Tuesday, April 25, 2017

Tuesday, April 25, Morning Global Market Roundup: World Stocks Rise On French Vote Relief, Trump Tax Plan Talk

By Nigel Stephenson 
April 25, 2017

World stocks hit record highs on Tuesday, with investors' relief at centrist Emmanuel Macron's victory in the first round of the French presidential election supported by speculation about U.S. tax reform.

Safe-haven assets such as gold and the Japanese yen retreated as opinion polls suggested Macron would easily beat far-right, anti-EU candidate Marine Le Pen in a May 7 run-off.

The yield gap between French and German short-term government bonds, a closely watched measure of political risk in the euro zone, tightened further after hitting a three-month low on Monday DE2FR2=RR.

"This (the second round) is going to be a non-event for the market," said Commerzbank currency strategist Thu Lan Nguyen in Frankfurt.

"Markets have pretty much priced out the risk of a Le Pen victory, and rightly so, because the first round of the elections has shown that the polls in France were correct...and this increases the confidence in the polls for the second round...It's highly likely that (Macron) is going to win."

European shares measured by the STOXX 600 index edged up by 0.2 percent, after rising 2.1 percent on Monday. French shares .FCHI pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012.

Euro zone bank shares .SX7E edged higher after big gains on Monday. The European Central Bank said in a quarterly survey of lenders that while banks would tighten access to credit for companies in the second quarter, lending volumes were still expected to rise.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.6 percent, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains.

Japan's Nikkei .N225 rose more than 1 percent to a three-week high. South Korea's KOSPI .KS11 also advanced 0.7 percent to its highest level since April 2015.

These gains helped push MSCI's world stocks index, comprising shares from 46 countries .MIWO00000PUS to a fresh all-time high after chalking up its biggest rise since shortly after Britain's vote last June to leave the European Union.

The euro added to Monday's gains against the dollar, rising 0.2 percent to $1.0884, albeit off Monday's high of $1.0940 EUR=.

The yen, however, pulled back 0.6 percent to 110.39 per dollar. Sterling GBP=D3 rose 0.1 percent to $1.2806.

The Canadian dollar CAD= fell 0.5 percent to C$1.3561 per U.S. dollar after the United States announced new duties averaging 20 percent on Canadian softwood lumber imports.

French and German 10-year government bond yields DE10YT=RR FR10YT=RR rose and the spread between them hit its tightest since November at around 41 basis points. The two-year spread was its narrowest since late January.

Trump Tax Talk

With one of the year's major risks to markets seen less acute, markets were also looking ahead to other factors, including U.S. President Donald Trump's promise to announce on Wednesday "a big tax reform and tax reduction."

The Wall Street Journal reported Trump wanted to cut the corporate tax rate to 15 percent. The White House budget director told Fox News on Monday Trump's announcement would focus on principles, ideas and rates.

"I'm becoming little concerned over the President’s big announcements, especially since we haven’t seen any major legislative achievement so far and he will be marking his 100th day in the White House this Saturday," said FXTM chief market strategist Hussein Sayed in a note.

Gold, sought as a shelter for wealth in turbulent times, fell 0.4 percent to just under $1,270 an ounce.

Copper reversed falls in Asia and headed higher, last trading 0.7 percent higher at $5,695 a tonne CMCU3.

Oil prices steadied after six straight days of losses. Brent crude, the international benchmark LCOc1, was just 4 cents down on the day at $51.59 a barrel.

Article Link To Reuters:

Not An Inside Job: How Two Analysts Became SEC Whistleblowers

By Sarah N. Lynch 
April 25, 2017

Four years ago, two analysts who liked to swap notes on numbers they thought looked odd took a fateful step and tipped off U.S. regulators about a company that one of them had watched for months.

Orthofix International NV (OFIX.O) caught one of the analysts' attention in 2012. The Texas-based medical device maker kept hitting ambitious earnings targets and many analysts had "buy" recommendations for the stock.

But the analyst thought something was off. Its earnings reports showed it was taking longer than usual for the company to get paid by wholesale customers, invoices were piling up and executives struggled to offer a convincing explanation, saying logistical problems at foreign offices were partly to blame.

He spent months tracking quarterly reports and earning calls, and using algorithms to compare Orthofix’s ratios and patterns of sales and inventory turnover with financial data of its peers stored in databases such as Compustat.

"I am always on the lookout for something unusual, either just unusually good and under appreciated, or unusually bad," the analyst told Reuters. "This one showed up as a company that looked like it had the potential to be unusually bad."

In the spring of 2013, he e-mailed his spreadsheets to a fellow analyst and a friend of more than a decade, with whom he regularly chatted about companies and sectors.

"The way we work together is one person makes a suggestion and the other person challenges it," that friend told Reuters.

"It is like a war game."

Now both men stand to win as much as $2.5 million after Orthofix reached a $8.25 million settlement in January with the Securities and Exchange Commission and several former executives collectively paid $120,000 in penalties to resolve accounting fraud charges.

The award might even be bigger, if the SEC also credits the analysts' tip for leading to a second civil settlement concerning foreign corrupt practices charges.

The pair declined to be publicly identified, citing concerns that it might jeopardize their current professional relations.

Referring to its January settlement with the SEC, Orthofix spokeswoman Denise Landry said the company had self-reported to the regulator and fully cooperated with the government during the investigation.

"We are pleased these matters are behind us," she said, declining to comment further.

By entering the SEC whistleblower program the duo showed how outsiders with analytical skills and tools and time to spare can accomplish what is typically done by those with inside access to confidential information.

The program, established in 2011 under the Dodd-Frank financial reform law, aimed to bolster the SEC's enforcement program by encouraging insiders to report potential fraud.

However, since its inception through Sept. 30, 2016, just over a third of the more than $111 million awarded to whistleblowers went to outsiders such as analysts or short-sellers, according to the SEC.

"Sometimes outsiders have a particular expertise and they are able to independently piece things together that might not be as obvious to those close to the matter," said Jane Norberg, the head of the SEC's Office of the Whistleblower.

"Channel Stuffing"

In Orthofix's case, what the two analysts pieced together suggested that Orthofix was goosing its earnings by "channel stuffing."

If not disclosed to investors, the practice of flooding distributors with more products than they can use or pay for is illegal. It lets the company smooth earnings by prematurely recognizing revenue, and pushing shortfalls into the future.

As the SEC settlement later showed, Orthofix was sending various implants from its spine division to distributors in Brazil that either lacked regulatory approval, or lacked medical instruments needed to use the implants. It then was recording products that could not be resold as revenue, and also treating some of the price discounts as expenses instead of a revenue reduction, the SEC said.

(Graphic: tmsnrt.rs/2pYNwgY)

Even without such details, the analysts felt they had enough to try the SEC's program.

Their suspicions turned into near-certainty when in May 2013, Orthofix missed its first quarter earnings targets, reporting a 14 percent year-over-year drop in net sales that sent its share price tumbling 15 percent.

"That was when the light bulb really goes off," the analyst who first started watching the company said.

By then the two had already contacted Jordan Thomas, an attorney at the law firm Labaton Sucharow, which specializes in class action litigation and also takes on a limited number of whistleblower cases.

The law firm gets paid for its services from a portion of the award, but it does not publicly disclose its share.

A Tip And A Follow Up

In June 2013, Thomas submitted a tip to the SEC on his clients' behalf, promising to follow up with a more detailed submission, records show. To bolster their case the analysts kept picking through the Orthofix's financial statements, while Labaton's investigators, led by a former FBI agent, hit the phones and scouted industry message boards looking for former Orthofix employees.

One former employee they found revealed in an interview that in order for them to "make their numbers," the company sent large orders to distributors, only to have them returned and then reshipped to other customers, according to the updated submission Labaton send to the SEC in August.

The update included the analysts' estimates by how much Orthofix would need to lower their earnings and sales for 2011 and 2012. Those numbers later turned out to be right in line with what the company ultimately restated in 2014 and 2015.

The SEC still does not know the identities of the two analysts, but it will find out in May, when Thomas submits a claim on their behalf asking the SEC to consider giving them an award for their tip.

The analysts, who live in different cities, said that the day the SEC charged Orthofix, they were just too far apart to get together and celebrate, but that an award would justify the trip.

"If and when the actual award settlement is disclosed, then we can meet up for champagne," one said.

Article Link To Reuters:

For Wells Fargo Directors, Narrow Wins May Not Be Enough

By Ross Kerber and Dan Freed
April 25, 2017

A shareholder vote scheduled for Tuesday could throw Wells Fargo & Co's (WFC.N) leadership into question if many directors, criticized for their slow response to the bank's phony-account scandal, fail to win solid majorities.

A dozen of the 15 directors on the ballot face negative recommendations from influential proxy adviser Institutional Shareholder Services (ISS), which argued the group, including Chairman Stephen Sanger, failed in their oversight duties.

Technically Wells Fargo's guidelines require that directors offer to resign if they fail to receive a majority of votes cast. But in practice, directors who win with less than 80 percent support should consider exiting the board, said Charles Elson, a University of Delaware expert on corporate governance.

"If they're below 80 (percent) I'd say they have a lot of soul-searching to do," he said.

Spokesmen for the bank and Wells Fargo's board said on Monday that they would not comment ahead of the meeting. But the country's third-largest bank has struggled for months to move past revelations that thousands of employees created as many as 2.1 million accounts in customers' names without their permission to hit lofty sales targets.

The bank's board and management have said steps taken to fix problems and punish employees responsible for abuses show there is now strong oversight, and that directors nominated deserve to be elected. But the public firestorm that hammered its shares and led to the resignation of then-Chairman and Chief Executive John Stumpf last year is not forgotten.

At most S&P 500 companies, director support averages around 95 percent of votes cast, according to pay consulting firm Semler Brossy. Typically a recommendation from ISS that investors vote "against" a director will reduce the support they receive by an average of 17 to 18 percentage points.

Not all of Wells Fargo's critics are in lockstep, meaning some directors may do better than others. California's two largest public pension funds, for instance, have said they oppose only nine Wells Fargo directors.

"We do want a core of directors left able to reconstitute the board," said Anne Simpson, Calpers' investment director of sustainability. "Simply declaring 'off with their heads' is not reasonable."

Should Wells Fargo directors win narrow majorities - between 50 to 80 percent of votes cast - the board would have to decide whether to accept any individual director's resignation.

University of Pennsylvania law professor Jill Fisch said a likely outcome, in the event of a close vote, would be for the board to bring in fresh faces over a period of months or longer.

"From a business perspective that may be the best response you could make," she said. "You don't want the whole leadership to be in flux."

Banks can be sensitive to narrow wins. Goldman Sachs Group Inc (GS.N), for instance, revamped its pay structure this year after 33 percent of votes cast went against executive compensation packages in 2016.

Wells Fargo's top investor Berkshire Hathaway Inc (BRKa.N) has already voted in favor of the bank's board. Representatives for other top shareholders declined to comment.

If the whole Well Fargo board receives a narrow majority, Vining Sparks analyst Marty Mosby expects few changes, saying it would be impractical to get rid of a nearly full slate of directors. But low vote totals concentrated on certain directors would likely force them to step down soon, he said.

The board would have sent a stronger reform signal by naming former banking regulator Elizabeth Duke as chair when it split the chairman and CEO roles in October, Mosby said.

"The only thing they haven't really changed substantially is the board," he said. "That last step would have completed the whole process and made this vote much easier on them."

Article Link To Reuters:

Waymo Testing Self-Driving Car Ride Service In Arizona

By Peter Henderson
April 25, 2017

Alphabet Inc's Waymo autonomous vehicle group will begin testing a self-driving car program for hundreds of families in Phoenix, Arizona and is buying 500 Chrysler minivans to do so, the companies said on Tuesday.

Waymo, which along with Google is owned by Alphabet Inc(GOOGL.O), recently has been quietly testing the service for a handful of families, learning what potential customers would want from a ride service, the company said in a blog post.

It urged people to apply to take part in an expanded test, which is the first public trial of Waymo's self-driving cars. The vehicles include human operators from Waymo behind the wheel, in case intervention is required and to take feedback.

Silicon Valley is racing to master self-driving technology, betting that it will transform the auto industry and be a gold mine for leading companies. Waymo has one of the best technology track records, and it has an alliance with Fiat Chrysler Automobiles (FCHA.MI).

Many companies expect that customers will use autonomous vehicles as a service, rather than owning them outright. Ride service Uber in particular expects to use autonomous cars.

The new Waymo test in Arizona is meant to help the company understand what people want out of self-driving cars and see how they use and integrate the service. Testers will get access every day at any time.

Waymo already has with 100 Chrysler Pacifica minivans and is acquiring five times more, partly to be able to support the service.

Article Link To Reuters:

ECB Meeting Comes At A Precarious Time For Markets

By Ben Emons
The Bloomberg View
April 25, 2017

The recent economic data out of the euro zone is encouraging. Production, manufacturing and confidence are robust, and inflation has stabilized. That’s not to say that there aren’t risks to the downside, such as growing populism, global geopolitical tensions, and uncertainty about sustainability of the economic recovery. To insure against these risks, the European Central Bank, which has a monetary policy meeting Thursday, has the option of boosting asset purchases.

For that to happen, though, the economic outlook has to become less favorable and financial conditions would need to be inconsistent with achieving sustainable inflation. Then there is the issue of credibility. If the ECB were to increase purchases, it could signal the economic outlook is deteriorating. But if the ECB keeps the status quo, it risks seeing an unexpected shock tighten financial conditions too quickly. When political events such as elections in France and Germany impact the economy, the ECB may choose to hold off on any action until the effects are revealed, but by then it may be too late. Markets understand this credibility issue, and financial conditions have begun to tighten while real interest rates have risen. The last time this happened was in April 2010 right before the Greek debt crisis erupted. 


The ECB has other options at its disposal besides asset purchases. There is forward guidance, the Outright Monetary Transactions Program, Long Term Refinance Operations and Emergency Liquidity Assistance. This arsenal should be sufficient to stave off a financial calamity. Yet, markets were still hedged for an adverse outcome from the French election by pricing in higher currency volatility and a possibility of restructuring French sovereign debt in case euroskeptic Marine Le Pen were victorious. The hedge has not been fully unwound, as seen in euro risk reversal rates (the difference between put and call volatility) that remain near levels last seen at the height of the euro crisis.

The outcome from the first round of elections suggests French polls are more reliable than what polls during the U.K.’s Brexit vote and U.S. election were indicating. On that basis, there is a near certainty that centrist candidate Emmanuel Macron will be the next French president. Markets remain cautious, however, not only of the possibility that Le Pen may still win, but also because of how the ECB may respond. That is because the economic data remains strong and should result in tighter ECB policy. Risk aversion, on the other hand, remains elevated as seen in currency risk reversals and negative German bond yields.


In a recent speech, ECB board member Benoit Coeure highlighted the dichotomy between interest rate expectations and risk aversion. On the one hand, expectations have firmed that the ECB may normalize policy based on the trajectory of the economy. On the other hand, risk aversion picked up in the aftermath of Brexit, due to rising geopolitical tensions and uncertainty about French and German elections.

Coeure pointed out that the ECB’s forward guidance consists out of two components -- one based on economic assessment and one based on action. Financial markets have priced this accordingly, whereas expectations of a hike derived from overnight rates (i.e. ECB’s policy rate) and that of economist surveys is higher than market expectations from Euribor futures. The ECB may convey a message of optimism to normalize policy, and economists agree, but markets are likely to bet the central bank will sit on its hands until election uncertainty dissipates. 

Although the ECB may begin normalizing quicker once the French election passes, market expectations price in a far slower pace. That is because tapering of quantitative easing and tightening of policy is seen as clearly linked. And because the ECB has set conditions when to increase or decrease asset purchases, markets assessed that data dependent policy should for now err on the cautious side because of unpredictable election outcomes. If the ECB were to follow economist surveys, it therefore may act too soon with policy normalization. This can put the ECB’s credibility at stake, and markets are rightfully questioning this.

Article Link To The Bloomberg View:

Madmen & Nukes Deter Western Actions In North Korea

Acting crazy has worked for rogue regimes, but Western appeasement is not a long-term solution.

By Victor Davis Hanson 
The National Review
April 25, 2017

How can an otherwise failed dictatorship best suppress internal dissent while winning international attention, influence—and money?

Apparently, it must openly seek nuclear weapons.

Second, the nut state should sound so crazy and unpredictable that it might just use them, regardless of civilization’s deterrent forces arrayed against it.

Third, it must welcome being “reluctantly” pulled into nonproliferation talks to prolong the farce and allow its deep-pocket enemies to brag of their diplomatic “strategic patience” and sophistication.

The accepted logic of the rogue state is that the Westernized world is so affluent and leisured, and life is so good, that it will understandably grant almost any immediate geostrategic or monetary concession to avoid serious disruptions of the international order. The logic of appeasement is always more appeasement — especially in the one-bomb nuclear age.

North Korea sounds as if Pyongyang is an expendable hellhole, but not so Seoul, one of world’s great commercial and industrial powerhouses that exports Hyudais, Kias, Samsung, and LG appliances.

The logic is that of the proverbial crazy country neighbor, whose house and yard are a junkyard mess, whose kids are criminals, and who periodically threatens to “mess you up” unless you put up with his antics, give him attention, and overlook his serial criminality.

The renegade neighbor’s logic is that you have lots to lose by descending into his world of violence and insanity, while he has nothing to forfeit by basking in it, and that such asymmetry allows him to have something on you. And it makes him something other than just the ex-con, creep, and failure that he otherwise is.

Short-term appeasement of unhinged monsters is always felt to be a safer and less dangerous choice than solving the problem once and for all, which one might do by calling the bluff of a rabid entity believed capable of inflicting grave damage on the civilized order.

And so for nearly the last half century we have found new and creative ways of feeding our pre-civilized dragons in fear that otherwise they will immediately scorch civilization. The logic, in other words, has been “let the next administration handle this temporarily placated monster when he gets hungry again.”

For nearly the last half century, the logic has been ‘let the next administration handle this temporarily placated monster when he gets hungry again.’

For much of the 1980s and 1990s, Saddam Hussein sounded and acted murderously unhinged: He preemptively attacked Iran, issued threats against most of his neighbors, gassed thousands of Kurds at Halajba, bragged about his human flesh-chipper, ran a gestapo police state that murdered hundreds of thousands of its own, invaded Kuwait, sent missiles into Israel, violated U.N. resolutions, and all the while slyly suggesting that Iraq had a huge arsenal of WMD.

A crazy, dangerous Iraq was all over the front pages — in a way that Saudi Arabia, Kuwait, Bahrain, and other oil-exporting Arab countries were not.

But eventually Saddam’s various enemies concluded that in fact he did not have nuclear capability, and then they moved to ensure that he never acquired it. After Israel’s preemptive strike in 1981 at the Iraq nuclear facility at Osirak, outside of Baghdad, and the crushing defeat in the First Gulf War, Saddam’s enemies guessed that he had no nuclear deterrent — yet. And so the Americans took him out in 2003, on the hunch that his much-bragged-about WMD arsenal did not mean he had a bomb.

Moammar Qaddafi adopted the same blueprint of acting crazy — subsidizing global terrorists, taking down airplanes, terrorizing his own people — while using his petrodollars to build centrifuges to acquire nuclear capability.

For a time, Qaddafi was on the world stage in a way that nondescript Morocco or Tunisia was not. But after the 2003 removal of Saddam, Qaddafi panicked, feared his own removal, and so gave up his nuclear program. Without nukes and a future deterrent, his craziness eventually sounded shrill and he was bombed out of power less than a decade later.

Iran follows the same tired and predictable script. It has talked grandly of Israel as a “one-bomb state.” It threatens to unleash a firestorm in the Persian Gulf. It sends out global terrorists and fights proxy wars in Syria, Yemen, and Iraq. Its hijacks boats and gloats about launching missiles toward American carriers.

Iran’s revolutionary theocracy has executed thousands of dissidents; it takes Western hostages and bargains for ransom. And all the while it has continued to build centrifuges — now bragging that it will soon become nuclear, now backing off under criticism and smirking that its enriched uranium is “for peaceful purposes” only.

In other words, a passive-aggressive Iran learned long ago that an otherwise nondescript rogue nation without an effective military and economy, or cultural influence of the caliber of the United States’, Europe’s, Russia’s, or China’s, usually does not warrant world attention. It does not win $400 million in bribe money in the dead of night along with fawning, serial concessions — unless it credibly acts as if it is both nuts and soon nuclear. So Iran, in seemingly suicidal fashion, poses as if it is existentially dangerous, neither subject to natural laws of deterrence nor to international norms and laws. (Few worry about democratic and nuclear France, India, and Israel or even much about Russia and China, both of which are autocratic and nuclear but otherwise globalized, commercially engaged, and usually predictable.)

In contrast, consider Pakistan. Periodically it has talked of nuclear exchanges with India, winked and nodded at terrorist operations against Mumbai, harbored bin Laden, promoted the Taliban, and profited from terrorism and drugs — on the loud assurance that it has a sizable nuclear arsenal, is unpredictable, and at times is prone to suicidal Islamist fantasies. Without such a strategy, Pakistan would earn little fear, no world attention, and not much international aid, given that it has never developed a sophisticated globalized economy like neighboring democratic India.

Pyongyang has gained billions in bribe money, international attention and concern, and free publicity, despite starving its own people and becoming the hated pariah of Asia.

But no one has played the game better than the two Kim Jongs of North Korea. The result is that Pyongyang has gained billions in bribe money, international attention and concern, and free publicity, despite starving its own people and becoming the hated pariah of Asia.

Certainly, comparably sized Asian countries such as Sri Lanka or Malaysia do not warrant the world’s focus or largesse by quietly tending to their own business. Under the rules of nuttiness and nuclearized blackmail, quiet non-nuclear states who play by the rules are ignored, and rogues who don’t are courted and bribed. Outlaw leaders see such brinkmanship as the pathway to family enrichment and prolonged tenure.

There are still a few ways to break this dangerous cycle, but they all are predicated on two assumptions: the immediate remedies are quite dangerous, and yet the status quo is not sustainable and even more existentially dangerous in the long term.

Here are some options; they are not mutually exclusive and universally applicable to rogue nuclear states besides North Korea.

Third Parties

Rogue nations exist because superpower patrons find them useful pawns.

Trump apparently is redefining Obama-era “normal” commercial relations with China as suddenly asymmetrical and detrimental to the U.S. — as a bargaining chip to negotiate downward so that the Chinese will help with North Korea. If in exchange he gets Chinese pressure on Pyongyang, then the upside of the deal is that we are no worse off trade-wise with China than we were in 2009, but much better off without a North Korea threat.

It’s usually delusional to appeal to the self-interest of a big power that is sponsoring a rogue state (a Russia or a China knows better than we do why their clients do things that bother us). Yet Trump apparently will try to convince China (no longer itself posing as a Maoist-crazy, impoverished nuclear state) that a rich South Korea that forgoes nuclear weapons, with traditional rivalries with Japan, is still a better deal than a serially unpredictable and treacherous nuclear Pyongyang, whose wayward nuclear explosions could radiate almost anywhere.


We laugh at soft-power sanctions. But in the case of North Korea and Iran, it was they, not us, who lobbied, threatened, and begged for them to end. The problem with sanctions is not that they do not eventually work but that that they take a long time to work well — and in the interim the sanctioneers lose their nerve and their solidarity and then capitulate, either to win accolades for a “legacy” deal or in guilt that they have reduced North Koreans to eating grass or Iranians to being without Advil. Once sanctions are leveled, they should never be lifted until the rogue state is certifiably incapable of deploying nuclear weapons.


Rogue nations do not care about offensive asymmetry, given their vows that they welcome Armageddon if it means the end of an American city or chaos in the supposedly hated West.

In such an unlikely but nevertheless dangerous calculus, ten nukes in the hand of Iran or North Korea are felt to be worth 1,000 in the possession of the U.S.

So the key is more defensive deterrence, or the overwhelming assurance that missile defense, cyberwarfare, etc. can nearly guarantee that North Korea’s weapons will have zero effect on its enemies. The script about desiring suicide is empty if a rogue state knows it cannot take anyone down with it (like a suicide bomber who beforehand knows that his bomb is a dud).

Clearly, the U.S. and its Asian allies must expand — and demonstrate — their anti-missile capability as fast as possible.

Degrees of Madness

Rogue madness can become banal quickly. (“My, my — North Korea threatened to blow us up again yesterday.”) North Korea can only threaten to incinerate the U.S. so many times; Iran can put out only so many videos showing America in flames.

Western madness is a different story, given its rarity and far more likely severity. It is a false reading of history to think that the U.S. has always responded predictably and proportionally. Its record in the World Wars and Korea and Vietnam is on occasion devastating and disproportionate.

We ridicule the good cop–bad cop, Nixonian-Kissingerian role-playing, but it achieved results precisely because there were unquestionably credible hawks in government who were always on the verge of breaking out of their cages. The loud presence of a supposedly Strangelovian Curtis LeMay was of value to U.S. presidents. The occasional narrative, true or fabricated, that a sober McMaster or Mattis must calm down an impulsive Trump may have some value.

Allied Cohesion

In a showdown, there can be no triangulating allies who publicly fret about America’s “show of force” but privately beg that it continues. The key is to separate rogue states from their patrons, not our clients from ourselves. Any policy must first be ironclad in its assurances that all frontline threatened states are on board with a new deterrent stature and not sending mixing signals to enemies.

The alignment of Japan, South Korea, Taiwan, and Australia with the U.S. is a potent force that can help sway China and reassure such non-nuclear states that they are under the American defensive umbrella.


As a last resort, of course, the U.S. can always tell China that it broke the unspoken rule of not letting a client go nuclear. It will remind Beijing that if Taiwan, Japan, or South Korea chooses to go nuclear as did North Korea, its nukes would work like Hondas and Kias and not implode on the launching pad.

Public opinion in all these countries, of course, understandably opposes nuclearization, but public opinion is fickle when North Korea sends missiles into one’s air space. Nuclearized India, Pakistan, Iran, and North Korea on the borders of Russia and China are unstable enough for these patrons — without adding a nearby nuclear Taiwan, Japan, and South Korea as well.

In sum, when a nutty nuclear or would-be nuclear state goes too far in its various extortions and is seen as an immediate existential threat, then long-term dangers become short-term crises and override short-term appeasement.

And that’s where we seem to be going with North Korea.

Article Link To The National Review:

Canadian Dollar Stumbles As US Plans To Slap Tariffs On Softwood Lumber

April 25, 2017

Canada's dollar, known as the loonie, dropped to its lowest since December after the U.S. announced plans to impose tariffs on its Northern neighbors' exports of softwood lumber.

The U.S. dollar was fetching 1.3552 Canadian dollars at 8:47 a.m. HK/SIN, compared with around C$1.3408 just before the announcement.

U.S. Commerce Secretary Wilbur Ross said on Monday that anti-subsidy tariffs averaging around 20 percent would be imposed, affecting $5 billion worth of imports of softwood lumber imports from Canada, Reuters reported.

In total, Canada exported around C$8.6 billion (around $6.37 billion) worth of softwood lumber in 2015, according to Canadian government data, which indicated the country was the world's fourth-largest forest product exporter.

In 2015, the U.S. imported a total of $325.4 billion in goods and services from Canada.

Khoon Goh, senior foreign-exchange strategist at ANZ, said there could be scope for more weakness in the loonie, particularly if it fell below C$1.36 against the dollar.

"It's not just the lumber," he said, noting the U.S. administration had also been rumbling about potential tariffs on dairy products. "Any further escalation of this situation between the U.S. and Canada could well see the Canadian dollar weaken further."

In 2016, Canada exported around C$112.6 million (around $83 million) worth of dairy products to the U.S., while it imported around C$557.3 million worth of dairy products from its Southern neighbor, according to Canadian government data.

Goh noted that the news appeared to have also depressed the Mexican peso. The U.S. dollar was trading under 18.48 pesos before the news broke, but rose as high as 18.8410 pesos afterward.

"It's really the sentiment around it," Goh said, noting that trade concerns had eased after the U.S. declined to label China a currency manipulator earlier this month.

"It appeared the U.S. administration was backing down on earlier trade threats. Suddenly, it's announced [tariffs] on Canadian products. Concerns were raised once again on the potential for trade frictions," he said.

During the presidential campaign, Trump also threatened trade tariffs on Mexico.

Article Link To CNBC:

Trump's 'Buy American' Policy Is Getting Support From An Unlikely Place

By Deirdre Bosa
April 25, 2017

President Donald Trump's "Buy American" policy is getting support from an unlikely place: China's biggest e-commerce company.

In a video to be posted Tuesday, Alibaba founder Jack Ma said: "As incomes rise, Chinese consumers are increasingly looking for high quality products from around the world, especially the United States."

Ma noted that nearly half a billion people shop on Alibaba's marketplaces and that by using the platform, American small businesses have the chance to "grow globally — like the big guys."

Now, Alibaba is announcing that it will host its first small business event in the U.S. this summer to try to convince American entrepreneurs that the company is on their side — and can help them reach millions of Chinese consumers.

The inaugural conference, "Gateway '17" will be held in Detroit, Michigan in June and the company is expecting more than 1,000 businesses from across the nation.

While touting China's growing opportunities, Alibaba will also have to convince attendees that their original businesses and ideas are safe from counterfeiters.

Alibaba has an American PR problem: Last December, it landed back on the U.S. government's "notorious markets" list for fakes — a designation that hurts its image among American businesses. That's especially important for small businesses that sell original creations on e-commerce platforms like Amazon and Etsy.

Alibaba has said it was disappointed by the decision and called for harsher penalties for counterfeiters. Ma even made a personal visit to Trump Tower shortly after the election and vowed to create a million new jobs in the U.S. in the next five years.

Article Link To CNBC:

Are Planets Aligned For A Renewed Stock Market Rally?

But specter of government shutdown could cast cloud over bullish outlook.

By Sue Chang
April 25, 2017

Every once in a while, stock market bulls catch a break where technicals, fundamentals and market psychology all fall into line. This week may be one of those rare times when the planets are aligned, analysts said.

For the technically-minded, Frank Cappelleri, executive director at Instinet LLC, may have the most encouraging chart of the day.

As he illustrates below, the S&P 500 SPX, +1.08% has been treading water since touching a record high of 2,395.96 on March 1.

“The S&P 500 had been confined to the trading channel since topping out in early March. Each decline found support near the lower line, and each advance ran into resistance at the upper line,” said Cappelleri.

“Today, the S&P 500 broke out of this technical pattern,” he said, and is now headed for a test of 2,400.

On Monday, the large-cap index had its best day since March 1 as investors welcomed the French election results.

The S&P 500 went through a rough patch in recent weeks with the index closing below its 50-day moving average on April 12 for the first time since November. That tends to signal near term weakness and the market subsequently fell 1.1% that week. But as far as red flags go, this one bodes well for the market as stocks tend to rally in the months following the breach.

The S&P has posted an average gain of 4.75% in the three months after it fell below the 50-day moving average, according to Bespoke Investment Group.

Seasonality may also supportive, at least in the short term. Historically, April tends to be a good time to buy stocks with the S&P 500 posting an average return of 2% in the month over the past 20 years, according to Ryan Detrick, senior market strategist at LPL Financial.

This year, the index’s performance month to date does not quite measure up but as Detrick noted, most of the gains have come in the second half of the month.

“As of April 14, the S&P 500 has been up only 0.2% on average, yet has finished up 2% by month end. In other words, the slow start to April in 2017 is perfectly normal, and history would suggest a bounce over the second half of the month is potentially still in play,” he said in a blog post earlier this month.

Fundamentally, the market is in a good place too, bulls say.

The U.S. economy remains on track for steady, if not spectacular, growth this year while corporate earnings are surprising on the upside.

As of Friday, with 30% of S&P 500 components having reported first-quarter results, earnings have come in 1% above estimates, the highest in five year, thanks to financial companies leading the charge, according to Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch.

Subramanian projected first-quarter earnings to grow more than 10% year-over-year and sales to rise more than 7% year-over-year.

“Managements’ positive tone on earnings calls has continued from fourth quarter into first quarter, with optimism still at record levels and mentions of the word ‘better’ relative to ‘worse’ or ‘weaker’ still at levels last seen in late 2010,” she said in a report.

The mood in the market is also much more confident this week, which analysts credit to the strong showing by centrist Emmanuel Macron in the French election. Macron will face National Front leader Marine Le Pen, a favorite of the far right, in the runoff on May 7.

There were fears going into the election over the weekend of a worst-case scenario where two euroskeptics—Le Pen and far-left candidate Jean Luc Melenchon—could emerge as forerunners to contest the presidency.

Barring any last minute upset, the polls indicate that Macron will prevail over Le Pen, which would ensure that France won’t abandon the eurozone.

Back in the U.S., there is anticipation building over President Donald Trump’s tax plan, which he promised to unveil Wednesday, just ahead of his 100th day in office. Trump has ordered White House aides to accelerate efforts to draft a tax plan that would slash the corporate rate to 15%, The Wall Street Journal reported Monday.

If Trump’s plan gains traction, it could help reinvigorate the rally that initially followed his November election victory but faded earlier this year after a White House-backed effort to repeal and replace Obamacare stalled in the House.

But for all the bullish signals, this market isn’t without risks.

If the president’s tax cuts don’t live up to expectations or he fails to secure legislative support for the plan, investors’ big hope could just as easily turn into a headache. There is also the possibility of a government shutdown this weekend if politicians are unable to reach a deal on a spending bill.

And just as for the positive thesis, one cannot ignore seasonality for the negative scenario as it will soon be that time of the year when investors like to dump stocks and check out for the summer.

“The market typically does better in November through April than in the worst six months from May through October,” Sam Stovall, chief investment strategist at CFRA, said in a Monday note.

Since April 1945, the S&P 500 has risen an average of 6.7% from November to April but added only 1.6% from May to October. Interestingly enough, the “sell in May and go away” appears to be a universal phenomenon with similar strength and weakness cycles apparent in international stock markets, he said.

Stovall, however, doesn’t advocate going to cash.

“History says investors would be better off rotating, than retreating. History shows that investing in cyclical sectors from November through April, and then gravitating toward defensive groups from May through October, has made the experience both thrilling and rewarding,” he said.

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World's Biggest Stock Markets Haven't Been This Split Since 2008

Shanghai share moves are at odds with the S&P 500 index; Divergence is driven by China effort to rein in shadow banking.

Bloomberg News
April 25, 2017

The Chinese and U.S. stock markets are going in opposite directions.

An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.

The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.

Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days.

As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.

In one sense, it’s a sign that investors overseas aren’t as worried about Chinese market ructions as they were in previous years -- perhaps partly thanks to underlying strength in China’s economy. Given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

“The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world," So said.

For now, the split with the U.S. is particularly marked, with the Shanghai Composite’s 30-day correlation with the Bank of New York Mellon index of Chinese American depository receipts approaching zero. The Chinese ADR market -- dominated by technology companies like Alibaba Group Holding Ltd. -- has climbed 8.6 percent since Trump was elected U.S. president, while the state-company-led Shanghai Composite is down 0.6 percent.

China’s deleveraging drive and the renewed focus on market irregularities have put the mainland share market into a “bad mood,” but officials aren’t likely to tolerate a lot of instability ahead of the Communist Party’s twice-a-decade leadership reshuffle later this year, said George Magnus, a former adviser to UBS Group AG and current associate at the University of Oxford’s China Centre.

‘Minimum Necessary’

“The authorities are trying to calm down leverage and housing at the margin but will not go any further than the minimum necessary,” he said. “If it looks as though regulatory tightening is delivering unfavorable outcomes, and risks any form of instability, you won’t be able to say the world ‘backtrack’ fast enough.”

Only two months ago, Chinese markets were a picture of calm, with mainland stock volatility near the lowest since 2014 and bond yields falling as money-market rates subsided. The Shanghai Composite rose 0.4 percent as of 1:11 p.m. local time Tuesday, after sinking 2.3 percent last week.

For Adrian Zuercher, head of Asia Pacific asset allocation at UBS’s private banking arm in Hong Kong, the weaker relationship between Chinese shares and other markets is a good thing, and is likely to become more marked.

“All these regulations that are taking place are done in a way that should make China less risky,” he said. “The economy is on a solid footing and that’s why they can do some of the measures. We will probably see more international investors coming into China on the fixed income and equity side.”

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The Average Person Today Really Isn't Rockefeller Rich

By Barry Ritholtz
The Bloomberg View
April 25, 2017

You are not poor; income inequality is a myth; the middle class is doing just fine.

That seems to be the message coming from numerous right-leaning think tanks, websites and authors.

I was reminded of this yet again over the weekend when I saw another attempt at telling the poor how lucky they are to be alive today. The title of the piece in question says it all: "You Are Richer than John D. Rockefeller." Note that last time out, the poor were told they were richer than France's Louis XIV, debunked by us here; our previous debunking of the richer-than-Rockefeller meme is here.

There are any number of ways to expose the fallacy of this claim, but I really want to focus on one of them: the role of luck in personal success or failure.

Wealth, as we have observed before, is a relative concept. We measure our economic well being by looking at our peers, not at different eras in time or geographies far away from us. The second point is that we can measure wealth in a variety of ways that are not simply based on income or financial assets: health, education, leisure time, lifespan and personal security.

Next, if we do indulge in one of these time-travel thought experiments, we must acknowledge that time is bi-directional. Thus, the richer-than-Rockefeller argument implies that the wealthiest people today should be willing to switch places with a poor person a century or two in the future, when presumably we will all live longer, healthier, happier lives with technology we can't even imagine today -- and on and on. It is a most dubious proposition.

But back to luck. This may be the biggest philosophical difference between the right-leaning think tanks and more rational, evidence-based outlooks less dependent upon a rigid belief system.

As Michael J. Mauboussin, head of global financial strategies at Credit Suisse, explains in "The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing," skill and luck are “hopelessly entangled.” Everyone possesses different levels of skill, and we are all subject to outcomes that are based on luck. We also are not very good at distinguishing between the two. How large a role chance plays in determining outcomes may be variable but it is also significant. Once we acknowledge how much of our individual success or failure can be at the mercy of random fortune, it changes the usual assignment of causation and blame.

In other words, this has big ramifications for those who believe we live in a meritocracy.

A surprising thing I learned from interviewing some of the most successful people in finance is how frequently they credit good luck. Indeed, in most of the almost 150 Masters in Business interviews I have done, our guests mention -- unprompted by me -- the crucial role of serendipity. This isn't false modesty or humility, but rather, an honest acknowledgment that chance can make a significant difference in people’s lives.

Note that the role of chance doesn't imply successful people don't need to be educated, smart and diligent. Rather, it recognizes that lots of insightful, intelligent, hard-working people may not achieve the same level of success as other folks with the exact same qualities -- and that those who are more successful may have had lucky breaks that other didn't get.

Once we take luck into our calculus, it creates problems for those enamored of Ayn Rand’s philosophy. It means some people succeed as a result of random chance, and that they will be mixed in with those rewarded based on merit -- and that telling them apart isn't always so easy. Similarly, by acknowledging the role of chance, we recognize why some people struggle. These people could use an assist, be it free lunches for poor kids who do much better in school when their nutritional needs are met or technical retraining for those whose industries have been displaced.

Luck matters, and those who oppose all forms of government intervention seem to ignore this.

It isn't my job to play the role of official arbiter of erroneous reasoning on the internet; there are more interesting things to write about. However, some poorly reasoned or misleading commentary demands a response. The claim that today's poor aren't really poor is one of those.

Article Link To The Bloomberg View:

Government Costs Could Rise $2.3 Billion Without Obamacare Payments

By Yasmeen Abutaleb
April 25, 2017

The U.S. government's costs could increase by $2.3 billion in 2018 if Congress and President Donald Trump decide not to fund Obamacare-related payments to health insurers, according to a study released Tuesday by the Kaiser Family Foundation.

The payments amount to about $7 billion in fiscal year 2017 and help cover out-of-pocket medical costs for low-income Americans who purchase insurance on the individual insurance exchanges created by the Affordable Care Act, often called Obamacare.

Trump has threatened to withhold the payments to force Democrats to the negotiating table on a healthcare bill to replace Obamacare.

He has also said he will fund the subsidies if Democrats agree to funding for his proposed border wall with Mexico as part of efforts to pass a government funding bill this week and avert a shutdown. Democrats have rejected the conditional offer.

If no deal is made, parts of the federal government will shut down at 12:01 am on Saturday.

The payments are the subject of a pending Republican lawsuit that was appealed by the Obama administration and put on hold when Trump took office.

The government could save $10 billion by revoking the payments, Kaiser said. But insurers that remain in the market would have to hike premiums nearly 20 percent to cover their losses, Kaiser found, so the government would have to spend $12.3 billion on tax credits to help pay for Americans' premium costs - a net increase of 23 percent on federal spending on marketplace subsidies.

The projection assumes that insurers remain in the marketplace next year. Health policy experts have said without the payments, many insurers could not afford to stay in the market and will likely exit, which would leave some U.S. counties without an insurer.

Aetna (AET.N), UnitedHealth Group Inc (UNH.N) and Humana (HUM.N) have already exited most state exchanges for 2017 and said they will do so next year as well.

Article Link To Reuters:

Oil Edges Up After Six Straight Sessions Of Losses

By Henning Gloystein 
April 25, 2017

Oil prices recovered some ground on Tuesday, halting six consecutive sessions of slide, but markets remain under pressure as traders lose confidence that pledged output cuts by major producers will rein in oversupply in a world awash with fuel.

U.S. West Texas Intermediate (WTI) crude futures CLc1 had added 14 cents, or 0.3 percent, but remained below the $50 mark pierced late last week, at $49.37 a barrel.

Brent crude LCOc1 rose 14 cents, or 0.27 percent, to $51.74 per barrel.

Traders said the gains were a counter-reaction to consecutive price drops in the previous six sessions.

Despite Tuesdays increases, market sentiment has turned bearish, with Brent down 10 percent since late 2016 despite efforts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia to cut output by 1.8 million barrels per day (bpd) in the first half of 2017 in order to tighten the market.

Given that oil supplies remain at record highs despite the cuts, Stephen Schork of the Schork report said on Tuesday that "OPEC has failed miserably in its endeavor to balance the oil market".

JPMorgan said in its latest weekly market note to clients that "it is evident that... crude markets are still struggling to clear (oversupply)."

The bank said that it was closing its "August Brent long position at a loss."

Indicating its cautious outlook, JPMorgan said that "crude markets are close to floating storage economics and (this) is a bearish sign for output price developments."

Floating storage is a clear indicator of oversupplied markets. It is pursued when oil for immediate delivery is so much cheaper than that for future dispatch that it becomes profitable for traders to charter tankers to store it for later.

JPMorgan said that in order to reduce the ongoing supply overhang, OPEC "will be forced to renew, and possibly deepen the agreement if they wish to keep prices much above $50 per barrel."

Russia said on Monday that its oil output could climb to the highest rate in 30 years if OPEC and non-OPEC producers do not extend a supply reduction deal beyond June 30.

Thomson Reuters Eikon data shows that Russian oil shipments, which exclude its pipeline exports, have already reached record highs of 5 million bpd in April, up 17 percent since December, before the cuts were officially implemented.

While producers may hurt under the renewed slack in crude markets, consumers like refiners benefit as their production margins making fuels such as gasoline improve.

Article Link To Reuters:

Russia's Oil Cuts Won't Be So Easy If OPEC Deal Is Extended

Country typically increases output in second half of the year; Rosneft and Lukoil plan higher spending and more drilling.

By Jack Farchy and Stephen Bierman
April 25, 2017

For Russian oil companies, the historic agreement to boost prices by cutting output in conjunction with the Organization of Petroleum Exporting Countries was an easy win. Extending the deal will be less straightforward.

Cuts so far this year came alongside the traditional seasonal stagnation in Russian production, meaning the country made relatively few sacrifices in exchange for an increase in crude prices of more than 10 percent. For the powerful Russian oil bosses who plan to discuss the OPEC accord with Energy Minister Alexander Novak this week, a decision by the government to extend the cuts beyond June would stymie plans to boost output, creating many more headaches than the initial agreement.

“It was not a surprise and not a big deal to have production going down in the first half of the year,” James Henderson, a Russian oil expert at the Oxford Institute of Energy Studies, said by phone. “When you go into the second half it’s a different story. All thoughts of production growth this year go out of the window.”

After two years of low oil prices and competition for market share, OPEC and Russia made a surprise agreement late last year on the first coordinated production cuts in more than a decade. While the deal lifted international crude futures above $58 a barrel in January -- double the level a year earlier -- stubbornly high inventories and rising U.S. production have dragged prices back toward $50. That’s prompted producers to consider extending the curbs beyond their initial six-month term.

Novak will hold talks with Russian oil companies this week before his meeting with OPEC and non-OPEC counterparts in Vienna on May 25. The minister said on April 21 that the issue of whether to prolong the deal was “under discussion” within Russia and would depend on “the market situation by the time when the current half-year agreement expires.”

Analysts predict Russia will double down and prolong the cuts, despite the problems it could cause for its largest producers.

Winter Freeze

Russian production is typically flat or lower in the first half of the year, according to a report from analysts at Sberbank CIB. Compared with October 2016 levels, the nation would have seen an average decline of about 40,000 to 50,000 barrels a day during the first four months of 2017 even without the OPEC deal, the bank said.

Current output is down 250,000 barrels a day from October and the nation’s pledged cut of 300,000 will be fully implemented by the end of this month, Novak said last week.

While drilling falls during the icy winter, companies do take advantage of frozen roads through the swampy Siberian landscape to transport drilling rigs. That sets up the industry for increased activity later in the year when output typically rises, according to Sberbank.

Expansion Plans

Until recently, Russian oil companies were saying they would ramp up production after the agreement expires in June. The Energy Ministry’s current outlook for 2017 implies average output of about 11.02 million barrels a day in the second half, some 75,000 barrels a day higher than its target under the OPEC deal.

Rosneft PJSC, the largest producer, is due to start the Yurubcheno-Tokhomskoye field in East Siberia, which should pump about 6 million barrels in total this year. Lukoil PJSC is planning to ramp up new wells at the Filanovsky field in the Caspian Sea, where it started production last summer. Gazprom Neft PJSC is in the middle of an investment boom that should see its Russian oil output increase 7.8 percent this year, according to Sberbank.

The Russian tax system -- which imposes lower rates on new fields -- reduces the likelihood that such projects will be delayed. Producers are more likely to cut back on drilling at their more highly taxed West Siberian assets, according to analysts and executives. Still, an extra six months of cuts would have a significant effect.

Rosneft’s Russian oil production -- including Bashneft, which it acquired at the end of last year -- would be 0.5 percent lower in 2017 than 2016, said Ildar Davletshin, an analyst at Renaissance Capital. Output at Lukoil would be reduced by 1.4 percent, Surgutneftegas OJSC by 2.1 percent, and Gazprom Neft would be restricted to growth of 4.4 percent, he said.

Budget Boost

While the Russian oil companies -- which declined to comment for this story -- may face some thwarted aspirations, the positive impact of the OPEC deal on the Russian government’s finances is ultimately more significant.

The rally in prices boosted budget revenue from oil and natural gas above 500 billion rubles ($8.9 billion) in February for the first time in almost two years, Finance Ministry data show. Energy taxes accounted for about half of overall budget revenue in the first quarter, up from an average of 36 percent last year, according to Energy Minister Novak.

Benchmark Brent crude traded at $51.73 a barrel at 7:40 a.m. in London on Tuesday, 16 percent higher than a year earlier.

As President Vladimir Putin seeks to ensure stability ahead of elections in March, that provides a forceful argument for continuing cooperation with OPEC.

Extending the cuts is “a disappointment for the oil companies but as far as the government are 
concerned they’re still well in the money,” said Henderson of the OIES.

Article Link To Bloomberg:

Looming Risks Subdue Asia Stock Investors After Stellar Quarter

By Nichola Saminather
April 25, 2017

Investors' enthusiasm for Asian stocks is waning as a raft of political and economic risks takes the shine off the best first-quarter returns in 26 years.

That period of strong gains could put Asian equities in the firing line for a sell-off, as funds investing in the region play it a lot safer than they were a few months ago on concerns that economic and business cycles may have peaked.

Graphic: reut.rs/2oFkb6A

"Most of the positive news may be priced in already. But at the same time, if we’re seeing disappointments, this could be a trigger for more profit taking," said Tuan Huynh, Asia Pacific chief investment officer at Deutsche Bank Wealth Management, who now recommends an underweight exposure to Asian equities from overweight at the start of 2017.

“Earnings season in the U.S. and political events like elections in Europe may bring negative surprises that could lead to corrections," he said.

The MSCI Asia ex-Japan index .MIAX00000PUS returned 12.8 percent in the first three months of 2017, the best first-quarter performance since 1991, as almost $17 billion of funds flowed into the region, excluding China and Malaysia.

But they've returned a pittance since then, and flows slowed to only $563 million in April through the 19th, according to Thomson Reuters data, as risks grew, including nuclear threats from North Korea, a series of elections in Europe and delays in fiscal stimulus and protectionist rhetoric from the United States.

Business activity in Asia, which had been above trend and improving in the second half of 2016 and earlier this year, is now above trend but decelerating, Goldman Sachs' Chief Asia Pacific Equity Strategist Timothy Moe said in a podcast this month.

Over the last 15 years, average three-month returns in a period of above-trend improving activity have been 7.9 percent for the MSCI Asia Pacific ex-Japan index .MIAPJ0000PUS, while returns have fallen to 1.5 percent in above-trend decelerating phases.

"We're going from a period of really juicy, good returns to a period where returns will be positive but decidedly more muted in magnitude," he said.

The modest acceleration in global expansion and inflation expected in 2017 and 2018 is also not enough to return trade growth to pre-global financial crisis levels, according to Schroders.

Earnings Support

Cyclical upswings in China and the United States, which have helped trade, are likely to fade soon, Keith Wade, chief economist and strategist at the investment house, wrote in a note this month.

"Without the support of these two economies, global trade is likely to roll over (slow), at least in value terms, in the second half of 2017," he added. "The implication is that this will take emerging market equities with it."

Still, investors aren't bailing out of Asia entirely, even though stocks are the most expensive relative to other emerging markets since February 2015. That is because they are still cheaper than developed markets, and earnings growth is finally materializing after years of disappointments.

Analysts expect earnings across the region to jump 17 percent this year from 2016.

"For that earnings trajectory to roll over, you'd have to see a breakdown in global reflation. It's not our base case," said John Woods, Asia Pacific Chief Investment Officer at Credit Suisse Private Banking and Wealth Management.

"We're reasonably comfortable that this earnings story can continue for a year or so."

However, if earnings do disappoint or expectations are downgraded -- possibilities many investors are dismissing -- that could be another catalyst for a sell-off.

For those buying, selectivity is key. Deutsche's Huynh and M&G Investments' Matthew Vaight prefer North Asia, specifically South Korea and Taiwan, which, along with being the cheapest in the region, also benefit from global growth.

Vaight, emerging markets portfolio manager at M&G, is underweight India, the region's most expensive market, and also finds Indonesia and the Philippines overvalued.

India, which received the most inflows from foreign investors in the first quarter, is trading at 21.2 times earnings, compared with the cheapest, South Korea, at 12.1.

Investors appear split on China. While Goldman is overweight, on expectations that improving economic growth will filter through to earnings and that stability will be a priority ahead of the 19th National Congress in October, M&G cites concerns about Chinese banks.

"They are tools of state policy and poor allocators of capital," Vaight said. The high valuations of many "new" China stocks, such as internet companies, are also difficult to justify, he said.

Article Link To Reuters: