Tuesday, April 11, 2017

Tuesday, April 11, Morning Global Market Roundup: Investors Flee Risk Assets As Geopolitical Tensions Heat Up

By Nichola Saminather 
April 11, 2017

Asian stocks fell on Tuesday as the political tinderbox in the Middle East and the Korean Peninsula added to uncertainty over the looming French vote, pushing nervous investors into safer assets such as the yen and Treasuries.

Even oil, which advanced earlier on supply concerns in the wake of U.S. missile strikes on a Syrian air base last week and a shutdown at a Libyan oilfield, reversed to trade lower, breaking its multi-session winning streak.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 0.3 percent.

"Most Asian markets could be seen with moderate changes this morning amid a mixed trend," said Jingyi Pan, market strategist at IG in Singapore. "Price movements here appear to be largely mirroring those in the U.S., with key corporate earnings due later in the week and could be the reason that investors are still holding onto equities."

The heightened geopolitical risks come at a time when the global economy has shown steady improvement, led by the United States and encouraging momentum in export-reliant Asia.

Tokyo's Nikkei .N225 closed 0.3 percent lower, dragged down by a stronger yen. Toshiba Corp. (6502.T) was among the biggest decliners, ending the day 2.7 percent lower, with the conglomerate expected to file its twice-delayed earnings results on Tuesday, without a full sign-off by auditors.

Accountants question the numbers at the company's U.S. nuclear subsidiary Westinghouse Electric Co., where massive cost overruns have pushed the Japanese parent company to the brink.

Chinese shares .CSI300 lost 0.4 percent, while Hong Kong stocks .HSI slumped 0.9 percent.

South Korean shares .KS11 and Taiwan .TWII were also lower.

Australian stocks reversed earlier losses to climb 0.3 percent, after a measure of business conditions hit the highest level in a decade. They earlier hit their highest level since April 2015 for the second session in a row.

The Australian dollar AUD=D4 was flat at $0.7501, paring earlier gains.

Overnight, Wall Street ended a choppy session little changed, weighed down by nervousness about quarterly corporate earnings later this week.

The depressed sentiment pulled 10-year U.S. Treasury yields down to 2.3427 percent on Tuesday from Monday's 2.361 percent close.

British Prime Minister Theresa May spoke on Monday with U.S. President Donald Trump and agreed that "a window of opportunity" exists to persuade Russia to break ties with Syrian President Bashar al-Assad, May's office said.

Trump is open to authorizing additional strikes on Syria if the use of chemical weapons continues in the country, the White House said on Monday.

Investors are also nervous about the possibility of U.S. military action against North Korea after the strikes in Syria.

A U.S. Navy strike group headed toward the western Pacific Ocean near the Korean peninsula as a show of force, while South Korea's acting president ordered the military to intensify monitoring of the North's activities.

China and South Korea agreed on Monday to tougher sanctions on North Korea if it carries out nuclear or long-range missile tests.

In France, polls for many weeks have been showing centrist Emmanuel Macron and far-right leader Marine Le Pen on track to top the first round of voting on April 23 and go through to a May 7 runoff.

While Le Pen's plans to ditch the euro and hold a referendum on European Union membership have spooked many investors, recent polls have pointed to a tighter race, with support for far-left candidate Jean-Luc Melenchon surging recently.

That has sent the spread between German DE10YT=RR and French FR10YT=RR 10-year government bonds soaring to the widest since Feb. 22.

"After Britain’s Brexit referendum and the U.S. presidential election surprised markets in 2016, could this event do the same?," Mark Burgess, global head of equities at Columbia Threadneedle in London, wrote in a note.

"As a Le Pen presidency is perceived to increase the likelihood of France’s withdrawal from the EU, the uncertainty is likely to continue about what this could mean for the euro, along with a potential wider hit to global markets."

The euro EUR=EBS pulled back 0.1 percent to $1.0587, ahead of data including German economic sentiment, UK price inflation and Eurozone industrial production later on Tuesday.

The dollar fell 0.3 percent to 110.65 yen JPY=, extending losses from Monday.

The dollar index .DXY, which tracks the greenback against a basket of major trade-weighted peers, was flat at 101.03, failing to rebound from Monday's 0.16 percent loss.

Federal Reserve Chair Janet Yellen said on Monday the central bank's plans to raise interest rates gradually are aimed at maintaining employment and inflation rather than boost growth.

Crude retreated from five-week highs hit earlier in the session as concerns about rising U.S. shale production offset a shutdown at Libya's largest oilfield over the weekend and the U.S. strikes against Syria that had supported prices.

U.S. crude CLc1 pulled back 14 cents to $52.95 a barrel, after rising for the previous five sessions.

Global benchmark Brent LCOc1 fell 10 cents to $55.89, breaking a six-session winning streak.

The market jitters and a weaker dollar supported gold, which advanced for a third straight day.

Spot gold XAU= was 0.2 percent higher at $1,256.50 an ounce.

Article Link To Reuters:

Trump's Syria Folly Is Bad For Everyone

By Doug Bandow
The National Interest
April 11, 2017

Less than three months into his presidency, Donald Trump has proved his criticism of America’s political class: that there really is little difference no matter who is elected. President Trump appears to have morphed into Hillary Clinton, or one of the many GOP neocons he battled during the primaries.

Candidate Trump made no pretense of offering a consistent foreign policy. However, he offered a very different vision from that of his opponents. It was “America First.” What that meant was not entirely clear—but at least, he indicated, Washington would improve relations with Russia while avoiding more foolish, unnecessary Middle Eastern wars. These two steps alone would be an extremely positive change.

But now President Trump plans to turn America into a global crusader. He ordered missile strikes in retaliation for the Syrian government’s apparent use of chemical weapons, and administration officials say more military action is possible.

Indeed, their comments suggest that they plan to dramatically expand Washington’s foreign policy objectives. Secretary of State Rex Tillerson and UN ambassador Nikki Haley both now indicate the administration might support regime change, a reversal of Trump’s campaign position. But then Washington would own what it broke: after the debacles in Iraq and Libya, the president would feel enormous pressure to have American troops occupy and rebuild the country—however long that might take.

But even this step might be merely a start. On Sunday, Haley, a Trump critic who never thought much about foreign policy while serving as South Carolina governor, announced an even more dramatic shift. Nothing “is off the table” when it comes to imposing sanctions on Russia and Iran for supporting the Assad government, she announced “they now have to answer for” their support for Damascus.

The administration, said Haley, plans to exercise “strong leadership” and “act when we need to act.” Haley declared that the president “won’t stop here.” If “he needs to do more, he will do more,” she added. Senate majority leader Mitch McConnell announced that he plans to consider legislation to sanction the two nations as well.

The president, or at least his appointees, has seemingly gone mad. Candidate Trump correctly pointed out that the American people have nothing vital at stake in one of the most complicated and brutal civil wars of recent years. Now he is preparing to drag the United States into the conflict. Candidate Trump also promised the American people that he would focus on the Islamic State, which is promoting terrorism around the world, including in the United States. Now he seems ready to target the strongest military force opposing the Islamic State and other radical forces.

Moreover, Donald Trump took on Republican orthodoxy by criticizing George W. Bush’s misbegotten Iraq invasion, as well as President Barack Obama’s counterproductive Libyan intervention. Now Trump, or those around him, at least, are pressing for America to join an even worse killfest: one that has run for six years, hosted fighting of unparalleled ferocity, has few good guys and would shift to another dimension if Assad is ousted.

All of this for a conflict in which the United States has no stake, and that the public is unlikely to back the moment casualties occur. If Americans liked the results in Iraq and Libya, they would love the consequences of intervening in Syria.

Even before his latest flip-flop, it was clear that the president has at best a superficial understanding of international affairs. Apparently he had not noticed after years of war and hundreds of thousands of deaths that Bashar al-Assad was an unpleasant character. But one photo of the dead from a chemical attack, and Trump swung into action. Now not only must Assad go, but Iran and Russia must stop supporting Damascus.

It’s a sanctimonious stretch for a president who has tightened relations with Saudi Arabia, essentially a totalitarian state. Worse, the president has continued his predecessor’s policy of arming and refueling Saudi Arabian aircraft, which have been slaughtering Yemeni civilians—who have never done anything against America. But then, Washington has rarely let murder or repression stand in the way of a beautiful international friendship.

Administration officials from the president on down imagine that they can browbeat Iran and Russia into submission. But neither is likely to concede what they view as important, if not vital, interests. Syria is a long-time ally of Iran (which faces Saudi Arabia allied with other Sunni states) and Moscow (which forged a Cold War relationship with Assad’s father). After the U.S. strike, the Iranian and Russian governments announced, “We will respond strongly to any aggression on Syria.”

But Tehran and Moscow are concerned about more than retaining influence with the busted Syrian state. The Trump administration’s almost instantaneous pirouette from protecting U.S. interests to coercing other countries suggests that it shares the almost insatiable desire of Republicans and Democrats alike to micromanage the globe. Which explains why Russia and Iran declared that they “will not allow America to dominate the world.”

Of course, administration officials are citing Tehran’s and Moscow’s “complicity” in Assad’s crimes. But the president and those around him must be slow learners. When Candidate Trump was talking about cooperating with Russia, it was strongly backing the very same Assad government. Of course, those supporting radical Islamist opponents of the Assad regime, including Turkey and the Gulf states, are little better. Sadly, after perhaps half a million lives, the latest atrocity adds little to the moral horror of the conflict.

Washington’s threats against Iran and Russia undermine other serious U.S. interests. Turning Syria into a genuine proxy war with Moscow would risk a direct military confrontation with another nuclear-armed power. Russia also can assist—or impede—efforts to denuclearize Iran and North Korea, confront the Taliban in Afghanistan, battle terrorism elsewhere, and counterbalance China.

Indeed, one of the worst consequences of the Obama administration’s tough stance toward Russia was to push it and China together. The two are at best uneasy friends; Moscow has much to fear from Chinese encroachment in the Far East. However, both are unwilling to allow the United States to permanently dominate their regions, and especially their borders. Vladimir Putin is an unpleasant authoritarian, but his government’s ambitions appear bounded and do not conflict with fundamental U.S. security interests. Nothing in Syria justifies a potential great-power confrontation and conflict.

The Trump administration’s virulent hostility toward Iran is as foolish as it is obvious. The Islamic terrorism facing America is almost entirely Sunni, advanced not only by groups such as Al Qaeda and the Islamic State, but nominal allies such as Saudi Arabia, which promotes fundamentalist Wahhabi theology around the world, including in America, and whose people have provided personnel and cash for terrorist groups. Iran is more diverse and cosmopolitan, and substantially freer—with elections that matter and minority religions that worship. The Tehran government remains authoritarian and threatening, but the nuclear deal reduced the likelihood that Iran will develop nukes. Moreover, including the country and its people in the global economy offers more reason to struggle against clerical elites for Iran’s future.

Such a future is likely to disappear if the administration applies new sanctions, and especially if it succeeds in replacing Tehran’s next-door ally with a U.S. proxy—imagine Washington’s reaction if the Soviet Union had installed a friendly regime in Mexico. America bears much of the blame for Iran’s hostility, having ousted a democratically elected government in 1953 and backed Saddam Hussein’s war of aggression against Iran during the 1980s. The Trump administration is threatening to initiate a new round of enhanced antagonism.

Three years ago Trump argued against attacking Syria: “There is no upside and tremendous downside.” That remains the case today.

It’s impossible for outsiders to know whether the president controls his administration’s foreign policy. The claim that he reversed policy after seeing a few photos suggests not. But ultimately he bears responsibility for a policy that looks extreme and unbalanced even by the standards of those he criticized during the campaign.

He explained his flip-flop: “I now have responsibility for Syria.” But that’s what one would expect the politicians he defeated to say. President Trump should recognize that he was elected as steward of the American republic and its people. To fulfill that responsibility, he should keep the United States out of the Syrian Civil War.

Article Link To The National Interest:

Banks May Be Behind The Mysterious Drop-Off In Car Sales

By Patti Domm
April 11, 2017

-- Banks tightening lending standards as delinquencies pick up.
-- March vehicle sales fell to an annualized pace of just 16.5 million, below expectations of 17.3 million and the weakest rate since February 2015.
-- Economists watching auto sales carefully to see if it's a sign of broader consumer weakness.

Lenders may have helped put the brakes on car sales last month.

March's sudden slowdown in vehicle sales surprised economists, who are now watching to see if the trend continues and whether it is also foreshadowing a weakening of the consumer. Auto sales are an important economic barometer, and while not a big part of the economy, the industry can create a much larger ripple effect.

"If the next few months reveals a further decline in auto sales, we need to pay attention to that because it will feed back to the economy directly. The bigger risk is that it's a sign of broad-based weakness of the consumer. At this point, we can't make that case," said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch.

Auto loan delinquencies have been on the rise in all categories, and lenders, after an extended period of low rates and easy money, have been tightening loan standards. The trend picked up in the second half of last year, but accelerated in the first quarter of this year.

Auto delinquencies, percent of balance of auto loans from the NY Fed's credit panel.

Some of the focus has been on subprime loans, but Meyer said all loan types have seen delinquencies. "It's possible the fact the delinquencies are picking up, it's leading to a tightening of lending standards, which is feeding back to the demand," she said, noting that the Federal Reserve's senior loan officer survey has been highlighting the trend.

She said, for now, the tightening appears to be a normal reaction, not a more dire concern.

Net percent of banks tightening standards for auto loans. 11.7 percent Q1, 2017

March vehicle sales fell to an annualized pace of just 16.5 million, below expectations of 17.3 million and the weakest rate since February 2015. Economists say they are watching to see if sales have peaked, after the annualized selling pace touched 18 million late last year.

"It's possible sales just increased much faster than broader consumer spending. That was partly because of finance, aging of stock and low gas prices," she said.

For now, economists are looking at other factors too.

Meyer said Bank of America Merrill Lynch analysts are concerned about bloated inventories, especially for used cars, a factor already weighing on prices.

BofA's auto analyst John Murphy expects auto sales to total 17.9 million annualized selling pace this year, and that means autos could provide a 0.1 percent point bump to growth. Murphy has said there are downside risks to his forecast but he has not changed it.

Meyer said if sales fall to a lower level, however, it could be a small hit to GDP. Based on worst case scenario of 15 million, GDP would be hit by 0.4 points and there would also be an impact on auto parts, trade and transportation. A big drop in sales would be the result of a downturn in consumer sentiment which would also ripple through other parts of the economy.

Goldman Sachs economists also studied the slowdown in vehicle sales, which they see as the beginning of a bigger trend. The economists say they expect the annualized selling pace could ultimately settle at 15 million, based on a trend of declining demand and other factors.

The economists point to a drop in licensed drivers, particularly among younger drivers, plus a decline in the number of vehicles per driver. The number of vehicles per driver fell to under 1.2 from about 1.25 in the early 2000s, according to Goldman.

"Our central estimate depends on a range of assumptions, including an annual 0.1-0.2pp decline in the adult population driver share and a flat number of autos per driver," they wrote.

Another trend is also emerging that could dampen car sales to even lower than 15 million. "Longer term, the risks to these estimates are probably on the downside, especially if the 'sharing economy' — exemplified by companies such as Zipcar, Uber, Lyft and Via — makes deeper inroads into the transportation sector," the economists wrote.

The Goldman economists said the impact on GDP would be small. Consumer spending on vehicles and parts is about 2.6 percent of GDP, but only half of that is from domestically produced vehicles, while the rest is imports or used vehicles. If the decline occurs over two to three years, the drag on annualized GDP growth would be about 0.05 to 0.1 percentage points per year, they added.

Meyer said the pace of auto sales is manageable for the economy, and the sector could go from a slight positive for growth to a neutral or slight negative. The inventory to sales ratio has been rising, and if sales slide further, inventories will rise, pressuring prices and resulting in production cutbacks.

BofA says autos make up 3 percent of U.S. GDP, much smaller than the 4.2 percent back in the late 1970s. When looking just at consumers, autos are 3.7 percent of personal consumption expenditures, a measure of overall consumer spending. Auto prices also play a role in the consumer price index, at 6.5 percent of the headline CPI.

"Historically you get very big swings in the inventories. Even though it's a small share of the economy, it matters a lot in terms of the swings can have a lot of impact," Meyer said.

"There's risk of greater disruptions to the economy through the indirect channels. Potentially it could impact credit creation if we are seeing further increases in delinquency rates. That could weigh more broadly on the flow of credit," said Meyer.

Article Link To CNBC:

A Fiscal Reality Test For US Republicans

By Nouriel Roubini
Project Syndicate
April 11, 2017

US President Donald Trump’s first major legislative goal – to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”) – has already imploded, owing to Trump and congressional Republicans’ naiveté about the complexities of health-care reform. Their attempt to replace an imperfect but popular law with a pseudo-reform that would deprive more than 24 million Americans of basic health care was bound to fail – or sink Republican members of Congress in the 2018 mid-term elections if it had passed.

Now, Trump and congressional Republicans are pursuing tax reform – starting with corporate taxes and then moving on to personal income taxes – as if this will be any easier. It won’t be, not least because the Republicans’ initial proposals would add trillions of dollars to budget deficits, and funnel over 99% of the benefits to the top 1% of the income distribution.

A plan offered by Republicans in the US House of Representatives to reduce the corporate-tax rate from 35% to 15%, and to make up for the lost revenues with a border adjustment tax, is dead on arrival. The BAT does not have enough support even among Republicans, and it would violate World Trade Organization rules. The Republicans’ proposed tax cuts would create a $2 trillion revenue shortfall over the next decade, and they cannot plug that hole with revenue savings from their health-care reform plan or with the $1.2 trillion that could have been expected from a BAT.

The Republicans must now choose between passing their tax cuts (and adding $2 trillion to the public debt) and pursuing a much more modest reform. The first scenario is unlikely for three reasons. First, fiscally conservative congressional Republicans will object to a reckless increase in the public debt. Second, congressional budget rules require any tax cut that is not fully financed by other revenues or spending cuts to expire within ten years, so the Republicans’ plan would have only a limited positive impact on the economy.

And, third, if tax cuts and increased military and infrastructure spending push up deficits and the public debt, interest rates will have to rise. This would hinder interest-sensitive spending, such as on housing, and lead to a surge in the US dollar, which could destroy millions of jobs, hitting Trump’s key constituency – white working-class voters – the hardest.

Moreover, if Republicans blow up the debt, markets’ response could crash the US economy. Owing to this risk, Republicans will have to finance any tax cuts with new revenues, rather than with debt. As a result, their roaring tax-reform lion will most likely be reduced to a squeaking mouse.

Even cutting the corporate tax rate from 35% to 30% would be difficult. Republicans would have to broaden the tax base by forcing entire sectors – such as pharmaceuticals and technology – that currently pay little in taxes to start paying more. And to get the corporate-tax rate below 30%, Republicans would have to impose a large minimum tax on these firms’ foreign profits. This would mark a departure from the current system, in which trillions of dollars in foreign profits remain untaxed unless they are repatriated.

During the presidential campaign, Trump proposed a one-time 10% repatriation-tax “holiday” to encourage American companies to bring their foreign profits back to the United States. But this would deliver only $150-200 billion in new revenues – less than 10% of the $2 trillion fiscal shortfall implied by the Republicans’ plan. In any case, revenues from a repatriation tax should be used to finance infrastructure spending or the creation of an infrastructure bank.

Some congressional Republicans who already know that the BAT is a non-starter are now proposing that the corporate income tax be replaced with a value-added tax that is legal under WTO rules. But this option isn’t likely to go anywhere, either. Republicans themselves have always strongly opposed a VAT, and there is even an anti-VAT Republican caucus in Congress.

The traditional Republican view holds that such an “efficient” tax would be too easy to increase over time, making it harder to “starve the beast” of “wasteful” government spending. Republicans point to Europe and other parts of the world where a VAT rate started low and gradually increased to double-digit levels, exceeding 20% in many countries.

Democrats, too, have historically opposed a VAT, because it is a highly regressive form of taxation. And while it could be made less regressive by excluding or discounting food and other basic goods, that would only make it less appealing to Republicans. Given this bipartisan opposition, the VAT – like the BAT – is already dead in the water.

It will be even harder to reform personal income taxes. Initial proposals by Trump and the Republican leadership would have cost $5-9 trillion over the next decade, and 75% of the benefits would have gone to the top 1% – a politically suicidal idea. Now, after abandoning their initial plan, Republicans claim they want a revenue-neutral tax cut that includes no reductions for the top 1% of earners.

But that, too, looks like mission impossible. Implementing revenue-neutral tax cuts for almost all income brackets means that Republicans would have to phase out many exemptions and broaden the tax base in ways that are politically untenable. For example, if Republicans eliminated the mortgage-interest deduction for homeowners, the US housing market would crash.

Ultimately, the only sensible way to provide tax relief to middle- and lower-income workers is to raise taxes on the rich. This is a socially progressive populist idea that a pseudo-populist plutocrat like Trump will never accept. So, it looks like Republicans will continue to delude themselves that supply-side, trickle-down tax policies work, in spite of the overwhelming weight of evidence to the contrary.

Article Link To Project Syndicate:

Qualcomm Hits Back At Apple In Legal Battle

By Ted Greenwald
April 11, 2017

Qualcomm Inc. fired back at Apple Inc. in their legal battle, defending its business model and seeking damages from Apple over withheld payments for technology used in iPhones.

Qualcomm, whose chips and patents are widely used in smartphones, accused Apple of mischaracterizing the chip maker's business and encouraging international regulators to attack it.

The filing, which Qualcomm said it made late Monday in a federal court in Southern California, argues that Apple's iPhone business wouldn't exist if Qualcomm hadn't developed essential technologies and agreed to license them fairly. The iPhone accounted for three-fourths of Apple's estimated $84 billion gross profit in its latest fiscal year, according to investment bank CLSA.

Apple stood by its statement in January when it said Qualcomm charges excessive royalties and benefits from Apple innovations unrelated to its patents, such as advanced displays and cameras.

Apple opened its legal battle in January by suing Qualcomm in the U.S., and later in China and the U.K.--building on international resistance to Qualcomm's patent-licensing business that has included antitrust investigations and fines in China, Europe, South Korea and the U.S.

Apple's U.S. suit claimed that Qualcomm abused its monopoly position in cellular chips to impose "onerous, unreasonable and costly" terms on customers and competitors. It also said that Qualcomm charged too much for its patents and refused to sell chips to phone makers that didn't license its patent portfolio.

Qualcomm's filing denies Apple's allegations, and says Qualcomm went out of its way to offer Apple alternatives in its licensing terms, which Apple rejected.

Qualcomm general counsel Don Rosenberg said his company believes Apple's suit was motivated by a need to reduce the cost of making iPhones. Qualcomm's licensing business "is a nice target for them to pursue to get that input cost lower. That's really what this is about," he said in an interview.

The stakes for both Apple and Qualcomm are high. Apple, facing competitive pressure from Chinese smartphone makers and others, would benefit from reducing costs. Qualcomm, meanwhile, gets most of its pretax profit from licensing its intellectual property.

Qualcomm typically charges handset makers up to 5% of the selling price of a wireless device to use its patents. Apple charges between $400 and $1,000 for an iPhone, implying that it pays Qualcomm as much as $20 to $50 for every unit it sells.

Apple, in its lawsuit, claimed that Qualcomm withheld $1 billion in payments that Apple referred to as rebates on royalties paid to Qualcomm by contract manufacturers that build iPhones. Qualcomm's response denies the allegation and charges that Apple caused those manufacturers, which previously had agreed to and complied with Qualcomm's licensing terms, to withhold royalty payments.

Qualcomm didn't specify the amount it believes it is owed by contract manufacturers of iPhones or the amount it seeks in damages.

Apple sued Qualcomm in the U.S. days after the U.S. Federal Trade Commission filed an antitrust lawsuit against the chip maker alleging anticompetitive behavior. Qualcomm last week filed a motion to dismiss the FTC's case.

A favorable judgment on that motion could undermine Apple's suit, said Mark Lemley, director of the Stanford University program in Law, Science & Technology, since "they're based on similar allegations."

If Apple's case proceeds, it may take as much as two years to reach a judgment, Mr. Lemley said, after which appeals might begin.

Qualcomm is also fighting a judgment by South Korea's antitrust authority, which in December imposed a $853 million fine, the largest in its history, for alleged violations.

Last year, Qualcomm agreed to a settlement with Chinese antitrust authorities that included a $975 million fine and required the company to base its royalty rates in that country on a percentage of handset prices rather than the full price.

Article Link To MarketWatch:

China Is Playing A $9 Trillion Game Of Chicken With Savers

WMPs have proliferated thanks to implicit state guarantees; Government wants to reduce moral hazard, but it won’t be easy.

Bloomberg News
April 11, 2017

Like many individual investors in China, Yang Mo has no idea what’s in the wealth management products that make up a big chunk of her net worth.

She says there’s really no point in finding out. Sure, WMPs invest in all kinds of risky assets, but the government would never let a big one fail, she explains.

“It’s not how the Chinese government does things, and it’s not even Chinese culture,” says Yang, a 29-year-old public relations professional in Beijing.

Hers is a common refrain in Asia’s largest economy, where savers have poured $9 trillion into WMPs and similar products on the assumption that they’ll get bailed out if the investments sour. Even after news in February that policy makers are drafting rules to make it clear that state guarantees don’t exist, Yang is undaunted. She says she’ll only withdraw money from WMPs in the unlikely event that they start to suffer losses.

“Cracking down on implicit guarantees is just like curbing home prices,” she says. “It’s something that the government needs to say, but it’s not something they will eventually do.”

Yang’s steadfast faith in bailouts illustrates the dilemma for authorities as they try to reduce moral hazard and improve the pricing of risk in China’s financial system: It may require a major WMP blowup to shake investors out of their complacency, an event that could wreak havoc on banks that increasingly rely on the products for funding.

“Only after a WMP defaults in a high-profile way will investors start worrying about their money,” says Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co. who’s known for his prescient calls on Chinese markets.

While Hong characterizes the proliferation of WMPs as a “bubble” that will eventually burst, he says imminent losses are unlikely because policy makers are focused on maintaining market stability before a leadership reshuffle at the end of 2017.

Still, that doesn’t mean it will be smooth sailing this year. WMPs -- a key part of China’s shadow banking system -- are getting squeezed as the nation’s central bank increases interest rates to discourage excessive leverage. That’s not only putting pressure on products that use borrowed funds to meet their fixed return targets, it’s also weighing on the Chinese bond market, where WMPs allocate the biggest portion of their funds.

For as long as they can, banks will make investors whole when WMPs run into trouble because they fear the reputational damage of a failed product, according to Hong. At some point, though, WMP shortfalls may be too large for the banks to cover, forcing policy makers to decide whether they’re willing to allow losses.

Intervention is becoming less likely, if the new draft rules are anything to go by. Regulators are working on language that would make clear there are no state guarantees on asset-management products -- which include WMPs, trusts, mutual funds and other products -- people familiar with the matter said in February.

On Monday, the China Banking Regulatory Commission issued risk management guidelines for lenders that included a section on WMPs. The regulator said the products should be simple and transparent, avoid excessive leverage and invest in distinct assets -- rather than pooling funds with other WMPs. Banks should only steer customers into products that are appropriate for their risk tolerance, the CBRC added.

The investments’ sheer size shows why Beijing is keen to quash the notion of a government backstop. Assets in AMPs amounted to about 80 percent of China’s gross domestic product as of June, data compiled by the China Securities Regulatory Commission and Bloomberg show.

WMPs are the biggest category of AMPs, with assets of around 29.1 trillion yuan ($4.2 trillion) at the end of December, according to the CBRC. They’re also the products most widely viewed as risk free by Chinese savers.

It’s easy to see why. Despite investing in volatile assets from corporate bonds to stocks and real estate, WMPs have produced remarkably steady returns. Among the more than 181,000 products that matured in 2015, just 44 suffered a loss, most of which were sold by foreign banks. WMPs issued last week advertised an average annualized return of about 4.3 percent, according to Chengdu-based research firm PY Standard, versus the benchmark one-year deposit rate of 1.5 percent.

While public evidence of WMP bailouts is scarce, the People’s Bank of China has said that when products struggle to meet their return targets, the banks that distribute them often make up the shortfall. Most of the nation’s biggest lenders are majority-owned by China’s government.

“Major banks appear to have sufficient capabilities to offset the potential losses," says Weiwei Fang, 35, who works at a consulting firm in Shanghai and keeps about 90 percent of her personal savings in WMPs. “At least I think my principal should be safe."

The PBOC, the CSRC and the CBRC didn’t respond to requests for comment.

Other Options

If WMPs do start to fail, the worry is that a run on the products will spark a liquidity crunch. The average WMP tracked by the China Banking Wealth Management Registration System matures in 127 days, versus 7 1/2 years for the average Chinese corporate bond. The mismatch leaves banks and other WMP managers exposed to market swings if they can’t raise fresh cash by issuing new products. It could lead to a downward spiral of falling asset prices, the liquidation of WMP holdings and still lower prices.

Three of the four individual investors interviewed by Bloomberg News for this story say that while they currently aren’t concerned about their exposure to WMPs, they’ll shift money out of the products if they see evidence of losses.

Yang, the PR professional with about a third of her savings in WMPs, says she’ll move her cash to bank deposits, while Django Zhang, a 28-year-old analyst at a research company in Beijing, says he’ll consider shifting into foreign exchange or real estate investment trusts. Zhang currently has all his savings in WMPs, about half of which carry guarantees on principal and interest.
Learning Experience

Even Michelle He, a 30-year-old client manager at a state-owned bank in Sichuan province, says her faith in WMPs has limits. He, who buys the products on her mobile phone, says she’s confident that banks or the government will step in to prevent failures, but concedes that any sign of losses in WMPs would prompt her to pull out.

The challenge for policy makers is to create an environment where troubled WMPs can inflict losses on investors without sparking a mass exodus. The government’s most likely approach is to let loss-making WMPs fail, before stepping in to contain the fallout, according to Andrew Collier, managing director at Orient Capital Research and author of a book on shadow banking. That could result in a “limited financial crisis” centered on smaller banks, he says, adding that some institutions would likely be recapitalized by the government or merged with larger peers.

As for the Chinese savers who lose their money, Collier says it would be an important learning experience. “Shadow banking has been a great lesson in capitalism and it has allowed many Chinese to learn how to manage their money in a free-market environment,” he says. “However, the real lessons about the risks of capitalism have yet to be learned by the average investor.”

Article Link To Bloomberg:

Oil Majors' Reserves Are Shrinking And Investors Don't Mind

By Ron Bousso
April 11, 2017

As crude prices recover, oil majors face a dilemma – how quickly should they seek to replenish reserves?

It’s the same question the cyclical oil industry has tackled many times before: go too fast and risk spending too much for little reward, go too slowly and your rivals will be better positioned to grab market share should oil prices rise.

New data revealed by a Reuters analysis shows the oil and gas reserves of global majors have fallen sharply.

Reserve life - the number of years that a company can keep production stable with its reserves - has decreased for Exxon Mobil, Shell, Total and Statoil, according to the Reuters analysis of the firms' annual reports.

BP and Italy's Eni saw a slight increase. (tmsnrt.rs/2nGfmte)

In the case of Exxon, the world's top publicly listed oil company, reserve life dropped in 2016 to 13 years, the lowest since 1997, after it wrote down Canadian oil sands.

Shell has its lowest reserve life since 2008 despite buying rival BG last year.

In the past, the trend may have caused alarm among investors.

But, focused on stock market returns, investors have clear advice: be cautious, do not overspend.

That, they say, is because the rise of oil production from shale and the growth of renewable energy mean oil majors should actively avoid storing volumes of oil underground they would have held in previous cycles.

Rohan Murphy, energy analyst at Allianz Global Investors, which holds shares in Shell, BP, Total and Statoil, sees a reserve life of eight to 10 years as "quite a healthy level".

"I don't think these companies should have a reserve life much above eight to 10 years, especially when we are trying to get to grips with what oil demand will be in 10 years from now."

Peak Demand

The global transition away from fossil fuels to renewable sources of energy in coming decades further reduces the need for a larger reserve life, said Murphy.

That contrasts sharply with fears about peak supply, so widespread only a decade ago, when investors were eagerly watching for news about majors' reserve replacement.

Over the past decade, the world has changed so much that Saudi Arabia now plans to list its national champion Saudi Aramco in what is widely seen by the market as an attempt to cash in on the country's huge reserves before demand peaks.

Oil companies are required to report their reserves every year based on an annual average oil price. With an average 2016 price of around $44 a barrel, the lowest in over a decade, firms were forced to remove reserves from high-cost projects.

Jonathan Waghorn, energy fund co-manager at Guinness Asset Management, which holds shares in a number of oil majors, says lower reserves are not his big concern at the moment: "The focus is on cutting costs and living within cash flows so that they survive for the future."

To offset the shrinkage, companies could opt to acquire other oil firms or sign production-sharing deals with countries that hold large reserves, similar to what BP and Total did with Abu Dhabi last year, Morgan Stanley analyst Martijn Rats said.

Companies have also taken advantage of the rout to buy acreage for future exploration, such as Total's investment in Brazil and Uganda and BP's buy into Eni's Egyptian field Zohr.

"It has never been cheaper to buy reserves or find them yourself ... it is very much a buyers' market if you want to replace reserves," Allianz's Murphy said.

Looming Supply Shortfall

The drop in reserves comes not only as oil prices fell but also because companies sharply cut spending in recent years, shelving many expensive, large-scale developments.

"We may be starting to witness the effect of significant capex cuts. The oil market is becoming increasingly undersupplied, which should move the oil price higher," said Kirill Pyshkin from Mirabaud, who has Shell in his portfolio.

Last year, 10 billion barrels of oil were discovered, around one third of global consumption, including well-appraisal activity, according to Per Magnus Nysveen, head of analysis at Oslo-based consultancy Rystad Energy.

Oil majors have made only a handful of large discoveries in recent years, including Zohr, Exxon's Liza field in Guyana and BP's Tortue discovery in west Mauritania and Senegal.

Since 2010, less than 2 billion barrels of oil has been discovered by majors per year and most of this in existing fields, Nysveen said.

"The shortcoming of oil replacement by the drillbit has been quite drastic ... Discoveries are not keeping up with production," said Nysveen, adding that supply could fall short by up to 2 million barrels per day within seven to eight years.

Article Link To Reuters:

Fed's Yellen Aims To Let 'Healthy' U.S. Economy Coast Along

By Jonathan Spicer and Ann Saphir
April 11, 2017

The Federal Reserve's plans to raise U.S. interest rates gradually are aimed at sustaining full employment and near-2-percent inflation without letting the economy overheat, Fed Chair Janet Yellen said on Monday.

"I think we have a healthy economy now," Yellen said at an event at the University of Michigan's Ford School of Public Policy in Ann Arbor.

Unemployment, at 4.5 percent, is now a little bit below the jobless rate that most Fed officials think signals full employment, and inflation is "reasonably close" to the Fed's 2-percent goal, she said. With the economy expected to continue to grow at a moderate pace, she said, the Fed is now shifting its focus.

"Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel -- to give it some gas but not so much that we are pressing down hard on the accelerator -- that’s a better stance of monetary policy," she said. "We want to be ahead of the curve and not behind it."

In the U.S. Treasury bond market, yields were little changed after Yellen's remarks.

The Fed raised rates in March for only the third time since the Great Recession, and most Fed officials expect the central bank to raise rates at least two more times this year.

Yellen's comments largely echoed what she has said since then, and did not offer any new color on the timing of the rate hikes, or of the Fed's eventual reduction of its $4.5 trillion balance sheet.

"We think a gradual path of increases in short-term interest rates can get us to where we need to be, but we don’t want to wait too long to have that happen," she said.

Article Link To Reuters:

Oil Eases From Five-Week Top, Rising U.S. Production Weighs

By Naveen Thukral
April 11, 2017

Crude oil eased from a five-week high on Tuesday as rising U.S. shale oil production offset concerns over geopolitical tensions in the Middle East and output cuts being made to support prices.

The international benchmark for oil prices, Brent crude futures LCOc1, were down 4 cents, or 0.1 percent, from its previous close at $55.94 per barrel. Earlier, Brent had climbed to its highest since March 7 at $56.16 a barrel.

U.S. West Texas Intermediate (WTI) CLc1 gave up 8 cents, or 0.15 percent, to $53.00 a barrel, after having touched a five-week high of $53.23 a barrel.

Brent has risen in each of the previous six sessions, while WTI gained for the last five days.

"We are getting into the high risk part of this rally. It has been going on for a long time," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

"I wouldn't be surprised to see a bit of book squaring going on now, ahead of the U.S. inventory data which is due on Thursday morning Asia time," he said, also noting that current prices have attracted shale oil producers in the past.

U.S. crude inventories have touched record highs at both the U.S. storage hub of Cushing, Oklahoma, and in the U.S. Gulf Coast in recent weeks, according to U.S. government data.

But the market had been pushed higher by tensions following a U.S. missile strike on Syria and a another shutdown at Libya's largest oilfield.

Libya's Sharara oilfield was shut on Sunday after a group blocked a pipeline linking it to an oil terminal, a Libyan oil source said. The field had only just returned to production, after a week-long stoppage ending in early April.

The outage added to a rally that started late last week after the United States fired missiles at a Syrian government air base.

While Syria produces only small volumes of oil, the Middle East is home to more than a quarter of the world's oil output.

The focus is also turning to the start of the U.S. summer driving season, which could support prices.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers have pledged to cut output by 1.8 million barrels per day in the first six months of 2017, to get rid of excess supply.

But trading data in Thomson Reuters Eikon shows that for the majority of 2017 supplies have been exceeding demand despite the OPEC and non-OPEC supply cuts.

Article Link To Reuters:

What United Airlines Should Have Done

United Airlines CEO Oscar Munoz blew it, says Brett Arends.

By Brett Arends
April 11, 2017

United Airlines CEO Oscar Munoz woke up Monday morning to a massive leadership test.

And he flunked — big time.

Munoz had to respond to the shocking video footage of a passenger being violently ejected from one of his flights Sunday night. The video, shot by two passengers on their cellphones and shared on Twitter, went viral. The passenger was thrown off the plane simply because United had overbooked.

Munoz’s public response was a piece of pusillanimous lawyer-crafted claptrap that was pitiful, inadequate and insulting.

The incident was “upsetting to all of us here at United,” he said. He apologized “for having to re-accommodate these customers.” His “team” was conducting a “detailed review” to “further address and resolve this situation.”

Memo to Munoz: Are you kidding me?

Nobody cares if this was upsetting to the people at United. How about the upset to the paying customer — apparently a middle-aged doctor — who was dragged from your plane like this?

Nobody buys your insulting euphemism “re-accomodate.” You were throwing this guy off the plane, not for anything he did, but because you had deliberately sold more tickets than you had seats to make some extra bucks.

When Max Bialystock pulls that trick in “The Producers,” he gets thrown in jail.

And nobody wants to hear that you’re shunting this off to your “team.” They’re not the ones getting paid millions a year.

Here’s what Munoz should have said instead on Monday morning:

“I have just seen the video from Flight 3411, and like all of you I am shocked. I have immediately cleared my calendar of all other commitments, and I am going to our company’s facilities at O’Hare to conduct a personal inquiry. All personnel involved in this incident will be reporting to me in person immediately. I am going to find out how this happened, who did what and why. I notice that the passenger’s violent removal was conducted by law enforcement personnel, not by United staff, and I am going to demand a full explanation from the relevant authorities as well. Meanwhile, I apologize personally to the passenger, to all others on the flight, to our customers and to the American public. I expect to issue a further report within 72 hours.”

(I initially wrote 36 hours, but on reflection, 72 hours — 3 days — makes more sense.)

If Munoz’s lawyers think that statement opens them up to — eek! — “legal liabilities,” I have some news for them.

The video is all the evidence an attorney is going to need. You’re going to be writing a big fat check anyway. Showing good faith now is going to help more than it could hurt.

A man was dragged off an overbooked United Airlines flight from Chicago O’Hare to Louisville, Ky, on Sunday night after agents couldn’t find volunteers to leave the plane and selected four passengers at random. A passenger captured video of the ordeal. Photo: Tyler Bridges via Storyful

Oh, and if if you’re worried about legal costs, wait till you see the business costs. We’re just heading into peak summer travel. How many lost customers would you like?

United’s revenues come to about $36 billion a year, or roughly $100 million a day. The financial risk of lost sales surely vastly outweighs any potential liability.

This is what happens when a leader lets lawyers and weak advisers write his statement.

Real leaders remember that the lawyers work for them, not the other way around. If it were up to the company lawyers, nobody would ever do anything.

You can’t handle corporate spin like this in the age of Twitter and Facebook and smartphone videos. While Munoz and his advisers were tinkering with this pabulum on their laptops, the video clips were going everywhere, and they are a public relations disaster.

How much damage will United suffer? The stock market seemed to brush it off. Shares UAL, +0.90% actually rose 0.91% on Monday. But I’m not so sure. Online videos are far more powerful than the powerful realize.

Article Link To MarketWatch: