Thursday, May 11, 2017

Thursday, May 11, Morning Global Market Roundup: Oil Bounces, World Stocks Hold Near All-Time Highs

By Christopher Johnson
Reuters
May 11, 2017

World stocks held near all-time highs on Thursday, helped by a rebound in energy shares as oil prices rose after U.S. fuel inventories declined and Saudi Arabia cut supplies of crude to Asia more than expected.

MSCI's gauge of global stock markets was up 0.1 percent, bringing their gains for the year to nearly 10 percent.

European shares underperformed as investors looked to lock in gains after their strong run so far this year. Government bond yields rose as rising oil prices reinforced expectations inflation would pick up.

Signs that prices would rise might encourage the European Central Bank to step back from its ultra-loose monetary policy in coming months.

Those expectations also underpinned the euro, which rose 0.2 percent against the dollar to $1.0883.

Sterling hovered below its seven-month highs against the dollar before a Bank of England interest rate decision and inflation report due later in the day. No change is expected in bank policies.

Oil prices stood out in an otherwise relatively quiet day across financial markets.

Brent crude rose another 1.3 percent following a 3 percent gain in the previous session. The advance helped Brent regain the $50 level and reverse all of last week's losses.

"We saw the biggest draw in (U.S.) inventories for the year last week with stockpiles down more than 5 million barrels, and it looks like OPEC's production cut is finally biting," said Greg McKenna, chief market strategist at brokerage AxiTrader.

The Organization of the Petroleum Exporting Countries and other producers, including Russia, have agreed to cut output by almost 1.8 million barrels per day during the first half of the year to try to reduce a global fuel glut.

The dollar weakened against a basket of major currencies, though most major currency pairs were all holding in tight ranges.

Earlier in the Asian day, the New Zealand dollar sank as much as 1.5 percent after the country's central bank stuck with a neutral bias on policy, warning markets they were reading the outlook wrong and expressing approval of the currency's declines this year.

The U.S. dollar came under pressure after U.S. President Donald Trump's abrupt dismissal of FBI Director James Comey raised fears that political turmoil would derail U.S. stimulus steps and tax reform.

But with markets pricing in around a 90 percent chance that the economy is strong enough for the Federal Reserve to raise interest rates at its meeting next month, investors did not lose sight of fundamentals.


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Oil Up On Falling U.S. Inventories, Saudi Cuts To Asia

By Christopher Johnson 
Reuters
May 11, 2017

Oil prices rose on Thursday, with benchmark Brent crude trading comfortably above $50 a barrel after a fall in U.S. inventories and a bigger-than-expected cut in Saudi supplies to Asia helped tightened the market.

Brent LCOc1 was 70 cents higher at $50.92 a barrel. U.S. light crude oil CLc1 was up 75 cents at $48.08.

"We saw the biggest draw in (U.S.) inventories for the year last week with stockpiles down more than 5 million barrels, and it looks like OPEC's production cut is finally biting," said Greg McKenna, chief market strategist at brokerage AxiTrader.

The Organization of the Petroleum Exporting Countries and other producers including Russia have agreed to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year to try to reduce a global fuel glut.

OPEC meets on May 25 to decide on production policy for the second half of 2017, and most analysts expect the group to extend cuts until at least the end of the year.

OPEC has reduced output as promised, but there have been few signs so far that supply has fallen significantly as producers have shielded many key customers, especially in Asia, from cuts.

However, after Brent fell below $50 a barrel last week, analysts said producers felt forced to act.

Saudi Arabia told Asian refiners of its first cuts in crude allocations since OPEC's output reduction took effect in January. Saudi Aramco will reduce supplies to Asian customers by about 7 million barrels in June.

"It is all about sentiment and perception," said Carsten Fritsch, commodities analyst at Commerzbank in Frankfurt. "The perception is that OPEC cuts are finally working."

In the United States, crude stockpiles posted their biggest weekly drawdown since December last week as imports dropped sharply, while inventories of refined products also fell.

Crude inventories USOILC=ECI fell 5.2 million barrels in the week to May 5, the U.S. Energy Information Administration said. At 522.5 million barrels, crude stocks were the lowest since February.

While U.S. oil inventories fell, the country's crude oil production C-OUT-T-EIA continued to rise, jumping above 9.3 million bpd last week, in what is now a more than 10 percent increase since its mid-2016 trough.


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In Trump's Shadow, Fed Official Says Trade Barriers A 'Dead End'

By Suvashree Choudhury and Jonathan Spicer
Reuters
May 11, 2017

Trade protectionism is a "dead end" that may score political points but will ultimately hurt the U.S. economy, one of the most influential Federal Reserve officials said on Thursday in the central bank's strongest defense yet of open borders in the face of a skeptical Trump Administration.

William Dudley, head of the New York Fed, did not mention U.S. President Donald Trump by name in a speech at the Bombay Stock Exchange. But he gave a full-throated economic and even political argument for resisting trade barriers that he said would hurt growth and living standards in both the United States and around the world.

"Protectionism can have a siren-like appeal," said Dudley, a close ally of Fed Chair Janet Yellen and a key decision-maker on U.S. interest-rate policy.

"Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term," he said in prepared remarks. "Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term."

The Fed is independent but answerable to Congress, and its governors are appointed by the White House and confirmed by the Senate. While Fed officials usually avoid recommending fiscal policies, several have highlighted the benefits of open borders since Trump was elected on an "America First" platform of revamping or ripping up trade deals.

Dudley said he was speaking out because "we are at a particularly important juncture" in which trade issues could imperil the long-term health and productivity of the economy and "the economic opportunities available to our people."

Barriers to trade are very costly, he said, because they blunt export opportunities, make everyday goods more expensive, and they can often "backfire" by harming workers who can no longer compete in a global economy.

"There are many approaches to dealing with the costs of globalization, but protectionism is a dead end," said Dudley, a former Goldman Sachs partner who joined the New York Fed in 2007 and became its president in the depths of the financial crisis in early 2009.

"Trying to achieve a high standard of living by following a policy of economic isolationism will fail," he said in Mumbai.

The unusually pointed speech comes after the New York Fed published research in recent months that warned against a Republican proposal for a border-adjustment tax and Trump threat to ditch the North American Free Trade Agreement. Both the Republicans and Trump have since largely backed down from those positions.

The U.S. central bank has hiked interest rates twice since December and expects to tighten policy about two more times this year as the economy carries on a roughly 2-percent growth track, and as unemployment at 4.4 percent remains low.

Dudley, who did not comment on rates in the speech, in the past has said the Fed would adapt its approach as tax, spending and trade policies emerge from Washington.


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The James Comey Show

He becomes the latest to disappear into the Clintons’ personal Bermuda Triangle.


By Daniel Henninger
The Wall Street Journal
May 11, 2017

If you read nothing else while fighting through the maelstrom around President Trump’s firing of FBI Director James Comey, read the full text of Deputy Attorney General Rod J. Rosenstein’s memorandum titled “Restoring Public Confidence in the FBI.”

Mr. Rosenstein’s memo makes meticulously clear the short version of this grandiose episode: Director Comey’s behavior violated numerous standards of federal prosecutorial procedure and lines of authority inside the Department of Justice.

Specifically, writes Mr. Rosenstein, “The Director was wrong to usurp the Attorney General’s authority on July 5, 2016, and announce his conclusion that the case should be closed without prosecution.”

Mr. Rosenstein cites a useful analysis of the Comey saga, published in the Washington Post, by former deputy attorneys general Jamie Gorelick and Larry Thompson. Mr. Comey’s conduct, they wrote, was “real-time, raw-take transparency taken to its illogical limit, a kind of reality TV of federal criminal investigation.”

That is an apt metaphor—a kind of reality TV—for everything the dazed public is reading and hearing now about James Comey, the federal investigation into a Russian connection with the Trump campaign, and reveries about Watergate.

But I know where to begin: with the news in March 2015 that Secretary of State Hillary Clinton created a private email server in 2009.

Hillary’s email server is the reason for James Comey’s rise, and why he has fallen. One could populate a political graveyard with figures who by choice or chance have sailed into the Clintons’ personal Bermuda Triangle.

Add to that graveyard former Attorney General Loretta Lynch, whose tarmac tête-à-tête with Bill Clinton about “grandchildren” amid the server scandal caused Mr. Comey to misbelieve, fatally, that he was thereby made independent of any authority.

Again, quoting Deputy Attorney General Rosenstein: “The FBI director is never empowered to supplant federal prosecutors and assume command of the Justice Department. There is a well-established process for other officials to step in when a conflict requires the recusal of the Attorney General.”

But what about the infinity of words produced Wednesday by the press, quoting Democrats and even themselves, that Mr. Trump fired Mr. Comey to subvert the FBI’s investigation of the president’s Russia entanglements? We say “entanglements” because nowhere has it been made remotely clear what the Trump-Russia connection may have been. What we read, endlessly, is that some strand or crumb “suggests that . . .”

As with Hillary’s server, there is a Rosetta Stone for the Russia story. It is the Barack Obama/Loretta Lynch decision in January to sign rules permitting the National Security Agency to disseminate “raw signals intelligence” to 16 other intelligence agencies without privacy protections for individuals.

Two months later, it was reported by the New York Times that Obama administration officials had done this to dispense information across the intelligence bureaucracies “about possible contacts between associates of President-elect Donald J. Trump and Russians.”

Of course, those “contacts” leaked into the water-collection barrels of the entire Washington press—either from officials inside 17 U.S. intelligence agencies or from Obama officials themselves, such as it-wasn’t-me Susan Rice.

The predictable tumult from the Obama-originated mass leaks then intimidated Congress into sending the House and Senate intelligence committees chasing after these “suggestions” of collusion.

Beyond Mike Flynn and Carter Page, why haven’t we seen more leaks pushing past the original stories? Why have the leakers gone silent, unless they leaked everything they had? Indeed why hasn’t there been a mega-dump into the press by now of all the original NSA “raw signals intelligence” à la the Pentagon Papers?

Instead, calls are now bubbling up from this swamp—what else can you call it?—to appoint a special prosecutor, presumably to get to the bottom of the Russian collusion swamp, though without subpoena powers in Moscow.

No one outside Washington should be misled by the choruses calling for an “independent” prosecutor. This is special pleading.

For the political class it relieves them of responsibility for policing their own neighborhood. The media likes these prosecutors because they become Inspector Javerts, melodramatically chasing their targets for years, more often than not destroying reputations. The Justice Department’s guidelines make clear these special prosecutors are accountable to virtually no one. They don’t produce justice; they endanger it.

The “Trump is Nixon” narrative will rattle on, but it is a sideshow. The Trump White House can take care of itself (maybe). The serious issue revealed in all this—the server, the leaks, the investigations—is about institutional accountability, not just at the FBI, but across the intelligence bureaucracies, their masters in government, Congress and the media.

The American public deserves better than this endless Beltway spectacle. Rod Rosenstein deserves credit for saying that the road back to public seriousness had to start with firing James Comey.


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Snapchat's Debut Quarter Turns Ugly

Rival Facebook has been nibbling away at features that made Snapchat stand apart.


By Georgia Wells
The Wall Street Journal
May 11, 2017

Snap Inc., SNAP -1.46% in its first quarterly report as a public company, showed it struggled to maintain strong user growth at its Snapchat vanishing-messaging app, sending shares tumbling and sparking worries about its ability to challenge social-media titanFacebook Inc. FB -0.13%

Snap, whose core business relies on selling advertising on the Snapchat messaging platform, reported 166 million daily users in the past quarter, up 8 million from the previous period and up 44 million from a year earlier—its slowest year-over-year growth rate in at least two years.

Meanwhile, Facebook’s Instagram, a key competitor for Snap, last month said it has 200 million daily users of Instagram Stories, a feature of the photo-sharing app that mimics Snapchat’s popular function.

“Everything for Snap starts with daily active users, because the more users Snap has, the more engagement Snap can have,” said Ronald Josey, senior internet analyst with JMP Securities, who expected Snap to have faster user growth.



The Venice, Calif.-based company’s shares plunged 23% in after-hours trading, hovering just above the $17 threshold at which it went public in March.

“You can’t miss out of the gate,” said Michael Nathanson, senior research analyst at MoffettNathanson.

Investors have clamored for Snap since its initial public offering, the highest-profile tech listing in years. But the comparisons with Facebook and Twitter Inc.—its two biggest rivals—raise questions about whether Snap can elbow its way into a crowded social media market.

Snap’s traditional core of users are teens and young adults, a valuable demographic that marketers are eager to reach. Snap has pitched itself as an alternative to traditional forms of media, such as television, rather than a competitor to the bigger social-media networks.

But Facebook has been nibbling away at the features that made Snapchat stand apart. Snap’s “Stories” function—collections of Snaps that play in chronological order, and a critical place for Snap to display ads—has been imitated by Facebook and its other platforms.



In a survey last month of 3,000 Americans conducted by Goodwater Capital, 25% of respondents said they prefer Stories on one of Facebook’s platforms, compared with the 12% of users who said they prefer Snapchat’s Stories.

Chief Executive Evan Spiegel defended Snap’s position. “I think the bottom line is if you want to be a creative company, you need to be comfortable with people copying your products,” he said. “Just because Yahoo has a search box, it doesn’t mean they’re Google.”

Snap on Wednesday posted a net loss of $2.2 billion, compared with $104.6 million a year ago, due to a $2 billion one-time hit from stock-compensation expenses related to its March IPO.

Snap’s costly efforts to ramp up advertising deepened its operating loss, which more than doubled to $188 million and surpassed its revenue of $149.6 million. While revenue in the quarter nearly quadrupled from a year earlier, it failed to exceed Snap’s fourth quarter revenue of $165.7 million.

Snap’s research and development costs jumped to $78 million in the quarter, as it worked on new products such as an ad-buying platform that automates purchases, an approach used by Google and Facebook.

Snap also recently introduced new augmented reality features, part of an effort to keep users engaged for long periods of time, which Snapchat touts as one of its competitive advantages. The average user spent over 30 minutes a day on Snapchat during the quarter, and 3 billion snaps, or disappearing messages, were created every day on its app.

‘I think the bottom line is if you want to be a creative company, you need to be comfortable with people copying your products.’—Snap CEO Evan Spiegel

Snap has focused on users in more developed markets with the most ad dollars, leaving global ubiquity to the other social media giants to chase. That increases the pressure to make more money per user. In the first quarter, it rose to 90 cents, from 32 cents during the same period a year ago. As a comparison, Facebook made $4.23 per user globally in the first quarter.

In a sign that it may be broadening its approach, Snap said 30% of new users during the quarter are on Android, Google’s operating system that Snap has de-emphasized in favor of iPhones.

In one area, Snap’s numbers stand out: stock compensation. Tech companies often have high stock compensation tied to their initial listings because that is when many of the awards are triggered. But Snap’s $2 billion payout surpassed its annual revenue by a wide margin. Twitter and Facebook, for example, paid out compensation equal to a fraction of their revenue at the time.

Despite the doubts over its growth, Snap resisted pressure to lift sentiment by pumping up its prospects. Mr. Spiegel said Snap wouldn’t resort to “growth hacking” methods of adding users quickly, such as sending push notifications. “We don’t think those sorts of techniques are very sustainable over the long-term,” he said.


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