, and is continuing to grow.

With fewer jobs available — and perhaps more robots buzzing on factory floors — experts maintain unemployment will be an ongoing concern, especially as the government works to maneuver the world's second-largest economy away from manufacturing and toward services.

"You're talking about a way to re-skill millions of workers, but it's not clear what jobs they're going to be placed into," Cavender said. "They're creating white collar, clerical jobs here as quickly as possible, but it's still not enough to go around."

Article Link To CNBC:

We’ve Entered An Era Of Disbelief

By Robert J. Samuelson
The Washington Post
February 27, 2017

We live in an age of disbelief. Many of the ideas and institutions that have underpinned Americans’ thinking since the early years after World War II are besieged. There is an intellectual and political vacuum into which rush new figures (Donald Trump) and different ideas (America First). These new ideas and leaders may be no better than the ones they displace — they may, in fact, be worse — but they have the virtue of being new.

Almost everything about the U.S. election defied belief, from Trump’s victory to the Russian hacking of Democratic computers, to Trump’s numerous falsehoods and smears. Could this really be happening? The campaign recalled humorist Dave Barry’s famous line, “I’m not making this up.”

To say that this is an era of disbelief means, quite literally, that millions of Americans no longer believe what they once believed. There is a loss of faith in old orthodoxies and the established “experts” who championed them. There are three areas where Trump suggests major departures from existing policies.

First, the economy. Despite a 4.8 percent unemployment rate, the recovery from the 2007-2009 Great Recession has been middling. The number of payroll jobs, 145.5 million in January, was only 5 percent above the level in January 2008, the peak in the previous economic expansion. Millions of workers have dropped out of the labor force, notes Nicholas Eberstadt of the American Enterprise Institute. Gross domestic product (GDP) — the economy’s output — has been growing only about 2 percent annually. The Trump administration believes it can raise that to 3 percent or more through lower tax rates, less regulation and more aggressive trade policies.

Second, the world order. Since the late 1940s, the United States has provided physical and economic security for our allies through alliances (NATO) and trade agreements. The collapse of the Soviet Union in 1991 signaled the success of this strategy and — it was said — marked the beginning of a long period of peace and prosperity, presided over by the United States. Trump is unsympathetic to this global role, which (he argues) burdens us with large costs in both blood and treasure. He wants trade agreements to be more favorable to us, and for our allies to pay for more of their defense.

Third, the welfare state. Here, Trump’s plans are fuzziest. He has said he would protect Social Security and Medicare but other anti-poverty programs could face cuts. One way or another, immense sums are involved. Under existing policies, the Congressional Budget Office estimates that all welfare programs, from Social Security to food stamps, will cost $34 trillion from 2018 to 2027; that’s two-thirds of federal spending projected over this period. The deficit is already $9 trillion for these years.

To be sure, there are other areas of policy differences from the status quo, immigration and climate change being two examples.

Just what will be proposed and enacted, and the consequences, are unknown. There are plenty of skeptics — including me — who think Trump’s agenda is largely impractical or undesirable. To take one example: Since at least John F. Kennedy, presidents have pledged to increase economic growth. What we have learned is that, over meaningful time periods (say, four or five years), they can’t control economic growth. It’s too complicated to be easily manipulated.

Or consider the United States’ relation with the world. I fear that an America in retreat will create a world that is less stable, more fractious and more dangerous. The perception of our weakness would encourage others, possibly Russia, to be more adventurous. It’s fine to ask our allies to spend more on their defense, but it’s inconsistent to do so while threatening to weaken their economies by insisting on tough trade concessions. True to his “America First” slogan, Trump minimizes the collective interests we share with many other countries, starting with Mexico.

But I want to make a larger point. The election’s unanticipated outcome is of a piece with other events: 9/11; the 2008-2009 financial crisis. These, too, were essentially unimagined and, therefore, unpredicted. Even without Trump’s eccentric and questionable behavior, so much is in flux that we’re disoriented. Stripped of familiar and reassuring beliefs, we are increasingly governed by disruptive surprises. This is why I call the present moment the age of disbelief.

Article Link To The Washington Post:

Mnuchin: 'No Cuts To U.S. Entitlement Programs In Trump Budget'

By David Lawder
February 27, 2017

U.S. President Donald Trump's first budget proposal will spare big social welfare programs such as Social Security and Medicare from any cuts, Treasury Secretary Steven Mnuchin said in an interview broadcast on Sunday.

Mnuchin said Trump would also use a major policy speech to a joint session of Congress on Tuesday night to preview some elements of his sweeping plans to cut taxes for the middle class, simplify the tax system and make American companies more globally competitive with lower rates and changes to encourage U.S. manufacturing.

Speaking on Fox News Channel's "Sunday Morning Futures" program, Mnuchin, who has acknowledged that tax reform is his top policy priority, said the budget plan would not seek cuts to federal benefits programs known as "entitlements."

"We are not touching those now. So don't expect to see that as part of this budget, OK," Mnuchin said of the programs, according to a transcript provided by Fox. "We are very focused on other aspects and that's what's very important to us. And that's the president's priority."

Trump during his election campaign promised not to cut Social Security, Medicare healthcare for seniors nor Medicaid healthcare for the poor. Preservation of these programs, coupled with a middle-class tax cut, would aid the retirees and working class Americans who make up a significant portion of Trump's political base.

In a transcript of the Fox News Channel interview, Mnuchin said Trump will be "touching on tax reform" in his speech. Mnuchin said the plan would cut the number of tax brackets and "create a level playing field for U.S. companies to be able to compete in the world."

But Wall Street, which has sent stocks to record highs on anticipation of Trump's tax cut plans, has grown impatient and could react negatively to a lack of substantive details about the plan in Trump's speech, financial analysts said.

With both chambers of the U.S. Congress in Republican hands, Trump has the potential to enact major elements of his legislative agenda.

But divisions with the Republican Party over the approach on Obamacare and taxes could prove to be an obstacle. Some Republican lawmakers have urged Trump to lay out more specifics on his policy plans, saying that more White House engagement is needed to build momentum in Congress for his agenda.

'Reciprocal Tax'

Mnuchin offered little new information and said key tax plan elements were not yet settled. He said Trump was looking at a "reciprocal tax" that would help create more trade parity with other countries. Trump administration officials have complained that many countries charge value-added taxes on imports while exempting exports from taxation.

But Mnuchin again said he was still "studying very carefully" a House Republican border tax adjustment plan that would levy a 20 percent tax on imports to encourage more U.S.-based production and exports. That plan aims to raise more than $1 trillion in revenue over a decade to offset lower tax rates for businesses.

"There are certain aspects that the president likes about the concept of a border-adjusted tax, there are certain aspects that he's very concerned about," Mnuchin said.

He added that the Trump administration would work with the House of Representatives and Senate to craft "a combined plan that takes the best of all of this when we bring it forward."

In a comment suggesting that Trump's budget and tax plans may use aggressive revenue assumptions, Mnuchin said the administration "fundamentally believes in dynamic scoring," a budget calculation method that assumes that a lower tax burden boosts revenues by encouraging economic activity.

The Congressional Budget Office has previously used mainly "static" scoring methods that assume very conservative economic effects of tax and budget changes.

Article Link To Reuters:

Anthem And Blue Crosses Loom Large In Obamacare Talks

By Caroline Humer 
February 27, 2017

Anthem Inc. (ANTM.N) and other U.S. health insurers complained to the White House for more than a year that they were losing money on people who waited to sign up for Obamacare coverage until they were sick.

They pleaded with the Obama administration to stem their losses by tightening up on the enrolment rules. When their pleas went unmet, UnitedHealth Group Inc (UNH.N), Humana Inc (HUM.N), and Aetna Inc (AET.N) pulled out of most of the government subsidized health insurance market.

But now that the new Trump administration and Republican lawmakers control the future of healthcare, the industry is getting a new hearing. And Anthem - the last national insurer playing big in the Obamacare market - is the loudest industry voice in meetings with policymakers who all have pledged to overthrow former President Barack Obama’s signature law.

President Donald Trump, who has said Obamacare coverage is too costly for customers and taxpayers, is set to meet with insurance industry executives today.

Since the election, lobbyists for Anthem and affiliated Blue Cross insurers have met “24/7’’ with Republicans leading the change effort, including House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, according to one healthcare industry lobbyist.

They are there “every time Senators and staffers are on the Hill,” the lobbyist said.

Another industry source who attended some of the meetings said lawmakers and aides were keen on hearing what the insurers needed to stay in the market.

That clout may explain Anthem Chief Executive Joseph Swedish's optimism in comments to investors earlier this month that policymakers would introduce new enrolment rules limiting when people can opt into coverage.

"We do have some positive indicators that stabilization could very likely occur,” Swedish said. “I am again hopeful that our recommendations will be looked at very carefully and adopted.”

A day later, the Trump administration took its first concrete stab at Obama's Affordable Care Act, proposing regulations that would shorten the enrolment period, establish a new eligibility verification process and force members to pay delinquent premiums if they want to return to the same insurer.

The so-called stabilization proposal addressed many of the industry’s top demands for shoring up the individual market and came after Anthem said it was considering whether it would remain in 2018.

Anthem is the largest insurer among the Blues, a collection of companies that share a governing board, a brand and networks. As a group, they cover the vast majority of people covered by Obamacare.

That means they have the most at stake and a lot of influence in shaping the future of an insurance market that covers more than 10 million people, according to people close to the negotiations.

"Blue Cross Blue Shield does have a larger role in discussing changes," said an aide to a key Republican Senator.

Trump's 3 ‘R’s: Repeal, Replace, Repair

Trump has said he wants to jettison the 2010 law that created Obamacare and replace it with legislation that would change access to individual insurance and the Medicaid program for the poor.

A copy of the administration's Feb. 10 working draft leaked out Friday. But it was not clear whether there was enough support for all of the measures or how it would evolve. Any major changes aren’t likely to affect consumers before 2019.

In the meantime, Republican lawmakers are hammering out tweaks to Obamacare they view necessary to preventing any more insurers from exiting. They are looking at ways to limit monthly premium increases. For 2017, the average premium went up 25 percent in these Obamacare plans, which incensed many consumers.

Anthem and other Blue Cross plans dominated the individual market before Obamacare coverage took effect in 2014. Obamacare remade that market and sought to stimulate competition by financing the start up of about two dozen smaller insurance co-ops. The Obama administration also courted big players, such as Aetna and UnitedHealth, by forecasting rapid enrolment growth to more than 20 million people, which failed to materialize.

Anthem operates the BCBS license in 14 states and insures more than 800,000 people in the Obamacare exchanges - the single biggest portion. It said it was making a slight profit on that business. Its rivals exited after losing hundreds of millions of dollars last year.

Wall Street analysts said Anthem was better at pricing and benefited from a well-known brand. Its huge pool of members also helps Anthem drive good deals with doctors and hospitals. Still, Anthem’s business is mostly in the employer-based market; Obamacare customers comprised only about 4 percent of its members at the end of 2016.

Ethan Lovell, co-portfolio manager at the Janus Global Life Sciences fund that owns Anthem shares, said without changes to the exchange rules, the company would likely have to raise the average premium 20 percent in 2018, as it did for this year, to keep from losing money.

In addition to the enrolment rules, Anthem is seeking changes in the way payments for the sickest patients are calculated. It also wants an extension to the planned discontinuation at year’s end of plans that were issued before Obamacare and that don’t meet the law’s coverage requirements.

Ed Haislmaier, senior health policy research fellow at The Heritage Foundation, helped draft the proposed stabilization rule Trump announced Feb. 2. He said he expected the Trump administration to also address Anthem’s older plans.

Swedish also wants the elimination of one of Obamacare’s most controversial revenue sources - an industry-wide premium tax that insurers say has driven up premiums in all private U.S. health insurance and that lawmakers agreed last year to set aside for a year.

On January 4, Representatives Kristi Noem, a Republican from South Dakota, and Kyrsten Sinema, a Democrat from Arizona, introduced the Jobs and Premium Protection Act that would repeal the premium tax; it has 145 co-sponsors.

Article Link To Reuters:

Funds Prepare $2 Billion Oil Market Play As Supply Tightens

By Catherine Ngai 
February 27, 2017

Passive investment funds are poised to shift an estimated $2 billion from far-term to near-term crude futures over the next week, anticipating an energy market rally as a historic OPEC output cut slashes supply.

The switch may foreshadow the end of a global oil glut that built up during a two-year price war.

On Friday - for the first time in six years - a rule in one of the most popular commodity market indices was triggered, requiring funds tracking the index to sell Brent crude futures contracts for December LCOZ7 and to buy contracts for June LCOM7.

The S&P GSCI Enhanced Commodity Index rule aims to ensure that investors are positioned to cash in when oil market fundamentals change - in this case, when supply becomes so tight that the current price of oil becomes higher than the price of oil for delivery many months or years into the future. That structure is called backwardation.

When markets are oversupplied, the opposite is true: It is cheaper to buy crude now than to buy it for delivery later. That structure is called contango.

An S&P bulletin late Friday confirmed the rule had been triggered for Brent contracts. It stipulates that the funds must bring their money forward if the second and third month contract settles at a difference of less than 0.5 percent on the third to the last day of any given trading month.

On Friday, the Brent May contract LCOK7 price settled at $56.31 a barrel, while the June LCOM7 price settled at $56.55 a barrel. That would make the difference about 0.4 percent.

The threshold was not breached for West Texas Intermediate crude.

Investors will need to start the shift on March 1 and complete it over the next five business days, moving 20 percent of their money each day. Two traders with knowledge of the indices told Reuters that they estimated that rule impacts between 35,000 and 45,000 Brent contracts.

Each contract represents 1,000 barrels. So if those predictions prove true, about 40 million barrels - worth about $2 billion - will change hands.

"This is just another reason to be very bullish" about oil prices, said one trader involved with the deals, who spoke on condition of anonymity.

OPEC Impact

When the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers agreed in November to cut output, they wanted to stem a flood of supply that had left the contango so deep that traders found it profitable to buy crude and store it for sale later.

That dynamic pushed worldwide inventories to record levels and helped drive oil prices to multi-year lows.

OPEC's output cut, however, has tightened supply and narrowed contango, prompting traders from the United States to Asia to start selling oil from more expensive storage facilities because the contango is no longer enough for them to make a profit by holding oil.

If contango narrows further, tens of millions more barrels could flood out of storage.

That could put downward pressure on prices in the short term, but the move to unleash stored oil is viewed by analysts as a first step toward rebalancing global markets after a period of oversupply.

The fast flow of capital into front-month contracts will make it uneconomical for traders to store physical barrels, said Michael Tran, director of energy strategy at RBC Capital Markets.

"The unintended consequence" of the trading shift, he added, "is helping OPEC in its objective to draw barrels from storage."

It's not clear exactly how much money is managed by firms that benchmark off the indices, but exchange-traded funds linked to them, such as the iShares S&P GSCI Commodity-Indexed Trust (GSG), have more than $1.1 billion in assets, according to ETF Securities LLC.

Storage Play Threatened

Since the OPEC output cut, the spread between the front month and second month Brent contracts LCOc1-LCOc2 has tightened to as little as 5 cents from 79 cents. June and December contracts LCOM7-Z7 traded near parity on Friday.

To make money by holding crude, the spread between oil prices for future months needs to be wide enough to cover the cost of leasing tank space and borrowing the money to buy the fuel to fill it.

For the last two years, U.S. traders have rushed to that opportunity as those price spreads widened. Now, they may be forced to rush out of it.

"When there's a shortage, there's no value to storage. So, there's a premium put on having the oil right now," said Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices. "That's where you want to be sitting up front in the near contract."

Article Link To Reuters:

The Bond Market Is Calling Yellen’s March Rate Hike Bluff

Traders hold veto power over hikes as policy makers push March; Central bankers running short on time before blackout period.

By Brian Chappatta, Liz McCormick, and Alexandria Arnold
February 27, 2017

Bond traders are calling the Federal Reserve’s bluff.

For weeks now, everyone from Janet Yellen to Fed newcomer Patrick Harker has been trying to jawbone investors into believing an interest-rate increase in March is on the table. That the meeting is “live.”

Yet try as they might, the bond market seems unconvinced there’s much behind the tough talk. With less than three weeks to go, traders see slightly more than a one-in-three chance the central bank raises rates. That’s well short of the 50 percent minimum that has predicated every rate hike in the past quarter-century, according to data compiled by Bianco Research.

Reasons for the skepticism are varied, but the one that stands out is the simple fact that Fed officials are running out of time to make their case. The February jobs report comes five days before Fed officials gather and inflation data will be released mere hours before their decision is announced. Both key metrics come out during the Fed’s public blackout period, which starts on March 4, leaving traders in the dark about the central bank’s intentions.

“The market recognizes it has a veto over the Fed,” said Jim Bianco, a three-decade industry veteran whose research is followed by some of the biggest fixed-income managers. Because of the timing of the releases and the risk of whipsawing the market, “it might be too late at that point for them to do anything, even if we get eye-popping numbers.”

U.S. Treasury yields have fallen this year as worries over faster inflation and bigger deficits under a Trump administration give way to a more tangible debate over the Fed’s interest-rate policy and jitters about the upcoming French election. The benchmark 10-year note has slid to 2.33 percent, down from 2.64 percent in mid-December.

Right now, the odds are decidedly against an increase in March. Futures traders are pricing in just a 40 percent probability, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next hike. The last two times the Fed raised rates, in December 2015 and December 2016, the chances were 74 percent and 100 percent. Just one of the 23 bond dealers that trade with Fed are calling for higher rates next month.

“The Fed wants the market to believe March is live, but I don’t necessarily think that means they will tighten then,” said Clayton Triick, money manager at Angel Oak Capital Advisors, which oversees $5.5 billion.

Fed officials said in minutes of their latest meeting that they can raise rates “fairly soon” if labor market and inflation data meet or exceed current expectations. But time and again, officials have shown that they want to be sure investors are ready for an increase before it actually happens.

“We certainly never want to surprise the markets,” Cleveland Fed President Loretta Mester told Bloomberg TV last week.

Since they began announcing their target for the Fed funds rate in 1994, a period encompassing 191 meetings, policy makers have never surprised traders by lifting rates when they were expecting the central bank to stay put, Bianco said. He looked at market-based expectations three weeks before each meeting and considers odds of 50 percent or more as pricing in a move.

Of course, the “bond markets can be wrong,” as Jeffrey Rosenberg, BlackRock’s chief fixed-income strategist, put it bluntly. But the window to change perceptions is closing fast. Yellen, the Fed chair, and Vice Chairman Stanley Fischer are both scheduled to speak on March 3, giving them each one last chance before the blackout period.

Recent figures on wage growth disappointed and the March calendar for economic releases is also working against the Fed. Not since January 2014 has the U.S. announced jobs data so late into a month. And the central bank rarely pulls the trigger right after the release.

“The fact that the releases don’t come far enough in advance is going to be a problem” if the Fed really intends to tighten, said Michael Gapen, the head of U.S. economics research at Barclays.

It’s not just March. The May 3 meeting comes between the first and second rounds of France’s presidential election, in which right-wing, anti-euro candidate Marine Le Pen is leading the polls. That’s heightening concern that geopolitical issues may once again hamstring the Fed. Last year, the Fed held off in June before the Brexit vote. China’s surprise yuan devaluation in 2015 also wreaked havoc with the central bank’s timetable.

Traders currently see a 61 percent likelihood of at least one rate increase by May. (If you were to strip out March, then odds for May would be lower.) The majority of dealers remain convinced the first hike won’t happen until June.

“I don’t think May is in play,” Paul Richards, the president of Medley Global Advisors, told Bloomberg TV last week. “They blinked last year. The French election, representing someone like Le Pen, is just too big.”

The May gathering is one of four each year that doesn’t have an accompanying news conference. The Fed began holding media briefings after every other meeting in 2011. Since then, it has only moved twice, raising rates both times at those meetings. If the Fed waits until June, it will only have two more such meetings after that in 2017. With policy makers projecting three increases at the start of the year, that leaves no wiggle room.

“They want to keep three as an option,” said Angel Oak’s Triick. However, “I personally expect they will end up moving rates higher just twice.”

Article Link To Bloomberg:

Dollar Treads Water As Investors Eye Trump Speech

By Jemima Kelly
February 27, 2017

The dollar edged up from a 2-1/2-week low against the yen on Monday but struggled to gain traction elsewhere, as investors awaited a speech this week by U.S. President Trump for clues on his economic agenda.

Trump is set make his first major policy address to the U.S. Congress on Tuesday, and is expected to give some details on his planned infrastructure spending and tax reform.

But market participants worry that if the plans laid out are too vague or look slow to execute, that could weigh on a dollar that reached 14-year highs earlier this year on the back of the "Trumpflation trade" - a view that Trump's policies would shore up inflation and growth.

"The market is still waiting for further details of President Trump's economic stimulus plans, including looser regulation, comprehensive tax reform, and higher infrastructure investment," said MUFG currency analyst Lee Hardman, in London.

"If (he) fails to provide further reassuring details in the address, the market is likely to be left disappointed, which at the very least could prompt the market to push back the timing of likely stimulus beyond this year," he added.

Treasury Secretary Steven Mnuchin said on Sunday that Trump will use the event to preview some elements of his sweeping plans to cut taxes for the middle class, simplify the tax system and make American companies more globally competitive with lower rates and changes to encourage U.S. manufacturing.

Having hit a low of 111.92 yen in early trading in Asia, the dollar was up 0.3 percent at 112.29 yen by 0845 GMT. Against a basket of major currencies it was flat at 101.15.

Economic data on Friday put pressure on U.S. bond yields and the dollar, showing new home sales grew less than expected in January and consumer sentiment weakening.

But speculators have not counted the dollar out. They increased bullish bets on the U.S. dollar for the first time in seven weeks, according to Commodity Futures Trading Commission data released on Friday and calculations by Reuters. [IMM/FX

The euro edged up just 0.1 percent on Monday to $1.0575, as concerns that far-right anti-EU leader Marine Le Pen could win France's upcoming presidential election continued to weigh on the single currency.

Despite another raft of polls showing Le Pen losing either to centrist Emmanuel Macron or the right-wing Francois Fillon, investors, mindful of the shocks of Brexit and Trump's victory, have not counted her out, and many fear that she could lead France out of the euro zone.

"The changes in the polls perhaps won't be listened to, because people just don't trust them," said Rabobank currency strategist Jane Foley, in London.

Sterling skidded to a twelve-day low of $1.2384 on a report that Scotland is preparing to call another independence referendum when formal Brexit negotiations are triggered in March.

Article Link To Reuters:

Oil Gains On Supply Cuts, But Rising U.S. Output Caps Gains

By Naveen Thukral
February 27, 2017

Oil prices rose on Monday, with the market set to rise for five of seven sessions as a global supply glut appears to ease, but rising U.S. production limited gains.

Brent crude oil LCOc1 climbed 0.8 percent to $56.44 per barrel, while U.S. West Texas Intermediate CLc1 added 0.7 percent to $54.35 a barrel.

Oil prices tumbled on Friday after data from U.S. Energy Information Administration showed U.S. crude inventories rose for a seventh straight week.

But the market has been supported within a tight $4 to $5 range since November, when the Organization of the Petroleum Exporting Countries (OPEC) and other producers agreed to cut production.

EIA data showed stocks rose 564,000 barrels to 518.7 million last week.

"However, it was the lowest increase over the past couple of months. If this trend of lower imports and smaller gains in inventories persists over the coming weeks, it would suggest that the OPEC led production cuts are starting to have an impact," ANZ said in a note.

OPEC's record compliance with the deal has surprised the market, and the biggest laggards, the United Arab Emirates and Iraq, have pledged to catch up with their targets.

The International Energy Agency put OPEC's average compliance at a record 90 percent in January, and based on a Reuters average of production surveys, it stands at 88 percent.

Money managers raised their net long U.S. crude futures and options positions in the week to Feb. 21, to the highest on record, based on data going back to at least 2009, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday.

"The market is trading in a range. OPEC supply cuts are putting a base under the market at this stage," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

On the technical front, Brent oil may break support at $55.93 per barrel and fall more towards the next support at $54.81, as its consolidation within a wedge has not completed, according to Reuters analyst Wang Tao.

U.S. oil may slide further to support at $53.37 per barrel, as suggested by a Fibonacci projection analysis and a rising channel.

Article Link To Reuters:

Stocks Set To Open At Highs: Workday, Priceline In Buy Range With Earnings Due; Trump Looms

By Ed Carson
February 27, 2017

The Dow Jones industrial average eked out an 11th straight gain on Friday, its longest win streak in decades. The S&P 500 index starts at an all-time high this week while the Nasdaq composite is less than 1% from record levels, with Workday (WDAY) and Priceline (PCLN) reporting earnings late Monday.

Dow industrials futures were slightly lower vs. fair value early Monday morning. S&P 500 futures rose a fraction while Nasdaq 100 futures climbed 0.1%.

It wouldn't be a surprise, or even that unhealthy, is the current rally took a breather. Investors may be cautious leading up to President Trump's big speech and the long-awaited Snap (SNAP) IPO later in the week.

Trump will give a primetime speech before Congress Tuesday, in which he may offer more details on his plans for tax reform, replacing ObamaCare, deregulation and infrastructure. In recent days Trump and his aides have given mixed signals on a border adjustment tax.

Executives from Dow component UnitedHealth (UNH) and other big health insurers reportedly will meet with Trump on Monday. While UnitedHealth and its rivals are exiting and mulling exits from the ObamaCare exchanges due to ongoing losses, they'll want to shape Trump's health care ideas.

The Mobile World Congress in Barcelona officially kicks off Monday, running through Thursday. But LG Electronics, Huawei and others began unveiling their latest devices on Sunday, hoping to build buzz and sales before Dow stock Apple (AAPL) releases its 10th anniversary phone later this fall.

Alphabet (GOOGL) unit Google announced Sunday at the Mobile World Congress that Google Assistant will able to run on phones running Google Play on Android 7 (Nougat) and Android 6 (Marshmallow), giving its AI personal helper a reach closer to that of Apple's Siri or Alexa from Amazon (AMZN).

Meanwhile, Workday and Priceline are both in buy range heading into earnings.


Workday is expected to report a 1-cent loss per share excluding items, equal to a year earlier, as revenue grows 33% to $430.2 million. The cloud-based human resources software firm has been alternating between profits and losses in recent quarters, but analysts expect consistent and accelerating EPS going forward.

Workday competes against business software giants Oracle (ORCL) and SAP (SAP) in the human resources software field, though it's expanding into other markets such as financial management software. Workday, Oracle and SAP are in buy range.

Workday rose 1.7% to 89.66 on Friday, holding above an 88.10 buy point initially cleared on Feb. 17 from a cup-with-handle base.


Priceline is expected to report a 3% rise in quarterly earnings to $12.98 per share with revenue up 16% to $2.32 billion.

Priceline cleared a 1600.10 buy point on Feb. 8, hitting a record intraday high of 1664.99 on Thursday. Priceline closed Friday at 1631.62.

Shale Sector

Frac sand provider Emerge Energy Services (EMES) reports before Monday's open while shale producers EOG Resources (EOG) and RSP Permian (RSPP) are on tap after the market close.

Economic Data

Durable Goods:
The Commerce Department will release the durable goods report at 8:30 a.m. ET. Durable goods are big-ticket, long-lasting goods. Business surveys show sentiment booming since election day. Will those "animal spirits" spur companies to step up capital spending?

Pending Home Sales:
The National Association of Realtors will release its pending home sales index at 10 a.m. ET. The index gauges contract signings of existing homes. That will foreshadow how actual existing home sales, when they have closed, will look in the next month or so.


In Asian trading Monday, Japan's Nikkei was down 0.8%, China's Shanghai composite lost 0.3% while Hong Kong's Hang Seng index dipped 0.2%.

Article Link To IBD: