Thursday, April 6, 2017

Thursday, April 6, Morning Global Market Roundup: Fed And Trump Signals Give Stocks Double Trouble

By Marc Jones
April 6, 2017

Stocks slipped and bonds rose on Thursday, with risk appetite soured by signs the Federal Reserve might start paring asset holdings later this year just as the chance of early U.S. fiscal stimulus seems to be evaporating.

Investors were also wary before a potentially tense meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping, the first between the world's two most powerful leaders.

Topping the agenda at Trump's Mar-a-Lago resort in Florida will be whether he makes good on his threat to use U.S.-China trade ties to pressure Beijing to do more to rein in its nuclear-armed neighbor North Korea.

Nerves were not helped when U.S. Pacific Fleet Commander Admiral Scott Swift said any decision on a pre-emptive attack against North Korea would be up to Trump.

Lingering fears of a possible trade war had kept Asian markets on edge and Europe .FTEU3 was just as cautious. A 0.8 percent fall put the pan-regional FTSEurofirst .FTEU3 on course for its biggest fall in over a month. .EU

"Most portfolio managers think equities are the most overbought in 20 years and so anything that creates some kind of concern, well, it is an excuse to take profits," said Pictet Asset Management's chief strategist Luca Paolini.

He was referring to minutes of the Fed's last meeting that showed most of the U.S. central bank's policymakers thought it should begin trimming its $4.5 trillion balance sheet later this year, earlier than many had expected.

Some Fed members also "viewed equity prices as quite high relative to standard valuation measures," a rare comment on asset levels that also caught investors off guard.

Wall Street futures ESc1 pointed to opening falls of around 0.15 percent for the S&P 500, Dow Jones and Nasdaq. The Dow posted its largest intra-day downside reversal in 14 months on Wednesday in reaction to the Fed, shedding a near 200-point gain. [.N]

The dollar, which in comparison had barely budged, rose in early European trading. European Central Bank head Mario Draghi said the ECB had no plans to deviate from its stimulus program, which pushed the euro to a three-week low.

Broader sentiment had also been bruised overnight when U.S. House of Representatives Speaker Paul Ryan said there was no consensus on tax reform and it would take longer to accomplish than healthcare.

Markets have risen in recent months in part on speculation fiscal stimulus would boost U.S. growth and inflation.

"Trump's agenda is falling to pieces," said Pictet's Paolini. "And that is probably the main concern (for stock market investors)."


The whiplash in sentiment saw Japan's Nikkei .N225 hit its lowest since early December.

Australia's index also lost 0.5 percent. Shanghai .SSEC made marginal gains as a private survey of China's service sector showed activity expanded at its slowest pace in six months in March.

"We were hit by a bucket of cold water," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Signs that the Fed could pare its balance sheet are shocking enough, but the mood was exacerbated as the Fed touched upon stock valuations, which is very rare."

The news overshadowed data showing U.S. private employers added a surprisingly strong 263,000 jobs in March, spurring speculation the official payrolls report on Friday would also impress.

Treasuries rallied, with yields on 10-year bonds back at 2.33 percent US10YT=RR and threatening to clear a chart barrier at 2.30 percent. Draghi's comments also helped euro zone yields drop back towards multi-week lows. [GVD/EUR]

The decline in yields prevented the dollar pulling away from the yen, where it was last at 110.46 JPY= near chart support in the 110.11/27 zone. [USD/]

Among emerging market currencies, the rand remained vulnerable amid political uncertainty and there was also speculation that the Czech central bank could remove a peg that has been keeping the crown below 27-per-euro.

In commodity markets, oil ticked lower after the U.S. government reported a surprise increase in U.S. crude inventories to a record high.

U.S. crude CLcv1 was down 29 cents at $50.86 a barrel, while Brent LCOcv1 lost 27 cents to $54.09. [O/R]

Easily the biggest mover this week has been coking coal, which surged 43 percent on Singapore-listed futures after Cyclone Debbie slammed into top supplier Australia, crippling exports of the steelmaking fuel.

Article Link To Reuters:

7-Eleven Operator To Buy U.S. Stores From Sunoco For $3.3 Billion

By Taiga Uranaka
April 6, 2017

Seven & i Holdings Co (3382.T) on Thursday said it would buy convenience stores and petrol stations from Texas-based Sunoco LP (SUN.N) for about $3.3 billion, as the Japanese retailer closes in on its goal to reach 10,000 North American outlets.

The operator of the 7-Eleven chain of convenience stores has been aggressively opening stores in Japan as well as the United States, where it has been acquiring stores from local retailers.

Its latest purchase comes as operators of traditional big-box retailers including Seven & i have been suffering weak sales as changing tastes and modest wage growth have prompted shoppers to defect to cheaper specialty chains and online outlets.

"The U.S. convenience store market has growth momentum. We see opportunities there," Seven & i President Ryuichi Isaka said at an earnings briefing after announcing the Sunoco deal.

Seven & i runs general merchandise, department and specialty stores, but the bulk of its operating profit comes from convenience stores - or 86 percent of 364.6 billion yen ($3.29 billion) in the year through February.

In a statement, the firm said U.S. unit 7-Eleven Inc [SILC.UL] has agreed to buy 1,108 Sunoco convenience stores and petrol stations in Texas and other states in August.

Sunoco currently operates about 1,350 retail fuelling sites and convenience stores under brands such as APlus and Stripes, the firm's website showed.

The deal would be the biggest by 7-Eleven Inc, known for its "Slurpee" frozen beverage. Most recently, 7-Eleven Inc acquired 79 stores in California and Wyoming from CST Brands Inc (CST.N) in July.

Seven & i has about 19,400 7-Eleven stores in Japan and 8,700 in the United States and Canada, including those run by franchisees. 7-Eleven Inc has said it aims to increase its number of stores to 10,000 over the three years through 2019.

In Japan, same-store sales in the year through February rose 1.8 percent at the 7-Eleven chain, but fell 4.2 percent at Seven & i's Ito-Yokado general merchandise stores.

A Japanese company which is now part of Seven & i opened a 7-Eleven store as a regional licensee in 1974. The then-new retail concept became so successful in Japan that the company later bought out the U.S. owner of the convenience store chain.

($1 = 110.6700 yen)

Article Link To Reuters:

The Real Political Scandal? Actually, There Are Two

By Eli Lake
The Bloomberg View
April 6, 2017

Let me guess. You read about Obama's national security adviser who unmasked the names of Trump associates who were caught up in surveillance and are bewildered that the media is even covering this nothing-burger. It's a diversion from the real story: how the president and his associates collaborated with a Russian influence operation against the U.S. election.

Or perhaps you are sick of hearing about Russia. After all, no one has presented any evidence that President Donald Trump or his team colluded with the Russians. Even James Clapper, President Barack Obama's director of national intelligence, last month acknowledged he saw no such evidence. The Russia story is #fakenews, to borrow a hashtag of the moment. The real story is about the Obama administration's politicization of state surveillance.

Let me suggest that both stories are something-burgers. Depending on where the facts lead, we will know whether Obama's national security adviser, Susan Rice, was justified in unmasking the names of Trump transition officials or whether the media's obsession with the government's Russia investigation was warranted.

Let's start with the Russia allegations. At this point, even Trump has reluctantly acknowledged that Russia is responsible for the hack of leading Democrats' emails during the election. As the U.S. intelligence community has concluded, those hacks were part of an elaborate operation to discredit the Democratic nominee in 2016, Hillary Clinton. This campaign included fake news, Twitter bots that promoted fake stories, hacking, and distributing hacked emails through WikiLeaks.

It's possible that Trump was just an unwitting beneficiary of this foreign meddling. But he and his associates have seemingly gone out of their way to act guilty. Trump seemed to be the last public figure to acknowledge the Russian hacks, even though everyone in his national security cabinet has pinned the blame on Moscow without condition. If he had nothing to hide, why was he clinging to that position? What's more, the Trump team denied having contact with Russians, and then those contacts were disclosed to the press. And Trump has shown no interest in deterring the Russians and other hostile powers from interfering in U.S. politics in the future.

And there are other suspicious facts as well. At this point, it looks like Paul Manafort, who served as Trump's campaign chairman, was an unregistered foreign agent for the pro-Russian government in Ukraine that was ousted in the 2014 popular uprising there. The Associated Press reported last month that Manafort had also been paid by a Russian oligarch, Oleg Deripaska, between 2005 and 2009 to help influence U.S. policy on behalf of Russia. Trump fired Manafort in August, after Ukrainian investigators discovered Manafort's name on a ledger listing alleged cash payouts from Ukraine's former ruling party to various cronies as part of an influence-peddling scheme.

No wonder there is an open FBI investigation into Russian influence in the U.S. election, and no wonder the bureau's investigators are also examining the role of Trump associates in all of this.

That investigation is warranted. But in the meantime, Trump's political opponents have weaponized the allegations of collusion against him. This does not support Trump's claim that Obama illegally wiretapped Trump Tower. But one can see why Trump is worried his predecessor ginned up the surveillance state against him, and also why he hopes to conflate the two issues.

As the New York Times reported on March 1, Obama's aides sought to preserve intelligence on Russia's influence operation and ties to Trump in the final days of his presidency. That included an effort to lower the classification on analysis of this information so it could be distributed more widely within the government and to allies in Congress.

We already know that leaks about Trump's first national security adviser, Michael Flynn, and his conversations with the Russian ambassador forced his resignation. There were also the reports on Jeff Sessions and his meeting with Russia's ambassador, after Sessions denied any contact with Russian officials.

Tuesday on MSNBC, Rice herself denied leaking anything. But that denial may be less than meets the eye. Rice may not have spoken to any reporters about intelligence she read about Trump and Russia, but did she discuss this with her colleagues? Did any of her colleagues then pass information along to the media?

Even if we take Rice at her word, it's still important to highlight a key point about Rice's interview on Tuesday: She declined to answer questions about whether she sought to unmask Trump transition officials or whether the pace of those requests increased after the election. This week the ranking Democrats on the House and Senate intelligence committees have said the issue of unmasking will be examined in the broader investigation into Russia and the election.

A final point needs to be made in both of these story lines. We don't have all the facts yet in either situation, but in both cases elements of the scandal are in public view.

On the matter of Russia and Trump, the Republican campaign's symbiosis with the Russian operation was not hidden. It happened in plain sight. Ahead of Election Day, Trump made the stolen emails published by WikiLeaks a key part of his strategy. His campaign highlighted them. Trump talked about them at his rallies. In some cases, Trump and his associates also repeated fake news stories generated by the Russians, a point made powerfully last week in testimony by former FBI officer Clint Watts before the Senate Intelligence Committee. The Trump campaign did all of this after the media and the U.S. government had accused Russia of hacking the Democrats. Even Senator Marco Rubio, who ended up supporting Trump, warned during the campaign against using the WikiLeaks documents for political gain. Whether Trump was secretly colluding with the Russians in advance or simply following their public cues, he used the information Moscow had stolen for political gain.

In the case of politicized surveillance, a real scandal is found in a talking point repeated this week by Rice and her defenders. In her interview with MSNBC, Rice said it was fairly routine for her to unmask the names of U.S. persons in the summaries of raw intelligence she received. As I reported Monday, the standard for unmasking when requested by a senior official is simply that it helps to better understand that piece of foreign intelligence. As numerous experts have since said, unmasking is pretty common. Even if Rice did not break the law (and it appears she did not), the scandal is that what she did was most likely legal. It is not outrageous that a national security adviser can discover the names of Americans caught up in legal surveillance of others when there is a threat of a terrorist or cyber attack. It is outrageous that it's so easy to do this in the absence of such a rationale.

Intelligence community leaders have repeatedly assured the public that there are strict rules for redacting the names of U.S. persons who are incidentally recorded as the government eavesdrops on foreign and criminal targets. While it's true that line analysts at the National Security Agency or the FBI take great pains to redact those names, what good are these protections if they can be unmasked with such a flimsy criterion?

What's more, there is at least some precedent on this issue. As the Wall Street Journal reported at the end of 2015, the Obama White House ended up learning the identities of members of Congress and Jewish organizations that were in discussions with Israeli senior officials during the fight over the Iran nuclear deal. The monitoring of Israelis was entirely legal, but it is troubling that the identities of the Americans with whom they spoke were also known to the White House in the middle of a bitter political fight over the agreement that defined Obama's foreign policy legacy.

Concern about unmasking is not a smokescreen, a nothing-burger or a diversionary tactic. It's a real story. So is how Russia helped Trump win the White House. Don't trust anyone who says "There's nothing to see here."

Article Link To The Bloomberg View:

America And China Should Avoid Igniting World War III Over Rocks And Reefs

Asia-Pacific regional security may hinge on Beijing's ability to clarify and reform its U-shaped claim in the South China Sea.

By Lyle J. Goldstein
The National Interest
April 6, 2017

Americans will do well to keep in mind during the next week that global summit meetings are not sporting matches. We should not judge the success or failure of the effort by the kind of apparatus employed to help the Chinese president deplane from his aircraft, nor by some pithy line delivered at a post-summit press conference like a bank shot at the buzzer. Equally troubling is the intensifying blurring of domestic political conspiracy theories with great-power politics. Such stories may titillate journalists and readers alike, but they also contribute to the current world disorder and could lead indirectly to catastrophe.

It is no exaggeration to say the weight of the world is on the shoulders of the two most important world leaders gathering at Mar-a-Lago at the end of this week. Presidents Donald Trump and Xi Jinping must endeavor to keep the world economy on a positive track. Also, they may discuss certain (often overlooked) initiatives vital to maintaining global order, such as United Nations peacekeeping. The critical climate change issue, a major feature of recent U.S.-China summits and bilateral negotiations, is not likely to make it onto the agenda this time for obvious reasons. Major points of tension—which include the South China Sea and the fraught Taiwan issue—could easily scuttle any chance to build a genuine working relationship between the two “political strong men.”

But far and away the most important issue before the two leaders is that of North Korea, and this is as it should be, because the crisis on the peninsula has reached an exceedingly delicate point. It will be essential for the two leaders to move briskly away from the customary blame game that has characterized U.S.-China interaction on the issue for more than a decade. Washington, DC blames Beijing for not using its obvious influence to restrain Pyongyang. Meanwhile, Beijing complains that Washington’s continuous military pressure against Pyongyang is the root of the problem. Both critiques actually have considerable merit. Some ideas are presented at the conclusion of this essay for breaking that particular impasse among others.

However, the main contribution of this pre-summit edition of Dragon Eye will be to make a quick, preliminary survey of Mandarin-language assessments from among a few of China’s up and coming “America hands”[ 美国通]. For instance, The Chinese Journal of American Studies [美国研究] devoted a special issue to the theme of Donald Trump’s election victory with the lead article written by Da Wei [达巍], director of the American Studies Center at the China Institute for Contemporary International Relations [中国现代国际关系研究院]. Da’s appraisal is quite balanced: “Trump, on the one hand continuously attacks China . . . but on the other hand has expressed a willingness to make deals with China.” After all, he is a businessman [商人] “with ample experience of negotiations and quite accustomed to using “psychological pressure” and strategically employing both “surprise” and “uncertainty.” In general, Da evaluates that Trump’s business mind will be looking for a China policy that is both “low cost and high payoff” [低成本高收益]. Da comes close to endorsing the common charge in the United States that China is insufficiently open to U.S. investment.

Continuing in a rather optimistic tone, Da cites numerous problems with the U.S. “rebalance,” including that the planned naval buildup will take many years. He additionally observes that Trump was widely criticized in the United States for his phone call with the Taiwan leader Tsai Ing-wen from early December. Da explains the hope among Chinese strategists that the Middle East will be the main focus of Trump’s strategy rather than the Asia-Pacific region. Ultimately, Da seems to expect increasing economic frictions, but suggests this could also be accompanied by a decreasing of ideological and geopolitical tensions. Still, there are major concerns articulated here, including the lack of China expertise in the senior ranks of the new administration. Da explains that policy could be “kidnapped” [绑架] by a small group of ideologues with little or no experience of policymaking in the complex Asia-Pacific context. At the conclusion of the piece, Da warns that Beijing must be ready to “retaliate” [回击], responding “action for action” [行动对行动] to any steps by the Trump administration that harm China’s interests. Still, Da ends the piece by calling for an expanded basis for U.S.-China cooperation and warning Beijing against “getting trapped in an arms race.”

Other Chinese analysts are a bit more pessimistic. Zhu Feng [朱锋] of Nanjing University, writing in an early 2017 article for Asia-Pacific Security and Maritime Affairs [亚太安全与海洋研究], characterizes Trump’s victory as a “Black Swan event” [黑天鹅事件] that has “brought to the Asia-Pacific region a new insecurity and anxiety.” Zhu predicts increasing tensions as the United States strengthens the U.S.-Japan alliance and seeks to bring greater sanctions pressure against North Korea. Even on the South China Sea, where Beijing’s hand has seemed to be strengthened of late by the policies of Philippines president Rodrigo Duterte, Zhu notes that Trump and Duterte will likely get along much better than Obama and Duterte. Adding the Taiwan issue to this above volatile mix, Zhu foresees the “trend toward U.S.-China strategic rivalry . . . will certainly deepen,” but he also says it is “most important to avoid . . . a U.S.-China confrontation.” Similarly, Wang Dong [王栋], a rising America hand at Peking University, or Bei Da, presents a rather dark appraisal, which appeared recently in Contemporary International Relations [现代国际关系]. Wang observes that scholars in China have been “excessively optimistic” [过度乐观] with regard to Trump. He briefly entertains the (mocking) theme from an American article that “China Just Won the U.S. Election,” since the new American president is less likely to interfere in China’s internal politics, or continue the “rebalance,” and has subsequently pulled out of the Trans-Pacific Partnership. However, Wang explains that this is a surficial analysis and that a more careful reading of Trump’s team members and the Republican majority in the Congress yields the conclusion that these people “are full of unfriendly attitudes toward China.” [对中国的认识是充满不友好态度的]. He explains that Trump accuses China of “cheating” and “not respecting the United States,” concluding that this new American president intends to “resort to all means of punishment, retaliation and intimidation in order to ‘tame’ China.” [用各种报复, 反击, 威吓手段来‘驯服’中国]. While he does not foreclose the business man open to bargaining interpretation, Wang concludes his analysis with the recommendation that Chinese leaders “cast aside illusions, make preparations, strive for the best [outcome], but prepare for the worst.” [抛弃幻想, 作好准备, 争取最好, 不怕最差].

Even in Wang’s rather gloomy appraisal, he nevertheless suggests that the goal of Chinese policy remains to “continue the stable development” of U.S.-China relations. Indeed, if U.S. and Chinese negotiators are creative and flexible in the coming years, a series of crucial bargains can be struck that serve the interests of both superpowers, as well as global security and the Asia-Pacific more generally. They can, for example, avoid igniting World War III over “rocks and reefs” by agreeing that Beijing must clarify and reform its U-shaped claim in the South China Sea, while Washington should simultaneously endorse the general approach of bilateral negotiations in pursuit of genuine “joint development.” Turning back to the Gordian Knot of the Korean Peninsula, the United States and China can likewise strike a bargain in which Beijing strengthens its security commitment to Pyongyang (obviating North Korea’s reliance on nuclear weapons for regime survival) and Washington agrees to scale back its pattern of exercises. The United States should seriously entertain the possibility of opening diplomatic relations with North Korea in exchange for a freeze on the nuclear program as a first step toward a larger deal that results in denuclearization. One can disagree about the specific proposals and their sequencing, of course, but the eventual cooperative steps must serve the basic interests of all parties involved (yes, including those of North Korea). Unlike in the Middle East, wherein continuous conflict and decades of killing have engendered such a level of animosity that peace agreements are nearly impossible, that is simply not the case in the Asia-Pacific region.

Washington and Beijing both have hawks aplenty. The latter are more vocal than ever and seem to have plenty of material to feast on, while the former can be counted upon to oppose any such practical diplomatic bargaining, wielding as is their wont the well-worn Munich trope. More than a few of these jingoists in both capitals (and their institutional backers) actually gain significant material benefits from continuing and further escalating strategic competition, it is sad to say. Of late, the atmosphere of intensifying U.S.-China rivalry has become so entrenched that it has even become fashionable around Washington to smirk sarcastically at the mere suggestion of a “win-win” compromise (once a core plank of liberal thinking) since this phrase is now apparently derided as “so much Chinese propaganda.” However, those entertaining this point of view might briefly reflect on just what the opposite of that clichéd aphorism actually entails: namely “lose-lose.” In that dark scenario—almost too dark to contemplate—massive wealth will be squandered and it’s likely that innumerable innocents (including far too many young Americans) will be slain as well.

With that sobering thought in mind, we should be happy if these two world leaders emerge from the Mar-a-Lago talks without any diplomatic fists thrown [打了一拳] and a renewed determination to cooperate across a plethora of domains in order to solve pressing world problems.

Article Link To The National Interest:

Australian Regulator Sues Apple Alleging iPhone 'Bricking'

By Byron Kaye
April 6, 2017

Australia's consumer watchdog has sued Apple Inc (AAPL.O) alleging it used a software update to disable iPhones which had cracked screens fixed by third parties.

The U.S. technology giant "bricked" - or disabled with a software update - hundreds of smartphones and tablet devices, and then refused to unlock them on the grounds that customers had had the devices serviced by non-Apple repairers, the Australian Competition and Consumer Commission said in a court filing.

"Consumer guarantee rights under the Australian Consumer Law exist independently of any manufacturer's warranty and are not extinguished simply because a consumer has goods repaired by a third party," ACCC Chairman Rod Sims said in a statement.

An Apple spokeswoman did not immediately respond to an email requesting comment.

The regulator said that between September 2014 and February 2016, Apple customers who downloaded software updates then connected their devices to their computers received a message saying the device "could not be restored and the device had stopped functioning".

Customers then asked Apple to fix their devices, only to be told by the company that "no Apple entity ... was required to, or would, provide a remedy" for free, the documents added.

Apple engaged in "misleading or deceptive conduct and made false or misleading representations to consumers" about its software updates and customers' rights to have their products repaired by the company, the commission said.

As well as fines, the ACCC said it was seeking injunctions, declarations, compliance program orders, corrective notices, and costs.

The lawsuit was filed late on Wednesday, a week after the consumer watchdog granted Apple a win by denying Australia's banks the right to introduce a mobile payment system to rival its Apple Wallet.

Article Link To Reuters:

Twitter Creates 'Lite' Version For Data-Starved Users

By David Ingram
April 6, 2017

Twitter Inc (TWTR.N) is launching a faster version of its mobile service on Wednesday aimed at people with sporadic connections or little data on their smartphone plans, hoping to pick up users in harder-to-reach emerging markets.

The company calls the version Twitter Lite and it will be aimed largely at users outside the United States. Twitter Lite works through a web browser, not a stand-alone phone application, but its appearance and functionality are nearly identical to what app users experience, according to a preview shown to Reuters.

The launch comes on the heels of similar products from other U.S. tech firms. Facebook Inc (FB.O) released Facebook Lite in 2015 and on Tuesday, Alphabet Inc's (GOOGL.O) YouTube unveiled a low-data mobile app designed for India.

San Francisco-based Twitter lags behind those companies in building a user base. It had 319 million average monthly active users at the end of last year, up 4 percent year-over-year but still a fraction of Facebook's 1.9 billion users.

A primary reason in some parts of the world is how much data its app and earlier website consumed, Keith Coleman, Twitter's vice president of product, said in an interview.

"We didn't feel like we were reaching these other countries well enough, and this will allow us to do it faster, cheaper and with a better experience than we've had before," he said.

The company estimates that, with several changes it is making to its mobile website,, users will see their average data consumption on the browser version go down 40 percent.

With an additional data-saving feature users can turn on, data consumption will drop some 70 percent on average, said Patrick Traughber, a Twitter product manager. The reduction will come from differences such as initially displaying previews of pictures instead of full pictures.

Like YouTube, Twitter is eyeing India's 1.3 billion people, and it timed the release of Twitter Lite in part to coincide with the start this week of a major cricket event there, the Indian Premier League's Twenty20 tournament.

Cricket is the most popular sport in India and following sports in real time is one of the main ways people use Twitter, which unlike many other social media networks still has a chronological timeline to emphasize immediacy.

Other countries where the company said it expects Twitter Lite to be most useful include Indonesia, the Philippines, Brazil, Argentina and Mexico.

Article Link To Reuters:

Draghi Says ECB's Policy Stance Is Still Appropriate, Too Soon To Reduce Stimulus

By Sam Meredith
April 6, 2017

European Central Bank President Mario Draghi insisted the bank's monetary policy stance remained appropriate on Thursday and stressed "sufficient confidence" would be necessary for the central bank to change tact.

"We are confident that our policy is working and that the outlook for the economy is gradually improving," Draghi said at a conference in Frankfurt on Thursday.

"But even so, we have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook – which remains conditional on a very substantial degree of monetary accommodation. Hence a reassessment of the current monetary policy stance is not warranted at this stage," he added.

The ECB chief reaffirmed his stance the central bank would not need to deviate from its generous asset-buying program until at least the end of the year. The ECB's rate of asset purchases is set to continue until at least the end of December, albeit at a reduced monthly rate of 60 billion euros ($63.8 billion) from April.

Inflation Outlook Remains Unchanged

At the central bank's March meeting, Draghi suggested he would continue to look through "transient" changes in headline inflation figures and reiterated this view on Thursday.

Improving economic data in Europe appeared to increase pressure on Draghi to reconsider the ECB's bond-buying program yet the central bank chief's reassessment of monetary policy found scant evidence of higher underlying inflation pressures. The euro moved down to $1.0640 shortly after Draghi finished speaking at the conference.

Elsewhere, Bundesbank President Jens Weidmann had suggested he would welcome a move in the opposite direction from the ECB.

Weidmann told German weekly newspaper Die Zelt in an interview published Wednesday that the time for the ECB to scale back monetary stimulus was fast-approaching given the apparent strength of the bloc's economy.

'Now Is Not The Time To Hit The Exit Button'

Meanwhile, S&P chief economist, Paul Sheard told CNBC on Thursday he was probably "more in the Draghi camp" when asked whether he would sympathize with Weidmann's criticism.

"I think after a sustained period of low inflation, weak growth with still unemployment relatively high in the euro zone … Now is not the time to be hitting the exit button," Sheard said.

"Give a little bit more time to run, make sure that this recovery is very, very sound and very, very firm and then I think you can start to move," he added.

Article Link To CNBC:

Bezos Is Selling $1 Billion Of Amazon Stock A Year To Fund Rocket Venture

By Irene Klotz
April 6, 2017 founder Jeff Bezos said on Wednesday he is selling about $1 billion worth of the internet retailer's stock annually to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year.

Blue Origin had hoped to begin test flights with company pilots and engineers in 2017, but that probably will not happen until next year, Bezos told reporters at the annual U.S. Space Symposium in Colorado Springs.

“My business model right now … for Blue Origin is I sell about $1 billion of Amazon stock a year and I use it to invest in Blue Origin," said Bezos, the chief executive of Inc (AMZN.O) and also the owner of The Washington Post newspaper.

Ultimately, the plan is for Blue Origin to become a profitable, self-sustaining enterprise, with a long-term goal to cut the cost of space flight so that millions of people can live and work off Earth, Bezos said.

Bezos is Amazon's largest shareholder, with 80.9 million shares, according to Thomson Reuters data. At Wednesday's closing share price of $909.28, Bezos would have to sell 1,099,771 shares to meet his pledge of selling $1 billion worth of Amazon stock. Bezos' total Amazon holdings, representing a 16.95 percent stake in the company, are worth $73.54 billion at Wednesday's closing price.

For now, Kent, Washington-based Blue Origin is working toward far shorter hops - 11 minute space rides that are not fast enough to put a spaceship into orbit around Earth.

Blue Origin has not started selling tickets or set prices to ride aboard its six-passenger, gumdrop-shaped capsule, known as New Shepard.

The reusable rocket and capsule is designed to carry passengers to an altitude of more than 100 miles (62 km) above the planet so they can experience a few minutes of weightlessness and see the curvature of Earth set against the blackness of space. Unmanned test flights have been underway since 2015.

At the symposium, Bezos showed off a mockup of the passenger capsule, which sports six reclined seats, each with its own large window. Also on display was a scorched New Shepard booster rocket that was retired in October after five flights.

Like fellow tech entrepreneur Elon Musk, founder and chief executive of SpaceX, Bezos says that reusability is the key to cutting the cost of space flight. Last week, SpaceX re-launched a rocket for an unprecedented second mission to put a spacecraft into orbit.

“The engineering approach is a little different, but we’re very like-minded,” Bezos said of Musk.

Blue Origin is developing a second launch system to carry satellites, and eventually people, into orbit, similar to SpaceX's Falcon 9 and Dragon capsule.

Development costs for that system, known as New Glenn, will be about $2.5 billion.

There is no estimate yet for how much Bezos will invest overall on Blue Origin. But Bezos has indicated he will spend what it takes.

“It’s a long road to get there and I’m happy to invest in it,” Bezos said.

According to Forbes magazine, Bezos has a net worth of $78 billion.

Article Link To Reuters:

Traders Bet The Fed Will Slow Rate Hikes To Shrink Balance Sheet

March minutes signal balance sheet reductions to start in 2017; Investors unsure whether Fed can hold three-hike plan for 2018.

By Craig Torres and Matthew Boesler
April 6, 2017

Most Federal Reserve officials agree that they will begin shrinking their super-sized balance sheet later this year. What they don’t want to discuss in detail yet is how that will shape their plans to continue raising the short-term interest rate in 2018.

The minutes of the March meeting employed some key words to outline plans to trim the balance sheet, which ballooned to $4.5 trillion following three rounds of bond purchases. Reductions need to be “gradual and predictable,” and should be accomplished by “phasing out” of reinvestments, meaning the central bank wouldn’t abruptly stop repurchasing all debt instruments when they mature. Finally, policy makers indicated reductions would start “later this year,” although they didn’t provide details on amounts.

The critical line the Fed is trying to walk is one of slow balance-sheet shrinkage that doesn’t tighten financial conditions so much that it becomes a second tool of monetary policy. Most Fed officials want the federal funds rate to be the primary instrument, according to the minutes published on Wednesday. That may be little more than wishful thinking.

“I am highly skeptical” the balance-sheet strategy won’t impact monetary policy, said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “It is hard to imagine that this isn’t going to lead to significant tightening.”

Ripple Effect

U.S. central bankers penciled in three rate hikes into their 2018 forecast, according to the median estimate. That may incorporate some balance-sheet runoff, though it may also reflect a lot of optimism about the limited effects that will have on longer-term Treasury rates, credit spreads and mortgages -- a mix of longer-term borrowing costs that economists generally describe as financial conditions. The Fed said it would run off both Treasuries and mortgage-backed securities.

New York Fed President William Dudley, who is also vice chairman of the Federal Open Market Committee, said he is aware that a change in policy on the balance sheet will ripple through credit and foreign exchange markets.

“If we start to normalize the balance sheet, that’s a substitute for short-term rate hikes,” and “we might actually decide at the same time to take a little pause in terms of raising short-term interest rates,” he said in a Bloomberg Television interview last week. He added that he isn’t worried about a “violent” market reaction to balance-sheet reductions “because it is already factored in.”
Hard to Predict

Communication matters a lot when it comes to limiting the impact of Fed policy on borrowing costs. Officials have telegraphed their latest rate hikes so well that financial conditions eased after their increases in December and March.

The Fed’s balance sheet is so huge, however, that the impact is difficult to predict. The Fed’s portfolio includes $426 billion of Treasury securities set to mature in 2018, and $352 billion more that will mature in 2019. Not all of that will have to be financed by private investors in a single year because the Fed wants gradual runoff.

In a section of the minutes where central bankers discussed their forecasts for monetary policy and the economy, participants signaled their plans to raise interest rates in 2017 would coincide with shrinkage of the balance sheet that could start “before the end of the year.” That may imply that the central bank’s median estimate of three rate hikes for 2018 includes the effects of slightly tighter credit conditions.

Winter Lull

“For the first time, they’re acknowledging” that their interest-rate outlook “incorporates balance-sheet assumptions,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Investors are paying a lot of attention to Dudley’s comments that the rate path could suffer interruptions or changes. Crandall said that, even with three hikes this year and next, there could be a lull in the winter.

But following the release of the minutes, investors reduced the expected amount of Fed tightening in 2018 via short-term interest rates to just 1.5 hikes, the least since Nov. 11. The FOMC schedules eight meetings a year with the next set for May 2-3 in Washington.

The matter on how the balance sheet could affect the funds rate path won’t be settled until investors know the amount the Fed plans to run off.

Article Link To Bloomberg:

Why Mortgages, Other Interest Rates Could Go Up Faster Than You Think

By Patti Domm
April 6, 2017
Interest rates may be going up even faster than you think.

That's because the Federal Reserve, in the minutes from its last meeting, announced that it would begin to shrink its balance sheet, ending some of the extreme measures it took to save the economy during the financial crisis.

The Fed balance sheet grew from about $1 trillion before the crisis to $4.5 trillion currently, as the central bank purchased Treasurys and mortgages to help the economy and keep interest rates low. The Fed carried out such "quantitative easing" even as it held interest rates at zero for years.

After it ended those "QE" programs, the Fed maintained one feature of the policy — it replaced the securities in its portfolio as they matured by buying more. That is the policy it may now end.

Since late 2015, the Fed has raised the federal funds target rate range three times, and it plans a fairly gradual and steady pace of interest rate hikes, with two more this year. In the minutes, it revealed that members would like to start shrinking the balance sheet later in 2017 — meaning that is when it may stop buying all the securities that mature.

That is several months sooner than some market participants had expected, and it could have the net effect of causing higher interest rates for mortgages and other types of loans.

"If you get good data, and things are going well, and we get some tax plan, then rates will go up faster than they otherwise ordinarily would have, with the reduction in the balance sheet," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.

Caron said when the Fed stops replacing securities, it in effect is removing some of its easy money policy.

"That should make rates go up. That's putting supply back into the market, effectively reducing the stock of securities. There were always two ways to think about the Fed's quantitative easing: One was the flow effect, the action of buying the securities, and the other was the securities the Fed held onto and took out of the market — the stock of securities they held," said Caron.

The Fed, in the minutes, was not clear how it would reduce its balance sheet or by how much, but New York Fed President William Dudley last week suggested the central bank could raise rates a couple more times and then pause, to make some adjustment to the balance sheet before resuming rate increases again.

Mark Cabana, head of U.S. short-rate strategy at Bank of America Merrill Lynch, said the Fed could raise the fed funds target range two more times this year, possibly in June and September, and then announce measures at its December meeting to reduce the balance sheet.

Shrinking the balance sheet could affect interest rates in several ways, he said. First, if the Fed no longer buys mortgage securities, then mortgage rates could rise because it removes one big, steady buyer from the market. Secondly, Treasury rates could rise if it no longer replaces those securities, and that could affect the rates of home mortgages and other loans.

Cabana said the amount of Treasurys alone that would roll down in 2017 amounts to about $195 billion. The fact that the Fed goes into the market and buys securities to replace those that roll down has helped keep interest rates low, because it has been a continuous buyer. In 2018, even more of those Treasurys would roll down — $422 billion worth, and in 2019, another $346 billion would mature.

If the Fed were to no longer replace the securities, the Treasury would have to raise cash to pay the Fed back for the maturing securities. That could come in the form of increased Treasury issuance.

"It could be bills or concentrated at the front end of the curve. I've been thinking it would be shorter-dated bills. It's the cheapest and fastest way for Treasury to raise additional cash," he said.

Bob Miller, lead portfolio manager of the BlackRock Total Return Fund, said he expects a lengthy research effort by the Fed before it reduces reinvestment in a very cautious and deliberate way.

"We think it's quite plausible that the first balance sheet adjustment may come as early as the fourth quarter of 2017, but there's also the possibility that the event is deferred to sometime in the first quarter of 2018, if the committee struggles to reach a decision on the policy," he wrote.

Miller noted that the composition of the Fed board could change, and that may affect the decision-making process.

"Additionally, Trump administration appointments to the Board of Governors could also impact the outcomes of rate normalization and balance sheet adjustment, so we'll be watching this nomination process very carefully," he wrote.

Caron said the fact that the Fed is talking about acting on the balance sheet this year will make it one of the final acts of Fed Chair Janet Yellen, whose term ends in January.

"If they're talking about doing it this year, then Janet Yellen is saying under the Janet Yellen Fed, they are starting the balance sheet winddown. They are not kicking the can to the next person," he said. "That's kind of setting the course for the next Fed chairperson to handle it."

Article Link To CNBC:

Why Investors Are Fretting Over The Trump-Xi Meeting

By William Watts
April 6, 2017

It takes a lot to overshadow a monthly unemployment report, but investors appear to be as focused on the start of a two-day meeting between President Donald Trump and Chinese President Xi Jinping that gets under way Thursday, as they are on the closely followed labor-market report.

It appears Trump will head into the meeting ready to take China to task over trade policy, while Xi is expected to offer, if not concessions, a grab bag of investment promises and other measures that Beijing hopes will be enough to at least ratchet down tensions.

The danger is that the meeting ends in acrimony, potentially spooking financial markets

The reason why should be clear to anyone with the faintest memory of Trump’s presidential campaign, in which bashing China as a ruthless competitor willing to manipulate its currency to steal U.S. markets and jobs was often a focus.

In one of many examples, Trump told a campaign rally in Indiana last May: “We can’t continue to allow China to rape our country and that is what they’re doing. It’s the greatest theft in the history of the world.”

The rhetoric hasn’t been quite as red hot since Election Day. The Trump administration has yet to follow through on his promise to officially declare Beijing a “currency manipulator”—something Trump had said he would do his first day in office—or slap punitive tariffs on imported Chinese goods.

But relations, while improving on the rocky start that followed Trump’s election victory, aren’t quite warm and fuzzy. On Twitter last week, Trump said he expected his first meeting with China’s president to be a “very difficult” discussion because the U.S. can no longer deal with massive trade deficits and job losses.

Jitters over the meeting were blamed for an indecisive tone in stocks earlier this week. The S&P 500 index SPX, -0.31% reversed course to end lower Wednesday, with a weekly decline of 0.4% in sight.

Currency issues are at the top of the list after Trump told the Financial Times earlier this week (paywall) that China remained a “world champion” at currency manipulation. The currency charge goes to the heart of Trump’s trade-fueled China rhetoric, based on the notion that Beijing is artificially holding down the value of the yuan to make its exports more competitive—at the expense of U.S. and other firms.

But while China’s currency was long and widely viewed as undervalued, that is no longer the case. For a number of years, Beijing allowed the yuan USDCNY, -0.0159%to appreciate and, as MarketWatch’s Joseph Adinolfi notes, it has also strengthened this year.

Moreover, if China were to allow the currency to float freely, it would almost certainly drop, said Simon Webber, lead portfolio manager for global and international equities at Schroders. A sharp drop in the value of the yuan would have adverse ramifications not just for trade but for global growth, something the Trump administration presumably doesn’t want.

While a full-on public spat over the yuan could be the worst case, signs of tension at the conclusion of the meeting could hurt overall risk appetite and would be particularly negative for “high-beta” currency pairs such as the Australian dollar/U.S. dollar AUDUSD, -0.3170% euro/U.S. dollar EURUSD, -0.1688% and possibly even dollar/yen USDJPY, -0.07% wrote Kathy Lien, managing director of FX strategy at BK Asset Management, in a note.

A sudden bout of market jitters would also be expected to be a positive for traditional havens, analysts said, like gold and Treasurys.

For his part, Xi isn’t expected to show up at Trump’s Mar-A-Lago estate in Florida empty-handed. Analysts expect him to take a page—and then some—out of Japanese Prime Minister Shinzo Abe’s book by pledging investment in the U.S. or announcing orders for big-ticket items and similar commitments.

Trump, meanwhile, is seen as likely to reaffirm support of the “one-China policy.” He could also repeat language U.S. Secretary of State Rex Tillerson used last month to describe the basis of the U.S.-China relationship as “non-conflict, non-confrontation, mutual respect, and win-win cooperation,” the same language Xi has used in the past. Some diplomats fear China views use of the language as an agreement to steer clear of issues such as Taiwan and the South China Sea.

Trump also wants China to ramp up pressure on North Korea, which launched a medium-range ballistic missile earlier Wednesday.

For Xi, there is an incentive to avoid ratcheting up conflict ahead of the Communist Party’s 19th National Congress this fall. But at the same time, Xi can’t afford to look weak, analysts said.

While China “might be able to appease Trump with promises of further liberalization and increased openness to trade into China, it is highly uncertain whether the Chinese president is willing to offer sufficient concessions to convince Trump. Failure to come to a mutually-beneficial understanding could mark the start of US-China trade frictions and uncertainty in markets,” said Elwin de Groot, head of macro strategy at Rabobank, in a note.

Article Link To MarketWatch:

Cohn Backs Wall Street Split Of Lending, Investment Banks

Senators ask about Glass-Steagall return in private meeting; Trump’s top economic adviser said he supports separation.

By Elizabeth Dexheimer
April 6, 2017

In a private meeting with lawmakers, White House economic adviser Gary Cohn said he supports a policy that could radically reshape Wall Street’s biggest firms by separating their consumer-lending businesses from their investment banks, said people with direct knowledge of the matter.

Cohn, the ex-Goldman Sachs Group Inc. executive who is now advising President Donald Trump, said he generally favors banking going back to how it was when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans, according to the people, who heard his comments.

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

In the years after the law’s 1999 repeal, banks such as Citigroup, Bank of America Corp. and JPMorgan Chase & Co. gobbled up rivals and pushed into all sorts of new businesses, becoming one-stop-shopping financial behemoths.

White House spokeswoman Natalie Strom didn’t immediately respond to requests for comment.
Tempering Changes

Many banking executives believed that the inclusion of former finance executives like Cohn in Trump’s White House would temper major changes such as a Glass-Steagall return. But his Wednesday remarks suggest he could be a wildcard should Congress get serious about reinstating the law.

White House officials haven’t said what an updated version of Glass-Steagall might look like.

Cohn’s remarks were prompted by a question from Senator Elizabeth Warren, one of the finance industry’s most relentless critics, said the people who asked not to be named because Cohn’s meeting with Senate Banking Committee members was private.

The Massachusetts Democrat asked Cohn about his thoughts on Glass-Steagall. After Cohn answered, Senator Robert Corker, a Tennessee Republican, pressed the White House official to clarify his views.

Spokesmen for Warren and Corker didn’t immediately respond to requests for comment.

Dismantling the nation’s banking giants isn’t a partisan issue, which is one reason why Wall Street fears the idea could gain traction. Both political parties -- and many voters -- still resent that taxpayers had to rescue the industry with a $700 billion bailout during the 2008 financial crisis.
Bipartisan Issue

Republicans included a return of Glass-Steagall in the party platform they approved in July during their national convention. Warren herself has proposed legislation with Republican Senator John McCain of Arizona called the “21st Century Glass-Steagall Act.”

Advocates for bringing the law back say smaller banks could be allowed to fail without threatening the economy or needing bailouts. They also argue that a less powerful finance industry wouldn’t have as much influence over Washington policy. Wall Street executives counter that it would be impossible for broken-up lenders to compete with overseas mega-banks and that the 2010 Dodd-Frank Act has made the industry much safer.

Wednesday’s Capitol Hill meeting with Cohn was arranged by Senate Banking Committee Chairman Mike Crapo, and included lawmakers from both political parties and their staffs. The discussion covered a wide range of topics, including financial regulations and overhauling the tax code, the people said.

A Crapo spokeswoman declined to comment.

Article Link To Bloomberg:

New Energy Goes Mainstream As Majors Muscle In

Utilities grabbing share of renewables from smaller developers; Maturity in renewables means narrower margins and lower profit.

By Anna Hirtenstein
April 6, 2017

With wind and solar generators becoming more mainstream sources of energy, governments around the world are weaning the industry off subsidies and creating new openings for older utilities built on coal and nuclear power to land their own renewable-fuel projects.

Across Europe, Latin America and India, major electricity suppliers including Enel SpA, Vattenfall AB and Engie SA are proposing to build wind and solar farms, offering low-cost construction bids to win energy-supply contracts. While that can mean cheaper power for consumers, it’s eroding profit margins and increasing competition for small, independent generators who have dominated what was once considered a fringe industry.

“What you see is that this industry is getting more mature,” said Gunnar Groebler, head of wind energy at Vattenfall, a Swedish utility that has installed more than 1,000 wind turbines in five countries. “It’s a maturity question rather than increasing risk. We’re better prepared to handle risk and also more mature in terms of project management.”

Unwittingly or not, governments and regulators are encouraging the trend through a change in the way they support renewables. Instead extending traditional subsidies and above-market prices for clean electricity, they’re auctioning off contracts to buy power from renewables. In more than 45 countries where those auctions are in place, costs typically fall as much as 50 percent for solar and 60 percent for wind within two years, according to analysis by Bloomberg New Energy Finance.

Specific figures on returns from clean energy projects vary widely and are a closely-guarded secret by the companies that win them. Even so, there is anecdotal evidence showing the big developers are triumphing over smaller ones most everywhere they compete.

Lines left of zero show green power costs before auctions. Dots to the right show results of individual auctions and how low green power costs go 1-3 years after the mechanism is adopted. 

New Energy Finance

In India, the biggest 10 developers now are winning 60 percent of all new contracts, almost double the portion they got two years ago, according to Vinay Rustagi, an analyst at the research firm Bridge to India. Enel of Italy and Fortum OYJ of Finland have access to cheaper capital than local developers who must borrow in their home markets, he said.

“They can also negotiate lower equipment costs and invest in design and technical competencies which further reinforces the scale advantage,” Rustagi said. “Scale begets more scale, forcing smaller players out of the market.”

Rahul Gupta, founder of Rays Power Experts Pvt Ltd., hasn’t participated in an auction in two years after winning contracts for 50 megawatts.

“A big chunk of solar auctions has gone to 15 big companies,” Gupta said. “No one sees participation from 200. Smaller companies bidding for smaller project sizes have to kill their margins or have to drop out if competing with a large company bidding for a large project of, say, 250 megawatts. It becomes a business only for a few.”

In Brazil, Rafael Brandao, a partner at the Sao Paulo-based Rio Alto Energia, has the same concerns.

“Big companies are crushing prices in auctions, which makes it not feasible the participation of smaller developers,” said Brandao, whose company is building three solar projects each with about 30 megawatts of capacity. “In the next auctions, we will see a consolidation. Big companies have cheaper corporate funding. The smaller ones have to focus on project finance and rely on development banks.”

At Enel, the biggest power provider in Italy with a growing renewables business overseas, the trend reflects a natural “weeding out” of some less competitive bidders, said Chief Executive Officer Francesco Starace.

“What is the space for a small player?” he said in an interview in New York earlier this month. “Can they be successful? Probably yes. But only if they specialize in what they are good at.”

Smaller companies “are good at opening up a country, developing the first projects,” Starace said. “They are nimble. They can move fast. They can anticipate the market. Big players typically come a little bit later on. They tend to be slow at realizing what the new markets are. So, they can live together.”

Investors are taking note because the risk-return ratio is changing in the clean energy business. Funds that seek the highest returns have scaled back their support, giving way to more conservative pension and generalist funds. Institutional investors are starting to accept returns more akin to what they get from utilities than those of a startup, said Mark Mansley, chief investment officer at Environment Agency Pension Fund, which has assets of 2.73 billion pounds ($3.36 billion).

“It’s something that we’re aware of,” Mansley said. “We have to be careful about who we work with. There’s a difference between genuine cost decreases and when things have gone a bit too far. We have seen massive cost decreases. But then there’s also a risk that a developer goes beyond that.”

The industry is being pushed to cut corners and could make promises it can’t keep, said Michael Andresen, head of asset management at Danish wind consultancy K2 Management.

“There is increased pressure from developers on the supply chain,” Andresen said. “On the supplier side, you will be faced with pressure on cost, quality and scope of the contracts. We could also see a movement into new suppliers entering the market that are potentially lower-cost and lower-quality.”

Developers say they’re concerned some suppliers may not be able to cope with the swift plunge in the cost of renewables. Project developers are thinking carefully about the long-term effects of putting pressure on their supply chains, said David Maguire, a director at the Dublin-based developer BNRG Renewables.

“I don’t want to squeeze my suppliers,” Maguire said. “I want them to be able to take a margin and be profitable. I want them to still be around in 10 years. I have warranties with them.”

Consumers welcome lower costs, no matter what damage it does to the industry, and say higher risks and compressed returns are something companies will have to live with.

“The renewables industry will have to accept what every other industry’s done,” said Jeremy Nicholson, director at Energy Intensive Users Group in the U.K., which represents industries such as steel and chemicals-making. “It can’t live on subsidies forever. It will have to show that it can stand on its own two feet. That’s what’s going to make these industries financially stable in the long run.”

For those smaller developers vying for contracts, the CEO of Italy’s Enel had a few words of advice.

“If you try to fight the big players, it is difficult,” Starace said. “Maybe you win one. But the next one you win, they might kill you.”

Article Link To Bloomberg:

Traders Bet Their Oil Storage Assets That OPEC Cuts Will Work

By Julia Payne
April 6, 2017

The jury is still out on whether OPEC can rein in a global oil glut but top commodity traders are betting it can by selling stakes in storage tank businesses that profited from oversupply.

Since January, Glencore, Vitol and Gunvor have completed or have been seeking to sell parts of their holdings in storage firms.

Vitol's deal was agreed in October, before the Nov. 30 announcement by the Organization of the Petroleum Exporting Countries that it would cut output from Jan. 1. Vitol's deal was completed in January, and others have lined up sales since.

"The traders picked the right time to sell," Jean-François Lambert of Lambert Commodities consultancy said, adding an oil price recovery and prospects for a more balanced market were partly behind the timing, alongside factors such as freeing up cash to trade.

"If you have an opportunity to sell assets to lighten your balance sheet without losing control then you do it," he said.

The five top traders, who also include Mercuria and Trafigura, expect OPEC to extend output cuts into the second half of 2017, which would help draw down global inventories.

When inventories are plentiful, the oil price for future delivery tends to be above the price for prompt delivery, a state known as contango, when it pays to be in the storage business, taking fees and selling stored oil forward at a profit. This has been the situation since mid-2014.

At times, the prompt price was more than $1 less than a barrel for delivery a month later. With an abundance of crude supplies, trading houses could book easy profits by buying crude and storing it after selling it forward.

"Contango is a very basic play. It's lazy," Trafigura's co-head of risk Ben Luckock said, speaking during a commodities conference. "But I think you've seen contango has come out of the market."

As stockpiles draw down, the oil price for prompt delivery tends to trade above future prices, a condition known as backwardation. At this point, oil cannot be sold forward at a quick profit and the storage business loses its luster.

Till now, there have been few clear signs that OPEC and non-OPEC cuts of 1.8 million barrels per day (bpd) were working, with global stockpiles stubbornly high, according to U.S. data and International Energy Agency (IEA) figures.

Market Momentum

But some analysts are starting to see a shift.

"Examining less visible - but still reported - inventories shows about a 72 million barrel of total oil draws globally since end-January. We expect this to gain momentum," Morgan Stanley said in a research note last week.

Oil trader Pierre Andurand of Andurand Capital Management, speaking to CNBC last week, went further, saying he expected "sustainable backwardation" by late summer.

The oil futures market was in backwardation, almost continuously, from early 2011 to mid-2014. Then it switched into contango as Brent crude tumbled from more than $100 a barrel. By the start of 2016, it had fallen below $30.

Capitalizing on this market price structure, in mid-2015, Vitol bought its partner's 50 percent stake in infrastructure and storage firm VTTI for $830 million. Then in October 2016, it agreed to sell 50 percent to Buckeye Partners for $1.15 billion, completing that deal in January.

The oil futures market has yet to slip into backwardation since OPEC began its cuts. But it came close in February when the price for the front-month Brent was $56.66 a barrel, settled at 16 cents less than the contract for delivery seven months later.

The spread has since widened again to about 80 cents between the front-month contract and seven-month Brent. That could change if, as some OPEC officials suggest, cuts by the group and its non-OPEC partners are extended beyond June and prices climb.

If it does, Glencore's sale of a 51 percent stake in its global oil products storage business for $775 million to Chinese conglomerate HNA last week would look prescient.

Gunvor, meanwhile, is selling a share in a Rotterdam storage facility, while Trafigura is working on its IPO in privately owned Puma Energy, a venture with Angola's state-run Sonangol Holdings LDA and investment company Cochan Holdings.

But not everyone is convinced a return to backwardation will be sustained, as U.S. shale oil producers have ramped up output, filling some of the gap left by OPEC and its partners.

"While over the next couple of months backwardation may temporarily come back ... we see a strong comeback of U.S. shale supplies joining in on many long-planned supply additions in the Atlantic Basin," David Wech of JBC Energy consultancy said.

Article Link To Reuters:

Oil Prices Fall On Bloated U.S. Market, But Other Regions Tighten

By Henning Gloystein
April 6, 2017

Oil prices fell on Thursday as record U.S. crude inventories underscored that markets remain bloated, although traders said there were signs that other regions were gradually tightening.

Brent crude futures were at $54.20 per barrel, down 16 cents, or 0.28 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were down 18 cents, or 0.35 percent, at $50.97 a barrel.

Traders said the declines were due to rising U.S. crude production that bolstered inventories to record levels.

U.S. fuel inventories and oil production levels are key to whether the United States remains the world's biggest oil importer, helping to support prices, or if soaring output and large stocks cut imports, which would weigh on oil markets.

The U.S. Energy Information Administration (EIA) reported an increase of 1.57 million barrels in crude inventories late on Wednesday, bringing total U.S. stocks to a record of 535.5 million barrels.

"Overnight crude inventory numbers pulled the rug out from under the feet of the oil rally," said Jeffrey Halley, senior analyst at futures brokerage OANDA.

The record crude inventories came as U.S. oil production rose 52,000 barrels per day (bpd) to 9.2 million bpd, a more than 9 percent increase since mid-2016 to levels last seen at the start of the market slump in late 2014 and early 2015.

Within the U.S. crude inventories, stocks at Cushing, the delivery hub for WTI, rose 1.4 million barrels to a record 69.1 million barrels. Rising stocks at Cushing, in Oklahoma, typically tend to depress the price of the U.S. benchmark.

Cushing crude tank farms have a total storage capacity of 77 million barrels, said Ole Hansen, head of commodity strategy at Saxo Bank.

Because of the glut, U.S. crude exports have soared to a record 1.1 million bpd, with most cargoes going to Asia, where traders say there are early signs of a tightening market due to efforts led by the Organization of the Petroleum Exporting Countries (OPEC) to cut output in an effort to prop up prices.

"The global picture is more important (than just the U.S.) and stocks are being drawn," said Oystein Berentsen, managing director at oil trading company Strong Petroleum in Singapore.

In the short-term, he said, a lot of oil was being sold out of storage around the world, adding to the imminent glut.

But Berentsen warned that once a significant amount of crude had been sold out of inventories, "then you get the full effect (of tighter supplies)."

Article Link To Reuters: