Monday, March 6, 2017

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Monday, March 6, Morning Global Market Roundup: Stocks Drop As Markets Wary Of Fed, Geopolitical Tensions

By Hideyuki Sano
March 6, 2017

U.S. stock futures dropped and Asian shares were on the defensive on Monday as investors weighed the near-certain prospect of an interest rate hike in the United States this month against news of slower growth in China this year.

Risk appetite also took a hit on rising geopolitical tensions in East Asia, as North Korea fired four ballistic missiles early in the day, while a spat between China and South Korea over missile defense deepened.

U.S. stock futures ESc1 dipped 0.4 percent, a fairly large move for Asian trade. Japan's Nikkei .N225 dropped 0.5 percent.

MSCI's broadest dollar-denominated index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.2 percent but Seoul shares were down 0.2 percent .KS11, hitting their lowest levels since early February at one point.

Federal Reserve Chair Janet Yellen on Friday all but confirmed market expectations for an interest rate rise in March barring any sharp deterioration in economic conditions.

U.S. money market futures FFH7 FFJ7 are pricing in about 90 percent chance the Fed will raise interest rates by 0.25 percentage point at its meeting on March 14-15, with another rate hike fully priced in by September.

"A rate hike is almost a done deal now. So the focus will be on the pace of rate hikes after that. If there's hawkish projections, the dollar could rise further," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

The dollar dipped 0.3 percent to 113.77 yen JPY= while the euro EUR= eased 0.1 percent to $1.0608.

In the United States, President Donald Trump accused predecessor Barack Obama on Saturday of wiretapping him during the late stages of the 2016 election campaign, an accusation rejected by both Obama and former top U.S. intelligence official.

The yuan was little moved so far, fetching 6.8920 yuan per dollar CNH=D4 in offshore trade after China cut its growth target for this year to 6.5 percent, compared to its 2016 goal of 6.5 to 7 percent when actual growth came in at 6.7 percent.

Keeping risk appetite in check was rising tensions over North Korea, which on Monday fired four ballistic missiles, three of which landed in Japan's exclusive economic zone, Japanese Prime Minister Shinzo Abe said, the latest in a series of provocative tests by the reclusive state.

The move came just after Japanese media reported on Saturday U.S. Secretary of State Rex Tillerson is due to visit Japan, South Korea and China this month to discuss North Korea on his first trip to the region since he took up his post.

Adding to the tensions in the region, South Korea's trade minister said on Sunday Seoul's responses against discriminating action by China towards South Korean companies will be strengthened.

South Korean media said last week Chinese government officials had given verbal guidance to tour operators in China, to stop selling trips to South Korea days after the Seoul government secured land for a U.S. missile-defense system.

The Korean won fell 0.4 percent KRW= in early trade.

Markets also remain focused on Trump's economic policies and how much of fiscal stimulus would come through during his first term in office.

"There are worries that Trump may not be able to push through his spending plans, given delay in appointments of key staff. It now looks possible that the next year's budget hardly reflects his agenda," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

The 10-year U.S. Treasuries yield dipped to 2.472 percent US10YT=RR after hitting a two-week high of 2.521 percent on Friday.

Oil prices dipped on concern over Russia's compliance with a global deal to cut oil output, though they are staying within their well-worn ranges since December.

International benchmark Brent futures LCOc1 traded at $55.76 per barrel, down 0.3 percent.

Figures released last week showed Russia's February oil output was unchanged from January, casting doubt on Russia's moves to rein in output as part of a pact with oil producers last year.

Article Link To Reuters:

Oil Falls On Lower China Growth Targets, Doubts On Russian Output Curbs

By Keith Wallis
March 6, 2017

Oil prices fell in Asian trade on Monday, wiping out some of the gains of the previous session amid worries lower growth targets in China could cut oil demand and ongoing concern over Russia's compliance with a global deal to cut oil output.

But worries over escalating violence in the Middle East put a floor under prices.

Brent crude futures dropped 20 cents, or 0.4 percent, to $55.70 a barrel after settling 1.5 percent higher in the previous session.

U.S. West Texas Intermediate (WTI) crude futures fell 23 cents, or 0.4 percent, to $53.10 a barrel after closing the previous session up 1.4 percent.

"The main drag affecting markets today is the lowering of growth targets by China and tighter regulatory controls which implies less demand for oil and commodities in general," said Jeffrey Halley, senior market strategist at Oanda brokerage in Singapore.

China aims to expand its economy by around 6.5 percent this year, Premier Li Keqiang said in his work report at the opening of the annual meeting of parliament on Sunday.

That is lower than the 6.7 percent growth achieved last year.

China also plans to cut steel and coal output this year in an effort to tackle pollution, its top economic planner said on Sunday, while China's newly appointed banking regulator vowed on to strengthen supervision of the lending sector.

Meanwhile, figures by Russia's energy ministry released last week showed February oil output was unchanged from January at 11.11 million barrels per day (bpd), casting doubt on Russia's moves to rein in output as part of a pact with oil producers last year.

That came as oil prices rose on Friday as the dollar weakened modestly after a speech by U.S. Federal Reserve Chair Janet Yellen, which suggested a rate increase would come at the end of its two-day meeting on March 15.

A weaker dollar bolsters commodity prices, including oil. While a rate hike would be supportive for the U.S. dollar, analysts said a near-term hike was already largely priced in.

Crude oil prices were also supported by news of increasing supply disruptions in the Middle East, ANZ said in a note on Monday.

That followed new doubts over Libya's attempts to revive its oil production after an armed faction entered two major oil ports on Friday, pushing back forces that captured and reopened the terminals in September.

"I'm surprised prices haven't moved higher given events in the Middle East over the weekend. China and U.S. interest rates are the bigger issues," Halley added.

Article Link To Reuters:

Titans Of Oil World Meet In Houston After Two-Year Price War

By Ernest Scheyder
March 6, 2017

The biggest names in the oil world come together this week for the largest industry gathering since the end of a two-year price war that pitted Middle East exporters against the firms that drove the shale energy revolution in the United States.

When OPEC in November joined with several non-OPEC producers to agree to a historic cut in output, the group called time on a fight for market share that drove oil prices to a 12-year low and many shale producers to the wall.

Oil prices are about 70 percent higher than they were the last time oil ministers and the chief executives of Big Oil met in Houston a year ago at CERAWeek, the largest annual industry meet in the Americas.

The ebullience as both sides enjoy higher revenues will be a welcome relief from the gloom of a year ago, near the depths of the price war.

"The oil market has been rebalancing and the powerful forces of supply and demand have been working," said Dan Yergin, vice chairman of conference organizer IHS Markit and a Pulitzer Prize-winning oil historian.

"The mood will be different this year."

The capital of the U.S. oil industry Houston is emerging from the price war sporting new downtown skyscrapers and the lingering glow from hosting last month's Super Bowl.

OPEC's November deal, the prospects for its continuation and rosier investment prospects for the industry will dominate the discussions, with state-run producers and Big Oil both positioning themselves for an upturn in the notoriously cyclical business.

Twice as many OPEC ministers as a year ago - plus Russia and India's top energy officials - will be in the capital of the U.S. energy industry.

Saudi Arabia's energy minister Khalid al-Falih, who assumed his role last spring and whose country has contributed the largest share of OPEC output curbs, addresses the meeting on Tuesday.

Russian Oil Minister Alexander Novak, who was key to bringing non-OPEC countries on board to cut in tandem with OPEC, will speak on Monday

Chief executives from five hard-hit international oil producers - BP, Chevron Corp, Exxon Mobil Corp, Royal Dutch Shell and Total - will be listening closely to the ministers' comments to see if those production curbs will be extended past their June expiration.

The meeting won't be without simmering tension between U.S. oil producers and OPEC. One of the biggest questions in the oil market is how quickly and how much shale producers will boost output. A sharp rise from the U.S. shale patch could undo the Saudi-led deal to reduce the global oil glut.

Shale activity is humming in the hottest U.S. oilfield, the Permian Basin, a 75,000 square mile expanse in West Texas. The U.S. land drilling rig count is up 55 percent in the past 12 months, and many of them are in the Permian.

"It's exciting now to see the rig count rising and business activity picking up again," said Peter Boylan, chief executive of Cypress Energy Partners LP, an oilfield service provider with operations in Texas and North Dakota.

More Spending

Oil's resurgence isn't confined to America. Already this year, Total and BP have launched multi-billion dollar deals to expand in Brazil and Mauritania, respectively. Better prices could stir a new round of merger activity, according to some analysts.

Exxon, which is expected later this year be eclipsed by Saudi Aramco as the world's largest publicly traded oil producer, recently pledged to boost this year's spending by 16 percent to expand operations, especially in shale production.

That newfound investment vigor and projections for stronger shale production have kept a lid on the recovery. Oil prices may struggle to breach $60 per barrel, regardless of how much OPEC cuts, if the U.S. keeps increasing production, according to a Reuters poll.

U.S. crude futures closed on Friday at $53.33 per barrel.

BHP Billiton has boosted investment in its shale operations since last fall, forecasting the sector to become the single largest generator of cash flow for its petroleum business within five years.

"We expect a balanced oil market in 2017 for the first time in nearly three years," said Steve Pastor, president of BHP's petroleum business.

Article Link To Reuters:

U.S. Energy Stocks, Darlings Last Year, Stumble In 2017

By Jessica Resnick-Ault and Lewis Krauskopf
March 6, 2017

The energy sector is the stock market's dud so far in 2017 after a banner performance in 2016, and the rest of the year may also be rocky for investors due to the unclear path for crude oil prices.

Energy outdid all other sectors last year, up nearly 24 percent thanks to a late-year rally on anticipation that impending production cuts from major oil producers would lift crude prices and after the election of Donald Trump as U.S. president spurred investor hopes for industry-friendly policies.

However, energy shares have been weak after peaking in mid-December, and are the worst-performing of the Standard & Poor's 11 stock sectors in 2017. Oil producers have been the poorest among energy sub-industries, due to doubts about the demand outlook and an unexpectedly high level of crude and finished product inventories.

In 2017, energy is down 5 percent, compared with a 6 percent climb for the overall S&P 500. U.S. oil producer shares rallied in late November along with commodity prices. But they have pared gains this year as a Nov. 30 agreement by the Organization of the Petroleum Exporting Countries to cut production has so far failed to quell fears of oversupply and lift crude prices beyond a tight $5 a barrel range.

Since not all oil companies perform the same task, not all shares are created equal. Analysts said production companies, particularly those operating in U.S. shale regions like Texas's Permian Basin, where drillers have been rapidly adding to rig counts, may be best positioned for gains.

They do carry risk, as shale producers can get more volatile if prices move more rapidly.

"There's a lot of worry about what the U.S. supply picture will look like, and there's a lot of worries about the OPEC cuts," said Vikas Dwivedi, global oil and gas strategist at Macquarie Group in Houston. "We think you're going to get good inventory numbers, which will propel a rally in the commodities, and take the exploration and production companies higher."

Investors have already beefed up bets on the sector - about $263 million has flowed into U.S.-listed energy mutual and exchange-traded funds in 2017 through February, according to Lipper data. The Energy Sector Select SPDR Fund, which has about $17.6 billion in assets, has attracted $400 million of new investment, according to Lipper data.

Companies like Exxon Mobil Corp and Chevron Corp may see profits rise as the economy strengthens and oil prices increase. Increased power demand and defense spending - the defense sector is a big energy consumer - could also propel demand. The chief executives of both companies will be presenting at this week's closely watched CERAweek conference in Houston.

Shares of oil majors pay a dividend yield, a benefit for times when oil prices are range-bound, said Christian Ledoux, senior portfolio manager at South Texas Money Management in San Antonio. "We think that the other categories of energy provide just too much risk at this point," he said.

Investors are also looking at the potential effect from Trump's policies. Since the election, refiners are up more than 9.5 percent, while oil producers have gained less than 2 percent, the weakest energy sub-sector.

Macquarie's Dwivedi said some independent refiners may benefit from expected changes to renewable fuel standards, while others may see profits hurt if a border adjustment tax is passed. Since the election, Valero Energy, which supports changes to renewable fuel blending rules, is up 14 percent.

Refiners overall saw margins pinched in 2016 after overproduction of product early in the year. Product inventories for gasoline and distillates are still considered high. That will hurt margins, especially if crude prices rise with production dropping.

Article Link To Reuters:

Out In The Cold: New U.S. Budget Priorities Threaten Housing Aid Programs

By James Oliphant
March 6, 2017

When Paul Ryan, speaker of the U.S. House of Representatives, talks of social mobility, about helping struggling Americans move out of impoverished areas to give them greater opportunity, Shiva Daniels is the kind of person he has in mind.

A federal housing voucher allowed Daniels to escape her crime-plagued neighborhood in Dallas, Texas, and move her four children to the suburb of Garland.

That move helped Daniels find a good job, working for a property management company. Today, she cherishes the small, two-bedroom house she rents, with a yard where her children can safely play, away from drugs and gang violence in Dallas.

But if Daniels, 31, were to lose the $1,082 monthly stipend she receives, she has no doubt what would happen. “I would have to move back,” she said. “I wouldn’t be able to afford it.”

Pulling Americans out of poverty is a subject close to Ryan’s heart. And President Donald Trump has frequently talked about aiding the inner cities.

But the housing assistance provided by the U.S. Department of Housing and Urban Development, or HUD, could fall victim to fiscal policies under consideration by the White House and Congress, which include a massive tax cut and increased military spending, according to a dozen congressional aides who spoke to Reuters.

While the White House has not been specific about its plans for HUD — the budget process remains in flux — it has called for a $54 billion cut in non-military discretionary domestic programs in the next fiscal year, which likely will dramatically impact safety-net programs that are not entitlements such as Medicare and Social Security, budget experts said.

Altogether, housing advocates paint a bleak picture of the landscape for low-income housing under the Trump administration. They warn that deep cuts to housing funds would force some people out of their homes and hollow out grant programs meant to revitalize urban neighborhoods.

There is also a ripple effect, they warn: Rental prices would likely rise alongside declines in affordable housing projects and vouchers available to renters. That would make it tougher for renters to save enough to eventually buy homes.

“It’s a bad cycle,” said Carol Galante, a former top HUD official during the Obama administration. “It puts pressure on the rental market. The rents are higher and higher so people can save less and less.”

Image Problems

HUD provides about 5 million Americans with some form of housing assistance, either through vouchers to renters, subsidies to landlords or public housing projects, which comprises about 85 percent of its budget. It also sends about $8 billion annually directly to communities through grants.

Even so, only about one-quarter of those eligible for assistance in the country receive it.

Housing advocates say changes to its budget or mandate would be directly felt in low-income communities. They point out that in 2013, when the legislatively mandated budget cuts known as sequestration hit HUD, more than 100,000 renters nationwide lost their housing support.

Douglas Rice, an expert at the Center for Budget and Policy Priorities, a nonpartisan think tank in Washington, estimates that for every 1 percent cut in HUD’s budget, 20,000 renters would lose their assistance.

But critics of the agency, including some Republican lawmakers, say its anti-poverty and community-development programs are inefficient and wasteful, and that it has failed to live up to its mission. Today, the proportion of Americans who live below the poverty line — 14.5 percent — is about the same as it was 35 years ago.

HUD has also at times had difficulty shaking the image of a bureaucratic agency that is vulnerable to corruption. It was at the center of a bid-rigging scandal during the Reagan Administration. And Alphonso Jackson, the HUD secretary under President George W. Bush, resigned in 2008 amid allegations that he steered contracts to friends. Charges were never brought against Jackson.

“There are some sports teams that never seem to gel. I think we’re a little like that at HUD,” said Bud Albright, a Washington lobbyist who worked at the agency when Republican Jack Kemp was secretary in the early 1990s.

Trump, who has not been specific on his plans for the agency, selected Ben Carson to lead HUD. The former neurosurgeon and Republican presidential candidate won Senate confirmation last week.

Although Carson's views hew closely to Republican orthodoxy on how too much government can discourage people from working hard, his upbringing in inner-city Detroit gives him a unique perspective: his mother received food stamps to provide for her family and he was raised around housing assistance programs similar to those he will now manage.

Carson, who declined requests for interviews by Reuters, has pledged to fight to protect HUD’s housing-assistance budget and preserve the agency’s community-development initiatives. He also said he would push to include funding to rehabilitate public-housing facilities in Trump’s proposed $1 trillion infrastructure plan.

But given the White House's determination to cut domestic spending, Carson will have to fight for every dollar. A HUD spokesman declined to comment on which programs could be hurt by any possible budget cuts. The White House's Office of Management and Budget did not respond to a request for comment.

'A Big Deal'

Congress, too, is looking to narrow HUD’s reach.

Ryan has called for work requirements and time limits on those who receive housing assistance, similar to how child support, food assistance and other welfare benefits function.

Tax reform spearheaded by Ryan and Kevin Brady, the House Ways and Means chairman, could ultimately do away with a key tax credit used by developers to build affordable housing, or could drastically curtail the credit’s use.

One vocal critic of HUD is Jeb Hensarling, Republican chair of the House Financial Services Committee, which oversees the housing agency. Hensarling plans to introduce legislation this year to narrow the $1 trillion portfolio of the Federal Housing Administration, which helps low-income and first-time homebuyers purchase homes, his office said.

Hensarling has said he fears that if home values drop the FHA would require another federal bailout as it did in 2013, when it received a taxpayer-funded infusion of $1.7 billion to cover its losses.

If the cuts to HUD’s budget are as severe as some expect, those who are on waiting lists now for vouchers will be staying on them for a very long time, and recipients such as Shiva Daniels, who has been receiving assistance for six years, will be at risk of seeing that support end.

That would mean losing her small house, with the yard she sees as a safe haven for her children. “It might not feel like it’s a big deal, but it is,” Daniels said. “When you feel good, it allows you to do better, and do better for them.”

Article Link To Reuters:

U.S. Republicans Expected To Unveil Healthcare Bill This Week

March 6, 2017

Republican U.S. lawmakers expect to unveil this week the text of long-awaited legislation to repeal and replace the Obamacare healthcare law, one of President Donald Trump's top legislative priorities, a senior Republican congressional aide said on Sunday.

Since taking office in January, Trump has pressed his fellow Republicans who control Congress to act quickly to dismantle former Democratic President Barack Obama's Affordable Care Act and pass a plan to replace it, but lawmakers in the party have differed on the specifics.

Democrats have warned that Republicans risk throwing the entire U.S. healthcare system into chaos by repealing the 2010 law that was passed by congressional Democrats over united Republican opposition. Republicans condemn it as a government overreach, and Trump has called it a "disaster."

The aide cited progress in meetings and phone calls starting on Friday and lasting through the weekend involving House of Representatives Speaker Paul Ryan, Health and Human Services Secretary Tom Price, White House budget chief Mick Mulvaney, Trump domestic policy adviser Andrew Bremberg and others.

"We are in a very good place right now, and while drafting continues, we anticipate the release of final bill text early this week," said the aide, speaking on condition of anonymity.

The aide called the expected bill a "consensus Republican plan," but offered no details.

AshLee Strong, a spokeswoman for Ryan, said: "We are now at the culmination of a years-long process to keep our promise to the American people."

The Obamacare law has proven popular in many states, even some controlled by Republicans, and it enabled about 20 million previously uninsured people to get medical insurance, although premium increases angered some.

Article Link To Reuters:

How The Rest Of The World Paved The Way For A March Fed Hike

U.S. data has been good enough to allow the Fed to hike, and global risks haven't soured the outlook.

By Jeanna Smialek
March 6, 2017

In just a week, markets went from doubting a March rate increase to viewing one as a sure bet. The central bank's top brass engineered the change by speaking in favor of a hike, culminating in Fed Chair Janet Yellen's endorsement on Friday.

What changed to push central bank policy makers from the neutral stance that Fed-watchers saw in their January meeting minutes to the brink of a rate increase? Not much, if you're looking at U.S. data. The fact that nothing deteriorated was enough to clear the hurdle for a March rate move, especially because steady domestic data have come alongside a slowly-improving international outlook – a major shift from the situation at this time last year, when global risks helped to stay the Fed's hand. 

The charts below illustrate the steady U.S. economy and sunnier international situation that have given policy makers the confidence to prime markets for a March 15 hike. 

U.S. Data: Good Enough

"There is almost no economic indicator that has come in badly in the last three months," Fed Vice Chairman Stanley Fischer said Friday at a forum hosted by the University of Chicago’s Booth School of Business. Likewise, Yellen said employment and inflation are evolving in line with the Federal Open Market Committee's expectations. As you can see below, while prices haven't broken out dramatically to the upside, they're still moving toward the Fed's goals. 

Unemployment has "essentially met" what officials see as full employment, Yellen said Friday. Low joblessness isn't a major change from last year, though wages are very slowly crawling higher, suggesting that the labor market is getting tighter. 

And the outlook for output growth hasn't changed much. New York Fed President William Dudley said the economy is still on about a 2 percent growth track, speaking in a CNN interview on Feb. 28. He then signaled a willingness to raise rates soon.

In short, the U.S. economy isn't experiencing a breakout moment, but it's holding up. Evidently, that's all the Fed needed to see. 

Risks Abroad: "Receded Somewhat"

The global outlook has shifted, if you listen to Yellen and Governor Lael Brainard. In 2016, the Fed entered the year looking to raise rates, but tumult in Chinese markets and Britain's vote to exit the European Union helped to keep them on hold until December.

This year, "the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat,” Yellen said Friday.

"Foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time," Brainard said March 1.

Yellen said China "has continued to grow and its management of its currency has been better understood and led to less volatility,'' while Brainard said government officials there had “stabilized growth and calmed fears of financial instability." In the chart below, you can see as the economic environment stabilizes, China's manufacturing sector is posting gradually better results. 

Yellen noted that Brexit negotiations and concerns about European integration could continue to pose a risk, but Brainard said Europe's "recovery has proven to be increasingly resilient.''

Euro area headline inflation has been climbing, providing fresh arguments to those calling for an exit from the European Central Bank’s monetary stimulus program, though core inflation remains below 1 percent. Euro-area unemployment was unchanged at 9.6 percent in January, the lowest since May 2009. 

At the end of the day, it wasn't an outsize improvement in data at home that dealt the Fed a winning hand in early 2017: growth remains in a holding pattern, progress in headline inflation is energy-tied, and the job market is growing at a similar clip to last year. And while domestic fiscal policy seems increasingly likely to turn stimulative as President Donald Trump promises tax cuts and infrastructure spending, Yellen and her colleagues say it's too early to take that into account when setting policy.

What has changed significantly is that threats from abroad are looking less scary. As long as that remains the case and U.S. data remain steady between now and March 15, the Fed appears poised for its first non-December rate increase since June 2006.

Article Link To Bloomberg:

Fed And ECB Go Their Separate Ways

By Balazs Koranyi 
March 6, 2017

Two of the world's biggest central banks are likely to find themselves with a bigger policy gap by the end of the coming fortnight

The European Central Bank on Thursday will resist calls to start tightening policy against surging inflation but robust U.S. jobs data on Friday could seal the case for another Federal Reserve hike the week after.

So, let's say minus 0.4 percent rates in Europe and more than 0.75 percent in Washington.

With just weeks to go before contentious French and Dutch elections, the ECB will be keen not to rock the boat, so it is likely to give just a token nod to robust growth figures, steering clear of any policy hint that may give emerging populist movements ammunition.

A Reuters poll showed unanimity for no change. [ECB/INT]

But the balancing act may be more difficult than it looks.

With growth on its best run since before the financial crisis and inflation peeking just above the ECB's target, calls are mounting, particularly in Germany, for the bank to scale back its 2.3 trillion euro ($2.42 trillion) bond buying scheme and raise its negative interest rates.

Doves hold a comfortable majority among the policymakers, however, so any shift will come at the margins. In practice that could mean increased inflation forecasts, letting an ultra-cheap lending scheme to banks expire as scheduled, and dropping a reference to the risk that growth may disappoint.

Still, ECB President Mario Draghi will probably avoid any discussion about winding down asset buys, even pushing back on calls by some rate setters to tweak the ECB's guidance, giving up its reference to further rate cuts, a possibility markets have already priced out.

"If the French presidential election also passes without turbulence, and growth and inflation data remain solid, the ECB might turn more hawkish in its meeting on June 8," Reinhard Cluse, economist at investment bank UBS, said. "This would then leave the meeting on July 20 for preparing the markets for the tapering (off asset-buying) on September 7."

For now though, Draghi will stick to his line that the inflation surge is temporary, growth is fragile and political risks clouds the outlook, requiring stimulus, a Reuters poll of analysts showed.

Having tightened policy in 2011 just months before the euro zone debt crisis started spiraling out of control, the ECB will be desperate not to move too early, even if it risks being called out by some for moving too late.

U.S. Jobs

The Fed, meanwhile, must deal with what Draghi dubbed a high-class problem: solid growth, full employment and returning inflation.

Non-farm payrolls, due on Friday, are expected to show an increase of 186,000 jobs, probably enough to push the Fed to move. Unemployment benefits already fell to near a 44-year low late last month, indicating further tightening of the labor market.

Indeed, markets FEDWATCH have now almost fully priced in a hike in March, the third since rates bottomed out at the height of the crisis, and two more increases could still come before the end of the year.

Robust jobs growth threatens to overheat the labor market, just as inflation is heading higher, with the Fed's preferred measure now in the upper end of the range central bank officials in December estimated would be reached this year.

Manufacturing growth is also firming, offsetting relatively weak consumer demand, good enough for even the most dovish Fed officials to argue for a hike sooner rather than later.

Soothing global growth fears, meanwhile, China is expected to report another set of strong figures for both exports and imports, indicating that even if overall growth is slowing and debt is rising fast, the slowdown remains under control, mitigating the risk for emerging market economies.

Indeed, China's factory activity expanded faster than expected in February, firming arguments for the central bank to raise short-term interest rates by a another 10 basis points as soon as March.

Data due on Wednesday are expected to show Chinese exports up by 10 percent in February while imports could have risen by 20 percent, a boon for countries like Australia, which supply China with raw materials.

Indeed, the Reserve Bank of Australia may signal on Tuesday that policy easing is done, given the economy's convincing rebound last quarter, rising commodity exports and a robust increase in household debt levels.

Article Link To Reuters:

China's Hidden Risks Rise

By Christopher Balding
The Bloomberg View
March 6, 2017

A major factor behind the soaring growth of risky wealth-management products in China is that investors typically think the government stands behind them. Lately, nervous regulators have been emphasizing that this isn't so. But they'll have to do a lot more to change expectations in a state-dominated economy.

Wealth-management products are short-term, high-yielding investments that are issued by banks. The market for such products is now worth close to $4 trillion, or nearly 40 percent of China's gross domestic product. Banks are heavily reliant on them for liquidity, and investors have come to view them as more or less risk-free, thanks to previous government bailouts.

This is a problem, as China's regulators well know. And officials have recently started signaling that the days of limitless government support are over. They're trying to establish a market in credit-default swaps, to better price and manage credit risk. They're imposing some mild new restrictions on WMPs, meant to rein in new issuance. Officially, even corporate defaults are up, suggesting that the government is finally getting serious about imposing losses on investors.

But there are reasons to doubt this new resolve. For one thing, regulation remains deficient. Banks are still allowed to hold wealth-management products off balance sheet, which allows them to stay within formal lending limits and meet capital requirements. When financial companies sell structured products, they typically partner with state-owned banks, lending a sheen of respectability to highly risky securities. Wealth-management products are even allowed to invest in wealth-management products, thus intensifying risk across the board.

And implicit bailouts -- despite the rhetoric -- are still rising. Some of the most toxic corporate assets in China are being restructured to avoid significant investor losses. Rather than imposing pain on banks that made reckless loans, the government is bailing out investors with little hope of recouping their capital. Even "bad banks" -- asset-management companies created to soak up bad loans from struggling lenders -- are selling bonds to buy the toxic debt, thereby piling leverage upon leverage.

Worse, all this may actually reinforce the perception that the government will step in, as it has so many times in the past. When a hugely risky product from China Credit Trust Co. nearly defaulted in 2014, and protesters promptly marched on a branch of the Industrial & Commercial Bank of China, the primary sales agent, the government arranged for a white knight to make investors whole. When Bohai Steel Group was teetering last year, a city government stepped in to restructure its debt while imposing almost no losses.

This kind of thing has intensified moral hazard at every level. Talk to most any investor in China and they clearly expect that financial products are "guaranteed." The same goes for local governments, banks and wealth-management firms: No one fears significant losses, and everyone expects the government will save them when things go south.

They may not be wrong. China's government is now engaged in a game of chicken. Impose losses on investors, and it risks triggering a run on the bank; continue bailing out investors, and it risks creating a problem that will swallow the economy whole. So what to do?

There's plenty of talk about merging regulatory agencies or creating new working groups. But none of that will help until the government resolves to start imposing meaningful losses, lowering overall leverage and reducing the economy's addiction to credit. Doing so will require a delicate balancing act.

In other countries, bankruptcies usually result in debtholders losing 50 to 75 percent of what they're owed. In China, that number is closer to zero for major companies. To avoid triggering a wave of defaults, regulators should allow for haircuts of, say, 25 percent -- enough to cause pain, but not enough to cause a panic. By publicly backing failing firms while still imposing losses, the government would begin to force companies to reckon with market forces while containing anxiety.

Authorities also need to crack down on the risky lending practices that caused such problems to begin with. Some banks still hold more than half their assets off balance sheet, and their capital ratios would be well below required levels if they were forced to report them accurately. As long as regulators approve of such practices, they're encouraging reckless behavior.

Without reform, risks will only accumulate until losses can no longer be supported, in which case China will have an even bigger problem on its hands. And that's what makes moral hazard so pernicious: Delaying the pain only compounds the risk.

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Congress Should Leave The Russia-Trump Inquiry To The FBI

By Eli Lake
The Bloomberg View
March 6, 2017

The one thing Republicans and Democrats in Congress can agree on when it comes to President Donald Trump and Russia is the need to investigate. In less than five weeks many in Trump's own party have moved from "nothing to see here," to "no stone left unturned." Meanwhile the Democrats smell blood.

In this spirit, the House Permanent Select Committee on Intelligence announced the parameters of its investigation. Its Senate counterpart did the same last month. At the heart of the probes are what links Russia's influence operation had to the Trump campaign and the president's associates.

This is the kind of oversight we expect from our legislators. And on the surface it makes sense. Both sides have an interest in establishing a common set of facts about what happened through bipartisan findings. If it's true, as Trump says, that there is nothing to the allegations that his campaign or associates colluded with Russians to influence the election, then it's important to have Democrats concur. If the opposite is true, it's important to have Republicans hold their party's leader accountable.

In this case though, the investigations are a recipe for chaos. This is because the FBI is conducting its own probe into Russia's influence operations and any connections to Trump and his campaign. If congressional committees are looking into the same thing, they can undermine the bureau's work.

There are a few ways this can happen. To start, the bureau and the committees will likely be calling many of the same witnesses. If either inquiry leads to prosecutions, it's important for the bureau to keep the record of its investigation pristine.

Representative Adam Schiff, the ranking Democrat on the House Intelligence Committee, supports the investigation, though he acknowledges the potential conflict. On Monday he said that were he an FBI agent, he would be concerned whether "Congress is going to be leaking information and saying things that will inhibit us and bringing in witnesses that may contradict what the witnesses have already told us," he said at a press conference. "I understand that concern and frankly Congress can help by not talking about the facts as we are learning them."

Schiff's point is well taken. But what are the chances that red-hot tidbits will remain secret?

For what it's worth, these kinds of leaks are often wrong. Remember Scooter Libby? All the leaks from the special prosecutor's office said he had disclosed the identity of CIA officer Valerie Plame. In fact it was one of Libby's bureaucratic rivals who made the initial disclosure.

Another problem with the committees probing Russia-Trump ties is that they are not really equipped to do this kind of work. The committees were set up to do oversight of the CIA, the FBI, the NSA and the rest of the intelligence community. It's the FBI that is supposed to conduct counter-intelligence investigations.

For the most part these things are done in secret, to ensure the quality of the investigation and to protect the identities of Americans being investigated. When Americans are accused of working for a foreign power -- even before being tried in court -- it's very hard for them to rehabilitate their reputation.

When Congress starts hunting spies on its own, we usually regret it. See for example the House Un-American Activities Committee or the McCarthy witch hunts.

Congress's involvement in the Trump-Russia investigation places the FBI itself in a bind. It was only five months ago that FBI Director James Comey turned the 2016 election on its head when he announced the FBI was combing through emails that could be related to the investigation of Hillary Clinton's private server -- after he had announced last summer that it was closed. The bureau didn't turn up anything. But to this day, many Democrats believe his announcement, with its ominous unsubstantiated implications just before Election Day, was a factor in why their candidate lost.

The reason Comey made this interim announcement was that he told Congress he would keep them informed of any updates. It was later reported that he announced the inconclusive information to the public because he was afraid it would leak anyway once he informed Congress.

Fortunately there is an easy fix here. The intelligence committees can still look into Trump and Russia. But they should do this after the FBI completes its own investigation into the matter. The oversight committees have a duty to check the bureau's work. They have no mandate or capability to conduct such investigations on their own.

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