Monday, May 29, 2017

Monday, May 29, Morning Global Market Roundup: European Shares Off To Sluggish Start To Week, Banks Weak

May 29, 2017

Euro zone shares fell slightly on Monday, pulling back further from their highest point in almost two years, dragged lower by financials and as holidays in major markets such as the UK and the United States kept investors away.

European blue chips .STOXXE eased 0.1 percent. Spain's IBEX .IBEX fell 0.4 percent with shares of travel booking software firm Amadeus (AMA.MC) down another 2 percent and extending Friday's losses. Germany's DAX .GDAXI was little changed.

UK markets were shut for a public holiday.

All main sectors on the European benchmarks were trading in the red. Regional banks .SX7E were among the biggest drags, however, as investors continued to lock in some gains following the sector's stellar run from last summer's lows.

Spanish-listed shares of International Airlines Group (ICAG.MC), the parent company of British Airways, fell 2.5 percent. BA flights have suffered massive disruptions over the weekend with over 1,000 flights canceled after a computer system failure.

Italy's Banco BPM (BAMI.MI) and Unicredit (CRDI.MI) were both down nearly 2 percent.

The dip in oil prices, exacerbated by a relentless rise in U.S. drilling that has undermined an OPEC-led push to tighten supply spurred investors, has dented appetite for risky assets among some investors over the past week.

Article Link To Reuters:

U.S.-Russia Relations After Trump And Putin

What if the U.S. accepted that Russia, long-term, is part of the West?

By Leonid Bershidsky
The Bloomberg View
May 29, 2017

European Council President Donald Tusk said after meeting with Donald Trump on Thursday that the two had diverging views on Russia. Though no details of the differences have been divulged, one can safely assume Trump was more dovish on Russia than Tusk -- despite all his troubles with the Russia-related scandal at home. To some, it may suggest that Russia has some leverage on him; to me, it means Trump still holds on to the notion that he can build a pragmatic relationship with Russian President Vladimir Putin.

The shape of such a relationship, however, is not obvious. It's more complicated than the simplistic ideological dilemma between the appeasement of a rogue regime and a cynical understanding of American military and economic interests. The fundamental issue is whether the U.S. wants a long-term relationship with Russia that goes beyond the tenures of Trump and Russian President Vladimir Putin.

The answer to that question may be "no." Some of Putin's fiercest enemies, especially in Ukraine, hope his corrupt, oil-fed regime is leading Russia toward a Soviet-style collapse and disintegration. If that's your prediction, a long-term relationship isn't necessary and all that's needed is enough strategic patience to bring about that outcome. Harsh economic sanctions and pressure on the oil price should eventually do the trick, perhaps even with benign consequences. After all, Western leaders who feared the Soviet Union's collapse as a threat to global stability turned out to be overcautious: The mafia didn't get a hold of Russian nuclear weapons and no Yugoslavia-style war broke out in the post-Soviet space.

Waiting for Russia to implode sounds like the tactic employed by the Komodo dragon, whose bite injects a blood-thinning poison into a prey's blood. The giant lizard then follows the prey as it bleeds to death. The problem with this approach is that while the Komodo's hunt ends when the victim dies, Russia's not going to die even if it ever falls apart, which is not likely anyway because it's far more resilient economically than the Soviet Union was. The U.S. will need to build relations with multiple rather large, resource-rich territories with unpredictable political leanings and military impulses. Only a minority of post-Soviet states ended up choosing a pro-Western orientation, even after 25 years of U.S. effort. Betting that a disintegrating Russia will be easier to handle is a mistake. For example, the Caucasus, if it ever splits off, is more likely to lean toward Islamic fundamentalism than toward the West.

So a long-term relationship with Russia based on recognition that the country is going to be around for a while is probably a good idea. Russia is big, easy to find on the map. In a pinch, it's capable of near-autarky. And it's been a military power to reckon with for centuries. Putin will give up power, die, or both at the same time -- but the country that's become hard for many people to detach from his personality is going to endure.

The U.S. could choose to treat Russia as a long-term geopolitical rival, a dangerous counterweight to Western values, a global corrupting influence in other nations' elections and more. After all, the Byzantine tradition that spawned Putin has been one of the most potent strain of Russian life for centuries, and it won't go away when he's gone. Deciding that this strain is the essence of Russia, and fighting against it even when its representatives aren't ostensibly in power, is a clear, principled stand. It's essentially what George Kennan advocated in his "Long Telegram," and much of Kennan's description of the Soviet Union in 1946 fits Putin's Russia, so that's an argument in favor of the approach Kennan described quite succinctly. Russia, he wrote, is

"impervious to logic of reason, and it is highly sensitive to logic of force. For this reason it can easily withdraw -- and usually does when strong resistance is encountered at any point. Thus, if the adversary has sufficient force and makes clear his readiness to use it, he rarely has to do so. If situations are properly handled there need be no prestige-engaging showdowns."

All the U.S. needs to do, then, is demonstrate convincingly but carefully that it can use force, and Russia -- with or without Putin at the helm -- will retreat. It's not clear, though, whether the U.S. can afford to project strength every time Russia provokes it. Would a U.S. administration enhance or reduce its popularity by going all-in in Syria to remove President Bashar Al-Assad? How many U.S. voters would agree to a military adventure in Ukraine? Clearly, less resolute U.S. action is not seen in Moscow as a credible show of strength. Putin is always willing to go an extra step because he's not held back by any democratic baggage, and the likelihood that Russia will have other rulers like him on a long-term horizon is quite high. That undermines the neo-Kennanist narrative.

There is an alternative to the Komodo dragon tactic and the Kennan deterrence doctrine. It's to ignore Putin's self-serving vision of Russia as a conservative, Orthodox bulwark against Western rot and Islamism as a flimsy propaganda construct, and to see the country, ultimately, as part of the Western civilization. It's not much harder than viewing today's Hungary or Poland through that lens despite the setbacks democracy and Western values have suffered in these countries.

Such a perspective would dictate a clear strategy: Cooperate with Russia where it's acting fundamentally like a Western country and confront it where it isn't. For example, Russia's support of the secular Assad regime against Islamic fundamentalist groups is in the Western tradition. Despite all the crimes Assad has committed, his fall would have made non-Sunni communities in Syria all but impossible to protect. Letting Russia prop up Assad and allying with it in the fight against ISIS wouldn't break with the long U.S. practice of backing pre-Arab Spring regimes throughout the Middle East and making alliances with repressive Gulf states. The U.S. isn't morally or ideologically bound to back the anti-Assad opposition: If it ever has the run of the country, it will not turn Syria toward the West.

On the other hand, Russia's territorial grab in Ukraine was decidedly un-Western. The U.S. was right to try to strengthen Ukraine economically and institutionally in its wake, though perhaps wrong in its choice of political forces to back, since the corruption of Ukraine's current leadership risks discrediting Western values in that country. The U.S. decision to withhold lethal weapons from the Kiev regime, however, was correct because arming it could have led to an escalation that could potentially harm the Western world.

Russia harbors an essentially Western desire for free trade and open borders. It's evident from its attempts to build a customs union with former Soviet states, its benign attitude toward emigration and immigration, its persistence in seeking to join the World Trade Organization despite political obstacles. That desire deserves support. Sectoral economic sanctions that prompt the Putin government to retaliate are a mistake: They push the country in the opposite, non-Western direction.

Personal sanctions against officials who push anti-Western, Byzantine policies, those who have taken part in aggression against Ukraine, those who violate human rights and persecute minorities or dissidents are perfectly justified. The West, and the U.S. in particular, would also be justified in banning Russian state-owned "media outlets": The propaganda machine is an affront to the Western idea of a free press. The West has every right to withhold its welcome from certain representatives of the Russian regime and demonstrate its hostility toward what they stand for. But sanctions directed against Russia as a country and Russians as a group are counterproductive. The West should relax visa policies, perhaps even offer visa-free travel to Russians and create more opportunities for them in universities and Western companies. The real reason the European Union is doing it for Ukrainians isn't to reward the government in Kiev for being good boys and girls. It's to give Ukrainians an opportunity to taste Western life, study it and build it at home. Russians should also have that opportunity, otherwise alternatives to their current government will not naturally occur to them.

Putin and his men enjoy Russia's current toxicity in Washington and Brussels. It's a bit counterproductive but it means recognition for their prowess as trolls and hybrid warriors, and it shows Russians they're hated, feared, not wanted in the West. That sense is the root of domestic support for Putin's policies. That's the opposite of what the U.S. would want if it saw Russia, long-term, as part of the West.

Making a deal in Syria, expanding trade and easing travel for Russians while backing Ukraine's pro-Western course, maintaining personal sanctions against Russian officials and fighting Russian state propaganda looks to many Westerners like a self-contradictory policy. It's not. It's about dealing with the current Russian leadership only to the extent necessary to maintain the long-term view that Russia is part of the West. Russia's seen regime change more often than most Western nations. The pendulum will swing back and forth, regimes will come and go, but the country and its people remain, and keeping the door open for Russia and Russians -- not just promising to open it if certain conditions are met -- is a powerful long-term enticement.

The Trump administration doesn't appear to be into long-term thinking. Instinctively, however, Trump and his allies appear to embrace some seemingly contradictory policies that would support the kind of long game I have described. Tusk, for example, found that Trump shared his anti-Kremlin views on Ukraine, though the U.S. president clearly leans toward working with Russia in Syria. That's a good place to start; it won't be the first time that intellectual arguments need to catch up with instincts.

Article Link To The Bloomberg View:

Trans-Pacific Partnership Can Succeed Without The U.S.

Rather than walking away or starting over, the 11 remaining nations should close the trade deal. 

By The Editors
The Bloomberg View
May 29, 2017

The U.S. signed the Trans-Pacific Partnership trade deal last year, then decided not to implement it. The 11 other signatories have given themselves until November to decide whether to go ahead anyway. They shouldn't need half that long. The deal as it stands is far better than none.

Contrary to warnings from some quarters, America's absence needn't kill the agreement. Negotiators mainly have to change the clause that says it must be ratified by countries accounting for 85 percent of the 12 members' gross domestic product (the U.S. is 60 percent). Other provisions dealing specifically with the U.S. will need to be adjusted or ignored, but if the 11 want to proceed, they can.

Some are hesitating. Malaysia and Vietnam, whose prime minister visits the White House this week, say they made concessions only in return for better access to the massive U.S. market. Yet apart from a few areas such as textiles, footwear, agriculture and some auto products, the U.S. market was already pretty open. Without the U.S., expanded intra-regional trade will deliver smaller benefits, but the deal is still a net plus.

The fact is, many of the so-called concessions granted during the talks don't require reciprocal sacrifices to make sense -- they're valuable in their own right. The TPP requires structural reforms in Japanese agriculture, for instance, and Vietnam's state-owned industries. The respective governments understand that those changes are necessary to raise productivity and living standards, but they're politically challenging. The TPP is a way to carry them forward.

In other ways, too, there's more to the deal than lower tariffs. The TPP offers a standard-setting rulebook for doing business globally in the 21st century, covering intellectual property, digital trade and environmental protection. If it goes ahead, membership is likely to grow. Before long, South Korea and Indonesia will feel inclined to sign up. Nations far from the Pacific Rim will look to TPP rules for guidance on how to stay competitive.

The only party to lose in this scenario is the U.S. It will forgo the gains in trade it would have enjoyed, and it will have less leverage in future trade talks with Japan, Canada and Mexico. Some U.S. companies may shift operations to other TPP members to take advantage of concessions originally won by U.S. negotiators. If that is how things unfold, the U.S might ask to be let back in.

Malaysia has proposed a different way forward -- a more exhaustive renegotiation of the pact. This seems ill-advised. It would make things difficult for countries such as Japan and New Zealand that have already ratified the TPP, and would delay implementation far past the end of this year.

Better to bank what's already been achieved, then build on that. No question, this would be a smaller success than the TPP's architects had hoped, but a notable achievement nonetheless.

Article Link To The Bloomberg View:

Russia Squares Up To Boeing, Airbus With Maiden Jet Flight

By Gleb Stolyarov and Jack Stubbs 
May 29, 2017

Russia carried out the maiden flight of its new MS-21 medium-range passenger plane on Sunday, its first post-Soviet foray into production of a mainline commercial aircraft which it hopes will rival those of its Western competitors.

In a surprise statement, manufacturer Irkut Corporation (IRKT.MM) and its state-controlled parent company United Aircraft Corporation (UAC) (UNAC.MM) said an MS-21-300 model had successfully completed a 30-minute flight at a height of 1,000 meters and traveling at 300 km an hour.

Squeezed by Western sanctions over its role in the Ukraine crisis, Russia is trying to rejuvenate domestic industrial production to make the country less dependant on foreign firms.

The test flight, which was not announced to media beforehand, comes just three weeks after China staged the maiden flight of its new C919 passenger jet, highlighting the growing competition to industry heavyweights Boeing (BA.N) and Airbus (AIR.PA).

Russian officials have said the MS-21 is superior to its Western-made counterparts in many respects and will be snapped up by both Russian and foreign carriers, but Western analysts say both Russia and China face a huge challenge to shatter the transatlantic airplane duopoly.

"The flight mission has been completed. The flight was fine, there were no observations which will prevent further testing," test pilot Oleg Kononenko was quoted as saying.

Western aviation sources however expressed surprise at the flight's brevity and relatively low altitude compared with recent 3-4 hour debuts of North American and European models.

"It suggests they either have severe limitations or may have had something happen and decided to come back," said a Western flight test engineer, speaking on condition of anonymity.

A Western jetmaking source called it a "genteel flight".

A UAC spokesman said the flight had been long enough to test everything that needed checking in the air.

Russia has fought hard to shake off its Soviet reputation for old and creaking aircraft flown by inexperienced crews.

Flag carrier Aeroflot (AFLT.MM) last year earned its fourth star from independent ratings website Skytrax, ranking it alongside major European and Middle Eastern competitors and ahead of big U.S. carriers such as Delta and United.

Firm Orders

President Vladimir Putin called Irkut General Director Oleg Demchenko to congratulate him and his employees with what the Kremlin called "a significant event".

The twin-engine MS-21 will be built in two variants: the MS-21-300 which will have 160-211 seats, and the later MS-21-200 which will have 130-165 seats. It is sometimes referred to as the MC-21 when using the Russian name and Cyrillic letters.

Production is expected to start in the next two years and state media have said numerous contracts with domestic and foreign carriers have already been agreed. Irkut said it so far had "firm orders" for 175 planes.

America's Boeing and Europe's Airbus remain far ahead of their Chinese and Russian rivals, with bigger sales books and more advanced technical know-how.

But the new plane could win sales in Russia and some eastern European and Asian countries, industry analysts say, with buyers attracted by its lower running costs.

Irkut said operational costs for its new plane will be up to 15 percent cheaper than current generation aircraft.

With a range of up to 6,000 kilometres, the MS-21 will be competing against the Boeing 737 and Airbus A320 aircraft which currently dominate the medium-range narrow-body market. Both companies recently upgraded those families to achieve comparable 15 percent operational savings compared to previous versions.

State defense conglomerate Rostec, which is headed by close Putin ally Sergei Chemezov, said it had agreed to purchase 85 aircraft. At least 50 of them will be leased to Aeroflot, Rostec said, which currently operates a fleet dominated by narrow-body Airbus models, including 70 A320s.

UAC President Yury Slyusar said he estimated global demand for the new MS-21 models at around 15,000 aircraft over the next 20 years. "I'm sure the airlines will appreciate our new aircraft," he said.

Article Link To Reuters:

Early China Data Shows Slowdown Biting Amid Credit Tightening

Four early indicators show cooling economic growth in May; Previous optimistic sentiment has faded: ZEW economist.

Bloomberg News
May 29, 2017

The first hints of China’s economic performance this month suggest that a slowdown in growth is taking hold, as policy makers beef up efforts to clamp down on financial risks.

The international-investor optimism that dominated in the earlier part of the year is now souring, as curbs on leverage push up the cost of domestic borrowing. Small and medium-sized companies are also reporting dented confidence, and sentiment among sales managers and in the steel market worsened.

A surprise cut in China’s debt rating by Moody’s Investors Service last week may mark a turning point for the world’s second-largest economy, as momentum weakens following a better-than-expected expansion in the first quarter. Yet the gloom shouldn’t spread too far, with consumers still spending, factory-gate prices gaining and home prices defying predictions of a hard landing.

Here’s what May’s earliest indicators show:

Smaller Businesses 

Standard Chartered Plc’s Small and Medium Enterprise Confidence Index headed for a second consecutive month of decline in May, falling slightly to 56.9 from 58 in April.

"Both current performance and expectations fell," which put pressure on the labor market and on profitability, economists Yan Se and Ding Shuang at the bank wrote in a note. "Credit access for small- and medium-sized enterprises is tougher" and funding costs have worsened, the analysts said.

ZEW Panel

Global financial market experts veered toward pessimism on the outlook for the economy, according to a survey of the China Economic Panel, a joint project of the Centre for European Economic Research (ZEW) in Mannheim, Germany, and Fudan University in Shanghai.

The reading for expectations slumped to minus 0.1 in May, down from 17.7 last month -- the highest since at least late 2015. The assessment of the current economic situation has also dampened, falling to 12.2 in May from 17.6 in April.

"The rather optimistic sentiment witnessed in the previous survey has thus faded" although the long-term outlook remains stable, said Michael Schroeder, a senior researcher at ZEW.

Sales Managers

A survey-based gauge of sales-manager sentiment also hit a six-month low at 51.6 in May, dragged down by a sub-index assessing the potential of market growth, according to London-based research firm World Economics Ltd. A reading above 50 indicates expansion.

Managers in services sectors were more upbeat than those in the manufacturing sector, the report said, a sign of the Chinese economy’s gradual reliance on consumption rather than investment and export-led growth.

The "economy continued to grow in May but at a slower rate than has been the case for some time," analysts at the firm wrote, "even though sales have remained stable in May, sales managers have expressed worry that the overall growth trend can’t continue."

Steel Plummet

The S&P Global Platts China Steel Sentiment Index slumped to 33.1 this month from 45.1 in April, weighed down by the outlook for domestic steel orders. The gauge is based on a survey of between 75 and 90 China-based market participants including traders and steel- mill executives.

"China’s steel market is extremely volatile at the moment," Paul Bartholomew, a senior managing editor at S&P Global Platts in Melbourne, wrote in a release. "Underlying demand for flat steel products has been more robust, both domestically and for exports, though overseas customers have started to resist further price hikes."

Article Link To Bloomberg:

Is Trump Pushing Merkel To Create A German Superpower?

It will be no small irony if Trump has impelled Europe to transform itself into a unified great power.

By Jacob Heilbrunn
The National Interest
May 29, 2017

Donald Trump entered office hoping that he could splinter the European Union. But what if his presidency has the effect of further unifying it—against America?

German Chancellor Angela Merkel's announcement that Europe can no longer rely on America as a partner and "must take our destiny into our own hands [3]” marks a turning point. Every American administration since 1945 has tried to work closely with Germany and NATO. Ronald Reagan even visited Bitburg cemetery in May 1985, in the face of controversy at home over the presence of SS graves, in order not to undermine the German chancellor Helmut Kohl, who had stood by him in installing intermediate range Pershing missiles in 1983.

Trump is pushing Germany and Europe in a different direction. Now that France has elected Emanuel Macron president, Merkel is moving to fashion a Franco-German axis that will pursue a common economic and military path. This will signal a significant diminution in American prestige and influence abroad. Imagine, for example, that Merkel decided to defy Trump's push for sanctions and isolating Iran by establishing trade ties with North Korea, including selling it weapons.

We aren't there yet. But Trump's approach to Europe and elsewhere has been predicated on the notion that he can singlehandedly defy the rules of the game and extract what he wants. The problem is that he is emboldening Germany to become the superpower of Europe and inevitably it will pursue what it considers its own interests. This is after all the nation that invented the term realpolitik.

So far Merkel is focusing on building up a joint military command in Brussels and improving relations with Poland. Poland's president has visited Berlin twice this year. Both Germany and Poland view Russia similarly. With Britain out of the picture, Merkel reckons she can move more quickly toward solidifying common EU military measures. She is also looking at cleaning up the EU's finances. The Frankfurter Allgemeine Zeitung reports that she wants to vouchsafe Brussels the economic clout to help ailing economies and boost reform efforts. In this regard, she will focus on trying to meet French demands for an easing of onerous fiscal demands on Southern Europe at least half way.

There is little appetite, at least as far as I could tell at a conference in Berlin sponsored by the American Council on Germany at the German Foreign Ministry, for transforming the country into a Fuehrungsmacht, or leading power. But Trump may be accelerating, willy-nilly, a development that he does not fully grasp. Overall it is hard to see what benefits America would derive by withdrawing from the Paris accords on the environment other than emotional satisfaction. It also seems clear from his complaints about German cars being sold in America that Trump doesn't know that many are manufactured in places like Alabama.

Until now, the core relationship in American foreign policy in Europe has been with Germany. That tie appears not simply to be fraying but on the verge of snapping. It will be no small irony if Trump has impelled Europe to transform itself into a unified great power.

Article Link To The National Interest:

Bitcoin Is More Akin To The Nasdaq Than Gold And Is Not A Safe Haven Asset

-- Buying the Nasdaq represents a risk-on move and I'd argue so does buying bitcoin.
-- Despite a fall in the gold price after the election of President Donald Trump, bitcoin continued its rally.

May 29, 2017

"I wish I'd invested in bitcoin," is a response I usually hear when I tell people how much they could have made off the cryptocurrency if they bought it at the start. Just to be clear, if you bought $100 worth of bitcoin in 2010 when it was worth 0.003 cents each, you'd be sitting on over $88 million.

It all sounds so easy. But for regular investors in bitcoin – those not heavily involved in the cryptocurrency world – bitcoin has often got a confusing reputation. It's known to be highly volatile with wild price swings, but at the same time some, such as Bobby Lee, co-founder and chief executive of bitcoin exchange BTCC, have called it a safe-haven asset.

"When the existing money system has problems, people turn to bitcoin sort of like people used to go to gold in the old days," Lee told CNBC in a recent interview.

I've never been a big believer in bitcoin as a safe haven asset. Sure it has got a touch of support when politics has been rocky. However, a comparison on bitcoin's performance over the past year against the Nasdaq – a tech-heavy stock index – and the typical safe-have asset of gold, shows that the cryptocurrency has more in common with the former.

From around mid-June of 2016, both bitcoin and the Nasdaq have been on a steady climb higher with the stock index recently breaking the 6,000 point barrier and continuing to hit fresh record highs. And it appears there isn't a day that goes by where bitcoin doesn't hit a fresh record high.

Buying the Nasdaq represents a risk-on move and I'd argue so does buying bitcoin, a currency that can see swings of over $100 in a few hours.

A look at bitcoin's trading pattern versus gold in the last year also gives a glimpse into how the cryptocurrency isn't really a safe haven asset. Gold saw a lot of support between mid-June of 2016 and the middle of October. Bitcoin was just bubbling along quietly. But once President Donald Trump was elected, investors moved out of gold into riskier assets on the promise that increased spending by the new U.S administration as well as tax reform could boost stocks. At the time the gold price continued to decline, bitcoin rose, and while the precious metal saw a bit of renewed support in the first few months, the cryptocurrency continues to skyrocket.

It's clear that investors are flocking to bitcoin, not because it offers stability, which it quite clearly doesn't, but more to find solid returns on an asset that is up over 150 percent year-to-date.

Investors still believing bitcoin is a safe-haven asset might find themselves on the wrong side of the trade.

Article Link To CNBC:

Oil Dips As U.S. Drilling Undermines Drive To Tighten Markets

By Henning Gloystein
May 29, 2017

Oil prices dipped on Monday as a relentless rise in U.S. drilling undermined an OPEC-led push to tighten supply.

Trading activity will be subdued on Monday due to public holidays in China, the United States and Britain.

Brent crude futures were trading down 6 cents at $52.09 per barrel.

U.S. West Texas Intermediate (WTI) crude futures were down 8 cents at $49.72 per barrel.

The Organization of the Petroleum Exporting Countries and some non-OPEC producers agreed last week to extend a pledge to cut production by around 1.8 million barrels per day (bpd) until the end of the first quarter of 2018. But the decision did not go as far as many investors had hoped and led to a heavy sell-off.

An initial agreement, in place since January, would have expired in June this year.

"The immediate market reaction to the May 25 OPEC decision is indicative of the weaker-than-expected impact production cuts had on bloated global crude stocks over H1 2017," BMI Research said in a note.

Despite the ongoing cuts, oil prices have not risen much beyond $50 per barrel.

Much of OPEC's success will depend on output in the United States, which is not participating in the cuts and where production has soared 10 percent since mid-2016 to over 9.3 million bpd, close to top producer levels Russia and Saudi Arabia.

U.S. drillers have now added rigs for 19 straight weeks, to 722, the highest amount since April 2015 and the longest run of additions on record, according to energy services firm Baker Hughes Inc.

Almost all of the recent U.S. output increases have been onshore, from so-called shale oil fields.

Even if the rig count did not rise further, Goldman Sachs said it estimates that U.S. oil production "would increase by 785,000 bpd between 4Q16 and 4Q17 across the Permian, Eagle Ford, Bakken and Niobrara shale plays."

Analysts say that reducing bloated global fuel inventories will be key to reining in ongoing oversupply.

"It's going to be all about inventories and whether they fall as much as OPEC thinks," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

While it is hard to come by reliable global oil inventory data, regional stock levels for the United States, Europe and parts of Asia suggest that inventories have dipped in recent weeks, albeit from record levels.

Article Link To Reuters:

OPEC Wins Hedge Funds Back With Jump In Oil Bets Before Deal

Net-long position on WTI rose by most this year: CFTC; U.S. supply drop will be key to sustaining the enthusiasm.

By Catherine Traywick
May 29, 2017

Hedge funds are giving OPEC some credit again.

Following four weeks of growing pessimism, bets on rising West Texas Intermediate prices jumped the most this year just as Saudi Arabia and Russia were mustering support for the deal they struck in Vienna last week, U.S. Commodity Futures Trading Commission data show.

What happens to U.S. stockpiles will be key to sustaining the enthusiasm, and the Saudis know that. In addition to prolonging a historical deal with allies, the kingdom plans to reduce exports to the world’s biggest consumer.

“With OPEC now consciously trying to reduce flows into North America, it’s suggesting a faster than expected inventory unwind,” Bart Melek, a commodity strategist at Toronto Dominion Bank, said by phone. “There may be a bigger upside as we go into summer driving season.”

U.S. inventories, one of the most watched indicators of the global supply glut, have remained above the five-year average that OPEC has sought to break as production from shale plays keeps rising. But they have fallen for seven straight weeks, and the decline is likely to continue as Americans take to the roads, boosting demand for fuel.

Markets were initially unimpressed by the May 25 deal between the Organization of Petroleum Exporting Countries and other top exporters to extend reduced output levels through March, without deeper cuts or any signals as to what happens later in 2018. Futures slumped 4.8 percent in New York before rebounding 2.1 percent Friday. WTI on Monday lost 0.3 percent to $49.65 a barrel as of 12:06 p.m. in Singapore.

"Ahead of the OPEC meeting there was a lot of optimism they would get a deal done, and potentially even a bigger cut," said Phil Flynn, senior market analyst at Chicago-based Price Futures Group.

Hedge funds’s WTI net-long position -- the difference between bets on a price rise and wagers on a drop -- rose 20 percent in the week ended May 23, reaching 193,143 futures and options, according to the CFTC. The number had plunged 50 percent in the previous four weeks.

As for fuels, pessimism over gasoline prices eased for a second week, with the net-short position on the New York-traded benchmark shrinking 79 percent, following a 38 percent contraction a week earlier, the CFTC data showed. Diesel bets moved to a net-long position of 10,846 contracts, from 4,053 net shorts.

When the Energy Information Administration reports on June 1 if U.S. stockpiles shrank for another week, oil investors will have a chance to reassess if their frustration following the OPEC meeting was exaggerated.

“I still think this was a knee-jerk sell-off,” Melek said of the plunge in oil futures after the meeting. “In fact, things are better fundamentally than they were. Guess what? For the next three quarters we are going to get pretty robust deficits.”

Article Link To Bloomberg:

Switch It Up This Year: Buy In May, Till November Stay

By Sinead Carew 
May 29, 2017

"Sell in May and go away" is perhaps the oldest saw on Wall Street, but it appears there's no shortage of U.S. mutual funds doing exactly that this year.

After all, the S&P 500 .SPX has delivered a total return, including reinvested dividends, of 10.8 percent over the last six months, essentially capturing all of the average rolling 12-month total return on the index since 1990, so why not cash in?

Indeed, political drama and high valuations are clearly driving some investors to take profits. American fund investors have yanked more than $17 billion from U.S. stocks so far this month, data from fund tracker Lipper shows, with some $10.1 billion in withdrawals in the latest week alone, the second biggest outflow for the year.

Some hearty investors, however, stand ready to bet against that flow - and history - and are advocating a buy-in-May approach this year.

"If anything you might want to buy in May and sell in November," said Chris Zaccarelli, Chief Investment Officer at Cornerstone Financial Partners, in Huntersville, North Carolina, who bases his bullishness on the healthy outlook for the global economy rather than expectations for a policy boost from the Trump administration.

While stocks appear to have priced in hope for a Trump stimulus this year, Zaccarelli says his expectations for progress on Trump's agenda in 2017 has recently tumbled to 40/60 from 80/20 because he doesn't see Trump gaining enough support from a severely divided Republican party, which suggests to him that selling will be more opportune a few months down the road.

"If we go the entire year and Washington does nothing, no tax reform, no repatriation, I think there will be a little disappointment," he said. "Ironically enough, the disappointment will be in November or December because people will realize they went the whole year and got nothing done."

An Oldie But A Goodie

The sell-in-May tactic has been kicked around Wall Street for decades and is premised on the historic outperformance of the November-May period over the other six months of the year. It works.

In the last 20 years, a $100 investment in the S&P from November through April would have become $343 while a $100 investment in May through October in the same years would have slipped to $98.5, according to Bespoke Investment Group, in Harrison, New York.

From 1928 to 2017 the $100 would have become $4,270 from November through April but would only be worth $257 from investing from May through October, according to Bespoke.

In the summer months "things slow down so you tend to see the chances for a pickup in volatility. That's usually accompanied by weakness in the market," according to Paul Hickey, Co-founder of Bespoke Investment Group, LLC who is not selling now as he still has "a positive view toward equities."
Other factors that can drive a summer lull include a corporate tendency to hold stock-boosting investor meetings early or late in the year, a reduction of over-optimistic analyst estimates around mid-year, and a boost just ahead of the end-of-year holiday shopping season, says Linda Bakhshian, portfolio manager at Federated Investors in Pittsburgh.

John Augustine, Chief Investment Officer at Huntington National Bank in Columbus, Ohio said he is "taking the opposite tack to "sell in May" and moving into U.S. small and mid cap stocks which have underperformed large caps so far this year.

The small cap Russell 2000 index has risen just 1.8 percent year-to-date compared with 7.8 percent for the S&P 500, 6.6 percent for the Dow Jones Industrial Average .DJI and 15.3 percent for Nasdaq Composite .IXIC.

"To sell we'd need a Fed that's more hawkish than expected mixed with economic data that's weaker than expected. That combination could give us a domestic stock sell off this summer. But markets have discounted that this week based after Fed minutes, thinking the Fed would stay dovish this Summer," said Augustine.

Article Link To Reuters: