Thursday, June 1, 2017

Thursday, June 1, Morning Global Market Roundup: Sterling Slips On Election Fears, Conflicting China Signals Weigh On Stocks

By Nichola Saminather
June 1, 2017

Sterling retreated on Thursday on fears that Prime Minister Theresa May could lose control of parliament in Britain's June 8 election, while conflicting signals on the health of China's manufacturing sector kept most Asian stock markets in check.

European stocks, however, looked set to open on a more positive note, with financial spreadbetter CMC Markets expecting major markets to start the day up about 0.1 percent.

Sterling GBP=D3 fell 0.1 percent to $1.2877 after a YouGov poll showed May could be well short of the number of seats needed to form a government, raising the prospect of political turmoil just as formal Brexit talks begin.

Other polls, however, show May winning a big majority.

The currency hit a near six-week low on Wednesday but recovered to close higher.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was flat after four sessions of losses as investors took profits after stocks hit a two-year high last week and as economic and geopolitical concerns continued to weigh on sentiment.

Chinese shares .SSEC.CSI300 fell as much as 0.5 percent after a private survey showed the country's manufacturing activity contracted in May for the first time in 11 months. The findings contrasted with official data on Wednesday which suggested growth remained steady.

South Korea's KOSPI .KS11 fell 0.1 percent and the Korean won KRW= fell 0.2 percent to 1,120.67 won to the dollar after data showing factory activity shrank for the 10th straight month.

However, losses were limited by other data showing rising exports in May.

Factories across much of Asia ran into a soft patch in May as export demand slowed, according to business surveys, but analysts said the weakness was likely to be temporary amid signs of steady improvement in the global economy.

Manufacturing activity continued to improve in most of the region -- albeit at a more modest pace -- and business confidence remained strong overall.

"Most of emerging Asia's manufacturing PMIs slipped in May but we doubt this marks the start of a significant downturn in Asian manufacturing," Krystal Tan, Asia economist at Capital Economics, wrote in a note.

Japan's Nikkei .N225 advanced 1 percent after data showed recurring first-quarter corporate profits were the highest on record for the January to March period.

An increase in capital expenditure in the first quarter added to a raft of recent data pointing to economic expansion, while manufacturing growth in Japan also rose to a three-month high, according to a business survey.

Overnight, Wall Street closed slightly lower as financials lost ground after JPMorgan and Bank of America warned of revenue weakness in the current quarter, but gains in defensive plays offset the decline.

All three major U.S. indexes .SPX .DJI .IXIC ended May in positive territory.

The dollar gained after touching a near two-week low against the yen overnight.

It was up 0.4 percent to 110.06 yen JPY=D4 on Thursday, its first positive session in five, but concerns about U.S. politics capped gains.

President Donald Trump's administration has been the focus of independent investigations by the Federal Bureau of Investigation and several congressional panels over alleged Russian meddling in the 2016 presidential election and potential collusion by the Trump campaign.

The House intelligence committee on Wednesday approved subpoenas for Trump's former national security advisor and personal lawyer in connected with the Russian meddling probe.

A decision by Trump on whether the U.S. will remain in a global pact to fight climate change, due at 3 p.m. EDT (1900 GMT) is also keeping markets on edge.

A source close to the matter said he was preparing to pull out of the deal.

The dollar index .DXY, which tracks the greenback against a basket of six major peers, inched up 0.1 percent to 97.003 after posting a 0.4 percent loss on Wednesday.

Clouding the picture further was a mixed bag of economic data on Wednesday.

Pending home sales fell for a second straight month in April, hindered by a lack of supply, while an index of U.S. Midwest manufacturing activity rose in May.

The Chinese yuan continued its recent run of gains, strengthening for a fourth straight session after news that authorities are tweaking their formula for the daily reference rate in a bid to quash persistent depreciation pressure. [CNY/]

It was last trading at 6.7948 per dollar CNY=CFXS, close to its strongest level since November hit earlier in the session, after the People's Bank of China set the midpoint CNY=PBOC at 6.8090.

The euro EUR=EBS was flat at $1.12405.

In commodities, oil prices advanced on a report that showed U.S. crude stockpiles had fallen more than expected.

That came on the heels of Wednesday's steep declines driven by after an increase in Libyan output that helped boost monthly OPEC production for the first time this year.

Global benchmark Brent LCOc1 advanced 1.7 percent to $51.16 a barrel after slumping 3 percent on Wednesday.

U.S. crude CLc1 rose 0.9 percent to $48.75, after plunging 2.7 percent in the previous session.

Gold XAU= rose 0.1 percent to $1,266.18 an ounce.

Article Link To Reuters:

Oil Futures Rise On U.S. Stockpile Draw, Doubts Over Climate Accord

By Aaron Sheldrick
June 1, 2017

Oil futures rose on Thursday from a three-week low touched the previous session, buoyed by expectations the United States could pull out of a global climate accord and by a report that showed U.S. crude stockpiles had fallen more than expected.

Trump said he would announce later on Thursday a decision on whether to keep the United States in a global pact to fight climate change, as a source close to the matter said he was preparing to pull out of the Paris agreement.

"If he actually withdraws the U.S from the climate accord, this would signal his intention to further roll-back emission regulations that would favor the use and demand of fossil fuels, thus giving a much needed boost to oil prices," said Jonathan Chan, investment analyst at Phillip Futures in Singapore.

Brent crude futures for July LCOc1 were up 39 cents, or 0.8 percent, at $51.15 a barrel, after trading higher earlier.

On Wednesday, they fell $1.53, or 3 percent, to settle at $50.31 a barrel on their last day as the front-month contract. It was Brent's lowest close since May 10 and the contract dropped 2.7 percent last month, the third monthly decline.

U.S. West Texas Intermediate crude CLc1 futures were up 40 cents, or 0.8 percent, $48.72 a barrel.

They dropped $1.34, or 2.7 percent, in the previous session to settle at $48.32 per barrel, the lowest close since May 12. The U.S. benchmark also fell for a third month in May, declining 2 percent.

Data from the American Petroleum Institute (API) showed crude inventories were down by 8.7 million barrels at 513.2 million in the week to May 26. That compared with analyst expectations for a decrease of 2.5 million barrels. [API/S]

The U.S. Energy Information Administration (EIA) report on stockpiles is due at 11:00 a.m. EDT (1500 GMT) on Thursday, delayed by a day because of the Memorial Day holiday on Monday.

Further gains may be limited for the two major oil benchmarks as bearish news keeps coming from the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia that are locked in a battle against rising shale production in their efforts to boost prices.

Oil futures have given up all the gains posted in advance of last week's agreement between OPEC and non-OPEC producers to extend a production cut for a further nine months.

Output from OPEC rose in May, the first monthly increase this year, a Reuters survey found.

Higher supply from Nigeria and Libya, OPEC members that are exempt from the production-cutting deal, offset improved compliance by others.

Article Link To Reuters:

'Axis Of Love': Saudi-Russia Detente Heralds New Oil Order

By Dmitry Zhdannikov and Vladimir Soldatkin 
June 1, 2017

A meeting between the two men who run Russia and Saudi Arabia's oil empires spoke volumes about the new relationship between the energy superpowers.

It was the first time that Rosneft (ROSN.MM) boss Igor Sechin and Saudi Aramco chief Amin Nasser had held a formal, scheduled meeting - going beyond the numerous times they had simply encountered each other at oil events around the world.

Their conversation also broke new ground, according to two sources familiar with the talks in the Saudi city of Dhahran last week who said the CEOs discussed possible ways of cooperating in Asia, such as Indonesia and India, as well as in other markets.

The sources did not disclose further details, but any cooperation in Asia between Russia and Saudi Arabia - the world's two biggest oil exporters - would be unprecedented.

State oil giant Aramco confirmed the meeting took place but declined to give details of the closed-door talks, which took place on the same day as OPEC kingpin Saudi Arabia and non-OPEC Russia led a global pact to extend a crude output cut to prop up prices. Kremlin oil major Rosneft declined to comment.

The meeting - which also saw Nasser give Sechin a tour of Aramco's HQ, according to the sources - gives an insight into the newfound, unexpected and fast-deepening partnership between the two countries. It is one that will be closely watched by big oil consumers around the world which have long relied on the hot rivalry between their top suppliers to secure better deals.

Such a detente between Moscow and Riyadh would have been almost unthinkable in the past.

Up until a year ago, the two sides had virtually no dialogue at all, even in the face of a spike in U.S. shale oil production that had led to a collapse in global prices from mid-2014. Sechin was strongly opposed to Russia cutting output in tandem with OPEC.

In a sign of their white-hot Asian rivalry, Rosneft outbid Aramco to buy India's refiner Essar last year and boost its share in the world's fastest growing fuel market.

Fast forward a matter of months, and Moscow and Riyadh have become the main protagonists of the pact to cut output - agreed in December and extended last week - and are even discussing possible cooperation in their core Asian markets.

"It is a new 'axis of love'," one senior Gulf official said of the relationship.

On Tuesday, Putin welcomed Saudi Deputy Crown Prince Mohammed bin Salman in the Kremlin and both men said they would deepen cooperation in oil and work on narrowing their differences over Syria, where Moscow and Riyadh are backing opposing sides in a civil war.

"The most important thing is that we are succeeding in building a solid foundation to stabilize oil markets and energy prices," said Prince Mohammed.

Putin said the countries would work together to resolve a "difficult situation".

Why Now?

The first attempt at cooperation between the two countries failed spectacularly with both sides unable to agree joint actions at an OPEC meeting in December 2014, six months after oil prices began tumbling from above $100 a barrel.

To add insult to injury, Sechin pledged to keep pushing output higher, even if prices fell to $20 per barrel. Saudi's then oil minister, Ali al-Naimi, retaliated by saying the Russian oil output would collapse as a result of low prices, a prediction that turned out to be wrong.

Much has changed since then, however, economically and politically - and the unlikely partnership between Moscow and Riyadh has been born out of necessity.

When oil prices collapsed, both economies were driven into deficit after years of high spending and are only now slowly recovering. With Russia heading for a presidential election in early 2018, and Prince Mohammed having pledged to reform the Saudi economy and publicly list Aramco, neither country can afford another oil price shock.

The ousting of veteran minister Naimi and his replacement with the more pragmatic Khalid al-Falih last year also appeared to have helped, with their dialogue facilitated by OPEC's new secretary general Mohammad Barkindo.

"If minister Falih says something, I know it will be done," Russian Energy Minister Alexander Novak said last week in Vienna after Russia and OPEC agreed to extend output cuts.

Novak is looking to organize a trip for Falih to a Russian Arctic field, having visited Aramco's facilities in the Empty Quarter desert himself last October. "Last year, minister Falih took us to a desert - we want to show him an ice desert," Novak joked last week.


On Tuesday, Novak and Falih reiterated in Moscow they would do "whatever it takes" to stabilize oil markets, borrowing a famous phrase used by European Central Bank President Mario Draghi five years ago to defend the euro.

They also discussed the outlook for non-OPEC production including U.S. shale output, which has resumed growing over the past year as private American producers have cut costs and adapted to lower prices.

U.S. crude is now being exported all over the world and the chances of private producers agreeing to cooperate with OPEC are minimal because of tough U.S. anti-monopoly legislation.

"Both Russia and the Gulf countries are interested in some type of oil price stabilization and they hope that they can achieve this without undertaking a sort of massive cuts which they had to do back in the 1980s," said Paul Simons, a former U.S. diplomat now serving as deputy executive director of the International Energy Agency.

Saudi Arabia and Russia say they will remain in partnership long after the current output reduction deal expires.

"It is necessary to work out new framework principles for continued cooperation between OPEC and non-OPEC even after the expiration of the Vienna agreements," Novak said on Wednesday.

Falih, for his part, ended his speech by thanking Novak in Russian: "Spasibo."

Article Link To Reuters:

For Democratic Hopefuls, The Deep South Is A Winner

The road to the presidential nomination doesn't go through New Hampshire. Or Iowa.

By Conor Sen
The Bloomberg View
June 1, 2017

If the past 25 years of Democratic presidential nomination contests are any guide, the process for 2020 will follow a familiar pattern: One candidate will dominate the Deep South and walk away with the nod, and everyone else will whine about how they got screwed by the party establishment. You'd be forgiven if this isn't what you've been led to believe by stories about the early contenders, which are often framed as a battle between an insider-friendly choice from a wealthy urban coastal area (like Hillary Clinton) and a champion of the white working class and rural America (like Bernie Sanders).

The truth is, while recent party nominees John Kerry, Barack Obama and Hillary Clinton hailed from large urban areas, it's the Deep South that ultimately anointed them. Going back to 1992, seven states have voted for the Democratic Party's eventual nominee every time -- Illinois and Missouri in the Midwest; Virginia; and the four Southern states of Georgia, Alabama, Mississippi and Louisiana. If John Edwards hadn't won his home turf of North and South Carolina in 2004, we could add those two to the list. Washington, D.C., has a perfect record as well.

This isn't a fluke. Not counting superdelegates, the Democratic Party's nomination process awards delegates on a proportional basis. As a result, blowouts count for a lot, while narrow victories count for little more than bragging rights. Sanders won the hotly contested battleground states of Wisconsin and Michigan, giving him a net advantage of 14 pledged delegates in those two states. Clinton dominated the state of Louisiana and walked away with 37 pledged delegates there compared to Sanders's 14. And Alabama gave Clinton a net advantage of 35 pledged delegates, while California only gave her a net advantage of 33.

The common denominators of these Southern states are their large black populations and racially polarized electorates. The "Democratic nominee plus Edwards" states and the District of Columbia make up seven of the 10 states with the highest proportion of black populations. In these states, white voters are far more likely to be Republicans, exacerbating the effect. Here in Georgia, 31 percent of the population is black, but FiveThirtyEight estimated in an analysis last year that the Democratic Party primary electorate was 51 percent black. In South Carolina, it was 61 percent, and in Louisiana, 71 percent.

One could argue that the clearest path to the Democratic nomination is to consolidate the black vote, dominate in the Deep South, build up a commanding delegate lead, then coast to victory. Consider how geography and proportional delegate allocation affected the 2016 Democratic nomination. In the 23 states Sanders won, he took a net 232 delegates more than Clinton. In that southern loop from Washington to Louisiana, she had a delegate advantage of 207. In South Carolina, Georgia, Alabama and Mississippi, Sanders won a grand total of one county. Throw in her blowout in Florida, strip out the superdelegates and give her ties everywhere else, and Clinton still would have been the nominee.

The demographics and delegate math make this strategy look even more appealing in 2020 than it was in 2016. While delegate apportionment for the 2020 Democratic nomination has yet to be decided, it should be even more favorable to the South. In 2016, states were awarded delegates in large part based on their electoral vote levels and how much of a share they had given the Democratic Party nominees in an average of the past three presidential elections (2004, 2008 and 2012). In 2020, we'll be rolling off the 2004 vote counts -- where the Democratic presidential nominee, Kerry, performed relatively well in the Midwest but poorly in the South -- and adding the results of the 2016 election, where Democrats performed better in Texas and Georgia than they did in Iowa and Ohio. Demographics are changing faster in the South than the North, populations are growing faster in the South than in the North, and, based on prior vote counts, Democratic delegates will be moving from the North to the South.

So, a word of advice to those with 2020 hopes: Skip the pancakes in Manchester and the corn dogs in Des Moines. Instead, grab some cobbler in Macon and a po' boy in New Orleans.

Article Link To The Bloomberg View:

Rove: The President Is Home, But Not Home Free

Trump stayed on message during his trip abroad. Now if only he can keep it up.

By Karl Rove
The Wall Street Journal
June 1, 2017

After a comparatively good week abroad, President Trump has returned home to deteriorating poll numbers, even among the Republicans and independents vital to his standing. To turn the situation around, Mr. Trump must learn from his foreign trip’s successes and get his promised White House shake-up right.

In the Feb. 13 Fox News poll, 48% of voters approved of the president’s job performance, and 47% disapproved. By May 23 he had slipped to 40% approval, 53% disapproval. Voters who strongly approved dropped from 35% in February to 28% in May, while those who strongly disapproved rose from 41% to 46%. Mr. Trump’s approval declined from 86% to 81% among Republicans during the same period and, alarmingly, from 52% to 34% among independents.

One thing Mr. Trump did right while overseas was to stay on message. During his trip the president had one powerful theme a day. He stuck to prepared remarks and generally did not create controversies or send tweets that would overshadow his agenda. Take his stop in Saudi Arabia. There the president called on leaders of Muslim nations to “drive out” Islamist terrorists in their midst.

Mr. Trump’s tone abroad was often “presidential,” a quality that’s difficult to describe but that you know when you see it. The first lady’s dignified presence helped as well.

The trip had some problems. By publicly pummeling North Atlantic Treaty Organization partners for failing to spend the agreed 2% of gross domestic product on defense, Mr. Trump sent a signal of disunity—especially since he also failed to explicitly affirm NATO’s Article 5 commitment, which holds that an attack on one ally is an attack on all. Adversaries might interpret this omission as weakness. A tough private lecture to NATO allies followed by a public explanation might have been better. Then when German Chancellor Angela Merkel took a swipe at Mr. Trump after he had departed, he responded with a petulant tweet.

Meanwhile, the talk of a West Wing shake-up continues. Communications director Mike Dubke has already resigned, and more departures are rumored. So is the establishment of a “war room” to deal with FBI and congressional investigations of Russian meddling in last year’s election. Whether such an operation would be dominated by lawyers or communicators is unclear. But that choice could determine if the controversy is compartmentalized and allowed to fade or inflamed to dominate all else.

Attorneys are typically cautious. They would express confidence in ultimate exoneration, while making certain White House aides didn’t create problems with false or explosive statements. If communicators are in charge—especially the “killers” Mr. Trump admires—then scorched-earth tactics could prevail. It may make for great TV but would destroy the president’s ability to rally public support for his agenda.

There’s talk of setting up this operation outside the White House, but that could violate the Antideficiency Act and other laws that bar government workers from controlling or directing private groups in support of official duties.

There are also rumors that the daily White House press briefing may be canceled, leaving Mr. Trump’s voice the only one heard from 1600 Pennsylvania Ave. That would be risky. Mr. Trump is volatile and prone to saying outrageous things. The press corps will keep reporting, whether it’s given the administration’s side of the story or not. The only thing canceling the daily briefing would accomplish is to further antagonize Mr. Trump’s relations with the media.

Holding more campaign-style rallies is a bad idea. Without a pending election, it would make Mr. Trump look like an office-seeker and not the Oval Office-holder. The public is tired of the perpetual campaign. It wants results.

Better for Team Trump to create events that show the president tackling problems people care about. One example: His policies have increased deportations of violent illegal immigrants. Why not showcase this by visiting Border Patrol agents and victims of the MS-13 gang?

And maybe the president should stop watching so many cable news shows. Obsessing over his coverage helps neither his state of mind nor West Wing morale. Remember what such habits did to Presidents Johnson and Nixon.

Nurturing a siege mentality, especially so early in a presidency, is a huge mistake. Mr. Trump may blame his poor standing on “fake news” and leaks by the “deep state,” but he has been weakened principally by his self-destructive habits.

His overseas trip showed that dysfunction and ineptness need not characterize the whole of his presidency. But it still dominates far too much. If that doesn’t change, Mr. Trump’s approval ratings will drop even lower and take down his governing agenda, too. Like so many of his predecessors, he must now demonstrate he can grow in office.

Article Link To The Wall Street Journal:

Uber's Finance Head Leaves; Company's Quarterly Loss Narrows

By Subrat Patnaik
June 1, 2017

Uber Technologies Inc [UBER.UL] said its head of finance is leaving, and the privately held ride-hailing company also said that its first-quarter loss narrowed substantially from the prior quarter, putting it on a path toward profitability.

Head of finance Gautam Gupta is leaving in July to join another startup in San Francisco, the company said, making Gupta the latest high-profile executive to leave Uber.

Uber, which has been rocked by several high-level executive departures in the past few months as it grapples with a series of controversies, has been looking for a chief operating officer to help change its now-notorious "bro" culture.

Gupta's exit sets the stage for a second major executive search, now for a chief financial officer who has public company experience.

About a dozen top executives have left Uber since February.

The company on Tuesday fired the technology whiz it had hired to lead its self-driving unit, Anthony Levandowski, after he failed to comply with a court order to hand over documents at the center of a legal dispute between Uber and Alphabet Inc's (GOOGL.O) Waymo unit. [nL3N1IW3CC]

Uber on Wednesday said its net loss in the first quarter, excluding employee stock compensation and other items, narrowed to $708 million, from $991 million in the fourth quarter.

As a private company, Uber does not report its financial results publicly, but at times it has confirmed figures reported in the media.

Uber said its first-quarter revenue rose 18 percent to $3.4 billion from the fourth quarter.

"The narrowing of our losses in the first quarter puts us on a good trajectory towards profitability," an Uber spokesperson said in an email.

Article Link To Reuters:

Trump Hails Deals Worth 'Billions' With Vietnam

By Roberta Rampton and David Brunnstrom
June 1, 2017

U.S. President Donald Trump talked trade with Vietnamese Prime Minister Nguyen Xuan Phuc during a White House visit on Wednesday and welcomed the signing of business deals worth billions of dollars and the jobs they would create.

The U.S. Commerce Department announced 13 new transactions with Vietnam worth $8 billion, including $3 billion worth of U.S.-produced content that would support more than 23,000 American jobs.

These include deals for General Electric Co (GE.N) worth $5.58 billion for power generation, aircraft engines and services, its largest-ever combined sale in Vietnam.

Caterpillar Inc (CAT.N) and its dealer in Vietnam also agreed to provide generator management technology for more than 100 generators in Vietnam, the company said.

"They (Vietnam) just made a very large order in the United States - and we appreciate that - for many billions of dollars, which means jobs for the United States and great, great equipment for Vietnam," Trump told reporters at the White House.

The Commerce Department estimate of the deals was considerably less than the $15 billion figure given by Phuc during a speech at the Heritage Foundation, adding that most of the total involved the import of U.S. equipment.

Communist Vietnam has gone from being a Cold War enemy to an important partner for the United States in the Asia-Pacific, where both countries share concerns about China's rising power.

Phuc told Trump the relationship had undergone "significant upheavals in history" but that the two countries were now "comprehensive partners."

Phuc's meeting with Trump makes him the first Southeast Asian leader to visit the White House under the new administration.

Trade Friction

However, while Hanoi and Washington have stepped up security cooperation in recent years, trade has become a potential irritant, with a deficit widening steadily in Vietnam's favor, reaching $32 billion last year, compared with $7 billion a decade earlier.

Commerce Secretary Wilbur Ross said it was important to shrink the U.S. trade deficit with Vietnam but noted that the southeast Asian country of 80 million people was the fastest-growing market for U.S. exports, rising 77 percent since 2014 to $4.4 billion.

"The growth of the middle class and the increasing purchasing power in Vietnam are further incentives to strengthening our long-term trade and investment relationship," Ross said.

Trump, who has had strong words for countries with large trade surpluses with the United States, said he would be discussing trade with Phuc, as well as North Korea.

Washington has been seeking support to pressure North Korea to drop its nuclear and missile programs, which have become an increasing threat to the United States. Hanoi has said it shares concerns about North Korea.

In his Heritage speech, Phuc welcomed Trump's plans to attend the November APEC summit in Hanoi. He called it a sign of U.S. commitment to the region and "an important occasion for the United States to assert its positive role."

In a reference to somewhat warmer ties between Washington and Beijing under Trump, who has been courting China's support on North Korea, Phuc said Vietnam welcomed good relations between the two powers, but hoped these would serve the interest of other nations in the region too.

He urged Washington and Beijing "to act with full transparency and in a responsible manner so as not to impact negatively the region and relations among other nations."

Vietnam's government said on its website Trump and Phuc had agreed to promote defense ties and discussed the possibility of U.S. vessels, including aircraft carriers, visiting Vietnamese ports.

It said they had expressed concern about the South China Sea, where Vietnam, Malaysia, the Philippines and Brunei are involved in maritime disputes with China, which claims nearly all the strategic waterway. Taiwan also stakes a claim.

"They emphasized that parties must not take actions accelerating tension such as the militarization of disputed structures," it said, an apparent reference to China's construction work.

"Nice, But Not Enough"

Murray Hiebert, a Southeast Asia expert at Washington's Center for Strategic and International Studies, said that while the Trump administration welcomed new business deals with Vietnam, its view was they were "nice, but not enough."

"They want Vietnam to bring some ideas about how to tackle the surplus on an ongoing basis,” he said.

On Tuesday, U.S. Trade Representative Robert Lighthizer expressed concern about the rapid growth of the deficit with Vietnam. He said it was a new challenge for the two countries and he was looking to Phuc to help address it.

The deficit is Washington's sixth largest and reflects growing imports of Vietnamese semiconductors and other electronics products in addition to more traditional sectors such as footwear, apparel and furniture.

On Tuesday Vietnam's trade minister, Tran Tuan Anh, presented Lighthizer with suggestions to address some U.S. concerns, such as advertising on U.S. social media, electronic payment services and imports of information security and farm products, Vietnam's trade ministry said.

Vietnam was disappointed when Trump ditched the 12-nation Trans-Pacific Partnership trade pact, of which Hanoi was expected to be one of the main beneficiaries, and focused U.S. trade policy on reducing deficits.

Article Link To Reuters:

Wall Street Traders Crave Action. April And May Didn't Deliver

Banks earn less as big geopolitical events like Brexit subside; For many traders, lower volatility means ‘a very tough slog.’

By Hugh Son, Laura J Keller, and Dakin Campbell
June 1, 2017

Many crises could’ve erupted in the world during the second quarter, and then didn’t. That’s not necessarily good for Wall Street banks.

Top executives at JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are lamenting that there’s too little happening in the world to spur investors to buy and sell. Yet at the same time, there’s just enough uncertainty over geopolitics and U.S. tax reform to restrain corporate mergers and acquisitions.

Remarks from those three banks’ leaders signal that almost a year of geopolitical turmoil that began with the U.K.’s surprise vote to exit the European Union, and then escalated with Donald Trump’s surprise victory in the U.S. presidential election, may be cooling. Wall Street had gorged as customers adjusted to every shock. Now it seems many are inured: Trump’s early morning tweets aren’t enough to keep trading desks buzzing.

“Volatility hasn’t been that great actually -- it’s made for a very tough slog,” Eric Wasserstrom, a banking analyst at Guggenheim Securities LLC, said Wednesday on Bloomberg Television. Still, “I don’t know if we really want to be rooting for political dislocation as something that really helps the investment banking community.”

‘Idiosyncratic Events’

At JPMorgan, markets revenue tumbled about 15 percent in April and May from a year earlier, driven by a fixed-income slump, Chief Financial Officer Marianne Lake told investors in New York on Wednesday morning. At Bank of America, revenue from the business will be 10 percent to 12 percent lower, Chief Executive Officer Brian Moynihan said at another event that day. At Goldman, clients’ trading remains “subdued,” co-President David Solomon said.

“There haven’t been that many idiosyncratic events, and we need a few more of them,” Lake said. “As a sweeping generalization, low rates, a more cautious outlook on rates, and low volatility have led to low client flows and a generally quiet, subdued and challenging trading environment.”

Morgan Stanley CEO James Gorman indicated his firm is seeing similar trading declines. The estimates from JPMorgan and Bank of America “are reflecting reality and I don’t think we’re very different,” Gorman said in an interview with Bloomberg Television in Beijing on Thursday.

A lot hasn’t happened this quarter. Centrist Emmanuel Macron prevailed in France’s presidential election last month, heading off euro-skeptic Marine Le Pen and taking pressure off the currency bloc. Trump struggled to score major legislative victories. And while tensions escalated between the U.S. and North Korea, they didn’t veer into open warfare.

Still, the trading doldrums described by bank executives on Wednesday caught their shareholders off guard. Goldman Sachs’s stock fell hardest, dropping 3.3 percent to the lowest since November, leading a decline in the Dow Jones Industrial Average. Bank of America and JPMorgan both slid more than 2 percent.

Investors were aware that volatility was muted but were expecting trading revenues to fall only about 5 percent from the year-earlier period, Gerard Cassidy, an analyst at RBC Capital Markets, said in a phone interview.

“There’s just been no event this quarter” comparable with last year’s, such as Brexit, he said.

The Federal Reserve’s meeting in June could provide fodder for bank clients, Cassidy said. Traders are expecting the Fed to outline how and when it plans to shrink its $4.5 trillion balance sheet. And futures prices indicate an 88 percent chance the Fed is poised to raise rates, according to data compiled by Bloomberg. If either of those don’t go according to expectations, banks could jump on the opportunity to trade.

Underwriting Down

In the first quarter, profits at several of the biggest U.S. banks trounced estimates, fueled by revenue from fixed-income sales and trading. Altogether, the five biggest U.S. banks took in 51 percent more from debt underwriting than a year earlier, according to Bloomberg Intelligence. Fresh debts typically help spur trading in the secondary market.

This quarter, new debt issuance has waned or stagnated in almost every major market. U.S. investment-grade bond underwriting declined 6.7 percent, European deals dropped 18 percent, and emerging-market bonds were flat through May 31, according to data compiled by Bloomberg. Even new loans -- typically more desirable for investors when rates are rising because the interest they charge can adjust -- declined globally by 28 percent, the data show.

Equities trading -- a business that’s been transforming into a lower-fee, largely electronic market -- may hold up for banks this quarter even after the CBOE Volatility Index for the S&P 500 neared a record low in May. In Europe, revenue from cash equities is on pace to rise 18 percent from the first quarter, while dropping “slightly” in the U.S., JPMorgan analyst Kian Abouhossein wrote in a note to clients May 23. Still, revenue from stock derivatives will decline across regions, he said.

JPMorgan’s Lake listed equities, especially corporate derivatives and prime brokerage, as an source of strength for the period.

When it comes to mergers and acquisitions, uncertainties over European elections and U.S. tax reform have led companies to exercise caution, Solomon said. That’s despite steady growth and a competitive environment that encourages CEOs to act. As a result, Solomon said he expects a “reasonable pace” for deals.

Gorman called the confluence of economic growth and political turmoil a “conundrum” for markets.

“There is enormous uncertainty, which typically would breed tremendous volatility, and it’s not,” Gorman said. “It’s this very passive perspective that investors have, and I think the downside risk at this point is outweighing the upside risk.”

Even if turmoil -- and thus trading -- revives, the reward for many employees may be limited. Executives said they’re trying hard to keep a lid on costs. Goldman Sachs Chief Financial Officer Marty Chavez put it like this alongside Solomon: “As revenue growth occurs, you should expect comp growth to lag.”

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Why Do The Young Reject Capitalism?

At the same time, they celebrate entrepreneurs and free enterprise. It’s a curious disconnect.

By Warren A. Stephens
The Wall Street Journal
June 1, 2017

When did capitalism become anathema to young people—and why? About a year ago the Institute of Politics at Harvard released survey results showing that more than half of respondents between 18 and 29 do not support capitalism, the free-market system that underpins our economy. An astonishing one-third said they support socialism.

Clearly the tenets of capitalism are deeply and fundamentally misunderstood. No system has done a better job addressing the very issues that its critics think are important. Capitalism has stabilized our communities, created jobs, lifted people out of poverty, and empowered them to fulfill their dreams.

Consequently, the merits of America’s free-market system are inspiring economies around the world. According to the Pew Research Center’s Global Attitudes and Trends study, a global median of 66%, from developing and advanced countries, believe people are better off under capitalism. This view is particularly prevalent in emerging economies like Kenya, Nigeria and Vietnam, where growth has been ignited by expansion of the free market. Yet here at home capitalism is now condemned as an elitist system that enriches a few at the expense of the many.

At the same time that young people are rejecting capitalism and free markets, they celebrate entrepreneurs and free enterprise. This disconnect is at best confusing; at worst it’s troubling. Without access to capital, budding entrepreneurs see their ideas wither; without capital, there is nothing to fuel innovation. Capital is the lifeblood of our economy. It must flow freely to ensure the economy’s vitality and health.

I recognize that young people have come of age during some troubled economic times. I suspect this contributes to their discontent and their misguided belief that government interference is the answer. In truth, government meddling is a large part of the problem. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, has made it harder for firms to lend money and for small and mid-cap companies in particular to access the capital markets. The 2012 JOBS Act tried to make it easier for smaller companies to issue equity in the public markets, but it is not enough. My father, Jack Stephens, used to say, “A great idea never fails for lack of capital, because capital will always find it.” Sadly, I’m not sure that’s true today.

For proof, we need look no further than the growth of private equity, a direct result of the limitations placed on the public markets. Yes, private equity should be an option both for those seeking money and for those who wish to invest it. But we cannot ignore that private equity is a vehicle that excludes most investors. The result: Access to capital and the benefits of capitalism have been concentrated among too small a group, restricting opportunity on both sides. The very individuals and businesses the government purports to help have virtually no chance to participate in and benefit from the creation of great companies.

As we have seen from the stifling effects of increased regulation around capital markets, bigger and more powerful government is not the answer. The appropriate role of government is to provide the framework that allows capital to flow freely, in accord with the law of supply and demand. That is how jobs, businesses and wealth are created. The government would have no money to distribute or spend without the tax revenue generated from the jobs and businesses that are the fruit of our capitalist system.

By virtue of living in the United States, we are all capitalists. Everyday transactions—putting gas in our cars, buying groceries—are just as much a part of capitalism as financing growing companies and investing in ideas. I hope for a day when young people no longer reject that concept but revel in it. As a country, we need to reclaim our pride in capitalism and remember that the markets have the greatest power when they are free, and that free markets empower one and all, not just the few and the select.

Article Link To The Wall Street Journal:

Is China Headed For A Recession?

Not exactly, but that raises another problem.

By Christopher Balding
The Bloomberg View
June 1, 2017

For the first time ever, China is facing a dreaded prospect: the inverted bond yield curve. The phenomenon, in which long-term interest rates sink below short-term interest rates, has caused some consternation among market-watchers, who know it's traditionally a harbinger of recession. The inversion suggests markets expect interest rates to fall eventually as monetary authorities move to stimulate economic activity.

In other countries, the curve is such a reliable indicator of a downturn that the Cleveland Federal Reserve maintains a recession probability measure based on short- and long-term government bond prices. The bank writes that bond yields “predict whether future GDP growth will be above or below average," although it acknowledges that the measure "does not do so well in predicting an actual number, especially in the case of recessions.” In other words, bond yields provide good evidence about the direction of economic growth, if not specific levels.

One needs to be careful about drawing similar conclusions in China, however. For one thing, the central government bond market remains relatively small, while the remaining bond market is overwhelmingly short-term. Government bonds account for roughly a third of the total market, and of those, only a third mature after 2027. These factors, as well as the relative immaturity of the Chinese bond market, defy any strong comparisons to other countries.

What else might explain China's inverted curve, if not an impending recession? For much of this year, banking regulators have focused on addressing financial risks, primarily by reducing leverage. Data indicates that downward pressure on new credit growth was strongest in March and April.

The crackdown has pushed up short-term interest rates and pushed down the prices of financial assets such as stocks, bonds and commodities. Officials are nervous; they want to restrain leverage growth without triggering a fire sale of assets. With surprising regularity, Chinese politicians and regulators have come out and publicly reaffirmed that the financial system remains sound, insisting investors need not fear an uncontrolled plunge in asset prices.

Meanwhile, short-term wealth-management funds hold large amounts of government and corporate bonds in levered fixed-income products. The government crackdown disproportionately impacts the yield curve on the short end of the term structure, pushing up yields in shorter maturities. The fact that long-term rates are more stable doesn't matter: Wealth-management products maturing every six months simply don't buy 30-year government bonds.

This matches closely what we see. Long-dated bond yields have risen much more slowly than the short-term debt yields since the beginning of 2017. For instance, spot yields on two-year government bonds have increased 80 basis points, while 10- and 50-year yields have increased only 54 and 31 basis points, respectively. The inversion in the Chinese bond market stems not from a major fall in long-term yields, but from a large increase in short-term yields.

This has important implications. Perhaps the central question among Chinese investors right now is how long regulators can sustain their game of chicken with levered investors. Thus far, the People's Bank of China has seemed willing to let short-term interest rates -- the primary borrowing tool of investors -- drift upward while providing just enough new liquidity to prevent a major selloff. Yet clearly, long-term investors remain unfazed.

This implies investors believe regulators will ease their deleveraging campaign, allowing short-term rates to come back down. This isn't a bad bet: Historically, while Chinese officials have talked tough about reining in financial risks, they've always blinked when their efforts seem to be threatening growth and asset prices.

If the government is to win its battle with the Chinese market, it needs to reset such expectations. It'll have to run a monetary policy that forces firms to allocate capital more efficiently, and avoid the temptation to revert to easy money flows.

So far, regulators seem to have accepted that asset prices will fall as financing options narrow. But there's more pain ahead: Some 11 percent of shares on Chinese stock markets are pledged for loans, and the profits of steel mills, say, are dependent on prices driven up by highly leveraged shadow banks. China may not be on the verge of recession. That hardly means the path forward is going to be easy.

Article Link To The Bloomberg View:

As China Ushers In New Cyber Law, Misgivings Remain

By Cate Cadell and Adam Jourdan
June 1, 2017

China ushered in a tough new cyber security law on Thursday, following years of fierce debate around the controversial legislation that many foreign business groups fear will hit their ability to operate in the country.

The law, passed by China's rubber-stamp parliament in November, requires local and overseas firms to submit to security checks and store user data within the country.

China's top cyber authority said on Wednesday it was not targeting foreign firms with the new law, after over 50 overseas companies and business groups lobbied against the legislation that includes stringent data storage and surveillance requirements.

"The purpose is to safeguard (China's) national cyberspace sovereignty and national security... rather than to restrict foreign enterprises," the Cyberspace Administration of China (CAC) said in a statement on its website.

The law has sparked fierce push-back by firms and lobby groups who say vague wording of the regulations leaves foreign firms vulnerable to abstract interpretations of the rules.

Earlier this month Reuters reported the CAC met foreign business groups in a closed-door meeting to try to allay these fears, including an 18-month phase-in period for aspects of the regulations, according to attendees.

According to a revised draft of the rules, seen by Reuters, a phase-in period until the end of 2018 would relate to measures affecting cross-border data transfers, which has been one of the most contentious elements of the new law.

The CAC notice on Wednesday made no mention of a phase-in period. It added the law is not designed to hinder international trade or the flow of data across the Chinese border.

Questions Remain

Firms and lobby groups say the late changes to the law, while positive, leave most of the original legislation intact and remain broad. The law's impact will therefore depend on how Beijing enforces it.

"Much will depend on how the measures are implemented," the U.S.-China Business Council said in a note to members last month after the CAC meeting.

On top of internationally common standards, such as requiring user consent before moving data beyond country borders, China's new cyber law also mandates companies store all data within China and pass security reviews.

This fits China's ethos of "cyber sovereignty" - the idea that states should be permitted to govern and monitor their own cyberspace, controlling incoming and outgoing data flows.

China maintains a strict censorship regime, banning access to foreign news outlets, search engines and social media including Google (GOOGL.O) and Facebook (FB.O).

Article Link To Reuters:

Fed's Williams Bullish On U.S. Economy, Sees Total Three Rate Hikes This Year

June 1, 2017

San Francisco Federal Reserve Bank President John C. Williams said on Thursday he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost.

"There is potential for upside occurrences in the economy. One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought," said Williams, who was speaking on the sidelines of a forum held by the Bank of Korea in Seoul.

Williams, who does not have a vote on the Federal Reserve's policy committee this year, said the end point of rate hike-cycle is probably just below 3 percent. He emphasised that the Fed will carry out its rate increases in a predictable and transparent manner to minimize any negative spillovers to emerging economies.

“In the end we are only moving gradually and to a relatively low level, 3 percent or less,” he said.

In March the Fed lifted rates a notch, its third tightening since the 2007-2009 financial crisis and recession. Forecasts from Fed officials suggest a median of two more hikes are planned before year end, and futures markets are pricing in a roughly 90 percent chance of a 25-basis-point hike later this month to a range of between 1.00 percent and 1.25 percent.

Williams said he doesn’t expect any changes in fiscal policies this year to impact the U.S. economy in 2017 in any meaningful way, adding the effects of such policy changes will likely influence growth only in 2018 and 2019.

He also reiterated his view that the U.S. economy is doing 'very well', though he said that inflation currently running below the Fed’s 2 percent target is a challenge for monetary policy.

Prices excluding food and energy in the Fed’s preferred inflation gauge were up only 1.5 percent on-year in April, the weakest reading since the end of 2015.

Just the same, Fed officials have said they remain confident that low unemployment will help lift inflation toward the central bank's target in coming years.

Article Link To Reuters:

The U.S. Has Forgotten How To Do Infrastructure

The nation once built things fast and cheaply. Now experts are puzzled why costs are higher and projects take longer than in other countries.

By Noah Smith
The Bloomberg View
June 1, 2017

As Vox’s Matthew Yglesias points out, the problem with high infrastructure costs is that they force us to debate the wrong things. If costs were reasonable, even skeptics would probably agree to fix roads and build better trains. But when the price of maintaining high-quality infrastructure is ridiculously high, the issue gets divided into two camps -- a pro-building contingent that advocates biting the bullet and overspending to maintain transportation networks, and an anti-building group that throws up its hands at the price tag. When this is the debate, the country loses either way, because it ends up either spending too much money or living with potholed roads and trains that never arrive.

The U.S. is in the grips of exactly this sort of dilemma. For some mysterious reason, the same mile of road or train track costs a lot more to build in the U.S. than in other rich countries like France or Japan. When it comes to trains, the disparity is particularly egregious. During the past few years, people who pay attention to this problem have catalogued a list of potential culprits. But none of these is really satisfying.

One popular villain is union labor. The Davis-Bacon Act, passed in 1931, mandates that infrastructure workers get paid locally prevailing wages, which usually means the wages that union members would receive. Some studies have claimed that this law and other union-friendly policies drive up costs in the U.S.

But unions probably don’t help explain the yawning gap between the U.S. and other rich countries. The reason is that places like France have some of the strongest unions in the world. Strikes by rail workers are commonplace. Yet France’s trains cost much less.

Japan is another counterexample. The median salary for a Japanese construction worker in 2014 was about 4 million yen a year, which at current exchange rates is roughly $36,000. Construction workers in the U.S. make about the same -- an average of $37,890 in 2016. Now, it’s possible that the average Japanese worker is capable of building much more in an hour than the average American worker, meaning U.S. laborers could still be overpaid in the relative sense. But it seems unlikely that the difference is that huge. The numbers are pretty clear -- high wages aren’t the big culprit in U.S. costs.

Another bogeyman is land-acquisition costs. People think of China’s authoritarian government forcing millions of people to move in order to build dams and highways, and assume this must be why it can get things done so much more cheaply than in the democratic U.S.

But this is also probably a red herring. As transit blogger Alon Levy notes, land-acquisition costs are much higher in Japan, where eminent domain laws are weaker. So much for the U.S. being the land of property rights! And yet, somehow, Japan still lays train track much more cheaply.

Explanations based on geography -- the U.S. is too spread out, or New York City is too dense -- also fail to stand up to scrutiny. Cumbersome environmental impact reviews are a possible culprit, but it’s hard to believe that countries such as France would be so willing to pave over their natural beauty and slaughter endangered species that their trains would cost only half as much as America’s as a result.

There is reason to suspect that high U.S. costs are part of a deeper problem. For example, construction seems to take a lot longer in the U.S. than in other countries. In China, a 30-story building can be completed in only 15 days. In Japan, giant sinkholes get fully repaired in one week. Even in the U.S. of a century ago, construction was pretty fast -- the Empire State Building went up in 410 days.

Yet today, it takes the U.S. many years to spend the money that Congress allocates for infrastructure. New buildings seem to linger half-built for months or years, with construction workers often nowhere to be found. Subways can take decades. Even in the private sector, there are problems -- productivity in the homebuilding sector has fallen in recent decades.

That suggests that U.S. costs are high due to general inefficiency -- inefficient project management, an inefficient government contracting process, and inefficient regulation. It suggests that construction, like health care or asset management or education, is an area where Americans have simply ponied up more and more cash over the years while ignoring the fact that they were getting less and less for their money. To fix the problems choking U.S. construction, reformers are going to have to go through the system and rip out the inefficiencies root and branch.

Unfortunately, this is going to be hard, given all the vested interests and institutional inertia blocking deep reform of the construction sector. As Yglesias ruefully notes, a study by the Government Accountability Office looking into the problem of high train-construction costs was recently killed by Congress, with no explanation given.

Shenanigans like this can only delay the day of reckoning. The U.S. construction sector is sick, and the disease must be diagnosed. Otherwise, infrastructure debates will continue to seesaw between those who are willing to spend too much and those who are willing to let the system crumble because it costs too much to repair.

Article Link To The Bloomberg View:

In The Age Of Trump, Beijing Pivots To Europe

China’s aim in Brussels this week is to undercut US leadership in global trade.

By Stephan Faris and Charles Lee
Politico EU
June 1, 2017

The most important person at this week’s EU-China summit won’t be in attendance.

After a decade in which China largely regarded the EU as a pool of rich consumers, Beijing suddenly senses an opportunity in Brussels.

The reason? In no small part, it’s Donald Trump.

China has responded to the U.S. president’s promises of “America first” protectionism with cross-continental overtures and an effort to present itself globally as a champion of free trade and openness. If the transatlantic tide is to recede, China wants to be able to take advantage of the vacuum.

After a robust defense of globalization by President Xi Jinping in Davos, the annual high-level summit in Brussels was brought forward a month. Taking place on Thursday and Friday, it is expected to be used as a forum by China to emphasize what it says is a mutual commitment to international cooperation in trade, and also fighting climate change.

Beijing’s pivot toward Europe comes at somewhat of an awkward time for the Chinese. Relations between Brussels and Beijing are first and foremost about trade. And Europe is showing signs of frustration over imbalances in that relationship.

China is already the EU’s second-biggest trading partner after the U.S. And the bloc is Beijing’s largest trading partner.

The two sides may have temporarily back-burnered a fierce disagreement over Chinese dumping and market economy status at the World Trade Organization, but European concerns about Chinese restrictions on foreign investments are threatening to turn into an uproar. This week’s gathering follows China’s showcase “one belt, one road” summit in May in Beijing aimed at boosting cross-continental Eurasian trade that several European leaders declined to attend.

In the age of Trump, Beijing might be forgiven for believing it has a message it can sell to Brussels. Both prefer working through multilateral institutions (unless it comes to the South China Sea) to unilateral action (at least when it’s being carried out by Washington). And both China and Europe — Germany in particular — are in Trump’s crosshairs when it comes to trade balances and alleged currency manipulation.

China is already the EU’s second-biggest trading partner after the U.S. And the bloc is Beijing’s largest trading partner. Chinese involvement in the Continent continues to grow as Beijing blazes a “new silk road” to the EU’s doorstep. In 2016, Chinese investment into EU countries reached €35 billion, a 77 percent jump from 2015, according to the Mercator Institute for China Studies and Rhodium Group.

And while China might not spend much time thinking about the “European project,” it does value predictability and stability — especially in a region that has become an increasingly important destination for investment. Where Moscow considers the EU and NATO as rivals to be divided and weakened, China sees European integration as something to be encouraged, and as Europe a potential, if highly unlikely, multipolar rival to the U.S.

Having established a base in a trade-friendly and financially sophisticated U.K. to exploit opportunities in continental Europe, China was firmly opposed to Brexit. Now that Britain is leaving, Beijing has already shifted the focus of its attention from London to the Continent. That’s why, in a meeting with EU foreign policy chief Federica Mogherini in Beijing, Chinese Premier Li Keqiang said China “supports European integration and expects the EU to remain united, stable and prosperous.”

China doesn’t see the EU — preoccupied with a litany of problems — as a serious geopolitical player.

Just over a decade ago, amid geopolitical tensions caused by the 2003 U.S. invasion of Iraq, Chinese geopolitical strategists entertained the notion that Beijing and Brussels could form a “comprehensive strategic partnership” that would serve as a counterweight to American hegemony. This time, the ambitions are much more modest.

Trump notwithstanding, there are few in Washington, Beijing or Brussels who believe China would be a more reliable ally to Europe than the United States. China, in any case, doesn’t see the EU — preoccupied with a litany of problems (terrorism, uneven growth, migration, Brexit) — as a serious geopolitical player.

What Beijing wants from Brussels is simple. Its mission this week: to undercut U.S. leadership in global trade, and to make sure that rising levels of European anxieties don’t turn into a problem.

Article Link To Politico EU:

Trump Has Little To Gain And Much To Lose By Backing Out Of Paris Agreement

-- President Donald Trump is leaning toward pulling out of the Paris climate agreement.
-- The move will please his political base, but threatens to upset allies and provoke trade disputes, analysts say.

-- Backing out of the accord will do little to advance Trump's pro-fossil fuel agenda, analysts told CNBC.

June 1, 2017

President Donald Trump stands to score political points with his base if he pulls out of the Paris climate agreement, but the move would do little to advance his pro-fossil fuel agenda and could strain relations with trading partners, analysts say.

The president is leaning toward leaving the international accord aimed at mitigating the impacts of climate change, according to White House sources. The move is no surprise, said analysts, given Trump campaigned on boosting fossil fuel output and reviving the coal industry.

"Domestically Trump does probably have quite a lot to gain from his core base by pulling out of something that is seen to negatively affect the prospects of coal," said Paul McConnell, research director of global trends at energy research firm Wood Mackenzie.

"The notion of a trade battle over climate change is something everyone's tried to avoid for two or three decades. That's why we have an international agreement to put everyone in the same frame"-Dirk Forrister, International Emissions Trading Organization president and CEO

But backing out of the deal will do little to increase demand for fossil fuels, he said. In the United States, higher energy efficiency, falling renewable energy prices, abundant natural gas, and the rise of electric vehicles and smart grids will continue to displace coal and oil, McConnell and other analysts told CNBC.

"Will pulling out of the Paris Agreement save coal? I suspect that renewables and gas will have more to say about that than anything else," he said.

Trump could actually cut off a path to making coal more viable, said Jonathan Elkind, former assistant secretary for the U.S. Energy Department's Office of International Affairs under President Barack Obama. Without the United States at the table, necessary investments in clean coal technology and next-generation nuclear plants could take a backseat to wind and solar energy.

A "risk that arises from the U.S. leaving is that people take what I think would be an inefficient and unwise but kind of bumper sticker-friendly approach to the climate issue," said Elkind, who is now a fellow at Columbia University's Center on Global Energy Policy.

Indeed, coal companies like Cloud Peak Energy and Peabody Energy argued for staying in the Paris Agreement to influence coal's role in the global energy mix.

A U.S. exit from the Paris Agreement also raises the risk of trade disputes.

The United States is the world's second-largest emitter of carbon dioxide. Its trade partners could argue they are at a disadvantage if the United States frees its companies from the burden of climate regulations, analysts said.

Many of the biggest U.S. trade partners, including the European Union, Canada, Mexico and China already have or will soon implement carbon trading systems to cap the amount of CO2 companies are allowed to emit.

Dirk Forrister, president and CEO of the nonprofit International Emissions Trading Organization, noted that some foreign officials have raised the prospect of imposing a "carbon tariff" on U.S. products, but said that is uncharted territory and would have serious consequences.

"The notion of a trade battle over climate change is something everyone's tried to avoid for two or three decades. That's why we have an international agreement to put everyone in the same frame," he said.

Rebecca Keller, senior science and technology analyst at risk consultancy Stratfor, said it would be difficult for a big bloc like the EU to reach consensus on such a drastic measure. Instead, she thinks more targeted tariffs on parts of the U.S. economy could gain momentum.

But Elkind, the former Obama official, suggested some nations may have little patience for the United States, given that the Paris Agreement gives signatories significant flexibility to set climate policies based on their individual circumstances.

"If one of the biggest emitters doesn't wish to take advantage of that flexibility and stay part of the solution, I bet it will only embolden those who want to reach for more punitive approaches," he said.

Article Link To CNBC: