Monday, April 17, 2017

Monday, April 17, Morning Global Market Roundup: Stocks, Dollar Under Pressure After Soft U.S. Data

By Hideyuki Sano 
April 17, 2017

Shares and the U.S. dollar dipped on Monday while U.S. bond yields slumped to five-month lows after soft U.S. economic data hurt investor sentiment already frayed by worries over North Korea and coming French elections.

That dwarfed any relief for market players after the U.S. Treasury department did not name China as a currency manipulator, avoiding an all-out confrontation on currencies between the world's two largest economies.

S&P 500 mini futures declined 0.15 percent to 2,324, edging near a six-week low of 2,317.75 touched in late March following U.S. President Donald Trump's defeat on healthcare reform.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.1 percent in holiday-thinned trade, while Japan's Nikkei fell as much as 0.6 pct to hit a five-month low before ending up 0.1 percent.

Most European share markets will be closed for Easter holidays.

A raft of Chinese economic data beat market expectations but did not produce notable market reactions as investors had been already optimistic following a recent string of positive China numbers.

China's economy grew 6.9 percent in the first quarter from a year earlier, a tad above economists' forecast of 6.8 percent.

However, mainland Chinese shares fell, with Shanghai Composite Index down 1.0 percent at 3,212, risking a close below its 60-day average at 3,216, seen as an important support by investors and weighed by warning from top securities regulator to combat market misbehavior.

U.S. retail sales dropped more than expected in March while annual core inflation slowed to 2.0 percent, the smallest advance since November 2015, from 2.2 percent in February, data showed on Friday.

That helped to drive down the 10-year U.S. Treasuries yield to 2.200 percent, its lowest level since mid-November from around 2.228 percent on Thursday before a market holiday on Friday.

The yield had risen above 2.6 percent in December and again in March, from around 1.85 percent before the U.S. presidential election, on expectations of Trump's stimulus.

But growing perception that Trump will struggle to push any tax cuts and fiscal spending programs through the Congress has prompted unwinding of the "Trump" trade.

"At the moment, it is hard to see any factors that could drive up bond yields," said Hiroko Iwaki, senior strategist at Mizuho Securities.

"And compared to U.S. bond yields, which have given up much of their gains after the election, U.S. share prices, having gone through a limited correction, look vulnerable given potential developments in North Korea or the French election," she said.

Fed fund futures <0> rose in price, now pricing less than a 50 percent chance of a rate hike in its June 13-14 meeting for the first time in about a month.

No Manipulation

Trump's administration declined to name any major trading partner as a currency manipulator in a highly anticipated report on Friday, backing away from a key Trump campaign promise to slap such a label on China.

"Concerns about U.S.-Sino trade frictions have eased for the time being," said Naoki Tashiro, the president of TS China Research.

"But this is also thought to be a part of a barter, namely the U.S. wants China to take tougher actions against North Korea in exchange," he said.

There is no sign of easing in tensions over North Korea's nuclear and missile program after the reclusive country's failed missile test on Sunday.

Trump's national security adviser said on Sunday that the United States, its allies and China are working together on a range of responses to North Korea.

"In essence, North Korea made a provocation that would not transcend the U.S. 'red line'. But depending on how China will react, Trump could lose his patience," said Makoto Noji, senior strategist at SMBC Nikko Securities.

Safe-haven gold gained as much as 0.8 percent to hit a five-month high of $1,295.5 per ounce on continued concerns on tensions over North Korea.

The dollar slipped to as low as 108.13 yen, a five-month low and 0.4 percent below its late U.S. levels.

The semi-annual U.S. Treasury currency report maintained the six countries on a "monitoring list" -- China, Japan, Germany, South Korea, Taiwan and Switzerland -- suggesting Washington could put more pressure on those countries to take steps to reduce their trade surplus with the United States in future.

The euro stood at $1.0622, little moved so far, and not far from a one-month low of $1.0570 touched last Monday, with focus on the French presidential election.

Ahead of the first round of voting on April 23, the race looked tighter. Two polls put any of the four frontrunners, including far-right candidate Marine Le Pen and hard-left challenger Jean-Luc Melenchon, within reach of a two-person run-off vote.

The Turkish lira jumped about 2.5 percent to 3.6300 per dollar versus 3.7220 on Friday after President Tayyip Erdogan snatched a victory in a referendum to grant him sweeping powers in the biggest overhaul of modern Turkish politics.

It last traded at 3.677.

Oil prices slipped on signs the United States is continuing to add output, undermining OPEC efforts to support prices. [O/R]

Benchmark Brent crude futures were down 1.0 percent at $55.34 a barrel.

Article Link To Reuters:

Wall Street Banker Cohn Moving Trump Toward Moderate Policies

By James Oliphant and Svea Herbst-Bayliss
April 17, 2017

In a White House marked by infighting, top economic aide Gary Cohn, a Democrat and former Goldman Sachs banker, is muscling aside some of President Donald Trump's hard-right advisers to push more moderate, business-friendly economic policies.

Cohn, 56, did not work on Republican Trump's campaign and only got to know him after the November election, but he has emerged as one of the administration's most powerful players in an ascent that rankles conservatives.

Trump refers to his director of the National Economic Council (NEC), as "one of my geniuses," according to one source close to Cohn.

More than half a dozen sources on Wall Street and in the White House said Cohn has gained the upper hand over Trump's chief strategist, Steve Bannon, the former head of the right-wing website Breitbart News and a champion of protectionist trade opposed by moderate Republicans and many big companies.

Cohn is a key administration link to business executives and White House sources say he will lead the charge for Trump on top domestic priorities such as tax reform, infrastructure and deregulation.

"Gary's singular focus is tax reform and he's working to try and get that done in 2017," said Orin Snyder, a partner at law firm Gibson Dunn and a long-time friend of Cohn.

"He is working to implement the president's twin goals of economic growth and job creation. The tax plan will also include a reduction in the corporate rate, but also tax relief for middle- and low-income Americans."

Some conservatives fear Cohn may push through a tax plan that is unnecessarily complicated and argue that including tax relief for middle- and low-income Americans would not spur economic growth as much as cuts focused entirely or mostly on businesses and entrepreneurs.

Adam Brandon, president of the conservative group FreedomWorks, is disappointed Trump is not charging ahead with a plan unveiled last year during his campaign that would slash taxes on businesses and wealthy individuals.

That plan was shaped heavily by Stephen Moore, an economic policy expert at the conservative Heritage Foundation think tank, who advised Trump's campaign. But it has since been shelved.

"I don't like the idea of scrapping it and starting over again," Brandon said.

A senior administration official said the White House has started from scratch on the tax plan and, while setting business tax cuts as the highest priority, is consulting with lawmakers, economists and business leaders before taking it to the Republican-led Congress.

Two administration officials said reports that the White House was considering a carbon tax and a value-added tax were incorrect, but that other ideas were on the table. "We are considering a multitude of options for tax reform," a White House official said on Sunday.


Associates of both Trump and Cohn say the two have developed a bond. People who have worked with Cohn say he is loyal, direct and assertive, traits that Trump likes.

Crucially, Cohn also has the trust of Jared Kushner, Trump's adviser and son-in-law, and his wife Ivanka, Trump's daughter.

Cohn hired his staff more quickly than other top officials, building a reputation for competence in an administration hurt by early missteps over healthcare reform and a travel ban, the sources said.

"Gary is a huge asset to the Trump administration. He'll be of great help in eliminating unnecessary regulation, stimulating growth and reforming the tax code," said billionaire hedge fund manager John Paulson, an early backer of Trump who knows Cohn through Wall Street circles.

The son of middle-class parents in Cleveland, Ohio, Cohn overcame dyslexia and worked in sales before elbowing his way into a position as a Wall Street trader and rising to become president and chief operating officer at Goldman Sachs Group Inc (GS.N).

Kushner was a Goldman Sachs intern when he first crossed paths with Cohn. After Trump's election victory, Kushner paved the way for Cohn to meet the president-elect, who had spent much of the campaign blasting investment banks as modern-day robber barons. Trump soon named Cohn his NEC director.

Apparently paying more heed to Cohn and other moderates on his team, Trump last week said he was open to reappointing Janet Yellen as Federal Reserve chairman when her term is up and he also held back from naming China a currency manipulator.

Both stances marked a reversal from his campaign when Trump criticized Yellen and vowed to label China a currency manipulator on "day one" of his administration, a move that could lead to punitive duties on Chinese goods.

Sources close to Cohn and inside the White House said there are sharp policy differences between Cohn and both Bannon and Reince Priebus, White House chief of staff.

A White House spokesperson denied there was a power struggle inside the West Wing.

Cohn has already put his stamp on regulatory policy by working with Kushner to successfully push Wall Street lawyer Jay Clayton for head of the Securities and Exchange Commission after billionaire investor Carl Icahn, an early Trump supporter, had vetted other candidates. Clayton's nomination has been advanced to the Senate for a vote.

The vacant Federal Reserve vice chairman's seat is a key regulatory role Cohn and his colleagues on the economic team want to fill soon. Cohn has interviewed nearly two dozen candidates and has whittled the list down. Randal Quarles, a veteran of the George W. Bush administration is one of several candidates left, a source familiar with the process said.

Cohn will also take a leading role in developing Trump’s infrastructure plan to rebuild airports, roads and bridges. The biggest challenge may be figuring out how to pay for the initiative, which Trump has estimated at $1 trillion.

While conservatives are concerned by Cohn, they note that Bannon is still part of Trump's mercurial administration and that Cohn could fall out of favor as quickly as he has risen.

"Whoever is up today," Brandon said, "could be gone tomorrow."

Article Link To Reuters:

Delta And The Game Theory Of Overbooking Flights

By Mohamed A. El-Erian
The Bloomberg View
April 17, 2017

Given the deep mess that United Airlines created for itself after a passenger was dragged off a full flight last week, Delta said it could increase the incentives for “voluntary denied boarding.” Agents will now be allowed to offer up to $2,000 to entice passengers to give up their seats, significantly more than the previous limit of $800. If that doesn’t work, the agents’ supervisors can authorize payments of almost $10,000.

Delta’s aim is clear: Use the price incentive to deal with oversold flights and, thus, avoid the social-media-fueled anger that would be sure to erupt again should there be another messy involuntary “reaccommodation” (as United initially called the incident).

On first sight, this approach is likely to work in reducing denied boarding situations for Delta, of which there were an estimated 1,200 in 2016. And once one major airline applies such a system, others are likely to follow (particularly major carriers such as American and United).

But what if insights from game theory -- and, particularly, the greater potential for high collective payouts from credible collaborative collusion -- were to inform passengers’ reactions? They would consider ways to enrich themselves at the expense of the airline.

Here’s an example: Once the airline calls for volunteers, those willing to respond would form a consultative group that would assign one passenger to miss the flight and then agree to collectively hold out until the airlines approaches its new $10,000 maximum. At that point, the one passenger would volunteer, collect the compensation, keep a good portion of it, and make smaller side payments to the other members of the group.

Of course, this is by no means a foolproof approach. Effective collusion and steadfast commitment are tricky for a plane full of strangers, especially when passengers arrive at the gate at different times and, after the flight, are unlikely to interact with their fellow travelers in future. The incentive for any one passenger to refuse to be a member of the group, or break away from it, is considerable -- especially because there are no easy group discipline enforcement mechanisms.

To add to the challenges of forming effective coalitions, the airline compensation is likely to come in the form of travel credits rather than cash, making the side payments complicated and hard to secure. There is also the problem of non-genuine participation by passengers who have no real desire to volunteer, but see this as an opportunity for a potentially risk-free payout.

Even if passengers were to overcome all these problems, such game theoretics are unlikely to allow for a “repeated game,” in which passengers repetitively benefit at the expense of the airline. After all, it wouldn’t take the airline long to realize that its highest net present value approach is now to lower its contingent exposure by reducing the overbooking practices.

Does this mean that Delta’s proposal is nothing more than clever public relations aimed at taking market share away from other airlines. Well, there probably is an element of this, but it's far from a layup, especially as other airlines are likely to follow.

The most probable outcome from this shift in the policy governing voluntary denied boarding is likely to materialize without headline-grabbing news of passengers successfully “arb’ing” the airline. Rather than eye-catching payments, airlines will reduce the amount of seats they sell on oversold flights. And as some passengers will cancel at the last minute, some popular routes may even end up with empty seats.

Passengers will have a slightly less awful experience, airlines will make a little less money, and Twitter storms will focus on other aspects of the travel experience.

Article Link To The Bloomberg View:

Oil Falls After Failed North Korean Missile Test, U.S. Rig Count Gains

By Aaron Sheldrick
April 17, 2017

Crude oil fell on Monday in quiet trading after the three-day Easter break on signs the United States is continuing to add output, undermining OPEC efforts to support prices, and as the market digested North Korea's failed missile launch on Sunday.

Benchmark Brent crude futures were down 56 cents at $55.33. On Thursday, before major markets closed for the holiday break, they settled up 3 cents at $55.89 a barrel.

U.S. West Texas Intermediate (WTI) crude futures were down 51 cents at $52.67 a barrel, after rising 7 cents to $53.18 on Thursday.

Both benchmarks last week rose for a third consecutive week, with Brent adding 1.2 percent over the four days before the Good Friday holiday and WTI up 1.8 percent.

Trading was subdued to start the week with major market center London still closed for the Easter holidays on Monday.

While markets are braced for the possibility of more geopolitical tensions over North Korea, the attempted launch on Sunday of a ballistic missile fizzled as the projectile blew up almost immediately.

"The drop in tensions following North Korea's failed missile test ... have seen oil fade in Asia," said Jeffrey Halley, senior market analyst at futures brokerage OANDA in Singapore.

"The soft U.S. CPI (consumer price index) on Friday will ease yields further, also undermining the reflationist markets such as oil and precious metals," he said.

Retail sales in the U.S. fell for a second straight month in March and consumer prices dropped for the first time in just over a year, official data showed on Friday.

In the oil patch, U.S. drillers last week added rigs for a 13th straight week, a sign output gains there will continue.

Energy services firm Baker Hughes said on Thursday drillers added 11 oil rigs in the week to April 13, bringing the count up to 683, highest in about two years.

Increasing U.S. output is proving a constant source of irritation to attempts by the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers to curb output and sustain a rally in prices in a market that has been oversupplied since mid-2014.

U.S. crude oil production has climbed to 9.24 million barrels per day, according to the latest Energy Information Administration data, making it the world's third-largest producer after Russia and Saudi Arabia.

While compliance has been strong among OPEC countries, production cuts have lagged among others that have agreed to act to curb oil prices, including Russia. That may be about to change, said BMI Research.

"Non-OPEC compliance will improve over the next two months with Russia driving the largest reductions in volume terms," BMI said. "Kazakhstan is likely to continue to exceed its quota given strong output from the Kashagan field."

Article Link To Reuters:

Undaunted By Oil Bust, Financiers Pour Billions Into U.S. Shale

By Ernest Scheyder
April 17, 2017

Investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy are already making big new bets on the industry's resurgence.

In the first quarter, private equity funds raised $19.8 billion for energy ventures - nearly three times the total in the same period last year, according to financial data provider Preqin.

The quickening pace of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices CLc1 from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.

The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions - slashing up to half the cost of pumping a barrel in the past two years. Investors also believe the glut will dissipate as demand for oil steadily rises.

That gives financiers confidence that they can squeeze increasing returns from shale fields - without price gains - as technology continues to cut costs. So they are backing shale-oil veterans and assembling companies that can quickly start pumping.

"Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range" per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which last month committed to invest $300 million in startup Admiral Permian Resources LLC to drill in West Texas.

Data on investments by hedge funds and other nonpublic investment firms is scant, but the rush of new private equity money indicates broader enthusiasm in shale plays.

"Demand for oil has been more robust than anyone imagined three years ago," said Mark Papa, chief executive of Centennial Resource Development Inc (CDEV.O).

Papa referred to the beginning of an international oil price crash in 2014, which took many firms in the shale sector to the brink of bankruptcy.

Centennial is a Permian oil producer backed by private equity fund Riverstone. Papa, a well-known shale industry entrepreneur, built EOG Resources Inc (EOG.N) into one of the most profitable U.S. shale producers before he retired in 2013.

The chance to further develop the Permian, he said, was enough for him to come out of retirement to deliver one of its bigger recent successes. The value of Riverstone's original $500 million investment has grown nearly four times since Centennial's initial public offering last fall.

'A Ton Of Private Capital'

Riverstone this year copied the Centennial model, putting experienced managers atop a startup charged with acquiring operations or assets. The equity fund hired Jim Hackett - the former head of shale producer Anadarko Petroleum Corp (APC.N) - to run the newly created Silver Run Acquisition Corp II (SRUNU.O).

Hedge funds Highfields Capital Management LP and Adage Capital Management have taken stakes in the new company, which has a valuation of about $1 billion after going public last month.

Private equity fund NGP Natural Resources XI LP invested $524 million last fall in Luxe Energy LLC, a shale producer formed in 2015 by former Statoil (STL.OL) executives.

NGP's investment was effectively a bet that Luxe could repeat its success of early 2016.

Then, NGP contributed about $250 million to Luxe, which used the money to acquire land in the Permian - and sold it seven months later for a double-digit profit.

This year's drilling rush could be tested if global supplies grow too fast or if demand cools. The U.S. drilling rig count is rising at its fastest pace in six years and U.S. crude stockpile are close to 533 million barrels - near an all-time high and enough to supply the United States for 25 days.

But some investors say even a decline of $10 in the oil price would not dissuade them.

"There is a ton of private capital to invest in the U.S. oil industry," said Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners.

Nicholas said he is comfortable lending even if oil prices fall to $40 per barrel.

Orion this month helped finance the expansion of a Florida oil-storage terminal, a move predicated in part on growth in U.S. oil exports. Since the U.S. lifted its oil export ban last year, crude exports have climbed to about 746,000 barrels per day, according to U.S. Energy Information Administration data.

Betting On OPEC's Self-Interest

The oil industry has seen boom-and-bust cycles since the first well was drilled about 160 years ago, and industry and government have sought to tame the volatility for just as long.

Texas regulators set output quotas from the 1920s through the 1970s, a practice that served as a model for the creation of the Organization of the Petroleum Exporting Countries (OPEC).

The U.S. boom has caused concern among OPEC member nations ahead of its meeting next month in Vienna, where they will consider extending oil production cuts that first took effect in January. Investors believe the cartel's members will extend the cuts because it is in OPEC's financial interest to prevent a steep drop in oil prices.

That likely will keep money flowing to nimble U.S. oil producers and the companies that provide them with services and equipment. Investors see the United States as the new swing producer, having the ability to quickly increase supply in response to any sudden increase in demand.

"The U.S., with its substantial inventory capacity and swing oil producer status, should see strong onshore activity for the next few years," said Charlie Leykum, founder of private equity fund CSL Capital Management LLC, in an interview.

CSL has invested in several oilfield service business in the past year. It partnered with Goldman Sachs (GS.N) and Baker Hughes Inc (BHI.N), for instance, to create a shale services company.

Centennial's Papa expects the flood of fresh capital to push U.S. production up 23 percent to 11.3 million barrels a day (bpd) by 2020, based on strong demand for oil.

"We're still in a hydrocarbon-based economy," said Papa.

Article Link To Reuters:

Bullish Oil Bets Gain On Signs OPEC Cuts To Outdo U.S. Boom

Money managers’ WTI net-longs increase for second week: CFTC; WTI oil tops $53 a barrel; U.S. crude supply drops from record.

By Mark Shenk
April 17, 2017

OPEC is finally making some headway in its race against the tide of surging U.S. supplies, and speculators are giving the group greater credence.

Hedge funds boosted bets on higher West Texas Intermediate crude prices a second week as futures topped $53 a barrel for the first time in a month, U.S. Commodity Futures Trading Commission data show. While more OPEC members are seen ready to extend output cuts, U.S. crude stockpiles dropped from a record. Fuel supplies are shrinking week after week at a time refineries are stepping up their crude processing ahead of the summer driving season.

“There’s renewed faith that OPEC and non-OPEC will be able to get global inventories lower,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone. “We’re also looking forward to the ramp-up of refineries before the summer driving season, which will also help lower crude inventories.”

There are many indicators pointing to a more balanced market, Saudi Arabian Oil Co. Chief Executive Officer Amin Nasser said during an event at Columbia University in New York April 14.

World stockpiles should soon start to decline, the International Energy Agency said in a monthly report on April 13. The Organization of Petroleum Exporting Countries said in a report a day earlier that inventories shrank in developed nations during the first quarter, while forecasting that rivals in the U.S. shale industry will boost output.

Money managers’ WTI net-long position, or the difference between bets on a price increase and wagers on a drop, climbed 16 percent in the week ended April 11, according to the CFTC. WTI rose 4.6 percent to $53.40 a barrel in the report week, and traded 0.9 percent lower at $52.73 as of 12:55 p.m. in Hong Kong on Monday.

OPEC Chatter

Futures closed at the highest in six weeks on April 11 after Saudi Arabia was said to likely support prolonging OPEC output cuts. Ministers are scheduled to gather in Vienna on May 25 to discuss whether the group will roll over for another six months the 1.2 million barrels a day in output curbs that went into effect in January.

“There’s an increasing likelihood that on May 25 OPEC will agree to extend production cuts,” Jason Schenker, president of Prestige Economics LLC in Austin, Texas, said by telephone. “The outlook is improving regardless of the high level in overall inventories. The OPEC meeting will take place just before the Memorial Day holiday, which is the start of the summer driving season.”

U.S. crude inventories fell 2.17 million barrels from an all-time high in the week ended April 7, according to the Energy Information Administration. Refineries processed 16.7 million barrels a day of crude during the period, the highest since January. U.S. fuel producers typically boost crude processing at this time of year as they prepare for the summer surge in gasoline demand.

The net-long position in WTI rose by 42,199 futures and options to 309,229. Longs climbed 2.8 percent, while shorts tumbled 31 percent, the biggest drop in four months.

Fuel Supply

Meanwhile, gasoline inventories dropped an eighth week, the longest stretch of declines in three years. Stockpiles of distillate fuel, a category that includes diesel and heating oil, fell a ninth week to the lowest since November. It was the longest stretch of pullbacks in distillate supplies since 2010.

Net bullish bets on gasoline climbed 19 percent to the highest since February. Net-long wagers on U.S. ultra low sulfur diesel surged 51 percent, the biggest gain this year.

“The numbers reflect slightly more bullish sentiment in the marketplace,” Schenker said. “The continued draw in product stocks is supportive as is the expected start of the summer driving season.”

Article Link To Bloomberg:

Steel, Stimulus Drive China's Strongest Economic Growth Since 2015

By Kevin Yao and Yawen Chen
April 17, 2017

China's economy expanded faster than expected in the first quarter as higher government infrastructure spending and a gravity-defying property boom helped boost industrial output by the most in over two years.

Growth of 6.9 percent was the fastest in six quarters, with forecast-beating March investment, retail sales and exports all suggesting the economy may carry solid momentum into spring.

But most analysts say the first quarter may be as good as it gets for China this year, and worry Beijing is still relying too heavily on stimulus and "old economy" growth drivers, primarily the steel industry and a property market that is showing signs of overheating.

"The Chinese government has a tendency to rely on infrastructure development to sustain growth in the long term," economists at ANZ said in a note.

"The question we need to ask is whether this investment-led model is sustainable as the authorities have trouble taming credit. We need to watch closely whether China’s top leadership will send a stronger signal to tighten monetary policy shortly."

Even as top officials vowed to crack down on debt risks, China's total social financing, a broad measure of credit and liquidity in the economy, reached a record 6.93 trillion yuan ($1 trillion) in the first quarter -- roughly equivalent to the size of Mexico's economy.

At the same time, spending by the central and local governments rose 21 percent from a year earlier.

That helped goose the pace of growth in the first quarter well above the government's 2017 target of around 6.5 percent, and pipped economists' forecasts of 6.8 percent year-on-year.

Such a strong bolt from the gate could see Beijing once again meet its annual growth target, even if activity starts to fade later in the year, as many analysts widely expect.

"Main indicators were better than expected...which laid a good foundation for achieving the full-year growth goals," statistics spokesman Mao Shengyong said at a news conference.

Same Old Growth Drivers?

Once again, China's policymakers leaned on infrastructure and real estate investment to drive expansion in the first quarter. Growth in both areas has accelerated from last year and helped offset slightly weaker growth in the services sector.

"Faster growth in industrial output is the primary factor in the first quarter surprise, and due mostly to higher value-added growth related to supply-side consolidation in heavy industry," said Brian Jackson, China economist at IHS Global Insight.

Real estate investment also remained robust in the first quarter, expanding by 9.1 percent on-year, and the pace of new construction quickened despite intensifying government measures to cool soaring prices.

Most analysts agree the heated property market poses the single biggest risk to China's economic growth, but predict the cumulative weight of property curbs will eventually temper activity, not produce an outright crash.

"Sales have started falling, which means tightening measures are starting to take effect," said Shen Jianguang, an analyst at Mizuho Securities in Hong Kong, noting that will start to drag on both the services and construction sectors.

More than two dozen cities announced new or additional property cooling measures in March and early April, after curbs late last year appeared to have little lasting effect.

Buoyed by a near 12 percent increase in housing starts, China produced a record amount of steel in March, Reuters data showed, though analysts say warning signs are flashing.

Rising inventory levels and recent falls in steel prices suggest output has been growing faster than China's actual demand, raising worries of a glut later in the year, which could heighten trade tensions with the U.S. and its other major trading partners.

Income Growth Picks Up

There were also positive signs on the consumer front in Monday's data dump.

After slowing for five quarters, disposable income growth picked up to 7.0 percent in the first quarter, the fastest since the end of 2015.

March retail sales rebounded 10.9 percent on-year as consumers shelled out more for home appliances, furniture and decorations for new homes.

Auto sales also showed signs of recovering after weakening in the first two months of the year after the government reduced subsidies on small cars.

Analysts are closely watching for signs that consumption is accounting for a greater share of China's economy, which would

not only make growth more resilient and broader based but also reduce the need for more debt-fueled stimulus and reliance on "smokestack" industries.

Focus On Stability, Then Reforms

Though policymakers have pledged repeatedly to push reforms to head off financial risks and asset bubbles, the government is seeking to keep the economy on an even keel ahead of a major leadership transition in later this year.

China's central bank has gingerly shifted to a tightening policy bias in recent months, and is using more targeted measures to contain risks in the financial system, after years of ultra-loose settings.

It has bumped up interest rates on money market instruments and special short- and medium-term loans several times already this year and further modest increases are expected, especially if U.S. rates continue to rise.

"I think China should be directing the economy to slow down its growth in the long term...but on the contrary, growth is accelerating," said Hidenobu Tokuda, senior economist at Mizuho Research Institute in Tokyo.

"This is good for now but it makes it difficult to see how China's economic slowdown will land in the future. Uncertainties remain high."

Article Link To Reuters:

Pence Says 'Era Of Strategic Patience' With North Korea Is Over

By Roberta Rampton
April 17, 2017

U.S. Vice President Mike Pence stared across the demilitarized border between North and South Korea on Monday, a day after North Korea's failed missile launch, reiterating that the U.S. "era of strategic patience" with Pyongyang was over.

Pence is on the first stop of a four-nation Asia tour intended to show America's allies, and remind its adversaries, that the Trump administration is not turning its back on the increasingly volatile region.

The demilitarized zone (DMZ) is a heavily mined, four-km-wide (2.5-mile-wide) strip of land lined with barbed wire running across the Korean peninsula, with soldiers on both sides in a continual eyeball-to-eyeball standoff.

Pence, whose father served in the 1950-53 Korean War, said the United States would stand by its "iron-clad alliance" with South Korea and was seeking peace through strength.

"All options are on the table to achieve the objectives and ensure the stability of the people of this country," he told reporters as tinny propaganda music floated across from the North Korean side.

He said U.S. President Donald Trump has made clear he won't talk about specific military tactics.

"There was a period of strategic patience but the era of strategic patience is over," Pence said.

The United States, its allies and China are working together on a range of responses to North Korea's latest failed ballistic missile test, Trump's national security adviser said on Sunday, citing what he called an international consensus to act.

H.R. McMaster indicated that Trump was not considering military action for now, even as a nuclear-powered aircraft carrier strike group was heading for the region.

"It's time for us to undertake all actions we can, short of a military option, to try to resolve this peacefully," he said on ABC's "This Week" program. "We are working together with our allies and partners and with the Chinese leadership to develop a range of options.

"There is an international consensus now, including the Chinese leadership, that this is a situation that just cannot continue," McMaster said.

The Trump administration is focusing its North Korea strategy on tougher economic sanctions, possibly including an oil embargo, a global ban on its airline, intercepting cargo ships and punishing Chinese banks doing business with Pyongyang, Reuters reported last week, citing U.S. officials.

While Trump has employed tough rhetoric in response to North Korea's recent missile tests, the new U.S. president's options appear limited in dealing with a challenge that has vexed his Oval Office predecessors.

Most options fall into four categories: economic sanctions, covert action, diplomatic negotiations and military force.

Pence landed in South Korea hours after the North's failed missile launch. His visit came a day after North Korea held a military parade in its capital, Pyongyang, marking the 105th anniversary of the birth of founding father Kim Il Sung.

What appeared to be new long-range ballistic missiles were on display in the parade.

"We'll See What Happens"

Tensions have risen as Trump takes a hard rhetorical line with North Korean leader Kim Jong Un, who has rebuffed admonitions from China and proceeded with nuclear and missile programs seen by Washington as a direct threat.

Trump acknowledged on Sunday that the softer line he had taken on China's management of its currency was linked to Beijing's help on the North Korea issue.

"Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!" Trump said on Twitter. Trump has backed away from a campaign promise to label China in that way.

Pence said Trump was hopeful China "will take actions needed to bring about change in policy" in North Korea.

"But as the president has made very clear, either China will deal with this problem or the United States and our allies will," he said.

Trump's decision to order a cruise missile strike on a Syrian airfield this month, in response to what he said was Syria's use of chemical weapons, raised questions about his plans for reclusive North Korea.

Japanese Prime Minister Shinzo Abe urged North Korea to refrain from taking further provocative actions, comply with U.N. resolutions and abandon its nuclear missile development.

"Japan will closely cooperate with the U.S. and South Korea over North Korea and will call for China to take a bigger role," Abe told parliament.

However, a U.S. foreign policy adviser traveling with Pence sought to defuse some of the tension, saying Sunday's test of what was believed to be a medium-range missile had come as no surprise.

"We had good intelligence before the launch and good intelligence after the launch," the adviser told reporters on condition of anonymity.

China has spoken out against the North's weapons tests and has supported U.N. sanctions. It has repeatedly called for talks while appearing increasingly frustrated with the North.

Beijing banned imports of North Korean coal on Feb. 26, cutting off Pyongyang's most important export. China's customs department issued an order on April 7 telling traders to return North Korean coal cargoes, trading sources said.

Pyongyang has conducted several missile and nuclear tests in defiance of U.N. sanctions, and regularly threatens to destroy South Korea and the United States. North and South Korea are technically still at war because their 1950-1953 conflict ended in a truce, not a treaty.

The North has said it has developed and would launch a missile that can strike the U.S. mainland, but officials and experts believe it is some time away from mastering the necessary technology, including miniaturizing a nuclear warhead.

Sunday's missile launch was a calculated move, the China Daily newspaper said in an editorial.

"And making it without prompting a furious response from Washington surely qualifies as a win to some degree from Kim's perspective," it said, referring to Kim Jong Un.

"Trump, too, can claim a win. That the nuclear test did not happen will surely be seen as the pressure working."

Article Link To Reuters:

Turkey's New Playbook For The Semi-Authoritarian

By Noah Feldman
The Bloomberg View
April 17, 2017

The votes from Turkey’s constitutional referendum are in, and President Recep Tayyip Erdogan has claimed victory for his side, even as the result remains disputed. What’s clear is who the winner is not: constitutional democracy. On the surface, the amendments turn Turkey into a presidential system instead of a parliamentary one. Underneath, they strengthen the personal authority of Erdogan, who in the last decade and a half has gone from prime minister to president to quasi-authoritarian leader.

Erdogan has shown once again that he is the vanguard of a new breed of semi-authoritarians that includes Viktor Orban of Hungary and potentially Jaroslaw Kaczynski of Poland. These aren’t your grandfather’s would-be fascists, who might have come to power by election but then planned to abolish them and assume total dictatorial power.
Instead, the new authoritarians’ playbook calls for maintaining regular elections and the outward forms of multiparty democracy, while in fact consolidating power and cooking the books just enough to keep winning the popular vote. Erdogan, like his emulators and colleagues, has weakened the free press and free speech without completely shutting down all alternative political voices.

After all, Erdogan put his proposed systemic changes up for a referendum, which is not what dictators traditionally did. Yes, he made efforts to silence opposition. And his AK Party may have cheated in other ways in some jurisdictions. Yet the fact remains that the election was clean enough -- and close enough -- that we will probably never know enough to say a majority of the voting public didn’t want the result.

All this leads to a genuine puzzle: Why bother? If your plan is to erode constitutional democracy in favor of authoritarianism, why follow most of the rules most of the time?

Part of the answer is that Erdogan, like Orban and the Polish PiS party, is carefully calibrating just how much support he actually has, and how much real opposition exists. Where somewhere close to half the population doesn’t like you, the challenge for the semi-authoritarian is to avoid pushing the opposition into all-out refusal of your legitimacy.

Call it the Hosni Mubarak lesson: If enough people want the president out, the people will go the streets. Then the army will do the rest, undertaking a coup in the name of democracy.

By maintaining at least the basic forms of constitutional democracy, the semi-authoritarian avoids alienating the opposition to the extent that it will try to overthrow him.

Erdogan has proved twice in recent years that he has achieved this balance, thus avoiding the fare of Mubarak. In the Gezi Park protests of 2013, he faced a huge public demonstration in Istanbul. He eventually shut down the protest by force. But the army didn’t take the opportunity to make a power grab.

Then, in 2016, some elements of the army did try a weird, half-hearted coup. It failed, in large part because the public didn’t take to the streets in support of the army. Much of the public seems to have felt that the coup was anti-democratic. Erdogan might be semi-authoritarian, but he had been elected and that was still less authoritarian than a military regime.

The other partial explanation for semi-authoritarianism is that today’s rulers don’t actually believe in total dictatorship as a desirable method for staying in power. Erdogan had the experience of being banned from politics for Islamic rhetoric. Orban lived through the fall of Communism, as did Kaczynski. That should be enough to teach anyone that rule without meaningful opposition doesn’t work very well.

Of course the new semi-authoritarians might fantasize about total power. But their real fantasy seems to be getting re-elected forever by more than 50 percent of an adoring public.

It’s not a coincidence that these leaders’ parties are all populist. And populism glories in speaking for “the people,” defined narrowly enough to exclude the opposition.

The last self-interested twist in the semi-authoritarians’ strategy is that they are keeping their options open should they lose popularity someday. Most true dictators are assassinated or end their lives in prison or exile.

But if the opposition is liberal-democratic and constitutionalist, it seems plausible that if it eventually comes to power, it won’t severely punish the semi-authoritarian as it would the true dictator. The populist semi-authoritarian will be able to say, when he’s out of power, that he followed the constitution, and that his successors should, too. Most liberal-democratic governments will be too rights-oriented -- or wimpy -- to exact punishment.

It emerges that semi-authoritarianism is a terrific way to stay in power so long as you have a populist base and a willingness to erode free speech and free elections.

The world doesn’t yet have a good set of tools to respond, as Europe’s ineffectual responses to Hungary and Poland show. As for Erdogan, his position is invulnerable relative to regional neighbors and European counterparts. Expect more leaders around the world to follow his lead.

Article Link To The Bloomberg View:

Stocks Ride Into North Korea ‘Danger Zone’ Before Monday Open

Last time stocks skirted open nuclear conflict possibility was 1962.

By Wallace Witkowski
April 17, 2017

Against the backdrop of missiles flying, the “mother of all bombs” being dropped on Islamic State targets and the threat of an all-out nuclear war, financial markets have been holding up relatively well, but face a major hurdle before the Monday open.

When taking bets on a game of nuclear chicken, there’s not a lot of historical perspective as investors consider a binary outcome: Either one side blinks, and the market resumes its business, or neither side blinks, and the market enters uncharted territory, hopefully for the short term.

With promises of a major event coming out of North Korea over the weekend and the USS carrier Carl Vinson sent in the wake of heightened aggressions toward the Korean Peninsula to support two cruise missile destroyers already stationed within striking range, investors are admittedly on edge. North Korea has vowed a pre-emptive strike laying the blame against hostile U.S. forces, and reports have suggested that the U.S. may launch its own pre-emptive strike against North Korea if it tests another nuclear device.

President Donald Trump has recently shown no qualms about the use of military force following the launch of cruise missiles against Syria while meeting with Chinese counterpart Xi Jinping.

Ultimately, there’s the question of how much support China will lend the U.S. while still saving face following the meeting between Trump and Xi.

“Apparently, Trump said to Xi that if China helps solve the [North Korea] problem, trade will benefit, but if not, he’ll take care of it, so there’s an incentive there,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

Trump followed that up by the first-ever combat use of the GBU-43/B Massive Ordnance Air Blast bomb, the most powerful nonnuclear bomb in the U.S. arsenal, in Afghanistan.

All in all, following that one-two punch of U.S. military power within the space of a week, the two events bookended a 1% decline in the Dow Jones Industrial Average DJIA, -0.67% and a 1.1% decline in the S&P 500 index SPX, -0.68% as a long-hoped-for return to double-digit earnings growth gets under way. The worst session over that time was Thursday at the close of a week shortened in observance of Good Friday, with stocks dropping 0.7% to their session lows at the close.

Over that same period, the CBOE Volatility Index VIX, +1.50% has jumped 29% to 15.96, but is still below its long-term average of 20, while haven assets like gold settled at their highest levels since the November election. What’s crucial is what happens this weekend, according to strategists.

“Right now, what has been pulling the market down have been the military strikes and a carrier group off the coast of North Korea,” said Commonwealth’s McMillan. “That raises the possibility of something unexpected happening.”

“This could turn out to be a lot of sabre-rattling,” said Robert Pavlik, chief market strategist at Boston Private Wealth. “There are a lot of unknowns at this point with the leader of North Korea an extreme wild card and a brand-new president who’s demonstrating a willingness to go it alone on what the rest of the world has placated or allowed to develop.”

“If nothing happens Saturday or Sunday, the market may be relieved, but don’t expect a lot of buying,” Pavlik said.

But if you go past sabre-rattling, there’s little precedence for direct confrontation with a proven nuclear power.

“You have to go back to the Cuban Missile Crisis for nuclear weapons on the table,” said Pavlik. “That’s the kind of nervousness you’d see in the market.”

Even then, the Dow industrials at the time declined 1.7% from the beginning of the crisis on Oct. 16, 1962 until Oct. 26, the last day of trading before the crisis resolved over the weekend, according to Dow Jones data. The next trading day after that, Oct. 29, the Dow closed up 1.8%, denying history a window into how the stock market performs following a nuclear exchange.

War, in the cruise-missile age, hasn’t done much to dent stocks for notable periods. Since the use of cruise missiles in the 1990s, stocks have to varying degrees bounced back from situations warranting those strikes relatively quickly. The last time the issue was of any real market concern, before President Trump’s Syria strike, was in 2013, when a strike by the U.S. was aborted by President Barack Obama that lacked international support.

If conflict with North Korea escalates beyond words, the situation becomes frightening, but not necessarily something that drives the world headlong into a recession-class event, said Pavlik. Expect something along the lines of a 500-point one-day drop in the Dow for starters, which hasn’t happened since June 2016, when Britain voted to leave the European Union.

Plus, investors have been chafing for months for a 5% or more pullback in stocks, or an excuse to buy into a fundamentally strong but cheaper market.

Article Link To MarketWatch: