Monday, April 24, 2017

Monday, April 24, Morning Global Market Roundup: French Election Relief Sends Europe Soaring

By Marc Jones
Reuters
April 24, 2017

European shares opened sharply higher and the euro briefly vaulted to five-month peaks on Monday after the market's favored candidate won the first round of the French election, reducing the risk of another Brexit-like shock.

The victory for pro-EU centrist Emmanuel Macron, who is now expected to beat right-wing rival Marine Le Pen in a deciding vote next month, sent the pan-European STOXX 50 index .STOXX50E up 3 percent, France's CAC40 .FCHI almost 4 percent and bank stocks .SX7E more than 6 percent. [.EU]

Traders top-sliced some of the euro's overnight gains, but it was still up more than 1 percent on the dollar EUR=EBS, more than 2 percent against the yen EURJPY= and 1.3 percent on the pound EURGBP= as the early flurry of deals subsided. [FRX/]

"It (the first round result) has come out in line with the market's expectations so you have something of a risk rally as there was a bit of a risk-premium built into all markets," said James Binny, head of currency at State Street Global Advisors.

There was also an unwinding of safe-haven trades.

Shorter-term German bonds DE2YT=TWEB saw their biggest sell-off since the end of 2015 as investors piled back into French FR10YT=TWEB as well as Italian, Spanish, Portuguese and Greek debt [GVD/EUR].

The Japanese yen's fall was widespread JPY=EBS, the market's so-called fear-guage, the VIX volatility index .VIX, plunged the most since November and gold XAU= saw its biggest tumble in more than a month. [GOL/]

E-mini futures for Wall Street's S&P 500 ESc1 climbed 0.9 percent in early trade, while yields on 10-year U.S. Treasury notes US10YT=RR rose almost 8 basis points to 2.31 percent.

Risk Rally

Asia also saw a risk rally. Japan's Nikkei .N225 jumped 1.5 percent as the yen retreated, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.3 percent.

Shanghai shares .SSEC fell 1.7 percent after state media signaled Beijing would tolerate more market volatility as regulators clamp down on riskier financing.

But Macron's success set the tone.

The euro jumped in relief, and was last up 1.1 percent at $1.0840 EUR=, having been as far as $1.0940, the highest since early November.

The safe-haven yen slipped across the board with the euro surging as much 2.4 percent to 119.77 yen EURJPY= while the U.S. dollar gained 1 percent to 110.20 yen JPY=.

"The rise of the euro and risk appetite rebounding is understandable and this should also see yields in Europe fall, spreads to Bunds tighten and stocks rally," said Tim Riddell, an analyst at Westpac.

"However, such gains are likely to be contained when markets reflect upon the marked shift away from the 'establishment' and just how effective the new president may be," he added.

Skeptical On Tax


Wall Street on Friday had only a modest lift from news President Donald Trump would announce the broad outline of his proposed tax package on Wednesday.

"Markets are skeptical that the real details will be forthcoming," said analysts at ANZ in a note.

"There is also plenty of conjecture about whether any tax cuts will be able to be revenue neutral, and that could affect their ease of passage through Congress."

The Dow .DJI ended Friday down a minor 0.15 percent, while the S&P 500 .SPX lost 0.30 percent and the Nasdaq .IXIC fell 0.11 percent.

Investors were also keeping a wary eye on tensions in the Korean peninsula.

North Korea said on Sunday it was ready to sink a U.S. aircraft carrier to demonstrate its military might, in the latest sign of rising tension as Trump called the leaders of China and Japan to discuss the situation.

South Korea responded by asking Washington about holding joint drills with the USS Carl Vinson aircraft carrier strike group as it approaches waters off the Korean peninsula.

Oil prices recouped just a little of last week's hefty losses, still weighed by signs U.S. production and inventory growth were offsetting OPEC's attempts to reduce the global crude glut.

Brent futures LCOc1 were up 16 cents at $52.12 a barrel, while U.S. crude futures CLc1 added 17 cents to $49.79.


Article Link To Reuters:

Oil Recovers Lost Ground, But Market Remains Under Pressure

By Henning Gloystein
Reuters
April 24, 2017

Oil prices recovered lost ground on Monday following big losses last week, driven by expectations that OPEC will extend a pledge to cut output to cover all of 2017, although a relentless rise in U.S. drilling capped gains.

U.S. West Texas Intermediate (WTI) crude oil futures CLc1 added 32 cents, or 0.64 percent, but were still just below the $50 mark pierced on Friday at $49.84 a barrel.

Brent crude futures LCOc1 rose 35 cents, or 0.67 percent, to $52.31 per barrel.

Oil prices fell steeply last week on the back of stubbornly high crude supplies, despite a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and some other producers to cut production by almost 1.8 million barrels per day (bpd) for six months from Jan. 1 to support the market.

U.S. drillers added oil rigs for a 14th week in a row, to 688 rigs, extending an 11-month recovery that is expected to boost U.S. shale production in May by the biggest monthly increase in more than two years.

"Since its trough on May 27, 2016, producers have added 372 oil rigs (+118 percent) in the U.S.," Goldman Sachs said in a note following the release of the data.

U.S. crude production is at 9.25 million barrels per day (bpd) C-OUT-T-EIA, up almost 10 percent since mid-2016 and approaching that of OPEC's top exporter Saudi Arabia.

"WTI oil slipped back below the $50 per barrel level, amid concerns that the lack of inventory drawdown since the OPEC production cuts is a sign that the cuts are not enough to rebalance supply and demand and put a floor under prices," said William O'Loughlin, investment analyst at Rivkin Securities in a note on Monday.

Both the Brent and WTI oil benchmarks are down more than 7.5 percent since the end of last year.

Keen to halt a further decline in prices, a panel made up by OPEC and other allied producers has recommended an extension of output cuts by another six months from June, a source said.

This, and an expected fall in Iranian production lent markets some support on Monday, traders said.

Iran's crude oil exports are set to hit a 14-month low in May, suggesting the country is struggling to raise exports after clearing out stocks stored on tankers.

Iranian oil exports, especially to its core markets in Asia, had soared since the ending of most sanctions against it in January 2016.


Article Link To Reuters:

Space May Be Next Frontier For Earth's Crude Oil Giants

Navitas says the Middle East could play space mining role; Satellites prospecting asteroids could be launched in 5 year.


By Dan Murtaugh
Bloomberg
April 24, 2017

The Middle East has an outsize impact on energy here on Earth. One analyst thinks some regional powerhouses may leverage that role into the development of natural resources in space.

Countries like the United Arab Emirates and Saudi Arabia are developing space programs and investing in nascent private space commodity initiatives, said Tom James, a partner at energy consultant Navitas Resources. Doing so could give them a foothold in building extraterrestrial reserves of water -- a substance likely to fuel travel within space -- and other resources that could be used for in-space manufacturing.

“Water is the new oil of space,” James said in Singapore. “Middle East investment in space is growing as it works to shift from an oil-based to a knowledge-based economy.”



Prospecting satellites can be built for tens of millions of U.S. dollars each and an asteroid-harvesting spacecraft could cost $2.6 billion, in line with mining operations on Earth, Goldman Sachs Group Inc. analysts including Noah Poponak said in an April 4 research note. Most resources would be processed and used in space although it may be economic to ship some commodities, such as platinum, back to Earth, according to James and Goldman.

“Space mining is still a long way from commercial viability, but it has the potential to further ease access to space,” Poponak wrote. “Water and platinum group metals that are abundant on asteroids are highly disruptive from a technological and economic standpoint.”

Water As Fuel

Navitas expects companies to launch satellites searching for rare gases and metals in asteroids within five years, with actual mining happening within eight. A single asteroid might contain 175 times more platinum than the Earth mines in a year, Goldman said, citing a project associated with the Massachusetts Institute of Technology. That much platinum could be worth $25 billion to $50 billion, although it would likely crater the market for the metal.

“You could go massively short on platinum and then show up at settlement with an asteroid, but you probably could only do that once,” James said in an interview after a presentation at the National University of Singapore’s Middle East Institute. “I don’t think the counter-party would take that trade a second time.”

Platinum futures for July delivery fell 0.6 percent to $972.10 an ounce on the New York Mercantile Exchange on Monday.

In the long term, most of the commodities mined in space will stay in space to power a low-orbit space economy built around satellites and space stations, James said. In that scenario, water accumulated in space would become valuable as it could be used for rocket fuel for interstellar voyages. The substance is too heavy and costly to transport from Earth.

Low-Orbit Economy


Water can be used as a propellant in space or split into hydrogen and oxygen, and then recombined and combusted. Deep Space Industries Inc., an asteroid mining company, has developed a thruster that heats water into a steam propellant, according to Goldman.

The U.A.E. and Saudi Arabia already have space programs, with the Saudis signing a pact with Russia in 2015 for cooperation on space exploration, according to a report from Arab News. Abu Dhabi is an investor in Richard Branson’s space tourism venture, Virgin Galactic. In addition to money, the Middle East also has geography on its side.

The closer a country is to the equator, the more surface velocity there is from spinning around the Earth’s axis, meaning space ships need to burn less fuel to exit the atmosphere. That benefits some Middle Eastern countries as launch sites, James said.

“The Middle East builds the tallest buildings, the biggest shopping complexes,” said James. “Certainly they’re having a big impact on the space and satellite industries as well.”


Article Link To Bloomberg:

Trump Pressures Democrats On Obamacare To Get Border Wall Deal

By David Morgan and Doina Chiacu
Reuters
April 24, 2017

President Donald Trump put pressure on Democrats on Sunday as U.S. lawmakers worked to avoid a government shutdown, saying Obamacare would die without a cash infusion the White House has offered in exchange for their agreement to fund his border wall.

The escalated push to get Trump's priorities, which Democrats reject, into spending legislation could jeopardize prospects for an agreement to keep the government open.

If talks fail, the government would shut down on Saturday, Trump's 100th day in office.

"Obamacare is in serious trouble. The Dems need big money to keep it going - otherwise it dies far sooner than anyone would have thought," the Republican president said in a Twitter post.

In a second tweet, he added: "The Democrats don't want money from budget going to border wall despite the fact that it will stop drugs and very bad MS 13 gang members."

MS-13 is a criminal gang with members of Central American origin.

The president's tweets appeared after White House budget director Mick Mulvaney accused Democrats of "holding hostage national security" by opposing $1.5 billion to help build a wall along the U.S.-Mexico border, one of Trump's top campaign pledges.

Democrats have said they would not support legislation that ends federal subsidies to help low-income people buy health insurance under the Affordable Care Act, popularly known as Obamacare.

The healthcare law was former Democratic President Barack Obama's signature domestic policy achievement, which Republicans are trying to repeal and replace.

On Sunday, Democrats called for Trump to stop making "poison pill" demands.

Senate Democratic leader Chuck Schumer said negotiations between Democrats and Republicans in both the House of Representatives and the Senate were "going quite well" and that he was hopeful a deal could be reached.

"The only fly in the ointment is that the president is being a little heavy handed, and mixing in and asking for things such as the wall," Schumer told reporters.

"We'd ask him to let us do our work, not throw in some last-minute poison pills that could undo it, and we could get this done," he said.

Trump wants money for the wall included in spending legislation that Congress must pass by Friday to keep the federal government operating through Sept. 30, when the 2017 fiscal year expires.

Mulvaney and White House Chief of Staff Reince Priebus played down the danger of a shutdown. Mulvaney said talks between Republicans and Democrats could produce an agreement as early as Sunday.

"I'm pretty confident we're going to get something that's satisfactory to the president in regard to border security within the current negotiations," Priebus said on NBC's "Meet the Press."

Homeland Security Secretary John Kelly said Trump had been clear about his desire for a wall. "I would suspect he will be insistent on the funding," he told CNN's "State of the Union."

Tax Reform: Principles But No Plan

The White House is expected to address another Trump campaign promise this week with a Wednesday announcement on tax reform that Mulvaney said would offer "governing principles, some guidance, also some indication of what the rates will be."

But he said basic elements of the plan remained undecided, including whether to have deficit-funded tax cuts that would not be permanent. "You can either have a small tax cut that's permanent, or a large tax cut that is short term," he said.

In a tweet on Saturday, Trump promised that a "Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday."

Legislative text on tax reform is not expected until June, Mulvaney said.

Spending legislation will require Democratic support to clear the Senate, and the White House says it has offered to include $7 billion in Obamacare subsidies to help low-income Americans pay for health insurance, if Democrats accept funding for the wall.

Democrats showed no sign of softening their opposition to wall funding on Sunday and sought to place responsibility for any shutdown squarely on Trump and Republicans who control the House of Representatives and the Senate.

"The Democrats do not support the wall," House Democratic leader Nancy Pelosi told NBC's "Meet the Press." "The wall is, in my view, immoral, expensive, unwise."

Senator Richard Durbin, an Illinois Democrat, called on Trump to "back off."

"To think that he would consider shutting down the government of the United States of America over this outlandish proposal of a border wall ... that would be the height of irresponsibility," he told CNN.


Article Link To Reuters:

Trump's 100 Days: A Rattled Establishment, Some Surprises

By Julie Pace
AP
April 24, 2017

For nearly 100 days, President Donald Trump has rattled Washington and been chastened by its institutions.

He's startled world leaders with his unpredictability and tough talk, but won their praise for a surprise strike on Syria.

He's endured the steady drip of investigations and a seemingly endless churn of public personnel drama.

"It's a different kind of a presidency," Trump said in an Oval Office interview with The Associated Press, an hour-long conversation as he approached Saturday's key presidential benchmark.

Trump, who campaigned on a promise of instant disruption, indirectly acknowledged that change doesn't come quickly to Washington. He showed signs that he feels the weight of the office, discussing the "heart" required to do the job. Although he retained his signature bravado and a salesman's confidence in his upward trajectory, he displayed an understanding that many of his own lofty expectations for his first 100 days in office have not been met.

"It's an artificial barrier. It's not very meaningful," he said.

Trump waffled on whether he should be held accountable for the 100-day plan he outlined with great fanfare in his campaign's closing days, suggesting his "Contract with the American Voter" wasn't really his idea to begin with.

"Somebody put out the concept of a 100-day plan," he said.

One hundred days are just a fraction of a president's tenure, and no president has quite matched the achievements of Franklin D. Roosevelt, who set the standard by which all are now judged.

Still, modern presidents have tried to move swiftly to capitalize upon the potent, and often fleeting, mix of political capital and public goodwill that usually accompanies their arrival in Washington.

Trump has never really had either.

A deeply divisive figure, he lost the popular vote to Democrat Hillary Clinton and had one of the narrower Electoral College victories in history. Since taking office on Jan. 20, his approval rating has hovered around 40 percent in most polls.

Trump's early presidency has been dogged by FBI and congressional investigations into whether his campaign coordinated with Russians to tilt the race in his favor. It's a persistent distraction that Trump would not discuss on the record.

Furthermore, his three months-plus in office have amounted to a swift education in a world wholly unfamiliar to a 70-year-old who spent his career in real estate and reality television.

For example, his two disputed travel ban executive orders are languishing, blocked by federal judges.

On Capitol Hill, majority Republicans muscled through Trump's nominee for the Supreme Court, Judge Neil Gorsuch, but had to blow up long-standing Senate rules to do so. Then there was the legislative debacle when Trump's own party couldn't come together to fulfill its long-sought promise of repealing President Barack Obama's health care law.

H.W. Brands, a history professor at the University of Texas at Austin, said Trump is learning that "the world is the way it is for a whole bunch of complicated reasons. And changing the guy at the top doesn't change the world."

Trump won't concede that point.

But he acknowledged that being commander in chief brings with it a "human responsibility" that he didn't much bother with in business, requiring him to think through the consequences his decisions have on people and not simply the financial implications for his company's bottom line.

"When it came time to, as an example, send out the 59 missiles, the Tomahawks in Syria," Trump said of his decision to strike a Syrian air base in retaliation for a chemical weapons attack. "I'm saying to myself, 'You know, this is more than just like 79 (sic) missiles. This is death that's involved because people could have been killed. This is risk that's involved.'"

"Here, everything, pretty much everything you do in government involves heart, whereas in business most things don't involve heart," he said. "In fact, in business you're actually better off without it."

As for accomplishments, Trump cited "tremendous success" on an undefined strategy for defeating the Islamic State group. He talked at length about saving taxpayers hundreds of millions of dollars on the price of F-35 fighter jets. Trump held meetings during the transition and in the White House with the CEO of Lockheed Martin, which produces the F-35, but the cost-savings were already in the works when he took office.

He promised a tax overhaul plan that would give Americans a tax cut bigger than "any tax cut ever."

A man accustomed to wealth and its trappings, Trump has embraced life in the Executive Mansion, often regaling guests with trivia about the historic decor. With the push of a red button placed on the Resolute Desk that presidents have used for decades, a White House butler soon arrived with a Coke for the president.

It's too soon to say whether the presidency has changed Trump in substantive ways. He's backpedaled on an array of issues in recent weeks, including his critiques of NATO and his threats to label China a currency manipulator. But his self-proclaimed flexibility means he could move back to where he started just as quickly.

Stylistically, Trump remains much the same as during the campaign.

He fires off tweets at odd hours of the morning and night, sending Washington into a stir with just a few words. Trump still litigates the presidential campaign, mentioning multiple times during the interview how difficult it is for a Republican presidential nominee to win the Electoral College.

He is acutely aware of how he's being covered in the media, rattling off the ratings for some of his television appearances. But he says he's surprised even himself with some recent self-discipline: He's stopped watching what he perceives as his negative coverage on CNN and MSNBC, he said.

"I don't watch things, and I never thought I had that ability," he said. "I always thought I'd watch."

For the moment, Trump seems to have clamped down on the infighting and rivalries among his top White House staffers that have spilled into the press and created a sense of paranoia in the West Wing. He praised his national security team in particular and said his political team in the White House doesn't get the credit it deserves for their work in a high-pressure setting.

"This is a very tough environment," he said. "Not caused necessarily by me."


Article Link To Bloomberg:

Tesla’s Big Model 3 Bet Rides On Risky Assembly Line Strategy

By Alexandria Sage
Reuters
April 24, 2017

Tesla Inc (TSLA.O) Chief Executive Elon Musk took many risks with the technology in his company's cars on the way to surpassing Ford Motor Co's market value. Now Musk is pushing boundaries in the factory that makes them.

Most automakers test a new model's production line by building vehicles with relatively cheap, prototype tools designed to be scrapped once they deliver doors that fit, body panels with the right shape and dashboards that don't have gaps or seams.

Tesla, however, is skipping that preliminary step and ordering permanent, more expensive equipment as it races to launch its Model 3 sedan by a self-imposed volume production deadline of September, Musk told investors last month.

Musk’s decision underscores his high-risk tolerance and willingness to forego long-held industry norms that has helped Tesla upend the traditional auto industry. While Tesla is not the first automaker to try to accelerate production on the factory floor, no other rival is putting this much faith in the production strategy succeeding.

Musk expects the Model 3 rollout to help Tesla deliver five times its current annual sales volume, a key target in the automaker's efforts to stop burning cash.

"He's pushing the envelope to see how much time and cost he can take out of the process," said Ron Harbour, a manufacturing consultant at Oliver Wyman.

Investors are already counting on Tesla’s factory floor success, with shares soaring 39 percent since January as it makes the leap from niche producer to mass producer in far less time than rivals.

There are caution signs, however. The production equipment designed to produce millions of cars is expensive to fix or replace if it doesn't work, industry experts say. Tesla has encountered quality problems on its existing low-volume cars, and the Model 3 is designed to sell in numbers as high as 500,000 vehicles a year, raising the potential cost of recalls or warranty repairs.

"It's an experiment, certainly," said Consumer Reports' Jake Fisher, who has done extensive testing of Tesla's previous Models S and X. Tesla could possibly fix errors quicker, speeding up the process, "or it could be they have unsuspected problems they'll have a hard time dealing with."

Musk discussed the decision to skip what he referred to as "beta" production testing during a call last month with an invited group of investors. Details were published on Reddit by an investor on the call. (here).

He also said that “advanced analytical techniques” – code word for computer simulations - would help Tesla in advancing straight to production tooling.

Tesla declined to confirm details of the call or comment on its production strategy.

The auto industry's incumbents have not been standing still. Volkswagen AG's Audi division launched production of a new plant in Mexico using computer simulations of production tools – and indeed the entire assembly line and factory - that Audi said it believed to be an industry first. That process allowed the plant to launch production 30 percent faster than usual, Audi said.

An Audi executive involved in the Mexican plant launch, Peter Hochholdinger, is now Tesla's vice president of production.

Making Tools Faster


Typically, automakers test their design with limited production using lower grade equipment that can be modified slightly to address problems. When most of the kinks are worked out, they order the final equipment.

Tesla’s decision to move directly to the final tools is in part because lower grade, disposable equipment known as “soft tooling” ended up complicating the debut of the problem-plagued Model X SUV in 2015, according to a person familiar with the decision and Tesla’s assembly line planning.

Working on a tight deadline, Tesla had no time to incorporate lessons learned from soft tooling before having to order the permanent production tooling, making the former's value negligible, the source said.

"Soft tooling did very little for the program and arguably hurt things," said the person.

In addition, Tesla has learned to better modify final production tools, and its 2015 purchase of a Michigan tooling company means it can make major equipment 30 percent faster than before, and more cheaply as well, the source said.

Financial pressure is partly driving Tesla’s haste. The quicker Tesla can deliver the Model 3 with its estimated $35,000 base price to the 373,000 customers who have put down a $1000 deposit, the closer it can log $13 billion.

Tesla has labored under financial pressure since it was founded in 2003. The company has yet to turn an annual profit, and earlier this year Musk said the company was "close to the edge" as it look toward capital spending of $2-2.5 billion in the first half of 2017.

Tesla has since gotten more breathing room by raising $1.2 billion in fresh capital in March and selling a five per cent stake to Chinese internet company Tencent Holdings Ltd (0700.HK) .

Musk has spoken to investors about his vision of an "alien dreadnought" factory that uses artificial intelligence and robots to build cars at speeds faster than human assembly workers could manage.

But there are limits to what technology can do in the heavily regulated car business. For example, Tesla will still have to use real cars in crash tests required by the U.S. government, because federal rules do not allow simulated crash results to substitute for data from a real car.


Article Link To Reuters:

What Markets Should Conclude From France's Election

By Mohamed A. El-Erian
The Bloomberg View
April 24, 2017

While French voters didn't shock markets by sending both presidential candidates from the far left and far right to the decisive second round in two weeks, investors did not get their dream lineup: A contest between Emmanuel Macron and Francois Fillon, the two most pro-market candidates.

Instead, the runoff between the National Front's Marine Le Pen and Macron -- the individual possibility to which the market assigned the highest single probability -- involves a clear battle between a commitment to shake the economic system and one to create change within the existing structure. And this first-round vote doesn’t signal, at least yet, the end of the anti-establishment phenomenon.

Although counterfactuals are inherently tricky, let’s start the market analysis by discussing what will not happen.

Risk assets and the spreads on French and peripheral bonds will avoid the volatility selloff that they surely would have experienced had Le Pen and Jean-Luc Melenchon, a far-left candidate, made it to the second round. With that, there will be significantly less risk of destabilizing capital flows out of the French banking system. At the same time, markets will not experience the extreme joy that would have resulted from the opposite outcome, a Fillon–Macron second round.

The initial market reaction to the actual outcome of the very competitive first round should be positive for risk assets and the euro, though not necessarily ebullient. The extent of the rally depends on what the final numbers say about the strength of Le Pen’s showing, especially now that both Fillon and Benoit Hamon, the Socialist Party candidate who was badly defeated, have rushed to throw their support behind Macron for the May 7 runoff.

Looking ahead, and based on the widespread conventional view that a majority of the French electorate will again seek to vote for any alternative to the National Front, most market participants will likely assume that, when push comes to shove, Macron will be elected president -- even though he lacks a political party and now faces the prospect of being pressed much harder on policy positions and past actions.

If this scenario were to be realized, markets would do more than avoid an upfront shock. They also would take France off the list of possible sources of systemic shock.

The immediate sighs of relief would be experienced well beyond markets. Two central banks -- the European Central Bank and the Swiss National Bank -- would be able to shelve plans to stabilize markets through exceptional measures in order to avoid wild moves in the currencies, at least for now. The Greek government would feel slightly more confident about the possibility of avoiding a debt cliff in the summer, though it still needs to resolve differences between the International Monetary Fund and European partners. And Germany would be less concerned about being forced further into anchoring a euro zone subject to growing forces of fragmentation.

With the relief, some investors may be tempted to go further and interpret the result as an indication that the wave of anti-establishment sentiment that delivered Brexit and the Donald Trump presidency has dissipated, allowing markets to set aside considerations of political and geopolitical risk in a more significant manner. But that would be premature, including when it comes to France, for two related reasons.

-- Not all the uncertainty in France has been lifted. Even if Macron prevails in the second round, the country's political system still has to deal with the fallout from a marginalization of mainstream parties in the presidential race that is unlikely to extend to the legislative elections that are scheduled for June. Some form of “cohabitation” -- a government made up of a president of one party and a prime minister from another -- will have to emerge, which is far from a straightforward proposition.

-- Although an immediate extreme outcome has been avoided, there is no denying that this is another example of an event deemed improbable not so long ago becoming reality. Remember, few initially took seriously Macron’s notion of getting to the second round as he was powered by a movement rather than a party.

Questions remain, though markets understandably will be relieved by the outcome of this first round. A potential bullet has been avoided and, absent an unanticipated shock, the markets already expect the second one to be avoided in the next round of voting. But it is way too early to declare an end to the anti-establishment phenomenon that has turned improbables, if not unthinkables, into realities.


Article Link To The Bloomberg View:

France Discards The Politics Of Left And Right

By Therese Raphael
The Bloomberg View
April 24, 2017

For globalists rattled by Brexit and Donald Trump, the first round of the French presidential race was a relief. They should savor it. It probably won't last.

Turnout was nearly 70 percent. I live in one of France's most important political centers -- London -- and here voters queued for hours (in polite English fashion) to cast their ballots.

And this time, pollsters got it right: The hypernationalist Marine Le Pen will face a 39-year-old centrist reformer, Emmanuel Macron, from a political party that didn’t exist one year ago, in the final round of the contest on May 7.

That’s a big change for France, which left its long-dominant political parties of both left and right gasping by the side of the road. But there won’t be an apocalyptic, turn-out-the-lights-as-you-leave-the-world second-round showdown between Le Pen and the anti-market statist Jean-Luc Melenchon. Both campaigned to substantially rewrite France's relationship with Europe and the rest of the world, something Macron does not propose to do.

Instead of this doomsday scenario, the largest share of the vote went to Macron, a blue-eyed reformer who’s easy to like. He is, without a doubt, a political phenomenon. Once part of a Socialist government that has been thoroughly rejected by voters, he launched an independent party he called En Marche!, styled himself as non-establishment, and campaigned as a changemaker who could bring in outsiders and parley with insiders. His success on Sunday is a salve to markets and a sign that the natural order of things hasn't been entirely disrupted.

"Foreign business chiefs swoon over this young, modern, dynamic minister. A French Justin Trudeau," wrote Gerard Davet and Fabrice Lhomme in their book about his mentor, President Francois Hollande, who tolerated Macron's political freelancing without suspecting that it would push his own party aside.

The Le Pen-Macron victories amount to the complete rejection of the rigid two-party system that has dominated French political life for over half a century. Grandees from the Socialist Party and the main party of the right (currently the Republicans) grew accustomed to gobbling up talent from France's best universities, clashing swords, handing off the Elysee Palace to one another and essentially deciding the terms of debate and the course of policy in the world's sixth largest economy. In 1956, they together got 76 percent of the total vote; in 2012 it was 56 percent in the first round. On Sunday it was 26 percent.

The biggest hemorrhaging came from the Socialist Party, whose hapless candidate, Benoit Hamon, barely surpassed 6 percent. Hamon's candidacy was rejected even by the Socialist Party prime minister; his proposal to tax robots and his advocacy of a universal basic income and a range of hard-left policies struck voters as out of touch, as it was. Imagine if the U.S. Democrats had chosen Bernie Sanders to lead them and he had received 6 percent of the vote last November (with a Democrat in the White House at the time). It's about that dramatic a result.

France's right fared better. Francois Fillon, a Thatcherite conservative to the right of his party, finished third with nearly 20 percent of the vote; at a time when voters had finally tired of the country’s endemic political scandals, he was hurt by allegations that he misused party funds to employ family members. But his surprise selection in a first-ever Republican primary was only begrudgingly accepted by party leaders. His party may do better in the June parliamentary elections, but there is likely to be a vigorous debate over what exactly it stands for.

France now has one presidential candidate, Le Pen, whose promises of expanding the already-robust welfare system coupled with xenophobia and contempt for the European Union justifies her claim to be both left and right. Macron, by contrast, claims to be neither. We can safely say that those labels no longer apply in France, just as they are becoming blurred elsewhere.

Instead, as in the U.S. and U.K., France is fractured by education and by geography. Over 40 percent of the voters picked candidates, Melenchon and Le Pen, who represent the most extreme views. Replacing the old left-right divide, there are new battle lines drawn between those who want a more open, globalist France and those who see international ties as destructive of sovereignty. There are elements of the old left and the right in each of these camps.

On the economy, the division is between a vision of the state that focuses more on redistribution of wealth (Le Pen and much of the Socialist left) and one that, while embracing the centrality of the state in the French social contract, is focused on improving its efficiency (Macron and much of the center-right).

Even if Macron wins the May 7 runoff, he will need to find a way to widen the center and draw from both left and right in the parliamentary elections in June. Without a governing majority, or a coalition in parliament, he can say what he likes but he can do little of it.

Alexis de Tocqueville once said, "The most dangerous moment for a bad government is usually when it starts to reform." Voters have decided that France has had bad government long enough and are demanding change. The person who gets to try to deliver it has a most difficult job. The relief may last into May, but it could be a hot summer.


Article Link To The Bloomberg View:

China Stocks Post Worst Day In Four Months As Regulators Tighten Grip

By Samuel Shen, Luoyan Liu and John Ruwitch
Reuters
April 24, 2017

China stocks tumbled more than 1 percent on Monday in their worst day in four months amid signs that Beijing will tolerate further market volatility as regulators clamp down on shadow banking and speculative trading.

Traders also said market confidence has been hit by an accelerated pace of initial public offerings which are pumping more supply into the weakening market, and by worries that the world's second-largest economy will start to lose momentum in coming months.

Recent signs of stability in China's economy "have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks," the official Xinhua News Agency reported on Sunday.

"Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. But these have little impact to the stability of the broader environment."

Chinese stocks have been on a downward trajectory since mid-April.

The Shanghai Composite Index .SSEC slumped 1.4 percent to 3,129.53 points, after posting its biggest weekly loss so far this year last week.

The blue-chip CSI300 index .CSI300 fell 1.0 percent to 3,431.26 points.

Daily declines of more than 1 percent in the indexes have been rare for notoriously volatile Chinese markets this year, though some highly speculative small cap shares have seen wild swings.

"Even the better-than-expected Q1 data could not boost the market, as investors are concerned about regulatory risks," wrote Larry Hu, an analyst at Macquarie Capital Ltd, referring to stronger-than-expected 6.9 percent economic growth early in the year.

He added that "the last thing policy makers want to see amid the Party Congress this fall is a market crash like that in summer 2015. And the outstanding economic performance in Q1 gives them more room to tighten."

In the latest of a flurry of regulatory measures in recent weeks, China's insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls.

It also threatened to investigate executives who flout rules aimed at rooting out risk-taking.

The banking regulator said late on Friday that growth in Chinese wealth management products (WMPs) and interbank liabilities eased in the first quarter, suggesting authorities are making some headway in containing financial risks built up by years of debt-fuelled stimulus.

But while the clampdown is expected to continue, most analysts believe the moves will be cautious to avoid hitting economic growth, and some skeptics believe authorities will continue to put off more painful reforms.

Investors are already concerned that the economy could lose momentum as local governments launch ever more stringent measures in a battle to cool heated property prices.

"Market risk appetite could continue to decline if financial regulation keeps tightening," said Gao Ting, Head of China Strategy at UBS Securities.

"Investors seem to mostly be responding by adjusting their positions, particularly by rotating into high-quality blue-chips."

Another big concern for investors has been the pace of new IPOs.

Up to 500 IPOs are expected to be approved to raise no more than 300 billion yuan ($43.57 billion) in 2017, an official with Shanghai Stock Exchange was quoted as saying.

Dozens of newly-listed stocks had lost more than 30 percent over the past weeks amid tougher regulation and expectations of more equity supply.

Main sectors fell across the board, led by infrastructure stocks .CSI300II, which dived more than 3 percent.

Bearish sentiment spread to major investment themes, including the China-to-Europe "One Belt, One Road" infrastructure project and the high-profile new Xiongan Economic Zone near Beijing.


Article Link To Reuters:

Trump’s Stock Boom: Real Or An Illusion?

By Robert J. Samuelson
The Washington Post
April 24, 2017

The last thing President Trump now needs is for the stock market to go south on him. After all, he’s got worries aplenty: abroad, North Korea, Syria, Russia and Brexit; at home, the stalled effort to repeal Obamacare and uncertainty surrounding “tax reform.” Compared with this tapestry of troubles, the stock market has been a splendid blessing.

It’s called the Trump Rally or the Trump Trade. By whatever name, it has been impressive. On Election Day, Nov. 8, the Dow Jones Industrial Average closed at 18,332.74, not much different from a year earlier. By March 1, the Dow hit 21,115.55, a gain of 15 percent. Although stocks are slightly off this peak, the market increase remains about 11 percent and represents roughly $2.7 trillion of paper wealth, reports Wilshire Associates.

To Trump, this must be immensely gratifying. Among other roles, the stock market serves as a general barometer of confidence that is independent of — and can’t by manipulated by — Trump’s nemesis, the detestable “mainstream media.” One message from the market, he doubtlessly thinks, is that he’s doing much better than his vocal critics acknowledge.

The theory of the Trump Rally is simple: He has brightened the economic outlook. Big business and personal tax cuts, combined with relief from over-regulation and higher infrastructure spending (roads, ports), will boost economic growth. Faster growth will raise profits — and higher profits tomorrow justify higher stock prices today. In theory, stocks represent the present value of (estimated) future profits.

But there’s the rub. What if those profits don’t materialize?

Immediately after the election, it was possible (though naive) to think that Trump could quickly convince the Republican Congress to pass his economic agenda. Now, that optimism seems unrealistic. The difficulty of repealing the Affordable Care Act showed the limits of the White House’s power. Similarly, big tax cuts may be doomed by budget deficits. Progress on infrastructure and regulation is also grudging.

So: If the main reason for the Trump Rally is missing, what’s holding stock prices up? Good question.

Let’s be clear: Stock prices are historically high by many traditional measures. Consider the price-earnings ratio, or P/E. It shows the relation between stock prices and underlying earnings (profits). Since 1936, the P/E ratio of the Standard & Poor’s 500 stocks has averaged 17 based on the latest profits and stock prices, says Howard Silverblatt of S&P Dow Jones Indices. Now, the P/E is almost 24.

Stock prices have outrun profits’ growth. According to Silverblatt, either added profits will materialize or, if they don’t, stocks will decline. “The P/E is high,” he says. “We are paying [in today’s stock prices] for future and expected earnings. At some point, we need to see them.”

Stock valuations are tricky. With hindsight, the market can stay above or below levels reflecting economic fundamentals for long stretches. Whatever the case today, stocks are nowhere near the absurd heights of the “tech bubble” at the turn of the century. It’s possible that a general improvement in the global economy justifies higher stock prices. The International Monetary Fund and some private economists have recently raised their forecasts.

“Compared with a month ago,” says Global Insight, a major forecasting firm, “[our predictions for economic growth] in the United States, Canada, Japan, Brazil, India and Russia have all been marked up a little.”

But the Trump Rally could be an exercise in over-optimism. Hefty expectations of tax cuts, regulatory savings and higher government spending may be disappointed, writes Mark Zandi of Moody’s Analytics. Or the rally could succumb to a foreign policy crisis. Take your pick: North Korea, the Middle East or others.

If so, the rally could backfire. Rising stocks cause consumers to spend more; falling stocks curb their spending. Zandi figures this so-called “wealth effect” at about 5 percent: A $1 change in stock-market wealth prompts consumers to alter spending by about 5 cents. If the entire $2.8 trillion rally were erased, that would imply a $140 billion loss in consumer spending.

Indeed, Zandi thinks the effect could be greater, because many heavily invested baby boomers — in or near retirement — “would be very sensitive to a decline in stock prices.”

What may be holding up stocks is inertia, herd behavior or wishful thinking. One test comes this week when, says Silverblatt, nearly 200 major companies report profits for 2017’s first quarter. Strong profits would vindicate the rally. For Trump and everyone else, the question is whether the rally rests on illusion or reality.


Article Link To The Washington Post: