Tuesday, May 9, 2017

Tuesday, May 9, Morning Global Market Roundup: Asia Stocks, Dollar Subdued After French Relief, South Korea Vote Eyed

By Nichola Saminather 
May 9, 2017

Asian stock markets edged down on Tuesday following a flat close on Wall Street, as investors searched for the next catalyst following France's presidential election, while oil inched higher on expectations OPEC supply cuts will be extended.

Financial spreadbetters expect Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC 40 .FCHI to all open flat.

The South Korean stock market, which finished at a record high on Monday, is closed for Tuesday's presidential election.

Liberal Moon Jae-in is widely expected to win the presidency, following months of leadership vacuum after former President Park Geun-hye was removed on charges of bribery and abuse of power.

The polls opened at 6 a.m. (2100 GMT on Monday) and will close at 8 p.m. (1100 GMT). The winner is expected to be sworn in on Wednesday after the Election Commission releases the official result.

Allies and neighbors are closely watching the election amid escalating tensions over North Korea's accelerating development of weapons since it conducted its fourth nuclear test in January last year. It conducted a fifth test in September and is believed ready for another.

North Korea would be keen to see a Moon victory. Its official Rodong Sinmun newspaper said in a commentary on Monday the time had come to put confrontation behind the Koreas by ending conservative rule in the South.

"South Korean markets had not registered significant risk-off sentiment similar to other economies pre-elections, and this is no surprise," Jingyi Pan, market strategist at IG in Singapore, wrote in a note.

"The largely similar stance on policies by the Presidential candidates provides little chance of surprise as compared to last week's French election. Meanwhile, the filling of the political vacuum could go a long way to benefitting the economy."

The Korean won KRW= weakened 0.25 percent on Tuesday, with the dollar buying 1,135.52 won.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.2 percent on Tuesday.

Japan's Nikkei .N225 was slightly lower.

China's CSI 300 index .CSI300 retreated 0.3 percent in its sixth straight session of losses amid concerns over tighter financial regulations. Hong Kong's Hang Seng .HSIreversed earlier losses to trade up 0.35 percent.

Taiwan stocks .TWII pulled back to trade 0.25 percent lower on profit taking after earlier surpassing the 10,000-point mark to hit a two-year high.

The MSCI World index .MIWD00000PUS, which touched a record high overnight, dropped about 0.1 percent.

The dollar was flat at 113.285 yen JPY=D4, retaining most of Monday's 0.4 percent gain.

The dollar index .DXY was also steady at 99.11.

The euro EUR=EBS was steady at $1.0927 after tumbling 0.7 percent on Monday.

"The euro's retreat was driven solely by profit-taking. I think it is going to regain momentum over time," said Yukio Ishizuki, senior currency analyst at Daiwa Securities.

French stocks .FCHI slumped 0.9 percent overnight, their biggest one-day loss in almost three weeks, as investors took profits following strong gains in the run-up to Sunday's vote that saw the market favorite, centrist Emmanuel Macron, elected president.

Germany's DAX .GDAXI closed 0.2 percent lower, while Britain's FTSE .FTSE was marginally higher.

On Wall Street, all three major indexes closed flat, holding near recent all-time highs. The CBOE Volatility Index .VIX closed at 9.77, its lowest since December 1993.

In commodities, oil market sentiment swung between optimism over statements from major oil-producing countries that supply cuts could be extended into 2018 and lingering concerns over slowing demand and a rise in U.S. crude output.

U.S. crude CLc1 inched up 0.1 percent to $46.47 a barrel.

Global benchmark Brent LCOc1 also rose 0.1 percent to $49.39.

Copper remained close to the four-month low touched on Monday after data showed a sharp drop on imports into China, the world's biggest consumer.

London copper CMCU3 slipped 0.1 percent to $5,481.50 a tonne on Tuesday, after falling to as low as $5,462.50 on Monday.

Gold recovered from a seven-week trough touched on Monday. Spot gold XAU= rose about 0.1 percent to $1,226.60 an ounce.

Article Link To Reuters:

South Korea's Crucial Election

Economic problems are mounting. But new ideas are in short supply.

By Michael Schuman
The Bloomberg View
May 9, 2017

So much attention is being lavished on the nuclear-edged tantrums of Kim Jong Un in North Korea that today's presidential election on the southern half of the Korean peninsula has gone practically unnoticed. But the outcome may be nearly as critical for the region's future as the fate of Kim's weapons program.

The main candidates -- the Democratic Party's Moon Jae-in and Ahn Cheol-soo of the People's Party -- have spent much of the campaign debating how to deal with North Korea and relations with the U.S., which makes perfect sense, given rising tensions between Washington and Pyongyang. On the crucial question of South Korea's faltering economy, though, neither seems to have sufficient answers. Fixing what ails Korea will require a lot more creativity and boldness than either candidate has so far shown.

South Korea has been among the most miraculous of Asia's economic miracles. One of the world's poorest countries in the early 1960s, it has since leaped into the ranks of the most advanced. Its big companies, such as Samsung Electronics Co. and Hyundai Motor Co., make some of the world's most popular products, while its music and television shows dominate pop culture across East Asia.

Yet that progress has slowed in recent years. The economy grew by a less-than-inspiring 2.8 percent in 2016, and the next president will have to face up to some serious long-term structural flaws.

The biggest challenge is Korea's impending demographic disaster. Its population is aging rapidly, due to one of the world's lowest fertility rates. That hampers growth by hoisting the costs of an army of senior citizens onto a smaller number of productive adults. The working-age population has probably peaked and is expected to shrink by 1 percent annually over the next 20 years.

Moon has spoken about wooing more of Korea's highly educated women into the workplace, which should help. A 2015 paper from the International Monetary Fund suggests encouraging companies to hire more women as full-time, rather than temporary, employees, and allowing them greater flexibility in working hours. But the one policy that would help most -- opening the country to more immigration -- remains so sensitive that no candidate is likely to touch it.

Then there's the challenge posed by China's rise. Korean companies have long had an edge over their Chinese rivals due to better technology and branding. But China is quickly catching up, and its companies have been gaining market share in key sectors, such as mobile phones and flat-panel TVs. That means Korean companies will have to become even more innovative and market-savvy to stay ahead -- no easy task. Reforming the country's exam-obsessed education system to allow for more creative thinking and specialization would be a start. Ahn has made education reform part of his campaign, but bringing major change to the entrenched school system and the success-crazed culture behind it would probably prove difficult.

The best chance for change is likely on corporate reform. Promises to whittle down the power of Korea's big family-run business groups, called chaebol, have been made, and broken, by politicians many times before. But the scandal that toppled the previous president, Park Geun-hye -- who was impeached and indicted on corruption charges -- has made reining in the big business houses a near necessity for the next president.

Both top candidates have pledged action. Moon has vowed to sharpen the teeth of the national business regulator, cease the regular pardons of corrupt corporate leaders, and force a restructuring of the opaque chaebol ownership and governance system. Such measures could professionalize management and possibly give smaller firms a better chance to compete. But they don't add up to the sort of radical reform that would truly shake the cozy ties between government and business. Actually breaking the chaebol up, for instance, would foster competition, productivity and innovation. Yet neither candidate has been willing to go that far.

All this has left some economists doubtful about Korea's future prospects. "The medium-term outlook will depend on any progress the new president and his administration is able to make in pushing through key reforms aimed at tackling the country's mounting structural problems," argued the research firm Capital Economics in a May report. "But we are not holding our breath."

Those problems will reverberate well beyond South Korea's borders. In a neighborhood where China is increasingly flexing its economic and military muscles, Korea is one of the few nations with the will, strength and influence to act as a bulwark for democratic ideals and the rule of law. Seoul has managed just that in recent months, as China has intensified economic pressure aimed at dissuading Korea from deploying an American missile-defense system. The stronger the South Korean economy, the better it can withstand that kind of pressure -- and the better off the whole region will be.

Article Link To The Bloomberg View:

Visiting The White House Can Boost Your Stock Price. So Who’s Visiting Trump?

Shares of companies whose top executives saw Obama officials outperformed the market in the following weeks, a new study finds. The Trump log is sealed.

By Peter Coy
May 9, 2017

New research shows that visiting the White House during the Obama years yielded a payoff in the stock price of the visitor's company. Will the same be true of the Trump years?

We may never know, because President Donald Trump has ended Barack Obama's practice of making the visitor log public.

The study, released late last month on the website of the National Bureau of Economic Research, found that the shares of companies whose top executives visited White House officials performed about 0.9 percentage point better than the overall stock market after the visits. The authors, Jeffrey Brown and Jiekun Huang, finance professors in the College of Business at the University of Illinois at Urbana-Champaign, say the stock-market lift occurred from 10 trading days before the meetings to 40 trading days after them. They reviewed 2,286 meetings between corporate executives and federal government officials at the White House from 2009 through 2015 1 , excluding meetings with 50 or more attendees, in which face time would presumably be limited.

"The evidence in our paper suggests that access to high-level officials in the executive branch can be an important source of competitive advantage for firms," they write. The paper, "All the President's Friends: Political Access and Firm Value," can be downloaded from the NBER site for $5.

As a test of their results, Brown and Huang looked at how the companies that benefited from access to the Obama White House did after Trump's surprise election. In the three days after the voting, the companies underperformed the overall market by about 0.8 percentage point, they found. That was all the time it took to see the difference the new president made.

A thorough study of Trump administration visits and corresponding stock performance would be impossible, because the president on April 14 closed the visitor logs to public inspection. At the time, White House Communications Director Mike Dubke cited “grave national security risks and privacy concerns.”

"We agree there are major risks associated with the documents’ release," Brown and Huang wrote in an article about their research that was published online by Politico Magazine on May 8. "Political ones."

Among corporate chieftains in Brown and Huang's study, the three most frequent White House visitors during the period were David Cote, then CEO of Honeywell International Inc., with 30 visits; Jeffrey Immelt, CEO of General Electric Co., with 22 visits; and Roger Altman, executive chairman of Evercore Partners, with 21 visits.

All three had things to discuss aside from their own businesses. Cote, who is now Honeywell's executive chairman, was appointed by Obama in 2010 to serve on a blue-ribbon deficit reduction commission. Immelt was chair of Obama's Council on Jobs and Competitiveness. And Altman was interviewed by Obama as a possible director of the National Economic Council.

Regardless of why they were there, it clearly doesn't hurt to get face time with the president or his top aides —which is why good-government types say it's important to know who gets into the White House.

"Trump is avoiding criticism about who visits him, and he’s avoiding scrutiny by voiding the voluntary disclosure policy," said John Wonderlich, executive director of the Sunlight Foundation, which favors public disclosure of government affairs. "This study tells us that the Obama administration did have deep ties with CEOs of top American companies," Wonderlich said. "The Trump administration is also going to have deep ties."

According to the finance professors' research, the three people in the White House who were most visited were Valerie Jarrett, senior adviser to President Obama, with 107 visits; Jeffrey Zients, director of the Office of Management and Budget and later director of the National Economic Council, with 103 visits; and Obama himself, with 100 visits.

Kevin Lewis, a spokesman for the former president, said Obama had no immediate comment on the research. GE pointed out Immelt's White House appointment. Honeywell didn't have an immediate comment. Evercore declined to comment.

Brown, the co-author, is familiar with the White House, having served as a senior economist on President George W. Bush's Council of Economic Advisers in 2001 and 2002. He served on Bush's Social Security Advisory Board from 2006 to 2008.

The Obama administration voluntarily released logs of all White House visits except for personal family visits and sensitive personnel matters such as visits of potential Supreme Court nominees. Previous presidents had more restrictive disclosure policies.

Article Link To Bloomberg:

Verizon Does Not Feel Pressure To Do Big Deal

By Anjali Athavaley 
May 9, 2017

Verizon Communications Inc (VZ.N) does not see an urgent need to undertake a big strategic merger or acquisition, its chief executive said on Monday, as some Wall Street analysts have urged the wireless company to do.

Some analysts believe Verizon needs a more transformative acquisition than its $4.48 billion deal for Yahoo Inc's (YHOO.O) core business to diversify away from the slow-growth wireless industry as it battles smaller rivals in an oversaturated market for U.S. mobile phone service.

Verizon, the No. 1 U.S. wireless carrier, last month reported its first-ever quarterly loss in subscribers who pay a monthly bill, its most valuable customers.

After saying he was referring to M&A speculation, Chief Executive Lowell McAdam told a meeting with analysts, "We don't feel the urgency that seems to be out there in the analyst community, the banking community and the media."

Verizon's main competitor, AT&T Inc (T.N), is planning an $85.4 billion acquisition of Time Warner Inc (TWX.N), which would give it control of cable TV channels like HBO and other coveted media assets.

Cable provider Charter Communications Inc (CHTR.O) was at one time considered a possible target for Verizon. In January, Reuters reported Verizon was interested in exploring a combination with Charter among a long list of potential acquisition targets.

But an agreement between Charter and rival cable provider Comcast Corp (CMCSA.O) announced on Monday would prohibit a Verizon-Charter combination.

The agreement, which aims to cut costs and speed up the cable companies' entry into the wireless market, also bars Comcast and Charter from entering into a material transaction for a year without the other company's consent. That would prevent either company from tying up with a wireless carrier on its own.

At the meeting, McAdam said the agreement does not change the companies' relationships with Verizon. Both companies will launch wireless services using Verizon's airwaves.

"Frankly, we encouraged them to work together because dealing with one customer is a lot better than dealing with multiple customers," he said.

Article Link To Reuters:

Apple Euphoria Back As Drexel Sees $1 Trillion Market Cap

By Lu Wang
May 9, 2017

The Apple Inc. euphoria is back. As the iPhone maker’s stock rallied to a record $153.01 Monday, Drexel Hamilton’s Brian White boosted his 12-month price target to $202, becoming the first sell-side analyst to project a market value exceeding $1 trillion. Carl Icahn made a similarly optimistic forecast in October 2014. Shares peaked seven months later and didn’t return to those levels until earlier this year.

Article Link To Bloomberg:

Trump Review Of Wall Street Rules To Be Done In Stages

By Olivia Oran and Pete Schroeder
May 9, 2017

The U.S. government's review of a landmark 2010 financial reform law will not be complete by early June as originally targeted, and officials will now report findings piece-by-piece, with priority given to banking regulations, sources familiar with the matter said on Monday.

President Donald Trump has pledged to do a "big number" on the Dodd-Frank financial overhaul law, which raised banks' capital requirements, restricted their ability to make speculative bets with customers' money and created consumer protections in the wake of the financial crisis.

In February, Trump ordered Treasury Secretary Steven Mnuchin to review the law and report back within 120 days, saying his administration expected to be cutting large parts of it.

But the Treasury Department is still filling vacancies after the transition from the Obama administration and there are not enough officials to get the full review done by early June, three sources said.

A Treasury spokesperson dismissed the idea the report that would be broken up because the department is short-handed, saying the reach of the project could require several separate reports, as permitted under the executive order.

"Treasury has an entire team dedicated to reviewing the financial regulatory rules and will begin reporting our findings to the president in June," the department spokesperson said.

"Given the volume and scope of the issues we are reviewing that involve potential changes to the financial regulatory system, we are carefully considering the best options to begin rolling them out in the most effective and responsible manner," the spokesperson said.

The Treasury Department will first report back on what banking rules could be changed, including capital requirements, restrictions on leverage and speculative trading.

Examinations of capital markets, clearing houses and derivatives as well as the insurance and asset management industries and financial innovation and banking technology will come later, the sources said.

It could be several months until these other stages of the financial reform review are completed, some of the sources said.

The piecemeal approach could create challenges for some sectors if parts of the report are significantly delayed. The report has been highly anticipated, as it marks the new administration's most detailed foray into outlining what it wants to do with financial rules.

Trump previously has spoken only in broad terms about easing regulation surrounding lending.

Any efforts to rework existing regulations or craft new legislation will be a lengthy and contentious process, something that banking lobbyists have said will make any delay to the administration's initial findings costly for businesses eager for regulatory relief.

Former BlackRock Inc executive Craig Phillips is leading the administration's plan for financial deregulation. Alongside other Treasury officials, he is soliciting feedback from banking industry groups and executives for how banking policy should be shaped.

The change in the timing of the Treasury report comes after Trump ordered a separate review of some key planks of the Dodd-Frank financial reform law.

In April, Trump signed a pair of executive orders directing a review of two additional regulatory powers - orderly liquidation authority, which allows regulators to step in and wind down a failing financial institution, and systemic designation, in which certain large firms may be deemed critical to the overall health of the financial system, meriting stricter oversight.

The findings from those reviews are not expected until October.

Article Link To Reuters:

Oil Gives Up Earlier Gains As Rising US Output, China Concerns Weigh

By Henning Gloystein
May 9, 2017

Oil prices gave up earlier gains on Tuesday, as concerns over slowing demand and a relentless rise in U.S. crude output undermined the impact of hopes that OPEC-led production cuts could be extended.

Brent crude futures, the international benchmark for oil prices, were at $49.37 per barrel Tuesday, down from a high of $49.60 earlier in the day and near their last close.

U.S. West Texas Intermediate (WTI) crude oil futures were trading at $46.46 per barrel, down from an intra-day high of $46.66 and also little changed from their last settlement.

Traders said that oil markets were under pressure as persistent climbs in U.S. production, especially from shale oil drillers, and concerns over a slowdown in China undermine efforts led by the Organization of the Petroleum Exporting Countries (OPEC) to prop up prices.

U.S. crude production has risen by over 10 percent since mid-2016 to 9.3 million bpd, close to the output of top producers Russia and Saudi Arabia.

"That's making it difficult to drive the stockpiles down to a level OPEC thinks will see prices rise sustainably," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

U.S. bank Goldman Sachs said that U.S. shale drillers "fundamentally changed" the oil industry due to their ability to ramp up output much faster than conventional producers.

Bank of America Merrill Lynch said the low oil prices were also due to a slowdown in demand.

"Oil demand growth this year is underwhelming, in part explaining why crude oil prices and refining margins have sold off sharply recently," it said.

AxiTrader's McKenna said that there were concerns about Chinese economic growth as imports and exports slowed.

"The economy could slow more sharply than ... expected," he said.

Top exporter and de-facto OPEC leader Saudi Arabia said on Monday it would "do whatever it takes" to rebalance a market that has been dogged by oversupply for over two years, resulting in crude prices below $50 per barrel.

A cornerstone of the Saudi promise to rebalance the market would be to extend, potentially into 2018, a pledge led by OPEC and other producers including Russia to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year.

Article Link To Reuters:

The Bullish Case For Oil In 2017 And Beyond

Russia is now on board with production cuts, which will buoy crude prices.

By Thomas H. Kee Jr.
May 9, 2017

Our estimates are for stockpiles of oil to decline by as much as 50 million barrels this year if the OPEC deal is extended. And every indication suggests it will be extended until at least the end of 2017, if not beyond.

Reductions in global stockpiles of oil CLM7, +0.09% have occurred already, but not in the U.S. or in OECD countries, where stockpiles have risen since last year. When stockpile reductions start to influence domestic stocks, the perception in the oil market will be dramatically different than it has been recently.

Efforts by the Organization of the Petroleum Exporting Countries so far have worked to curtail oversupply. Still, those efforts have taken place only during seasonally low demand periods. The added value of the production cuts is not nearly as obvious during low demand cycles as it will be during peak demand seasons.

Additionally, the U.S. will likely be the last place where OPEC’s production cuts are felt most. The U.S. has been the focus of bearish oil investors, but American shale producers are unlikely to be able to meet growing oil demand in the years to come, even with recent rapid production growth. And major projects that might be able to match the expected demand growth have been postponed because of the relative weakness in oil prices versus the cost of those efforts.

This sets the stage for both immediate and future supply concerns.

Arguably, the recent decline in oil had everything to do with concern that Russia would not participate in an extension. But now, not only is Russia vocalizing support for an extension, but it is also, in coordination with Saudi Arabia, hinting at an extension beyond six months. Had this been communicated to the market two short weeks ago, we believe oil prices today would be significantly higher. But the delay in this communication has allowed bearish investors to bring fear to a market that is about to face a deficit.

Reasonably, if OPEC did not extend the agreement, it would be negative for prices, but an extension of the agreement is positive, and from these levels quite bullish.

Using data supplied by OPEC that is largely substantiated by the U.S. Energy Information Administration (EIA), oil stockpiles have increased during this seasonally slow period by roughly 400,000 barrels a day in the first quarter and by roughly 900,000 barrels a day in the second. This does not include the stockpiles in the Caribbean and other places where measurements are less obtainable.

So far, this seasonally slow period in which stockpiles are building has added fuel to the bearish case in oil. After all, the data come every week and stockpiles normally build during the first part of the year, so it is easy to say that OPEC’s efforts are not reducing stockpiles, but that is not completely true. OPEC’s effort substantially reduced stockpiles from what they would otherwise be. In 2016, for example, supplies grew by about 1.3 million barrels per day (mbd) more than in 2017 so far.

In addition, starting in June our model suggests that the oil market will come into deficit, where demand levels exceed supply levels, and there it will remain for the rest of the year. Our estimates suggest that global stockpiles will decline by roughly 1.1 mbd in the third quarter and 500,000 barrels a day in the fourth quarter if OPEC extends. That would cause global stockpiles to experience a material decline in 2017, but the evidence will not be regularly visible until the second half of the year.

Oil bears have been using seasonal weakness in conjunction with a recent lack of confirmation from Russia to promote the negative side of the debate, and bulls have had little ammunition, until now. Russia is finally vocalizing support, the Saudis and Russia are talking about extending beyond six months too, and material deficits are on the immediate horizon. But there is also a wild card and a long-term catalyst. The wild card is the possible border tax, and the long-term influence is the lack of new projects to meet increased global demand in the years ahead.

The bullish sentiment for oil would have been maintained if Russia confirmed an interest in participating in the production-cut extension two weeks ago. Still, oil can turn on a dime, but the bullish case for 2017 and beyond has not changed.

Article Link To MarketWatch:

Goldman Says Oil Prices On The Brink Of ‘Capitulation’

Is Goldman rethinking its forecast for Brent crude at $50 a barrel?

By Mark DeCambre
May 9, 2017

After crude-oil prices took a beating over the past week, falling to their lowest level since before OPEC-led a deal to curb output in November, analysts at Goldman Sachs say crude may reaching a “capitulation” point.

In a research note dated Friday, Goldman commodity strategists, headed by Damien Courvalin and Jeff Currie, said their 2017 forecast for Brent crude oil trading on London’s ICE exchange LCON7, +0.14% to hit $50 a barrel could be in jeopardy, if the prices continue to come under pressure:

Net, the faster decline in long-term oil prices than we expected this year is a clear downside risk to our spot price level forecast, even if it helps slow US production growth and achieve the inventory draws and the rotation of the forward curve into backwardation that we forecast.

Goldman is referencing the current and future relationship between near-term and the long-term price of oil. A faster decline in contracts in the future may result in more oil being pushed out into the market. Higher prices for oil for future delivery than spot prices—a situation known as contango—tends to encourage crude participants to store oil with the expectation of selling the commodity in the future.

On Friday, West Texas Intermediate crude oil trading on the New York Mercantile Exchange CLM7, +0.06% the U.S. benchmark, logged a weekly decline of 6%. Prices on Thursday marked the lowest settlement since Nov. 29—the day before the Organization of the Petroleum Exporting Countries announced an agreement to limit production by 1.2 million barrels a day.

However, an unrelenting ramp up by U.S. shale-oil producers is being widely credited with the recent downturn in price action for oil, which peaked in late February.

Goldman’s analysts also see U.S. output pressuring oil (see Goldman’s chart below):

Goldman cites two other key reasons for the recent tumble in the commodity complex, including high-grade copper HGN7, -0.42% and iron ore: A China-fueled sell-off in base commodities, that was easing on Friday, and technical trading that has exacerbated the sharp selloff in U.S. benchmark oil and its European counterpart:

Given the lack of any significant oil data releases on the day, we see two forces at play in this sell-off: (1) a follow through on the sharp declines in copper and iron ore the day before on concerns over growth in China, and (2) once again, the influence of technicals and positioning.

Brent crude on London’s ICE Futures exchange LCON7, +0.14% is down nearly 6% for the week.

Goldman writes that although overall stocks have retreated, they may not be declining as fast as the analysts had forecast, which could weigh on prices.

Despite this sharp move lower in prices and timespreads, our tracking of the oil market rebalancing suggests that the month of April featured further progress in reducing the inventory overhang, although at a pace short of prior consensus expectations.

Adding to those concerns, a reading of rig counts by Baker Hughes Inc. BHI, +0.25% showed a 16th straight weekly increase in rigs drilling for oil, suggesting that shale producers in the U.S. may continue to ramp up production, fueling concerns of a renewed glut in crude.

Crude’s decline on Thursday helped to keep the S&P 500 index SPX, +0.00% and the Dow Jones Industrial Average DJIA, +0.03% near break-even levels, with the benchmarks tilting higher in Friday trade.

Article Link To MarketWatch:

Don’t Fear The EU

The European Union isn't the boogieman it's made out to be.

May 9, 2017

Emmanuel Macron walked into the courtyard of the Louvre to celebrate his landslide win Sunday in the French presidential election to the strains not of “The Marseillaise,” France’s national anthem, but rather to the “Ode to Joy,” the anthem of the European Union. It was an important symbolic choice, signaling that Macron’s victory is also the EU’s victory.

Indeed, the EU dodged a bullet. Marine Le Pen had vowed to take France out of the Eurozone and to hold a referendum on France’s membership in the European Union. Coming after the success of the Brexit referendum in the United Kingdom, a “Frexit” likely would have been fatal to the EU. Macron’s victory, by contrast, strengthens the EU. He is even in favor of deepening the ties among EU member states into the realm of fiscal, not just monetary, policy.

How you feel about this depends on how you feel about the EU. Some Anglo-American conservatives support it, others oppose it. My own thinking on the subject has changed over the years. I used to be a Euro-skeptic, fearing that the giant bureaucracy in Brussels was an anti-market force imposing statism across the continent. In more recent years, I have come to conclude that such concerns are overblown—most government regulations and all tax and spend policies are still made in the national capitals. Brussels has merely become a convenient whipping boy that national politicians can use to shift blame for unpopular policies.

The conservative British newspapers have long specialized in demonizing the EU. Boris Johnson, now the foreign minister, was a pioneer of this art form when he was the Daily Telegraph correspondent in Brussels in the late 1980s and early 1990s. Johnson delighted his readers with fanciful “stories headlined ‘Brussels recruits sniffers to ensure that Euro-manure smells the same’, ‘Threat to British pink sausages’ and ‘Snails are fish, says EU’. He wrote about plans to standardise condom sizes and ban prawn cocktail flavour crisps.”

Tabloids such as the Daily Mail and the Sun have specialized in this genre, propagandizing British conservatives against the EU—and, in the process, convincing many non-British conservatives, too.

If the EU were all about standardizing condom sizes, it’s hard to see why it has any reason for existence. But the reality is far more complex. Robert D. Kaplan offers a persuasive counterpart to this vilification in his New York Times op-ed, which described the EU as an important stabilizing force on the eastern and southern frontiers of Europe. He notes that the Balkans, in particular, remain a tinderbox two decades after the Dayton Peace Accords ended the wars of Yugoslav succession.

Kaplan argued:

[I]t is only the European Union that can stabilize the Balkans. Only if Serbia, Albania, and Kosovo all become members of the union can the ethnic dispute between Serbs and Albanians truly be solved. Within the European Union, Albania and Kosovo will have no need of unifying on their own. But if they were to attempt unification, it could become a casus belli for the Serbs. A similar dynamic holds for the continuing contest between Croatia and Serbia for influence in Bosnia-Herzegovina. There is peace for everyone in the former Yugoslavia within the framework of the European Union. There is only protracted conflict without it. Indeed, the European Union offers a world of legal states instead of ethnic nations, governed by impersonal laws rather than fiat, where individuals are protected over the group.

The EU plays an equally important role in Eastern Europe, which is why I discovered last year that leaders of the Baltic Republics were anxious for Britain to reject Brexit. Sure, NATO is important, too, in deterring Russian aggression, but the EU helps to subsidize impoverished, nascent democracies, allowing them to develop into full-blown liberal democracies despite Russian interference.

Even with the EU’s expansion, there is democratic backsliding going on in Hungary and Poland, where populist-nationalist rulers have taken power. Imagine how much worse the situation would be if the EU were not there to promote democratic norms and to use the power of its purse to encourage these struggling states to stick to the democratic path. It takes no great feat of the imagination to suppose that, absent the EU, the democratic experiments in Eastern Europe after the end of the Cold War could have turned out to be as short-lived as those after the end of World War I.

None of this is to deny that the EU is more statist than it needs to be, nor to deny that it is in need of reform. But I believe it is a cause for celebration that the EU has survived, having withstood yet another challenge from the far-right. On the whole, and despite its manifest flaws, the kind of trans-national integration promoted by the EU is far preferable to the virulent nationalism that was dominant across Europe before World War II and that could arise again if the EU simply fades away.

Article Link To Commentary:

Trump’s Favorite Fall Guy: Barack Obama

The president has blamed his predecessor for many of his administration’s woes — from the botched raid in Yemen to the Flynn scandal.

By Josh Dawsey
May 9, 2017

For President Donald Trump's administration, the buck often stops with former President Barack Obama.

Michael Flynn's appointment to a high-level post inside the Trump White House was opposed by a number of senior high-ranking officials, including New Jersey Gov. Chris Christie, the head of the transition team. Obama huddled privately with Trump and warned him about Flynn’s erratic ways. And after Trump moved ahead with the hire, Flynn lied to Vice President Mike Pence about his meetings with the Russian ambassador.

But asked about Flynn's issues Monday, White House press secretary Sean Spicer blamed Obama's administration for not revoking Flynn's security clearance. “That was something adjudicated by the Obama administration in April of 2016. They took no steps to suspend that, so that's not really a question for us. It's a question for them at that time,” he said.

"It's laughable and comical the lengths they're going to to distance themselves from any of the Flynn business," said John Weaver, a Republican strategist who advised John Kasich's presidential bid.

The White House’s knee-jerk reaction of blaming Obama hasn’t been contained to the Flynn scandal. It has blamed him for widespread protests, wiretapped phones, poor economic numbers, outsourced jobs, gangs proliferating across the United States and problems in the Middle East — among other issues.

"I inherited a mess," Trump said, explaining some of his early woes.

Since time immemorial, presidents have blasted their predecessors — Obama, for example, repeatedly blamed George W. Bush for prolonged Middle East entanglements and the economic collapse.

And to Trump advisers and allies, the tactic is a no-brainer. Trump's supporters largely disliked Obama and voted for Trump, in many ways, because he was so vociferous in his attacks on the former president.

Keeping the feud alive — which Obama’s high-profile aides also appear happy to do — only stokes Trump’s base further.

"Using Obama as a focal point probably works because he's so polarizing with Republicans," said Julian Zelizer, a presidential historian at Princeton University. "He's just reminding them how much they disliked Obama and that he's better than the other guy."

Yet some of the claims simply are not true or are without context, Zelizer notes, something that stands in stark contrast with his predecessors. "These are wilder, continual attacks," he said. "The difference is in scale and scope."

The White House didn't respond to a request for comment.

Trump most notably blamed Obama for tapping his phones during the "very sacred election process," calling him a "bad (or sick) guy!" Evidence has not backed up that claim, though there is evidence that shows some Trump associates were monitored during the transition as they spoke with foreign officials.

After a botched raid in Yemen that killed a Navy SEAL, Trump said, "this was a mission that was started before I got here." Trump, however, made the final decision to forge ahead with the raid.

Facing massive protests across the country and leaks within the federal government that were critical of his administration, Trump blamed Obama "or his people" for inciting the protests and leaking the material.

"I think President Obama is behind it because his people are certainly behind it," Trump said.

While some former Obama aides have certainly encouraged resistance to Trump, and Obama officials have sometimes been quoted anonymously in stories, there is no proof Obama organized any protests or leaked any material.

Trump blamed the Obama administration for Rexnord, an Indiana company, for moving 300 jobs to Mexico in October. While the decision was certainly made during Obama's presidency, it is unclear why Obama is to blame. Trump allies say Trump has created better job conditions in the United States since becoming president, and often cite consumer confidence studies that show Americans believe the economy is improving.

The president also laid blame for gang activity on Obama.

“The weak illegal immigration policies of the Obama Admin. allowed bad MS 13 gangs to form in cities across U.S. We are removing them fast!” the president wrote on Twitter at about 5:40 a.m. on April 18.

MS-13, which was created in Los Angeles, has been around for several decades. Even before Obama took office in 2009, the FBI said the gang was active in more than 40 states. But a spate of high-profile incidents, including murders, have dominated the news lately — and law enforcement authorities say the gang has grown.

When Trump recently announced he'd sent 59 missiles into a Syrian air base in response to a chemical attack there, he immediately cast the blame on his predecessor. "These heinous actions by the Bashar al-Assad regime are a consequence of the past administration's weakness and irresolution," he said.

While Obama was criticized — even by his own aides — for not taking more aggressive action in Syria, he is hardly to blame for a Middle East dictator deciding to gas his own people.

Spicer even invoked Obama when defending the administration's ill-fated travel ban executive order, which has been put on hold by a number of courts. "These seven countries were identified by the Obama administration as needing further travel scrutiny," Spicer said in January. Obama, however, never called for a ban on Muslims or tried to ban travel from the countries.

The White House didn't respond to specific questions about why Obama's administration, which renewed a security clearance for Flynn, was responsible for Trump hiring him as the chief national security adviser. In the briefing, Spicer said the clearance shouldn't have been approved if Obama had so many concerns.

Weaver was unsparing in his criticism. "The Spicer briefing was about as comical as the Pentagon briefings during the Vietnam War," he said.

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Inertia, Revolt Will Test Macron’s Reformism

Vested interests will fight to derail the new president’s optimistic drive to shake up France.

By Paul Taylor
Politico EU
May 9, 2017

In France, efforts at reform often end in tears, if not in blood.

The country’s newly elected president, Emmanuel Macron, will need steely determination and all his youthful intellectual powers of persuasion, as well as supportive European partners and a dose of economic good luck, if he is to avoid the fate of past liberal modernizers.

History was not kind to his predecessors. During the French Revolution, the moderate, decentralizing Girondins were purged and guillotined by the centralizing, authoritarian Jacobins. In the 19th century, Louis Philippe, the bourgeois, reformist “king of the French,” was toppled at the barricades in 1848.

More recently, reformer Pierre Mendes-France was swiftly evicted by the Fourth Republic’s party system in 1955 after extricating the country from Indochina and starting the decolonization of Tunisia and Morocco. And pro-European centrist President Valéry Giscard d’Estaing was denied a second term in 1981 after trying to build an “advanced liberal society.”

France is rarely liberal for long. Three different faces of Europe’s pivotal nation have been on display in this still incomplete election year: the complacent, the rebellious and the optimistic. Macron, 39, embodies the latter. But he will need to overcome a deep aversion to change and a proclivity for sometimes violent revolt if he is to galvanize the economy, reshape the political system and deepen European integration.

The dominant trend of the last two decades has been sullen complacency — what the French call l’immobilisme (immobility). This has led to genteel decline, too slow to stimulate reform or spark revolt. Shielded by an implicit German guarantee, France has sustained its generous welfare state and giant public sector with budget deficits financed by cheap borrowing, shielded by an implicit German guarantee.

Many people have suffered unemployment, stagnant or falling living standards, a loss of personal status and a sense that their country and its language and culture are losing ground internationally. But the slide has been so gradual that the national reflex has been to cling to the status quo, defend acquired rights and privileges, and reject disruptive change.

This dynamic may explain the disconnect in opinion polls. The French report feeling less confident in their country’s future than Afghans or Iraqis, and only just a little more than Greeks, but when asked how they feel about their personal situation, they are much less gloomy.

Many of the widely shared perceptions that shaped the electoral debate are statistically unfounded. Social inequality has not widened sharply since some distant golden age. Public services are not collapsing; indeed, compared to most countries in the world, they are enviable, as is the state of French infrastructure. Insiders with secure jobs, healthy pensions, a 35-hour work week with six or more weeks’ holiday and good public health care have been mostly successful in defending their status against outsiders — the unemployed, the young and immigrants.

France’s deep attachment to the status quo may ultimately prevail again, especially if Macron’s new centrist En Marche movement fails to win an outright parliamentary majority and has to haggle for support issue-by-issue with other lawmakers. That dynamic was on display on Sunday. No sooner had Macron been declared the victor than politicians from the mainstream conservative Republicans were vowing to win control of the National Assembly in elections on June 11 and 18 and turn him into a lame duck, forced to cohabitate with political opponents in government.

A second feature of France never far from the surface is rebellion. As the leftist philosopher Jean-Paul Sartre famously said, “It’s always right to revolt.”

Each time a government has tried since 1995 to push back the retirement age, abolish special public sector pension regimes, ease hiring and firing, or pay young labor market entrants below the minimum wage, protesters have taken to the streets. “The French have more talent for making revolution than for reforms,” the 19th-century political theorist Alexis de Tocqueville observed.

The country’s deep streak of bolshiness was given full throttle once again in this election campaign. Candidates demanding a radical break with globalization and with the EU’s open market economy won more than 40 percent of the vote in the first round. Both runner-up far-right leader Marine Le Pen and leftist Jean-Luc Mélenchon, as well as two Trotskyists, advocated upending the political system, changing the EU beyond recognition or walking out, imposing trade barriers and making the central bank print money to finance investment and yet more state spending.

With her relentless focus on “the people’s anger” against “the elites,” her rejection of liberal reforms and an open, multicultural society, Le Pen was the megaphone for the angry, pessimistic France that has made immigration a scapegoat for their frustrations and sense of decline.

With his emphasis on optimism and generational renewal, and his unambiguous embrace of Europe and of social diversity, Macron embodies the France of aspiration.

But in the end, Le Pen lost heavily. And instead, the third — optimistic — France championed by Macron prevailed, at least for now. His vision is of a nation full of pent-up energy, creativity and entrepreneurship, straining to be unshackled from restrictive practices, over-regulation and over-taxation; a younger generation desperate to escape the doom loop of unfocused education, precarious temporary jobs and unemployment.

Many of these young talents have been emigrating to Britain, America or Canada but would rather be starting businesses or building a career in France.

Two leading market economists — Holger Schmieding of Berenberg Bank and Erik Nielsen of Unicredit — reckon that with a solid package of reforms and fiscal discipline, France has the potential to overtake an aging Germany’s growth rate and become a more equal partner in leading a deepening of the eurozone and the EU. “After Germany’s golden decade, now it could be France’s turn in the 2020s,” Schmieding wrote in a note to clients.

There are also challenges and opportunities in the banlieues, those grim high-rise suburbs where unemployment is more than twice the national average and young people, often of immigrant origin, are desperate for better ways to make a living than in the drugs trade and petty crime.

With his emphasis on optimism and generational renewal, and his unambiguous embrace of Europe and of social diversity, Macron embodies the France of aspiration, what Tony Blair and political theorist Anthony Giddens called “the third way.” The young president’s social liberalism offers the prospect of an acceleration of the current cyclical economic recovery and a path toward a more inclusive society.

But the first two Frances will be lying in ambush. Macron’s opponents will first try to put the handcuffs on him in next month’s legislative elections. And already trade unions and the hard left are threatening a “third round in the street” to resist his planned labor market reforms. The real struggle between the three Frances has only just begun.

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Why Do Gas Station Prices Constantly Change? Blame The Algorithm

Retailers are using artificial-intelligence software to set optimal prices, testing textbook theories of competition; antitrust officials worry such systems raise prices for consumers.

By Sam Schechner
The Wall Street Journal
May 9, 2017

One recent afternoon at a Shell-branded station on the outskirts of this Dutch city, the price of a gallon of unleaded gas started ticking higher, rising more than 3½ cents by closing time. A little later, a competing station 3 miles down the road raised its price about the same amount.

The two stations are among thousands of companies that use artificial-intelligence software to set prices. In doing so, they are testing a fundamental precept of the market economy.

In economics textbooks, open competition between companies selling a similar product, like gasoline, tends to push prices lower. These kinds of algorithms determine the optimal price sometimes dozens of times a day. As they get better at predicting what competitors are charging and what consumers are willing to pay, there are signs they sometimes end up boosting prices together.

Advances in A.I. are allowing retail and wholesale firms to move beyond “dynamic pricing” software, which has for years helped set prices for fast-moving goods, like airline tickets or flat-screen televisions. Older pricing software often used simple rules, such as always keeping prices lower than a competitor.

These new systems crunch mountains of historical and real-time data to predict how customers and competitors will react to any price change under different scenarios, giving them an almost superhuman insight into market dynamics. Programmed to meet a certain goal—such as boosting sales—the algorithms constantly update tactics after learning from experience.

Ulrik Blichfeldt, chief executive of Denmark-based a2i Systems A/S, whose technology powers the Rotterdam gas stations, said his software is focused primarily on modeling consumer behavior and leads to benefits for consumers as well as gas stations. The software learns when raising prices drives away customers and when it doesn’t, leading to lower prices at times when price-sensitive customers are likely to drive by, he said.

“This is not a matter of stealing more money from your customer. It’s about making margin on people who don’t care, and giving away margin to people who do care,” he said.

Driving the popularity of A.I. pricing is the pain rippling through most retail industries, long a low-margin business that’s now suffering from increased competition from online competitors.

“The problem we’re solving is that retailers are going through a bloodbath,” said Guru Hariharan, chief executive of Mountain View, Calif.-based Boomerang Commerce Inc., whose A.I.-enabled software is used by StaplesInc. and other companies.

The rise of A.I. pricing poses a challenge to antitrust law. Authorities in the EU and U.S. haven’t opened probes or accused retailers of impropriety for using A.I. to set prices. Antitrust experts say it could be difficult to prove illegal intent as is often required in collusion cases; so far, algorithmic-pricing prosecutions have involved allegations of humans explicitly designing machines to manipulate markets.

Officials say they are looking at whether they need new rules. The Organization for Economic Cooperation and Development said it plans to discuss in June at a round table how such software could make collusion easier “without any formal agreement or human interaction.”

“If professional poker players are having difficulty playing against an algorithm, imagine the difficulty a consumer might have,” said Maurice Stucke, a former antitrust attorney for the U.S. Justice Department and now a law professor at the University of Tennessee, who has written about the competition issues posed by A.I. “In all likelihood, consumers are going to end up paying a higher price.”

In one example of what can happen when prices are widely known, Germany required all gas stations to provide live fuel prices that it shared with consumer price-comparison apps. The effort appears to have boosted prices between 1.2 to 3.3 euro cents per liter, or about 5 to 13 U.S. cents per gallon, according to a discussion paper published in 2016 by the Düsseldorf Institute for Competition Economics.

Makers and users of A.I. pricing said humans remain in control and that retailers’ strategic goals vary widely, which should promote competition and lower prices.

“If you completely let the software rule, then I could see [collusion] happening,” said Faisal Masud, chief technology officer for Staples, which uses A.I.-enabled software to change prices on 30,000 products a day on its website. “But let’s be clear, whatever tools we use, the business logic remains human.”

Online retailers in the U.S., such as Amazon.com Inc. and its third-party sellers, were among the first to adopt dynamic pricing. Amazon.com declined to comment.

Since then, sectors with fast-moving goods, frequent price changes and thin margins—such as the grocery, electronics and gasoline markets—have been the quickest to adopt the latest algorithmic pricing, because they are the most keen for extra pennies of margin, analysts and executives say.

The pricing-software industry has grown in tandem with the amount of data available to—and generated by—retailers. Stores keep information on transactions, as well as information about store traffic, product location and buyer demographics. They also can buy access to databases that monitor competitors’ product assortments, availability and prices—both on the web and in stores.

A.I. is used to make sense of all that information.International Business Machines Corp. said its price-optimization business uses capabilities from its Watson cognitive-computing engine to advise retailers on pricing. Germany’s Blue Yonder GmbH, a price-optimization outfit that serves clients in the grocery, electronics and fashion industries, said it uses neural networks based on those its physicist founder built to analyze data from a particle collider.

Neural networks are a type of A.I. computer system inspired by the interconnected structure of the human brain. They are good at matching new information to old patterns in vast databases, which allows them to use real-time signals such as purchases to predict from experience how consumers and competitors will behave.

Algorithms can also figure out what products are usually purchased together, allowing them to optimize the price of a whole shopping cart. If customers tend to be sensitive to milk prices, but less so to cereal prices, the software might beat a competitor’s price on milk, and make up margin on cereal.

“They’re getting really smart,” said Nik Subramanian, chief technology officer of Brussels-based Kantify, who said its pricing software has figured out how to raise prices after it sees on a competitor’s website that it has run out of a certain product.

Algorithmic pricing works well in the retail gasoline market, because it is a high-volume commodity that is relatively uniform, leading station owners in competitive markets to squeeze every penny.

For years, price wars in cutthroat markets have followed a typical pattern. A retailer would cut prices to lure customers, then competitors would follow suit, each cutting a little more than the others, eventually pushing prices down close to the wholesale cost. Finally one seller would reach a breaking point and raise prices. Everyone would follow, and the cycle started all over.

Some economists say the price wars helped consumers with overall lower prices, but led to very thin margins for station owners.

Danish oil and energy company OK hired a2i Systems in 2011 because its network of gas stations was suffering from a decade-old price war. It changed what it charged as many as 10 times a day, enlisting a team of people to drive around the country and call in competitors’ prices, said Gert Johansen, the company’s head of concept development.

A2i Systems—the name means applied artificial intelligence—was started by Alireza Derakhshan and Frodi Hammer, both engineering graduates of the University of Southern Denmark, in Odense. Before focusing on fuel, they built other A.I. systems, including a game displayed on interactive playground floor tiles that adapted to the speed and skill level of the children running around on top.

For OK, a2i created thousands of neural networks—one for each fuel at each station—and trained them to compare live sales data to years of historical company data to predict how customers would react to price changes. Then it ran those predictions through algorithms built to pick the optimal prices and learn from their mistakes.

In a pilot study, OK split 30 stations into two sets, a control group and an a2i group. The group using the software averaged 5% higher margins, according to a paper Mr. Derakhshan presented last June at an A.I. conference in Seville, Spain.

The new system could make complex decisions that weren’t simply based on a competitor’s prices, Mr. Derakhshan said in an interview.

One client called to complain the software was malfunctioning. A competitor across the street had slashed prices in a promotion, but the algorithm responded by raising prices. There wasn’t a bug. Instead, the software was monitoring the real-time data and saw an influx of customers, presumably because of the long wait across the street.

“It could tell that no matter how it increased prices, people kept coming in,” said Mr. Derakhshan.

On the outskirts of Rotterdam, Koen van der Knaap began running the system on his family-owned Shell station in recent months. Down the road, a station owned by Tamoil, a gasoline retailer owned by Libya’s Oilinvest Group, uses it too.

During a late-March week for which both Tamoil and Mr. van der Knaap provided hourly data, the costs for unleaded gas at the two stations—which vary in opening hours and services—bounced around independently much of the time, and generally declined, reflecting falling oil prices that week.

During some periods, however, the stations’ price changes paralleled each other, going up or down by more than 2 U.S. cents per gallon within a few hours of each other. Often, prices dropped early in the morning and increased toward the end of the day, implying that the A.I. software may have been identifying common market-demand signals through the local noise.

The station owners say their systems frequently lower prices to gain volume when there are customers to be won.

“It can be frustrating,” said Erwin Ralan, an electronics-store manager who was filling up at the Tamoil station that week. “Prices usually go up at the end of the day. But when you’re empty and you’re in a rush, there’s not much you can do.”

Article Link To The Wall Street Journal:

Why The Commodities Rally Might Be Different This Time

-- Commodity prices usually rally as the Fed enters hiking cycles, but there are three risks that could derail gains, Goldman Sachs said in a note on Monday.
--Goldman pointed to U.S. shale oil, diminishing China demand and the Fed's gradual hiking cycle as risks to its overweight call on commodities.

May 9, 2017

Commodity prices usually rally as the U.S. Federal Reserve heads into a hiking cycle, but it might be different this time, Goldman Sachs said in a note Monday.

Historically, "commodities perform the best when the Fed is raising rates," Goldman said. "This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating. Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best."

It added that rising interest rates in China also tend to coincide with better commodities performance, noting the mainland's "outsized role" in demand.

That's a driver of Goldman's overweight call on commodities, with expectations for solid performance over the coming year as the Fed raises rates and the labor market runs at full employment.

But Goldman pointed to three risks that could derail its view.

Firstly, it noted that technology changes and U.S. shale oil production could have "a profound impact" on commodity returns.

"While conventional oil production takes time to ramp up, the response time for shale is much shorter," it said. "This has increased the oil supply elasticity, which may contribute to lower commodities returns relative to historical experience even as demand strengthens."

Secondly, Goldman said the China tailwind may be waning.

As an example, it cited China's demand for refined copper, which rose to 10.2 million tons in 2015 from 660,000 tons in 1990, totalling 90 percent of the total global growth in copper demand.

"Going forward, the growth in the Chinese demand for industrial metals is likely to be much more muted, also contributing to lower commodities returns relative to historical experience," Goldman said.

Finally, Goldman also pointed to a risk from the Fed's hiking cycle itself, noting that the current pace has been much slower compared with previous cycles amid a gradual U.S. and global economic recovery.

"While our U.S. economists expect three hikes this year and another four hikes in 2018, the fact that this hiking cycle has been different from previous hiking cycles imply that commodities returns may also differ from their historical performance," it said.

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China Has Now Become The Biggest Fear For Markets

By Patti Domm
May 9, 2017

Stocks are at record highs, the VIX is at a 10-year low, and while investors are relieved the French presidency did not go to an anti-euro candidate, new risks are filling the void.

Topping the list of market worries is China, which has been on the back burner for months now. Some weaker-than-expected data, however, has put spotlight on the country's economy.

Last week, PMI manufacturing data showed signs of slowing, and China's trade data overnight was weaker than expected, with misses both on imports and exports. Chinese inflation data was due Tuesday.

"I'm more concerned about the risks stemming from a China slowdown," said Jeff Kleintop, Charles Schwab chief global investment strategist.

Commodities have sold off on concerns. Copper was down about 3 percent last week amid concerns about China, and off another 1.4 percent Monday.

"Some of this might be some warning signs that China could be the next thing that would throw the market a curve ball," he said. If the Chinese economy loses so much steam that its currency weakens a lot, and commodities continue to sell off, it could be a negative for other markets

"The government has slowed down on infrastructure spending, thinking private sector spending would pick up and offset it. I'm just worried rising interest rates, tighter conditions and some new down payment requirements could nip that in the bud," Kleintop said.

China President Xi Jinping is expected to consolidate his power later this year at the party congress in November. "Now that the political hatches are battened down, the main risks in the world today are still deflation, not inflation. A significant slowdown in China could be deflationary," said Paul Christopher, chief international investment strategist at Wells Fargo Investment Institute.

Christopher added, however, that China has responded to signs of weakness and market sell offs, as in August 2015, by easing credit and stepping back from reform, when necessary.

"For a long time, China was a high impact, low probability. Now the near term risk of a slowdown has a higher probability but probably a lower impact," he said. "Slowdown does not mean financial disruption."

He said the rest of the world is stronger and would hold up much better now than a year or two ago. "The Chinese have shown if they get into reform and the economy slows, they are able to moderate the speed of reform in order to maintain stability. They are not so gung ho on reform that they want to risk the stability of the markets," Christopher said.

China's Shanghai index was lower Monday, while other Asian markets were higher. There were reports that officials are looking to curb some of the speculation there, and there has been talk of reform in the financial markets from cross market risk.

Some of the other risks around China have eased however. President Donald Trump has said he would not call China a currency manipulator.

"I think Xi has been very cautious in reacting to anything Trump has said," said Kleintop. "I think China's won any meeting they had with Trump or Trump officials. So far they've been coming out on top."

"The unknown, unknowns are still out there. The VIX is quite low. The market is near a record high, and could we get a blip that causes a pull back? If it doesn't affect the economic recovery, our advice is still to buy," said Christopher.

Christopher said China's economy is a bigger worry if the U.S. does not follow the reflation policies laid out by President Trump when he won the election. Markets have become skeptical of how quickly tax reform can be enacted, especially since the Senate plans to come up with its own health care bill.

U.S. stocks held their ground Monday, and did not react much at all to the French election. The S&P 500 eked out a 0.09 point gain, closing at a record 2,399.38. The VIX, which is the CBOE, Volatility Index, fell 7.6 percent to a 10-year low of 9.77.

China is also clearly a key in potentially resolving tensions over North Korea's nuclear program. Investors were watching for any activity from North Korea ahead of South Korea's presidential election Tuesday. The front-runner there, Moon Jae-In has signaled a more conciliatory tone toward North Korea, and a less friendly stance on the United States.

"Geopolitical risk is one of those black swans where you can't predict the timing. You just watch. In the case of North Korea, what we're watching more carefully is whether there is another nuclear test," said Christopher. "That seems to be the red line President Trump has drawn and it's not clear what arrangements he's made with the Chinese...I really think they would have worked something out, in the event there's another nuclear test."

He said it's unclear if either China or the U.S. would act without alerting the other.

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