Thursday, May 25, 2017

As The U.S. Sends More Oil To World, OPEC Sends Less To The U.S.

Exports to U.S. down almost 1m b/d since end-March: Bernstein; Cut in crude shipments to U.S. seen as top priority for OPEC.

By Serene Cheong
May 25, 2017

OPEC is finally making the move that could help complete a mission that it’s failed so far: shipping less oil to the U.S., according to Sanford C. Bernstein.

Exports from the Organization of Petroleum Exporting Countries to America have declined by close to 1 million barrels a day since a peak at the end of March, Bernstein analysts including Neil Beveridge wrote in a May 25 report. The group, including top producer Saudi Arabia, understands that reducing cargoes to the U.S. is the top priority if it’s to reach the goal of shrinking a global inventory glut, they said.

OPEC is curbing its supplies just as the U.S. threatens to eat into the group’s market share in its traditional strongholds such as Asia, the world’s biggest oil consuming region. The group’s problems have also been compounded by a spike in shipments to developed nations at the end of last year, just before a six-month output cut deal with some allies including Russia went into effect in January. That means global inventories have increased rather than shrunk since the curbs were announced, according to Bernstein.

“While OPEC has been slow to act so far, it finally looks like they are starting to deliver,” Beveridge wrote. Since April, “we have seen a noticeable reduction in exports of oil from OPEC to OECD countries, with a drop of close to 1 million barrels a day. Importantly, most of the reduction in OPEC exports to the OECD has been concentrated in reductions of crude exports to the U.S.”

OPEC and its allies are meeting in Vienna Thursday to discuss prolonging their output curbs. Their goal is to reduce global inventories to or below the five-year average and revive prices from their worst crash in a generation. Futures in New York traded up 0.8 percent at $51.77 a barrel by 2 p.m. Singapore time. Brent in London rose 0.8 percent to $54.40, still more than 50 percent below its 2014 peak.

If OPEC is to reduce U.S. crude inventories back to normalized levels by the end of the year, stockpiles need to fall consistently by 5 million barrels per week for the next 30 weeks, Bernstein estimates. “This means a reduction in supply to the U.S. of close to 1 million barrels a day,” it said in the report.

While OPEC exports to the U.S. have fallen by almost that volume since the end of March, according to Bernstein, America has been shipping more to the world, including Asia. As Middle East nations including Saudi Arabia bear the majority of the mandated output curbs, the regional benchmark Dubai crude has strengthened versus U.S. West Texas Intermediate, making oil linked to WTI attractive to buyers.

U.S. oil exports to China, the world’s biggest energy consumer, surged to 768,000 metric tons in April, giving it a market share in the Asian nation of 2.2 percent, compared with 0.1 percent a year ago, according to Bloomberg Intelligence. The Middle East’s market share, meanwhile, fell to 43 percent from 47 percent.

Exports from Saudi Arabia, which “matters most,” to developed nations have significantly fallen since the beginning of April, according to Bernstein. “Saudi has been able to reduce loadings to the U.S. primarily though changes in its pricing policy, which arguably should have been more aggressive,” Beveridge wrote. “Since the start of the year Saudi has raised the price of its light crude grades to the U.S. relative to Asian delivery.”

Maintaining production and export discipline in the second half of 2017 will be OPEC’s most important priority, according to Bernstein. Assuming the group is able to do this, inventories should fall “‘noticeably” and continue to support an “upward path for oil prices,” it said.

Article Link To Bloomberg:

Donald Trump’s Base Is Shrinking

By Nate Silver
May 25, 2017

A widely held tenet of the current conventional wisdom is that while President Trump might not be popular overall, he has a high floor on his support. Trump’s sizable and enthusiastic base — perhaps 35 to 40 percent of the country — won’t abandon him any time soon, the theory goes, and they don’t necessarily care about some of the controversies that the “mainstream media” treats as game-changing developments.

It’s an entirely reasonable theory. We live in a highly partisan epoch, and voters are usually loyal to politicians from their party. Trump endured a lot of turbulence in the general election but stuck it out to win the Electoral College. The media doesn’t always guess right about which stories will resonate with voters.

But the theory isn’t supported by the evidence. To the contrary, Trump’s base seems to be eroding. There’s been a considerable decline in the number of Americans who strongly approve of Trump, from a peak of around 30 percent in February to just 21 or 22 percent of the electorate now. (The decline in Trump’s strong approval ratings is larger than the overall decline in his approval ratings, in fact.) Far from having unconditional love from his base, Trump has already lost almost a third of his strong support. And voters who strongly disapprove of Trump outnumber those who strongly approve of him by about a 2-to-1 ratio, which could presage an “enthusiasm gap” that works against Trump at the midterms. The data suggests, in particular, that the GOP’s initial attempt (and failure) in March to pass its unpopular health care bill may have cost Trump with his core supporters.

These estimates come from the collection of polls we use for FiveThirtyEight’s approval ratings tracker. Many approval-rating polls give respondents four options: strongly approve, somewhat approve, somewhat disapprove and strongly disapprove. Ordinarily, we only estimate Trump’s overall approval and disapproval. But we went back and collected this more detailed data for all polls for which it was available, and then we reran our approval ratings program to output numbers for all four approval categories instead of the usual two.1 Here are Trump’s strongly approve and somewhat approve ratings from shortly after the start of his term2 through this Tuesday:

After a slight uptick in the first two to three weeks of his term, Trump’s strong approval ratings have headed downward. But it hasn’t been a steady decline. Instead, they fell considerably from about 29 percent on March 6 — when Republicans introduced their health care bill — to around 24 percent on April 1, shortly after the GOP pulled the bill from the House floor. They then remained stable for much of April, before beginning to fall again this month after the reintroduction (and House passage) of the health care bill and after Trump fired FBI director James Comey on May 9. As of Tuesday, just 21.4 percent of Americans strongly approved of Trump’s performance.

By comparison, 45 percent of Americans strongly approved of President Obama’s performance as of April 2009, although Obama’s strong approval numbers would fall considerably over the course of his term — to the mid-to-high 20s by the midterms and to the high teens by 2014.

The share of Americans who somewhat approve of Trump’s performance has actually increased slightly, however, from about 16 percent in early February to 17.9 percent as of Tuesday. In part, this probably reflects voters who once strongly approved of Trump and who have now downgraded him to the somewhat approve category. (Trump’s strongly approve and somewhat approve numbers have been inversely correlated so far, meaning that as one has risen, the other has tended to fall.) A potential problem for Trump is that in the event of continued White House turmoil, the next step for these somewhat approve voters would be to move toward disapproval of the president.

The number of Americans who strongly disapprove of Trump has sharply risen since early in his term, meanwhile, from the mid-30s in early February to 44.1 percent as of Tuesday. In most surveys, Trump’s strongly disapprove rating exceeds his overall approval rating, in fact.

The bulk of the increase in Trump’s strong disapproval ratings came early in his term, over the course of late January and early February. It’s possible that this was partly a reaction to Trump’s initial travel ban on immigrants from seven predominantly Muslim countries, which was the biggest news of Trump’s first few weeks in office. But presidential disapproval often rises in the first month or so of a president’s tenure as voters who initially give a new president the benefit of the doubt find things to dislike in his performance.

Meanwhile, the share of Americans who somewhat disapprove of Trump has been small and fairly steady throughout his term, usually averaging around 10 or 11 percent. It was 11.6 percent as of Tuesday.

During last year’s presidential primaries, Trump received about 14 million votes out of a total of 62 million cast between the two parties, which works out to 23 percent of the total. So perhaps it’s not a coincidence that 20 to 25 percent of the country still strongly supports Trump; they were with him from the start.

But 20 to 25 percent isn’t all that large a base — obviously not enough to win general elections on its own. Instead, Trump won the White House because most Republicans who initially supported another GOP candidate in the primary wound up backing him in the November election. Trump has always had his share of reluctant supporters, and their ranks have been growing as the number of strong supporters has decreased. If those reluctant Trump supporters shift to being reluctant opponents instead, he’ll be in a lot of trouble,3 with consequences ranging from a midterm wave against Republicans to an increased likelihood of impeachment.

So while there’s risk to Democrats in underestimating Trump’s resiliency, there’s an equal or perhaps greater risk to Republicans in thinking Trump’s immune from political gravity.

If you look beneath the surface of Trump’s approval ratings, you find not hidden strength but greater weakness than the topline numbers imply.

Article Link To FiveThirtyEight:

How To Read An ObamaCare Prediction

Congress’s fiscal scorekeepers are often wrong but never more modest.

By Review & Outlook
The Wall Street Journal
May 25, 2017

The political world waited with rapt attention Wednesday for the oracles at the Congressional Budget Office to release their cost-and-coverage predictions for the revised House health reform bill, which arrived late in the afternoon. But while Washington stood by, two reports emerged from the real world that are far more consequential.

First, the Health and Human Services Department released new research showing that average premiums in the individual market have increased 105% since 2013 in the 39 states where the ObamaCare exchanges are federally run. That translates into about $3,000 more a year for the average family. There are limitations to the data, such as separating ObamaCare artifacts from underlying medical cost movements, but the trend doesn’t reflect well on whoever called it the Affordable Care Act.

Also on Wednesday, Blue CrossBlue Shield of Kansas City withdrew its ObamaCare plans for 2018 in Kansas and Missouri. The insurer cited ObamaCare losses of $100 million, which it called “unsustainable for our company.” The decision will leave 77 of Missouri’s 114 counties, including St. Louis, with a single insurer, and some 31,000 Missourians in another 25 counties with no coverage options. By the way, HHS says premiums have increased by 145% on average in Missouri over four years.

This is real news in real markets that affects people’s lives. So, naturally, the speculative CBO report became the day’s major story.

That news wasn’t all bad for Republicans, not that you could tell from the media accounts. CBO confirmed that the American Health Care Act is a major fiscal dividend, cutting taxes by $992 billion, spending by $1.1 trillion and the deficit by $119 billion over 10 years. Compared to a CBO estimate of an earlier House bill, the number of people with insurance will be “slightly higher” and premiums will be “slightly lower.”

Nonetheless CBO says 14 million fewer people on net would be insured in 2018 relative to the ObamaCare status quo, rising to 23 million in 2026. The political left has defined this as “losing coverage.” But 14 million would roll off Medicaid as the program shifted to block grants, which is a mere 17% drop in enrollment after the ObamaCare expansion. The safety net would work better if it prioritized the poor and disabled with a somewhat lower number of able-bodied, working-age adults.

The balance of beneficiaries “losing coverage” would not enroll in insurance, CBO says, “because the penalty for not having insurance would be eliminated.” In other words, without the threat of government to buy insurance or else pay a penalty, some people will conclude that ObamaCare coverage isn’t worth the price even with subsidies. CBO adds that “a few million” people would use the new tax credits to buy insurance that the CBO doesn’t consider adequate.

The problem with this educated guess about enrollment is that CBO’s models put too much confidence in the effectiveness of central planning. The nearby table shows CBO’s projections about ObamaCare enrollment, which were consistently too high and discredited by reality year after year. CBO is also generally wrong in the opposite direction about market-based reforms, such as the 2003 Medicare drug benefit whose costs the CBO badly overestimated.

Unlike CBO, most economic forecasters publish their assumptions and a range of possible outcomes for different variables. This transparency reveals the uncertainty built into any predictive model, rather than homing in on one number like 23 million, as if it is omniscient. The complication for CBO is that the more it defines its uncertainty, the less authority the political class will invest in its estimates.

This particular credibility gap is exposed in CBO’s treatment of the House compromise on waivers, which would allow states to apply to opt out of certain ObamaCare regulations like benefit mandates. How many Governors would choose to do so, over what time period, in what political context, and how aggressively would they deregulate markets? “Who knows?” is the only honest answer.

CBO allows that there can be no “single definitive interpretation” of how states would respond to new incentives—before claiming that precisely “one-third of the population would be in states that would choose to make moderate changes to market regulations” and precisely “one-sixth of the population” lives where Governors would “substantially alter” those regulations. This isn’t a quantitative economic judgment but a raw political assumption.

Headlines aside, the CBO report matters because it is the fiscal template for Senate negotiations and what policies can be included under the budget “reconciliation” procedure that requires 51 votes. But Senators shouldn’t allow the budget scorekeeper’s opinions about the future to dictate policy or political decisions. Incentives and private competition can produce better outcomes than CBO’s model foresees.

In any case, the real world is throwing off plenty of evidence of the urgent need to repeal and replace ObamaCare, like the Missouri crisis and national rate shock. CBO never saw any of that coming.

Article Link To The Wall Street Journal:

Newly Discovered Vulnerability Raises Fears Of Another WannaCry

May 25, 2017

A newly found flaw in widely used networking software leaves tens of thousands of computers potentially vulnerable to an attack similar to that caused by WannaCry, which infected more than 300,000 computers worldwide, cybersecurity researchers said on Thursday.

The U.S. Department of Homeland Security on Wednesday announced the vulnerability, which could be exploited to take control of an affected computer, and urged users and administrators to apply a patch.

Rebekah Brown of Rapid7, a cybersecurity company, told Reuters that there were no signs yet of attackers exploiting the vulnerability in the 12 hours since its discovery was announced.

But she said it had taken researchers only 15 minutes to develop malware that made use of the hole. "This one seems to be very, very easy to exploit," she said.

Rapid7 said it had found more than 100,000 computers running vulnerable versions of the software, Samba, free networking software developed for Linux and Unix computers. There are likely to be many more, it said in response to emailed questions.

Most of the computers found are running older versions of the software and cannot be patched, said Brown.

Some of the computers appear to belong to organizations and companies, she said, but most were home users.

The vulnerability could potentially be used to create a worm like the one which allowed WannaCry to spread so quickly, Brown said, but that would require an extra step for the attacker.

Cybersecurity researchers have said they believe North Korean hackers were behind the WannaCry malware, which encrypted data on victims' computers and demanded bitcoin in return for a decryption key.

Article Link To Reuters:

Your Data Is Way More Exposed Than You Realize

To get a handle on your online privacy, first understand how much of your data is already out there, and how it can be weaponized.

By Geoffrey A. Fowler
The Wall Street Journal
May 25, 2017

Privacy wasn’t a concern for her until it was too late.

The woman, who agreed to share her story if she weren’t to be identified, told me she left home one midnight, after four years in a relationship. She moved away and restarted her life. But then, she says, she was bombarded by phone calls from men soliciting her for sex. Then came bizarre friend requests on social media. She says one man showed up at her house.

She suspected her ex of stalking her online, and posting her information to fuel harassment. “It is psychological torture,” she told me.

She turned to a domestic-violence shelter for technical and legal help, including working with Verizon in an effort to unmask some of the phone numbers she’d logged as harassing, and helping her file for her state’s “Safe at Home” status, which would shield her address from public records.

The global “WannaCry” ransomware attack that affected computers in 150 countries and the growing threat of new malware illustrate a basic problem that is becoming more pressing.

Her nightmare, which is ongoing, might not resemble your life or mine. But it’s a stark reminder that erosion of privacy is a cancer of digital life. And while we might not talk about privacy as often as the latest cool app, it’s only getting worse.

I hear this all the time: “I have nothing to hide.” The truth is, pretty much everybody does something online they have reason to keep private. You can’t see the future. The woman I spoke to said she never planned on getting into what she described as a terrible relationship.

What These Sites Know Might Freak You Out
Free, publicly accessible
Listings show age, current and past addresses, phone numbers and possible relatives and associates, based on geography. Remove listings here.

Free and paid, publicly accessible
Listings show birth month, email, current and past addresses, phone numbers, relatives, social networks and court records. Remove listings here.

Google My Activity, Maps Timeline
Free, requires Google login
Google gathers locations, searches, web-browsing history, even recordings of your voice. Not visible to public; you can delete data.
Free, requires social security number
What data broker Acxiom shares with marketers, including political affiliation, home and vehicle details, income. You can edit and delete some data.

What has your web browser seen that could embarrass you later? This isn’t just about porn. Have you hunted for a new job, streamed the ball game at work, investigated a crush or googled the morning-after pill? Imagine having a report about it show up on the desk of your boss, spouse or legal adversary. The most innocuous fragments of your digital life— Facebook posts, even the Find My iPhone app—can be weaponized to target or harass.

Meanwhile, data aggregators send their bots to collect anything and everything they can about you: addresses, browsing habits, even estimated net worth. Then they glue it all together, facts and wild guesses alike, into dossiers. That’s the legal side of data collection. Things get scarier when your tax accountant, credit-card company or email provider gets hacked.

Think about what’s coming in the era of artificial intelligence. Many of Silicon Valley’s smartest minds are making billions mining you. Since 2010, the ad industry fueled by all that data has tripled in size in the U.S. alone to an estimated $83 billion in 2017, according to eMarketer. And this year, the Federal Communications Commission changed its rules to allow your internet service provider in on the action.

OK, maybe you don’t mind that underwear ad that follows you around the web. But data brokers now combine information from multiple sources to segment us in ways that go well beyond advertising. Should you be invited to join a club? Or a clinical trial?

It’s about self-determination. “If people don’t have the ability to control or understand how their data is being used, it can lead to severe difficulties,” says Julie Brill, a former FTC commissioner and current partner at the law firm Hogan Lovells, who helped lead a big investigation of data collectors.

Many assume the law will intervene when data might be used to harm you, and they’re both right and wrong. There are laws, Ms. Brill points out, but they’re fairly focused on topics like health and financial data.

The Privacy Test

I have a theory: People would care a lot more about privacy if they realized how exposed they already are.

So I invited a half-dozen volunteers I hadn’t met before into my lab to see how much extremely personal information I could find about each of them in under an hour.

I managed to shock every person. It wasn’t even very hard.

Level one was calling up what’s out there and totally public. Lots of people have googled themselves, but fewer are familiar with “people search engines” like and Spokeo, which pull together and cross-reference public data, such as property records and court reports, into one place. Anyone can use them to look for birth dates, current and former addresses, phone numbers, gobs of relatives—even ex-lovers and roommates.

Along with some legit uses—finding lost relatives, protecting against fraud—all that info could be used for “doxing,” where harassers surface personal information to intimidate their targets. This public personal data could also be used to impersonate you. and Spokeo accept requests to remove data, though they don’t promise your name won’t show up again in the future.

Everybody knows about privacy on social media, right? The problem is, people aren’t very good at using privacy controls.

A site with the terrifying name drives home the point. Made by a self-described “ethical hacker” named Inti De Ceukelaire, the site lets non-friends search your Facebook account for public posts, as well as public pictures, tags and likes. The founder says the site, which automates Facebook’s existing search function, is intended to show Facebook users posts they may not know are public.

Level two in my privacy test was looking at data we willingly give to companies like Google. My volunteers brought their laptops and logged in. What we found provoked their most uncomfortable reactions.

On its Maps Timeline, Google is gathering a dossier about you that would make a spy jealous. Depending on how much you use Google products, there could be an hour-by-hour map of everywhere you’ve ever visited. Yes, everywhere. On Google’s My Activity site, you can see everything else they’re cataloging: searches, websites you visit in Chrome, YouTube videos you watch, even recordings of your voice to Google’s Assistant.

At least Google, like a few others, presents the data in a dashboard for you to see—and delete, if you want. Half of my volunteers deleted stuff immediately. (In a coming column, I’ll describe many more ways to reduce your digital footprint.)

The woman who received harassing phone calls told me she has made it her mission to scrub her name from the internet entirely. It isn’t going very well. She canceled her Google and Facebook accounts, but still can’t remove some info posted by others. She says several people-search sites haven’t responded to her requests. “No one will hear me,” she says.

Article Link To The Wall Street Journal:

Lack Of New Launches Leaves Ford Playing Catchup With GM

By Paul Lienert 
May 25, 2017

James Hackett spent the last year plotting Ford Motor Co's long-term self-driving car strategy. In his first week as chief executive, he has more immediate concerns: stopping a skid in North American sales and fending off a market share grab by resurgent archrival General Motors Co.

The U.S. No. 2 automaker is stuck in a product drought that shows no signs of easing until 2019, according to two sources who track Detroit's launch plans. Given the auto industry's long product cycles, it is not clear what Hackett can do immediately to get Ford out of its predicament, which can be traced back to decisions by former CEOs.

Hackett was tapped to run the company's autonomous car and ride-sharing unit a year ago. On Monday he unexpectedly found himself at the helm of the whole company as Ford axed CEO Mark Fields.

He now has to face up to a void of new vehicles, partly caused by former CEO Alan Mulally, who focused much of the company's resources on an expensive 2014 redesign of Ford's crown jewel, the F-Series pickup.

That safeguarded America's longtime best-selling vehicle, but it prevented Ford from developing other hits. Given that it typically takes three to four years for a new or redesigned vehicle to get into production, the full effect of Mulally's narrow focus is now being felt.

Mulally also gambled heavily on making an expensive shift to aluminum from steel to lighten up trucks and make them more fuel efficient, a bet that looks questionable in retrospect, as gas prices have remained far lower than anyone expected.

If Fields had immediately started pulling forward product launches when he took over from Mulally in July 2014, the first of those would likely reach the market in the autumn of 2018 at the earliest. As it is, Ford must wait until early 2019 for its first big slug of new models to hit showrooms.

There is not much Hackett can do about that. Any product moves he makes today would not likely show up in the market before 2021.

"Ford needs to move faster," said RBC auto analyst Joseph Spak.

Hackett, only three days into his new job, has not yet laid out his plans for Ford publicly.

Ford spokesman Michael Levine side-stepped questions of a short-term product drought. "We're bullish on our strong pipeline of all-new cars, trucks and SUVs coming in the next five years," he told Reuters. "What's more, the vehicles that we are launching ... will continue to deliver high transaction prices and good business."

Profit Per Vehicle

For much of the past decade, Ford has benefited from management and marketing problems at GM, including GM's 2009 bankruptcy and a safety scandal that hobbled the company in 2014.

Now, however, Ford confronts a crosstown rival largely free of debt and focused on grabbing market share from Ford, particularly in the truck and SUV segments which account for most of both companies' profits.

GM, the No. 1 U.S. automaker, is in the midst of a prolific four-year patch of new vehicle launches, many approved by Mary Barra, the company's former head of global product development who was named CEO in January 2014.

In hindsight, GM benefited from its bankruptcy, as it emerged essentially debt-free and able to spend more on new products. Ford did not seek bankruptcy during last decade's auto industry crisis, and instead borrowed heavily to survive it, leaving it short on cash to invest in new vehicles.

That result of that disparity is now becoming evident. A Reuters analysis shows that over the past two years GM has surpassed Ford in pretax profit per vehicle in North America. In 2016, Ford made $2,981 (2,296 pounds) per vehicle, calculated by dividing pretax earnings by the number of vehicles sold, compared with $3,044 for GM. And GM plans to solidify that lead by rolling out a volley of new models aimed at the heart of Ford's lineup.

GM has invested billions of dollars over the past three years to overhaul many of its best-selling truck and SUV models, including the full-size Chevrolet Suburban and Cadillac Escalade SUVs that dominate their sector and typically boast pretax margins of $20,000 or more.

GM also has boosted its share of the U.S. truck market with the 2014 launch of the mid-size Chevrolet Colorado and GMC Canyon pickups. Ford's rival to the Colorado - an all-new Ranger pickup - is not expected to debut until early 2019.

Over the past five years, both companies have spent roughly the same - about 8 percent to 10 percent of revenue - on capital equipment, engineering, and research and development, Reuters analysis shows. But GM has brought far more new and redesigned vehicles to market in the United States in the past three years.

"GM seems to be getting more for its money and realizing the results sooner," said Joe Langley, an analyst with IHS Markit.

Missed Opportunity

Earlier this month, Ford's U.S. sales and marketing chief Mark LaNeve acknowledged the company had missed an opportunity by "not participating in" the mid-size truck and compact crossover segments where GM is well positioned.

Ford also has lagged in redesigning its eight-year-old Expedition and Navigator SUVs, which go up against GM's Suburban and Escalade, and finally will be overhauled this fall.

One of the biggest challenges for Ford will come next year, when its market-leading F-150 truck will be challenged by GM's redesigned Chevrolet Silverado and GMC Sierra pickups.

A year after that, GM is expected to launch new heavy-duty editions of the Silverado and Sierra to challenge Ford's F-Series Super Duty, which is one of the industry's most profitable vehicles.

Altogether, GM plans five launches in 2018 and eight in 2019, according to industry sources familiar with the company's plans. In comparison, Ford expects to unveil only two redesigned vehicles in 2018 and will only reach some kind of parity with six launches in 2019.

Article Link To Reuters:

This Could Be The Euro's Best Year In A Decade

Hedge funds are joining the euro trade, according to BofAML; Banks have lifted forecasts for currency as data improves.

By Stefania Spezzati
May 25, 2017

It was supposed to be a year of risk that could lead to a break up of the euro. It’s turning out to be the best year in a decade for the shared currency.

The euro hit a six-month high against the dollar this week and is on track to be the top-performing currency in the Group-of-10 in the first half of the year. Defeat for anti-euro candidates in the Dutch and French elections, better-than-expected regional economic data and increasing fund inflows into euro-zone equity markets are all making investors more confident on the outlook.

“There is a positive momentum on flows, with more hedge funds joining the euro trade,” said Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, which has a long position on the shared currency against the yen.

Foreign investors have bought $7 billion of euro-zone exchange-traded funds without a hedge on the currency since March, compared to only $0.9 billion hedged, according to Morgan Stanley. The U.S. bank’s ‘trade of the week’ is to buy the euro against the yen.

The euro has climbed more than 6 percent versus the greenback this year, set for its biggest annual increase since 2007. It was at $1.1180 by 4:10 p.m. London time on Wednesday. Banks including Credit Agricole SA, UniCredit SpA and ING Groep NV have recently raised their forecasts for the currency, with ING targeting $1.20 by mid-2018.

That comes after it tumbled a total 23 percent in the past three years, leading German Chancellor Angela Merkel to say this month that the currency was “too weak” because of European Central Bank policy. It is more undervalued than any G-10 peer in terms of purchasing-power parity, according to data from the Organisation for Economic Co-operation and Development.

After the region’s struggle to emerge from the financial crisis, economic data are improving with recent euro-area manufacturing and retail sales beating analysts’ forecasts. Inflation is also picking up, though there is a divergence of views among ECB officials on when to start removing monetary stimulus. Centrist Emmanuel Macron’s victory in the French presidential elections against euro skeptic Marine Le Pen this month, and progress in Greek debt talks, have further spurred appetite for regional assets.

“We are already starting to see the euro moving in line with positive economic data surprises,” Morgan Stanley strategists including Hans Redeker said in a note to clients. “Stronger growth means a stronger euro.”

Article Link To Bloomberg:

Thursday, May 25, Morning Global Market Roundup: Asia Shares Race To Two-Year High As Fed Signals No Rush To Tighten

By Hideyuki Sano
May 25, 2017

Asian shares scaled two-year highs on Thursday while the dollar and U.S. bond yields slipped after the U.S. Federal Reserve signaled a cautious approach to future rate hikes and the reduction of its $4.5 trillion of bond holdings.

European shares are also expected to gain, with spread-betters looking to higher openings of 0.3 percent in Germany's DAX .GDAX and France's CAC .FCHI and 0.2 percent in Britain's FTSE .FTSE.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS advanced 1.0 percent, hitting its highest level since May 2015, and bringing its gains so far this year to about 17 percent.

The gains were led by South Korean shares .KS11, which rose 1.0 percent to record highs. Hong Kong's Hang Seng .HSI gained 0.8 percent to its highest level since July 2015 while Taiwanese shares hit 17-year highs .TWII.

In Japan, Nikkei .N225 gained 0.5 percent.

Minutes from the Fed's last policy meeting showed policymakers agreed they should hold off on raising interest rates until it was clear a recent U.S. economic slowdown was temporary, though most said a hike was coming soon.

"Their views seem to have changed considerably. In the past, they had said the slowdown was transitory," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The minutes also showed that policymakers favored a gradual reduction in its massive balance sheet.

Fed staff proposed that the central bank set a cap on the amount of bonds that would be allowed to run off each month, initially setting it at a low level and raising it every three months.

Following the minutes, the 10-year U.S. Treasuries yield US10YT=RR fell to 2.255 percent from Wednesday's high of 2.297 percent.

Fed funds rate futures are pricing in about a 75 percent chance that the Fed will raise rates next month, moving down from more than 80 percent earlier this week .

The specter of a slower pace of policy tightening underpinned share prices, with the S&P 500 .SPX closing at a record high.

In the currency market, the euro EUR= traded up 0.1 percent in Asia at $1.1225, having bounced back from Wednesday's low of $1.1168 and coming within sight of $1.1268, its 6 1/2-month high set on Tuesday.

The dollar stood at 111.63 yen JPY=, slipping from one-week highs of 112.13 touched on Wednesday.

Those moves have pulled the dollar's index against a basket of six major currencies .DXY =USD down to 97.028, near Monday's 6-1/2-month low of 96.797.

The Chinese yuan CNH=D4 CNY=CFXS strengthened, hitting its highest level in almost two months, on buying by major state-owned banks in what some traders thought was a show of strength a day after Moody's downgraded the country's credit rating.

Mainland Chinese shares .SSEC, which were briefly unsettled by Moody's downgrade of its rating on China on Wednesday, bounced back 1.6 percent.

"Credit downgrade wasn't a surprise after all given the delay in structural reforms such as liberalization of capital moves. The Chinese economy looks set to grow more than six percent, so there's no reason to be that pessimistic either," said Shuji Shirota, head of macro economic strategy group at HSBC in Tokyo.

The Canadian dollar strengthened to a five-week high of C$1.3402 per U.S. dollar CAD=D4 after the Bank of Canada was more upbeat about the economy than some investors had expected.

Oil prices flirted with five-week highs as investors expect oil producing countries to extend output cuts at their meeting in Vienna later in the day.

Benchmark Brent crude oil LCOc1 rose 49 cents a barrel, or 0.9 percent, to $54.45. U.S. light crude CLc1 was up 46 cents, or 0.9 percent, at $51.82.

Both benchmarks have gained more than 16 percent from their May lows below $50 a barrel, rebounding on a consensus that OPEC and other producers will maintain strict limits on production in an attempt to drain persistent global oversupply.

Elsewhere, digital currency bitcoin BTC=BTSP hit a fresh record high, having surged 170 percent in about two months from its March low.

Demand for crypto-assets soared with the creation of new tokens to raise funding for start-ups using blockchain technology.

Article Link To Reuters:

China Is Downside Risk For Oil Prices As OPEC Meets

-- OPEC meets today amid expectations of an extension of output cuts
-- Major importer China could present downside risk for the oil market, said an analyst

May 25, 2017

All eyes are on the Organization of the Petroleum Exporting Countries ahead of a highly-anticipated meeting later Thursday when the oil group looks set to extend their crude production cuts, but the big downside risk comes from China, an analyst said.

The OPEC and 11 non-members will be negotiating whether to extend an agreement reached in December to cut oil production by about 1.8 million barrels a day in the first half of this year.

"If you wanted to know where the downside risk is, it is not in OPEC's decision or in U.S. driving demand or in global inventories rebalancing. I think China is the big source of concern," said Prestige Economics President Jason Schenker.

Worries about slowing Chinese growth will affect the market, he told CNBC's "The Rundown". The world's second largest economy is also the second largest importer of crude oil behind the U.S.

"If China weakens further, that poses downside risk. But if we see the rebound in the (China Caixin Manufacturing Purchasing Managers Index) and we see Chinese manufacturing PMI as a proxy for global growth improve, then we see some upside potential here," Schenker added.

Crude oil prices were higher on Thursday in Asia on hopes of an extended production cut. U.S. West Texas Intermediate was up 0.7 percent at $51.74 a barrel while European Brent was up 0.8 percent at $54.38 a barrel at noon SIN/HK time.

IHS Energy vice president Victor Shum told CNBC that supply and demand will be balanced for the rest of 2017 with no sharp drawdowns in inventories even with the production cut extended for another six to nine months. Longer or deeper cuts will take "a lot of time and a lot of diplomacy," he said.

Moody's Investors Service on Wednesday downgraded China's credit rating to A1 from Aa3, changing its outlook to stable from negative, citing concerns efforts to support growth will spur debt growth across the economy.

That could be problem for the oil industry that has been propped by the East Asian giant.

"Without China, the oil market cannot survive," said industry consultancy FGE's founder and chairman Fereidun Fesharaki at a Center for Strategic and International Studies discussion in Washington D.C. on Tuesday.

Asian demand for crude has grown he added, even as Middle Eastern demand growth has fallen due to reduction in energy subsidies across most countries.

Meanwhile, production has been falling in China, spurring greater imports, he noted.

China imported 34.39 million tons of crude oil in April, about 8.4 million barrels a day and up 5.5 percent from a year ago, Reuters reported.

This is as China's domestic crude oil production fell 3.7 percent in April from a year ago to 15.99 million tons, or 3.89 million barrels a day. Output for the first four months was down 6.1 percent from a year ago, Reuters reported.

Fesharaki said China is likely to import a additional 900,000 barrels of oil a day this year over 2016.

On Sunday, China announced new guidelines for the oil and gas industry that will allow for more private participation, but the regulated environment will still present headwinds against the backdrop of a challenging macroeconomic environment.

In a report on Tuesday, BMI Research noted headwinds for independent refiners or "teapots" in China, including limited storage and pipeline capacity in the Shandong province, where around 70 percent of China's independent refiners are located.

"Onshore crude stock levels in Shandong are reportedly at a multi-month high, and the volume of crude cargoes stored in floating tankers is on the rise, which points to the need for additional storage and distribution infrastructure to remove supply bottlenecks," said BMI.

"A slew of other policies , including tighter scrutiny of tax compliance could further hamper teapots ' operations, and pose downside risks to teapot imports," the house added.

OPEC's meeting is expected to start at 10 a.m. local time in Vienna (0800 GMT) and will end with a press conference starting at 5 p.m. local time.

Article Link To CNBC:

Oil Prices Rise In Anticipation Of Extended OPEC-Led Output Cut

By Henning Gloystein
May 25, 2017

Oil prices rose ahead of an OPEC meeting on Thursday that is expected to extend output cuts into 2018, adding at least nine months to an initial six-month curb in the first half of this year.

Brent crude futures LCOc1 were trading at $54.41 per barrel, up 45 cents, or 0.8 percent from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were up 40 cents, or 0.8 percent, at $51.76.

Both benchmarks have climbed over 16 percent from their May lows.

Prices have risen on a consensus that a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) would be extended into 2018, instead of covering only the first half of 2017.

Speculation was rife that the cuts may be extended by nine and possibly 12 months, said Jeffrey Halley, analyst at futures brokerage OANDA in Singapore.

The production cut, introduced in January, was initially only to cover the first half of 2017, but an ongoing glut has put pressure on OPEC and its allies to extend at a meeting in Vienna on Thursday.

"It is widely expected the cartel (OPEC) will, at a minimum, extend its production quota for another nine months," said Stephen Schork of the Schork Report.

James Woods, analyst at Australia's Rivkin Securities, said that an extended production cut was already "factored into the price of oil", adding that is was unlikely that a deeper cut would be announced at this stage.

"OPEC officials prefer ... to wait and see the impact of an extension in helping rebalance the market prior to taking any more drastic actions," he said.

Energy consultancy Wood Mackenzie said a nine-month extension "would have little impact on our price forecast for 2017, which is for an annual average of $55 per barrel for Brent".

It estimated that a nine-month extension would result in a 950,000 bpd production increase in the United States, undermining OPEC's efforts.

U.S. oil production C-OUT-T-EIA has already risen by more than 10 percent since mid-2016 to over 9.3 million bpd as its drillers take advantage of higher prices and the supply gap left by OPEC and its allies.

Should the meeting in Vienna result in a cut extension to cover all of 2018, Wood Mackenzie said the tighter market could push average 2018 Brent prices up to $63 per barrel.

Brent has averaged $53.90 per barrel so far this year.

If the meeting fails to agree an extended cut, traders expect oil prices to fall as this would result in ongoing oversupply.

Article Link To Reuters:

U.S. Oilfield Service Firms Lag Shale Recovery; Old Deals Hold

By Liz Hampton
May 25, 2017

U.S. oil services companies have been doing a lot more work as recovering oil prices have lifted the shale industry from a two-year slump, but producers have been pocketing much of the new cash generated by rising output and squeezing service providers to keep costs down.

Oil service companies that provide the crews, labor and technology used to drill, construct and operate wells are lagging the recovery in U.S. shale producers. The lopsided situation could chill the production rebound or keep it from spreading to more shale fields, executives of services companies said.

Rising demand for certain services means raising salaries to attract workers and refurbishing equipment, while often being paid under fixed contracts signed during harder times, these companies said. That has pressured margins, leading to further losses. Law firm Haynes and Boone LLP said the U.S. oilfield sector experienced 127 bankruptcies between 2015 and April 2017.

Among the 10 largest oilfield service providers, just five were profitable last quarter, the same number as a year ago. In contrast, seven of the top shale oil producers posted a first quarter profit, up from just one a year ago.

"Both of us have to be able to earn a return and give something back to our shareholders," David Lesar, chief executive officer of Halliburton Co (HAL.N), the world's second-largest oilfield services company, said in an interview.

The sector is struggling to change onerous contract terms set when oil prices were much lower. Service companies agreed to those prices out of necessity; they needed cash flow to cover expenses. Those contracts, some of which extend into next year, are contributing to losses, preventing some companies from adding equipment or moving it to oil fields where it could be put to use.

The expiration of those contracts should allow prices for high-demand services to rise, oilfield services executives said.

Even so, some of the changes that shale oil producers made during the downturn are likely to stick, making it harder for service firms to drive up prices.

Oil producers have better returns today because of those cost controls, winning greater favor among investors.

"Many of (oil producers) have reduced capex spending and are increasing capital returns to investors," said Tom Bergeron, a senior fund manager for Frost Investment Advisors.

Shale firms have demanded deals that unbundle the functions of service providers, allowing them to spread the work out among more companies, who then have less leverage to raise prices.

Those practices allowed shale producer profits to start rebounding just a few months after oil prices began to recover from the $26 a barrel nadir of February 2016 Clc1. But it left services companies without a way to immediately benefit from the U.S. crude benchmark's return to about $50 a barrel.

Service companies hope they can raise prices by the second half of this year, but for now there is limited scope to pass along costs, Chakra Mandava, an operations executive at Nabors Drilling USA, (NBR.N), said at an energy conference this month in Houston.

Nabors blamed its first quarter loss on an inability to offset costs for new staff and equipment.

Keane Group (FRAC.N), which supplies pressure pumping services, one of the highest demand services in the shale patch, reported a first-quarter loss due largely to long-term, fixed price contracts, despite a 59 percent jump in revenue from the fourth quarter.

One proposal that might resolve the disconnect between oil price moves and contract changes is to tie deals to the cost of crude.

Apache Corp (APA.N), which plans to drill some 250 wells this year in the Permian Basin, is looking to tie what it pays for services to the U.S. crude benchmark CLc1 - converting fixed service costs to a variable cost in order to cushion the hit to earnings of future oil-price changes.

That way, if crude prices rise, Apache could afford to pay more for services, but would pay less if oil drops. Chevron (CVX.N) also is tying some of its contracts to indexes in a bid to remain competitive, the company said at a recent security analysts meeting.

"We're just opening up the business model to what's possible," Michael Behounek, a senior drilling advisor for Apache, said in May at a drilling conference in Houston. "We want to put a dampener in place."

"They [service companies] don't want to ride the roller coaster either. If we go down this route, it might be good for both parties."

Article Link To Reuters:

The Saudi Oil Blunder That Will Keep Costing

Instead of OPEC production cuts, the kingdom should have fought for market share.

By Leonid Bershidsky
The Bloomberg View
May 25, 2017

It's all but decided that the Organization of Petroleum Exporting Countries and Russia will extend their so-called "production cuts" at Thursday's meeting in Vienna. It's clear, however, that the play has been a mistake for Saudi Arabia, which initiated it. It should have stuck with the policies of its former oil minister, wise Ali Al-Naimi, who had driven down the price of oil in 2014 and put the U.S. shale industry through the wringer.

Naimi's bold move was a bid to regain market share for OPEC. The Saudis were worried about the U.S.'s growing share of global oil exports, as Middle Eastern nations including Saudi Arabia decreased in importance.

Naimi saw the danger inherent in the U.S. shale oil development. Eventually, the U.S. companies would grab even more of the market, and prices would eventually drop because of the emergence of these new, bold players. So the Saudis tried to preempt this. They increased production and offered deep discounts to clients. In late 2014, prices plummeted. Oil-dependent nations, including Gulf states, Nigeria, Venezuela and Russia, had to pump like crazy to compensate for the loss of export revenue.

In 2015, the traditional oil exporters gained little because U.S. shale oil companies had hedged against the price risk. The price drop was costly for Saudi Arabia, which faced a fiscal deficit and shrinking international reserves. There was probably pressure on Naimi, but he stuck to his guns, ruling out any production cuts. And it began to work.

Global investment in oil exploration and production shrank some 23 percent in 2016, but North America saw a 38 percent decline. Credit became hard to come by. Since the beginning of 2015, 123 North American oil companies with almost $80 billion of debt filed for bankruptcy. Between June 2015 and July 2016, U.S. oil production shrank 12 percent.

The shale industry survived by driving down cost and innovating. But its wings had been clipped; it had to be more careful in future planning.

Naimi, however, retired in May 2016, and his successor Khalid Al-Falih almost immediately signaled a U-turn. The Saudi royals, including deputy crown prince Mohammad bin Salman Al Saud, were too impatient to continue the oil war. They sought an output-cutting deal with other large oil-producing states to drive the oil price higher. Though such a deal was reached, and the price rose, the effect could only be short-lived.

Firstly, the Saudis' important negotiating partner, Russia, cheated. It had ratcheted up production to an unsustainably high level as the cuts were negotiated so it could just go back to normal output once the time came to cut. At the same time, Russia moved to take market share away from Saudi Arabia in one of its top export markets, China. This year, Russia is the top exporter to that country, displacing the Saudis.

As expected, not all OPEC members reduced output by as much as they'd promised. Iraq, the United Arab Emirates, Algeria and Venezuela missed their targets by a considerable amount. So while the Saudis and the Russians managed to talk up the oil price for a while, traders later were underwhelmed by the hard data.

They also couldn't fail to notice rising oil inventories in the U.S., where the shale industry reacted vigorously to OPEC's retreat. U.S. oil production is again approaching record levels. Some of the bankrupt producers are back, riding a new wave of optimism. And U.S. exports are up dramatically, competing with OPEC and Russia in every market, including China.

What Naimi feared is now happening, and it would be harder and costlier for OPEC to hold back the trend if it decided to boost production again now. It won't try, however: Instead of playing a long game, the Saudis have chosen to reap the benefits of moderate oil prices today, patching up the kingdom's budget and trying to invest in the diversification of its economy. It's a weak position; even if President Donald Trump, a major fan of the U.S. oil industry, bowed slightly as he accepted Saudi Arabia's highest civilian award last week, the Saudis are essentially acquiescing to a U.S. conquest of their traditional markets and to the loss of their role as the only power capable of balancing the oil market.

Naimi's price war is often called an expensive miscalculation. But I would argue that leadership in the global oil market, and a stable market share, was more important to Saudi Arabia than the income it lost during Naimi's gamble -- about one-third of the $2 trillion lost by OPEC. It will be decades until the country sheds its oil dependence, even if its monopolized, overregulated economy can move fast on diversification. If it hung on for another year, maybe two, shale would have sustained bigger losses, and the investment drought could have had lasting consequences. Saudi Arabia would have retained a substantial degree of control over prices and faced less competition in key markets. But it gave up, and the nine-month extension of the production cuts, which will probably be agreed on Thursday, will further undermine its position, though perhaps keeping the oil price above $50 a barrel a little longer.

Article Link To The Bloomberg View:

China's Bill Will Have To Be Paid

A Moody's downgrade makes clear there's no easy way out of its debt problems.

By Michael Schuman
The Bloomberg View
May 25, 2017

On Tuesday night, Moody’s Corp. downgraded China’s sovereign credit rating for the first time in 28 years. In doing so, the rating agency is acknowledging the dragon in the room: China will have to pay the price for its epic debt binge, whatever policymakers do from here.

The burning question in China these days is whether the government is serious about tackling the debt pile that's exploded since the global financial crisis. Total outstanding credit grew to around 260 percent of GDP at the end of last year, from 160 percent in 2008 -- one of the biggest and fastest expansions ever. Officials say they're keenly aware of the need to deleverage, and there's evidence that recent efforts to deal with the problem are starting to have an impact. What's uncertain is whether the government has the will to push ahead with reforms even as companies start to default and the economy slows.

With its decision, Moody's essentially recognized that the task of resolving China's debt problems is going to bear more and more heavily on the state and the economy. “The downgrade,” the agency explained, "reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.”

The downgrade was slight, and China remains well within investment grade. Still, Moody’s concerns should wake up those investors who have decided, based on the apparent calm in Chinese stock and currency markets, that the country isn't experiencing financial strain. What's happening today may not look like the meltdowns suffered by South Korea or Indonesia in the 1990s. But that might be only because the state retains so much more control in China. If officials hadn’t stepped in last year to curtail escalating outflows of capital, the picture would likely have looked much grimmer.

This “crisis with Chinese characteristics” features all of the seeds of a much more serious downturn: still-rising debt, unrecognized bad loans and a government paying lip service to the severity of the problem. Brandon Emmerich of Granite Peak Advisory noted in a recent study that more and more new debt is being used to pay off old debt, and “a subset of zombie issuers borrowed to avoid default.” As he explains, “even as Chinese corporate bond yields have rebounded (in 2017) and issuance stalled, the proportion of bond volume issued to pay off old debt reached an all-time high -- not the behavior of healthy firms taking advantage of a low-yield environment.”

Efforts to curtail credit will thus inflict serious pain on corporate China. And given that the economy remains largely dependent on debt for growth, deleveraging will also make it harder for such firms to expand and service their debt. The one-two punch could push more companies toward default, punishing bank balance sheets.

What's more, if Beijing policymakers respond by ramping up credit again, all they’ll do is delay the inevitable. Larger dollops of debt simply allow zombie companies to stay alive longer and add to the debt burden on the economy.

Sooner or later, the government is going to have to bail out local governments and state-owned enterprises, and recapitalize the banks. The only question is how expensive repairing the financial sector will be for taxpayers once Chinese leaders realize the game is up. Looking at past banking crises, the tab could prove huge. South Korea’s cleanup after the 1997 crisis cost more than 30 percent of gross domestic product. Applying that to China suggests the cost would reach some $3.5 trillion.

Chinese leaders might be able to keep the final bill down if they take steps now to eradicate zombie firms, strengthen bank balance sheets and allow the market more say in the allocation of capital. Moody's, however, was dubious: “We do not think that the reform effort will have sufficient impact, sufficiently quickly, to contain the erosion of credit strength associated with the combination of rising economy-wide leverage and slower growth.”

There will be those who dismiss all this as a fantasy conjured by anti-China bias or an inability to grasp the wonders of the Chinese economic system. But the dangers escalating debt present to the Chinese economy are a simple matter of mathematics. Insisting China is somehow immune to such logic is the biggest risk of all.

Article Link To The Bloomberg View:

Three Reasons To Fear The Coming Crash In Bitcoins

The bursting of the bitcoin bubble could ripple far beyond investors.

By Matthew Lynn
May 25, 2017

$1,000 $2,000 or $3,000. Heck, it could be up to $10,000 by the end of the month, and carry on climbing from there. While most markets around the world are mildly positive for this year, the cryptocurrency bitcoin has gone through the roof. At $2,400 it has more than doubled in value this year alone, and it is hitting fresh highs almost every day.

But hold on. Bitcoins themselves may be very new, yet that kind of price action is very old. In truth, it is starting to look like a bubble, and that should be making investors everywhere feel nervous. Why? Because it tells us that financial crazes are back. Because it will lead to overinvestment and wild speculation. And because bubbles inevitably crash — and once that happens, the losses can ripple out in unexpected ways.

If you were lucky enough, or smart enough, to load up on some bitcoins early, you will be feeling a lot wealthier heading into the summer.

On Monday, the value of bitcoin BTCUSD, +4.89% raced up close to $2,200, an all-time high. By Wednesday it was soaring over $2,400.

If you had put $1,000 in the electronic currency in 2010, it would be worth an extraordinary $38 million (up from $35 million on Monday and compared to $2,500 if you had put it into the S&P 500 SPX, +0.25% ). Not many people were ever going to be that quick off the mark, but if you had loaded up on a few when the price last crashed in 2014 you would have almost quadrupled your money. In the last month alone, the price has risen by 87%, and there is little sign of it stopping there.

There are plenty of solid reasons why bitcoins are going up in price. It is growing in importance, along with other cryptocurrencies, as more and more companies accept it as a means of payment, and as regulators start to accept it as a legitimate investment. It may well start to break out of a small techno world, and become a mainstream asset, like the dollar, or equities, gold or bonds.

Even so, 87% in a month is not a normal price movement. In reality, no one really needs to spend time debating whether it’s a bubble or not. It is just obvious. The interesting question is what will be the consequences of that, and how much damage it might do when it bursts.

On one level, the answer might be — not much. For all the hype and hoopla around electronic currencies, they are not yet a huge financial deal. There are 16 million bitcoins out there, and they currently have a combined value of $35 billion.

Okay, so that might be $40 billion or even $50 billion by the time you get around to reading this far, but in the context of the global capital markets that is not a huge sum.

Apple AAPL, -0.30% has a market value of $805 billion. All the gold in the world has an estimated combined price of $8.2 trillion. The United States bond market is worth an estimated $31 trillion. Bitcoin is hardly that important. Associated British Foods ABF, +0.37% , a relatively dull company you have probably never heard of, is worth about the same as all the bitcoins put together — and the markets would not crash if it went pop.

On another level, however, the bubble could matter a lot. Here are three reasons why it should be making investors, whether they have any cryptocurrencies in their portfolio or not, feel anxious.

First, like any mania, it will lead to overinvestment, and that will lead to a misallocation of capital. Only this month, a company called RSK Labs raised $3.5 million for a bitcoin “smart contract.” Coinbase, a digital wallet startup, raised $75 million in funding.

Anyone who has time on their hands this week might want to try rolling up to a venture capital fund with a whizzy idea for a bitcoin something-or-other. They will probably walk out with $10 million, and a promise of more funding when that is used up. Sure, some of those will be great ideas, and go on to make everyone a lot of money. But a lot of them will flimsy and unpractical — and will burn though a lot of cash that could have been more usefully deployed elsewhere.

Next, it tells us that manias are back.

In any long bull market, there are always one or two assets where the price goes completely crazy. It might be dot-com stocks, or space exploration companies, or apartments in central London, or hedge-fund managers, or if you go back far enough, radio shares, or South American railway companies.

But it is always something. If there is an asset bubble underway, it surely tells us that we are close to the peak of a bull market — and sooner or later, that will turn down.

Finally, if bitcoin crashes, it might not do that much damage. $30 billion can disappear without leaving much of a trace in the capital markets. The worrying point is this. Bitcoin is not just any old asset. It is also money, if not of the conventional sort.

As we learned in 2008 and 2009 when a part of the financial system starts to crumble, suddenly the whole edifice starts to look pretty shaky. We don’t really know what contracts have been linked to cryptocurrencies, what derivatives have been hitched to them, or how deeply they have been embedded into the financial system. One thing is for sure, though. In a crash, we would find out very quickly – and the losses might ripple out in all unexpected ways.

Right now, bitcoin is on a roll. We have no way of knowing what its real value might be. The peak of a run might well be some way off. But when a crash comes, it won’t just be its holders who feel the pain.

Article Link To MarketWatch:

Fed Ties Rate Hike To Economic Rebound, Sees Balance Sheet Cuts In 2017

By Jason Lange and Howard Schneider
May 25, 2017

Federal Reserve policymakers agreed they should hold off on raising interest rates until it was clear a recent U.S. economic slowdown was temporary, though most said a hike was coming soon, minutes from their last policy meeting showed on Wednesday.

Nearly all policymakers at the May 2-3 meeting also said they favored beginning the wind-down of the U.S. central bank's massive holdings of Treasury debt and mortgage-backed securities this year.

While investors continue to see a rate increase as highly likely next month, the minutes showed that the Fed's rate-setting committee "generally" believed it hinged on the economy rebounding from its sharp slowdown in the first quarter.

"Members generally judged that it would be prudent to await additional evidence indicating that a recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation," according to the minutes, which provided the latest indication of the Fed's heightened caution over policy tightening.

Still, Fed officials made it clear they expected the economy to pick up momentum.

U.S. stocks briefly pared gains and the U.S. dollar .DXY fell against a basket of currencies after the minutes were released. Yields on U.S. Treasury debt turned lower.

"They left June open. I think they would move in June, followed by a fourth-quarter hike," said Matt Toms, chief investment officer of fixed income at Voya Investment Management in Atlanta.

Fed policymakers also discussed at length the reasons for the first-quarter slowdown and why a measure of underlying price gains also fell further below their 2 percent inflation target, according to the minutes.

A wider group of policymakers including officials who aren't voting on the rate-setting committee this year said they expected a rate increase would be needed soon, and reviewed a Fed staff proposal on reducing the central bank's balance sheet.

The Fed has more than $4 trillion in Treasury debt and mortgage-backed securities, largely accumulated as part of the effort to stimulate the economy in the wake of the 2007-2009 recession.

The staff proposal, presented as a "possible operational approach" to winding down the balance sheet, entails halting reinvestments of ever-larger amounts of maturing securities.

Under the plan, a limit would be set on the amount of securities allowed to fall off the balance sheet every month. Initially, the cap would be set at a low level, but every three months the Fed would allow deeper cuts.

"Nearly all policymakers expressed a favorable view of this general approach," the minutes said.

Article Link To Reuters: