Wednesday, March 8, 2017

Wednesday, March 8, Night Wall Street Roundup: Stocks Close Mostly Lower After Oil Plunges 5.4%

By Fred Imbert
March 8, 2017

U.S. equities closed mostly lower on Wednesday as investors dealt with plunging oil prices and digested scorching employment data.

The Dow Jones industrial average fell about 70 points, with Caterpillar and Chevron contributing the most losses.

The S&P 500 closed 0.2 percent lower, with energy falling more than 2.5 percent to lead decliners.

U.S. crude prices fell 5.38 percent to settle at $50.28 per barrel after data from the Energy Information Administration showed inventories rose by 8.2 million barrels last week.

"The report is certainly a negative in the short term," said Tamar Essner, an energy analyst at Nasdaq. "If you're an equity investor in the U.S., you're not going to want to put money to work [in energy] because inventories are so critical at this point."

She also said that comments made by Saudi officials earlier this week on production cuts have also been pressuring the commodity. "That sort of puts into question that perceived floor around $50," she said.

WTI also posted its worst one-day performance in 13 months.

"I think we're seeing some equilibrium in the $45-$55 range," said Eric Aanes, president and founder of Titus Wealth Management. "Personally, I'd like to see it higher, ... but barring some Middle East political event, I think we're going to remain range-bound."

The Nasdaq composite outperformed, closing above breakeven.

WTI In 2017

On the data front, private sector employment rose by 298,000 jobs last month, according to ADP and Moody's, well above a Reuters estimate of 190,000. The report encompassed the first full month under President Donald Trump, who has pledged to rebuild the nation's aging infrastructure system.

The data come just days ahead of the U.S. government's nonfarm payrolls report. Goldman Sachs and UBS raised their forecasts for the headline nonfarm payrolls figure after the strong ADP report.

Treasury yields popped following the data release, with the benchmark 10-year yield hitting its highest level since December and the two-year note yield reaching levels not seen since 2009.

"That's a very strong report. That could mean a more aggressive Fed and that could be a negative for stocks," said Bruce Bittles, chief investment strategist at Baird, referring to the ADP report. "But the fact that stocks are holding up here is surprising."

The Federal Reserve is scheduled to meet next week and is widely expected to tighten monetary policy. According to the CME Group's FedWatch tool, market expectations for a March rate hike were around 91 percent.

Other data released Wednesday included fourth-quarter productivity, which remained unrevised at a gain of 1.3 percent. Wholesale inventories fell 0.2 percent, more than expected.

Stocks have been on a tear lately amid a backdrop of improving economic data and the prospects of pro-growth policies being enacted by the Trump administration.

Over the past month, the three major U.S. indexes had gained at least 2.67 percent entering Wednesday's session.

But equities have hit a soft patch this week, amid concerns that Trump will not be able to deliver on his promises as fast as it expected and worries that the market may be too expensive at this point.

"Obviously, Trump is pro-growth, but unless we get some confirmation on tax reform and tax cuts, we're going to hold in a trough here," said Titus' Aanes.

The S&P was on track to snap a six-week winning streak.

"It's kind of funny because, about a month ago, it was the bond market taking a wait-and-see approach; now it's stocks," said Nick Raich, CEO at The Earnings Scout. "They are not moving in tandem at all."

"I think the stock market is catching up to the bond market, saying 'things are going to be great, but not as great as we thought,'" he said.

That said, hedge fund manager David Tepper told CNBC's "Squawk Box" on Wednesday that it's hard to short stocks despite their current valuations, adding he is short bonds.

The iShares 20+ year Treasury Bond ETF (TLT) fell in the premarket following those remarks and traded about 0.5 percent lower.

In corporate news, Caterpillar's stock fell after The New York Times reported that a new government report accused the company of using improper accounting methods to boost its stock price.

The U.S. dollar rose 0.28 percent against a basket of currencies, with the euro near $1.054 and the yen around 114.3.

Overseas, European stocks rose broadly, with the pan-European Stoxx 600 index advancing 0.08 percent. In Asia, equities closed mixed, with the Nikkei 225 falling 0.47 percent and the Shanghai composite ending nearly flat.

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Wednesday, March 8, Morning Global Market Roundup: Europe Stocks Inch Up, Dollar Rises Before Jobs Data

By Nigel Stephenson
March 8, 2017

European shares edged up on Wednesday after minor gains in Asia as Chinese import data signaled a recovering economy, while the dollar rose before jobs numbers that could help cement expectations that U.S. interest rates will rise next week.

The pan-European STOXX 600 index inched up 0.1 percent, after falling for the previous four trading days. Banks .SX7P rose, while healthcare stocks .SXDP fell after U.S. President Donald Trump said on Tuesday he was developing a plan to encourage competition in the drug industry.

Britain's blue-chip FTSE 100 index .FTSE rose 0.1 percent before finance minister Philip Hammond unveils his first budget since the UK voted to leave the European Union.

China's imports in February grew 44.7 percent from a year earlier on a yuan-denominated basis and 38.1 percent in dollar terms, accelerating from the previous month and leading to a rare trade deficit. Exports rose 4.2 percent.

That briefly pushed the MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS higher, although it later traded flat. Mainland Chinese shares .SSEC dipped but Hong Kong .HSI stocks rose 0.4 percent.

Sterling was an underperformer on currency markets, down 0.3 percent at $1.2161, having fallen to a fresh seven-week low of $1.2158. Below-forecast consumer spending data on Tuesday pushed the pound lower as it came after months of robust numbers and suggested the economy might be slowing.

The dollar rose 0.2 percent against a basket of currencies .DXY. It hit a seven-week high last week as a host of Federal Reserve officials talked up the chances of a rise in interest rates as soon as the March 14-15 meeting.

Some analysts are waiting for Friday's U.S. jobs data as a final piece of evidence supporting a 25 basis point rise, which futures prices indicate is an 83 percent probability. Investors will also be alert to signs of how many hikes to expect in 2017.

Private-sector U.S. employment data is due on Wednesday.

The euro weakened 0.1 percent to $1.0555 EUR= a day before a meeting of European Central bank policymakers.

The yen was marginally stronger at 113.92 per dollar JPY=.

"Unless the market were to price in a significantly more upbeat picture for the US, which would imply the Fed might move much more dynamically than is currently priced in, whether they hike two time or three times this year isn't going to matter for the dollar," said Sonja Marten, FX strategist at DZ Bank in Frankfurt.

ECB asset buying to stimulate the euro zone economy is among factors that have pushed yields on short-dated German government bonds to record lows in recent weeks.

Two-year yields edged down 1 basis point to minus 0.88 percent while 10-year yields rose 4 bps to 0.36 percent, taking the gap between them to 122 bps, its widest since July 2014.

Germany sells 4 billion euros of five-year bonds on Wednesday. [GVD/EUR]

Oil prices fell in anticipation of data expected to show growing U.S. crude stockpiles. Brent LCOc1, the international benchmark, fell 31 cents a barrel to $55.61.

"Oil is range-bound. If prices dip below $50 a barrel, OPEC will cut more; if it goes above $55 the U.S. will produce more," said Jonathan Barratt, chief investment officer at Ayers Alliance in Sydney.

Gold XAU= fell 0.3 percent to $1,211 an ounce, weighed down by the prospect of higher U.S. interest rates.

Article Link To Reuters:

Crude Prices Fall On Likely U.S. Stocks Build

By Keith Wallis
March 8, 2017

Oil futures fell in Asian trade on Wednesday after industry data pointed to a potential ninth straight week of inventory builds, renewing concerns about an oversupply of oil despite output curbs by OPEC and non-OPEC members.

Brent futures were down 23 cents, or 0.4 percent, at $55.69, after settling down 0.2 percent in the previous session.

U.S. West Texas Intermediate (WTI) crude fell 29 cents, or 0.6 percent, to $52.85 a barrel, after ending the previous session down 0.1 percent.

"Oil is range-bound. If prices dip below $50 a barrel, OPEC will cut more; if it goes above $55 the U.S. will produce more," said Jonathan Barratt, chief investment officer at Ayers Alliance in Sydney.

U.S. crude stocks rose by 11.6 million barrels last week, more than five times analysts' estimates, according to industry group, the American Petroleum Institute.

If the figures are confirmed later on Wednesday by official data from the U.S. Department of Energy's Energy Information Administration (EIA) it would be the ninth straight week of inventory builds.

Analysts have forecast a 1.7 million barrel inventory build.

"All eyes are on the EIA numbers," said Jeffrey Halley, senior market strategist at Oanda in Singapore. "A big washout of that will see oil test technical support levels."

Oil prices are facing headwinds from a likely U.S. Fed interest rate hike next week, a strong dollar, increasing inventory builds to record levels and rising U.S. shale oil production, he said.

"The planets seem to be aligning for a bit of a washout of long positions. I think it's getting time for a bit of a correction in oil prices," Halley said.

The API stocks data came as the EIA on Tuesday cut its 2017 world oil demand growth forecast by 110,000 barrels per day to 1.51 million bpd.

At the same time, members of an OPEC-led production agreement said on Tuesday total output reductions are more than 1.5 million barrels per day and are meeting their expectations.

China demand remains strong, with crude oil imports hitting the second-highest level on record in February on a daily basis at about 8.286 million barrels per day, up 3.5 percent on a year ago, customs data showed on Wednesday.

Article Link To Reuters:

Confronted By Market Doubts, Federal Reserve Drove March Rate Rise Expectations

By Jonathan Spicer and Ann Saphir 
March 8, 2017

Early last week, financial markets saw just a 30 percent chance of the Federal Reserve raising interest rates in March; but by Friday after a striking series of comments from Fed officials, including Chair Janet Yellen, traders saw an 80 percent chance.

Investors were aware that improving U.S. economic data, a stable global economy, a booming U.S. stock market and easy financial conditions, provided some justification for further Fed interest rates rises this year.

But policymakers had to ensure that global markets were indeed ready for a rate increase as soon as its next policy meeting on March 14-15, and further rises later this year, after a series of false starts in 2015 and 2016.

The U.S. central bank prefers to have market expectations aligned with its own policy plans. Of the 27 rises in interest rates of a quarter of a percentage point since 1991 only three occurred with a market probability forecast of less than 60 percent a month beforehand, research from U.S. bank, Wells Fargo (WFC.N), research showed.

"We didn't clearly see how the balance of risks was shifting, so they have to slap our faces, and say, 'Look, you are missing the point'," said Tim Duy, an economics professor at the University of Oregon.

U.S. economic data had been improving in recent weeks as the Fed forecast, and the jump in U.S. stock prices, alongside improved consumer and business confidence readings, provided an opening to hike rates without overly rocking markets, public and private comments by Fed officials suggested.

A series of previously scheduled speeches by Fed officials, as well at least two television interviews without prepared remarks, gave the Federal Reserve the platform it needed to alert markets before the traditional "black out" period went into effect ahead of the March 14-15 meeting.

The result: over the course of four days Fed policymakers successfully shifted market expectations for perhaps only two rate rises this year to fully expecting three, and perhaps more, according to Reuters data.

New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Yellen, played a key role in orchestrating the messaging.

Dudley gave markets an initial jolt when he said in a television interview that "animal spirits had been unleashed." By the time of Yellen's speech on Friday, five other policymakers had also flagged a March rate hike.

"It was pretty extreme in that they left little doubt," said David Stockton, a senior fellow at the Peterson Institute for International Research and a former chief economist at the Fed. "Moving now gives them more optionality for three or even four hikes this year."

Wall Street Doubts

In December last year the Fed had telegraphed the likelihood of at least three rate rises in 2017, but few believed the U.S. central bank would follow through. After all the Fed had over-promised two years in a row, forecasting more rate hikes than they delivered.

As a result, Wall Street's most influential banks predicted just two rises this year, in June and December, according to the New York Fed's January survey of primary dealers. Traders of interest rate futures contracts placed similar bets.

The minutes of the Fed's Jan. 31-Feb. 1 meeting showed many policymakers were coalescing around the need for a rate hike "fairly soon" with language nearly identical to the "relatively soon" phrasing the Fed had used the last two times to signal an imminent hike. Yet markets oddly reacted by trimming, not boosting, expectations for a March rise.

So last week, the time had come to bring out the big guns. Fed governors Lael Brainard, Jerome Powell and Vice Chair Stanley Fischer all helped drive the blunt message that, barring some unexpected shock, a rate hike would come soon.

Other policymakers echoed those sentiments, both publicly and privately, but also nodded to the need to get markets in line with Fed intentions.

Michael Gapen, chief economist at Barclays, said: "A little messaging got the markets where the Fed wanted it, without adverse consequences."

Article Link To Reuters:

Hurt By Weak Holiday Sales, More Retailers File For Chapter 11

By Lisa Fickenscher
The New York Post
March 8, 2017

The seeds of a disappointing holiday retail season are beginning to sprout scores of store closings.

Within the past week, two long established retailers filed for bankruptcy protection — electronics chain, HHGregg and women’s apparel chain, BCBG Max Azria Group — while Vanity Shop, a 137-store apparel chain in Fargo, ND, said on Tuesday that its liquidating all its stores.

Meanwhile, two other chains, Gander Mountain and Radio Shack, could file for court-protected reorganization this week while a third chain, Payless Shoes, could file for bankruptcy protection in April, according to industry sources.

“There is a seasonality component,” said bankruptcy lawyer Jeffrey Cohen of Lowenstein Sandler. “After coming out of a fourth quarter that was not as good as they’d hoped, retailers are placing new orders for the spring which creates tension between them and their lenders.”

Rising interest rates are also a factor in the acceleration of filings, say retail experts.

“Lenders recognize that if sales numbers are not turning around and forecasts by the retailers are falling short of their own guidance, they have no interest in pumping even more money,” into these failing businesses, said Richard Weltman, a bankruptcy expert at Weltman & Moskowitz.

As many has 5,000 stores are expected to close this year, a 25 percent increase over last year, according to Cushman & Wakefield.

Vanity Shop which has been in business in the Midwest since the late 1950s blamed its demise on “the pressures facing mall-based specialty apparel retailers in the wake of ever-increasing competition from ‘fast-fashion chains and e-commerce sites,” the company said in a statement.

Article Link To The New York Post:

Watchdog To Ask U.S. Lawmakers To Probe Icahn's Role With Trump

By Chris Prentice
March 8, 2017

A government watchdog group, Public Citizen, said on Wednesday it will ask lawmakers to investigate whether billionaire investor Carl Icahn should have been subject to lobbying disclosure laws when he advised President Donald Trump to overhaul the U.S. biofuels program.

Icahn, an unpaid adviser to Trump on regulation, submitted a proposal to Trump last month to change the U.S. Renewable Fuel Standard by shifting the burden of blending biofuels into gasoline away from oil refining companies, and further down the supply chain to marketers.

Public Citizen said that, because Icahn owns a controlling stake in a refinery that could benefit from the proposed change, he may have been required by a 1995 lobbying disclosure law to disclose his discussions with Trump on the subject as lobbying. The group said it would make its request for a probe in a letter to Congress later on Wednesday.

"All of this has occurred with no record of any (Lobbying Disclosure Act) filings by or on behalf of Mr. Icahn," Public Citizen said in a copy of the letter provided to Reuters.

The Renewable Fuel Standard, signed into law by former President George W. Bush, requires refiners to mix increasing levels of renewable fuels into gasoline and diesel each year - a requirement that many refiners say costs them millions of dollars.

Icahn owns an 82-percent stake in refiner CVR Energy Inc, which along with other refining companies, have urged the Environmental Protection Agency (EPA) to shift the blending obligation away from them.

Icahn has said that the change would benefit not just his company, but the entire refining industry.

Icahn has disclosed his role as a Trump adviser to the Securities and Exchange Commission, but he has not registered as a lobbyist. Several Democratic lawmakers have said they want more information about his role in the Trump administration.

Last week, the head of a U.S. biofuels group said Icahn told him that Trump was readying an executive order to change the point of obligation for blending under the biofuels program, something both the White House and Icahn have denied. The White House has said it is reviewing Icahn's proposal and has not yet taken a position.

Article Link To Reuters:

Trump To Meet With Business Leaders On Infrastructure

By David Shepardson
March 8, 2017

President Donald Trump plans to meet with a group of infrastructure business leaders at the White House on Wednesday, a person briefed on the meeting said.

During his presidential campaign, Trump said he would push for a $1 trillion infrastructure program to rebuild roads, bridges, airports and other public works projects.

The lunch meeting is set to include real estate, management consulting, private equity and other business leaders, along with at least one environmental group, a person briefed on the matter said.

Last month, Trump touted the plan in an address to Congress.

"The time has come for a new program of national rebuilding," Trump said.

"To launch our national rebuilding, I will be asking Congress to approve legislation that produces a $1 trillion investment in infrastructure of the United States - financed through both public and private capital - creating millions of new jobs."

The American Society of Civil Engineers has graded U.S. infrastructure at D+ and estimated the country needs to invest $3.6 trillion by 2020.

U.S. Transportation Secretary Elaine Chao told Fox News last month that the needs for infrastructure are so great the federal government cannot shoulder all the costs.

"Public private partnerships are a very important part of a new way of financing our roads and bridges that are in disrepair and our very dangerous," Chao said.

In January, Trump signed an executive order aimed at expediting environmental reviews and approvals for all infrastructure projects, especially high priority projects "such as improving the U.S. electric grid and telecommunications systems and repairing and upgrading critical port facilities, airports, pipelines, bridges, and highways."

Article Link To Reuters:

Stock Investors Can’t Bank On Another 8-Year Bull-Market Bonanza

By Anora Mahmudova
March 8, 2017

On Thursday, Wall Street will celebrate the eighth anniversary of the most recent, and perhaps the most hated, cyclical bull market. It has been hated because there are those who believe the gains were fueled by the Federal Reserve’s quantitative-easing program—and therefore artificial.

Yet, the bull has charged on, making the faithful a pretty penny.

Since March 9, 2009, when the most recent bull market began, the total return on the benchmark S&P 500 index SPX, -0.29% was an impressive 316%. The market has more than quadrupled in just eight years.

Over the past eight years, there hasn’t been a single year of losses and the average annual return was 14.9%. The S&P 500 is up 6.5% year to date and up more than 18% over the past 12 months, according to FactSet.

Hating this bull market and bracing for a crash, as some scary headlines had suggested over the years, would have cost investors dearly even though there were many reasons to suggest that fundamentals were shaky.

Lofty stock prices have been a key concern. Earnings growth has lagged behind the appreciation of prices, sending valuations to the highest levels since the tech boom of late 1990s.

“If you had told me at the end of 2013, after we’ve had more than 30% gain, that the market would rise another 50%, I would not have believed it. All the reasons [for it to fall instead] seemed sound at the time,” said Ben Carlson, director of institutional asset management at Ritholtz Wealth Management.

This kind of stellar performance from the market isn't unprecedented. U.S. large-cap stocks performed even better between 1991 and 1999, when the average annual return was 21.4%.

The cyclically-adjusted price-to-earnings ratio, often referred as CAPE or Shiller PE, hit the nosebleed level of 44 in early 2000, just before the market crash. By comparison, the average Shiller PE is 16.7.

While predicting the absolute top or bottom is impossible, estimating expected returns is somewhat easier. Usually, the higher the CAPE, the lower the long-term returns on average.

The decade between 1999 and 2009, in terms of returns was one of the weakest, where the average annual return was less than 1%. Adjusting for inflation, you would have actually lost money during that period.

However, students of statistics know that average expected returns shouldn’t be confused with actual returns and should be used as guidepost rather than gospel.

For example, between 1999 and 2009, even though the average return was than 1%, the period included years of double-digit losses as well as double-digit gains.

Currently, the CAPE ratio is at 30, suggesting the average 10-year return will be near break-even.

But the momentum in the market still seems to be somewhat intact, which means that valuations could go higher yet, before reverting to its historical average.

Wouter Sturkenboom, senior investment strategist at Russell Investments said scaling back U.S. stock allocations early could mean leaving a lot of returns on the table, but risks now may outweigh the rewards, some market strategists and analysts argue.

“At this point we believe long-term returns will be very low single digits and possibly with one particularly bad year,” Sturkenboom said.

“We don’t have the ability to pick the top, so the best we can do when valuations are this high is to manage risk by hedging,” Sturkenboom said, noting their current recommendation is underweight for U.S. large-cap equities.

Trying to time the market is perhaps the worst possible strategy, according to Carlson.

“In order to be successful in market timing you have to be right twice—at the top and at the bottom, and it’s really tough to get both right,” Carlson said. “Momentum in this market has been one of the most underappreciated forces. The pendulum can swing in both direction and last for longer than we expect,” he said.

The recent run-up in stocks has been underpinned by a belief that President Donald Trump will invigorate the economy by putting into law a series of pro-business policies.

Article Link To MarketWatch:

Adidas Shares Jump On Upbeat Growth Outlook

By Natascha Divac
March 8, 2017

Shares in Adidas AG soared Wednesday after the German sportswear maker issued a surprisingly upbeat outlook and raised its 2016 dividend.

Adidas posted a narrower quarterly net loss, beating analyst expectations, and said it expects 2017 sales to increase between 11% and 13% and net income by 18% to 20%.

"This is above our as well as market expectations and therefore we see uplift potential," said Volker Bosse, an analyst at Baader Helvea Equity Research.

The company's shares were up 7.3% in morning trading.

Adidas is in the midst of an overhaul focused on shedding underperforming operations and beefing up results in its important U.S. market, where it competes with Nike Inc. and Under Armour Inc. Since taking over as chief executive in October, Kasper Rorsted has also made a priority of boosting the company's Reebok brand, which has been a drag on profitability.

Adidas on Wednesday said it aimed to accelerate sales and earnings growth until 2020, and now sees currency-neutral sales increasing at a rate between 10% and 12% a year on average through 2020. Previously, it saw an increase at a high-single-digit rate.

Net income from continuing operations is projected to grow between 20% and 22% a year on average in the period. Previously, Adidas predicted an increase of around 15% on average.

A trader said the market was also surprised by Adidas's forecast that its 2017 gross margin would rise to as much as 49.1%. In 2016, that margin was 48.6%.

"Profitability is seen increasing at a significantly higher pace than expected," the trader said.

The sportswear maker proposed to raise its dividend to EUR2.00 from EUR1.60.

Adidas's net loss in the three months ended December narrowed to EUR10 million ($10.57 million) from a EUR44 million loss a year earlier, beating analyst expectations for a loss around EUR19 million. Sales increased to EUR4.69 billion from EUR4.17 billion, boosted by double-digit growth in its running category.

"Building on our 2016 performance, our momentum continues and we will again achieve strong top- and bottom-line improvements in 2017," said Mr. Rorsted.

The company said it would continue to sharpen its focus on its Adidas and Reebok brands and whittle away at its noncore operations. It is now seeking a buyer for its ice hockey brand CCM Hockey, and said the sale process for golf brands TaylorMade, Adams Golf and Ashworth is on track.

Article Link To MarketWatch:

Prepare For Market Beliefs To Be Challenged

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

Deeply ingrained beliefs can be hard to dislodge -- and especially in markets when they have led to high investment returns over a prolonged period. That can encourage certain behaviors to last even in the face of contradictory indicators; and it may take a very large set of inconsistent data for behaviors to change.

This tendency -- underpinned by what behavioral finance calls “belief perseverance,” “confirmation bias” and “attitude polarization" -- could be one of the reasons that financial markets have confidently brushed off what has been a growing list of developments that otherwise would have resulted in higher volatility. It includes just in the last couple of weeks:

--Sudden and large upward movements in expectations of an imminent interest rate hike by the Federal Reserve;
-- A speech by President Donald Trump that was constructive in tone but light on economic policy details;
-- Higher political risk in Europe (particularly linked to the French elections); and
-- In the developing world, the downward revision of China’s growth target, which was accompanied by a warning from Premier Li Keqiang in his speech to the opening session of the National People’s Congress about a “build-up of risks, including risks related to non-performing assets, bond defaults, shadow banking and internet finance.”

The particular beliefs I am thinking of relate to the trifecta of economics, finance and politics, and they have been extremely profitable for investors and traders. Specifically:

-- While low and insufficiently inclusive, global growth will remain relatively stable and predictable; and, to the extent there is a balance of risk, it is now clearly to the upside;
-- Central banks are still able and willing to repress financial volatility; and
-- Though noisy and unusual, politics will not adversely contaminate economics and finance; and, if there is an impact, it will provide an upside to markets now that the Republican Party has the White House and a majority in both houses of Congress.

While all three are fluid -- and, I would argue, quite uncertain and less predictable -- developments so far haven’t been enough to reach a critical mass, either on a standalone basis or in combination. As a result, most measures of market volatility remain very low and extremely well-behaved.

As to the next few weeks, this market calm would be upset unfavorably by signs such as:

-- Policy steps that markets fear, such as protectionism in the U.S., or the European Central Bank and Bank of Japan joining the Fed in adopting a strategically less dovish policy stance;
-- Lower probability of pro-growth legislation due to stress in the working relationship between Trump and the Republican establishment controlling Congress; and
-- Big wins by the anti-establishment parties in two European elections (the Netherlands and France).

Adding to the outlook’s fluidity, the risks are not just in one direction. Thus, markets would respond well to progress in detailing and implementing the Trump’s administration pro-growth measures relating to tax reform, deregulation and infrastructure, as well as dovish central bank statements out of Europe and Japan.

Then there are the longer-term issues that I discussed in prior articles and that also carry the risk of higher market volatility. Endogenously, the low-volatility market regime faces a potential headwind because of currency appreciation that is too strong and would slow growth, pressure corporate earnings and fuel protectionist rhetoric. Exogenously, markets may find it increasingly harder to be shielded from the cumulative adverse effect on the economy/politics/institutions of growth that has been too low and insufficiently inclusive.

Over the next few months, the markets’ faith in its three beliefs -- stable economics, low financial volatility, and politics that does not adversely affect either of these -- is likely to be more seriously challenged by the possible further accumulation of contrary data points, thus increasing the potential for a tipping point. And if it takes a long time for this to happen, the greater the likelihood that these cyclical contradictions could be accompanied by larger secular and structural ones.

Yet the consequences don’t necessarily have to be dire for markets.

Yes, one cannot ignore the potential for downside risk in which low growth gives way to periodic recessions, artificial financial stability yields to unsettling volatility, and the politics get so messy they result in disruptive economics. Depending on the timely response of politicians, however, there is also an upside in which growth is higher and more inclusive, financial stability is genuinely anchored, and politics improve and enable better economic governance.

With such a bimodal distribution of outcomes ahead, it’s good that we are learning more about which indicators to watch and why.

Article Link To The Bloomberg View:

China May Already Be Losing The Trade War

Capital outflow is spelling trouble for Beijing.

The National Interest
March 8, 2017

During last year’s U.S. presidential election, then-candidate Donald Trump made a great deal of political hay calling China a “currency manipulator” and suggesting that the United States would rectify the situation when he took office. Now ensconced in the White House, President Trump continues to wave the bloody shirt of unfair trade practices by Beijing, but the fact is that China’s terms of trade with the West have eroded steadily in recent years.

Treasury Secretary Steven Mnuchin has signaled no urgency to designate China a currency manipulator, Bloomberg News reports, saying instead that he wants to use a regular review of foreign-exchange markets to determine if America’s largest trading partner is cheating.

While China did devalue the yuan in the 1990s and 2000s, Beijing modified its currency policy in 2005 and allowed the yuan to appreciate. These days, many analysts believe that China is actively trying to prop up the value of its currency as private capital flees the country.

Back in December, Barron’s Randall Forsyth noted that China has been spending its foreign currency reserves to “brake the depreciation of the yuan—contrary to assertions that it’s trying to drive its currency lower.” Many of President Trump’s supporters view China’s sales of U.S. Treasury bonds—some $1 trillion since 2014—as part of a nefarious plot to drive up interest rates and thereby weaken the United States. But in fact, China remains the largest holder of U.S. Treasury debt and Chinese citizens have been spending the dollars provided by the Bank of China to purchase real estate and other assets in the United States

As this writer noted in a research note for Kroll Bond Rating Agency last December:

***Hopefully at some point the impressive collection of business moguls and financial titans surrounding President-elect Trump will refocus U.S. policy pronouncements on the basic tenants of global economics, especially the concept of “recycling” dollar trade surpluses. Just as capital inflows from China helped to stoke the housing boom of the 2000s, ending with financial disaster in 2008, inflows from China more recently have helped to reflate sagging asset prices and then some, and arguably complemented the Fed’s actions in this regard.***

In many respects, the decision by Communist Party Secretary Xi Jinping to allow Chinese nationals to have access to dollars and to spend them freely offshore may be at least partly responsible for the strong economic situation in the United States, at least in terms of asset prices and real estate. Over the past five years, $1 trillion has flowed out of China, much of it to the United States in the form of direct investment. Indeed, what Trump ought to worry about is the day when “Uncle Xi,” as he is known in China, shuts the currency door and ends the flow of Chinese direct investment coming into the United States. Such a decision would mean that the yuan would weaken and the flow of dollars into the country from Chinese nationals would dry up.

Aside from the accusations of currency manipulation, the larger issue driving the Trump administration’s antagonism towards China is the notion that they and other Asian nations are using their low labor and other costs to unfairly compete with American workers. In The Coming China Wars—a 2006 book President Trump cites as his favorite on China—White House trade czar Peter Navarro portrays the Asian country as a nightmarish realm where “the raw stench of a gut-wrenching, sweat-stained fear” hangs in the air and myopic, venal and incompetent Communist party officials rule the roost. The Harvard-educated hardliner accuses “cheating China” of destroying American factories, communities and lives by flooding the United States with illegally subsidized and “contaminated, defective and cancerous” products.

While Navarro’s view of China’s dismal political situation may be entirely accurate, the country’s terms of trade have deteriorated significantly over the past two decades. This is not simply a function of the appreciation of the yuan, but a more basic change in the cost of doing business in China. Whereas in the 1980s and 1990s, China could be described as an ultra-low-cost producer of many manufactured goods, by the 2000s—when this writer was covering the semiconductor capital equipment sector—China was rapidly losing its comparative advantage to nations such as South Korea, Vietnam and Mexico due to rising wages and steady internal inflation.

Today, China's labor costs are only 4 percent cheaper than those in the United States when productivity is factored in, according to Oxford Economics. Moreover, the additional costs of doing business in China, including payments to senior government officials required to lubricate the process, make a China-based production base even less competitive than two decades ago. Other surveys suggest that the cost of labor in China is now higher than that of Brazil, Mexico, and above that of smaller Latin American and Eastern European nations.

“Made in China” is not as cheap as it used to be, 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 the hourly manufacturing wage in India, and is more on par with countries such as Portugal and South Africa.”

In the 2000s, U.S. labor costs were twenty times that of China, according to the U.S. Commerce Department. Today, however, the same survey has U.S. wages only 4 times more than Chinese workers, with the gap closing rapidly due to rising wages and prices in China—as opposed to the United States and other industrial nations. Inflation is a significant problem in China, yet few foreign observers ever mention the issue in the context of either the currency or the economy as a whole.

As the new government of Donald Trump engages with Beijing in areas such as trade and economics, Washington needs to appreciate that the economic situation in China is changing rapidly and has significant political ramifications. Rising wages and prices are eliminating China’s relative advantage in the global competition for investment and production, while higher productivity nations, such as the United States, are actually becoming more alluring. One need only observe the growing flow of direct investment from China to other nations in Europe, Latin America and North America to understand that the People’s Republic is no longer as attractive a destination for capital as it was two and three decades ago.

Article Link To The National Interest:

Why The Trump Bump Has Set Us Up For A Market Crash

By Shawn Tully
March 8, 2017

Donald Trump's economic platform has sent stocks skyward.

That's great for anyone already invested in the stock market, and planning on selling soon. But anyone who has years before they cash in their 401(k) should beware: The Trump Bump will make it far, far tougher to make money in the stock market in the years ahead. It may even set some investors up for big, big losses.

Wall Street hailed Trump's triumph on Nov. 8 as the dawn of a pro-business, growth-spurring revolution. His pledge to roll-back regulations, slash personal and corporate taxes, and lavish $1 trillion on renewing infrastructure has produced a rare, raging bull-market in optimism, both on and off Wall Street. Although the hard economic numbers don't yet show improvement––GDP rose just 1.9% in the fourth quarter––corporate America and investors now perceive far sunnier times ahead than the gloomy view that prevailed before the election.

"It's the expectation of lower corporate costs from tax reform and deregulation, just look at the performance of the banks," notes Chris Brightman, chief investment officer of Research Affiliates, a firm that oversees strategies for $169 billion in assets for mutual funds and ETFs. "In addition, the market expects faster top-line sales growth resulting from a significantly higher economic growth rate."

Indeed, the combination of expense reductions from a shrinking burden of regulations, and faster growth driven by tax cuts that enable companies to keep more of the dollars gained from investing in new plants, fabs, and productivity-enhancing tech gear, should produce far higher profits going forward.

That certainly sounds good to investors. Trump's proposed policies have propelled a double-digit rise in share prices in just three months, pushing the Dow past 20,000, and beyond. The question is whether, given the high levels where stock prices stood pre-election, and the astounding run-up since then, investors have raised the bar for corporate performance so outrageously high that even if Trump does deliver on what he has promised rich returns may still be out of reach.

So let's examine whether the Trump Bump, despite the president's promising policies, spells doom for the stock market's future.

Since the election, the S&P 500 has spiked 11.3% to close at 2381 on March 2. That run has raised the index's total market cap from $19.1 trillion to $21.6 trillion, a gain of $2.5 trillion. Think of that $21.6 trillion as the price investors are now paying for their shares.

In 2016, the S&P produced $865 billion in earnings. The price-earnings multiple, or P/E, stood at 22 on Nov. 8, a figure that far exceeds the historical average of 16, and the norm of 19 since around 1990. Since then, the P/E has risen to 25. The surge has reduced the S&P's dividend yield from 2.3% to 2.0%. Same payments on more expensive shares.

So exactly how much has the Trump rally raised the hurdle for stocks? The best measure is to compare how fast earnings needed to grow at the S&P's pre-election valuation, and how rapidly they need to wax now that they're $2.5 trillion more expensive. We'll assume that investors want an 8% annual return over the next eight years—the possible duration of a Trump administration. That's around the goal that pension funds establish for their equity portfolios. In the pre-election scenario, stocks were yielding 2.3%, so they needed to rise, and garner capital gains, of 5.7% to reach the 8% bogey. At today's higher prices, they need to gain 6% a year. Add the lower, 2% dividend yield, and the total return is a matching 8%.

We'll also assume that over those eight years, the P/E falls to 19, the average over recent decades. We'll proceed as if both pre-and post-election S&Ps were one big stock that we'll call Pre-Inc and Post-Inc, with Pre-Inc selling at $19.10, and the Post-Inc at $22.60, reflecting their relative values (with dollars substituting for trillions). Both "companies" are earning 87 cents a share (the $865 billion in profits, once again reduced to dollars).

To reach that 8% goal, Pre-Inc must raise its stock price to $29.80 or 82% by 2025, and earn $1.57 a share (at our 19 P/E). But Post-Inc faces a far steeper climb, for two reasons. First, the price increase lowered its dividend yield, requiring faster earnings growth to get to an 8% return. Second, Post-Inc started with the Trump Bump's 11% premium, so it needs to not just grow faster, but build that growth on a higher starting price, requiring a much higher ending price, and final earnings, to get to 8%.

To reach that goal, Post-Inc must hit $34.40 in eight years, and earn $1.81 a share. Those numbers are both 15% higher than the hurdles required for Pre-Inc. Here's the number that really counts: Before the Trump Bump, the S&P––or our Pre-Inc––needed to raise earnings 7.5% a year to reach 8%. Because of the post-election spike, the index, represented by Post-Inc, needs to lift profits 9.9% a year, or 2.4% points more.

At the end of our eight-year window, the market needs to deliver $240 billion, or 15% more a year in annual earnings to deliver the 8% return.

Keep in mind that this analysis is based on total S&P earnings. What matters to investors is earnings-per-share. If the market experiences significant dilution ovcr those eight years, either because companies issue a lot more stock than they repurchase, hand out more and more options to top executives, or newcomers challenge incumbents in a number of industries, the bar will rise far higher.

But here's the reality that should sway even the true believers. Trump pledges to get the economy growing at 3% to 4%. Say he reaches the higher goal. In the absence of big dilution, that would raise earnings 6%, including 2% inflation (GDP gains, and declines, are adjusted for inflation). That's nowhere near the 9% requirement needed to reach an 8% annual return.

Another problem is that although profits peaked in late 2014, they're still high by historical standards. The bulls are betting that, from already lofty levels, earnings can somehow far outgrow the overall economy even if the overall economy practically doubles its growth rate. If that happens, the president might actually deserve a "Thanks, Trump!"

The best bet is that returns eight years from now will be in the low single-digits at best. Brightman forecasts that they'll be either in that range, or "modestly negative." Of course, this writer, as did at times the president, thought stocks were extremely pricey, before Trump's amazing win, and they've jumped since. The market is a hotbed of emotions in short interludes. But numbers tend in reign over long periods. The irony is that potentially excellent policies have raised expectations Trump Tower-high. Hope and emotion has gotten us to this summit. Market math will dictate where we go from here.

Article Link To Fortune:

Trump’s Regulation-Rollbacks Have Already Set Off An Economic Revolution

By Betsy McCaughey
The New York Post
March 8, 2017

If you want to start a business, the World Bank says you’d be better off in Canada than setting up shop here in the United States, where mind-numbing government regulations smother entrepreneurs.

That was true, anyway, before Donald Trump became president. In his address to Congress last week, Trump announced that a “historic effort to massively reduce job-crushing regulations” is under way. In a mere six weeks, Trump and his Republican allies in Congress have rolled back 90 regulations.

And they’re just getting started.

Business leaders are cheering. “Relief is finally on the way,” says Thomas J. Donohue, president of the US Chamber of Commerce.

While the media obsess about Russian conspirators, people who actually make things for a living — whether burgers, bridges or buildings — see that the real story unfolding in Washington, DC, is the unprecedented pace of deregulation. It’s helping to fuel the stock market’s record-shattering optimism. And just in the nick of time.

By every measure, the United States has been sinking into economic mediocrity over the last decade because of excessive regulation.

When Barack Obama took office in 2009, the United States ranked third among all nations as a place to do business. Since then it has plummeted to eighth, according to the World Bank. Why? Eight years ago, it took 40 days to get a construction permit in the United States. Today, it’s double that.

Regulatory overkill started long before Obama. But Donohue calls the last eight years a “regulatory onslaught that loaded unprecedented burdens on business and the economy.”

The Heritage Foundation, which grades nations on economic freedom, now puts the US 17th in the world, our lowest-ever ranking. That’s below Chile, and former Soviet states like Estonia, Lithuania and Georgia.

Government bureaucrats here are choking us with compliance costs. Small businesses get hit hardest, because they lack legal departments and market clout to maneuver around the rules.

Unreasonable government regulations are second only to the cost of health insurance as the biggest challenge facing small businesses, according to the National Federation of Independent Businesses.

And we have ObamaCare to thank for both. Restaurateurs nationwide face 622,000 hours of work to comply with new menu-labeling rules. Physicians have to report 18 different clinical measurements on the patients they see or get whacked with penalties.

ObamaCare imposes almost three times as much paperwork on businesses as the notoriously complex Dodd-Frank financial regulations did, and more than 10 times as much as the Sarbanes-Oxley financial reform. The impending repeal of ObamaCare’s employer mandate will liberate companies to start hiring again.

On the campaign trail, candidate Trump’s pledge to repeal ObamaCare and “cut regulations massively” resonated. People struggling to operate businesses were seething with anger at how government regulators compel them to spend hours filling out paperwork and constantly changing their hiring and compensation practices. It’s a colossal theft.

Now, as president, Trump is following through: He’s appointing watchdogs for every federal agency to identify and cut any job-killing rules. He has also ordered agencies to dump two regulations for every new one added. And he’s working with congressional Republicans to undo the reams of last-minute regulations Obama added in his final days in office.

Deregulation will be key to a timely rollout of Trump’s infrastructure plan. Otherwise, it will be delay after delay. Big highway and bridge projects often require up to a decade of regulatory and environmental review and permitting before construction begins. These delays would thwart Trump’s plan to use such spending to jump-start the economy.

Investors are banking on Trump meeting his target to get the nation’s economy growing at 3 percent again, a rate not seen for years. Last week, the Dow Jones Industrial Average hurtled across the 21,000 mark for the first time ever.

The soaring market reflects expectations that Trump will slash corporate taxes. But investors are also buoyed by the pace of deregulation. Call it the biggest tax cut of all.

Article Link To The New York Post:

UK Faces €2 Billion EU Tab For China Fraud

UK customs’ negligence deprived EU of billions of euros of revenue in lost duties and VAT.

By Giulia Paravicini
Politico EU
March 8, 2017

Britain faces a potential €2 billion bill from Brussels after EU investigators found that U.K. authorities turned a blind eye to a massive fraud network that allowed ultra-cheap Chinese goods to flood into Europe.

The EU’s anti-fraud office OLAF, uncovering allegedly one of the biggest fraud rings in its history, concluded that British customs played a central role by repeatedly ignoring warnings to take action over Chinese textiles and footwear pouring into the EU at a tiny fraction of their cost of production.

OLAF calculated that U.K. customs’ “continuous negligence” deprived the EU of €1.987 billion in revenues in lost duties on Chinese merchandise. The highly sophisticated organized crime network also stripped €3.2 billion from the value-added-tax income of major EU countries such as France, Germany, Spain and Italy, the investigators said.

In an attempt to recoup some of the funds, OLAF has sent a recommendation to the European Commission’s Directorate-General for Budget that the U.K. government should be forced to pay the €2 billion directly into the EU budget. Any recovery of the funds will depend on talks and legislative procedures between the U.K. and the Commission.

The anti-fraud investigators confirmed the details of the probe to POLITICO and said: “These losses to the EU budget are still ongoing since this fraud has not been stopped to date.”

“Despite repeated efforts deployed by OLAF, and in contrast to the actions taken by several other member states to fight against these fraudsters, the fraud hub in the U.K. has continued to grow,” a spokesperson for the anti-fraud office said, adding that Britain had also failed to open any criminal investigation into the fraud scheme.

OLAF declined to speculate on Britain’s possible motives for offering easy customs clearance to Chinese goods, but people familiar with similar fraud schemes said it could be the lure of attracting greater traffic than competitor ports such as Rotterdam and Antwerp. The goods in the fraud ring enter the EU’s single market through the U.K.

Her Majesty’s Revenue and Customs (HMRC) said in a statement to POLITICO it had an “excellent record in tackling fraud and rule breaking of all kinds, securing more than £26.6 billion last year alone.” The agency was “considering” OLAF’s findings and recommendations, it said.

Adding To The Bills

The revelations come on the eve of Britain’s negotiations to leave the EU, which are expected to focus on the size of the U.K.’s exit bill, widely estimated at about €60 billion.

The investigation is a particular embarrassment because U.K. officials have consistently pushed the EU to avoid taking a harder line against Beijing for dumping cheap goods. This has angered southern European countries, led by Italy, which accuse the U.K. of sabotaging European trade defenses.

The investigation took place from 2014 to 2016 — also using evidence from 2013 — and focused on the English ports of Felixstowe and Dover, the main entry points for Chinese textiles and footwear coming into Europe. Britain has allegedly established itself as the prime destination for these deliveries; even goods that arrive by ship in Hamburg are ferried to Dover before clearing European customs.

To illustrate the generosity of Britain’s customs terms on these clothes, OLAF cited the case of women’s trousers which were declared with a value of 91 cents per kilo, undershooting the market price of cotton at €1.44/kg. The average price for the trousers declared at customs across the EU was €26 per kilo.

The goods were then trafficked to members of the criminal network across Europe, with the fraudsters setting up “phoenix” companies to take delivery of the goods, according to a joint OLAF-French investigation. These businesses would then disappear, only to be reborn elsewhere, like the mythical bird.

This strategy enabled the companies to avoid paying value added tax because the EU allows importers to pay VAT in the country where they intend to sell it, and not at their port of entry. 
‘Extremely Vague’

Bruno Collin, a head of unit at the French National Directorate of Intelligence and Customs Investigations, attributed Britain’s disinterest to the fact that it was other countries that lost the VAT revenue.

“U.K. authorities are not interested at all in cooperating in this field, probably because the phenomenon does not directly affect them,” he said. Collin was in charge of Octopus, a joint customs’ operation conducted by France and coordinated by OLAF last year, which found that the value of Chinese imports declared at U.K. ports was “discounted five to 10 times.”

Collin said that British authorities largely did not respond to French requests to help trace goods, for example by using tax registration numbers issued at the port of entry. When the British did reply, Collin said they offered only “extremely vague explanations … They don’t make an effort.”

Last Hold-Out

Britain’s alleged determination not to apply rigorous duties to dumped Chinese goods became evident to European authorities in an investigation in 2014 called Snake, a joint customs’ operation between several EU countries and China.

Within one month, “major undervaluation hubs” were uncovered in the U.K., Slovakia, Malta, Portugal and Spain.

To curb the traffic OLAF asked the countries to introduce measures to reduce fraud.

All countries, including the U.K., initially complied with the requests, but the British customs introduced the new risk assessment tools for only four weeks, during Snake. As soon as the operation was over, they returned to business as usual, according to officials involved in Snake. Other countries kept the measures in place, pushing the fraudulent traffic to Britain, they added.

Over 2015 and 2016, OLAF held four bilateral meetings with British officials “where the magnitude of the fraud scheme and the related risks were drawn to the U.K.’s attention,” the fraud office said in a statement to POLITICO. OLAF also held six “ad hoc meetings” where other EU countries were invited to discuss the growing problem.

According to sources briefed on the meetings, HRMC repeatedly came up with excuses for not implementing the measures to reduce fraud.

When confronted with details on how other EU countries had curbed the fraud, British officials said that most of the measures in other countries “would not comply with UK law.”

The Crown Prosecution Service, which also received the OLAF report, was not immediately able to comment. The European Commission also declined to comment.

Article Link To Politico EU:

China Posts First Monthly Trade Deficit In Three Years

By Sue-Lin Wong
March 8, 2017

China unexpectedly posted its first trade deficit in three years in February as imports surged far more than expected to feed a construction boom, driven by commodities from iron ore and copper to crude oil and coal.

The upbeat import reading reinforced the growing view that economic activity in China picked up in the first two months of the year, adding to a global manufacturing revival.

That could give China's policymakers more confidence to press ahead this year with oft-delayed and painful structural reforms such as tackling a rapid build-up in debt.

"We suspect that this largely reflects the boost to import values from the recent jump in commodity price inflation, but it also suggests that domestic demand remains resilient," Julian Evans-Pritchard at Capital Economics said in a note

China's imports surged 38.1 percent from a year earlier, the biggest increase since February 2012, official data showed on Wednesday, while exports unexpectedly fell 1.3 percent.

That left the country with a trade deficit of $9.15 billion for the month, the General Administration of Customs said.

The surprise deficit comes as new President Donald Trump focuses increased attention on China's large and persistent trade surplus with the United States. In an interview with Reuters last month, Trump declared China the "grand champions" of currency manipulation to make its exports cheaper.

Most analysts, however, chalked up the rare deficit to distortions caused by the long Lunar New Year celebrations, which began in late January this year but fell in February in 2016. Many businesses shut for a week or more and factory production and port operations can be significantly affected.

"All deficits since 2005 have been in either the Lunar New Year month or in one of the months around the Lunar New Year month," ING's Chief Asia Economist Tim Condon wrote in a note.

"Like those earlier ones, we expect February's to be a one-off and the full-year trade surplus will be close to 2016's 3.4 trillion yuan."

Still, combined January and February data showed China's trade rose 13.3 percent from the same period a year earlier, suggesting real improvement in underlying demand at home and abroad.

That also jives with strong China factory activity surveys which showed growth in both output and orders is accelerating.

"Looking ahead, we expect external demand to remain fairly strong during the coming quarters which should continue to support exports," Evans-Pritchard said.

But he added that it was unlikely the current pace of import growth can be sustained as the impact of higher commodity prices will start to drop out of the calculations in coming months.

Analysts polled by Reuters had expected February shipments from the world's largest exporter to have risen 12.3 percent in dollar-terms, an improvement from a 7.9 percent rise in January.

Imports had been expected to rise 20 percent, after rising 16.7 percent in January.

That would have produced a trade surplus of $25.75 billion in February, roughly half that recorded in January.

China's February trade surplus with the United States fell to $10.42 billion, the smallest since February 2014. China exports to the U.S. fell 4.2 percent, while its imports from the U.S. rose 38 percent.

Commodity Boom

China's first-quarter economic growth could accelerate to 7 percent year-on-year, from 6.8 percent in the last quarter, economists at OCBC wrote in a note on Monday, while adding that the pace may start softening in spring.

Most of China's February commodity imports grew strongly in volume terms from a year earlier, but dipped from January.

As the government ramps up infrastructure spending and developers rush to complete new housing projects, steel mills are hoovering up more iron ore and coking coal to meet demand.

China's crude oil imports rose to the second-highest level on record in February, as strong demand from independent "teapot" refiners continues to drive growth.

With the economy on much steadier footing than a year ago, the government has trimmed its economic growth target to around 6.5 percent this year, Premier Li Keqiang said in his work report at the opening of parliament on Sunday. The economy grew 6.7 percent last year, the slowest pace in 26 years.

A more modest growth target should in theory give authorities more room to concentrate on reducing the risks from years of debt-fueled stimulus, but they are expected to proceed cautiously and not tap the brakes too hard.

China's central bank has already started bumping up short-term interest rates to encourage debt-laden companies to deleverage and deter speculative activity, but it is expected to keep its benchmark policy lending rate steady through at least mid-2018.

As with last year, China has not set a target for exports in 2017, underlining the uncertain global outlook and fears of rising U.S. trade protectionism, but Li said China will take steps to steady exports this year.

Trump hasn't made good yet on his campaign pledges of greater protectionist measures In the early days of his presidency, but analysts say the specter of deteriorating U.S.-China trade and political ties is likely to weigh on confidence of exporters and investors worldwide.

Article Link To Reuters:

The Winners And Losers Of The GOP’s Obamacare Replacement Bill

By Bertha Coombs
March 8, 2017

The new Republican health plan tries to keep the popular parts of Obamacare, such as allowing children to stay on their parents plans until age 26, and making insurers cover people with preexisting conditions, while getting rid of parts people don't like such as the individual mandate. It also expands tax credits.

GOP leaders are calling the American Health Care Act, released on Monday, the first three phases in the process of repealing and replacing Obamacare, under a budgetary process that will ultimately allow them to pass the bill through a simple majority in the Senate.

But critics say the bill will not help stabilize the individual market or result in lower prices.

"The risk here is we've got these fundamental reforms that include tax repeals, that undermine the system," said Michael Barnes, managing partner at the DCBA law firm in Washington, and a former confidential counsel in the White House Office of drug policy under the Bush administration.

"Without an individual mandate repeal that is somehow balanced by a stronger incentive to get people to buy insurance, you don't have enough of a base for there to be affordability," said Barnes.

One of the things that has drawn the most criticism from conservatives is the way in which the GOP bill widens the use of tax credits, prompting them to call it "Obamacare light." Republican leaders and the Trump administration pushed back on that charge.

"We need to equalize the tax treatment for the purchase of coverage," explained Health and Human Services Secretary Tom Price. "Those… in the employer-sponsored market, they get a tax benefit for buying health coverage. Those folks that are out there in the individual small group market, (get) no tax benefit and that's what this plan would (fix)."

How GOP Tax Credits Works

The Affordable Care Act (ACA) provides tax credits for lower-income Americans, but under the GOP plan the big difference is how tax credits would be calculated, and who would get them.

Under the ACA: Your income and the cost of your insurance determine your tax credit, phasing out for those earning more than $47,000 in 2017.

Under the GOP Health Care Act: Refundable tax credits are based on your age and get phased out if you earn more than $75,000 year, starting at $2,000 annually for individuals in their 20s, and up to $4,000 for those in their 60s. For a household with multiple adults, the maximum tax credit would be $14,000 a year.

The former administrator for the Centers for Medicare and Medicaid says the GOP tax credit changes would result in lower-income people losing ground on affordability.

"The president says he's going to put forward a replacement bill that would cover the same number of people more affordably. This unfortunately doesn't do that," said Andy Slavitt, who served as CMS director during the last two years of the Obama administration.

Tax Credit Winners & Losers

The GOP's Healthcare Act could result in less generous benefits for many of the ACA's winners -- older, low-income people. The ACA's losers – high income earners who got no Obamacare tax credits—would gain new tax break to buy insurance, as well as relief from the repeal of taxes on high- income earners that helped pay for Obamacare.

Here's how the tax credit amounts would change for an older enrollee in a high cost market like Mobile, Alabama, according to an analysis by the Kaiser Family Foundation.

Under the ACA in 2017, for exchange plans:

-- 60-year old with $20,000 income now gets $13,200
-- 60-year old with $40,000 income now gets $10,100
-- 60-year old with $60,000 income now gets $0

Under the GOP's tax credit proposal, for any individual market plan:
-- 60-year old with $20,000 income would get $4,000 (70% less than under ACA)
-- 60-year old with $40,000 would get $4,000 (60% less than under ACA)
-- 60-year old with earning up to $75,000 would get $4,000

But under the GOP plan, insurers would also be allowed to charge 60-year olds rates up to 5 times higher than those for younger people. Under the ACA, older enrollees are charged only 3 times as much.

Analysts at S&P Global estimate that the GOP insurance changes could result in 20 percent cheaper plans for young people in their 20s, and increase premiums by 30 percent for people in their 60s, who would likely then drop coverage. S&P sees a net reduction of 2 to 4 million in individual market enrollment.

"What happens when people can't afford insurance is that the only people that tend to buy it are the sicker people," said Slavitt. "This (plan) is not only going to cover fewer people, but it's actually not going to be good for the risk pool, either."

Employer Mandate Repealed, Cadillac Tax Remains

The GOP plan also repeals the Obamacare employer mandate, which requires companies with more than 100 full-time workers to provide health coverage.

However, the plan keeps ACA's so-called Cadillac excise tax on high-cost plans, pushing it back to 2025.

At RHA Health Services in Asheville, North Carolina, Misty Guinn and her benefits staff are already starting to explore what kind of health insurance options the company will offer in 2018. They've operated under the assumption that employer benefits will someday be taxed.

"Within the benefits world, the Cadillac Tax has been some kind of mythical creature that may or may not happen," said Guinn, RHA's director of benefits and wellness. "I feel that we already made strides, to reduce the value of our plans."

In 2015, under the ACA, the firm found that it was actually more cost-effective for the firm to pay the employer mandate penalty for their lowest income workers, so that they could qualify for more affordable care on the Obamacare exchange.

Working with the online benefits firm, Benefitfocus, RHA switched to higher deductible plans in 2016, and other voluntary options which help employees pay for out-of-pocket costs. That has allowed them to control premium increases and health costs.

For now, RHA plans to continue offering benefits to its employees, regardless of what happens in Congress.

"If the ACA stays, or the ACA goes away, we're still going to be offering more options for our employees," said Guinn.

Until the Congressional Budget Office has weighed in on the American Health Care Act, there are no official estimates on how many people will be covered or could possibly lose coverage under the bill, or how much it will cost.

Article Link To CNBC: