Monday, April 10, 2017

Monday, April 10, Morning Global Market Roundup: Asian Stocks Struggle, Dollar Shines As Geopolitical Risks Grow

By Saikat Chatterjee
Reuters
April 10, 2017

Asian stocks slipped on Monday as increased geopolitical risks prompted investors to favor safe-haven bets such as government debt while the greenback was supported by Federal Reserve policy tightening expectations.

The rise in risks of a conflict contrasts with market watchers' outlook for the global economy, which is perhaps the most optimistic it has been in years, with Chinese data this week expected to show the economy performing well.

Top aides to U.S. President Donald Trump differed on Sunday on where U.S. policy on Syria was headed after last week's attack on a Syrian air base, while U.S. Secretary of State Rex Tillerson warned the strikes were a warning to other nations, including North Korea.

"The geopolitical risks will continue to hold markets back this week though there be some opportunities for individual stock or sector plays," said Alex Wong, a fund manager at Ample Capital Ltd. in Hong Kong, with about $130 million in assets.

MSCI's broadest index of Asia-Pacific shares outside Japan fell for a third consecutive session, heading back towards a three-week low tested on Friday.

A U.S. Navy strike group will be moving toward the western Pacific Ocean near the Korean peninsula as a show of force, a U.S. official told Reuters on Saturday, as concerns grow about North Korea's advancing weapons program.

Korean stocks led regional losers with the main index falling to its lowest levels since mid-March as foreigners sold stocks for a sixth consecutive session.

Hong Kong bucked the regional weakness, due to strength in property stocks and financial counters. Australian shares were also stronger, up 0.7 percent at a near two-year high as higher oil and metal prices propped up commodity plays.

"The risks of a conflict have certainly grown and that should keep the dollar supported against most Asian currencies with hawkish comments from the U.S. central bank also helping," said Gao Qi, an FX strategist at Scotiabank in Singapore.

Economic data also offered little support with major U.S. indexes closing lower in choppy trade after a key jobs report on Friday showed the economy added 98,000 jobs in March, the fewest since last May and well below economists' expectation of 180,000.

Risks Rising

Risk indicators have edged higher with the CBOE Volatility Index trading at near 13 compared to around 11 at the beginning of March, prompting some analysts to warn of a pull back in global equities.

Latest flows data showed investors yanked money out of both developed and emerging market equity funds in the week ending April 5, according to Thomson Reuters Lipper data.

The dollar index, a trade-weighted basket of the greenback against its major rivals rose to near a one-month high of 101.30.

Only the yen, a favored haven in times of stress, offered some resistance against the greenback at 111.44 yen, after touching 110.11 on Friday, its lowest since March 27.

"Geopolitical risk can be a potentially positive factor for the yen, with risk aversion and flight to safety," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

Support for the dollar also came from rising U.S. yields after comments from a U.S. policymaker boosted expectations for Federal Reserve interest rate increases this year.

Yields on 10-year U.S. Treasuries were at 2.38 percent on Monday after briefly breaking below a significant chart barrier at 2.30 percent on Friday for the first time this year.

Spot gold was last at $1,252.70 per ounce. It has rallied nearly 5 percent over the past month.

Oil prices held firm at $52.36 per barrel, on risks that the Syria conflict may spread more widely within the oil-rich Middle East region. [O/R]


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Oil Prices Firm On Strong Demand, Political Uncertainty In Syria

By Henning Gloystein
Reuters
April 10, 2017

Oil prices were firm on Monday, supported by strong demand and political uncertainty in Syria, although another rise in U.S. drilling activity kept a lid on gains.

Brent crude futures, the international benchmark for oil, were at $55.28 per barrel, up 4 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 10 cents at $52.34 a barrel.

Traders said prices were being supported by strong demand, and also political uncertainty following the U.S. missile air strikes on Syria late last week.

ANZ bank said on Monday that strong oil demand and "an unsettled global backdrop (is) leaving the market very finely balanced".

However, another increase in U.S. oil drilling, which has run up for 12 straight weeks to 672 rigs - the highest level since August 2015, kept markets from breaking last week's one-month highs of over $56 per barrel.

U.S. bank Goldman Sachs said following the rig data release that year-on-year U.S. oil production "would rise by 215,000 barrels per day in 2017" once a backlog of production waiting to be brought back online was taken into account.

The soaring output in the United States contrasts with a supply cut led by the Organization of the Petroleum Exporting Countries (OPEC), which hopes to prop up prices by reducing supplies in the first half of 2017 - and maybe even beyond.

This allows U.S. producers to sell rising amounts of cheap U.S. crude into the rest of the world, where prices are higher.

"Reduced OPEC volumes and stronger U.S. output will result in a deeper discount for U.S. crude and support greater exports from the U.S. to Asia over the coming months," BMI Research said, although it added that in terms of overall volumes, "the U.S. will remain a small player in Asia as OPEC actively protects its market share."

Beyond the United States, other producers are also benefiting from OPEC's supply cuts and artificially tighter market.

Brazil's oil exports have soared 65 percent since February 2016, to record highs of more than 1.46 million bpd, according to government data obtained by Reuters.

Consultancy Wood Mackenzie estimates 2017 exports will hit nearly 1 million bpd, up from 798,000 bpd last year.


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China Offers Concessions To Avert Trade War With U.S.

By Parikshit Mishra
Reuters
April 10, 2017

China will offer the Trump administration better market access for financial sector investments and U.S. beef exports to help avert a trade war, the Financial Times reported on Sunday, citing officials familiar with the matter.

China is prepared to raise the investment ceiling in the Bilateral Investment treaty and is also willing to end the ban on U.S. beef imports, the newspaper also reported.

"China was prepared to (raise the investment ceilings) in the BIT but those negotiations were put on hold (after Trump's election victory)," the Financial Times also reported citing a Chinese official involved in the talks.

U.S. Commerce Secretary Wilbur Ross said on Friday that President Donald Trump and Chinese President Xi Jinping have agreed to a new 100-day plan for trade talks on Friday.

The U.S. trade department was not immediately available for comment while the China's ministry of commerce could not be reached for comment.


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Investors Look To Global Growth For Earnings Power

By Caroline Valetkevitch
Reuters
April 10, 2017

America First may be a main policy of the White House and fuel to the stock market rally but U.S. investors are looking overseas for stronger earnings as S&P 500 companies are set to report their first quarter of double-digit profit gains since 2014.

A strong earnings season would help justify pricey stock valuations, with the S&P 500 rallying this month to its most expensive since 2004 on a forward price-to-earnings basis.

While the U.S. economy has gotten a lot of attention since the Nov. 8 election and President Donald Trump's vows to boost the domestic economy, data during the quarter has suggested the global economy is strengthening.

That is welcome news for S&P components, since nearly half of their sales come from overseas.

Shares of the biggest U.S. companies, which tend to have the most overseas exposure, have been among the strongest performers over the past several weeks. For instance, the S&P 500 .SPX has outperformed its average stock .SPXEW this year since mid-February, after performing mostly in line at the beginning of the year. [www.bit.ly/2oQPVXF]

"The fact that we're seeing stabilization in the global community will bode well for multinational companies and help earnings for the first quarter," said Terry Sandven, senior equity strategist at U.S. Bank Wealth Management in Minneapolis.

"You've also seen the dollar not appreciate as much as many had forecast a quarter ago, so multinational companies may get some relief on the (foreign exchange) line," he said.

A weaker dollar boosts offshore revenues when they are translated into the U.S. currency. The U.S. dollar index .DXY was down 1.8 percent in the first quarter, but it was still cheaper during last year's first quarter.

Stronger Data As Earnings Loom


A survey this week showed euro zone business activity at a six-year high. Forecasts from the International Monetary Fund show a pickup in the global economy in 2017 and 2018, especially in developing economies.

However, some investors worry multinationals may have already priced in big gains in earnings.

"As long as nothing changes, these firms are going to be fine," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, speaking of the strength of the largest American companies.

He warned, however, that stock prices may have taken in any good news. "The market has certainly fully discounted all that."

The U.S. earnings season gets under way next week, with results from banks JPMorgan Chase (JPM.N), Wells Fargo (WFC.N) and Citigroup (C.N) among others.

The financial sector is projected to post a 15.4 percent profit gain, second only to energy among S&P sectors.

Energy companies, which carried most of the losses that extended an S&P 500 earnings recession until the second quarter of last year, are expected to do most of the heavy lifting this earnings season with a whopping 600 percent increase.

For the entire S&P 500, analysts are projecting earnings up 10.1 percent compared with a year ago, which would be the first double-digit increase since the third quarter of 2014, according to Thomson Reuters data.

Excluding the energy sector, S&P 500 earnings are expected to be up 6.1 percent.

Revenue is expected to have jumped 7 percent, the most since 2011, which should help compensate for higher wage and other costs facing companies, strategists said.

"We're seeing revenues contribute materially more to that bottom-line growth," said Patrick Palfrey, senior equity strategist at RBC Capital Markets in New York.

Big profit gains are expected in technology and materials as well, the data showed.

"It comes down to a synchronized global economic acceleration ...; a rebound and stabilization in commodity prices and a higher interest rate environment," Palfrey said.


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Taxes -- The Great Uniter?

By Robert J. Samuelson
The Washington Post
April 10, 2017

As Tax Day — April 18 this year — approaches, we are confronted once again with the apparently enduring reality that Americans hate to pay taxes. Few political generalizations seem so indestructible. Gallup has long asked Americans whether their federal income taxes are too high. About 50 to 60 percent regularly say “yes.” The federal income tax is deeply unpopular. So goes the conventional wisdom.

Except that it’s not true or, at any rate, is too simple and incomplete. The tax system is not just a divider; it’s a uniter, too.

“Americans almost universally agree that taxpaying is a civic duty,” writes political scientist Vanessa Williamson in her new book, “Read My Lips: Why Americans Are Proud to Pay Taxes.” To be a taxpayer is “a source of pride because it is evidence that one is an upstanding, contributing member of the community.”

Williamson studied existing surveys, conducted one of her own and interviewed 49 taxpayers in depth. What she concluded suggests a sizable revision of popular thinking, which emphasizes a profound dislike of taxes.

“Around four in five Americans . . . see taxpaying as a moral responsibility and tax evasion as morally wrong,” she writes of the various surveys. “This is a belief that is particularly strong in the United States” compared with many European countries, she finds. Americans have one of the world’s highest rates of tax compliance — an achievement aided by tax withholding.

In one of the interviews, Roy — a 61-year-old retired Republican postal worker from Ohio — puts it this way: “I feel like I am doing my part in supplying the needs and to help pay for things in this country that are needed. So, in a small way, I do feel like it’s my civic duty and that I’m responsible for paying taxes.”

Taxes are a bond as well as a burden. They’re a modern embrace of Supreme Court Justice Oliver Wendell Holmes Jr.’s famous dictum: “Taxes are what we pay for civilized society.” Interestingly, Republicans more than Democrats feel that tax evasion is morally wrong. “Republicans believe strongly in paying taxes,” Williamson writes.

One reason popular opinion misses the unifying aspects of taxes is that public surveys are skewed, she argues. “Public opinion polls commonly assume that the only attitude Americans hold about taxes is one of enraged opposition,” Williamson writes. “Negative questions carry a value judgment and predispose certain answers.”

Still, it’s possible to take tax revisionism too far, as Williamson herself notes. Taxes — and the government programs they support — remain highly contentious issues at both the state and national levels. Somebody has got to pay; conflict is unavoidable.

In her interviews, Williamson found widespread resentment that both the very rich and the very poor (particularly immigrants) don’t pay their “fair share” of taxes. The animus against the poor affects both Republicans and Democrats, though Republicans more so.

(It’s also a bum rap, Williamson argues. Thanks to the payroll and sales taxes, almost everyone is a taxpayer in some form. She estimates that the poorest fifth of earners make 3 percent of the income and account for 2 percent of all taxes. It’s also true that high taxable thresholds mean that 44 percent of tax filers in 2016 didn’t owe federal income taxes, reports the nonpartisan Tax Policy Center.)

Even if all Americans were satisfied with their present tax situation — clearly not the case — it does not follow that everyone would be happy if their taxes were raised. President Trump has promised tax reform but has yet to present a concrete proposal. When he does, it is almost certain to trigger a congressional donnybrook, because some taxpayers will be hit with increases to finance tax cuts for other taxpayers.

Bigger problems loom in the future. Sooner or later, we will have to raise taxes, because there is a huge and growing gap between the government’s spending commitments and its tax revenues. Although we are now near full employment, meaning the economy is near its physical capacity, the deficit is roughly $500 billion. Under present policies and assuming unrealistically no future recession, it will continue to rise.

How long this can continue is anyone’s guess, although the answer is probably not forever. By all means, let’s acknowledge the benefits of taxes. But let’s not assume that higher taxes will make government more popular. This seems dubious.


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